Part IV. Items of General Interest

Notice of Proposed Rulemaking by Cross Reference to Temporary Regulations

Designated IRS Officer or Employee Under Section 7602(a)(2) of the Internal Revenue Code

REG–134026–02

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross reference to temporary regulations.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9015) that modify the existing regulations promulgated under section 7602(a) of the Internal Revenue Code relating to administrative summonses. The temporary regulations confirm that officers and employees of the Office of Chief Counsel may be included as persons designated to receive summoned books, papers, records, or other data and to take summoned testimony under oath. The text of the temporary regulations also serves as the text of these proposed regulations.

DATES: Written comments and requests for a public hearing must be received by December 9, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG–134026–02), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG–134026–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Comments may also be submitted electronically to the IRS Internet site at: www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Elizabeth Rawlins at 202– 622–3630 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Explanation of Provisions

The temporary regulations in the Rules and Regulations section of the Federal Register dated September 10, 2002, amend the Procedure and Administration Regulations (26 CFR part 301) under section 7602 of the Internal Revenue Code of 1986 (Code). The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains 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 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. In addition, because this notice of proposed rulemaking does not impose a collection of information obligation on small entities, it is not subject to the Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 7805(f) of the Code, the temporary regulation 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 written comments (preferably a signed original and eight (8) copies) that are submitted timely to the IRS or electronically generated comments that are submitted timely to the IRS. The IRS generally requests any comments on the clarity of the proposed rule and how it may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a person who 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 Elizabeth Rawlins of the Office of the Associate Chief Counsel (Procedure and Administration), Collection, Bankruptcy and Summonses Division.

* * * * *

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.7602–1 is revised to read as follows:

§ 301.7602–1 Examination of books and witnesses.

[The text of this proposed section is the same as the text of § 301.7602–1T published elsewhere in this issue of the Fed- eral Register .]

David A. Mader, Acting Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on September 9, 2002, 8:45 a.m., and published in the issue of the Federal Register for September 10, 2002, 67 F.R. 57354)

Archer MSAs

Announcement 2002–90

PURPOSE

Sections 220(i) and (j) of the Internal Revenue Code provide that if the number of Medical Savings Account (MSA) returns filed for 2001 or a statutorily specified projection of the number of MSA returns that will be filed for 2002 exceeds 750,000, then October 1, 2002, is a “cutoff ” date for the Archer MSA pilot project.

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plus the product of 2.5 and the number of applicable Archer MSAs established from January 1, 2002 through June 30, 2002) is 59,151 (90 percent of 21,079 plus 2.5 times 16,072), which is less than the statutory limit of 750,000. Thus, 2002 is not a “cutoff” year for the Archer MSA pilot project by reason of either the 2001 MSA returns test of section 220(j)(2)(A) or the alternative test of section 220(j)(2)(B) of the Code.

Questions regarding this announcement may be directed to Shoshanna Chaiton in the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) at (202) 622–6080 (not a tollfree number).

Guidance Regarding Mixed Use Output Facilities

Announcement 2002–91

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Advance notice of proposed rulemaking.

SUMMARY: This document describes and illustrates rules the IRS and Treasury Department expect to propose in a notice of proposed rulemaking with respect to the issuance of tax-exempt bonds for the government use portion of an output facility that is used for both a government use and a private business use. This document also invites comments from the public regarding these rules. Issuers may rely on this advance notice of proposed rulemaking for issues sold before the notice of proposed rulemaking is issued.

DATES: Written and electronic comments must be submitted by December 23, 2002.

ADDRESSES:

Send submissions to: CC:ITA:RU (REG–142599–02), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG–142599–02), courier’s desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, submissions may be made

The Internal Revenue Service (IRS) has determined that the applicable number of MSA returns filed for 2001 is 21,079 and that the applicable number of MSA returns projected to be filed for 2002 is 59,151 (after reduction in each case for statutorily specified exclusions, such as the exclusion for previously uninsured taxpayers). Consequently, October 1, 2002, is not a “cut-off ” date and 2002 is not a “cutoff ” year for the Archer MSA pilot project.

BACKGROUND

The Health Insurance Portability and Accountability Act of 1996 added section 220 to the Code to permit eligible individuals to establish Archer MSAs under a pilot project effective January 1, 1997. The pilot project, as amended by The Job Creation and Worker Assistance Act of 2002 has a scheduled “cut-off” year of 2003, but may have an earlier “cut-off” year if the number of individuals who have established Archer MSAs exceeds certain numerical limitations. See sections 220(i) and (j).

If a year is a “cut-off” year, section 220(i)(1) generally provides that no individual will be eligible for a deduction or exclusion for Archer MSA contributions for any taxable year beginning after the “cutoff” year unless the individual (A) was an active MSA participant for any taxable year ending on or before the close of the “cutoff” year, or (B) first became an active MSA participant for a taxable year ending after the “cut-off” year by reason of coverage under a high deductible health plan of an MSA-participating employer.

Section 220(j)(2)(A) provides that the numerical limitation for 2002 is exceeded if the number of MSA returns filed on or before April 15, 2002, for taxable years ending with or within the 2001 calendar year, plus the Secretary’s estimate of the number of MSA returns for those taxable years which will be filed after April 15, 2002, exceeds 750,000. For this purpose, section 220(j)(2)(A) provides that a tax return is an MSA return for a taxable year if any exclusion is claimed under section 106(b) or any deduction is claimed under section 220 for that taxable year. Section 220(j)(2)(B) provides, as an alternative test, that the numerical limitation for 2002 is also exceeded if the sum of 90 percent of the MSA returns for 2001 plus the product of 2.5 and the number of Archer MSAs for taxable

years beginning in 2002 that are established during the portion of 2002 preceding July 1 (based on reports by Archer MSA trustees and custodians), exceeds 750,000. Under section 220(j)(3), in determining whether any calendar year is a “cutoff” year, the Archer MSA of any previously uninsured individual is not taken into account. In addition, section 220(j)(4)(D) specifies that, to the extent practical, all Archer MSAs established by an individual are aggregated and two married individuals opening separate Archer MSAs are to be treated as having a single Archer MSA for purposes of determining the number of Archer MSAs.

A total of 61,802 tax returns reporting an excludable or deductible contribution to an Archer MSA for the 2001 taxable year were filed by April 15, 2002. Of this total, 49,653 taxpayers were reported as being previously uninsured. It has been estimated that an additional 17,111 tax returns reporting Archer MSA contributions for the 2001 taxable year have been or will be filed after April 15, 2002, including 8,181 taxpayers who were previously uninsured. Accordingly, it has been determined that there were 78,913 (61,802 plus 17,111) MSA returns for 2001. Of this total, 57,834 (49,653 plus 8,181) were for taxpayers reported as being previously uninsured. As a result, 21,079 (78,913 minus 57,834) MSA returns count toward the applicable statutory limitation for 2002 MSA returns of 750,000.

Based on the Forms 8851 filed on or before August 1, 2002, by Archer MSA trustees and custodians, it has been determined that 20,592 taxpayers who did not have Archer MSA contributions for 2001 established Archer MSAs for 2002 during the portion of 2002 preceding July 1. Of this total, 4,490 taxpayers were reported by trustees and custodians as previously uninsured, and therefore are not taken into account in determining whether 2002 is a “cut-off” year. In addition, 30 taxpayers were reported by trustees and custodians as excludable from the count because their spouse also established an Archer MSA. Accordingly, the applicable number of Archer MSAs established from January 1, 2002, through June 30, 2002, is 16,072 (20,592 minus (4,490 plus 30)). The alternative limitation for 2002 (90 percent of the applicable number of MSA returns for 2001

October 7, 2002 685 2002–40 I.R.B.

2002–2003 Guidance Priority Plan. The proposed regulations will provide guidance regarding the issuance of tax-exempt bonds for the government use portion of a mixed use output facility without the bonds being characterized as private activity bonds.

Explanation of Provisions

A. Mixed Use Allocations

1. In general

The proposed regulations will provide that tax-exempt bonds may be issued to finance costs attributable to the government use portion of a mixed-use output facility (plus any costs attributable to de minimis private business use permitted under section 141) without the bonds being characterized as private activity bonds. For this purpose, the term facility includes an undivided ownership interest in a facility. With respect to arrangements for the purchase of output, the government use portion of an output facility is determined based on the percentage of the available output of the facility that is not used for a private business use (as determined under § 1.141– 7).

2. Allocation of private business use and payments

The proposed regulations will provide that, in the case of a mixed use output facility, output contracts that result in private business use (including any payments thereunder) are allocated first to the portion of the facility that is financed with equity. For this purpose, equity means any amount other than proceeds of a tax-exempt bond, including funds of the issuer that are not derived from a borrowing and proceeds of taxable bonds, but does not include any amount allocable to a tax-exempt bond that has been retired. With respect to each issue of bonds, the portion of the output facility financed with equity is determined based on expenditures of equity that are made contemporaneously with expenditures of proceeds of the issue as part of the same plan of financing. In order for an output contract to be allocated (in whole or in part) to the equity-financed portion of an output facility as described in this paragraph, it first must be allocable to the facility under the facts and circumstances test contained in § 1.141–7(h). For example, an output contract that is allocable to two output facilities under § 1.141–7(h) may not

electronically to the IRS Internet site at http://www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning submissions, Guy Traynor, (202) 622–7180; concerning the proposals, Rose M. Weber, (202) 622– 3980 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

In general, under section 103 of the Internal Revenue Code, gross income does not include the interest on any State or local bond. However, this exclusion generally does not apply to private activity bonds. Section 141(a)(1) defines a private activity bond as any bond issued as part of an issue that meets either (1) the private business use test in section 141(b)(1) and the private security or payment test in section 141(b)(2) (the private business tests) or (2) the private loan financing test in section 141(c).

The private business use test is met if more than 10 percent of the proceeds of an issue are to be used for any private business use. Section 141(b)(6) defines private business use as use directly or indirectly in a trade or business that is carried on by any person other than a governmental unit. Section 141(b)(7) defines government use as any use other than a private business use.

The private security or payment test is met if the payment of the principal of, or the interest on, more than 10 percent of the proceeds of an issue is directly or indirectly (1) secured by an interest in property used or to be used for a private business use, (2) secured by an interest in payments in respect of such property, or (3) to be derived from payments, whether or not to the issuer, in respect of property, or borrowed money, used or to be used for a private business use.

Section 1.141–7 of the Income Tax Regulations provides rules under which the purchase pursuant to a contract by a nongovernmental person of available output of an output facility (output contract) may be taken into account under the private business tests. Section 1.141–1(b) defines out- put facility as electric and gas generation, transmission, distribution, and related facilities, and water collection, storage, and distribution facilities.

Section 141(b)(4) contains a special limitation under which an issue five percent or more of the proceeds of which are to be used with respect to any output facility (other than a facility for the furnishing of water) will be treated as meeting the private business tests if the nonqualified amount for the issue exceeds the excess of $15 million, over the aggregate nonqualified amounts with respect to all prior taxexempt issues 5 percent or more of the proceeds of which are or will be used with respect to such facility (or any other facility which is part of the same project). Section 141(b)(8) defines nonqualified amount as the lesser of (1) the proceeds used for a private business use, or (2) the proceeds with respect to which there are payments, property or borrowed money taken into account under the private security or payment test.

The Conference Committee Report to the Tax Reform Act of 1986, H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II–690 (1986), 1986–3 (Vol. 4) C.B. 686 (the Conference Report), contains an example that illustrates the treatment under section 141(b)(4) of an output facility the output of which is sold for both a government use and a private business use (a mixed use output facility), but the amount of private business use and private payments would cause bonds to be private activity bonds if they financed the entire facility. In the Conference Report example, a single issue of taxexempt bonds is contemplated to finance the acquisition of a $500 million electric generating facility. Ten percent of the output of the facility will be sold to an investorowned utility under an output contract that gives rise to private business use. The Conference Report example concludes that $465 million of tax-exempt bonds may be used to acquire the facility, $450 million for the 90 percent of the facility that is used for a government use, plus $15 million for the allowable private business use portion under section 141(b)(4). Section 1.141–8(c) contains an example that is substantially the same as the example contained in the Conference Report.

The IRS and Treasury Department are reviewing the application of section 141 to mixed use output facilities. This Announcement describes and illustrates rules that the IRS and Treasury Department expect to propose in a notice of proposed rulemaking (the proposed regulations) as part of the

2002–40 I.R.B. 686 October 7, 2002

be allocated in its entirety to the equityfinanced portion of one of the facilities.

B. Examples

The provisions of the proposed regulations described above are illustrated by the following examples (although the examples involve only an electric transmission facility, the principles illustrated apply equally to all output facilities):

Example 1.

Authority is a governmental person that owns and operates an electric transmission facility. Prior to 2003, Authority incurred capital costs of $500 million for the facility. None of those costs was financed with taxexempt bonds. In 2003, Authority needs to make repairs, upgrades and improvements to the facility in the amount of $50 million. On April 10, 2003, Author ity issues an issue with proceeds of $30 million and

uses those proceeds to pay capital costs of the facil ity. As part of the same plan of financing, Authority

also uses $20 million of its own funds which are not

derived from a borrowing to pay capital costs of the

facility. With respect to the 2003 issue, 46 percent of

the available output (as determined under § 1.141–7)

of the facility is sold under output contracts that re sult in private business use. Thus, of the $50 mil lion of new capital costs, $27 million (54 percent) are

attributable to government use and $23 million (46 per

cent) are attributable to private business use. In general, output contracts that result in private business use are allocated first to the portion of the output facility that is financed with equity. Therefore, of the $23 million of costs attributable to private business use, $20 million are allocable to Authority’s equity and $3 million are allocable to the 2003 issue. Thus, $27 million (90 percent) of the proceeds of the issue are used for a government use. The issue does not consist of private activity bonds.

Example 2.

The facts are the same as in Example 1, except that by 2010, only 75 percent of the original principal amount of the 2003 issue remains outstanding. The retirement of a portion of the issue does not affect the amount of private business use of the facility that must occur in order for the issue to consist of private activity bonds.

Request for Comments

Before the notice of proposed rulemaking is issued, consideration will be given to any written comments that are submitted timely (preferably a signed original and eight (8) copies) to the IRS. All comments will be available for public inspection and copying. In addition to comments regarding allocation and accounting rules for mixed use output facilities, comments are also invited on allocation and accounting

rules under section 141 for other facilities that are used for both a government use and a private business use.

Reliance on Announcement

Issuers may rely on the rules described in this Announcement with respect to any issue that is sold before the date the proposed regulations are published in the Fed- eral Register (or such later date as may be specified in the proposed regulations or final regulations). Issuers may rely on this Announcement with respect to bonds that are subject to the Internal Revenue Code of 1986 or the Internal Revenue Code of 1954.

Drafting Information

The principal authors of this advance notice of proposed rulemaking are Bruce M. Serchuk and Rose M. Weber, Office of Chief Counsel (Tax Exempt and Government Entities), Internal Revenue Service, and Stephen J. Watson, Office of Tax Legislative Counsel, Department of the Treasury. However, other personnel from the IRS and Treasury Department participated in its development.

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