Part IV. Items — Internal Revenue Bulletin 2002-26

temporarily guarantees a higher return than the permanently guaranteed crediting rate, in exchange for shifting additional investment risk to the policyholder in the form of a market value adjustment. The temporary guarantee may be a fixed rate (non-equity-indexed modified guaranteed contracts) or a rate based on bond or equity yields (equity-indexed modified guaranteed contracts). During the temporary guarantee period, the amount paid to the policyholder upon surrender is increased or decreased by a market value adjustment, which is determined by a formula in the modified guaranteed contract. Modified guaranteed contracts can be issued out of a life insurance company’s general account or one or more segregated accounts.

Section 817A provides special tax treatment for certain modified guaranteed contracts issued out of a segregated account. For this purpose, the term modified guaranteed contract is defined as an annuity, life insurance, or pension plan contract (other than a variable contract described in section 817) under which all or part of the amounts received under the contract are allocated to a segregated account. Assets and reserves in this segregated account must be valued from time to time with reference to market values for annual statement purposes. Further, a modified guaranteed contract must provide either for a net surrender value or for a policyholder’s fund (as defined in section 807(e)(1)). If only a portion of a contract is not described in section 817, such portion is treated as a separate contract for purposes of applying section 817A.

The tax reserves for a modified guaranteed contract are computed under either sections 807(c)(3) or (d)(2), depending upon whether the reserves are also life insurance reserves as defined by section 816(b). If the reserves are not life insurance reserves, section 807(c)(3) provides that reserves for obligations under insurance and annuity contracts not involving life, accident, or health contingencies are computed using an appropriate rate of interest. The appropriate rate of interest is the highest (as of the time the obligation first did not involve life, accident, or health contingencies) of the following rates: (1) the applicable Federal interest

Notice of Proposed Rulemaking and Notice of Public Hearing

Guidance Under Section 817A Regarding Modified Guaranteed Contracts

REG–248110–96

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed regulations affecting insurance companies that define the interest rate to be used with respect to certain insurance contracts that guarantee higher returns for an initial, temporary period. Specifically, the proposed regulations define the appropriate interest rate to be used in the determination of tax reserves and required interest for certain modified guaranteed contracts. The proposed regulations also address how temporary guarantee periods that extend past the end of a taxable year are to be taken into account. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by August 20, 2002. Requests to speak (with outlines of oral comments to be discussed) at the public hearing scheduled for August 27, 2002, at 10 a.m., must be received by August 6, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG–248110–96), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Comments may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to CC:ITA:RU (REG–248110–96), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may submit comments electronically directly to the IRS internet site at: http://www.irs.gov/ regs . The public hearing will be held in

Room 4718, 1111 Constitution, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Ann H. Logan, 202–622–3970. Concerning the hearing, LaNita Van Dyke of the Regulations Unit, 202–622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

History

Section 817A was added by section 1612 of the Small Business Job Protection Act of 1996, Public Law 104–188, 110 Stat. 1755. Section 817A is effective for taxable years beginning after December 31, 1995. See Small Business Job Protection Act section 1612(c)(1).

Previous guidance on the matters addressed by these proposed regulations is provided in Notice 97–32, 1997–1 C.B. 420, which specifies the appropriate interest rate to be used during the temporary guarantee period of modified guaranteed contracts. Generally, the specified rate is the greater of the interest rate assumed by the insurance company to determine future guaranteed benefits or Moody’s Corporate Bond Yield Average-Monthly Average Corporates (Moody’s rate). For equity-indexed modified guaranteed contracts whose market value adjustment is based on the performance of stocks, other equity instruments or equity-based derivatives, the specified rate is obtained by multiplying whichever of the two rates is greater by 1.1. Notice 97–32 was to be effective pending the publication of further guidance. Comments received after publication of the Notice indicated the need for further consideration of the appropriate rate to be used.

Interest Rates Affecting Modified Guaranteed Contracts

These proposed regulations govern the interest rate to be used when life insurance companies issue certain modified guaranteed annuity and life insurance contracts. A modified guaranteed contract

2002–26 I.R.B. 19 July 1, 2002

rate (as defined in section 807(d)(2)(B)(i)); (2) the prevailing State assumed interest rate (as defined in section 807(d)(2)(B)(ii)); or (3) the rate of interest assumed by the insurance company to determine the contract’s guaranteed benefit. Section 807(c) also provides that the reserves computed under section 807(c)(3) are never less than the net surrender value of the contract.

For a modified guaranteed contract that does give rise to life insurance reserves, as defined in section 816(b), reserves are computed under section 807(d). Under section 807(d)(1), the life insurance reserves for a contract cannot exceed the statutory reserves for the contract. Subject to that cap, a contract’s life insurance reserves equal the greater of: (1) the contract’s net surrender value; or (2) the contract’s Federally prescribed reserve determined under section 807(d)(2). Section 807(d)(2) provides that the Federally prescribed reserves for a contract are determined using: (1) the tax reserve method applicable to the contract; (2) the greater of the applicable Federal interest rate or the prevailing State assumed interest rate in effect on the date of the issuance of the contract; and (3) the prevailing commissioners’ standard tables for mortality and morbidity. In the case of a life insurance contract covered by the Commissioners’ Reserve Valuation Method (CRVM) or an annuity contract covered by the Commissioners’ Annuities Reserve Valuation Method (CARVM), section 807(d)(3) provides that the tax reserve method applicable to a contract is the CRVM or CARVM prescribed by the National Association of Insurance Commissioners (NAIC), which is in effect on the date of the issuance of the contract.

Section 811(d) imposes an additional reserve computation rule for contracts that guarantee beyond the end of the taxable year payment or crediting of amounts in the nature of interest in excess of the greater of the prevailing state assumed interest rate or the applicable Federal interest rate. In those circumstances, section 811(d) requires that the contract’s future guaranteed benefits be determined as though the interest in excess of the greater of the prevailing state assumed interest rate or the appli

cable Federal rate were guaranteed only to the end of the taxable year.

Required Interest

Section 812(b) defines the company’s share of net investment income for the taxable year the computation of which also requires use of an interest rate. The company’s share equals the excess, if any, of the net investment income over the sum of the policy interest (as defined in section 812(b)(2)) and the gross investment income’s proportionate share of policyholder dividends (as defined in section 812(b)(3)) for the taxable year. Policy interest includes required interest on reserves under section 807(c) (other than section 807(c)(2) reserves), determined under section 812(b)(2)(A) by using the greater of the prevailing State assumed rate or the applicable Federal interest rate. If neither the prevailing State assumed interest rate nor the applicable Federal interest rate is used, another appropriate rate is used to calculate required interest.

Legislation Affecting Modified Guaranteed Contracts

The interest rates used for both reserves and required interest for modified guaranteed contracts are governed by section 817A. Under section 817A(e)(2), the IRS is authorized to determine annually the applicable interest rate to be used under sections 807(c)(3), 807(d)(2)(B) and 812 for a modified guaranteed contract. The IRS is authorized to exercise this authority by issuing a periodic announcement of the appropriate market interest rates or formula for determining such rates. H.R. Conf. Rept. No. 737, 104th Cong. 2d Sess. 313 (1996). Section 817A(e) also authorizes the IRS to modify or waive the application of section 811(d) (relating to interest guaranteed beyond the end of the taxable year), and to prescribe other regulations that are necessary or appropriate to carry out the purposes of section 817A.

The legislative history of section 817A indicates that an appropriate interest rate is a current market rate. H.R. Conf. Rep. No. 737, at 313. The interest rate may be determined, for example, using either a rate that is appropriate for the obligations under the contract to which the reserve

relates or the yield on the assets underlying the modified guaranteed contract. In light of this legislative history and the purpose of section 817A, the statutory grant of authority to prescribe regulations to specify the appropriate interest rate is broad, granting discretion to the Secretary to determine that rate which will best match the obligations under modified guaranteed contracts to the market fluctuations of the underlying assets.

EXPLANATION OF PROVISIONS

This document contains proposed amendments to 26 CFR part 1 under sections 807, 811, 812, and 817A of the Internal Revenue Code (Code). These proposed rules specify the appropriate interest rates to be used by insurance companies in the determination of tax reserves under sections 807(c)(3) and (d)(2)(B), and the company’s share of net investment income under 812(b)(2)(A), for certain modified guaranteed contracts, as defined in section 817A(d). It also describes the manner in which section 811(d) governing the calculation of reserves for certain insurance contracts is to be applied to these contracts. The proposed regulations do not adopt the position set forth in Notice 97–32, and instead provide that the appropriate interest rate for each non-equity-indexed modified guaranteed contract is the current market rate. These proposed regulations define the current market rate as the Treasury constant maturity interest rate published by the Board of Governors of the Federal Reserve System. The Treasury constant maturity interest rates are released each Monday as part of statistical release H.15, Selected Interest Rates, and can also be found at http://www.federalreserve.gov/ releases/#weekly. Availability of the release is announced on (202) 452–3206. The proposed regulations do not take a position as to the appropriate interest rate to be used for an equity-indexed modified guaranteed contract whose market value adjustment is based on the performance of stocks, other equity instruments or equity-based derivatives.

The proposed regulations under section 817A, relating to the definition of the appropriate interest rate to be used in determining tax reserves under sections 807(c)(3) and (d)(2), the appropriate interest rate to be used under section

July 1, 2002 20 2002–26 I.R.B.

811(d), and required interest under 812(b)(2)(A), will be effective on the date that the regulations become final. However, pursuant to section 7805(b)(7), taxpayers will be permitted to apply the final regulations retroactively for all tax years beginning after December 31, 1995, the effective date of section 817A.

Effect on Other Documents

Notice 97–32 will not be revoked or superseded until final regulations are published in the Federal Register.

Special Analyses

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

Comments and Public Hearing

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

Comments are specifically requested on the use of a different current market rate for non-equity-indexed modified guaranteed contracts than the rate specified in these proposed regulations. Comments are also requested concerning the appropriate interest rate to use for equityindexed modified guaranteed contracts. Any comments on these topics should address not only the definitions of such

rates, but whether such approaches are presently in use among taxpayers, why such rates would produce superior measures of reserves and net income than the current market rate proposed in these regulations, and whether the use of such rates would produce simpler and less costly compliance burdens than the current market rate proposed in these regulations.

With regard to any comments submitted regarding non-equity-indexed modified guaranteed contracts that suggest the use of a insurer’s contract crediting rate offered for newly issued contracts with temporary guarantee periods equal in duration to the remaining duration of the temporary guarantee period of the original contract, several additional questions should be addressed. In the event the insurer does not offer modified guaranteed contracts with an identical temporary guarantee period as the temporary guarantee period remaining for the original contract, what rule should be used? If an interpolation of other rates should be used, what rule should be used? In the event interpolation is not meaningful because (1) the duration periods of the modified guaranteed contracts being newly issued are too dissimilar from the contract’s remaining duration, (2) there are not enough newly issued modified guaranteed contracts to make a reasonable interpolation, or (3) the insurer has ceased issuing modified guaranteed contracts, what rule should be used? For example, should the federal rate defined in section 1272(d) applicable for the number of years remaining in the temporary guarantee period of the contract be used?

Comments may also be submitted requesting that section 811(d) be modified or waived regarding modified guarantee contracts. The requested waiver or modification should include details on the implementation of any proposed rules.

Finally, if the application of the regulation for earlier tax years, once made final, requires clarification or amplification, affected taxpayers should detail their concerns and proposed solutions. All comments will be available for public inspection and copying in their entirety.

A public hearing has been scheduled for August 27, 2002, at 10 a.m., in Room 4718 in the Internal Revenue Building, 1111 Constitution Avenue, NW, Washing

ton, DC. Because of access restrictions, visitors must enter at the main entrance, located at 1111 Constitution Avenue, NW. All visitors must present photo identification to enter the building and visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” portion of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments, an outline of the topics to be discussed, and the time to be devoted to each topic (preferably a signed original and eight (8) copies) by August 6, 2002. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these proposed regulations is Ann H. Logan, Office of the Associate Chief Counsel (Financial Institutions and Products), Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the IRS and the Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

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

PART 1—INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

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

Authority: 26 U.S.C. 7805 - - Section 1.807–2 also issued under 26 U.S.C. 817A(e) - - Section 1.811–3 also issued under 26 U.S.C. 817A(e) - -

2002–26 I.R.B. 21 July 1, 2002

Section 1.812–9 also issued under 26 U.S.C. 817A(e) - - Section 1.817A–1 also issued under 26 U.S.C. 817A(e) - - Par. 2. Section 1.807–2 is added to read as follows:

§ 1.807–2 Cross-Reference.

For special rules regarding the treatment of modified guaranteed contracts (as defined in section 817A and § 1.817A– 1(a)(1)), see § 1.817A–1. Par. 3. Section 1.811–3 is added to read as follows:

§ 1.811–3 Cross-Reference.

For special rules regarding the treatment of modified guaranteed contracts (as defined in section 817A and § 1.817A– 1(a)(1)), see § 1.817A–1. Par. 4. Section 1.812–9 is added to read as follows:

§ 1.812–9 Cross-Reference.

For special rules regarding the treatment of modified guaranteed contracts (as defined in section 817A and § 1.817A– 1(a)(1)), see § 1.817A–1. Par. 5. Sections 1.817A–0 and 1.817A–1 are added to read as follows:

§ 1.817A–0 Table of contents.

This section lists the captions that appear in section 1.817A–1:

§ 1.817A–1 Certain modified guaranteed contracts.

(a) Definitions. (1) Modified guaranteed contract. (2) Temporary guarantee period. (3) Equity-indexed modified guaranteed contract. (4) Non-equity-indexed modified guaranteed contract. (5) Current market rate for non-equityindexed modified guaranteed contract. (6) Current market rate for equityindexed modified guaranteed contract.

[Reserved.] (b) Applicable interest rates for nonequity-indexed modified guaranteed contracts. (1) Tax reserves during temporary guarantee period.

(2) Required interest during temporary guarantee period. (3) Application of section 811(d). (4) Periods after the end of the temporary guarantee period. (5) Examples. (c) Applicable interest rates for equityindexed modified guaranteed contracts.

[Reserved.] (d) Effective date.

§ 1.817A–1 Certain modified guaranteed contracts.

(a) Definitions —(1) Modified guaran- teed contract . The term modified guaran- teed contract (MGC) is defined in section 817A(d) as an annuity, life insurance, or pension plan contract (other than a variable contract described in section 817) under which all or part of the amounts received under the contract are allocated to a segregated account. Assets and reserves in this segregated account must be valued from time to time with reference to market values for annual statement purposes. Further, an MGC must provide either for a net surrender value or for a policyholder’s fund (as defined in section 807(e)(1)). If only a portion of a contract is not described in section 817, such portion is treated as a separate contract for purposes of applying section 817A. (2) Temporary guarantee period . An MGC may temporarily guarantee a return other than the permanently guaranteed crediting rate for a period specified in the contract (the temporary guarantee period ). During the temporary guarantee period, the amount paid to the policyholder upon surrender is usually increased or decreased by a market value adjustment, which is determined by a formula set forth under the terms of the MGC.

(3) Equity-indexed modified guaran- teed contract . An equity-indexed MGC is an MGC, as defined in paragraph (a)(1) of this section, that provides a return during or at the end of the temporary guarantee period based on the performance of stocks, other equity instruments, or equity-based derivatives.

(4) Non-equity-indexed modified guar- anteed contract . A non-equity-indexed MGC is an MGC, as defined in paragraph (a)(1) of this section, that provides a return during or at the end of the tempo

rary guarantee period not based on the performance of stocks, other equity instruments, or equity-based derivatives.

(5) Current market rate for non- equity-indexed modified guaranteed con- tracts . The current market rate for a nonequity-indexed MGC issued by an insurer (whether issued in that tax year or a previous one) is the appropriate Treasury constant maturity interest rate published by the Board of Governors of the Federal Reserve System for the month containing the last day of the insurer’s taxable year. The appropriate rate is that rate published for Treasury securities with the shortest published maturity that is greater than (or equal to) the remaining duration of the current temporary guarantee period under the MGC.

(6) Current market rate for equity- indexed modified guaranteed contracts .

[Reserved]

(b) Applicable interest rates for non- equity-indexed modified guaranteed contracts —(1) Tax reserves during tem- porary guarantee period . An insurance company is required to determine the tax reserves for an MGC under sections 807(c)(3) or (d)(2). During a non-equityindexed MGC’s temporary guarantee period, the applicable interest rate to be used under sections 807(c)(3) and (d)(2)(B) is the current market rate, as defined in paragraph (a)(5) of this section.

(2) Required interest during temporary guarantee period . During the temporary guarantee period of a non-equity-indexed MGC, the applicable interest rate to be used to determine required interest under section 812(b)(2)(A) is the same current market rate, defined in paragraph (a)(5) of this section, that applies for that period for purposes of sections 807(c)(3) or (d)(2)(B).

(3) Application of section 811(d) . An additional reserve computation rule applies under section 811(d) for contracts that guarantee certain interest payments beyond the end of the taxable year. Section 811(d) is not modified or waived for the taxable year in which a non-equityindexed MGC is issued. The current market rate, as defined in paragraph (a)(5) of this section, is to be applied to the remaining years of the MGC’s temporary guarantee period.

July 1, 2002 22 2002–26 I.R.B.

(4) Periods after the end of the tempo- rary guarantee period . For periods after the end of the temporary guarantee period, sections 807(c)(3), 807(d)(2)(B), 811(d) and 812(b)(2)(A) are not modified when applied to non-equity-indexed MGCs. None of these sections are affected by the definition of current market rate contained in paragraph (a)(5) of this section once the temporary guarantee period has expired.

(5) Examples . The following examples illustrate this paragraph (b):

Example 1 . (i) IC, a life insurance company as defined in section 816, issues a MGC (the Contract) on August 1 of 1996. Assume that the conditions invoking the application of section 811(d) are not present. The Contract is an annuity contract that gives rise to life insurance reserves, as defined in section 816(b). IC is a calendar year taxpayer. The Contract guarantees that interest will be credited at 8 percent per year for the first 8 contract years and 4 percent per year thereafter. During the 8-year temporary guarantee period, the Contract provides for a market value adjustment based on changes in a published bond index and not on the performance of stocks, other equity instruments or equity based derivatives. IC has chosen to avail itself of the provisions of these regulations for 1996 and taxable years thereafter. The 10-year Treasury constant maturity interest rate published for December of 1996 was 6.30 percent. The next shortest maturity published for Treasury constant maturity interest rates is 7 years. As of the end of 1996, the remaining duration of the temporary guarantee period for the Contract was 7 years and 7 months.

(ii) To determine under section 807(d)(2) the end of 1996 reserves for the Contract, IC must use a discount interest rate of 6.30 percent for the temporary guarantee period. The interest rate to be used in computing required interest under section 812(b)(2)(A) for 1996 reserves is also 6.30 percent. (iii) The discount rate applicable to periods outside the 8-year temporary guarantee period is determined under sections 807(c)(3), 807(d)(2)(B), 811(d), and 812(b)(2)(A) without regard to the current market rate.

Example 2 . Assume the same facts as in Example 1 except that it is now the last day of 1998. The remaining duration of the temporary guarantee period under the Contract is now 5 years and 7 months. The 7-year Treasury constant maturity interest rate published for December of 1998 was 4.65 percent. The next shortest duration published for Treasury constant maturity interest rates is 5 years. A discount rate of 4.65 percent is used for the remaining duration of the temporary guarantee period for the purpose of determining a reserve under section 807(d) and for the purpose of determining required interest under section 812(b)(2)(A).

Example 3 . Assume the same facts as in Example 1 except that it is now the last day of 2001. The remaining duration of the temporary guarantee period under the Contract is now 2 years and 7 months. The 3-year Treasury constant maturity interest rate published for December of 2001 was 3.62 percent. The next shortest duration published

for Treasury constant maturity interest rates is 2 years. A discount rate of 3.62 percent is used for the remaining duration of the temporary guarantee period for the purpose of determining a reserve under section 807(d) and for the purpose of determining required interest under section 812(b)(2)(A).

[Reserved.]

(d) Effective date . Paragraphs (a), (b) and (d) of this proposed regulation are effective on the date this notice is filed as a final regulation in the Federal Regis- ter . However, pursuant to section 7805(b)(7), taxpayers may elect to apply the final regulations retroactively for all taxable years beginning after December 31, 1995, the effective date of section 817A. Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on May 31, 2002, 8:45 a.m., and published in the issue of the Federal Register for June 3, 2002, 67 F.R. 38214)

Notice of Proposed Rulemaking

Diesel Fuel; Blended Taxable Fuel

REG–106457–00

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the tax on diesel fuel and the tax on blended taxable fuel. These regulations affect persons that remove, enter, or sell diesel fuel or remove or sell blended taxable fuel.

DATES: Written and electronic comments and requests for a public hearing must be received by August 14, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG–106457–00), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m.

to: CC:ITA:RU (REG–106457–00), 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.

FOR FURTHER INFORMATION CONTACT: Concerning submissions, Sonya Cruse, (202) 622–7180; concerning the regulations, Frank Boland, (202) 622– 3130 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and explanation of provisions

Definition of Diesel Fuel .

Section 4081(a) of the Internal Revenue Code (Code) imposes a tax on certain removals, entries, and sales of taxable fuel. Taxable fuel means gasoline, diesel fuel, and kerosene. Section 4083 defines diesel fuel as any liquid (other than gasoline) that is suitable for use as a fuel in a diesel-powered highway vehicle or diesel-powered train. Existing regulations follow the Code provisions by providing that (with certain exceptions) diesel fuel is any liquid that, without further processing or blending, is suitable for such use. However, the existing regulations do not define the term suitable for use . The proposed regulations add to existing regulations by providing that a liquid is suitable for use as diesel fuel if the liquid has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train.

Liability for Tax on Sale or Removal of Blended Taxable Fuel .

Blended taxable fuel is taxable fuel that is created by mixing a liquid that has not been taxed under section 4081 with previously taxed taxable fuel. Typically, this mixing occurs outside of the bulk transfer/terminal system. Under section 4081(b), tax is imposed on the removal or sale of the mixture (blended taxable fuel) by the blender thereof. Existing regulations provide that the blender is liable for this tax. Generally, the blender is the person that owns the mixture immediately after it is created. If the mixture is not taxable fuel because it is not suitable for

2002–26 I.R.B. 23 July 1, 2002

§ 48.4081–1 Taxable fuel; definitions .

(c) - - (2) - - - (i) - - - A liquid is suitable for this use if the liquid has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train.

Par. 3. Section 48.4081–3 is amended by revising paragraphs (g)(2) and (g)(3) to read as follows:

§ 48.4081–3 Taxable fuel; taxable events other than removal at the terminal rack .

(g) - - (2) Liability for tax —(i) Liability of the blender . The blender is liable for the tax imposed under paragraph (g)(1) of this section.

(ii) Liability of seller of untaxed liquid . On and after the date of publication of these regulations as final regulations in the Federal Register, a person that sells any liquid that is used to produce blended taxable fuel is jointly and severally liable for the tax imposed under paragraph (g)(1) of this section on the removal or sale of that blended taxable fuel if the liquid—

(A) Is described in § 48.4081– 1(c)(1)(i)(B) (relating to liquids on which tax has not been imposed under section 4081); and (B) Is sold by that person as gasoline, diesel fuel, or kerosene that has been taxed under section 4081.

(3) Examples . The following examples illustrate the provisions of this paragraph (g) and the definitions of blended taxable fuel and diesel fuel in § 48.4081–1(c):

Example 1 . (i) Facts . W is a wholesale distributor of petroleum products and R is a retailer of petroleum products. W sold to R 1,000 gallons of an untaxed liquid (a liquid described in § 48.4081– 1(c)(1)(i)(B)) and delivered the liquid into a storage tank (tank) at R’s retail facility. However, W’s invoice to R stated that the liquid is undyed diesel fuel. At the time of the delivery, the tank contained 4,000 gallons of undyed diesel fuel, a taxable fuel that has been taxed under section 4081. The resulting 5,000 gallon mixture is suitable for use as a fuel in a diesel-powered highway vehicle because it has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle.

use as a fuel in a diesel-powered highway vehicle or diesel-powered train, tax is imposed only if the mixture is delivered into the fuel supply tank of a dieselpowered highway vehicle or dieselpowered train. See section 4041(a).

The IRS has found that abusive situations exist with regard to the blending of diesel fuel. For example, untaxed liquids are sold as taxed diesel fuel to a retailer and delivered into the retailer’s bulk storage tank that contains taxed diesel fuel. Under existing regulations, the retailer would be a blender and liable for tax on its removal or sale of the resulting mixture.

When the Congress enacted the present fuel tax regime, it noted that the Treasury Department is permitted “to prescribe rules and administrative procedures for determining liability for payment of tax.” H.R. Conf. Rep. No. 101–964, at 1052 (1990). Thus, the Treasury Department may impose liability on persons other than the blender if that is necessary to prevent abuses and assure that the tax is, in fact, paid to the government.

Under these proposed regulations, a person would be jointly and severally liable for the section 4081(b) tax if the person sells a previously untaxed liquid as a taxed taxable fuel and that liquid becomes a part of a mixture that is blended taxable fuel.

Definition of Refinery .

The proposed regulations clarify that the term refinery generally includes any facility that produces taxable fuel.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rule

making will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any electronic and written comments that are submitted timely to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Frank Boland, Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 48 is proposed to be amended as follows:

PART 48—MANUFACTURERS AND RETAILERS EXCISE TAXES

Paragraph 1. The authority citation for part 48 continues to read in part as follows:

Authority: 26 U.S.C. 7805 - - Par. 2. Section 48.4081–1 is amended as follows:

Paragraph (b) is amended by removing the language “from crude oil, unfinished oils, natural gas liquids, or other hydrocarbons” in the first sentence of the definition of Refinery.
Paragraph (c)(2)(i) is amended by adding a sentence to the end.

The addition reads as follows:

July 1, 2002 24 2002–26 I.R.B.

DATES: Written or electronic comments and requests for a public hearing must be received by July 30, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU, room 5226 (REG–122564– 02), Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may also be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU, room 5226 (REG– 122564–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet directly to the IRS Internet site at www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the regulation, Marie C. Milnes-Vasquez (202) 622–7770; concerning submissions and/or requests for a public hearing, Guy Traynor (202) 622– 7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained 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 Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR: MP:FP:S, Washington, DC 20224. Comments on the collection of information should be received by July 30, 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;

The mixture does not satisfy the dyeing requirements of § 48.4082–1. R sold the mixture from the tank to a construction company for off-highway business use.

(ii) Analysis —(A) Production of blended taxable fuel . R is a blender within the meaning of § 48.4081–1 because R has produced blended taxable fuel, as defined in § 48.4081–1, by mixing 4,000 gallons of diesel fuel that has been taxed under section 4081 with 1,000 gallons of a liquid that has not been taxed under section 4081. The mixing occurred outside of the bulk transfer/ terminal system and the resulting product is diesel fuel because it is suitable for use as a fuel in a diesel-powered highway vehicle.

(B) Imposition of tax . Under paragraph (g)(1) of this section, tax is imposed on R’s sale of the 5,000 gallons of blended taxable fuel to the construction company. Even though the blended taxable fuel is sold for off-highway business use, which is a nontaxable use as defined in section 4082(b), the sale is not exempt from tax because the blended taxable fuel does not satisfy the dyeing requirements of § 48.4082–1. Tax is computed on 1,000 gallons, which is the difference between the number of gallons of blended taxable fuel sold by R (5,000) and the number of gallons of previously taxed taxable fuel used to produce the blended taxable fuel (4,000).

(C) Liability for tax . R, as the blender, is liable for this tax under paragraph (g)(2)(i) of this section. W is jointly and severally liable for this tax under paragraph (g)(2)(ii) of this section because the blended taxable fuel was produced using an untaxed liquid that W sold as undyed diesel fuel (that is, as diesel fuel that was taxed under section 4081).

Example 2 . (i) Facts . W, a wholesale distributor of petroleum products, bought 7,000 gallons of diesel fuel at a terminal rack. The diesel fuel was delivered into a tank trailer. Tax was imposed on the diesel fuel under § 48.4081–2 when the diesel fuel was removed at the rack. W then went to another location where X, the operator of a chemical plant, sold W 1,000 gallons of an untaxed liquid (a liquid described in § 48.4081–1(c)(1)(i)(B)). However, X’s invoice to W stated that the liquid is undyed diesel fuel. This liquid was delivered into the tank trailer already containing the 7,000 gallons of diesel fuel. The resulting 8,000 gallon mixture is suitable for use as a fuel in a diesel-powered highway vehicle because it has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle. The mixture does not satisfy the dyeing requirements of § 48.4082–1. W sold the mixture to R, a retailer of petroleum products, and delivered the mixture into a storage tank at R’s retail facility. R sold the mixture to its customers.

(ii) Analysis —(A) Production of blended taxable fuel . W is a blender within the meaning of § 48.4081–1 because W produced blended taxable fuel, as defined in § 48.4081–1, by mixing 7,000 gallons of diesel fuel that was taxed under section 4081 with 1,000 gallons of a liquid that was not taxed under section 4081. The mixing occurred outside of the bulk transfer/terminal system and the resulting product is diesel fuel because it is suitable for use as a fuel in a diesel-powered highway vehicle. Thus, R bought blended taxable fuel.

(B) Imposition of tax . Under paragraph (g)(1) of this section, tax is imposed on W’s sale of the 8,000

gallons of blended taxable fuel to R. Tax is computed on 1,000 gallons, which is the difference between the number of gallons of blended taxable fuel sold by W (8,000) and the number of gallons of previously taxed taxable fuel used to produce the blended taxable fuel (7,000). No tax is imposed on R’s subsequent sale of the blended taxable fuel because tax is imposed only with respect to a removal or sale by the blender.

(C) Liability for tax . W, as the blender, is liable for this tax under paragraph (g)(2)(i) of this section. X is jointly and severally liable for this tax under paragraph (g)(2)(ii) of this section because the blended taxable fuel sold by W was produced using a previously untaxed liquid X sold to W as undyed diesel fuel, a taxed taxable fuel. R has no liability for tax because R is not a blender and did not sell any untaxed liquid as a taxed taxable fuel. R only sells previously taxed taxable fuel, the blended taxable fuel bought from W.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on May 15, 2002, 8:45 a.m., and published in the issue of the Federal Register for May 16, 2002, 67 F.R. 34882)

Notice of Proposed Rulemaking

Carryback of Consolidated Net Operating Losses to Separate Return Years

REG–122564–02

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of Proposed Rulemaking.

SUMMARY: This document contains proposed regulations under section 1502 that affect corporations filing consolidated returns. In the Rules and Regulations section of this issue of the Federal Register, the IRS is issuing temporary regulations permitting certain acquiring consolidated groups to elect to waive all or a portion of the pre-acquisition portion of the 5-year carryback period under section 172(b)(1)(H) for certain losses attributable to certain acquired members. The text of those regulations also serves as the text of these proposed regulations.

2002–26 I.R.B. 25 July 1, 2002

(Filed by the Office of the Federal Register on May 30, 2002, 8:45 a.m., and published in the issue of the Federal Register for May 31, 2002, 67 F.R. 38039)

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

Loss Limitation Rules

REG–123305–02

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 amendments to temporary regulations issued under sections 337(d) and 1502. The amendments clarify certain aspects of the temporary regulations relating to the deductibility of losses recognized on dispositions of subsidiary stock by members of a consolidated group. The proposed amendments in these proposed regulations apply to corporations filing consolidated returns, both during and

How the burden of complying with the proposed collections 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 costs of operation, maintenance, and purchase of service to provide information.

The collection of information in this proposed regulation is in § 1.1502– 21(b)(3)(ii)(C). This information is required to document the taxpayer’s election to relinquish portions of its carryback period for 2001 and 2002 losses attributable to acquired members. The data will be used by the Internal Revenue Service to ensure that taxpayers are preparing their returns in accordance with their elections. The collection of information is required to obtain a benefit. The likely respondents are businesses.

Estimated total annual reporting burden: 1,000 hours.

Estimated average annual burden hours per respondent: 15 minutes.

Estimated number of respondents: 4,000. 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 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 tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) relating to section 1502. The temporary regulations provide rules permitting certain acquiring consolidated groups to elect to waive all or a portion of the pre-acquisition portion of the 5-year carryback period under section 172(b)(1)(H) for certain losses attributable to certain acquired members. The text of those regulations also serves as the text of these proposed regulations. The

preamble to the temporary regulations explains the amendments.

Special Analyses

It has been determined that this notice of proposed 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 principally affect persons filing consolidated Federal income tax returns. Available data indicates that most consolidated return filers are large companies (not small businesses). 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

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are timely submitted to the IRS. All comments will be made available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.

Drafting Information

The principal author of these proposed regulations is Marie C. Milnes-Vasquez, Office of the Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended to read 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 1.1502–21 is amended by adding paragraph (b)(3)(ii)(C) to read as follows:

§ 1.1502–21 Net operating losses.

[The text of proposed § 1.1502– 21(b)(3)(ii)(C) is the same as the text of § 1.1502–21T(b)(3)(ii)(C) published elsewhere in this issue of the Federal Regis- ter ].

David A. Mader, Acting Deputy Commissioner

of Internal Revenue.

July 1, 2002 26 2002–26 I.R.B.

rium, IRS Building, 1111 Constitution, NW, Washington, DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 30 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.

- - - - Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing the entry for “Section 1.1502–20T(i)” and adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 - - Section 1.1502–20 also issued under the authority of 26 U.S.C. 337(d) and 1502. - - Par. 2. In § 1.337(d)–2, paragraphs (a)(4) and (b)(4) are 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. Section 1.1502–20 is amended by revising paragraphs (i)(3)(v) and (i)(4) to read as follows:

§ 1.1502–20 Disposition or deconsolidation of subsidiary stock.

[The text of this proposed section is the same as the text of § 1.1502–20T published elsewhere in this issue of the Fed- eral Register ].

after the period of affiliation, and also affect purchasers of the stock of members of a consolidated group. The text of the temporary regulations (T.D. 8998) published 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 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 20044. 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 collections of information contained in this notice of proposed rulemaking have been previously reviewed and approved by the Office of Management and Budget under control number 1545– 1774. No material changes to these collections of information are proposed in these regulations.

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.

Background

Temporary regulations in this issue of the Bulletin amend 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 temporary regulations contains a full explanation of the reasons underlying the issuance of these 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

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

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on May 30, 2002, 8:45 a.m., and published in the issue of the Federal Register for May 31, 2002, 67 F.R. 38040)

2002–26 I.R.B. 27 July 1, 2002

Arbitration is now available for an issue for which the taxpayer intends to seek competent authority assistance, provided a request for competent authority assistance has not as yet been filed. In such a case, the taxpayer may not request competent authority assistance until the arbitration process is completed. However, competent authority assistance may be requested while arbitration is pending if such request is necessary to keep open a statute of limitations in the treaty country. In such a case, the U.S. competent authority will suspend action on the case until arbitration is competed. Arbitration is not available for an issue for which the taxpayer has requested competent authority assistance or the simultaneous Appeals/Competent Authority procedure described in section 8 of Rev. Proc. 96–13, 1996–1 C.B. 616, or any subsequent revenue procedure. Taxpayers are cautioned that if they enter into a settlement with Appeals (including an Appeals settlement through the arbitration process), and then request competent authority assistance, the U.S. competent authority will endeavor only to obtain a correlative adjustment with the treaty country and will not take any actions that would otherwise amend the settlement. See section 7.05, Rev. Proc. 96–13.
The arbitration procedure now includes the following express timelines to complete the agreement to arbitrate and proceed to arbitration. Generally, it is expected that the parties will complete the agreement to arbitrate within four weeks after the taxpayer is notified that Appeals has approved the arbitration request, and proceed to arbitration within 90 days after signing the agreement to arbitrate. A taxpayer’s inability to adhere to these timeframes, without reasonable cause, may result in Appeals’ withdrawal from the arbitration process.
The arbitration procedure excludes Collection cases.
The arbitration procedure excludes issues for which arbitration would not be consistent with sound tax administration, e.g. issues governed by closing agreements, by res judicata, or controlling Supreme Court precedent.

Announcement 2002–59

New Publications Reflect Tax Law Changes

Four new publications are available from the Internal Revenue Service reflecting changes enacted by the Job Creation and Worker Assistance Act of 2002. Publication 3991, Highlights of the Job Creation and Worker Assistance Act of 2002, provides information about tax law changes that affect many individuals and businesses. Some of the tax law changes from the Job Creation and Worker Assistance Act of 2002 took effect retroactively for 2001 and others take effect in 2002 and later years.

Supplement to Publication 463, Travel, Entertainment, Gift, and Car Expenses, provides information for taxpayers who purchased a car for business purposes after September 10, 2001. If you use the actual car expense method to deduct expenses for the business use of your car, you may qualify for the new special depreciation allowance. This allowance is a deduction equal to 30% of the car’s depreciable basis. This supplement explains how to claim (or elect to not claim) the allowance for 2001.

Supplement to Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, provides information about the new 5-year NOL carryback period for tax years ending in 2001 or 2002. This supplement also explains how taxpayers who have already filed their return for a tax year ending during 2001 or 2002 and did not apply the new 5-year carryback will have an opportunity to do so by October 31, 2002.

Supplement to Publication 946, How To Depreciate Property, provides information about changes to the tax rules explained in Publication 946 for certain qualified property placed in service after September 10, 2001, including a new special depreciation allowance, an increased dollar limit on the section 179 deduction, a shorter recovery period for certain property, and an increase in the maximum depreciation deduction for 2001 for a passenger automobile. This supplement explains changes to the law that may reduce your taxes for 2001.

You can get a copy of these publications by calling 1–800–TAX-FORM (1–800–829–3676). You can also write to the Distribution Center nearest to you. Check your income tax package for the address. These publications are also available on the IRS Internet web site at www.irs.gov .

Extension of Test of Arbitration Procedure for Appeals

Announcement 2002–60

SUMMARY: This document modifies and extends the test of the arbitration procedure set forth in Announcement 2000–4, 2000–1 C.B. 317, for an additional one-year period beginning on July 1, 2002, the date this announcement is published in the Internal Revenue Bulletin.

This procedure allows taxpayers to request binding arbitration for factual issues that are already in the Appeals process. Under the procedure set forth in Announcement 2000–4, the taxpayer and Appeals must first attempt to negotiate a settlement. If those negotiations are unsuccessful, the taxpayer and Appeals may jointly request binding arbitration.

BACKGROUND: Appeals concluded a two-year test of the arbitration procedure on January 17, 2002. During this period, Appeals received five requests for arbitration, four of which Appeals approved. The arbitration program is consistent with IRS’ efforts to improve tax administration, provide customer service, and reduce taxpayer burden. During the additional one-year test period, Appeals will seek additional cases for arbitration to further evaluate the program.

CHANGES: Changes to Announcement 2000–4 made by this announcement include:

Issues involving the substantiation of expenses under § 162 of the Internal Revenue Code, Trade or Business Expenses, or § 274, Disallowance of Certain Entertainment, Etc., Expenses, are now eligible for arbitration.

July 1, 2002 28 2002–26 I.R.B.

staffing. Therefore, position and office titles in Announcement 2000–4 are substituted as follows, along with an updated mailing address for Headquarters Appeals:

The arbitration procedure excludes frivolous issues, such as, but not limited to, those identified in Rev. Proc. 2001–41, 2001–33 I.R.B.173.
The arbitration procedure excludes cases where the taxpayer did not act in good faith during settlement negotia

tions, e.g., failure to respond to document requests, failure to respond timely to offers to settle, failure to address arguments and precedents raised by Appeals.

Since the publication of Announcement 2000–4, Appeals has reorganized its

Position Title Changes Old New National Director of Appeals National Chief, Appeals Assistant Regional Director of Appeals Area Director (ARDA-LC)

Appeals Associate Chief Appeals Team Manager

Appeals Team Chief Appeals Team Case Leader

Office Title Changes Old New National Director of Appeals National Chief, Appeals Attn: C:AP:ADR&CS Attn: Appeals Large Business and 1099 14th Street, N.W. Specialty Programs - Operations Suite 4200 - East 1099 14th Street, N.W. Washington, DC 20005 Suite 4200 - East Washington, DC 20005

National Office Appeals Headquarters Appeals

Appeals Region Appeals Area

Office of Alternative Dispute Resolution and Customer Service Programs

In addition to the above changes, responsibility for the management of the Appeals arbitration program has been transferred from the Office of Alternative Dispute Resolution and Customer Service Programs to Appeals Large Business and Specialty Programs - Operations.

EFFECTIVE DATE: This procedure is effective July 1, 2002, the date this announcement is published in the Internal Revenue Bulletin.

EFFECT ON OTHER DOCUMENTS: This announcement modifies and extends the test of the arbitration procedure set forth in Announcement 2000–4.

Appeals Large Business and Specialty Programs - Operations

DRAFTING INFORMATION: The principal author of this announcement is Sandy Cohen, of the office of Appeals Large Business and Specialty Programs Operations, Headquarters Appeals. For further information regarding this announcement, contact Mr. Cohen at (202) 694–1818 (not a toll-free call).

2002–26 I.R.B. 29 July 1, 2002