Part I. Rulings — Internal Revenue Bulletin 2004-3

Section 170.—Charitable, etc., Contributions and Gifts

Is a charitable deduction under section 642(c) for a trust’s distributive share of a charitable contribution made by a partnership from the partnership’s gross income prohibited because the trust’s governing instrument does not authorize the trustee to make charitable contributions? See Rev. Rul. 2004-5, page 295.

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 446.—General Rule for Methods of Accounting

26 CFR 1.446-1T: General rule for methods of ac- counting (temporary).

If a taxpayer used an impermissible method of accounting for depreciation or amortization for certain depreciable or amortizable property that has been disposed of by the taxpayer, is a change to a permissible method of accounting for depreciation or amortization for that property after its disposition a change in method of accounting under §446(e) of the Internal Revenue Code? See Rev. Proc. 2004-11, page 311.

Section 556.—Undistributed Foreign Personal Holding Company Income

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 565.—Consent Dividends

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 642.—Special Rules for Credits and Deductions

26 CFR 1.642(c)–1: Unlimited deduction for amounts paid for a charitable purpose. (Also §§ 170, 651, 652, 681, 702; 1.651(a)–1, 1.651(a)–4, 1.702–1.)

Charitable deductions. This ruling concludes that a trust is not prohibited

from taking a charitable deduction under section 642(c) of the Code for the trust’s distributive share of a charitable contribution made by a partnership from the partnership’s gross income even though the trust’s governing instrument does not authorize the trustee to make charitable contributions.

Rev. Rul. 2004–5

ISSUE

Is a charitable deduction under § 642(c) of the Internal Revenue Code for a trust’s distributive share of a charitable contribution made by a partnership from the partnership’s gross income prohibited because the trust’s governing instrument does not authorize the trustee to make charitable contributions?

FACTS

The governing instrument of trust TR provides that all the income is to be distributed annually to A for life and upon A ’s death, TR will terminate and all the assets will pass to B . TR ’s governing instrument does not authorize the trustee to make charitable contributions.

One of TR ’s assets is an interest in partnership PRS . During the taxable year, PRS contributes cash from its gross income to a charitable organization for a purpose specified in § 170(c). None of TR ’s income for the taxable year is “unrelated business income” within the meaning of § 681(a). In computing its income tax for the taxable year, TR takes into account its distributive share of PRS ’s income, gain, loss, deductions (including charitable contributions), and credits.

LAW AND ANALYSIS

Section 642(c)(1) provides that a trust (other than a trust subject to §§ 651 and 652) is allowed a deduction in computing its taxable income for any amount of the gross income, without limitation, that pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in § 170(c) (determined

without regard to § 170(c)(2)(A)). The deduction is in lieu of the charitable deduction allowed by § 170(a).

A trust subject to §§ 651 and 652 is known as a simple trust. A trust that is not a simple trust is known as a complex trust and is subject to the provisions of §§ 661–663. Section 1.651(a)–1 of the Income Tax Regulations provides that a trust may be a simple trust for one year and a complex trust for another year.

Under § 651(a), the terms of a simple trust (1) provide that all of the trust’s income is to be distributed currently and (2) do not provide that any amounts are to be paid, permanently set aside, or used for the charitable purposes specified in § 642(c). Under § 1.651(a)–4, a trust is not considered to be a trust that may pay, permanently set aside, or use any amount for charitable purposes for any taxable year in which the trust is not allowed a charitable deduction under § 642(c).

Section 702(a)(4) provides that in determining a partner’s income tax, each partner shall take into account separately the partner’s distributive share of the partnership’s charitable contributions (as defined in § 170(c)).

Section 1.702–1(a)(4) provides that each partner shall take into account, as part of the charitable contributions paid by the partner, the partner’s distributive share of each class of charitable contributions paid by the partnership within the partnership’s taxable year. Section 170 determines the extent to which the amount may be allowed as a deduction to the partner.

Section 1.702–1(b) provides that the character in the hands of a partner of any item of income, gain, loss, deduction, or credit described in § 702(a)(1) through (8) shall be determined as if that item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership.

Section 1.702–1(c)(1) provides that if it is necessary to determine the amount or character of the gross income of a partner, the partner’s gross income shall include the partner’s distributive share of the

2004-3 I.R.B. 295 January 20, 2004

Section 702.—Income and Credits of Partner

26 CFR 1.702-1: Income and credits of partner.

Section 936.—Puerto Rico and Possession Tax Credit

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 1016.—Adjustment to Basis

26 CFR 1.1016-3T: Exhaustion, wear and tear, ob- solescence, amortization, and depletion for periods since February 28, 1913 (temporary).

Whether § 1016(a)(2) of the Internal Revenue Code permanently affects a taxpayer’s lifetime income for purposes of determining whether a change in depreciation or amortization is a change in method of accounting under § 446(e)? See Rev. Proc. 2004-11, page 311.

Section 1017.—Discharge of Indebtedness

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 1368.—Distri- butions

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 1377.—Definitions and Special Rule

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 1502.—Regulations

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

gross income of the partnership, that is, the amount of gross income of the partnership from which was derived the partner’s distributive share of partnership taxable income or loss (including items described in § 702(a)(1) through (8)).

For a trust to claim a charitable deduction under § 642(c) for amounts of gross income that it contributes for charitable purposes, the governing instrument of the trust must give the trustee the authority to make charitable contributions. This requirement is an essential element to qualify the trust to claim a deduction for a charitable contribution made directly by the trust. In the case of a trust’s investment in a partnership, the partnership may make a charitable contribution from the partnership’s gross income, and that income is never available to the trust. For federal tax purposes, however, the trust must take into account its distributive share of the partnership’s income, gain, loss, deductions (including charitable contributions), and credits. Under these circumstances, a trust’s deduction for its distributive share of a charitable contribution made by a partnership will not be disallowed under § 642(c) merely because the trust’s governing instrument does not authorize the trustee to make charitable contributions. See Estate of Bluestein v. Commis- sioner, 15 T.C. 770 (1950), acq., 1951–1 C.B. 1, and Estate of Lowenstein v. Com- missioner 12 T.C. 694 (1949), acq. 1949–2 C.B. 2, aff’d sub nom, First National Bank of Mobile v. Commissioner, 183 F.2d 172 (5th Cir. 1950), reaching similar conclusions under the statutory predecessor to § 642(c).

In the present situation, PRS ’s charitable contribution is made from PRS ’s gross income. TR is allowed a charitable deduction for its distributive share of this contribution, even though TR ’s governing instrument does not authorize the trustee to make charitable contributions. Because none of TR ’s income for the taxable year would be considered “unrelated business income” for purposes of § 681(a), the amount of the charitable deduction is not limited under § 681. TR is a complex trust for the taxable year because it is allowed a charitable deduction under § 642(c) for that year.

The same result would apply if TR were always a complex trust because it was not required to distribute all its income currently.

HOLDING

A charitable deduction under § 642(c) for a trust’s distributive share of a charitable contribution made by a partnership from the partnership’s gross income is not prohibited even though the trust’s governing instrument does not authorize the trustee to make charitable contributions.

DRAFTING INFORMATION

The principal author of this revenue ruling is Charlotte Chyr of the Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Charlotte Chyr at (202) 622–3080 (not a toll-free call).

Section 651.—Deduction for Trusts Distributing Current Income Only

26 CFR 1.651(a)-1: Simple trusts; deductions for dis- tributions; in general. 26 CFR 1.651(a)-4: Charitable purposes.

Section 652.—Inclusion of Amounts in Gross Income of Beneficiaries of Trusts Distributing Current Income Only

Section 681.—Limitation on Charitable Deduction

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Section 1503.—Computa- tion and Payment of Tax

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Section 6011.—General Requirement of Return, Statement, or List

26 CFR 1.6011–1: General requirement of return, statement, or list.

T.D. 9100

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 301 and 602

Guidance Necessary to Facilitate Business Electronic Filing

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains regulations designed to eliminate regulatory impediments to the electronic filing of certain income tax returns and other forms. These regulations affect business taxpayers who file income tax returns electronically. The text of the temporary regulations also serves as the text of the proposed regulations (REG–116664–01) set forth in this issue of the Bulletin.

DATES: Effective Date : These regulations are effective on December 19, 2003.

Applicability Date : These regulations apply with respect to taxable years beginning after December 31, 2002. The applicability of §§1.170A–11T, 1.556–2T, 1.565–1T, 1.936–7T, 1.1017–1T, 1.1368–1T, 1.1377–1T, 1.1502–21T, 1.1502–75T, 1.1503–2T, 1.6038B–1T, and 301.7701–3T will expire on or before December 18, 2006.

FOR FURTHER INFORMATION CONTACT: Nathan Rosen, (202) 622–4910 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545–1868. Responses to this collection of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in this issue of the Bulletin.

Books and 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

This document contains amendments to the Income Tax Regulations (26 CFR part

and the Procedure and Administration Regulations (26 CFR part 301) designed to eliminate regulatory impediments to the electronic submission of tax returns and other forms filed by corporations, partnerships and other businesses.

In 1998, Congress enacted the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Public Law 105–206 (112 Stat. 685) (1998). In relevant part, RRA 1998 states that the policy of Congress is to promote the paperless filing of Federal tax returns. Section 2001(a) of RRA 1998 sets a long-range goal for the IRS to have at least 80 percent of all Federal tax returns filed electronically by 2007. Section 2001(b) of

RRA 1998 requires the IRS to establish a 10-year strategic plan to eliminate barriers to electronic filing. On January 30, 2003, the IRS published final regulations (T.D. 9040, 2003–10 I.R.B. 568) eliminating a number of regulatory impediments to the electronic filing of Form 1040, “ U.S. Indi- vidual Income Tax Return .”

The IRS has identified a number of regulatory provisions that impede the ability of business entities to file returns electronically. Some of these regulations, for example, impede electronic filing by requiring taxpayers to include third-party signatures on their tax returns or by requiring taxpayers to attach documents or statements generated by a third party. Others require a taxpayer to sign an IRS form and file it as an attachment to the taxpayer’s income tax return. These regulations eliminate the impediments for taxable years beginning after December 31, 2002. The regulations generally affect taxpayers who must file any of the following forms: Form 926, “ Return by a U.S. Transferor of Property to a Foreign Corporation ”; Form 972, “ Consent of Shareholder To Include Spe- cific Amount in Gross Income ”; Form 973, “ Corporation Claim for Deduction for Consent Dividends ”; Form 982, “ Reduc- tion of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Ad- justment) ”; Form 1120, “ U.S. Corporation Income Tax Return ”; Form 1120S, “ U.S. Income Tax Return for an S Corporation ”; Form 1122, “ Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return ”; Form 5471, “ Information Return of U.S. Persons With Respect To Certain Foreign Corpo- rations ”; Form 5712–A, “ Election and Verification of the Cost Sharing or Profit Split Method Under Section 936(h)(5) ”; and Form 8832, “ Entity Classification Election .”

Explanation of Provisions

Form 926: Return by a U.S. Transferor of Property to a Foreign Corporation

Section 6038B provides that transferors of property to foreign corporations must, in certain circumstances, file information returns with the Secretary regarding such transactions. Section 1.6038B–1(b)(1)(i) requires the transferor to file the return on Form 926 as an attachment to its income

2004-3 I.R.B. 297 January 20, 2004

tions to file annual certifications with respect to dual consolidated losses. The annual certification must be signed under penalties of perjury by the person who signs the corporation’s income tax return. The signature requirements in §1.1503–2(g)(2)(i), (g)(2)(iv)(B)( 3 )( iii ), and (g)(2)(vi)(B) impede electronic filing of the corporation’s income tax return because neither the agreement nor the annual certification can be signed electronically. These regulations eliminate the obligations under §1.1503–2(g)(2)(i) and (iv)(B)( 3 )( iii ) to attach a signed agreement and provide, instead, that an unsigned copy of the agreement may be submitted with the corporation’s income tax return if the corporation retains the signed original in its records. These regulations also eliminate the obligation under §1.1503–2(g)(2) (vi)(B) to sign the annual certification and provide, instead, that the annual certification is verified by signing the income tax return with which the certification is filed.

Section 170 addresses the tax deductibility of charitable contributions and gifts. Section 1.170A–11(b)(1) provides that, under certain conditions, corporations may treat a charitable contribution as paid during a taxable year even if the contribution occurs in the following taxable year. A corporation claiming a charitable deduction for a taxable year under this provision must attach a copy of the resolution of the board of directors authorizing the contribution to its return for the year. In addition, the corporation must attach a declaration, signed under penalties of perjury, that the resolution was adopted during the taxable year. See §1.170A–11(b)(2). Requiring taxpayers to attach a signed declaration impedes electronic filing of Form 1120 because the declaration cannot be signed electronically. The regulations eliminate the requirement of a signed declaration and provide, instead, that the declaration is verified by signing the return. The regulations also slightly expand the content of the declaration by requiring that it state the date on which the board of directors authorized the contribution. Requiring taxpayers to attach a copy of the resolution authorizing the contribution may also impede electronic filing of Form 1120 because including the resolution increases the size of the electronic return file in a potentially burdensome manner. The regulations eliminate this requirement and

tax return. Under §1.6038B–1(b)(1)(i) and (ii), filers of Form 926 must sign the form and attachments to the form are subject to the declaration under penalties of perjury that the information submitted is true, correct, and complete. The signature requirement impedes electronic filing of the transferor’s income tax return because Form 926 cannot yet be signed electronically. These regulations eliminate the obligation to sign Form 926 and provide, instead, that Form 926 and any attachments to the form are verified by signing the income tax return with which the form and attachments are filed.

Form 972: Consent of Shareholder To Include Specific Amount in Gross Income

Section 565 allows a corporation and its shareholders to treat certain hypothetical corporate distributions as actual dividends. Section 1.565–1(b)(1) requires shareholders to use Form 972 to elect such treatment and requires each consenting shareholder (or an authorized agent) to sign the form. Section 1.565–1(b)(3) requires the corporation to attach the signed Form 972 to its income tax return for the taxable year in which it claims the dividends paid deduction for the hypothetical dividends. Requiring corporations to attach a signed Form 972 impedes electronic filing of their income tax returns because third-party signatures cannot be incorporated into an electronic return. These regulations provide that an unsigned copy of Form 972 may be submitted with the corporation’s income tax return if the corporation retains the signed original in its records.

Form 973: Corporation Claim for Deduction for Consent Dividends

A corporation uses Form 973 to claim the dividend treatment permitted by section 565. Section 1.565–1(b)(3) requires the corporation to sign Form 973 under penalties of perjury and submit the form with its tax return. This signature requirement impedes electronic filing of a corporation’s income tax return because Form 973 cannot yet be signed electronically. These regulations eliminate the obligation to sign Form 973 and provide, instead, that Form 973 is verified by signing the income tax return with which the form is filed.

Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

Section 1017 provides for basis reductions when income from discharge of indebtedness is excluded from gross income. If a partnership has income from discharge of indebtedness, §1.1017(g) permits its partners to request that the partnership reduce the basis of partnership depreciable property with respect to the partners. Section 1.1017–1(g)(2)(iii)(A) requires a partnership that consents to this basis reduction to prepare a statement describing, among other things, the amount of the reduction. Section 1.1017–1(g)(2)(iii)(B) requires the affected partners to attach a copy of that statement to their income tax returns.

Requiring partners to attach the partnership consent statement impedes the electronic filing of their income tax returns because the partnership statement cannot yet be incorporated into all electronic returns. To remedy this impediment, these regulations eliminate the obligation to attach the partnership consent statement and provide, instead, that taxpayers must retain the consent statement in their records.

Form 1120: U.S. Corporation Income Tax Return

Section 1503 prescribes certain rules for computing tax for corporations filing consolidated returns. Section 1.1503–2(g) permits dual consolidated losses of dual resident corporations to offset the income of domestic affiliates under specified circumstances, including entry into an agreement described in §1.1503–2(g)(2)(i). The corporation entering into the agreement must attach the agreement to its timely filed U.S. income tax return for the taxable year in which the loss is incurred. The agreement must be signed under penalties of perjury by the person who signs the income tax return. Section 1.1503–2(g)(2)(iv)(B)( 3 )( iii ) also requires a successor corporation to file an agreement described in §1.1503–2(g)(2)(i) to prevent recapture of the dual consolidated loss in certain circumstances. The new agreement must be signed under penalties of perjury by the person who signs the income tax return. Section 1.1503–2(g)(2)(vi)(B) requires corpora

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sonal holding company must attach a number of items to their income tax returns relating to property the company owns or operates. In particular, §1.556–2(e)(2)(vii) requires certain shareholders to attach a copy of the contract, lease or rental agreement covering the property. A shareholder attaches these items to Form 5471, and in turn attaches that form to its return. Requiring shareholders to attach a copy of these documents to an income tax return impedes electronic filing because the documents cannot yet be incorporated into all electronic returns. These regulations eliminate this requirement and provide, instead, that a copy of the contract, lease or rental agreement must be retained in the shareholder’s records.

Form 5712–A: Election and Verification of the Cost Sharing or Profit Split Method Under Section 936(h)(5)

Section 1.936–7(a), Q&A 1 provides that a possessions corporation makes the election under section 936(h)(5) to use the cost sharing or profit split method by filing a signed Form 5712-A that includes a declaration that all affiliated group members have consented to the election. The electing corporation attaches the Form 5712-A to Form 5735, “ Possessions Corporation Tax Credit,” which in turn must be attached to the corporation’s income tax return. Requiring taxpayers to sign Form 5712–A impedes electronic filing of corporate income tax returns because Form 5712–A cannot yet be signed electronically. These regulations eliminate the signature requirement and permit the election to be made using an unsigned Form 5712–A that is verified by signing the return.

Form 8832: Entity Classification Election

An eligible business entity may file Form 8832 to specify the way in which it is to be classified for federal tax purposes. The form must be signed under penalties of perjury. Section 301.7701–3(c)(1)(ii) provides that in certain circumstances the entity must attach a copy of Form 8832 to its tax or information returns. The requirement to attach a copy of Form 8832 impedes electronic filing of tax and information returns because a copy of the signed form cannot yet be incorporated into all electronic returns. These regula

provide, instead, that the resolution must be retained in the taxpayer’s records.

Section 1.1502–21(b)(3)(i) provides that a consolidated group of corporations may elect to relinquish carryback treatment with respect to a consolidated net operating loss for any consolidated return year. The consolidated group elects this treatment by attaching a statement to the group’s income tax return for the relevant year. The regulations require the statement to be signed by the common parent. This signature requirement impedes electronic filing of Form 1120 because the statement cannot be signed electronically. These regulations eliminate the signature requirement and permit the election to be made in an unsigned statement.

Section 1.1502–21(b)(3)(ii)(B) provides that a group of corporations acquiring a new member may elect to relinquish part of the carryback period with respect to certain net operating losses of the new member. The election is made in a statement attached to the group’s income tax return. The statement must be signed by the common parent, the new member, and any other corporation joining the group with the new member. This signature requirement impedes electronic filing of Form 1120 because third-party signatures cannot be incorporated into an electronic return. These regulations eliminate the signature requirement and permit the election to be made in an unsigned statement.

Form 1120S: U.S. Income Tax Return for an S Corporation

Section 1377 provides that under certain circumstances an S Corporation may elect to treat a taxable year as if it consisted of two separate taxable years. Section 1.1377–1(b)(5) provides that an S Corporation elects this treatment by attaching a signed statement to its income tax return. This signature requirement impedes electronic filing of Form 1120S because the statement described in §1.1377–1(b)(5) cannot be signed electronically. These regulations eliminate the signature requirement and permit the election to be made in an unsigned statement that is verified by signing the return.

Section 1.1368–1(g)(2)(i) provides a similar election for purposes of determining the treatment of distributions by an S Corporation in the event of certain owner

ship changes. Section 1.1368–1(g)(2)(iii) provides that an S Corporation makes this election by attaching a statement, signed by an officer of the corporation, to its income tax return for the relevant taxable year. This signature requirement impedes electronic filing of Form 1120S because the statement described in §1.1368–1(g)(2)(iii) cannot be signed electronically. These regulations eliminate the signature requirement and permit the election to be made in an unsigned statement that is verified by signing the return.

Section 1.1368–1(f) allows an S corporation to make certain elections relating to the source of its distributions. Section 1.1368–1(f)(5)(iii) provides that an S corporation makes these elections by attaching a statement containing specified information to its income tax return. An officer of the corporation must sign the statement under penalties of perjury. This signature requirement impedes electronic filing of Form 1120S because the statement described in §1.1368–1(f)(5)(iii) cannot be signed electronically. These regulations eliminate the signature requirement and permit the election to be made in an unsigned statement that is verified by signing the return.

Form 1122: Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return

Section 1.1502–75(h)(2) provides that, when an affiliated group of corporations files a consolidated return for the first time, each subsidiary must consent to the filing by signing Form 1122 and the signed consent forms must be attached to the consolidated return. Requiring the group to file signed consent forms impedes electronic filing of consolidated returns because Form 1122 cannot yet be signed electronically. These regulations retain the requirement that each subsidiary consent to filing a consolidated return but eliminate the impediment to electronic filing by permitting the group to submit unsigned copies of the consents with its return if it retains the signed originals in its records.

Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations .

Section 1.556–2(e)(2) provides that certain U.S. shareholders of a foreign per

2004-3 I.R.B. 299 January 20, 2004

§1.556–2T Adjustments to taxable income (temporary).

(a) through (e)(2)(vi) [Reserved]. For further guidance, see §1.556–2(a) through (e)(2)(vi).

(e)(2)(vii) In the case of a return for a taxable year beginning before January 1, 2003, a copy of the contract, lease, or rental agreement;

(e)(2)(viii) through (xi) [Reserved]. For further guidance, see §1.556–2(e)(2)(viii) through (xi).

(3) If the statement described in §1.556–2(e)(2) is attached to a taxpayer’s income tax return for a taxable year beginning after December 31, 2002, a copy of the applicable contract, lease or rental agreement is not required to be submitted with the return, but must be retained by the taxpayer and kept available for inspection in the manner required by §1.6001–1(e).

(f) [Reserved]. For further guidance, see §1.556–2(f).

Par. 6. Section 1.565–1 is amended by revising paragraph (b)(3) to read as follows:

§1.565–1 General rule.

- - - (b) - * (3) [Reserved]. For further guidance, see §1.565–1T(b)(3).
- - - Par. 7. Section 1.565–1T is added to read as follows:

§1.565–1T General rule (temporary).

(a) through (b)(2) [Reserved]. For further guidance, see §1.565–1(a) through (b)(2).

(b)(3) A consent may be filed at any time not later than the due date of the corporation’s income tax return for the taxable year for which the dividends paid deduction is claimed. With such return, and not later than the due date thereof, the corporation must file Forms 972 for each consenting shareholder, and a return on Form 973 showing by classes the stock outstanding on the first and last days of the taxable year, the dividend rights of such stock, distributions made during the taxable year to shareholders, and giving all the other information required by the form. For taxable years beginning before January 1, 2003, the Form 973 filed with the

tions provide that the requirement to attach a copy of Form 8832 to a return may be satisfied with an unsigned copy.

Special Analyses

It has been determined that this Treasury decision 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. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section of the preamble to the cross-reference notice of proposed rulemaking published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these temporary and final regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Nathan Rosen, Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 301, and 602 are amended 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 1.170A–11 is amended by revising paragraph (b)(2) to read as follows:

§1.170A–11 Limitation on, and carryover of, contributions by corporations.

- - - (b) - - (2) [Reserved]. For further guidance see §1.170A–11T(b)(2).

Par. 3. Section 1.170A–11T is added to read as follows:

§1.170A–11T Limitation on, and carryover of, contributions by corporations (temporary).

(a) [Reserved]. For further guidance, see §1.170A–11(a).

(b) Election by corporations on an accrual method—(1) [Reserved]. For further guidance, see §1.170A–11(b)(1).

(2) The election must be made at the time the return for the taxable year is filed, by reporting the contribution on the return. There shall be attached to the return when filed a written declaration stating that the resolution authorizing the contribution was adopted by the board of directors during the taxable year. For taxable years beginning before January 1, 2003, the declaration shall be verified by a statement signed by an officer authorized to sign the return that it is made under penalties of perjury, and there shall also be attached to the return when filed a copy of the resolution of the board of directors authorizing the contribution. For taxable years beginning after December 31, 2002, the declaration must also include the date of the resolution, the declaration shall be verified by signing the return, and a copy of the resolution of the board of directors authorizing the contribution is a record that the taxpayer must retain and keep available for inspection in the manner required by §1.6001–1(e).

Par. 4. Section 1.556–2 is amended by revising paragraph (e)(2)(vii) and adding paragraph (e)(3) to read as follows:

§1.556–2 Adjustments to taxable income.

- - - (e) - - (2) - - (vii) [Reserved]. For further guidance, see §1.556–2T(e)(2)(vii) and (3).
- - - (3) [Reserved]. For further guidance, see §1.556–2T(e)(3).
- - - Par. 5. Section 1.556–2T is added to read as follows:

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split method, and failure to provide such information shall be treated as a request to revoke the election out under section 936(h)(5)(F)(iii). Q. & A. 2 through 8 [Reserved]. For further guidance, see §1.936–7(b), Q. & A. 2 through 8. (c) and (d) [Reserved]. For further guidance, see §1.936–7(c) and (d).

Par. 10. Section 1.1017–1 is amended by revising paragraph (g)(2)(iii)(B) to read as follows:

§1.1017–1 Basis reductions following a discharge of indebtedness.

- - - (g) - * (2) - * (iii) * * (B) [Reserved]. For further guidance, see §1.1017–1T(g)(2)(iii)(B).
- - - Par. 11. Section 1.1017–1T is amended by revising paragraphs (c) through (i) to read as follows:

§1.1017–1T Basis reductions following a discharge of indebtedness (temporary).

- - - (c) through (g)(2)(iii)(A) [Reserved]. For further guidance, see §1.1017–1(c) through (g)(2)(iii)(A).

(g)(2)(iii)(B) Taxpayer’s requirement . For taxable years beginning before January 1, 2003, statements described in §1.1017–1(g)(2)(iii)(A) must be attached to a taxpayer’s timely filed (including extensions) Federal income tax return for the taxable year in which the taxpayer has COD income that is excluded from gross income under section 108(a). For taxable years beginning after December 31, 2002, taxpayers must retain the statements and keep them available for inspection in the manner required by §1.6001–1(e), but are not required to attach the statements to their returns.

(g)(2)(iv) through (i) [Reserved]. For further guidance, see §1.1017–1(g)(2)(iv) through (i).

Par. 12. Section 1.1368–1 is amended by revising paragraphs (f)(5)(iii) and (g)(2)(iii) to read as follows:

corporation’s income tax return shall contain or be verified by a written declaration that is made under the penalties of perjury and the Forms 972 filed with the return must be duly executed by the consenting shareholders. For taxable years beginning after December 31, 2002, the Form 973 filed with the corporation’s income tax return shall be verified by signing the return and the Forms 972 filed with the return must be duly executed by the consenting shareholders or, if unsigned, must contain the same information as the duly executed originals. If the corporation submits unsigned Forms 972 with its return for a taxable year beginning after December 31, 2002, the duly executed originals are records that the corporation must retain and keep available for inspection in the manner required by §1.6001–1(e).

Par. 8. Section 1.936–7 is amended by:

Designating the undesignated introductory text as paragraph (a).
Redesignating paragraphs (a) through (c) as paragraphs (b) through (d), respectively.
Revising newly designated paragraph (b), Q. & A. 1.

The revision reads as follows:

§1.936–7 Manner of making election under section 936(h)(5); special election for export sales; revocation of election under section 936(a).

- - - (b) - - Q. 1. [Reserved]. For further guidance, see §1.936–7T(b) Q. 1.

A. 1. [Reserved]. For further guidance, see §1.936–7T(b) A. 1.

- - - Par. 9. Section 1.936–7T is added to read as follows:

§1.936–7T Manner of making election under section 936(h)(5); special election for export sales; revocation of election under section 936(a) (temporary).

(a) [Reserved]. For further guidance, see §1.936–7 (a).

(b) Manner of making election . Q. 1: How does a possessions corporation make an election to use the cost sharing method or profit split method?

A. 1: A possessions corporation makes an election to use the cost sharing or profit split method by filing Form 5712–A (“ Election and Verification of the Cost Sharing or Profit Split Method Under Sec- tion 936(h)(5) ”) and attaching it to its tax return. Form 5712–A must be filed on or before the due date (including extensions) of the tax return of the possessions corporation for its first taxable year beginning after December 31, 1982. The electing corporation must set forth on the form the name and the taxpayer identification number or address of all members of the affiliated group (including foreign affiliates not required to file a U.S. tax return). All members of the affiliated group must consent to the election. For elections filed with respect to taxable years beginning before January 1, 2003, an authorized officer of the electing corporation must sign the statement of election and must declare that he has received a signed statement of consent from an authorized officer, director, or other appropriate official of each member of the affiliated group. Elections filed for taxable years beginning after December 31, 2002, will incorporate a declaration by the electing corporation that it has received a signed consent from an authorized officer, director, or other appropriate official of each member of the affiliated group and will be verified by signing the return. The election is not valid for a taxable year unless all affiliates consent. A failure to obtain an affiliate’s written consent will not invalidate the election out if the possessions corporation made a good faith effort to obtain all the necessary consents or the failure to obtain the missing consent was inadvertent. Subsequently created or acquired affiliates are bound by the election. If an election out is revoked under section 936(h)(5)(F)(iii), a new election out with respect to that product area cannot be made without the consent of the Commissioner. The possessions corporation shall file an amended Form 5712–A with its timely filed income tax return to reflect any changes in the names or number of the members of the affiliated group for any taxable year after the first taxable year to which the election out applies. By consenting to the election out, all affiliates agree to provide information necessary to compute the cost sharing payment under the cost sharing method or combined taxable income under the profit

2004-3 I.R.B. 301 January 20, 2004

statement described in §1.1377–1(b)(5)(i) shall be verified, and the requirement of this paragraph (b)(5)(i)(C) is satisfied, by the signature on the Form 1120S filed by the S corporation.

(b)(5)(i)(D) through (c) [Reserved]. For further guidance, see §1.1377–1 (b)(5)(i)(D) through (c).

Par. 16. Section 1.1502–21 is amended by revising paragraphs (b)(3)(i) and (b)(3)(ii)(B) to read as follows:

§1.1502–21 Net operating losses.

- - - (b) - * (3) - - - (i) [Reserved]. For further guidance, see §1.1502–21T(b)(3)(i).

(ii)(A) * * * (b)(3)(ii)(B) [Reserved]. For further guidance, see §1.1502–21T(b)(3)(ii)(B).

- - - Par. 17. Section 1.1502–21T is amended by revising paragraphs (b)(3) through (b)(3)(ii)(B) to read as follows:

§1.1502–21T Net operating losses (temporary) .

- - - (b)(3) Special rules —(i) Election to relinquish carryback . A group may make an irrevocable election under section 172(b)(3) to relinquish the entire carryback period with respect to a CNOL for any consolidated return year. Except as provided in paragraph (b)(3)(ii)(B) of this section, the election may not be made separately for any member (whether or not it remains a member), and must be made in a separate statement entitled “THIS IS AN ELECTION UNDER §1.1502–21(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION 172(b)(3) FOR THE [insert consolidated return year] CNOLs OF THE CONSOLIDATED GROUP OF WHICH [insert name and employer identification number of common parent] IS THE COMMON PARENT”. The statement must be filed with the group’s income tax return for the consolidated return year in which the loss arises. If the consolidated return year in which the loss arises begins before January 1, 2003, the statement making the election must be signed by the common parent. If the consolidated return year in

§1.1368–1 Distributions by S corporations.

- - - (f) - - (5) - * (iii) [Reserved]. For further guidance, see §1.1368–1T(f)(5)(iii).
- - - (g) - * (2) - * (iii) [Reserved]. For further guidance, see §1.1368–1T(g)(2)(iii).
- - - Par. 13 Section 1.1368–1T is added to read as follows:

§1.1368–1T Distributions by S corporations (temporary).

(a) through (f)(5)(ii) [Reserved]. For further guidance, see §1.1368–1(a) through (f)(5)(ii).

(f)(5)(iii) Corporate statement regard- ing elections . A corporation makes an election for a taxable year under §1.1368–1(f) by attaching a statement to a timely filed original or amended return required to be filed under section 6037 for that taxable year. In the statement, the corporation must identify the election it is making under §1.1368–1(f) and must state that each shareholder consents to the election. In the case of elections for taxable years beginning before January 1, 2003, an officer of the corporation must sign under penalties of perjury the statement on behalf of the corporation. In the case of elections for taxable years beginning after December 31, 2002, the statement described in this paragraph (f)(5)(iii) shall be verified by signing the return. A statement of election to make a deemed dividend under §1.1368–1(f) must include the amount of the deemed dividend that is distributed to each shareholder.

(f)(5)(iv) through (g)(2)(ii) [Reserved]. For further guidance, see §1.1368–1(f)(5)(iv) through (g)(2)(ii).

(g)(2)(iii) Time and manner of making election . A corporation makes an election under §1.1368–1(g)(2)(i) for a taxable year by attaching a statement to a timely filed original or amended return required to be filed under section 6037 for a taxable year (without regard to the election under §1.1368–1(g)(2)(i)). In the statement, the corporation must state that it is electing for

the taxable year under §1.1368–1(g)(2)(i) to treat the taxable year as if it consisted of separate taxable years. The corporation also must set forth facts in the statement relating to the qualifying disposition ( e.g., sale, gift, stock issuance, or redemption), and state that each shareholder who held stock in the corporation during the taxable year (without regard to the election under §1.1368–1(g)(2)(i)) consents to this election. For purposes of this election, a shareholder of the corporation for the taxable year is a shareholder as described in section 1362(a)(2). A single election statement may be filed for all elections made under §1.1368–1(g)(2)(i) for the taxable year. An election made under §1.1368–1(g)(2)(i) of this section is irrevocable. In the case of elections for taxable years beginning before January 1, 2003, the statement through which a corporation makes an election under §1.1368–1(g)(2)(i) must be signed by an officer of the corporation under penalties of perjury. In the case of elections for taxable years beginning after December 31, 2002, the statement described in the preceding sentence shall be verified by signing the return.

(g)(2)(iv) [Reserved]. For further guidance, see §1.1368–1(g)(2)(iv).

Par. 14. Section 1.1377–1 is amended by revising paragraph (b)(5)(i)(C) to read as follows:

§1.1377–1 Pro rata share.

- - - (b) - - (5) - - (i) - - (C) [Reserved]. For further guidance, see §1.1377–1T(b)(5)(i)(C).
- - - Par. 15. Section 1.1377–1T is added to read as follows:

§1.1377–1T Pro rata share (temporary).

(a) through (b)(5)(i)(B) [Reserved]. For further guidance, see §1.1377–1(a) through (b)(5)(i)(B).

(b)(5)(i)(C) The signature on behalf of the S corporation of an authorized officer of the corporation under penalties of perjury, except that for taxable years beginning after December 31, 2002, the election

January 20, 2004 302 2004-3 I.R.B.

(vi) - - (B) [Reserved]. For further guidance, see §1.1503–2T(g)(2)(vi)(B).

- - - Par. 21. Section 1.1503–2T is added to read as follows:

§1.1503–2T Dual consolidated loss (temporary).

(a) through (g)(1) [Reserved]. For further guidance, see §1.1503–2(a) through (g)(1).

(2) Elective relief provision —(i) In general . Paragraph (b) of this section shall not apply to a dual consolidated loss if the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner elects to be bound by the provisions of §1.1503–2(g)(2) and this paragraph (g)(2). In order to elect relief under §1.1503–2(g)(2) and this paragraph (g)(2), the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must attach to its timely filed U.S. income tax return for the taxable year in which the dual consolidated loss is incurred an agreement described in paragraph (g)(2)(i)(A) of this section. The agreement must be signed under penalties of perjury by the person who signs the return. For taxable years beginning after December 31, 2002, the agreement attached to the income tax return of the consolidated group, unaffiliated dual resident corporation or unaffiliated domestic owner pursuant to the preceding sentence may be an unsigned copy. If an unsigned copy is attached to the return, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must retain the original in its records in the manner specified by §1.6001–1(e). The agreement must include the following items, in paragraphs labeled to correspond with the items set forth in paragraphs (g)(2)(i)(A) through (F) of this section:.

(A) A statement that the document submitted is an election and an agreement under the provisions of §1.1503–2(g)(2) of the Income Tax Regulations.

(B) The name, address, identifying number, and place and date of incorporation of the dual resident corporation, and the country or countries that tax the dual resident corporation on its worldwide income or on a residence basis, or, in the

which the loss arises begins after December 31, 2002, the election may be made in an unsigned statement.

(b)(3)(ii) through (b)(3)(ii)(A)

[Reserved]. For further guidance, see §1.1502–21(b)(3)(ii) through (b)(3)(ii)(A).

(B) Acquisition of member from an- other consolidated group . If one or more members of a consolidated group becomes a member of another consolidated group, the acquiring group may make an irrevocable election to relinquish, with respect to all consolidated net operating losses attributable to the member, the portion of the carryback period for which the corporation was a member of another group, provided that any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group is also included in the waiver. This election is not a yearly election and applies to all losses that would otherwise be subject to a carryback to a former group under section 172. The election must be made in a separate statement entitled “THIS IS AN ELECTION UNDER §1.1502–21(b)(3)(ii)(B)( 2 ) TO WAIVE THE PRE-[insert first taxable year for which the member (or members) was not a member of another group] CARRYBACK PERIOD FOR THE CNOLs attributable to [insert names and employer identification number of members].” The statement must be filed with the acquiring consolidated group’s original income tax return for the year the corporation (or corporations) became a member. If the year in which the corporation (or corporations) became a member begins before January 1, 2003, the statement must be signed by the common parent and each of the members to which it applies. If the year in which the corporation (or corporations) became a member begins after December 31, 2002, the election may be made in an unsigned statement.

- - - Par. 18. Section 1.1502–75 is amended by revising paragraph (h)(2) to read as follows:

§1.1502–75 Filing of consolidated returns.

- - - (h) - -

(2) [Reserved]. For further guidance, see §1.1502–75T(h)(2).

- - - Par. 19. Section 1.1502–75T is added to read as follows:

§1.1502–75T Filing of consolidated returns (temporary).

(a) through (h)(1) [Reserved]. For further guidance, see §1.1502–75(a) through (h)(1).

(2) Filing of Form 1122 for first year . If, under the provisions of §1.1502–75 (a)(1), a group wishes to file a consolidated return for a taxable year, then a Form 1122 (“ Authorization and Consent of Subsidiary Corporation To Be Included in a Consoli- dated Income Tax Return ”) must be executed by each subsidiary. For taxable years beginning before January 1, 2003, the executed Forms 1122 must be attached to the consolidated return for the taxable year. For taxable years beginning after December 31, 2002, the group must attach either executed Forms 1122 or unsigned copies of the completed Forms 1122 to the consolidated return. If the group submits unsigned Forms 1122 with its return, it must retain the signed originals in its records in the manner required by §1.6001–1(e). Form 1122 is not required for a taxable year if a consolidated return was filed (or was required to be filed) by the group for the immediately preceding taxable year.

(h)(3) through (k) [Reserved]. For further guidance, see §1.1502–75(h)(3) through (k).

Par. 20. Section 1.1503–2 is amended by revising paragraphs (g)(2)(i), (g)(2)(iv)(B)( 3 )( iii ) and (g)(2)(vi)(B) to read as follows:

§1.1503–2 Dual consolidated loss.

- - - (g) - - (2) - - (i) [Reserved]. For further guidance, see §1.1503–2T(g)(2)(i).
- - - (iv) - - (B) - - ( 3 ) - - ( iii ) [Reserved]. For further guidance, see §1.1503–2T(g)(2)(iv)(B)( 3 )( iii )

2004-3 I.R.B. 303 January 20, 2004

§1.6038B–1 Reporting of certain transfers to foreign corporations.

- - - (b)(1)(i) and (ii) [Reserved]. For further guidance, see §1.6038B–1T(b)(1)(i) and (ii).
- - - Par. 23. Section 1.6038B–1T is amended by revising paragraphs (a) through (b)(3) to read as follows:

§1.6038B–1T Reporting of certain transactions to foreign corporations (temporary).

(a) [Reserved]. For further guidance, see §1.6038B–1(a).

(b) Time and manner of reporting —(1) In general —(i) Reporting procedure . Except for stock or securities qualifying under the special reporting rule of §1.6038B–1(b)(2), and certain exchanges described in section 354 (listed below), any U.S. person that makes a transfer described in section 6038B(a)(1)(A), 367(d) or (e), is required to report pursuant to section 6038B and the rules of §1.6038B–1 and this section and must attach the required information to Form 926, “ Return by a U.S. Transferor of Property to a Foreign Corporation .” For special rules regarding cash transfers made in tax years beginning after February 5, 1999, see §1.6038B–1(b)(3) and (g) . For purposes of determining a U.S. transferor that is subject to section 6038B, the rules of §1.367(a)–1T(c) and §1.367(a)–3(d) shall apply with respect to a transfer described in section 367(a), and the rules of §1.367(a)–1T(c) shall apply with respect to a transfer described in section 367(d). Additionally, if in an exchange described in section 354, a U.S. person exchanges stock of a foreign corporation in a reorganization described in section 368(a)(1)(E), or a U.S. person exchanges stock of a domestic or foreign corporation for stock of a foreign corporation pursuant to an asset reorganization described in section 368(a)(1)(C), (D), or (F), that is not treated as an indirect stock transfer under section 367(a), then the U.S. person exchanging stock is not required to report under section 6038B. Notwithstanding any statement to the contrary on Form 926, the form and attachments must be attached to, and filed by the due date

case of a separate unit, identification of the separate unit, including the name under which it conducts business, its principal activity, and the country in which its principal place of business is located.

(C) An agreement by the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner to comply with all of the provisions of paragraphs (g)(2)(iii) through (vii) of §1.1503–2 and this section.

(D) A statement of the amount of the dual consolidated loss covered by the agreement.

(E) A certification that no portion of the dual resident corporation’s or separate unit’s losses, expenses, or deductions taken into account in computing the dual consolidated loss has been, or will be, used to offset the income of any other person under the income tax laws of a foreign country.

(F) A certification that arrangements have been made to ensure that no portion of the dual consolidated loss will be used to offset the income of another person under the laws of a foreign country and that the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner will be informed of any such foreign use of any portion of the dual consolidated loss.

(g)(2)(ii) through (iv)(B)( 3 )( ii ) [Reserved] For further guidance, see §1.1503–2(g)(2)(ii) through (iv)(B)( 3 )( ii ).

(g)(2)(iv)(B)( 3 )( iii ) The unaffiliated domestic corporation or new consolidated group must file, with its timely filed income tax return for the taxable year in which the event described in §1.1503–2(g)(2)(iv)(B)( 1 ) or ( 2 ) occurs, an agreement described in paragraph (g)(2)(i) of this section (new (g)(2)(i) agreement), whereby it assumes the same obligations with respect to the dual consolidated loss as the corporation or consolidated group that filed the original (g)(2)(i) agreement with respect to that loss. The new (g)(2)(i) agreement must be signed under penalties of perjury by the person who signs the return and must include a reference to §1.1503–2(g)(2)(iv)(B)( 3 )( iii ) or this paragraph (g)(2)(iv)(B)( 3 )( iii ). For taxable years beginning after December 31, 2002, the agreement attached to the return pursuant to the preceding sentence may be an unsigned copy. If an unsigned

copy is attached to the return, the corporation or consolidated group must retain the original in its records in the manner specified by §1.6001–1(e).

(g)(2)(iv)(C) through (vi)(A) [Reserved]. For further guidance, see §1.1503–2(g)(2)(iv)(C) through (vi)(A).

(B) Annual certification . Except as provided in §1.1503–2(g)(2)(vi)(C), until and unless Form 1120 or the Schedules thereto contain questions pertaining to dual consolidated losses, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must file with its income tax return for each of the 15 taxable years following the taxable year in which the dual consolidated loss is incurred a certification that the losses, expenses, or deductions that make up the dual consolidated loss have not been used to offset the income of another person under the tax laws of a foreign country. For taxable years beginning before January 1, 2003, the annual certification must be signed under penalties of perjury by a person authorized to sign the agreement described in paragraph (g)(2)(i) of this section. For taxable years beginning after December 31, 2002, the certification is verified by signing the return with which the certification is filed. The certification for a taxable year must identify the dual consolidated loss to which it pertains by setting forth the taxpayer’s year in which the loss was incurred and the amount of such loss. In addition, the certification must warrant that arrangements have been made to ensure that the loss will not be used to offset the income of another person under the laws of a foreign country and that the taxpayer will be informed of any such foreign use of any portion of the loss. If dual consolidated losses of more than one taxable year are subject to the rules of this paragraph (g)(2)(vi)(B), the certifications for those years may be combined in a single document but each dual consolidated loss must be separately identified.

(g)(2)(vii) through (h) [Reserved]. For further guidance, see §1.1503–2(g)(2)(vii) through (h).

Par. 22. Section 1.6038B–1 is amended by revising paragraphs (b)(1)(i) and (b)(1)(ii) to read as follows:

January 20, 2004 304 2004-3 I.R.B.

return. If an entity, or one of its direct or indirect owners, fails to attach a copy of a Form 8832 to its return as directed in this section, an otherwise valid election under §301.7701–3(c)(1)(i) will not be invalidated, but the non-filing party may be subject to penalties, including any applicable penalties if the federal tax or information returns are inconsistent with the entity’s election under §301.7701–3(c)(1)(i). In the case of returns for taxable years beginning after December 31, 2002, the copy of Form 8832 attached to a return pursuant to this paragraph (c)(1)(ii) is not required to be a signed copy.

(c)(1)(iii) through (h) [Reserved]. For further guidance, see §301.7701–3(c)(1)(iii) through (h).

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 27. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805 Par. 28. In §602.101, paragraph (b) is amended by adding the following entry in numerical order to the table to read as follows:

§602.101 OMB Control numbers

- - - (b) - *

Current OMB control No.

(including extensions) of the transferor’s income tax return for the taxable year that includes the date of the transfer (as defined in §1.6038B–1T(b)(4)). For taxable years beginning before January 1, 2003, any attachment to Form 926 required under the rules of this section is filed subject to the transferor’s declaration under penalties of perjury on Form 926 that the information submitted is true, correct and complete to the best of the transferor’s knowledge and belief. For taxable years beginning after December 31, 2002, Form 926 and any attachments shall be verified by signing the income tax return with which the form and attachments are filed.

(ii) Reporting by corporate transferor . For transfers by corporations in taxable years beginning before January 1, 2003, Form 926 must be signed by an authorized officer of the corporation if the transferor is not a member of an affiliated group under section 1504(a)(1) that files a consolidated Federal income tax return and by an authorized officer of the common parent corporation if the transferor is a member of such an affiliated group. For transfers by corporations in taxable years beginning after December 31, 2002, Form 926 shall be verified by signing the income tax return to which the form is attached.

(b)(2) through (b)(3) [Reserved]. For further guidance, see §1.6038B–1(b)(2) through (b)(3).

PART 301 - PROCEDURE AND ADMINISTRATION

Par. 24. The authority citation for part 301 continues to read in part as follows:

CFR part or section where identified and described

Authority: 26 U.S.C. 7805 * * * Par. 25. Section 301.7701–3 is amended by revising paragraph (c)(1)(ii) to read as follows:

§301.7701–3 Classification of certain business entities.

- - - (c) * * * (1) * * * (ii) [Reserved]. For further guidance, see §301.7701–3T(c)(1)(ii).
- - - Par. 26. Section 301.7701–3T is added to read as follows:

§301.7701–3T Classification of certain business entities (temporary).

(a) through (c)(1)(i) [Reserved]. For further guidance, see §301.7701–3(a) through (c)(1)(i).

(ii) Further notification of elections . An eligible entity required to file a federal tax or information return for the taxable year for which an election is made under §301.7701–3(c)(1)(i) must attach a copy of its Form 8832 to its federal tax or information return for that year. If the entity is not required to file a return for that year, a copy of its Form 8832 (“ Entity Classification Election ”) must be attached to the federal income tax or information return of any direct or indirect owner of the entity for the taxable year of the owner that includes the date on which the election was effective. An indirect owner of the entity does not have to attach a copy of the Form 8832 to its return if an entity in which it has an interest is already filing a copy of the Form 8832 with its

1.170A–11T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1868

Section 6038B.—Notice of Certain Transfers to Foreign Persons

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Robert E. Wenzel, Deputy Commissioner for Services and Enforcement .

Approved December 2, 2003.

Gregory F. Jenner, Deputy Assistant Secretary of the Treasury (Tax Policy) .

(Filed by the Office of the Federal Register on December 18, 2003, 8:45 a.m., and published in the issue of the Federal Register for December 19, 2003, 68 F.R. 70701)

2004-3 I.R.B. 305 January 20, 2004

Section 6045.—Returns of Brokers

26 CFR 1.6045–2: Furnishing statement required with respect to certain substitute payments.

T.D. 9103

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Information Statements for Certain Substitute Payments

AGENCY: Internal Revenue Service (IRS) Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under section 6045(d) that reflect the changes to information reporting for payments in lieu of dividends effected by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). These regulations provide that brokers must file information returns and furnish information statements reporting substitute payments in lieu of dividends to individuals who receive substitute payments in lieu of dividends on or after January 1, 2003.

DATES: Effective Date : These final regulations are effective December 29, 2003.

Applicability Date : These regulations apply to information returns required to be filed, and information statements required to be furnished, after December 31, 2003.

FOR FURTHER INFORMATION CONTACT: Michael Hara of the Office of Associate Chief Counsel (Procedure and Administration), (202) 622–4910 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 302 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the JGTRRA), Public Law No. 108–27 (117 Stat. 752), reduced the tax rate for “qualified dividends” paid to an individual shareholder to the same tax rate as capital gains for taxable years beginning after December 31, 2002, and beginning before January 1, 2009. The legislative history states,

however, “Payments in lieu of dividends are not eligible for the lower rates.” See H.R. REP. NO. 108–94, 108th Cong., 1st Sess. 31 n.36 (2003).

Explanation of Provisions

Section 6045(a) of the Internal Revenue Code (Code) provides that every person doing business as a broker shall, when required by the Secretary, make a return showing the name and address of each customer, together with information as required by forms and regulations. Section 6045(d) provides that brokers who transfer a customer’s securities for use in a short sale or similar transaction, and receive payments in lieu of a dividend, taxexempt interest, or other items set forth in regulations (substitute payments), must furnish the customer with a written statement identifying the payment as being in lieu of the dividend, tax-exempt interest, or other item. This section authorizes the Secretary to prescribe regulations that require brokers to file information returns that include the information contained in the written statement.

Section 1.6045–2 of the existing Income Tax Regulations provides rules for reporting substitute payments under section 6045(d). In general, §1.6045–2(a)(3)(i) of the existing regulations excludes payments in lieu of dividends received by a broker on behalf of an individual from the broker reporting requirements of section 6045(d). Section 1.6045–2(a)(3)(ii) of the existing regulations requires reporting for certain dividend substitute payments received by a broker on behalf of an individual, such as payments in lieu of exempt interest dividends distributed by regulated investment companies.

These regulations contain amendments to the existing regulations to require reporting under section 6045(d) for payments in lieu of dividends made to individuals on or after January 1, 2003. For taxable years beginning on or after January 1, 2003, brokers must use Form 1099–MISC, “ Miscellaneous Income ”, to report substitute payments to individuals, including payments in lieu of dividends.

The IRS issued interim guidance regarding provisions of the JGTRRA that affect information reporting for payments in lieu of dividends in Notice 2003–67,

2003–40 I.R.B. 752. The notice also provided guidance on the definition of loanable shares and the allocation and selection of transferred shares (that is, shares giving rise to payments in lieu of dividends to customers). The IRS intends to issue comprehensive regulations amending §1.6045–2 in the future. The IRS anticipates that these regulations will define payments in lieu of dividends, provide rules for determining loanable shares, and provide rules for allocating and selecting transferred shares to customers. Pending issuance of further amendments to §1.6045–2 of the existing regulations, brokers may rely on Notice 2003–67 to comply with the requirements of the JGTRRA and section 6045(d).

In addition, pending issuance of further amendments to §1.6045–2, the IRS will permit brokers to continue to use the rules of §1.6045–2 of the existing regulations for allocating transferred shares to customers. A broker may continue to allocate transferred shares to shares of stock that the broker has borrowed under a security agreement with the customer. In addition, if a broker uses the lottery method of allocation and selection of loanable shares specified in §1.6045–2(f)(2)(ii), the broker may make the selection of the transferred shares within the individual pool described in §1.6045–2(f)(2)(ii)(C) using the methods of selection of transferred shares used within the nonindividual pool as prescribed in §1.6045–2(f)(2)(ii)(B).

Special Analyses

These final regulations are necessary to provide brokers and taxpayers with immediate guidance regarding provisions in the JGTRRA that affect information reporting for substitute payments in lieu of dividends. The regulations apply to information returns required to be filed, and information statements required to be furnished, after December 31, 2003. Based on these considerations, it is determined that these final regulations will provide brokers and taxpayers with the necessary guidance and authority to comply with the tax laws. Because of the need for immediate guidance, notice and public procedure are impracticable and contrary to the public interest pursuant to 5 U.S.C. 553(b)(B) and delayed effective date is not required pursuant to 5 U.S.C. 553(d)(3).

January 20, 2004 306 2004-3 I.R.B.

Mark E. Matthews, Deputy Commissioner for Services

and Enforcement.

Approved December 18, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on December 24, 2003, 8:45 a.m., and published in the issue of the Federal Register for December 29, 2003, 68 F.R. 74847)

Section 7701.—Definitions

Regulations eliminate impediments to the electronic filing of certain income tax returns and other forms. See T.D. 9100, page 297.

Because no notice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act, 5 U.S.C. 601 ( et seq. ) do not apply. Further, it has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Pursuant to section 7805(f) of the Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Michael Hara, Office of Associate Chief Counsel (Procedures and Administration), Administrative Provisions and Judicial Practice.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended 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 1.6045–2 is amended by:

Paragraph (a)(3)(i) is revised.
The heading for paragraph (a)(3)(ii) is revised.

The revisions read as follows:

§1.6045–2 Furnishing statement required with respect to certain substitute payments.

(a) - - (3) * * * (i) In general. Except as otherwise provided in paragraph (a)(3)(ii) of this section, for taxable years beginning before January 1, 2003, a broker that receives a substitute payment in lieu of a dividend on behalf of a customer who is an individual (“individual customer”) need not furnish a statement to the customer.

(ii) Reporting for certain dividends.

2004-3 I.R.B. 307 January 20, 2004