Part IV. Items — Internal Revenue Bulletin 2007-15

Notice of Proposed Rulemaking

Suspension of Statutes of Limitations in Third-Party and John Doe Summons Disputes and Expansion of Taxpayers’ Rights to Receive Notice and Seek Judicial Review of Third-Party Summonses

REG–153037–01

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed amendments to the regulations relating to third-party and John Doe summonses. These proposed regulations reflect amendments to sections 7603 and 7609 of the Internal Revenue Code of 1986 made by the Internal Revenue Service Restructuring and Reform Act of 1998, the Omnibus Budget Reconciliation Act of 1990, the Technical and Miscellaneous Revenue Act of 1988, and the Tax Reform Act of 1986, which were enacted subsequent to adoption of the current regulations. These proposed regulations provide guidance relating to the manner in which summonses may be served on third-party recordkeepers, the expanded class of third-party summonses subject to notice requirements and other procedures, and the suspension of periods of limitations if a court proceeding is brought involving a challenge to a third-party summons, or if a third party’s response to a summons is not finally resolved within six months after service. These proposed regulations affect third parties who are served with a summons, taxpayers identified in a third-party summons, and other persons entitled to notice of a third-party summons.

DATES: Written comments and requests for a public hearing must be received by October 19, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–153037–01), room

5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, submissions may be hand delivered between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–153037–01), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Comments may also be submitted electronically to www.irs.gov/regs or the Federal eRulemaking Portal at www.regulations.gov (IRS—REG–153037–01).

FOR FURTHER INFORMATION CONTACT: Elizabeth Rawlins at (202) 622–3630 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed regulations amending the Procedure and Administration Regulations (26 CFR part 301) under sections 7603 and 7609 of the Internal Revenue Code of 1986 (Code). The proposed regulations reflect amendments to sections 7603 and 7609 enacted in the Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105–206, 112 Stat. 685) (RRA 1998), the Technical and Miscellaneous Revenue Act of 1988 (Public Law 100–647, 102 Stat. 3343) (TAMRA 1988), and the Tax Reform Act of 1986 (Public Law 99–514, 100 Stat. 2085) (TRA 1986). The proposed regulations also reflect changes made to section 6503(j) in the Omnibus Budget Reconciliation Act of 1990 (Public Law 101–508, 104 Stat. 1388) (OBRA 1990).

Explanation of Provisions

In general, section 7609 provides that if a summons is served on a third party requiring the third party to give testimony or produce records relating to a taxpayer or other person identified in the summons, the Internal Revenue Service (IRS) must provide notice of the summons to the taxpayer and to any other person identified in the description of summoned records and testimony within three days of the date on which the summons was served, but no later than 23 days prior to the date fixed

in the summons as the day on which the examination of the summoned person or materials is scheduled. Persons entitled to notice of a third-party summons are entitled to bring a proceeding to quash the summons by filing a petition in district court within 20 days after notice is given. Persons entitled to notice also may intervene in any proceeding to enforce the summons. During the pendency of a proceeding to quash a summons brought by the taxpayer, or during the pendency of a proceeding to enforce a summons in which the taxpayer has intervened, the periods of limitations on assessment and criminal prosecution are suspended. These periods of limitations are also suspended if the third-party’s response to the summons remains unresolved six months after the summons is served, regardless of whether a proceeding has been brought with respect to the summons. These proposed regulations amend prior regulations relating to third-party summonses to reflect the statutory changes to sections 7603 and 7609 described below.

Notice of Third-Party Summonses

Section 7609(a) requires the IRS to provide notice of a third-party summons to the taxpayer being investigated and every person identified in the description of summoned records and testimony unless the summons is excepted from the notice requirements under section 7609(c)(2). Prior to RRA 1998, the IRS was required to provide notice of a third-party summons only if the summons was served on a third-party recordkeeper and the summons required the production of records made or kept of another person’s business transactions or affairs (or testimony about such records). RRA 1998 expanded the types of third-party summonses to which the notice, intervention, and proceeding to quash procedures apply by removing the prior specifically-defined third-party recordkeeper limitation. The proposed regulations reflect the expansion of the notice procedures to all third-party summonses not excepted by section 7609(c)(2).

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Suspension of Periods of Limitations

Suspension under section 7609(e)(1)

Section 7609(e)(1) provides that the periods of limitations under section 6501 (relating to assessment and collection) and section 6531 (relating to criminal prosecution) are suspended if any person with respect to whose liability a third-party summons was issued (or the agent, nominee, or other person acting under the direction and control of such person), pursuant to section 7609(b), intervenes in a judicial proceeding to enforce a third-party summons or brings a proceeding to quash a third-party summons. The suspension continues for the period during which the proceeding, including appeals, is pending.

Suspension under section 7609(e)(2)

Section 7609(e)(2) provides that the periods of limitations under section 6501 and section 6531, are suspended if there is no final resolution of the third party’s response to the summons within six months after service of such summons, regardless of whether the person with respect to whose liability the summons was issued has intervened in an enforcement proceeding or brought a proceeding to quash.

Suspension of the periods of limitations under section 7609(e)(2) begins six months after the summons is served and ends upon the final resolution of the summoned party’s response. The proposed regulations describe the types of summonses to which the suspension of periods of limitations under section 7609(e)(2) apply and define final resolution.

a. Summonses to which suspension under section 7609(e)(2) may apply

Prior to RRA 1998, former section 7609(e)(2) suspended a taxpayer’s periods of limitations if either a third-party recordkeeper’s response to a summons, for which the taxpayer was entitled to receive notice under section 7609(a), or if a summoned person’s response to a John Doe summons was not finally resolved within six months after the summons was served. Nothing in the legislative history to RRA 1998 suggests that Congress intended to expand the basic statutory structure of section 7609(e)(2) to encompass any summonses other than John Doe summonses

Exceptions to Notice, Intervention, and Proceeding to Quash Procedures

Section 7609(c)(2) provides that certain summonses, including summonses served on the person with respect to whose liability the summons was issued, third-party summonses issued to confirm or deny the existence of records, and summonses that require court approval before service, are excepted from the notice, intervention, and proceeding to quash provisions of subsections 7609(a) and (b). Two additional exceptions, relating to third-party summonses issued in aid of collection under section 7609(c)(2)(D) and summonses issued by a criminal investigator under section 7602(c)(2)(E), were the subject of recent statutory changes.

Prior to RRA 1998, former section 7609(c)(2)(B) broadly excepted from the notice requirements and other procedural rules a summons issued in aid of the collection of any person’s liability. RRA 1998 narrowed the collection exception, now found in section 7609(c)(2)(D), to except only summonses issued in aid of the collection of either: (i) an assessment or judgment against the person with respect to whose liability the summons is issued, or (ii) the liability of a transferee or fiduciary of the liable person. Under section 7609(c)(2)(D), as amended, the IRS now must give notice of a third-party summons issued in aid of the collection of a person’s potential liability for an unassessed tax. For example, the IRS must provide notice of a third-party summons to a potentially responsible person if the purpose of the third-party summons is to determine whether the person is liable for the trust fund recovery penalty under section 6672.

The exception from notice, intervention, and proceeding to quash procedures for summonses issued by a criminal investigator under section 7609(c)(2)(E) was added by RRA 1998. Section 7609(c)(2)(E) excepts third-party summonses issued by criminal investigators if the summoned third party is not a third-party recordkeeper, as that term is defined under new section 7603(b).

Third-Party Recordkeepers

Section 7603(b)(1) provides that third-party recordkeeper summonses may be served by certified or registered mail to

the last known address of the third-party recordkeeper. Section 7603(b)(2) enumerates classes of persons that are third-party recordkeepers, including banks, credit card issuers, attorneys, accountants, and enrolled agents.

When third-party recordkeeper status arises

Prior to RRA 1998, third-party recordkeeper summonses were defined under former section 7609(a)(1) as summonses that were served on a third-party recordkeeper, i.e., a person belonging to one of several enumerated classes of business occupations, for the production of records made or kept of another person’s business transactions or affairs. Based on these requirements, existing §301.7609–2(b) provides that “[a] person is a ‘third-party recordkeeper’ with respect to a given set of records only if the person made or kept the records in the person’s capacity as a third-party recordkeeper.”

RRA 1998 amended section 7603, relating to service of summonses, by adding to new subsection (b) the enumerated classes of third-party recordkeepers, but did not incorporate the requirement of former section 7609(a)(1)(B) that the records of the business transactions or affairs be made or kept by the third-party recordkeeper in its capacity as such. There is no indication in the legislative history to RRA 1998 that Congress intended to alter the requirement under §301.7609–2(b) that the records of a third-party recordkeeper be made or kept in the third-party recordkeeper’s capacity as such. Accordingly, the proposed regulations maintain the requirement under existing §301.7609–2(b).

Owners or developers of computer software source code

RRA 1998 added owners or developers of computer software source code to the enumerated classes of third-party recordkeepers under section 7603(b)(2). The proposed regulations define owners or developers of computer software source code as third-party recordkeepers if they are summoned to produce the source code or the programs and data to which the source code relates, whether or not they make or keep records of another person’s business transactions or affairs.

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inquiry of a third party or examining a third party’s books, papers, records, or other data during an investigation.

Proposed Effective Dates

These amendments are proposed to be applicable on the date the final regulations are filed with the Federal Register .

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 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 and, because these regulations do not impose a collection of information under the Paperwork Reduction Act (44 U.S.C. section 3501), the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to these regulations. 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 (preferably a signed original and eight (8) copies) that are submitted timely to the IRS. The IRS and the Treasury Department specifically request comments on the clarity of the proposed rule and how it may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Elizabeth Rawlins of the Office of the Associate Chief Counsel, Procedure and Administration (Collection, Bankruptcy and Summonses Division), Internal Revenue Service.

and third-party summonses subject to the notice requirement of section 7609(a). Therefore, the proposed regulations provide that the periods of limitations are suspended under section 7609(e)(2) only with respect to third-party summonses to which the notice requirements of section 7609(a) apply, or to John Doe summonses for which taxpayers are entitled to notice of any statute suspension pursuant to section 7609(i)(4).

b. Final resolution of a third party’s response to a summons

Section 7609(e)(2) provides that suspension of the periods of limitations ends on the date of final resolution of the third party’s response to the summons. The purpose of section 7609(e)(2) is to suspend the periods of limitations if an investigation is delayed by a summoned person’s failure to produce all of the summoned information within six months. Although final resolution is not defined in section 7609, nor is it elaborated on in the legislative history of that statute, the same term is found in section 6503(j), which suspends the period of limitations on assessment during a judicial enforcement period relating to designated and related summonses. Like section 7609(e)(2), section 6503(j) provides that the suspension period will not end until there is final resolution of the summoned person’s response to the summons. The legislative history of section 6503(j) indicated that the term final resolu- tion means, in cases in which a court proceeding is brought, that no court proceeding remains pending and the summoned party has complied with the summons to the extent the court required. Therefore, the proposed regulations define final resolution as occurring when the summoned person fully complies with the production required by the summons. If the summons is the subject of litigation, full compliance occurs when any order enforcing any part of the summons is fully complied with and all appeals are either disposed of or the period in which an appeal may be taken or a request for further review may be made has expired. The IRS will administratively create procedures by which taxpayers can inquire about the suspension of their periods of limitations under section 7609(e)(2).

Protections for and Duties of Summoned Third Parties

Section 7609(i)(3) provides that any summoned party who produces records or gives testimony in good faith reliance on an IRS certificate or court order is not liable to a customer or other person for disclosure of records or testimony in response to a third-party summons. RRA 1998 modified these provisions by extending protection to all recipients of third-party summonses subject to the notice requirements of section 7609(a) and by expanding the protection from liability to include the giving of testimony by a third party, in addition to the production of records. The proposed regulations reflect these statutory changes.

Notification Requirement for John Doe Summonses under Section 7609(i)(4)

Section 7609(i)(4) requires the recipient of a John Doe summons to notify the unnamed taxpayers to which the summons applies if those taxpayers’ periods of limitations are suspended by operation of section 7609(e)(2), relating to the absence of a resolution to the summoned party’s response six months after service of the summons.

The proposed regulations specify the time and the manner for providing the notice required under section 7609(i)(4). Notice must be given as soon as possible after the suspension of the periods of limitations and must be made in writing. The written notification may be hand delivered, sent to the address of the taxpayer last known by the summoned person to be valid, or transmitted by any electronic means. Failure by the summoned party to comply with the notice requirements of section 7609(i)(4) will not preclude the suspension of the periods of limitations pursuant to section 7609(e)(2).

Use of Informal Procedures not Precluded by Section 7609

Section 7609(j) provides that nothing in section 7609 shall be construed to limit the IRS’s ability to obtain information through formal or informal procedures authorized by sections 7601 and 7602. The proposed regulations provide that section 7609 does not require the IRS to issue a third-party summons before conducting an informal

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(iii) Debit cards . A debit card is not a credit card or similar device because a debit card is not tendered to obtain an extension of credit.

(4) Enrolled agent . A person is an enrolled agent under section 7603(b)(2)(I) for purposes of determining whether that person is a third-party recordkeeper if the person is enrolled as an agent authorized to practice before the Internal Revenue Service pursuant to Circular 230, 31 CFR Part 10. (5) Owner or developer of certain com- puter code and data . An owner or developer of computer software source code under section 7603(b)(2)(J) is a third-party recordkeeper when summoned to produce a computer software source code (as defined in section 7612(d)(2)), or an executable code and associated data described in section 7612(b)(1)(A)(ii), even if that person did not make or keep records of another person’s business transactions or affairs.

(b) When third-party recordkeeper sta- tus arises —(1) In general . Except as provided in paragraph (a)(5) of this section, a person listed in section 7603(b)(2) is a third-party recordkeeper for purposes of section 7609(c)(2)(E) and §301.7603–1 only if the summons served on that person seeks records (or testimony regarding such records) of a third party’s business transactions or affairs and such recordkeeper made or kept the records in the capacity of a third-party recordkeeper. For instance, an accountant is not a third-party recordkeeper (by reason of being an accountant) with respect to the accountant’s records of a sale of property by the accountant to another person. Similarly, a credit card issuer is not a third-party recordkeeper (by reason of being a person extending credit through the use of credit cards or similar devices) with respect to—

(i) Records relating to non-credit card transactions, such as a cash sale by the issuer to a holder of the issuer’s credit card; or

(ii) Records relating to transactions involving the use of another issuer’s credit card.

(2) Examples . The rules of paragraph (b)(1) of this section are illustrated by the following examples:

Example 1 . V issues a credit card (the V card) that is honored by R, a retailer. When using the V card, C, a customer, signs a sales slip in triplicate. C, R,

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Proposed Amendment to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.7603–1 is revised to read as follows:

§301.7603–1 Service of summons.

(a) In general —(1) Hand delivery or delivery to place of abode . Except as otherwise provided in paragraph (a)(2) of this section, a summons issued under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602 shall be served by an attested copy delivered in hand to the person to whom it is directed, or left at such person’s last and usual place of abode.

(2) Summonses issued to third-party recordkeepers . A summons issued under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602 for the production of records (or testimony about such records) by a third-party recordkeeper, as described in section 7603(b)(2) and §301.7603–2, may also be served by certified or registered mail to the third-party recordkeeper’s last known address, as defined in §301.6212–2. If service to a third-party recordkeeper is made by certified or registered mail, the date of service is the date on which the summons is mailed.

(b) Persons who may serve a summons . The officers and employees of the Internal Revenue Service whom the Commissioner has designated to carry out the authority described in §301.7602–1(b) to issue a summons are authorized to serve a summons issued under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7602. (c) Effect of certificate of service . The certificate of service signed by the person serving the summons shall be evidence of the facts it states on the hearing of an application for the enforcement of the summons.

(d) Sufficiency of description of sum- moned records . When a summons requires

the production of records, it shall be sufficient if such records are described with reasonable certainty.

(e) Records . For purposes of this section and §301.7603–2, the term records includes books, papers, or other data.

(f) Effective date . This section is applicable on the date final regulations are published in the Federal Register .

Par. 3. Section 301.7603–2 is added to read as follows:

§301.7603–2 Third-party recordkeepers.

(a) Definitions —(1) Accountant . A person is an accountant under section 7603(b)(2)(F) for purposes of determining whether that person is a third-party recordkeeper if, on the date the records described in the summons were created, the person was registered, licensed, or certified as an accountant under the authority of any state, commonwealth, territory, or possession of the United States, or of the District of Columbia.

(2) Attorney . A person is an attorney under section 7603(b)(2)(E) for purposes of determining whether that person is a third-party recordkeeper if, on the date the records described in the summons were created, the person was registered, licensed, or certified as an attorney under the authority of any state, commonwealth, territory, or possession of the United States, or of the District of Columbia.

(3) Credit cards —(i) Person extend- ing credit through credit cards . The term person extending credit through the use of credit cards or similar devices under section 7603(b)(2)(C) generally includes any person who issues a credit card. The term does not include a seller of goods or services who honors credit cards issued by other parties but who does not extend credit through the use of credit cards or similar devices.

(ii) Devices similar to credit cards . An object is a device similar to a credit card under section 7603(b)(2)(C) only if it is physical in nature, such as a charge plate or similar device that may be tendered to obtain an extension of credit. Thus, a person who extends credit by requiring customers to sign sales slips without requiring the use of, or reference to, a physical object issued by that person is not a third-party recordkeeper under section 7603(b)(2)(C).

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(1) Summons served on the taxpayer . The IRS is not required to provide notice of a summons served on the person with respect to whose liability the summons was issued, or any officer or employee of such person.

(2) Existence of records . The IRS is not required to provide notice in the case of a summons issued to determine whether or not records of the business transactions or affairs of a person identified in the summons have been made or kept.

(3) Numbered account or similar ar- rangement . The IRS is not required to provide notice in the case of a summons issued solely to determine the identity of a person having a numbered account or similar arrangement with a bank or other institution. An account is a numbered account or similar arrangement within the meaning of this paragraph (b)(3) if it is an account through which a person may authorize transactions solely through the use of a number, symbol, code name, or other device not involving the disclosure of the person’s identity. The term person having a numbered ac- count or similar arrangement includes the person who opened the account and any person authorized to access the account or to receive records or statements concerning it.

(4) Summonses in aid of the collection of liabilities —(i) In general . The IRS is not required to provide notice in the case of a summons issued in aid of the collection of liabilities. A summons is in aid of the collection of liabilities within the meaning of this paragraph if it is issued in connection with the collection of—

(A) An assessment or judgment against the person with respect to whose liability the summons is issued; or

(B) The liability determined at law or in equity of any transferee or fiduciary of a person described in paragraph (b)(4)(i)(A) of this section.

(ii) Examples . The rules of paragraph (b)(4) of this section are illustrated by the following examples:

Example 1 . A third-party summons is issued to a bank to determine the amount held in an account in the name of A, against whom unpaid income taxes have been assessed. Notice of the summons is not required to be given to A or any other persons identified in the summons because the summons is issued in connection with the collection of taxes that have been assessed.

Example 2 . A third-party summons is issued to determine whether assessments should be made against A, who is potentially liable for a trust fund

and V each retain one copy. Only the copy held by V is held by a third-party recordkeeper under section 7603(b)(2), even though R may issue its own credit card.

Example 2 . R, a retailer, issues its own credit card (the R card) to C, a customer. When C makes a credit purchase from R using the R card, C signs a sales slip in duplicate. C and R each retain one copy. Because R keeps the copy in its capacity as credit card issuer, as well as in its capacity as a retailer, it is a third-party recordkeeper under section 7603(b)(2) with respect to its copy of the sales slip.

(c) Effective date . This section is applicable on the date the final regulations are published in the Federal Register .

Par. 4. Sections 301.7609–1 through 301.7609–5 are revised to read as follows:

§301.7609–1 Special procedures for third-party summonses.

(a) In general —(1) Section 7609 requires the Internal Revenue Service (IRS) to follow special procedures when summoning a third party’s testimony, records, or computer software source code. Except as provided in §301.7609–2(b), the IRS must provide notice of a third-party summons to any person identified in the summons, other than the person summoned. A person entitled to notice of a third-party summons may intervene in any proceeding brought to enforce the summons or may bring a proceeding to quash the summons, regardless of whether they receive notice of the summons from the IRS pursuant to section 7609(a) and §301.7609–2.

(2) Neither section 7609 nor §301.7603–1, §301.7603–2, or §§301.7609–1 through 301.7609–5, limit the IRS’s ability to obtain information, other than by summons, through formal or informal procedures authorized by sections 7601 and 7602.

(b) Cross references . See §301.7609–2 for rules relating to persons who must be notified of a third-party summons and exceptions to the notification requirements. See §301.7609–3 for rules relating to the rights and duties of summoned parties. See §301.7609–4 for rules relating to actions to quash a summons or to intervene in a summons enforcement proceeding. See §301.7609–5 for rules relating to the suspension of periods of limitations.

(c) Records . For purposes of §§301.7609–1 through 301.7609–5, the term “records” includes books, papers, or other data.

(d) Effective date . This section is applicable on the date the final regulations are published in the Federal Register .

§301.7609–2 Notification of persons identified in third-party summonses.

(a) In general —(1) Persons enti- tled to notice . Except as provided in §301.7609–2(b), the Internal Revenue Service (IRS) shall give notice of a third-party summons to any person, other than the person summoned, who is identified in the summons. The only persons so identified are the person with respect to whose liability the summons is issued and any other person identified in the description of summoned records or testimony. For example, if the IRS issues a summons to a bank with respect to the liability of C that requires the production of account records of A and B, both of whom are named in the summons, the IRS must notify A, B and C of the summons.

(2) Time for providing notice . If notice is required by this paragraph (a)(1), such notice must be given within three days of the date on which the summons is served on the third party, but no later than 23 days prior to the date fixed in the summons as the date on which the examination of the summoned person or records is scheduled.

(3) Methods for serving notice . Notice may be served by hand delivery to any person entitled to notice or by leaving notice at such person’s last and usual place of abode. Notice also may be served by certified or registered mail to the person’s last known address, as defined in §301.6212–2. If service to a person entitled to notice is made by certified or registered mail, the date of service is the date on which the notice is mailed.

(4) Content of the notice . Notice required to be given to any person entitled to notice must be accompanied by a copy of the summons that has been served and must include an explanation of the right to bring a proceeding to quash the summons. The copy of the summons accompanying the notice is not required to contain the attestation that appears pursuant to section 7603 on the copy of the summons served on the summoned person.

(b) Exceptions . The IRS is not required to provide notice to persons identified in the following third-party summonses:

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response to the summons has not been finally resolved;

(v) The periods of limitations under section 6501 (relating to assessment and collection) and section 6531 (relating to criminal prosecution), have been suspended; and

(vi) The date on which suspension of the periods of limitations under sections 6501 and 6531 began. (3) Time and manner of notification . The notification must be made in writing and may be delivered in person, by mail sent to the address last known by the summoned party, or by use of any electronic means of transmission. Notification should be made as soon as possible after the suspension of the periods of limitations begins. Failure by a summoned party to give notice of the suspension of periods of limitations as required by section 7609(i)(4) does not prevent the suspension of the periods of limitations under section 7609(e)(2). (e) Effective date . This section is applicable on the date the final regulations are published in the Federal Register .

§301.7609–4 Right to intervene; right to institute a proceeding to quash.

(a) Intervention in proceeding with re- spect to enforcement of a summons . Under section 7609(b)(1), a person entitled to notice of a summons under section 7609(a) and §301.7609–2 is entitled to intervene in any proceeding brought under section 7604 with respect to the enforcement of that summons.

(b) Right to institute a proceeding to quash —(1) In general . Under section 7609(b), a person entitled to notice of a summons under section 7609(a) and §301.7609–2 may institute a proceeding to quash the summons in the United States district court for the district in which the summoned person resides or is found.

(2) Requirements for a proceeding to quash . To institute a proceeding to quash a summons, a person entitled to notice of the summons must, not later than the 20th day following the day the notice of the summons was served on or mailed to such person—

(i) File a petition to quash a summons in the name of the person entitled to notice of the summons in the proper district court;

recovery penalty under section 6672 with respect to the assessed but unpaid withholding tax liability of employer E. The summons is captioned: In the matter of A. Notice of the summons must be provided to A and to any other persons identified in the summons because the summons was issued with respect to A’s potential, unassessed liability under section 6672.

(5) Summonses issued by a criminal in- vestigator . The IRS is not required to provide notice in the case of a summons issued by a criminal investigator to a person other than a third-party recordkeeper, as defined in section 7603(b). For purposes of section 7609(c)(2)(E), a summons issued by a criminal investigator is any summons issued as part of a criminal investigation by an IRS officer or employee having authority to conduct a criminal investigation and to issue a summons.

(6) John Doe summons . The IRS is not required to provide notice in the case of a John Doe summons issued under section 7609(f). (7) Summons issued pursuant to a court order to prevent spoliation of evidence . The IRS is not required to provide notice in the case of a summons for which a court determines there is reasonable cause to believe the giving of notice may lead to attempts to conceal, destroy, or alter records relevant to the examination, to prevent communication of information from other persons through intimidation, bribery, or collusion, or to flee to avoid prosecution, testifying, or production of records.

(c) Effective date . This section is applicable on the date the final regulations are published in the Federal Register .

§301.7609–3 Duty of and protection for the summoned party.

(a) Duty of the summoned party . Upon receipt of a summons, the summoned party must begin to assemble the summoned records. The summoned party must be prepared to produce the summoned records on the date on which the summons states that they are to be examined, regardless of the institution or anticipated institution of a proceeding to quash or the summoned party’s intervention in a proceeding to quash, as allowed under section 7609(b)(2)(C).

(b) Disclosing summoned party not li- able —(1) In general . A summoned party, or an agent or employee thereof, who makes a disclosure of records or gives testimony as required by a summons in

good faith reliance on the certificate of the Secretary (as defined in paragraph (b)(2) of this section) or an order of a court requiring production of records or giving of testimony, will not be liable for any claim arising from such disclosure brought by any customer, any party with respect to whose tax liability the summons was issued, or any other person.

(2) Certificate of the Secretary . The Secretary may issue to the summoned party a certificate if the person with respect to whose liability the summons was issued expressly consents to the examination of the records summoned and the taking of testimony. The Secretary also may issue to the summoned party a certificate stating that—

(i) The 20-day period within which a person entitled to notice of the summons may institute a proceeding to quash the summons has expired; and

(ii) No proceeding has been instituted within that period.

(c) Reimbursement of costs . Summoned third parties may be entitled to reimbursement of their costs of assembling and preparing to produce summoned records, to the extent allowed by section 7610 and §301.7610–1. (d) Notification of suspension of pe- riods of limitations in connection with a John Doe summons —(1) Requirement of notification . If any periods of limitations are suspended under section 7609(e)(2) and §301.7609–5(d) with respect to a John Doe summons described in section 7609(f), the summoned party is required under section 7609(i)(4) to provide notice of such suspension to all persons with respect to whose liability the summons was issued.

(2) Content of notification . A summoned party required to notify a person of the suspension of the periods of limitations shall provide the following information to such person—

(i) A John Doe summons was served on the summoned party seeking records that may be relevant to the person’s tax liability;

(ii) The date on which the summons was served;

(iii) The tax period(s) to which the summons relates;

(iv) Six months has passed since service of the summons and the summoned party’s

2007–15 I.R.B. 947 April 9, 2007

are suspended for the period during which such proceeding is pending.

(2) Action to institute a proceeding to quash a summons . A person entitled to notice takes any action to institute a proceeding to quash if he or she files a petition to quash the summons in any district court, regardless of whether the timely filing requirements of section 7609(b)(2)(A) or the notice requirements of section 7609(b)(2)(B) are satisfied. For example, a person entitled to notice takes an action to institute a proceeding to quash a summons for purposes of this section if that person files a petition to quash the summons in district court and notifies the summoned person by sending a copy of the petition by registered or certified mail, but fails to mail a copy of that notice to the appropriate Internal Revenue Service (IRS) person and office.

(d) Summoned party’s failure to finally resolve the response to a summons after six months from service —(1) In general . If a third party’s response to a summons for which the IRS was required to provide notice to persons identified in the summons, or to a John Doe summons described in section 7609(f), is not finally resolved within six months after the date of service of the summons, the periods of limitations are suspended under sections 6501 and 6531, for the person with respect to whose liability the summons was issued and for any person whose identity is sought to be obtained by a John Doe summons, for the tax period or periods that are the subject of the summons. The suspension shall begin on the date which is six months after the service of the summons and shall end on the date on which there is a final resolution of the summoned party’s response to the summons.

(2) Example . The rules of paragraph (d)(1) of this section are illustrated by the following example:

Example . A John Doe summons is issued on April 1, 2000, to the promoter of a tax shelter and seeks the names of all participants in the shelter in order to investigate the participants’ income tax liabilities for 1997 and 1998. The district court approves service of the summons on April 30, 2000, and the summons is served on the promoter on May 1, 2000. The promoter does not provide the names of the participants. The periods of limitations for the participants’ income tax liabilities and criminal prosecution for 1997 and 1998 are suspended under section 7609(e)(2) beginning on November 1, 2000, the date which is six months after the date the John Doe

(ii) Notify the Internal Revenue Service (IRS) by sending a copy of that petition to quash by registered or certified mail to the IRS employee and office designated in the notice of summons to receive the copy; and

(iii) Notify the summoned person by sending by registered or certified mail a copy of the petition to quash to the summoned person.

(3) Failure to give timely notice . If a person entitled to notice of the summons fails to give proper and timely notice to either the summoned person or the IRS in the manner described in this paragraph (b)(2) of this section, that person has failed to institute a proceeding to quash and the district court lacks jurisdiction to hear the proceeding. For example, if the person entitled to notice mails a copy of the petition to the summoned person, but fails to mail a copy of the petition to the designated IRS employee and office, the person entitled to notice has failed to institute a proceeding to quash. Similarly, if the person entitled to notice mails a copy of such petition to the summoned person but, instead of sending a copy of the petition by registered or certified mail to the designated IRS employee and office, the person entitled to notice provides the designated IRS employee and office the petition by some other means, the person entitled to notice has failed to institute a proceeding to quash.

(4) Failure to institute a proceeding to quash . If a person entitled to notice fails to institute a proceeding to quash within 20 days following the day the notice of the summons was served on or mailed to such person, the IRS may examine the summoned records and take summoned testimony following the 23rd day after notice of the summons was served on or mailed to the person entitled to notice.

(c) Presumption no notice has been mailed . Section 7609(b)(2)(B) permits a person entitled to notice to institute a proceeding to quash by filing a petition in district court and notifying both the IRS and the summoned person. Unless the person entitled to notice has notified both the IRS and the summoned person in the appropriate manner, the person entitled to notice has failed to institute a proceeding to quash. For the purpose of permitting the IRS to examine the summoned witnesses and records, it is presumed that the notification was not timely mailed if the copy of the petition was not delivered to

the summoned person or to the person and office designated to receive the notice on behalf of the IRS within three days after the close of the 20-day period allowed for instituting a proceeding to quash.

(d) Effective date . This section is applicable on the date the final regulations are published in the Federal Register .

§301.7609–5 Suspension of periods of limitations.

(a) In general . Except in the case of a summons that is a designated or related summons described in section 6503(j), the following rules relating to the suspension of certain periods of limitations apply to all third-party summonses subject to the notice requirements of section 7609(a) and to all John Doe summonses subject to the requirements of section 7609(f).

(b) Intervention in an action to enforce the summons —(1) In general . If a person entitled to notice of a summons under section 7609(a) and §301.7609–2 with respect to whose liability the summons was issued, or such person’s agent, nominee, or other person acting under the direction or control of the person entitled to notice, takes any action to intervene in a proceeding with respect to enforcement of such summons brought pursuant to section 7604, that person’s periods of limitations under sections 6501 (relating to assessment and collection) and 6531 (relating to criminal prosecutions) for the tax period or periods that are the subject of the summons are suspended for the period during which such proceeding is pending.

(2) Action to intervene . A person entitled to notice takes any action to intervene in a proceeding to enforce a summons within the meaning of §301.7609–4(a) on the date when a motion to intervene is filed with the court.

(c) Institution of a proceeding to quash a summons —(1) In general . If a person entitled to notice of a summons under section 7609(a) and §301.7609–2 with respect to whose liability the summons was issued, or such person’s agent, nominee, or other person acting under the direction or control of the such person, takes any action described in §301.7609–4(b) to institute a proceeding to quash such summons, that person’s periods of limitations under sections 6501 and 6531 for the tax period or periods that are the subject of the summons

April 9, 2007 948 2007–15 I.R.B.

be imposed against the summoned party for a failing to do so, the suspension of the periods of limitations shall continue until the summons or any order enforcing any part of the summons is fully complied with and the decision in the collateral proceeding becomes final. A decision in a collateral proceeding becomes final when all appeals are disposed of or when the period in which an appeal may be taken or a request for further review may be made has expired.

(f) Effective date . This section is applicable on the date the final regulations are published in the Federal Register .

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

(Filed by the Office of the Federal Register on July 20, 2006, 8:45 a.m., and published in the issue of the Federal Register for July 21, 2006, 71 F.R. 41377)

Escrow Accounts, Trusts, and Other Funds Used During Deferred Exchanges of Like-Kind Property

Announcement 2007–35

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Proposed Rulemaking; Revised Initial Regulatory Flexibility Analysis.

SUMMARY: This document contains a revised initial regulatory flexibility analysis relating to proposed regulations (REG–113365–04, 2006–10 I.R.B. 580) under section 468B of the Internal Revenue Code on the taxation and reporting of income earned on escrow accounts, trusts, and other funds used during deferred exchanges of like-kind property, and proposed regulations under section 7872 regarding below-market loans to facilitators of these exchanges. The proposed regulations affect taxpayers that engage in deferred like-kind exchanges and escrow holders, trustees, qualified intermediaries, and others that hold funds during deferred like-kind exchanges.

DATES: Written or electronic comments must be received by May 4, 2007.

summons was served until the date on which the promoter’s response to the summons is finally resolved.

(e) Definitions —(1) Agent, nominee, etc . A person is the agent, nominee, or other person of a person entitled to notice under section 7609(a) and §301.7609–2, and is acting under the direction or control of the person entitled to notice for purposes of section 7609(e)(1), if the person entitled to notice has the ability in fact or at law to cause the agent, nominee or other person, to take the actions permitted under section 7609(b).

(2) Period during which a proceeding is pending —(i) Intervention in an en- forcement proceeding . The period during which the periods of limitations under sections 6501 and 6531 are suspended under section 7609(e)(1) begins on the date any person described in paragraph (b) of this section intervenes in an action to enforce the summons. The periods of limitations remain suspended until all appeals are disposed of, or until the expiration of the period during which an appeal may be taken or a request for further review may be made. The periods of limitations remain suspended for the period during which a proceeding is pending, regardless of compliance (or partial compliance) with the summons during that period. If, following issuance of an order to enforce a third-party summons, a collateral proceeding is brought challenging whether production made by the summoned party fully satisfied the court order and whether sanctions should be imposed against the summoned party for a failure to satisfy that order, the periods of limitations remain suspended until all appeals of the collateral proceeding are disposed of, or until the expiration of the period during which an appeal may be taken or a request for further review of the collateral proceeding may be made. Any collateral proceeding to the original proceeding shall be considered to be a continuation of the original proceeding.

(ii) Proceeding to quash a summons . The period during which the periods of limitations under sections 6501 and 6531 are suspended under section 7609(e)(1) begins on the date any person described in paragraph (c) of this section files a petition to quash the summons in district court. The periods of limitations remain suspended until all appeals are disposed of, or until expiration of the period in

which an appeal may be taken or a request for further review may be made. The periods of limitations remain suspended for the period during which a proceeding is pending, regardless of compliance (or partial compliance) with the summons during that period,

(iii) Examples . The rules of paragraph (e)(2) are illustrated by the following examples:

Example 1 . A revenue agent issues a summons to A, an accountant for B, requiring production of records relating to B’s income tax liabilities for 1998. The summons is served on A on March 1, 2000. B files a petition to quash the summons in district court on March 15, 2000. The district court dismisses B’s petition on July 1, 2000. B fails to appeal this decision by filing a notice of appeal within 60 days from the date of the district court’s order of dismissal. The revenue agent notifies A that B did not appeal the district court’s order. A turns over all of the records requested in the summons. The periods of limitations applicable to B for 1998 under sections 6501 and 6531 are suspended under section 7609(e)(1) from March 15, 2000, the date B filed a petition to quash, until August 30, 2000, the last day on which B could have filed a notice of appeal.

Example 2 . A revenue agent issues a summons to A, an accountant for B, requiring production of records relating to B’s income tax liabilities for 1999. The summons is served on A on June 1, 2001. B files an untimely petition to quash the summons in district court on June 30, 2001. The district court dismisses B’s petition on July 31, 2001. B does not file an appeal of the district court’s order. The periods of limitations applicable to B for 1999 under sections 6501 and 6531 are suspended under section 7609(e)(1) from June 30, 2001, the date B filed an untimely petition to quash, until September 29, 2001, the last day on which B could have filed a notice of appeal.

(3) Final resolution of the summoned third party’s response to a summons . For purposes of section 7609(e)(2)(B), final resolution with respect to a summoned party’s response to a third-party summons occurs when the summons or any order enforcing any part of the summons is fully complied with and all appeals are disposed of or the period in which an appeal may be taken or a request for further review may be made has expired. The determination of whether there has been full compliance will be made within a reasonable time, given the volume and complexity of the records produced, after the later of the giving of all testimony or the production of all records requested by the summons. If, following an enforcement order, collateral proceedings are brought challenging whether the production made by the summoned party fully satisfied the court order and whether sanctions should

2007–15 I.R.B. 949 April 9, 2007

whether as a grantor trust or otherwise), and section 7872.

Section 1.468B–6 of the Income Tax Regulations was included in proposed regulations issued in 1999 under section 468B(g) (the 1999 proposed regulations), and provided rules for the current taxation of income of a qualified escrow account or qualified trust used in a section 1031 deferred exchange of like-kind property. The 1999 proposed regulations included a facts and circumstances test to determine whether the taxpayer (the transferor or exchangor of the property), the QI, or a transferee is the owner of the assets in a qualified escrow account or qualified trust and must take into account all items of income, deduction, and credit (including capital gains and losses) of the account or trust. The 1999 proposed regulations further provided that, if a QI or transferee is the owner of the assets transferred, the transaction may be characterized as a below-market loan from the taxpayer to the owner to which section 7872 may apply. Under this proposed rule, if a QI or transferee is the owner of the assets, the transaction is a loan to which section 7872 generally applies if the loan is below-market.

Comments received on the 1999 proposed regulations reflected differing interpretations of the 1999 proposed regulations and disagreement on the proper rules for taxing these transactions. Some commentators interpreted the 1999 proposed regulations as allowing a QI to “own” the funds held in connection with the deferred like-kind exchange and never characterize the arrangement between the taxpayer and the QI as a loan.

Rules based on a facts and circumstances test are inherently difficult for taxpayers to apply and for the IRS to administer, and are subject to inconsistent application. Therefore, the 2006 proposed regulations eliminate the facts and circumstances test and propose specific rules that determine whether the income of an escrow account, trust, or fund used in a deferred like-kind exchange is taxed to the taxpayer or to an exchange facilitator, which is a QI, transferee, or other party that holds the exchange funds. These rules are intended to provide greater certainty for taxpayers, enhance administrability, and ensure consistent treatment of taxpayers.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–113365–04), room 5203, 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:LPD:PR (REG–113365–04), courier’s desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit electronic comments via the Federal eRulemaking Portal at www.regulations.gov (IRS-REG–113365–04).

FOR FURTHER INFORMATION CONTACT: Concerning the revised initial regulatory flexibility analysis and the proposed regulations under section 468B, Jeffrey Rodrick, (202) 622–4930; concerning the proposed regulations under section 7872, David Silber, (202) 622–3930; concerning submission of comments, Kelly Banks, (202) 622–3628 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

On February 7, 2006, a partial withdrawal of notice of proposed rulemaking, notice of proposed rulemaking, and notice of public hearing was published in the Federal Register (71 FR 6231). The initial regulatory flexibility analysis included in that notice of proposed rulemaking concluded that the number of transactions involving small businesses that will be affected and the full extent of the economic impact on small businesses could not be precisely determined and requested additional comments. This notice revises the initial regulatory flexibility analysis included in that notice of proposed rulemaking in response to comments provided in writing and at a public hearing. These comments asserted that the analysis did not adequately define the industry, determine the number of small businesses affected, describe the economic impact of the proposed regulations on small businesses, or discuss alternatives to the proposed rules that were considered and the bases for conclusions reached. The IRS and the Department of the Treasury have worked closely with the Small Business Administration’s (SBA) Office of Advocacy (Advocacy) to obtain additional information from the

affected industry to identify and quantify the small businesses affected and to determine the likely economic impact of the proposed regulations on small businesses. In a letter dated August 3, 2006, the president of the leading industry association for qualified intermediaries (QI), wrote that the association “believes we have or can develop information that would be helpful in this [impact-study] effort,” and volunteered to provide this information to the IRS. The industry association surveyed its members based on questions developed by the IRS and the Department of the Treasury, and submitted a summary of the survey responses for consideration. The association, which according to its website has over 300 member companies (not all of which are QIs), received approximately 130 responses. Seventy-one respondents indicated they engage in the QI business exclusively, which represents 22 percent of the estimated number of 325 full-time QIs in the industry (as discussed in this notice, not all of which are small businesses). The summary of the survey responses submitted did not address a substantial number of the issues important to evaluating the effect of the proposed regulations on small business. The summary of the survey responses is available at www.IRS.gov/regs . This notice seeks additional comments and reiterates questions that will assist in assessing the economic impact of the proposed regulations on small businesses in the QI industry and in considering reasonable alternatives. The survey information provided is discussed in this revised initial regulatory flexibility analysis and will be considered further in the development of final regulations.

Revised Initial Regulatory Flexibility Analysis

Reasons for Action and Succinct Statement of the Objectives of, and Legal Basis for, the Proposed Rule

The proposed regulations are issued under the authority of section 7805, section 468B(g) (which provides that nothing in any provision of law shall be construed as providing that an escrow account, settlement fund, or similar fund is not subject to current income tax and that the Secretary shall prescribe regulations providing for the taxation of such accounts or funds

April 9, 2007 950 2007–15 I.R.B.

Under section 7872 and the 2006 proposed regulations, if the exchange funds are treated as loaned from the taxpayer to the QI and the loan is a below-market loan, income is deemed transferred to the exchange facilitator as compensation and retransferred to the taxpayer as interest. The taxpayer’s imputed interest income is not offset by a deduction for the taxpayer’s imputed payment to the exchange facilitator because compensation paid to the exchange facilitator is a cost of acquiring the replacement property that must be capitalized and added to the property’s basis. The exchange facilitator has income from the imputed compensation and an offsetting deduction for the interest deemed paid to the taxpayer.

Seventy percent of respondents to the industry survey reported that they engage in at least 100 exchange transactions a year. According to information provided by the industry association from an earlier survey of its members, over 92 percent of the small business respondents currently pay to the taxpayer at least 20 percent of the income earned on exchange funds, including accounts that commingle the exchange funds of multiple taxpayers. The IRS and the Department of the Treasury request additional comments providing more specific information to clarify these results. The information available suggests that an overwhelming majority of small businesses affected by the 2006 proposed regulations currently maintain records of the amount of income paid to the taxpayer and report the payments on Form 1099. Therefore, the IRS and the Department of the Treasury estimate that for most small businesses the 2006 proposed regulations should not increase significantly the compliance burden associated with keeping records and reporting income paid to the taxpayer.

Nonetheless, commentators have stated generally that complying with the 2006 proposed regulations would result in additional recordkeeping and reporting requirements. Fifty-eight percent of respondents to the recent industry survey indicated that the 2006 proposed regulations significantly will increase recordkeeping burdens and accounting costs, but the survey did not provide quantified data on the amount of any additional time or cost expected to result from the 2006 proposed regulations. Comments are requested esti

Description and Estimate of the Number of Small Businesses to Which the Proposed Regulations Will Apply

The 2006 proposed regulations affect exchange facilitators that hold exchange funds for taxpayers engaging in deferred exchanges of like-kind property. Exchange facilitators may be large or small businesses (including individuals operating as sole proprietors). For this purpose, the SBA size standards set forth at 13 CFR 121.201 for North American Industry Classification System (NAICS) code 531390 (other activities related to real estate), define a business with annual gross receipts of up to $2 million as a small business. There is no NAICS code associated specifically with exchange facilitators or QIs. Although like-kind exchanges are not limited to real estate transactions, 70 percent of the respondents to the industry survey indicated that they use NAICS code 531390. Therefore, notwithstanding comments criticizing the use of NAICS code 531390 for purposes of determining the applicable size standard with respect to the 2006 proposed regulations, after consultation with Advocacy, the IRS and the Department of the Treasury have determined that NAICS code 531390 is appropriate for this industry. Accordingly, the applicable size standard for determining what constitutes a small business with respect to the 2006 proposed regulations is $2 million in annual gross receipts, the SBA’s definition of a small business for NAICS code 531390.

The IRS and the Department of the Treasury estimate that there are approximately 325 businesses (primarily QIs) that are full-time exchange facilitators. This estimate is based on information originally provided by the industry association in connection with the development of the 2006 proposed regulations. The recent industry survey did not provide any additional information regarding this number. Seventy-one of 121 (58.7 percent) respondents to the survey indicated that they are engaged exclusively in the QI business, although it is unclear how many of these are small businesses. Although 84 percent of respondents reported having annual gross revenues (fees plus net retained interest, if any) from the QI business of $1.5 million or less (the previous size standard for NAICS code 531390) for the most

recent year, it is unclear how many of this number are exclusively in the QI business. The survey also indicated that almost 90 percent of respondents have 10 or fewer employees (including owners active in the business), and nearly 70 percent have fewer than 5 employees. An estimate of the percentage of the QI industry that consists of small businesses is difficult to make based on the available information. The summary of the survey responses did not correlate information on annual gross revenues reported with information on the number of respondents engaged exclusively in the QI business. Nonetheless, it appears that a significant portion of the QI industry consists of small businesses under the SBA’s size standard. Accordingly, the IRS and the Department of the Treasury continue to seek information regarding the number of small businesses engaged in the QI industry. Specific comments are requested from QIs engaged exclusively in that business indicating whether their annual gross receipts are $2 million or less, or more than $2 million.

Searches for information through the Department of Commerce and the SBA disclosed no data collected or maintained on QIs or exchange facilitators as an industry.

Description of Compliance Requirements and Estimate of the Classes of Small Businesses that Will Be Affected by the Compliance Requirements

Under the 2006 proposed regulations, exchange funds are treated as loaned by the taxpayer to the exchange facilitator unless all of the income earned is paid to the taxpayer. If the exchange funds are treated as loaned to the exchange facilitator, interest generally is imputed to the taxpayer under section 7872 unless the exchange facilitator pays sufficient interest. If a loan between the taxpayer and the exchange facilitator does not provide for sufficient interest and the loan is not otherwise exempt from section 7872, interest income is imputed to the taxpayer at the applicable Federal rate (AFR) (or the difference between the rate paid and the AFR). Therefore, exchange facilitators must keep records of the amount of income paid to the taxpayer and may be required to report the income on Form 1099.

2007–15 I.R.B. 951 April 9, 2007

that would change their business model as a result of the 2006 proposed regulations.

Significant Alternatives Considered

Various alternatives to the rules contained in the 2006 proposed regulations were considered. For example, retaining the facts and circumstances test of the 1999 proposed regulations was considered but rejected because the test is difficult for taxpayers to apply, lacks administrability, is subject to misinterpretation, and may result in inconsistent tax treatment of similarly-situated taxpayers.

Rules that would allow the exchange facilitator and taxpayer to determine which party will be taxed on the earnings were considered but regarded as lacking certainty and administrability and violating established tax principles. Rules that would tax the party that receives the income (and thus treat only income paid and not income retained by the QI as the taxpayer’s taxable income) were considered but not adopted. Under some circumstances, a QI’s retention of income earned by an exchange fund is properly characterized as a payment of compensation by the taxpayer for the QI’s services. Therefore, under the appropriate circumstances, a rule that taxed only the QI on retained earnings would violate the doctrine of Old Colony Trust v. Commissioner, 279 U.S. 716 (1929), that a payment that satisfies the obligation of a taxpayer to a third party is includible in the income of the taxpayer.

A rule that would treat all the earnings of the exchange funds in all circumstances as the taxpayer’s income was considered but lacked flexibility and did not conform in all cases to the substance of the transaction. Other alternatives were considered and not adopted because they were considered inconsistent with section 7872. In the legislative history to section 7872, Congress stated that when a service provider is permitted to retain customer funds without paying interest to the customer, and the benefit the service provider derives from the funds is in lieu of a fee for services, the transaction is a compensation-related loan under section 7872. H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 1019 (1984) (1984–3 (Vol. 2) C.B. 272). Moreover, it was determined that exchange funds are not received in consideration for the sale or exchange of property (within the mean

mating the annual number of transactions that will result in an increased recordkeeping and reporting burden, per transaction, under the 2006 proposed regulations, as well as the amount of time and additional cost that each additional recordkeeping and reporting burden would impose.

Commentators also have stated that accounting for individual taxpayers’ earnings in commingled accounts would necessitate additional labor and system design costs that would fall disproportionately on small business QIs. The IRS and the Department of the Treasury have not received specific comments quantifying the effect of these costs on small businesses. Specific comments are requested estimating the amount of these costs.

Commentators have asserted that complying with the loan characterization rules of the 2006 proposed regulations will result in a substantial revenue loss and cause a large number of small businesses to fail or to reduce their workforces. They claimed that small business QIs would be disproportionately affected because the small business QIs predominantly apply a business model that would place them at a disadvantage under the 2006 proposed regulations.

In general, commentators have described two business models employed to facilitate deferred like-kind exchanges:

The exchange facilitator segregates the exchange funds in separate accounts, charges a separate fee for its services, and pays all earnings to the taxpayer, or
The exchange facilitator commingles the exchange funds, pays a portion of the earnings to the taxpayer and retains a portion of the earnings, or may retain all of the earnings. Some of these exchange facilitators also may charge a separate fee for their services. If a fee is charged, it is likely to be lower than the fee that would be charged if the exchange facilitator retains no earnings.

Some small businesses offer customers both forms of structuring the transaction. Comments from and discussions with industry members, however, have disclosed that the first model is employed most commonly by large businesses often “affiliated” (in the sense of having some level of corporate relationship and not necessarily within the meaning of section 1504) with banks. The second model also may be employed by large businesses but is

used widely by independent, small business QIs. In the recent industry survey, 95.8 percent of respondents indicated that they are not affiliated with a bank, savings and loan company, brokerage firm, or similar financial institution.

The earlier industry survey indicated that 96 percent of the small business respondents retain at least a portion of the interest earned on the exchange funds. Commentators have stated that if these small businesses are required to impute interest on the exchange funds, taxpayers will demand that this interest be paid to them. According to commentators, to compensate for this loss of revenue these businesses will be required to change their business practices to pay all income to the taxpayer and to charge higher fees. Commentators further stated that absent charging higher fees, paying all interest to the taxpayer is expected to result in a reduction of revenues ranging from 10 to 80 percent. Specific comments are requested estimating the effect on revenues or profits of a change in business practices to pay all income to the taxpayer.

Some commentators have asserted that, in contrast, bank-affiliated QIs generally pay all the income to the taxpayer under their current business practices and therefore will not be required to change their business practices or charge higher fees as a result of the 2006 proposed regulations. These commentators claim that bank-affiliated QIs are able to pay all the income to the taxpayer and charge fees commensurate with the fees charged by independent QIs because bank-affiliated QIs are compensated through the receipt of fees paid by institutions in which the funds are deposited. Moreover, these commentators maintain that bank-affiliated QIs indirectly benefit when funds are deposited with related-party depositary institutions that invest deposited exchange funds and earn income that is not required to be paid to the taxpayer under the 2006 proposed regulations. If, as these commentators claim, bank-affiliated QIs would not be required to change their business model as a result of the 2006 proposed regulations, the commentators predict that the 2006 proposed regulations will cause many small business QIs to be disadvantaged in competing with bank-affiliated QIs. Specific comments are requested estimating the number of QIs

April 9, 2007 952 2007–15 I.R.B.

ing of section 1274(c)(1)) or received as a deferred payment on account of a sale or exchange of property (within the meaning of section 483).

The industry survey indicates that 30 percent of respondents closed at least half of their deferred like-kind exchange transactions within 60 days or less. Only eight percent completed at least half of their transactions in more than 150 days. In addition, 42 percent of survey respondents reported that at least half of their transactions typically involve exchange funds of $250,000 or less, while about 8 percent of respondents reported that most of their transactions involve exchange funds in excess of $1 million. In light of this information, comments specifically are requested regarding the average duration of exchange transactions, the average dollar amount of exchange funds, and the appropriateness and nature of a de minimis rule that would except certain exchange transactions from the application of section 7872.

If exchange funds are characterized as loaned by the taxpayer to the exchange facilitator, interest may be imputed if the exchange facilitator does not pay sufficient interest to the taxpayer. To reduce the administrative burden of determining imputed interest, the 2006 proposed regulations provide a special AFR, equal to the investment rate on a 182-day Treasury bill, in lieu of the short-term AFR (which applies to loans of 3 years or less), to qualify as sufficient interest for purposes of determining whether interest must be imputed. This special AFR was intended to be a more accurate measure of a market rate of interest for these loans than the short-term AFR, and was expected to result in characterization of fewer transactions as below-market loans than if the short-term AFR were used. Commentators have stated that the special AFR is significantly higher than the market rate paid on funds held for the periods of time that exchange funds typically are held by QIs. They state, for example, that few if any QIs that pay less than all the income to the taxpayer pay an amount that is equal to or greater than the special AFR provided in the 2006 proposed regulations. Specific comments are requested identifying the rate of return typically earned by small

business QIs on exchange funds, the interest rate QIs typically pay to taxpayers, and an appropriate rate for testing exchange facilitator loans for sufficient interest under section 7872.

Duplicative, Overlapping, and Conflicting Rules

The IRS and the Department of the Treasury are not aware of any duplicative, overlapping, or conflicting federal rules.

Kevin M. Brown, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on March 19, 2007, 8:45 a.m., and published in the issue of the Federal Register for March 20, 2007, 72 F.R. 13055)

Expenses for Household and Dependent Care Services Necessary for Gainful Employment; Correction

Announcement 2007–36

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to notice of proposed rulemaking.

SUMMARY: This document contains a correction to notice of proposed rulemaking (REG–139059–02, 2006–24 I.R.B. 1052) that was published in the Federal Register on Wednesday, May 24, 2006 (71 FR 29847) regarding the credit for expenses for household and dependent care services necessary for gainful employment.

FOR FURTHER INFORMATION CONTACT: Sara Shepherd, (202) 622–4960 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking (REG–139059–02) that is the subject of this correction is under section 21 of the Internal Revenue Code.

Need for Correction

As published, the notice of proposed rulemaking (REG–139059–02) contains an error that may prove to be misleading and is in need of correction.

- - - -

Correction of Publication

Accordingly, the notice of proposed rulemaking (REG–139059–02), that was the subject of FR Doc. E6–7390, is corrected 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 * * *

§ 1.21–1 [Corrected]

Par. 2. On page 29851, column 1, Sec. 1.21–1 is amended by revising paragraph (b)(5)(ii) to read as follows:

§ 1.21–1 Expenses for household and dependent care services necessary for gainful employment.

- - - (b) - * (5) - * (ii) Custodial parent allowed the credit. A child to whom this paragraph (b)(5) applies is the qualifying individual of only one parent in any taxable year and is the qualifying child of the custodial parent even if the noncustodial parent may claim the dependency exemption for that child for that taxable year. See section 152(e). The custodial parent is the parent with whom a child shared the same principal place of abode the greater portion of the calendar year. See section 152(e)(4)(A).

Guy R. Traynor, Branch 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. 38322)

2007–15 I.R.B. 953 April 9, 2007

Expenses for Household and Dependent Care Services Necessary for Gainful Employment; Correction

Announcement 2007–37

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to notice of proposed rulemaking.

FOR FURTHER INFORMATION CONTACT: Sara Shepherd, (202) 622–4960 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking (REG–139059–02) that is the subject of this correction is under section 21 of the Internal Revenue Code.

Need for Correction

As published, the notice of proposed rulemaking (REG–139059–02) contains an error that may prove to be misleading and is in need of correction.

Correction of Publication

Accordingly, the notice of proposed rulemaking (REG–139059–02), that was the subject of FR Doc. E6–7390, is corrected as follows:

On page 29848, column 2, in the preamble under the paragraph heading “3. Special Rule for Children of Separated or Divorced Parents”, line 4 from the bottom of the paragraph, the language “section 152(e)(3)(A) as the parent with” corrected to read “section 152(e)(4)(A) as the parent with.”

Guy R. Traynor, Branch 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. 38323)

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

Announcement 2007–38

The names of organizations that no longer qualify as organizations described in section 170(c)(2) of the Internal Revenue Code of 1986 are listed below.

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.

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 April 9, 2007, 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.

Quality Industrial Services

Snohomish, WA

Nazareth, Inc.

Cleveland Heights, OH

One Step Ahead Daycare, Inc.

Racine, WI

Gift America Program

Rockville, MD

The Patrick and Janet Hayes

Charitable Supporting Organization Houston, TX

10 ^th Life Foundation Santa Barbara, CA

San Francisco Neighbors Resource Center

San Francisco, CA

Emerald Foundation, Inc.

Ojai, CA

Osterville Village Association

Osterville, MA

Further Extension of Deadline for Settlement Offered to Certain Foreign Embassy Staff

Announcement 2007–39

Following is a copy of the News Release issued by the Office of Deputy Commissioner, International, on March 22, 2007 (IR–2007–67).

IRS Further Extends Deadline for Settlement Offered To Certain Foreign Embassy Staff

IR–2007–67, Mar. 22, 2007

WASHINGTON — The Internal Revenue Service is providing a further extension, until June 30, 2007, of the deadline for current and former U.S.-based employees of foreign embassies, consular offices and missions and international organizations to

April 9, 2007 954 2007–15 I.R.B.

for tax years prior to the 2004 tax year. This change follows discussions with embassies and provides consistency with the income tax portion of the settlement initiative.

IRS will remove the 2003 tax year issues from the settlement elections previously received from taxpayers.

IRS encourages those affected taxpayers to act quickly so to avoid a future audit process that could prove costly. Foreign embassy, consular office or international organization employees who fail to come forward may be subject to IRS audits and penalties which could cover more than just three years.

participate in a one-time settlement initiative to resolve outstanding tax matters related to their employment.

Following requests from several embassies, the date is again being extended to make certain those wishing to participate in the initiative have the opportunity to do so.

The offer is open to employees of those organizations who are U.S. citizens, greencard holders and foreign employees who have tax obligations. Accredited diplomatic personnel are generally exempt from income taxes on their wages under the Internal Revenue Code and international treaties or agreements.

The IRS estimates that as many as half of these employees subject to U.S. tax fail to report their wages, claim deductions they are not entitled to, incorrectly establish SEP/IRA retirement plans, fail to pay self-employment tax or fail to file tax returns.

To participate, employees must submit amended or original tax returns for tax years 2004 and 2005 that properly reflect their income and expenses. Participants in the settlement will not be required to provide tax year 2003 returns, which was previously part of the settlement eligibility requirement. In addition, participants with erroneously established SEP/IRA plans will not be required to distribute amounts contributed to these SEP/IRAs

2007–15 I.R.B. 955 April 9, 2007