Part IV. Items of General Interest

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

Transfers of Compensatory Options

REG–116914–03

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. 9067) relating to the sale or other disposition of compensatory nonstatutory stock options to related persons. The text of those regulations also serves as the text of these proposed regulations.

DATES: Written or electronic comments and requests for a public hearing must be received by September 30, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG–116914–03), 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 4 p.m. to: CC:PA:RU (REG–116914–03), Courier's Desk, Internal Revenue Service, 1111 Constitution Ave., 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 the proposed regulations, Stephen Tackney (202) 622–6030; concerning submissions of comments and/or requests for a hearing, Guy Traynor, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend 26 CFR part 1. The

regulations provide that a sale or other disposition of a nonstatutory stock option to a related person will not be treated as a transaction that closes the application of section 83 with respect to the option. The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations and these proposed regulations.

Special Analyses

It has been determined that these proposed regulations are 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 533(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these 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, these regulations are being submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their 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 (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. The IRS and Treasury Department specifically request comments on the clarity and efficacy of the proposed definition of a related person. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

DRAFTING INFORMATION

The principal author of these proposed regulations is Stephen Tackney of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in their development.

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Adoption of Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read as follows: Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.83–7 is amended as follows:

1. Paragraph (a) is amended by adding a sentence at the end.
2. Paragraphs (a)(1) and (a)(2) are added.
3. Paragraph (d) is added. The additions read as follows:

(a) [The text of proposed § 1.83–7(a) is the same as the text of § 1.83–7T(a) published elsewhere in this issue of the Bulletin].

• • • • (d) Effective dates . This section is applicable to sales or other dispositions of options on or after the publication of final regulations in the Federal Register . For dates on or after July 2, 2003, see § 1.83–7T(d).

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on July 1, 2003, 8:45 a.m., and published in the issue of the Federal Register for July 2, 2003, 68 F.R. 39498)

August 11, 2003 338 2003-32 I.R.B.

Changes in Annual Accounting Period

Announcement 2003–49

PURPOSE

This announcement discusses some of the changes that the Internal Revenue Service and Treasury Department have made in finalizing Notice 2002–75, 2002–47 I.R.B. 884, which proposes procedures for individuals to obtain the automatic approval of the Commissioner to change their annual accounting period from a fiscal year to a calendar year. The final procedures are contained in Rev. Proc. 2003–62, page 299 of this Bulletin.

BACKGROUND

The Service published Notice 2002–75 on November 25, 2002, and requested public comments on the proposed procedures contained therein. No public comments were received. However, the Service and Treasury Department have made certain changes to Notice 2002–75 to further conform the rules for automatic accounting period changes by individuals to those provided in Rev. Proc. 2002–37, 2002–1 C.B. 1030 (providing procedures for automatic approval of annual accounting period changes by corporations) and Rev. Proc. 2002–39, 2002–1 C.B. 1046 (providing procedures for the prior approval of annual accounting period changes by taxpayers generally, including individuals).

Also, the Service and Treasury Department have made conforming changes to Notice 2002–75 as a result of Rev. Proc. 2003–34, 2003–18 I.R.B. 856, which modifies the term and condition of Rev. Proc. 2002–37 and Rev. Proc. 2002–39 regarding the carryback of losses incurred in the short period.

CHANGES

A. Interest in a Pass-through Entity

The Service and Treasury Department have determined that the $10,000 de min- imis exception for an individual's interest in a pass-through entity provided in section 4.02(2)(d) of Notice 2002–75 should be raised to $500,000. This change is consistent with the $500,000 de minimis exception to the “substantial distortion” rule provided in section 5.05(1)(ii) of Rev. Proc. 2002–39. The corresponding example in Notice 2002–75 is modified to reflect this change.

Section 4.02(2)(a) of Notice 2002–75 is modified to remove the reference to foreign personal holding companies (FPHCs), because FPHCs cannot make a one-month deferral election under § 898(c)(1)(B) of the Internal Revenue Code. Section 4.02(2)(a) of Rev. Proc. 2002–37 also contains this reference. The Service and Treasury Department intend to remove the reference to FPHCs in section 4.02(2)(a) of Rev. Proc. 2002–37. No inference should be drawn from that reference that FPHCs are eligible to

make a one month deferral election under § 898(c)(1)(B).

B. Net Operating Loss Term and Condition.

Section 6.05 of Notice 2002–75 provides that a net operating loss (NOL) generated in the short period is carried back or carried over if the loss is $10,000 or less. The Service and Treasury Department have determined that the $10,000 ceiling should be raised to $50,000, consistent with the $50,000 ceiling provided in section 5.04 of Rev. Proc. 2002–39. Also, the Service and Treasury Department have made other changes to this section consistent with Rev. Proc. 2003–34.

C. Other Changes

Additional conforming changes have been made to Notice 2002–75 to make the automatic approval procedures applicable to individuals consistent with those of Rev. Proc. 2002–37 and Rev. Proc. 2002–39. See, for example, section 6.07 of Rev. Proc. 2003–62.

FURTHER INFORMATION

For further information regarding this announcement, contact Roy A. Hirschhorn or Jeffrey S. Marshall of the Office of the Associate Chief Counsel (Income Tax and Accounting) at (202) 622–4960 (not a tollfree call).