Part IV. Items — Internal Revenue Bulletin 2001-6

offer period open until shortly before trial while ensuring that the last day of the qualified offer period can be ascertained on that day.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

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

A public hearing has been scheduled for May 23, 2001, at 10 a.m., in room 4718, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Due to building security procedures, visitors must enter at the 10th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having a visitor’s name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CON

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations and Notice of Public Hearing

Awards of Attorney’s Fees and Other Costs Based Upon Qualified Offers

REG–121928–98

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In T.D. 8922 on page 508 of this Bulletin, the IRS is issuing temporary regulations relating to the circumstances in which a party, by reason of having made a qualified offer, will be entitled to an award of court costs and certain fees in a civil tax proceeding brought in a court of the United States (including the Tax Court). The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by April 4, 2001. Outlines of topics to be discussed at the public hearing scheduled for May 23, 2001, at 10 a.m., must be received by May 2, 2001. The IRS and Treasury specifically request comments on the clarity of the proposed rule and how it may be made easier to understand.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG–121928–98), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG–121928–98), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.gov/prod/tax_regs/regslist.ht

ml. The public hearing will be held in room 4718, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the hearing, submission of written comments, and to be placed on the building access list to attend the hearing, Treena V. Garrett, (202) 6227180; concerning the regulations, Thomas D. Moffitt (202) 622-7900 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in T.D. 8922 provide rules relating to the circumstances in which a party, by reason of having made a qualified offer, will be entitled to an award of court costs and certain fees in a civil tax proceeding brought in a court of the United States (including the Tax Court). The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Comments are specifically requested on the rule requiring the provision of information and arguments regarding adjustments raised by taxpayers after the issuance of the first letter of proposed deficiency which provides the taxpayer with an opportunity for administrative review in the Internal Revenue Service Office of Appeals and still unresolved at the time the last qualified offer is made. The changes to section 7430 made by Congress anticipate qualified offers based upon the adjustments at issue when the first letter of proposed deficiency is sent. Adjustments subsequently raised by taxpayers would not be subject to the audit development preceding the issuance of such first letter of proposed deficiency. The proposed rule is intended to eliminate any such differences between the adjustments subject to the last qualified offer.

Comments are also specifically requested on the rule establishing the end of the qualified offer period, for courts using trial calendars, at the point where the case remains listed on a trial calendar thirty days before the scheduled date for the calendar call for that trial session. The proposed rule is intended to keep the qualified

February 5, 2001 520 2001–6 I.R.B.

TACT caption.

An outline of the topics to be discussed and the time to be devoted to each topic (a signed original and eight (8) copies) must be submitted by any person that wishes to present oral comments at the hearing. Outlines must be received by May 2, 2001.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving requests to speak has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Thomas D. Moffitt, Office of Assistant Chief Counsel (Field Service). However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

§301.7430–0 [Removed]

Par. 2. Section 301.7430–0 is removed. Par. 3. Section 301.7430–7 is added to read as follows:

§301.7430–7 Qualified offers.

[The text of this proposed section is the same as the text of §301.7430–7T published in T.D. 8922.]

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on January 3, 2001, 8:45 a.m., and published in the issue of the Federal Register for January 4, 2001, 66 F.R. 749)

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations, and Notice of Public Hearing

Liabilities Assumed in Certain Corporate Transactions

REG–106791–00

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations, and notice of public hearing.

SUMMARY: In T.D. 8924 on page 489 of this Bulletin, the IRS is issuing temporary regulations relating to the assumption of liabilities in certain corporate transactions under section 301 of the Internal Revenue Code. The temporary regulations affect corporations and their shareholders. The text of those temporary regulations also serves as the text of these proposed regulations. This document also gives notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by May 10, 2001 . Requests to speak and outlines of topics to be discussed at the public hearing scheduled for May 31, 2001 at 10 a.m. must be received by May 10, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG–106791–00), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG–106791–00), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option of the IRS Home Page or by submitting comments directly to the IRS Internet site at http://www.irs.gov/tax-regs/regslist.html. A public hearing will be held in room 4718 , Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Mary E. Dean, (202) 622-7550; concerning submissions and the hearings, Guy Traynor, (202) 622-7180.

SUPPLEMENTARY INFORMATION

Background

T.D. 8924 amends the income tax regulations (26 CFR part 1) under section 301 relating to liabilities assumed in connection with distributions made by a corporation to shareholders with respect to their stock. These regulations provide that the amount of a distribution under section 301 will be reduced by the amount of any liability that is treated as assumed by the distributee within the meaning of section 357(d)(1) and (2). Thus, in a distribution under section 301, if a liability is treated as not having been assumed by the distributee under section 357(d)(1) and (2), the amount of the distribution will not be reduced by the amount of any liability the property is subject to under section 301(b)(2)(B). The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the proposed regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required.

It is hereby certified that these regulations do not have a significant economic impact on a substantial number of small entities. These proposed regulations under section 301 of the Internal Revenue Code (Code) address distributions by corporations in which liabilities are assumed by the shareholders or in which the distributed property is subject to liabilities. These proposed regulations provide that the amount of a distribution under section 301 will be reduced by the amount of any liability that is treated as assumed by the distributee within the meaning of section 357(d)(1) and (2). If adopted these regulations will affect only corporations making distributions of property, in which the property is subject to a liability, or in which liabilities are assumed by the distributee. Moreover, if adopted, the proposed regulations will affect only those corporations that would have, but for the regulations, considered

2001–6 I.R.B. 521 February 5, 2001

liabilities to have been assumed in circumstances other than those described in section 357(d)(1) and (2). Therefore, most corporations, whether large or small, will not be affected by the proposed regulations in any given year. 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 Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Comments and Public Hearing

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

A public hearing has been scheduled for May 31, 2000, at 10 a.m., in room 4718, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Due to building security procedures, visitors must enter at the 1111 Constitution Avenue entrance, located between 10th and 12th streets. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having your name placed on the access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by May 10, 2001 . A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed.

Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Mary E. Dean, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1 — INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.301–1 is amended by revising paragraph (g) to read as follows:

§1.301–1 Rules applicable with respect to distributions of money and other property.

(g) [The text of the proposed amendment to paragraph (g) of §1.301–1 is the same as the text of paragraph (g) of §1.301–1T published in T.D. 8924].

David A. Mader, Acting Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on January 3, 2001, 8:45 a.m., and published in the issue of the Federal Register for January 4, 2001, 66 F.R. 748)

Notice of Proposed Rulemaking and Notice of Public Hearing

Minimum Cost Requirement Permitting the Transfer of Excess Assets of a Defined Benefit Pension Plan to a Retiree Health Account

REG–116468–00

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed Income Tax Regulations relating to the minimum cost requirement under section 420, which permits the transfer of excess assets of a defined benefit pension plan to a retiree health account. Pursuant to section 420(c)(3)(E), these proposed regulations provide that an employer who significantly reduces retiree health coverage during the cost maintenance period does not satisfy the minimum cost requirement of section 420(c)(3). In addition, these proposed regulations clarify the circumstances under which an employer is considered to have significantly reduced retiree health coverage during the cost maintenance period. This document also provides a notice of public hearing on these regulations.

DATES: Written or electronic comments must be received by March 6, 2001. Requests to speak (with outlines of oral comments to be discussed) at the public hearing scheduled for March 15, 2001, must be received by February 21, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG–116468–00), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG–116468–00), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Vernon S. Carter or Janet A. Laufer, (202) 622-6060; concerning submissions, Treena Garrett, (202) 622-7180 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Background

The Revenue Reconciliation Act of 1990 (Public Law 101–508)(104 Stat. 1388), section 12011, added section 420

February 5, 2001 522 2001–6 I.R.B.

of the Internal Revenue Code (Code), a temporary provision permitting certain qualified transfers of excess pension assets from a non-multiemployer defined benefit pension plan to a health benefits account (defined as an account established and maintained under section 401(h) of the Code (401(h) account)) that is part of the plan. ¹ One of the conditions of a qualified section 420 transfer was that the employer satisfy a maintenance of effort requirement in the form of a “minimum cost requirement” under which the employer was required to maintain employer-provided retiree health expenditures for covered retirees, their spouses, and dependents at a minimum dollar level for a 5-year cost maintenance period, beginning with the taxable year in which the qualified transfer occurs.

The Uruguay Round Agreements Act (Public Law 103–465)(108 Stat. 4809) (December 8, 1994), extended the availability of section 420 through December 31, 2000. In conjunction with the extension, Congress modified the maintenance of effort rules for plans transferring assets for retiree health benefits so that employers could take into account cost savings realized in their health benefit plans. As a result, the focus of the maintenance of effort requirement was shifted from health costs to health benefits. Under this “benefit maintenance requirement,” which applied to qualified transfers made after December 8, 1994, an employer had to maintain substantially the same level of employer-provided retiree health coverage for the taxable year of the transfer and the following 4 years. The level of coverage required to be maintained was based

1 Section 420(a)(1) and (2) provide that the trust that is part of the plan is not treated as failing to satisfy the qualification requirements of section 401(a) or (h) of the Code, and no amount is includible in the gross income of the employer maintaining the plan, solely by reason of such transfer. Also, section 420(a)(3) provides that a qualified transfer is not treated as either an employer reversion for purposes of section 4980 or a prohibited transaction for purposes of section 4975.

In addition, Title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), as amended (ERISA), provides that a qualified transfer pursuant to section 420 is not a prohibited transaction under ERISA (ERISA section 408(b)(13)) or a prohibited reversion of assets to the employer (ERISA section 403(c)(1)). ERISA also provides certain notification requirements with respect to such qualified transfers.

on the coverage provided in the taxable year immediately preceding the taxable year of the transfer.

The Tax Relief Extension Act of 1999 (title V of H.R. 1180, the Ticket to Work and Work Incentives Improvement Act of 1999)(Public Law 106–170,113 Stat 1860) (TREA–99) extended section 420 through December 31, 2005. In conjunction with this extension, the minimum cost requirement was reinstated as the applicable “maintenance of effort” provision (in lieu of requiring the maintenance of the level of coverage) for qualified transfers made after December 17, 1999. Because the minimum cost requirement relates to per capita cost, an employer could satisfy minimum cost requirement by maintaining the average cost even though the employer defeats the purpose of the maintenance of effort requirement by reducing the number of people covered by the health plan. In response to concerns regarding this possibility, TREA–99 also added section 420(c)(3)(E), which requires the Secretary of the Treasury to prescribe such regulations as may be necessary to prevent an employer who significantly reduces retiree health coverage during the cost maintenance period from being treated as satisfying the minimum cost requirement of section 420(c)(3). If the minimum cost requirement of section 420(c)(3) is not satisfied, the transfer of assets from the pension plan to the 401(h) account is not a “qualified transfer” to which the provisions of section 420(a) apply.

Explanation of Provisions

These proposed regulations would provide that the minimum cost requirement of section 420(c)(3) is not met if the employer significantly reduces retiree health coverage during the cost maintenance period. The proposed regulations would measure whether this occurs by looking at the number of individuals (retirees, their spouses, and dependents) who lose coverage during the cost maintenance period as a result of employer actions, measured on both an annual basis and a cumulative basis.

In determining whether an employer has significantly reduced retiree health coverage, the regulations would provide that the employer does not satisfy the minimum cost requirement if the percentage decrease in the number of individuals

provided with applicable health benefits that is attributable to employer action exceeds 10% in any year, or if the sum of the annual percentage decreases during the cost maintenance period exceeds 20%. The 10% annual limit would not apply to a taxable year that begins before February 5, 2001. The regulations would provide a broad definition of employer action, including not only plan amendments but also situations in which other employer actions, such as the sale of all or part of the employer’s business, operate in conjunction with the existing plan terms to have the indirect effect of ending an individual’s coverage. The definition of employer action would include plan amendments that are executed before the cost maintenance period but take effect during the cost maintenance period, unless the amendment occurred before the later of December 18, 1999, and 5 years before the start of the cost maintenance period.

The regulations contain a special rule that addresses situations in which an employer adopts plan terms that establish eligibility for health coverage for some individuals, but provide that those same individuals lose health coverage upon the occurrence of a particular event or after a stated period of time. In those cases, an individual is not counted as having lost health coverage by reason of employer action merely because that individual’s coverage ends upon the occurrence of the event or after the stated period of time.

Under the proposed regulation, when an individual’s coverage ends by reason of a sale of all or part of the employer’s business, the individual is counted as an individual losing coverage by reason of employer action. The proposed regulation contains no exceptions from this rule even if the buyer provides coverage for such individuals (on the implicit assumption that the buyer rarely undertakes to provide such coverage to retirees in these transactions). Comments are specifically requested as to (1) the circumstances, if any, in which buyers commonly provide the seller’s retirees, and their spouses and dependents, with health coverage following a corporate transaction, and (2) in such cases, criteria that should apply to the replacement coverage in determining whether to treat those individuals as not having lost coverage.

2001–6 I.R.B. 523 February 5, 2001

(ii) The sum of the employer-initiated reduction percentages for that taxable year and all prior taxable years during the cost maintenance period exceeds 20%. (2) Special rule for certain taxable years . Notwithstanding paragraph (b)(1)(i) of this section, an employer will not be treated as significantly reducing retiree health coverage for a taxable year that begins before February 5, 2001, merely because the employer-initiated reduction percentage for that taxable year exceeds 10%.

(3) Employer-initiated reduction per- centage . The employer-initiated reduction percentage for any taxable year is the fraction B/A, expressed as a percentage, where

Proposed Effective Date

The regulations are proposed to be applicable to transfers of excess pension assets on or after December 18, 1999.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

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

A public hearing has been scheduled for March 15, 2001, beginning at 10 a.m. in the IRS Auditorium, Seventh Floor, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the 10th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “For Further Information Contact” portion of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments must submit written comments and an outline of the topics to be discussed and time to be devoted to each topic (a signed original and eight (8) copies) by February 21, 2001. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal authors of these regulations are Vernon S. Carter and Janet A. Laufer, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805, 26 U.S.C. 420(c)(3)(E) * * * Par. 2. Section 1.420–1 is added to read as follows:

§1.420–1 Significant reduction in retiree health coverage during the cost maintenance period.

(a) In general . Notwithstanding section 420(c)(3)(A), the minimum cost requirements of section 420(c)(3) are not met if the employer significantly reduces retiree health coverage during the cost maintenance period.

(b) Significant reduction —(1) In gener- al . An employer significantly reduces retiree health coverage during the cost maintenance period if, for any taxable year during the cost maintenance period, either —

(i) The employer-initiated reduction percentage for that taxable year exceeds 10%; or

A = The total number of individuals

(retired employees plus their spouses plus their dependents) receiving coverage for applicable health benefits as of the day before the first day of the taxable year. B = The total number of individuals

included in A whose coverage for applicable health benefits ended during the taxable year by reason of employer action. (4) Employer action —(i) General rule . For purposes of paragraph (b)(3) of this section, an individual’s coverage for applicable health benefits ends during a taxable year by reason of employer action, if on any day within the taxable year, the individual’s eligibility for applicable health benefits ends as a result of a plan amendment or any other action of the employer (e.g., the sale of all or part of the employer’s business) that, in conjunction with the plan terms, has the effect of ending the individual’s eligibility. An employer action is taken into account for this purpose regardless of when the employer action actually occurs (e.g., the date the plan amendment is executed), except that employer actions occurring before the later of December 18, 1999, and the date that is 5 years before the start of the cost maintenance period are disregarded.

(ii) Special rule . Notwithstanding paragraph (b)(4)(i) of this section, coverage for an individual will not be treated as having ended by reason of employer action merely because such coverage ends

February 5, 2001 524 2001–6 I.R.B.

under the terms of the plan if those terms were adopted contemporaneously with the provision under which the individual became eligible for retiree health coverage.

(1) Applicable health benefits . Applicable health benefits means applicable health benefits as defined in section 420(e)(1)(C) (2) Cost maintenance period . Cost maintenance period means the cost maintenance period as defined in section 420(c)(3)(D). (d) Examples . The following examples illustrate the application of this section:

Example 1 . (i) Employer W maintains a defined benefit pension plan that includes a 401(h) account and permits qualified transfers that satisfy section 420. The number of individuals receiving coverage for applicable health benefits as of the day before the first day of Year 1 is 100. In Year 1, Employer W makes a qualified transfer under section 420. There is no change in the number of individuals receiving health benefits during Year 1. As of the last day of Year 2, applicable health benefits are provided to 99 individuals, because 2 individuals became eligible for coverage due to retirement and 3 individuals died in Year 2. During Year 3, Employer W amends its health plan to eliminate coverage for 5 individuals, 1 new retiree becomes eligible for coverage and an additional 3 individuals are no longer covered due to their own decision to drop coverage. Thus, as of the last day of Year 3, applicable health benefits are provided to 92 individuals. During Year 4, Employer W amends its health plan to eliminate coverage under its health plan for 8 more individuals, so that as of the last day of Year 4, applicable health benefits are provided to 84 individuals. During Year 5, Employer W amends its health plan to eliminate coverage for 8 more individuals.

(ii) There is no significant reduction in retiree health coverage in either Year 1 or Year 2, because there is no reduction in health coverage as a result of employer action in those years.

(iii) There is no significant reduction in Year 3. The number of individuals whose health coverage ended during Year 3 by reason of employer action (amendment of the plan) is 5. Since the number of individuals receiving coverage for applicable health benefits as of the last day of Year 2 is 99, the employer-initiated reduction percentage for Year 3 is 5.05% (5/99), which is less than the 10% annual limit.

(iv) There is no significant reduction in Year 4. The number of individuals whose health coverage ended during Year 4 by reason of employer action is 8. Since the number of individuals receiving coverage for applicable health benefits as of the last day of Year 3 is 92, the employer-initiated reduction percentage for Year 4 is 8.70% (8/92), which is less than the 10% annual limit. The sum of the employer-initiated reduction percentages for Year 3 and Year 4 is 13.75%, which is less than the 20% cumulative limit. (v) In Year 5, there is a significant reduction under paragraph (b)(1)(ii) of this section. The number of individuals whose health coverage ended dur

ing Year 5 by reason of employer action (amendment of the plan) is 8. Since the number of individuals receiving coverage for applicable health benefits as of the last day of Year 4 is 84, the employer-initiated reduction percentage for Year 5 is 9.52% (8/84), which is less than the 10% annual limit. However, the sum of the employer-initiated reduction percentages for Year 3, Year 4, and Year 5 is 5.05% + 8.70%

9.52% = 23.27%, which exceeds the 20% cumulative limit.

Example 2 . (i) Employer X maintains a defined benefit pension plan that includes a 401(h) account and permits qualified transfers that satisfy section 420. X also provides lifetime health benefits to employees who retire from Division A as a result of a plant shutdown, no health benefits to employees who retire from Division B, and lifetime health benefits to all employees who retire from Division C. In 2000, X amends its health plan to provide coverage for employees who retire from Division B as a result of a plant shutdown, but only for the 2-year period coinciding with their severance pay. Also in 2000, X amends the health plan to provide that employees who retire from Division A as a result of a plant shutdown receive health coverage only for the 2-year period coinciding with their severance pay. A plant shutdown that affects Division A and Division B employees occurs in 2000. The number of individuals receiving coverage for applicable health benefits as of the last day of 2001 is 200. In 2002, Employer X makes a qualified transfer under section 420. As of the last day of 2002, applicable health benefits are provided to 170 individuals, because the 2-year period of benefits ends for 10 employees who retired from Division A and 20 employees who retired from Division B as a result of the plant shutdown that occurred in 2000.

(ii) There is no significant reduction in retiree health coverage in 2002. Coverage for the 10 retirees from Division A who lose coverage as a result of the end of the 2-year period is treated as having ended by reason of employer action, because coverage for those Division A retirees ended by reason of a plan amendment made after December 17, 1999. However, the terms of the health plan that limit coverage for employees who retired from Division B as a result of the 2000 plant shutdown (to the 2-year period) were adopted contemporaneously with the provision under which those employees became eligible for retiree coverage under the health plan. Accordingly, under the rule provided in paragraph (b)(4)(ii) of this section, coverage for those 20 retirees from Division B is not treated as having ended by reason of employer action. Thus, the number of individuals whose health benefits ended by reason of employer action in 2002 is 10. Since the number of individuals receiving coverage for applicable health benefits as of the last day of 2001 is 200, the employer-initiated reduction percentage for 2002 is 5% (10/200), which is less than the 10% annual limit.

(e) Effective date . This section is applicable December 18, 1999, for qualified transfers occurring on or after that date.

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on January 4, 2001, 8:45 a.m., and published in the issue of the Federal Register for January 5, 2001, 66 F.R. 1066)

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations and Notice of Public Hearing

Guidance on Filing an Application for a Tentative Carryback Adjustment in a Consolidated Return Context

REG–119352–00

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In T.D. 8919 on page 505 of this Bulletin, the IRS is issuing temporary regulations relating to the filing of an application for a tentative carryback adjustment by a consolidated group and by certain new members of a consolidated group. The text of those temporary regulations also serves as the text of these proposed regulations. In addition, this document provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by April 5, 2001. The public hearing has been scheduled for April 26, 2001. Outlines of topics to be discussed at the public hearing scheduled for April 26, 2001, at 10 a.m. must be received by April 5, 2001.

ADDRESSES: Send submissions to: Regulations Unit CC, room 5226 (REG–119352–00), Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 2044. Submissions may also be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to Regulations Unit CC, room 5226 (REG–119352–00), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet directly to the IRS Internet site at http://www.irs.gov/tax_regs/regslist.html. The public hearing is scheduled for April

2001–6 I.R.B. 525 February 5, 2001

26, 2001, and will be held in room 4718, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulation, Christopher M. Bass or Frances L. Kelly, (202) 622-7770; concerning submissions, the hearing, and/or to be placed on the building access list to attend the hearing, Guy Traynor, (202) 622-7180 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in T.D. 8919 amend the Income Tax Regulations (26 CFR Part 1) under section 1502 of the Internal Revenue Code of 1986 (Code). The temporary regulations provide guidance as to the time for filing an application for a tentative carryback adjustment by a consolidated group. The amendments also extend the time for filing an application for a tentative carryback adjustment by certain corporations for the separate return year created by their becoming new members of a consolidated group. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

Special Analyses

It has been determined that this notice of proposed rule making is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that these regulations will primarily affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses, and, moreover, that any burden on taxpayers is minimal. 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 Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Public Hearing

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

A public hearing has been scheduled for April 26, 2001, beginning at 10 a.m., in room 4718, Internal Revenue Service Building, 1111 Constitution Avenue, NW., Washington DC. Due to building security procedures, visitors must enter at the 10 ^th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must request to speak, and submit written comments and an outline of the topics to be discussed and the time to be devoted to each topic (a signed original and eight (8) copies) by April 5, 2001. A period of ten minutes will be allocated to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal authors of these proposed regulations are Christopher M. Bass and Frances L. Kelly, Office of the Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1 — INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Section 1.1502–78 also issued under 26 U.S.C. 1502 and 6411(c).* * *

Par. 2. Section 1.1502–78, as proposed to be amended, reads as follows:

§1.1502–78 Tentative carryback adjustments.

[The text of the amendments to this proposed section is the same as the text of the amendments to §1.1502–78T published in T.D. 8919.]

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on January 3, 2001, 8:45 a.m., and published in the issue of the Federal Register for January 4, 2001, 66 F.R. 747)

The GUST Remedial Amendment Period for Employers Who Use M&P or Volume Submitter Specimen Plans

Announcement 2001–12

This announcement –

Provides a general summary of the rules for determining the GUST remedial amendment period for employers who use master and prototype (M&P) plans or volume submitter specimen plans. This summary is followed by answers to questions the Service has received regarding the application of these rules.
Describes circumstances under which the Service will waive the requirement that employers certify their intent to adopt a sponsor or practitioner’s M&P or volume submitter specimen plan. In some situations, such a certification is required as a condition for extend

February 5, 2001 526 2001–6 I.R.B.

ing the GUST remedial amendment period. In addition, this announcement describes the Service’s policies regarding requests for additional information on opinion and advisory letter applications for M&P and volume submitter specimen plans, including applications that relate to previously approved plans.

Summary of Rules for Determining the GUST Remedial Amendment Period for Employers Who Use M&P or Volume Submitter Specimen Plans

Employers who maintain tax-qualified retirement plans under section 401(a) or section 403(a) of the Internal Revenue Code generally are required to amend their plans for new law changes, which are described using the acronym “GUST,” within the GUST remedial amendment period under section 401(b). ( See section 1.02 of Rev. Proc. 2000–27, 2000–26 I.R.B. 1272, for a complete listing of the public laws described collectively as GUST.) The following is a general summary of the rules for determining the GUST remedial amendment period for employers who use M&P or volume submitter specimen plans.

The GUST remedial amendment period generally ends on the last day of the first plan year beginning in 2001 (“the regular GUST remedial amendment period”). However, employers may have a later deadline if the requirements of section 19 of Rev. Proc. 2000–20, 2000–6 I.R.B. 553, as modified by Rev. Proc. 2000–27, are met.
To be eligible for a later deadline under section 19 of Rev. Proc. 2000–20, an employer must either: (i) adopt an M&P or volume submitter specimen plan (regardless of whether the plan has a TRA ‘86 opinion or advisory letter); or (ii) jointly certify with an M&P sponsor or volume submitter practitioner that the employer intends to amend its plan for GUST by adopting the sponsor or practitioner’s M&P or volume submitter specimen plan after the plan has received GUST approval. This required action (either adoption of an M&P or volume submitter specimen plan or execution of a certification of intent to adopt) must take place by the end of the reg

ular GUST remedial amendment period. In addition, the sponsor or practitioner of the M&P or volume submitter specimen plan which the employer has adopted or intends to adopt must have requested a complete GUST opinion or advisory letter for the plan by December 31, 2000. Thus, if a sponsor or practitioner requested a GUST opinion or advisory letter for an M&P or volume submitter specimen plan by December 31, 2000, employers who have adopted the plan by the end of the regular GUST remedial amendment period (December 31, 2001, in the case of calendar year plans) do not have to take further action until the time described in 3, following. 3. If the requirements described above are satisfied, the employer’s deadline for amending its plan for GUST is the later of:

(i) the end of the regular GUST remedial amendment period, or (ii) the end of the 12th month beginning after the date a GUST opinion or advisory letter is issued for the M&P or volume submitter specimen plan, or the opinion or advisory letter application is withdrawn. By this deadline, the employer must adopt one of the following: the GUST-approved M&P or volume submitter specimen plan referred to above, another GUSTapproved M&P or volume submitter specimen plan or individually-designed GUST amendments. In addition, in order to be entitled to extend the remedial amendment period under this rule, the employer must request a determination letter by the end of the extended period, if a determination letter is required for reliance.

(In cases where the M&P plan is an identical adoption or minor modification of a “mass submitter plan,” or where the volume submitter specimen plan is an identical adoption of a “lead specimen plan,” the date of the letter approving the mass submitter or lead specimen plan is irrelevant. It is the date the letter is issued for the sponsor or practitioner’s plan that governs. A mass submitter plan is an M&P plan that is submitted to the Service on behalf of at least 30 M&P sponsors who will sponsor the identical plan. A lead specimen plan is a volume submitter specimen plan that is submitted to the Service on behalf of at least 30 practitioners who will sponsor the identical volume submitter specimen plan.)

In applying these rules, an employer who has adopted (or certified its intent to adopt) a sponsor or practitioner’s M&P or volume submitter specimen plan by the end of the regular GUST remedial amendment period will be deemed to have adopted (or certified its intent to adopt) each other M&P or volume submitter specimen plan of that sponsor or practitioner. Example 1. Employer X adopted Bank A ’s M&P plan in 1997. Bank A does not sponsor any other plans. Bank A restates its M&P plan for GUST and files an application for a complete GUST opinion letter by December 31, 2000. X does not have to take further action until the M&P plan is approved for GUST. If a GUST opinion letter for the M&P plan is issued on May 1, 2001, X must adopt the GUST-approved plan by May 31, 2002. Alternatively, X may adopt another GUST-approved M&P or volume submitter specimen plan or individually-designed GUST amendments by this date. In addition, if a determination letter is required for reliance, for example because X ’s plan is a nonstandardized plan, X must also apply for a GUST determination letter by May 31, 2002.

Example 2 Bank B sponsors two M&P plans, Plan 001 and Plan 002. Employer Y adopted Plan 001 in 1996. Employer Z adopted Plan 002 in 1996. Bank B decides to discontinue Plan 002 and does not request a GUST opinion letter for this plan. Z does not certify its intent to adopt another sponsor or practitioner’s plan. Bank B files an application for a complete GUST opinion letter for Plan 001 by December 31, 2000, and a favorable letter is issued on April 30, 2001. Because Z is deemed to have adopted Plan 001 before the end of the regular GUST remedial amendment period, Z is entitled to the same GUST remedial amendment period extension as Y . Therefore, by April 30, 2002, both Y and Z must adopt the GUST-approved Plan 001, another GUST-approved M&P or volume submitter specimen plan or individually-designed GUST amendments. Each must also request a determination letter by April 30, 2002, if a determination letter is required for reliance.

Example 3 . Practitioner C sponsors three volume submitter specimen plans, Plans 1, 2 and 3. Practitioner C files applications for complete GUST advisory letters for each of the plans on June 1, 2000. Favorable advisory letters for Plans 1 and 2 are issued on November 30, 2000. A favorable advisory letter for Plan 3 is issued on March 15, 2001. Each employer who adopted (or certified its intent to adopt) Plan 1 or Plan 2 before the end of the regular GUST remedial amendment period is also deemed to have adopted (or certified its intent to adopt) Plan 3. Therefore, the GUST remedial amendment period for each employer who adopted (or certified its intent to adopt) any of Practitioner C’s volume submitter specimen plans by the end of the regular GUST remedial amendment period is extended to March 31, 2002, provided the employer adopts one of Practitioner C’s GUST-approved plans, another GUST-approved volume submitter specimen or M&P plan or individually-designed GUST amendments, and requests a determination letter (if required for reliance) by this date.

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those who had adopted the discontinued plan) must:

(i) adopt any of the GUST-approved plans of the sponsor, or any other GUST-approved M&P or volume submitter specimen plan; or (ii) adopt individually-designed GUST amendments; and (iii) request a determination letter, if a determination letter is required for reliance.

Extending the GUST Remedial Amendment Period When Sponsor or Practitioner Does Not Timely Request Opinion or Advisory Letter

If an M&P sponsor or volume submitter practitioner did not request GUST opinion or advisory letters for its plans by December 31, 2000, employers who have adopted the plans must take one of the following steps by the end of the regular GUST remedial amendment period:

(i) adopt a GUST-approved M&P or volume submitter specimen plan of another sponsor or practitioner, or individually-designed GUST amendments; (ii) extend the GUST remedial amendment period by adopting a timely submitted M&P or volume submitter specimen plan of another sponsor or practitioner; or (iii) extend the GUST remedial amendment period by jointly certifying with another sponsor or practitioner that the employer intends to amend its plan for GUST by adopting the sponsor or practitioner’s timely submitted M&P or volume submitter specimen plan after the plan has been approved for GUST. The Service is aware that some sponsors and practitioners will not be requesting GUST opinion or advisory letters for their M&P or volume submitter specimen plans because the plans are being replaced by plans of other sponsors or practitioners as a result of business circumstances. In order to ameliorate the burden of requiring employers to take one of the intermediate steps described in (ii) or (iii) above in these situations, the Service is adopting the policy described in the next paragraph. This policy aims to reduce burden by providing relief from the certification requirement in appropriate, clearly defined situations.

Questions and Answers

The following are answers to specific questions the Service has received regarding the rules for determining the GUST remedial amendment period for employers who use M&P or volume submitter specimen plans. These Q&As address situations involving M&P plans but are equally applicable to situations involving volume submitter specimen plans.

Q1. An M&P sponsor has submitted its M&P plan for GUST approval, but has not received approval by the end of 2000. Must the sponsor or the adopting employers (i.e., employers who have either adopted the plan or certified their intent to adopt the plan by the end of the regular GUST remedial amendment period) have done anything before January 1, 2001?

A1. No.

Q2. An M&P sponsor has decided to discontinue marketing its M&P plan and will not seek approval for GUST amendments to the plan. Did the employers who have adopted the M&P plan have to do anything before January 1, 2001? Did the sponsor? Do the answers change if the plan had been approved as a regional prototype plan under Rev. Proc. 89–13, 1989–1 C.B. 801?

A2. The employers who have adopted the M&P plan did not have to do anything at this time. Assuming the M&P sponsor is not continuing to sponsor any plan (see Q&A4 below for analysis of a case where the M&P sponsor is continuing to sponsor another plan or plans), the employers must do one of the following by the end of the regular GUST remedial amendment period:

plan has been approved for GUST. The sponsor of the discontinued plan must notify the adopting employers and the Service of the discontinuance of the plan. The sponsor should also advise the adopting employers of their options for complying with GUST, as described above. It makes no difference if the plan is a regional prototype plan.

Q3. Is the answer to 2 different if the M&P plan is being discontinued by a mass submitter?

A3. The discontinuance of an M&P plan by a mass submitter does not constitute discontinuance of the M&P plans that are identical adoptions or minor modifications of the mass submitter’s plan. If a mass submitter discontinues a plan, an M&P sponsor that is using the plan has the following options:

(i) continue the plan as a nonmass submitter M&P plan; (ii) amend the form of the plan to be a word-for-word identical or minor modifier adoption either of another plan of the mass submitter or of a plan of another mass submitter; or (iii) discontinue the M&P plan as described in A2 above.

Q4. An M&P sponsor has several plans and decides to discontinue only one of them. What effect will this have on the deadline for amending for those employers who have adopted one of the other plans? What effect will this have on the deadline for amending for those employers who have adopted the plan that will be discontinued?

A4. Each employer who has adopted any of the M&P sponsor’s plans (including the discontinued plan) before the end of the regular GUST remedial amendment period is deemed to have adopted all of the sponsor’s plans. It is assumed that the M&P sponsor requested GUST opinion letters by December 31, 2000, for each M&P plan that will continue. Therefore, the GUST remedial amendment period for each employer who adopted any of the M&P sponsor’s plans (including the discontinued plan) before the end of the regular GUST remedial amendment period will be extended until the end of the 12th month beginning after the date of approval of the last plan of the sponsor to receive a GUST opinion letter. By this time, the employers (including

February 5, 2001 528 2001–6 I.R.B.

If a sponsor or practitioner of an M&P or volume submitter specimen plan did not request a GUST opinion or advisory letter for the plan by December 31, 2000, because the plan is being replaced by an M&P or volume submitter specimen plan of another sponsor or practitioner, the Service will not require an employer who has adopted the “replaced plan” to sign a certification of intent to adopt the “replacement” plan in order to be eligible for the extension under section 19 of Rev. Proc. 2000–20, provided the following conditions are met:

(i) the employer has adopted the replaced plan by the end of the regular GUST remedial amendment period; (ii) the sponsor or practitioner of the replacement plan has submitted the plan to the Service for a GUST opinion or advisory letter by December 31, 2000; and (iii) the sponsor or practitioner of the replacement plan and the sponsor or practitioner of the replaced plan are related in one of the following ways: (a) one was merged into the other before January 1, 2001; or (b) as of December 31, 2000, both are

members of the same controlled group of corporations within the meaning of section 414(b) or are trades or businesses which are under common control within the meaning of section 414(c). If these conditions are met, the employer will have until the end of the 12th month beginning after the date of issuance of a GUST opinion or advisory letter for the replacement plan to adopt the GUSTapproved replacement plan. (Alternatively, the employer may, on or before the end of the 12th month beginning after the date of issuance of a GUST opinion or advisory letter for the replacement plan, adopt another GUST-approved M&P or volume submitter specimen plan or individually-designed GUST amendments). If a determination letter is required for reliance, the employer must also request the determination letter on or before the end of the 12th month beginning after the date of issuance of a GUST opinion or advisory letter for the replacement plan.

The determination letter request should include a statement from the sponsor or practitioner of the replacement plan, which indicates that the sponsor has satis

fied the requirements described above and which lists the sponsor, file folder number and name of the M&P or volume submitter specimen plan(s) being replaced. (This statement should also be included with the GUST opinion or advisory letter application for the replacement plan.) The determination letter request should also include evidence of the employer’s prior adoption of the replaced plan.

Service Procedures for Reviewing M&P and Volume Submitter Specimen Plans

The Service may, at its discretion, require any additional information it considers necessary to the issuance of a favorable opinion or advisory letter. Although the Service’s review of a previously approved M&P or volume submitter specimen plan is focused primarily on the requirements of GUST and plan provisions affected by the GUST requirements, the Service may request changes to any provisions of the plan when necessary, notwithstanding that the plan included the provisions when it was previously approved.