SECTION 3. TRANSITION — Internal Revenue Bulletin 2002-42

Under the transition relief of Section IV of Notice 2001–4, as extended by this notice, for calendar year 2002, the IRS will permit a foreign partnership to provide a withholding agent, including a QI, with a Form W–8IMY together with a withholding statement that provides the withholding agent with information regarding withholding rate pools. The foreign partnership must provide a separate withholding rate pool for each U.S. non-exempt recipient partner. The foreign partnership must associate the documentation from each of its partners with the Form W–8IMY. If

October 21, 2002 715 2002–42 I.R.B.

of gain to take into account. See Q & A–7 for help in determining whether any portion of the amount to be received is treated as interest for federal tax purposes.

Q–5. Is the gain or loss ordinary or capital gain or loss?

A–5. Whether the gain or loss is ordinary or capital depends on how the quota holder made use of the quota.

If the quota holder used the quota in the trade or business of farming and, on May 13, 2002, the quota holder’s holding period for the quota was more than one year, then the transaction is reported as a section 1231 transaction on Form 4797, Sales of Busi- ness Property . Assuming a quota holder has no other section 1231 transactions reportable on Form 4797, any gain is treated as long-term capital gain and any loss is treated as ordinary loss. Even if a quota holder has other reportable section 1231 transactions, the net result of all section 1231 transactions reported is generally either longterm capital gain or ordinary loss. See the instructions for Form 4797 for more detailed information.
If the quota holder held the quota for investment purposes, any gain or loss is capital gain or loss. The same result also applies if the quota holder held the quota for the production of income, though not connected with a trade or business. Under certain circumstances, some or all of the capital gain must be recharacterized and reported as ordinary income. If the quota holder previously deducted (a) the cost of acquiring a quota; (b) amounts for amortization, depletion, or depreciation; or (c) amounts to reflect a reduction in the quota pounds, any resulting capital gain is taxed as ordinary income up to the amount previously deducted. This amount of ordinary income should be included in income in the quota holder’s return for the taxable year that includes May 13, 2002, even if the quota holder uses the installment method to report the remainder of the gain.

Q–6. Is the compensation received un- der the Act self-employment income?

A–6. No. Q–7. How does a quota holder deter- mine if a portion of the amount paid will be treated as interest for federal tax pur- poses?

2006, and does not provide for the payment of any interest. A quota holder also has an option of receiving a single lump sum payment in any one of those five years. The contract between a quota holder and USDA will set forth the payment terms selected by the quota holder.

QUESTIONS AND ANSWERS

Q–1. Are the payments received by a quota holder under the Act subject to fed- eral income tax?

A–1. Yes. If the amount paid for the quota is more than the quota holder’s adjusted basis in the quota, the quota holder has a taxable gain; if the amount paid for the quota is less than the adjusted basis, the quota holder has a loss that may be deductible for tax purposes. The amount paid for the quota does not include any amount treated as interest for federal tax purposes, and the total amount paid to the quota holder is reduced by amounts treated as interest before determining the quota holder’s gain or loss. See Q & A–7 for help in determining whether any portion of the amount paid is treated as interest for federal tax purposes.

Q–2. How does a quota holder deter- mine the adjusted basis of a quota?

A–2. The adjusted basis of a quota is determined differently depending upon how the quota came into the hands of the quota holder.

A quota holder who holds a quota that is derived from an original grant by the Federal government of an acreage allotment has a basis of zero in the quota.
The basis of a quota that was purchased is the price the quota holder paid for it. The basis of a quota that is derived from an acreage allotment that was purchased is the price that the quota holder paid for the acreage allotment.
Generally a quota holder who received a quota as a gift has the same basis in the quota as the person who gave it to the quota holder. Under certain circumstances, the basis is increased by an amount related to the amount of gift tax paid. If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is that fair market value.
The basis of a quota that was inherited generally is the fair market value of the quota at the time of the decedent’s death. The basis of a peanut quota is not subject to adjustment through amortization, depletion, or depreciation. However, if a quota holder has previously deducted amounts for these purposes, the basis should be reduced by a corresponding amount before determining the quota holder’s gain or loss. A similar reduction in the basis of a quota should be made for any amount previously deducted as a loss because of a reduction in the number of pounds of peanuts allowable under the quota. If a quota holder purchased a quota or acreage allotment and deducted the entire cost in the year of purchase, then the quota holder’s basis in the purchased quota or the quota derived from the acreage allotment is zero.

Q–3. If a quota holder has a gain and either receives a lump sum payment in the taxable year that includes May 13, 2002, or elects not to use the installment method, when should the gain be included in in- come for tax purposes?

A–3. The entire gain should be taken into account on the quota holder’s federal income tax return for the taxable year that includes May 13, 2002. The amount of gain to include in income is the excess of the total amount to be received, reduced by any amount treated as interest, over the quota holder’s adjusted basis in the quota. See Q & A–7 for help in determining whether any portion of the amount to be received is treated as interest for federal tax purposes.

Q–4. If a quota holder has a gain and reports the transaction using the install- ment method, when should the gain be in- cluded in income for tax purposes?

A–4. The installment method may be used to report a gain if a quota holder receives at least one payment after the close of the holder’s taxable year that includes May 13, 2002. The amount of gain is the excess of the total amount to be received, reduced by any amount treated as interest, over the quota holder’s adjusted basis in the quota. Under the installment method, a proportionate amount of the gain is taken into account in each year in which a payment is received. See the instructions for Form 6252, Installment Sale In- come, for help in determining the amount

2002–42 I.R.B. 716 October 21, 2002

obligations. Section 1065 of the Tax Reform Act of 1984, 1984–3 (Vol. 1) C.B. 556, made permanent the rules treating Indian tribal governments (or subdivisions thereof) as states (or political subdivisions thereof).

.04 DEFINITIONS The term “Indian tribal government” is defined under section 7701(a)(40) of the Code, as amended, to mean the governing body of any tribe, band, community, village or group of Indians, or (if applicable) Alaska Natives that is determined by the Secretary of Treasury, after consultation with the Secretary of the Interior, to exercise governmental functions. Section 7871(d) of the Code states that, for purposes of section 7871(a), a subdivision of an Indian tribal government shall be treated as a political subdivision of a state if (and only if) the Secretary of the Treasury determines (after consultation with the Secretary of the Interior) that such subdivision has been delegated the right to exercise one or more of the substantial governmental functions of the Indian tribal government.