Part IV. Items — Internal Revenue Bulletin 2008-21

Notice of Proposed Rulemaking and Withdrawal of Notice of Proposed Rulemaking

Suspension of Running of Period of Limitations During a Proceeding to Enforce or Quash a Designated or Related Summons

REG–208199–91

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and withdrawal of notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations regarding the use of designated summonses and related summonses and the effect on the period of limitations on assessment when a case is brought with respect to a designated or related summons. This document also withdraws the previous proposed regulations published in the Federal Register on July 31, 2003 (REG–208199–91, 2003–2 C.B. 757 [68 FR 44905]). These proposed regulations reflect changes to section 6503 of the Internal Revenue Code of 1986 made by the Omnibus Budget Reconciliation Act of 1990 and the Small Business Job Protection Act of 1996. These regulations affect corporate taxpayers that are examined under the coordinated issue case (CIC) program and are served with designated or related summonses. These regulations also affect third parties that are served with designated or related summonses for information pertaining to the corporate examination.

DATES: Written or electronic comments and requests for a public hearing must be received by July 28, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–208199–91), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, submissions may be hand delivered be

tween the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–208199–91), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Comments may also be submitted electronically to the Federal eRulemaking Portal at www.regulations.gov (IRS REG–208199–91).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Elizabeth Rawlins, (202) 622–3630; concerning submissions of comments, Richard Hurst, (202) 622–7180 or Richard.A.Hurst@IRSCounsel.Treas.Gov (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed regulations amending the Procedure and Administration regulations (26 CFR part 301) under section 6503. Section 11311 of the Omnibus Budget Reconciliation Act of 1990 (Public Law 101–508, 104 Stat. 1388) amended section 6503(k) to suspend the period of limitations on assessment when a case is brought with respect to a designated or related summons. Section 6503(k) was redesignated as section 6503(j) by section 1702(h)(17)(A) of the Small Business Job Protection Act of 1996 (Public Law 104–188, 110 Stat. 1874).

Proposed regulations under section 6503(j) were previously published in the Federal Register on July 31, 2003 (68 FR 44905) (the 2003 proposed regulations). The 2003 proposed regulations contained a procedure for determining the date of compliance with a designated or related summons issued with respect to a taxpayer whose statute of limitations on assessment was suspended under section 6503(j) because a court proceeding was brought. No comments were received with respect to this procedure or any other aspect of the 2003 proposed regulations, and no hearing was requested or held. The IRS and the Treasury Department have determined that, in the interest of effective tax administration, the procedure in the 2003 proposed regulations is not warranted. Instead, the IRS intends to create procedures

by which taxpayers can inquire about the suspension of their periods of limitations under section 6503(j), including the date of compliance with the summons, and to publish these procedures in the Internal Revenue Manual. In addition, the IRS has established administrative procedures in the Internal Revenue Manual that ensure substantial IRS executive involvement and oversight of any designated and related summons issued. Additionally, §301.6503(j)–1(c)(1)(i) of these proposed regulations requires that any designated summons be reviewed by the IRS Division Commissioner and Division Counsel of the Office of Chief Counsel before it is issued. Accordingly, the 2003 proposed regulations are withdrawn.

Explanation of Provisions

These proposed regulations generally provide that the period of limitations on assessment provided for in section 6501 is suspended with respect to any return of tax by a corporation that is the subject of a designated or related summons if a court proceeding to enforce or quash is instituted with respect to that summons.

Designated Summonses and Related Summonses

A designated summons is a summons issued to determine the amount of any internal revenue tax of a corporation for which a return was filed if certain additional requirements are satisfied. A designated summons may only be issued to a corporation (or any other person to whom the corporation has transferred records) if the corporation is being examined under the IRS’s coordinated examination program or “any successor program.” The existing successor program to the coordinated examination program is the coordinated issue case (CIC) program.

Section 6503(j)(2)(A)(i) requires that the issuance of the summons be preceded by a review by the regional counsel of the Office of Chief Counsel for the region in which the examination of the corporation is being conducted. The office of regional counsel was eliminated by the IRS reorganization implemented pursuant to the IRS Reform and Restructuring Act

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determination of whether there has been full compliance will be made within a reasonable time after the later of the giving of all testimony or the production of all records required by the order. What constitutes a reasonable time will depend on the volume and complexity of the records produced.

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 be imposed against the summoned party for a failing to do so, the suspension of the periods of limitations shall continue until the 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 for appeal or further review has expired.

Other Rules

These proposed regulations provide additional rules regarding the number of designated and related summonses that may be issued with respect to a return for any taxable period, the time within which a court proceeding must be brought to enforce or quash a designated or related summons, the computation of the suspension period in cases of multiple court proceedings, and the computation of the 60-day period for assessment when the last day falls on a weekend or holiday.

The proposed regulations also address the relationship of the suspension period provided for in section 6503(j) with other suspension provisions in the Code. The proposed regulations provide that if a designated or related summons also could be subject to the suspension rules governing third-party summonses under section 7609(e), then the suspension rules in section 6503(j) govern. In addition, the proposed regulations provide that the section 6503(j) suspension period is independent of, and may run concurrently with, any other period of suspension, such as the suspension period for third-party summonses under section 7609(e) if a separate third-party summons also was issued in a case. Examples of these rules are contained in the proposed regulations.

of 1998. Because the office of regional counsel no longer exists, these proposed regulations provide that the review must by completed by the Division Commissioner and the Division Counsel of the Office of Chief Counsel (or their successors) for the organizations that have jurisdiction over the corporation whose liability is the subject of the summons. The summons also must be issued at least 60 days before the day on which the statute of limitations on assessment under section 6501 would otherwise expire. Finally, the summons must clearly state that it is a designated summons for purposes of section 6503(j). A related summons is any other summons that is issued with respect to the same tax return of the corporation as a designated summons and is issued during the 30-day period that begins on the date the designated summons is issued.

Suspension of Period of Limitations on Assessment

Section 6503(j)(1) suspends the period of limitations on assessment under section 6501 for the applicable tax period when a court proceeding is brought with respect to a designated or related summons. For purposes of these proposed regulations, a court proceeding is a proceeding brought in a United States district court either to quash a designated or related summons under section 7609(b)(2) or to enforce a designated or related summons under section 7604. The court proceeding must be brought within the otherwise applicable period of limitations in order to suspend that period under section 6503(j).

The proposed regulations provide that the suspension begins on the day that a court proceeding is brought and continues until there is a final resolution as to the summoned party’s response to the summons (discussed in the next section), plus an additional 120 days if a court requires any compliance with the summons at issue. If a court does not require any compliance, then the period of limitations on assessment resumes running on the day following the date of the final resolution and in no event shall expire before the 60th day following the date of final resolution.

Final Resolution of a Summoned Party’s Response to a Summons

Under section 6503(j)(3)(B), the length of the suspension under section 6503(j) depends on when “final resolution” of a summoned party’s response to the designated or related summons occurs. The term “final resolution” is not defined in the statute. The legislative history states that the term “final resolution” has the same meaning it has under section 7609(e)(2)(B), relating to third-party summonses. H.R. Conf. Rep. No. 101–964 (1990). Specifically, the conference report states that final resolution means that no court proceeding remains pending and that the summoned party has complied with the summons to the extent required by a court.

Accordingly, the proposed regulations provide that final resolution occurs when no court proceeding remains pending and the summoned party complies with the summons to the extent required by the court. If the summoned party has complied with the summons to the extent required by the court but there still remains time to appeal that order, final resolution occurs when all appeals have been either disposed of or the period in which an appeal may be taken or a request for further review may be made has expired. If all appeal periods have expired but the summoned party has not complied with the summons to the extent required by the court, the proposed regulations provide that final resolution does not occur until the summoned party has complied with the summons to the extent required by the court. Whether a party has complied with the terms of the summons as enforced by a court cannot be determined until the completeness of the materials produced and the testimony given has been evaluated. The IRS intends to create administrative procedures by which the taxpayer can inquire about the suspension of its period of limitations under section 6503(j) and to publish these procedures in the Internal Revenue Manual.

In cases in which a court wholly denies enforcement or orders that the summons in its entirety be quashed, the date of compliance with the court’s order is treated as occurring on the date when all appeals are disposed of or when all appeal periods expire. In cases in which a court orders the summons enforced, in whole or in part, the

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nated industry case program or any other successor to the coordinated examination program if—

(i) The Division Commissioner and the Division Counsel of the Office of Chief Counsel (or their successors) for the organizations that have jurisdiction over the corporation whose tax liability is the subject of the summons have reviewed the summons before it is issued;

(ii) The IRS issues the summons at least 60 days before the day the period prescribed in section 6501 for the assessment of tax expires (determined with regard to extensions); and

(iii) The summons states that it is a designated summons for purposes of section 6503(j). (2) A related summons is any summons issued that—

(i) Relates to the same return of the corporation under examination as the designated summons; and

(ii) Is issued to any person, including the person to whom the designated summons was issued, during the 30-day period that begins on the day the designated summons is issued.

(3) The judicial enforcement period is the period that begins on the day on which a court proceeding is instituted with respect to a designated or related summons and ends on the day on which there is a final resolution as to the summoned person’s response to that summons.

(4) Court proceeding —(i) In general . For purposes of this section, a court pro- ceeding is a proceeding filed in a United States district court either to quash a designated or related summons under section 7609(b)(2) or to enforce a designated or related summons under section 7604. A court proceeding includes any collateral proceeding, such as a civil contempt proceeding.

(ii) Date when proceeding is no longer pending . A proceeding to quash or to enforce a designated or related summons is no longer pending when all appeals (including review by the Supreme Court) are disposed of or after the expiration of the period in which an appeal may be taken or a request for further review (including review by the Supreme Court) may be made. If, however, following an enforcement order, a collateral proceeding is brought challenging whether the testimony given or production made by the

Proposed Effective Date

These regulations are proposed to be applicable on the date final regulations are published in 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 has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to this regulation, and because the regulation does not impose a collection of information requirement on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f), this regulation has been 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 the 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 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 Fed- eral Register .

Drafting Information

The principal author of these regulations is Elizabeth Rawlins of the Office of the Associate Chief Counsel, Procedure and Administration.

- - - -

Withdrawal of Proposed Regulations

Accordingly, under the authority of 26 U.S.C. 7805, the notice of proposed rulemaking (REG–208199–91) that was pub

lished in the Federal Register on Thursday, July 31, 2003 (68 FR 44905) is withdrawn.

Proposed Amendments 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 301.6503(j)–1 is added to read as follows:

§301.6503(j)–1 Suspension of running of period of limitations; extension in case of designated and related summonses .

(a) General rule . The running of the applicable period of limitations on assessment provided for in section 6501 is suspended with respect to any return of tax by a corporation that is the subject of a designated or related summons if a court proceeding is instituted with respect to that summons.

(b) Period of suspension . The period of suspension is the time during which the running of the applicable period of limitations on assessment provided for in section 6501 is suspended under section 6503(j). If a court requires any compliance with a designated or related summons by ordering that any record, document, paper, object, or items be produced, or the testimony of any person be given, the period of suspension consists of the judicial enforcement period plus 120 days. If a court does not require any compliance with a designated or related summons, the period of suspension consists of the judicial enforcement period, and the period of limitations on assessment provided in section 6501 shall not expire before the 60th day after the close of the judicial enforcement period.

(c) Definitions —(1) A designated sum- mons is a summons issued to a corporation (or to any other person to whom the corporation has transferred records) with respect to any return of tax by such corporation for a taxable period for which such corporation is being examined under the coordi

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tuted . If multiple court proceedings are instituted to enforce or to quash a designated or one or more related summonses concerning the same tax return, the period of limitations on assessment is suspended beginning on the date the first court proceeding is brought. The suspension shall end on the date that is the latest date on which the judicial enforcement period, plus the 120 day or 60 day period (depending on whether the court requires any compliance) as provided in paragraph (b) of this section, expires with respect to each summons.

(4) Effect on other suspension peri- ods —(i) In general . Suspensions of the period of limitations under section 6501 provided for under subsections 7609(e)(1) and (e)(2) do not apply to any summons that is issued pursuant to section 6503(j). The suspension under section 6503(j) of the running of the period of limitations on assessment under section 6501 is independent of, and may run concurrent with, any other suspension of the period of limitations on assessment that applies to the tax return to which the designated or related summons relates.

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

Example 1 . The period of limitations on assessment against Corporation P, a calendar year taxpayer, for its 2007 return is scheduled to end on March 17, 2011. (Ordinarily, Corporation P’s returns are filed on March 15 ^th of the following year, but March 15, 2008 was a Saturday, and Corporation P timely filed its return on the subsequent Monday, March 17, 2008, making March 17, 2011 the last day of the period of limitations on assessment for Corporation P’s 2007 tax year.) On January 4, 2011, a designated summons is issued to Corporation P concerning its 2007 return. On March 3, 2011 (14 days before the period of limitations on assessment would otherwise expire with respect to Corporation P’s 2007 return), a court proceeding is brought to enforce the designated summons issued to Corporation P. On June 6, 2011, the court orders Corporation P to comply with the designated summons. Corporation P does not appeal the court’s order. On September 6, 2011, agents for Corporation P deliver material that they state are the records requested by the designated summons. On October 13, 2011, a final resolution to Corporation P’s response to the designated summons occurs when it is determined that Corporation P has fully complied with the court’s order. The suspension period applicable with respect to the designated summons issued to Corporation P consists of the judicial enforcement period (March 3, 2011 through October 13, 2011) and an additional 120-day period under section 6503(j)(1)(B), because the court required Corporation P to comply with the designated summons. Thus, the suspension period applicable with respect

summoned party fully satisfied the court order and whether sanctions should be imposed against the summoned party for a failure to so testify or produce, the proceeding to quash or to enforce the summons shall include the time from which the proceeding to quash or to enforce the summons was brought until the decision in the collateral proceeding becomes final. The decision becomes final on the date when all appeals (including review by the Supreme Court) are disposed of or when all appeal periods or all periods for further review (including review by the Supreme Court) expire. A decision in a collateral proceeding becomes final when all appeals (including review by the Supreme Court) are disposed of or when all appeal periods or all periods for further review (including review by the Supreme Court) expire.

(5) Compliance —(i) In general . Com- pliance is the giving of testimony or the performance of an act or acts of production, or both, in response to a court order concerning the designated or related summons and the determination that the terms of the court order have been satisfied.

(ii) Date compliance occurs . Compliance with a court order that wholly denies enforcement of a designated or related summons is deemed to occur on the date when all appeals (including review by the Supreme Court) are disposed of or when the period in which an appeal may be taken or a request for further review (including review by the Supreme Court) may be made expires. Compliance with a court order that grants enforcement, in whole or in part, of a designated or related summons, occurs on the date it is determined that the testimony given, or the books, papers, records, or other data produced, or both, by the summoned party fully satisfy the court order concerning the summons. 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 or required by any order enforcing any part of 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 be imposed against the summoned party for a failing to do so,

the suspension of the periods of limitations shall continue until the 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, the period in which an appeal may be taken has expired or the period in which a request for further review may be made has expired.

(6) Final resolution occurs when the designated or related summons or any order enforcing any part of the designated or related summons is fully complied with and all appeals or requests for further review are disposed of, the period in which an appeal may be taken has expired or the period in which a request for further review may be made has expired.

(d) Special rules —(1) Number of sum- monses that may be issued —(i) Desig- nated summons . Only one designated summons may be issued in connection with the examination of a specific taxable year or other period of a corporation. A designated summons may cover more than one year or other period of a corporation. The designated summons may require production of information that was previously sought in a summons (other than a designated summons) issued in the course of the examination of that particular corporation if that information was not previously produced.

(ii) Related summonses . There is no restriction on the number of related summonses that may be issued in connection with the examination of a corporation. As provided in paragraph (c)(2) of this section, however, a related summons must be issued within the 30-day period that begins on the date on which the designated summons to which it relates is issued and must relate to the same return as the designated summons. A related summons may request the same information as the designated summons.

(2) Time within which court proceed- ings must be brought . In order for the period of limitations on assessment to be suspended under section 6503(j), a court proceeding to enforce or to quash a designated or related summons must be instituted within the period of limitations on assessment provided in section 6501 that is otherwise applicable to the tax return.

(3) Computation of suspension period if multiple court proceedings are insti-

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to the designated summons issued to Corporation P begins on March 3, 2011, and ends on February 10, 2012. Under the facts of this Example 1, the period of limitations on assessment against Corporation P further extends to February 24, 2012, to account for the additional 14 days that remained on the period of limitations on assessment under section 6501 when the suspension period under section 6503(j) began.

Example 2 . Assume the same facts set forth in Example 1, except that in addition to the issuance of the designated summons and related enforcement proceedings, on April 5, 2011, a summons concerning Corporation P’s 2007 return is issued and served on individual A, a third party. This summons is not a related summons because it was not issued during the 30-day period that began on the date the designated summons was issued. The third-party summons served on individual A is subject to the notice requirements of section 7609(a). Final resolution of individual A’s response to this summons does not occur until February 15, 2012. Because there is no final resolution of individual A’s response to this summons by October 5, 2011, which is six months from the date of service of the summons, the period of limitations on assessment against Corporation P is suspended under section 7609(e)(2) to the date on which there is a final resolution to that response for the purposes of section 7609(e)(2). Moreover, because final resolution to the summons served on individual A does not occur until after February 10, 2012, the end of the suspension period for the designated summons, the period of limitations on assessment against Corporation P expires 14 days after the date that the final resolution as provided for in section 7609(e)(2) occurs with respect to the summons served on individual A.

(5) Computation of 60-day period when last day of assessment period falls on a weekend or holiday . For purposes of paragraph (c)(1)(ii) of this section, in determining whether a designated summons has been issued at least 60 days before the date on which the period of limitations on assessment prescribed in section 6501 expires, the provisions of section 7503 apply when the last day of the assessment period falls on a Saturday, Sunday, or legal holiday.

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

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

(Filed by the Office of the Federal Register on April 25, 2008, 8:45 a.m., and published in the issue of the Federal Register for April 28, 2008, 73 F.R. 22879)

Notice of Proposed Rulemaking

Gross Estate; Election to Value on Alternate Valuation Date

REG–112196–07

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that provide guidance relating to the availability of the election to use the alternate valuation method under section 2032 of the Internal Revenue Code (Code). The proposed regulations will affect estates that file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and elect to use the alternate valuation method.

DATES: Written or electronic comments and requests for a public hearing must be received by July 24, 2008.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–112196–07), Internal Revenue Service, Room 5203, PO Box 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–112196–07), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224; or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG–112196–07).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Theresa M. Melchiorre, at (202) 622–3090; concerning submissions of comments or to request a hearing, Kelly Banks, at (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Estate Tax Regulations (26 CFR part 20) under section 2032 of the Code. Section 2001 imposes a tax on

the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2031(a) provides that the value of the decedent’s gross estate includes the value at the time of decedent’s death of all property, real or personal, tangible or intangible, wherever situated. Section 2032(a) provides that the value of the gross estate instead may be determined, if the executor so elects, by valuing all the property included in the gross estate as follows. Property distributed, sold, exchanged, or otherwise disposed of within 6 months after the decedent’s death must be valued as of the date of distribution, sale, exchange, or other disposition. I.R.C. section 2032(a)(1). Property not distributed, sold, exchanged, or otherwise disposed of within 6 months after the decedent’s death must be valued as of the date that is 6 months after the decedent’s death. I.R.C. section 2032(a)(2). Any interest or estate which is affected by the mere lapse of time is included at its value as of the time of death (instead of the later date), with adjustment for any difference in its value as of the later date that is not due to the mere lapse of time. I.R.C. section 2032(a)(3).

The predecessor to section 2032 is section 302(j) of the Revenue Act of 1926, as added by section 202(a) of the Revenue Act of 1935. Revenue Act of 1935, 74 Public Law 407, 49 Stat. 1014 (1935). Section 302(j) allowed executors to elect to use a date that was one year after the date of decedent’s death to value estate property. Section 302(j) contained provisions for valuing the property on the date of its sale or disposition during the alternate valuation period and for not taking into account changes in value due to a mere lapse of time. Congress enacted section 302(j) in response to “the hardships which were experienced after 1929 when market values decreased very materially between the period from the date of death and the date of distribution to the beneficiaries.” 79 Cong. Rec. 14632 (1935) (statement of Mr. Samuel B. Hill). See, also, H.R. Rep. No. 74–1681, at 9 (1935); S. Rep. No. 74–1240, part 1, at 9–10 (1935); and S. Rep. No. 74–1240, part 2, at 8–9 (1935). Section 302(j) was codified as section 811(j) in the Internal Revenue Code of 1939. In 1941, the U. S. Supreme Court addressed whether rents, dividends, and interest received and accrued during the al

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of the gross estate following the date of the decedent’s death due to market conditions, but not due to other post-death events. The term market conditions is defined in the proposed regulations and examples are provided, which are not intended to be exclusive.

Proposed Effective Date

The fourth sentence of §20.2032–1(f)(2)(i) is applicable to decedents dying after May 1, 1999, subject to transition rules for certain incapacitated individuals. The fifth sentence of §20.2032–1(f)(2)(i) is applicable to decedents dying after November 30, 1983, subject to transition rules for certain incapacitated individuals. The first, second, and third sentences of §20.2032–1(f)(2)(i), §20.2032–1(f)(2)(ii), and all but the last sentence in §20.2032–1(f)(2) are applicable to decedent’s dying after August 16, 1954. When adopted as final regulations, the rules contained in §20.2032–1(f)(1), §20.2032–1(f)(3), and the last sentence of §20.2032–1(f)(2), will be made applicable to estates of decedents dying on or after April 25, 2008.

Special Analyses

It has been determined that this proposed regulation 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 on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this regulation has been 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 (a signed original and eight (8) copies) or electronic com

ternate valuation period are includible in the decedent’s gross estate under section 811(j). Maass v. Higgins, 312 U.S. 443 (1941). In that case, the Court stated that the purpose of section 811(j) is “to mitigate the hardship consequent upon shrinkage in the value of estates during the year following death. Congress enacted it in the light of the fact that, due to such shrinkages, many estates were almost obliterated by the necessity of paying a tax on the value of the assets at the date of decedent’s death.” Id . at 446.

In 1954, section 811(j) was recodified as section 2032. Congress considered proposals to amend section 811(j) and, again, Congress stated that, “The option to value property [on the alternate valuation date] initially was provided during the depression of the early 1930’s because by the time estate taxes were paid, property values had dropped substantially, sometimes to such an extent that the proceeds of the sale would not pay the estate tax due.” H. Rep. No. 83–1337 at 90 (1954). See, also, S. Rep. No. 83–1622, at 122–123 (1954).

In 1958, §20.2032–1 of the Estate Tax Regulations was published. This regulation restates the rule in section 2032(a)(3) and provides an example that illustrates the rule that only changes in the value of the decedent’s gross estate due to market conditions, and not changes to the value due to a mere lapse of time, are to be considered in valuing the decedent’s gross estate under the alternate valuation method. See example in §20.2032–1(f)(1).

Two judicial decisions have interpreted the language of section 2032 and its legislative history differently in determining whether post-death events other than market conditions may be taken into account under the alternate valuation method. In Flanders v. United States, 347 F. Supp. 95 (N.D. Cal. 1972), the district court held that the reduction in value of property included in the decedent’s estate as a result of a voluntary act by the trustee, instead of as a result of market conditions, could not be taken into consideration in valuing the property under the alternate valuation method. In that case, a few months after the death of the decedent, the trustee of the trust owning decedent’s undivided one-half interest in real property entered into a Land Conservation Agreement pursuant to the California Land Conservation

Act of 1965. In exchange for restricting the property to agricultural uses for a period of 10 years, the trustee was allowed to reduce the assessed value of the land for purposes of paying property taxes. The estate elected to use the alternate valuation method for estate tax purposes and reported the value of the decedent’s interest in the land as $25,000. This value represented one-half of the value of the ranch after the land use restriction was placed upon it, less a lack of marketability discount.

The district court stated that, “It seems clear that Congress intended that the character of the property be established for valuation purposes at the date of death. The option to select the alternate valuation date is merely to allow an estate to pay a lesser tax if unfavorable market conditions (as distinguished from voluntary acts changing the character of the property) result in a lessening of its fair market value.” Id . at 98. In Kohler v. Commissioner, T.C. Memo. 2006–152, the U.S. Tax Court held that valuation discounts attributable to restrictions imposed on closely-held corporate stock pursuant to a post-death reorganization of the Kohler Company should be taken into consideration in valuing stock on the alternate valuation date. In that case, approximately two months after the death of the decedent, the Kohler Company underwent a reorganization that qualified as a tax-free reorganization under section 368(a) and, thus, was not a sale or disposition for purposes of section 2032(a)(1). The estate opted to receive new Kohler shares that were subject to transfer restrictions. The estate elected to use the alternate valuation method under section 2032(a)(2) and took into account discounts attributable to the transfer restrictions on the stock in determining the value for Federal estate tax purposes. In the Internal Revenue Bulletin No. 2008–9 on March 3, 2008, the IRS nonacquiesced to the Tax Court opinion in Kohler (AOD 2008–1) .

Explanation of Provisions

The proposed regulations will amend §20.2032–1 by restructuring paragraph (f) of this section to clarify that the election to use the alternate valuation method under section 2032 is available to estates that experience a reduction in the value

May 27, 2008 1022 2008–21 I.R.B.

ments that are submitted timely to the IRS. The IRS and the Treasury Department also request comments on the clarity of the proposed regulations and how they 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 any person that 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 proposed regulations is Theresa M. Melchiorre, Office of Associate Chief Counsel (Passthroughs and Special Industries).

- - - -

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 20 is proposed to be amended as follows:

PART 20—ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 1954

Paragraph 1. The authority citation for part 20 continues to read in part as follows:

Authority: 26 U. S. C. 7805 * * * Par. 2. Section 20.2032–1 is amended as follows:

Paragraph (f)(1) is redesignated as paragraph (f)(2)(i).
Paragraph (f)(2) is redesignated as paragraph (f)(2)(ii).
Paragraph (f) introductory text is redesignated as paragraph (f)(2) introductory text and the last sentence in the paragraph is revised.
New paragraphs (f)(1) and (f)(3) are added.
The heading for paragraph (h) is revised and four sentences are added at the end of the paragraph.

The additions and revisions read as follows.

§20.2032–1 Alternate valuation .

- - - (f) Post-death market conditions and other post-death events —(1) In general . The election to use the alternate valuation method under section 2032 permits

the property included in the gross estate to be valued as of the alternate valuation date to the extent that the change in value during the alternate valuation period is the result of market conditions. The term mar- ket conditions is defined as events outside of the control of the decedent (or the decedent’s executor or trustee) or other person whose property is being valued that affect the fair market value of the property being valued. Changes in value due to mere lapse of time or to other post-death events other than market conditions will be ignored in determining the value of decedent’s gross estate under the alternate valuation method.

(2) Mere lapse of time . - * * The application of this paragraph (f)(2) is illustrated in paragraphs (f)(2)(i) and (f)(2)(ii) of this section:

(3) Post-death events —(i) In general . In order to eliminate changes in value due to post-death events other than market conditions, any interest or estate affected by post-death events other than market conditions is included in a decedent’s gross estate under the alternate valuation method at its value as of the date of the decedent’s death, with adjustment for any change in value that is due to market conditions. The term post-death events includes, but is not limited to, a reorganization of an entity (for example, corporation, partnership, or limited liability company) in which the estate holds an interest, a distribution of cash or other property to the estate from such entity, or one or more distributions by the estate of a fractional interest in such entity.

(ii) Examples . The following examples illustrate the application of this paragraph (f)(3). In each example, decedent’s (D’s) estate elects to value D’s gross estate under the alternate valuation method, so that the valuation date of the property included in D’s gross estate as of D’s date of death is either the date the property is distributed, sold, exchanged, or disposed of under section 2032(a)(1) (the date of distribution (distribution date)) or the date that is 6 months after the date of the decedent’s death under section 2032(a)(2) (the six month alternate valuation date (AVD)).

Example 1 . At D’s death, D owned common stock in Corporation, a closely-held subchapter C corporation. At that time, the common stock was not subject to transfer restrictions. D’s stock was valued at $50X at the date of death. Two months after D’s death, D’s estate participated in a tax-free reorganization of Corporation that qualified under section

368(a) with respect to which no gain or loss was recognized for income tax purposes under section 354 or 355. Pursuant to the reorganization, D’s estate opted to exchange its stock for stock subject to transfer restrictions. Although the value of the stock did not change during the alternate valuation period, discounts for lack of marketability and lack of control (totaling $20X) were applied in determining the value of the stock held by D’s estate on the AVD, and D’s estate reported the value of the stock on the AVD as $30X. Because the claimed reduction in value is not attributable to market conditions, the discounts may not be taken into account in determining the value of the stock on the AVD. Accordingly, the value on the AVD is $50X.

Example 2 . The facts are the same as in Exam- ple 1 except that the value of the stock declined from $50X to $40X during the alternate valuation period because of changes in market conditions during that period. D’s estate may report the value of the stock as $40X on the AVD. As in Example 1, however, no discounts resulting from the reorganization are allowed in computing the value on the AVD.

Example 3 . At D’s death, D owned property valued at $100X. Two months after D’s death, the executor of D’s estate and other family members formed four limited partnerships. The estate contributed the estate’s property to the partnerships in exchange for a 25% interest in each partnership. Discounts for lack of marketability and lack of control (totaling $25X) were applied in determining the value of the estate’s partnership interests, and the estate reported $75X as the total value of the estate’s partnership interests on the AVD. Because the reduction in value is not attributable to market conditions, the discounts for lack of marketability and control may not be taken into account in determining the value of the partnership interests on the AVD. The result would be the same if the limited partnerships were formed prior to D’s death, and the estate transferred property into the partnerships after D’s death but prior to the AVD.

Example 4 . At D’s death, D owned 100% of the units of a limited liability company (LLC). The executor elected the alternative valuation method. During the 6 months following D’s death and in accordance with D’s will, the executor made 6 distributions, each to a different residuary legatee on a different date and each of a 10% interest in the LLC. Pursuant to section 2032(a)(1), each distribution is valued on the distribution date. On the AVD, the estate held 40% of the units in the LLC. Pursuant to section 2032(a)(2), the 40% is valued on the AVD. In valuing the 10% interests distributed and the 40% interest held on the AVD, discounts for lack of control and lack of marketability were applied. The reduction in value of the units is not attributable to market conditions. Accordingly, the discounts for lack of marketability and control may not be taken into account in determining the value of the units distributed or held by the estate. The value of each 10% distribution is determined by taking 10% of the value on the distribution date of the units (100%) owned by the estate at D’s death. The value of the units held by the estate on the AVD is determined by taking 40% of the value on the AVD of all of the units (100%) owned by the estate at D’s death. If because of market conditions, the units had declined in value as of each distribution date or as of the AVD, D’s estate would take such reduction in value into account.

2008–21 I.R.B. 1023 May 27, 2008

Lima Legionnaires Charitable

Foundation, Inc. Lima, OH

Announcements of Disciplinary Sanctions From the Office of Professional Responsibility Will List Specific Violations of Circular 230

Announcement 2008–50

The Office of Professional Responsibility intends to publish announcements of disciplinary sanctions in a redesigned format that will list specific violations of Treasury Department Circular No. 230. A new “Disciplinary Sanction” column of the announcements will include the relevant section number of Circular 230 and a brief description of misconduct. Each announcement will be headed by an introduction that explains the various types of sanctions, for example, disbarment or suspension from practice before the IRS.

The listing of individuals sanctioned will continue to include the professional designation: attorney, certified public accountant, enrolled agent, enrolled actuary, enrolled retirement plan agent, or appraiser. The listing in the new format will be alphabetized first by the names of the individuals’ states of residence and second by the last names of the individuals sanctioned.

Previously, OPR endeavored to publish announcements of disciplinary sanctions on a quarterly basis, and each announcement was published in five consecutive issues of the Internal Revenue Bulletin (IRB). Future announcements will be published more frequently, and each announcement will be published in one issue of the IRB and also in the Cumulative Bulletin.

OPR redesigned the format of the announcements in order to expand the public availability of information about disciplinary proceedings and disciplinary sanctions. The first announcement in the new format is expected to be published in June 2008.

Example 5 . D died owning 100% of Blackacre. D’s will directs that Blackacre be divided between two trusts, 70% to Trust A for the benefit of S, D’s surviving spouse, and 30% to Trust B for the benefit of C, D’s surviving child. The executor of D’s estate distributed a 70% interest in Blackacre to Trust A three months after D’s death, and distributed a 30% interest in Blackacre to Trust B four months after D’s death. On the estate tax return, the executor elected to value the estate’s property under the alternate valuation method under section 2032. There was no change in the value of Blackacre during the four-month period following D’s death. The 70% interest in Blackacre is to be valued as of the distribution date to Trust A, and that value is determined by taking 70% of the value of all (100%) of Blackacre as of the distribution date. The 30% interest in Blackacre is to be valued as of the distribution date to Trust B, and that value is determined by taking 30% of the value of all (100%) of Blackacre as of the distribution date. If, however, because of market conditions such as a decline in the real estate market, Blackacre’s value had declined by 10% between D’s date of death and the distribution date of the 30% interest, the value of the 30% interest would be determined by ascertaining 30% of the value of all (100%) of Blackacre as of the distribution date, which would equal 30% of 90% of the date of death value of Blackacre.

- - - (h) Effective/applicability date . - - The fourth sentence of paragraph (f)(2)(i) of this section is applicable to decedents dying after May 1, 1999, subject to transition rules for certain incapacitated individuals. The fifth sentence of paragraph (f)(2)(i) of this section is applicable to decedents dying after November 30, 1983, subject to transition rules for certain incapacitated individuals. The first, second, and third sentences of paragraph (f)(2)(i), paragraph (f)(2)(ii), and all but the last sentence in paragraph (f)(2) of this section are applicable to decedent’s dying after August 16, 1954. When adopted as final regulations, the rules contained in paragraphs (f)(1), (f)(3), and the last sentence of paragraph (f)(2) of this section, will be made applicable to estates of decedents dying on or after April 25, 2008.

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on April 24, 2008, 8:45 a.m., and published in the issue of the Federal Register for April 25, 2008, 73 F.R. 22300)

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

Announcement 2008–49

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.

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 May 27, 2008, 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.

Heritage Christian Schools for Children

Stone Mountain, GA

May 27, 2008 1024 2008–21 I.R.B.