Part IV. Items of General Interest

The collection of information in this proposed regulation is in §§ 1.337(d)–2T, 1.1502–20T, and 1.1502–32T. The collection of information is required to allow the taxpayer to make certain elections to determine the amount of allowable loss under § 1.337(d)–2T, § 1.1502–20 as currently in effect, or under § 1.1502–20 modified so that the amount of allowable loss determined pursuant to § 1.1502– 20(c)(1) is computed by taking into account only the amounts computed under § 1.1502–20(c)(1)(i) and (ii); to allow the taxpayer to reapportion a section 382 limitation in certain cases; to allow the taxpayer to waive certain loss carryovers; and to ensure that loss is not disallowed under § 1.337(d)–2T and basis is not reduced under § 1.337(d)–2T to the extent the taxpayer establishes that the loss or basis is not attributable to the recognition of built-in gain on the disposition of an asset. The collection of information is required to obtain a benefit. The likely respondents are corporations that file consolidated income tax returns.

Estimated total annual reporting burden: 30,000 hours.

Estimated average annual burden hours per respondent: 2 hours.

Estimated number of respondents: 15,000. Estimated annual frequency of responses: once.

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

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

Background

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) relating to sections 337(d) and 1502. The text of those regulations also serves as the text of these proposed regulations. The preamble to the

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

Loss Limitation Rules

REG–102740–02

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed regulations under sections 337(d) and 1502 of the Internal Revenue Code. These regulations permit certain losses recognized on sales of subsidiary stock by members of a consolidated group. The regulations apply to corporations filing consolidated returns, both during and after the period of affiliation, and also affect purchasers of the stock of members of a consolidated group. The text of the temporary regulations published in T.D. 8984, in this issue of the Bulletin also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by July 10, 2002. Requests to speak (with outlines of oral comments to be discussed) at the public hearing scheduled for July 17, 2002, at 10 a.m., must be received by June 26, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG–102740–02), 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 6 p.m. to CC:ITA:RU (REG–102740–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit electronic comments directly to the IRS Internet site at www.irs.gov/regs . The public hearing will be held in the Internal

Revenue Service Auditorium, in the Internal Revenue Service Building, 1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Sean P. Duffley (202) 622–7530, or Lola L. Johnson (202) 622–7550; concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, LaNita VanDyke (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Rev- enue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S, Washington, DC 20224. Comments on the collection of information should be received by May 6, 2002. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information (see below);

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start up-costs and the costs of operation, maintenance, and purchase of services to provide information.

April 1, 2002 701 2002-13 I.R.B.

§ 1.1502–32 Investment adjustment .

[The text of this proposed section is the same as the text of § 1.1502– 32T(b)(4)(v) published elsewhere in this issue of the Federal Register ].

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue .

(Filed by the Office of the Federal Register on March 7, 2002, 3:17 p.m., and published in the issue of the Federal Register for March 12, 2002, 67 F.R. 11070)

Extension of Time to File Form(s) 1042–S

Announcement 2002–34

The IRS has received inquiries regarding the implementation of the new withholding and reporting requirements under §§ 1.1441 and 1.1461 of the Income Tax Regulations (T.D. 8734, 1997–2 C.B. 109 and T.D. 8881, 2000–23 I.R.B. 1158). Specifically, the IRS has recently become aware that some taxpayers (including, in particular, small taxpayers) are experiencing difficulty implementing the changes to the Form 1042–S reporting requirements (which require the filing of information returns to report certain payments to nonresident aliens). Under the regulations, a withholding agent must file Form(s) 1042–S with the IRS on or before March 15 of the calendar year following the year in which the amount subject to reporting was paid. See § 1.1461– 1(c). The IRS believes that ensuring the successful implementation of these new withholding and reporting procedures is in the best interests of sound tax administration. Accordingly, the IRS is extending the due date for filing 2001 Forms 1042–S from March 15, 2002, to May 15, 2002. The principal author of this announcement is Laurie Hatten-Boyd of the Office of Associate Chief Counsel (International). For further information regarding this announcement, contact Ms. HattenBoyd at (202) 622–3840 (not a toll-free call).

temporary regulations contains a full explanation of the reasons underlying the issuance of 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. This certification is based on 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 Internal Revenue 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

The IRS and Treasury are undertaking a study of the various approaches that could be implemented to give full effect to section 337(d) and to reflect the single entity principles of the consolidated return rules. Among the approaches the IRS and Treasury are studying is one that would deny positive investment adjustments for gain recognized and income attributable to the disposition or consumption of built-in gain assets held by the subsidiary at the time it joined the consolidated group. In addition, the IRS and Treasury are considering allowing selling groups to deduct subsidiary stock losses that would otherwise reflect duplicated loss, if the subsidiary reduces its attributes (including net operating loss carryovers and asset basis) immediately prior to the disposition. Comments are requested concerning any approaches that may be employed to allow appropriate losses in a manner that is administrable for both taxpayers and the government.

Before these proposed regulations are adopted as final regulations, consideration will be given to any electronic and writ

ten comments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing has been scheduled for July 17, 2002, at 10 a.m., in the IRS Auditorium, IRS Building, 1111 Constitution, NW, Washington, DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 15 minutes before the hearing starts.

Drafting Information

The principal authors of these regulations are Sean P. Duffley and Lola L. Johnson, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury participated in their development.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 - -
Par. 2. Section 1.337(d)–2 is added to read as follows:

§ 1.337(d)–2 Loss limitation window period .

[The text of this proposed section is the same as the text of § 1.337(d)–2T published elsewhere in this issue of the Federal Register ].

Par. 3. In § 1.1502–20, paragraph (i) is added to read as follows:

§ 1.1502–20 Disposition or deconsolida- tion of subsidiary stock .

[The text of this proposed section is the same as the text of § 1.1502–20T(i) published elsewhere in this issue of the Federal Register ].

Par. 4. In § 1.1502–32, paragraph (b)(4)(v) is added to read as follows:

2002-13 I.R.B. 702 April 1, 2002

CHANGES TO NOTICE 98–31

The Service received a number of comments in connection with Notice 98–31, which were considered carefully in revising and finalizing the proposed procedures in Rev. Proc. 2002–18. The following discussion describes some of the most significant comments and the manner in which the final guidance addresses them.

Commentators expressed concern that use of the term “timing issue” to describe the scope of the proposed procedures, and in particular an examining agent’s discretion, inappropriately expanded the scope of the procedures to issues that affect timing but that should not be treated as changes in method of accounting, such as where the issue is an isolated occurrence or results from a change in underlying facts. The Service and Treasury Department did not intend to alter the definition of a change in method of accounting or to expand the scope of the proposed revenue procedure beyond issues concerning changes in method of accounting. To address the commentators’ concerns, the final revenue procedure uses the term “accounting method issue” rather than “timing issue,” clarifies the definition of an accounting method issue, and changes the reference for the definition of a change in method of accounting to § 1.446–1(e)(2).

Commentators expressed concern that the procedures set forth in Notice 98–31 would deprive examining agents of the authority to exercise discretion and professional judgment in resolving accounting method issues. Specifically, the commentators believed that the procedures would limit the existing authority of an examining agent to make findings of fact and to apply the law to those facts in determining whether an issue is an accounting method issue and whether the taxpayer’s method of accounting is permissible. Rev. Proc. 2002–18 makes clear that these procedures do not limit or expand an examining agent’s authority under existing delegation orders. Under Rev. Proc. 2002–18, an examining agent’s ability to exercise professional judgment in accordance with existing auditing standards to make findings of fact, and to apply the law to the facts as found by the agent is preserved. Rev. Proc. 2002–18

Extension of Comment Period on White Paper on Future of Employee Plans Determination Letter Program

Announcement 2002–36

The Service is extending the comment period on its white paper on the long-term future of the Employee Plans (EP) determination letter program.

In Announcement 2001–83 (2001–35 I.R.B. 205), the Service invited the public to participate in a dialogue on the future of the EP determination letter program by submitting comments on a white paper that it had published on the Internet in August 2001. The white paper is entitled The Future of the Employee Plans Deter- mination Letter Program: Some Possible Options and it may be downloaded from the Internet at the following site: http:// www.irs.gov/ep . Announcement 2001–83 asked for written comments on the white paper to be submitted by March 31, 2002.

In order to provide an opportunity to those who wish to comment but are unable to do so by March 31, 2002, the Service is extending the comment period under Announcement 2001–83 to July 1, 2002. Commentators are also asked to comment on whether the Service should hold a series of nationwide town meetings to permit furtherance of dialogue on the future of the EP determination letter program. Comments should be submitted in duplicate and reference Announcement 2001–83. Comments should be sent to the following address:

CC:M&SP:RU (Announcement 2001–83), room 5626 Internal Revenue Service POB 7604, Ben Franklin Station Washington, DC 20044

Alternatively, comments may be hand delivered between the hours of 8:30 a.m. and 4:30 p.m. to:

CC:M&SP:RU (Announcement 2001–83) Courier’s Desk Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC

All written comments will be open to public inspection.

DRAFTING INFORMATION

The principal author of this announcement is James Flannery of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this announcement, please contact Mr. Flannery at 1–202–283–9888 (not a toll-free number).

Changes in Method of Accounting

Announcement 2002–37

PURPOSE

In 1998, the Service published Notice 98–31 (1998–1 C.B. 1165), which proposed procedures for changes in method of accounting imposed by the Service under § 446(b) of the Internal Revenue Code and § 1.446–1(b) of the Income Tax Regulations (“involuntary changes”), and for accounting method issues resolved by the Service on a nonaccounting-methodchange basis. Notice 98–31 also requested comments from the public in connection with these proposed procedures. The final involuntary change procedures appear concurrently in this Bulletin as Rev. Proc. 2002–18. The purpose of this announcement is to discuss some of the most significant and prevalent issues raised in the comments to Notice 98–31, and the manner in which those issues are addressed in the final guidance.

Along with Rev. Proc. 2002–18, this Bulletin contains Rev. Proc. 2002–19, which modifies the procedures contained in Rev. Proc. 97–27 (1997–1 C.B. 680) and Rev. Proc. 2002–9 (2002–3 I.R.B. 327) for taxpayers within the scope of those revenue procedures to obtain advance consent of the Commissioner, or automatic consent, respectively, to change a method of accounting (“voluntary changes”). Together, these three revenue procedures are intended to provide a more efficient use of Service and taxpayer resources with respect to accounting method issues and facilitate greater uniformity in the Service’s resolution of accounting method issues.

April 1, 2002 703 2002-13 I.R.B.

also clarifies that although accounting method changes ordinarily will be implemented in the earliest open year under examination, and with a § 481(a) adjustment, there may be instances in which it is appropriate for an examining agent to consider deferring the year of change to a later year under examination, or to impose the change on a cut-off basis.

Similarly, some commentators believed that the procedures set forth in Notice 98–31 would limit the existing authority of Appeals and counsel for the government to resolve accounting method issues. Rev. Proc. 2002–18 clarifies that an appeals officer or counsel for the government may resolve an accounting method issue as an accounting method change (with or without compromise terms and conditions), using one of the nonaccounting-method change procedures provided in Rev. Proc. 2002–18, or using any other means deemed appropriate under the circumstances, consistent with existing delegation orders.

The background section of the proposed revenue procedure provides that the Service ordinarily will not initiate an accounting method change if the change will place the taxpayer in a position more favorable than if the taxpayer had not been contacted for examination (taxpayer-favorable change). Some commentators thought that this statement was out of place in a document intended to provide the procedures for how the Service will resolve accounting method issues that are raised on examination. The Service and Treasury Department agree that this statement does not belong in the background of the involuntary method change revenue procedure and thus have deleted it from Rev. Proc. 2002–18.

Consistent with Rev. Proc. 97–27 and Rev. Proc. 2002–9, the background section of the proposed revenue procedure provides that a change in the characterization of an item may constitute a change in method of accounting if the change has the effect of shifting income from one period to another. Some commentators objected to the inclusion of this statement, questioning whether a change in characterization of an item is properly considered a change in method of accounting and, in any event, whether such a rule belongs in the revenue procedures. Consistent with the purpose of

these documents to provide procedural, rather than substantive, rules governing changes in method of accounting, the Service and the Treasury Department have not included section 2.01(3) of Notice 98–31 in Rev. Proc. 2002–18. Further, similar paragraphs have been removed from Rev. Proc. 97–27 and Rev. Proc. 2002–9 by Rev. Proc. 2002–19. The Service and Treasury Department are considering issuing separate guidance to address the issue of characterization in the context of a guidance project regarding the definition of a change in method of accounting.

The Service and Treasury Department were considering including guidance regarding the effect of closed years following the year of change (closed intervening years) in the final revenue procedure. In response to a specific request to opine as to the effect of closed intervening years, commentators suggested that substantive guidance addressing this issue should not be set forth in the final revenue procedure. Upon further consideration, the Service and Treasury Department agree that the resolution of this legal issue should not be set forth in Rev. Proc. 2002–18 and are considering issuing separate guidance to address this issue.

Finally, some commentators objected to the fact that, under Notice 98–31, the specified amount payable in the case of accounting method issues resolved by Appeals or counsel for the government on a time-value-of-money (TVM) basis is not treated as interest under § 163, and is not deductible under any provision of the Code. The commentators argued that this limitation was effectively punitive, and made the TVM alternative less attractive. In fact, as the sample computation contained in Notice 98–31 illustrates, the computation of the specified amount should be based on a tax-effected tax rate for taxpayers that would otherwise be entitled to a deduction if the specified amount were treated as interest under the Code. The use of a tax-effected rate effectively allows a deduction for the specified amount. A sentence is included in the final revenue procedure to clarify the use of tax-effected rates.

The Service and Treasury Department recognize that the TVM resolution has not been widely tested in practice, and that as the Service and taxpayers gain

experience with this alternative, issues may arise that will require further clarifying guidance. The Service and Treasury Department anticipate that the TVM resolution will be most attractive in situations where it would be unnecessary to perform the complex interest credit calculation upon a subsequent change in method, such as when the resolution includes all years preceding a point at which a statutorily prescribed method becomes effective, a safe harbor method becomes available and is elected, or the issue of the proper method is otherwise resolved.

RELATED GUIDANCE

In addition to the proposed revenue procedure, Notice 98–31 outlined other guidance that the Service intended to publish as part of a comprehensive, and interrelated, set of procedures for resolving accounting method issues raised on audit. First, Notice 98–31 announced that the Service intended to publish guidance making the Coordinated Examination Program (CEP) early referral process provided in Rev. Proc. 96–9 (1996–1 C.B. 575) available to non-CEP taxpayers for the resolution of accounting method issues. This guidance has been published as Rev. Proc. 99–28 (1999–2 C.B. 109). By expanding the early referral procedures to include all taxpayers with respect to accounting method issues, the Service intends to provide a mechanism for expediting the resolution of those issues, which otherwise might be delayed pending the resolution of other (nonaccounting-method) issues raised in the course of the audit.

Second, the Service announced that it intended to publish guidance that would permit taxpayers under examination who otherwise cannot request a voluntary change in method of accounting under the advance consent revenue procedure (Rev. Proc. 97–27) or the automatic consent revenue procedure (Rev. Proc. 2002–9) to do so prospectively without audit protection. That guidance is contained in Rev. Proc. 2002–19. The modification is intended to provide a means for taxpayers under examination with an accounting method issue pending, as well as taxpayers before an area appeals office or a federal court with an accounting method issue under consideration, to change their method of accounting on a going forward

2002-13 I.R.B. 704 April 1, 2002

response to comments, the Service is considering whether it would be appropriate to change the existing delegation orders to authorize approval of closing agreements for accounting method change issues at lower levels.

Fourth, Notice 98–31 referred to certain other anticipated guidance projects ( i.e., guidance that would delegate limited discretionary authority to Examination to resolve certain accounting method issues, and guidance to expand the accelerated issue resolution procedures of Rev. Proc. 94–67 (1994–2 C.B. 800) to non-CEP taxpayers to allow these taxpayers and the Service to resolve accounting method issues for taxable years beyond the years under examination, before appeals, or before a federal court). The Service is interested in receiving comments from taxpayers and practitioners on the extent to which there is a need for this guidance.

basis while the issue is in the process of being resolved for prior taxable years. This new procedure set forth in Rev. Proc. 2002–19 does not limit or extend the existing authority of an examining agent, appeals officer, or counsel for the government to resolve accounting method issues raised on examination.

Also in connection with finalizing Notice 98–31 and the related guidance, the Service and Treasury Department have reconsidered the appropriateness of a 4-year § 481(a) adjustment period for voluntary accounting method changes that result in a negative adjustment. The Service and Treasury Department have concluded that the objectives of prompt voluntary compliance are enhanced by reducing the § 481(a) adjustment period for such changes from 4 years to 1 year. This new 1-year § 481(a) adjustment period, reflected in Rev. Proc. 2002–19, is

effective for taxable years ending on or after December 31, 2001.

Third, Notice 98–31 provided that the Service intended to publish a model closing agreement for Service-initiated accounting method changes in order to provide greater uniformity in the Service’s resolution of accounting method issues. Appendices A and B of Rev. Proc. 2002–18 provide model closing agreements for use in finalizing accounting method changes imposed by the Service, and for finalizing accounting method issues resolved by the Service on a nonaccounting-method-change basis, respectively. Closing agreements are encouraged, but not required, in the case of accounting method issues resolved as accounting method changes. Closing agreements are required for accounting method issues resolved on a nonaccounting-method-change basis. In

April 1, 2002 705 2002-13 I.R.B.