Part IV. Items — Internal Revenue Bulletin 2006-35

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations

REMIC Residual Interests — Accounting for REMIC Net Income (Including Any Excess Inclusions (Foreign Holders)

REG–159929–02

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations, (T.D. 9272) relating to the income that is associated with a residual interest in a Real Estate Mortgage Investment Conduit (REMIC) and that is allocated through certain entities to foreign persons who have invested in those entities. The regulations accelerate the time when income is recognized for withholding tax purposes to conform to the timing of income recognition for general tax purposes. The foreign persons covered by these regulations include partners in domestic partnerships, shareholders of real estate investment trusts, shareholders of regulated investment companies, participants in common trust funds, and patrons of subchapter T cooperatives. These regulations are necessary to prevent inappropriate avoidance of current income tax liability by foreign persons to whom income from REMIC residual interests is allocated. The regulations clarify the timing of income under section 860G for purposes of determining a domestic partnership’s responsibility under sections 1441 and 1442 for withholding tax with respect to a foreign partner’s share of REMIC net income as a result of indirectly holding a residual interest. The regulations also provide that an excess inclusion is treated as income from sources within the United States. The text of those temporary 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 October 30, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–159929–02), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, taxpayers may submit electronic comments directly to the IRS Internet site at www.irs.gov/regs or the Federal eRulemaking Portal at www.regulations.gov (IRS-REG–159929–02).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Dale Collinson, (202) 622–3900 (not a toll-free number); concerning the submission of comments, or a request for a public hearing, Kelly Banks (Kelly.D.Banks@irscounsel.treas.gov).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in the Rules and Regulations section of this issue of the Bulletin amend the Income Tax Regulations (26 CFR Part 1) relating to sections 860A; 860G, 863, 1441, and 1442 of the Internal Revenue Code (Code). The temporary regulations provide rules relating to the recognition and sourcing of income and related withholding issues associated with a Real Estate Mortgage Investment Conduit (REMIC) residual interest that is allocated to a foreign person, including a foreign partner in a domestic partnership. The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact

that the regulations do not impose any new or different requirements on small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (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. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing 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 regulations is Dale Collinson, Office of the Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed 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 is amended by adding an entry in numerical order to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * §1.860A–1 also issued under 26 U.S.C. 860G(b) and 860G(e). - * *

2006–35 I.R.B. 341 August 28, 2006

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on August 28, 2006, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

Aviation Safety Council, Inc.

Pasadena, CA Budget and Credit Counseling

Services, Inc. New York, NY Mason Credit Counseling, Inc.

Hauppauge, NY

Computer Software Under Section 199(c)(5)(B); Correction

Announcement 2006–56

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

SUMMARY: This document contains a correction to temporary regulations (T.D. 9262, 2006–24 I.R.B. 1040) that were published in the Federal Register on Thursday, June 1, 2006 (71 FR 31074) concerning the application of section 199 of the Internal Revenue Code, which provides a deduction for income attributable to domestic production activities, to certain transactions involving computer software.

DATES: These corrections are effective June 1, 2006.

FOR FURTHER INFORMATION CONTACT: Paul Handleman or Lauren Ross Taylor, (202) 622–3040 (not a toll-free number).

Par. 2. In §1.860A–1, paragraph (b)(5) is added to read as follows:

§1.860A–1 Effective dates and transition rules.

- - - (b) - - (5) [The text of the proposed amendment to §1.860A–1(b)(5) is the same as the text of §1.860A–1T(b)(5) published elsewhere in this issue of the Bulletin].

Par. 3. In §1.860G–3, paragraph (b) is added to read as follows:

§1.860G–3 Treatment of foreign persons.

- - - (b) [The text of the proposed amendment to §1.860G–3(b) is the same as the text of §1.860G–3T(b) published elsewhere in this issue of the Bulletin].

Par. 4. Section 1.863–1 is amended as follows:

The paragraph heading for paragraph (e) is revised.
The text of paragraph (e) is redesignated as (e)(1).
A new paragraph heading for paragraph (e)(1) is added.
A new paragraph (e)(2) is added.
The last sentence of paragraph (f) is revised and a new sentence is added to the end.

The revisions and additions read as follows:

§1.863–1 Allocation of gross income under section 863(a).

- - - (e) Residual interest in a REMIC —(1) REMIC inducement fees .* * *

(2) [The text of the proposed amendment to §1.863–1(e)(2) is the same as the text of §1.863–1T(e)(2) published elsewhere in this issue of the Bulletin].

(f) [The text of proposed amendment to §1.863–1(f) is the same as the text of §1.863–1T(f) published elsewhere in this issue of the Bulletin].

Par. 5. Section 1.1441–2 is amended by adding paragraphs (b)(5) and (d)(4) and a sentence to the end of paragraph (f) to read as follows:

§1.1441–2 Amounts subject to withholding.

(b) - - (5) [The text of the proposed amendment to §1.1441–2(b)(5) is the same as the text of §1.1441–2T(b)(5) published elsewhere in this issue of the Bulletin].

- - - (d) - - (4) [The text of the proposed amendment to §1.1441–2(d)(4) is the same as the text of §1.1441–2T(d)(4) published elsewhere in this issue of the Bulletin.]
- - - (f) [The text of the proposed amendment to §1.1441–2T(f)(1) is the same as the text of §1.1441–2T(f)(1) published elsewhere in this issue of the Bulletin.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 31, 2006, 8:45 a.m., and published in the issue of the Federal Register for August 1, 2006, 71 F.R. 43398)

Deletions From Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code

Announcement 2006–55

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986. Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

August 28, 2006 342 2006–35 I.R.B.

SUPPLEMENTARY INFORMATION:

Background

The correction notice that is the subject of this document is under section 199 of the Internal Revenue Code.

Need for Correction

As published, the correction notice (T.D. 9262) contains errors that may prove to be misleading and are in need of clarification.

- - - -

Correction of Publication

Accordingly, 26 CFR Part 1 is corrected by making the following correcting amendments:

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 * * *

§ 1.199–3T [Corrected]

Par. 2. Section 1.199–3T is amended by revising paragraphs (i)(6)(iii) introductory text and Example 5 to read as follows:

§ 1.199–3T Domestic production gross receipts (temporary).

- - - (i) - - (6) - - (iii) Exceptions . Notwithstanding paragraph (i)(6)(ii) of this section, if a taxpayer derives gross receipts from providing to customers computer software MPGE in whole or in significant part by the taxpayer within the United States for the customers’ direct use while connected to the Internet (online software), then such gross receipts will be treated as being derived from the lease, rental, license, sale, exchange, or other disposition of computer software only if
- - - Example 5 . The facts are the same as in Exam- ple 4, except that O does not sell the tax preparation computer software to customers affixed to a compact disc or by download and O’s only method of providing the tax preparation computer software to customers is over the Internet. P, an unrelated person, derives, on a regular and ongoing basis in its business, gross receipts from the sale to customers of P’s substantially identical tax preparation computer software that has been affixed to a compact disc as well as from the sale to customers of P’s substantially identical tax preparation computer software that customers have downloaded from the Internet. Under paragraph (i)(6)(iii)(B) of this section, O’s gross receipts derived from providing its tax preparation computer software to customers over the Internet will

be treated as derived from the lease, rental, license, sale, exchange, or other disposition of computer software and are DPGR (assuming all the other requirements of § 1.199–3 are met).

§ 1.199–8T [Corrected]

Par. 3. Section 1.199–8T is amended by revising paragraph (i)(4) to read as follows:

§ 1.199–8T Other rules (temporary).

- - - (i) - - (4) Computer software . Section 1.199–3T(i)(6)(ii) through (v) are applicable for taxable years beginning on or after June 1, 2006. Taxpayers may apply these temporary regulations to taxable years beginning after December 31, 2004, and before June 1, 2006. The applicability of § 1.199–3T(i)(6)(ii) through (v) expires on or before May 22, 2009.

Guy R. Traynor, Chief, Publications and

Regulations Branch, Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on July 5, 2006, 8:45 a.m., and published in the issue of the Federal Register for July 6, 2006, 71 F.R. 38262)