Part III. — Internal Revenue Bulletin 2001-3

exception of these Canadian and Mexican flights, the tax does not apply to air transportation between the United States and a foreign country, which is subject to the international arrival and departure tax imposed by § 4261(c), or to entirely foreign air transportation, which is not taxed.

Section 4261(e)(3) was enacted for the purpose of “clarifying that the air transportation excise tax applies to payments to air carriers (and related parties) for the right to award air travel benefits.” H.R. Conf. Rep. No. 105–220, at 555 (1997), 1997–4 (Vol. 2) C.B. 2025. Thus, because the Treasury Department and the IRS have concluded that this clarification was intended as a backstop to the 7.5 percent tax imposed by § 4261(a), the new mileage award rules should not apply with respect to mileage awards for air transportation that would not, under any circumstances, be subject to the tax imposed by § 4261(a) or with respect to mileage awards that will otherwise be fully subject to that tax.

Regulations under § 4261(e)(3) will provide the following rules concerning mileage awards:

(1) Amounts paid for mileage awards that cannot be redeemed for taxable transportation (for example, awards usable only on a foreign air carrier) are not subject to tax.

(2) Amounts paid by an air carrier to another air carrier, whether foreign or domestic, for mileage awards that can be redeemed for taxable transportation are not subject to tax to the extent those miles will be awarded in connection with the purchase of air transportation subject to the tax imposed by § 4261(a).

(3) Amounts paid by an air carrier to another air carrier, whether foreign or domestic, for mileage awards that can be redeemed for taxable transportation are subject to tax to the extent those miles will be awarded other than in connection with the purchase of air transportation subject to the tax imposed by § 4261(a).

Air carriers may use any reasonable method to allocate amounts paid (and the value of any other benefits provided) between purchased mileage that cannot be redeemed for taxable transportation or that will be awarded in connection with the purchase of air transportation that is

Partnership Termination - Final Short-Year Tax Return

Notice 2001–5

This notice provides guidance to partnerships regarding the need to file a final short-year partnership tax return following a partnership termination under §708(b)(1)(B) of the Internal Revenue Code. Questions have arisen regarding whether a terminated partnership files a final short-year tax return given that the new partnership resulting from the termination will continue to use the employer identification number of the terminated partnership.

A partnership terminates for tax purposes under § 708(b)(1)(B) as a result of the sale or exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period. The regulations under § 708(b) were modified in 1997 to provide that following the termination of a partnership, the terminated partnership is deemed to contribute all its assets and liabilities to a new partnership in exchange for an interest in the new partnership; and, immediately thereafter, the terminated partnership distributes interests in the new partnership to the purchasing partner and the other remaining partners in proportion to their respective interests in the terminated partnership in liquidation of the terminated partnership.

Section 301.6109–1(d)(2)(iii) of the Procedure and Administration Regulations provides that the new partnership that is formed as a result of the termination of a partnership under § 708(b)(1)(B) will retain the employer identification number of the terminated partnership.

Section 1.706–1(c)(1) of the Income Tax Regulations provides that in the case of a termination, the partnership taxable year closes for all partners as of the date of termination. Thus, the taxable year of the partnership terminates with the termination of the partnership under § 708(b)(1)(B). Under § 6031(a) every partnership that is required to file a return must file a return of partnership income for each taxable year of the partnership.

Under § 443(a)(2), a return is required to be made for a period of less than 12 months if the taxpayer is in existence for

only part of what would otherwise be its taxable year.

Accordingly, a partnership that terminates under § 708(b)(1)(B) is required to file a short-year final return for the taxable year ending with the date of its termination. The new partnership is required to file a return for its taxable year beginning after the date of termination of the terminated partnership.

The principal author of this notice is Stephen J. Coleman of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice contact Mr. Coleman at (202) 622-3060 (not a toll free call).

Air Transportation Excise Tax; Amount Paid for the Right to Award Miles

Notice 2001–6

This notice provides rules relating to the air transportation tax imposed by § 4261(a) of the Internal Revenue Code on amounts paid for the right to provide mileage awards. The notice reflects changes made by § 1031(c)(2) of the Taxpayer Relief Act of 1997, 1997–4 (Vol. 1) C.B. 2, 144, which added § 4261(e)(3) to the Code. Section 4261(e)(3) provides that the tax imposed by § 4261(a) applies to any amount paid (and the value of any other benefit provided) for the right to provide mileage awards for, or other reductions in the cost of, any transportation of persons by air. The Treasury Department and the Internal Revenue Service expect to issue the substance of this notice as a regulation at a later date. Until that regulation is published, persons responsible for collecting the tax and persons responsible for paying the tax may rely on the guidance provided in this notice.

Section 4261(a) imposes a 7.5 percent excise tax on amounts paid for taxable transportation. Taxable transportation includes most domestic air transportation (that is, transportation between points in the United States) and certain air transportation beginning or ending in southern Canada or northern Mexico. With the

2001–3 I.R.B. 327 January 16, 2001