Part III. Administrative, Procedural, and Miscellaneous

product accounts by the Department of Commerce. The inflation adjustment factor for calendar year 1999 is 2.0013. The reference price for calendar year 1999 is $15.56. As required by § 29(d)(2)(A), the inflation adjustment factor and reference price for calendar year 1999 were published in the Federal Register on April 7, 2000 (65 Fed. Reg. 18429).

PHASE-OUT CALCULATION

Because the calendar year 1999 reference price does not exceed $23.50 multiplied by the inflation adjustment factor, the phaseout of the credit provided for in § 29(b)(1) does not occur for any qualified fuel sold in calendar year 1999.

CREDIT AMOUNT

The nonconventional source fuel credit under § 29(a) is $6.00 per barrel-of-oil equivalent of qualified fuels ($3.00 x 2.0013). This amount was published in the Federal Register on April 7, 2000 (65 Fed. Reg. 18429).

DRAFTING INFORMATION CONTACT

The principal author of this notice is David McMunn of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice contact David McMunn or Alan H. Cooper at (202) 6223110 (not a toll-free call).

Charitable Split-Dollar Insurance Reporting Requirements

Notice 2000–24

I. PURPOSE

This notice provides guidance to help charitable organizations comply with the information reporting requirements imposed by the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. No. 106-170 (Dec. 17, 1999) (“Act”). The reporting requirements apply to charitable organizations that pay premiums after February 8, 1999, in connection with certain life insurance, annuity, and endowment contracts.

Nonconventional Source Fuel Credit, Section 29 Inflation Adjustment Factor, and Section 29 Reference Price

Notice 2000–23

This notice publishes the nonconventional source fuel credit, inflation adjustment factor, and reference price under § 29 of the Internal Revenue Code for calendar year 1999. These are used to determine the credit allowable on fuel produced from a nonconventional source under § 29 of the Internal Revenue Code. The calendar year 1999 inflation-adjusted credit applies to the sales of barrel-of-oil equivalent of qualified fuels sold by a taxpayer to an unrelated person during the 1999 calendar year, the domestic production of which is attributable to the taxpayer.

BACKGROUND

Section 29(a) provides for a credit for producing fuel from a nonconventional source, measured in barrel-of-oil equivalent of qualified fuels, the production of which is attributable to the taxpayer and sold by the taxpayer to an unrelated person during the tax year. The credit is equal to the product of $3.00 and the appropriate inflation adjustment factor.

Section 29(b)(1) and (2) provides for a phaseout of the credit. The credit allowable under § 29(a) must be reduced by an amount which bears the same ratio to the amount of the credit (determined without regard to § 29(b)(1)) as the amount by which the reference price for the calendar year in which the sale occurs exceeds $23.50 bears to $6.00. The $3.00 in § 29(a) and the $23.50 and $6.00 must each be adjusted by multiplying these amounts by the 1999 inflation adjustment factor. In the case of gas from a tight formation, the $3.00 amount in § 29(a) must not be adjusted.

Section 29(d)(1) provides that the credit is to be applied only for sale of qualified fuels the production of which is within the United States (within the meaning of § 638(1)) or a possession of the United States (within the meaning of § 638(2)). Section 29(d)(2)(A) requires that the Secretary, not later than April 1 of each calendar year, determine and publish in the Federal Register the inflation adjustment factor and the reference price for the preceding calendar year.

Section 29(d)(2)(B) defines “inflation adjustment factor” for a calendar year as the fraction the numerator of which is the GNP implicit price deflator for the calendar year and the denominator of which is the GNP implicit price deflator for calendar year 1979. The term “GNP implicit price deflator” means the first revision of the implicit price deflator for the gross national product as computed and published by the Department of Commerce.

Section 29(d)(2)(C) defines “reference price” to mean with respect to a calendar year the Secretary’s estimate of the annual average wellhead price per barrel of all domestic crude oil the price of which is not subject to regulation by the United States.

Section 29(d)(3) provides that in the case of a property or facility in which more than one person has an interest, except to the extent provided by regulations prepared by the Secretary, production from the property or facility (as the case may be) must be allocated among the persons in proportion to their respective interests in the gross sales from the property or facility.

Section 29(d)(5) and (6) provides that the term “barrel-of-oil equivalent” with respect to any fuel generally means that amount of the fuel which has a Btu content of 5.8 million.

INFLATION ADJUSTMENT FACTOR AND REFERENCE PRICE

The inflation factor is calculated using GNP Implicit Price Deflators as computed and published by the Department of Commerce. The inflation factor for 1999, which is smaller than the factor published for 1998, reflects a comprehensive revision in 1999 of the national income and

Section 29(c)(1) defines the term “qualified fuels” to include oil produced from shale and tar sands; gas produced from geopressurized brine, Devonian shale, coal seams, or a tight formation, or biomass; and liquid, gaseous, or solid synthetic fuels produced from coal (including lignite), including such fuels when used as feedstocks.

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II. BACKGROUND

a. Overview.

Section 537 of the Act added § 170(f)(10) to the Internal Revenue Code. Section 170(f)(10)(A) provides that, in two circumstances, no charitable contribution deduction is allowed under § 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for any transfer to, or for the use of, an organization described in § 170(c) or a charitable remainder trust described in § 664(d) (such an organization or trust is referred to herein as a “charitable organization”). No charitable contribution deduction is allowed if, in connection with the transfer, (1) the charitable organization directly or indirectly pays, or has previously paid, any premium on a personal benefit contract with respect to the transferor, or (2) there is an understanding or expectation that any person will directly or indirectly pay any premium on a personal benefit contract with respect to the transferor.

b. Personal Benefit Contract.

In general, § 170(f)(10)(B) defines a “personal benefit contract” as any life insurance, annuity, or endowment contract that benefits, directly or indirectly, the transferor, a member of the transferor’s family, or any other person designated by the transferor (other than an organization described in § 170(c)). Under § 170(f)(10)(D), a person receiving payments under a charitable gift annuity (as defined in § 501(m)) funded by an annuity contract purchased by a charitable organization is not treated as an indirect beneficiary of a personal benefit contract if the timing and amount of the payments under the annuity contract are substantially the same as the charitable organization’s obligations under the charitable gift annuity. For this exception to apply, the charitable organization must possess all the incidents of ownership and be entitled to all the payments under the annuity contract.

III. REPORTING AND EXCISE TAX REQUIREMENTS

Section 170(f)(10)(F) requires any charitable organization that pays premiums on a personal benefit contract in connection with a transfer for which a deduction is not allowed under § 170(f)(10)(A)

to pay an excise tax and to report certain information related to the premium payments.

a. Form 4720 — Excise Tax Return

Section 170(f)(10)(F)(i) imposes on a charitable organization an excise tax equal to the premiums paid by the organization after December 17, 1999, on any personal benefit contract, if the payment of premiums is in connection with a transfer for which a deduction is not allowed under § 170(f)(10)(A). For purposes of this excise tax, § 170(f)(10)(F)(ii) provides that premium payments made by any other person pursuant to an understanding or expectation described in § 170(f)(10)(A) are treated as made by the charitable organization.

A charitable organization liable for excise taxes under § 170(f)(10)(F)(i), must file a return on Form 4720, Return of Certain Excise Tax on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code, to report and pay the taxes due. The charitable organization must include the amount of the § 170(f)(10)(F) tax on line 8 of Part I and should write in the amount of the § 170(f)(10)(F) tax, preceded by “Sec 170(f)(10)(F)” on the dotted line to the left of the entry space for line 8 of the 1999 Form 4720. The Service will revise Form 4720 for taxable years beginning after December 31, 1999.

Some charitable organizations may not yet be aware of this new excise tax requirement. Therefore, this Notice extends the due dates for the 1999 Form 4720 only with respect to the § 170(f)(10)(F) tax as follows. For a taxable year beginning prior to January 1, 2000, a charitable organization liable for the § 170(f)(10)(F) tax must report and pay that tax on a Form 4720 filed by the later of July 24, 2000 or the regular due date specified in § 53.6071–1 of the Procedure and Administration Regulations. For a charitable organization, other than a charitable remainder trust described in § 664(d), the regular due date for filing Form 4720 occurs on the fifteenth day of the fifth month following the close of the organization’s taxable year. For a charitable remainder trust, the regular due date for filing Form 4720 occurs on the fifteenth day of the fourth month following the close of the trust’s tax year. Charitable organiza

tions that are required to report items other than the § 170(f)(10)(F) tax must report those items on a 1999 Form 4720 filed by the regular due date. A charitable organization may request an extension of time to file Form 4720 by filing Form 2758, Application for Extension of Time to File Certain Excise, Income, Information, and Other Returns, on or before the due date of the return.

If a 1999 Form 4720 reporting the § 170(f)(10)(F) tax is filed and the tax is paid by the later of July 24, 2000 or the regular due date specified in § 53.6071–1, the Service will not assess penalties under § 6651 for failure to file a tax return or to pay the tax required under § 170(f)(10)(F). The law does not, however, permit the Service to waive the interest due under § 6601. Section 6601 requires that taxpayers pay interest from the last date prescribed for payment of the tax (determined without regard to any extension of time for payment) to the date the taxes are paid.

b. Form 8870 — Information Return Required By § 170(f)(10)(F)(iii)

Section 170(f)(10)(F)(iii) requires charitable organizations to report annually (1) the amount of premiums paid during the year which are subject to the tax under § 170(f)(10)(F) (to be determined in the case of premiums paid after February 8, 1999 and before December 18, 1999 as if the excise tax applied to premiums paid during that period); (2) the name and taxpayer identification number (“TIN”) of each beneficiary under each contract to which the premiums relate; and (3) any other information the Secretary may require. Section 170(f)(10)(F)(iii) makes returns required by § 170(f)(10)(F)(iii) subject to the penalties applicable to returns filed under § 6033.

The Internal Revenue Service expects to issue a new form, Form 8870, Information Return for Transfers Associated with Personal Benefit Contracts (Under section 170(f)(10)), for reporting the information required by § 170(f)(10)(F)(iii). For a taxable year beginning prior to January 1, 2000, a charitable organization that paid any such premiums during the taxable year must file Form 8870 by the later of 90 days after the date of the Service’s announcement in the Internal Revenue Bulletin of

2000–17 I.R.B. 953 April 24, 2000

the availability of Form 8870, or the date the charitable organization is required to file its annual information return under § 1.6033–2(e) or § 53.6071–1(c), as applicable. The Service expects to publish the announcement by May 15, 2000. Section 1.6033–2(e) requires a charitable organization, other than a charitable remainder trust described in § 664(d), to file its annual information return by the fifteenth day of the fifth month following the close of the charitable organization’s taxable year. Section 53.6071–1(c) requires a charitable remainder trust to file its annual information return by the fifteenth day of the fourth month following the close of the trust’s taxable year. A charitable organization, including a charitable remainder trust, may obtain an extension of time to file Form 8870 by filing Form 2758 on or before the due date of the return, stating on line 4 of Form 2758 that it is requesting an extension to file Form 8870 pursuant to this notice. For any taxable year beginning after December 31, 1999, Form 8870 will be due on the date the charitable organization is required to file its annual information return.

c. Forms 990, 990-PF, and 5227 — Information Returns By Charitable Organizations

Section 6033 requires most charitable organizations to file annual information returns with the Service. Generally, an organization described in § 170(c) files either Form 990, Return of Organization Exempt From Income Tax, or Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation. The regulations under § 6011 require a split-interest trust described in § 4947(a)(2), including a charitable remainder trust described in § 664(d), to file Form 5227, Split-Interest Trust Information Return. Form 5227 is used by a split-interest trust to report its financial activities and whether it is subject to excise taxes under Chapter 42 of the Code. The Service will revise Forms 990, 990-PF, and 5227 for taxable years beginning after December 31, 1999, to add questions relating to charitable split-dollar insurance arrangements described in § 170(f)(10)(F).

DRAFTING INFORMATION

The principal author of this notice is Michael B. Blumenfeld of the Office of Associate Chief Counsel (Employee Benefits & Exempt Organizations). For further information regarding this notice

contact Mr. Blumenfeld at (202) 6226070 (not a toll-free call).

Weighted Average Interest Rate Update

Notice 2000–25

Notice 88–73 provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Internal Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987 and as further amended by the Uruguay Round Agreements Act, Pub. L. 103-465 (GATT).

The average yield on the 30-year Treasury Constant Maturities for March 2000 is 6.05 percent.

The following rates were determined for the plan years beginning in the month shown below.

90% to 105% 90% to 110% Weighted Permissible Permissible Month Year Average Range Range

April 2000 6.03 5.43 to 6.33 5.43 to 6.64

Drafting Information

The principal author of this notice is Todd Newman of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, call the Employee Plans Actuarial hotline, (202) 622-6076 between 2:30 and 3:30 p.m. Eastern time (not a toll-free number). Mr. Newman’s number is (202) 622-8458 (also not a toll-free number).

Installment Sales by Accrual Method Taxpayers

Notice 2000–26

PURPOSE

This notice provides guidance in a question and answer format on the application of § 453(a)(2) of the Internal Revenue Code to certain installment sale transactions.

BACKGROUND

An installment sale is defined in § 453(b) to mean generally a disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs. Section 453(a)(1) provides the general rule that income from an installment sale must be taken into account under the installment method. An exception to this rule is set forth in § 453(a)(2), which provides gener

ally that the installment method does not apply to income from an installment sale if the income would be reported under an accrual method of accounting without regard to § 453. Section 453(a)(2) was added by § 536 of the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. No. 106-170, 113 Stat. 1860 (1999), and is effective for sales or other dispositions occurring on or after December 17, 1999, the date of enactment. Section 453(a)(2) does not affect the ability of a taxpayer using the cash receipts and disbursements method of accounting to use the installment method.

QUESTIONS AND ANSWERS

The following questions and answers provide guidance on the application of § 453(a)(2) to certain installment sale trans

April 24, 2000 954 2000–17 I.R.B.

actions. Depending on the facts and circumstances of a particular transaction, taxpayers also should consider the applicability of § 453A, which in certain circumstances imposes an interest charge on the tax liability that is deferred through use of the installment method.

Corporations

For each question and answer assume the shareholder uses the cash receipts and disbursements method of accounting and the corporation uses an accrual method of accounting. Also assume the stock of the corporation is not traded on an established securities market. Except as otherwise indicated, the term “corporation” refers to either an S corporation or a C corporation.

Q-1: Can the shareholder report on the installment method the gain arising from a sale of the shareholder’s stock in the corporation in exchange for cash and an installment obligation?

A-1: The shareholder can report the gain from the sale of the stock on the installment method.

Q-2: Can the corporation report on the installment method the gain arising from a sale of the corporation’s assets in exchange for cash and an installment obligation?

A-2: The corporation cannot report the gain from the sale of its assets on the installment method. See § 453(a)(2).

Q-3: What is the effect on the transaction described in Q&A:1 above if the buyer makes an election under § 338(g) (a “§ 338 election”) for the corporation?

A-3: The shareholder is not affected and can report the gain from the sale of the stock on the installment method. The corporation cannot report the gain from the deemed sale of assets on the installment method. See § 453(a)(2).

Q-4: What is the effect on the transaction described in Q&A:1 above if the shareholder is a corporation and the buyer and the corporate shareholder join in making a § 338(h)(10) election for the target corporation, a C corporation, which is either the corporate shareholder’s affiliate or a member of its consolidated group?

A-4: The corporate shareholder recognizes no gain or loss on the sale of the target corporation’s stock. See § 1.338(h)(10)–1T(d)(5)(iii) of the temporary Income Tax Regulations. The target corporation cannot report the gain from the deemed sale of assets on the install

ment method. See § 453(a)(2). The corporate shareholder generally recognizes no gain or loss on the deemed transfer of the target corporation’s assets (including the installment obligation) to the corporate shareholder because, in most circumstances, the transfer would qualify as a distribution in complete liquidation to which § 332 applies. See § 1.338(h)(10)–1T(d)(5)(i). Q-5: What is the effect on the transaction described in Q&A:1 above if the buyer and the shareholder join in making a § 338(h)(10) election for the corporation, an S corporation?

A-5: The shareholder recognizes no gain or loss on the sale of the S corporation’s stock. See § 1.338(h)(10)–1T(d)(5)(iii). The S corporation cannot report the gain from the deemed sale of assets on the installment method. See § 453(a)(2). The shareholder may realize gain or loss on the deemed transfer of the S corporation’s assets (including the installment obligation) to the shareholder, after taking into account the effect of the deemed sale of the assets. See § 1.338(h)(10)–1T(d)(5)(i). The shareholder can report on the installment method the gain, if any, arising from this deemed transfer. See § 453(h); §§ 1.453–11(a)(2) and 1.338(h)(10)–1T(d)(8).

Q-6: What is the effect on the transaction described in Q&A:2 above if the corporation, a C corporation, distributes the note to a shareholder in a liquidation that meets the requirements of § 453(h)?

A-6: The C corporation must recognize any gain or loss upon the distribution of the note. See § 453B(a). The shareholder can report on the installment method the gain arising from the exchange of the shareholder’s stock for the note. See § 1.453–11(a)(2).

Q-7: What is the effect on the transaction described in Q&A:2 above if the corporation, an S corporation, distributes the note to a shareholder in a liquidation that meets the requirements of § 453(h)?

A-7: Except for taxes imposed by subchapter S ( e.g., §§ 1374 and 1375), the S corporation does not recognize gain or loss upon the distribution of the note. See § 453B(h). The shareholder can report on the installment method the gain, if any, arising from the exchange of the shareholder’s stock for the note. See § 1.453–11(a)(2).

Partnerships

For each question and answer assume the partner uses the cash receipts and disbursements method of accounting and the partnership uses an accrual method of accounting.

Q-8: Can the partner report on the installment method the gain arising from a sale of an interest in the partnership in exchange for cash and an installment obligation?

A-8: If the sale otherwise qualifies for installment method reporting, the partner is not precluded by § 453(a)(2) from reporting on the installment method the gain arising from the sale of the partnership interest. But see, e.g., § 453(i)(2) and Rev. Rul. 89–108, 1989–2 C.B. 100.

Q-9: Can the partnership report on the installment method the gain arising from a sale of the partnership’s assets in exchange for cash and an installment obligation?

A-9: The partnership cannot report the gain from the sale of its assets on the installment method. See § 453(a)(2).

Treatment of Sales Not Eligible for the Installment Method

Q-10: How does a taxpayer take into account an installment obligation received in an installment sale transaction that is not eligible for the installment method for any reason, including § 453(a)(2)?

A-10: The taxpayer generally must recognize the entire amount of the gain from the installment sale in the year of the sale. See § 1001(c). Section 1.1001–1(a) or § 1.1001–1(g), whichever is applicable, will determine the amount of gain that is realized by the taxpayer attributable to an installment obligation issued in exchange for property when the income from the exchange is not eligible to be reported on the installment method. See also §§ 483 and 1271 through 1275, and the underlying regulations, to determine if the installment obligation has either unstated interest or original issue discount.

Q-11: If an installment obligation providing for one or more contingent payments is issued in the installment sale transaction described in Q&A:10 above, can the taxpayer use the “open transaction” method to report the gain from the transaction? See, e.g., Burnet v. Logan, 283 U.S. 404 (1931).

2000–17 I.R.B. 955 April 24, 2000

A-11: In general, the taxpayer cannot use the “open transaction” method to report the gain from the installment sale transaction. Only in those rare and extraordinary cases in which the fair market value of the obligation cannot reasonably be ascertained can a taxpayer use the “open transaction” method to report the gain from the transaction. See § 1.1001–1(a) or § 1.1001–1(g).

See also § 1.483–4 or § 1.1275–4, whichever is applicable, for rules concerning the taxpayer’s treatment of the installment obligation.

DRAFTING INFORMATION

The principal author of this notice is Kimberly L. Koch of the Office of Assistant Chief Counsel (Income Tax and Ac

counting). For further information regarding a § 338 election or a § 338(h)(10) election made in connection with an installment sale transaction, contact Victor Penico on (202) 622-7790 (not a toll-free call). For further information regarding the rest of this notice, contact Ms. Koch on (202) 622-4950 (not a toll-free call).

April 24, 2000 956 2000–17 I.R.B.