Part I. Rulings — Internal Revenue Bulletin 2000-5

held May 27, 1999. Numerous comments have been received. After consideration of all the comments, the proposed regulations are adopted as revised by this Treasury Decision.

Public Comments

A. Compliance Monitoring

Inspection Requirement for New Build- ings.

The proposed regulations require that, by the end of the calendar year following the year the last building in a project is placed in service, the Agency conduct onsite inspections of the projects and review the low-income certification, the documentation supporting such certification, and the rent record for each tenant in the project. Most commentators view the requirement for reviewing all tenant records for all buildings in a project as unnecessary and burdensome. Most commentators suggest limiting inspections for new buildings to 20 percent of the project’s low-income units. Commentators also suggest extending the time limit for inspecting new buildings to the end of the calendar year following the first year of the credit period or at least until a reasonable time after the Agency issues Form 8609, “Low-Income Housing Credit Allocation Certification.” This added flexibility would allow the Agency to combine a physical inspection with a file review of the first year of the credit period.

In response to the comments, the final regulations reduce the inspection burden for new buildings by requiring the Agency to conduct on-site inspections of all new buildings in the project and, for at least 20 percent of the project’s low-income units, to inspect the units and review the low-income certifications, the documentation supporting the certifications, and the rent records for the tenants in those units. To allow the Agency sufficient time to review the tenant files for the first year of the credit period, the final regulations extend the time limit for inspecting new buildings to the end of the second calendar year following the year the last building in the project is placed in service. 2. Three-year Inspection Requirement. The proposed regulations require that,

Section.—42 Low-Income Housing Credit

26 CFR 1.42–5: Monitoring compliance with low- income housing credit requirements.

T.D. 8859

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602

Compliance Monitoring and Miscellaneous Issues Relating to the Low-Income Housing Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations regarding the procedures for compliance monitoring by state and local housing agencies (Agencies) with the requirements of the low-income housing credit; the requirements for making carryover allocations; the rules for Agencies’ correction of administrative errors or omissions; and the independent verification of information on sources and uses of funds submitted by taxpayers to Agencies. These final regulations affect owners of low-income housing projects who claim the credit and the Agencies who administer the credit.

DATES: Effective Dates : These regulations are effective January 1, 2001, except that the amendments made to §§1.42–5(c)(5) and (e)(3)(i), and 1.42–13 are effective January 14, 2000, and the amendment made to §1.42–6(d)(4)(ii) is effective January 1, 2000.

Applicability Dates: For dates of applicability of the amendments to §1.42–5, see §1.42–5(h). For date of applicability of the amendment made to §1.42–6, see §1.42–12(c). For date of applicability of the amendments made to §1.42–13, see §1.42–13(d). For date of applicability of §1.42–17, see §1.42–17(b).

FOR FURTHER INFORMATION CONTACT: Paul Handleman, (202) 622-3040 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545-1357. Responses to these collections of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

For §1.42–5, the estimated annual burden per respondent varies from .5 hour to 3 hours for taxpayers and 250 to 5,000 hours for Agencies, with an estimated average of 1 hour for taxpayers and 1,500 hours for Agencies. For §1.42–13, the estimated annual burden per respondent varies from .5 hour to 10 hours for taxpayers and Agencies, with an estimated average of 3.5 hours for taxpayers and 3 hours for Agencies. For §1.42–17, the estimated annual burden per respondent varies from .5 hour to 2 hours for taxpayers and .5 hour to 5 hours for Agencies, with an estimated average of 1 hour for taxpayers and 2 hours for Agencies.

Comments concerning the accuracy of these burden estimates and suggestions for reducing these burdens should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503. Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

On January 8, 1999, the IRS published proposed regulations (REG–114664–97, 1999–11 I.R.B. 21) in the Federal Regis- ter (64 FR 1143) inviting comments under section 42. A public hearing was

2000–5 I.R.B. 429 January 31, 2000

HUD, or private contractors. 4. Local Reports of Building Code Viola- tions.

The proposed regulations require the owner of a low-income housing project to certify that for the preceding 12-month period the state or local government unit responsible for making building code inspections didnot issue a report of a violation for the project. If the governmental unit issued a report of a violation, the owner is required to attach a copy of the report of the violation to the annual certification submitted to the Agency.

A commentator noted that the number of violations attached to the annual owner certification would be considerable because even the highest quality rental housing operations do not have an inspection without a report or notice of some violation. Two commentators suggest attaching reports only for violations that have not been corrected prior to filing the annual owner certification or requiring that owners only attach reports for “major” violations. The commentators suggest defining major violations as violations not corrected within 90 days of the notice of violation or violations where the cost to comply exceeds $2,500. A commentator suggests that Agencies be allowed to distinguish between minor technical violations and serious violations (i.e., lack of heat or hot water, hazardous conditions, and security) in reporting noncompliance.

Though a minor violation will not lead to the disallowance or recapture of section 42 credits, a series of minor violations may be the equivalent of a major violation resulting in disallowance or recapture of credits. Determining the difference between a major and minor violation is subjective. The final regulations do not exclude minor violations from the reporting and recordkeeping requirement. However, to reduce the inspection violation paperwork, the final regulations require that the owner must either attach a statement summarizing the violations or a copy of each violation report to the annual owner certification submitted to the Agency. The owner must state on the certification whether the violation has been corrected. In addition, the final regulations require that the owner retain the original violation report for the Agency’s physical inspection. Retention of the

at least once every 3 years, each Agency conduct on-site inspections of all buildings in each low-income housing project and, for each tenant in at least 20 percent of the project’s low-income units selected by the Agency, review the low-income certification, the documentation supporting such certification, and the rent record.

Most commentators agree with requiring physical inspections of the buildings at least once every 3 years. However, commentators recommend reviewing tenant income and rent records once every 5 years, which is one of the options under the current compliance monitoring regulations (see §1.42–5(c)(2)(ii)(B) requiring an Agency to review tenant files for 20 percent of the low-income housing projects each year). Commentators also recommend reviewing tenant files either onsite or at other locations, including desk audits.

Although the physical inspection and file review requirements for new buildings are relaxed in the final regulations, the final regulations retain the 3-year inspection cycle for existing buildings. The final regulations do not separate the physical inspection and file review cycles (every 3 years for physical inspections and every 5 years for file reviews) as suggested by commentators because it is administratively complete to do both during the same year. The tenant income and rent restrictions in section 42(g) are equally important as the habitability standards for a low-income unit in section 42(i)(3)(B)(ii). The final regulations adopt the suggestion that the file review may be done wherever the tenant files are maintained. 3. Health, Safety, and Building Code In- spections.

The proposed regulations require the Agency to determine whether the project is suitable for occupancy, taking into account local health, safety, and building codes. Many commentators object to this requirement as too costly and unadministerable because building codes vary considerably within states. Commentators also asked for guidelines as to what constitutes an “inspection.” Some commentators propose defining an inspection as looking at selected units in the building and common areas for visible problems or defects without applying the local health, safety, and building codes standards. One

commentator suggests inspections based on a complaint from the local jurisdiction or from a tenant. Some commentators suggest using a uniform physical standard such as the uniform physical condition standards for public housing established by the Department of Housing and Urban Development (HUD) in 24 CFR 5.703.

Section 42(i)(3)(B)(i) excludes from the definition of a “low-income unit” a unit that is not suitable for occupancy. Under section 42(i)(3)(B)(ii), suitability of a unit for occupancy shall be determined under regulations prescribed by the Secretary taking into account local health, safety, and building codes. Recognizing that these codes vary considerably within states, the final regulations require an Agency to determine whether a low-income housing project satisfies these codes, or satisfies the HUD uniform physical condition standards. The HUD standards are intended to ensure that housing is decent, safe, sanitary, and in good repair. Though it would be appropriate that an Agency use HUD’s inspection protocol under 24 CFR 5.705, the final regulations do not mandate use of HUD’s inspection protocol because to do so could increase costs to the Agencies as well as limit their latitude in applying standards consistent with their own operating procedures and practices. The final regulations except a building from the inspection requirement if the building is financed by the Rural Housing Service (RHS) under the section 515 program, the RHS inspects the building (under 7 CFR part 1930(c)), and the RHS and Agency enter into a memorandum of understanding, or other similar arrangement, under which the RHS agrees to notify the Agency of the inspection results. Irrespective of the physical inspection standard selected by the Agency, a low-income housing project under section 42 must continue to satisfy local health, safety, and building codes.

The proposed regulations limit an Agency’s delegation of the physical inspection of a project to only a state or local government unit responsible for making building code inspections. Commentators suggest expanding the delegation of inspections to professional firms. The final regulations remove the delegation limitation and Agencies may delegate the physical inspection requirement to state or local governmental agencies,

January 31, 2000 430 2000–5 I.R.B.

original violation report is not required once the Agency reviews the violation and completes its inspection, unless the violation remains uncorrected. 5. Correction of Noncompliance or Fail- ure to Certify.

The final regulations adopt commentators’ suggestion to limit to a 3-year period after the end of the correction period in §1.42–5(e)(4) the requirement that Agencies file Form 8823, “Low-Income Housing Credit Agencies Report of Noncompliance,” with the IRS reporting the correction of the noncompliance or failure to certify. 6. Compliance Monitoring Effective Dates.

Commentators suggest an effective date of at least one year after the final regulations are published in the Federal Register. Commentators also recommend onsite inspections apply only to new buildings allocated section 42 credits after the effective date of the final regulations.

Because the amendments to the compliance monitoring regulations will require amendments to qualified allocation plans, the final regulations relating to compliance generally contain a January 1, 2001, effective date. Thus, the requirements to attach local health, safety, or building code violations to the annual owner certification and to inspect buildings and review tenant files for existing projects are effective January 1, 2001. The inspection requirement and tenant file review for new buildings is effective for buildings placed in service on or after January 1, 2001. 7. Section 8 and Federal Civil Rights Laws.

Two commentators state that insufficient controls are in place to ensure that low-income housing projects adhere to the requirement in section 42(h)(6)(B)(iv) of nondiscrimination against Section 8 voucher or certificate holders. The commentators suggest that the IRS could help compensate for lack of controls by working with HUD to ensure that Section 8 voucher or certificate holders are aware of, and have access to, low-income housing projects. The commentators also suggest that Agencies provide regional HUD offices a list of low-income housing projects in that state, with information that would be helpful for prospective tenants. One commentator suggests that the prohi

bition on discrimination based on Section 8 status be clarified to exclude policies that bar Section 8 tenants but have no substantial business justification. For example, low-income housing projects should not be permitted to exclude Section 8 voucher or certificate holders through a rule that requires every applicant to have income equal to at least three times the total rent.

The commentators also suggest that the Agencies should be required to develop a plan for educating applicants and owners of projects of the prohibition against discrimination on the basis of Section 8 voucher or certificate status. They recommend that the Agencies should be required to have a procedure for accepting and processing complaints about discrimination against Section 8 voucher or certificate holders. They also recommend that IRS and HUD should work together to study the circumstances under which Section 8 voucher or certificate holders are, or are not, accessing projects.

Section 42(h)(6)(A) provides that no credit shall be allowed by reason of section 42 with respect to any building for the taxable year unless an extended lowincome housing commitment is in effect as of the end of such taxable year. Section 42(h)(6)(B)(iv) defines the term “extended low-income housing commitment” to include any agreement between the taxpayer and the housing credit agency that prohibits the refusal to lease to a holder of a voucher or certificate of eligibility under section 8 of the United States Housing Act of 1937 because of the status of the prospective tenant as such a holder. To help monitor compliance with section 42(h)(6)(B)(iv), the final regulations amend the annual owner certification relating to the extended low-income housing commitment under §1.42–5(c)(1)(xi) to require owners to certify that the owner has not refused to lease a unit in the project to a Section 8 applicant because the applicant holds a Section 8 voucher or certificate.

The IRS has informed HUD of the comments received about preventing discrimination based on Section 8 status. Agencies should provide HUD with publicly available information on section 42 low-income housing projects if HUD requests it.

A commentator also suggests that the

compliance monitoring regulations be amended to acknowledge the authority of Title VIII of the 1968 Civil Rights Act, as well as HUD’s Title VIII regulations; specify the civil rights obligations of the Agencies; and specify what developers and owners of projects must do to satisfy their civil rights obligations.

To monitor for compliance with the Fair Housing Act, the final regulations amend the annual owner certification relating to the general public use requirement in §1.42–5(c)(1)(v) to require owners to certify that no finding of discrimination under the Fair Housing Act has occurred for the project (a finding of discrimination includes an adverse final decision by HUD, an adverse final decision by a substantially equivalent state or local fair housing agency, or an adverse judgment from a Federal court). B. Sources and Uses of Funds

Section 42(m)(2)(A) requires Agencies to limit the housing credit dollar amount allocated to a project to only the amount necessary for the financial feasibility of a project and its viability as a qualified lowincome project through the credit period. The proposed regulations require an Agency to evaluate the housing credit dollar amount at four times: (1) at application for the housing credit dollar amount, (2) the allocation of the housing credit dollar amount, (3) the date the building is placed in service, and (4) after the building is placed in service, but before the Agency issues the Form 8609. Commentators recommend elimination of the evaluation at the placed-in-service date. In practice, Agencies currently evaluate the credit amount at the three other times. The final regulations adopt the recommendation by deleting the fourth time requirement and clarifying that the placed-in-service evaluation may occur not later than the date the Agency issues the Form 8609.

Commentators are concerned that the opinion by a certified public accountant, based upon the accountant’s audit or examination, on the financial determinations and certifications required in the proposed regulations, could have significant cost implications, particularly for smaller developers. Commentators suggest limiting the requirement to projects with 25 or more units, or projects with total development costs of $5 million or more.

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The third-party validation on financial information was recommended in the report by the General Accounting Office (GAO), “Tax Credits: Opportunities to Improve Oversight of the Low-Income Housing Program,” (GAO/GGD/RCED97–55), dated March 28, 1997. The GAO report states on page 93 that an accounting firm with a tax credit speciality would charge in the $5,000 to $7,500 range per engagement for tax credit certifications (opinion on total costs, eligible basis, and tax credit amount) prepared on the basis of an audit done in accordance with AICPA audit standards even for projects costing upwards of $5 million to $10 million. As a percentage of development costs, the CPA tax credit certifications represent a minimal cost for validating financial information. However, in recognition that the cost may be burdensome for smaller developers, the final regulations limit the requirement for an audited schedule of costs for projects with more than 10 units.

Two commentators were concerned that the meaning of the term “financial determinations and certifications” is unclear. A CPA would not be able to evaluate what needs to be audited and whether there are relevant and reliable criteria against which the information can be evaluated. To conduct an audit or attestation engagement, CPAs require that the subject matter be defined and that such subject matter be capable of evaluation against reasonable criteria. Reasonable criteria are essential so that CPAs using the same criteria will be able to arrive at similar conclusions.

Another concern expressed by commentators involved uncertainty as to whether the CPA is being asked to report on financial information that is only historical or whether the CPA is also being asked to examine prospective financial information. CPAs can compile or examine and report on certain types of prospective financial information. However, such engagements generally are more costly than audits of historical information because of minimum presentation guidelines required by professional standards as well as increased risk associated with futureoriented information. The commentators believe that if an Agency were to require CPAs to be associated with prospective financial information, the related costs to

the taxpayer may far exceed any perceived benefits to the Agency. Accordingly, the final regulations have been revised to specify that the CPA’s opinion only relates to historical project costs. C. Correction of Administrative Errors and Omissions

Commentators recommend filing the corrected allocation document with the current year’s Form 8610, “Annual LowIncome Housing Credit Agencies Report,” instead of amending the Form 8610 for the year the allocation was made. Because the administrative errors covered by the automatic approval provision will not have an effect on the total amount of credit the Agency allocated to the building(s) or project, commentators view an amended Form 8610 as unnecessary. Agency recordkeeping would be simplified if all corrected allocation documents could be submitted with the current year’s Form 8610. The final regulations adopt this recommendation.

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 regulations. It is hereby certified that the collections of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the burden on taxpayers is minimal and the burden on small entity Agencies is not significant. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act 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 author of these regulations is Paul F. Handleman, Office of the Assistant Chief Counsel (Passthroughs and Special Industries), IRS. However,

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

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Section 1.42–17 also issued under 26 U.S.C. 42(n); * * *

Par. 2. Section 1.42–5 is amended by:

Removing the word “Revenue” in paragraph (b)(1)(iv) and adding “Omnibus Budget” in its place.
Adding paragraph (b)(3).
Revising paragraphs (c)(1)(v), (c)(1)(vi), (c)(1)(xi), (c)(2)(ii), and (c)(2)(iii).
Removing the word “project” in paragraph (c)(1)(x) and adding “building” in its place.
Removing the word “and” at the end of paragraph (c)(1)(x).
Adding paragraph (c)(1)(xii).
Removing the language “paragraph (c)(2)(ii)(A), (B), and (C) of this section” from the first sentence in paragraph (c)(4)(i) and adding “paragraph (c)(2)(ii) of this section” in its place.
Removing the language “Farmers Home Administration (FmHA)” in the first sentence in paragraph (c)(4)(i) and adding “Rural Housing Service (RHS), formerly known as Farmers Home Administration,” in its place.
Removing the language “FmHA” in paragraph (c)(4)(ii) and adding “RHS” in its place in each place it appears.
Removing the language “An Agency chooses the review requirement of paragraph (c)(2)(ii)(A) of this section and some of the buildings selected for review are” from the first sentence in the example in paragraph (c)(4)(iii) and adding “An Agency selects for review” in its place.
Removing the language “FmHA” in paragraph (c)(4)(iii) Example and adding “RHS” in its place in each place it appears.
Adding paragraph (c)(5).

January 31, 2000 432 2000–5 I.R.B.

Revising paragraph (d).
Removing the language “(c)(2)(ii)(A), (B), or (C) of this section (whichever is applicable)” from paragraph (e)(2) and adding the language “(c)(2)(ii) of this section” in its place.
Adding a sentence at the end of paragraph (e)(3)(i).
Removing the language “paragraph (e)(3) of this section” in the third sentence in paragraph (f)(1)(i) and adding “paragraphs (c)(5) and (e)(3) of this section” in its place.
Adding three sentences at the end of paragraph (h).

The revisions and additions read as follows: §1.42–5 Monitoring compliance with low-income housing credit requirements.

(b) * * * (3) Inspection record retention provi- sion . Under the inspection record retention provision, the owner of a low-income housing project must be required to retain the original local health, safety, or building code violation reports or notices that were issued by the State or local government unit (as described in paragraph (c)(1)(vi) of this section) for the Agency’s inspection under paragraph (d) of this section. Retention of the original violation reports or notices is not required once the Agency reviews the violation reports or notices and completes its inspection, unless the violation remains uncorrected.

(c) * * * (1) * * * (v) All units in the project were for use by the general public (as defined in §1.42–9), including the requirement that no finding of discrimination under the Fair Housing Act, 42 U.S.C. 3601 – 3619, occurred for the project. A finding of discrimination includes an adverse final decision by the Secretary of the Department of Housing and Urban Development (HUD), 24 CFR 180.680, an adverse final decision by a substantially equivalent state or local fair housing agency, 42 U.S.C. 3616a(a)(1), or an adverse judgment from a federal court;

(vi) The buildings and low-income units in the project were suitable for occupancy, taking into account local health, safety, and building codes (or other habitability standards), and the State or local government unit responsible for making local health, safety, or building code in

spections did not issue a violation report for any building or low-income unit in the project. If a violation report or notice was issued by the governmental unit, the owner must attach a statement summarizing the violation report or notice or a copy of the violation report or notice to the annual certification submitted to the Agency under paragraph (c)(1) of this section. In addition, the owner must state whether the violation has been corrected;

(xi) An extended low-income housing commitment as described in section 42(h)(6) was in effect (for buildings subject to section 7108(c)(1) of the Omnibus Budget Reconciliation Act of 1989, 103 Stat. 2106, 2308 - 2311 (1989)), including the requirement under section 42(h)(6)(B)(iv) that an owner cannot refuse to lease a unit in the project to an applicant because the applicant holds a voucher or certificate of eligibility under section 8 of the United States Housing Act of 1937, 42 U.S.C. 1437f (for buildings subject to section 13142(b)(4) of the Omnibus Budget Reconciliation Act of 1993, 107 Stat. 312, 438 – 439 (1993)); and

(xii) All low-income units in the project were used on a nontransient basis (except for transitional housing for the homeless provided under section 42(i)(3)(B)(iii) or single-room-occupancy units rented on a month-by-month basis under section 42(i)(3)(B)(iv)).

(2) * * * (ii) Require that with respect to each low-income housing project—

(A) The Agency must conduct on-site inspections of all buildings in the project by the end of the second calendar year following the year the last building in the project is placed in service and, for at least 20 percent of the project’s low-income units, inspect the units and review the low-income certifications, the documentation supporting the certifications, and the rent records for the tenants in those units; and

(B) At least once every 3 years, the Agency must conduct on-site inspections of all buildings in the project and, for at least 20 percent of the project’s low-income units, inspect the units and review the low-income certifications, the documentation supporting the certifications, and the rent records for the tenants in

those units; and

(iii) Require that the Agency randomly select which low-income units and tenant records are to be inspected and reviewed by the Agency. The review of tenant records may be undertaken wherever the owner maintains or stores the records (either on-site or off-site). The units and tenant records to be inspected and reviewed must be chosen in a manner that will not give owners of low-income housing projects advance notice that a unit and tenant records for a particular year will or will not be inspected and reviewed. However, an Agency may give an owner reasonable notice that an inspection of the building and low-income units or tenant record review will occur so that the owner may notify tenants of the inspection or assemble tenant records for review (for example, 30 days notice of inspection or review).

(5) Agency reports of compliance mon- itoring activities. The Agency must report its compliance monitoring activities annually on Form 8610, “Annual Low-Income Housing Credit Agencies Report.”

(d) Inspection provision —(1) In gen- eral . Under the inspection provision, the Agency must have the right to perform an on-site inspection of any low-income housing project at least through the end of the compliance period of the buildings in the project. The inspection provision of this paragraph (d) is a separate requirement from any tenant file review under paragraph (c)(2)(ii) of this section.

(2) Inspection standard. For the onsite inspections of buildings and low- income units required by paragraph (c)(2)(ii) of this section, the Agency must review any local health, safety, or building code violations reports or notices retained by the owner under paragraph (b)(3) of this section and must determine—

(i) Whether the buildings and units are suitable for occupancy, taking into account local health, safety, and building codes (or other habitability standards); or

(ii) Whether the buildings and units satisfy, as determined by the Agency, the uniform physical condition standards for public housing established by HUD (24 CFR 5.703). The HUD physical condition standards do not supersede or preempt local health, safety, and building codes. A

2000–5 I.R.B. 433 January 31, 2000

low-income housing project under section 42 must continue to satisfy these codes and, if the Agency becomes aware of any violation of these codes, the Agency must report the violation to the Service. However, provided the Agency determines by inspection that the HUD standards are met, the Agency is not required under this paragraph (d)(2)(ii) to determine by inspection whether the project meets local health, safety, and building codes.

(3) Exception from inspection provi- sion. An Agency is not required to inspect a building under this paragraph (d) if the building is financed by the RHS under the section 515 program, the RHS inspects the building (under 7 CFR part 1930), and the RHS and Agency enter into a memorandum of understanding, or other similar arrangement, under which the RHS agrees to notify the Agency of the inspection results.

(4) Delegation . An Agency may delegate inspection under this paragraph (d) to an Authorized Delegate retained under paragraph (f) of this section. Such Authorized Delegate, which may include HUD or a HUD-approved inspector, must notify the Agency of the inspection results.

(e) * * * (3) * * * (i) * * * If the noncompliance or failure to certify is corrected within 3 years after the end of the correction period, the Agency is required to file Form 8823 with the Service reporting the correction of the noncompliance or failure to certify.

(h) * * * In addition, the requirements in paragraphs (b)(3) and (c)(1)(v), (vi), and (xi) of this section (involving recordkeeping and annual owner certifications) and paragraphs (c)(2)(ii)(B), (c)(2)(iii), and (d) of this section (involving tenant file reviews and physical inspections of existing projects, and the physical inspection standard) are applicable January 1, 2001. The requirement in paragraph (c)(2)(ii)(A) of this section (involving tenant file reviews and physical inspections of new projects) is applicable for buildings placed in service on or after January 1, 2001. The requirements in paragraph (c)(5) of this section (involving Agency reporting of compliance monitoring activities to the Service) and paragraph (e)(3)(i) of this section (involving Agency reporting of corrected noncom

pliance or failure to certify within 3 years after the end of the correction period) are applicable January 14, 2000.

Par. 3. Section 1.42–6 is amended by:

In paragraph (c)(3), second sentence, remove the language “Annual Low-Income Housing Credit Agencies Report,” and add the language “ ‘Annual Low-Income Housing Credit Agencies Report,’ “ in its place.
In paragraph (d)(1), first sentence, remove the language “Low-Income Housing Credit Allocation Certification,” and add the language “ ‘Low-Income Housing Credit Allocation Certification,’ “ in its place.
Revising the first sentence in paragraph (d)(4)(ii). §1.42–6 Buildings qualifying for carry- over allocations.

(d) * * * (4) * * * (ii) Agency. The Agency must retain the original carryover allocation document made under paragraph (d)(2) of this section and file Schedule A (Form 8610), “Carryover Allocation of the Low-Income Housing Credit,” with the Agency’s Form 8610 for the year the allocation is made. *

Par. 4. Section 1.42–11 is amended by revising the last sentence in paragraph (b)(3)(ii)(A) to read as follows: § 1.42–11 Provision of services.

(b) * * * (3) * * * (ii) * * * (A) * * * For a building described in section 42(i)(3)(B)(iii) (relating to transitional housing for the homeless) or section 42(i)(3)(B)(iv) (relating to single-room occupancy), a supportive service includes any service provided to assist tenants in locating and retaining permanent housing.

Par. 5. Section 1.42–12 is amended by adding paragraph (c) to read as follows: §1.42–12 Effective dates and transitional rules.

(c) Carryover allocations . The rule set forth in §1.42–6(d)(4)(ii) relating to the requirement that state and local housing agencies file Schedule A (Form 8610), “Carryover Allocation of the Low-Income

Housing Credit,” is applicable for carryover allocations made after December 31, 1999. Par. 6. Section 1.42–13 is amended by:

Revising the introductory text of paragraph (b)(3)(iii).
Adding paragraphs (b)(3)(vi), (b)(3)(vii), and (b)(3)(viii).
Adding a sentence at the end of paragraph (d).

The revisions and additions read as follows: §1.42–13 Rules necessary and appropri- ate; housing credit agencies’ correction of administrative errors and omissions.

(b) * * * (3) * * * (iii) Secretary’s prior approval re- quired. Except as provided in paragraph (b)(3)(vi) of this section, an Agency must obtain the Secretary’s prior approval to correct an administrative error or omission, as described in paragraph (b)(2) of this section, if the correction is not made before the close of the calendar year of the error or omission and the correction—

(vi) Secretary’s automatic approval . The Secretary grants automatic approval to correct an administrative error or omission described in paragraph (b)(2) of this section if—

(A) The correction is not made before the close of the calendar year of the error or omission and the correction is a numerical change to the housing credit dollar amount allocated for the building or multiple-building project;

(B) The administrative error or omission resulted in an allocation document (the Form 8609, “Low-Income Housing Credit Allocation Certification,” or the allocation document under the requirements of section 42(h)(1)(E) or (F), and §1.42–6(d)(2)) that either did not accurately reflect the number of buildings in a project (for example, an allocation document for a 10-building project only references 8 buildings instead of 10 buildings), or the correct information (other than the amount of credit allocated on the allocation document);

(C) The administrative error or omission does not affect the Agency’s ranking of the building(s) or project and the total amount of credit the Agency allocated to the building(s) or project; and

January 31, 2000 434 2000–5 I.R.B.

(D) The Agency corrects the administrative error or omission by following the procedures described in paragraph (b)(3)(vii) of this section.

(vii) How Agency corrects errors or omissions subject to automatic approval. An Agency corrects an administrative error or omission described in paragraph (b)(3)(vi) of this section by—

(A) Amending the allocation document described in paragraph (b)(3)(vi)(B) of this section to correct the administrative error or omission. The Agency will indicate on the amended allocation document that it is making the “correction under §1.42–13(b)(3)(vii).” If correcting the allocation document requires including any additional B.I.N.(s) in the document, the document must include any B.I.N.(s) already existing for buildings in the project. If possible, the additional B.I.N.(s) should be sequentially numbered from the existing B.I.N.(s);

(B) Amending, if applicable, the Schedule A (Form 8610), “Carryover Allocation of the Low-Income Housing Credit,” and attaching a copy of this schedule to Form 8610, “Annual Low-Income Housing Credit Agencies Report,” for the year the correction is made. The Agency will indicate on the schedule that it is making the “correction under §1.42–13(b)(3)(vii).” For a carryover allocation made before January 1, 2000, the Agency must complete Schedule A (Form 8610), and indicate on the schedule that it is making the “correction under §1.42–13(b)(3)(vii)”;

(C) Amending, if applicable, the Form 8609 and attaching the original of this amended form to Form 8610 for the year the correction is made. The Agency will indicate on the Form 8609 that it is making the “correction under §1.42–13(b)(3)(vii)”; and

(D) Mailing or otherwise delivering a copy of any amended allocation document and any amended Form 8609 to the affected taxpayer.

(viii) Other approval procedures. The Secretary may grant automatic approval to correct other administrative errors or omissions as designated in one or more documents published either in the Federal Reg- ister or in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter).

(d) * * * Paragraphs (b)(3)(vi), (vii),

and (viii) of this section are effective January 14, 2000.

Par. 7. Section 1.42–17 is added to read as follows: §1.42–17 Qualified allocation plan.

(a) Requirements —(1) In general.

[Reserved]

(2) Selection criteria. [Reserved] (3) Agency evaluation. Section 42(m)(2)(A) requires that the housing credit dollar amount allocated to a project is not to exceed the amount the Agency determines is necessary for the financial feasibility of the project and its viability as a qualified low-income housing project throughout the credit period. In making this determination, the Agency must consider—

(i) The sources and uses of funds and the total financing planned for the project. The taxpayer must certify to the Agency the full extent of all federal, state, and local subsidies that apply (or which the taxpayer expects to apply) to the project. The taxpayer must also certify to the Agency all other sources of funds and all development costs for the project. The taxpayer’s certification should be sufficiently detailed to enable the Agency to ascertain the nature of the costs that will make up the total financing package, including subsidies and the anticipated syndication or placement proceeds to be raised. Development cost information, whether or not includible in eligible basis under section 42(d), that should be provided to the Agency includes, but is not limited to, site acquisition costs, construction contingency, general contractor’s overhead and profit, architect’s and engineer’s fees, permit and survey fees, insurance premiums, real estate taxes during construction, title and recording fees, construction period interest, financing fees, organizational costs, rent-up and marketing costs, accounting and auditing costs, working capital and operating deficit reserves, syndication and legal fees, and developer fees;

(ii) Any proceeds or receipts expected to be generated by reason of tax benefits;

(iii) The percentage of the housing credit dollar amount used for project costs other than the costs of intermediaries. This requirement should not be applied so as to impede the development of projects in hard-to-develop areas under section 42(d)(5)(C); and

(iv) The reasonableness of the developmental and operational costs of the project.

(4) Timing of Agency evaluation —(i) In general . The financial determinations and certifications required under paragraph (a)(3) of this section must be made as of the following times—

(A) The time of the application for the housing credit dollar amount;

(B) The time of the allocation of the housing credit dollar amount; and

(ii) Time limit for placed-in-service evaluation. For purposes of paragraph (a)(4)(i)(C) of this section, the evaluation for when a building is placed in service must be made not later than the date the Agency issues the Form 8609, “Low-Income Housing Credit Allocation Certification.” The Agency must evaluate all sources and uses of funds under paragraph (a)(3)(i) of this section paid, incurred, or committed by the taxpayer for the project up until date the Agency issues the Form 8609.

(5) Special rule for final determina- tions and certifications . For the Agency’s evaluation under paragraph (a)(4)(i)(C) of this section, the taxpayer must submit a schedule of project costs. Such schedule is to be prepared on the method of accounting used by the taxpayer for federal income tax purposes, and must detail the project’s total costs as well as those costs that may qualify for inclusion in eligible basis under section 42(d). For projects with more than 10 units, the schedule of project costs must be accompanied by a Certified Public Accountant’s audit report on the schedule (an Agency may require an audited schedule of project costs for projects with fewer than 11 units). The CPA’s audit must be conducted in accordance with generally accepted auditing standards. The auditor’s report must be unqualified.

(6) Bond-financed projects . A project qualifying under section 42(h)(4) is not entitled to any credit unless the governmental unit that issued the bonds (or on behalf of which the bonds were issued), or the Agency responsible for issuing the Form(s) 8609 to the project, makes determinations under rules similar to the rules in paragraphs (a)(3), (4), and (5) of this section.

(b) Effective date . This section is ef

2000–5 I.R.B. 435 January 31, 2000

fective January 1, 2001.

Part 602–OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 8. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 9. In §602.101, paragraph (b) is amended by revising the entry for 1.42–5

and adding an entry for 1.42–17 to the table in numerical order to read as follows: §602.101 OMB Control numbers.

(b) * * *

Robert E. Wenzel, Acting Commissioner

of Internal Revenue.

Approved December 28, 1999.

Jonathan Talisman, Acting Assistant Secretary of the

Treasury.

(Filed by the Office of the Federal Register on Janu- ary 13, 2000, 8:45 a.m., and published in the issue of the Federal Register for January 14, 2000, 65 F.R. 2323)

CFR part or section where Current OMB identified and described control No.

1.42–5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1357 1.42–17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1357

§ 368(a)(1)(C), an “acquisition by one corporation . . . of substantially all the properties of another corporation” continued to be a reorganization where payment was effectuated with the acquiror’s voting stock. In the predecessor of current § 368(a)(1)(A), the terms “merger or consolidation” were qualified by requiring that they be “statutory” mergers and consolidations. The word “statutory” was added to the definition of a reorganization so that the definition “will conform more closely to the general requirements of

[state] corporation law.” See H. R. Rep. No. 704, 73d Cong., 2 d Sess. 14 (1934).

Historically, corporate law merger statutes have operated to ensure that “[a] merger ordinarily is an absorption by one corporation of the properties and franchises of another whose stock it has acquired. The merged corporation ceases to exist, and the merging corporation alone survives.” Cortland Specialty Co. v. Com- missioner, 60 F.2d 937, 939 (2d Cir. 1932), cert. denied, 288 U.S. 599 (1933); for other cases that describe mergers as requiring that the target corporation transfer its assets and cease to exist, see, e.g., Vul- can Materials Company v. U.S., 446 F.2d 690, 694 (5th Cir. 1971), cert. denied, 404 U.S. 942 (1971); Fisher v. Commissioner, 108 F.2d 707, 709 (6th Cir. 1939), cert. denied, 310 U.S. 627 (1939). Thus, unlike § 368(a)(1)(C), in which Congress included a “substantially all the properties”

Section 368(a)(1)(A).— Definitions Relating to Corporate Reorganizations

26 CFR 1.368–1: Purpose and scope of exception of reorganization exchanges.

Application of section 368(a)(1)(A) to divisive mergers. The ruling holds that a state law merger will not qualify as a reorganization under section 368(a)(1)(A) of the Code if the merger does not result in one corporation acquiring the assets of a target corporation and the target corporation ceasing to exist.

Rev. Rul. 2000–5

ISSUES:

Whether a transaction in which (1) a target corporation “merges” under state law with and into an acquiring corporation and the target corporation does not go out of existence, or (2) a target corporation “merges” under state law with and into two or more acquiring corporations and the target corporation goes out of existence, qualifies as a reorganization under § 368(a)(1)(A) of the Internal Revenue Code?

FACTS:

Situation (1) . A target corporation transfers some of its assets and liabilities

to an acquiring corporation, retains the remainder of its assets and liabilities, and remains in existence following the transaction. The target corporation’s shareholders receive stock in the acquiring corporation in exchange for part of their target corporation stock and they retain their remaining target corporation stock. The transaction qualifies as a merger under state X corporate law.

Situation (2) . A target corporation transfers some of its assets and liabilities to each of two acquiring corporations. The target corporation liquidates and the target corporation’s shareholders receive stock in each of the two acquiring corporations in exchange for their target corporation stock. The transaction qualifies as a merger under state X corporate law.

DISCUSSION:

The purpose of the reorganization provisions of the Code is to provide tax-free treatment to certain exchanges incident to readjustments of corporate structures made in one of the specified ways described in the Code. Section 1.368–1(b) of the Income Tax Regulations. In 1921, Congress defined a reorganization as including “. . . a merger or consolidation (including the acquisition by one corporation . . . of substantially all the properties of another corporation).” In 1934, Congress separated this rule into two distinct provisions. In the predecessor of current

January 31, 2000 436 2000–5 I.R.B.

requirement, it was not necessary for Congress to explicitly include a similar requirement in § 368(a)(1)(A) because corporate law merger statutes contemplated an acquisition of the target corporation’s assets by the surviving corporation by operation of law.

Compliance with a corporate law merger statute does not by itself qualify a transaction as a reorganization. See, e.g., Southwest Natural Gas Co. v. Commis- sioner, 189 F.2d 332 (5th Cir. 1951), cert. denied, 342 U.S. 860 (1951) (holding that a state law merger was not a reorganization under § 368(a)(1)(A)); Roebling v. Commissioner, 143 F.2d 810 (3d Cir. 1944), cert. denied, 323 U.S. 773 (1944) (same holding) . In addition to satisfying the requirements of business purpose, continuity of business enterprise and continuity of interest, in order to qualify as a reorganization under § 368(a)(1)(A), a transaction effectuated under a corporate law merger statute must have the result that one corporation acquires the assets of the target corporation by operation of the corporate law merger statute and the target corporation ceases to exist. The transactions described in Situations (1) and (2) do not have the result that one corporation acquires the assets of the target corporation by operation of the corporate law merger statute and the target corporation ceases to exist. Therefore, these transactions do not qualify as reorganizations under § 368(a)(1)(A).

In contrast with the operation of corporate law merger statutes, a divisive transaction is one in which a corporation’s assets are divided among two or more corporations. Section 355 provides taxfree treatment for certain divisive transactions, but only if a number of specific requirements are satisfied. Congress intended that § 355 be the sole means under which divisive transactions will be afforded tax-free status and, thus, specifically required the liquidation of the acquired corporation in reorganizations under both §§ 368(a)(1)(C) and 368(a)(1)(D) in order to prevent these reorganizations from being used in divisive transactions that did not satisfy § 355. See S. Rep. No. 1622, 83d Cong., 2d Sess. 274 (1954); S. Rep. No. 169, 98th Cong., 2d Sess. 204 (1984). No specific liquidation requirement was necessary for statutory mergers because corporate law

merger statutes contemplated that only one corporation survived a merger. The transaction described in Situation (1) is divisive because, after the transaction, the target corporation’s assets and liabilities are held by both the target corporation and acquiring corporation and the target corporation’s shareholders hold stock in both the target corporation and acquiring corporation. The transaction described in Situation (2) is divisive because, after the transaction, the target corporation’s assets and liabilities are held by each of the two acquiring corporations and the target corporation’s shareholders hold stock in each of the two acquiring corporations.

HOLDING:

The transactions described in Situations (1) and (2) do not qualify as reorganizations under § 368(a)(1)(A). However, the transactions described in Situations (1) and (2) possibly may qualify for taxfree treatment under other provisions of the Code.

DRAFTING INFORMATION:

The principal author of this revenue ruling is Reginald Mombrun of the Office of the Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Reginald Mombrun on (202) 622-7750 (not a tollfree call).

Section 988.—Treatment of Certain Foreign Currency Transactions

26 CFR 1.988–2: Recognition and computation of exchange gain or loss.

T.D. 8860

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Treatment of Income and Expense From Certain Hyperinflationary, Nonfunctional Currency Transactions and Certain Notional Principal Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations regarding the treatment of income and deductions arising from certain foreign currency transactions denominated in hyperinflationary currencies and coordinates section 988 with the section 446 regulations pertaining to significant nonperiodic payments. These regulations are intended to prevent distortions in computing income and deductions of taxpayers who enter into certain transactions in hyperinflationary currencies, and nonfunctional currency, notional principal contracts with significant nonperiodic payments.

DATES: These regulations are effective February 14, 2000 .

FOR FURTHER INFORMATION CONTACT: Roger M. Brown at (202) 6223830 (not a toll-free number) of the Office of the Associate Chief Counsel (International) within the Office of the Chief Counsel, Room 4554, 1111 Constitution Avenue, NW., Washington, DC. 20224.

SUPPLEMENTARY INFORMATION:

Background

On March 17, 1992, proposed regulations were published in the Federal Reg- ister at (57 F.R. 9217 [INTL–15–91, 1992–1 C.B. 1202]). The IRS received two written comments on the proposed regulations, which are discussed below. No public hearing was held and no requests to speak were received. Having considered the comments, the IRS and Treasury Department adopt the proposed regulations, as modified by this Treasury decision.

Explanation of Provisions

I. Hyperinflationary Instruments A. Proposed Regulations

The proposed regulations under §1.988–2(b)(15) generally provided that currency gain or loss on debt instruments and demand deposits entered into or acquired when the currency in which the item was denominated was hyperinflationary must be realized annually under a

2000–5 I.R.B. 437 January 31, 2000

principal with a devalued currency. In instances, however, where hyperinflationary conditions are subsiding and a lender would actually have currency gain on principal repayment (and the borrower would have currency loss on principal repayment), these assumptions are no longer appropriate. For example, if a lender has currency gain on the marking to market (for currency fluctuations only) of the principal of a debt instrument, high nominal interest rates would not be compensating the lender for the decline in the value of the principal as there would be a gain on the principal.

Accordingly, the final regulations retain the source and character rule of the proposed regulations (direct allocation of the exchange gain or loss against interest expense or income, respectively) when hyperinflationary conditions result in exchange loss to lenders or exchange gain to borrowers on the principal amount of a debt instrument or deposit. However, where a lender has exchange gain or a borrower has exchange loss on the debt instrument — which may occur as hyperinflationary conditions subside — the final regulations clarify that the exchange gain or loss is not allocated against interest expense or income. Rather, the exchange gain or loss is treated under the normal currency character and source rules of §§1.988–3 and 1.988–4. Thus, for example, if an issuer has both interest expense and currency loss, the currency loss is sourced and characterized under section 988 and does not affect the determination of interest expense. (b) Synthetic, Non-hyperinflationary Currency Debt Instruments

The final regulations also make clear that when a debt instrument has interest and principal payments that are to be made by reference to a non-hyperinflationary currency or item (commonly known as interest and principal protection features), the instrument is not marked to market under the final section 988 regulations. This is because the instrument is, in substance, a synthetic non-hyperinflationary instrument and does not experience the distortions associated with a hyperinflationary instrument. (c) Treatment of Hyperinflationary Contracts

Proposed regulation §1.988–2(d)(5) generally provided that currency gain or

mark-to-market methodology. For purposes of determining the character and source (or allocation) of such currency gain or loss, the gain or loss was generally treated as an increase in, or a reduction of, interest income or expense.

The proposed §1.988–2(b)(15) regulations excluded instruments described in section 988(a)(3)(C) (relating to non-dollar, related-party loans where the rate of interest is at least 10 percentage points higher than the Federal mid-term rate) from these rules. Proposed regulations §1.988–2(d)(5) and (e)(7) generally provided that currency gain or loss realized with respect to section 988 forward contracts, futures contracts, option contracts and similar items (such as currency swap contracts) entered into or acquired when the currency in which such an item is denominated was hyperinflationary was recognized annually under a mark-to-market methodology. B. Discussion of Comments and Final Regulations

Comments and the Treasury and IRS’s responses

One of the comments responding to the proposed regulations criticized the exclusion of loans described in section 988(a)(3)(C) from the rules of proposed regulation §1.988–2(b)(15). The comment noted that it was inappropriate to treat related-party loans differently from loans between unrelated parties in this context.

Proposed regulation §1.988–2(b)(15) excluded loans subject to section 988(a)(3)(C) from the mark-to-market rule of the proposed regulations because the loans were already subject to mark-tomarket treatment under section 988(a)(3)(C), which was enacted to prevent manipulation of the section 904(a) foreign tax credit limitation through related party loans with artificially high interest rates. See H. Conf. Rep. No. 841, 99 ^th Cong., 2d Sess. 668 (1986). However, due to interest income’s U.S. source treatment under section 988(a)(3)(C)(ii), mark-to-market treatment under section 988(a)(3)(C), rather than §1.988–2(b)(15), would be, in most cases, more unfavorable to taxpayers.

Since the rules of proposed regulation §1.988–2(b)(15) were consistent with the approach of section 988(a)(3)(C) and prevented manipulation of the type Congress

addressed in that section, the IRS and Treasury agree that transactions described in section 988(a)(3)(C) should not be excluded from the mark-to-market rule of the final regulations. The IRS and Treasury also have concluded that to the extent a debt instrument is subject to the rules of §1.988–2(b)(15), the application of section 988(a)(3)(C)’s resourcing rule is not necessary. The final regulations reflect these changes.

The other comment identified the need for coordinating the mark-to-market regime for hyperinflationary instruments under proposed regulation §1.988–2(b)(15), and the mark-to-market election under proposed regulation §1.988–5(f) for all section 988 transactions. The final regulations do not include a rule coordinating these two markto-market regimes because the mark-to-market election for all section 988 transactions is still in proposed form. Accordingly, the IRS and Treasury have decided that consideration of the proper coordination is most appropriate when the regulations relating to the general markto-market election for all section 988 transactions are finalized. 2. Other changes to the final regulations (a) Source and Character of Gain or Loss

The proposed regulations provided that any exchange gain or loss realized upon marking to market a debt instrument or a demand deposit under proposed regulation §1.988–2(b)(15)(i) was to be directly allocable to the interest income or interest expense from the debt instrument or deposit. Accordingly, the gain or loss reduced or increased the amount of interest income or interest expense paid or accrued during that year with respect to that instrument or deposit. Additionally, if realized exchange gain exceeded interest expense of an issuer, or realized exchange loss exceeded interest income of a holder or depositor, the character and source of such excess amount were to be determined under the general rules of §§1.988–3 and 1.988–4.

The assumption underlying this proposed treatment was that in hyperinflationary conditions, high nominal interest rates perform two functions: compensate lenders for currency loss attributable to the repayment of the principal with a devalued currency, and account for borrowers’ currency gain on the repayment of the

January 31, 2000 438 2000–5 I.R.B.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small businesses.

Drafting Information

The principal author of these regulations is Roger M. Brown of the Office of the Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department also participated in their development.

Adoption of the Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 *** Par. 2. Section 1.988–0 in the Table of Contents is amended by:

The entry for §1.988–2(b)(14)–(15) is removed.
An entry for §1.988–2(b)(14) is added.
An entry for §1.988–2(b)(15) is added.
The entry for §1.988–2(d)(5) is revised.
The entry for §1.988–2(e)(7) is revised. The revisions and additions read as follows: §1.988–0 Taxation of gain or loss from a section 988 transaction; Table of Con- tents.

§1.988–2 Recognition and computation of exchange gain or loss.

(b) *** (14) [Reserved] (15) Debt instruments and deposits denominated in hyperinflationary currencies.

(d) *** (5) Hyperinflationary contracts. (e) *** (7) Special rules for currency swap contracts in hyperinflationary currencies.

loss on derivative contracts described in §1.988–1(a)(2)(iii) and denominated in a currency that was hyperinflationary at the time the contract was entered into was to be realized annually under a mark-to-market methodology. This proposed regulation was issued prior to promulgation of the §1.446–4 regulations (published in the Federal Register on July 18, 1994) which requires that, to clearly reflect income, the timing of income, deduction, gain or loss on a hedge must match the timing of income, deduction, gain or loss on the item being hedged. The final regulations modify proposed regulation §1.988–2(d)(5) by providing that §1.446–4, to the extent applicable, will take precedence over proposed regulation §1.988–2(d)(5). This is because the IRS and Treasury believe that a clearer reflection of income is present where the income and deductions arising from an item hedged under §1.446–4 is matched with the income and deductions arising from the hedge. See §1.446–4(b). (d) Demand and Time Deposits

The proposed regulations applied the mark-to-market rules to demand deposits denominated in a currency that was hyperinflationary at the time the deposit was entered into. Under the final regulations, the mark-to-market rules apply to demand and time deposits that provide for payments denominated in or by reference to a currency which is hyperinflationary at the time the taxpayer enters into or otherwise acquires the deposit, or whose interest rate reflects hyperinflationary conditions in a country. Similar clarifications have been made with respect to the definitions of hyperinflationary debt instruments and currency swap contracts. 3. Abusive transactions The Treasury and the IRS are concerned about the use of hyperinflationary currencies in transactions motivated by tax considerations. Because the direction of exchange rates is relatively predictable in hyperinflation economies, some taxpayers have attempted to use such currencies in transactions lacking economic substance. See, e.g., Agro Science Co. v. Commissioner, T.C. Memo. 1989–687, aff’d, 927 F.2d 213 (5 ^th Cir.), cert. denied, 502 U.S. 907 (1991). However, section 988 may be applied by the IRS in a manner that reflects the proper timing, source, and character of income, gain,

loss, or expense arising from a transaction whose form is not in accordance with its economic substance. §§1.988–1(a)(11) and 1.988–2(f); Agro Science Co. v. Commissioner, supra . Accordingly, the rules contained in this Treasury decision will be applied within the framework of these general economic substance principles. II. Significant Non-periodic Payments and Currency Swaps

The proposed regulations coordinated section 988 with the section 446 regulations pertaining to significant nonperiodic payments. The final regulations maintain this coordination and clarify that exchange gain or loss may be realized on the principal and interest components of a significant nonperiodic payment. III. Proposed Change to Base Period in Notice of Proposed Rulemaking

In REG–116567–99 on page 463, the IRS and Treasury are publishing a notice of proposed rulemaking that proposes to change the period during which inflation rates are measured in the determination of whether a currency is hyperinflationary for purposes of section 988 (base period). The effect of this change to §1.988–1(f) (defining hyperinflationary currency for purposes of section 988) is to take into account current year, hyperinflationary conditions, rather than determining whether a currency is hyperinflationary based on the three years prior to the current year. The proposed change relates only to section 988 and not to the dollar approximate separate transactions method of §1.985–3 (DASTM). However, other sections, such as §1.267(f)–1(e) (relating to application of the loss disallowance rule of section 267(a)(1) as applied to related party, nonfunctional currency loans), which make reference to the section 988 definition of hyperinflation will be affected.

Special Analyses

2000–5 I.R.B. 439 January 31, 2000

Par. 3. Section 1.988–2 is amended by:

Adding paragraphs (b)(14) and (b)(15).
Adding paragraph (d)(5).
Adding paragraph (e)(3)(iv).
Adding paragraph (e)(7). The additions read as follows: §1.988–2 Recognition and computation of exchange gain or loss.

(b) *** (14) [Reserved] (15) Debt instruments and deposits de- nominated in hyperinflationary curren- cies - (i) In general. If a taxpayer issues, acquires, or otherwise enters into or holds a hyperinflationary debt instrument (as defined in paragraph (b)(15)(vi)(A) of this section) or a hyperinflationary deposit (as defined in paragraph (b)(15)(vi)(B) of this section) on which interest is paid or accrued that is denominated in (or determined by reference to) a nonfunctional currency of the taxpayer, then the taxpayer shall realize exchange gain or loss with respect to such instrument or deposit for its taxable year determined by reference to the change in exchange rates between—

(A) The later of the first day of the taxable year, or the date the instrument was entered into (or an amount deposited); and

(B) The earlier of the last day of the taxable year, or the date the instrument (or deposit) is disposed of or otherwise terminated.

(ii) Only exchange gain or loss is real- ized . No gain or loss is realized under paragraph (b)(15)(i) by reason of factors other than movement in exchange rates, such as the creditworthiness of the debtor.

(iii) Special rule for synthetic, non-hy- perinflationary currency debt instruments —(A) General rule. Paragraph (b)(15)(i) does not apply to a debt instrument that has interest and principal payments that are to be made by reference to a currency or item that does not reflect hyperinflationary conditions in a country (within the meaning of §1.988–1(f)).

(B) Example . Paragraph (b)(15)(iii)(A) is illustrated by the following example:

Example. When the Turkish lira (TL) is a hyperinflationary currency, A, a U.S. corporation with the U.S. dollar as its functional currency, makes a 5 year, 100,000 TL-denominated loan to B, an unrelated corporation, at a 10% interest rate when 1,000

TL equals $1. Under the terms of the debt instrument, B must pay interest annually to A in amount of Turkish lira that is equal to $100. Also under the terms of the debt instrument, B must pay A upon maturity of the debt instrument an amount of Turkish lira that is equal to $1,000. Although the principal and interest are payable in a hyperinflationary currency, the debt instrument is a synthetic dollar debt instrument and is not subject to paragraph (b)(15)(i) of this section.

(iv) Source and character of gain or loss —(A) General rule for hyperinfla- tionary conditions . The rules of this paragraph (b)(15)(iv)(A) shall apply to any taxpayer that is either an issuer of (or obligor under) a hyperinflationary debt instrument or deposit and has currency gain on such debt instrument or deposit, or a holder of a hyperinflationary debt instrument or deposit and has currency loss on such debt instrument or deposit. For purposes of subtitle A of the Internal Revenue Code, any exchange gain or loss realized under paragraph (b)(15)(i) of this section is directly allocable to the interest expense or interest income, respectively, from the debt instrument or deposit (computed under this paragraph (b)), and therefore reduces or increases the amount of interest income or interest expense paid or accrued during that year with respect to that instrument or deposit. With respect to a debt instrument or deposit during a taxable year, to the extent exchange gain realized under paragraph (b)(15)(i) of this section exceeds interest expense of an issuer, or exchange loss realized under paragraph (b)(15)(i) of this section exceeds interest income of a holder or depositor, the character and source of such excess amount shall be determined under §§1.988–3 and 1.988–4.

(B) Special rule for subsiding hyperin- flationary conditions . If the taxpayer is an issuer of (or obligor under) a hyperinflationary debt instrument or deposit and has currency loss, or if the taxpayer is a holder of a hyperinflationary debt instrument or deposit and has currency gain, then for purposes of subtitle A of the Internal Revenue Code, the character and source of the currency gain or loss is determined under §§1.988–3 and 1.988–4. Thus, if an issuer has both interest expense and currency loss, the currency loss is sourced and characterized under section 988, and does not affect the determination of interest expense.

(v) Adjustment to principal or basis . Any exchange gain or loss realized under

paragraph (b)(15)(i) of this section is an adjustment to the functional currency principal amount of the issuer, functional currency basis of the holder, or the functional currency amount of the deposit. This adjusted amount or basis is used in making subsequent computations of exchange gain or loss, computing the basis of assets for purposes of allocating interest under §§1.861–9T through 1.861–12T, and 1.882–5, or making other determinations that may be relevant for computing taxable income or loss.

(vi) Definitions —(A) Hyperinflation- ary debt instrument . A hyperinflationary debt instrument is a debt instrument that provides for—

( 1 ) Payments denominated in or determined by reference to a currency that is hyperinflationary (as defined in §1.988–1(f)) at the time the taxpayer enters into or otherwise acquires the debt instrument; or

( 2 ) Payments denominated in or determined by reference to a currency that is hyperinflationary (as defined in §1.988–1(f)) during the taxable year, and the terms of the instrument provide for the adjustment of principal or interest payments in a manner that reflects hyperinflation. For example, a debt instrument providing for a variable interest rate based on local conditions and generally responding to changes in the local consumer price index will reflect hyperinflation.

(B) Hyperinflationary deposit . A hyperinflationary deposit is a demand or time deposit or similar instrument issued by a bank or other financial institution that provides for—

( 2 ) Payments denominated in or determined by reference to a currency that is hyperinflationary (as defined in §1.988–1(f)) during the taxable year, and the terms of the deposit provide for the adjustment of the deposit amount or interest payments in a manner that reflects hyperinflation.

(vii) Interaction with other provisions (A) Interest allocation rules. In determining the amount of interest expense, this

January 31, 2000 440 2000–5 I.R.B.

paragraph (b)(15) applies before §§1.861–9T through 1.861–12T, and 1.882–5. (B) DASTM . With respect to a qualified business unit that uses the United States dollar approximate separate transactions method of accounting described in §1.985–3, paragraph (b)(15)(i) of this section does not apply.

(C) Interaction with section 988(a)(3)(C) . Section 988(a)(3)(C) does not apply to a debt instrument subject to the rules of paragraph (b)(15)(i) of this section.

(D) Hedging rules . To the extent §1.446–4 or 1.988–5 apply, the rules of paragraph (b)(15)(i) of this section will not apply. This paragraph (b)(15)(vii)(D) does not apply if the application of §1.988–5 results in hyperinflationary debt instrument or deposit described in paragraph (b)(15)(vi)(A) or (B) of this section.

(viii) Effective date . This paragraph (b)(15) applies to transactions entered into after February 14, 2000 .

(d) * * * (5) Hyperinflationary contracts —(i) In general . If a taxpayer acquires or otherwise enters into a hyperinflationary contract (as defined in paragraph (d)(5)(ii) of this section) that has payments to be made or received that are denominated in (or determined by reference to) a nonfunctional currency of the taxpayer, then the taxpayer shall realize exchange gain or loss with respect to such contract for its taxable year determined by reference to the change in exchange rates between—

(A) The later of the first day of the taxable year, or the date the contract was acquired or entered into; and

(B) The earlier of the last day of the taxable year, or the date the contract is disposed of or otherwise terminated.

(ii) Definition of hyperinflationary contract . A hyperinflationary contract is a contract described in paragraph (d)(1) of this section that provides for payments denominated in or determined by reference to a currency that is hyperinflationary (as defined in §1.988–1(f)) at the time the taxpayer acquires or otherwise enters into the contract.

(iii) Interaction with other provisions (A) DASTM . With respect to a qualified business unit that uses the United States

dollar approximate separate transactions method of accounting described in §1.985–3, this paragraph (d)(5) does not apply.

(B) Hedging rules. To the extent §1.446–4 or 1.988–5 apply, this paragraph (d)(5) does not apply.

(C) Adjustment for subsequent trans- actions. Proper adjustments must be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of this paragraph (d)(5).

(A) The later of the first day of the taxable year, or the date the instrument was entered into (by the taxpayer); and

(B) The earlier of the last day of the taxable year, or the date the instrument is disposed of or otherwise terminated.

(ii) Adjustment to principal or basis. Proper adjustments are made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of this paragraph (e)(7).

(iii) Interaction with DASTM. With respect to a qualified business unit that uses the United States dollar approximate separate transactions method of accounting described in §1.985–3, this paragraph (e)(7) does not apply.

(iv) Effective date . This paragraph (d) (5) is applicable to transactions acquired or otherwise entered into after February 14, 2000 . (e) *** (3) *** (iv) Coordination with §1.446–3(g)(4) regarding swaps with significant nonperi- odic payments. The rules of §1.446–3(g)(4) apply to any currency swap with a significant nonperiodic payment. Section 1.446–3(g)(4) applies before this paragraph (e)(3). Thus, if §1.446–3(g)(4) applies, currency gain or loss may be realized on the loan. This paragraph (e)(3)(iv) applies to transactions entered into after February 14, 2000 .

(7) Special rules for currency swap contracts in hyperinflationary currencies —(i) In general . If a taxpayer enters into a hyperinflationary currency swap (as defined in paragraph (e)(7)(iv) of this section), then the taxpayer realizes exchange gain or loss for its taxable year with respect to such instrument determined by reference to the change in exchange rates between —

(iv) Definition of hyperinflationary currency swap contract. A hyperinflationary currency swap contract is a currency swap contract that provides for—

(A) Payments denominated in or determined by reference to a currency that is hyperinflationary (as defined in §1.988–1(f)) at the time the taxpayer enters into or otherwise acquires the currency swap; or

(B) Payments that are adjusted to take into account the fact that the currency is hyperinflationary (as defined in §1.988–1(f)) during the current taxable year. A currency swap contract that provides for periodic payments determined by reference to a variable interest rate based on local conditions and generally responding to changes in the local consumer price index is an example of this latter type of currency swap contract.

(v) Special effective date for nonfunc- tional hyperinflationary currency swap contracts. Paragraph (e)(7) applies to transactions entered into after February 14, 2000 .

Approved December 13, 1999.

Jonathan Talisman, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on January 12, 2000, 8:45 a.m., and published in the issue of the Federal Register for January 13, 2000, 65 F.R. 2026)

Section 6104.—Publicity of Information Required From Certain Exempt Organizations and Certain Trusts

26 CFR 1.6104(d)–1: Public inspection and distribution of applications for tax exemption and annual information returns of tax-exempt organizations.

T.D. 8861

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 301 and 602

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

2000–5 I.R.B. 441 January 31, 2000

vate foundation must publish the notice not later than the due date of the return (determined with regard to any extension of time for filing) in a newspaper having general circulation in the county in which the principal office of the foundation is located. Section 6104(e), as in effect prior to the effective date of the Tax and Trade Relief Extension Act of 1998 (with respect to private foundations), requires a private foundation to allow public inspection of the foundation’s application for recognition of exemption at the foundation’s principal office (and certain regional or district offices). Section 6104(e) also requires a private foundation to provide copies of its exemption application upon request. The requirement to provide copies of an exemption application upon request becomes effective, however, only after the Secretary of the Treasury issues final regulations applicable to private foundations that describe how the requirement is inapplicable if the private foundation makes its exemption application widely available or obtains an IRS determination that a particular request is part of a harassment campaign.

Amendments Made by the Tax and Trade Relief Extension Act of 1998

The Tax and Trade Relief Extension Act of 1998 was enacted on October 21, 1998. Among its provisions, it amended section 6104(e) of the Code to apply to private foundations the same rules regarding public disclosure of annual information returns that apply to other tax-exempt organizations. In addition, the Tax and Trade Relief Extension Act of 1998 repealed existing section 6104(d), and redesignated section 6104(e), as amended, as new section 6104(d). Section 6104(d), as amended by the Tax and Trade Relief Extension Act of 1998, requires each taxexempt organization, including one that is a private foundation, to allow public inspection at its principal office (and at certain regional or district offices) and to comply with requests, made either in person or in writing, for copies of the organization’s application for recognition of exemption and the organization’s three most recent annual information returns. Congress also intended that nonexempt charitable trusts described in section 4947(a)(1) and nonexempt private foundations comply with the expanded public disclosure requirements, just as the infor

Private Foundation Disclosure Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that amend the regulations relating to the public disclosure requirements described in section 6104(d) of the Internal Revenue Code. These final regulations implement changes made by the Tax and Trade Relief Extension Act of 1998, which extended to private foundations the same rules regarding public disclosure of annual information returns that apply to other taxexempt organizations. These final regulations provide guidance for private foundations required to make copies of applications for recognition of exemption and annual information returns available for public inspection and to comply with requests for copies of those documents.

DATES: Effective Date : These regulations are effective March 13, 2000.

Applicability date . Except as provided below, these regulations are applicable to private foundations on or after March 13, 2000. These regulations are not applicable to any private foundation annual information return the due date for which (determined with regard to any extension of time for filing) is before March 13, 2000.

FOR FURTHER INFORMATION CONTACT: Michael B. Blumenfeld, (202) 622-6070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under control number 1545-1655. Responses to these collections of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget .

The estimated average annual burden per respondent/recordkeeper is 30 minutes.

Comments on the accuracy of this bur

den estimate and suggestions for reducing the burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of Man- agement and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document amends §§301.6104(d)–1 through 301.6104(d)–5 of the Procedure and Administration Regulations (26 CFR Part 301) relating to the section 6104(d) public disclosure rules applicable to tax-exempt organizations (organizations described in section 501(c) or (d) and exempt from taxation under section 501(a)) and certain nonexempt charitable trusts and nonexempt private foundations referenced in section 6033(d). The amendments remove existing §301.6104(d)–1 (relating to public inspection of private foundation annual information returns). The amendments also revise §§301.6104(d)–2 through 301.6104(d)–5 to apply the provisions to all tax-exempt organizations, nonexempt charitable trusts described in section 4947(a)(1) and nonexempt private foundations. In addition, the amendments redesignate existing §§301.6104(d)–2 through 301.6104(d)–5 as §§301.6104(d)–0 through 301.6104(d)–3, respectively.

Description of Current Law Disclosure Requirements Applicable to Private Foundations

Section 6104(d), as in effect prior to the effective date of the Tax and Trade Relief Extension Act of 1998 (Division J of H.R. 4328, the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999)(Public Law 105-277, 112 Stat 2681) (with respect to private foundations), requires a private foundation to make its annual information returns available for public inspection at its principal office during regular business hours for a period of 180 days after the foundation publishes notice of the availability of its return. A pri

January 31, 2000 442 2000–5 I.R.B.

mation reporting requirements of section 6033, pursuant to section 6033(d), apply to these entities. See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 1998 (JCS–6–98), November 24, 1998, at 242, fn. 102.

The Tax and Trade Relief Extension Act of 1998 amendments apply to requests made after the later of December 31, 1998, or the 60 ^th day after the Secretary of the Treasury issues final regulations referred to in section 6104(d)(4) (relating to when documents are made widely available and when a particular request is considered part of a harassment campaign). On April 9, 1999, the IRS published T.D. 8818, 1999–17 I.R.B. 3, in the Federal Register (64 FR 17279) final regulations under section 6104(d) applicable to tax- exempt organizations other than private foundations. Accordingly, section 6104(d), as amended by the Tax and Trade Relief Extension Act of 1998, became effective with respect to tax-exempt organizations other than private foundations on June 8, 1999.

On August 10, 1999, the IRS published a notice of proposed rulemaking, under section 6104(d) in the Federal Register (64 FR 43324) that extends the recently-published final regulations under section 6104(d) to apply to private foundations and modifies those final regulations in several respects. The IRS received a few comments on the proposed regulations. No public hearing on the regulations was requested or held. After consideration of all the comments, the proposed regulations are adopted with minor clarifying modifications by this Treasury Decision. The provisions and significant comments are discussed below.

Explanation of the Provisions

These final regulations amend the final regulations (T.D. 8818) under section 6104(d) that were published in the Federal Register (64 FR 17279) on April 9, 1999 (the April 9, 1999 final regulations). The amendments clarify that the term annual information return includes any return that is required to be filed under section 6033. For a private foundation, these returns include Form 990-PF and Form 4720. The amendments clarify that, unlike other taxexempt organizations, a private foundation

must disclose to the general public the names and addresses of its contributors, consistent with section 6104(d)(3). The amendments also clarify that, for purposes of section 6104(d), the terms tax-exempt organization and private foundation include nonexempt private foundations and nonexempt charitable trusts described in section 4947(a)(1) that are subject to the information reporting requirements of section 6033. Finally, the amendments remove existing §301.6104(d)–1 and redesignate existing §§301.6104–2 through 301.6104(d)–5, as §§301.6104(d)–0 through 301.6104(d)–3, respectively.

Until March 13, 2000, private foundations remain subject to section 6104(d) and section 6104(e), as in effect prior to the Tax and Trade Relief Extension Act of 1998, and existing §301.6104(d)–1. Thereafter, private foundations are subject to the public inspection requirements of section 6104(d), as in effect prior to the Tax and Trade Relief Extension Act of 1998, and existing §301.6104(d)–1 with respect to any annual information return the due date (determined with regard to any extension of time for filing) for which is prior to March 13, 2000.

Summary of Comments

One commenter suggested another method to satisfy the widely available exception to the requirement that a private foundation provide a copy of its applicable documents upon request. The commenter would permit a private foundation to satisfy the widely available exception by (1) filing copies of its documents with a state agency that, in turn, makes the documents available for public inspection, and (2) publishing a notice in a newspaper of general circulation stating where the documents are available. The Tax and Trade Relief Extension Act of 1998 repealed the requirement (in former section 6104(d)) that private foundations publish notice of the availability of their annual information returns with respect to annual information returns due after the effective date of these final regulations. The Act extended the same public disclosure requirements that apply to all other tax-exempt organizations to private foundations, including the widely available exception. The proposed regulations specify that a private foundation satisfies the widely available exception by posting its documents on the World Wide Web as de

scribed in the April 9, 1999 final regulations. After carefully considering this comment, the IRS and the Treasury Department have concluded that providing copies of the applicable documents to a state agency and publishing notice would not make those documents widely available. We reached our conclusion because the method suggested by the commenter could impose a substantial inconvenience to members of the public. Therefore, the IRS and the Treasury Department did not adopt this suggestion.

A few commenters asked that these final regulations not require private foundations to disclose to the general public the identities of their contributors. Section 6104(d) requires public disclosure of all the information contained on an exemption application and an annual information return filed with the IRS, unless the information is specifically excepted from disclosure. Section 6104(d)(3) specifically excepts from disclosure the names and addresses of any contributor to an organization which is not a private foundation. By its terms, this exception does not apply to private foundations. The IRS and the Treasury Department believe the rule of the proposed regulation is consistent with the statute and Congressional intent and, therefore, did not change this provision.

One commenter asked that these final regulations clarify how the disclosure requirements apply to a supporting organization described in section 509(a)(3). Section 509(a) provides that an organization described in section 501(c)(3) is a private foundation if it does not meet the requirements of section 509(a)(1), (2), (3), or (4). Therefore, an organization that is described in section 501(c)(3) and classified as a supporting organization under section 509(a)(3) is not a private foundation. The disclosure requirements under section 6104(d) apply to supporting organizations described in section 509(a)(3) in the same manner as they apply to all other tax-exempt organizations that are not private foundations. The proposed regulations define the terms tax-exempt organization and private foun- dation consistent with the applicable statutory provisions, and the IRS and the Treasury Department have determined that further regulatory clarification is not necessary in this regard.

Another commenter expressed concern

2000–5 I.R.B. 443 January 31, 2000

that some private foundations may not have copies of their exemption applications. This commenter suggested that these final regulations only require private foundations formed after 1990 to disclose their exemption applications. Since July 15, 1987, a tax-exempt organization, including one that is a private foundation, has been required under section 6104 to make its exemption application available for public inspection. See section 10702(b) of the Omnibus Budget Reconciliation Act of 1987 (Public Law 100–203) and Notice 88–120 (1988–2 C.B. 454). Under the proposed regulations, a private foundation that filed its exemption application before July 15, 1987 is required to make available for public inspection a copy of its application only if it had a copy of its application on July 15, 1987. Thus, these final regulations do not change this provision of the proposed regulations.

One commenter stated that the applicable date in the proposed regulations, which would eliminate the requirement that private foundations publish notice of the availability of their annual information returns, is inconsistent with the effective date specified in the House Committee Report to the Tax and Trade Relief Extension Act of 1998 (H.R. Rep. No. 105–817). This commenter requested that the final regulations add a rule that prevents the IRS from asserting a late filing penalty against a private foundation whose return is rejected by the IRS because the foundation filed the return on or after June 8, 1999 (the effective date of the April 9, 1999 final regulations) without proof that it satisfied the publication of notice requirement. Section 6104(d), as in effect prior to the effective date of the Tax and Trade Relief Extension Act of 1998, provides that a private foundation must publish a notice of the availability of its return not later than the due date of the return (determined with regard to any extension of time for filing). Section 1.6033–3(b) of the regulations requires a private foundation to attach a copy of the notice to its return.

The Tax and Trade Relief Extension Act of 1998 repealed the publication of notice requirement of section 6104(d) effective for private foundation annual information returns due after the later of December 31, 1998 or 60 days after the Treasury Department issues final regulations that explain how requested documents may be made widely available or when requests for docu

ments are part of a harassment campaign. The April 9, 1999 final regulations do not apply to private foundations and, therefore, the issuance of those regulations did not trigger the repeal of the publication of notice requirement. Indeed, the April 9, 1999 final regulations stated explicitly that, until the IRS issues final regulations under section 6104(d) applicable to private foundations, private foundations continue to be governed by the existing § 301.6104(d)–1 requirements relating to public disclosure of private foundation annual information returns

The IRS and the Treasury Department believe the effective date of the repeal of the publication of notice requirement stated in the proposed regulations is consistent with both the statute and the legislative history. Further, the IRS and the Treasury Department believe it is important to retain one public disclosure standard for private foundations until another is finally adopted. Accordingly, the IRS and the Treasury Department did not modify these final regulations as suggested.

Finally, one commenter expressed concern that disclosure in some instances could adversely affect the charitable operations of some small operating private foundations that advance unpopular causes or desire to maintain a low profile. This commenter suggested that the final regulations should authorize the Secretary to grant a waiver from some or all of the disclosure requirements if a small operating foundation establishes that, without the waiver, its charitable operations could be adversely affected and it provides alternative methods of disclosure that enhance oversight and public accountability. Section 6104(d), however, does not authorize the Secretary to grant waivers except in the case of a harassment campaign determination. Moreover, all tax-exempt organizations have the option under the regulations of avoiding having to comply with requests for copies of documents by making such documents widely available on the Internet. Therefore, the IRS and the Treasury Department did not adopt this suggestion.

Effective Date

These final regulations are applicable to private foundations on March 13, 2000.

Special Analyses

It is hereby certified that the collections

of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the average time required to maintain and disclose the information required under these regulations is estimated to be 30 minutes for each private foundation. This estimate is based on the assumption that, on average, a private foundation will receive one request per year to inspect or provide copies of its application for tax exemption and its annual information returns. Approximately 0.1 percent of the private foundations affected by these regulations will be subject to the reporting requirements contained in the regulations. It is estimated that annually, approximately 65 private foundations will make their documents widely available by posting them on the Internet. In addition, it is estimated that annually, approximately 3 private foundations will file an application for a determination that they are the subject of a harassment campaign such that a waiver of the obligation to provide copies of their applications for tax exemption and their annual information returns is in the public interest. The average time required to complete, assemble and file an application describing a harassment campaign is expected to be 5 hours. Because applications for a harassment campaign determination will be filed so infrequently, they will have no effect on the average time needed to comply with the requirements in these regulations. In addition, a private foundation is allowed in these regulations to charge a reasonable fee for providing copies to requesters. Therefore, it is estimated that it will cost a private foundation less than $10 per year to comply with these regulations, which is not a significant economic impact. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking 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 author of these regulations is Michael B. Blumenfeld, Office of Associate Chief Counsel (Employee Ben

January 31, 2000 444 2000–5 I.R.B.

efits and Exempt Organizations), IRS. Other personnel from the IRS and Treasury Department also participated in their development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 301 and 602 are amended as follows:

PART 301–PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.6104(d)–2 also issued under 26 U.S.C. 6104(d)(3);

Section 301.6104(d)–3 also issued under 26 U.S.C. 6104(d)(3); * * * §301.6104(d)–1 [Removed]

Par. 2. Section 301.6104(d)–1 is removed. §301.6104(d)–2 [Redesignated as §301.6104(d)–0]

Par. 3. Section 301.6104(d)–2 is redesignated as §301.6104(d)–0.

Par. 4. Newly designated §301.6104(d)–0 is revised to read as follows: §301.6104(d)–0 Table of contents.

This section lists the major captions contained in §§301.6104(d)–1 through 301.6104(d)–3 as follows:

§301.6104(d)–1 Public inspection and distribution of applications for tax exemption and annual information returns of tax-exempt organizations.

(a) In general. (b) Definitions. (1) Tax-exempt organization. (2) Private foundation. (3) Application for tax exemption. (i) In general. (ii) No prescribed application form. (iii) Exceptions. (iv) Local or subordinate organizations. (4) Annual information return. (i) In general. (ii) Exceptions. (iii) Returns more than 3 years old. (iv) Local or subordinate organizations. (5) Regional or district offices. (i) In general. (ii) Site not considered a regional or district office.

(c) Special rules relating to public inspection. (1) Permissible conditions on public inspection. (2) Organizations that do not maintain permanent offices. (d) Special rules relating to copies. (1) Time and place for providing copies in response to requests made in person. (i) In general. (ii) Unusual circumstances. (iii) Agents for providing copies. (2) Request for copies in writing. (i) In general. (ii) Time and manner of fulfilling written requests. (A) In general. (B) Request for a copy of parts of document. (C) Agents for providing copies. (3) Fees for copies. (i) In general. (ii) Form of payment. (A) Request made in person. (B) Request made in writing. (iii) Avoidance of unexpected fees. (iv) Responding to inquiries of fees charged. (e) Documents to be provided by regional and district offices. (f) Documents to be provided by local and subordinate organizations. (1) Applications for tax exemption. (2) Annual information returns. (3) Failure to comply. (g) Failure to comply with public inspection or copying requirements. (h) Effective date. (1) In general. (2) Private foundation annual information returns.

§301.6104(d)–2 Making applications and returns widely available.

(a) In general. (b) Widely available. (1) In general. (2) Internet posting. (i) In general. (ii) Transition rule. (iii) Reliability and accuracy. (c) Discretion to prescribe other methods for making documents widely available. (d) Notice requirement. (e) Effective date.

§301.6104(d)–3 Tax-exempt organization subject to harassment

(a) In general. (b) Harassment. (c) Special rule for multiple requests from a single individual or address. (d) Harassment determination procedure. (e) Effect of a harassment determination. (f) Examples. (g) Effective date. §301.6104(d)–3 [Redesignated as §301.6104(d)–1]

Par. 5. Section 301.6104(d)–3 is redesignated as §301.6104(d)–1.

Par. 6. Newly designated §301.6104(d)–1 is amended as follows:

Revise the section heading. 1a. Paragraph (a) is amended as follows:

a. Remove the language “, other than a private foundation (as defined in paragraph (b)(2) of this section),” from the first sentence.

b. Remove the language “, other than a private foundation,” from the second sentence.

c. Remove the language “§§301.6104(d)–4 and 301.6104(d)–5” from the fourth sentence and add “§§301.6104(d)–2 and 301.6104(d)–3” in its place.

In paragraph (b) introductory text, remove the language “§§301.6104(d)–4 and 301.6104(d)–5” and add “§§301.6104(d)–2 and 301.6104(d)–3” in its place.
In paragraph (b)(1), add a sentence at the end of the paragraph.
In paragraph (b)(2), add the language “or a nonexempt charitable trust described in section 4947(a)(1) or a nonexempt private foundation subject to the information reporting requirements of section 6033 pursuant to section 6033(d)” at the end of the sentence.
In paragraph (b)(3)(iii)(B), remove the word “or” at the end of the paragraph.
Redesignate paragraph (b)(3)(iii)(C) as paragraph (b)(3)(iii)(D) and add a new paragraph (b)(3)(iii)(C).
In paragraph (b)(4)(i), remove the last two sentences and add three sentences in their place.
Paragraph (b)(4)(ii) is amended as follows:

a. Remove the language “, and the return of a private foundation” from the first sentence.

b. Revise the last sentence. 9. Revise paragraph (h).

campaign.

2000–5 I.R.B. 445 January 31, 2000

The revisions and additions read as follows: §301.6104(d)–1 Public inspection and distribution of applications for tax exemp- tion and annual information returns of tax-exempt organizations.

(b) * * * (1) * * * The term tax-exempt organization also includes any nonexempt charitable trust described in section 4947(a)(1) or nonexempt private foundation that is subject to the reporting requirements of section 6033 pursuant to section 6033(d).

(3)* * * (iii) * * * (C) In the case of a tax-exempt organization other than a private foundation, the name and address of any contributor to the organization; or

(4) * * * (i) * * * Returns filed pursuant to section 6033 include Form 990, Return of Organization Exempt From Income Tax, Form 990-PF, Return of Private Foundation, or any other version of Form 990 (such as Forms 990-EZ or 990-BL, except Form 990T) and Form 1065. Each copy of a return must include all information furnished to the Internal Revenue Service on the return, as well as all schedules, attachments and supporting documents. For example, in the case of a Form 990, the copy must include Schedule A of Form 990 (containing supplementary information on section 501(c)(3) organizations), and those parts of the return that show compensation paid to specific persons (currently, Part V of Form 990 and Parts I and II of Schedule Aof Form 990).

(ii) * * * In the case of a tax-exempt organization other than a private foundation, the term annual information return does not include the name and address of any contributor to the organization.

(h) Effective date –(1) In general. For a tax-exempt organization, other than a private foundation, this section is applicable June 8, 1999. For a private foundation, this section is applicable (except as provided in paragraph (h)(2) of this section) beginning March 13, 2000.

(2) Private foundation annual informa- tion returns . This section does not apply to any private foundation return the due date for which (determined with regard to any extension of time for filing) is before the applicable date for private foundations specified in paragraph (h)(1) of this section. §301.6104(d)–4 [Redesignated as §301.6104(d)–2]

Par. 7. Section 301.6104(d)–4 is redesignated as §301.6104(d)–2.

Par. 8. Newly designated §301.6104(d)–2 is amended as follows:

In paragraph (a), remove the language “§301.6104(d)–3(a)” from each place it appears and add “§301.6104(d)–1(a)” in each place, respectively.
Revise paragraph (e). The revision reads as follows: §301.6104(d)–2 Making applications and returns widely available.

(e) Effective date. For a tax-exempt organization, other than a private foundation, this section is applicable June 8, 1999. For a private foundation, this section is applicable beginning March 13, 2000. §301.6104(d)–5 [Redesignated as §301.6104(d)–3]

Par. 9. Section 301.6104(d)–5 is redesignated as §301.6104(d)–3.

Par. 10. Newly designated §301.6104(d)–3 is amended as follows:

In paragraph (a), remove the language “§301.6104(d)–3(a)” and add “§301.6104(d)–1(a)” in its place.
Revise paragraph (g). The revision reads as follows:

§301.6104(d)–3 Tax-exempt organization subject to harassment campaign.

(g) Effective date. For a tax-exempt organization, other than a private foundation, this section is applicable June 8, 1999. For a private foundation, this section is applicable beginning March 13, 2000.

PART 602–OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 11. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 12. In §602.101, paragraph (b) is amended by removing the entries for 301.6104(d)–4 and 301.6104(d)–5, by revising the entries for 301.6104(d)–1 and 301.6104(d)–3, and adding a new entry for 301.6104(d)–2 in numerical order to the table to read as follows: §602.101 OMB Control numbers.

(b) * * *

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved December 23, 1999.

Jonathan Talisman, Acting Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on January 12, 2000, 8:45 a.m., and published in the issue of the Federal Register for January 13, 2000, 65 F.R. 2030)

CFR part or section where Current OMB identified and described control No.

301.6104(d)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655 301.6104(d)–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655 301.6104(d)–3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655

January 31, 2000 446 2000–5 I.R.B.