Part III. — Internal Revenue Bulletin 2003-28

Deadline for Allocating Private Activity Bond State Ceiling Among Issuing Authorities Under Section 146(e)

Notice 2003–41

PURPOSE

This notice provides guidance to state authorities responsible for allocating private activity bond state ceiling under § 146(e) of the Internal Revenue Code (the “Code”). It clarifies that the deadline for allocating any portion of the state ceiling under § 146(e) is the earlier of (1) February 15 of the calendar year following the year in which the state ceiling arises, or (2) the date of issue of bonds issued pursuant to an allocation of that portion of the state ceiling. Notice 2003–42 clarifies the deadline under § 146 for an issuing authority that has been allocated state ceiling, referred to as the issuing authority’s volume cap, to assign all or any portion of that volume cap to another issuing authority in the state.

BACKGROUND

Under § 103(a), except as provided in § 103(b), gross income does not include interest on any state or local bond. Section 103(b) provides, in part, that § 103(a) shall not apply to any private activity bond that is not a qualified bond (within the meaning of § 141). Section 141(e) provides, in part, that a qualified bond must meet the applicable requirements of § 146.

Section 146(a) provides that a private activity bond issued as part of an issue meets the requirements of § 146 if the aggregate face amount of the private activity bonds issued pursuant to such issue, when added to the aggregate face amount of tax-exempt private activity bonds previously issued by the issuing authority during the calendar year, does not exceed such authority’s volume cap for such calendar year.

amount equal to $75 multiplied by the state population, or (2) $225 million. Beginning in 2003, these amounts are adjusted for inflation in accordance with § 146(d)(2).

Generally, §§ 146(b) and (c) provide formulae for allocating state ceiling among issuing authorities in the state authorized to issue tax-exempt private activity bonds. However, § 146(e)(1) provides that, except as provided in § 146(e)(3) (relating to volume cap of constitutional home rule cities), a state may, by law, provide a different allocation formula for allocating the state ceiling among the governmental units (or other authorities) in such state having authority to issue tax-exempt private activity bonds.

Section 146(f)(1) provides that if an issuing authority’s volume cap for any calendar year after 1985 exceeds the aggregate amount of tax-exempt private activity bonds issued by the authority during such calendar year, such issuing authority may elect to treat all (or any portion) of such excess as a carryforward for one or more carryforward purposes described in § 146(f)(5). Section 146(f)(4) provides that any carryforward election (and any identification or specification contained therein), once made, shall be irrevocable.

Temporary Income Tax Regulations § 1.103(n)–4T, A–2, generally provides that an election to carry forward volume cap must be filed prior to the end of the calendar year with respect to which the issuing authority has the unused volume cap. These regulations, which were issued under the predecessor to § 146, generally continue to apply to the extent they are not inconsistent with the Tax Reform Act of 1986. See H.R. Conf. Rep. 99–841 at II–686 (1986), 1986–3 (Vol. 4) C.B. 686. However, Notice 89–12, 1989–1 C.B. 633, which may be relied upon, provides that regulations to be issued under § 146 will require that the issuing authority file the carryforward election by the earlier of (1) February 15 of the calendar year following the year in which the excess amount arises, or (2) the date of issue of bonds issued pursuant to the carryforward election.

DISCUSSION

Neither the Code nor the regulations specifically provide a due date for making allocations of state ceiling under § 146(e). In Notice 89–12, the Internal Revenue Service extended the time to file a carryforward election to accommodate difficulties issuers may experience in determining the amount of unused volume cap and filing the election by the end of the calendar year. To coordinate the deadline for allocating state ceiling and the deadline for making a carryforward election, the deadline for allocating any portion of the state ceiling under § 146(e) is the earlier of (1) February 15 of the calendar year following the year in which the state ceiling arises, or (2) the date of issue of bonds issued pursuant to an allocation of that portion of the state ceiling.

EFFECTIVE DATE

This notice applies to allocations of state ceiling arising after 2002.

DRAFTING INFORMATION

The principal authors of this notice are Rebecca L. Harrigal and Zoran Stojanovic of the Office of the Division Counsel/Associate Chief Counsel (TEGE). For further information regarding this notice, contact Mr. Stojanovic at (202) 622–3980 (not a toll-free call).

Deadline for an Issuing Authority to Assign Private Activity Bond Volume Cap to Another Issuing Authority Under Section 146

Notice 2003–42

PURPOSE

This notice provides guidance to issuing authorities on the deadline for assigning private activity bond volume cap under § 146 of the Internal Revenue Code (the “Code”) to other issuing authorities. It clarifies that the deadline for an issuing authority to assign any portion of its volume cap to another issuing authority in the state is the earlier of (1) February 15 of the calendar year following the year in which the state ceiling represented by that volume

July 14, 2003 49 2003-28 I.R.B.

To coordinate the deadline for assigning volume cap and the deadline for making a carryforward election, the deadline for an issuing authority to assign any portion of its volume cap to another issuing authority in the state is the earlier of (1) February 15 of the calendar year following the year in which the state ceiling represented by that volume cap arises, or (2) the date of issue of bonds issued pursuant to the assignment of that portion of the volume cap.

EFFECTIVE DATE

This notice applies to assignments of volume cap with respect to state ceiling arising after 2002.

DRAFTING INFORMATION

2003 Section 43 Inflation Adjustment

Notice 2003–43

Section 43(b)(3)(B) of the Internal Revenue Code requires the Secretary to publish an inflation adjustment factor. The enhanced oil recovery credit under § 43 for any taxable year is reduced if the “reference price,” determined under § 29(d)(2)(C), for the calendar year preceding the calendar year in which the taxable year begins is greater than $28 multiplied by the inflation adjustment factor for that year.

The term “inflation adjustment factor” means, with respect to any calendar year, a fraction the numerator of which is the GNP implicit price deflator for the preceding calendar year and the denominator of which is the GNP implicit price deflator for 1990.

Because the reference price for the 2002 calendar year ($22.51) does not exceed $28 multiplied by the inflation adjustment factor for the 2003 calendar year, the enhanced oil recovery credit for qualified costs paid or incurred in 2003 is determined without regard to the phase-out for crude oil price increases.

cap arises, or (2) the date of issue of bonds issued pursuant to the assignment of that portion of the volume cap. Notice 2003–41 clarifies the deadline under § 146(e) for a state to allocate its state ceiling among issuing authorities in the state.

BACKGROUND

In general, an issuing authority’s volume cap for a calendar year is the portion of the state ceiling allocated to the issuing authority for that year. Under § 146(d)(1), the state ceiling applicable to any state for any calendar year is the greater of (1) an amount equal to $75 multiplied by the state population, or (2) $225 million. Beginning in 2003, these amounts are adjusted for inflation in accordance with § 146(d)(2).

Section 1.103(n)–3T, A–14, of the temporary Income Tax Regulations provides that in certain circumstances an issuing authority may assign all or any portion of its volume cap to other issuing authorities within the state. These regulations, which

were issued under the predecessor to § 146, generally continue to apply to the extent they are not inconsistent with the Tax Reform Act of 1986. See H.R. Conf. Rep. 99–841 at II–686 (1986), 1986–3 (Vol. 4) C.B. 686.

Section 146(f)(3) provides that if any issuing authority elects a carryforward with respect to any carryforward purpose, any private activity bonds issued by such authority with respect to such purpose during the three calendar years following the calendar year in which the carryforward arose shall not be taken into account under § 146(a) to the extent the amount of such bonds does not exceed the amount of the carryforward elected for that purpose.

Section 146(f)(4) provides that any carryforward election (and any identification or specification contained therein), once made, shall be irrevocable.

Section 1.103(n)–4T, A–2, generally provides that an election to carry forward volume cap must be filed prior to the end of the calendar year with respect to which the issuing authority has the unused volume cap. However, Notice 89–12, 1989–1 C.B. 633, which may be relied upon, provides that regulations to be issued under § 146 will require that the issuing authority file the carryforward election by the earlier of (1) February 15 of the calendar year following the year in which the excess amount arises, or (2) the date of issue of bonds issued pursuant to the carryforward election.

DISCUSSION

Neither the Code nor the regulations specifically provide a due date for making assignments of volume cap under § 146. In Notice 89–12, the Internal Revenue Service extended the time to file a carryforward election to accommodate difficulties issuers may experience in determining the amount of unused volume cap and filing the election by the end of the calendar year.

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Table 1 contains the GNP implicit price deflator used for the 2003 calendar year, as well as the previously published GNP

implicit price deflators used for the 1991 through 2002 calendar years.

Notice 2003–43 TABLE 1

GNP IMPLICIT PRICE DEFLATORS

Calendar Year GNP Implicit Price Deflator

1990 112.9 (used for 1991)

1991 117.0 (used for 1992)

1992 120.9 (used for 1993)

1993 124.1 (used for 1994)

1994 126.0 (used for 1995)

1995 107.5 (used for 1996)*

1996 109.7 (used for 1997)

1997 112.35 (used for 1998)**

1998 112.64 (used for 1999)

1999 104.59 (used for 2000)***

2000 106.89 (used for 2001)

2001 109.31 (used for 2002)

2002 110.63 (used for 2003)

Beginning in 1995, the GNP implicit price deflator was rebased relative to 1992. The 1990 GNP implicit price deflator used to compute the 1996 § 43 inflation adjustment factor is 93.6.

** Beginning in 1997, two digits follow the decimal point in the GNP implicit price deflator. The 1990 GNP price deflator used to compute the 1998 § 43 inflation adjustment factor is 93.63.

*** Beginning in 1999, the GNP implicit price deflator was rebased relative to 1996. The 1990 GNP implicit price deflator used to compute the 2000 § 43 inflation adjustment factor is 86.53.

Table 2 contains the inflation adjustment factor and the phase-out amount for taxable years beginning in the 2003 calendar year as well as the previously published

inflation adjustment factors and phase-out amounts for taxable years beginning in the 1991 through 2002 calendar years.

Notice 2003–43 TABLE 2

INFLATION ADJUSTMENT FACTORS AND PHASE-OUT AMOUNTS

Calendar Year Inflation Adjustment Factor Phase-out Amount

1991 1.0000 0

1992 1.0363 0

1993 1.0708 0

1994 1.0992 0

1995 1.1160 0

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Notice 2003–43 TABLE 2 Continued

INFLATION ADJUSTMENT FACTORS AND PHASE-OUT AMOUNTS

Calendar Year Inflation Adjustment Factor Phase-out Amount

1996 1.1485 0

1997 1.1720 0

1998 1.1999 0

1999 1.2030 0

2000 1.2087 0

2001 1.2353 0

2002 1.2633 0

2003 1.2785 0

DRAFTING INFORMATION

The principal author of this notice is Jaime Park of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Park at (202) 622–3120 (not a toll-free call).

2003 Marginal Production Rates

Notice 2003–44

Section 613A(c)(6)(C) of the Internal Revenue Code defines the term “applicable percentage” for purposes of determining percentage depletion for oil and gas produced from marginal properties. The applicable percentage is the percentage (not greater than 25 percent) equal to the sum of 15 percent, plus one percentage

Notice 2003–44 Table 1

point for each whole dollar by which $20 exceeds the reference price (determined under § 29(d)(2)(C)) for crude oil for the calendar year preceding the calendar year in which the taxable year begins. The reference price determined under § 29(d)(2)(C) for the 2002 calendar year is $22.51.

Table 1 contains the applicable percentages for marginal production for taxable years beginning in calendar years 1991 through 2003.

APPLICABLE PERCENTAGE FOR MARGINAL PRODUCTION

Calendar Year Applicable Percentage

1991 15 percent

1992 18 percent

1993 19 percent

1994 20 percent

1995 21 percent

1996 20 percent

1997 16 percent

1998 17 percent

1999 24 percent

2000 19 percent

2001 15 percent

2002 15 percent

2003 15 percent

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generally requires former U.S. shareholders of the acquired corporation to recognize gain on their original transfers if the acquiring corporation disposes of the stock or substantially all of the assets of the acquired corporation (including a disposition of substantially all of the assets following a liquidation of the acquired corporation) during the five-year period following the initial transaction. The IRS and Treasury are considering whether to extend the gain recognition agreement requirement for nonrecognition treatment under the section 367 regulations to asset reorganizations.

Another category of transactions that the IRS and Treasury are considering is the disposition of a controlled foreign corporation by liquidating the corporation (through an actual liquidation or by electing to treat the corporation as a disregarded entity) and selling its assets rather than by selling the stock of the controlled foreign corporation. For purposes of subpart F, section 954(c)(1) generally characterizes gain on the sale of assets based on the type of income produced by such assets. Thus, section 954(c)(1) distinguishes between gain from the sale of stock, which generally is characterized as subpart F income because stock gives rise to dividend income, and gain from the sale of the underlying assets of the corporation, which is characterized as subpart F income or other income based on the types of income produced by such assets. The IRS and Treasury are continuing to consider the proper treatment of these transactions under the substantive rules of subpart F.

Written comments concerning this notice may be submitted to CC:PA:RU (Notice 2003–46), room 5226, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 am and 4 pm to: CC:PA:RU (Notice 2003–46), Courier's desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044. Alternatively, taxpayers may submit comments electronically to: notice.com- ments@irscounsel.treas.gov.

Entity Classification for Certain Foreign Eligible Entities

Notice 2003–46

On November 29, 1999, the IRS and Treasury issued proposed regulations (REG–110385–99, 1999–2 C.B. 670 [64 FR 66591]) addressing certain transactions that occur within a specified period of time before or after a change in entity classification. The proposed regulations generally would provide that if an “extraordinary transaction,” as defined in the proposed regulations, occurred either one day before or within 12 months after the date a foreign entity changed its classification to disregarded-entity status, then the entity would not be treated as a disregarded entity but instead would be classified as an association taxable as a corporation for all purposes. In addition to this extraordinary transaction rule, the proposed regulations also address “grandfathered” pass-through entities and the determination of relevance of the classification of a foreign entity for U.S. federal income tax purposes.

A public hearing on the proposed regulations was held on January 31, 2000. In addition, written comments were received. Most commentators criticized the approach adopted in the proposed regulations as overly broad and expressed concern that it would mitigate the increased certainty promoted by the entity classification regulations issued in 1996.

After considering the comments received, the IRS and Treasury have decided to withdraw the extraordinary transaction rule of the proposed regulations. Therefore, the IRS and Treasury will withdraw proposed section 301.7701–3(h). The IRS and Treasury received minimal comments on the portions of the proposed regulations addressing grandfathered entities and the relevancy of classification status, and intend to finalize those portions of the proposed regulations.

The IRS and Treasury remain concerned about cases in which a taxpayer,

seeking to dispose of an entity, makes an election to disregard it merely to alter the tax consequences of the disposition. The IRS will continue to pursue the application of other principles of existing law (such as the substance over form doctrine) to determine the proper tax consequences in such cases. As the Supreme Court has noted: “To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945).

In addition, the IRS and Treasury are continuing to examine the potential use of the entity classification regulations to achieve results inconsistent with the policies and rules of particular Code provisions or of U.S. tax treaties. In contrast to the approach of the extraordinary transaction rule, which would operate to change the classification of an entity if certain conditions are met, this examination will focus on ensuring that the substantive rules of particular Code provisions and U.S. tax treaties reach appropriate results notwithstanding changes in entity classification.

One category of transactions that the IRS and Treasury are considering is the acquisition of the assets of one controlled foreign corporation (the acquired CFC) by a second controlled foreign corporation (the acquiring CFC) that involves the acquisition of the stock in the acquired CFC followed by its liquidation into the acquiring CFC (through an actual liquidation or by electing to treat the acquired CFC as a disregarded entity). Such a transaction typically would be treated as an asset reorganization under section 368(a)(1)(C) or (D), provided that the transaction meets the other requirements generally applicable to reorganizations, including the requirements that the transaction have a valid business purpose and continuity of business enterprise. See §1.368–1. Although the regulations under section 367(a) would require certain U.S. shareholders of the acquired corporation to enter into a gain recognition agreement if the acquiring CFC had acquired the stock of the acquired CFC, the regulations do not require a gain recognition agreement in an asset reorganization. §1.367(a)–3(a) and (b)(1)(ii). A gain recognition agreement

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of bonds issued pursuant to the carryforward election.

.10 The Internal Revenue Service has learned that certain allocating authorities have filed a Form 8328 to carry forward unused private activity bond volume cap that was properly allocated to an issuing authority (other than the allocating authority). A Form 8328 filed by an allocating authority that is not the issuing authority does not comply with the 1986 Code and regulations because the Form 8328 does not constitute an election by the issuing authority and because the form may fail to provide other information required under § 1.103(n)–4T, A–2.