Part I. Rulings — Internal Revenue Bulletin 2002-2

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 83.—Property Transferred in Connection With Performance of Services

26 CFR 1.83–6: Deduction by employer.

Options & Spin-off: Income tax treatment of options and restricted stock in spin-offs, under the facts presented. See Rev. Rul. 2002–1, page 268.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 355.—Distributions of Stock and Securities of a Controlled Corporation

26 CFR 1.355–1: Distribution of stock and securi- ties of a controlled corporation. (Also §§: 1.83–6, 1.1032–3).

Options and spin-off. Income tax treatment of options and restricted stock in spin-offs, under the facts presented.

Rev. Rul. 2002–1

ISSUE

Under the facts presented below, after a distributing corporation (D) distributes the stock of a controlled corporation (C) in a transaction to which § 355(c) of the Internal Revenue Code applies,

(1) Does D recognize gain or loss when restrictions lapse on C stock held by D employees that is received in connection with the § 355 transaction? Does D recognize gain or loss when stock options for C stock held by D employees that are received in connection with the § 355 transaction are exercised?

(2) Does C recognize gain or loss when restrictions lapse on D stock held by C employees that is received before the § 355 transaction? Does C recognize gain or loss when stock options for D stock held by C employees that are received in connection with the § 355 transaction are exercised?

(3) Who is entitled to deductions for amounts includible in employees’ income as a result of the lapse of restrictions on D and C stock and the exercise of options to acquire D and C stock described above?

FACTS

D is a domestic corporation of which A is an employee at all times relevant to this ruling. C is a wholly-owned domestic subsidiary of D of which B is an employee at all times relevant to this ruling.

In Year 1, D implements a plan to attract and retain qualified personnel and to provide incentives for continued performance of services by providing additional compensation to its employees and to the employees of C in the form of: (i) stock of D that is not transferable and is subject to a substantial risk of forfeiture, as defined in § 83(c), for a period of five years beginning in Year 1 (restricted stock); and (ii) non-statutory options to purchase shares of D stock (the predivision options). The plan is not implemented in anticipation of a spin-off.

Under the plan, in Year 1 D issues restricted D stock to A, and to B on behalf of C, for the employees’ services performed for their respective employers. In the event of forfeiture, the restricted stock would revert to D. A and B do not make an election in Year 1 pursuant to § 83(b) with respect to the restricted stock. Also in Year 1, D grants to A, and to B on behalf of C, pre-division options for their services. The options do not have a readily ascertainable fair market value (within the meaning of § 1.83–7(b) of the Income Tax Regulations) at the time they are issued.

In Year 3, D distributes the stock of C pro rata to D’s shareholders in a transaction that qualifies for nonrecognition of gain to D under § 355(c) (hereinafter

referred to as the spin-off). In the spinoff, the shareholders of D receive one share of C stock for each share of D stock.

Although, under § 83, A and B are not treated as the owners of the restricted D stock for Federal tax purposes, A and B have rights in the D stock and receive, in connection with the spin-off, a distribution of C stock with restrictions identical to the restrictions on the D stock in order to preserve their pre-spin-off economic interest in the pre-spin-off restricted D stock. In the event of forfeiture, the restricted D stock would revert to D and the restricted C stock would revert to C. Thus, after the spin-off, A and B each hold restricted stock in both D and C.

Also as part of the spin-off, the predivision options held by A and B are canceled and replaced with new options (the post-division options) to acquire stock in D from D and stock in C from C. Pursuant to the terms of the post-division options, the post-division options’ exercise price is paid directly to the issuing corporation in exchange for the stock. Except to the extent that the post-division options separate the pre-division options into two instruments, the post-division options are designed to preserve the economic terms of the pre-division options. The total exercise price of the postdivision options held by each of A and B, respectively, is equal to the total exercise price of the pre-division options held by each of A and B, respectively. The total number of shares of D stock subject to the post-division options held by each of A and B, respectively, is equal to the total number of shares of D stock subject to the pre-division options held by each of A and B, respectively. The total number of shares of C stock subject to the postdivision options held by each of A and B, respectively, is equal to the total number of shares of D stock subject to the predivision options held by each of A and B, respectively. Finally, the ratio of (a) the exercise price for each share subject to a post-division option to acquire D stock to (b) the exercise price of each share subject to a post-division option to acquire C stock is equal to the ratio of (x) the estimated fair market value of all of the outstanding D stock, excluding the estimated

2002-2 I.R.B 268 January 14, 2002

cussion addresses the Federal income tax consequences to D and C when these events occur.

The characterization of the events that occur in Year 6 should reflect the relationship of D and C that existed in Year 1 and continued until immediately before the spin-off. Cf. Rev. Rul. 83–73, 1983–1 C.B. 84 (applying a relation-back principle to characterize indemnity payments made by former shareholders of a merged corporation to the acquiring corporation). Specifically, to determine whether D recognizes gain or loss in Year 6 when the restrictions lapse on the restricted C stock held by A, whether C recognizes gain or loss in Year 6 when the restrictions lapse on the restricted D stock held by B, whether D recognizes gain or loss in Year 6 when A exercises the post-division options for C stock, and whether C recognizes gain or loss in Year 6 when B exercises the post-division options for D stock, it is appropriate to take into account the terms of the original arrangement created in Year 1, and the parentsubsidiary relationship between D and C that existed in Year 1 and continued until immediately before the spin-off.

Prior to the spin-off, the stock of D reflected an interest in C. Although, prior to the spin-off, A was not treated as the owner of the restricted D stock for Federal tax purposes, A had valuable economic rights with respect to that stock and, indirectly, with respect to D’s stock ownership interest in C. Similarly, although the pre-division options did not give A ownership in D stock, the predivision options did give A valuable economic rights with respect to D stock by reason of the right to acquire D stock at a fixed price, which would have included an indirect ownership interest in C if the spin-off had not occurred. Thus, A’s receipt in connection with the spin-off of the restricted C stock and the postdivision options to acquire D and C stock preserved A’s economic rights with respect to the entire pre-spin-off D enterprise, which included C.

Because the restricted C stock and the post-division options to acquire C stock are a substitute in part for pre-spin-off restricted D stock and the pre-division options, it is appropriate for purposes of §§ 1032 and 355 to treat a post-spin-off lapse in restrictions on the restricted C

fair market value attributable to D’s ownership of C stock immediately prior to the spin-off to (y) the estimated fair market value of all of the outstanding C stock immediately prior to the spin-off.

In Year 6, the restrictions lapse on the restricted stock held by A and B. Also in Year 6, A and B exercise all of their postdivision options.

LAW AND ANALYSIS

Under § 83(a), when property is transferred to a person in connection with the performance of services, the service provider must include in gross income an amount equal to the fair market value of such property, less the amount (if any) paid for the property. However, if the property transferred is not transferable and is subject to a substantial risk of forfeiture in the hands of the service provider, the fair market value of the property, less the amount (if any) paid for the property, is not includible in the service provider’s gross income until the property is transferable or is not subject to a substantial risk of forfeiture, unless the service provider elects to include such amount in gross income at the time of the transfer under § 83(b). Section 83(e)(3) provides that § 83 does not apply to the grant of an option without a readily ascertainable fair market value.

Under § 83(h), the service recipient is allowed a deduction under § 162 in an amount equal to the amount included in the service provider’s gross income under § 83(a). Where the property is not substantially vested on transfer, the deduction is allowed for the taxable year of the service recipient in which or with which ends the service provider’s taxable year in which the amount is included in the service provider’s gross income. See § 1.83–6(a)(1), (2) of the Income Tax Regulations. Where property is substantially vested on transfer, the deduction is allowed in accordance with the service recipient’s method of accounting (in conformity with §§ 446 and 461). See § 1.83–6(a)(3).

Section 1.83–6(b) states that, except as provided in § 1032, at the time of a transfer of property in connection with the performance of services, the transferor recognizes gain to the extent that the transferor receives an amount that exceeds its basis in the property. In addi

tion, at the time a deduction is allowed under §§ 83(h) and 1.83–6(a), the transferor recognizes gain or loss to the extent of the difference between (1) the sum of the amount paid plus the amount allowed as a deduction under § 83(h), and (2) the sum of the transferor’s basis in the property plus any gain recognized at the time of the transfer.

Section 1032(a) provides, in part, that no gain or loss is recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation. Under § 1.1032–1(a), for purposes of § 1032(a), a transfer by a corporation of its own stock as compensation for services is considered a disposition for money or other property. Thus, when a corporation compensates employees with its own stock, the corporation does not recognize gain or loss under § 1032.

Section 1.1032–3 generally provides that in certain transactions in which a corporation (the acquiring entity) acquires money or other property in exchange, in whole or in part, for stock of a corporation (the issuing corporation), the acquiring entity is treated as purchasing the stock of the issuing corporation from the issuing corporation for fair market value with cash contributed to the acquiring entity by the issuing corporation. If the issuing corporation receives money or other property in payment for its stock, the amount of cash deemed contributed is the difference between the fair market value of the issuing corporation stock and the amount of money or fair market value of other property that the issuing corporation receives as payment. Section 1.1032–3 generally enables a corporate subsidiary to obtain a fair market value basis in parent stock contributed to the subsidiary’s capital if the subsidiary disposes of the parent stock in a taxable transaction immediately after it is received from the parent. Thus, as a result of the operation of § 1.1032–3, a subsidiary generally does not recognize gain or loss on the immediate transfer of parent stock to the subsidiary’s employee.

A and B recognize income in Year 6 under the rules of § 83 when the restrictions on the D and C stock lapse and when they exercise their options to acquire D and C stock. The following dis

January 14, 2002 269 2002-2 I.R.B.

stock held by A and A’s exercise of postdivision options to acquire C stock in the same manner under §§ 1032 and 355 as a pre-spin-off lapse of restrictions on the restricted D stock held by A and A’s prespin-off exercise of pre-division options, respectively, would be treated followed by the spin-off. Accordingly, because D would have recognized no gain or loss under § 1032 by reason of the pre-spinoff lapse of restrictions on D stock held by A and A’s pre-spin-off exercise of the pre-division options to acquire D stock, and because § 355(c) applies to the spinoff in Year 3, in Year 6 D recognizes no gain or loss with respect to the C stock by reason of the lapse of restrictions on the restricted C stock issued to A and on A’s exercise of the post-division options to acquire C stock. Further, under § 83(h), in Year 6 D is entitled to a deduction under § 162 in the amount that A includes in income under § 83(a) as a result of the lapse in restrictions on the C stock and the exercise of the post-division options to acquire C stock.

Similarly, it is appropriate for purposes of § 1032 to treat a post-spin-off lapse in restrictions on the restricted D stock held by B and B’s exercise of post-division options to acquire D stock in the same manner under § 1032 as a pre-spin-off lapse of restrictions on the restricted D stock held by B and B’s pre-spin-off exercise of pre-division options, respectively, would be treated followed by the spin-off. C would have recognized no gain or loss under § 1032 by reason of the pre-spinoff lapse of restrictions on D stock held by B and B’s pre-spin-off exercise of the pre-division options to acquire D stock. See §§ 1.83–6(d) and 1.1032–3; see also § 1.1032–3(e), exs. 6, 8. Consistent with this analysis, the consequences of the post-spin-off lapse of restrictions on the restricted D stock held by B and B’s postspin-off exercise of D options are characterized by reference to the parentsubsidiary relationship between D and C that existed in Year 1 and continued until immediately before the spin-off. Accordingly, in Year 6, for purposes of § 1032, C is treated as if it bought the D stock from D at fair market value after a shareholder capital contribution from D, with the result that C recognizes no gain or loss with respect to the D stock by reason of the lapse of restrictions on the

restricted D stock issued to B and on B’s exercise of the post-division options to acquire D stock. See §§ 1.83–6(d) and 1.1032–3. Under § 83(h), in Year 6 C is entitled to a deduction under § 162 in the amount that B includes in income under § 83(a) as a result of the lapse of restrictions on the D stock and the exercise of post-division options to acquire D stock.

Under § 1032, in Year 6 D recognizes no gain or loss when the restrictions lapse on the restricted D stock held by A and B and when A and B exercise the postdivision options to acquire D stock. In addition, under § 1032, C recognizes no gain or loss when the restrictions lapse on the restricted C stock held by A and B and when A and B exercise the postdivision options to acquire C stock.

HOLDING

Under the facts presented above, after D distributes the stock of C in a transaction to which § 355(c) applies,

(1) D recognizes no gain or loss when restrictions lapse on the C stock held by A that is received in connection with the spin-off; D recognizes no gain or loss when stock options for C stock held by A that are received in connection with the spin-off are exercised;

(2) C recognizes no gain or loss when restrictions lapse on D stock held by B that is received before the spin-off; C recognizes no gain or loss when stock options for D stock held by B that are received in connection with the spin-off are exercised; and

(3) D is entitled to deductions for amounts includible in A’s income as a result of the lapse of restrictions on D and C stock and the exercise of options to acquire D and C stock, and C is entitled to deductions for amounts includible in B’s income as a result of the lapse of restrictions on D and C stock and the exercise of options to acquire D and C stock.

DRAFTING INFORMATION

For further information regarding this revenue ruling, contact Mark Weiss of the Office of Associate Chief Counsel (Corporate) at 202–622–7790 (not a toll-free call).

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

2002-2 I.R.B 270 January 14, 2002

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, on this page.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, on this page.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, on this page.

Section 1032.—Exchange of Stock for Property

26 CFR 1.1032–3: Disposition of stock or stock options in certain transactions not qualifying under any other nonrecognition provision.

Options and Spin-off: Income tax treatment of options and restricted stock in spin-offs, under the facts presented. See Rev. Rul. 2002–1, page 268.

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

(Also sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for January 2002.

Rev. Rul. 2002–2

This revenue ruling provides various prescribed rates for federal income tax purposes for January 2002 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the deemed rate of return for transfers made during calendar year 2002 to pooled income funds described in § 642(c)(5) that have been in existence for less than 3 taxable years immediately preceding the taxable year in which the transfer is made.

Applicable Federal Rates (AFR) for January 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 2.73% 2.71% 2.70% 2.69% 110% AFR 3.00% 2.98% 2.97% 2.96% 120% AFR 3.28% 3.25% 3.24% 3.23%

130% AFR 3.55% 3.52% 3.50% 3.49%

January 14, 2002 271 2002-2 I.R.B.

REV. RUL. 2002–2 TABLE 1—CONTINUED

Applicable Federal Rates (AFR) for January 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Mid-Term

AFR 4.49% 4.44% 4.42% 4.40% 110% AFR 4.94% 4.88% 4.85% 4.83% 120% AFR 5.40% 5.33% 5.29% 5.27% 130% AFR 5.85% 5.77% 5.73% 5.70% 150% AFR 6.77% 6.66% 6.61% 6.57% 175% AFR 7.92% 7.77% 7.70% 7.65%

Long-Term

AFR 5.46% 5.39% 5.35% 5.33%

110% AFR 6.02% 5.93% 5.89% 5.86%

120% AFR 6.57% 6.47% 6.42% 6.38%

130% AFR 7.13% 7.01% 6.95% 6.91%

REV. RUL. 2002–2 TABLE 2

Adjusted AFR for January 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted AFR 2.47% 2.45% 2.44% 2.44%

Mid-term adjusted AFR 3.57% 3.54% 3.52% 3.51%

Long-term adjusted AFR 4.82% 4.76% 4.73% 4.71%

2002-2 I.R.B 272 January 14, 2002

REV. RUL. 2002–2 TABLE 3

Rates Under Section 382 for January 2002

Adjusted federal long-term rate for the current month 4.82%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.82%

REV. RUL. 2002–2 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for January 2002

Appropriate percentage for the 70% present value low-income housing credit 8.16%

Appropriate percentage for the 30% present value low-income housing credit 3.50%

REV. RUL. 2002–2 TABLE 5

Rate Under Section 7520 for January 2002

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 5.4%

REV. RUL. 2002–2 TABLE 6

Rate Under Section 7520 for January 2002

Deemed rate of return for transfers during 2002 to pooled income funds that have been in existence for less than 3 taxable years

6.6%

January 14, 2002 273 2002-2 I.R.B.

regulation permits disclosure by Federal agencies, with the Commissioner’s approval, to 1) other Federal agencies, 2) state tax agencies, 3) the General Accounting Office, 4) Federal, state and local child support enforcement agencies, 5) persons described in section 6103(c) (person designated in a taxpayer consent), and 6) persons described in section 6103(e) (person with a material interest). The Consolidated Appropriations Act, 2001, Pub. L. No. 106–554 (114 Stat. 2763), was signed into law on December 21, 2000. Section 1 of that Act enacted into law H.R. 5662, the Community Renewal Tax Relief Act of 2000. Section 310 of the Community Renewal Tax Relief Act of 2000 added section 6103(j)(6) to the Code, authorizing the Commissioner to disclose return information to the Congressional Budget Office (CBO) for the purpose of, but only to the extent necessary for, long term models of the Social Security and Medicare programs. The conference report, H.R. Conf. Rep. No. 106–1033, at 1020–21 (2000), provides that it is the intent of Congress that all requests for information made by CBO under this provision be made to the Commissioner, who will use his authority under section 6103(p)(2) such that the Social Security Administration (SSA) or other agency can furnish the information directly to CBO for the purpose of CBO’s long term models of Social Security and Medicare. SSA, not IRS, collects and maintains much of the information sought by CBO and also receives the tax information CBO seeks under other provisions of section 6103. However, section 301.6103(p)(2)(B)–1 in its current form would not allow the Commissioner to authorize SSA to redisclose return information properly in its possession to CBO, an authorized recipient of the information under section 6103(j)(6). The temporary regulation allows SSA to make return information in its possession available to CBO to the extent authorized by section 6103(j)(6). There are other situations, similar to that found under section 6103(j)(6), where it is more efficient for returns and return information in the possession of one authorized agency recipient, to be disclosed by such agency to another statutorily authorized recipient. The inability of agencies, including Federal, state and

Section 1288.—Treatment of Original Issue Discounts on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term, rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 6103.— Confidentiality and Disclosure of Returns and Return Information

26 CFR 301.6103(p)(2)(B)–1T: Disclosure of returns and return information by other agencies.

T.D. 8968

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

Disclosure of Returns and Return Information by Other Agencies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulation.

SUMMARY: This temporary regulation relates to the disclosure of returns and return information by Federal, state and local agencies other than the IRS. The temporary regulation permits the IRS to authorize agencies with access to returns and return information under section 6103 of the Internal Revenue Code (Code) to redisclose returns and return information, with the Commissioner’s approval, to any authorized recipient set forth in section 6103, subject to the same conditions and restrictions, and for the same purposes, as if the recipient had received the information from the IRS directly.

DATES: This regulation is effective December 13, 2001.

FOR FURTHER INFORMATION CONTACT: Julie C. Schwartz, 202–622– 4570 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These temporary regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545–1757. Responses to this collection of information are required if the Commissioner is to authorize the disclosure of returns and return information from agencies with access to returns and return information under section 6103 to other authorized recipients of returns and return information in accordance with section 6103.

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 OMB control number.

For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register .

Books or records relating to a 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 return information are confidential, as required by 26 U.S.C. 6103.

Background

Section 6103(p)(2)(B) provides that return information disclosed pursuant to the Code may be disclosed by any mode or means that the Secretary determines necessary or appropriate. 26 C.F.R. section 301.6103(p)(2)(B)–1 currently permits certain recipients of returns and return information under section 6103, with the Commissioner’s approval, to disclose returns and return information to certain other permissible recipients under section 6103. Specifically, the existing

2002-2 I.R.B 274 January 14, 2002

local agencies, to share returns and return information between themselves or even inside a single agency, even where the information is more readily available from an agency other than the IRS, was highlighted by the Department of the Treasury on pages 89-90 of its October 2000 Report to the Congress on the Scope and Use of Taxpayer Confidentiality and Disclosure Provisions. The report notes, for example, that currently a single agency within a state (or even a single caseworker) may be administering both child support under Title IV-D of the Social Security Act and welfare under Title IV-A of the Social Security Act. The agency may receive return information under both section 6103(l)(6) and section 6103(l)(7) to aid the agency in making determinations of eligibility for these programs, but the current regulation does not permit even intra-agency pooling or sharing of these data. The report notes that both intra- and inter-agency data sharing with respect to common data elements could be authorized by amendment to the Treasury regulations. The temporary regulation allows the IRS to authorize redisclosure in appropriate situations.

Explanation of Provisions

The temporary regulation expands the agencies that may redisclose returns and return information if authorized by the Commissioner of Internal Revenue to any Federal, state or local agency that receives information under section 6103. Similarly, it expands the authorized recipients of returns and return information pursuant to this redisclosure authority to any recipient authorized to receive returns and return information in accordance with section 6103. All redisclosures by agencies pursuant to this regulation will be made subject to the same conditions, restrictions, safeguards, recordkeeping requirements, and civil and criminal penalties that would apply if the disclosure were made by the IRS. The reference in the existing regulation excepting redisclosures of return information under section 6103(m) from the recordkeeping requirements has been deleted as unnecessary because section 6103(p)(3) does not require recordkeeping by the IRS of section 6103(m) disclosures. As under the existing regulation, Federal, state and local agencies making

disclosures of return information under the temporary regulation will continue to provide to the IRS certain information regarding disclosures made pursuant to this authority, in order for the IRS to fulfill its reporting requirements under section 6103(p).

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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel of the Small Business Administration for comment on their impact on small businesses.

Drafting Information

The principal author of these regulations is Julie C. Schwartz, Office of the Associate Chief Counsel (Procedure and Administration), Disclosure and Privacy Law Division.

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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 an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 *** Section 301.6103(p)(2)(B)–1T also issued under 26 U.S.C. 6103(p)(2);***

§ 301.6103(p)(2)(B)–1 [Removed]

Par. 2. Section 301.6103(p)(2)(B)–1 is removed.

Par. 3. Section 301.6103(p)(2)(B)–1T is added to read as follows:

§ 301.6103(p)(2)(B)–1T Disclosure of Returns and Return Information by Other Agencies

(a) General Rule. Subject to the requirements of paragraphs (b), (c), and (d) of this section, returns or return information that have been obtained by a Federal, state or local agency, or its agents or contractors in accordance with section 6103 (the “first recipient”) may be disclosed by the first recipient to another recipient authorized to receive such returns or return information under section 6103 (the “second recipient”).

(b) Approval by Commissioner. A disclosure described in paragraph (a) of this section may be made if the Commissioner of Internal Revenue (the “Commissioner”) determines, after receiving a written request under this section, that such returns or return information are more readily available from the first recipient than from the Internal Revenue Service. The disclosure authorization by the Commissioner shall be directed to the head of the first recipient and may contain such conditions or restrictions as the Commissioner may prescribe. The disclosure authorization may be revoked by the Commissioner at any time.

(c) Requirements and restrictions. The second recipient may only receive returns or return information as authorized by the provision of section 6103 applicable to such second recipient. Any returns or return information disclosed may only be used by the second recipient for a purpose authorized by and subject to any conditions imposed by section 6103 and the regulations thereunder, including, if applicable, safeguards imposed by section 6103(p)(4). (d) Records and reports of disclosure. The first recipient shall maintain to the satisfaction of the Internal Revenue Service a permanent system of standardized records regarding such disclosure authorization described in paragraph (a) of this section and any disclosure of returns and return information made pursuant to such authorization, and shall provide such information as prescribed by the Commissioner in order to enable the Internal Revenue Service to comply with its obligations under section 6103(p)(3) to keep accountings for disclosures and to make annual reports of disclosures to the Joint Committee on Taxation. The information

January 14, 2002 275 2002-2 I.R.B.

Authority: 26 U.S.C. 7805 *** Par. 5. In § 602.101, paragraph (b) is amended by adding an entry to the table in numerical order to read as follows: § 602.101 OMB Control Numbers.

(b)***

Current OMB

control No.

required for reports to the Joint Committee on Taxation must be provided within 30 days after the close of each calendar year. The requirements of this paragraph do not apply to the disclosure of returns and return information as provided by paragraph (a) of this section which, had such disclosures been made directly by the Service, would not have been subject to the recordkeeping requirements imposed by section 6103(p)(3)(A).

CFR part or section where identified and described

(e) Effective Date. This section is applicable on December 13, 2001.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as follows:

301.6103(p)(2)(B)–1T ............................................................................................................................... 1545–1757

*****

Robert E. Wenzel, Deputy Commissioner of Internal Revenue.

Approved December 4, 2001.

Mark Weinberger, Assistant Secretary (Tax Policy)

Department of the Treasury.

(Filed by the Office of the Federal Register on December 12, 2001, 8:45 a.m., and published in the issue of the Federal Register for December 13, 2001, 66 F.R. 64351)

Section 6311.—Payment of Tax by Commercially Acceptable Means

26 CFR 6311–2: Payment by credit card and debit card.

T.D. 8969

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Payment by Credit Card and Debit Card

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document contains final regulations authorizing the Commissioner to accept payment of internal revenue taxes by credit card or debit card and limit the use and disclosure of information relating to payment of taxes by credit card and debit card. Additionally, the final regulations provide that payments of tax by check or money order should be made payable to the United States Treasury. The final regulations reflect changes to the law made by the Taxpayer Relief Act of 1997 and affect persons who pay their tax liabilities by credit card, debit card, check, or money order.

DATES: Effective Date: These final regulations are effective December 14, 2001.

Applicability Date: For dates of applicability, see §301.6311–2(h).

FOR FURTHER INFORMATION CONTACT: Brinton Warren (202) 622–4940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations amending the Procedure and Administration Regulations (26 CFR part 301) under sections 6103 and 6311 of the Internal Revenue Code (Code). The final regulations reflect the amendment of sections 6103 and 6311 by section 1205 of the Taxpayer Relief Act of 1997, Public Law 105–34 (111 Stat. 788) (TRA 1997);

2002-2 I.R.B 276 January 14, 2002

section 4003(k) of the Tax and Trade Relief Extension Act of 1998, Public Law 105–277 (112 Stat. 2681) (TREA 1998); and section 3703 of the Internal Revenue Service Restructuring and Reform Act of 1998, Public Law 105–206 (112 Stat. 685) (RRA 1998). On December 15, 1998, the IRS and Treasury published temporary regulations (T.D. 8793, 1999–1 C.B. 466) in the Fed- eral Register (63 FR 68995). A notice of proposed rulemaking (REG–111435–98, 1999–1 C.B. 506) cross-referencing the temporary regulations was published on the same day in the Federal Register (63 FR 69031). (References herein to the proposed regulations shall be to the temporary regulations.) No public hearing was requested or held. Two written comment letters were received. After consideration of the comments, the proposed regulations are adopted as revised by this Treasury decision, and the corresponding temporary regulations are removed. The comments and revisions are discussed below.

Explanation of Provisions

Section 301.6311–1 currently provides that checks or money orders should be made payable to the Internal Revenue Service. Section 3703 of RRA 1998 states that the Secretary of the Treasury shall establish such rules, regulations, and procedures as are necessary to allow payment of taxes by check or money order payable to the United States Treasury. The amendment to § 301.6311–1 accordingly provides that checks and money orders should be made payable to the United States Treasury.

As amended by section 1205 of TRA 1997, section 6311(a) provides that it shall be lawful for the Secretary of the Treasury to receive payment for internal revenue taxes by any commercially acceptable means that the Secretary deems appropriate, to the extent and under the conditions provided in regulations prescribed by the Secretary. The legislative history accompanying TRA 1997 explains that commercially acceptable means include “electronic funds transfers, including those arising from credit cards, debit cards, and charge cards.” H.R. Conf. Rep. No. 105–220, at 652 (1997). The current regulations under § 301.6311–1 permit payment of taxes by

checks, drafts drawn on financial institutions, or money orders. The final regulations add payments by credit cards (which includes charge cards) and debit cards to the acceptable methods of payment under section 6311. Section 6302 and the regulations thereunder remain the authority for forms of payment by electronic funds transfer other than payment by credit card or debit card.

Only credit cards or debit cards approved by the Commissioner may be used for payment of internal revenue taxes under section 6311, only the types of tax liabilities specified by the Commissioner may be paid by credit card or debit card, and all such payments must be made in the manner and in accordance with the forms, instructions, and procedures prescribed by the Commissioner. The Commissioner has entered into contracts with third party service providers who will process the credit and debit card transactions. The Commissioner may not impose any fee on persons making payment of taxes by credit card or debit card. However, other persons participating in the program, including third party service providers who process credit or debit card transactions, are not prohibited from charging fees.

The final regulations provide, as required by section 6311(d)(3), that the payment of taxes by credit card or debit card is subject to the error resolution procedures of section 161 of the Truth in Lending Act (TILA) (15 U.S.C. 1666), section 908 of the Electronic Fund Transfer Act (EFTA) (15 U.S.C. 1693f), or any similar provisions of state or local law. The payment, however, is subject to the error resolution procedures of these statutes only for the purpose of resolving errors relating to the credit card or debit card account, and not for the purpose of resolving any errors, disputes, or adjustments relating to the underlying tax liability. These provisions ensure that any disputes concerning the merits of the tax liability will be resolved in the traditional administrative and judicial forums ( e.g., by filing a petition in Tax Court or by paying the disputed tax and filing a claim for refund), and will not be raised in any dispute with the card issuer, financial institution, or other person participating in the credit card or debit card transaction.

As authorized by section 6311(d) (3)(E), the final regulations permit the Commissioner to return funds erroneously received due to errors relating to the credit card or debit card account by arranging for a credit to the taxpayer’s account with the issuer of the credit card or debit card or other appropriate financial institution or person. Returns of funds through credit card or debit card account credits, however, are available only to correct errors relating to the credit card or debit card account, and not to refund overpayments of taxes.

The final regulations also provide the procedures required under sections 6103(k)(9) and 6311(e) with respect to the use and disclosure of information relating to payment of taxes by credit card and debit card. Section 1205(c)(1) of TRA 1997 (as amended by section 6012(b)(2) of RRA 1998) added section 6103(k)(9), which authorizes the IRS to disclose returns and return information to financial institutions and others to the extent necessary for the administration of section 6311. Section 6103(k)(9) further provides that disclosures of information for purposes other than to accept payments by check or money order (for example, to accept payment by credit card or debit card) shall be made only to the extent authorized by written procedures promulgated by the Secretary. Section 6311(e) provides that no person shall use or disclose any information relating to credit card or debit card transactions obtained pursuant to section 6103(k)(9), except to the extent authorized by written procedures promulgated by the Secretary.

Pursuant to section 6311(e), the final regulations provide that information received by any person in connection with the payment of tax by credit card or debit card shall be treated as confidential by all persons who receive such information, whether such information is received from the IRS or from any other person, including the taxpayer. IRS personnel are authorized to disclose to card issuers, financial institutions, and other persons information necessary to process the tax payment or to bill or collect the amount charged or debited (for example, to resolve billing errors).

The final regulations set forth the limited purposes and activities for which

January 14, 2002 277 2002-2 I.R.B.

term exchange . To avoid confusion, the final regulations replace exchange with transfer for consideration.

Explanation of Other Revisions

Other changes to the final regulations include the following. First, the final regulations clarify that sending receipts or confirmation of a transaction to the taxpayer, including secured electronic transmissions and facsimiles, is a permissible disclosure. See §301.6311–2(g)(1)(i)(E). Second, the final regulations clarify that disclosure of information necessary to complete a transaction by the taxpayer with a state or local government agency (for example, to pay state or local tax by credit card or debit card) is a permissible disclosure when explicitly authorized by the taxpayer. This allows a taxpayer to make a state or local tax payment immediately after making a federal tax payment without requiring the taxpayer to reenter information (for example, name and Taxpayer Identification Number). See §301.6311–2(g)(1)(i)(F). Third, the final regulations provide that the term tax as used in these final regulations includes interest, penalties, additional amounts, and additions to tax. See §301.6311– 2(a)(1). The temporary regulations did not refer to additional amounts .

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 final regulations, and because these final regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

such information may be used or disclosed by card issuers, financial institutions, and other persons. The permitted purposes and activities principally involve credit card and debit card processing, billing, collection, account servicing, account transfers, internal business records, legal compliance, and legal proceedings. The final regulations expressly prohibit the selling of information, the sharing of information with credit bureaus, or the use of information for any marketing purpose. Any person who uses or discloses information in violation of section 6311(e) is subject to civil liability for damages under section 7431(a)(2). See section 7431(h), added by section 1205(c)(2) of TRA 1997 (as amended by section 6012(b)(3) of RRA 1998).

Summary of Comments

Commentators recommended that the final regulations be amended to permit the IRS to compensate private sector companies for the services they provide in connection with the payment of taxes by credit and debit card. However, section 6311(d)(2) prohibits the payment of such compensation. Thus, the final regulations do not adopt this recommendation.

Commentators also recommended that the final regulations incorporate by reference the applicable regulations and staff commentaries adopted by the Federal Reserve Board under the provisions of TILA and EFTA referenced in the final regulations. The final regulations do not adopt this recommendation because the references in section 6311 and the final regulations to section 161 of TILA and section 908 of EFTA are sufficient to make the Federal Reserve Board regulations and other legal guidance under section 161 of TILA and section 908 of EFTA applicable to the payment of taxes by credit card or debit card, except as explicitly excepted in sections 6311(d)(3)(A) and (C). Commentators also recommended a clarification of § 301.6311–2T(c)(2) of the temporary regulations, which provides that the United States has a lien for the guaranteed amount of a transaction upon all the assets of the institution making the guarantee if the United States is not duly

paid after the taxpayer tenders a payment of taxes by credit card or debit card. The commentators note that the mere tendering of payment by credit card or debit card is not sufficient for the United States to have a lien. Rather, the parties involved in the transaction must also follow the applicable procedures required to authorize the transaction and to obtain the guarantee. Thus, the commentators recommended that language be added to the final regulations to provide that the United States will not have a lien unless the parties involved follow the procedures required to authorize the transaction and obtain a guarantee.

Under the temporary regulations, the financial institution must expressly guarantee the payment in order for the United States to have a lien on the assets of the institution making the guarantee. The financial institution’s express guarantee will arise only if the applicable procedures necessary to authorize the transaction and obtain the guarantee are properly followed. Additional language in the final regulations is therefore unnecessary.

One commentator questioned the use of the term commercial transactions in § 301.6311–2T(d)(2)(D). The commentator recommended removing the word commercial because, in general, TILA does not apply to commercial transactions. The final regulations adopt this recommendation by replacing §301.6311– 2T(d)(2)(D) in the final regulations with a provision covering other types of errors similar to the ones explicitly covered by error resolution procedures in the final regulations.

One commentator recommended clarification of §301.6311–2T(g)(3)(i), which prohibits use or disclosure of information relating to credit and debit card transactions for purposes related to the sale or exchange of such information separate from the underlying receivable or account. The commentator stated that this provision conflicts with other provisions in the temporary regulations that specifically permit an exchange of credit and debit card information to process credit and debit card transactions and resolve billing errors without a sale or exchange of the underlying receivable or account. The commentator’s concern stems from an ambiguity created by the use of the

2002-2 I.R.B 278 January 14, 2002

Drafting Information

The principal author of these final regulations is R. Bradley Taylor of the Office of Associate Chief Counsel, Procedure and Administration (Administrative Provisions and Judicial Practice Division).

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

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

Authority: 26 U.S.C. 7805 - - Section 301.6103(k)(9)–1 also issued under 26 U.S.C. 6103(k)(9) and 26 U.S.C. 6103(q). - - Section 301.6311–2 also issued under 26 U.S.C. 6311. - - Par. 2. Section 301.6103(k)(9)–1 is added to read as follows:

§ 301.6103(k)(9)–1 Disclosure of returns and return information relating to pay- ment of tax by credit card and debit card.

Officers and employees of the Internal Revenue Service may disclose to card issuers, financial institutions, or other persons such return information as the Commissioner deems necessary in connection with processing credit card and debit card transactions to effectuate payment of tax as authorized by § 301.6311–2. Officers and employees of the Internal Revenue Service may disclose such return information to such persons as the Commissioner deems necessary in connection with billing or collection of the amounts charged or debited, including resolution of errors relating to the credit card or debit card account as described in § 301.6311–2(d).

§ 301.6103(k)(9)–1T [Removed]

Par. 3. Section 301.6103(k)(9)–1T is removed.

§ 301.6311–1 [Amended]

Par. 4. In section 301.6311–1, paragraph(a)(1)(i) is revised by removing the language “Internal Revenue Service” from the third sentence and adding the language “United States Treasury” in its place.

Par. 5. Section 301.6311–2 is added to read as follows:

§ 301.6311–2 Payment by credit card and debit card.

(a) Authority to receive —(1) Payments by credit card and debit card. Internal revenue taxes may be paid by credit card or debit card as authorized by this section. Payment of taxes by credit card or debit card is voluntary on the part of the taxpayer. Only credit cards or debit cards approved by the Commissioner may be used for this purpose, only the types of tax liabilities specified by the Commissioner may be paid by credit card or debit card, and all such payments must be made in the manner and in accordance with the forms, instructions and procedures prescribed by the Commissioner. All references in this section to tax also include interest, penalties, additional amounts, and additions to tax.

(2) Payments by electronic funds transfer other than payments by credit card and debit card. Provisions relating to payments by electronic funds transfer other than payments by credit card and debit card are contained in section 6302 and the Treasury Regulations promulgated pursuant to section 6302.

(3) Definitions —(i) Credit card means any credit card as defined in section 103(k) of the Truth in Lending Act (15 U.S.C. 1602(k)), including any credit card, charge card, or other credit device issued for the purpose of obtaining money, property, labor, or services on credit.

(ii) Debit card means any accepted card or other means of access as defined in section 903(1) of the Electronic Fund Transfer Act (15 U.S.C. 1693a(1)), including any debit card or similar device or means of access to an account issued for the purpose of initiating electronic fund transfers to obtain money, property, labor, or services.

(b) When payment is deemed made. A payment of tax by credit card or debit card shall be deemed made when the issuer of the credit card or debit card properly authorizes the transaction, provided that the payment is actually received by the United States in the ordinary course of business and is not returned pursuant to paragraph (d)(3) of this section.

(c) Payment not made —(1) Continu- ing liability of taxpayer. A taxpayer who tenders payment of taxes by credit card or debit card is not relieved of liability for such taxes until the payment is actually received by the United States and is not required to be returned pursuant to paragraph (d)(3) of this section. This continuing liability of the taxpayer is in addition to, and not in lieu of, any liability of the issuer of the credit card or debit card or financial institution pursuant to paragraph (c)(2) of this section.

(2) Liability of financial institutions. If a taxpayer has tendered a payment of internal revenue taxes by credit card or debit card, the credit card or debit card transaction has been guaranteed expressly by a financial institution, and the United States is not duly paid, then the United States shall have a lien for the guaranteed amount of the transaction upon all the assets of the institution making such guarantee. The unpaid amount shall be paid out of such assets in preference to any other claims whatsoever against such guaranteeing institution, except the necessary costs and expenses of administration and the reimbursement of the United States for the amount expended in the redemption of the circulating notes of such institution.

(d) Resolution of errors relating to the credit card or debit card account —(1) In general. Payments of taxes by credit card or debit card shall be subject to the applicable error resolution procedures of section 161 of the Truth in Lending Act (15 U.S.C. 1666), section 908 of the Electronic Fund Transfer Act (15 U.S.C. 1693f), or any similar provisions of state or local law, for the purpose of resolving errors relating to the credit card or debit card account, but not for the purpose of resolving any errors, disputes or adjustments relating to the underlying tax liability.

January 14, 2002 279 2002-2 I.R.B.

(2) Matters covered by error resolution procedures. (i) The error resolution procedures of paragraph (d)(1) of this section apply to the following types of errors—

(A) An incorrect amount posted to the taxpayer’s account as a result of a computational error, numerical transposition, or similar mistake;

(B) An amount posted to the wrong taxpayer’s account;

(D) Other similar types of errors that would be subject to resolution under section 161 of the Truth in Lending Act (15 U.S.C. 1666), section 908 of the Electronic Fund Transfer Act (15 U.S.C. 1693f), or similar provisions of state or local law.

(ii) An error described in paragraph (d)(2)(i) of this section may be resolved only through the procedures referred to in paragraph (d)(1) of this section and cannot be a basis for any claim or defense in any administrative or court proceeding involving the Commissioner or the United States.

(3) Return of funds pursuant to error resolution procedures. Notwithstanding section 6402, if a taxpayer is entitled to a return of funds pursuant to the error resolution procedures of paragraph (d)(1) of this section, the Commissioner may, in the Commissioner’s sole discretion, effect such return by arranging for a credit to the taxpayer’s account with the issuer of the credit card or debit card or any other financial institution or person that participated in the transaction in which the error occurred.

(4) Matters not subject to error resolu- tion procedures. The error resolution procedures of paragraph (d)(1) of this section do not apply to any error, question, or dispute concerning the amount of tax owed by any person for any year. For example, these error resolution procedures do not apply to determine a taxpayer’s entitlement to a refund of tax for any year for any reason, nor may they be used to pay a refund. All such matters shall be resolved through administrative and judicial procedures established pursuant to the Internal Revenue Code and the rules and regulations thereunder.

(5) Section 170 of the Truth in Lending Act not applicable. Payments of taxes by

credit card or debit card are not subject to section 170 of the Truth in Lending Act (15 U.S.C. 1666i) or to any similar provision of state or local law.

(e) Fees or charges. The Internal Revenue Service may not impose any fee or charge on persons making payment of taxes by credit card or debit card. This section does not prohibit the imposition of fees or charges by issuers of credit cards or debit cards or by any other financial institution or person participating in the credit card or debit card transaction. The Internal Revenue Service may not receive any part of any fees that may be charged.

(f) Authority to enter into contracts. The Commissioner may enter into contracts related to receiving payments of tax by credit card or debit card if such contracts are cost beneficial to the Government. The determination of whether the contract is cost beneficial shall be based on an analysis appropriate for the contract at issue and at a level of detail appropriate to the size of the Government’s investment or interest. The Commissioner may not pay any fee or charge or provide any other monetary consideration under such contracts for such payments.

(g) Use and disclosure of information relating to payment of taxes by credit card and debit card. Any information or data obtained directly or indirectly by any person other than the taxpayer in connection with payment of taxes by a credit card or debit card shall be treated as confidential, whether such information is received from the Internal Revenue Service or from any other person (including the taxpayer).

(1) No person other than the taxpayer shall use or disclose such information except as follows—

(i) Card issuers, financial institutions, or other persons participating in the credit card or debit card transaction may use or disclose such information for the purpose and in direct furtherance of servicing cardholder accounts, including the resolution of errors in accordance with paragraph (d) of this section. This authority includes the following—

(A) Processing the credit card or debit card transaction, in all of its stages through and including the crediting of the amount charged on account of tax to the United States Treasury;

(B) Billing the taxpayer for the amount charged or debited with respect to payment of the tax liability;

(D) Returning funds to the taxpayer in accordance with paragraph (d)(3) of this section;

(E) Sending receipts or confirmation of a transaction to the taxpayer, including secured electronic transmissions and facsimiles; and

(F) Providing information necessary to make a payment to state or local government agencies, as explicitly authorized by the taxpayer ( e.g., name, address, taxpayer identification number).

(ii) Card issuers, financial institutions or other persons participating in the credit card or debit card transaction may use and disclose such information for the purpose and in direct furtherance of any of the following activities—

(A) Assessment of statistical risk and profitability;

(B) Transfer of receivables or accounts or any interest therein;

(E) Cooperation in properly authorized civil, criminal, or regulatory investigations by federal, state, or local authorities.

(2) Notwithstanding the provisions of paragraph (g)(1), use or disclosure of information relating to credit card and debit card transactions for purposes related to any of the following is not authorized—

(i) Sale of such information (or transfer of such information for consideration) separate from a sale of the underlying account or receivable (or transfer of the underlying account or receivable for consideration);

(ii) Marketing for any purpose, such as, marketing tax-related products or services, or marketing any product or service that targets those who have used a credit card or debit card to pay taxes; and

(iii) Furnishing such information to any credit reporting agency or credit bureau, except with respect to the aggregate amount of a cardholder’s account, with the amount attributable to payment of taxes not separately identified.

2002-2 I.R.B 280 January 14, 2002

I.R.B. 917)) under section 7701. No comments were received from the public in response to the proposed regulations. No public hearing was requested or held. The proposed regulations are adopted by this Treasury decision.

Explanation of Provisions

Section 301.7701–3(g)(1) describes how elective changes in the classification of an entity will be treated for tax purposes. Section 301.7701–3(g)(1)(ii) provides that an elective conversion of an association to a partnership is deemed to have the following form: the association distributes all of its assets and liabilities to its shareholders in liquidation of the association, and immediately thereafter, the shareholders contribute all of the distributed assets and liabilities to a newly formed partnership. Section 301.7701– 3(g)(1)(iii) provides that an elective conversion of an association to an entity that is disregarded as an entity separate from its owner is deemed to have the following form: the association distributes all of its assets and liabilities to its single owner in liquidation of the association.

Section 332 may be relevant to the deemed liquidation of an association if it has a corporate owner. Under section 332, no gain or loss is recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation if the requirements of section 332(b) are satisfied. Those requirements include the adoption of a plan of liquidation at a time when the corporation receiving the distribution owns stock of the liquidating corporation meeting the requirements of section 1504(a)(2) ( i.e., 80 percent of vote and value). The elective change from an association to a partnership or to a disregarded entity results in a constructive liquidation of the association for federal tax purposes. Formally adopting a plan of liquidation for the entity, however, is potentially incompatible with an elective change under section 301.7701–3, which allows the local law entity to remain in existence while liquidating only for federal tax purposes. Accordingly, to provide tax treatment of an association’s deemed liquidation that is compatible with the

(3) Use and disclosure of information other than as authorized by this paragraph (g) may result in civil liability under sections 7431(a)(2) and (h).

(h) Effective date. This section applies to payments of taxes made on and after December 12, 2001.

§ 301.6311–2T [Removed]

Par. 6. Section 301.6311–2T is removed.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

The regulations apply to subsidiary corporations that elect to change their classification for federal tax purposes from a corporation to either a partnership or disregarded entity.

DATES: Effective Date: These regulations are effective December 17, 2001.

FOR FURTHER INFORMATION CONTACT: Beverly Katz, (202) 622–3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On November 29, 1999, final regulations were published in the Federal Reg- ister (T.D. 8844, 1999–2 C.B. 661 [64 FR 66580]) describing the transactions that are deemed to occur when an entity elects to change its classification for Federal tax purposes. Those regulations did not address certain requirements of section 332 as applied to the deemed liquidation incident to an association’s election to be classified as a partnership or to be disregarded as an entity separate from its owner. This amendment to the final regulations addresses those requirements.

On January 25, 2000, final regulations were published in the Federal Register (T.D. 8869, 2000–6 I.R.B. 498 [65 FR 3843]) relating to qualified subchapter S subsidiaries (QSub). In order to permit the deemed transaction resulting from a QSub election to comply with the requirement of section 332 that a plan of liquidation has been adopted at the time of a liquidating distribution, the final regulations provide that a plan of liquidation is deemed adopted immediately before the deemed liquidation incident to the QSub election, unless a formal plan of liquidation that contemplates the filing of a QSub election is adopted on an earlier date. The preamble to the QSub regulations provides that Treasury and the IRS intend to amend the section 7701 regulations regarding elective changes in entity classification to provide a similar rule concerning the timing of the plan of liquidation.

Consistent with the commitment in the preamble to the QSub regulations, on January 17, 2001, proposed regulations were published in the Federal Register (REG–110659–00, 66 FR 3959 (2001–12

Approved December 10, 2001.

Mark Weinberger, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on December 13, 2001, 8:45 a.m., and published in the issue of the Federal Register for December 14, 2001, 66 F.R. 64740)

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

Section 7701.—Definitions

26 CFR 301.7701–3: Classification of certain busi- ness entities.

T.D. 8970

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Amendment, Check the Box Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to elective changes in entity classification under section 7701 of the Internal Revenue Code.

January 14, 2002 281 2002-2 I.R.B.

be classified as a partnership or to be disregarded as an entity separate from its owner is considered to be the adoption of a plan of liquidation immediately before the deemed liquidation described in paragraph (g)(1)(ii) or (iii) of this section. This paragraph (g)(2)(ii) applies to elections filed on or after December 17, 2001. Taxpayers may apply this paragraph (g)(2)(ii) retroactively to elections filed before December 17, 2001, if the corporate owner claiming treatment under section 332 and its subsidiary making the election take consistent positions with respect to the federal tax consequences of the election.

(4) Effective date. Except as otherwise provided in paragraph (g)(2)(ii) of this section, this paragraph (g) applies to elections that are filed on or after November 29, 1999.***

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

Approved December 10, 2001.

Mark Weinberger, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on December 14, 2001, 8:45 a.m., and published in the issue of the Federal Register for December 17, 2001, 66 F.R. 64911)

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2002. See Rev. Rul. 2002–2, page 271.

requirements of section 332, the regulations state that, for purposes of satisfying the requirement of adoption of a plan of liquidation under section 332(b), a plan of liquidation is deemed adopted immediately before the deemed liquidation incident to an elective change in entity classification, unless a formal plan of liquidation that contemplates the filing of the elective change in entity classification is adopted on an earlier date.

Effective Date

These regulations apply to elections filed on or after December 17, 2001; however, taxpayers may apply the amendments retroactively if the corporate owner claiming treatment under section 332 and its subsidiary making the election take consistent positions with respect to the federal tax consequences of the election.

Special Analyses

It has been determined that these regulations are 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 533(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Beverly M. Katz of the Office of Associate Chief Counsel (Passthroughs &

Special Industries) and David J. Sotos of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development.

- - - - Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

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

Authority: 26 U.S.C. 7805 - - Par. 2. Section 301.7701–3 is amended as follows:

Redesignating the text of paragraph (g)(2) as paragraph (g)(2)(i) and adding a heading for newly designated paragraph (g)(2)(i).
Adding a new paragraph (g)(2)(ii).
Revising the first sentence of paragraph (g)(4).

The additions and revision read as follows:

§ 301.7701–3 Classification of certain business entities.

- - - - (g) - -

(2) Effect of elective changes —(i) In general. - - (ii) Adoption of plan of liquidation. For purposes of satisfying the requirement of adoption of a plan of liquidation under section 332, unless a formal plan of liquidation that contemplates the election to be classified as a partnership or to be disregarded as an entity separate from its owner is adopted on an earlier date, the making, by an association, of an election under paragraph (c)(1)(i) of this section to

2002-2 I.R.B 282 January 14, 2002