SEC. 5. EFFECTIVE DATE

.01 This revenue procedure applies to any return filed on 1995 tax forms for a taxable year beginning in 1995, and to any return filed on 1995 tax forms in 1996 for short taxable years beginning in 1996.

Social Security Contribution and Benefit Base

Under authority contained in the Social Security Act (‘‘the Act’’), the Commissioner, Social Security Administration, has determined and announced (60 F.R. 54751, dated October 25, 1995) that the contribution and benefit base for remuneration paid in 1996, and self-employment income earned in taxable years beginning in 1996 is $62,700.

‘‘Old-Law’’ Contribution and Benefit Base

General. The 1996 ‘‘old-law’’ contribution and benefit base is $46,500. This is the base that would have been effective under the Act without the enactment of the 1977 amendments. The base is computed under section 230(b) of the Act as it read prior to the 1977 amendments. The ‘‘old-law’’ contribution and benefit base is used by:

(a) the Railroad Retirement program to determine certain tax liabilities and tier II benefits payable under that program to supplement the tier I payments which correspond to basic Social Security benefits,

(b) the Pension Benefit Guaranty Corporation to determine the maximum amount of pension guaranteed under the Employee Retirement Income Security Act (as stated in section 230(d) of the Act),

(c) Social Security to determine a year of coverage in computing the special minimum benefit, as described earlier, and

(d) Social Security to determine a year of coverage (acquired whenever earnings equal or exceed 25 percent of the ‘‘old-law’’ base for this purpose only) in computing benefits for persons who are also eligible to receive pensions based on employment not covered under section 210 of the Act.

of issuance unless superseded or cancelled prior to that date.

9. Office of Primary Interest. Office of the Under Secretary (Enforcement).

Dated: July 24, 1995.

1. Purpose. This Directive delegates to the Commissioner, Internal Revenue Service, criminal investigatory authority and civil penalty enforcement authority under 31 U.S.C. 333 relating to misuse of the name or symbol of the Department of the Treasury or any Treasury component or employee thereof as specified below.

2. Delegation. By virtue of the authority vested in the Secretary of the Treasury by 31 U.S.C. 333, and the authority delegated to the Under Secretary (Enforcement) by Treasury Order (TO) 101–05, there is hereby delegated to the Commissioner, Internal Revenue Service, authority to investigate criminal violations of, and to assess civil penalties under, section 333 involving: (a) The misuse of the name or symbol of the Internal Revenue Service or the name of any IRS employee; or (b) the name or symbol of the Department of the Treasury or the Secretary or any Treasury employee in connection with activities within the jurisdiction of the Internal Revenue Service.

3. Civil Penalty Authority. The Commissioner, Internal Revenue Service, will assess, mitigate and collect civil penalties in accordance with guidelines issued by the Office of the Under Secretary (Enforcement).

4. Redelegation. The authority delegated by this Directive may be redelegated.

5. Authorities. a. TO 101–05, ‘‘Reporting Relationships and Supervision of Officials, Offices and Bureaus, Delegation of

1995–2 C.B. 459

Treasury Directive No. 15–42

Delegation of Authority to the Commissioner, Internal Revenue Service, To Perform Functions Under the Money Laundering Control Act of 1986, as Amended

September 11, 1995.

1. Purpose. This Directive delegates to the Commissioner, Internal Revenue Service (IRS), investigatory, seizure and forfeiture authority under the Money Laundering Control Act of 1986, Public Law 99–570, Subtitle H (October 27, 1986), as amended.

2. Delegation. By virtue of the authority vested in the Secretary of the Treasury by 18 U.S.C. §§ 981, 1956(e), 1957(e) and the authority delegated to the Under Secretary (Enforcement) by Treasury Order (TO) 101–05, there is hereby delegated to the Commissioner, IRS:

a. investigatory authority over violations of 18 U.S.C. §§ 1956 and 1957 where the underlying conduct is subject to investigation under Title 26 or under the Bank Secrecy Act, as amended; 31 U.S.C. §§ 5311–5328 (other than violations of 31 U.S.C. § 5316);

b. seizure and forfeiture authority over violations of 18 U.S.C. § 981 relating to violations of:

(1) 31 U.S.C. §§ 5313 and 5324; and

(2) 18 U.S.C. §§ 1956 and 1957 which are within the investigatory jurisdiction of IRS pursuant to paragraph 2.a.; and

c. seizure authority relating to any other violation of 18 U.S.C. § 1956 or 1957 if the bureau with investigatory authority is not present to make the seizure. Property seized under 18 U.S.C. § 981 where investigatory jurisdiction is solely with another bureau not present at the time of the seizure shall be turned over to that bureau.

3. Forfeiture Remission. The Commissioner, IRS, is authorized to remit or mitigate forfeitures of property valued at not more than $500,000 seized pursuant to paragraph 2.b.

4. Redelegation. The authority delegated by this directive may be redelegated.

5. Coordination. a. If at any time during an investigation of a violation of 18 U.S.C. § 1956 or 1957, IRS discovers evidence of a

matter within the jurisdiction of another Treasury bureau, to the extent authorized by law, IRS shall immediately notify that bureau of the investigation and invite that bureau to participate in the investigation. The Commissioner, IRS, shall attempt to resolve disputes over investigatory jurisdiction with other Treasury bureaus at the field level.

b. The Under Secretary (Enforcement) shall settle disputes that cannot be resolved by the bureaus in consultation with the Commissioner, IRS.

c. With respect to matters discovered within the investigatory jurisdiction of a Department of Justice bureau or the Postal Service, IRS shall adhere to the provisions on notice and coordination in the ‘‘Memorandum of Understanding Among the Secretary of the Treasury, the Attorney General and the Postmaster General Regarding Money Laundering Investigations,’’ dated August 16, 1990, or any such subsequent memorandum of understanding entered pursuant to 18 U.S.C. § 1956(e) or 1957(e). d. With respect to seizure and forfeiture operations and activities within its investigative jurisdiction, IRS shall comply with the policy, procedures, and directives developed and maintained by the Treasury Executive Office for Asset Forfeiture. Compliance will include adhering to the oversight, reporting, and administrative requirements relating to seizure and forfeiture contained in such policy, procedures, and directives.

6. Authorities. a. 18 U.S.C. §§ 981, 1956 and 1957. b. 31 U.S.C. §§ 5311–5328 (other than violations of 31 U.S.C. § 5316).

c. TO 101–05, ‘‘Reporting Relationships and Supervision of Officials, Offices and Bureaus, Delegation of Certain Authority, and Order of Succession in the Department of the Treasury.’’

d. TO 102–14, ‘‘Delegation of Authority with Respect to the Treasury Forfeiture Fund Act of 1992,’’ dated January 10, 1995.

7. Cancellation. Treasury Directive 15–42, ‘‘Delegation of Authority to the Commissioner, Internal Revenue Service to Perform Functions Under the Money Laundering Control Act of 1986, as amended,’’ dated May 1, 1991, is superseded.
8. Expiration Date. This Directive shall expire three years from the date

Ronald K. Noble,

Under Secretary

(Enforcement).

(Filed by the Office of the Federal Register on

September 15, 1995, 8:45 a.m., and published in the issue of the Federal Register for September 18, 1995, 60 F.R. 48199)

Treasury Directive No. 15–43

Delegation of Authority to the Commissioner, Internal Revenue Service, Under 31 U.S.C. 333, Misuse of Treasury Name or Symbol

Certain Authority, and Order of Succession in the Department of the Treasury.’’

b. 31 U.S.C. 333. 6. References. a. Treasury Directive (TD) 73–03, ‘‘Official Flags of the Department of the Treasury.’’

b. TD 73–04, ‘‘Official Seal of the Department of the Treasury.’’

c. 18 U.S.C. 701. 7. Expiration Date. This Directive shall expire three years from the date of issuance unless cancelled or superseded by that date.

8. Office of Primary Interest. Office of the Under Secretary (Enforcement).

office shall be titled ‘‘Director’’ identified by the district name as specified in the Attachment. The geographic areas within each district are shown in the Attachment.

3. U.S. Territories and Insular Pos- sessions. The Commissioner of Internal Revenue shall, to the extent of authority vested in the Commissioner, provide for the administration of the United States internal revenue laws in the U.S. territories and insular possessions and other areas of the world.

4. Implementation. The district and regional organization described above shall be implemented on dates determined by the Commissioner of Internal Revenue. Until such dates, the existing offices are authorized to continue. Effective immediately, the Commissioner is authorized to effect such transfers of functions, personnel, positions, equipment and funds as may be necessary to implement the provisions of this Order.

5. Other Offices. This Order affects only the regional and district offices subject to this Order and does not affect service centers or other offices in existence within the Internal Revenue Service.

6. Effect On Prior Treasury Orders. a. TO 150–01, ‘‘Designation of Internal Revenue Districts,’’ dated October 27, 1987, is superseded. b. TO 150–03, ‘‘Designation of Internal Revenue Regions and Regional Service Centers,’’ dated January 24, 1986, is superseded.

the Treasury.

Ronald K. Noble,

Under Secretary

(Enforcement).

1951, as amended) as made applicable to Section 7621 of the Internal Revenue Code of 1986, as amended (as previously contained in the Internal Revenue Code of 1954) by Executive Order 10574 (approved November 5, 1954); under the authority vested in the Secretary of the Treasury by 31 U.S.C. 321(a), (b) and Reorganization Plan No. 1 of 1952 as made applicable to the Internal Revenue Code of 1986, as amended, by Section 7804(a) of such Code; and under the authority vested in the Secretary of the Treasury by Sections 7801(a) and 7803 of the Internal Revenue Code of 1986, as amended; the following internal revenue districts and regions are established or continued as described in this Order. When fully implemented, this Order establishes fewer internal revenue regions and districts than designated in previous Orders.

1. Regions. Four regions are established which shall be identified as Northeast Region, headquartered at New York, New York; Southeast Region, headquartered at Atlanta, Georgia; Midstates Region, headquartered at Dallas, Texas; and Western Region, headquartered at San Francisco, California. The head of each regional office shall bear the title ‘‘Regional Commissioner’’ identified by the region name. The geographic areas and internal revenue districts within each region are shown in the Attachment to this Order.

2. Districts. Thirty-three districts are established. Each shall be known as an internal revenue district and shall be identified by the names listed in the Attachment. The head of each district

(Filed by the Office of the Federal Register on

July 31, 1995, 8:45 a.m., and published in the issue of the Federal Register for August 1, 1995, 60 F.R. 39203)

DEPARTMENT OF THE TREASURY

Treasury Order No. 150–01

Regional and District Offices of the Internal Revenue Service

Dated: September 28, 1995.

Under the authority given to the President to establish and alter internal revenue districts by Section 7621 of the Internal Revenue Code of 1986, as amended, and vested in the Secretary of the Treasury by Executive Order 10289 (approved September 17,

Robert E. Rubin,

Secretary of

460 1995–2 C.B.

REGIONAL AND DISTRICT OFFICES OF THE INTERNAL REVENUE SERVICE—Continued

1995–2 C.B. 461

REGIONAL AND DISTRICT OFFICES OF THE INTERNAL REVENUE SERVICE—Continued

(Filed by the Office of the Federal Register on October 6, 1995, 8:45 a.m., and published in the issue of the Federal Register for October 10, 1995, 60 F.R.

(Filed by the Office of the Federal Register on October 6, 1995, 8:45 a.m., and published in the issue of the Federal Register for October 10, 1995, 60 F.R.

462 1995–2 C.B.

Notice of Proposal Rulemaking

CO–19–95 464 CO–24–95 466 CO–26–95 466 EE–24–93 468 IA–36–91 470 IA–44–94 471 IA–10–95 478 IA–30–95 479 INTL–75–92 480 INTL–24–94 485 PS–268–82 491 PS–29–92 497 PS–34–92 494 PS–25–94 502 PS–54–94 503 PS–8–95 506

The ‘‘Proposed regulations’’ heading in the index contains a list of Code sections affected, the subject matter and the number and page.

1995–2 C.B. 463

Notice of Proposed Rulemaking

bers of a controlled group of corporations (within the meaning of section 1563(a)) shall be treated as one issuer. Also, a person holding stock in a RIC, REIT, or other investment company (as defined in section 368(a)(2)(F)(iii)) that meets the requirements of section 368(a)(2)(F)(ii) shall be treated as holding its proportionate share of the assets held by the company. Section 368(a)(2)(F)(iv) provides that in determining total assets, certain assets shall be excluded, including cash and cash items (including receivables), Government securities, and assets acquired to meet section 368(a)(2)(F)(ii) or to cease to be an investment company. Section 368(a)(2)(F)(v) provides that section 368(a)(2)(F) shall not apply if the stock of each investment company is owned substantially by the same persons in the same proportions. Section 368(a)(2)(F)(vii) defines securities for purposes of clauses (ii) and (iii) of section 368(a)(2)(F).

Reasons for Change

The IRS wants to clarify that 1.351– 1(c)(5) does not prevent tax-free combinations of already diversified portfolios, and that combinations of already diversified portfolios are not inconsistent with the purposes of section 351(e) ( i.e., preventing the tax-free transfer of one or a few stocks or securities to swap funds). For example, RICs often transfer portfolios of investment assets to partnerships under section 721(a) (which is subject to the section 351(e) rules pursuant to section 721(b)). These transactions are appropriately tax-free because the RICs are not transferring one or a few stocks or securities, but rather, the RICs are transferring diversified portfolios of stocks and securities.

Also, the nonidentical asset standard of 1.351–1(c)(5) is stricter than the test applied for combinations of investment companies under the corporate reorganization provisions (see section 368(a)(2)(F)(ii)). Transfers of certain diversified portfolios to a corporation may be taxable under section 351(e), while the same portfolios could be combined through a merger that may qualify as a tax-free reorganization.

Explanation of Provisions

The proposed amendments to 1.351– 1(c) provide that transfers of assets will

Notice of Proposed Rulemaking

Transfers to Investment Companies

CO–19–95

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document proposes amendments to regulations relating to transfers to investment companies. The amendments are necessary to clarify existing regulations relating to certain transfers to a controlled corporation. Generally, the regulations will be amended to provide when certain transfers will not cause a diversification of the transferors’ interests.

DATES: Written comments and requests for a public hearing must be received by November 8, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (CO–19–95), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (CO–19– 95), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

This document proposes amendments to the Income Tax Regulations (26 CFR part 1) under section 351 of the Internal Revenue Code of 1986. Section 351(a) provides that no gain or loss will be recognized if one or more persons transfer property to a corporation solely in exchange for stock in the corporation and immediately after the exchange the transferors control the transferee corporation. Section 351(e)(1) provides that section 351(a) will not apply to a transfer of property to an investment company.

The rule of section 351(e)(1) was enacted as part of the Foreign Investors Tax Act of 1966, with the goal of

464 1995–2 C.B.

preventing individuals from achieving tax-free diversification by the transfer of one or a few stocks or securities to a corporation (referred to as a swap fund). See generally H. Rep. No. 1049, 94th Cong., 2d Sess. (Apr. 27, 1976). Section 1.351–1(c)(1) states that a transfer to an investment company will occur when (i) the transfer results in diversification of the transferors’ interests, and (ii) the transferee is a Regulated Investment Company (RIC), Real Estate Investment Trust (REIT), or a corporation more than 80 percent of the value of whose assets (excluding cash and non-convertible debt obligations) are readily marketable stocks or securities. Section 1.351–1(c)(5) provides that a transfer ordinarily results in the diversification of the transferors’ interests if two or more persons transfer nonidentical assets to a corporation in the exchange.

As part of the Tax Reform Act of 1976 (the 1976 Act), Congress enacted sections 683(a) and 721(b), which incorporate the section 351(e) rules for transfers to a trust and a partnership, respectively.

The 1976 Act also addressed reorganizations of investment companies by enacting section 368(a)(2)(F). This legislation was intended to prevent the tax-free merger of a closely held corporation holding an undiversified group of assets into a publicly held diversified investment company, resulting in a tax-free diversification of the interests of the target shareholders.

Section 368(a)(2)(F)(i) provides that a transaction between two ‘‘investment companies’’ otherwise qualifying as a reorganization will not qualify as a reorganization for any corporation in the transaction that is not a RIC, REIT, or corporation described in section 368(a)(2)(F)(ii). Section 368(a)(2)(F)(iii) defines an investment company as a RIC, REIT, or corporation with at least 50 percent of its assets comprised of stocks or securities and 80 percent of its assets held for investment. A corporation satisfies section 368(a)(2)(F)(ii) if not more than 25 percent of the value of its total assets is invested in the stock and securities of any one issuer and not more than 50 percent of the value of its total assets is invested in the stock and securities of five or fewer issuers. For purposes of the section 368(a)(2)(F)(ii) test, all mem

not be treated as transfers that result in diversification of the transferors’ interests for purposes of 1.351–1(c)(1)(i) if each transferor transfers assets that satisfy section 368(a)(2)(F)(ii), as modified. Under this rule, no transfers of nonidentical assets to a corporation described in 1.351–1(c)(1)(ii) will qualify for nonrecognition treatment under section 351 unless each transferor transfers assets that satisfy section 368(a)(2)(F)(ii), as modified. For purposes of 1.351–1(c), relevant provisions of section 368(a)(2)(F) will apply to the section 368(a)(2)(F)(ii) test. Those provisions include the controlled group and look-through rules found in clause (ii) (members of a controlled group of corporations are considered as one issuer and persons holding stock in certain investment companies are treated as holding a proportionate share of the investment company’s assets), the common ownership rule found in clause (v) (diversification will not be considered to occur if the interests in the assets to be transferred are held substantially by the same persons in the same proportions as the interests in the transferee), and the definition of securities found in clause (vii) (the term securities includes investments constituting a security within the meaning of the Investment Company Act of 1940 (15 U.S.C. 80a– 2(36)). The definition of total assets in section 368(a)(2)(F)(iv) will apply, except that Government securities will be included in determining total assets, unless the Government securities are acquired to meet section 368(a)(2)(F)(ii).

The proposed modification of the definition of total assets to include Government securities addresses a problem caused by transfers of funds consisting mostly of Government securities. For example, if 95 percent of a money market fund’s assets are invested in Government securities and five percent are invested in the stock of corporation X, the Government securities would not be treated as securities (see section 368(a)(2)(F)(vii)) and, without the modification, would be excluded from total assets for purposes of the 25 and 50 percent test of section 368(a)(2)(F)(ii). As a result, the unmodified test would treat 100 percent of the fund’s assets as X stock and the fund would not satisfy the 25 and 50 percent test of section 368(a)(2)(F)(ii). The modified test would include Government securities in

total assets. The fund would satisfy the modified test because the stock of one issuer would constitute only five percent of the fund’s portfolio. The IRS believes that the modification is appropriate because the presence of a small amount of nondiversified property in a Government securities portfolio (otherwise qualifying under section 368(a)(2)(F)(ii)) should not disqualify the portfolio from tax-free treatment.

The adoption of the modified section 368(a)(2)(F)(ii) test is intended to limit section 351(e) to cases more analogous to the typical swap fund cases that were the focus of the section 351(e) legislation. Also, the adoption of this test should minimize the different tax treatment of a section 351 transfer and a section 368 reorganization under economically similar situations. This test will also apply for purposes of sections 683(a) and 721(b). Finally, a proposed revision to 1.584–4(a) adopts this test.

Proposed Effective Date

These regulations are proposed to apply to transfers of assets occurring on or after the date of publication as final regulations 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 EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to

the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a 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.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 as proposed to be amended in a document published elsewhere in *** [CO–26–95, page 45 this Bulletin] continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.351–1 also issued under 26 U.S.C. 351 * * * .

Par. 2. Section 1.351–1 is amended by:

1. Redesignating paragraph (c)(6) as paragraph (c)(7).

2. Adding new paragraph (c)(6) to read as follows:

1.351–1 Transfer to corporation controlled by transferor.

- - - - -

(c) - * * (6) For purposes of paragraph (c)(5) of this section, a transfer of assets will not be treated as resulting in a diversification of the transferors’ interests if each transferor transfers a diversified portfolio of assets. For purposes of this paragraph, a portfolio of assets is diversified if it satisfies section 368(a)(2)(F)(ii), applying the relevant provisions of section 368(a)(2)(F), except that, in applying section 368(a)(2)(F)(iv), Government securities are included in determining total assets, unless the Government securities are acquired to meet section 368(a)(2)(F)(ii).

- - - - -

1995–2 C.B. 465

Margaret Milner Richardson,

the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * - Par. 2. In §1.1502–13, paragraph (f)(6) is added to read as follows:

§1.1502-13 Intercompany transactions.

[The text of proposed paragraph (f)(6) is the same as the text of §1.1502–13T(f)(6) published elsewhere in *** [T.D. 8598, this Bulletin].]

Michael P. Dolan, Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

July 12, 1995, 12:56 p.m., and published in the issue of the Federal Register for July 18, 1995, 60 F.R. 36755)

Notice of Proposed Rulemaking and Notice of Public Hearing

Treatment of Underwriters in Section 351 and Section 721 Transactions

CO–26–95

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document proposes rules for transfers of cash to a corporation or a partnership. The proposed regulations will affect taxpayers in transactions intended to qualify under section 351 and section 721 when there is an offering of stock or partnership interests through an underwriter. This

Commissioner of

Internal Revenue.

the Income Tax Regulations (26 CFR part 1) relating to section 1502. The temporary regulations provide rules for disallowing loss and excluding gain for certain dispositions and other transactions involving stock of the common parent of a consolidated group.

The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Special Analysis

Is has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 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) that are submitted timely to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for November 16, 1995 at 10 a.m., in the IRS Auditorium. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons who wish to present oral comments at the hearing must submit written comments by October 26, 1995 and submit an outline of the topics (signed original and eight (8) copies) to be discussed by October 26, 1995.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after

(Filed by the Office of the Federal Register on

August 9, 1995, 8:45 a.m., and published in the issue of the Federal Register for August 10, 1995, 60 F.R. 40794)

Notice of Proposed Rulemaking and Notice of Public Hearing

Consolidated Groups—Intercompany Transactions and Related Rules

CO–24–95

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In *** [T.D. 8598, page 188, this Bulletin], the IRS is issuing temporary regulations that provide rules for disallowing loss and excluding gain for certain dispositions and other transactions involving stock of the common parent of a consolidated group. The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by October 16, 1995. Outlines of topics to be discussed at the public hearing scheduled for November 16, 1995 must be received by October 26, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (CO–24–95), Room 5228, Internal Revenue Service, P.O.B. 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (CO–24–95), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. The hearing will be held in the IRS Auditorium, 1111 Constitution Avenue, NW, Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in *** [T.D. 8598, page 188, this Bulletin] amend

466 1995–2 C.B.

document also provides notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by November 8, 1995. Requests to speak at the public hearing scheduled for Wednesday, January 17, 1996, at 10 a.m., with outlines of oral comments, must be received by Wednesday, December 27, 1995.

ADDRESSES: Send submissions: CC:DOM:CORP:T:R (CO–26–95), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (CO–26– 95), Courier’s Desk, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. The hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

Section 351(a) provides that no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and immediately after the exchange the person or persons are in control (as defined in section 368(c)) of the corporation.

Section 721(a) provides that no gain or loss is recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.

Rev. Rul. 78–294, 1978–2 C.B. 141, involves the incorporation of an existing sole proprietorship by an individual to raise capital through a public offering. The individual sought the assistance of an underwriter. In accordance with the plan, the individual organized a new corporation, which had capital stock of 1,000 authorized but unissued shares.

Situation 1 describes a transaction that was considered to fall within the general definition of a ‘‘best efforts’’ underwriting. Pursuant to an agreement among the individual, the new corporation, and the underwriter, the individual transferred all the business property to the new corporation in exchange for

500 shares of stock. The underwriter agreed to use its best efforts as an agent of the corporation to sell the 500 unissued shares to the general public at $200 per share. The underwriter succeeded in selling the stock within two weeks of the initial offering with no change in the terms of the offering.

Situation 2 describes a transaction that was considered to fall within the general definition of a ‘‘firm commitment’’ underwriting. Pursuant to an agreement among the individual, the new corporation, and the underwriter, the individual transferred all the business property to the new corporation in exchange for 500 shares of stock, and the underwriter transferred $100,000 in cash to the new corporation in exchange for the remaining 500 shares. At the time of the underwriter’s purchase, the underwriter had not entered into a binding contract to dispose of its stock in the new corporation. However, the underwriter intended to sell its 500 shares, but, if unsuccessful, was required to retain them. Following the exchanges, the underwriter sold its 500 shares of stock in the new corporation to the general public within two weeks of the initial offering. The individual retained the 500 shares of stock in the new corporation.

In Situation 1, the ruling holds that the individual who transferred the business property to the corporation and the investors in the public offering were co-transferors in a single transaction that qualified under section 351. In Situation 2, the ruling holds that the firm commitment underwriter was a transferor along with the individual and that their control was not defeated by the subsequent resale of 50 percent of the stock in the public offering.

The IRS and Treasury believe that Situation 2 of Rev. Rul. 78–294 does not reflect current underwriting practices. In addition, the IRS and Treasury believe that underwritings of partnership interests should be treated similarly to underwritings of stock. Further, the proposed regulations are necessary to prevent inappropriate imposition and inappropriate avoidance of tax.

The proposed regulations, under certain circumstances, disregard underwriters of stock and partnership interests for purposes of section 351 and section 721. The proposed treatment of underwriters is similar to their treatment under 1.382–3(j)(7) and 1.1273–2(e).

Explanation of Provisions

Proposed Amendment Adding 1.351–1(a)(3)

This document proposes to add 1.351–1(a)(3) to 26 CFR part 1. The proposed regulation provides that, for the purpose of section 351, if a person acquires stock from an underwriter in exchange for cash in a qualified underwriting transaction, the person who acquires the stock from the underwriter is treated as transferring cash directly to the corporation in exchange for the stock and the underwriter is disregarded. A qualified underwriting transaction is a transaction in which a corporation issues stock for cash in an underwriting in which either the underwriter is an agent of the corporation or the underwriter’s ownership of stock is transitory. The proposed regulation would render Rev. Rul. 78–294 obsolete. No inference is intended as to transactions not within the scope of the proposed regulation.

Proposed Amendment Adding 1.721–1(c)

This document proposes to add 1.721–1(c) to 26 CFR part 1. The proposed regulation provides that, for the purpose of section 721, if a person acquires a partnership interest from an underwriter in exchange for cash in a qualified underwriting transaction, the person who acquires the partnership interest from the underwriter is treated as transferring cash directly to the partnership in exchange for the partnership interest and the underwriter is disregarded. A qualified underwriting transaction is a transaction in which a partnership issues partnership interests for cash in an underwriting in which either the underwriter is an agent of the partnership or the underwriter’s ownership of the partnership interests is transitory. No inference is intended as to transactions not within the scope of the proposed regulation.

Comments Solicited

The IRS and Treasury invite public comment on the proposed regulations. In particular, the IRS and Treasury solicit comments on (a) whether the proposed rules should apply for all tax purposes; (b) whether the proposed rules should be limited to underwriters;

1995–2 C.B. 467

(a)(3) is effective for qualified underwriting transactions occurring on or after the date of publication of the final regulation in the Federal Register.

- - - - -

Par. 3. In 1.721–1, paragraph (c) is added to read as follows:

1.721–1 Nonrecognition of gain or loss on contribution.

- - - - -

(c) Underwritings of partnership interests —(1) In general. For the purpose of section 721, if a person acquires a partnership interest from an underwriter in exchange for cash in a qualified underwriting transaction, the person who acquires the partnership interest is treated as transferring cash directly to the partnership in exchange for the partnership interest and the underwriter is disregarded. A qualified underwriting transaction is a transaction in which a partnership issues partnership interests for cash in an underwriting in which either the underwriter is an agent of the partnership or the underwriter’s ownership of the partnership interests is transitory.

(2) Effective date. This paragraph (c) is effective for qualified underwriting transactions occurring on or after the date of publication of the final regulation in the Federal Register.

(Filed by the Office of the Federal Register on

August 9, 1995, 8:45 a.m., and published in the issue of the Federal Register for August 10, 1995, 60 F.R. 40792)

Notice of Proposed Rulemaking

Notice, Consent, and Election Requirements Under Sections 411(a)(11) and 417

EE–24–93

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: In *** [T.D. 8620, page 63, this Bulletin], the IRS is issuing

and (c) whether the proposed rules should be limited to cash transactions.

Proposed Effective Dates

New 1.351–1(a)(3) and new 1.721– 1(c) are proposed to be effective for qualified underwriting transactions occurring on or after the date of publication as final regulations in the Federal Register.

Effect on other documents

The following publication would become obsolete as of the date of publication in the Federal Register of the final regulations: Rev. Rul. 78–294, 1978–2 C.B. 141.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 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) that are submitted timely to the Internal Revenue Service. All comments will be available for public inspection and copying.

A public hearing has been scheduled for Wednesday, January 17, 1996, beginning at 10 a.m., in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

468 1995–2 C.B.

Persons who wish to present oral comments at the hearing must submit written comments, an outline of topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by Wednesday, December 27, 1995.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.351–1 also issued under 26 U.S.C. 351. * * *

Section 1.721–1 also issued under 26 U.S.C. 721. * * *

Par. 2. In 1.351–1, paragraph (a)(3) is added to read as follows:

1.351–1 Transfer to corporation controlled by transferor.

(a) - * * (3) Underwritings of stock —(i) In general. For the purpose of section 351, if a person acquires stock of a corporation from an underwriter in exchange for cash in a qualified underwriting transaction, the person who acquires stock from the underwriter is treated as transferring cash directly to the corporation in exchange for stock of the corporation and the underwriter is disregarded. A qualified underwriting transaction is a transaction in which a corporation issues stock for cash in an underwriting in which either the underwriter is an agent of the corporation or the underwriter’s ownership of the stock is transitory.

(ii) Effective date. This paragraph

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

temporary regulations that provide guidance concerning the notice and consent requirements under section 411(a)(11) and the notice and election requirements of section 417. The text of those temporary regulations also serves as the text of these proposed regulations.

DATES: Written comments must be received by December 21, 1995.

ADDRESSES: Send submissions to CC:DOM:CORP:T:R (EE–24–93), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:T:R (EE–24– 93), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget (OMB) for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507).

Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224. To ensure that comments on the collection of information may be given full consideration during the review by OMB, these comments should be received by December 21, 1995.

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

The collection of information is in the provisions of §§1.411(a)– 11(c)(2)(iii) and 1.417(e)–1(b)(3)(ii) that require the plan administrator to inform a participant that the participant has a right to at least 30 days to consider distribution options. Existing regulations implement the mandate of section 417(a)(3) that a qualified plan

provide a written explanation of distribution options to each participant. Under existing regulations, a distribution cannot be made until 30 days after the explanation is provided. The provisions of this notice of proposed rulemaking give plans the flexibility to make a distribution within 30 days provided the participant is clearly informed of the right to at least 30 days for consideration of the distribution options. The IRS requires this information to be provided to participants to assure they have adequate time to evaluate their distribution options.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The collection of information under this notice of proposed rulemaking can be satisfied by the addition of a statement to the explanation already provided by plan administrators to participants under existing regulations. Therefore, this collection of information results in a minor increase in an existing burden. Estimated total annual reporting burden: 8333 hours. The estimated burden per respondent varies from 0 hours to 2 hours, depending on individual circumstances, with an estimated average of .011 hours.

Estimated number of respondents: 750,000.

Estimated annual frequency of responses: One time per year.

Background

Temporary regulations in *** [T.D. 8620, page 00, this Bulletin] amend the Income Tax Regulations (26 CFR part

1. relating to section 411(a)(11) and section 417. The temporary regulations contain rules relating to the notice, consent, and election requirements of those sections. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined

in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying.

A public hearing may be scheduled if requested in writing by a 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.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805. * * * Par. 2. Section 1.411(a)–11 is amended by

1. Revising paragraphs (c)(2)(ii) and (iii).

2. Adding paragraphs (c)(2)(iv) and (v) and (c)(8).

The revisions and additions read as follows:

§1.411(a)–11 Restriction and valuation of distributions.

[The text of proposed paragraphs (c)(2)(ii) through (c)(2)(v) and (c)(8)

1995–2 C.B. 469

are the same as the text of §1.411(a)– 11T published elsewhere in *** [T.D. 8620, this Bulletin].] Par. 3. Section 1.417(e)–1 is amended by:

1. Revising paragraph (b)(3).
2. Adding paragraph (b)(4). The revision and addition read as follows:

§1.417(e)–1 Restrictions and valuations of distributions from plans subject to sections 401(a)(11) and 417.

[The text of proposed paragraphs (b)(3) and (4) is the same as the text of §1.417(e)–1T published elsewhere in *** [T.D. 8620, this Bulletin].]

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (IA–36– 91), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Procedure and Administration Regulations (26 CFR part 301) that would revise the paragraphs in the regulations that specify the legal holidays and provide other related information.

Explanation of Provisions

This document proposes to amend §301.7503–1, which explains and supplements section 7503 of the Internal Revenue Code pertaining to the performance of any act prescribed under authority of the internal revenue laws when the last day for performance of the act falls on Saturday, Sunday, or a legal holiday. First, §301.7503–1(a) would be amended to reflect a change to the name of the Court of Claims, which, as of October 29, 1992, became the Court of Federal Claims.

Second, §301.7503–1(b), which provides a list of the legal holidays and other related information, would be revised. The current list of holidays is outdated. However, in light of the aim toward tax simplification, the list of holidays in paragraph (b) would be replaced by citations to the law from which the holidays must be discerned. In this way, future changes in the law with respect to the holidays will not require amendments to the regulations.

Third, §301.7503–1(c), which provides that section 7503 is applicable in any case where the last day for performance of an act occurs after August 16, 1954, would be removed because this information is obsolete.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comments 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) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any 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.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

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 301.7503–1 is amended as follows:

1. In the fourth sentence of paragraph (a), the language ‘‘Thursday, November 22, 1956 (Thanksgiving Day), the suit will be timely if filed on Friday, November 23, 1956, in the Court of Claims’’ is removed and the language ‘‘Thursday, November 23, 1995 (Thanksgiving Day), the suit will be timely if filed on Friday, November

(Filed by the Office of the Federal Register on

September 15, 1995, 4:00 p.m., and published in the issue of the Federal Register for September 22, 1995, 60 F.R. 49236)

Notice of Proposed Rulemaking

Time for Performance of Acts Where Last Day Falls on Saturday, Sunday, or Legal Holiday

IA–36–91

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the time for performance of acts by taxpayers and by the Commissioner, a district director, or the director of a regional service center, where the last day for performance falls on a Saturday, Sunday, or legal holiday. In particular, the proposed regulations would remove the list of legal holidays and other outdated material.

DATES: Written comments and requests for a public hearing must be received by December 26, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (IA–36–91), Room 5228, Internal Revenue Service,

470 1995–2 C.B.

24, 1995, in the Court of Federal Claims’’ is added in its place.

2. Paragraph (b) is revised as set forth below.

3. Paragraph (c) is removed. The revision reads as follows:

§301.7503–1 Time for performance of acts where last day falls on Saturday, Sunday, or legal holiday .

- - - - -

(b) Legal holidays . For the purpose of section 7503, the term legal holiday includes the legal holidays in the District of Columbia as found in D.C. Code Ann. 28–2701. In the case of any return, statement, or other document required to be filed, or any other act required under the authority of the internal revenue laws to be performed, at an office of the Internal Revenue Service, or any other office or agency of the United States, located outside the District of Columbia but within an internal revenue district, the term legal holiday includes, in addition to the legal holidays in the District of Columbia, any statewide legal holiday of the state where the act is required to be performed. If the act is performed in accordance with law at an office of the Internal Revenue Service or any other office or agency of the United States located in a territory or possession of the United States, the term legal holiday includes, in addition to the legal holidays in the District of Columbia, any legal holiday that is recognized throughout the territory or possession in which the office is located.

tions. The likely respondents are individuals or households, business or other for-profit institutions, nonprofit institutions, and small businesses or organizations. Estimated total annual recordkeeping burden: 100,000 hours. Estimated average annual burden per recordkeeper: .10 hour. Estimated number of recordkeepers: 1,000,000. Estimated total annual reporting burden: 1,875,000 hours. Estimated average burden per respondent: 2.5 hours. Estimated number of respondents: 750,000. Estimated frequency of responses: On occasion.

Background

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) that provide guidance under sections 170(a), 170(f)(8), and 6115 of the Internal Revenue Code of 1986.

Sections 170(f)(8) and 6115 were added to the Code by sections 13172 and 13173 of the Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103–66, 107 Stat. 455, 1993–3 C.B. 43. Temporary regulations (TD 8544 [1994–2 C.B. 28]) and a notice of proposed rulemaking by cross-reference to temporary regulations under section 170(f)(8) were published in the Federal Register for May 27, 1994 (52 FR 27458, 27515

[IA–74–93, 1994–2 C.B. 873]). The temporary and proposed regulations primarily address contributions made by payroll deduction and a donor’s receipt of goods or services with insubstantial value. A public hearing was held on November 10, 1994. On March 22, 1995, the Service released Notice 95–15, which was published in 1995–1 C.B. 299. Notice 95–15 provides transitional relief (for 1994) from the substantiation requirement.

Explanation of Statutory Provisions

Section 170(a) allows a deduction for certain charitable contributions to or for the use of an organization described in section 170(c). Under section 170(f)(8), taxpayers who claim a deduction for a charitable contribution of $250 or more are responsible for obtaining from the

1995–2 C.B. 471

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

SUMMARY: This document contains proposed regulations that provide guidance regarding the allowance of certain charitable contribution deductions, the substantiation requirements for charitable contributions of $250 or more, and the disclosure requirements for quid pro quo contributions in excess of $75. The proposed regulations will affect organizations described in section 170(c) and individuals and entities that make payments to those organizations.

DATES: Written comments must be received by November 1, 1995. Requests to appear and outlines of oral comments to be presented at the public hearing scheduled for November 1, 1995, must be received by October 11, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (IA–44–94), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, D.C. 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (IA–44– 94), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. The Public Hearing scheduled for November 1, 1995, at 10:00 a.m., will be held in the IRS Auditorium, 7th floor, 1111 Constitution Avenue, N.W., Washington, D.C.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)). Comments on the collections of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224.

The collections of information are in §§1.170A–13(f)(1), (f)(10), (f)(14), and 1.6115–1. This information is required by the IRS to determine the deductibility of certain charitable contribu

(Filed by the Office of the Federal Register on

September 22, 1995, 8:45 a.m., and published in the issue of the Federal Register for September 25, 1995, 60 F.R. 49356)

Notice of Proposed Rulemaking and Notice of Public Hearing

Deductibility, Substantiation, and Disclosure of Certain Charitable Contributions

IA–44–94

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

donee organization, and maintaining in their records, substantiation of that contribution. See H.R. Conf. Rep. 2264, 103d Cong., 1st Sess. 565 (1993). Specifically, section 170(f)(8) provides that no charitable contribution deduction will be allowed under section 170(a) for a contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee organization.

Section 170(f)(8)(B) provides that an acknowledgment meets the requirements of that section if it includes the following information: (1) the amount of cash paid and a description (but not necessarily the value) of any property other than cash transferred to a donee organization; (2) whether or not the donee organization provided any goods or services in consideration for the cash or property; and (3) a description and good faith estimate of the value of any goods or services provided by the donee organization in consideration for the cash or property. A written acknowledgment is contemporaneous, within the meaning of section 170(f)(8)(C), if it is obtained on or before the earlier of: (1) the date the taxpayer files its original return for the taxable year in which the contribution was made, or (2) the due date (including extensions) for filing the taxpayer’s original return for that year.

Section 170(f)(8) does not prescribe a format for the written acknowledgment. Any document that contains the required information, including but not limited to a letter, postcard, computergenerated form, or tax form, is an acceptable means of providing a taxpayer with a written acknowledgment. For example, a private foundation may use a copy of its Form 990–PF, Return of Private Foundation, as a written acknowledgment for a taxpayer’s charitable contribution of $250 or more if it contains the necessary information. Any documents that are used as a written acknowledgment of a taxpayer’s charitable contribution must be contemporaneous within the meaning of section 170(f)(8)(C).

Section 6115 generally requires an organization described in section 170(c) that receives a ‘‘quid pro quo contribution’’ in excess of $75 to provide a written disclosure statement to the donor. The written disclosure statement must contain the following information: (1) a statement that the deductibility of the donor’s contribution is limited to

472 1995–2 C.B.

the excess of the amount of any money or the value of any property contributed by the donor over the value of the goods or services provided to the donor by the organization, and (2) a good faith estimate of the value of the goods or services provided by the organization. Section 6115(b) defines a quid pro quo contribution as a payment made partly as a contribution and partly in consideration for goods or services provided by the organization.

Explanation of Regulatory Provisions

Deductibility of a Payment in Exchange for Consideration

In United States v. American Bar Endowment, 477 U.S. 105 (1986), the Supreme Court set forth a two-part test for determining whether a payment that is partly in consideration for goods or services is deductible under section 170(a). First, a payment to an organization described in section 170(c) is deductible only if, and to the extent that, the payment exceeds the fair market value of the benefits received. Second, the excess payment must be made with the intent to make a charitable contribution. See also Rev. Rul. 67–246, 1967–2 C.B. 104.

The proposed regulations adopt this two-part test for determining whether a payment is deductible under section 170(a). Specifically, the regulations provide that, in order for a charitable contribution deduction to be allowed, a taxpayer must intend to make a payment in an amount that exceeds the fair market value of the goods or services received in return, and must actually make a payment in an amount that exceeds that fair market value.

Certain Goods or Services Disregarded

Under current law, a taxpayer who receives membership benefits in return for a payment to an organization described in section 170(c) may not claim a charitable contribution deduction for more than the amount by which the payment exceeds the fair market value of the membership benefits. United States v. American Bar Endowment, 477 U.S. 105 (1986). See also Rev. Rul. 68–432, 1968–2 C.B. 104; Rev. Rul. 67–246, 1967–2 C.B. 104. Accordingly, taxpayers and donee organizations must determine the fair market value of any membership bene

fits the donee organization provides to its donors.

It is often difficult to value membership benefits, especially rights or privileges that are not limited as to use, such as free or discounted admission or parking, and gift shop discounts. In the course of preparing these proposed regulations, the IRS and the Treasury Department have considered the extent of the difficulty of valuation and have concluded that it is appropriate to provide limited relief with respect to certain types of customary membership benefits while preserving the IRS’s ability to administer the law fairly and consistently. Accordingly, the proposed regulations provide that both the donee organization and the donor may disregard certain membership benefits when they are provided in return for a payment to the organization.

Section 1.170A–13T(a) already allows donors and donee organizations to disregard goods or services that are treated as having insubstantial value under existing IRS guidelines. See Rev. Proc. 90–12, 1990–1 C.B. 471, and Rev. Proc. 92–49, 1992–1 C.B. 987. The guidelines cover low cost articles (items costing $6.60 or less for 1995), newsletters that are not commercial quality publications, and benefits worth 2% or less of a payment, up to a maximum of $66 for 1995. The substance of this section has been incorporated into section 1.170A–13(f)(8)(i).

Under the proposed regulations, other benefits may be disregarded only if they are given as part of an annual membership offered in return for a payment of $75 or less and fall into one of two categories. The first category is admission to events that are open only to members and for which the donee organization reasonably projects that the cost per person (excluding allocable overhead) for each event will be less than or equal to the standard for low cost articles under section 513(h)(2)(C) ($6.60 for 1995). An example is a modest reception where light refreshments are served to members of a donee organization before an event. The second category is rights or privileges that members can exercise frequently during the membership period. An example is free admission to a museum.

The items described in the previous two paragraphs may be disregarded for purposes of determining whether the taxpayer has made a charitable contribution, the amount of any charitable

contribution that has been made, and whether any goods or services have been provided that must be substantiated under section 170(f)(8) or disclosed under section 6115. Thus, the effect of these provisions is broader than that of the temporary regulations, which provided less comprehensive relief and then only for items of insubstantial value.

Goods or Services Provided to Donor’s Employees

The proposed regulations also contain relief where donee organizations provide goods or services to the employees of their donors. Goods or services that may be disregarded for the purposes specified above when provided directly to a donor may also be disregarded for the same purposes when provided to a donor’s employees.

Any other goods or services provided to the donor’s employees must be taken into account for purposes of calculating any charitable contribution the donor claims as a deduction. If a contemporaneous written acknowledgment of the donor’s contribution is required under section 170(f)(8), it must include a description of these goods or services. However, the proposed regulations provide that the contemporaneous written acknowledgment may omit the otherwise required good faith estimate of the value of these goods or services; similarly, the proposed regulations provide that a written disclosure statement required by section 6115 for a payment made in exchange for these goods or services may include a description of them in lieu of the otherwise required good faith estimate of their value.

Good Faith Estimate

For purposes of sections 170 and 6115, the proposed regulations define a good faith estimate of the value of goods or services provided by an organization described in section 170(c) as an estimate of the fair market value of those goods or services. The fair market value of goods or services may differ from their cost to the donee organization. The organization may use any reasonable methodology that it applies in good faith in making the good faith estimate. However, a taxpayer is not required to determine how the donee organization made the estimate.

The proposed regulations further provide that a donee organization may make a good faith estimate of the value of goods or services that are not available in a commercial transaction by reference to the fair market value of similar or comparable goods or services. Goods or services may be similar or comparable even though they do not have the unique qualities of the goods or services that are being valued.

Reliance on Donee Estimates

The proposed regulations provide that a taxpayer generally may treat an estimate of the value of goods or services as the fair market value for purposes of section 170(a) if the estimate is in a contemporaneous written acknowledgment (as required by section 170(f)(8)) or a written disclosure statement (as required by section 6115). Thus, a taxpayer that makes a payment to an organization described in section 170(c) and receives an item in return generally may rely on the organization’s estimate of the value of the item in calculating its charitable contribution deduction if the estimate is included in a contemporaneous written acknowledgment or a written disclosure statement.

However, a taxpayer may not treat an estimate as the fair market value of the goods or services if the taxpayer knows, or has reason to know, that such treatment is unreasonable. For example, if the taxpayer is a dealer in the type of goods or services it receives from an organization described in section 170(c), or if the goods or services are readily valued, it is unreasonable for the taxpayer to treat the donee organization’s estimate as the fair market value of the goods or services if that estimate is in error and the taxpayer knows, or has reason to know, the fair market value of the goods or services.

An estimate of the value of goods or services in a contemporaneous written acknowledgment or written disclosure statement is not in error if the estimate is within the typical range of retail prices for the goods or services. For example, if an organization provides a book in exchange for a $100 payment, and the book is sold at retail prices ranging from $18 to $25, the taxpayer may rely on any estimate of the organization that is within the $18 to $25 range.

Substantiation of Contributions to a Split Interest Trust

Section 170(f)(8)(E) provides the Secretary with authority to issue regulations that relieve taxpayers, in appropriate cases, from some or all of the requirements of section 170(f)(8).

The grantor of a charitable lead trust, a charitable remainder annuity trust, or a charitable remainder unitrust is not required to designate a specific organization as the charitable beneficiary at the time the grantor transfers property to the trust. As a result, there is often no designated donee organization available to provide a contemporaneous written acknowledgment to a taxpayer. In addition, even if a specific beneficiary is designated, the designation is often revocable. In contrast, a pooled income fund is created and maintained by one charitable organization to which the remainder interest is contributed.

The IRS and the Treasury Department believe that for these reasons it is appropriate to exempt from the requirements of section 170(f)(8) transfers of property to charitable lead trusts, charitable remainder annuity trusts, or charitable remainder unitrusts while not exempting transfers to pooled income funds.

Substantiation of Out-of-Pocket Expenses

Section 1.170A–1(g) provides that an unreimbursed expenditure made incident to the rendition of services to a donee organization may be a deductible charitable contribution. Some taxpayers may make individual unreimbursed expenditures of $250 or more (such as for a plane ticket) that will require substantiation under section 170(f)(8). The IRS and the Treasury Department recognize that a donee organization typically has no knowledge of the amount of out-ofpocket expenditures incurred by a taxpayer, and therefore, would have difficulty providing taxpayers with substantiation of unreimbursed expenditures.

To address this concern, the proposed regulations provide that where a taxpayer has individual unreimbursed expenditures made incident to the rendition of services and of an amount requiring substantiation, the expenditures may be substantiated by the donor’s normal records (see §1.170A– 13(a)) and an abbreviated written ac knowledgment provided by the donee organization. This written acknowledgment from the donee organization must contain a description of the services provided by the donor, the date the services were provided, whether or not the donee organization provided any goods or services in return and, if the donee organization provided any goods or services, a description and good faith estimate of the fair market value of those goods or services. This written acknowledgment must be obtained by the taxpayer on or before the earlier of the date the taxpayer files its original return for the taxable year in which the contribution was made, or the due date (including extensions) for filing the taxpayer’s original return for that year.

Contributions Made by a Partnership or an S Corporation

The proposed regulations provide that if a partnership or an S corporation makes a charitable contribution of $250 or more, the partnership or S corporation will be treated as the taxpayer for purposes of section 170(f)(8). Therefore, the partnership or S corporation is required to obtain a contemporaneous written acknowledgment for each charitable contribution of $250 or more that it reports on its income tax return (regardless of whether any partner’s or shareholder’s distributive share of the contribution is less than $250). Because the partnership or S corporation must satisfy the requirements of section 170(f)(8) in order to list charitable contributions of $250 or more on the schedules provided to its partners or shareholders, the partners and shareholders are not required to obtain any additional contemporaneous written acknowledgments before taking a deduction for their allocable shares of the partnership’s or S corporation’s charitable contribution.

Contributions Made By Payroll Deduction

These proposed regulations reserve two paragraphs so that the balance of the temporary and proposed regulations published in the Federal Register for May 27, 1994, may be incorporated into §1.170A–13(f) upon finalization.

Proposed Effective Date

These regulations are proposed to be effective on the date they are published

474 1995–2 C.B.

in the Federal Register as final regulations. Taxpayers may, however, rely on the proposed regulations for contributions made on or after January 1, 1994.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 businesses.

Comments and Public Hearing

Before the proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for November 1, 1995, at 10:00 a.m. in the IRS Auditorium, 7th floor, 1111 Constitution Avenue, N.W., Washington, D.C. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing is scheduled to begin.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons who wish to present oral comments at the hearing must submit written comments by November 1, 1995, and submit an outline (a signed original and eight copies) of the topics to be discussed and the time to be devoted to each topic by October 11, 1995. A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding a new entry for Section 1.170A–1 and revising the entry for Section 1.170A–13 to read as follows:

Authority: 26 U.S.C. 7805. Section 1.170A–1 also issued under 26 U.S.C. 170(a). Section 1.170A–13 also issued under 26 U.S.C. 170(f)(8). * * * Par. 2. Section 1.170A–1 is amended as follows:

1. Paragraph (h) is redesignated as paragraph (j).

2. Paragraph (i) is redesignated as paragraph (k) and is revised.

3. Paragraph (h) is added.

4. Paragraph (i) is added and reserved.

The additions and revisions read as follows:

§1.170A-1 Charitable, etc., contributions and gifts; allowance of deduction .

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(h) Payment in exchange for con- sideration —(1) Burden on taxpayer to show that all or part of payment is a charitable contribution or gift . No part of a payment that a taxpayer makes to or for the use of an organization described in section 170(c) that is in consideration for goods or services (as defined in §1.170A–13(f)(5)) is a contribution or gift within the meaning of section 170(c) unless the taxpayer—

(i) Intends to make a payment in an amount that exceeds the fair market value of the goods or services; and

(ii) Makes a payment in an amount that exceeds the fair market value of the goods or services.

( 2 ) L i m i t a t i o n o n a m o u n t deductible —(i) In general . The charitable contribution deduction under section 170(a) for a payment a taxpayer

makes partly in consideration for goods or services may not exceed the excess of—

(A) The amount of any cash paid and the fair market value of any property (other than cash) transferred by the taxpayer to an organization described in section 170(c); over

(B) The fair market value of the goods or services the organization provides in return.

(ii) Special rules . For special limits on the deduction for charitable contributions of ordinary income and capital gain property, see section 170(e) and §§1.170A–4 and 1.170A–4A.

(3) Certain goods or services dis- regarded . For purposes of section 170(a) and paragraphs (h)(1) and (h)(2) of this section, goods or services described in §1.170A–13(f)(8)(i) or §1.170A–13(f)(9)(i) are disregarded.

(4) Donee estimates of the value of goods or services may be treated as fair market value —(i) In general . For purposes of section 170(a), a taxpayer may rely on either a contemporaneous written acknowledgment provided under section 170(f)(8) and §1.170A– 13(f) or a written disclosure statement provided under section 6115 for the fair market value of any goods or services provided to the taxpayer by the donee organization.

(ii) Exception . A taxpayer may not treat an estimate of the value of goods or services as their fair market value if the taxpayer knows, or has reason to know, that such treatment is unreasonable. For example, if the taxpayer knows, or has reason to know, that there is an error in an estimate provided by an organization described in section 170(c) pertaining to goods or services that have a readily ascertainable value, it is unreasonable for the taxpayer to treat the estimate as the fair market value of the goods or services. Similarly, if the taxpayer is a dealer in the type of goods or services provided in consideration for its payment and knows, or has reason to know, that the estimate is in error, it is unreasonable for the taxpayer to treat the estimate as the fair market value of the goods or services.

(5) Examples . The following examples illustrate the rules of this paragraph (h).

Example 1 . Certain goods or services dis- regarded . Taxpayer makes a $50 payment to Charity B, an organization described in section 170(c), in exchange for a family membership.

The family membership entitles Taxpayer and members of Taxpayer’s family to certain benefits. These benefits include free admission to weekly poetry readings, discounts on merchandise sold by B in its gift shop or by mail order, and invitations to special events for members only, such as lectures or informal receptions. When B first offers its membership package for the year, B reasonably projects that each special event for members will have a cost to B, excluding any allocable overhead, of $5 or less per person. Because the family membership benefits are disregarded pursuant to §1.170A– 13(f)(8)(i), Taxpayer may treat the $50 payment as a contribution or gift within the meaning of section 170(c), regardless of Taxpayer’s intent and whether or not the payment exceeds the fair market value of the goods or services. Furthermore, any charitable contribution deduction available to Taxpayer may be calculated without regard to the membership benefits.

Example 2 . Treatment of good faith estimate at auction as the fair market value . Taxpayer attends an auction held by Charity C, an organization described in section 170(c). Prior to the auction, C publishes a catalog that meets the requirements for a written disclosure statement under section 6115(a) (including C ’s good faith estimate of the value of items that will be available for bidding). A representative of C gives a copy of the catalog to each individual (including Taxpayer) who attends the auction. Taxpayer notes that in the catalog C ’s estimate of the value of a vase is $100. Taxpayer has no reason to doubt the accuracy of this estimate. Taxpayer successfully bids and pays $500 for the vase. Because Taxpayer knew, prior to making her payment, that the estimate in the catalog was less than the amount of her payment, Taxpayer satisfies the requirement of paragraph (h)(1)(i) of this section. Because Taxpayer makes a payment in an amount that exceeds that estimate, Taxpayer satisfies the requirements of paragraph (h)(1)(ii) of this section. Taxpayer may treat C ’s estimate of the value of the vase as its fair market value in determining the amount of her charitable contribution deduction.

Example 3 . Good faith estimate not in error . Taxpayer makes a $200 payment to Charity D, an organization described in section 170(c). In return for Taxpayer’s payment, D gives Taxpayer a book that Taxpayer could buy at retail prices typically ranging from $18 to $25. D provides Taxpayer with a good faith estimate, in a written disclosure statement under section 6115(a), of $20 for the value of the book. Because the estimate is within the range of typical retail prices for the book, the estimate contained in the written disclosure statement is not in error. Although Taxpayer knows that the book is sold for as much as $25, Taxpayer may treat the estimate of $20 as the fair market value of the book in determining the amount of his charitable contribution deduction.

(i) [Reserved]

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(k) Effective date . In general this section applies to contributions made in taxable years beginning after December 31, 1969. Paragraph (j)(11) of this section, however, applies only to outof-pocket expenditures made in taxable years beginning after December 31,

1976. In addition, paragraph (h) of this section applies only to payments made on or after the date these regulations are published in the Federal Register as final regulations. However, taxpayers may rely on the rules of paragraph (h) of this section for payments made on or after January 1, 1994.

Par. 3. Section 1.170A–13 is amended as follows:

1. Paragraph (e) is added and reserved.

2. Paragraph (f) is added. The additions read as follows:

§1.170A–13 Recordkeeping and return requirements for deductions for charitable contributions .

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(e) [Reserved] (f) Substantiation of charitable con- tributions of $250 or more —(1) In general . No deduction is allowed under section 170(a) for all or part of any contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from a donee organization. Section 170(f)(8) does not apply to a payment of $250 or more if the amount contributed (as determined under §1.170A–1(h)) is less than $250.

(2) Written acknowledgment . Except as otherwise provided in paragraphs (f)(8) and (f)(9) of this section, a written acknowledgment from a donee organization must provide the following information—

(i) The amount of any cash the taxpayer paid and a description (but not necessarily the value) of any property other than cash the taxpayer transferred to the donee organization;

(ii) A statement of whether or not the donee organization provides any goods or services in consideration, in whole or in part, for any of the cash or other property transferred to the donee organization;

(iii) If the donee organization provides any goods or services other than intangible religious benefits (as described in section 170(f)(8)), a description and good faith estimate of the value of those goods or services; and

(iv) If the donee organization provides any intangible religious benefits, a statement to that effect.

(3) Contemporaneous . A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of—

1995–2 C.B. 475

(i) The date the taxpayer files its original return for the taxable year in which the contribution was made; or

(ii) The due date (including extensions) for filing the taxpayer’s original return for that year.

(4) Donee organization . For purposes of this paragraph (f), a donee organization is an organization described in section 170(c).

(5) Goods or services . Goods or services means cash, property, services, benefits, and privileges.

(6) In consideration for . A donee organization provides goods or services in consideration for a taxpayer’s payment if, at the time the taxpayer makes the payment to the donee organization, the taxpayer receives or expects to receive goods or services in exchange for that payment. Goods or services a donee organization provides in consideration for a payment by a taxpayer include goods or services provided in a year other than the year in which the taxpayer makes the payment to the donee organization.

(7) Good faith estimate . For purposes of this section, good faith estimate means the donee organization’s estimate of the fair market value of any goods or services, without regard to the manner in which the organization in fact made that estimate. See §1.170A– 1(h)(4) for rules regarding when a taxpayer may treat a donee organization’s estimate of the value of goods or services as the fair market value.

(8) Certain goods or services dis- regarded —(i) In general . For purposes of section 170(f)(8), the following goods or services are disregarded—

(A) Goods or services that have insubstantial value under the guidelines provided in Revenue Procedures 90–12, 1990–1 C.B. 471, 92–49, 1992–1 C.B. 987, and any successor documents. (See §601.601(d)(2)(ii) of the Statement of Procedural Rules, 26 CFR part 601.); and (B) Annual membership benefits offered to a taxpayer for a payment of $75 or less per year that consist of—

( 1 ) Any rights or privileges, other than those described in section 170(l), that the taxpayer can exercise frequently during the membership period. Examples of such rights and privileges include, but are not limited to, free or discounted admission to the organization’s facilities or events, free or discounted parking, preferred access to goods or services, and discounts on the purchase of goods or services; and

476 1995–2 C.B.

( 2 ) Admission to events during the membership period that are open only to members of the donee organization and for which the donee organization reasonably projects that the cost per person (excluding any allocable overhead) for each such event is within the limits established for ‘‘low cost articles’’ under section 513(h)(2). The projected cost to the donee organization is determined at the time the organization first offers its membership package for the year (using section 3.07 of Revenue Procedure 90–12, or any successor documents, to determine the cost if items or services are donated).

(ii) Examples . The following examples illustrate the rules of this paragraph (f)(8).

Example 1 . Membership benefits disregarded . Performing Arts Center E is an organization described in section 170(c). In return for a payment of $75, E offers a package of basic membership benefits that includes the right to purchase tickets to performances one week before they go on sale to the general public, free parking in E ’s garage during evening and weekend performances, and a 10% discount on merchandise sold in E ’s gift shop. In return for a payment of $150, E offers a package of preferred membership benefits that includes all of the benefits in the $75 package as well as a poster that is sold in E ’s gift shop for $20. The basic membership and the preferred membership are each valid for twelve months, and there are approximately 50 performances of various productions at E during a twelve month period. ’s gift shop is open for several hours each week and at performance times. F, a patron of the arts, is solicited by E to make a contribution. E offers F the preferred membership benefits in return for a payment of $150 or more. F makes a payment of $300 to E . F can satisfy the substantiation requirement of section 170(f)(8) by obtaining a contemporaneous written acknowledgment from E that includes a description of the poster and a good faith estimate of its fair market value ($20) and disregards the remaining membership benefits.

Example 2 . Rights or privileges that cannot be exercised frequently . Community Theater Group G is an organization described in section 170(c). Every summer, G performs four different plays. Each play is performed two times. In return for a membership fee of $60, G offers its members free admission to any of its performances. Nonmembers may purchase tickets on a performance by performance basis for $15 a ticket. H, an individual who is a sponsor of the theater, is solicited by G to make a contribution. G tells H that the membership benefit will be provided in return for any payment of $60 or more. H chooses to make a payment of $350 to G and receives in return the membership benefit. G ’s membership benefit of free admission is not described in paragraph (f)(8)(i)(B) of this section because it is not a privilege that can be exercised frequently (due to the limited number of performances offered by G ). Therefore, to meet the requirements of section 170(f)(8), a contemporaneous written acknowledgment of H ’s $350 payment must include a description of the free admission benefit and a good faith estimate of its value.

(9) Goods or services provided to employees of donors —(i) Certain goods or services disregarded . For purposes of section 170(f)(8), goods or services provided by a donee organization to a taxpayer’s employees in return for a payment to the organization may be disregarded to the extent that the goods or services provided to each employee are the same as those described in paragraph (f)(8)(i) of this section.

(ii) No good faith estimate required for other goods or services . If a taxpayer makes a contribution of $250 or more to a donee organization and, in return, the donee organization offers the taxpayer’s employees goods or services other than those described in paragraph (f)(9)(i) of this section, the contemporaneous written acknowledgment of the taxpayer’s contribution is not required to include a good faith estimate of the value of such goods or services but must include a description of those goods or services.

(iii) Example . The following example illustrates the rules of this paragraph (f)(9).

Example . Museum J is an organization described in section 170(c). For a payment of $40, J offers a package of basic membership benefits that includes free admission and a 10% discount on merchandise sold in J ’s gift shop. J ’s other membership categories are for supporters who contribute $100 or more. Corporation K makes a payment of $50,000 to J and in return, J offers K ’s employees free admission, a tee-shirt with J ’s logo that costs J $4.50, and a gift shop discount of 25%. The free admission for K ’s employees is the same as the benefit made available to holders of the $40 membership and is otherwise described in paragraph (f)(8)(i)(B) of this section. The tee-shirt given to each of K ’s employees is described in paragraph (f)(8)(i)(A) of this section. Therefore, a contemporaneous written acknowledgment of K ’s payment is not required to include a description or good faith estimate of the value of the free admission or the tee-shirts. However, because the gift shop discount offered to K ’s employees is different than that offered to those who purchase the $40 membership, the discount is not described in paragraph (f)(8)(i) of this section. Therefore, the contemporaneous written acknowledgment of K ’s payment is required to include a description of the 25% discount offered to K ’s employees.

(10) Substantiation of out-of-pocket expenses . A taxpayer that incurs unreimbursed expenditures incident to the rendition of services, within the meaning of §1.170A–1(g), is treated as having obtained a contemporaneous written acknowledgment of those expenditures if the taxpayer—

(i) Has adequate records under paragraph (a) of this section to substantiate the amount of the expenditures; and

transaction may be determined by reference to the fair market value of similar or comparable goods or services. Goods or services may be similar or comparable even though they do not have the unique qualities of the goods or services that are being valued.

(3) Examples . The following examples illustrate the rules of this paragraph (a).

Example 1 . Facility not available on a commercial basis . Museum M, an organization described in section 170(c), is located in Community N . In return for a payment of $50,000 or more, M allows a donor to hold a private event in a room located in M . No other private events are permitted to be held in M . In Community N, there are four hotels, O, P, Q, and R, that have ballrooms with the same capacity as the room in M . Of these hotels, only O and P have ballrooms that offer amenities and atmosphere that are similar to the amenities and atmosphere of the room in M (although O and P lack the unique collection of art that is displayed in the room of M ). Because the capacity, amenities, and atmosphere of ballrooms in O and P are comparable to the capacity, amenities, and atmosphere of the room in M, a good faith estimate of the benefits received from M may be determined by reference to the cost of renting either the ballroom in O or the ballroom in P . The cost of renting the ballroom in O is $2500 and, therefore, a good faith estimate of the fair market value of the right to host a private event in the room at M is $2500. In this example, the ballrooms in O and P are considered similar and comparable facilities to the room in M for valuation purposes, notwithstanding the fact that the room in M displays a unique collection of art.

Example 2 . Services available on a commer- cial basis . Charity S is an organization described in section 170(c). S offers to provide a one-hour tennis lesson with Tennis Professional T in return for the first payment of $500 or more that it receives. T provides one-hour tennis lessons on a commercial basis for $100. Taxpayer pays $500 to S and in return receives the tennis lesson with T . A good faith estimate of the fair market value of the lesson provided in exchange for Taxpayer’s payment is $100.

Example 3 . Celebrity presence . Charity U is an organization described in section 170(c). In return for the first payment of $1000 or more that it receives, U will provide a dinner for two followed by an evening tour of Museum V conducted by Artist W, whose most recent works are on display at V . W does not provide tours of V on a commercial basis. Typically, tours of V are free to the public. Taxpayer pays $1000 to U and in return receives a dinner valued at $100 and an evening tour of V conducted by W . Because tours of V are typically free to the public, a good faith estimate of the value of the evening tour conducted by W is $0. In this example, the fact that Taxpayer’s tour of V is conducted by W rather than V ’s regular tour guides does not render the tours dissimilar or incomparable for valuation purposes.

(b) Certain goods or services dis- regarded . For purposes of section 6115, an organization described in

1995–2 C.B. 477

(ii) Obtains by the date prescribed in paragraph (f)(3) of this section a statement prepared by the donee organization containing—

(A) A description of the services provided by the taxpayer;

(B) The date the services were provided;

(C) A statement of whether or not the donee organization provides any goods or services in consideration, in whole or in part, for the unreimbursed expenditures; and

(D) The information required by paragraphs (f)(2)(iii) and (iv) of this section.

(11) Contributions made by payroll deduction . [Reserved]

(12) Distributing organizations as donees . [Reserved]

(13) Transfers to certain trusts . Section 170(f)(8) does not apply to a transfer of property to a trust described in section 170(f)(2)(B), a charitable remainder annuity trust (as defined in section 664(d)(1)), or a charitable remainder unitrust (as defined in section 664(d)(2)). Section 170(f)(8) does apply, however, to a transfer to a pooled income fund (as defined in section 642(c)(5)).

(14) Substantiation of charitable contributions made by a partnership or an S corporation . If a partnership or an S corporation makes a charitable contribution of $250 or more, the partnership or S corporation will be treated as the taxpayer for purposes of section 170(f)(8). Therefore, the partnership or S corporation must substantiate the contribution with a contemporaneous written acknowledgment from the donee organization before reporting the contribution on its income tax return for the year in which the contribution was made and must maintain the contemporaneous written acknowledgment in its records. A partner of a partnership or a shareholder of an S corporation is not required to obtain any additional substantiation for his or her share of the partnership’s or S corporation’s charitable contribution.

(15) Substantiation of matched pay- ments —(i) In general . For purposes of section 170, if a taxpayer’s payment to a donee organization is matched, in whole or in part, by another payor, and the taxpayer receives goods or services in consideration for its payment and some or all of the matching payment, those goods or services will be treated as provided in consideration for the

taxpayer’s payment and not in consideration for the matching payment.

(ii) Example . The following example illustrates the rules of this paragraph (f)(15).

Example . Taxpayer makes a $400 payment to Charity L, a donee organization. Pursuant to a matching payment plan, Taxpayer’s employer matches Taxpayer’s $400 payment with an additional payment of $400. In consideration for the combined payments of $800, L gives Taxpayer an item that it estimates has a fair market value of $100. L does not give the employer any goods or services in consideration for its contribution. The contemporaneous written acknowledgment provided to the employer must include a statement that no goods or services were provided in consideration for the employer’s $400 payment. The contemporaneous written acknowledgment provided to Taxpayer must include the amount of Taxpayer’s payment, a description of the item received by Taxpayer, and a statement that L ’s good faith estimate of the value of the item received by Taxpayer is $100.

(16) Effective date . This paragraph (f) applies to contributions made on or after the date that these regulations are published in the Federal Register as final regulations. However, taxpayers may rely on the rules of this paragraph (f) for contributions made on or after January 1, 1994.

Par. 4. Section 1.6115–1 is added under the undesignated centerheading ‘‘Miscellaneous Provisions’’ to read as follows:

§1.6115–1 Disclosure requirements for quid pro quo contributions .

(a) Good faith estimate defined —(1) In general . A good faith estimate of the value of goods or services provided by an organization described in section 170(c) in consideration for a taxpayer’s payment to that organization is an estimate of the fair market value, within the meaning of §1.170A–1(c)(2), of the goods or services. The organization may use any reasonable methodology in making a good faith estimate, provided it applies the methodology in good faith. If the organization fails to apply the methodology in good faith, the organization will be treated as not having met the requirements of section 6115. See section 6714 for the penalties that apply for failure to meet the requirements of section 6115.

(2) Good faith estimate for goods or services that are not commercially available . A good faith estimate of the value of goods or services that are not generally available in a commercial

section 170(c) may disregard goods or services described in §1.170A– 13(f)(8)(i). (c) Goods or services provided to employees of donors (1) Certain goods or services dis- regarded . For purposes of section 6115, goods or services provided by an organization described in section 170(c) to a taxpayer’s employees in return for a payment to the organization may be disregarded to the extent that the goods or services provided to each employee are the same as those described in §1.170A–13(f)(8)(i).

(2) Description permitted in lieu of good faith estimate for other goods or services . If a taxpayer makes a quid pro quo contribution in excess of $75 to an organization described in section 170(c) and, in return, the organization offers the taxpayer’s employees goods or services other than those described in paragraph (c)(1) of this section, the organization’s written disclosure statement required by section 6115 may include a description of the goods or services in lieu of a good faith estimate of the value of the goods or services, provided that the statement otherwise satisfies the requirements of section 6115. (d) Effective date . This section applies to contributions made on or after the date that these regulations are published in the Federal Register as final regulations. However, taxpayers may rely on the rules of this section for contributions made on or after January 1, 1994.

therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 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) that are submitted timely to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for November 2, 1995, at 10 am in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written comments by October 19, 1995, and submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by October 12, 1995.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

- - - - -

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

SUMMARY: In *** [T.D. 8603, page 281, this Bulletin], the IRS is issuing temporary regulations relating to the signing of returns, statements, or other documents. The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by October 19, 1995. Outlines of topics to be discussed at the public hearing scheduled for November 2, 1995, must be received by October 12, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (IA–10–95), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (IA–10–95), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in *** [T.D. 8603, page 281, this Bulletin], amend the Income Tax Regulations (26 CFR part 1) relating to section 6695 and the Procedure and Administration Regulations (26 CFR part 301) relating to section 6061. The temporary regulations relate to signing returns, statements, or other documents.

The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and

(Filed by the Office of the Federal Register on

August 3, 1995, 8:45 a.m., and published in the issue of the Federal Register for August 4, 1995, 60 F.R. 39896)

Notice of Proposed Rulemaking and Notice of Public Hearing

Methods of Signing

IA–10–95

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

478 1995–2 C.B.

respond to, a collection of information unless the collection of information displays a valid control number.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Estimates of the reporting burden in this Notice of Proposed Rulemaking will be reflected in the burden of Form 945.

Background

The temporary regulations published in *** [T.D. 8624, page 258, this Bulletin] contain an amendment to the Regulations on Employment Taxes and Collection of Income Tax at Source (26 CFR part 31). This amendment relates to the reporting of nonpayroll withheld tax liabilities. The temporary regulations change the rule regarding the filing of Form 945, Annual Return of Withheld Federal Income Tax, for a calendar year in which there is no liability.

The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains these proposed regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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, consid

1995–2 C.B. 479

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as follows:

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

Authority: 26 U.S.C. 7805 * * * Par. 2. In §1.6695–1, the first sentence of paragraph (b) (1) is revised to read as follows:

§1.6695–1 Other assessable penalties with respect to the preparation of income tax returns for other persons.

[The text of the proposed amendment to paragraph (b)(1) is the same as the text of §1.6695–1T(b) published elsewhere in *** [T.D. 8603, this Bulletin].

Par. 3. The authority citation for part 301 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.6061–1 also issued under 26 U.S.C. 6061.

Par. 4. Section 301.6061–1 is amended as follows:

1. The text in §301.6061–1 is designated as paragraph (a) and a heading is added.

2. Paragraphs (b) and (c) are added. The additions read as follows:

§301.6061–1 Signing of returns and other documents.

(a) In general. - * *

[The text of proposed paragraphs (b) and (c) is the same as the text of §301.6061–1T(b) and (c) published elsewhere in *** [T.D. 8603, page 281, this Bulletin].

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

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

SUMMARY: In *** [T.D. 8624, page 258, this Bulletin], the IRS is issuing temporary regulations relating to the reporting of nonpayroll withheld income taxes under section 6011 of the Internal Revenue Code. The text of the temporary regulations also serves as the text for this notice of proposed rulemaking.

DATES: Written comments and requests for a public hearing must be received by December 15, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (IA–30–95), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (IA–30– 95), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave. NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget (OMB) for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507). The collection of information is in §31.6011(a)–4T(b). This information is required by the IRS to monitor compliance with the federal tax rules related to the reporting and deposit of nonpayroll withheld taxes.

Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. To ensure that comments on the collection of information may be given full consideration during the review by the Office of Management and Budget, comments on the collection of information should be received by December 15, 1995.

An agency may not conduct or sponsor, and a person is not required to

(Filed by the Office of the Federal Register on

July 20, 1995, 8:45 a.m., and published in the issue of the Federal Register for July 21, 1995, 60 F.R. 37621)

Notice of Proposed Rulemaking

Reporting of Nonpayroll Withheld Tax Liabilities

IA–30–95

AGENCY: Internal Revenue Service (IRS), Treasury.

eration will be given to any written comments (preferably a signed original and eight (8) copies) that are timely submitted to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a 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.

List of Subjects in 26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. In §31.6011(a)–4, paragraph (b) is revised to read as follows:

§31.6011(a)–4 Returns of income tax withheld .

- - - - -

(b) [The text of this proposed paragraph (b) is the same as the text of §31.6011(a)–4T(b) published elsewhere in *** [T.D. 8624, this Bulletin].]

- - - - -

tion and, therefore, it has not been submitted to the Office of Management and Budget for review under the Paperwork Reduction Act (44 U.S.C. 3504(h)).

Background

This document contains proposed regulations amending the Income Tax Regulations (26 CFR Part 1) under sections 952, 954(c) and 960 of the Internal Revenue Code. These regulations are also issued under authority contained in section 7805 of the Internal Revenue Code. In final regulations under section 954, published elsewhere in *** [T.D. 8618, page 89, this Bulletin], the section relating to the treatment of tax-exempt interest under the foreign personal holding company income rules was reserved. These proposed regulations would provide rules for the treatment of tax-exempt interest and would also provide guidance under sections 952 and 960 to coordinate with the final regulations.

Explanation of Provisions

§§1.952–1(e) and (f) and 1.960–1(i)

Section 1.954–1(c)(1)(ii), published elsewhere in [T.D. 8618, this Bulletin], provides generally that if the amount in any category of foreign base company income or foreign personal holding company income is less than zero, the loss may not reduce any other category of foreign base company income or foreign personal holding company income except by operation of the earnings and profits limitation of section 952(c)(1). The earnings and profits limitation will apply when subpart F income exceeds current earnings and profits. This notice of proposed rulemaking provides rules under section 952(c)(1)(A) to determine how the excess of subpart F income over current earnings and profits will reduce categories of foreign base company income or foreign personal holding company income.

These rules apply both to determine the amount that is included in the U.S. shareholder’s gross income in each category of subpart F income under section 951(a)(1)(A) from each section 904(d) separate category, and to determine the subpart F category and the section 904(d) separate category from which an amount will be recharac

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

Notice of Proposed Rulemaking and Notice of Public Hearing

Definition of Foreign Base Company Income and Foreign Personal Holding Company Income of a Controlled Foreign Corporation

INTL–75–92

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed Income Tax Regulations relating to the definitions of subpart F income and foreign personal holding company income of a controlled foreign corporation and the allocation of deficits for purposes of computing the deemed-paid foreign tax credit. These proposed regulations are necessary to provide guidance that coordinates with guidance provided in final regulations under section 954, published elsewhere in *** [T.D. 8618, page 89, this Bulletin]. These regulations will affect United States shareholders of controlled foreign corporations. This document also contains a notice of hearing on these regulations.

DATES: Written comments must be received by December 6, 1995. Outlines of topics to be discussed at the public hearing scheduled for January 4, 1996 at 10 a.m. must be received by December 14, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (INTL–0075–92), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (INTL– 0075–92), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington DC. The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

This notice of proposed rulemaking does not contain collections of informa

(Filed by the Office of the Federal Register on

October 13, 1995, 8:45 a.m., and published in the issue of the Federal Register for October 16, 1995, 60 F.R. 53561)

480 1995–2 C.B.

terized as subpart F income under section 952(c)(2). Separate rules are provided in this notice of proposed rulemaking to compute post-1986 undistributed earnings under section 960.

Section 1.952–1(e) provides that for post-1986 years, when the subpart F income of a controlled foreign corporation exceeds its current earnings and profits, this excess, first, proportionately reduces subpart F income in each separate category in which current earnings and profits are zero or less than zero, second, proportionately reduces subpart F income in each separate category in which subpart F income exceeds current earnings and profits, and third, proportionately reduces subpart F income in other separate categories. If a single separate category contains more than one category of subpart F income, the categories of subpart F income in the separate category will be proportionately reduced.

Section 1.952–1(f) provides that the amount and category of subpart F income in each separate category that is reduced by operation of the earnings and profits limitation, as determined under paragraph (e), constitutes a recapture account. In any year in which earnings and profits exceed subpart F income, the recapture accounts in each separate category of the corporation will be recharacterized, on a proportionate basis, as subpart F income to the extent of this excess. An amount that is recharacterized as subpart F income is treated as income in the same separate category as the recapture account from which it was derived.

Under paragraph (f), a recapture account is reduced either when amounts in the account are recharacterized as subpart F income or when the corporation makes an actual distribution from the separate category containing the recapture account. A distribution out of section 959(c)(3) earnings and profits is treated as made first on a proportionate basis out of the recapture accounts in each separate category. If a distribution from earnings and profits described in section 959(c)(3) occurs in the same year that an amount is recharacterized, the recharacterization rules will apply first. Examples are provided to illustrate the rules of paragraphs (e) and (f).

Regulations are proposed under section 960 that apply the principles of section 902 to determine the portion of the controlled foreign corporation’s

post-1986 foreign income taxes deemed to be paid by a United States corporate shareholder in connection with a subpart F inclusion. If the corporate shareholder computes an amount under both sections 902 and 960 for a taxable year, section 960 is applied first.

These proposed regulations also provide rules to determine how deficits in post-1986 undistributed earnings are allocated for purposes of sections 902 and 960. In accordance with the approach of Notice 88–70 (1988–2 C.B. 369), §1.960–1(i)(4) provides that a post-1986 accumulated deficit in a separate category is allocated pro rata against post-1986 undistributed earnings in other separate categories to compute post-1986 undistributed earnings. The deficit does not permanently reduce earnings in these other separate categories. Rather, after deemed-paid taxes are computed, it is carried forward in the same separate category in which it was incurred. Paragraph (i)(3) clarifies that the numerator of the deemed-paid credit fraction cannot exceed the denominator because deemedpaid taxes may not exceed taxes paid or accrued by the controlled foreign corporation. Examples are provided to illustrate these rules.

The proposed regulations attempt to coordinate, to the extent possible, the allocation of deficits for purposes of determining the amounts of subpart F inclusions and deemed-paid taxes out of the controlled foreign corporation’s separate foreign tax credit limitation categories under sections 952, 954, and 960. Complete coordination is not possible in all cases, because subpart F income and the earnings and profits limitation of section 952(c)(1)(A) are determined on the basis of earnings and profits of only the current year, whereas deemed-paid taxes are calculated under section 960 on the basis of multi-year pools of earnings and profits and taxes. In addition, potential differences in the calculation of income and earnings and profits, cf. section 952(c)(3), complicate the coordination. The proposed rules attempt to minimize the incidence of subpart F inclusions out of separate categories with no current earnings which, in the absence of sufficient accumulated earnings, may carry no deemed-paid taxes. Comments are requested as to whether the proposed allocation methods or some alternative approach would best achieve appropriate foreign tax credit results.

§1.954–2(b)(3)

Under §1.954–2T(b)(6), interest income that is exempt from tax under section 103 is included in the foreign personal holding company income of the controlled foreign corporation. However, the net foreign base company income that is attributable to taxexempt interest is treated as tax-exempt interest in the hands of the United States shareholder upon a deemed distribution under subpart F. Therefore, for regular tax purposes, the taxexempt interest is not currently included in the gross income of the United States shareholder under subpart F. However, the deemed distribution of tax-exempt interest may subject the United States shareholder to the alternative minimum tax.

Section 1.954–2(b)(3) of the proposed regulations would amend the rule in the temporary regulations to provide that foreign personal holding company income includes interest income that is exempt from tax under section 103. The tax-exempt interest would not retain its character as such in the hands of the United States shareholder upon a deemed distribution under subpart F. This proposed rule closely parallels the domestic rule for tax-exempt interest. The controlled foreign corporation realizes the tax benefit associated with the receipt of interest income described in section 103 because no United States withholding tax is collected on the income when it is paid to the controlled foreign corporation. As in the domestic context, however, this tax benefit is limited to the corporate level and is not retained when the taxexempt interest is distributed to the United States shareholders or included in their gross income under subpart F. This rule simplifies the interaction of the tax-exempt interest and alternative minimum tax provisions, and avoids the double-taxation and administrative problems associated with the current rule.

These regulations are proposed to be effective for taxable years of the foreign corporation beginning after 60 days after the date these regulations are published as final regulations in the Federal Register.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a

1995–2 C.B. 481

profits limitation . Any amount in a category of subpart F income described in section 952(a) or, in the case of foreign base company income, described in §1.954–1(c)(1)(iii)(A)( 1 ) or ( 2 ) that is reduced by operation of the current year earnings and profits limitation of section 952(c)(1)(A) and this paragraph (e) shall be subject to recapture in a subsequent year under the rules of section 952(c)(2) and paragraph (f) of this section.

(4) Coordination with sections 953 and 954 . The rules of this paragraph (e) shall be applied after the application of sections 953 and 954 and the regulations under those sections, except as provided in §1.954–1(d)(4)(ii).

(5) Earnings and deficits retain sep- arate limitation character . The income reduction rules of paragraph (e)(1) of this section shall apply only for purposes of determining the amount of an inclusion under section 951(a)(1)(A) from each separate category as defined in §1.904–5(a)(1) and the separate categories in which recapture accounts are established under section 952(c)(2) and paragraph (f) of this section. For rules applicable in computing post-1986 undistributed earnings, see generally section 902 and the regulations under that section. For rules relating to the allocation of deficits for purposes of computing foreign taxes deemed paid under section 960 with respect to an inclusion under section 951(a)(1)(A), see §1.960–1(i). (f) Recapture of subpart F income in subsequent taxable year —(1) In gen- eral . If a controlled foreign corporation’s subpart F income for a taxable year is reduced under the current year earnings and profits limitation of section 952(c)(1)(A) and paragraph (e) of this section, recapture accounts will be established and subject to recharacterization in any subsequent taxable year to the extent the recapture accounts were not previously recharacterized or distributed, as provided in paragraphs (f)(2) and (3) of this section.

(2) Rules of recapture —(i) Recap- ture account . If a category of subpart F income described in section 952(a) or, in the case of foreign base company income, described in §1.954–1(c)(1)(iii)(A)( 1 ) or ( 2 ) is reduced under the current year earnings and profits limitation of section 952(c)(1)(A) and paragraph (e) of this section for a taxable year, the amount of such reduction shall constitute a recapture account.

significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (signed original and eight (8) copies) that are timely submitted to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for January 4, 1996, at 10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 15 minutes before the hearing starts. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons that wish to present oral comments at the hearing must submit written comments by December 6, 1995, and submit an outline of topics to be discussed and time to be devoted to each topic (signed original and eight (8) copies) by December 14, 1995.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

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

482 1995–2 C.B.

PART 1—INCOME TAXES

Paragraph 1. The authority for Part 1 is amended by adding the following citation in numerical order to read as follows:

Authority: 26 U.S.C. 7805. * * * Section 1.960–1 also issued under 26 U.S.C. 960(a). * * *

Par. 2. Section 1.952–1 is amended by adding paragraphs (e) and (f) to read as follows:

§1.952–1 Subpart F income defined .

- - - - -

(e) Application of current earnings and profits limitation —(1) In general . If the subpart F income (as defined in section 952(a)) of a controlled foreign corporation exceeds the foreign corporation’s earnings and profits for the taxable year, the subpart F income includible in the income of the corporation’s United States shareholders is reduced under section 952(c)(1)(A) in accordance with the following rules. The excess of subpart F income over current year earnings and profits shall—

(i) First, proportionately reduce subpart F income in each separate category of the controlled foreign corporation, as defined in §1.904–5(a)(1), in which current earnings and profits are zero or less than zero;

(ii) Second, proportionately reduce subpart F income in each separate category in which subpart F income exceeds current earnings and profits; and

(iii) Third, proportionately reduce subpart F income in other separate categories.

(2) Allocation to a category of sub- part F income . An excess amount that is allocated under paragraph (e)(1) of this section to a separate category must be further allocated to a category of subpart F income if the separate category contains more than one category of subpart F income described in section 952(a) or, in the case of foreign base company income, described in §1.954–1(c)(1)(iii)(A)( 1 ) or ( 2 ). In such case, the excess amount that is allocated to the separate category must be allocated to the various categories of subpart F income within that separate category on a proportionate basis.

(3) Recapture of subpart F income reduced by operation of earnings and

(ii) Recapture . Each recapture account of the controlled foreign corporation will be recharacterized, on a proportionate basis, as subpart F income in the same separate category (as defined in §1.904–5(a)(1)) as the recapture account to the extent that current year earnings and profits exceed subpart F income in a taxable year. The United States shareholder must include his pro rata share (determined under the rules of §1.951–1(e)) of each recharacterized amount in income as subpart F income in such separate category for the taxable year.

(iii) Reduction of recapture account and corresponding earnings . Each recapture account, and post-1986 undistributed earnings in the separate category containing the recapture account, will be reduced in any taxable year by the amount which is recharacterized under paragraph (f)(2)(ii) of this section. In addition, each recapture account, and post-1986 undistributed earnings in the separate category containing the recapture account, will be reduced in the amount of any distribution out of that account (as determined under the ordering rules of section 959(c) and paragraph (f)(3)(ii) of this section).

(3) Distribution ordering rules —(i) Coordination of recapture and distribu- tion rules . If a controlled foreign corporation distributes an amount out of earnings and profits described in section 959(c)(3) in a year in which current year earnings and profits exceed subpart F income and there is an amount in a recapture account for such year, the recapture rules will apply first.

(ii) Distributions reduce recapture accounts first . Any distribution made by a controlled foreign corporation out of earnings and profits described in section 959(c)(3) shall be treated as made first on a proportionate basis out of the recapture accounts in each separate category to the extent thereof (even if the amount in the recapture account exceeds post-1986 undistributed earnings in the separate category containing the recapture account). Any remaining distribution shall be treated as made on a proportionate basis out of the remaining earnings and profits of the controlled foreign corporation in each separate category. See section 904(d)(3)(D).

(4) Examples . The application of paragraphs (e) and (f) of this section may be illustrated by the following examples:

Example 1 . (i) A, a U.S. person, is the sole shareholder of CFC, a controlled foreign corporation formed on January 1, 1996, whose functional currency is the u . In 1996, CFC earns 100u of foreign base company sales income that is general limitation income described in section 904(d)(1)(I) and incurs a (200u) loss attributable to activities that would have produced general limitation income that is not subpart F income. In 1996 CFC also earns 100u of foreign personal holding company income that is passive income described in section 904(d)(1)(A), and 100u of foreign personal holding company income that is dividend income subject to a separate limitation described in section 904(d)(1)(E) for dividends from a noncontrolled section 902 corporation. CFC ’s subpart F income for 1996, 300u, exceeds CFC ’s current earnings and profits, 100u, by 200u. Under section 952(c)(1)(A) and paragraph (e) of this section, subpart F income is limited to CFC ’s current earnings and profits of 100u, all of which is included in A ’s gross income under section 951(a)(1)(A). The 200u of CFC ’s 1996 subpart F income that is not included in A ’s income in 1996 by reason of section 952(c)(1)(A) is subject to recapture under section 952(c)(2) and paragraph (f) of this section.

(ii) For purposes of determining the amount and type of income included in A ’s gross income and the amount and type of income in CFC ’s recapture account, the rules of paragraphs (e)(1) and (2) of this section apply. Under paragraph (e)(1)(i), the amount by which CFC ’s subpart F income exceeds its earnings and profits for 1996, 200u, first reduces from 100u to 0 CFC ’s subpart F income in the general limitation category, which has a current year deficit of (100u) in earnings and profits. Next, under paragraph (e)(1)(iii) of this section, the remaining 100u by which CFC ’s 1996 subpart F income exceeds earnings and profits is applied proportionately to reduce CFC ’s subpart F income in the separate categories for passive income (100u) and dividends from the noncontrolled section 902 corporation (100u). Thus, A includes 50u of passive limitation/foreign personal holding company income and 50u of dividends from the noncontrolled section 902 corporation/foreign personal holding company income in gross income in 1996. CFC has 100u in its general limitation/ foreign base company sales income recapture account attributable to the 100u of foreign base company sales income that is not included in A ’s income by reason of the earnings and profits limitation of section 952(c)(1)(A). CFC also has 50u in its passive limitation recapture account, all of which is attributable to foreign personal holding company income, and 50u in its recapture account for dividends from the noncontrolled section 902 corporation, all of which is attributable to foreign personal holding company income.

(iii) For purposes of computing post-1986 undistributed earnings, the rules of sections 902 and 960, including the rules of §1.960–1(i), apply. Under §1.960–1(i), the general limitation deficit of (100u) is allocated proportionately to reduce passive limitation earnings of 100u and noncontrolled section 902 dividend earnings of 100u. Thus, passive limitation earnings are reduced by 50u to 50u (100u passive limitation earnings/200u total earnings in positive separate categories - (100u) general limitation deficit = 50u reduction), and the noncontrolled section 902 corporation earnings are reduced by 50u to 50u (100u noncontrolled section 902 corporation earnings/200u total earnings in positive separate categories - (100u) general limitation deficit =

50u reduction). All of CFC ’s post-1986 foreign income taxes with respect to passive limitation income and dividends from the noncontrolled section 902 corporation are deemed paid by A under section 960 with respect to the subpart F inclusions (50u inclusion/50u earnings in each separate category). After the inclusion and deemed-paid taxes are computed, at the close of 1996 CFC has a (100u) deficit in general limitation earnings (100u subpart F earnings + (200u) nonsubpart F loss), 50u of passive limitation earnings (100u of earnings attributable to foreign personal holding company income – 50u inclusion) with a corresponding passive limitation/foreign personal holding company income recapture account of 50u, and 50u of earnings subject to a separate limitation for dividends from the noncontrolled section 902 corporation (100u earnings – 50u inclusion) with a corresponding noncontrolled section 902 corporation/foreign personal holding company income recapture account of 50u.

Example 2 . (i) The facts are the same as in Example 1 with the addition of the following facts. In 1997, CFC earns 100u of foreign base company sales income that is general limitation income and 100u of foreign personal holding company income that is passive limitation income. In addition, CFC incurs (10u) of expenses that are allocable to its separate limitation for dividends from the noncontrolled section 902 corporation. Thus, CFC ’s subpart F income for 1997, 200u, exceeds CFC ’s current earnings and profits, 190u, by 10u. Under section 952(c)(1)(A) and paragraph (e) of this section, subpart F income is limited to CFC ’s current earnings and profits of 190u, all of which is included in A ’s gross income under section 951(a)(1)(A). (ii) For purposes of determining the amount and type of income included in A ’s gross income and the amount and type of income in CFC ’s recapture accounts, the rules of paragraphs (e)(1) and (2) of this section apply. While CFC ’s general limitation post-1986 undistributed earnings for 1997 are 0 ((100u) opening balance + 100u subpart F income), CFC ’s general limitation subpart F income (100u) does not exceed its general limitation current earnings and profits (100u) for 1997. Accordingly, under paragraph (e)(1)(iii) of this section, the amount by which CFC ’s subpart F income exceeds its earnings and profits for 1997, 10u, is applied proportionately to reduce CFC ’s subpart F income in the separate categories for general limitation income, 100u, and passive income, 100u. Thus, A includes 95u of general limitation foreign base company sales income and 95u of passive limitation foreign personal holding company income in gross income in 1997. At the close of 1997 CFC has 105u in its general limitation/ foreign base company sales income recapture account (100u from 1996 + 5u from 1997), 55u in its passive limitation/foreign personal holding company income recapture account (50u from 1996 + 5u from 1997), and 50u in its dividends from the noncontrolled section 902 corporation/ foreign personal holding company income recapture account (all from 1996).

(iii) For purposes of computing post-1986 undistributed earnings in each separate category, the rules of sections 902 and 960, including the rules of §1.960–1(i), apply. Thus, post-1986 undistributed earnings (or an accumulated deficit) in each separate category are increased (or reduced) by current earnings and profits or current deficits in each separate category. The accumulated deficit in CFC ’s general limitation earnings). No post-1986 foreign income taxes remain to be deemed paid under section 902 in connection with the 25u distribution from the passive limitation/foreign personal holding company income recapture account. One-twelfth of CFC ’s post-1986 foreign income taxes with respect to general limitation earnings are deemed paid by A under section 902 with respect to the distribution of 25u general limitation earnings and profits described in section 959(c)(3) (25u inclusion/300u general limitation earnings). After the deemed-paid taxes are computed, at the close of 1997 CFC has 425u of general limitation earnings and profits (400u opening balance + 50u current earnings – 25u distribution), 0 of passive limitation earnings (75u recapture account + 75u current foreign personal holding company income – 125u inclusion – 25u distribution), and a (200u) deficit in shipping limitation earnings.

Par. 3. In §1.952–2, paragraph (c)(1) is revised to read as follows:

§1.952–2 Determination of gross income and taxable income of a foreign corporation .

- - - - -

(c) Special rules for purposes of this section —(1) Nonapplication of certain provisions . Except where otherwise distinctly expressed, the provisions of section 103 and subchapters F, G, H, L, M, N, S, and T of chapter 1 of the Internal Revenue Code shall not apply.

- - - - -

Par. 4. In §1.954–2, paragraph (b)(3) is added to read as follows:

§1.954–2 Foreign personal holding company income .

- - - - -

(b) - * * (3) Treatment of tax exempt interest . Foreign personal holding company income includes all interest income, including interest that is described in section 103 (see §1.952–2(c)(1)).

- - - - -

Par. 5. In §1.960–1, paragraph (i) is added to read as follows:

§1.960–1 Foreign tax credit with respect to taxes paid on earnings and profits of controlled foreign corporations .

- - - - -

(i) Computation of deemed-paid taxes in post-1986 taxable years —(1) General rule . If a domestic corporation is eligible to compute deemed-paid

earnings and profits (100u) is reduced to 0 by the addition of 100u of 1997 earnings and profits. CFC ’s passive limitation earnings of 50u are increased by 100u to 150u, and CFC ’s noncontrolled section 902 corporation earnings of 50u are decreased by (10u) to 40u. After the addition of current year earnings and profits and deficits to the separate categories there are no deficits remaining in any separate category. Thus, the allocation rules of §1.960–1(i)(4) do not apply in 1997. Accordingly, in determining the post-1986 foreign income taxes deemed paid by A, post-1986 undistributed earnings in each separate category are unaffected by earnings in the other categories. Foreign taxes deemed paid under section 960 for 1997 would be determined as follows for each separate category: with respect to the inclusion of 95u of foreign base company sales income out of general limitation earnings, the section 960 fraction is 95u inclusion/0 total earnings; with respect to the inclusion of 95u of passive limitation income the section 960 fraction is 95u inclusion/150u passive earnings. Thus, no general limitation taxes would be associated with the inclusion of the general limitation earnings because there are no accumulated earnings in the general limitation category. After the deemed-paid taxes are computed, at the close of 1997 CFC has a (95u) deficit in general limitation earnings and profits ((100u) opening balance + 100u current earnings

• 95u inclusion), 55u of passive limitation earnings and profits (50u opening balance + 100u current foreign personal holding company income – 95u inclusion), and 40u of earnings and profits subject to the separate limitation for dividends from the noncontrolled section 902 corporation (50u opening balance + (10u) expense).

Example 3 . (i) A, a U.S. person, is the sole shareholder of CFC, a controlled foreign corporation whose functional currency is the u . At the beginning of 1996, CFC has post-1986 undistributed earnings of 275u, all of which are general limitation earnings described in section 904(d)(1)(I). CFC has no previously-taxed earnings and profits described in section 959(c)(1) or (c)(2). In 1996, CFC has a (200u) loss in the shipping category described in section 904(d)(1)(D), 100u of foreign personal holding company income that is passive income described in section 904(d)(1)(A), and 125u of general limitation manufacturing earnings that are not subpart F income. CFC ’s subpart F income for 1996, 100u, exceeds CFC’s current earnings and profits, 25u, by 75u. Under section 952(c)(1)(A) and paragraph (e) of this section, subpart F income is limited to CFC ’s current earnings and profits of 25u, all of which is included in A ’s gross income under section 951(a)(1)(A). The 75u of CFC ’s 1996 subpart F income that is not included in A ’s income in 1996 by reason of section 952(c)(1)(A) is subject to recapture under section 952(c)(2) and paragraph (f) of this section.

(ii) For purposes of determining the amount and type of income included in A ’s gross income and the amount and type of income in CFC ’s recapture account, the rules of paragraphs (e)(1) and (2) of this section apply. Under paragraph (e)(1) of this section, the amount of CFC ’s subpart F income in excess of earnings and profits for 1996, 75u, reduces the 100u of passive limitation foreign personal holding company income. Thus, A includes 25u of passive limitation foreign personal holding company income in gross income, and CFC has 75u in its passive limitation/foreign personal holding company income recapture account.

484 1995–2 C.B.

(iii) For purposes of computing post-1986 undistributed earnings in each separate category the rules of sections 902 and 960, including the rules of §1.960–1(i), apply. Under §1.960–1(i), the shipping limitation deficit of (200u) is allocated proportionately to reduce general limitation earnings of 400u and passive limitation earnings of 100u. Thus, general limitation earnings are reduced by 160u to 240u (400u general limitation earnings/500u total earnings in positive separate categories - (200u) shipping deficit = 160u reduction), and passive limitation earnings are reduced by 40u to 60u (100u passive earnings/500u total earnings in positive separate categories - (200u) shipping deficit = 40u reduction). Five-twelfths of CFC ’s post-1986 foreign income taxes with respect to passive limitation earnings are deemed paid by A under section 960 with respect to the subpart F inclusion (25u inclusion/60u passive earnings). After the inclusion and deemed-paid taxes are computed, at the close of 1996 CFC has 400u of general limitation earnings (275u opening balance + 125u current earnings), 75u of passive limitation earnings (100u of foreign personal holding company income – 25u inclusion), and a (200u) deficit in shipping limitation earnings.

Example 4 . (i) The facts are the same as in Example 3 with the addition of the following facts. In 1997, CFC earns 50u of general limitation earnings that are not subpart F income and 75u of passive limitation income that is foreign personal holding company income. Thus, CFC has 125u of current earnings and profits. CFC distributes 200u to A . Under paragraph (f)(3)(ii) of this section, the recapture rules are applied first. Thus, the amount by which 1997 current earnings and profits exceed subpart F income, 50u, is recharacterized as passive limitation foreign personal holding company income. CFC ’s total subpart F income for 1997 is 125u of passive limitation foreign personal holding company income (75u current earnings plus 50u recapture account), and the passive limitation/foreign personal holding company income recapture account is reduced from 75u to 25u. (ii) CFC has 150u of previously-taxed earnings and profits described in section 959(c)(2) (25u attributable to 1996 and 125u attributable to 1997), all of which is passive limitation earnings and profits. Under section 959(c), 150u of the 200u distribution is deemed to be made from earnings and profits described in section 959(c)(2). The remaining 50u is deemed to be made from earnings and profits described in section 959(c)(3). Under paragraph (f)(3)(i) of this section, the dividend distribution is deemed to be made first out of the passive limitation recapture account to the extent thereof (25u). Under paragraph (f)(2)(iii) of this section, the passive limitation recapture account is reduced from 25u to 0. The remaining distribution of 25u is treated as made out of CFC ’s general limitation earnings and profits.

(iii) For purposes of computing post-1986 undistributed earnings, the rules of section 902 and 960, including the rules of §1.960–1(i), apply. Thus, the shipping limitation accumulated deficit of (200u) reduces general limitation earnings and profits of 450u and passive limitation earnings and profits of 150u on a proportionate basis. Thus, 100% of CFC ’s post-1986 foreign income taxes with respect to passive limitation earnings are deemed paid by A under section 960 with respect to the 1997 subpart F inclusion of 125u (100u inclusion (numerator limited to denominator)/100u passive

taxes under section 960(a)(1) with respect to an amount included in gross income under section 951(a), then, such domestic corporation shall be deemed to have paid a portion of such foreign corporation’s post-1986 foreign income taxes determined under section 902 and the regulations under that section in the same manner as if the amount so included were a dividend paid by such foreign corporation (determined by applying section 902(c) in accordance with section 904(d)(3)(B)).

(2) Ordering rule for computing deemed-paid taxes under sections 902 and 960 . If a domestic corporation computes deemed-paid taxes under both section 902 and section 960 in the same taxable year, section 960 shall be applied first. After the deemed-paid taxes are computed under section 960 with respect to a deemed income inclusion, post-1986 undistributed earnings and post-1986 foreign income taxes in each separate category shall be reduced by the appropriate amounts before deemed-paid taxes are computed under section 902 with respect to a dividend distribution.

(3) Computation of post-1986 un- distributed earnings . Post-1986 undistributed earnings (or an accumulated deficit in post-1986 undistributed earnings) are computed under section 902 and the regulations under that section.

(4) Allocation of accumulated defi- cits . For purposes of computing post-1986 undistributed earnings under sections 902 and 960, a post-1986 accumulated deficit in a separate category shall be allocated proportionately to reduce post-1986 undistributed earnings in the other separate categories. However, a deficit in any separate category shall not permanently reduce earnings in other separate categories, but after the deemed-paid taxes are computed the separate limitation deficit shall be carried forward in the same separate category in which it was incurred. In addition, because deemedpaid taxes may not exceed taxes paid or accrued by the controlled foreign corporation, in computing deemed-paid taxes with respect to an inclusion out of a separate category that exceeds post-1986 undistributed earnings in that separate category, the numerator of the deemed-paid credit fraction (deemed inclusion from the separate category) may not exceed the denominator (post-1986 undistributed earnings in the separate category).

(5) Examples . The application of this paragraph (i) may be illustrated by the

following examples. See §1.952–1(f)(4) for additional illustrations of these rules.

Example 1 . (i) A, a U.S. person, is the sole shareholder of CFC, a controlled foreign corporation formed on January 1, 1996, whose functional currency is the u . In 1996 CFC earns 100u of general limitation income described in section 904(d)(1)(I) that is not subpart F income and 100u of foreign personal holding company income that is passive income described in section 904(d)(1)(A). In 1996 CFC also incurs a (50u) loss in the shipping category described in section 904(d)(1)(D). CFC ’s subpart F income for 1996, 100u, does not exceed CFC ’s current earnings and profits of 150u. Accordingly, all 100u of CFC ’s subpart F income is included in A ’s gross income under section 951(a)(1)(A). Under section 904(d)(3)(B) of the Code and paragraph (i)(1) of this section, A includes 100u of passive limitation income in gross income for 1996.

(ii) For purposes of computing post-1986 undistributed earnings under sections 902, 904(d) and 960 with respect to the subpart F inclusion, the shipping limitation deficit of (50u) is allocated proportionately to reduce general limitation earnings of 100u and passive limitation earnings of 100u. Thus, general limitation earnings are reduced by 25u to 75u (100u general limitation earnings/200u total earnings in positive separate categories - (50u) shipping deficit = 25u reduction), and passive limitation earnings are reduced by 25u to 75u (100u passive earnings/ 200u total earnings in positive separate categories - (50u) shipping deficit = 25u reduction). All of CFC ’s post-1986 foreign income taxes with respect to passive limitation earnings are deemed paid by A under section 960 with respect to the 100u subpart F inclusion of passive income (75u inclusion (numerator limited to denominator under paragraph (i)(4) of this section)/75u passive earnings). After the inclusion and deemed-paid taxes are computed, at the close of 1996 CFC has 100u of general limitation earnings, 0 of passive limitation earnings (100u of foreign personal holding company income – 100u inclusion), and a (50u) deficit in shipping limitation earnings.

Example 2 . (i) The facts are the same as in Example 1 with the addition of the following facts. In 1997, CFC distributes 150u to A . CFC has 100u of previously-taxed earnings and profits described in section 959(c)(2) attributable to 1996, all of which is passive limitation earnings and profits. Under section 959(c), 100u of the 150u distribution is deemed to be made from earnings and profits described in section 959(c)(2). The remaining 50u is deemed to be made from earnings and profits described in section 959(c)(3). The entire dividend distribution of 50u is treated as made out of CFC ’s general limitation earnings and profits. See section 904(d)(3)(D).

(ii) For purposes of computing post-1986 undistributed earnings under section 902 with respect to the 1997 dividend of 50u, the shipping limitation accumulated deficit of (50u) reduces general limitation earnings and profits of 100u to 50u. Thus, 100% of CFC ’s post-1986 foreign income taxes with respect to general limitation earnings are deemed paid by A under section 902 with respect to the 1997 dividend of 50u (50u dividend/50u general limitation earnings). After the deemed-paid taxes are computed, at the close of 1997 CFC has 50u of general limitation earnings (100u opening balance — 50u distribution), 0 of passive limitation earnings, and a (50u) deficit in shipping limitation earnings.

(Filed by the Office of the Federal Register on

September 6, 1995, 8:45 a.m., and published in the issue of the Federal Register for September 7, 1995, 60 F.R. 46548)

Withdrawal of Notice of Proposed Rulemaking; Notice of Proposed Rulemaking; Notice of Public Hearing

Taxpayer Identifying Numbers (TIN)

INTL–24–94

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking; Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document withdraws the notice of proposed rulemaking relating to taxpayer identifying numbers published in the Federal Register on September 27, 1990, at 55 FR 39486 [IA–224–82, 1990–2 C.B. 739]. This document also contains proposed amendments to the regulations relating to requirements for furnishing a taxpayer identifying number on returns, statements, or other documents. These amendments set forth procedures for requesting a taxpayer identifying number for certain alien individuals for whom a social security number is not available. These numbers would be called ‘‘IRS individual taxpayer identification numbers.’’ These amendments also require certain foreign persons to furnish a taxpayer identifying number on their tax returns. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written comments and outlines of the oral comments to be presented at the public hearing scheduled for 10 a.m. on September 28, 1995, must be received by September 7, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (INTL–0024–94), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5

1995–2 C.B. 485

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

p.m. to: CC:DOM:CORP:T:R (INTL– 0024–94), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. The public hearing will be held in the Internal Revenue Service Auditiorium, 7400 corridor, 1111 Constitution Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office in Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224.

The collection of information from certain resident alien individuals and foreign persons required to furnish taxpayer identifying numbers under section 6109 of the Internal Revenue Code (Code) is found in § 301.6109–1. This information will be used by the IRS for tax administration purposes. The likely respondents and recordkeepers are certain resident alien individuals and foreign persons such as nonresident alien individuals and foreign corporations who make a return of tax.

The burden for the collection of information contained in § 301.6109– 1(d) is reflected in the burden of Form W–7.

Background

This document withdraws the notice of proposed relemaking under section 6109 published in the Federal Register on September 27, 1990 at 55 FR 39486. This document also contains proposed amendments to 26 CFR part 301 to provide rules under section 6109 of the Internal Revenue Code relating to a new type of taxpayer identifying number.

Explanation of Provisions

In General

Section 6109(a) of the Code provides

486 1995–2 C.B.

that, when requied by regulations, a person must furnish a taxpayer identifying number (TIN) for securing proper identification of that person on any return, statement, or other document made under the Code. The assignment of a unique and permanent number to each taxpayer is important for the effective operation of the IRS automatic data processing system. The numbering system improves the IRS’ ability to identify and access database records; to match information provided on tax and information returns, statements, and other documents with the proper taxpayers; and to provide better customer service to taxpayers.

The Treasury Department and the IRS are concerned about individuals who are filing tax returns but who are unable to obtain a social security number. In order to insure that all taxpayers required to provide a TIN for tax purposes are able to obtain one, the IRS is developing a separate numbering system that will make unique and permanent numbers available to those individuals. The proposed regulations explain how alien individuals, whether resident or nonresident, can obtain an IRS individual taxpayer identification number from the IRS.

The regulations require any foreign person who makes a return to provide a TIN on the return. This TIN may be an employer identification number, a social security number, or a new IRS individual taxpayer identification number in the case of an alien individual who does not have a social security number and cannot obtain one.

The Treasury Department and the IRS are also considering changes to the procedures that apply to withholding tax on payments to foreign persons in order to excourage compliance and reduce paperwork burden. The Treasury Department and the IRS are aware that significant changes in this area will impact some aspects of transactions subject to withholding. Accordingly, the Treasury Department and the IRS intend to move very cautiously, particularly by considering the possible effect of changes in these procedures on investment decisions by foreign persons and by considering the adequacy of existing procedures for those taxpayers who wish to continue to comply with current rules. Generally, no new procedures will be adopted without adequate opportunity for public comment and appropriate transition periods before taking effect. This will

not, however, preclude the Treasury Department and the IRS from adopting new procedures to replace the current address rule for dividends.

Specific Changes

The most significant changes proposed by these regulations are described below. The first change is the introduction of a new IRS-issued TIN for use by alien individuals who currently do not have, and are not eligible to obtain, social security numbers. The number is called an IRS individual taxpayer identification number (ITIN). This number is intended to be issued to alien individuals, whether resident or nonresident, who are currently required to furnish a number for tax purposes but who are not entitled to obtain social security numbers. Therefore, these amendments are designed to help taxpayers maintain compliance with TIN requirements under the Code and regulations. The Social Security Administration limits its assignment of social security numbers to individuals who are U.S. citizens and alien individuals legally admitted to the United States for permanent residence or under other immigration categories which authorize U.S. employment. Therefore, IRS-issued numbers are necessary for those individuals who need a TIN but cannot qualify for a social security number.

The second change is to modify the existing rule set forth in § 301.6109– 1(g) that currently excludes from the general requirement of providing a TIN, foreign persons that do not have either (1) income effectively connected with the conduct of a U.S. trade or business or (2) a U.S. office or place of business or a U.S. fiscal or paying agent. Under the proposed regulations, the exclusion is modified to require that any foreign person who makes a return of tax furnish its TIN on that return. This change is intended solely to address the IRS’ and Treasury’s concern that, without TINs, taxpayers cannot be identified and tax returns cannot be processed effectively.

The Treasury Department and the IRS are giving added thought to applying the TIN requirement to facilitate changes to the procedures that apply to withholding taxes on payments to foreign persons. Decisions with respect to the withholding tax system have yet to be made, and when made, will be proposed in subsequent regula

tions. The Treasury Department and the IRS will proceed cautiously in expanding the scope of the TIN requirement and will consider the adequacy of existing procedures for those taxpayers who wish to continue to comply with current rules.

The IRS individual taxpayer identification numbers issued under this regulation will differ from, and replace, the ‘‘temporary’’ TINs the IRS currently issues under the authority of section 6109(c). For example, after declaring in Rev. Rul. 84–158, 1984–2 C.B. 262, that a partnership must request the social security numbers of its individual partners (including a nonresident alien limited partner), the IRS announced in Rev. Rul. 85–61, 1985–1 C.B. 355, that it would issue temporary numbers to nonresident alien limited partners who do not have, and cannot obtain, social security numbers. All of these temporary numbers, however, will be retired upon subsequent revocation of these revenue rulings.

IRS individual taxpayer identification numbers are intended for tax use only. For example, the numbers will create no inference regarding the immigration status of a foreign person or the right of that person to be legally employed in the United States. The IRS individual taxpayer identification numbers and the information obtained by the IRS as a result of issuing numbers constitute confidential taxpayer information. Section 6103 strictly prohibits the disclosure of this information to other government agencies, private entities, or citizens. Disclosure in violation of the restrictions under section 6103 may lead to civil or criminal penalties.

Section-By-Section Analysis

Proposed § 301.6109–1(a)(1)(i) provides a general description of the types of TINs, including the new IRS individual taxpayer identification number. The IRS individual taxpayer identification number will begin with a specific number designated by the IRS and will otherwise resemble a social security number. Proposed § 301.6109– 1(a)(1)(ii) provides general rules for use of the different TINs, including the rule for an estate to obtain and furnish its employer identification number when required, such as in its capacity as a payor or payee of royalties. This rule for estates was announced previously in the proposed regulations under section 6109 published in the

Federal Register at 55 FR 39486 on September 27, 1990.

The requirement for foreign persons to provide a TIN if they have income effectively connected with the conduct of a U.S. trade or business, if they have a U.S. office or place of business, or a U.S. fiscal or paying agent during the taxable year, or if they are treated as resident alien individuals under section 6013(g) or (h), is restated without change in proposed §§ 301.6109– 1(b)(2) and (c). However, proposed § 301.6109–1(b)(2)(iv) modifies the exclusion currently provided in § 301.6109–1(g) with respect to other foreign persons by providing that a foreign person filing a return of tax is subject to the TIN requirements under section 6109. For this purpose, a return of tax includes income, estate, and gift tax returns but excludes information returns, statements or other documents. This requirement is proposed to be effective for foreign persons who file returns of tax after December 31, 1995.

The provisions of § 301.6109– 1(d)(2) dealing with obtaining an employer identification number are unchanged except to specify that a Form SS–4 will be available from U.S. consular offices abroad. This change is intended to accommodate those foreign persons that are required to provide an employer identification number.

The procedures governing the new IRS individual taxpayer identification number, including procedurs for obtaining such a number, are set forth in proposed § 301.6109–1(d)(3). An IRS individual taxpayer identification number is applied for on Form W–7, Application for IRS Individual Taxpayer Identification Number. Under normal procedures, the application is submitted to the IRS for processing together with required documentation designed to substantiate foreign status, as well as true identity. Further guidance will be issued to specify the types of acceptable documentation. Because the IRS intends to rely as much as possible on the identifying documents that are customarily used in a foreign jurisdiction to identify a resident in that jurisdiction, the documentation requirements are likely to vary from country to country. Comments and suggestions are solicited regarding the type of documents that could be used reliably to establish the identity of taxpayers and their foreign status.

The IRS is planning a wide distribution of application forms in the United

States and abroad and will insure that the form is easily available to the public. Further, in order to facilitate the application process and to expedite the issuance of the TINs, the regulations propose to authorize agreements that would permit certain persons to act as an applicant’s agent. These agents are called acceptance agents. Generally, an acceptance agent may include financial institutions or educational institutions, i.e., institutions that are likely to come in contact with a large number of foreign taxpayers earning U.S. source income and that can establish to the IRS that they have the resources and procedures necessary to undertake the duties expected from an acceptance agent.

Under an agreement with the IRS, an acceptance agent would assume responsibility for providing the necessary information to the IRS for the issuance of a number, together with a certification that the applicant is a foreign person. The certification would be issued on the basis of prescribed documentation obtained from the applicant. Under this procedure, no documentation generally would be required to be furnished to the IRS, except as part of a verification process by which the IRS may periodically verify the agent’s compliance with the agreement. In order to streamline the process and facilitate the agent’s due diligence under the agreement, the agreement would specify the type of documentation that must be obtained to verify foreign status and true identity of an applicant.

Proposed § 301.6109–1(d)(4) provides rules for the coordination of the different TINs. A person entitled to a social security number will not be issued an IRS individual taxpayer identification number. Once a person has a social security number, that number must be used for all tax purposes, even though the person is a nonresident alien. A nonresident alien who is issued an IRS individual taxpayer identification number and later becomes entitled to a social security number ( e.g., becomes a U.S. resident under an immigration visa) must apply for a social security number and must stop using the IRS number. IRS matching systems will help the IRS detect taxpayers who are incorrectly using an IRS individual taxpayer identification number. The IRS will contact those individuals and request that they obtain a social security number.

1995–2 C.B. 487

Section 301.6109–1(f) is modified to cross reference the new penalty provisions under sections 7621 through 6724. Proposed § 301.6109–1(g)(1) provides the general rule that, in the IRS records, a person with a social security number or an employer identification number will normally be identified as a U.S. person. Regulations to be issued at a later time may make it important for a person to be identified correctly in the IRS records as a U.S. or a foreign person. Accordingly, these proposed regulations provide that the foreign person with a social security number or an employer identification number may establish foreign status with the IRS. Any foreign person that holds an employer identification number issued prior to the effective date of this proposed regulation may continue to use its employer identification number for tax purposes. However, when requested by the IRS, such persons must apply for a new employer identification number that is exclusively dedicated to foreign persons. Proposed § 301.6109– 1(g)(1) also provides that an IRS individual taxpayer identification number is considered by the IRS to belong to a nonresident alien individual if the foreign status of the individual is established upon initial application for the number. If foreign status is not established, the IRS will generally require the individaul to apply for a social security number. In rare cases when a resident alien individual is not eligible for a social security number, the taxpayer will be entitled to use an IRS individual taxpayer identification number, and the IRS will note in its records that the number belongs to a U.S. person.

No re-filings are required in order to maintain foreign status described in proposed § 301.6109–1(g)(1). However, proposed § 301.6109–1(g)(2) provides that if circumstances change (for example, a taxpayer becomes a U.S. resident), then the taxpayer must notify the IRS to record the change of status. The IRS will issue guiance on procedures for notifying the IRS of a person’s status or changes thereof.

Proposed § 301.6109–1(g)(3) concerns disclosure provisions. In order to make the acceptance agent’s procedures possible, it is necessary that taxpayers requesting a TIN through an acceptance agent authorize the disclosure of taxpayer information to the extent necessary to allow communications between

488 1995–2 C.B.

the IRS and the acceptance agent in the course of the issuance and administration of the number. Accordingly, the application form will include a waiver of the prohibition against disclosure of taxpayer information in order to permit the IRS to communicate with an acceptance agent regarding matters related to the assignment of a TIN.

Proposed Effective Date

These regulations would apply to returns, statements, or documents filed after December 31, 1995, except the provision relating to the requirement for an estate to obtain an employer identification number applies on and after January 1, 1984. Thus, these regulations would apply to foreign persons described in proposed § 301.6109–1(b)(2)(iv) who file a return of tax after December 31, 1995.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments that are submitted timely (preferably a signed original and eight (8) copies) to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for 10 a.m. on September 28, 1995. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing starts. The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written comments and an outline of the topics to be discussed and the time to be devoted to each topic by September 7, 1995. A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Withdrawal of Proposed Regulations

The previously proposed regulations under § 301.6109–1, as published in the Federal Register on September 27, 1990, at 55 FR 39486, are hereby 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 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.6109–1 also issued under 26 U.S.C. 6109(a), (c), and (d). - *

Par. 2. Section § 301.6109–1 is amended as follows:

1. Paragraphs (a)(1), (b), (c), and (d)(2) are revised.

2. Paragraphs (d)(3) and (4) are added.

3. Paragraphs (f), (g), and (h) are revised.

The revisions and additions read as follows:

§ 301.6109–1 Identifying numbers.

(a) In general —(1) Taxpayer identi- fying numbers —(i) Types. There are generally three types of taxpayer identifying numbers: social security numbers, Internal Revenue Service (IRS) individual taxpayer identification numbers, and employer identification numbers. Social security numbers take the form

000–00–0000, IRS individual taxpayer identification numbers take the form 000–00–0000 but begin with a specific number designated by the IRS, and employer identification numbers take the form 00–0000000. Both social security numbers and IRS individual taxpayer identification numbers identify individual persons. For the definition of social security number and employer i d e n t i f i c a t i o n n u m b e r, s e e §§ 301.7701–11 and 301.7701–12, respectively. For the definition of IRS individual taxpayer identification number, see paragraph (d)(3) of this section.

(ii) Uses. Except as otherwise provided in applicable regulations under this title or on a return, statement, or other document, and related instructions, taxpayer identifying numbers must be used as follows:

(A) Except as otherwise provided in paragraphs (a)(1)(ii)(B) and (D) of this section, an individual required to furnish a taxpayer identifying number must use a social security number.

(B) Except as otherwise provided in paragraph (a)(1)(ii)(D) of this section, an individual required to furnish a taxpayer identifying number but who is not eligible to obtain a social security number, must use an IRS individual taxpayer identification number.

(C) Any person other than an individual (such as corporations, partnerships, nonprofit associations, trusts, estates, and similar nonindividual persons) that is required to furnish a taxpayer identifying number must use an employer identification number.

(D) An individual, whether U.S. or foreign, who is an employer or who is engaged in trade or business as a sole proprietor should use an employer identification number as required by returns, statements, or other documents and their related instructions.

- - - - -

(b) Requirement to furnish one’s own number —(1) U.S. persons. Every U.S. person who makes under this title a return, statement, or other document must furnish its own taxpayer identifying number as required by the forms and the accompanying instructions. A U.S. person whose number must be included on a document filed by another person must give the taxpayer identifying number so required to the other person on request. For penalties

for failure to supply taxpayer identifying numbers, see sections 6721 through 6724. For provisions dealing specifically with the duty of employees with respect to their social security numbers, see § 31.6011(b)–2 (a) and (b) of this chapter (Employment Tax Regulations). For provisions dealing specifically with the duty of employers with respect to employer identification numbers, see § 31.6011(b)–1 of this chapter (Employment Tax Regulations).

(2) Foreign persons. The provisions of paragraph (b)(1) of this section regarding the furnishing of one’s own number shall apply to the following foreign persons)

(i) A foreign person that has income effectively connected with the conduct of a U.S. trade or business at any time during the taxable year;

(ii) A foreign person that has a U.S. office or place of business or a U.S. fiscal or paying agent at any time during the taxable year;

(iii) A nonresident alien treated as a resident under section 6013(g) or (h); and

(iv) Any other foreign person who makes a return of tax under this title (including income, estate, and gift tax returns) but excluding information returns, statements, or documents.

(c) Requirement to furnish another’s number. Every person required under this title to make a return, statement, or other document must furnish such taxpayer identifying numbers of other U.S. persons and foreign persons that are described in paragraph (b)(2)(i), (ii), or (iii) of this section as required by the forms and the accompanying instructions. If the person making the return, statement, or other document does not know the taxpayer identifying number of the other person, such person must request the other person’s number. A request should state that the identifying number is required to be furnished under authority of law. When the person making the return, statement, or other document does not know the number of the other person, and has complied with the request provision of this paragraph, such person must sign an affidavit on the transmittal document forwarding such returns, statements, or other documents to the Internal Revenue Service, so stating. A person required to file a taxpayer identifying number shall correct any errors in such filing when such person’s attention has been drawn to them.

(d) - * * (2) Employer identification number. Any person required to furnish an employer identification number must apply for one, if not done so previously, on Form SS–4. A Form SS–4 may be obtained from any office of the Internal Revenue Service, U.S. consular office abroad, or from an acceptance agent described in paragraph (d)(3)(iv) of this section. The person must make such application in advance of the first required use of the employer identification number to permit issuance of the number in time for compliance with such requirement. The form, together with any supplementary statement, must be prepared and filed in accordance with the form, accompanying instructions, and relevant regulations, and must set forth fully and clearly the requested data.

(3) IRS individual taxpayer identi- fication number —(i) Definition. The term IRS individual taxpayer identifica- tion number means a taxpayer identifying number issued to an alien individual by the Internal Revenue Service, upon application, for use in connection with filing requirements under this title. The term IRS individual taxpayer iden- tification number does not refer to a social security number or an account number for use in employment for wages. For purposes of this section, the term alien individual means an individual who is not a citzen or national of the United States.

(ii) General rule for obtaining num- ber. Any individual who is not eligible to obtain a social security number and is required to furnish a taxpayer identifying number must apply for an IRS individual taxpayer identification number on Form W–7, Application for IRS Individual Taxpayer Identification Number, or such other form as may be prescribed by the Internal Revenue Service. Form W–7 may be obtained from any office of the Internal Revenue Service, U.S. consular office abroad, or any acceptance agent described in paragraph (d)(3)(iv) of this section. The individual shall furnish the information required by the form and accompanying instructions, including the individual’s name, address, foreign tax identification number (if any), and specific reason for obtaining an IRS individual taxpayer identification number. The individual must make such application in advance of the first required use of the IRS individual taxpayer identification number to permit issuance of the number in time for compliance with such requirement. The application form, together with any supplementary statement and documentation, must be prepared and filed in accordance with the form, accompanying instructions, and relevant regulations, and must set forth fully and clearly the requested data.

(iii) General rule for assigning num- ber. Under procedures issued by the Internal Revenue Service, an IRS individual taxpayer identification number will be assigned to an individual upon the basis of information reported on Form W–7 (or such other form as may be prescribed by the Internal Revenue Service) and any such accompanying documentation that may be required by the Internal Revenue Service. An applicant for an IRS individual taxpayer identification number must submit such documentary evidence as the Internal Revenue Service may prescribe in order to establish alien status and identity. Examples of acceptable documentary evidence for this purpose may include items such as an original (or a certified copy of the original) passport, driver’s license, birth certificate, identity card, or U.S. visa.

(iv) Acceptance agents —(A) Agree- ments with acceptance agents. A person described in paragraph (d)(3)(iv)(B) of this section will be accepted by the Internal Revenue Service to act as an acceptance agent for purposes of the regulations under this section upon entering into an agreement with the Internal Revenue Service, under which the acceptance agent will be authorized to act on behalf of taxpayer seeking to obtain a taxpayer identifyin number from the Internal Revenue Service. The agreement must contain such terms and conditions as are necessary to insure proper administration of the process by which the Internal Revenue Service issues taxpayer identifying numbers to foreign persons, including proof of their identity and foreign status. In particular, the agreement may contain—

( 1 ) Procedures for providing Form SS–4 and Form W–7, or such other necessary form to applicants for obtaining a taxpayer identifying number;

( 2 ) Procedures for providing assistance to applicants in completing the application form or completing it for them;

( 3 ) Procedures for collecting, reviewing, and maintaining, in the nor

490 1995–2 C.B.

mal course of business, a record of the required documentation for assignment of a taxpayer identifying number;

( 4 ) Procedures for submitting the application form and required documentation to the Internal Revenue Service, or if permitted under the agreement, submitting the application form together with a certification that the acceptance agent has reviewed the required documentation and that it has no actual knowledge or reason to know that the documentation is not complete or accurate;

( 5 ) Procedures for assisting taxpayers with notification procedures described in paragraph (g)(2) of this section in the event of change of foreign status;

( 6 ) Procedures for making all documentation or other records furnished by persons applying for a taxpayer identifying number promptly available for review by the Internal Revenue Service, upon request; and

( 7 ) Provisions that the agreement may be terminated in the event of a material failure to comply with the agreement, including failure to exercise due diligence under the agreement.

(B) Persons who may be acceptance agents. An acceptance agent may include any financial institution as defined in section 265(b)(5) or § 1.165– 12(c)(1)(v) of this chapter, any college or university that is an educational organization as defined in § 1.501(c)(3)–1(d)(3)(i) of this chapter, any federal agency as defined in section 6402(f) or any other person or categories of persons that may be authorized by regulations or Internal Revenue Service procedures. A person described in this paragraph (d)(3)(iv)(B) that seeks to qualify as an acceptance agent must have an employer identification number for use in any communication with the Internal Revenue Service. In addition, it must establish to the satisfaction of the Internal Revenue Service that it has adequate resources and procedures in place to comply with the terms of the agreement described in paragraph (d)(3)(iv)(A) of this section.

(4) Coordination of taxpayer identi- fying numbers —(i) Social security number. Any individual who is duly assigned a social security number or who is entitled to a social security number will not be issued an IRS individual taxpayer identification number. The individual can use the social security number for all tax purposes

under this title, even though the individual is, or later becomes, a nonresident alien individual. Further, an individual who has an application pending with the Social Security Administration will be issued an IRS individual taxpayer identification number only after the Social Security Administration has notified the individual that a social security number cannot be issued. Any alien individual duly issued an IRS individual taxpayer identification number who later becomes a U.S. citizen, or an alien lawfully permitted to enter the United States either for permanent residence or under authority of law permitting U.S. employment, will be required to obtain a social security number. Any individual who has an IRS individual taxpayer identification number and a social security number, due to the circumstances described in the preceding sentence, must notify the Internal Revenue Service of the acquisition of the social security number and must use the newly-issued social security number as the taxpayer identifying number on all future returns, statements, or other documents filed under this title.

(ii) Employer identification number. Any individual with both a social security number (or an IRS individual taxpayer identification number) and an employer identification number may use the social security number (or the IRS individual taxpayer identification number) for individual taxes, and the employer identification number for business taxes as required by returns, statements, and other documents and their related instructions. Any alien individual duly assigned an IRS individual taxpayer identification number who also is required to obtain an employer identification number must furnish the previoulsy-assigned IRS individual taxpayer identification number to the Internal Revenue Service on Form SS–4 at the time of application for the employer identification number. Similarly, where an alien individual has an employer tax identification number and is required to obtain an IRS individual taxpayer identification number, the individual must furnish the previoulsy-assigned employer identification number to the Internal Revenue Service on Form W–7, or such other form as may be prescribed by the Internal Revenue Service, at the time of application for the IRS individual taxpayer identification number.

Notice of Proposed Rulemaking

Definitions Under Subchapter S of the Internal Revenue Code

PS–268–82

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations for S corporations and their shareholders relating to the definitions and the special rule provided in section 1377 of the Internal Revenue Code of 1986. The proposed regulations reflect changes to the law made by the Subchapter S Revision Act of 1982. The proposed regulations are necessary to provide guidance needed by taxpayers to comply with the law.

DATES: Written comments and requests for a public hearing must be received by October 10, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS–268–82), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS–268– 82), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)). Comments on the collections of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224.

A collection of information is required under §1.1377–1(b). This infor

1995–2 C.B. 491

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(f) Penalty. For penalties for failure to supply taxpayer identifying numbers, see sections 6721 through 6724.

(g) Special rules for taxpayer identi- fying numbers issued to foreign persons —(1) General rule —(i) Social security number. A social security number is generally identified in the records and database of the Internal Revenue Service as a number belonging to a U.S. citizen or resident alien individual. A person may establish a different status for the number by providing proof of foreign status with the Internal Revenue Service under such procedures as the Internal Revenue Service shall prescribe, including the use of a form as the Internal Revenue Service may specify. Upon accepting an individual as a nonresident alien individual, the Internal Revenue Service will assign this status to the individual’s social security number.

(ii) Employer identification number. An employer identification number is generally identified in the records and database of the Internal Revenue Service as a number belonging to a U.S. person. However, the Internal Revenue Service may establish a separate class of employer identification numbers solely dedicated to foreign persons which will be identified as such in the records and database of the Internal Revenue Service. A person may establish a different status for the number either at the time of application or subsequently by providing proof of U.S. or foreign status with the Internal Revenue Service under such procedures as the Internal Revenue Service shall prescribe, including the use of a form as the Internal Revenue Service may specify. The Internal Revenue Service may require a person to apply for the type of employer identification number that reflects the status of that person as a U.S. or foreign person.

(iii) IRS individual taxpayer identi- fication number. An IRS individual taxpayer identification number is generally identified in the records and database of the Internal Revenue Service as a number belonging to a nonresident alien individual. If the Internal Revenue Service determines at the time of application or subsequently, that an individual is not a nonresident alien individual, the Internal Revenue Service may require that the individual

apply for a social security number. If a social security number is not available, the Internal Revenue Service may accept that the individual use an IRS individual taxpayer identification number, which the Internal Revenue Service will identify as a number belonging to a U.S. resident alien.

(2) Change of foreign status. Once a taxpayer identifying number is identified in the records and database of the Internal Revenue Service as a number belonging to a U.S. or foreign person, the status of the number is permanent until the circumstances of the taxpayer change. A taxpayer whose status changes (for example, a nonresident alien individual with a social security number becomes a U.S. resident alien) must notify the Internal Revenue Service of the change of status under such procedures as the Internal Revenue Service shall prescribe, including the use of a form as the Internal Revenue Service may specify.

(3) Waiver of prohibition to disclose taxpayer information when acceptance agent acts. As part of its request for an IRS individual taxpayer identification number or submission of proof of foreign status with respect to any taxpayer identifying number, where the foreign person acts through an acceptance agent, the foreign person will agree to waive the limitations in section 6103 regarding the disclosure of certain taxpayer information. However, the waiver will apply only for purposes of permitting the Internal Revenue Service and the acceptance agent to communicate with each other regarding matters related to the assignment of a taxpayer identifying number and change of foreign status.

(h) Effective date. The provisions of this section generally are effective for any return, statement, or other document to be filed after December 31, 1995. However, the provision of paragraph (a)(1)(ii) of this section that requires an estate to obtain an employer identification number applies on and after January 1, 1984.

Margaret Milner Richardson, Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on

June 7, 1995, 8:45 a.m., and published in the issue of the Federal Register for June 8, 1995, 60 F.R. 30211)

mation is required by the IRS to verify the event giving rise to the making of an election under section 1377(a)(2) by an S corporation. The likely respondents and/or recordkeepers will be S corporations and shareholders of S corporations.

Estimated total annual reporting burden: 1,000 hours.

The estimated annual burden per respondent varies from .2 hour to .5 hour, depending on individual circumstances, with an estimated average of .25 hour.

Estimated number of respondents: 4,000. Estimated annual frequency of responses: 1.

Background

This document proposes amendments to the Income Tax Regulations (26 CFR part 1) under section 1377 of the Internal Revenue Code (Code). Section 18.1377–1 was issued by TD 7872

[1983–1 C.B. 193] (48 FR 3590). The proposed regulations would conform the regulations to the addition of section 1377 to the Code by section 2 of the Subchapter S Revision Act of 1982, Pub. L. 97–354 (1982–2 C.B. 702, 710).

Explanation of Provisions

Shareholder’s pro rata share of items of income, loss, deduction, and credit

Section 1366(a)(1) requires a shareholder of an S corporation to take into account the shareholder’s pro rata share of the corporation’s items of income, loss, deduction, and credit. The proposed regulations provide that, except in the case of an election under section 1377(a)(2), each shareholder’s pro rata share of an item for a taxable year is the sum of the amounts determined with respect to the shareholder by assigning an equal portion of the item to each day of the S corporation’s taxable year, and then dividing that portion pro rata among the shares outstanding on that day.

The proposed regulations contain several special rules for determining a shareholder’s pro rata share. First, solely for purposes of determining a shareholder’s pro rata share of an item, an S corporation’s taxable year does not include any day on which the corporation has no shareholders. This

492 1995–2 C.B.

rule ensures that the full amount of all items of the S corporation will be allocated to the corporation’s shareholders. Second, a shareholder who disposes of stock of an S corporation is treated as the shareholder for the day of the disposition. Finally, a shareholder who dies is treated as the shareholder for the day of the shareholder’s death.

Election to treat taxable year as separate taxable years

Under section 1377(a)(2), if a shareholder’s interest in an S corporation is terminated during the taxable year and all persons who are shareholders during the taxable year agree, the corporation may elect (terminating election) to apply section 1377(a)(1) as if the taxable year of the S corporation consisted of two taxable years, the first of which ends on the date of the termination. The proposed regulations provide rules concerning the time and manner of making a terminating election and, therefore, it is proposed that §18.1377–1 (which provides temporary rules concerning the time and manner of making a terminating election) be removed. The proposed regulations also provide that the terminating election is irrevocable and is effective only for the terminating event for which it is made.

The proposed regulations clarify that a terminating election may be made only if a shareholder’s entire interest as a shareholder in the S corporation is terminated. A shareholder’s entire interest as a shareholder is terminated under the proposed regulations on the occurrence of any event through which a shareholder’s entire stock ownership in the S corporation ceases, including a sale, exchange, or other disposition of all of the stock held by the shareholder; a gift under section 102(a) of all the shareholder’s stock; a spousal transfer under section 1041(a) of all the shareholder’s stock; a redemption, as defined in section 317(b), of all of the shareholder’s stock, regardless of the tax treatment of the redemption under section 302; and the death of the shareholder. A shareholder’s entire interest in an S corporation is not terminated under the proposed regulations if the shareholder retains ownership of any stock that would result in the shareholder continuing to be considered a shareholder of the corporation for purposes of section 1362(a)(2). Thus, in determining whether a share

holder’s entire interest in an S corporation has been terminated, any options held by the shareholder (other than options that are treated as stock under §1.1361–1(l)(4)(iii)) and any interest in the S corporation held by the shareholder as a creditor, employee, director, or in any other non-shareholder capacity are disregarded.

The proposed regulations also describe the effects of a terminating election. Under the proposed regulations, an S corporation that makes a terminating election must treat its taxable year as two separate taxable years for purposes of computing and allocating to each shareholder items of income (including tax-exempt income), loss, deduction, and credit; making adjustments to the accumulated adjustments account (AAA), earnings and profits, and basis; and determining the tax effect of a distribution to the shareholders. This treatment is required to give full effect to treating the taxable year as two separate taxable years. The proposed regulations also require the S corporation to assign items of income, loss, deduction, and credit to each deemed separate taxable year using the corporation’s normal method of accounting as determined under section 446(a). The proposed regulations provide that a terminating election does not affect the due date of the S corporation’s tax return for the taxable year or the time when the shareholders must include their pro rata allocations of items from the S corporation. The proposed regulations also provide that a terminating election by an S corporation that is a partner in a partnership is treated as a sale or exchange of the corporation’s entire interest in the partnership for purposes of section 706(c) (closing of the partnership’s taxable year) if the taxable year of the partnership ends after the shareholder’s interest is terminated and within the full taxable year of the S corporation for which the terminating election is made. This rule conforms terminating elections with the rule for S termination years. See §1.1362– 3(c)(1). The proposed regulations coordinate the application of the terminating election under section 1377(a)(2) with the election under section 1362(e)(3) (election to have items assigned to each short taxable year of an S termination year under normal accounting rules rather than pro rata) and the election under §1.1368–1(g)(2) (election to ter

minate the taxable year when there is a qualifying disposition). Under the proposed regulations, if a transfer results in a termination of the shareholder’s entire interest as a shareholder and the transfer also constitutes a qualifying disposition under §1.1368–1(g)(2)(i), the terminating election rules under these proposed regulations take precedence and a qualifying disposition election cannot be made. If a termination of a shareholder’s entire interest results in a termination under section 1362(d)(2) of the corporation’s election to be an S corporation, however, the proposed regulations provide that the corporation may not make a terminating election. When a corporation’s election to be an S corporation terminates, the portion of the corporation’s taxable year ending at the close of the day preceding the day for which the terminating event is effective is treated as an S short year, and the remainder is treated as a C short year. Thus, because the day upon which a terminating event occurs is the first day of a C short year, as of that date there is no S corporation taxable year that may be divided into two separate years under section 1377(a)(2). Under section 1362(e)(2), the income or loss for the entire S termination year is allocated on a pro rata basis between the S and C short years. However, if the corporation makes an election under section 1362(e)(3), the corporation allocates income and loss to each short taxable year under the corporation’s normal tax accounting rules. Thus, when a corporation makes an election under section 1362(e)(3), a shareholder of an S corporation may achieve a result similar to the result of an election under section 1377(a)(2) and these proposed regulations (which also require an allocation of income and loss to each short taxable year under normal accounting rules).

Post-termination transition period

Section 1377(b) provides that the term post-termination transition period (PTTP) for purposes of subchapter S of chapter 1 of the Code means: (1) the period beginning on the day after the last day of the corporation’s last taxable year as an S corporation and ending on the later of the day which is 1 year after such last day, or the due date for filing the return for the last taxable year as an S corporation (including extensions); and (2) the 120

day period beginning on the date of a determination that the corporation’s election under section 1362(a) had terminated for a previous taxable year. The PTTP is relevant for purposes of section 1366(d)(3) (carryover of disallowed losses after the last taxable year for which a corporation is an S corporation) and section 1371(e) (distributions of money by a corporation with respect to its stock after termination of S corporation status).

The proposed regulations clarify that a PTTP arises following the termination under section 1362(d) of a corporation’s S election. For example, a PTTP arises in the case of a C corporation that acquires the assets of an S corporation in a transaction to which section 381(a)(2) applies. However, if an S corporation acquires the assets of another S corporation in a transaction to which section 381(a)(2) applies, a PTTP does not arise. Instead, under §1.1368–2(d)(2), the acquiring S corporation succeeds to and merges its AAA with the AAA of the distributor or transferor S corporation.

The proposed regulations clarify that the last day of a corporation’s last taxable year as an S corporation is the last day of the short S taxable year under section 1362(e)(1)(A) or the date of transfer in the event that a C corporation acquires the assets of an S corporation in a transaction to which section 381(a)(2) applies. The proposed regulations also provide that the special treatment under section 1371(e)(1) is available only to those shareholders who were shareholders in the S corporation at the time of the termination.

The proposed regulations provide additional guidance on the definition of a determination for purposes of ascertaining when a PTTP begins under section 1377(b)(1)(B). Under the proposed regulations, a determination includes a written agreement between an S corporation and the Commissioner that the corporation failed to qualify as an S corporation. The agreement must be signed by the appropriate district director and an authorized officer of the corporation. In addition, if there is no written agreement, a determination results from the expiration of the period specified in section 6226 for filing a petition for readjustment of a final S corporation administrative adjustment finding that the corporation failed to qualify as an S corporation, provided that no petition is filed prior to the expiration of the period. For corpora

tions not subject to the audit and assessment provisions of subchapter C of chapter 63 of subtitle A (dealing with the tax treatment of partnership items) a determination results from the expiration of the period for filing a petition under section 6213 for the shareholder’s taxable year for which the Commissioner has made a finding that the corporation failed to qualify as an S corporation, provided that no petition was timely filed before the expiration of the period.

Effective date

The regulations under section 1377 are proposed to apply to taxable years of an S corporation beginning after the date of publication as final regulations in the Federal Register.

Special Analysis

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a 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.

List of Subjects in 26 CFR Parts 1 and 18

Income taxes, Reporting and recordkeeping requirements.

1995–2 C.B. 493

of two separate taxable years, the first of which ends at the close of the day on which the shareholder’s entire interest in the S corporation is terminated. If the event resulting in the termination of the shareholder’s entire interest also constitutes a qualifying disposition as described in §1.1368–1(g)(2), the election under §1.1368–1(g)(2) cannot be made. An S corporation may not make a terminating election if the cessation of a shareholder’s interest occurs in a transaction which results in a termination under section 1362(d)(2) of the corporation’s election to be an S corporation. (See section 1362(e)(3) for an election to have items assigned to each short taxable year under normal tax accounting rules in the case of a termination of a corporation’s election to be an S corporation.) A terminating election is irrevocable and is effective only for the terminating event for which it is made.

(2) Effect of the terminating election —(i) In general. An S corporation that makes a terminating election for a taxable year must treat the taxable year as separate taxable years for purposes of allocating items of income (including tax-exempt income), loss, deduction, and credit; making adjustments to the accumulated adjustments account, earnings and profits, and basis; and determining the tax effect of a distribution to the shareholders. An S corporation that makes a terminating election must assign items of income (including tax-exempt income), loss, deduction, and credit to each deemed separate taxable year using its normal method of accounting as determined under section 446(a).

(ii) Due date of S corporation re- turn. A terminating election does not affect the due date of the S corporation’s return required to be filed under section 6037(a) for a taxable year (determined without regard to a terminating election).

(iii) Taxable year of inclusion by shareholder. A terminating election does not affect the taxable year in which a shareholder (including any shareholder whose entire interest in the corporation has terminated during the corporation’s taxable year) must take into account the shareholder’s pro rata share of the S corporation’s items of income, loss, deduction, and credit.

(iv) S corporation that is a partner in a partnership. A terminating election by an S corporation that is a partner in a partnership is treated as a sale or

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 18 are proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * - Section 1.1377–1 also issued under 26 U.S.C. 1377(a)(2) and (c). Par. 2. Sections 1.1377–0, 1.1377–1, 1.1377–2, and 1.1377–3 are added under the heading ‘‘Small Business Corporations and Their Shareholders’’ to read as follows:

§1.1377–0 Table of contents.

The following table of contents is provided to facilitate the use of §§1.1377–1 through 1.1377–3:

§1.1377–1 Pro rata share.

(a) Computation of pro rata shares. (1) In general. (2) Special rules. (i) Days without shareholders. (ii) Determining shareholder for day of stock disposition.

(b) Election to terminate year. (1) In general. (2) Effect of the terminating election.

(i) In general. (ii) Due date of S corporation return. (iii) Taxable year of inclusion by shareholder.

(iv) S Corporation that is a partner in a partnership.

(3) Determination of whether an S shareholder’s entire interest has terminated.

(4) Time and manner of making terminating election.

(i) In general. (ii) Shareholders required to consent. (iii) More than one terminating election.

(c) Examples.

§1.1377–2 Post-termination transition period.

(a) In general.

494 1995–2 C.B.

(b) When a post-termination transition period arises.

(c) Last day of last taxable year. (d) Determination defined. (e) Time of determination. (1) Court decision. (2) Closing agreement. (3) Written agreement. (4) Implied agreement.

§1.1377–3 Effective date.

§1.1377–1 Pro rata share.

(a) Computation of pro rata shares —(1) In general. For purposes of subchapter S of chapter 1 of the Code and this section, each shareholder’s pro rata share of any S corporation item described in section 1366(a) for any taxable year is the sum of the amounts determined with respect to the shareholder by assigning an equal portion of the item to each day of the S corporation’s taxable year, and then dividing that portion pro rata among the shares outstanding on that day. See paragraph (b) of this section for rules pertaining to the computation of each shareholder’s pro rata share when an election is made under section 1377(a)(2) to treat the taxable year of an S corporation as if it consisted of two taxable years in the case of a termination of a shareholder’s entire interest in the corporation.

(2) Special rules —(i) Days without shareholders. Solely for purposes of determining a shareholder’s pro rata share of an item for a taxable year under section 1377(a) and this section, an S corporation’s taxable year does not include any day on which the corporation has no shareholders.

(ii) Determining shareholder for day of stock disposition. A shareholder who disposes of stock in an S corporation is treated as the shareholder for the day of the disposition. A shareholder who dies is treated as the shareholder for the day of the shareholder’s death.

(b) Election to terminate year —(1) In general. If a shareholder’s entire interest in an S corporation is terminated during the S corporation’s taxable year and all persons who are shareholders during the taxable year agree (as prescribed in paragraph (b)(4) of this section), the S corporation may elect under section 1377(a)(2) and this paragraph (b) (terminating election) to treat its taxable year as if it consisted

exchange of the corporation’s entire interest in the partnership for purposes of section 706(c) (relating to closing the partnership taxable year), if the taxable year of the partnership ends after the shareholder’s interest is terminated and within the taxable year of the S corporation (determined without regard to any terminating election) for which the terminating election is made.

(3) Determination of whether an S shareholder’s entire interest has termi- nated. For purposes of section 1377(a)(2) and paragraph (b) of this section, a shareholder’s entire interest in an S corporation is terminated on the occurrence of any event through which a shareholder’s entire stock ownership in the S corporation ceases, including a sale, exchange, or other disposition of all of the stock held by the shareholder; a gift under section 102(a) of all the shareholder’s stock; a spousal transfer under section 1041(a) of all the shareholder’s stock; a redemption, as defined in section 317(b), of all the shareholder’s stock, regardless of the tax treatment of the redemption under section 302; and the death of the shareholder. A shareholder’s entire interest in an S corporation is not terminated if the shareholder retains ownership of any stock that would result in the shareholder continuing to be considered a shareholder of the corporation for purposes of section 1362(a)(2). Thus, in determining whether a shareholder’s entire interest in an S corporation has been terminated, any options held by the shareholder (other than options that are treated as stock under §1.1361– 1(l)(4)(iii)) and any interest held by the shareholder as a creditor, employee, director, or in any other nonshareholder capacity are disregarded. (See §1.1361–1(l)(4)(iii) for circumstances under which an option is treated as stock of the corporation and, therefore, the holder of the option is treated as owning a stock interest in the corporation.)

(4) Time and manner of making terminating election —(i) In general. An S corporation makes a terminating election by attaching a statement to its timely filed original or amended return required to be filed under section 6037(a) (that is, a Form 1120S) for the taxable year during which a shareholder’s entire interest is terminated. A single election statement may be filed by the S corporation for all terminating elections for the taxable year. The election statement must include—

(A) A declaration by the S corporation that it is electing under section 1377(a)(2) and §1.1377–1(b) to treat the taxable year as if it consisted of two separate taxable years;

(B) Information setting forth when and how the shareholder’s entire interest was terminated (for example, a sale or gift);

(C) The signature on behalf of the S corporation of an authorized officer of the corporation under penalties of perjury; and

(D) A notice of consent, signed by each person who is a shareholder in the S corporation during the taxable year (determined without regard to the terminating election), including any shareholder whose entire interest terminates during the taxable year, in which each shareholder consents to the S corporation making the terminating election.

(ii) Shareholders required to con- sent. For purposes of paragraph (b)(4)(i)(D) of this section, a shareholder of the S corporation for the taxable year is a shareholder as described in section 1362(a)(2). For example, the person who under §1.1362– 6(b)(2) must consent to a corporation’s S election in certain special cases is the person who must consent to the terminating election. In addition, an executor or administrator of an estate of a deceased shareholder may consent to the terminating election on behalf of the deceased shareholder.

(iii) More than one terminating elec- tion. A shareholder whose entire interest in an S corporation is terminated in an event for which a terminating election was made is not required to consent to a terminating election made with respect to a subsequent termination within the same taxable year of the entire interest of another shareholder.

(c) Examples. The following examples illustrate the provisions of this section.

Example 1. General rule. (i) On January 2, 1997, X, a calendar year corporation, is incorporated. On January 4, 1997, X acquires assets. On January 6, 1997, X issues 100 shares of common stock to each of A and B and files an election to be an S corporation effective for its 1997 taxable year. During its 1997 taxable year, X has nonseparately computed income (as defined in section 1366(a)(2)) of $720,000.

(ii) Each shareholder’s pro rata share of X’s nonseparately computed income for 1997 is determined by assigning an equal portion of the income to each day of X’s taxable year on which X had shareholders. In the present case, there are only 360 days on which X had shareholders because X had no shareholders until January 6,

1997. Thus, $2,000 of nonseparately computed income is assigned to each day that X had shareholders ($720,000/360 days = $2,000 per day). The amount assigned to each day is multiplied by the percentage of shares held by the shareholder on that day. Because A and B each owned 50 percent of the shares of stock outstanding on each day that X had shareholders, each shareholder’s daily pro rata share of X’s nonseparately computed income is $1,000 ($2,000 per day - 50%). Finally, the amounts of each shareholder’s daily pro rata shares are aggregated to produce the shareholder’s pro rata share of X’s nonseparately computed income for
1998. During 1997, A and B each held X stock for 360 days. Thus, each shareholder’s pro rata share of X’s nonseparately computed income for 1997 is $360,000 ($1,000 per day - 360 days). Example 2. Shareholder’s pro rata share in the case of a partial disposition of stock. (i) X, a newly incorporated calendar year corporation, issues 100 shares of common stock on January 6, 1997, to each of A and B and files an election to be an S corporation for its 1997 taxable year. On July 24, 1997, B sells 50 shares of X stock to C. Thus, in 1997, A owned 50 percent of the outstanding shares of X on each day of X’s 1997 taxable year on which X had shareholders, B owned 50 percent on each day from January 6, 1997, to July 24, 1997 (200 days), and 25 percent from July 25, 1997, to December 31, 1997 (160 days), and C owned 25 percent from July 25, 1997, to December 31, 1997 (160 days).

(ii) Because B’s entire interest in X is not terminated when B sells 50 shares to C on July 24, 1997, X cannot make a terminating election under section 1377(a)(2) and paragraph (b) of this section for B’s sale of 50 shares to C. Although B’s sale of 50 shares to C is a qualifying disposition under §1.1368–1(g)(2)(i), X does not make an election to terminate its taxable year under §1.1368–1(g)(2). During its 1997 taxable year, X has nonseparately computed income of $720,000.

(iii) For each day in X’s 1997 taxable year, A’s daily pro rata share of X’s nonseparately computed income is $1,000 ($720,000/360 days

• 50%). Thus, A’s pro rata share of X’s nonseparately computed income for 1997 is $360,000 ($1,000 x 360 days). B’s daily pro rata share of X’s nonseparately computed income is $1,000 ($720,000/360 - 50%) for the first 200 days of X’s taxable year on which X has shareholders, and $500 ($720,000/360 - 25%) for the following 160 days in 1997. Thus, B’s pro rata share of X’s nonseparately computed income for 1997 is $280,000 (($1,000 - 200 days) + ($500 - 160 days)). C’s daily pro rata share of X’s nonseparately computed income is $500 ($720,000/360 - 25%) for 160 days in

1997. Thus, C’s pro rata share of X’s nonseparately computed income for 1997 is $80,000 ($500 - 160 days).

Example 3. Shareholder’s pro rata share when an S corporation makes a terminating election under section 1377(a)(2). (i) On January 6, 1997, X, a newly incorporated calendar year corporation, issues 100 shares of common stock to each of A and B and files an election to be treated as an S corporation for its 1997 taxable year. On July 24, 1997, B sells B’s entire 100 shares of X corporation stock to C. During its 1997 taxable year, X has nonseparately computed income of $720,000. X makes an election under section 1377(a)(2) and paragraph (b) of this section for the termination of B’s entire interest arising from B’s sale of 100 shares to C. As a result of the election, each shareholder’s pro rata share is determined as if X’s taxable year consisted of two separate taxable years, the first of which ends on July 24, 1997, the date B’s entire interest in X terminates.

(ii) Under X’s normal method of accounting, $200,000 of the $720,000 of nonseparately computed income is allocable to the period of January 6, 1997, through July 24, 1997 (the first deemed taxable year), and the remaining $520,000 is allocable to the period of July 25, 1997, through December 31, 1997 (the second deemed taxable year).

(iii) The pro rata share of the $200,000 of nonseparately computed income for each of A and B for the first deemed taxable year is determined by assigning the $200,000 of nonseparately computed income to each day of the first deemed taxable year ($200,000/200 days = $1,000 per day). Thus, for each day of the first deemed taxable year, $1,000 is allocated between A and B based on their proportionate stock ownership. Because A and B each held 50% of X’s authorized and issued shares on each day of the first deemed taxable year, the daily pro rata share for each of A and B for each day of the first deemed taxable year is $500 ($1,000 per day - 50%). Thus, each shareholder’s pro rata share of the $200,000 of nonseparately computed income for the first deemed taxable year is $100,000 ($500 per day - 200 days). A and B must report these amounts for their respective taxable years with or within which X’s full taxable year ends (December 31, 1997).

(iv) The pro rata share of the $520,000 of nonseparately computed income for each of A and C for the second deemed taxable year is determined by assigning the $520,000 of nonseparately computed income to each day of the second deemed taxable year ($520,000/160 days = $3,250 per day). Thus, for each day of the second deemed taxable year, $3,250 is allocated between A and C based on their proportionate ownership. Because A and C each held 50% of X’s authorized and issued shares on each day of the second deemed taxable year, the daily pro rata shares for each of A and C for each day of the second deemed taxable year is $1,625 ($3,250 per day - 50%). Therefore, each shareholder’s pro rata share of the $520,000 nonseparately computed income is $260,000 ($1,625 per day - 160 days). A and C must report these amounts for their respective taxable years with or within which X’s full taxable year ends (December 31, 1997).

Example 4. Interaction between the terminat- ing election under section 1377(a)(2) and section 1362(e). (i) On January 1, 1997, X, a calendar year S corporation, has two shareholders, A and B, owning 60 shares and 40 shares, respectively. On June 29, 1997, B sells B’s 40 shares to C. On July 20, 1997, C sells C’s 40 shares to P, a partnership, causing a termination under section 1362(d)(2) of X’s election to be an S corporation. X makes an election under section 1377(a)(2) and paragraph (b) of this section with regard to the termination of B’s entire interest on June 29, 1997. Because the termination on July 20, 1997, of C’s entire interest results in a termination of X’s election to be an S corporation, X cannot make a terminating election under section 1377(a)(2) and paragraph (b) of this section with regard to C’s sale of 40 shares to P. However, X makes an election under section 1362(e)(3) to assign items to each short taxable year of the S termination year under X’s normal method of accounting. X has nonseparately computed income of $530,000 for its 1997 taxable year.

496 1995–2 C.B.

(ii) As a result of the election under section 1362(e)(3), the portion of X’s taxable year ending at the close of the day prior to the termination of X’s S corporation election (January 1, 1997, through July 19, 1997) is treated as a short taxable year for which X is an S corporation, and the portion of the year beginning on the day the termination is effective (July 20, 1997, through December 31, 1997) is treated as a short taxable year for which X is a C corporation. Under X’s normal method of accounting, $200,000 of the $530,000 of X’s taxable income is allocable to the S short year and the remaining $330,000 is allocable to the C short year. Of the $200,000 allocable to the S short year, $90,000 is allocable to the first deemed taxable year (January 1, 1997, through June 29, 1997) (180 days), and $110,000 is allocable to the second deemed taxable year (June 30, 1997, through July 19, 1997) (20 days) under X’s normal method of accounting.

(iii) Each shareholder’s pro rata share of X’s income for the first deemed taxable year within the S short year is determined as follows. Because A owns 60% of the stock outstanding during the first deemed taxable year, A’s pro rata share for that period is $54,000 ($90,000/180 days in the period - 60% - 180 days). B’s pro rata share for that period, reflecting B’s 40% ownership, is $36,000 ($90,000/180 days in the period � 40% � 180 days). A and B must report these amounts for their respective taxable years with or within which the S termination year ends (December 31, 1997).

(iv) Each shareholder’s pro rata share of X’s income for the second deemed taxable year within the S short year is determined as follows. Because A owns 60% of the stock outstanding during the second deemed taxable year, A’s pro rata share for that period is $66,000 ($110,000/20 days in the period - 60% - 20 days). C’s pro rata share for that period, reflecting C’s 40% ownership, is $44,000 ($110,000/20 days in the period - 40% - 20 days). A and C must report these amounts for their respective taxable years with or within which the S termination year ends (December 31, 1997).

§1.1377–2 Post-termination transition period.

(a) In general. For purposes of subchapter S of chapter 1 of the Code and this section, the term posttermination transition period means—

(1) The period beginning on the day after the last day of the corporation’s last taxable year as an S corporation and ending on the later of—

(i) The day which is 1 year after such last day; or

(ii) The due date for filing the return for the last taxable year as an S corporation (including extensions); and

(2) The 120-day period beginning on the date of a determination that the corporation’s election under section 1362(a) had terminated for a previous taxable year.

(b) When a post-termination transi- tion period arises. A post-termination

transition period arises following the termination under section 1362(d) of a corporation’s S election. For example, a post-termination transition period arises if a C corporation acquires the assets of an S corporation in a transaction to which section 381(a)(2) applies. However, if an S corporation acquires the assets of another S corporation in a transaction to which section 381(a)(2) applies, a post-termination transition period does not arise. (See §1.1368– 2(d)(2) for the treatment of the acquisition of the assets of an S corporation by another S corporation in a transaction to which section 381(a)(2) applies.) The special treatment under section 1371(e)(1) of distributions of money by a corporation with respect to its stock during the post-termination transition period is available only to those shareholders who were shareholders in the S corporation at the time of the termination.

(c) Last day of last taxable year. For purposes of section 1377(b)(1)(A) and paragraph (a)(1) of this section, the last day of a corporation’s last taxable year as an S corporation is—

(1) The last day of the short S taxable year under section 1362(e)(1)(A); or

(2) The date of transfer (within the meaning of section 381(a)(2)) in the event that a C corporation acquires the assets of an S corporation in a transaction to which section 381(a)(2) applies.

(d) Determination defined. For purposes of section 1377(b)(1)(B) and paragraph (a)(2) of this section, the term determination means—

(1) A court decision rendered by a court of competent jurisdiction;

(2) A closing agreement entered into between the Secretary and the taxpayer pursuant to section 7121;

(3) A written agreement between the corporation and the Commissioner (including a statement acknowledging that the corporation’s election to be an S corporation terminated under section 1362(d)) that the corporation failed to qualify as an S corporation;

(4) For a corporation subject to the audit and assessment provisions of subchapter C of chapter 63 of subtitle A, the expiration of the period specified in section 6226 for filing a petition for readjustment of a final S corporation administrative adjustment finding that the corporation failed to qualify as an S corporation, provided that no petition was timely filed before the expiration of the period; and

(5) For a corporation not subject to the audit and assessment provisions of subchapter C of chapter 63 of subtitle A, the expiration of the period for filing a petition under section 6213 for the shareholder’s taxable year for which the Commissioner has made a finding that the corporation failed to qualify as an S corporation, provided that no petition was timely filed before the expiration of the period.

(e) Time of determination —(1) Court decision. A court decision becomes a determination on the date the decision becomes final under rules applicable to the court rendering the decision.

(2) Closing agreement. A closing agreement becomes a determination on the date of its approval by the Commissioner.

(3) Written agreement. A written agreement described in paragraph (d)(3) of this section becomes a determination when it is signed by the district director having jurisdiction over the corporation (or by another Service official to whom authority to sign the agreement is delegated) and by an officer of the corporation authorized to sign on its behalf. Neither the request for a written agreement nor the terms of the written agreement suspend the running of any statute of limitations.

(4) Implied agreement. A determination under paragraph (d)(4) or (d)(5) of this section becomes effective on the day after the date of expiration of the period specified under section 6226 or 6213, respectively.

§1.1377–3 Effective date.

Sections 1.1377–1 and 1.1377–2 apply to taxable years of an S corporation beginning after [ the date of publication as final regulations in the Federal Register ].

PART 18—TEMPORARY INCOME TAX REGULATIONS UNDER THE SUBCHAPTER S REVISION ACT OF 1982

Par. 3. The authority citation for part 18 continues to read as follows: Authority: 26 U.S.C. 7805 sec. (6)(c)(3)(B)(iii) of the Subchapter S Revision Act of 1982.

Section 18.1377–1 [Removed]

Par. 4. Section 18.1377–1 is removed.

(Filed by the Office of the Federal Register on

July 11, 1995, 8:45 a.m., and published in the issue of the Federal Register for July 12, 1995, 60 F.R. 35882)

Notice of Proposed Rulemaking

Diversification of Common Trust Funds

PS–29–92

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of Proposed Rulemaking.

SUMMARY: This document proposes regulations relating to the diversification of common trust funds at the time of a combination or division. The proposed regulations will affect common trust funds and their participants.

DATES: Written comments and requests for a public hearing must be received by November 8, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS–29–92), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS–29– 92), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

This document proposes amendments to the Income Tax Regulations (26 CFR part 1) under section 584 of the Internal Revenue Code of 1986 relating to common trust funds.

A common trust fund is an investment vehicle set up by a bank in the form of a state-law trust. The investors in a common trust fund, referred to as participants, are trusts and certain other accounts for which the bank acts as a fiduciary.

Section 584(b) provides that a common trust fund is not subject to

Margaret Milner Richardson,

Commissioner of

Internal Revenue

taxation. Instead, each participant that invests in the common trust fund includes its proportionate share of the common trust fund’s income or loss on its own return.

Under section 584(e), the contribution of property to a common trust fund is a taxable event to the contributing participant. This provision was added to section 584(e) by the Tax Reform Act of 1976 and was intended to prevent participants from using a common trust fund to diversify their portfolios tax-free. Accordingly, the legislative history to the 1976 amendment indicates that mergers or divisions of common trust funds will continue to be tax-free as long as the combining or dividing funds have portfolios that are diversified within the meaning of the corporate merger rules. S. Rep. No. 938, pt. 2, 94th Cong., 2d Sess. 48 (1976), 1976–3 (Vol. 3) C.B. 643, 690. The diversification test for corporate mergers, section 368(a)(2)(F)(ii), was enacted in 1976 as part of the same legislation.

Section 1.584–4(a), promulgated in 1984 and based on the 1976 amendment, provides that the transfer of a participating interest as a result of the combination of two or more common trust funds, or the division of a single common trust fund, is not considered an admission or a withdrawal if the combining, dividing, and resulting funds have diversified portfolios within the meaning of section 368(a)(2)(F)(ii).

Under section 368(a)(2)(F)(ii), a corporation has a diversified portfolio if not more than 25 percent of the value of its total assets is invested in the stock and securities of any one issuer and not more than 50 percent of the value of its total assets is invested in the stock and securities of five or fewer issuers. For purposes of the section 368(a)(2)(F)(ii) test, all members of a controlled group of corporations (within the meaning of section 1563(a)) shall be treated as one issuer. Also, a person holding stock in a regulated investment company, real estate investment trust, or other investment company (as defined by section 368(a)(2)(F)(iii)) that meets the requirements of section 368(a)(2)(F)(ii) shall be treated as holding its proportionate share of the assets held by the company. Section 368(a)(2)(F)(iv) provides that in determining total assets, certain assets shall be excluded, including cash and cash items (including receivables), Government securities, and assets acquired to meet section 368(a)(2)(F)(ii) or to cease to be an investment company. Section 368(a)(2)(F)(v) provides that section 368(a)(2)(F) shall not apply if the stock of each investment company is owned substantially by the same persons in the same proportions. Section 368(a)(2)(F)(vii) defines securities for purposes of clauses (ii) and (iii) of section 368(a)(2)(F).

Reasons for Change

Excluding Government securities from a common trust fund’s total assets pursuant to section 368(a)(2)(F)(iv) could inappropriately cause a fund with investments in Government securities to fail to be diversified under section 368(a)(2)(F)(ii). For example, if 95 percent of a common trust fund’s assets are invested in Government securities and five percent are invested in the stock of corporation X, only five percent of the fund’s total assets (that is, only the X stock) would be included in total assets in applying section 368(a)(2)(F)(ii). As a result, the X stock would be treated as constituting 100 percent of the common trust fund’s assets and the fund would not satisfy the 25 and 50 percent test of section 368(a)(2)(F)(ii). Because excluding Government securities from a common trust fund’s total assets could cause a fund with investments in Government securities to fail to be diversified under section 368(a)(2)(F)(ii), common trust funds might be discouraged from investing in Government securities.

Explanation of Provisions

Under the proposed amendment to §1.584–4(a), the diversification test applied to a common trust fund at the time of a merger or division will continue to be section 368(a)(2)(F)(ii). However, the test is modified so that Government securities are now counted in determining a fund’s total assets, unless the Government securities are acquired to meet section 368(a)(2)(F)(ii).

For purposes of §1.584–4(a), relevant provisions of section 368(a)(2)(F) will apply to the section 368(a)(2)(F)(ii) test. Those provisions include the controlled group and look-through rules found in clause (ii) (members of a controlled group of corporations are considered as one issuer and persons holding stock in certain investment

498 1995–2 C.B.

companies are treated as holding a proportionate share of the investment company’s assets), the common ownership rule found in clause (v) (diversification will not be considered to occur if the interests in the common trust funds transferred are held substantially by the same persons in the same proportions), and the definition of securities found in clause (vii) (the term securities includes investments constituting a security within the meaning of the Investment Company Act of 1940 (15 U.S.C. 80a–2(36)). The definition of total assets in section 368(a)(2)(F)(iv) will apply, except that, as stated above, Government securities will be included in determining total assets, unless the Government securities are acquired to meet section 368(a)(2)(F)(ii).

The proposed regulations contain the same diversification test as that in the proposed regulations under section 351(e) dealing with transfers to investment companies. Thus, these proposed regulations would ensure that a uniform diversification test is applied to common trust funds and similar investment entities.

The proposed regulations also update the regulations under section 584 to conform to changes in the law.

Proposed Effective Date

These regulations are proposed to apply to combinations and divisions of common trust funds consummated on or after the date of publication as final regulations 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 EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a 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.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *

§1.584–2 [Amended]

Par. 2. Section 1.584–2 is amended by:

1. Removing paragraph (b)(1).
2. Redesignating paragraph (b)(2) as paragraph (b).

Par. 3. Section 1.584–4 is amended by:

1. Removing paragraphs (a)(1) and (2).

2. Revising the sixth sentence of paragraph (a).

3. Adding two sentences after the sixth sentence of paragraph (a).

The revision and additions read as follows:

§1.584–4 Admission and withdrawal of participants in the common trust fund.

(a) *** When a participating interest is transferred by a bank, or by two or more banks that are members of the

691. This revenue procedure describes circumstances under which the IRS will determine that it is impracticable to apply the largest-profits-interest rule and describes the criteria the IRS will consider in selecting a tax matters partner for the partnership.

Since the enactment of TEFRA, virtually all states and several foreign jurisdictions have enacted laws providing for the formation of limited liability companies (LLCs). Although local law varies as to the requirements for establishing an LLC, the common denominator is that none of the members are liable for the debts and obligations of the LLC beyond their contributions (absent an express assumption of liability by a member if authorized under the applicable LLC statute). In addition, under local law, LLCs may be generally managed by elected or designated ‘‘managers,’’ who may be members of the LLC. In most jurisdictions, however, LLCs need not be managed by elected or designated managers. In those cases, all members of the LLC have management authority.

LLCs in most jurisdictions may be classified for Federal tax purposes either as partnerships or associations that are taxable as corporations, depending on the characteristics of the LLC. See, e.g., Rev. Rul. 88–76, 1988– 2 C.B. 360; Rev. Rul. 93–38, 1993–1 C.B. 233. For LLCs that are classified as partnerships for Federal tax purposes, it is necessary to determine the tax matters partner for the LLC.

Explanation of Provisions

A. Tax Matters Partner for LLCs

The proposed regulations provide that a ‘‘member-manager’’ of an LLC will be treated as a general partner for purposes of determining the tax matters partner of the LLC. Any member of an LLC that is not a member-manager is treated as a partner other than a general partner. The proposed regulations define a member-manager as a member of the LLC who, alone or together with others, is vested with the continuing exclusive authority to make the management decisions necessary to conduct the business for which the organization was formed. This approach is adopted because, if a member of the LLC has such continuing exclusive management authority, the member should have the necessary authority and access to part same affiliated group (within the meaning of section 1504), as a result of the combination of two or more common trust funds or the division of a single common trust fund, the transfer to the surviving or divided fund is not considered to be an admission or a withdrawal if the combining, dividing, and resulting common trust funds have diversified portfolios. For purposes of this paragraph, a common trust fund has a diversified portfolio if it satisfies section 368(a)(2)(F)(ii), applying the relevant provisions of section 368(a)(2)(F), except that, in applying section 368(a)(2)(F)(iv), Government securities are included in determining total assets, unless the Government securities are acquired to meet section 368(a)(2)(F)(ii). In addition, for a transfer of a participating interest in a division of a common trust fund not to be considered an admission or withdrawal, each participant’s pro rata interest in each of the resulting common trust funds must be substantially the same as was the participant’s pro rata interest in the dividing fund.

- - - - -

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS–34–92), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8:00 a.m. and 5:00 p.m. to: CC:DOM:CORP:T:R (PS–34–92), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

Prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), adjustments attributable to the tax items of a partnership were made at the partner level. Section 402 of TEFRA added sections 6221 through 6231 to the Internal Revenue Code of 1986, as amended, to allow for consolidated administrative and judicial proceedings to determine the tax treatment of partnership items at the partnership level. Under this consolidated proceeding, the tax matters partner of a partnership represents the partnership before the IRS in all tax matters for a specific taxable year.

Section 6231(a)(7) provides that the tax matters partner of a partnership is the general partner designated as the tax matters partner as provided in regulations or, if no general partner is designated, the general partner having the largest profits interest in the partnership at the close of the taxable year involved (largest-profits-interest rule). Section 6231(a)(7) also provides that, if no general partner is designated and the Commissioner determines that it is impracticable to apply the largest-profitsinterest rule, the partner selected by the Commissioner is treated as the tax matters partner.

Proposed regulations under sections 6221 through 6231 and section 6233 were published in the Federal Register (51 FR 13231 [LR–205–82, 1986–1 C.B. 782]) on April 18, 1986. Several comments on the proposed regulations were received, but no public hearing was requested and none was held. Temporary regulations identical to the proposed regulations were published in the Federal Register (52 FR 6779 [T.D. 8128, 1987–1 C.B. 325]) on March 5, 1987. The temporary and proposed regulations remain outstanding.

On February 29, 1988, the IRS published Rev. Proc. 88–16, 1988–1 C.B.

(Filed by the Office of the Federal Register on

August 9, 1995, 8:45 a.m., and published in the issues of the Federal Register for August 10, 1995, 60 F.R. 40796)

Notice of Proposed Rulemaking

Selection of Tax Matters Partner for Limited Liability Companies

PS–34–92

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the designation or selection of a tax matters partner for limited liability companies classified as partnerships. This document also amends current proposed regulations to consolidate certain guidance necessary to determine the tax matters partner for partnerships.

DATES: Written comments and requests for a public hearing must be received by January 29, 1996.

nership records needed to function as a tax matters partner. The proposed regulations also provide that if there are no elected or designated membermanagers (as described above), each member will be treated as a membermanager.

The proposed regulations define an LLC as an organization formed under a law that allows the limitation of the liability of all members for the organization’s debts and other obligations and classified as a partnership for Federal tax purposes.

Penalties, Reporting and recordkeeping requirements.

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 is amended by adding entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 301.6231(a)(7)–1 also issued under 26 U.S.C. 6230 (i) and (k). * * *

Section 301.6231(a)(7)–2 also issued under 26 U.S.C. 6230 (i) and (k). * * *

Par. 2. Section 301.6231(a)(7)–1 (as proposed to be added in the Federal Register for April 18, 1986 (51 FR 13245)) is amended by:

1. Revising the section heading.

2. Adding a new sentence at the end of paragraph (a).

3. Removing the heading for paragraph (c)(1) and redesignating paragraph (c)(1) as paragraph (c).

4. Removing paragraph (c)(2).

5. Adding a sentence at the end of paragraph (m)(2).

6. Adding paragraphs (n), (o), (p), (q), (r), and (s).

The additions and revisions read as follows:

§301.6231(a)(7)–1 Designation or selection of tax matters partner .

(a) - * * If a partnership does not designate a general partner as the tax matters partner for a specific taxable year, or if the designation is terminated without the partnership designating another general partner as the tax matters partner, the tax matters partner is the partner determined under this section.

- - - - -

(m) - * * (2) - * * For purposes of this paragraph (m)(2), the general partner with the largest profits interest is determined based on the year-end profits interests reported on the Schedules K–1 filed with the partnership income tax return for the taxable year for which the determination is being made.

B. Amending proposed regulations to

incorporate the provisions of Rev. Proc. 88–16

The current proposed regulations under §301.6231(a)(7)–1 provide certain guidance concerning the designation of a tax matters partner under the largest-profits-interest rule of section 6231(a)(7)(B). However, the current proposed regulations do not describe circumstances under which the Commissioner will determine that it is impracticable to apply the largestprofits-interest rule and do not describe how the Commissioner will select a tax matters partner when it is impracticable to apply the largest-profits-interest rule. This additional guidance is provided in Rev. Proc. 88–16.

For administrative simplicity, the provisions in this notice of proposed rulemaking amend the current proposed regulations to include the rules of Rev. Proc. 88–16. As a result, the complete guidance necessary for determining the tax matters partner for a partnership and an LLC will be contained in the proposed regulations under section 6231(a)(7). As amended, the proposed regulations incorporate the provisions of Rev. Proc. 88–16 with one substantive change. Under sections 3.05 and 3.06 of Rev. Proc. 88–16, if each general partner is deemed to have no profits interest under section 3.03(2) or 3.03(3), the IRS will select a limited partner as the tax matters partner. Some partnerships, such as a general partnership or a foreign LLC in which all members are member-managers, do not have limited partners. To permit the Commissioner to select a tax matters partner in these situations, the proposed regulations allow the Commissioner to select any partner (including either a general or limited partner) as the tax matters partner.

500 1995–2 C.B.

Proposed Effective Date

Sections 301.6231(a)(7)–1 and 301.6231(a)(7)–2 are proposed to be effective for all designations, selections, and terminations of a tax matters partner occurring on or after the date final regulations are published in the Federal Register. Any other reasonable designation or selection of a tax matters partner of an LLC is binding for periods prior to the effective date of this regulation.

Effect on Other Documents

Rev. Proc. 88–16 is obsolete as of 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 EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a 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.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes,

partnership of the selection, effective as of the date specified in the notice.

(q) Criteria for selecting a partner as tax matters partner —(1) In general . The Commissioner will select a partner as the tax matters partner under paragraph (p)(2) or (3)(ii) of this section only if the partner was a partner in the partnership at the close of the taxable year under examination.

(2) Criteria to be considered . The Commissioner may consider the following criteria in selecting a partner as the tax matters partner:

(i) The general knowledge of the partner in tax matters and the administrative operation of the partnership.

(ii) The partner’s access to the books and records of the partnership.

(iii) The profits interest held by the partner.

(iv) The views of the partners having a majority interest in the partnership regarding the selection.

(v) Whether the partner is a partner of the partnership at the time the taxmatters-partner selection is made.

(vi) Whether the partner is a United States person (within the meaning of section 7701(a)(30)).

(3) Limited restriction on subsequent designation of a tax matters partner by the partnership . For purposes of paragraphs (p)(2) and (3)(ii) of this section, the partnership cannot designate a partner who is not a general partner to serve as tax matters partner in lieu of a partner selected by the Commissioner.

(r) Notification of partnership —(1) In general . If the Commissioner selects a tax matters partner under the provisions of paragraph (p)(1) or (3)(i) of this section, the Commissioner will notify both the partner selected and the partnership of the selection, effective as of the date specified in the notice.

(2) Limited opportunity for part- nership to designate the tax matters partner . (i) Before the Commissioner selects a tax matters partner under paragraphs (p)(1) and (3)(i) of this section, the Commissioner will notify the partnership by mail that, after 30 days from the date of the notice, the Commissioner will make a determination that it is impracticable to apply the largest-profits-interest rule of paragraph (m)(2) of this section and will select the tax matters partner unless a prior designation is made by the partnership. This delay in making the determination will permit the partnership to designate

1995–2 C.B. 501

---

(n) Selection of tax matters partner by Commissioner when impracticable to apply the largest-profits-interest rule . If the partnership has not designated a tax matters partner under this section for the taxable year and it is impracticable (as determined under paragraph (o) of this section) to apply the largest-profits-interest rule of paragraph (m)(2) of this section, the Commissioner will select a tax matters partner as described in paragraph (p) of this section.

(o) Impracticability of largest- profits-interest rule . It is impracticable to apply the largest-profits-interest rule of paragraph (m)(2) of this section if, on the date the rule is applied, any one of the following three conditions is met:

(1) General partner with the largest profits interest is not apparent . The general partner with the largest profits interest is not apparent from the Schedules K–1 and is not otherwise readily determinable.

(2) Each general partner is deemed to have no profits interest in the partnership . Each general partner is deemed to have no profits interest in the partnership under paragraph (m)(3) of this section (concerning termination of a designation under the largestprofits-interest rule) because of the occurrence of one or more of the events described in paragraphs (l)(1) through (4) of this section (involving death, adjudication of incompetency, liquidation, and conversion of partnership items to nonpartnership items).

(3) General partner with the largest profits interest is disqualified . The general partner with the largest profits interest determined under paragraph (m)(2) of this section—

(i) Has been notified of suspension from practice before the Internal Revenue Service;

(ii) Is incarcerated; (iii) Is residing outside the United States, its possessions, or territories; or

(iv) Cannot be located or cannot perform the functions of a tax matters partner for any reason, except that lack of cooperation with the Internal Revenue Service by the general partner with the largest profits interest is not a basis for finding that the partner cannot perform the functions of a tax matters partner.

(p) Commissioner’s selection of the tax matters partner —(1) When the

general partner with the largest profits interest is not apparent . If it is impracticable under paragraph (o)(1) of this section to apply the largest-profitsinterest rule of paragraph (m)(2) of this section, the Commissioner will select (in accordance with the notification procedures set forth in paragraph (r) of this section) as the tax matters partner any person who was a general partner at any time during the taxable year under examination.

(2) When each general partner is deemed to have no profits interest in the partnership . If it is impracticable under paragraph (o)(2) of this section to apply the largest-profits-interest rule of paragraph (m)(2) of this section, the Commissioner will select a partner (including a general or limited partner) as the tax matters partner in accordance with the criteria set forth in paragraph (q) of this section. The Commissioner will notify both the partner selected and the partnership of the selection, effective as of the date specified in the notice.

(3) When the general partner with the largest profits interest is dis- qualified —(i) In general . Except as otherwise provided in paragraph (p)(3)(ii) of this section, if it is impracticable under paragraph (o)(3) of this section to apply the largest-profits-interest rule of paragraph (m)(2) of this section, the Commissioner will treat each general partner who fits the criteria contained in paragraph (o)(3) of this section as having no profits interest in the partnership for the taxable year and will select (in accordance with the notification procedures set forth in paragraph (r) of this section) a tax matters partner from the remaining persons who were general partners at any time during the taxable year.

(ii) Partner selected if no general partner may be selected . If all general partners during the taxable year either are treated as having no profits interest in the partnership for the taxable year under paragraph (m)(3) of this section (concerning termination of a designation under the largest-profits-interest rule) or are described in paragraph (o)(3) of this section (general partner with the largest profits interest is disqualified), the Commissioner will select a partner (including a general or limited partner) as the tax matters partner in accordance with the criteria set forth in paragraph (q) of this section. The Commissioner will notify both the partner selected and the

a tax matters partner under paragraph (e) (designation by general partners with a majority interest) or (f) of this section (designation by partners with a majority interest under certain circumstances), thereby avoiding a selection made by the Commissioner.

(ii) During the 30-day period and prior to a tax-matters-partner designation by the partnership, the Commissioner will communicate with the partnership by sending all correspondence or notices to ‘‘The Tax Matters Partner’’ in care of the partnership at the partnership’s address.

(iii) Any subsequent designation of a tax matters partner by the partnership after the 30-day period will become effective as provided under paragraph (k)(2) of this section (concerning designations made after a notice of beginning of administrative proceeding is mailed).

(s) Effective date . This section applies to all designations, selections, and terminations of a tax matters partner occurring on or after the date final regulations are published in the Federal Register.

Par. 3. Section 301.6231(a)(7)–2 is added to read as follows:

§301.6231(a)(7)–2 Designation or selection of tax matters partner for a limited liability company (LLC) .

(a) In general . Solely for purposes of applying section 6231(a)(7) and §301.6231(a)(7)–1 to an LLC, only a member-manager of an LLC is treated as a general partner, and a member of an LLC who is not a member-manager is treated as a partner other than a general partner.

(b) Definitions —(1) LLC . Solely for purposes of this section, LLC means an organization—

(i) Formed under a law that allows the limitation of the liability of all members for the organization’s debts and other obligations within the meaning of §301.7701–2(d); and

(ii) Classified as a partnership for Federal tax purposes.

(2) Member . Solely for purposes of this section, member means any person who owns an interest in an LLC.

(3) Member-manager . Solely for purposes of this section, member- manager means a member of an LLC who, alone or together with others, is vested with the continuing exclusive

502 1995–2 C.B.

authority to make the management decisions necessary to conduct the business for which the organization was formed. Generally, an LLC statute may permit the LLC to choose management by one or more managers (whether or not members) or by all of the members. If there are no elected or designated member-managers (as so defined in this paragraph (b)(3)) of the LLC, each member will be treated as a member-manager for purposes of this section.

(c) Effective date . This section applies to all designations, selections, and terminations of a tax matters partner of an LLC occurring on or after the date final regulations are published in the Federal Register. Any other reasonable designation or selection of a tax matters partner of an LLC is binding for periods prior to the effective date of this section.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

DATES: Written comments must be received by November 20, 1995. Outlines of topics to be discussed at the public hearing scheduled for January 16, 1996, at 10 a.m., must be received by December 26, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R: (PS–25–94), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered to: CC:DOM:CORP:T:R (PS–25–94), Internal Revenue Service, Room 5228, 1111 Constitution Avenue NW., Washington, DC. The public hearing will be held in the Auditorium, Internal Revenue Service Building, 1111 Constitution Avenue NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)). Comments on the collections of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224.

The collections of information are in 20.2056A–2T(d). This information is required by the IRS in order to ensure the collectibility of the estate tax imposed under section 2056A(b) in cases (1) where a bond or letter of credit security arrangement alternative is adopted and (2) where the qualified domestic trust holds foreign real property or the principal residence exclusion applies. This information will be used to monitor compliance with the additional regulatory requirements contained in 20.2056A–2T(d)(1)(i) and (iv). The likely respondents will be trustees of qualified domestic trusts. Estimated total annual reporting burden: 6110 hours. The estimated annual burden per respondent varies from 30 minutes to 3 hours, depending upon individual circumstances, with an estimated average of 1.37 hours.

(Filed by the Office of the Federal Register on

October 27, 1995, 8:45 a.m., and published in the issue of the Federal Register for October 30, 1995, 60 F.R. 55228)

Notice of Proposed Rulemaking and Notice of Public Hearing

Requirements to Ensure Collection of Section 2056A Estate Tax

PS–25–94

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In *** [T.D. 8613, page 216, this Bulletin], the IRS is issuing temporary regulations relating to the additional requirements necessary to ensure the collection of the estate tax imposed under section 2056A(b) with respect to taxable events involving qualified domestic trusts described in section 2056A(a). The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

Estimated number of respondents: 4470. Estimated annual frequency of responses: 1.

Background

Temporary regulations in *** [T.D. 8613, page 216, this Bulletin], amend Estate Tax Regulations (26 CFR part 20) relating to section 2056A. The temporary regulations contain rules relating to the additional requirements to ensure the collectibility of the estate tax imposed under section 2056A.

The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments that are submitted timely (preferably a signed original and eight copies) to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for January 16, 1996, at 10 a.m. in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 15 minutes before the hearing starts. The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit written comments by November 20, 1995, and submit an outline of the topics to be discussed and the time to be devoted to each topic by December 26, 1995. A period of 10 minutes will allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

List of Subjects in 26 CFR Part 20

Estate taxes, Reporting and recordkeeping requirements.

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

Par. 1. The authority citation for part 20 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 20.2056A–2 is amended by adding paragraph (d) to read as follows:

20.2056A–2 Requirements for qualified domestice trust.

- - - - -

(d) [The text of this proposed regulation is the same as the text of 20.2056A–2T(d) published elsewhere in *** [T.D. 8613, page 216, this Bulletin].

(Filed by the Office of the Federal Register on

August 21, 1995, 8:45 a.m., and published in the issue of the Federal Register for August 22, 1995, 60 F.R. 43574)

Notice of Proposed Rulemaking and Notice of Public Hearing

Environmental Settlement Funds—Classification

PS–54–94

AGENCY: Internal Revenue Service (IRS), Treasury.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations relating to the classification of certain organizations as trusts for federal tax purposes. The proposed regulations would provide guidance to taxpayers on the proper classification of trusts formed to collect and disburse amounts for environmental remediation of an existing waste site to discharge taxpayers’ liability or potential liability under applicable environmental laws.

DATES: Written comments must be received by October 5, 1995. Requests to speak (with outlines of oral comments) at a public hearing scheduled for October 26, 1995, at 10 a.m. must be submitted by October 5, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS–54–94), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS–54– 94), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. The public hearing has been scheduled to be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)). Comments on the collection of information should be sent to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224.

The collection of information is required by §301.7701–4(e)(2). This information is required by the IRS to ensure the proper reporting of items of income and expense of an environmental remediation trust in which a portion of the trust is treated as owned by a grantor. This information will be used to ensure compliance with the proposed regulation. The likely respondents are businesses and other for-profit institutions, including small businesses.

Estimated total annual reporting burden: 2,000 hours.

The estimated annual burden per respondent: 4 hours.

Estimated number of respondents: 500. Estimated annual frequency of responses: 1.

Introduction

This document proposes to add §301.7701–4(e) to the Procedure and Administration Regulations (26 CFR Part 301) relating to the classification of certain environmental remediation trusts as trusts for federal tax purposes.

Background

Unincorporated organizations may be classified as associations (which are taxable as corporations), partnerships, or trusts for federal tax purposes. The criteria for determining when an organization will be classified as a trust are set forth in §301.7701–4. The proposed amendment to §301.7701–4 provides that an environmental remediation trust will be classified as a trust for federal tax purposes.

A trust is an environmental remediation trust if (1) the primary purpose of the trust is collecting and disbursing amounts for environmental remediation of an existing waste site to resolve, satisfy, mitigate, address, or prevent the liability or potential liability of persons imposed by federal, state, or local environmental laws; (2) all contributors to the trust have potential liability or a reasonable expectation of liability under federal, state, or local environmental laws for environmental remediation of the waste site; and (3) the trust is not a qualified settlement fund within the meaning of §1.468B–1(a). Environmental remediation trusts include trusts formed pursuant to an order of a governmental authority, as well as trusts formed by taxpayers to avoid future liability or potential liability under federal, state, or local environmental laws. An environmental remediation trust is classified as a trust,

504 1995–2 C.B.

even though it may differ from the traditional trust in which trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts, because the purpose of an environmental remediation trust is to pay the costs of environmental remediation of an existing waste site as a result of liability or potential liability under federal, state, or local environmental laws, not to carry on a for-profit business.

The proposed regulations provide that each contributor to the trust will be treated as the owner of the portion of the trust contributed by that person, and, therefore, the trust is treated as a grantor trust under subpart E of subchapter J. The proposed regulations also require the trustee to provide information to the participants that will enable them to properly report their share of income, deductions, and credits, including information to properly determine whether a payment satisfies the economic performance rules of section 461(h).

The proposed regulations provide certain rules relating to participants (cash-out grantors) that contribute a fixed amount to the trust and are relieved from making further contributions to the trust, even though the participant still is liable or potentially liable under applicable environmental laws. Under the proposed regulations, all amounts contributed to an environmental remediation trust by a cash-out grantor are considered amounts contributed for remediation. In addition, the trust agreement may direct the trustee to expend amounts contributed by a cash-out grantor (and the earnings thereon) before expending amounts contributed by other grantors (and the earnings thereon). The proposed regulations also provide that a cash-out grantor will cease to be treated as an owner of a portion of the trust when the grantor’s portion is treated as fully expended.

Effective Date

The regulations are proposed to apply to trusts that meet the requirements of paragraph (e)(1) of the regulations that are formed on or after the date of publication of these proposed regulations as final regulations 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 EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue 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 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) that are submitted timely to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for October 26, 1995, at 10:00 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written comments by October 5, 1995, and submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by October 5, 1995.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.

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 301.7701–4(e) is added to read as follows:

§301.7701–4 Trusts.

- - - - -

(e) Environmental remediation trusts . (1) An environmental remediation trust is considered a trust for purposes of the Internal Revenue Code. For purposes of this paragraph (e), an organization is an environmental remediation trust if the organization is organized under state law as a trust; the primary purpose of the trust is collecting and disbursing amounts for environmental remediation of an existing waste site to resolve, satisfy, mitigate, address, or prevent the liability or potential liability of persons imposed by federal, state, or local environmental laws; all contributors to the trust have potential liability or a reasonable expectation of liability under federal, state, or local environmental laws for environmental remediation of the waste site; and the trust is not a qualified settlement fund within the meaning of §1.468B–1(a) of this chapter. An environmental remediation trust is classified as a trust because its primary purpose is environmental remediation of a waste site and not the carrying on of a profit-making business which normally would be conducted through business organizations classified as corporations or partnerships. However, if the remedial purpose is altered or becomes so obscured by business or investment activities that the declared remedial purpose is no longer controlling, the organization will no longer be classified as a trust. For purposes of this paragraph (e), environmental remediation includes the costs of assessing environmental conditions, remediating environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, and collecting

amounts from persons liable or potentially liable for the costs of these activities. For purposes of this paragraph (e), persons have potential liability or a reasonable expectation of liability under federal, state, or local environmental laws for environmental remediation of the waste site if there is authority under a federal, state, or local law that requires such persons to satisfy all or a portion of the costs of the environmental remediation.

(2) Each contributor (grantor) to the trust will be treated as the owner of the portion of the trust contributed by that grantor. See section 677 and §1.677(a)– 1(d) of this chapter for rules regarding the treatment of a grantor as the owner of a portion of a trust applied in discharge of the grantor’s legal obligation. Items of income, deduction, and credit attributable to any portion of an environmental remediation trust treated as owned by the grantor should not be reported by the trust on Form 1041, but should be shown on a separate statement to be attached to that form. See §1.671–4(a) of this chapter. The trustee must also furnish to each grantor a statement that shows all items of income, deduction, and credit of the trust for the taxable year attributable to the portion of the trust treated as owned by the grantor. The statement must provide the grantor with the information necessary to take the items into account in computing the grantor’s taxable income, including information necessary to properly take into account items under the economic performance rules of section 461(h) and the regulations thereunder. See §1.461–4 of this chapter for rules relating to economic performance.

(3) All amounts contributed to an environmental remediation trust by a grantor (cash-out grantor) who, pursuant to an agreement with the other grantors, contributes a fixed amount to the trust and is relieved of any further obligation to make contributions to the trust, but remains liable or potentially liable under the applicable environmental laws, will be considered amounts contributed for remediation. An environmental remediation trust agreement may direct the trustee to expend amounts contributed by a cash-out grantor (and the earnings thereon) before expending amounts contributed by other grantors (and the earnings thereon). A cash-out grantor will cease to be treated as an owner of a portion of the trust when the grantor’s portion is fully expended by the trust.

(4) The provisions of this paragraph (e) may be illustrated by the following example:

Example . (a) X, Y, and Z are calendar year corporations that are liable for the remediation of an existing waste site under applicable federal environmental laws. On June 1, 1996, pursuant to an agreement with the governing federal agency, X, Y, and Z create an environmental remediation trust within the meaning of paragraph (e)(1) to collect funds contributed to the trust by X, Y, and Z and to carry out the remediation of the waste site to the satisfaction of the federal agency. X, Y, and Z are jointly and severally liable under the federal environmental laws for the remediation of the waste site, and the federal agency will not release X, Y, or Z from liability until the waste site is remediated to the satisfaction of the agency.

(b) The estimated cost of the remediation is $20,000,000. X, Y, and Z agree that, if Z contributes $1,000,000 to the trust, Z will not be required to make any additional contributions to the trust, and X and Y will complete the remediation of the waste site and make additional contributions if necessary.

(c) On June 1, 1996, X, Y, and Z each contribute $1,000,000 to the trust. The trust agreement directs the trustee to spend Z ’s contributions to the trust and the income allocable to Z ’s portion before spending X ’s and Y ’s portions. On November 30, 1996, the trustee pays $2,000,000 for remediation work performed from June 1, 1996, through September 30, 1996. As of November 30, 1996, the trust had $75,000 of interest income, which is allocated in equal shares of $25,000 to X, Y, and Z ’s portions of the trust.

(d) Pursuant to the agreement between X, Y, and Z, Z made no further contributions to the trust. Pursuant to the trust agreement, the trustee expended Z ’s portion of the trust before expending X ’s and Y ’s portion. Therefore, Z ’s share of the remediation payment made in 1996 is $1,025,000 ($1,000,000 contribution by Z plus $25,000 of income allocated to Z ’s portion of the trust). Z must take the $1,025,000 payment into account under the appropriate federal tax accounting rules. In addition, X ’s share of the remediation payment made in 1996 is $487,500, and Y ’s share of the remediation payment made in 1996 is $487,500. X and Y must take their respective shares of the payment into account under the appropriate federal tax accounting rules.

(e) The trustee made no further remediation payments in 1996, and X and Y made no further contributions in 1996. From December 1, 1996, to December 31, 1996, the trust had $5,000 of interest income, which is allocated $2,500 to X ’s portion and $2,500 to Y ’s portion. Accordingly, for 1996, X and Y each had income of $27,500 from the trust.

(5) This paragraph (e) is applicable to trusts meeting the requirements of paragraph (e)(1) of this section that are formed on or after the date of publication of these proposed regulations as final regulations in the Federal Register.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

1995–2 C.B. 505

(Filed by the Office of the Federal Register on

August 3, 1995, 8:45 a.m., and published in the issue of the Federal Register for August 4, 1995, 60 F.R. 39903)

Notice of Proposed Rulemaking

Deposits of Excise Taxes

PS–8–95

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: In *** [T.D. 8616, page 263, this Bulletin], the IRS is issuing temporary regulations relating to deposits of excise taxes. The text of those temporary regulations also serves as the text of these proposed regulations.

DATES: Written comments and requests for a public hearing must be received by November 27, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS–8–95), Room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS–8–95), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC.

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in *** [T.D. 8616, page 263, this Bulletin] amend

506 1995–2 C.B.

the Excise Tax Procedural Regulations (26 CFR part 40) relating to deposits of excise taxes under section 6302. The temporary regulations contain special safe harbor rules for the additional deposit of taxes due in September of each year.

The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. 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.

List of Subjects in 26 CFR Part 40

Excise taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 40 is proposed to be amended as follows:

PART 40—EXCISE TAX PROCEDURAL REGULATIONS

Paragraph 1. The authority citation for part 40 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * - Par. 2. Section 40.6302(c)–5 is added to read as follows:

§40.6302(c)–5 Use of Government depositaries; rules under sections 6302(e) and (f).

[The text of this proposed section is the same as the text of §40.6302(c)–5T published elsewhere in *** [T.D. 8616, this Bulletin].

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

August 28, 1995, 8:45 a.m., and published in the issue of the Federal Register for August 29, 1995, 60 F.R. 44788)

Announcement of the Disbarment, Suspension, or Consent to Voluntary Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and Enrolled Actuaries From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent or enrolled actuary, in order to avoid the institution or conclusion of a proceeding for his disbarment or suspension from practice before the Internal Revenue Service, may offer his consent to suspension from such practice. The Director of Practice, in his discretion, may suspend an attorney, certified public accountant, enrolled agent or enrolled actuary in accordance with the consent offered.

Attorneys, certified public accountants, enrolled agents and enrolled actuaries are prohibited in any Internal

Revenue Service matter from directly or indirectly employing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred or suspended from practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents and enrolled actuaries to identify practitioners under consent suspension from practice before the Internal Revenue Service, the Director of Practice will announce in the Internal Revenue Bulletin the names and addresses of practitioners who have been suspended from such practice, their designation as attor

ney, certified public accountant, enrolled agent or enrolled actuary and date or period of suspension. This announcement will appear in the weekly Bulletin at the earliest practicable date after such action and will continue to appear in the weekly Bulletins for five successive weeks or for as many weeks as is practicable for each attorney, certified public accountant, enrolled agent or enrolled actuary so suspended and will be consolidated and published in the Cumulative Bulletin.

The following individuals have been placed under consent suspension from practice before the Internal Revenue Service:

Name Address Designation Date of Suspension

Anderson, David J. Minneapolis, MN CPA July 1, 1995 to September 30, 1995 Broderick, William Farmington Hills, MI CPA June 7, 1995 to December 6, 1995 Chee, Warren W. Honolulu, HI CPA October 1, 1995 to March 31, 1996 Stenquist, Sigfred N. Troy, MI CPA August 1, 1995 to July 31, 1996 Cigainero, James M. Houston, TX CPA Indefinite from June 13, 1995 Tussey, Alva S. Fayetteville, NC CPA June 16, 1995 to August 15, 1995 Wright Jr., Edward Matteson, IL CPA June 15, 1995 to June 14, 1996 Genovese, Philip A. Shrewsbury, NJ CPA Indefinite from June 26, 1995 Jonaitis, George J. Omaha, NE CPA Indefinite from June 29, 1995 Birnbaum, Bernard Larchmont, NY CPA July 20, 1995 to November 20, 1995 Himmelmann III, William Sacramento, CA CPA August 1, 1995 to October 1, 1995 Milligan, Alex Rockville, IN CPA July 26, 1995 to July 25, 1996 Belfiore Jr., Paul J. Simsbury, CT CPA Indefinite from August 7, 1995 Crews, Robert J. Florence, AL CPA September 1, 1995 to December 31, 1995 Golden, Stephen Imperial, MO Enrolled Agent September 7, 1995 to September 6, 1996 Baldwin, Harrison S. Richmond, VA CPA September 12, 1995 to March 11, 1996 Hartman Jr., Charles Dallas, TX CPA September 12, 1995 to September 11, 1997 Hersh, Joel A. Silver Spring, MD CPA September 12, 1995 to November 11, 1995 Vines, Gerald L. Birmingham, AL Enrolled Agent December 15, 1995 to December 14, 1997 De Sonia, Richard H. Burton, MI Enrolled Agent Indefinite from October 1, 1995 Kendrick, Perry D. Lodi, CA CPA Indefinite from October 1, 1995 De Los Santos, Michael Corpus Christi, TX CPA October 1, 1995 to September 30, 1996 Monnett, Gary M. Cloverdale, IN CPA October 1, 1995 to November 30, 1995 Hanlin, William Seattle, WA CPA Indefinite from October 6, 1995 Smith Jr., Edward H. S. Glastonbury, CT CPA Indefinite from October 18, 1995 Moore, Michael C. Huntsville, AL Attorney October 19, 1995 to October 18, 1996

1995–2 C.B. 507

Under Section 330, Title 31 of the United States Code, the Secretary of the Treasury, after due notice and opportunity for hearing, is authorized to suspend or disbar from practice before the Internal Revenue Service any person who has violated the rules and regulations governing the recognition of attorneys, certified public accountants, enrolled agents or enrolled actuaries to practice before the Internal Revenue Service.

Attorneys, certified public accountants, enrolled agents, and enrolled actuaries are prohibited in any Internal Revenue Service matter from directly

or indirectly employing, accepting assistance from, being employed by or sharing fees with, any practitioner disbarred or under suspension from practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents and enrolled actuaries to identify such disbarred or suspended practitioners, the Director of Practice will announce in the Internal Revenue Bulletin the names and addresses of practitioners who have been suspended from such practice, their designation as attorney, certified public accountant, enrolled

agent or enrolled actuary, and the date of disbarment or period of suspension. This announcement will appear in the weekly Bulletin for five successive weeks or as long as it is practicable for each attorney, certified public accountant, enrolled agent or enrolled actuary so suspended or disbarred and will be consolidated and published in the Cumulative Bulletin.

After due notice and opportunity for hearing before an administrative law judge, the following individuals have been disbarred from further practice before the Internal Revenue Service:

Name Address Designation Effective Date

Glennon, Martin K. Bedford, NH Attorney June 15, 1995 Kraemer, Steven Minneapolis, MN CPA June 15, 1995 Miglino, Nicholas Whitetone, NY Attorney June 26, 1995 Milone Jr., Louis Rockville Center, NY Attorney June 26, 1995 Roy, Lansing J. Ponte Vedra Beach, FL Attorney June 26, 1995 Rusk, James E. Marlborough, CT CPA June 26, 1995 Meyer, Robert Hamden, CT CPA September 25, 1995 Haskins, Wayne Humble, TX CPA September 29, 1995 Tritt, Raymond Jackson, TN CPA October 6, 1995 Perryman, James R. Montgomery, AL CPA October 15, 1995

Announcement of the Expedited Suspension of Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the Internal Revenue Service

Under title 31 of the Code of Federal Regulations, section 10.76, the Director of Practice is authorized to immediately suspend from practice before the Internal Revenue Service any practitioner who, within five years, from the date the expedited proceeding is instituted, (1) has had a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause; or (2) has been convicted of any crime under title 26 of the United States Code or, of a felony under title 18 of the United States Code involving dishonesty or breach of trust.

Attorneys, certified public accountants, enrolled agents, and enrolled actuaries are prohibited in any Internal

508 1995–2 C.B.

Revenue Service matter from directly or indirectly employing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred or suspended from practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled actuaries to identify practitioners under expedited suspension from practice before the Internal Revenue Service, the Director of Practice will announce in the Internal Revenue Bulletin the names and addresses of practitioners who have been suspended from such practice, their designation as attorney, certified public accountant, enrolled

agent, or enrolled actuary, and date or period of suspension. This announcement will appear in the weekly Bulletin at the earliest practicable date after such action and will continue to appear in the weekly Bulletins for five successive weeks or for as many weeks as is practicable for each attorney, certified public accountant, enrolled agent, or enrolled actuary so suspended and will be consolidated and published in the Cumulative Bulletin.

The following individuals have been placed under suspension from practice before the Internal Revenue Service by virtue of the expedited proceeding provisions of the applicable regulations:

Name Address Designation Date of Suspension

McNamee Sr., Michael B. W. Alton, MO CPA Indefinite from May 22, 1995 Rice, Jerry V. Albuquerque, NM CPA Indefinite from June 1, 1995 Michel, Ralph Huntingburg, IN CPA Indefinite from June 7, 1995 Parkins Sr., Gerald B. Moscow, ID CPA Indefinite from June 8, 1995 Love, David M. Hot Springs, AZ Attorney Indefinite from June 12, 1995 Fitch II, Paul V. Aiken, SC CPA Indefinite from June 20, 1995 Rice, Jeffrey B. Middleburg, VA Attorney Indefinite from June 22, 1995 Henss, John L. Des Moines, IA CPA Indefinite from June 30, 1995 Bates, Donald K. Wharton, TX CPA Indefinite from July 5, 1995 Hofflin, Harold M. Fort Lee, NJ CPA Indefinite from July 14, 1995 Ramacciotti, Frank Buffalo, MN Attorney Indefinite from July 17, 1995 Craven, Patrick J. Crete, NE Attorney Indefinite from July 24, 1995 Burkholder Jr., Robert C. Richmond, VA Attorney Indefinite from July 24, 1995 Dubin, Robert P. Palm Springs, CA CPA Indefinite from July 24, 1995 Harrison, Lance Livingston, NJ CPA Indefinite from August 3, 1995 Piccola, Ronald J. Lexington, KY CPA Indefinite from August 3, 1995 Wachs, Melvin G. Baltimore, MD Attorney Indefinite from August 3, 1995 Crist, John A. Middletown, OH Attorney Indefinite from August 21, 1995 Marks, Richard E. Redding, CA Enrolled Agent Indefinite from August 21, 1995 Goldstein, Issac Brooklyn, NY CPA Indefinite from September 1, 1995 Pardue Jr., Hobart O. Springfield, LA Attorney Indefinite from September 5, 1995 Rodriguez, Manuel A. Union City, NJ Enrolled Agent Indefinite from September 13, 1995 Saylors, John R. Denver, CO CPA Indefinite from September 18, 1995 Remillard, John A. Methuen, MA Attorney Indefinite from October 10, 1995 Rotenberg, Gary A. Westland, MI CPA Indefinite from October 10, 1995 Phillips, Erwin W. Scottsdale, AZ CPA Indefinite from October 10, 1995 Joyce, Philip Pittsburg, PA CPA Indefinite from October 10, 1995 Jones, Wayne G. Vidalia, GA CPA Indefinite from October 13, 1995

1995–2 C.B. 509

Scenarios of Disciplinary Actions from the Office of Director of Practice

The following scenarios are composites of matters that have come to the attention of the Office of Director of Practice. The scenarios are intended to inform tax practitioners of the types of activity that may result in disciplinary action under Treasury Department Circular No. 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents Enrolled Actuaries, and Appraisers Before the Internal Revenue Service (a republication of 31 C.F.R. Part 10). Because disciplinary matters are resolved on the basis of their particular facts and circumstances, these scenarios do not constitute precedent in any matter before the Director.

Comments concerning the scenarios should be sent to: Office of Director of Practice, C:AP:P, Internal Revenue Service, 1111 Constitution Ave., N.W., Washington, D.C. 20224.

Failure to file— For several years, the so le practitioner made estimated payments that exceeded his personal income tax liability. During those years he did not file Form 1040. When contacted by IRS Examination personnel, he stated that he always gave his many clients’ first priority and, as a result, had no time to file his own returns. He claimed, moreover, that his estimated payments not only showed his good faith but, for all practical purposes, satisfied his income tax obligations.

The Director regarded the practitioner’s conduct as a violation of Circular 230. Under section 10.51(d), a practitioner may be suspended or disbarred for willfully failing to make a Federal tax return in violation of the revenue laws of the United States. The willful failure to file tax returns is not a mere formality, even when the practitioner is due a refund. Rather, such failure is a violation of a known legal duty and constitutes disreputable conduct under section 10.51(d). Although the practitioner’s estimated payments entitled his to some credit for good faith, this did not offset his failure to meet his responsibility to file.

Disreputable conduct— After the clien t’s personal return w as selected for audit, the client insisted to the practitioner that the matter be resolved as soon as possible. The practitioner immediately telephoned the revenue agent who was to conduct the audit, but

510 1995–2 C.B.

found that the agent was unavailable. When the agent returned the call, the practitioner was with a client. Over the next several days—through no fault of either party—they happened to miss each other’s calls.

The practitioner placed another call and was informed that the revenue agent was in a meeting. The practitioner then said, ‘‘This is John Smith at City Hospital emergency room. I must speak to Agent Jones right now. It’s matter of life or death.’’

The practitioner’s message was relayed to the revenue agent, who became alarmed. When the revenue agent picked up the telephone, the practitioner identified himself and stated that he wanted to schedule the audit.

The Director contacted the practitioner concerning this incident, stating that the practitioner may have engaged in disreputable conduct in violation of section 10.51 of Circular 230. The practitioner responded that he had used a harmless ruse to bring the revenue agent to the telephone. However, the Director concluded that under any standard of reasonableness, the practitioner must have known that his conduct was unprofessional and hurtful. Therefore, the Director found the practitioner in violation of section 10.51.

Unreasonable delay— Within two m onths, the practitioner cancelled five conferences with the appeals officer. In each case, on the day of the conference, before normal business hours, the practitioner left a telephone message on the Appeals answering machine stating that he had to cancel due to ‘‘scheduling problems’’ or ‘‘prior commitments.’’ Rescheduling was done at the initiative of the appeals officer, whose records revealed that three out of four telephone calls to the practitioner were not returned.

The Director regarded the practitioner’s conduct as a possible violation of section 10.23 of Circular 230. That provision states that no practitioner shall unreasonably delay the prompt disposition of any matter before the IRS. Upon being contacted by the Director, the practitioner stated that he could not remember the specific reasons for his cancellations. Because the practitioner had given notice—albeit short notice—of his intention to cancel, he felt he had met his responsibilities.

The Director, however, concluded that the practitioner’s conduct, taken as a whole, was unreasonable. Unreasonable delay covers a wide range of behavior. For example, it can take the form of several long delays or a pattern of short delays. In this case, the practitioner established a pattern of behavior that was objectionable for three reasons: he showed no consideration for the appeals officer’s time; he had no objective reason for the delays, and he took no interest in rescheduling appointments to resolve a matter pending before the IRS. Consequently, the Director issued a private reprimand to the practitioner with a warning that repeated instances of such conduct could warrant a proceeding for suspension or disbarment.

Expedited Suspension— The practiti oner pleaded guilty to m aking a false statement in securing a federally insured mortgage, which resulted in a felony conviction under 18 U.S.C. 1001. Within five years of the conviction, the Director of Practice served the practitioner with a complaint seeking his expedited suspension under section 10.76 of Circular 230. Section 10.76, which was added to Circular 230 in 1994, permits the expedited suspension of a practitioner convicted of a felony under title 18 of the United States Code involving ‘‘dishonesty’’ or ‘‘breach of trust.’’ The practitioner filed an answer, claiming that breach of a fiduciary duty is a necessary element for a section 10.76 suspension that is based on a felony involving dishonesty.

Section 10.51(a) of Circular 230 provides that a practitioner who is convicted of an offense involving ‘‘dishonesty’’ or ‘‘breach of trust’’ is subject to suspension or disbarment in a non-expedited proceeding. The Director’s long-standing interpretation of ‘‘dishonesty’’ in section 10.51(a) is that it means a knowing falsehood. Fiduciary duty has no relevance to an offense involving ‘‘dishonesty,’’ although it may be relevant to an offense involving ‘‘breach of trust.’’

The Director’s interpretation of ‘‘dishonesty’’ in section 10.76 was consistent with his interpretation of the term in section 10.51(a). Section 1001 of 18 U.S.C. imposes penalties for knowingly making false statements in any matter within the jurisdiction of any federal agency. Because the practitioner’s felony involved a knowing falsehood, he was subject to an expedited suspension.

The abbreviation and number in parentheses following the index entry refer to the specific item; numbers following the parentheses refer to page number on which it appears.

Key to Abbreviations:

RR Revenue Ruling RP Revenue Procedure TD Treasury Decision CD Court Decision PL Public Law EO Executive Order DO Delegation Order TDO Treasury Department Order TC Tax Convention SPR Statement of Procedural

Rules PTE Prohibited Transaction

Exemption

Administration:

Correction of previously filed Forms

942 (Notice 54) 335 Deficiencies:

Adjusted interest rates (RR 59) 266 ;

(RR 78) 269 Overpayments:

Proposed regulations—Continued

26 CFR 301.7503–1, amended; time for performance of acts where last day falls on Saturday, Sunday, or legal holiday (IA–36–91) 470 26 CFR 301.7701–4(e), added; environmental settlement funds, classification (PS–54–94) 503 Request for comments concerning

Rulings:

Obsolete (RP 43) 412 Self-employment tax:

Social Security contribution and ben

efit base 458

withdrawal (Notice 51) 333 Railroad retirement:

Rate determination, quarterly (begin

Deficiencies:

ning Oct. 1, 1995) 227 Rates of tax:

Social Security contribution and ben

(RR 78) 269 Overpayments:

Adjusted interest rates (RR 59) 266 ;

efit base 458 Regulations:

Adjusted interest rates (RR 59) 266 ;

26 CFR 301.6061–1T, added; methods of signing (TD 8603) 281 26 CFR 301.6109–2, amended; authority of Sec. of Agriculture to share EIN collected from retail food stores and wholesale food concerns (TD 8621) 261 26 CFR 301.6211–1, 301.7611–1, and intermediate sections, amended; 301.6852–1, 301.7409– 1, added; political expenditures by sec. 501(c)(3) organizations (TD 8628) 253

(RR 78) 269 Proposed regulations:

Adjusted interest rates (RR 59) 266,

(RR 78) 269 Penalties, use of electronic funds

transfer (RR 68) 272 Proposed regulations:

26 CFR 31.6011(a)–4, revised; reporting of nonpayroll withheld tax liabilities (IA–30–95) 479 26 CFR 301.6061–1, amended; methods of signing (IA–10–95) 478 26 CFR 301.6109–1, amended; taxpayer identifying numbers (INTL– 24–94) 485 26 CFR 301.6109–3, added; authority of FCIC to require EINs, withdrawal of regs. (Notice 62) 341 26 CFR 301.6231(a)(7)–1, amended; 301.6231(a)(7)–2, added; selection of tax matters partner for limited liability companies (PS–34–92) 499

26 CFR 31.3402(p)–1, amended; 31.3504(c)–1, added; 31.3405(c)– 1T, removed; direct rollovers and 20-percent withholding upon eligible rollover distributions from qualified plans (TD 8619) 41 26 CFR 31.3505–1, amended; liability of third parties paying or providing for wages, suit period and extension and maximum amount recoverable (TD 8604) 227 26 CFR 31.6011(a)–4, amended; 31.6011(a)–4T, added; reporting of nonpayroll withheld tax liabilities (TD 8624) 258 26 CFR 301.6061–1T, added; mehtods of signing (TD 8603) 281 26 CFR 301.6109–2, amended; authority of Sec. of Agriculture to share EIN collected from retail food stores and wholesale food concerns (TD 8621) 261 26 CFR 301.6211–1, 301.7611–1, and intermediate sections, amended; 301.6852–1, 301.7409– 1, added; political expenditures by sec. 501(c)(3) organizations (TD 8628) 253 26 CFR 301.6867–1, added; 301.6867–1T, removed; presumptions where owner of large amount of cash is not identified (TD 8605) 282 26 CFR 301.7514–1, amended; seals of office (TD 8625) 284 26 CFR 301.7701(i)–0—301.7701(i)– 4, added; taxable mortgage pools (TD 8610) 306 Request for comments concerning

removal (Notice 51) 333

26 CFR 301.6061–1, amended; methods of signing (IA–10–95) 478 26 CFR 301.6109–1, amended; taxpayer identifying numbers (INTL– 24–94) 485 26 CFR 301.6109–3, added; authority of FCIC to require EINs, withdrawal of regs. (Notice 62) 341 26 CFR 301.6231(a)(7)–1, amended; 301.6231(a)(7)–2, added; selection of tax matters partner for limited liability companies (PS–34–92) 499 26 CFR 301.7503–1, amended; time for performance of acts where last day falls on Saturday, Sunday, or legal holiday (IA–36–91) 470 26 CFR 301.7701–4(e), added; environmental settlement funds, classification (PS–54–94) 503 Request for comments concerning

withdrawal (Notice 51) 333 Regulations:

1995–2 C.B. 511

Regulations—Continued

26 CFR 52.4681–0, removed; 52.4681–1, 52.4682–1, –2, –4, amended; 52.4682–5, added; exports of chemicals that deplete the ozone layer, special rules for certain medical uses of chemicals that deplete the ozone layer (TD 8622) 237 26 CFR 53.4955–1, 53.6071–1(e), 301.6852–1, 301.7409–1, added; 53.4963–1, 53–6011–1, 301.6211– 1, 301.7611–1, and intermediated sections, amended; 53.6091–1, revised; political expenditures by sec. 501(c)(3) organizations (TD 8628) 253 26 CFR 301.6061–1T, added; methods of signing (TD 8603) 281 26 CFR 301.6109–2, amended; authority of Sec. of Agriculture to share EIN collected from retail food stores and wholesale food concerns (TD 8621) 261 26 CFR 301.6867–1, added; 301.6867–1T, removed; presumptions where owner of large amount of cash is not identified (TD 8605) 282 26 CFR 301.7514–1, amended; seals of office (TD 8625) 284 26 CFR 301.7701(i)–0—301.7701(i)– 4, added; taxable mortgage pools (TD 8610) 306

Regulations—Continued

26 CFR 301.6867–1, added; 301.6867–1T, removed; presumptions where owner of large amount of cash is not identified (TD 8605) 282 26 CFR 301.7514–1, amended; seals of office (TD 8625) 284 26 CFR 301.7701(i)–0—301.7701(i)– 4, added; taxable mortgage pools (TD 8610) 306 Request for comments concerning

(RR 78) 269 Overpayments:

Methyl methacrylate (Notice 58)

337 Monoethanolamine, diethanola mine, triethanolamine, monoisopropanolamine, diisopropanolamine, triisopropanolamine, toluene diisocyanate, and chlorinated polyethylene (Notice 43) 328 Poly 1,4 butyleneterephthalate

(Notice 59) 338 Toluenediamine (Notice 44) 330 Deficiencies:

Adjusted interest rates (RR 59) 266 ;

removal (Notice 51) 333 Rulings:

Adjusted interest rates (RR 59) 266 ;

Areas in which rulings will not be

issued: Generation skipping transfers (RP

(RR 78) 269 Proposed regulations:

26 CFR 40.6302(c)–5, added; deposits of excise taxes (PS–8–95) 506 26 CFR 301.6061–1, amended; methods of signing (IA–10–95) 478 26 CFR 301.6109–1, amended; taxpayer identifying numbers (INTL– 24–94) 485 26 CFR 301.6109–3, added; authority of FCIC to require EINs, withdrawal of regs. (Notice 62) 341 26 CFR 301.6231(a)(7)–1, amended; 301.6231(a)(7)–2, added; selection of tax matters partner for limited liability companies (PS–34–92) 499 26 CFR 301.7503–1, amended; time for performance of acts where last day falls on Saturday, Sunday, or legal holiday (IA–36–91) 470 26 CFR 301.7701–4(e), added; environmental settlement funds, classification (PS–54–94) 503 Rates of tax:

50. 430

ESTATE TAX

Proposed regulations:

26 CFR 20.2056A–2, amended; requirements to ensure collection of estate tax (PS–25–94) 502 Regulations:

26 CFR 20.2056–0, 20.2102–1, 20.2106–1, amended; 20.2056(d)–1 & –2 redesignated (d) –2 & –3; 20.2056(d)–1, 20.2056A–0— 20.2056A–13, added; 20.2101–1, revised; 20.2106–2(c) removed & reserved; marital deduction provisions (TD 8612) 192 26 CFR 20.2056A–2T, added; requirements to ensure collection of estate tax (TD 8613) 216 Trusts:

Accounting methods:

Change, section 263A costs (RP 33)

380 Rent-to-own contracts (RP 38) 397 Sec. 1281 method changes (Notice

57. 337 Administration:

Delegation of authority:

Power to appoint trustee (RR 58)

(RP 53) 445 Regulations:

Luxury automobile, adjustment, 1996

191

Criminal investigatory and civil

penalty enforcement authority to Commissioner (Treas. Directive 15–43) 459 Investigatory, seizure, and forfeit ure authority under Money Laundering Control Act of 1986 to Commissioner (Treas. Directive 15–42) 459 Merchant Marine Capital Con

struction Funds, interest rate (Notice 46) 331

GIFT TAX

Regulations:

26 CFR 25.2503–2, amended; 25.2523(i)–1, –2, –3, 25.2702– 1(c)(8), added; marital deduction provisions (TD 8612) 192

512 1995–2 C.B.

26 CFR 40.6302(c)–0, 48.4081–0, removed; 40.6302(c)–1(e)(4), 48.4101–3, added; 48.4041–8(f), 48.4081–7, amended; 48.4041–21, 48.4081–3(b)(1), 48.4081–6, revised; gasohol, compressed natural gas (CNG) (TD 8609) 229 26 CFR 40.6302(c)–5T, added; deposits of excise taxes (TD 8616) 263

Administration—Continued

Foreign tax credit—Continued

1040A & related schedules will be input through Document Processing System (RP 46) 414 Gain or loss:

Regional and district offices of the

Domestic international sales corpora

tions (DISC): International boycotts, countries re quiring cooperation (Notice 41) 328 ; (Notice 65) 342 Taxation of DISC income to share

International boycotts, countries re

IRS (TDO 150–01) 460 Allocation of income and deductions,

‘‘stripping transactions’’ (Notice 53) 334 Automobiles:

Optional standard mileage rates (RP

holders, T-bill rate ending 9/30/95 (RR 77) 122 Employee plans:

54. 450 Bonds:

Administrative:

quiring cooperation (Notice 41) 328 ; (Notice 65) 342 Forms:

1040A & related schedules will be input through Document Processing System (RP 46) 414 Gain or loss:

Recognition:

Nonrecognition of FCC certified

Qualified mortgage bonds:

Closing agreement program ex

Mortgage credit certificates:

National median gross income

(RP 32) 379 Qualified census tracts (RP 31)

tended indefinitely (RP 52) 439 Contributions and benefits:

limitations, 1996 (Notice 55) 336 Limitations (RR 29A) 66 Employee stock ownership plans:

Exclusions-inclusions:

Cost-of-living adjustments, dollar

sales and exchanges, repealed (PL 104–7) 325 Gross income:

378 Tax-exempt bonds, arbitrage (RP 47)

Fringe benefits, SIFL, aircraft

417 Business expenses:

Exercise of voting rights by trustee

U.S. citizen abroad, waiver of resi

Health insurance, self-employed indi vidual (PL 104–7) 325 Substantiation requirements (Notice

(RR 57) 62 Funding:

Life:

Fringe benefits, SIFL, aircraft

valuation formula (RR 66) 11 Income source:

U.S. citizen abroad, waiver of resi dency requirements (RP 45) 412 Insurance companies:

Differential earning rate for 1994

and recomputed rate for 1993 (RR 60) 78 Reserves, health and accident pol icies (RR 80) 79 Other than life or mutual:

50. 333 Charitable contributions:

Organizations providing relief to vic

Change in method, automatic ap proval for specific methods (RP 51) 431 Full funding limitations, weighted

tims of Hurricane Marilyn (Notice 56) 336 Consolidated returns:

Permission to discontinue filing (RP

39. 399 Corporations:

Foreign sales corporations, require

average interest rate, July 1995 (Notice 42) 328 ; Aug. 1995 (Notice 48) 332 ; Sept. 1995 (Notice 49) 332 ; Oct. 1995 (Notice 52) 334 ; Nov. 1995 (Notice 63) 342 Qualification:

ments suspended, Hurricane Marilyn (Notice 60) 338 Credits against tax:

Carryovers allocated to qualified

states (RP 36) 393 Commingled alcohol mixture (RR

54. 6 Earned income, excessive investment

General:

Covered compensation tables,

1996 (RR 75) 39 Highly compensated employees,

definition (RP 34) 385 Issuance of notification letters,

certain regional prototype plans (RP 42) 411 Exempt organizations:

income (PL 104–7) 325 Low-income housing:

Loss payment and discount fac tors, 1995 (RP 40) 402 Salvage discount factors, 1995 (RP

41. 409 Interest:

Investment:

Federal short-term, mid-term, and

long-term rates, July 1995 (RR 48) 125 ; Aug. 1995 (RR 51) 127 ; Sept. 1995 (RR 62) 129 ; Oct. 1995 (RR 67) 130 ; Nov. 1995 (RR 73) 132 ; Dec. 1995 (RR 79) 134 Paid:

loan collateral (RR 53) 30 Inventories:

Satisfactory bond, ‘‘bond factor’’

amounts, Jan. through Sept. 1995 (RR 64) 7 ; Jan. through Dec. 1995 (RR 83) 8 Section 42(h)(6) extended commit ment (RR 49) 7 Damages, compensation for inju

tures, reporting requirement exception (RP 35) 391 ; (RP 35A) 392 Qualification:

Exercise of Commissioner’s dis cretionary authority under sec. 6033 (RP 48) 418 Hurricane Opal assistance, relief

from certain providions (Notice 66) 343 Lobbying and political expendi

LIFO:

Qualified stated interest, definition

(RR 70) 124 Single premium annuity contract,

ries or sickness (Notice 45) 330 Deficiencies:

Adjusted interest rates (RR 59) 266 ;

Virginia flood relief, emergency

Price indexes, department stores,

May 1995 (RR 50) 71 ; June 1995 (RR 61) 72 ; July 1995 (RR 65) 73 ; Aug. 1995 (RR 72) 74 ; Sept. 1995 (RR 76) 75 ; Oct. 1995 (RR 82) 76 REMIC residual interests (RR 81) 70

1995–2 C.B. 513

(RR 78) 269 Depreciation:

Leased consumer durable property

assistance (Notice 47) 331 Foreign tax credit:

Income source, certain countries (RR

63. 85

(RR 52) 27

Regulations—Continued

26 CFR 1.170A–13(e), added & reserved; 1.170A–13(f), added; 1.170A–13T, removed; substantiation requirement for certain charitable contributions (TD 8623) 28 26 CFR 1.274–2, 1.274–5T, amended; definition of club (TD 8601) 31 26 CFR 1.338–0, 1.338–2, amended; continuity of interest in transfer of target assets after qualified stock purchase of target (TD 8626) 34 26 CFR 1.401(a)(31)–1T, 1.402(c)– 2T, 1.402(f)–2T, 1.403(b)–2T, removed; 1.401(a)(31)–1, 1.402(c)– 2, 1.403(b)–2, added; 1.402(f)–1, revised direct rollovers and 20percent withholding upon eligible rollover distributions from qualified plans (TD 8619) 41 26 CFR 1.411(a)–11, 1.417(e)–1, 1.417(e)–1T, amended; 1.411(a)– 11T, added; notice, consent, and election requirements (TD 8620) 63 26 CFR 1.446–1, 1.481–1, –2, –3, amended; 1.481–4, –6, removed; 1.481–5 redesignated 1.481–4 & revised; 1.481–5, added; requirements for changes in method of accounting (TD 8608) 67 26 CFR 1.860A–0, 1.860G–1, amended; 1.860A–1(b)(4), added; 1.860G–1T, removed; real estate mortgage investment conduits (TD 8614) 80 26 CFR 1.863–1(d), added; special rules for determining sources of scholarships and fellowship grants (TD 8615) 83 26 CFR 1.871–1 (b) (7), 1.881–0, –3, –4, 1.1441–3(j), 1.1441–7(d), 1.6038A–3(b)(5) & (c)(2)(vii), 1.7701(1)–1, added; conduit financing arrangements (TD 8611) 286 26 CFR 1.904–0, amended; 1.904(i)– 1, added; limitation on use of deconsolidation to avoid foreign tax credit limitations (TD 8627) 86 26 CFR 1.952–3, 1.954A–1, –2, 1.957–1T, removed; 1.954–0, –1, –2, Part 4, added; 1.957–1, 4.954– 0, amended; 1.954–0T, –1T, –2T redesignated 4.954–0, –1, –2; definition of controlled foreign corporation, foreign base company income and foreign personal holding company income of a controlled foreign company (TD 8618) 89

Involuntary conversions:

Treatment of specific section 1033

transactions (PL 104–7) 325 Levy:

Table, exempt from levy on wages,

salary, and other income (Notice 61) 339 Liability for tax:

Contingent liabilities assumed in sec

tion 351 exchanges (RR 74) 36 Overpayments:

Adjusted interest rates (RR 59) 266 ;

(RR 78) 269 Partnership:

Limited:

New York (RLLP) (RR 55) 313 Penalties:

Substantial understatement (RP 55)

457 Possessions of the United States:

Post-1993 section 936 elections (RP

37. 393 Proposed regulations:

26 CFR 1.170A–1, 1.170A–13, amended; 1.6115–1, added; deductibility, substantiation, and disclosure of certain charitable contributions (IA–44–94) 471 26 CFR 1.351–1, amended; transfers to investment companies (CO–19– 95) 464 26 CFR 1.351–1(a)(3), 1.721–1(c), added; treatment of underwriters (CO–26–95) 466 26 CFR 1.411(a)–11, 1.417(e)–1, amended; notice, consent, and election requirements (EE–24–93) 468 26 CFR 1.584–2, 1.584–4, amended; diversification of common trust funds (PS–29–92) 497 26 CFR 1.952–1, amended; 1.952– 2(c)(1), revised; 1.954–2(b)(3), 1.960–1(i), added; definition of foreign base company income and foreign personal holding company income of a controlled foreign corporation (INTL–75–92) 480 26 CFR 1.1377–0, –1, –2, –3, added; definitions under subchapter S for S corporations and their shareholders (PS–268–82) 491 26 CFR 1.1502–1(f)(6), added; consolidated groups—intercompany transactions and related rules (CO– 24–95) 466 26 CFR 1.6695–1, revised; 301.6061–1, amended; methods of signing (IA–10–95) 478

Proposed regulations—Continued

26 CFR 301.6109–1, amended; taxpayer identifying numbers (INTL– 24–94) 485 26 CFR 301.6109–3, added; authority of FCIC to require EINs, withdrawal of regs. (Notice 62) 341 26 CFR 301.6231(a)(7)–1, amended; 301.6231(a)(7)–2, added; selection of tax matters partner for limited liability companies (PS–34–92) 499 26 CFR 301.7503–1, amended; time for performance of acts where last day falls on Saturday, Sunday, or legal holiday (IA–36–91) 470 26 CFR 301.7701–4(e), added; environmental settlement funds, classification (PS–54–94) 503 Request for comments concerning

withdrawal (Notice 51) 333 Rates of tax:

Income tax cost-of-living adjust ments, 1996 (RP 53) 445 Regulations:

26 CFR 1.30–1, 1.179A–1, added; definition of qualified electric vehicle, recapture rules for qualified electric vehicles, qualified cleanfuel vehicle property, qualified clean-fuel vehicle refueling property (TD 8606) 3 26 CFR 1.61–2, 1.217–2, amended; 1.61–22T, 1.217–2T, removed; allowances received by members of the Armed Forces in connection with moves to new permanent duty stations (TD 8607) 9 26 CFR 1.83–6, amended; deductions for transfers of property (TD 8599) 12 26 CFR 1.108–3, added; 1.167(a)– 11, 1.460–0, –4, 1.469–0, –1, –1T, 1.1502–17, –18, –20, –26, –33, –79, –80, amended; 1.263A–1, 1.267(f)–1, 1.1502–13, revised; 1267(f)–1T, –2T, –3, 1.1502–13T, –14, –14T, removed; consolidated return intercompany transactions system and related rules (TD 8597) 147 26 CFR 1.162–20(c)(5) & (d), 1.162–28, 1.162–29, added; 1.162– 20T, removed; lobbying expense deductions (TD 8602) 15

514 1995–2 C.B.

Regulations—Continued

26 CFR 1.1015–5, amended; marital deduction provisions (TD 8612) 192 26 CFR 1.1361–0, revised; 1.1361–1, amended; definition of an S corporation (TD 8600) 135 26 CFR 1.1502–13T, added; consolidated groups—intercompany transactions and related rules (TD 8598) 188 26 CFR 1.6091–2, 301.6852–1, 301.7409–1, added; 301.6211–1, 301.7611–1, and intermediate sections, amended; political expenditures by sec. 501(c)(3) organizations (TD 8628) 253 26 CFR 1.6662–0, –2, –3, –4, 1.6664–0, –1, –4, amended; 1.6662–1, revised; 1.6662–7, added; 1.6662–7T, removed; accuracy-related penalty (TD 8617) 274 26 CFR 1.6695–1T, 301.6061–1T, added; methods of signing (TD 8603) 281 26 CFR 1.7704–1, added; classification of certain publicly traded partnerships as corporations (TD 8629) 315

Regulations—Continued

26 CFR 301.6109–2, amended; authority of Sec. of Agriculture to share EIN collected from retail food stores and wholesale food concerns (TD 8621) 261 26 CFR 301.6867–1, added; 301.6867–1T, removed; presumptions where owner of large amount of cash is not identified (TD 8605) 282 26 CFR 301.7514–1, amended; seals of office (TD 8625) 284 26 CFR 301.7701(i)–0—301.7701(i)– 4, added; taxable mortgage pools (TD 8610) 306 Request for comments concering re

Regulations—Continued

tory Reinvention Initiative (RR 71) 323 Self-employment tax:

Information, reproduction of Forms

1096, 1098, 1099 Series, 5498, and W–2G (RP 30) 354 Magnetic media reporting, Forms

1098, 1099 series, 5498, and W– 2G (RP 29A) 343 Rulings:

Obsolete, conduit rev. ruls. (RR 56)

322 Obsolete procedures as a result of

Regulatory Reinvention Initiative (RP 44) 412 Obsolete rulings as result of Regula

moval (Notice 51) 333 Reorganizations:

Social Security contribution and ben

Continuity of proprietary interest,

efit base 458 Travel expenses:

distribution to partners (RR 69) 38 Returns:

Per diem allowance procedure to be

Electronic filing, Form 1040 (RP 49)

419 Information, magnetic media, wage

issued (Notice 67) 343

and tax statements, Puerto Rico, Virgin Islands, Guam and American Samoa (Notice 64) 342

1995–2 C.B. 515