Part I. Rulings — Internal Revenue Bulletin 1999-50

Section 401.—Pension, Profit- Sharing, Stock Bonus Plans, etc.

26 CFR 1.401(a)(4)–1: Nondiscrimination requirements of section 401(a)(4).

Nondiscrimination; duplicate benefits. This ruling provides that the duplication of benefits for highly compensated employees may result in the failure of plans to satisfy the nondiscrimination requirements of section 401(a)(4) of the Code.

Rev. Rul. 99–51

Employer A maintained one plan, Plan X, a calendar year defined benefit plan, benefiting all of A’s highly compensated employees within the meaning of § 414(q) of the Internal Revenue Code of 1986 (HCEs) and all of A’s employees who are not highly compensated employees (NHCEs). Under Plan X, each employee’s accrued benefit equals an annual benefit commencing at normal retirement age of one percent of average annual compensation per year of service. A “year of service” includes all years of service with Employer A. There are no related or predecessor employers nor is service under any other plan taken into account under Plan X.

In November 1997, Plan X was amended effective as of December 31, 1997 (the spin-off date) to become two plans: Plan X-H covering Employer A’s HCEs and Plan X-N covering Employer A’s NHCEs. The assets and benefit liabilities under Plan X as of the spin-off date were allocated between Plan X-H and Plan X-N in accordance with § 414(l). Pursuant to the terms of the amendment, NHCEs were excluded from participation in Plan X-H and HCEs were excluded from participation in Plan X-N. In addition, the amendment provided that there would be no benefit accruals under Plan X-H with respect to periods after the spinoff date (i.e., Plan X-H was “frozen” as of the spin-off date). Benefit accruals continued under Plan X’s original formula for participants in Plan X-N.

Employer A later amended Plan X-N to include the HCEs and to provide the HCEs with an annual benefit commencing at normal retirement age equal to one percent of average annual compensation

per year of service with Employer A. The years of service included in the computation of the HCEs’ accrued benefit under Plan X-H were included in the computation of their benefits under Plan X-N as well. Benefits employees accrued under Plan X-N were not offset by their accrued benefits under Plan X-H.

Plan X, Plan X-H and Plan X-N are the only plans that have been maintained by Employer A, and none of these plans have been top-heavy within the meaning of § 416 for any plan year. Section 401(a)(4) provides that contributions or benefits under a plan qualified under § 401(a) must not discriminate in favor of HCEs.

Section 1.401(a)(4)–1(c)(2) of the Income Tax Regulations provides that the regulations under § 401(a)(4) must be interpreted in a reasonable manner consistent with the purpose of preventing discrimination in favor of HCEs.

Section 1.401(a)(4)–5(a)(1)&(2) provides that, for determining whether the timing of a plan amendment or series of amendments has the effect of discriminating significantly in favor of HCEs, a plan amendment includes the establishment or termination of the plan, and any change in the benefits, rights, features or benefit formulas under the plan. Whether the timing of a plan amendment or series of plan amendments has the effect of discriminating significantly in favor of HCEs is determined at the time the plan amendment first becomes effective based on all relevant facts and circumstances. These include the relative numbers of current HCEs and NHCEs affected by the plan amendment, the relative accrued benefits of current HCEs and NHCEs before and after the plan amendment and any additional benefits provided to current HCEs and NHCEs under other plans.

Section 1.401(a)(4)–11(d)(2) provides that, on the basis of all relevant facts and circumstances, the manner in which employees’ service is credited for all purposes under the plan must not discriminate in favor of HCEs.

Section 1.401(a)(4)–11(d)(3) provides that, except as otherwise provided, service for periods in which an employee did not participate in the plan may not be

taken into account in determining whether the plan satisfies § 401(a)(4).

Held, under the facts of this case there is a duplication of service and benefits that discriminates in favor of HCEs in violation of § 401(a)(4).

DRAFTING INFORMATION

The principal author of this revenue ruling is Kenneth Conn of the Employee Plans Division. For further information regarding this revenue ruling, call the Employee Plans Division’s taxpayer assistance telephone service at (202) 6226074/6075 (not toll-free numbers) between 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday, or Mr. Conn at (202) 622-6214 (also not a toll-free number).

Section 483.—Interest on Certain Deferred Payments

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

As defined by section 1274A, the definitions for both “qualified debt instruments” and “cash method debt instruments” have dollar ceilings on the stated principal amount. The limits to the stated principal amount are adjusted for inflation for sales or exchanges occurring in the 2000 calendar year. See Rev. Rul. 99–50, page 656.

Section 995.—Taxation of DISC Income to Shareholders

1999 base period T-bill rate. The base period T-bill rate, under section 995 of the Code, is 4.80 percent for the period ending September 30, 1999.

Rev. Rul. 99–52

Section 995(f)(l) of the Internal Revenue Code provides that a shareholder of a DISC shall pay interest each taxable year in an amount equal to the product of the shareholder’s DISC-related deferred tax liability for the year and the “base period T-bill rate.” Under section 995(f)(4), the base period T-bill rate is the annual rate of interest determined by the Secretary to be equiva

December 13, 1999 652 1999–50 I.R.B.

lent to the average investment yield of United States Treasury bills with maturities of 52 weeks which were auctioned during the one-year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder. The base period T-bill rate for the period ending September 30, 1999, is 4.80 percent. Pursuant to section 6622 of the Code, interest must be compounded daily. The table below provides factors for compounding the base period T-bill rate daily for any number of days in the shareholder’s taxable year (including a 52-53 week accounting period) for the 1999 base period T-bill rate. To compute the amount of the interest charge for the shareholder’s taxable year, multiply the amount of the shareholder’s DISC-related deferred tax liability (as defined in section 995(f)(2)) for that year by the base period T-bill rate factor corresponding to the number of days in the shareholder’s taxable year for which the interest charge is being computed. Generally, one would use the factor for 365 days. One would use a different factor only if the shareholder’s taxable year for which the interest charge being determined is a short taxable year, if the shareholder uses the 52-53 week taxable year, or if the shareholder’s taxable year is a leap year.

For the base period T-bill rates for the periods ending in prior years, see: Rev. Rul. 86–132, 1986–2 C.B. 137; Rev. Rul. 87–129, 1987-2 C.B. 196; Rev. Rul. 88–94, 1988–2 C.B. 301; Rev. Rul. 89–116, 1989–2 C.B. 197; Rev. Rul. 90–96, 1990–2 C.B. 188; Rev. Rul. 91–59, 1991–2 C.B. 347; Rev. Rul. 92–98, 1992–2 C.B. 201; Rev. Rul. 93–77, 1993–2 C.B. 253; Rev. Rul. 94–68, 1994–2 C.B. 177; Rev. Rul. 95–77, 1995–2 C.B. 122; Rev. Rul. 96–55, 1996–2 C.B. 57; Rev. Rul. 97–49, 1997–2 C.B. 89; and Rev. Rul. 98–54, 1998–56 I.R.B. 5.

DRAFTING INFORMATION

The principal author of this revenue ruling is David Bergkuist of the Office of the Associate Chief Counsel (International). For further information about this revenue ruling, contact Mr. Bergkuist on (202) 622-3850 (not a toll-free call).

1999 ANNUAL RATE COMPOUNDED DAILY

4.80 PERCENT DAYS FACTOR

1 .000131507 2 .000263031 3 .000394572 4 .000526131 5 .000657707

6 .000789301 7 .000920911 8 .001052539 9 .001184184 10 .001315847

11 .001447527 12 .001579224 13 .001710939 14 .001842670 15 .001974420

16 .002106186 17 .002237970 18 .002369771 19 .002501590 20 .002633425

21 .002765279 22 .002897149 23 .003029037 24 .003160942 25 .003292865

26 .003424805 27 .003556762 28 .003688736 29 .003820728 30 .003952738

31 .004084764 32 .004216808 33 .004348870 34 .004480948 35 .004613045

36 .004745158 37 .004877289 38 .005009437 39 .005141603 40 .005273786

41 .005405986 42 .005538204 43 .005670439 44 .005802692

4.80 PERCENT DAYS FACTOR

45 .005934962

46 .006067249 47 .006199554 48 .006331876 49 .006464215 50 .006596572

51 .006728947 52 .006861338 53 .006993748 54 .007126174 55 .007258618

56 .007391080 57 .007523558 58 .007656055 59 .007788568 60 .007921099

61 .008053648 62 .008186214 63 .008318797 64 .008451398 65 .008584016

66 .008716652 67 .008849305 68 .008981976 69 .009114664 70 .009247369

71 .009380092 72 .009512833 73 .009645591 74 .009778366 75 .009911159

76 .010043969 77 .010176797 78 .010309642 79 .010442504 80 .010575384

81 .010708282 82 .010841197 83 .010974130 84 .011107080 85 .011240047

86 .011373032 87 .011506035 88 .011639055 89 .011772092 90 .011905147

91 .012038220

1999–50 I.R.B. 653 December 13, 1999

4.80 PERCENT DAYS FACTOR

92 .012171309 93 .012304417 94 .012437542 95 .012570684

96 .012703844 97 .012837022 98 .012970217 99 .013103429 100 .013236659

101 .013369907 102 .013503172 103 .013636455 104 .013769755 105 .013903072

106 .014036408 107 .014169760 108 .014303131 109 .014436518 110 .014569924

111 .014703347 112 .014836787 113 .014970245 114 .015103721 115 .015237214

116 .015370724 117 .015504253 118 .015637798 119 .015771362 120 .015904943

121 .016038541 122 .016172157 123 .016305791 124 .016439442 125 .016573111

126 .016706797 127 .016840501 128 .016974222 129 .017107961 130 .017241718

131 .017375492 132 .017509284 133 .017643094 134 .017776921 135 .017910765

136 .018044628 137 .018178507 138 .018312405 139 .018446320

4.80 PERCENT DAYS FACTOR

140 .018580253

141 .018714203 142 .018848171 143 .018982156 144 .019116159 145 .019250180

146 .019384219 147 .019518275 148 .019652348 149 .019786439 150 .019920548

151 .020054675 152 .020188819 153 .020322981 154 .020457160 155 .020591357

156 .020725572 157 .020859805 158 .020994055 159 .021128322 160 .021262608

161 .021396911 162 .021531231 163 .021665570 164 .021799926 165 .021934299

166 .022068691 167 .022203100 168 .022337527 169 .022471971 170 .022606433

171 .022740913 172 .022875410 173 .023009925 174 .023144458 175 .023279009

176 .023413577 177 .023548163 178 .023682766 179 .023817388 180 .023952027

181 .024086683 182 .024221358 183 .024356050 184 .024490760 185 .024625487

186 .024760233

4.80 PERCENT DAYS FACTOR

187 .024894996 188 .025029776 189 .025164575 190 .025299391

191 .025434225 192 .025569076 193 .025703946 194 .025838833 195 .025973738

196 .026108660 197 .026243601 198 .026378559 199 .026513534 200 .026648528

201 .026783539 202 .026918568 203 .027053615 204 .027188680 205 .027323762

206 .027458862 207 .027593980 208 .027729116 209 .027864269 210 .027999440

211 .028134629 212 .028269836 213 .028405061 214 .028540303 215 .028675563

216 .028810841 217 .028946137 218 .029081450 219 .029216781 220 .029352130

221 .029487497 222 .029622882 223 .029758284 224 .029893705 225 .030029143

226 .030164599 227 .030300072 228 .030435564 229 .030571073 230 .030706600

231 .030842145 232 .030977708 233 .031113289

December 13, 1999 654 1999–50 I.R.B.

4.80 PERCENT DAYS FACTOR

234 .031248887 235 .031384503

236 .031520138 237 .031655790 238 .031791459 239 .031927147 240 .032062852

241 .032198576 242 .032334317 243 .032470076 244 .032605853 245 .032741648

246 .032877460 247 .033013291 248 .033149139 249 .033285005 250 .033420889

251 .033556791 252 .033692711 253 .033828649 254 .033964604 255 .034100578

256 .034236569 257 .034372578 258 .034508605 259 .034644650 260 .034780713

261 .034916794 262 .035052892 263 .035189009 264 .035325143 265 .035461296

266 .035597466 267 .035733654 268 .035869860 269 .036006084 270 .036142326

271 .036278586 272 .036414864 273 .036551159 274 .036687473 275 .036823804

276 .036960154 277 .037096521 278 .037232906 279 .037369310 280 .037505731

4.80 PERCENT DAYS FACTOR

281 .037642170 282 .037778627 283 .037915102 284 .038051595 285 .038188106

286 .038324635 287 .038461182 288 .038597746 289 .038734329 290 .038870930

291 .039007548 292 .039144185 293 .039280840 294 .039417512 295 .039554203

296 .039690911 297 .039827638 298 .039964382 299 .040101144 300 .040237925

301 .040374723 302 .040511540 303 .040648374 304 .040785226 305 .040922097

306 .041058985 307 .041195892 308 .041332816 309 .041469758 310 .041606719

311 .041743697 312 .041880694 313 .042017708 314 .042154741 315 .042291791

316 .042428860 317 .042565946 318 .042703051 319 .042840173 320 .042977314

321 .043114473 322 .043251649 323 .043388844 324 .043526057 325 .043663288

326 .043800536 327 .043937803 328 .044075088

4.80 PERCENT DAYS FACTOR

329 .044212391 330 .044349712

331 .044487052 332 .044624409 333 .044761784 334 .044899177 335 .045036589

336 .045174018 337 .045311466 338 .045448931 339 .045586415 340 .045723917

341 .045861437 342 .045998975 343 .046136531 344 .046274105 345 .046411697

346 .046549307 347 .046686936 348 .046824582 349 .046962247 350 .047099930

351 .047237630 352 .047375349 353 .047513086 354 .047650841 355 .047788615

356 .047926406 357 .048064216 358 .048202043 359 .048339889 360 .048477753

361 .048615635 362 .048753535 363 .048891453 364 .049029390 365 .049167344

366 .049305317 367 .049443308 368 .049581317 369 .049719344 370 .049857389

371 .049995453

1999–50 I.R.B. 655 December 13, 1999

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

Section 1274A(d)(2) provides that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in § 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is a multiple of $50 and not of $100, the increase is increased to the nearest multiple of $100). The inflation adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B)

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

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

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

(Also, sections 1274, 483; 1.1274A–1, 1.483–1.)

Section 1274A inflation-adjusted numbers for 2000. This ruling provides the dollar amounts, increased by the 2000 inflation adjustment, for section 1274A of the Code. Rev. Rul. 98–58 supplemented and superseded.

Rev. Rul. 99–50

This revenue ruling provides the dollar amounts, increased by the 2000 inflation adjustment, for § 1274A of the

Internal Revenue Code.

BACKGROUND

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

In the case of a “qualified debt instrument,” the discount rate used for purposes of §§ 483 and 1274 may not exceed 9 percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of property (other than new § 38 property within the meaning of § 48(b), as in effect on the day before the date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in § 1274A(b). For debt instruments arising out of sales or exchanges before January 1, 1990, this amount is $2,800,000.

In the case of a “cash method debt instrument,” as defined in § 1274A(c), the borrower and lender may elect to use the cash receipts and disbursements method of accounting. In particular, for any cash method debt instrument, § 1274 does not

Rev. Rul. 99–50 Table 1

Inflation-Adjusted Amounts Under § 1274A Calendar Year 1274A(b) Amount 1274A(c)(2)(A) Amount of Sale (qualified debt (cash method debt or Exchange instrument) instrument)

1990 $2,933,200 $2,095,100 1991 $3,079,600 $2,199,700 1992 $3,234,900 $2,310,600 1993 $3,332,400 $2,380,300 1994 $3,433,500 $2,452,500 1995 $3,523,600 $2,516,900 1996 $3,622,500 $2,587,500 1997 $3,723,800 $2,659,900 1998 $3,823,100 $2,730,800 1999 $3,885,500 $2,775,400 2000 $3,960,100 $2,828,700

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

December 13, 1999 656 1999–50 I.R.B.

Notice 88–59, 1988–1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under § 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with § 6621 which, pursuant to § 6622, is subject to daily compounding.

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of October 1999 is 5 percent. Accordingly, an overpayment rate of 8 percent (7 percent in the case of a corporation) and an underpayment rate of 8 percent are established for the calendar quarter beginning January 1, 2000. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning January 1, 2000, is 5.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning January 1, 2000, is 10 percent. These rates apply to amounts bearing interest during that calendar quarter.

The 8 percent rate also applies to estimated tax underpayments for the first calendar quarter in 2000 and for the first 15 days in April 2000.

Interest factors for daily compound interest for annual rates of 5.5 percent, 7 percent, 8 percent, and 10 percent are published in Tables 64, 67, 69, and 73 of Rev. Proc. 95–17, 1995–1 C.B. 556, 618, 621, 623, and 627. Annual interest rates to be compounded daily pursuant to § 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue ruling is Raymond Bailey of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Bailey on (202) 622-6226 (not a toll-free call).

defines the CPI for any calendar year as the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of that calendar year.

INFLATION-ADJUSTED AMOUNTS

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

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 98–58, 1998–52 I.R.B. 6 is supplemented and superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is Courtney Shepardson the Office of the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Ms. Shepardson on (202) 6223930 (not a toll-free call).

Section 6621.— Determination of Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning January 1, 2000, will be 8 percent for overpayments (7 percent in the case of a corporation), 8 percent for underpayments, and 10 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 is 5.5 percent.

Rev. Rul. 99–53

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under § 6621(a)(1), the overpayment rate beginning January 1, 2000, is the sum of

the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under § 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under § 6601 on any large corporate underpayment, the underpayment rate under § 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See § 6621(c) and § 301.6621–3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and § 301.6621–3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal shortterm rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the federal short-term rate determined under § 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

Section 6621(b)(2)(B) provides that in determining the addition to tax under § 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following such taxable year also applies during the first 15 days of the fourth month following such taxable year.

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of ¹ ⁄2 of 1 percent, the rate is increased to the next highest full percent).

1999–50 I.R.B. 657 December 13, 1999

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 – PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

In 1995–1 C.B. PERIOD RATE DAILY RATE TABLE Before Jul. 1, 1975 6% Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 1978 7% Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 1980 6% Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 1982 12% Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 1982 20% Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 1983 16% Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 1983 11% Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 1984 11% Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 1984 11% Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 1986 10% Table 25 pg. 579 Jul. 1, 1986—Dec. 31, 1986 9% Table 23, pg. 577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 – Dec. 31, 1998

OVERPAYMENTS UNDERPAYMENTS

1995–1 C.B. 1995–1 C.B. RATE TABLE PG RATE TABLE PG

Jan. 1, 1987—Mar. 31, 1987 8% 21 575 9% 23 577 Apr. 1, 1987—Jun. 30, 1987 8% 21 575 9% 23 577 Jul. 1, 1987—Sep. 30, 1987 8% 21 575 9% 23 577 Oct. 1, 1987—Dec. 31, 1987 9% 23 577 10% 25 579 Jan. 1, 1988—Mar. 31, 1988 10% 73 627 11% 75 629 Apr. 1, 1988—Jun. 30, 1988 9% 71 625 10% 73 627 Jul. 1, 1988—Sep. 30, 1988 9% 71 625 10% 73 627 Oct. 1, 1988—Dec. 31, 1988 10% 73 627 11% 75 629 Jan. 1, 1989—Mar. 31, 1989 10% 25 579 11% 27 581 Apr. 1, 1989—Jun. 30, 1989 11% 27 581 12% 29 583 Jul. 1, 1989—Sep. 30, 1989 11% 27 581 12% 29 583 Oct. 1, 1989—Dec. 31, 1989 10% 25 579 11% 27 581 Jan. 1, 1990—Mar. 31, 1990 10% 25 579 11% 27 581 Apr. 1, 1990—Jun. 30, 1990 10% 25 579 11% 27 581 Jul. 1, 1990—Sep. 30, 1990 10% 25 579 11% 27 581 Oct. 1, 1990—Dec. 31, 1990 10% 25 579 11% 27 581 Jan. 1, 1991—Mar. 31, 1991 10% 25 579 11% 27 581 Apr. 1, 1991—Jun. 30, 1991 9% 23 577 10% 25 579 Jul. 1, 1991—Sep. 30, 1991 9% 23 577 10% 25 579 Oct. 1, 1991—Dec. 31, 1991 9% 23 577 10% 25 579 Jan. 1, 1992—Mar. 31, 1992 8% 69 623 9% 71 625 Apr. 1, 1992—Jun. 30, 1992 7% 67 621 8% 69 623 Jul. 1, 1992—Sep. 30, 1992 7% 67 621 8% 69 623 Oct. 1, 1992—Dec. 31, 1992 6% 65 619 7% 67 621 Jan. 1, 1993—Mar. 31, 1993 6% 17 571 7% 19 573 Apr. 1, 1993—Jun. 30, 1993 6% 17 571 7% 19 573 Jul. 1, 1993—Sep. 30, 1993 6% 17 571 7% 19 573

December 13, 1999 658 1999–50 I.R.B.

1999–50 I.R.B. 659 December 13, 1999

TABLE OF INTEREST RATES FOR

LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT

1995–1 C.B. RATE TABLE PG Jan. 1, 1991—Mar. 31, 1991 13% 31 585 Apr. 1, 1991—Jun. 30, 1991 12% 29 583 Jul. 1, 1991—Sep. 30, 1991 12% 29 583 Oct. 1, 1991—Dec. 31, 1991 12% 29 583 Jan. 1, 1992—Mar. 31, 1992 11% 75 629 Apr. 1, 1992—Jun. 30, 1992 10% 73 627 Jul. 1, 1992—Sep. 30, 1992 10% 73 627 Oct. 1, 1992—Dec. 31, 1992 9% 71 625 Jan. 1, 1993—Mar. 31, 1993 9% 23 577 Apr. 1, 1993—Jun. 30, 1993 9% 23 577 Jul. 1, 1993—Sep. 30, 1993 9% 23 577 Oct. 1, 1993—Dec. 31, 1993 9% 23 577 Jan. 1, 1994—Mar. 31, 1994 9% 23 577 Apr. 1, 1994—Jun. 30, 1994 9% 23 577 Jul. 1, 1994—Sep. 30, 1994 10% 25 579 Oct. 1, 1994—Dec. 31, 1994 11% 27 581 Jan. 1, 1995—Mar. 31, 1995 11% 27 581 Apr. 1, 1995—Jun. 30, 1995 12% 29 583 Jul. 1, 1995—Sep. 30, 1995 11% 27 581 Oct. 1, 1995—Dec. 31, 1995 11% 27 581 Jan. 1, 1996—Mar. 31, 1996 11% 75 629 Apr. 1, 1996—Jun. 30, 1996 10% 73 627 Jul. 1, 1996—Sep. 30, 1996 11% 75 629 Oct. 1, 1996—Dec. 31, 1996 11% 75 629 Jan. 1, 1997—Mar. 31, 1997 11% 27 581 Apr. 1, 1997—Jun. 30, 1997 11% 27 581 Jul. 1, 1997—Sep. 30, 1997 11% 27 581 Oct. 1, 1997—Dec. 31, 1997 11% 27 581 Jan. 1, 1998—Mar. 31, 1998 11% 27 581 Apr. 1, 1998—Jun. 30, 1998 10% 25 579 Jul. 1, 1998—Sep. 30, 1998 10% 25 579 Oct. 1, 1998—Dec. 31, 1998 10% 25 579 Jan. 1, 1999—Mar. 31, 1999 9% 23 577 Apr. 1, 1999—Jun. 30, 1999 10% 25 579 Jul. 1, 1999—Sep. 30, 1999 10% 25 579 Oct. 1, 1999—Dec. 31, 1999 10% 25 579 Jan. 1, 2000—Mar. 31, 2000 10% 73 627

December 13, 1999 660 1999–50 I.R.B.

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 – PRESENT

1995–1 C.B RATE TABLE PG Jan. 1, 1995—Mar. 31, 1995 6.5% 18 572 Apr. 1, 1995—Jun. 30, 1995 7.5% 20 574 Jul. 1, 1995—Sep. 30, 1995 6.5% 18 572 Oct. 1, 1995—Dec. 31, 1995 6.5% 18 572 Jan. 1, 1996—Mar. 31, 1996 6.5% 66 620 Apr. 1, 1996—Jun. 30, 1996 5.5% 64 618 Jul. 1, 1996—Sep. 30, 1996 6.5% 66 620 Oct. 1, 1996—Dec. 31, 1996 6.5% 66 620 Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572 Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572 Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572 Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572 Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572 Apr. 1, 1998—Jun. 30, 1998 5.5% 16 570 Jul. 1. 1998—Sep. 30, 1998 5.5% 16 570 Oct. 1, 1998—Dec. 31, 1998 5.5% 16 570 Jan. 1, 1999—Mar. 31, 1999 4.5% 14 568 Apr. 1, 1999—Jun. 30, 1999 5.5% 16 570 Jul. 1, 1999—Sep. 30, 1999 5.5% 16 570 Oct. 1, 1999—Dec. 31, 1999 5.5% 16 570 Jan. 1, 2000—Mar. 31, 2000 5.5% 64 618

ments to the regulations (REG–105162–97, 1997–2 C.B. 649) under §§301.6109–1, 301.7701–2, and 301.7701–3 were published in the Federal Register (62 F.R. 55768). A number of comments were received on the proposed regulations. The public hearing scheduled for February 24, 1998, was canceled because no one requested to speak. After considering the submitted comments, the IRS and Treasury adopt the proposed amendments to the regulations under §§301.6109–1, 301.7701–2, and 301.7701–3 as revised by this Treasury decision.

Explanation of Provisions

I. Characterization of Elective Changes

in Classification

There are four possible changes in classification of an eligible entity by election under §301.7701–3: (i) a partnership elects to be an association taxable as a

Section 7701.—Definitions

26 CFR 301.7701–3: Classification of certain business entities.

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

T.D. 8844

Treatment of Changes in Elective Entity Classification

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations describing how elective changes in classification will be treated for federal tax purposes. The final regulations affect business entities and their members. The final regulations provide

guidance to taxpayers who elect to change an entity’s classification for federal tax purposes.

DATES: Effective Date: These regulations are effective November 29, 1999.

Applicability Dates: These regulations apply on or after November 29, 1999. However, taxpayers may choose to apply certain provisions in these regulations before November 29, 1999 as specified in §301.7701–2(e) and §301.7701–3(g)(4).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Dan Carmody, (202) 622-3080 (not a toll-free number); concerning international issues, Mark Harris, (202) 622-3860 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

On October 28, 1997, proposed amend

1999–50 I.R.B. 661 December 13, 1999

corporation (association); (ii) an association elects to be a partnership; (iii) an association elects to be disregarded as an entity separate from its owner (disregarded entity); and (iv) a disregarded entity elects to be an association. The proposed regulations provide a form that each elective conversion would be treated as having for federal tax purposes. Under the proposed regulations, there is only one form for each elective conversion, and taxpayers could not elect to have a different form apply to the elective conversion.

A. Elective Conversions Treated as

Having One Form

Commentators recommended that taxpayers be allowed to choose which form to apply to an elective conversion. This would allow taxpayers to avoid having to take the actual steps of a conversion to produce the most favorable tax results. A commentator suggested that the lack of choice in the proposed regulations is inconsistent with the intent of the check-thebox regulations, which adopted an elective regime for classifying eligible entities.

Because elective conversions are transactions without actual form, the IRS and Treasury believe that it is appropriate to provide that only one transaction form will be applied to each type of elective conversion. Furthermore, while the check-the-box regulations provide an elective regime for classifying eligible entities, the elective regime was not intended to substitute for actual transactions in all situations. Instead, the purpose of implementing the regime was to simplify an area of the law where legal distinctions previously drawn in determining an entity’s classification were no longer meaningful. While the factors considered under prior law did not meaningfully distinguish between business organizations, taxpayers still were required to expend considerable resources to ensure that they obtained the classification they desired. Small business organizations often lacked the resources and expertise to achieve their desired tax classification. This was viewed as unfair. The IRS was also expending considerable resources providing guidance on these classification issues. These same concerns generally are not present in determining the form of a conversion transaction. Therefore, the final

regulations maintain only one form for each type of elective conversion.

B. Form of Conversion From Association

to Partnership

The proposed regulations provide that an elective conversion of an association to a partnership is deemed to have the following form: The association distributes all of its assets and liabilities to its shareholders in liquidation of the association, and immediately thereafter, the shareholders contribute all of the distributed assets and liabilities to a newly formed partnership.

A commentator suggested that the proposed form for an elective conversion of an association to a partnership may not minimize the tax consequences of such a conversion under certain circumstances. The commentator suggested that the proposed form should be available as an election, but that the default form should be a deemed transfer of assets and liabilities from the electing corporation to a newly formed partnership for interests in the partnership followed immediately by a liquidation of the electing corporation.

The IRS and Treasury believe that under current law a voluntary formless change from an association to a partnership should be treated as a liquidation of the corporation followed by a contribution of assets to the partnership. See Rev. Rul. 63–107 (1963–2 C.B. 71). Moreover, if the assets were deemed contributed by the electing corporation to the partnership for partnership interests followed by a liquidation of the corporation, the application of section 704(c) (contribution of appreciated property), section 708 (partnership termination), and section 754 (elective adjustments to the basis of partnership assets) could be somewhat complex and difficult for taxpayers and the IRS to administer. Therefore, the proposed form for the elective conversion of an association to a partnership is adopted without change.

C. Timing of Elective Changes in

Classification

The proposed regulations provide that a classification election takes effect at the start of the day for which the election is effective. Any transactions that are deemed to occur because of a change in

classification are treated as occurring immediately before the close of the day before the effective date of the election. The owners of the entity when the election is effective may be different from the owners of the entity when the conversion transactions are deemed to occur. To ensure that the taxpayers who recognize the tax consequences of a conversion election approve of the election, the proposed regulations require that the election be signed by every owner on the date of the deemed conversion transactions.

A commentator indicated that purchasers who wish to make a classification election effective as of their first day of ownership may endure a burden in obtaining the consents of previous owners. The commentator recommended that the deemed conversion transactions be treated as occurring at the start of the day for which the election is effective, eliminating the need to obtain the consent of prior owners. Under this suggestion, purchasers of an association who wish to elect partnership treatment effective as of the first day of ownership would be treated as owning both stock and partnership interests on that first day of ownership. This would result in the purchasers being responsible for a corporate return for their transitory period of corporate ownership. See §1.6012–2.

The IRS and Treasury intended that the proposed timing rule generally would be beneficial for taxpayers. The IRS and Treasury believe that any burden imposed by this rule is outweighed by the transactional flexibility that this rule provides. Accordingly, the suggested change to the timing rule is not adopted.

Another commentator noted a conflict between the proposed timing rule and the deemed transactions under section 338. Section 338 allows a purchasing corporation to treat its stock purchase of another corporation as an asset purchase. Under section 338, a purchasing corporation may elect to treat the target corporation as (1) selling its assets at fair market value on the acquisition date, and (2) a new corporation that purchased all of the assets at the beginning of the day after the acquisition date. If the purchaser also makes a classification election for the target effective for the purchaser’s first day of ownership, the timing of the deemed liquidation under §301.7701–3(g)(1) would conflict

December 13, 1999 662 1999–50 I.R.B.

with the timing of the deemed transactions required by section 338.

To address the issue, the final regulations specify that if section 338 applies, an election to convert the target corporation’s classification cannot be effective before the day after the acquisition date of the target corporation. Additionally, the deemed liquidation and conversion under §301.7701–3(g)(1) will occur immediately after the completion of the section 338 transactions. These rules follow the approach of §1.338–2(c)(1)(i), which provides that when a target corporation liquidates on the acquisition date, the liquidation is treated as occurring on the following day and immediately after the deemed purchase of assets. If a taxpayer makes an election under section 338 (without a section 338(h)(10) election) regarding a target corporation that is subsequently deemed liquidated under these final regulations, the target corporation must file a final or deemed sale return as a C corporation reflecting the deemed sale. See §1.338–1(e).

Commentators also expressed concern over the effect the proposed timing rule would have on a sequence of elections when a number of corporations are owned through a single ownership chain. If the elections are all effective for the same date, the effect of the interaction of the timing rule with section 332 is unclear. For example, P corporation owns 100 percent of the interest of an eligible entity classified as an association (S1), which owns directly 100 percent of the interest of an eligible entity classified as an association (S2). P wants to convert S1 and S2 to disregarded entities on the same day; however, if both deemed liquidations are treated as occurring simultaneously, it is not clear that section 332 nonrecognition treatment would be available for both liquidations. The final regulations clarify that in such a situation, unless another order is specified for the elections, S1 will be treated as liquidating into P immediately before S2 liquidates into P.

Commentators suggested that this situation could be addressed by allowing taxpayers to make elections effective by the hour, instead of only at the start of the day. The IRS and Treasury believe that the clarification in the final regulations appropriately addresses the treatment of successive elections. Therefore, the final

regulations maintain the rule that conversion elections take effect at the start of the day on which the election is effective.

II. Taxpayer Identifying Numbers and

Disregarded Entities

The proposed regulations provide clarification of the rules regarding taxpayer identifying numbers (TINs). The proposed regulations restate the rule that when an entity’s classification changes under §301.7701–3, it retains its employer identification number (EIN). The proposed regulations also clarified the rule that a disregarded entity must use its owner’s TIN for federal tax purposes. Furthermore, when a disregarded entity becomes respected as a separate entity, it must use its own EIN and not the TIN of the single owner.

One commentator asked for clarification regarding the use of TINs and EINs in the proposed regulations. TINs include EINs, social security numbers (SSNs), and IRS individual taxpayer identification numbers (ITINs). The regulations require that a disregarded entity report under the owner’s TIN. The regulations refer to a taxpayer’s TIN because the term TIN encompasses not only an EIN, but also an SSN and an ITIN.

Another commentator suggested that the proposed regulations were too restrictive and prohibited a disregarded entity from applying for and receiving its own TIN. The regulations do not prevent a single member disregarded entity from applying for and receiving its own TIN. The regulations merely provide that, except as otherwise provided in regulations or other guidance, the single owner disregarded entity must use the owner’s TIN for federal tax purposes and not the EIN of the disregarded entity. Notice 99–6 (1999–3 I.R.B. 1) provides guidance on the limited circumstances under which a disregarded entity may use its own EIN.

III. Rules for Foreign Entities

These final regulations also contain rules relating to certain foreign entities.

A. Foreign Per Se Entities

The final check-the-box regulations provided a list of the names of certain foreign business entities that are treated as corporations for federal tax purposes. In

response to comments from taxpayers, the proposed regulations clarified those provisions. Specifically, clarifications were made with respect to certain business entities formed in Finland, Malaysia, Malta, Mexico, and Norway. These final regulations adopt the proposed regulation’s clarifications.

These final regulations also clarify the treatment of an entity formed in Trinidad and Tobago that is specified in the final check-the-box regulations. Prior to April 1997, Trinidad and Tobago’s Companies Act distinguished between public and private limited companies. Effective April 1997, Trinidad and Tobago’s Companies Act was amended and now only provides for limited companies (and no longer provides for private limited companies). Accordingly, these final regulations have been modified to take into account that change. The effective date of these final regulations with regard to an entity formed in Trinidad and Tobago has been modified so as not to disadvantage taxpayers who relied on the final check-thebox regulations. These final regulations provide that the rule with regard to an entity formed in Trinidad and Tobago will be effective on or after November 29, 1999. Accordingly, this rule only affects those entities which were formed (or made affirmative elections) on or after November 29, 1999.

These regulations also clarify the exception to per se corporate treatment for Canadian companies and corporations. When the final check-the-box regulations were promulgated, the only company or corporation that could be formed where the liability of all of its members was unlimited pursuant to any federal or provincial statute (as opposed to through side agreements of the members), was a Nova Scotia Unlimited Liability Company (NSULC). However, in order to avoid changing the regulations if any other province, or the federal government, subsequently allowed for the formation of unlimited liability companies by statute, these regulations did not specifically list the NSULC. In response to questions from taxpayers, the regulation is clarified, with effect from January 1, 1997, by specifically naming the NSULC, while still providing for any other unlimited liability company that might subsequently be allowed by any other federal or provincial statute.

1999–50 I.R.B. 663 December 13, 1999

B. Foreign Eligible Entities

Proposed regulations that provide a special rule for certain foreign eligible entities are published in REG–110385–99 on page 000. In addition, the IRS and Treasury are still studying what, if any, consequences occur when a foreign eligible entity that is not relevant for federal tax purposes files an entity classification election. The IRS and Treasury continue to request comments on this topic.

IV. Changes in Number of Members of an

Entity

The proposed regulations provide that an entity’s classification may change as a result of a change in the number of its members. Specifically, an eligible entity classified as a partnership will become a disregarded entity when the entity’s membership is reduced to one member, and a disregarded entity will be classified as a partnership when the entity has more than one member. The final regulations adopt these provisions without substantive change. Guidance on the federal tax consequences of such changes has been provided in Rev. Rul. 99–5 (1999–6 I.R.B. 8) and Rev. Rul. 99–6 (1999–6 I.R.B. 6).

Effective Date

These regulations are applicable on or after November 29, 1999. In response to comments, however, the final regulations include a provision allowing taxpayers to apply the regulations retroactively for elective entity conversions that occurred before November 29, 1999. Taxpayers may apply the final regulations retroactively only if all taxpayers involved in the transaction follow the regulations. The rules contained in §301.6109–1(h) are applicable as of January 1, 1997. Certain changes to §301.7701–2(b)(8) may be applied before the effective date as specified in §301.7701–2(e).

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regula

tions, 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 notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Dan Carmody and Jeff Erickson, Office of Chief Counsel (Passthroughs and Special Industries) and Mark Harris and Philip Tretiak, Office of Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Amendments to the Regulations

Accordingly, 26 CFR part 301 is 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. Section 301.6109-1 is amended as follows:

Paragraph (d)(2)(ii) is removed and reserved.
Paragraph (h) is redesignated as paragraph (i) and the first sentence of newly designated paragraph (i)(1) is amended by removing the language “paragraph (h)” and adding “paragraph (i)” in its place.
A new paragraph (h) is added. The addition reads as follows:

§301.6109–1 Identifying numbers.

(h) Special rules for certain entities under §301.7701-3 —(1) General rule. Any entity that has an employer identification number (EIN) will retain that EIN if its federal tax classification changes under §301.7701–3.

(2) Special rules for entities that are disregarded as entities separate from their owners —(i) When an entity becomes disregarded as an entity separate from its owner. Except as otherwise provided in regulations or other guidance, a single owner entity that is disregarded as an entity separate from its owner under §301.7701–3, must use its owner’s taxpayer identifying number (TIN) for federal tax purposes.

(ii) When an entity that was disre- garded as an entity separate from its owner becomes recognized as a separate entity. If a single owner entity’s classification changes so that it is recognized as a separate entity for federal tax purposes, and that entity had an EIN, then the entity must use that EIN and not the TIN of the single owner. If the entity did not already have its own EIN, then the entity must acquire an EIN and not use the TIN of the single owner.

(3) Effective date. The rules of this paragraph (h) are applicable as of January 1, 1997.

Par. 3. Section 301.7701–2 is amended as follows:

Paragraph (b)(8)(i) is amended by revising the entries for Finland, Malta, Norway, and Trinidad and Tobago.
Paragraph (b)(8)(ii)(A) is redesignated as paragraph (b)(8)(ii)(A)(1) and is revised.
Paragraph (b)(8)(ii)(B) is redesignated as paragraph (b)(8)(ii)(A)(2).
Paragraph (b)(8)(ii) heading and introductory text are redesignated as paragraph (b)(8)(ii)(A) heading and introductory text, and a new paragraph heading is added for paragraph (b)(8)(ii).
Paragraphs (b)(8)(ii)(A)(3) and (b)(8)(ii)(B) are added.
Paragraphs (b)(8)(iii), (b)(8)(iv), and (e) are revised.

The revisions and additions read as follows:

§301.7701–2 Business entities; definitions.

(b) * * * (8) * * * (i) * * *

December 13, 1999 664 1999–50 I.R.B.

Finland, Julkinen Osakeyhtio/Publikt Aktiebolag

Malta, Public Limited Company

Norway, Allment Aksjeselskap

Trinidad and Tobago, Limited Company

(ii) Clarification of list of corporations in paragraph (b)(8)(i) of this section (A) Exceptions in certain cases. - * *

( 1 ) With regard to Canada, a Nova Scotia Unlimited Liability Company (or any other company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law).

( 3 ) With regard to Malaysia, a Sendirian Berhad.

(B) Inclusions in certain cases. With regard to Mexico, the term Sociedad Anonima includes a Sociedad Anonima that chooses to apply the variable capital provision of Mexican corporate law (Sociedad Anonima de Capital Variable).

(iii) Public companies. For purposes of paragraph (b)(8)(i) of this section, with regard to Cyprus, Hong Kong, and Jamaica, the term Public Limited Company includes any Limited Company that is not defined as a private company under the corporate laws of those jurisdictions. In all other cases, where the term Public Limited Company is not defined, that term shall include any Limited Company defined as a public company under the corporate laws of the relevant jurisdiction.

(iv) Limited companies. For purposes of this paragraph (b)(8), any reference to a Limited Company includes, as the case may be, companies limited by shares and companies limited by guarantee.

(e) Effective date. Except as otherwise provided in this paragraph (e), the rules of this section apply as of January 1, 1997.

The reference to the Finnish, Maltese, and Norwegian entities in paragraph (b)(8)(i) of this section is applicable on November 29, 1999. The reference to the Trinidadian entity in paragraph (b)(8)(i) of this section applies to entities formed on or after November 29, 1999. Any Maltese or Norwegian entity that becomes an eligible entity as a result of paragraph (b)(8)(i) of this section in effect on November 29, 1999, may elect by February 14, 2000, to be classified for federal tax purposes as an entity other than a corporation retroactive to any period from and including January 1, 1997. Any Finnish entity that becomes an eligible entity as a result of paragraph (b)(8)(i) of this section in effect on November 29, 1999, may elect by February 14, 2000, to be classified for federal tax purposes as an entity other than a corporation retroactive to any period from and including September 1, 1997.

Par. 4. Section 301.7701-3 is amended as follows:

A sentence is added at the end of paragraph (c)(1)(iii).
A sentence is added at the end of paragraph (c)(1)(iv).
Paragraph (c)(2)(iii) is added.
A heading is added to paragraph (d)(1).
Paragraph (f) is redesignated as paragraph (h) and newly designated paragraph (h)(1) is revised.
Paragraphs (f) and (g) are added. The revision and additions read as follows:

§301.7701-3 Classification of certain business entities.

(c) * * * (1) * * * (iii) Effective date of election. - * * If a purchasing corporation makes an election under section 338 regarding an acquired subsidiary, an election under paragraph (c)(1)(i) of this section for the acquired subsidiary can be effective no earlier than the day after the acquisition date (within the meaning of section 338(h)(2)).

(iv) Limitation. - * * An election by a newly formed eligible entity that is effective on the date of formation is not considered a change for purposes of this paragraph (c)(1)(iv).

(2) * * * (iii) Changes in classification. For paragraph (c)(2)(i) of this section, if an election under paragraph (c)(1)(i) of this section is made to change the classification of an entity, each person who was an owner on the date that any transactions under paragraph (g) of this section are deemed to occur, and who is not an owner at the time the election is filed, must also sign the election. This paragraph (c)(2)(iii) applies to elections filed on or after November 29, 1999.

(d) Special rules for foreign eligible en- tities—(1) Definition of relevance. - * *

(f) Changes in number of members of an entity —(1) Associations. The classification of an eligible entity as an association is not affected by any change in the number of members of the entity.

(2) Partnerships and single member entities. An eligible entity classified as a partnership becomes disregarded as an entity separate from its owner when the entity’s membership is reduced to one member. A single member entity disregarded as an entity separate from its owner is classified as a partnership when the entity has more than one member. If an elective classification change under paragraph (c) of this section is effective at the same time as a membership change described in this paragraph (f)(2), the deemed transactions in paragraph (g) of this section resulting from the elective change preempt the transactions that would result from the change in membership.

(3) Effect on sixty month limitation. A change in the number of members of an entity does not result in the creation of a new entity for purposes of the sixty month limitation on elections under paragraph (c)(1)(iv) of this section.

(4) Examples. The following examples illustrate the application of this paragraph (f):

Example 1. A, a U.S. person, owns a domestic eligible entity that is disregarded as an entity separate from its owner. On January 1, 1998, B, a U.S. person, buys a 50 percent interest in the entity from A. Under this paragraph (f), the entity is classified as a partnership when B acquires an interest in the entity. However, A and B elect to have the entity classified as an association effective on January 1, 1998. Thus, B is treated as buying shares of stock on Janu

1999–50 I.R.B. 665 December 13, 1999

(including the liquidation of the association) are treated as occurring immediately before the close of December 31 and must be reported by the owners of the entity on December 31. Thus, the last day of the association’s taxable year will be December 31 and the first day of the partnership’s taxable year will be January 1.

(ii) Coordination with section 338 election. A purchasing corporation that makes a qualified stock purchase of an eligible entity taxed as a corporation may make an election under section 338 regarding the acquisition if it satisfies the requirements for the election, and may also make an election to change the classification of the target corporation. If a taxpayer makes an election under section 338 regarding its acquisition of another entity taxable as a corporation and makes an election under paragraph (c) of this section for the acquired corporation (effective at the earliest possible date as provided by paragraph (c)(1)(iii) of this section), the transactions under paragraph (g) of this section are deemed to occur immediately after the deemed asset purchase by the new target corporation under section 338. (iii) Application to successive elections in tiered situations . When elections under paragraph (c)(1)(i) of this section for a series of tiered entities are effective on the same date, the eligible entities may specify the order of the elections on Form 8832. If no order is specified for the elections, any transactions that are deemed to occur in this paragraph (g) as a result of the classification change will be treated as occurring first for the highest tier entity’s classification change, then for the next highest tier entity’s classification change, and so forth down the chain of entities until all the transactions under this paragraph (g) have occurred. For example, Parent, a corporation, wholly owns all of the interest of an eligible entity classified as an association (S1), which wholly owns another eligible entity classified as an association (S2), which wholly owns another eligible entity classified as an association (S3). Elections under paragraph (c)(1)(i) of this section are filed to classify S1, S2, and S3 each as disregarded as an entity separate from its owner effective on the same day. If no order is specified for the elections, the following transactions are deemed to occur under this paragraph

ary 1, 1998. (Under paragraph (c)(1)(iv) of this section, this election is treated as a change in classification so that the entity generally cannot change its classification by election again during the sixty months succeeding the effective date of the election.) Under paragraph (g)(1) of this section, A is treated as contributing the assets and liabilities of the entity to the newly formed association immediately before the close of December 31, 1997. Because A does not retain control of the association as required by section 351, A’s contribution will be a taxable event. Therefore, under section 1012, the association will take a fair market value basis in the assets contributed by A, and A will have a fair market value basis in the stock received. A will have no additional gain upon the sale of stock to B, and B will have a cost basis in the stock purchased from A .

Example 2. (i) On April 1, 1998, A and B, U.S. persons, form X, a foreign eligible entity. X is treated as an association under the default provisions of paragraph (b)(2)(i) of this section, and X does not make an election to be classified as a partnership. A subsequently purchases all of B ’s interest in X .

(ii) Under paragraph (f)(1) of this section, X continues to be classified as an association. X, however, can subsequently elect to be disregarded as an entity separate from A. The sixty month limitation of paragraph (c)(1)(iv) of this section does not prevent X from making an election because X has not made a prior election under paragraph (c)(1)(i) of this section.

Example 3 . (i) On April 1, 1998, A and B, U.S. persons, form X, a foreign eligible entity. X is treated as an association under the default provisions of paragraph (b)(2)(i) of this section, and X does not make an election to be classified as a partnership. On January 1, 1999, X elects to be classified as a partnership effective on that date. Under the sixty month limitation of paragraph (c)(1)(iv) of this section, X cannot elect to be classified as an association until January 1, 2004 (i.e., sixty months after the effective date of the election to be classified as a partnership).

(ii) On June 1, 2000, A purchases all of B ’s interest in X . After A ’s purchase of B ’s interest, X can no longer be classified as a partnership because X has only one member. Under paragraph (f)(2) of this section, X is disregarded as an entity separate from A when A becomes the only member of X . X, however, is not treated as a new entity for purposes of paragraph (c)(1)(iv) of this section. As a result, the sixty month limitation of paragraph (c)(1)(iv) of this section continues to apply to X, and X cannot elect to be classified as an association until January 1, 2004 (i.e., sixty months after January 1, 1999, the effective date of the election by X to be classified as a partnership).

(5) Effective date. This paragraph (f) applies as of November 29, 1999.

(g) Elective changes in classification (1) Deemed treatment of elective change —(i) Partnership to association . If an eligible entity classified as a partnership elects under paragraph (c)(1)(i) of this section to be classified as an association, the following is deemed to occur: The partnership contributes all of its assets and liabilities to the association in ex

change for stock in the association, and immediately thereafter, the partnership liquidates by distributing the stock of the association to its partners.

(ii) Association to partnership. If an eligible entity classified as an association elects under paragraph (c)(1)(i) of this section to be classified as a partnership, the following is deemed to occur: The association distributes all of its assets and liabilities to its shareholders in liquidation of the association, and immediately thereafter, the shareholders contribute all of the distributed assets and liabilities to a newly formed partnership.

(iii) Association to disregarded entity. If an eligible entity classified as an association elects under paragraph (c)(1)(i) of this section to be disregarded as an entity separate from its owner, the following is deemed to occur: The association distributes all of its assets and liabilities to its single owner in liquidation of the association.

(iv) Disregarded entity to an associa- tion. If an eligible entity that is disregarded as an entity separate from its owner elects under paragraph (c)(1)(i) of this section to be classified as an association, the following is deemed to occur: The owner of the eligible entity contributes all of the assets and liabilities of the entity to the association in exchange for stock of the association.

(2) Effect of elective changes. The tax treatment of a change in the classification of an entity for federal tax purposes by election under paragraph (c)(1)(i) of this section is determined under all relevant provisions of the Internal Revenue Code and general principles of tax law, including the step transaction doctrine.

(3) Timing of election —(i) In general. An election under paragraph (c)(1)(i) of this section that changes the classification of an eligible entity for federal tax purposes is treated as occurring at the start of the day for which the election is effective. Any transactions that are deemed to occur under this paragraph (g) as a result of a change in classification are treated as occurring immediately before the close of the day before the election is effective. For example, if an election is made to change the classification of an entity from an association to a partnership effective on January 1, the deemed transactions specified in paragraph (g)(1)(ii) of this section

December 13, 1999 666 1999–50 I.R.B.

(g) as a result of the elections, with each successive transaction occurring on the same day immediately after the preceding transaction: S1 is treated as liquidating into Parent, then S2 is treated as liquidating into Parent, and finally S3 is treated as liquidating into Parent.

(4) Effective date. This paragraph (g) applies to elections that are filed on or after November 29, 1999. Taxpayers may apply this paragraph (g) retroactively to elections filed before November 29, 1999 if all taxpayers affected by the deemed transactions file consistently with this paragraph (g).

(h) Effective date —(1) In general . Except as otherwise provided in this section, the rules of this section are applicable as of January 1, 1997.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

Approved November 2, 1999.

Jonathan Talisman, Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on November 26, 1999, 8:45 a.m., and published in the issue of the Federal Register for November 29, 1999, 64 F.R. 66580)

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

CPI adjustments for below-market loans for 2000 . The amount that section 7872(g) of the Code permits a taxpayer to lend to a qualified continuing care facility without incurring imputed interest is adjusted for years 1987-2000. Rev. Rul. 9859 supplemented and superseded.

Rev. Rul. 99–49

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

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

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

Section 7872(g)(2) provides that, in the case of loans made after October 11, 1985, and before 1987, § 7872(g)(1) applies only to the extent that the aggregate outstanding amount of any loan to which § 7872(g) applies (determined without regard to § 7872(g)(2)), when added to the aggregate outstanding amount of all other previous loans between the lender (or the lender's spouse) and any qualified continuing care facility to which § 7872(g)(1) applies, does not exceed $90,000.

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

amount is increased by the inflation adjustment for the years 1987-2000.

REV. RUL. 99–49 TABLE 1

Limit under 7872(g)(2)

Year Amount

Before 1987 $ 90,000 1987 $ 92,200 1988 $ 94,800 1989 $ 98,800 1990 $103,500 1991 $108,600 1992 $114,100 1993 $117,500 1994 $121,100 1995 $124,300 1996 $127,800 1997 $131,300 1998 $134,800 1999 $137,000 2000 $139,700 Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index 1982-1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 98–59, 1998–52 I.R.B. 8, is supplemented and superseded.

DRAFTING INFORMATION

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

1999–50 I.R.B. 667 December 13, 1999