us-irs-notices-irb-2003-41-pdf•Internal Revenue Bulletin 2003-41 (PDF rendition): IRS Notices
Internal Revenue Bulletin 2003-41 (PDF rendition): IRS Notices
us-irs-notices-irb-2003-41-pdfInternal Revenue Bulletin 2003-41 (PDF rendition): IRS NoticesGuidance
Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.
Bulletin No. 2003-41 October 14, 2003 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 2003–107, page 815. Federal rates; adjusted federalrates; adjusted federal long- term rate and the long-term exempt rate.For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for October 2003. T.D. 9082, page 807. Final and temporary regulations require th euseoftaxpayer identifying numbers to properly identify foreign taxpayers for which submissions are made for the reduct ion or elimination of tax under sections 897 and 1445 of the Code. The regulations also address other miscellaneous i tems under section 1445. T.D. 9085, page 775. Final regulations under sections 148 and 141 of the Code re- late to the definition of investment-type property and private loan for the arbitrage and private activity restrictions, respec- tively, applicable to tax-exempt bonds issued by state and local governments. Final regulations relate to certain natural gas and electricity prepayment transactions. T.D. 9087, page 781. Final regulations under section 883 of the Code concern when a foreign corporation engaged in the international operation of ships or aircraft may exempt its U.S source income from fed- eral income tax. The rules apply to a corporation organized in a foreign country that grants a reciprocal exemption to U.S. corporations, if the foreign corporation satisfies certain owner- ship requirements. REG–140378–01, page 825. Proposed regulations under section 6334 of the Code relate to property exempt from levy. The regulations have been revised to provide guidance with respect to the procedures for obtain- ing prior judicial approval of certain principal residence levies and for exemption from levy for certain residences and busi- ness assets. The regulations have also been revised to reflect recent legislative changes. REG–128203–02, page 828. Proposed regulations under section 460 of the Code provide guidance regarding the income tax consequences of certain partnership transactions involving contracts accounted for un- der a long-term contract method of accounting. Notice 2003–68, page 824. Qualified community development ent ity (CDE) loan purchases.The Treasury Department and the Service an- nounce that they will clarify and am end the definition of a qualified low-income communit y investment under section 1.45D–1T(d)(1)(ii) of the reg ulations. TAX CONVENTIONS Announcement 2003–62, page 821. This announcement provides the rates for various types of in- come under new tax conventions. The United States recently exchanged instruments of ratification for a new income tax treaty with the United Kingdom and new protocols for the in- come tax treaties with Australia and Mexico. (Continued on the next page) Finding Lists begin on page ii. ADMINISTRATIVE T.D. 9086, page 817. Final regulations under section 7122 of the Code impose a $150.00 user fee for the processing of offers to compromise effective November 1, 2003. The user fee does not apply to offers based on doubt as to liability or offers made by low income taxpayers. The fee will be applied against the amount of the offer or refunded to the taxpayer if the offer is accepted to promote effective tax administration or accepted based on doubt as to collectibility where there has been a determination that, although an amount greater than the amount offered could be collected, collection of more than the amount offered would create economic hardship within the meaning of regulations section 301.6343–1. REG–140378–01, page 825. Proposed regulations under section 6334 of the Code re late to property exempt from levy. The regulations have been revised to provide guidance with respect to the procedu res for obtain- ing prior judicial approval of certain princi pal residence levies and for exemption from levy for certain resid ences and busi- ness assets. The regulations have also been revised to reflect recent legislative changes. October 14, 20032003-41 I.R.B. The IRS Mission Provide AmericaÊs taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conven- tions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bul- letin contents are consolidated semiannually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all sub- stantive rulings necessary to promote a un iform application of the tax laws, including all rulings that s upersede, revoke, mod- ify, or amend any of those previously pub lished in the Bulletin. All published rulings apply retroacti vely unless otherwise indi- cated. Procedures relating solely to matters of internal man- agement are not published; howeve r, statements of internal practices and procedures that af fect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Leg- islation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rul- ings. Bank Secrecy Act Administrative Rulings are issued by the Department of the TreasuryÊs Office of the Assistant Sec- retary (Enforcement). Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbar- ment and suspension lists, and announcements. The first Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the first Bulletin of the succeeding semiannual period, respectively. The contents of this pu blication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402. 2003-41 I.R.B.October 14, 2003 Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 42.—Low-Income Housing Credit The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 141.—Private Activity Bond; Qualified Bond 26 CFR 1.141-5: Private loan financing test. Which prepayments for property or services made with the proceeds of tax-exempt bonds give rise to a private loan under section 141(c)? See T.D. 9085, page 775. Section 148.—Arbitrage 26 CFR 1.141–5: Private loan financing test. 26 CFR 1.148–1: Definitions and elections. T.D. 9085 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR part 1 Arbitrage and Private Activity Restrictions Applicable to Tax-Exempt Bonds Issued by State and Local Governments; Investment-Type Property (prepayment); Private Loan (prepayment) AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains fi- nal regulations on the arbitrage and private activity restrictions applicable to tax-ex- empt bonds issued by State and local gov- ernments. These regulations affect issuers of tax-exempt bonds and provide guidance on the definitions of investment-type prop- erty and private loan to help issuers com- ply with the arbitrage and private activity restrictions. DATES:Effective Date:These regulations are effective October 3, 2003. Applicability Date:For dates of ap- plicability, see §§1.141–15(b)(3) and 1.148–11(j) of these regulations. FOR FURTHER INFORMATION CONTACT: Johanna Som de Cerff (202) 622–3980 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document amends the Income Tax Regulations (26 CFR part 1) under sec- tions 141 and 148 of the Internal Revenue Code by providing rules for determining whether a prepayment for property or services results in a private loan or invest- ment-type property (the final regulations). On April 17, 2002, the IRS published in theFederal Registera notice of pro- posed rulemaking (REG–113526–98; REG–105369–00, 2002–1 C.B. 828 [67 FR 18835]) (the proposed regula- tions). The proposed regulations modify §§1.141–5(c)(2) and 1.148–1(e) of the In- come Tax Regulations to establish which prepayments for property or services give rise to a private loan under section 141(c) or investment-type property under section 148(b)(2)(D). On September 25, 2002, the IRS held a public hearing on the proposed regulations. Written comments respond- ing to the proposed regulations were also received. After consideration of all the comments, the proposed regulations are adopted as amended by this Treasury de- cision. The revisions are discussed below. Explanation of Provisions I.Investment-type Property A.Existing regulations The existing regulations,at §1.148–1(e)(2), contain rules for deter- mining when a prepayment for property or services results in investment-type prop- erty. Under that provision, a prepayment generally gives rise to investment-type property if a principal purpose for prepay- ing is to receive an investment return from the time the prepayment is made until the time payment otherwise would be made. However, a prepayment does not give rise to investment-type property under the existing regulations if (1) it is made for a substantial business purpose other than investment return and the issuer has no commercially reasonable alternative to the prepayment (thebusiness purpose exception); or (2) prepayments on sub- stantially the same terms are made by a substantial percentage of persons who are similarly situated to the issuer but who are not beneficiaries of tax-exempt financing (thecustomary exception). B.Business purpose exception The proposed regulations narrow the scope of the business purpose exception. Under the proposed regulations, a prepay- ment meets the business purpose exception only if the primary purpose for the prepay- ment is to accomplish one or more substan- tial business purposesthat (1) are unrelated to any investment return based on the time value of money and (2) cannot be accom- plished without the prepayment. Commentators suggested that the busi- ness purpose exception in the proposed regulations would have limited usefulness and that the language in the existing regu- lations is superior. However, as discussed in the preamble to the proposed regula- tions, the business purpose exception in the existing regulations was intended to be a narrow exception and has raised difficult interpretive questions. For example, in many instances it may be unclear whether the alternatives available to the issuer are “commercially reasonable.” The IRS and Treasury Department have considered all of the comments relating to the business purpose exception and have concluded that a standard that considers whether one or more business purposes and/or com- mercially reasonable alternatives exist is not an administrable test for determining whether prepayments give rise to invest- ment-type property. Therefore, based on tax administration considerations and the broad scope of the investment-type prop- erty concept, the final regulations delete the business purpose exception. However, the final regulations provide that the Com- missioner may, by published guidance, set forth additional circumstances in which a 2003-41 I.R.B.775October 14, 2003 prepayment does not give rise to invest- ment-type property. C.Customary exception The proposed regulations retain the customary exception in its present form. Commentators expressed concern that the customary exception may be difficult to apply in some cases. They suggested that the regulations identify examples of prepayments that satisfy the excep- tion. The final regulations retain the customary exception and indicate that it generally applies based on all the facts and circumstances. In addition, the final regulations contain a safe harbor under which a prepayment is deemed to satisfy the customary exception if: (1) the pre- payment is made for maintenance, repair, or an extended warranty with respect to personal property (for example, automo- biles or electronic equipment), or updates or maintenance or support services with respect to computer software; and (2) the same maintenance, repair, extended war- ranty, updates or maintenance or support services, as applicable, are regularly pro- vided to nongovernmental persons on the same terms. D.Certain prepayments to acquire a supply of natural gas or electricity 1. Prepayments for Natural Gas The proposed regulations add an excep- tion to the definition of investment-type property for certainnatural gas prepay- ments that are made by or for one or more utilities that are owned by a governmen- tal person, as defined in §1.141–1(b) (for example, if a joint action agency acquires a natural gas supply for one or more mu- nicipal gas or electric utilities). The ex- ception applies only if at least 95 percent of the natural gas purchased with the pre- payment is to be consumed by retail cus- tomers in the service area of a municipal gas utility, or used to produce electricity that will be furnished to retail customers that a municipal electric utility is obligated to serve under state or Federal law (theuse requirement). For this purpose, the service area of a municipal gas utility is defined as (1) any area throughout which the mu- nicipal utility provided (at all times dur- ing the five-year period ending on the is- sue date) gas transmission or distribution service, and any area that is contiguous to such an area, or (2) any area where the mu- nicipal utility is obligated under state or Federal law to provide gas distribution ser- vices as provided in such law. Some commentators recommended that the 95 percent threshold be reduced to 85 percent. These commentators stated that various factors make it difficult for munic- ipal gas utilities to determine in advance the precise quantity of gas supplies they will need to serve their customers during a given period. These factors include a lim- ited capability to store gas and variations in demand due to circumstances beyond the utilities’ control, such as economic condi- tions and the weather. In recognition of these unique factors, the final regulations reduce the 95 percent threshold to 90 per- cent. Some commentators recommended that the use requirement apply based on the is- suer’s reasonable expectations as of the is- sue date. To ensure that the prepaid gas is consumed by retail customers in the ser- vice area of the municipal utility, the final regulations retain the requirement that the prepaid gas supply actually be used for a qualifying purpose. Some commentators suggested that the use of natural gas to fuel the transporta- tion of the prepaid gas supply on a pipeline should be a qualifying use under the nat- ural gas exception. The final regulations adopt this comment. Under the final regu- lations, the use of gas to fuel the pipeline transportation of theprepaid gas supply is a qualifying use and is not pro-rated based on the amount of qualified and nonquali- fied use of the remaining prepaid gas. Commentators indicated that most mu- nicipal gas and electric utilities do not have an obligation to serve that arises under state or Federal law. These commenta- tors suggested replacing the “obligation to serve” requirement for municipal electric utilities with a service area rule that is sim- ilar to the rule for municipal gas utilities. The final regulations adopt this comment. Commentators also recommended that the definition ofservice areabe expanded to include any area recognized as the service area of the municipal utility under state or federal law. The final regulations adopt this comment. Commentators requested clarification that sales to governmental persons are qualifying sales under the use test. Com- mentators also requested clarification that a retail customer of a municipal utility is a qualifying end-user even if the pre- payment was made by or for another municipal utility. The final regulations do not provide that all sales to governmental persons, or to retail customers of a munic- ipal utility, are qualifying sales. Rather, the final regulations clarify that, in the case of a natural gas prepayment by or for one or more municipal utilities (each, the issuing municipal utility), the use of prepaid gas is a qualifying use if the gas is: (1) furnished to retail gas customers of the issuing municipal utility who are located in the natural gas service area of the issuing municipal utility (other than sales of gas to produce electricity for sale); (2)usedbytheissuingmunicipalutilityto produce electricity that will be furnished to retail electric customers of the issu- ing municipal utility who are located in the electricity service area of the issuing municipal utility; (3) used by the issuing municipal utility to produce electricity that will be sold to a municipal utility and furnished to retail electric customers of the purchaser who arelocated in the elec- tricity service area of the purchaser; (4) sold to a municipal utility if the require- ments of (1), (2) or (3) of this paragraph are satisfied by the purchaser (treating the purchaser as the issuing municipal utility); or (5) used to fuel the transportation of the prepaid gas supply on a pipeline. Thus, for example, the sale of gas or electricity by the issuing municipal utility directly to customers of another municipal utility is not a qualifying use. Some commentators recommended that the final regulations define “retail customer” as a customer that is not pur- chasing for resale. The final regulations provide that a retail customer is a customer that purchases natural gas or electricity, as applicable, other thanfor resale. The final regulations also clarify that the consump- tion of natural gas by a nongovernmental person to produce electricity for sale is not a qualifying use of natural gas under the 90 percent use test. Some commentators requested clarifi- cation of which “contiguous” areas may be treated as part of a municipal utility’s service area. One commentator suggested that contiguous areas should not be consid- ered part of the service area. To provide October 14, 20037762003-41 I.R.B. clarity, and in light of the expansion of the service area definition to include any area recognized as the service area under state or Federal law, the final regulations elim- inate contiguous areas from the definition of service area. Some commentators suggested that the definition of service area should be ex- panded to include any area “in which” (rather than “throughout which”) the mu- nicipal utility provided service during the five-year period. To ensure that the gas or electricity is consumed by customers in an area recognized as the service area of a mu- nicipal utility under state or Federal law, or throughout which the municipal utility provided service during the five-year pe- riod, the final regulations do not adopt this comment. 2. Prepayments for Electricity Some commentators suggested that the natural gas exception should be expanded to include prepayments for electricity. These commentators stated that the re- structuring of the electric power industry has affected municipal electric utilities in a manner that is similar to the effect that deregulation of the natural gas industry had on municipal gas utilities. These commentators stated that restructuring has threatened the ability of municipal electric utilities to obtain a secure supply of elec- tric power on commercially reasonable terms, and that electric power prepayment transactions are necessary to obtain a guaranteed supply of electric power on favorable terms in light of restructuring. The final regulations add an exception to the definition of investment-type prop- erty for certain electricity prepayments that are made by or for one or more mu- nicipal utilities (for example, if a joint action agency acquires electricity for one or more municipal electric utilities). The exception applies only if at least 90 per- cent of the prepaid electricity financed by the issue is used for a qualifying use. For this purpose, electricity is used for a qualifying use if it is to be: (1) furnished to retail electric customers of the issuing municipal utility who are located in the electricity service area of the issuing mu- nicipal utility; or (2) sold to a municipal utility and furnished to retail electric cus- tomers of the purchaser who are located intheelectricityserviceareaofthepur- chaser. 3. Remedial Actions The preamble to the proposed regula- tions states that issuers may apply princi- ples similar to the rules of §1.141–12 to cure a violation of the use requirement. Commentators requested clarification re- garding which remedies under §1.141–12 are available for this purpose. The final regulations provide that issuers may apply principles similar to the rules of §1.141–12 to cure a violation of the 90 percent use re- quirement, and that the “redemption or de- feasance” remedy in §1.141–12(d) and the “alternative use of disposition proceeds” remedy in §1.141–12(e) are available for this purpose. Some commentators requested clarifi- cation of the amount of nonqualified bonds that must be redeemed or defeased under the “redemption or defeasance” remedy. Under the final regulations, the amount of nonqualified bonds is determined in the same manner as for output contracts taken into account under the private busi- ness tests, including the principles of §1.141–7(d), treating nonqualified sales of gas or electricity as satisfying the benefits and burdens test under §1.141–7(c)(1). Commentators also suggested that the definition of “nonqualified bonds” un- der §1.141–12 may require excessive amounts of bonds to be retired. The IRS and Treasury Department are considering this comment in connection with possible amendments to §1.141–12. 4. Commodity Swap Contracts The proposed regulations provide that a transaction will not fail to qualify for the natural gas exception by reason of any commodity swap contract that may be en- tered into between the issuer and an un- related party (other than the gas supplier), or between the gas supplier and an unre- lated party (other than the issuer), so long as each swap contract is an independent contract. For this purpose, the proposed regulations provide that a swap contract is an independent contract if the obligation of each party to performunder the swap con- tract is not dependent on performance by any person (other than the other party to the swap contract) underanother contract (for example, a gas supply contract or another swap contract). Notice 2002–52, 2002–2 C.B. 187, provides that a natural gas com- modity swap contract will not fail to be an independent contract solely because the swap contract may terminate in the event of a failure of a gas supplier to deliver gas for which the swap contract is a hedge. Commentators generally agreed with the provision on swap contracts in the pro- posed regulations, as modified by Notice 2002–52. The final regulations retain the provision on commodity swap contracts for natural gas prepayments, as modified by Notice 2002–52, and expand it to apply to electricity prepayments. E.De minimis prepayments The proposed regulations add an ex- ception for prepayments made within 90 days of the date of delivery of all the prop- erty or services to which the prepayment relates. Commentators recommended that the exception apply based on reasonable expectations. The final regulations adopt this comment. This change to a reason- able expectations standard is intended to permit a prepayment to qualify for thede minimisexception even if an unexpected event beyond the control of the issuer causes delivery of the property or services to be delayed beyond the 90-day period. The reasonable expectations standard does not, however, apply to any change to the terms of the prepayment other than an unexpected delay in delivery. II.Private Loans The existing regulations,at §1.141–5(c)(2)(ii), provide rules for determining whether a prepayment for property or services is treated as a loan for purposes of the private loan financing test. The existing regulations for private loans are similar to the existing regula- tions in §1.148–1(e)(2) for determining whether a prepayment gives rise to invest- ment-type property, except that the private loan regulations focus on whether the pre- payment provides a benefit of tax-exempt financing to the seller. The final regula- tions amend the private loan provisions of §1.141–5(c)(2) to conform to the amend- ments to the definition of investment-type property in the final regulations. 2003-41 I.R.B.777October 14, 2003 III.Tables of Contents The final regulations amend the tables of contents in §§1.141–0 and 1.148–0 to reflect the final regulations and certain pre- viously issued regulations under sections 141 and 148. Effective Dates The final regulations apply to bonds sold on or after October 3, 2003. In ad- dition, issuers may apply the final regula- tions to bonds sold before October 3, 2003, that are subject to §§1.141–5 and 1.148–1. Special Analyses It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Order 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) does not apply to these regulations, and because the rule does not impose a collection of in- formation on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. 601et seq.) do not apply. Drafting Information The principal authors of these regula- tions are Rebecca L. Harrigal and Johanna Som de Cerff, Office of Chief Counsel (TE/GE), IRS, and Stephen J. Watson, Of- fice of Tax Policy, Treasury Department. However, other personnel from the IRS and Treasury Department participated in their development. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.141–0 is amended by revising the entry for §1.141–15(b) to read as follows: §1.141–0 Table of contents. ***** §1.141–15 Effective dates. ***** (b) Effective dates. (1) In general. (2) Certain short-term arrangements. (3) Certain prepayments. ***** Par. 3. In §1.141–5, paragraph (c)(2)(ii) is revised and paragraphs (c)(2)(iii) and (c)(2)(iv) are added to read as follows: §1.141–5 Private loan financing test. ***** (c) * * * (2) * * * (ii)Certain prepayments treated as loans. Except as otherwise provided, a prepayment for property or services, including a prepayment for property or services that is made after the date that the contract to buy the property or services is entered into, is treated as a loan for purposes of the private loan financing test if a principal purpose for prepaying is to provide a benefit of tax-exempt financing to the seller. A prepayment is not treated as a loan for purposes of the private loan financing test if— (A) Prepayments on substantially the same terms are made by a substantial per- centage of persons who are similarly situ- ated to the issuer but who are not benefi- ciaries of tax-exempt financing; (B) The prepayment is made within 90 days of the reasonably expected date of delivery to the issuer of all of the property or services for which the prepayment is made; or (C) The prepayment meets the require- ments of §1.148–1(e)(2)(iii)(A) or (B) (re- lating to certain prepayments to acquire a supply of natural gas or electricity). (iii)Customary prepayments.Thede- termination of whether a prepayment sat- isfies paragraph (c)(2)(ii)(A) of this sec- tion is generally made based on all the facts and circumstances. In addition, a prepayment is deemed to satisfy paragraph (c)(2)(ii)(A) of this section if— (A) The prepayment is made for— (1) Maintenance, repair, or an extended warranty with respect to personal property (for example, automobiles or electronic equipment); or (2) Updates or maintenance or support services with respectto computer soft- ware; and (B) The same maintenance, repair, ex- tended warranty, updates or maintenance or support services, as applicable, are regu- larly provided to nongovernmental persons onthesameterms. (iv)Additional prepayments as permit- ted by the Commissioner.TheCommis- sioner may, by published guidance, set forth additional circumstances in which a prepayment is not treated as a loan for pur- poses of the private loan financing test. ***** Par. 4. Section 1.141–15 is amended by adding paragraph (b)(3) to read as follows: §1.141–15 Effective dates. ***** (b) * * * (3)Certain prepayments. Except as provided in paragraph (c) of this sec- tion, paragraphs (c)(2)(ii), (c)(2)(iii) and (c)(2)(iv) of §1.141–5 apply to bonds sold on or after October 3, 2003. Issuers may apply paragraphs (c)(2)(ii), (c)(2)(iii) and (c)(2)(iv) of §1.141–5, in whole but not in part, to bonds sold before October 3, 2003, that are subject to §1.141–5. Par. 5. Section 1.148–0 is amended by: 1. Adding entries in paragraph (c) for §1.148–1, paragraphs (e)(1) through (e)(3). 2. Adding entries in paragraph (c) for §1.148–11, paragraphs (b)(4), (h), (i) and (j). The additions read as follows: §1.148–0 Scope and table of contents. ***** (c)Table of contents. ***** §1.148–1 Definitions and elections. ***** (e) * * * (1) In general. (2) Prepayments. (3) Certain hedges. ***** §1.148–11 Effective dates. (b) * * * (4) No elective retroactive application for safe harbor for establishing fair market October 14, 20037782003-41 I.R.B. value for guaranteed investment contracts and investments purchased for a yield restricted defeasance escrow. ***** (h) Safe harbor for establishing fair market value for guaranteed investment contracts and investments purchased for a yield re- stricted defeasance escrow. (i) Special rule for investments purchased for a yield restricted defeasance escrow. (j) Certain prepayments. Par. 6. In §1.148–1, paragraphs (e)(1) and (2) are revised to read as follows: §1.148–1 Definitions and elections. ***** (e)Investment-type property—(1)In general. Investment-type property in- cludes any property, other than property described in section 148(b)(2)(A), (B), (C) or (E), that is held principally as a passive vehicle for the production of income. For this purpose, production of income in- cludes any benefit based on the time value of money. (2)Prepayments—(i)In general—(A) Generally. Except as otherwise provided in this paragraph (e)(2), a prepayment for property or services, including a prepay- ment for property or services that is made after the date that the contract to buy the property or services is entered into, also gives rise to investment-type property if a principal purpose for prepaying is to re- ceive an investment return from the time theprepaymentismadeuntilthetimepay- ment otherwise would be made. A prepay- ment does not give rise to investment-type property if— (1) Prepayments on substantially the same terms are made by a substantial percentage of persons who are similarly situated to the issuer but who are not ben- eficiaries of tax-exempt financing; (2) The prepayment is made within 90 days of the reasonably expected date of delivery to the issuer of all of the property or services for which the prepayment is made; or (3) The prepayment meets the require- ments of paragraph (e)(2)(iii)(A) or (B) of this section. (B)Example. The following example illustrates an application of this paragraph (e)(2)(i): Example.Prepayment after contract is executed. In 1998, City A enters i nto a ten-year contract with Company Y. Under the contract, Company Y is to provide services to City A over the term of the con- tract and in return City A will pay Company Y for its services as they are provided. In 2004, City A is- sues bonds to finance a lump sum payment to Com- pany Y in satisfaction of City A’s obligation to pay for Company Y’s services to be provided over the re- maining term of the contract. The use of bond pro- ceeds to make the lump sum payment constitutes a prepayment for services under paragraph (e)(2)(i) of this section, even though the payment is made after the date that the contract is executed. (ii)Customary prepayments. The de- termination of whether a prepayment sat- isfies paragraph (e)(2)(i)(A)(1)ofthissec- tion is generally made based on all the facts and circumstances. In addition, a prepayment is deemed to satisfy paragraph (e)(2)(i)(A)(1)ofthissectionif— (A) The prepayment is made for— (1) Maintenance, repair, or an extended warranty with respect to personal property (for example, automobiles or electronic equipment); or (2) Updates or maintenance or support services with respect to computer soft- ware; and (B) The same maintenance, repair, ex- tended warranty, updates or maintenance or support services, as applicable, are regu- larly provided to nongovernmental persons onthesameterms. (iii)Certain prepayments to acquire a supply of natural gas or electricity—(A) Natural gas prepayments. A prepayment meets the requirements of this paragraph (e)(2)(iii)(A) if— (1) It is made by or for one or more utilities that are owned by a governmen- tal person, as defined in §1.141–1(b) (each ofwhichisreferredtointhisparagraph (e)(2)(iii)(A) as the issuing municipal util- ity), to purchase a supply of natural gas; and (2) At least 90 percent of the prepaid natural gas financed by the issue is used for a qualifying use. Natural gas is used for a qualifying use if it is to be— (i) Furnished to retail gas customers of the issuing municipal utility who are lo- cated in the natural gas service area of the issuing municipal utility, provided, how- ever, that gas used to produce electricity for sale shall not be included under this paragraph (e)(2)(iii)(A)(2)(i); (ii)Usedbytheissuingmunicipalutil- ity to produce electricity that will be fur- nished to retail electric customers of the issuing municipal utility who are located in the electricity service area of the issuing municipal utility; (iii) Used by the issuing municipal util- itytoproduceelectricity that will be sold to a utility that is owned by a governmen- tal person and furnished to retail electric customers of the purchaser who are located in the electricity service area of the pur- chaser; (iv) Sold to a utility that is owned by a governmental person if the requirements of paragraph (e)(2)(iii)(A)(2)(i), (ii)or(iii)of this section are satisfied by the purchaser (treating the purchaser as the issuing mu- nicipal utility); or (v) Used to fuel the pipeline trans- portation of the prepaid gas supply ac- quired in accordance with this paragraph (e)(2)(iii)(A). (B)Electricity prepayments. A prepay- ment meets the requirements of this para- graph (e)(2)(iii)(B) if— (1) It is made by or for one or more utilities that are owned by a governmen- tal person (each of which is referred to in this paragraph (e)(2)(iii)(B) as the issuing municipal utility) to purchase a supply of electricity; and (2) At least 90 percent of the prepaid electricity financed by the issue is used for a qualifying use. Electricity is used for a qualifying use if it is to be— (i) Furnished to retail electric customers of the issuing municipal utility who are located in the electricity service area of the issuing municipal utility; or (ii) Sold to a utility that is owned by a governmental person and furnished to retail electric customers of the purchaser who are located in the electricity service area of the purchaser. (C)Service area. For purposes of this paragraph (e)(2)(iii), the service area of a utility owned by a governmental person consists of— (1) Any area throughout which the util- ity provided, at all times during the 5-year period ending on the issue date— (i) In the case of a natural gas util- ity, natural gas transmission or distribution service; and (ii) In the case of an electric utility, elec- tricity distribution service; and (2) Any area recognized as the service area of the utility under state or Federal law. (D)Retail customer. For purposes of this paragraph (e)(2)(iii), a retail customer 2003-41 I.R.B.779October 14, 2003 is a customer that purchases natural gas or electricity, as applicable, other than for resale. (E)Commodity swaps. A prepayment does not fail to meet the requirements of this paragraph (e)(2)(iii) by reason of any commodity swap contract that may be en- tered into between the issuer and an unre- lated party (other than the gas or electricity supplier), or betweenthe gas or electricity supplier and an unrelated party (other than the issuer), so long as each swap contract is an independent contract. A swap con- tract is an independent contract if the obli- gation of each party to perform under the swap contract is not dependent on perfor- mance by any person (other than the other party to the swap contract) under another contract (for example, a gas or electricity supply contract or another swap contract); provided, however, that a commodity swap contract will not fail to be an independent contract solely because the swap contract may terminate in the event of a failure of a gas or electricity supplier to deliver gas or electricity for which the swap contract is a hedge. (F)Remedial action. Issuers may apply principles similar to the rules of §1.141–12, including §1.141–12(d) (re- lating to redemption or defeasance of nonqualified bonds) and §1.141–12(e) (relating to alternative use of disposition proceeds), to cure a violation of paragraph (e)(2)(iii)(A)(2) or (e)(2)(iii)(B)(2)ofthis section. For this purpose, the amount of nonqualified bonds is determined in the same manner as for output contracts taken into account under the private busi- ness tests, including the principles of §1.141–7(d), treating nonqualified sales of gas or electricity under this paragraph (e)(2)(iii) as satisfying the benefits and burdens test under §1.141–7(c)(1). (iv)Additional prepayments as permit- ted by the Commissioner. The Commis- sioner may, by published guidance, set forth additional circumstances in which a prepayment does not give rise to invest- ment-type property. ***** Par. 7. Section 1.148–11 is amended by adding paragraph (j) to read as follows: §1.148–11 Effective dates. ***** (j)Certain prepayments. Section 1.148–1(e)(1) and (2) apply to bonds sold on or after October 3, 2003. Issuers may apply §1.148–1(e)(1) and (2), in whole but not in part, to bonds sold before October 3, 2003, that are subject to §1.148–1. Dale F. Hart, Acting Deputy Commissioner for Services and Enforcement. Approved July 25, 2003. Pamela F. Olson, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on August 1, 2003, 8:45 a.m., and published in the issue of the Federal Register for August 4, 2003, 68 F.R. 45772) Section 280G.—Golden Parachute Payments Federal short-term, mid-term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change The adjusted applicable federal long-term rate is set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 412.—Minimum Funding Standards The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 467.—Certain Payments for the Use of Property or Services The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 482.—Allocation of Income and Deductions Among Taxpayers Federal short-term, mid-term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 483.—Interest on Certain Deferred Payments The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 642.—Special Rules for Credits and Deductions Federal short-term, mid-term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 807.—Rules for Certain Reserves The adjusted applicable federal short-term ,mid- term, and long-term rates are set forth for th emonth of October 2003. See Rev. Rul. 2003-107, pag e 815. Section 846.—Discounted Unpaid Losses Defined The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. October 14, 20037802003-41 I.R.B. Section 883.—Exclusions From Gross Income 26 CFR 1.883–1: Exclusion of income from the inter- national operation of ships or aircraft. T.D. 9087 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602 Exclusions From Gross Income of Foreign Corporations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations implementing sections 883(a) and (c) that relate to income derived by foreign corporations from the international operation of ships or aircraft. The final regulations reflect changes made by the Tax Reform Act of 1986 and subsequent legislative amendments. The final regu- lations provide, in general, that a foreign corporation organized in a qualified for- eign country and engaged in the interna- tional operation of ships or aircraft shall exclude qualified income from gross in- come for purposes of U.S. federal income taxation, provided that the corporation can satisfy certain ownership and related doc- umentation requirements. The final regu- lations explain when a foreign country is a qualified foreign country and what in- come is considered to be qualified income. The final regulations specify how a for- eign corporation may satisfy the ownership and related documentation requirements. In addition, the final regulations describe the information that the foreign corpora- tion must include on its U.S. income tax return in order to claim an exemption. All foreign corporations engaged in the inter- national operation of ships or aircraft that claim an exemption from U.S. federal in- come tax based on section 883 are affected by these regulations. DATES:Effective Date: These regulations are effective August 26, 2003. Applicability Date: These regulations are applicable to taxable years of the for- eign corporation beginning 30 days or more after August 26, 2003. FOR FURTHER INFORMATION CONTACT: Patricia A. Bray or David L. Lundy at (202) 622–3880 (not a toll-free number). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collections of information con- tained in these final regulations have been reviewed and approved by the Office of Management and Budget in accor- dance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1677. Responses to these collec- tions of information are mandatory. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget. For corporations, the estimated annual burden per respondent varies from 30 min- utes to eight hours, depending on the in- dividual circumstances of the foreign cor- poration, with an estimated average of one hour. For shareholders, the estimated an- nual burden per respondent varies from zero minutes to eight hours, depending on the individual circumstances of the share- holder or intermediary, with an estimated average of 90 minutes. Comments concerning the accuracy of this burden estimate and sugges- tions for reducing this burden should be sent to theInternal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224, and to theOffice of Manage- ment and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503. Books or records relating to this col- lection of information must be retained as long as their contents may become mate- rial in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as re- quired by 26 U.S.C. 6103. Background A notice of proposed rulemaking (REG–208280–86, 2000–1 C.B. 654 [65 FR 6065]) under sections 883(a) and (c) was published in theFederal Register on February 8, 2000 (the 2000 proposed regulations). Due to the substantial num- ber of comments that were received on the 2000 proposed regulations, and the significant impact the regulations have on large segments of the shipping and air transport industries, the 2000 proposed regulations were withdrawn on August 2, 2002. A revised notice of proposed rulemaking (REG–136311–01, 2002–2 C.B. 485 [67 FR 50510]) was published in theFederal Registeron August 2, 2002 (the proposed regulations), and provided an opportunity for additional comments. A public hearing on the proposed regu- lations was held on November 25, 2002. Numerous comments have been received. After consideration of all the comments, the proposed regulations are adopted as revised by this Treasury decision. The preamble to the 2000 proposed regulations contains a detailed explanation of the provisions in the 2000 proposed regulations, and the preamble to the pro- posed regulations describes the comments received on the 2000 proposed regulations and the consequent changes reflected in the proposed regulations. The explana- tions contained in those preambles are not repeated herein. The comments submitted to the IRS on the proposed regulations and the consequent changes reflected in the final regulations are described herein. Public Comments Comments Relating to §1.883–1: Exclusion of Income From The International Operation of Ships or Aircraft A.Substantiation and reporting requirements For a foreign corporation to be consid- ered a qualified foreign corporation un- der §1.883–1(c)(3), the proposed regula- tions require that the corporation provide on its return a reasonable estimate of the amount of income in each category of qual- ified income for which an exemption is 2003-41 I.R.B.781October 14, 2003 claimed to the extent such amounts are readily determinable. Commentators criti- cized this requirement on the ground that it could require the creation of a sepa- rate accounting system, and would neces- sitate the allocation of expenses to each of the specific categories of income. Com- mentators suggested that whether amounts arereadily determinableshould depend on whether records to ascertain such amounts are available in the ordinary course of busi- ness. The IRS and Treasury believe that the suggested definition ofreadily deter- minabledoes not ensure that adequate records will be maintained. That term should be interpreted in accordance with §1.6012–2(g)(1)(i). However, the final regulations have been revised to clarify that a reasonable estimate of thegross amount of income in each category is required. Accordingly, there is no require- ment that expenses be allocated to each category of income. B.Operation of ships or aircraft Section 1.883–1(e) of the proposed reg- ulations provides generally that a corpora- tion is considered engaged in the operation of ships or aircraft only when it is an owner or lessee of an entire ship or aircraft used in the carriage of passengers or cargo for hire. Commentators said that a shipping com- pany utilizing less than the entire space on several vessels also should be considered engaged in the operation of ships or air- craft. The final regulations do not adopt this suggestion. The IRS and Treasury be- lieve that it is appropriate to consider a for- eign corporation to be engaged in the op- eration of ships or aircraft for purposes of section 883 only when it is an owner or lessee of an entire ship or aircraft. C.Pool, partnership, strategic alliance, joint operating agreement, code-sharing arrangement or other joint venture Section 1.883–1(e)(2) generally treats a foreign corporation as engaged in the operation of ships or aircraft with respect to its participation in a pool, partnership, strategic alliance, joint operating agree- ment, code-sharing arrangement or other joint venture. Commentators asked that these rules be made applicable to single- member disregarded entities in addition to arrangements with multiple owners. Com- mentators also asked for clarification con- cerning whether these rules apply to tiered partnerships, such as in the case of a for- eign corporation that is a partner in a part- nership, whose sole activity is to be a part- ner in another partnership that is engaged in international shipping. The rules have been revised to cover single-member disregarded entities, and to clarify that they apply to tiered entities in the case of both joint venture entities and joint ventures that are not entities. An ex- ample was added to illustrate these revi- sions. D.Cruises to nowhere Section 1.883–1(f)(1) excludes from the international operation of ships or aircraft the carriage of passengers or cargo on a voyage or flight that begins and ends in the United States, even if the voyage or flight contains a segment extending beyond the territorial limits of the United States, unless the passenger disembarks or the cargo is unloaded outside the United States. Commentators renewed their ob- jection to this exclusion of such "cruises to nowhere.” The final regulations continue to exclude cruises to nowhere because such travel has beginning and ending points within the United States within the meaning of section 863(c)(1). E.Determining whether income is derived from international operation of ships or aircraft Section 1.883–1(f)(2) of the proposed regulations provides that whether income is derived from international operation of ships or aircraft is determined on a passen- gerbypassengerbasisandonanitem-of- cargo by item-of-cargo basis. Commenta- tors suggested that with respect to the car- riage of passengers by ship, the determina- tion should be made on a voyage by voy- age basis. Commentators said the voyage should be treated as international if it can- not be completed because of weather or similar factors. The final regulations do not adopt the suggestion that income be determined on a voyage by voyage basis. The regula- tions have been revised, however, to ex- empt income from the sale of a ticket for international carriage of a passenger when the passenger does not begin or complete an international journey because of unan- ticipated circumstances. For example, if a passenger does not leave on an interna- tional flight because of a change in plans, or is unable to complete an international voyage because of illness, any income de- rived from the sale of the ticket nonetheless will qualify for exemption. F.International carriage of cargo Under §1.883–1(e)(1), a foreign corpo- rationisconsideredengagedintheoper- ation of ships or aircraft only if the ship or aircraft is used in the carriage of pas- sengers or cargo for hire. Commentators pointed out that the regulations do not de- fine the termfor hire. They expressed con- cern that requiring the carriage of cargo for hire might be interpreted to exclude in- come derived by a vessel owner or oper- ator who charters a vessel to a lessee, if the lessee uses it to transport the lessee’s own cargo or repositions the vessel without cargo on board for its next voyage. Com- mentators suggested that the termfor hire be defined to include carriage of propri- etary goods and an empty backhaul voy- age, or that it be deleted from the regula- tions. Section 1.883–1(f)(2)(iv) of the final regulations provides that if a foreign cor- poration time, voyage, or bareboat char- ters out a ship or aircraft, and the low- est-tier lessee uses the ship or aircraft to carry passengers or cargo on a fee basis, the ship or aircraft is considered used to carry passengers or cargo for hire, regard- less of whether the ship or aircraft may be empty during a portion of the charter period due to a backhaul voyage or flight or for purposes of repositioning. If a for- eign corporation time, voyage, or bareboat charters out a ship or aircraft, and the low- est-tier lessee uses the ship or aircraft for the carriage of proprietary goods, includ- ing an empty backhaul voyage or flight or repositioning related to such carriage of proprietary goods, the ship or aircraft sim- ilarly will be treated as used to carry cargo for hire. G.Bareboat charter of ships or dry lease of aircraft used in international operation ofshipsoraircraft When a foreign corporation bareboat charters a ship or dry leases an aircraft October 14, 20037822003-41 I.R.B. to a lessee, §1.883–1(f)(2)(iii) of the pro- posed regulations requires the corporation to adopt a reasonable method for deter- mining the amount of charter income at- tributable to the international operation of ships or aircraft by the lowest tier lessee. The regulations contain two ratios that may provide a reasonablemethod for determin- ing the amount of qualifying charter in- come. Commentators asked for clarification that business records or log books are a reasonable method for determining the amount of charter income when those records show that the vessel has been used exclusively in international transportation. Commentators also asserted that the ratios are unnecessary and suggested that they be deleted. The IRS and Treasury believe that busi- ness records or log books showing that a ship or aircraft has been used exclusively on voyages or flights that begin or end in the United States (but not both) may be suf- ficient to establish that the foreign corpora- tion’s entire gross income is income from the international operation of ships or air- craft. However, if the ship or aircraft also has been used on voyages or flights that begin and end outside the United States, the foreign corporation must determine the amount of the charter income that is at- tributable to voyages or flights that begin or end in the United States (but not both) to determine the amount of income poten- tially within the scope of section 883. The final regulations have been revised gener- ally to require such a foreign corporation to determine the amount of such income based on the total number of days of un- interrupted travel on voyages or flights be- tween the United States and the farthest point or points where cargo or passengers are loaded en route to, or discharged en route from, the United States. However, the final regulations permit the foreign cor- poration to adopt an alternative method for determining the amount of the charter in- come that is attributable to the interna- tional operation of ships or aircraft if it can establish that the alternative method more accurately reflects the amount of such in- come. H.Activities incidental to the international operation of ships or aircraft Section 1.883–1(g) of the proposed reg- ulations provides that certain activities of an operator of a ship or aircraft are so closely related to the primary activity of the international operation of ships or air- craft that income from those incidental ac- tivities shall be considered income from the international operation of ships or air- craft, and thus eligible for exemption. Intermodal Containers. Section 1.883–1(g)(1)(x) of the pro- posed regulations treats certain container rental activities in the United States as incidental to the international operation of ships or aircraft. The regulations limit incidental treatment to the rental of con- tainers for use in the United States for a period not exceeding five days beyond the original delivery date to the consignee as stated on the bill of lading, and also impose other limitations on incidental treatment. Commentators stated that ocean carri- ers provide containers to their customers as an integral part of international ship- ping, but do not “rent” containers or pro- vide them for “temporary warehousing” of cargo. Commentators also noted that de- liveries can be delayed beyond five days for many reasons that clearly do not in- volve warehousing, such as congestion at port facilities. Commentators said it would be difficult and unrealistic to allocate a portion of the shipping charges to the use of containers. For these reasons, the reference to con- tainer rental as an incidental activity has been modified. The “five day” rule has been eliminated and replaced with a more flexible rule under which the provision of containers or other related equipment by the foreign corporation in connection with the international carriage of cargo for use by its customers, including short-term use within the United States immediately pre- ceding or following the international car- riage of cargo, is considered an inciden- tal activity. The regulations presume that a container is used in connection with the in- ternational carriage of cargo if it is used for a period of five days or less immediately preceding or following the international carriage of cargo. Beyond this five-day pe- riod, whether a container is being used in connection with the international carriage of cargo, or for some other purpose such as warehousing of cargo, will depend on the facts and circumstances. The regulations make clear that the use of containers for any such other purpose will be considered to give rise to income that is not inciden- tal to the international operation of ships or aircraft. Hotel Accommodations. Arranging for one night in a hotel within the United States before or after a cruise is considered incidental to the international operation of ships under §1.883–1(g)(1)(vii) of the proposed regu- lations. Commentators suggested that the exception also should apply to one-night hotel accommodations arranged by air- lines. Commentators said that airlines occasionally provide such accommoda- tions to passengers on tour packages for the same reasons that cruise companies provide accommodations. The final regu- lations do not adopt this suggestion. The IRS and Treasury believe that different rules are appropriate in light of operational differences between the airline and cruise industries. Inland Transportation of Cargo. Section 1.883–1(g)(1)(v) treats the in- land transportation of cargo by a related or unrelated corporation as incidental. Commentators suggested that inland transportation of cargo by the foreign cor- poration itself (after the cargo has passed through Customs) also should be treated as incidental. The final regulations do not adopt this suggestion. The IRS and Treasury are concerned that an exemp- tion would permit foreign corporations engaged in international transportation to compete unfairly with other corporations engaged in the inland transportation of cargo. Under the proposed regulations, inland transportation by another corporation must be documented by a through bill of lading, airway bill, or similar document. Com- mentators asked whether the termsimilar documentcan include any document show- ing an inland leg to international trans- portation, such as a seaway bill or cargo receipt. The IRS and Treasury believe 2003-41 I.R.B.783October 14, 2003 thatsimilar documentmay be construed broadly to include any appropriate docu- ment. Commentators stated that some unin- corporated entities provide inland trans- portation, and asked that such entities be included in the regulations. Accordingly, the final regulations have been revised to permit any unrelated person (whether in- corporated or not) to provide inland trans- portation of cargo. The final regulations also provide that the rules of section 267(b) shall apply for purposes of determining whether persons are related. Inland Transportation of Passengers. Section 1.883–1(g)(1)(vi) treats the sale or issuance by a foreign corporation of in- terline or code-sharing tickets for the in- land transportation of passengers by air as an incidental activity. Commentators sug- gested that the inland segment of an in- ternational journey also should be treated as incidental when provided by the for- eign airline itself through the sale or is- suance of an intraline ticket. The final regulations extend incidental treatment to the sale or issuance of intraline tickets. The final regulations also impose a maxi- mum 12-hour scheduled interval between the international and inland segments of any flight involving intraline tickets. Shore Excursions. Land tour packages are excluded from incidental activities under §1.883–1(g)(2)(i). Commentators con- tend that single-day shore excursions are not the same as land tour packages and should qualify as an incidental activity. The final regulations do not adopt this suggestion because the two activities are similar in nature. Short-term Use. Ships normally engaged in interna- tional cruises may occasionally be used for other purposes, such as cruises to nowhere. Commentators asked that such short-term use be treated as an incidental activity. The final regulations do not adopt this suggestion because domestic use of a vessel does not qualify as the international operation of ships or aircraft. Airline Tickets. Section 1.883–1(g)(1) treats as inciden- tal the sale of tickets by an airline for inter- national transportation on another airline, and the sale of tickets by a ship operator on behalf of another ship operator. Sec- tion 1.883–1(g)(2)(iii), however, excludes from incidental income the sale of air- line tickets by a cruise company. Com- mentators objected to this exclusion. This exclusion is retained in the final regula- tions. Cruise companies that sell airline tickets are acting in a capacity compara- ble to travel agents, and would have an un- fair competitive advantage if their income from this activity were exempt. Ground Services and Other Services. The proposed regulations, in §1.883–1(g)(3), reserve on the treat- ment of ground services, maintenance and catering, as well as other services not mentioned as included among incidental activities. In the absence of a clear inter- national norm or standard regarding the appropriate treatment of such services, the IRS and Treasury solicited comments on an appropriate rule.Commentators gen- erally suggested that activities be treated as incidental unless they rise to the level of a separate, nonshipping business. The final regulations continue to reserve on this issue, pending further consideration by the IRS and Treasury. I.Determining equivalent exemptions for each category of income Section 1.883–1(h)(2) of the proposed regulations provides that if an exemption is unavailable in a foreign country for one of the eight enumerated categories of in- come, the foreign country is not consid- ered to grant an equivalent exemption with respect to that category of income. Para- graph (h)(2)(vi) of this section treats inci- dental income, other than incidental bare- boat charter or dry lease income and in- cidental container-related income, as one category of income. Commentators suggested that an equiv- alent exemption be determined on an item-of-income basis rather than by cate- gory of income. Commentators objected to the requirement that a foreign country exempt all items of income within a cate- gory of income to be treated as granting an equivalent exemption. The examples pro- vided by commentators indicated that this concern arose primarily in the context of the residual category of incidental income described in paragraph (h)(2)(vi). The final regulations retain the re- quirement that a foreign country exempt all items of income within a category of income, but provide an exception for incidental income described in paragraph (h)(2)(vi). The final regulations permit an exemption of any type of incidental income that qualifies under paragraph (g)(1) if a foreign country grants an equiv- alent exemption with respect to that type of income. For example, if a foreign country grants an equivalent exemption for the sale of airline tickets on behalf of another corporation engaged in interna- tional operation of aircraft, as provided in paragraph (g)(1)(iii), but does not provide an equivalent exemption for the inland transportation of cargo, as provided in paragraph (g)(1)(v), the foreign country is nonetheless considered to grant an equiv- alent exemption for the sale of airline tickets. Commentators also pointed out that some income items may be described in more than one category of income, and asked which category would apply for pur- poses of determining whether the foreign country provides an equivalent exemption. The IRS and Treasury believe that the tax- payer can select any applicable category of income that provides an exemption. J.Special rules with respect to income tax conventions Section 1.883–1(h)(3)(i) of the pro- posed regulations provides that if a tax- payer is eligible to exempt income under both an applicable income tax convention and section 883, the taxpayer may claim an exemption under both the applicable in- come tax convention and section 883 with respect to such category of income. Such an election must be made with respect to all income of the foreign corporation from the international operation of ships or air- craft, and cannot be made separately with respect to different categories of income. Commentators requested clarification concerning the election to claim an ex- emption under both the applicable income tax convention and section 883 when the benefits under the two exemptions are not October 14, 20037842003-41 I.R.B. co-extensive with respect to any category of income. The final regulations have been clari- fied to provide that if a corporation chooses to claim an exemption under an income tax convention, it may simultaneously claim an exemption under section 883 with re- spect to any category of income listed in paragraphs (h)(2)(i) through (v), (vii), and (viii) of §1.883–1 and to any type of in- come described in paragraph (h)(2)(vi) of §1.883–1, but only to the extent that such income also is exempt under the income tax convention. K.Participation in certain joint ventures Under §1.883–1(h)(3)(i), a corpora- tion organized in a foreign country that provides an exemption only through an income tax convention is not permitted to claim an exemption under section 883, with one exception. Paragraph (h)(3)(ii) permits such corporation to claim an ex- emption under section 883 if the foreign corporation participates in a joint venture described in paragraph (e)(2) that is not treated as fiscally transparent with respect to the category of income derived from the joint venture under the income tax laws of the jurisdiction where the foreign cor- poration is organized, and treaty benefits would be available but for this reason. Commentators suggested that the ex- ception in §1.883–1(h)(3)(ii) should apply to single-owner disregarded entities in ad- dition to transparent joint ventures. This suggestion was not adopted. The IRS and Treasury believe that the policy justifica- tion for relief in the joint venture context is not present in the context of a wholly owned entity. L.Independent interpretation of income tax conventions Section 1.883–1(h)(3)(iii) of the pro- posed regulations clarifies that definitions provided in these regulations do not give meaning or provide guidance regarding similar terms in U.S. income tax conven- tions or the scope of any treaty exemption. Commentators stated that definitions in the regulations and income tax conven- tions should have the same scope and be interpreted in the same way. The IRS and Treasury continue to believe that terms used in the proposed regulations should not be used to interpret terms and concepts in U.S. income tax conventions except to the extent that a treaty that entered into force after August 26, 2003, or its legisla- tive history explicitly refers to section 883 and guidance thereunder for its meaning. Comments Relating to §1.883–2: Treatment of Publicly-traded Corporations A.Closely-held classes of stock not treated as meeting trading requirements Section 1.883–2(d)(3)(i) of the pro- posed regulations disqualifies a class of stockfrombeingreliedontosatisfythe publicly traded test if, at any time during the taxable year, one or more 5-percent shareholders of that class of stock (deter- mined without regard to the attribution rules in §1.883–4) owns, in the aggregate, 50 percent or more of the total vote and value of that class of stock (closely-held rule). Commentators pointed out that a com- pany could lose its exemption if a nonqual- ified shareholder held a sufficiently large block of stock for one day. Commenta- tors suggested requiring a longer period of ownership by nonqualified sharehold- ers before disqualifying a class of stock from being relied on to satisfy the publicly traded test. This suggestion has been adopted. The final regulations provide that a class of stock will be disqualified if one or more 5-percent shareholders of that class of stock owns, in the aggregate, 50 percent or more of the total vote and value of that class of stock for more than half the number of days during the corporation’s taxable year. In this way, the closely-held rule matches the exception provided in §1.883–2(d)(3)(ii) which permits a for- eign corporation to establish that qualified shareholders own sufficient shares in the closely-held block of stock to preclude nonqualified shareholders from owning 50 percent or more of the total value of the class of stock for more than half the number of days during the taxable year. To demonstrate that a class of stock is not closely-held for purposes of §1.883–2(d)(3)(i), a foreign corporation whose stock is traded on an established securities market in the United States may rely on current Schedule 13G filings with the Securities and Exchange Commission to identify its 5-percent shareholders in each class of stock relied upon to meet the regularly traded test, without having to make any independent investigation to determine the identity of the 5-per- cent shareholders. §1.883–4(d)(3)(viii). Commentators suggested that a foreign corporation also be permitted to rely on current Schedule 13D filings with the Securities and Exchange Commission to identify 5-percent shareholders for pur- poses of meeting the exception contained in §1.883–2(d)(3)(ii). The final regula- tions adopt this suggestion. Under §1.883–2(d)(3)(iii)(B) of the proposed regulations, an investment com- pany registered under the Investment Company Act of 1940 will not be treated as a 5-percent shareholder if no person owns both 5 percent or more of the value of the outstanding interests in the invest- ment company and 5 percent or more of the value of the shares of the class of stock of the foreign corporation. Com- mentators suggested that this exception be extended to foreign mutual funds, other investment companies not registered un- der the Investment Company Act of 1940, and financial institutions with customer or nominee accounts. Commentators also pointed out that it would be difficult for a shipping company to determine the iden- tity of 5-percent owners of a mutual fund because most mutual fund shares are held in street name. The final regulations eliminate the pro- vision that treats an investment company registered under the Investment Company Act of 1940 as a 5-percent shareholder if a person owns both 5 percent or more of the value of the outstanding interests in the in- vestment company and 5 percent or more of the value of the shares of the class of stock of the foreign corporation. Instead, the final regulations provide that such an investment company shall not be treated as a 5-percent shareholder for purposes of these regulations. The final regulations do not expand the mutual fund exception to include other types of investment vehicles or financial institutions. 2003-41 I.R.B.785October 14, 2003 Comments relating to §1.883–3: Treatment of Controlled Foreign Corporations Income inclusion test Section 883(c)(2) provides that the stock ownership test of section 883(c)(1) shall not apply to controlled foreign cor- porations (CFCs). Under the proposed regulations, a CFC is considered to satisfy the CFC exception of section 883(c)(1) if it meets the requirements of §1.883–3. One such requirement is the income inclu- sion test of §1.883–3(b). This test requires that more than 50 percent of the subpart F income derived by the CFC from the international operation of ships or aircraft be includible in the gross income of one or more U.S. citizens, individual residents of the United States, or domestic corpora- tions. Commentators restated their objection to the income inclusion test. They ar- gued that the test is too restrictive because it could deny qualified foreign corpora- tion status to CFCs legitimately owned and controlled by U.S. shareholders. The IRS and Treasury continue to be- lieve that the income inclusion rule con- tained in the proposed regulations is sup- ported by the legislative history to sec- tion 883(c). The Conference report ac- companying the legislation that added the CFC exception provides with respect to the exception that “corporations are not con- sidered residents ofcountries that exempt U.S. persons unless 50 percent or more of the ultimate individual owners are U.S. shareholders of controlled foreign corpo- rations”. H.R. Conf. Rep. No. 99–841, 99 th Cong., 2d Sess. 598 (1986), reprinted in 1986–3 C.B. vol. 4, at 598 (1986). The intent of the CFC exception, therefore, is for the general ownership requirement of section 883(c)(1) to apply unless the for- eign corporation is a CFC and 50 percent or more of the subpart F income of that cor- poration derived from the international op- eration of ships or aircraft is includible by U.S. citizens, individual residents, or do- mestic corporations. Commentators stated that if the income inclusion test is retained, the regulations should provide that income derived by U.S. tax-exempt organizations holding shares in CFCs should be counted toward satisfying the income inclusion test even though the income is not taxed. The final regulations do not adopt this suggestion. A U.S. tax-exempt organiza- tion is not in substance different from a U.S. person that is not required to include in its gross income the subpart F income of aCFC. Comments Relating to §1.883–4: Qualified Shareholder Stock Ownership Test A.Qualified shareholders A foreign corporation satisfies the stock ownership test of §1.883–1(c)(2) if more than 50 percent of the value of its outstanding shares is owned, or treated as owned through attribution, for at least half of the number of days in the for- eign corporation’s taxable year by one or more qualified shareholders. Section 1.883–4(b)(1)(i)(A) of the proposed reg- ulations treats an individual resident in a qualified foreign country as a qualified shareholder, but excludes individuals de- scribed in §1.883–4(b)(1)(i)(E) and (F). Commentators stated that the exclusion of pension fund beneficiaries described in paragraph (b)(1)(i)(E) could be inter- preted to prevent the qualification of an individual under paragraph (b)(1)(i)(A). For example, if an individual held stock di- rectly in a shipping company and also was the beneficiary of a pension fund holding stock in the same company, commenta- tors believe that the individual might not qualify under paragraph (b)(1)(i)(A) with respect to the individual’s direct owner- ship. The final regulations clarify that an individual can be a qualified shareholder under paragraph (b)(1)(i)(A) and also be a qualified shareholder under paragraph (b)(1)(i)(E) with respect to a category of income for which a foreign corporation is seekinganexemption. Under §1.883–4(b)(1)(i)(D) of the proposed regulations, a not-for-profit or- ganization described in §1.883–4(b)(4) is treated as a qualified shareholder. Section 1.883–4(b)(4)(iii)(A) requires a not-for-profit organization to expend more than 50 percent of its annual sup- port on behalf of individuals described in §1.883–4(b)(1)(i)(A). Commentators suggested that the cate- gory of recipients eligible for support be expanded to include other not-for-profit organizations. This suggestion has been adopted in part. The final regulations pro- vide that a not-for-profit organization may be a qualified shareholder if it expends more than 50 percent of its annual support on behalf of U.S. organizations that have received determination letters under sec- tion 501(c)(3) and on behalf of individuals described in §1.883–4(b)(1)(i)(A). Commentators asked that the list of qualified shareholders in §1.883–4(b)(1)(i) be expanded to include international organizations as defined in section 7701(a)(18), and pension funds established for employees of such orga- nizations. The final regulations do not adopt this suggestion. Under section 883(c)(1) and §1.883–4(a), a foreign cor- poration satisfies the stock ownership test if more than 50 percent of the value of its outstanding shares is owned by qualified shareholders who are residents of qualified foreign countries. The remaining shares of the foreign corporation can be owned by nonqualified shareholders, including international organizations. Section 1.883–4(b)(1)(ii) of the pro- posed regulations provides that a share- holder is a qualified shareholder only if the shareholder does not own its interest in the foreign corporation through bearer shares, either directly or by applying the attribu- tion rules of §1.883–4(c). Commentators renewedtheirobjectiontothisrule. The final regulations retain this provision due to the difficulty of reliably demonstrating the true ownership of bearer shares. B.Substantiation of stock ownership Section 1.883–4(b)(1)(iii) of the pro- posed regulations provides that a share- holder is a qualified shareholder only if the shareholder provides to the foreign corporation the documentation required in §1.883–4(d), and the foreign corpora- tion meets the reporting requirements of §1.883–4(e) with respect to such share- holder. Commentators argued that the required reporting requirements are bur- densome, and suggested that taxpayers have the option of submitting a sworn statement with theirreturn stating that qualified individuals own the corporation and that supporting documentation has been deposited with a qualified tax prac- titioner in the United States. The final October 14, 20037862003-41 I.R.B. regulations do not adopt this suggestion. The IRS and Treasury continue to be- lieve that this information is necessary for proper administration of section 883 and that the provision of this information with the foreign corporation’s tax return is not unduly burdensome. Special Analyses It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that the collection of information in these reg- ulations will not have a significant eco- nomic impact on a substantial number of U.S. small entities. This certification is based upon the fact that these regulations apply to foreign corporations and impose only a limited collection of information burden on shareholders of such corpora- tions, which in some cases may include U.S. small entities. Therefore, a Regula- tory Flexibility Analysis under the Regu- latory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these reg- ulations was submitted to the Chief Coun- sel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal author of these final reg- ulations is David L. Lundy of the Office of Associate Chief Counsel (International ). However, other personnel from the IRS and Treasury Department participat ed in their development. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in nu- merical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.883–1 is also issued under 26 U.S.C. 883. Section 1.883–2 is also issued under 26 U.S.C. 883. Section 1.883–3 is also issued under 26 U.S.C. 883. Section 1.883–4 is also issued under 26 U.S.C. 883. Section 1.883–5 is also issued under 26 U.S.C. 883. * * * Par. 2. Section 1.883–0 is added to read as follows: §1.883–0 Outline of major topics. This section lists the major paragraphs contained in §§1.883–1 through 1.883–5. §1.883–1 Exclusion of income from the international operation of ships or aircraft. (a) General rule. (b) Qualified income. (c) Qualified foreign corporation. (1) General rule. (2) Stock ownership test. (3) Substantiation and reporting require- ments. (i) General rule. (ii) Further documentation. (4) Commissioner’s discretion to cure de- fects in documentation. (d) Qualified foreign country. (e) Operation of ships or aircraft. (1) General rule. (2) Pool, partnership, strategic alliance, joint operating agreement, code-sharing arrangement or other joint venture. (3) Activities not considered operation of ships or aircraft. (4) Examples. (5) Definitions. (i) Bareboat charter. (ii) Code-sharing arrangement. (iii) Dry lease. (iv) Entity. (v) Fiscally transparent entity under the in- come tax laws of the United States. (vi) Full charter. (vii) Nonvessel operating common carrier. (viii) Space or slot charter. (ix) Time charter. (x) Voyage charter. (xi) Wet lease. (f) International operation of ships or air- craft. (1) General rule. (2) Determining whether income is derived from international operation of ships or aircraft. (i) International carriage of passengers. (A) General rule. (B) Round trip travel on ships. (ii) International carriage of cargo. (iii) Bareboat charter of ships or dry lease of aircraft used in international operation of ships or aircraft. (iv) Charter of ships or aircraft for hire. (g) Activities incidental to the international operation of ships or aircraft. (1) General rule. (2) Activities not considered incidental to the international operation of ships or air- craft. (3) Services. (i) Ground services, maintenance, and catering. (ii) Other services. (4) Activities involved in a pool, partner- ship, strategic alliance, joint operating agreement, code-sharing arrangement or other joint venture. (h) Equivalent exemption. (1) General rule. (2) Determining equivalent exemptions for each category of income. (3) Special rules with respect to income tax conventions. (i) General rule. (ii) Participation in certain joint ventures. (iii) Independent interpretation of income tax conventions. (4) Exemptions not qualifying as equiva- lent exemptions. (i) General rule. (ii) Reduced tax rate or time limited ex- emption. (iii) Inbound or outbound freight tax. (iv) Exemptions for limited types of cargo. (v) Territorial tax systems. (vi) Countries that tax on a residence basis. (vii) Exemptions within categories of in- come. (i) Treatment of possessions. (j) Expenses related to qualified income. §1.883–2 Treatment of publicly-traded corporations. (a) General rule. (b) Established securities market. (1) General rule. (2) Exchanges with multiple tiers. (3) Computation of dollar value of stock traded. (4) Over-the-counter market. 2003-41 I.R.B.787October 14, 2003 (5) Discretion to determine that an ex- change does not qualify as an established securities market. (c) Primarily traded. (d) Regularly traded. (1) General rule. (2) Classes of stock traded on a domes- tic established securities market treated as meeting trading requirements. (3) Closely-held classes of stock not treated as meeting trading requirements. (i) General rule. (ii) Exception. (iii) Five-percent shareholders. (A) Related persons. (B) Investment companies. (4) Anti-abuse rule. (5) Example. (e) Substantiation that a foreign corpora- tion is publicly traded. (1) General rule. (2) Availability and retention of documents for inspection. (f) Reporting requirements. §1.883–3 Treatment of controlled foreign corporations. (a) General rule. (b) Income inclusion test. (1) General rule. (2) Examples. (c) Substantiation of CFC stock owner- ship. (1) General rule. (2) Documentation from certain United States shareholders. (i) General rule. (ii) Availability and retention of docu- ments for inspection. (d) Reporting requirements. §1.883–4 Qualified shareholder stock ownership test. (a) General rule. (b) Qualified shareholder. (1) General rule. (2) Residence of individual shareholders. (i) General rule. (ii) Tax home. (3) Certain income tax convention restric- tions applied to shareholders. (4) Not-for-profit organizations. (5) Pension funds. (i) Pension fund defined. (ii) Government pension funds. (iii) Nongovernment pension funds. (iv) Beneficiary of a pension fund. (c) Rules for determining constructive ownership. (1) General rules for attribution. (2) Partnerships. (i) General rule. (ii) Partners resident in the same country. (iii) Examples. (3) Trusts and estates. (i) Beneficiaries. (ii) Grantor trusts. (4) Corporations that issue stock. (5) Taxable nonstock corporations. (6) Mutual insurance companies and simi- lar entities. (7) Computation of beneficial interests in nongovernment pension funds. (d) Substantiation of stock ownership. (1) General rule. (2) Application of general rule. (i) Ownership statements. (ii) Three-year period of validity. (3) Special rules. (i) Substantiating residence of certain shareholders. (ii) Special rule for registered shareholders owning less than one percent of widely- held corporations. (iii) Special rule for beneficiaries of pen- sion funds. (A) Government pension fund. (B) Nongovernment pension fund. (iv) Special rule for stock owned by pub- licly-traded corporations. (v) Special rule for not-for-profit organiza- tions. (vi) Special rule for a foreign airline cov- ered by an air services agreement. (vii) Special rule for taxable nonstock cor- porations. (viii) Special rule for closely-held corpo- rations traded in the United States. (4) Ownership statements from sharehold- ers. (i) Ownership statements from individuals. (ii) Ownership statements from foreign governments. (iii) Ownership statements from publicly- traded corporate shareholders. (iv) Ownership statements from not-for- profit organizations. (v) Ownership statements from intermedi- aries. (A) General rule. (B) Ownership statements from widely- held intermediaries with registered share- holders owning less than one percent of such widely-held intermediary. (C) Ownership statements from pension funds. (1) Ownership statements from govern- ment pension funds. (2) Ownership statements from non- government pension funds. (3) Time for making determinations. (D) Ownership statements from taxable nonstock corporations. (5) Availability and retention of documents for inspection. (e) Reporting requirements. §1.883–5 Effective dates. (a) General rule. (b) Election for retroactive application. (c) Transitional information reporting rule. Par. 3. §1.883–1 is revised to read as follows: §1.883–1 Exclusion of income from the international operation of ships or aircraft. (a)General rule. Qualified income de- rived by a qualified foreign corporation from its international operation of ships or aircraft is excluded from gross income and exempt from United States federal income tax. Paragraph (b) of this section defines the termqualified income. Paragraph (c) of this section defines the termqualified foreign corporation. Paragraph (f) of this section defines the terminternational op- eration of ships or aircraft. (b)Qualified income. Qualified income is income derived from the international operation of ships or aircraft that— (1) Is properly includible in any of the income categories described in paragraph (h)(2) of this section; and (2) Is the subject of an equivalent ex- emption, as defined in paragraph (h) of this section, granted by the qualified foreign country, as defined in paragraph (d) of this section, in which the foreign corporation seeking qualified foreign corporation sta- tus is organized. (c)Qualified foreign corporation—(1) General rule. A qualified foreign corpo- ration is a corporation that is organized in a qualified foreign country and considered engaged in the international operation of ships or aircraft. The termcorporationis defined in section 7701(a)(3) and the reg- ulations thereunder. Paragraph (d) of this section defines the termqualified foreign October 14, 20037882003-41 I.R.B. country. Paragraph (e) of this section de- fines the termoperation of ships or air- craft, and paragraph (f) of this section de- fines the terminternational operation of ships or aircraft. To be a qualified for- eign corporation, the corporation must sat- isfy the stock ownership test of paragraph (c)(2) of this section and satisfy the sub- stantiation and reporting requirements de- scribed in paragraph (c)(3) of this section. A corporation may be a qualified foreign corporation with respect to one category of qualified income but not with respect to an- other such category. See paragraph (h)(2) of this section for a discussion of the cate- gories of qualified income. (2)Stock ownership test. To be a qual- ified foreign corporation, a foreign cor- poration must satisfy the publicly-traded test of §1.883–2(a), the CFC stock own- ership test of §1.883–3(a), or the quali- fied shareholder stock ownership test of §1.883–4(a). (3)Substantiation and reporting re- quirements—(i)General rule.Tobea qualified foreign corporation, a foreign corporation must include the following information in its Form 1120–F, “U.S. Income Tax Return of a Foreign Corpo- ration,” in the manner prescribed by such form and its accompanying instructions— (A) The corporation’s name and ad- dress (including mailing code); (B) The corporation’s U.S. taxpayer identification number; (C) The foreign country in which the corporation is organized; (D) The applicable authority for an equivalent exemption, for example, ci- tation of a statute in the country where the corporation is organized, a diplomatic note between the United States and such country, (for further guidance, see Rev. Rul. 2001–48, 2001–2 C.B. 324 (see §601.601(d)(2) of this chapter)), or, in the case of a corporation described in para- graph (h)(3)(ii) of this section, an income tax convention between the United States and such country; (E) The category or categories of quali- fied income for which an exemption is be- ing claimed; (F) A reasonable estimate of the gross amount of income in each category of qual- ified income for which the exemption is claimed, to the extent such amounts are readily determinable; (G) Any other information required under §1.883–2(f), 1.883–3(d), or 1.883–4(e), as applicable; and (H) Any other relevant information specified by the Form 1120–F and its accompanying instructions. (ii)Further documentation.Ifthe Commissioner requests in writing that the foreign corporation document or sub- stantiate representations made under para- graph (c)(3)(i) of this section, or under §1.883–2(f), 1.883–3(d) or 1.883–4(e), the foreign corporation must provide the documentation or substantiation within 60 days following the written request. If the foreign corporation does not provide the documentation and substantiation requested within the 60-day period, but demonstrates that the failure was due to reasonable cause and not willful neglect, the Commissioner may grant the foreign corporation a 30-day extension to pro- vide the documentation or substantiation. Whether a failure to obtain the docu- mentation or substantiation in a timely manner was due to reasonable cause and not willful neglect shall be determined by the Commissioner after considering all the facts and circumstances. (4)Commissioner’s discretion to cure defects in documentation.TheCommis- sioner retains the discretion to cure any de- fects in the documentation where the Com- missioner is satisfied that the foreign cor- poration would otherwise be a qualified foreign corporation. (d)Qualified foreign country. A qual- ified foreign country is a foreign country that grants to corporations organized in the United States an equivalent exemption, as described in paragraph (h) of this section, for the category of qualified income, as de- scribed in paragraph (h)(2) of this section, derivedbytheforeigncorporationseek- ing qualified foreign corporation status. A foreign country may be a qualified foreign country with respect to one category of qualified income but not with respect to an- other such category. (e)Operation of ships or aircraft—(1) General rule. Except as provided in para- graph (e)(2) of this section, a foreign cor- poration is considered engaged in the op- eration of ships or aircraft only during the time it is an owner or lessee of one or more entire ships or aircraft and uses such ships or aircraft in one or more of the following activities— (i) Carriage of passengers or cargo for hire; (ii) In the case of a ship, the leasing out of the ship under a time or voyage char- ter (full charter), space or slot charter, or bareboat charter, as those terms are defined in paragraph (e)(5) of this section, pro- vided the ship is used to carry passengers or cargo for hire; and (iii) In the case of aircraft, the leasing out of the aircraft under a wet lease (full charter), space, slot, or block-seat charter, or dry lease, as those terms are defined in paragraph (e)(5) of this section, provided the aircraft is used to carry passengers or cargo for hire. (2)Pool, partnership, strategic al- liance, joint operating agreement, code-sharing arrangement or other joint venture. A foreign corporation is consid- ered engaged in the operation of ships or aircraft within the meaning of paragraph (e)(1) of this section with respect to its participation in a pool, partnership, strate- gic alliance, joint operating agreement, code-sharing arrangement or other joint venture if it directly, or indirectly through one or more fiscally transparent entities under the income tax laws of the United States, as defined in paragraph (e)(5)(v) of this section— (i) Owns an interest in a partnership, disregarded entity, or other fiscally trans- parent entity under the income tax laws of the United States that itself would be con- sidered engaged in the operation of ships or aircraft under paragraph (e)(1) of this section if it were a foreign corporation; or (ii) Participates in a pool, strategic al- liance, joint operating agreement, code- sharing arrangement, or other joint venture that is not an entity, as defined in para- graph (e)(5)(iv) of this section, involving one or more activities described in para- graphs (e)(1)(i) through (iii) of this section, but only if— (A) In the case of a direct interest, the foreign corporation is otherwise engaged in the operation of ships or aircraft under paragraph (e)(1) of this section; or (B) In the case of an indirect interest, either the foreign corporation is otherwise engaged, or one of the fiscally transparent entities would be considered engaged if it were a foreign corporation, in the opera- tion of ships or aircraft under paragraph (e)(1) of this section. 2003-41 I.R.B.789October 14, 2003 (3)Activities not considered operation of ships or aircraft. Activities that do not constitute operation of ships or aircraft in- clude, but are not limited to— (i) The activities of a nonvessel oper- ating common carrier, as defined in para- graph (e)(5)(vii) of this section; (ii) Ship or aircraft management; (iii) Obtaining crews for ships or air- craft operated by another party; (iv) Acting as a ship’s agent; (v) Ship or aircraft brokering; (vi) Freight forwarding; (vii) The activities of travel agents and tour operators; (viii) Rental by a container leasing com- pany of containers and related equipment; and (ix) The activities of a concessionaire. (4)Examples. The rules of paragraphs (e)(1) through (3) of this section are illus- trated by the following examples: Example 1.Three tiers of charters—(i)Facts.A, B, and C are foreign corporations. A purchases a ship. A and B enter into a bareboat charter of the shipforatermof20years,andB,inturn,enters into a time charter of the ship with C for a term of 5 years. Under the time charter, B is responsible for the complete operation of the ship, including providing the crew and maintenance. C uses the ship during th e term of the time charter to carry its customers’ freight between U.S. and foreign ports. C owns no ships. (ii)Analysis. Because A is the owner of the entire ship and leases out the ship under a bareboat charter to B, and because the sublessor, C, uses the ship to carry cargo for hire, A is considered engage dinthe operation of a ship under paragraph (e)(1) of this sec- tion during the term of the time charter. B leases in theentireshipfromAandleasesoutthesh ip under a time charter to C, who uses the ship to carry cargo for hire. Therefore, B is considered engaged in the operation of a ship under paragraph (e)( 1) of this sec- tion during the term of the time charter. C time char- ters the entire ship from B and uses the ship to carry its customers’ freight during the t erm of the charter. Therefore, C is also engaged in the operation of a ship under paragraph (e)(1) of this section during the term of the time charter. Example 2.Partnership with contributed ship- ping assets—(i)Facts. X, Y, and Z, each a foreign corporation, enter into a partne rship, P. P is a fiscally transparent entity under the income tax laws of the United States, as defined in paragraph (e)(5)(v) of this section. Under the terms of t he partnership agree- ment, each partner contributes all of the ships in its fleet to P in exchange for interests in the partnership andsharesinthePprofitsf rom the international car- riage of cargo. The partners share in the overall man- agement of P, but each partner, acting in its capacity as partner, continues to c rew and manage all ships pre- viously in its fleet. (ii)Analysis. P owns the ships contributed by the partners and uses these ships to carry cargo for hire. Therefore, if P were a foreign corporation, it would be considered engaged in the operation of ships within the meaning of paragraph (e)(1) of this section. Ac- cordingly, because P is a fiscally transparent entity under the income tax laws of the United States, as defined in paragraph (e)(5)(v) of this section, X, Y, and Z are each considered engaged in the operation of ships through P, within the meaning of paragraph (e)(2)(i) of this section, with respect to their distribu- tive share of income from P’s international carriage of cargo. Example 3.Joint venture with chartered in ships—(i)Facts. Foreign corporation A owns a number of foreign subsidiaries involved in various aspects of the shipping business, including S1, S2, S3, and S4. S4 is a foreign corporation that provides cruises but does not own any ships. S1, S2, and S3 are foreign corporations that own cruise ships. S1, S2, S3, and S4 form joint venture JV, in which they are all interest holders, to conduct cruises. JV is a fiscally transparent entity under the income tax laws of the United States, as defined in paragraph (e)(5)(v)ofthissection.Underthetermsofthejoi nt venture, S1, S2, and S3 each enter into time charter agreements with JV, pursuant to which S1, S2, and S3 retain control of the navigation and managemen t of the individual ships, and JV will use the ships to carry passengers for hire. The overall management of the cruise line will be provided by S4. (ii)Analysis. S1, S2, and S3 each owns ships and time charters those ships to JV, which uses the ships to carry passengers for hire. Accordingl y, S1, S2, and S3 are each considered engaged in the operation of ships under paragraph (e)(1) of this section. JV leases in entire ships by means of the time c harters, and JV uses those ships to carry passengers on cruises. Thus, JV would be engaged in the operation of ships within the meaning of paragraph (e)(1) o f this section if it were a foreign corporation. Therefore, although S4 does not directly own or lease in a ship, S4 also is engaged in the operation of shi ps,withinthemeaning of paragraph (e)(2)(i) of this section, with respect to its participation in JV. Example 4.Tiered partnersh ips—(i)Facts. For- eign corporations A, B, and C enter into a partnership, P1. P1 is one of several shareholders of Poolco, a for- eign limited liability co mpany that makes an election pursuant to §301.7701–3 of this chapter to be treated as a partnership for U.S. tax purposes. P1 acquires several ships and time charters them out to Poolco. Poolco slot or voyage charters such ships out to third parties for use in the carriage of cargo for hire. P1 andPoolcoarefiscal ly transparent entities under the income tax laws of the United States, as defined in paragraph (e)(5)(v) of this section. (ii)Analysis.A,B, and C are considered engaged in the operation of ships under paragraph (e)(2)(i) of this section with respect to their direct interest in P1 and with respect t o their indirect interest in Poolco be- cause both P1 and Poolco are fiscally transparent en- tities under the income tax laws of the United States and would be con sidered engaged in the operation of ships under paragraph (e)(1) of this section if they were foreign corporations. The result would be the same if Poolc o were a single-member disregarded en- tity owned solely by P1. (5)Definitions—(i)Bareboat charter. A bareboat charter is a contract for the use of a ship or aircraft whereby the lessee is in complete possession, control, and com- mand of the ship or aircraft. For example, in a bareboat charter, the lessee is respon- sible for the navigation and management of the ship or aircraft, the crew, supplies, repairs and maintenance, fees, insurance, charges, commissions and other expenses connected with the use of the ship or air- craft. The lessor of the ship bears none of the expense or responsibility of operation of the ship or aircraft. (ii)Code-sharing arrangement.A code-sharing arrangement is an arrange- ment in which one air carrier puts its identification code on the flight of another carrier. This arrangement allows the first carrier to hold itself out as providing ser- vice in markets where it does not otherwise operate or where it operates infrequently. Code-sharing arrangements can range from a very limited agreement between two carriers involving only one market to agreements involving multiple markets and alliances between or among interna- tional carriers whichalso include joint marketing, baggage handling, one-stop check-in service, sharing of frequent flyer awards, and other services. For rules in- volving the sale of code-sharing tickets, see paragraph (g)(1)(vi) of this section. (iii)Dry lease. A dry lease is the bare- boat charter of an aircraft. (iv)Entity. For purposes of this para- graph (e), an entity is any person that is treated by the United States as other than an individual for U.S. federal income tax purposes. The term includes disregarded entities. (v)Fiscally transparent entity under the income tax laws of the United States. For purposes of this paragraph (e), an entity is fiscally transparent under the income tax laws of the United States if the entity would be considered fiscally transparent under the income tax laws of the United States under the principles of §1.894–1(d)(3). (vi)Full charter. Full charter (or full rental) means a time charter or a voyage charter of a ship or a wet lease of an aircraft but during which the full crew and man- agement are provided by the lessor. (vii)Nonvessel operating common car- rier. A nonvessel operating common car- rier is an entity that does not exercise con- trol over any part of a vessel, but holds it- self out to the public as providing trans- portation for hire, issues bills of lading, October 14, 20037902003-41 I.R.B. assumes responsibility or is liable by law as a common carrier for safe transporta- tion of shipments, and arranges in its own name with other common carriers, includ- ing those engaged in the operation of ships, for the performance of such transportation. (viii)Space or slot charter. A space or slot charter is a contract for use of a certain amount of space (but less than all of the space) on a ship or aircraft, and may be on a time or voyage basis. When used in connection with passenger aircraft this sort of charter may be referred to as the sale of block seats. (ix)Time charter. A time charter is a contract for the use of a ship or aircraft for a specific period of time, during which the lessor of the ship or aircraft retains control of the navigation and management of the ship or aircraft (i.e., the lessor continues to be responsible for the crew, supplies, re- pairs and maintenance, fees and insurance, charges, commissions and other expenses connected with the use of the ship or air- craft). (x)Voyage charter. A voyage charter is a contract similar to a time charter except that the ship or aircraft is chartered for a specific voyage or flight rather than for a specific period of time. (xi)Wet lease. A wet lease is the time or voyage charter of an aircraft. (f)International operation of ships or aircraft—(1)General rule.Thetermin- ternational operation of ships or aircraft means the operation of ships or aircraft, as defined in paragraph (e) of this section, with respect to the carriage of passengers or cargo on voyages or flights that begin or end in the United States, as determined under paragraph (f)(2) of this section. The term does not include the carriage of pas- sengers or cargo on a voyage or flight that begins and ends in the United States, even if the voyage or flight contains a segment extending beyond the territorial limits of the United States, unless the passenger dis- embarks or the cargo is unloaded outside the United States. Operation of ships or aircraft beyond the territorial limits of the United States does not constitute in itself international operation of ships or aircraft. (2)Determining whether income is de- rived from international operation of ships or aircraft. Whether income is derived from international operation of ships or aircraft is determined on a passenger by passenger basis (as provided in paragraph (f)(2)(i) of this section) and on an item-of- cargo by item-of-cargo basis (as provided in paragraph (f)(2)(ii) of this section). In the case of the bareboat charter of a ship or the dry lease of an aircraft, whether the charter income for a particular period is de- rived from international operation of ships or aircraft is determined by reference to how the ship or aircraft is used by the low- est-tier lessee in the chain of lessees (as provided in paragraph (f)(2)(iii) of this sec- tion). (i)International carriage of passen- gers—(A)General rule. Except in the case of a round trip described in paragraph (f)(2)(i)(B) of this section, income derived from the carriage of a passenger will be income from international operation of ships or aircraft if the passenger is carried between a beginning point in the United States and an ending point outside the United States, or vice versa. Carriage of a passenger will be treated as ending at the passenger’s final destination even if, en route to the passenger’s final destina- tion, a stop is made at an intermediate point for refueling, maintenance, or other business reasons, provided the passenger does not change ships or aircraft at the intermediate point. Similarly, carriage of a passenger will be treated as beginning at the passenger’s point of origin even if, en route to the passenger’s final destination, a stop is made at an intermediate point, provided the passenger does not change ships or aircraft at the intermediate point. Carriage of a passenger will be treated as beginning or ending at a U.S. or foreign in- termediate point if the passenger changes ships or aircraft at that intermediate point. Income derived from the sale of a ticket for international carriage of a passenger will be treated as income derived from international operation of ships or aircraft even if the passenger does not begin or complete an international journey because of unanticipated circumstances. (B)Round trip travel on ships.Inthe case of income from the carriage of a pas- senger on a ship that begins its voyage in the United States, calls on one or more for- eign intermediate ports, and returns to the same or another U.S. port, such income from carriage of a passenger on the en- tire voyage will be treated as income de- rived from international operation of ships or aircraft under paragraph (f)(2)(i)(A) of this section. This result obtains even if such carriage includes one or more inter- mediate stops at a U.S. port or ports and even if the passenger does not disembark at the foreign intermediate point. (ii)International carriage of cargo.In- come from the carriage of cargo will be income derived from international oper- ation of ships or aircraft if the cargo is carried between a beginning point in the United States and an ending point outside the United States, or vice versa. Carriage of cargo will be treated as ending at the final destination of the cargo even if, en route to that final destination, a stop is made at a U.S. intermediate point, pro- vided the cargo is transported to its ulti- mate destination on the same ship or air- craft. If the cargo is transferred to another ship or aircraft, the carriage of the cargo may nevertheless be treated as ending at its final destination, if the same taxpayer transports the cargo to and from the U.S. intermediate point and the cargo does not pass through customs at the U.S. interme- diate point. Similarly, carriage of cargo will be treated as beginning at the cargo’s point of origin, even if en route to its fi- nal destination a stop is made at a U.S. intermediate point, provided the cargo is transported to its ultimate destination on the same ship or aircraft. If the cargo is transferred to another ship or aircraft at the U.S. intermediate point, the carriage of the cargo may nevertheless be treated as be- ginning at the point of origin, if the same taxpayer transports the cargo to and from the U.S. intermediate point and the cargo does not pass through customs at the U.S. intermediate point. Repackaging, recon- tainerization, or any other activity involv- ing the unloading of the cargo at the U.S. intermediate point does not change these results, provided the same taxpayer trans- ports the cargo to and from the U.S. inter- mediate point and the cargo does not pass through customs at the U.S. intermediate point. A lighter vessel that carries cargo to, or picks up cargo from, a vessel located beyond the territorial limits of the United States and correspondingly loads or un- loads that cargo at a U.S. port, carries cargo between a point in the United States and a point outside the United States. How- ever, a lighter vessel that carries cargo to, or picks up cargo from, a vessel located within the territorial limits of the United 2003-41 I.R.B.791October 14, 2003 States, and correspondingly loads or un- loads that cargo at a U.S. port, is not en- gaged in international operation of ships or aircraft. Income from the carriage of mil- itary cargo on a voyage that begins in the United States, stops at a foreign interme- diate port or a military prepositioning lo- cation, and returns to the same or another U.S. port without unloading its cargo at the foreign intermediate point, will never- theless be treated as derived from interna- tional operation of ships or aircraft. (iii)Bareboat charter of ships or dry lease of aircraft used in international op- eration of ships or aircraft.Ifaquali- fied foreign corporation bareboat charters a ship or dry leases an aircraft to a lessee, and the lowest tier lessee in the chain of ownership uses such ship or aircraft for the international carriage of passengers or cargo for hire, as described in paragraphs (f)(2)(i) and (ii) of this section, then the amount of charter income attributable to the period the ship or aircraft is used by thelowesttierlesseeisincomefromin- ternational operation of ships or aircraft. The foreign corporation generally must de- termine the amount of the charter income that is attributable to such international op- eration of ships or aircraft by multiplying the amount of charter income by a fraction, the numerator of which is the total number of days of uninterrupted travel on voyages or flights of such ship or aircraft between the United States and the farthest point or points where cargo or passengers are loaded en route to, or discharged en route from, the United States during the smaller of the taxable year or the particular char- ter period, and the denominator of which is the total number of days in the smaller of the taxable year or the particular char- ter period. For this purpose, the number of days during which the ship or aircraft is not generating transportation income, within the meaning of section 863(c)(2), are not included in the numerator or denominator of the fraction. However, the foreign cor- poration may adopt an alternative method for determining the amount of the charter income that is attributable to the interna- tional operation of ships or aircraft if it can establish that the alternative method more accurately reflects the amount of such in- come. (iv)Charter of ships or aircraft for hire. For purposes of this section, if a foreign corporation time, voyage, or bare- boat charters out a ship or aircraft, and the lowest-tier lessee uses the ship or aircraft to carry passengers or cargo on a fee basis, the ship or aircraft is considered used to carry passengers or cargo for hire, regardless of whether the ship or aircraft may be empty during a portion of the charter period due to a backhaul voyage or flight or for purposes of repositioning. If a foreign corporation time, voyage, or bareboat charters out a ship or aircraft, and the lowest-tier lessee uses the ship or aircraft for the carriage of proprietary goods, including an empty backhaul voy- age or flight or repositioning related to such carriage of proprietary goods, the ship or aircraft similarly will be treated as used to carry cargo for hire. (g)Activities incidental to the interna- tional operation of ships or aircraft—(1) General rule. Certain activities of a for- eign corporation engaged in the interna- tional operation of ships or aircraft are so closely related to the international opera- tion of ships or aircraft that they are con- sidered incidental to such operation, and income derived by the foreign corporation from its performance of these incidental activities is deemed to be income derived from the international operation of ships or aircraft. Examples of such activities in- clude— (i) Temporary investment of working capital funds to be used in the international operation of ships or aircraft by the foreign corporation; (ii) Sale of tickets by the foreign cor- poration engaged in the international op- eration of ships for the international car- riage of passengers by ship on behalf of another corporation engaged in the inter- national operation of ships; (iii) Sale of tickets by the foreign cor- poration engaged in the international oper- ation of aircraft for the international car- riage of passengers by air on behalf of an- other corporation engaged in the interna- tional operation of aircraft; (iv) Contracting with concessionaires for performance of services onboard dur- ing the international operation of the for- eign corporation’s ships or aircraft; (v) Providing (either by subcontract- ing or otherwise) for the carriage of cargo preceding or following the international carriage of cargo under a through bill of lading, airway bill or similar document through a related corporation or through an unrelated person (and the rules of section 267(b) shall apply for purposes of deter- mining whether a corporation or other per- son is related to the foreign corporation); (vi) To the extent not described in para- graph (g)(1)(iii) of this section, the sale or issuance by the foreign corporation en- gaged in the international operation of air- craft of intraline, interline, or code-sharing tickets for the carriage of persons by air be- tween a U.S. gateway and another U.S. city preceding or following international car- riage of passengers, provided that all such flight segments are provided pursuant to the passenger’s original invoice, ticket or itinerary and in the case of intraline tickets are a part of uninterrupted international air transportation (within the meaning of sec- tion 4262(c)(3)); (vii) Arranging for port city hotel ac- commodations within the United States for a passenger for the one night before or after the international carriage of that passenger by the foreign corporation engaged in the international operation of ships; (viii) Bareboat charter of ships or dry lease of aircraft normally used by the foreign corporation in international op- eration of ships or aircraft but currently not needed, if the ship or aircraft is used by the lessee for international carriage of cargo or passengers; (ix) Arranging by means of a space or slot charter for the carriage of cargo listed on a bill of lading or airway bill or simi- lar document issued by the foreign corpo- ration on the ship or aircraft of another cor- poration engaged in the international oper- ation of ships or aircraft; and (x)Theprovisionofcontainersorother related equipment by the foreign corpora- tion in connection with the international carriage of cargo for use by its customers, including short-term use within the United States immediately preceding or following the international carriage of cargo (and for this purpose, a period of five days or less shall be presumed to be short-term). (2)Activities not considered incidental to the international operation of ships or aircraft. Examples of activities that are not considered incidental to the international operation of ships or aircraft include— (i) The sale of or arranging for train travel, bus transfers, single day shore ex- cursions, or land tour packages; October 14, 20037922003-41 I.R.B. (ii) Arranging for hotel accommoda- tions within the United States other than as provided in paragraph (g)(1)(vii) of this section; (iii) The sale of airline tickets or cruise tickets other than as provided in paragraph (g)(1)(ii), (iii), or (vi) of this section; (iv) The sale or rental of real property; (v) Treasury activities involving the in- vestment of excess funds or funds awaiting repatriation, even if derived from the inter- national operation of ships or aircraft; (vi) The carriage of passengers or cargo on ships or aircraft on domestic legs of transportation not treated as either interna- tional operation of ships or aircraft under paragraph (f) of this section or as an activ- ity that is incidental to such operation un- der paragraph (g)(1) of this section; (vii) The carriage of cargo by bus, truck or rail by a foreign corporation between a U.S. inland point and a U.S. gateway port or airport preceding or following the international carriage of such cargo by the foreign corporation; and (viii) The provision of containers or other related equipment by the foreign corporation within theUnited States other than as provided in paragraph (g)(1)(x) of this section, including warehousing. (3)Services—(i)Ground services, maintenance and catering.[Reserved] (ii)Other services.[Reserved] (4)Activities involved in a pool, part- nership, strategic alliance, joint operat- ing agreement, code-sharing arrangement or other joint venture. Notwithstanding paragraph (g)(1) of this section, an ac- tivity is considered incidental to the in- ternational operation of ships or aircraft by a foreign corporation, and income de- rived by the foreign corporation with re- spect to such activity is deemed to be in- come derived from the international oper- ation of ships or aircraft, if the activity is performedbyorpursuanttoapool,part- nership, strategic alliance, joint operating agreement, code-sharing arrangement or other joint venture in which such foreign corporation participates directly, or indi- rectly through a fiscally transparent entity under the income tax laws of the United States, provided that— (i) Such activity is incidental to the international operation of ships or aircraft by the pool, partnership, strategic alliance, joint operating agreement, code-sharing arrangement or other joint venture, and provided that it is described in paragraph (e)(2)(i) of this section; or (ii) Such activity would be incidental to the international operation of ships or air- craft by the foreign corporation, or fiscally transparent entity if it performed such ac- tivity itself, and provided the foreign cor- poration is engaged or the fiscally transpar- ent entity would be considered engaged if it were a foreign corporation in the oper- ation of ships or aircraft under paragraph (e)(1) of this section. (h)Equivalent exemption—(1)Gen- eral rule. A foreign country grants an equivalent exemption when it exempts from taxation income from the interna- tional operation of ships or aircraft derived by corporations organized in the United States. Whether a foreign country pro- vides an equivalent exemption must be determined separately with respect to each category of income, as provided in para- graph (h)(2) of this section. An equivalent exemption may be available for income derived from the international operation of ships even though income derived from the international operation of aircraft may not be exempt, and vice versa. For rules regarding foreign corporations orga- nized in countries that provide exemptions only through an income tax convention, see paragraph (h)(3) of this section. An equivalent exemption may exist where the foreign country— (i) Generally imposes no tax on income, including income from the international operation of ships or aircraft; (ii) Specifically provides a domestic law tax exemption for income derived from the international operation of ships or aircraft, either by statute, decree, or otherwise; or (iii) Exchanges diplomatic notes with the United States, or enters into an agree- ment with the United States, that provides for a reciprocal exemption for purposes of section 883. (2)Determining equivalent exemptions for each category of income.Whether a foreign country grants an equivalent exemption must be determined separately with respect to income from the inter- national operation of ships and income from the international operation of air- craft for each category of income listed in paragraphs (h)(2)(i) through (v), (vii), and (viii) of this section. If an exemption is unavailable in the foreign country for a particular category of income, the for- eign country is not considered to grant an equivalent exemption with respect to that category of income. Income in that category is not considered to be the subject of an equivalent exemption and, thus, is not eligible for exemption from income tax in the United States, even though the foreign country may grant an equivalent exemption for other categories of income. With respect to paragraph (h)(2)(vi) of this section, a foreign country may be consid- ered to grant an equivalent exemption for one or more types of income described in paragraph (g)(1) of this section. The following categories of income derived from the international operation of ships or aircraft may be exempt from United States income tax if an equivalent exemption is available— (i) Income from the carriage of passen- gers and cargo; (ii) Time or voyage (full) charter in- come of a ship or wet lease income of an aircraft; (iii) Bareboat charter income of a ship or dry charter income of an aircraft; (iv) Incidental bareboat charter income or incidental dry lease income; (v) Incidental container-related income; (vi) Income incidental to the interna- tional operation of ships or aircraft other than incidental income described in para- graphs (h)(2)(iv) and (v) of this section; (vii) Capital gains derived by a qualified foreign corporation engaged in the interna- tional operation of ships or aircraft from the sale, exchange or other disposition of a ship, aircraft, container or related equip- ment or other moveable property used by that qualified foreigncorporation in the in- ternational operation of ships or aircraft; and (viii) Income from participation in a pool, partnership, strategic alliance, joint operating agreement, code-shar- ing arrangement, international operating agency, or other joint venture described in paragraph (e)(2) of this section. (3)Special rules with respect to income tax conventions—(i)General rule.Ex- cept as provided in paragraph (h)(3)(ii) of this section, if a corporation is organized in a foreign country that provides an exemp- tion only through an income tax conven- tion with the United States, the foreign cor- poration is not organized in a foreign coun- try that grants an equivalent exemption. 2003-41 I.R.B.793October 14, 2003 Rather, the foreign corporation must sat- isfy the terms of that convention to receive a benefit under the convention, and the for- eign corporation may not claim an exemp- tion under section 883. If the corporation is organized in a foreign country that offers an exemption under an income tax conven- tion and also by some other means, such as by diplomatic note or domestic statutory law, the foreign corporation may choose annually whether to claim an exemption under section 883 based upon the equiv- alent exemption provided by such other means or under the income tax convention. However, if a corporation chooses to claim an exemption under an income tax conven- tion under the preceding sentence, it may simultaneously claim an exemption under section 883 with respect to any category of income listed in paragraphs (h)(2)(i) through (v), (vii), and (viii) of this sec- tion and to any type of income described in paragraph (h)(2)(vi) of this section, but only to the extent that such income also is exempt under the income tax convention. Anysuchchoicewillapplywithrespect to all qualified income of the corporation from the international operation of ships or aircraft and cannot be made separately with respect to different categories of such income. If a foreign corporation bases its claim for an exemption on section 883, the foreign corporation must satisfy all of the requirements of this section to qualify for an exemption from U.S. income tax. See §1.883–4(b)(3) for rules regarding satisfy- ing the ownership test of paragraph (c)(2) of this section using shareholders resident in a foreign country that offers an exemp- tion under an income tax convention. (ii)Participation in certain joint ven- tures. Notwithstanding paragraph (h)(3)(i) of this section, if a corporation is orga- nized in a foreign country that provides an exemption only through an income tax convention with the United States, the foreign corporation will be treated as organized in a foreign country that grants an equivalent exemption under section 883 with respect to a category of income derived through participation, directly or indirectly, in a pool, partnership, strate- gic alliance, joint operating agreement, code-sharing arrangement or other joint venture described in paragraph (e)(2) of this section, but only where treaty benefits would be available under the treaty but for the treatment of the pool, partnership, strategic alliance, joint operating agree- ment, code-sharing arrangement or other joint venture as not fiscally transparent with respect to that category of income under the income tax laws of the foreign country in which the foreign corporate interest holder is organized for purposes of §1.894–1(d)(3)(iii)(A). (iii)Independent interpretation of in- come tax conventions. Nothing in this section and §§1.883–2 through 1.883–5 affects the rights or obligations under any income tax convention. The definitions provided in this section and §§1.883–2 through 1.883–5 shall neither give mean- ing to similar terms used in income tax conventions nor provide guidance regard- ing the scope of any exemption provided by such conventions, unless an income tax convention that entered into force after August 26, 2003, or its legislative history explicitly refers to section 883 and guid- ance thereunder for its meaning. (4)Exemptions not qualifying as equiv- alent exemptions—(i)General rule.Cer- tain types of exemptions provided to cor- porations organized in the United States by foreign countries do not satisfy the equiv- alent exemption requirements of this sec- tion. Paragraphs (h)(4)(ii) through (vii) of this section provide descriptions of some of the types of exemptions that do not qual- ify as equivalent exemptions for purposes of this section. (ii)Reduced tax rate or time limited ex- emption. The exemption granted by the foreign country’s law or income tax con- vention must be a complete exemption. The exemption may not constitute merely a reduction to a nonzero rate of tax levied against the income of corporations orga- nized in the United States derived from the international operation of ships or aircraft or a temporary reduction to a zero rate of tax, such as in the case of a tax holiday. (iii)Inbound or outbound freight tax. With respect to the carriage of cargo, the foreign country must provide an exemp- tion from tax for income from transporting freight both inbound and outbound. For example, a foreign country that imposes tax only on outbound freight will not be treated as granting an equivalent exemp- tion for income from transporting freight inbound into that country. (iv)Exemptions for limited types of cargo. A foreign country must provide an exemption from tax for income from transporting all types of cargo. For exam- ple, if a foreign country were generally to impose tax on income from the inter- national carriage of cargo but were to provide a statutory exemption for income from transporting agricultural products, the foreign country would not be consid- ered to grant an equivalent exemption with respect to income from the international carriage of cargo, including agricultural products. (v)Territorial tax systems.Aforeign country with a territorial tax system will be treated as granting an equivalent exemp- tion if it treats all income derived from the international operation of ships or aircraft derivedbyaU.S.corporationasentirely foreign source and therefore not subject to tax, including income derived from a voy- age or flight that begins or ends in that for- eign country. (vi)Countries that tax on a residence basis. A foreign country that provides an equivalent exemption to corporations or- ganized in the United States but also im- poses a residence-based tax on certain cor- porations organized in the United States may nevertheless be considered to grant an equivalent exemption if the residence- basedtaxisimposedonlyonacorporation organized in the United States that main- tains its center of management and control or other comparable attributes in that for- eign country. If the residence-based tax is imposed on corporations organized in the United States and engaged in the interna- tional operation of ships or aircraft that are not managed and controlled in that foreign country, the foreign country shall not be treated as a qualified foreign country and shall not be considered to grant an equiva- lent exemption for purposes of this section. (vii)Exemptions within categories of income. With respect to paragraphs (h)(2)(i) through (v), (vii), and (viii) of this section, a foreign country must pro- vide an exemption from tax for all income in a category of income, as defined in para- graph (h)(2) of this section. For example, a country that exempts income from the bareboat charter of passenger aircraft but not the bareboat charter of cargo aircraft does not provide an equivalent exemption. However, an equivalent exemption may be available for income derived from the in- ternational operation of ships even though income derived from the international operation of aircraft may not be exempt, October 14, 20037942003-41 I.R.B. and vice versa. With respect to paragraph (h)(2)(vi) of this section, a foreign country may be considered to grant an equivalent exemption for one or more types of in- come described in paragraph (g)(1) of this section. (i)Treatment of possessions. For pur- poses of this section, a possession of the United States will be treated as a foreign country. A possession of the United States will be considered to grant an equivalent exemption and will be treated as a quali- fied foreign country if it applies a mirror system of taxation. If a possession does not apply a mirror system of taxation, the possession may nevertheless be a qualified foreign country if, for example, it provides for an equivalent exemption through its in- ternal law. A possession applies the mirror system of taxation if the U.S. Internal Rev- enue Code of 1986, as amended, applies in the possession with the name of the posses- sion used instead of “United States” where appropriate. (j)Expenses related to qualified in- come. If a qualified foreign corporation derives qualified income from the interna- tional operation of ships or aircraft as well as income that is not qualified income, and the nonqualified income is effectively connected with the conduct of a trade or business within the United States, the foreign corporation may not deduct from such nonqualified income any amount otherwise allowable as a deduction from qualified income, if that qualified income is excluded under this section. See section 265(a)(1). Par. 4. Sections 1.883–2 through 1.883–5 are added to read as follows: §1.883–2 Treatment of publicly-traded corporations. (a)General rule. A foreign corpora- tion satisfies the stock ownership test of §1.883–1(c)(2) if it is considered a pub- licly-traded corporation and satisfies the substantiation and reporting requirements of paragraphs (e) and (f) of this section. To be considered a publicly-traded corpo- ration, the stock of the foreign corpora- tion must be primarily traded and regularly traded, as defined in paragraphs (c) and (d) of this section, respectively, on one or more established securities markets, as defined in paragraph (b) of this section, in either the United States or any qualified foreign country. (b)Established securities market—(1) General rule. For purposes of this sec- tion, the termestablished securities market means, for any taxable year— (i) A foreign securities exchange that is officially recognized, sanctioned, or super- visedbyagovernmentalauthorityofthe qualified foreign country in which the mar- ket is located, and has an annual value of shares traded on the exchange exceeding $1 billion during each of the three calen- dar years immediately preceding the be- ginning of the taxable year; (ii) A national securities exchange that is registered under section 6 of the Securi- ties Act of 1934 (15 U.S.C. 78f); (iii) A United States over-the-counter market, as defined in paragraph (b)(4) of this section; (iv) Any exchange designated under a Limitation on Benefits article in a United States income tax convention; and (v) Any other exchange that the Secre- tary may designate by regulation or other- wise. (2)Exchanges with multiple tiers.Ifan exchange in a foreign country has more than one tier or market level on which stock may be separately listed or traded, each such tier shall be treated as a separate exchange. (3)Computation of dollar value of stock traded. For purposes of paragraph (b)(1)(i) of this section, the value in U.S. dollars of shares traded during a calendar year shall be determined on the basis of the dollar value of such shares traded as reported by the International Federation of Stock Ex- changes located in Paris, or, if not so re- ported,thenbyconvertingintoU.S.dollars the aggregate value in local currency of the shares traded using an exchange rate equal to the average of the spot rates on the last day of each month of the calendar year. (4)Over-the-counter market. An over- the-counter market is any market reflected by the existence of an interdealer quota- tion system. An interdealer quotation sys- tem is any system of general circulation to brokers and dealers that regularly dissemi- nates quotations of stocks and securities by identified brokers or dealers, other than by quotation sheets that are prepared and dis- tributed by a broker or dealer in the regu- lar course of business and that contain only quotations of such broker or dealer. (5)Discretion to determine that an ex- change does not qualify as an established securities market. The Commissioner may determine that a securities exchange that otherwise meets the requirements of para- graph (b) of this section does not qualify as an established securities market, if— (i) The exchange does not have ade- quate listing, financial disclosure, or trad- ing requirements (or does not adequately enforce such requirements); or (ii) There is not clear and convincing evidence that the exchange ensures the ac- tive trading of listed stocks. (c)Primarily traded. For purposes of this section, stock of a corporation is pri- marily traded in a country on one or more established securities markets, as defined in paragraph (b) of this section, if, with re- spect to each class of stock described in paragraph (d)(1)(i) of this section (relating to classes of stock relied on to meet the reg- ularly traded test)— (1) The number of shares in each such class that are traded during the taxable year on all established securities markets in that country exceeds (2) The number of shares in each such class that are traded during that year on established securities markets in any other single country. (d)Regularly traded—(1)General rule. For purposes of this section, stock of a cor- poration is regularly traded on one or more established securities markets, as defined in paragraph (b) of this section, if— (i) One or more classes of stock of the corporation that, in the aggregate, repre- sent more than 50 percent of the total com- bined voting power of all classes of stock of such corporation entitled to vote and of the total value of the stock of such corpo- ration are listed on such market or markets during the taxable year; and (ii) With respect to each class relied on to meet the more than 50 percent require- ment of paragraph (d)(1)(i) of this sec- tion— (A) Trades in each such class are ef- fected, other than inde minimisquantities, on such market or markets on at least 60 days during the taxable year (or 1/6 of the number of days in a short taxable year); and (B) The aggregate number of shares in each such class that are traded on such market or markets during the taxable year 2003-41 I.R.B.795October 14, 2003 are at least 10 percent of the average num- ber of shares outstanding in that class dur- ing the taxable year (or, in the case of a short taxable year, a percentage that equals at least 10 percent of the average number of shares outstanding in that class during the taxable year multiplied by the number of days in the short taxable year, divided by 365). (2)Classesofstocktradedonadomes- tic established securities market treated as meeting trading requirements. A class of stock that is traded during the taxable year on an established securities market located in the United States shall be considered to meet the trading requirements of para- graph (d)(1)(ii) of this section if the stock is regularly quoted by dealers making a market in the stock. A dealer makes a mar- ket in a stock only if the dealer regularly and actively offers to, and in fact does, pur- chase the stock from, and sell the stock to, customers who are not related persons (as defined in section 954(d)(3)) with respect to the dealer in the ordinary course of a trade or business. (3)Closely-held classes of stock not treated as meeting trading require- ments—(i)General rule. Except as provided in paragraph (d)(3)(ii) of this section, a class of stock of a foreign corporation that otherwise meets the re- quirements of paragraph (d)(1) or (2) of this section shall not be treated as meeting such requirements for a taxable year if, for more than half the number of days during the taxable year, one or more persons who own at least 5 percent of the vote and value of the outstanding shares of the class of stock, as determined under paragraph (d)(3)(iii) of this section (each a 5-percent shareholder), own, in the aggregate, 50 percent or more of the vote and value of the outstanding shares of the class of stock. If one or more 5-percent shareholders own, in the aggregate, 50 percent or more of the vote and value of the outstanding shares of the class of stock, such shares held by the 5-percent shareholders will constitute a closely-held block of stock. (ii)Exception. Paragraph (d)(3)(i) of this section shall not apply to a class of stock if the foreign corporation can es- tablish that qualified shareholders, as de- fined in §1.883–4(b), applying the attribu- tion rules of §1.883–4(c), own sufficient shares in the closely-held block of stock to preclude nonqualified shareholders in the closely-held block of stock from owning 50 percent or more of the total value of the class of stock of which the closely-held block is a part for more than half the num- ber of days during the taxable year. Any shares that are owned, after application of the attribution rules in §1.883–4(c), by a qualified shareholder shall not also be treated as owned by a nonqualified share- holder in the chain of ownership for pur- poses of the preceding sentence. A for- eign corporation must obtain the documen- tation described in §1.883–4(d) from the qualified shareholders relied upon to sat- isfy this exception. However, no person shall be treated for purposes of this para- graph (d)(3) as a qualified shareholder if such person holds an interest in the class of stock directly or indirectly through bearer shares. (iii)Five-percent shareholders—(A) Related persons. Solely for purposes of determining whether a person is a 5-per- cent shareholder, persons related within the meaning of section 267(b) shall be treated as one person. In determining whether two or more corporations are members of the same controlled group under section 267(b)(3), a person is con- sideredtoownstockowneddirectlyby such person, stock owned through the ap- plication of section 1563(e)(1), and stock owned through the application of section 267(c). In determining whether a corpo- ration is related to a partnership under section 267(b)(10), a person is considered to own the partnership interest owned di- rectly by such person and the partnership interest owned through the application of section 267(e)(3). (B)Investment companies.Forpur- poses of this paragraph (d)(3), an invest- ment company registered under the Invest- ment Company Act of 1940, as amended (54 Stat. 789), shall not be treated as a 5-percent shareholder. (4)Anti-abuse rule. Trades between or among related persons described in section 267(b), as modified by paragraph (d)(3)(iii) of this section, and trades con- ducted in order to meet the requirements of paragraph (d)(1) of this section shall be disregarded. A class of stock shall not be treated as meeting the trading require- ments of paragraph (d)(1) of this section if there is a pattern of trades conducted to meet the requirements of that paragraph. For example, trades between two persons that occur several times during the taxable year may be treated as an arrangement or a pattern of trades conducted to meet the trading requirements of paragraph (d)(1)(ii) of this section. (5)Example. The closely-held test in paragraph (d)(3) of this section is illus- trated by the following example: Example.Closely-held exception—(i)Facts.Xis a foreign corporation organized in a qualified foreign country and engaged in the international operation of ships. X has one class of stock, which is primarily traded on an established securities market in the qual- ified foreign country. The stock of X meets the reg- ularly traded requirements of paragraph (d)(1)(ii) of this section without regard to paragraph (d)(3)(i) of this section. A, B, C and D are four members of the corporation’s founding family who each own, during the entire taxable year, 25 percent of the stock of Hold Co, a company that issues registered shares. Hold Co, in turn, owns 60 percent of the stock of X during the entire taxable year. The remaining 40 percent of the stock of X is not owned by any 5-percent shareholder, as determined under paragraph (d)(3)(iii) of this sec- tion. A, B, and C are not residents of a qualif ied for- eign country, but D is a resident of a qualified foreign country. (ii)Analysis. Because Hold Co owns 60 perce nt of the stock of X for more than half the number of days during the taxable year, Hold Co is a 5-percent shareholder that owns 50 percent or mo re of the value of the stock of X. Thus, the shares owned by Hold Co constitute a closely-held block of stock. Under paragraph (d)(3)(i) of this sectio n, the stock of X will not be regularly traded within the meaning of para- graph (d)(1) of this section unless X can establish, under paragraph (d)(3)(ii) of th is section, that qual- ified shareholders within the closely-held block of stock own sufficient shares in the closely-held block of stock to preclude nonqual ified shareholders in the closely-held block of stock from owning 50 percent or more of the value of the outstanding shares in the class of stock for more than half t he number of days during the taxable year. A, B, and C are not qualified share- holders within the meaning of §1.883–4(b) because they are not residents of a qualified foreign country, but D is a resident of a qualified foreign country and therefore is a qualified shareholder. D owns 15 per- cent of the outstandi ng shares of X through Hold Co (25 percent x 60 percent = 15 percent) while A, B, and C in the aggregate own 45 percent of the out- standing shares of X through Hold Co. D, therefore, owns sufficient shares in the closely-held block of stock to preclude the nonqualified shareholders in the closely-held bl ockofstock,A,BandC,fromowning 50 percent or more of the value of the class of stock (60 percent - 15 percent = 45 percent) of which the closely-held block is a part. Provided that X obtains from D the documentation described in §1.883–4(d), X’s sole class of stock meets the exception in para- graph (d)(3) (ii) of this section and will not be dis- qualified from the regularly traded test by virtue of paragraph (d)(3)(i) of this section. (e)Substantiation that a foreign cor- poration is publicly traded—(1)General rule. A foreign corporation that relies October 14, 20037962003-41 I.R.B. on the publicly traded test of this sec- tion to meet the stock ownership test of §1.883–1(c)(2) must substantiate that the stock of the foreign corporation is primar- ily and regularly traded on one or more established securities markets, as that term is defined in paragraph (b) of this section. If one of the classes of stock on which the foreign corporation relies to meet this test is closely-held within the meaning of paragraph (d)(3)(i) of this section, the foreign corporation must obtain an own- ership statement described in §1.883–4(d) from each qualified shareholder and in- termediary that it relies upon to satisfy the exception to the closely-held test, but only to the extent such statement would be required if the foreign corporation were relying on the qualified shareholder stock ownership test of §1.883–4 with respect to those shares of stock. The foreign cor- poration must also maintain and provide to the Commissioner upon request a list of its shareholders of record and any other relevant information known to the foreign corporation supporting its entitlement to an exemption under this section. (2)Availability and retention of docu- ments for inspection. The documentation described in paragraph (e)(1) of this sec- tion must be retained by the corporation seeking qualified foreign corporation sta- tus until the expiration of the statute of limitations for the taxable year of the for- eign corporation to which the documenta- tion relates. Such documentation must be made available for inspection by the Com- missioner at such time and such place as the Commissioner may request in writing. (f)Reporting requirements. A for- eign corporation relying on this section to satisfy the stock ownership test of §1.883–1(c)(2) must provide the following information in addition to the information required in §1.883–1(c)(3) to be included in its Form 1120–F, “U.S. Income Tax Return of a Foreign Corporation,” for the taxable year. The information must be current as of the end of the corporation’s taxable year and must include the follow- ing— (1) The name of the country in which the stock is primarily traded; (2) The name of the established securi- ties market or markets on which the stock is listed; (3) A description of each class of stock relied upon to meet the requirements of paragraph (d) of this section, including the number of shares issued and outstanding as of the close of the taxable year; (4) For each class of stock relied upon to meet the requirements of paragraph (d) of this section, if one or more 5-percent share- holders, as defined in paragraph (d)(3)(i) of this section, own in the aggregate 50 percent or more of the vote and value of the outstanding shares of that class of stock for more than half the number of days during the taxable year— (i) The days during the taxable year of the corporation in which the stock was closely-held without regard to the excep- tion in paragraph (d)(3)(ii) of this section and the percentage of the vote and value of the class of stock that is owned by 5-per- cent shareholders during such days; (ii) For each qualified shareholder who owns or is treated as owning stock in the closely-held block upon whom the corpo- ration intends to rely to satisfy the excep- tion to the closely-held test of paragraph (d)(3)(ii) of this section— (A) The name of each such shareholder; (B) The percentage of the total value of the class of stock held by each such shareholder and the days during which the stock was held; (C) The address of record of each such shareholder; and (D) The country of residence of each such shareholder, determined under §1.883–4(b)(2) (residence of individual shareholders) or §1.883–4(d)(3) (special rules for residence of certain sharehold- ers); and (5) Any other relevant information specified by Form 1120–F and its accom- panying instructions. §1.883–3 Treatment of controlled foreign corporations. (a)General rule. A foreign corpora- tion satisfies the stock ownership test of §1.883–1(c)(2) if it is a controlled foreign corporation (CFC), as defined in section 957(a), and satisfies the income inclusion test in paragraph (b) of this section and the substantiation and reporting require- ments of paragraphs (c) and (d) of this sec- tion, respectively. A CFC that fails the income inclusion test of paragraph (b) of this section will not be a qualified foreign corporation unless it meets either the pub- licly traded test of §1.883–2(a) or the qual- ified shareholder stock ownership test of §1.883–4(a). (b)Income inclusion test—(1)General rule. A CFC shall not be considered to sat- isfy the requirements of paragraph (a) of this section unless more than 50 percent of the CFC’s adjusted net foreign base com- pany income (as defined in §1.954–1(d) and as increased or decreased by section 952(c)) derived from the international operation of ships or aircraft is includible in the gross income of one or more United States citizens, individual residents of the United States or domestic corporations, pursuant to section 951(a)(1)(A) or an- other provision of the Internal Revenue Code, for the taxable years of such persons in which the taxable year of the CFC ends. (2)Examples. The income inclusion test of paragraph (b)(1) of this section is illustrated in the following examples: Example 1. Ship Co is a CFC organized in a qual- ified foreign country. All of Ship Co’s inco me is for- eign base company shipping income that is derived from the international operation of ships. All of its shares are owned by a domestic partner ship that is a United States shareholder for purposes of section 951(b). All of the partners in the domestic partnership are citizens and residents of forei gn countries. Ship Co fails the income inclusion test of paragraph (b)(1) of this section because no amount of Ship Co’s sub- part F income that is adjusted net foreign base com- pany income derived from the international operation of ships is includible under any provision of the In- ternal Revenue Code in the gr oss income of one or more United States citizens, individual residents of the United States or domestic corporations. There- fore, Ship Co must satisfy t he qualified shareholder stock ownership test of §1.883–4(a), in order to sat- isfy the stock ownership test of §1.883–1(c)(2) and to be considered a qualifie d foreign corporation. Example 2. Ship Co is a CFC organized in a qual- ified foreign country. All of Ship Co’s income is for- eign base company ship ping income that is derived from the international operation of ships. Corp A, a domestic corporation, owns 50 percent of the value of the stock of Ship Co . X, a domestic partnership, owns the remaining 50 percent of the value of the stock of Ship Co. A United States citizen is a partner owning a 10 percen t income interest in X. Individual partners owning 90 percent of X are citizens and res- idents of foreign countries. There are no special allo- cations of part nership income. Ship Co satisfies the income inclusion test of paragraph (b)(1) of this sec- tion because 55 percent (50 percent + (10 percent x 50 percent))oft he subpart F income that is adjusted net foreign base company income derived from the inter- national operation of ships would be includible in the gross incom e of U.S. citizens, individual residents of the United States or domestic corporations. If Ship Co satisfies the substantiation and reporting require- ments of pa ragraphs (c) and (d) of this section, it will meet the stock ownership test of §1.883–1(c)(2). 2003-41 I.R.B.797October 14, 2003 (c)Substantiation of CFC stock owner- ship—(1)General rule.Aforeigncorpo- ration that relies on this section to satisfy the stock ownership test of §1.883–1(c)(2) must substantiate all the facts necessary to satisfy the Commissioner that it qualifies under the income inclusion test of para- graph (b)(1) of this section. For purposes of the income inclusion test, if the CFC has one or more United States shareholders, as defined in section 951(b), that are domes- tic partnerships, estates, or trusts, thepro ratashare of the subpart F income includi- ble in the gross income of such sharehold- ers will only be treated as includible in the income of any partner, beneficiary or other interest owner of such United States share- holder that is a United States citizen, resi- dent of the United States or a domestic cor- poration if the CFC obtains the documen- tation described in paragraph (c)(2) of this section. (2)Documentation from certain United States shareholders—(i)General rule. A CFC only meets the documentation requirements of paragraph (c)(1) of this section if the CFC obtains the follow- ing documentation with respect to each United States shareholder, as defined in section 951(b), that is a partnership, es- tate or trust, for the taxable year of the shareholder which ends with or within the taxable year of the CFC— (A) A copy of the Form 5471, “In- formation Return of U.S. Persons with Respect to Certain Foreign Corpora- tions,” filed with the controlling United States shareholder’s return; (B) A written statement, signed under penalties of perjury by a person autho- rized to sign the U.S. federal tax return of each such United States shareholder, pro- viding the following information with re- spect to each United States citizen, indi- vidual resident of the United States or do- mestic corporation that is a partner, bene- ficiary or other interest owner of each such United States shareholder and upon whom the CFC intends to rely to satisfy the in- come inclusion test of paragraph (b)(1) of this section— (1) The name, address from the CFC’s corporate records (that is a specific street address and not a nonresidential address, such as a post office box or in care of a financial intermediary or stock transfer agent), and taxpayer identification number of the interest owner; (2) The interest owner’s proportionate interest in the United States shareholder that reflects that owner’s share of subpart F income required to be included in income on such interest owner’s U.S. federal in- come tax return; (3) The percentage of the value of shares of the CFC owned by each such interest owner pursuant to the attribution rules in §1.883–4(c); and (C) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (ii)Availability and retention of docu- ments for inspection. The documentation described in paragraph (c)(2)(i) of this sec- tion must be retained by the corporation seeking qualified foreign corporation sta- tus (the CFC) until the expiration of the statute of limitations for the taxable year of the CFC to which the documentation re- lates. Such documentation must be made available for inspection by the Commis- sioner at such place as the Commissioner may request in writing. (d)Reporting requirements. A foreign corporation that relies on the CFC test of this section to satisfy the stock ownership test of §1.883–1(c)(2) must provide the following information in addition to the in- formation required in §1.883–1(c)(3) to be included in its Form 1120–F,“U.S. Income Tax Return of a Foreign Corporation,”for the taxable year. Theinformation must be current as of the end of the corporation’s taxable year and must include the follow- ing— (1) The name, address from the CFC’s corporate records (that is a specific street address and not a nonresidential address, such as a post office box or in care of a financial intermediary or stock transfer agent), and taxpayer identification number of each United States shareholder, as de- finedinsection951(b),oftheCFC; (2) The percentage of the vote and value of the shares of the CFC that is owned by each United States shareholder, as defined in section 951(b); (3) If one or more of the United States shareholders is a domestic partnership, es- tate or trust, the name, address, taxpayer identification number and the percentage of the value of shares of the CFC owned (as determined under §1.883–4(c)) by each interest owner of each such United States shareholder that is a United States citizen, individual resident of the United States or a domestic corporation; and (4) Any other relevant information specified by Form 1120–F and its accom- panying instructions. §1.883–4 Qualified shareholder stock ownership test. (a)General rule. A foreign corpora- tion satisfies the stock ownership test of §1.883–1(c)(2) if more than 50 percent of the value of its outstanding shares is owned, or treated as owned by applying the attribution rules of paragraph (c) of this section, for at least half of the number of days in the foreign corporation’s tax- able year by one or more qualified share- holders, as defined in paragraph (b) of this section. A shareholder may be a quali- fied shareholder with respect to one cat- egory of income while not being a qual- ified shareholder with respect to another. A foreign corporation will not be consid- ered to satisfy the stock ownership test of §1.883–1(c)(2) pursuant to this section un- less the foreign corporation meets the sub- stantiation and reporting requirements of paragraphs (d) and (e) of this section. (b)Qualified shareholder—(1)General rule. A shareholder is a qualified share- holder only if the shareholder— (i) With respect to the category of in- come for which the foreign corporation is seeking an exemption, is— (A) An individual who is a resident, as described in paragraph (b)(2) of this sec- tion, of a qualified foreign country; (B) The government of a qualified for- eign country (or a political subdivision or local authority of such country); (C) A foreign corporation that is or- ganized in a qualified foreign country and meets the publicly traded test of §1.883–2(a); (D) A not-for-profit organization de- scribed in paragraph (b)(4) of this section that is not a pension fund as defined in paragraph (b)(5) of this section and that is organized in a qualified foreign country; (E) An individual beneficiary of a pension fund (as defined in paragraph (b)(5)(iv) of this section) that is adminis- teredinorbyaqualifiedforeigncountry, who is treated as a resident under para- graph (d)(3)(iii) of this section, of a qualified foreign country; or October 14, 20037982003-41 I.R.B. (F) A shareholder of a foreign corpora- tion that is an airline covered by a bilateral Air Services Agreement in force between the United States and the qualified foreign country in which the airline is organized, provided the United States has not waived the ownership requirement in the Air Ser- vices Agreement, or that the ownership re- quirement has not otherwise been made in- effective; (ii) Does not own its interest in the for- eign corporation through bearer shares, ei- ther directly or by applying the attribution rules of paragraph (c) of this section; and (iii) Provides to the foreign corporation the documentation required in paragraph (d) of this section and the foreign corpo- ration meets the reporting requirements of paragraph (e) of this section with respect to such shareholder. (2)Residence of individual sharehold- ers—(i)General rule. An individual de- scribed in paragraph (b)(1)(i)(A) of this section is a resident of a qualified foreign country only if the individual is fully liable to tax as a resident in such country (e.g.,an individual who is liable to tax on a remit- tance basis in a foreign country will not be treated as a resident of that country unless all residents of that country are taxed on a remittance basis only) and, in addition— (A) The individual has a tax home, within the meaning of paragraph (b)(2)(ii) of this section, in that qualified foreign country for 183 days or more of the tax- able year; or (B) The individual is treated as a resi- dent of a qualified foreign country based on special rules pursuant to paragraph (d)(3) of this section. (ii)Tax home. For purposes of this sec- tion, an individual’s tax home is consid- ered to be located at the individual’s reg- ular or principal (if more than one regu- lar) place of business. If the individual has no regular or principal place of business because of the nature of his business (or lack of a business), then the individual’s tax home is located at his regular place of abode in a real and substantial sense. If an individual has no regular or principal place of business and no regular place of abode in a real and substantial sense in a qualified foreign country for 183 days or more of the taxable year, that individual does not have a tax home for purposes of this section. A foreign estate or trust, as defined in sec- tion 7701(a)(31), does not have a tax home for purposes of this section. See paragraph (c)(3) of this section for alternative rules in the case of trusts or estates. (3)Certain income tax convention re- strictions applied to shareholders.For purposes of paragraph (b)(1) of this sec- tion, a shareholder described in paragraph (b)(1) of this section may be considered a resident of, or organized in, a qualified for- eign country if that foreign country pro- vides an exemption by means of an income tax convention with the United States, but only if the shareholder demonstrates that it is treated as a resident of that country un- der the convention and qualifies for ben- efits under any Limitation on Benefits ar- ticle, and that the convention provides an exemption for the relevant category of in- come. If the convention has a require- ment in the shipping and air transport ar- ticle other than residence, such as place of registration or documentation of the ship or aircraft, the shareholder is not required to demonstrate that the corporation seeking qualified foreign corporation status could satisfy any such additional requirement. (4)Not-for-profit organizations.The termnot-for-profit organizationmeans an organization that meets the following re- quirements— (i) It is a corporation, association tax- able as a corporation, trust, fund, founda- tion, league or other entity operated ex- clusively for religious, charitable, educa- tional, or recreational purposes, and not or- ganized for profit; (ii) It is generally exempt from tax in its country of organization by virtue of its not-for-profit status; and (iii) Either— (A) More than 50 percent of its an- nual support is expended on behalf of indi- viduals described in paragraph (b)(1)(i)(A) of this section (see paragraph (d)(3)(v) of this section for special rules to substantiate the residence of individual beneficiaries of not-for-profit organizations) and on behalf of U.S. exempt organizations that have re- ceived determination letters under section 501(c)(3); or (B) More than 50 percent of its an- nual support is derived from individuals described in paragraph (b)(1)(i)(A) of this section (see paragraph (d)(3)(v) of this sec- tion for special rules to substantiate the res- idence of individual supporters of not-for- profit organizations). (5)Pension funds—(i)Pension fund de- fined.Thetermpension fundshall mean a government pension fund or a nongovern- ment pension fund, as those terms are de- fined, respectively, in paragraphs (b)(5)(ii) and (iii) of this section, that is a trust, fund, foundation, or other entity that is estab- lished exclusively for the benefit of em- ployees or former employees of one or more employers, the principal purpose of which is to provide retirement, disability, and death benefits to beneficiaries of such entity and persons designated by such ben- eficiaries in consideration for prior ser- vices rendered. (ii)Government pension funds.A government pension fund is a pension fund that is a controlled entity of a for- eign sovereign within the principles of §1.892–2T(c)(1) (relating to pension funds established for the benefit of em- ployees or former employees of a foreign government). (iii)Nongovernment pension funds.A nongovernment pension fund is a pension fund that— (A) Is administered in a foreign coun- try and is subject to supervision or regula- tion by a governmental authority (or other authority delegated to perform such super- vision or regulation by a governmental au- thority) in such country; (B) Is generally exempt from income taxation in its country of administration; (C) Has 100 or more beneficiaries; and (D) The trustees, directors or other ad- ministrators of which pension fund provide the documentation required in paragraph (d)ofthissection. (iv)Beneficiary of a pension fund.The termbeneficiary of a pension fundshall mean any person who has made contri- butions to a pension fund, as that term is defined in paragraph (b)(5)(i) of this sec- tion, or on whose behalf contributions have been made, and who is currently receiv- ing retirement, disability, or death bene- fits from the pension fund or can reason- ably be expected to receive such benefits in the future, whether or not the person’s right to receive benefits from the fund has vested. See paragraph (c)(7) of this sec- tion for rules regarding the computation of stock ownership through nongovernment pension funds. (c)Rules for determining constructive ownership—(1)General rules for attribu- tion. For purposes of applying paragraph 2003-41 I.R.B.799October 14, 2003 (a) of this section and the exception to the closely-held test in §1.883–2(d)(3)(ii), stock owned by or for a corporation, partnership, trust, estate, or mutual in- surance company or similar entity shall be treated as owned proportionately by its shareholders, partners, beneficiaries, grantors, or other interest holders, as pro- vided in paragraphs (c)(2) through (7) of this section. The proportionate interest rules of this paragraph (c) shall apply successively upward through a chain of ownership, and a person’s proportionate interest shall be computed for the relevant days or period taken into account in de- termining whether a foreign corporation satisfies the requirements of paragraph (a) of this section. Stock treated as owned by a person by reason of this paragraph (c) shall be treated as actually owned by such person for purposes of this section. Anownerofaninterestinanassociation taxable as a corporation shall be treated as a shareholder of such association for pur- poses of this paragraph (c). No attribution will apply to an interest held directly or indirectly through bearer shares. (2)Partnerships—(i)General rule.A partner shall be treated as having an inter- est in stock of a foreign corporation owned by a partnership in proportion to the least of— (A) The partner’s percentage distribu- tive share of the partnership’s dividend in- come from the stock; (B) The partner’s percentage distribu- tive share of gain from disposition of the stock by the partnership; or (C) The partner’s percentage distribu- tive share of the stock (or proceeds from the disposition of the stock) upon liquida- tion of the partnership. (ii)Partners resident in the same coun- try. For purposes of this paragraph, all qualified shareholders that are partners in a partnership and that are residents of, or organized in, the same qualified foreign country shall be treated as one partner. Thus, the percentage distributive shares of dividend income, gain and liquidation rights of all qualified shareholders that are partners in a partnership and that are res- idents of, or organized in, the same quali- fied foreign country are aggregated prior to determining the least of the three percent- ages set out in paragraph (c)(2)(i) of this section. For the meaning of the termresi- dent, see paragraph (b)(2) of this section. (iii)Examples. The rules of paragraph (c)(2)(ii) of this section are illustrated by the following examples: Example 1.Stock held solely by qualified share- holders through a partnership. Country X grants an equivalent exemption. A and B are individual res- idents of Country X and are qualified shareholders within the meaning of paragraph (b)(1) of this sec- tion. A and B are the sole partners of Partnership P. P’s only asset is the stock of Corporation Z, a Country X corporation seeking a reciprocal exemption under this section. A’s distributive share of P’s income and gain on the disposition of P’s assets is 80 percent, but A’s distributive share of P’s assets (or the proceeds therefrom) on P’s liquidation is 20 percent. B’s dis- tributive share of P’s income and gain is 20 percent and B is entitled to 80 percent of the assets (or pro- ceeds therefrom) on P’s liquidation. Under the attri- bution rules of paragraph (c)(2)(ii) of this section, A and B will be treated as a single partner owning in the aggregate 100 percent of the stock of Z owned by P. Example 2.Stock held by both qualified and non- qualified shareholders through a partnership.As- sume the same facts as inExample 1except that C, an individual who is not a resident of a qualified for- eign country, is also a partner in P and that C ’s dis- tributive share of P’s income is 60 percent. The dis- tributive shares of A and B are the same as inExam- ple 1, except that A’s distributive share of income is 20 percent. Under the attribution rules of paragraph (c)(2)(ii) of this section, qualified shareholders A and B will be treated as a single partner owning in the aggregate 40 percent of the stock of Z owned by P (i.e., the lowest aggregate percentage of A and B’s distributive shares of dividend i ncome (40 percent), gain (100 percent), and liquidation rights (100 per- cent) with respect to the Z stock). Thus, only 40 per- cent of the Z stock is treated as o wned by qualified shareholders. Example 3.Stock held through tiered partner- ships. Country X grants an eq uivalent exemption. A and B are individual residents of Country X and are qualified shareholders within the meaning of para- graph (b)(1) of this sectio n. A and B are the sole part- ners of Partnership P. P is a partner in Partnership P1, which owns the stock of Corporation Z, a Country X corporation seeking a re ciprocal exemption under this section. Assume that P’s distributive share of the div- idend income, gain and liquidation rights with respect to the Z stock held by P 1 is 40 percent. Assume that of the remaining partners of P1 only D is a qualified shareholder. D’s distributive share of P1’s dividend income and gain is 1 5 percent; D’s distributive share of P1’s assets on liquidation is 25 percent. Under the attribution rules of paragraph (c)(2)(ii) of this section, A and B, treated a sasinglepartner,willown40per- cent of the Z stock owned by P1 (100 percent x 40 percent) and D will be treated as owning 15 percent of the Z stock o wned by P1 (the least of D’s dividend income (15 percent), gain (15 percent), and liquida- tion rights (25 percent) with respect to the Z stock). Thus, 55 perc ent of the Z stock owned by P1 is treated as owned by qualified shareholders. (3)Trusts and estates—(i)Beneficia- ries. In general, an individual shall be treated as having an interest in stock of a foreign corporation owned by a trust or es- tate in proportion to the individual’s ac- tuarial interest in the trust or estate, as provided in section 318(a)(2)(B)(i), except that an income beneficiary’s actuarial in- terest in the trust will be determined as if the trust’s only asset were the stock. The interest of a remainder beneficiary in stock will be equal to 100 percent minus the sum of the percentages of any inter- estinthestockheldbyincomebeneficia- ries. The ownership of an interest in stock owned by a trust shall not be attributed to any beneficiary whose interest cannot be determined under the preceding sen- tence, and any such interest, to the extent not attributed by reason of this paragraph (c)(3)(i), shall not be considered owned by a beneficiary unless all potential benefi- ciaries with respect to the stock are qual- ified shareholders. In addition, a bene- ficiary’s actuarial interest will be treated as zero to the extent that someone other than the beneficiary is treated as owning the stock under paragraph (c)(3)(ii) of this section. A substantially separate and inde- pendent share of a trust, within the mean- ing of section 663(c), shall be treated as a separate trust for purposes of this para- graph (c)(3)(i), provided that payment of income, accumulated income or corpus of a share of one beneficiary (or group of ben- eficiaries) cannot affect the proportionate share of income, accumulated income or corpus of another beneficiary (or group of beneficiaries). (ii)Grantor trusts. A person is treated as the owner of stock of a foreign corpora- tion owned by a trust to the extent that the stock is included in the portion of the trust that is treated as owned by the person un- der sections 671 through 679 (relating to grantors and others treated as substantial owners). (4)Corporations that issue stock.A shareholder of a corporation that issues stock shall be treated as owning stock of a foreign corporation that is owned by such corporationonanydayinaproportionthat equals the value of the stock owned by such shareholder to the value of all stock of such corporation. If, however, there is an agreement, express or implied, that a shareholder of a corporation will not re- ceive distributions from the earnings of stock owned by the corporation, the share- holder will not be treated as owning that stock owned by the corporation. October 14, 20038002003-41 I.R.B. (5)Taxable nonstock corporations. A taxable nonstock corporation that is entitled in its country of organization to deduct from its taxable income amounts distributed for charitable purposes may deem a recipient of such charitable distri- butions to be a shareholder of such taxable nonstock corporation in the same propor- tion as the amount that such beneficiary receives in the taxable year bears to the total income of such taxable nonstock cor- poration in the taxable year. Whether each such recipient is a qualified shareholder may then be determined under paragraph (b) of this section or under the special rules of paragraph (d)(3)(vii) of this section. (6)Mutual insurance companies and similar entities. Stock held by a mutual insurance company, mutual savings bank, or similar entity (including an association taxable as a corporation that does not issue stock interests) shall be considered owned proportionately by the policyholders, de- positors, or other owners in the same pro- portion that such persons share in the sur- plus of such entity upon liquidation or dis- solution. (7)Computation of beneficial interests in nongovernment pension funds.Stock held by a pension fund shall be consid- ered owned by the beneficiaries of the fund equallyonapro-ratabasis if— (i) The pension fund meets the require- ments of paragraph (b)(5)(iii) of this sec- tion; (ii) The trustees, directors or other ad- ministrators of the pension fund have no knowledge, and no reason to know, that a pro-rataallocation of interests of the fund to all beneficiaries would differ signifi- cantly from an actuarialallocation of inter- ests in the fund (or, if the beneficiaries’ ac- tuarial interest in thestock held directly or indirectly by the pension fund differs from the beneficiaries’ actuarial interest in the pension fund, the actuarial interests com- puted by reference to the beneficiaries’ ac- tuarial interest in the stock); (iii) Either— (A) Any overfunding of the pension fund would be payable, pursuant to the governing instrument or the laws of the foreign country in which the pension fund is administered, only to, or for the benefit of, one or more corporations that are organized in the country in which the pension fund is administered, individ- ual beneficiaries of the pension fund or their designated beneficiaries, or social or charitable causes (the reduction of the obligation of the sponsoring company or companies to make future contributions to the pension fund by reason of overfunding shall not itself result in such overfunding being deemed to be payable to or for the benefit of such company or companies); or (B) The foreign country in which the pension fund is administered has laws that are designed to prevent overfunding of a pension fund and the funding of the pen- sion fund is within the guidelines of such laws; or (C) The pension fund is maintained to provide benefits to employees in a partic- ular industry, profession, or group of in- dustries or professions and employees of at least 10 companies (other than compa- nies that are owned or controlled, directly or indirectly, by the same interests) con- tribute to the pension fund or receive ben- efits from the pension fund; and (iv) The trustees, directors or other ad- ministrators provide the relevant documen- tationasrequiredinparagraph(d)ofthis section. (d)Substantiation of stock owner- ship—(1)General rule. A foreign corpo- ration that relies on this section to satisfy the stock ownership test of §1.883–1(c)(2), must establish all the facts necessary to sat- isfy the Commissioner that more than 50 percent of the value of its shares is owned, or treated as owned applying paragraph (c) of this section, by qualified shareholders. A foreign corporation cannot meet this requirement with respect to any stock that is issued in bearer form. A shareholder that holds shares in the foreign corporation either directly or indirectly in bearer form cannot be a qualified shareholder. (2)Application of general rule—(i) Ownership statements. Except as pro- vided in paragraph (d)(3) of this section, a person shall only be treated as a qualified shareholder of a foreign corporation if— (A) For the relevant period, the per- son completes an ownership statement de- scribed in paragraph (d)(4) of this section or has a valid ownership statement in effect under paragraph (d)(2)(ii) of this section; (B) In the case of a person owning stock in the foreign corporation indirectly through one or more intermediaries (in- cluding mere legal owners or recordhold- ers acting as nominees), each intermediary in the chain of ownership between that person and the foreign corporation seek- ing qualified foreign corporation status completes an intermediary ownership statement described in paragraph (d)(4)(v) of this section or has a valid intermediary ownership statement in effect under para- graph (d)(2)(ii) of this section; and (C) The foreign corporation seek- ing qualified foreign corporation status obtains the statements described in para- graphs (d)(2)(i)(A) and (B) of this section. (ii)Three-year period of validity.The ownership statements required in para- graph (d)(2)(i) of this section shall remain valid until the earlier of the last day of the third calendar year following the year in which the ownership statement is signed, orthedaythatachangeofcircumstance occurs that makes any information on the ownership statement incorrect. For example, an ownership statement signed on September 30, 2000, remains valid through December 31, 2003, unless a change of circumstance occurs that makes any information on the ownership state- ment incorrect. (3)Special rules—(i)Substantiating residence of certain shareholders.Afor- eign corporation seeking qualified foreign corporation status or an intermediary that is a direct or indirect shareholder of such foreign corporation may substantiate the residence of certain shareholders, for pur- poses of paragraph (b)(2)(i)(B) of this section, under one of the following special rules in paragraphs (d)(3)(ii) through (viii) of this section, in lieu of obtaining the ownership statements required in para- graph (d)(2)(i) of this section from such shareholders. (ii)Special rule for registered share- holders owning less than one percent of widely-held corporations.Aforeigncor- poration with at least 250 registered share- holders, that is not a publicly-traded corpo- ration, as described in §1.883–2 (a widely- held corporation), is not required to obtain an ownership statement from an individual shareholder owning less than one percent of the widely-held corporation at all times during the taxable yearif the requirements of paragraphs (d)(3)(ii)(A) and (B) of this section are satisfied. If the widely-held foreign corporation is the foreign corpo- ration seeking qualified foreign corpora- tion status, or an intermediary that meets the documentation requirements of para- graphs (d)(4)(v)(A) and (B) of this section, 2003-41 I.R.B.801October 14, 2003 the widely-held foreign corporation may treat the address of record in its ownership records as the residence of any less than one percent individual shareholder if— (A) The individual’s address of record is a specific street address and not a non- residential address, such as a post office box or in care of a financial intermediary or stock transfer agent; and (B) The officers and directors of the widely-held corporation neither know nor have reason to know that the individual doesnotresideatthataddress. (iii)Special rule for beneficiaries of pension funds—(A)Government pension fund. An individual who is a beneficiary of a government pension fund, as defined in paragraph (b)(5)(ii) of this section, may be treated as a resident of the country in which the pension fund is administered if the pen- sion fund satisfies the documentation re- quirements of paragraphs (d)(4)(v)(A) and (C)(1) of this section. (B)Nongovernment pension fund.An individual who is a beneficiary of a non- government pension fund, as described in paragraph (b)(5)(iii) of this section, may be treated as a resident of the country of the beneficiary’s address as it appears on the records of the fund, provided it is not a nonresidential address, such as a post of- fice box or an address in care of a finan- cial intermediary, and provided none of the trustees, directors or other administrators of the pension fund know, or have reason to know, that the beneficiary is not an in- dividual resident of such foreign country. The rules of this paragraph (d)(3)(iii)(B) shall apply only if the nongovernment pen- sion fund satisfies the documentation re- quirements of paragraphs (d)(4)(v)(A) and (C)(2) of this section. (iv)Special rule for stock owned by publicly-traded corporations.Anystock in a foreign corporation seeking qualified foreign corporation status that is owned by a publicly-traded corporation will be treated as owned by an individual resident in the country where the publicly-traded corporation is organized if the foreign cor- poration receives the statement described in paragraph (d)(4)(iii) of this section from the publicly-traded corporation and copies of any relevant ownership statements from shareholders of the publicly-traded corpo- ration relied on to satisfy the exception to the closely-held test of §1.883–2(d)(3)(ii), as required in paragraph (d)(2)(i) of this section. (v)Special rule for not-for-profit or- ganizations. For purposes of meeting the ownership requirements of paragraph (a) of this section, a not-for-profit organiza- tion may rely on the addresses of record of its individual beneficiaries and supporters to determine the residence of an individual beneficiary or supporter, within the mean- ing of paragraph (b)(2)(i)(B) of this sec- tion, to the extent required under paragraph (b)(4) of this section, provided that— (A) The addresses of record are not non- residential addresses such as a post office box or in care of a financial intermediary; (B) The officers, directors or adminis- trators of the organization do not know or have reason to know that the individual beneficiaries or supporters do not reside at that address; and (C) The foreign corporation seek- ing qualified foreign corporation status receives the statement required in para- graph (d)(4)(iv) of this section from the not-for-profit organization. (vi)Special rule for a foreign airline covered by an air services agreement.A foreign airline that is covered by a bilateral Air Services Agreement in force between the United States and the qualified foreign country in which the airline is organized may rely exclusively on the Air Services Agreement currently in effect and will not have to otherwise substantiate its owner- ship under this section, provided that the United States has not waived the owner- ship requirements in the agreement or that the ownership requirements have not oth- erwise been made ineffective. Such an air- line will be treated as owned by qualified shareholders resident in the country where the foreign airline is organized. (vii)Special rule for taxable nonstock corporations. Any stock in a foreign cor- poration seeking qualified foreign corpora- tion status that is owned by a taxable non- stock corporation will be treated as owned, in any taxable year, by the recipients of dis- tributions made during that taxable year, as set out in paragraph (c)(5) of this sec- tion. The taxable nonstock corporation may treat the address of record in its dis- tribution records as the residence of any re- cipient if— (A) An individual recipient’s address is in a qualified foreign country and is a spe- cific street address and not a nonresidential address, such as a post office box or in care of a financial intermediary or stock trans- fer agent; (B) The address of a nonindividual re- cipient’s principal place of business is in a qualified foreign country; (C) The officers and directors of the taxable nonstock corporation neither know nor have reason to know that the recipients do not reside or have their principal place of business at such addresses; and (D) The foreign corporation receives the statement described in paragraph (d)(4)(v)(D) of this section from the tax- able nonstock corporation intermediary. (viii)Special rule for closely-held cor- porations traded in the United States. To demonstrate that a class of stock is not closely-held for purposes of §1.883–2(d)(3)(i), a foreign corporation whose stock is traded on an established securities market in the United States may rely on current Schedule 13D and Schedule 13G filings with the Securities and Exchange Commission to identify its 5-percent shareholders in each class of stock relied upon to meet the regularly traded test, without having to make any independent investigation to determine the identity of the 5-percent shareholder. However, if any class of stock is de- termined to be closely-held within the meaning of §1.883–2(d)(3)(i), the pub- licly traded corporation cannot satisfy the requirements of §1.883–2(e) unless it ob- tains sufficient documentation described in this paragraph (d) to demonstrate that the requirements of §1.883–2(d)(3)(ii) are met with respect to the 5-percent share- holders. (4)Ownership statements from share- holders—(i)Ownership statements from individuals. An ownership statement from an individual is a written statement signed by the individual under penalties of perjury stating— (A) The individual’s name, permanent address, and country where the individual is fully liable to tax as a resident, if any; (B) If the individual was not a resident of the country for the entire taxable year of the foreign corporation seeking quali- fied foreign corporation status, each of the foreign countries in which the individual resided and the dates of such residence during the taxable year of such foreign cor- poration; October 14, 20038022003-41 I.R.B. (C) If the individual directly owns stock in the corporation seeking qualified for- eign corporation status, the name of the corporation, the number of shares in each class of stock of the corporation that are so owned, and the period of time during the taxable year of the foreign corporation dur- ing which the individual owned the stock; (D) If the individual directly owns an in- terest in a corporation, partnership, trust, estate or other intermediary that directly or indirectly owns stock in the corporation seeking qualified foreign corporation sta- tus, the name of the intermediary, the num- ber and class of shares or amount and na- ture of the interest of the individual in such intermediary, and the period of time during the taxable year of the corporation seeking qualified foreign corporation status during which the individual held such interest; (E) To the extent known by the individ- ual, a description of the chain of ownership through which the individual owns stock in the corporation seeking qualified foreign corporation status, including the name and address of each intermediary standing be- tween the intermediary described in para- graph (d)(4)(i)(D) of this section and the foreign corporation and whether this inter- est is owned either directly or indirectly through bearer shares; and (F) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (ii)Ownership statements from foreign governments. An ownership statement from a foreign government that is a quali- fied shareholder is a written statement— (A) Signed by any one of the follow- ing— (1) An official of the governmental au- thority, agency or office who has supervi- sory authority with respect to the govern- ment’s ownership interest and who is au- thorized to sign such a statement on behalf of the authority, agency or office; or (2) The competent authority of the for- eign country (as defined in the income tax convention between the United States and the foreign country); or (3) An income tax return preparer that, for purposes of this paragraph (d)(4)(ii) only, shall mean a firm of licensed or certified public accountants, a law firm whose principals or members are admitted to practice in one or more states, territories or possessions of the United States or the country of such government, or a bank or other financial institution licensed to do business in such foreign country and having assets at least equivalent to 50 mil- lion U.S. dollars and who is authorized to represent the government or governmental authority; and (B) That provides— (1) The title of the official or other per- son signing the statement; (2) The name and address of the gov- ernment authority, agency or office that has supervisory authority and, if applica- ble, the income tax preparer which has pre- pared such ownership statement; (3) The information described in para- graphs (d)(4)(i)(C) through (E) of this sec- tion (as if the language applied “govern- ment” instead of “individual”) with respect to the government’s direct or indirect own- ership of stock in the corporation seeking qualified resident status; (4) In the case of an ownership state- ment prepared by an income tax return pre- parer, a statement under penalties of per- jury identifying the documentation relied upon in the conduct of due diligence for the taxable year to determine the aggregate government investment in the stock of the shipping or aircraft company in prepara- tion of such ownership statement attached to a valid power of attorney to represent the taxpayer for the taxable year; and (5) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (iii)Ownership statements from pub- licly-traded corporate shareholders. An ownership statement from a pub- licly-traded corporation that is a direct or indirect owner of thecorporation seeking qualified foreign corporation status is a written statement, signed under penalties of perjury by a person that would be au- thorized to sign a tax return on behalf of the shareholder corporation containing the following information— (A) The name of the country in which the stock is primarily traded; (B) The name of the established securi- ties market or markets on which the stock is listed; (C) A description of each class of stock reliedupontomeettherequirementsof §1.883–2(d)(1), including the number of shares issued and outstanding as of the close of the taxable year; (D) For each class of stock re- lied upon to meet the requirements of §1.883–2(d)(1), if one or more 5-percent shareholders, as defined in §1.883–2(d)(3)(i), own in the aggregate 50 percent or more of the vote and value of the outstanding shares of that class of stock for more than half the number of days during the taxable year— (1) The days during the taxable year of the corporation in which the stock was closely-held without regard to the excep- tion in paragraph (d)(3)(ii) of this section and the percentage of the vote and value of the class of stock that is owned by 5-per- cent shareholders during such days; (2) For each qualified shareholder who owns or is treated as owning stock in the closely-held block upon whom the corporation intends to rely to satisfy the exception to the closely-held test of §1.883–2(d)(3)(ii)— (i) The name of each such shareholder; (ii) The percentage of the total value of the class of stock held by each such shareholder and the days during which the stock was held; (iii) The address of record of each such shareholder; and (iv) The country of residence of each such shareholder, determined under para- graph (b)(2) or (d)(3) of this section; (E) The information described in para- graphs (d)(4)(i)(C) through (E) of this section (as if the language applied “pub- licly-traded corporation” instead of “indi- vidual”) with respect to the publicly-traded corporation’s direct or indirect ownership ofstockinthecorporationseekingquali- fied resident status; and (F) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (iv)Ownership statements from not-for-profit organizations.Anown- ership statement from a not-for-profit organization (other than a pension fund as defined in paragraph (b)(5) of this section) is a written statement signed by a person authorized to sign a tax return on behalf of the organization under penalties of perjury stating— (A) The name, permanent address, and principal location of the activities of the or- ganization (if different from its permanent address); 2003-41 I.R.B.803October 14, 2003 (B) The information described in paragraphs (d)(4)(i)(C) through (E) of this section (as if the language applied "not-for-profit organization" instead of "individual"); (C) A representation that the not-for-profit organization satisfies the requirements of paragraph (b)(4) of this section; and (D) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (v)Ownership statements from interme- diaries—(A)General rule. The foreign corporation seeking qualified foreign cor- poration status under the shareholder stock ownership test must obtain an intermediary ownership statement from each intermedi- arystandinginthechainofownershipbe- tween it and the qualified shareholders on whom it relies to meet this test. An inter- mediary ownership statement is a written statement signed under penalties of perjury by the intermediary (ifthe intermediary is an individual) or a person who would be authorized to sign a tax return on behalf of the intermediary (if the intermediary is not an individual) containing the following in- formation— (1) The name, address, country of resi- dence, and principal place of business (in the case of a corporation or partnership) of the intermediary, and, if the intermediary is a trust or estate, the name and perma- nent address of all trustees or executors (or equivalent under foreign law), or if the in- termediary is a pension fund, the name and permanent address of place of administra- tion of the intermediary; (2) The information described in para- graphs (d)(4)(i)(C) through (E) of this sec- tion (as if the language applied “interme- diary” instead of “individual”); (3) If the intermediary is a nominee for a shareholder or another intermediary, the name and permanent address of the share- holder, or the name and principal place of business of such other intermediary; (4) If the intermediary is not a nominee for a shareholder or another intermedi- ary, the name and country of residence (within the meaning of paragraph (b)(2) of this section) and the proportionate in- terest in the intermediary of each direct shareholder, partner, beneficiary, grantor, or other interest holder (or if the direct holder is a nominee, of its beneficial shareholder, partner, beneficiary, grantor, or other interest holder), on which the for- eign corporation seeking qualified foreign corporation status intends to rely to satisfy the requirements of paragraph (a) of this section. In addition, such intermediary must obtain from all such persons an own- ership statement that includes the period of time during the taxable year for which the interest in the intermediary was owned by the shareholder, partner, beneficiary, grantor or other interest holder. For pur- poses of this paragraph (d)(4)(v)(A), the proportionate interest of a person in an intermediary is the percentage interest (by value) held by such person, determined using the principles for attributing owner- ship in paragraph (c) of this section; (5) If the intermediary is a widely-held corporation with registered shareholders owning less than one percent of the stock of such widely-held corporation, the state- ment set out in paragraph (d)(4)(v)(B) of this section, relating to ownership state- ments from widely-held intermediaries with registered shareholders owning less than one percent of such widely-held in- termediaries; (6) If the intermediary is a pension fund, within the meaning of paragraph (b)(5) of this section, the statement set out in para- graph (d)(4)(v)(C) of this section, relat- ing to ownership statements from pension funds; (7) If the intermediary is a taxable non- stock corporation, within the meaning of paragraph (c)(5) of this section, the state- ment set out in paragraph (d)(4)(v)(D) of this section, relating to ownership state- ments from intermediaries that are taxable nonstock corporations; and (8) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (B)Ownership statements from widely- held intermediaries with registered share- holders owning less than one percent of such widely-held intermediary.Anown- ership statement from an intermediary that is a corporation with at least 250 regis- tered shareholders, but that is not a pub- licly-traded corporation within the mean- ing of §1.883–2, and that relies on para- graph (d)(3)(ii) of this section, relating to the special rule for registered shareholders owning less than one percent of widely- held corporations, must provide the fol- lowing information in addition to the infor- mation required in paragraph (d)(4)(v)(A) of this section— (1) The aggregate proportionate interest by country of residence in the widely-held corporation of such registered sharehold- ers or other interest holders whose address of record is a specific street address and not a nonresidential address, such as a post of- fice box or in care of a financial intermedi- ary or stock transfer agent; and (2) A representation that the officers and directors of the widely-held intermedi- ary neither know nor have reason to know that the individual shareholder does not re- side at his or her address of record in the corporate records; and (3) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (C)Ownership statements from pension funds—(1)Ownership statements from government pension funds. A government pension fund (as defined in paragraph (b)(5)(ii) of this section) that relies on paragraph (d)(3)(iii) of this section (relat- ing to the special rules for pension funds) generally must provide the documentation required in paragraph (d)(4)(v)(A) of this section, and, in addition, the government pension fund must also provide the fol- lowing information— (i) The name of the country in which the plan is administered; (ii) A representation that the fund is es- tablished exclusively for the benefit of em- ployees or former employees of a foreign government, or employees or former em- ployees of a foreign government and non- governmental employees or former em- ployees that perform or performed govern- mental or social services; (iii) A representation that the funds that comprise the trust are managed by trustees who are employees of, or persons appointed by, the foreign government; (iv) A representation that the trust form- ing part of the pension plan provides for retirement, disability, or death benefits in consideration for prior services rendered; (v) A representation that the income of the trust satisfies the obligations of the for- eign government to the participants under the plan, rather than inuring to the benefit of a private person; and October 14, 20038042003-41 I.R.B. (vi) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (2)Ownership statements from non- government pension funds. The trustees, directors, or other administrators of the nongovernment pension fund, as defined in paragraph (b)(5)(iii) of this section, that rely on paragraph (d)(3)(iii) of this section, relating to the special rules for pension funds, generally must provide the pension fund’s intermediary ownership statement described in paragraph (d)(4)(v)(A) of this section. In addition, the nongovernment pension fund must also provide the fol- lowing information— (i) The name of the country in which the pension fund is administered; (ii) A representation that the pension fund is subject to supervision or regula- tion by a governmental authority (or other authority delegated to perform such su- pervision or regulation by a governmen- tal authority) in such country, and, if so, the name of the governmental authority (or other authority delegated to perform such supervision or regulation); (iii) A representation that the pension fund is generally exempt from income tax- ation in its country of administration; (iv) The number of beneficiaries in the pension plan; (v) The aggregate percentage interest of beneficiaries by country of residence based on addresses shown on the books and records of the fund, provided the ad- dresses are not nonresidential addresses, such as a post office box or an address in care of a financial intermediary, and provided none of the trustees, directors or other administrators of the pension fund know, or have reason to know, that the ben- eficiary is not a resident of such foreign country; (vi) A representation that the pension fund meets the requirements of paragraph (b)(5)(iii) of this section; (vii) A representation that the trustees, directors or other administrators of the pension fund have no knowledge, and no reason to know, that apro-rataallocation of interests of the fund to all beneficiaries would differ significantly from an actu- arial allocation of interests in the fund (or, if the beneficiaries’ actuarial interest in the stock held directly or indirectly by the pension fund differs from the benefi- ciaries’ actuarial interest in the pension fund, the actuarial interests computed by reference to the beneficiaries’ actuarial interest in the stock); (viii) A representation that any over- funding of the pension fund would be payable, pursuant to the governing instru- ment or the laws of the foreign country in which the pension fund is adminis- tered, only to, or for the benefit of, one or more corporations that are organized in the country in which the pension fund is administered, individual beneficiaries of the pension fund or their designated bene- ficiaries, or social or charitable causes (the reduction of the obligation of the spon- soring company or companies to make future contributions to the pension fund by reason of overfunding shall not itself result in such overfunding being deemed to be payable to or for the benefit of such company or companies); or that the for- eign country in which the pension fund is administered has laws that are designed to prevent overfunding of a pension fund and the funding of the pension fund is within the guidelines of such laws; or that the pension fund is maintained to provide ben- efits to employees in a particular industry, profession, or group of industries or pro- fessions, and that employees of at least 10 companies (other than companies that are owned or controlled, directly or indirectly, by the same interests) contribute to the pension fund or receive benefits from the pension fund; and (ix) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (3)Time for making determinations. The determinations required to be made under this paragraph (d)(4)(v)(C) shall be made using information shown on the records of the pension fund for a date dur- ing the foreign corporation’s taxable year to which the determination is relevant. (D)Ownership statements from taxable nonstock corporations.Anownership statement from an intermediary that is a taxable nonstock corporation must pro- vide the following information in addition to the information required in paragraph (d)(4)(v)(A) of this section— (1) With respect to paragraph (d)(4)(v)(A)(7) of this section, for each beneficiary that is treated as a quali- fied shareholder, the name, address of residence (in the case of an individual beneficiary, the address must be a specific street address and not a nonresidential address, such as a post office box or in care of a financial intermediary; in the case of a nonindividual beneficiary, the address of the principal place of business) and percentage that is the same proportion as the amount that the beneficiary receives in the tax year bears to the total net income of the taxable nonstock corporation in the tax year; (2) A representation that the officers and directors of the taxable nonstock cor- poration neither know nor have reason to know that the individual beneficiaries do not reside at the address listed in paragraph (d)(4)(v)(D)(1)ofthissectionorthatany other nonindividual beneficiary does not conduct its primary activities at such ad- dress or in such country of residence; and (3) Any other information as specified in guidance published by the Internal Rev- enue Service (see §601.601(d)(2) of this chapter). (5)Availability and retention of docu- ments for inspection. The documentation described in paragraphs (d)(3) and (4) of this section must be retained by the cor- poration seeking qualified foreign corpo- ration status (the foreign corporation) until the expiration of the statute of limitations for the taxable year of the foreign corpo- ration to which the documentation relates. Such documentation must be made avail- able for inspection by the Commissioner at such time and place as the Commissioner may request in writing. (e)Reporting requirements.Aforeign corporation relying onthe qualified share- holder stock ownership test of this sec- tion to meet the stock ownership test of §1.883–1(c)(2) must provide the following information in addition to the information required in §1.883–1(c)(3) to be included in its Form 1120–F,“U.S. Income Tax Re- turn of a Foreign Corporation,”for each taxable year. The information should be current as of the end of the corporation’s taxable year. The information must in- clude the following— (1) A representation that more than 50 percent of the value of the outstanding shares of the corporation is owned (or treated as owned by reason of paragraph 2003-41 I.R.B.805October 14, 2003 (c) of this section) by qualified sharehold- ers for each category of income for which the exemption is claimed; (2) With respect to each individual qual- ified shareholder owning 5 percent or more of the foreign corporation, applying the at- tribution rules of paragraph (c) of this sec- tion, and relied upon to meet the 50 percent ownership test of paragraph (a) of this sec- tion, the name and street address, as rep- resented on each such individual’s owner- ship statement; (3) With respect to all qualified share- holders relied upon to satisfy the 50 per- cent ownership test of paragraph (a) of this section, the total percentage of the value of the outstanding shares owned, apply- ing the attribution rules of paragraph (c) of this section, by all qualified shareholders resident in a qualified foreign country, by country; and (4) Any other relevant information specified by the Form 1120–F and its accompanying instructions. §1.883–5 Effective dates. (a)General rule. Sections 1.883–1 through 1.883–4 apply to taxable years of a foreign corporation seeking qualified foreign corporation status beginning 30 days or more after August 26, 2003. (b)Election for retroactive application. Taxpayers may elect to apply §§1.883–1 through 1.883–4 for any open taxable year of the foreign corporation beginning after December 31, 1986, except that the substantiation and reporting requirements of §1.883–1(c)(3) (relating to the substan- tiation and reporting required to be treated as a qualified foreign corporation) or §§1.883–2(f), 1.883–3(d) and 1.883–4(e) (relating to additional information to be included in the return to demonstrate whether the foreign corporation satisfies the stock ownership test) will not apply to any year beginning before September 25, 2003. Such election shall apply to the taxable year of the election and to all subsequent taxable years beginning before September 25, 2003. (c)Transitional information reporting rule. For taxable years of the foreign cor- poration beginning 30 days or more after August 26, 2003, and until such time as the Form 1120–F,“U.S. Income Tax Return of a Foreign Corporation,”or its instructions are revised to provide otherwise, the in- formation required in §1.883–1(c)(3) and §1.883–2(f), §1.883–3(d) or §1.883–4(e), as applicable, must be included on a writ- ten statement attached to the Form 1120–F and filed with the return. PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 5. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 6. In §602.101, paragraph (b) is amended by adding entries in numerical order to the table to read as follows: §602.101 OMB control numbers. ***** (b) * * * CFR part or section where identified and described Current OMB control No. ***** 1.883–1 .............................................................................. 1545–1677 1.883–2 .............................................................................. 1545–1677 1.883–3 .............................................................................. 1545–1677 1.883–4 .............................................................................. 1545–1677 1.883–5 .............................................................................. 1545–1677 ***** Robert E. Wenzel, Deputy Commissioner for Services and Enforcement. Approved July 11, 2003. Pamela F. Olson, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on August 25, 2003, 8:45 a. m., and published in the issue of the Federal Register for August 26, 2003, 68 F.R. 51393) October 14, 20038062003-41 I.R.B. Section 897.—Disposition of Investment in United States Real Property 26 CFR 1.897–3: Election by foreign corporation to be treated as a domestic corporation under section 897(i). T.D. 9082 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 301 and 602 Revision of Income Tax Regulations Under Sections 897, 1445, and 6109 to Require Use of Taxpayer Identifying Numbers on Submissions Under the Section 897 and 1445 Regulations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regula- tions. SUMMARY: This document contains fi- nal and temporary regulations to require the use of taxpayer identifying numbers on submissions under sections 897 and 1445. The regulations are necessary to properly identify foreign taxpayers for which sub- missions are made for the reduction or elimination of tax under sections 897 and 1445. The regulations also address certain additional issues under section 1445. DATES:Effective Date: These regulations are effective August 6, 2003. Applicability Date: For dates of ap- plicability, see §§1.897–3(h), 1.897–5(e), 1.1445–1(h), 1.1445–2(b)(2)(iii), 1.1445– 2(d)(2)(iv), 1.1445–2(e), 1.1445–3(h), 1.1445–5(b)(8)(iii), 1.1445–5(h), and 1.1445–6(h). FOR FURTHER INFORMATION CONTACT: Robert W. Lorence, Jr. (202) 622–3860 (not a toll-free number). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collections of information con- tained in these final regulations have been reviewed and approved by the Office of Management and Budget in accor- dance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1797. The collection of infor- mation in these final regulations are in §§1.1445–2(d)(2) and 1.1445–3. These collections of information are required to notify the IRS of dispositions of U.S. real property interests by foreign persons that otherwise are subject to taxation under section 897 and the collection of a with- holding tax under section 1445. 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 assigned by the Office of Management and Budget. The estimated annual burden per re- spondent varies from 3 to 5 hours, depend- ing on individual circumstances, with an estimated average of 4 hours. Comments concerning the accuracy of this burden estimate and sugges- tions for reducing this burden should be sent to theInternal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224, and to theOffice of Manage- ment and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503. Books or records relating to these col- lections of information must be retained as long as their contents may become mate- rial in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as re- quired by 26 U.S.C. 6103. Background This document contains amendments to 26 CFR parts 1 and 301. On July 26, 2002, a notice of proposed rule-making (REG–106876–00, 2002–2 C.B. 392 [67 FR 48823]), relating to the use of taxpayer identifying numbers on submissions un- der sections 897 and 1445 of the Inter- nal Revenue Code (Code), was published in theFederal Register. No public hear- ing was requested or held. Written com- ments responding to the notice of proposed rule-making were received. After consid- eration of the comments, the proposed reg- ulations are adopted as amended by this Treasury decision. The revisions are dis- cussed below. Summary of Public Comments and Explanation of Revisions A.Use of Taxpayer Identifying Number. This document contains final regula- tions under sections 897, 1445, and 6109 that require foreign transferors of U.S. real property interests (and transferees where applicable) to provide their taxpayer iden- tifying numbers (TINs) on withholding tax returns, applications for withholding cer- tificates, and other notices and elections under sections 897 and 1445 and the reg- ulations thereunder. TINs are required so that the IRS can identify foreign taxpayers and more easily match applications, with- holding tax returns, notices, and elections with the transferors’ income tax returns. Applications for withholding certifi- cates, and other notices and elections under section 897 and 1445 will be con- sidered incomplete and generally will not be processed by the IRS unless the TIN of the transferor is provided. Amounts withheld under section 1445 must still be reported and paid to the IRS on with- holding tax returns (Form 8288,“U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests”, and Form 8288–A,“Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests”) if the appropriate TINs are not provided. The final regulations provide that al- though such amounts have been paid, if the transferor’s TIN is not included, a receipt (Form 8288–A) for withholding taxpaidtotheServicewillnotbestamped to show receipt and will not be mailed to the transferor. In many cases, the foreign taxpayer will already have a TIN, because the taxpayer will have already filed a U.S. tax return. If the taxpayer does not already have a TIN, the TIN requirement under the regu- lations merely accelerates the time to ob- tain a TIN, because the foreign taxpayer must have a TIN to file its U.S. income tax return for the year of the disposition of the U.S. real property interest. In the case of foreign entities (such as foreign corpora- tions) that are required to have employee identification numbers (EINs), the EINs 2003-41 I.R.B.807October 14, 2003 can be obtained without delay through ex- isting procedures. Commentators have expressed concern about the time it takes nonresident alien in- dividuals to obtain TINs and how it could effect the timing of transactions. The IRS is aware of this concern and is exploring approaches for addressing it. For example, the IRS is considering implementing a pro- gram in which applications for withhold- ing certificates will be processed in con- junction with applications for TINs. The need to obtain a TIN generally should not delay the time it takes to get a withhold- ing certificate under §1.1445–3. In addi- tion, the portion of these regulations that imposes a requirement concerning TINs, will not be applicable until 90 days after the date of publication in theFederal Reg- isterin order to permit taxpayers that cur- rently own real property additional time to obtain a TIN, if necessary. B.Section 1031 Like-Kind Exchanges. Section 1031(a) provides for the non- recognition of gain or loss on the exchange of like-kind property which is held for pro- ductive use in a trade or business or held for investment. Section 1031(a)(3) pro- vides for the exchange of like-kind prop- erty in deferred exchanges, where the tax- payer has 45 days after it relinquishes the property to the transferee to identify re- placement property and the transferee has until the earlier of 180 days or the due date of the tax return for the year of transfer to deliversuchpropertytothetransferor. Notices of nonrecognition under §1.1445–2(d) are limited to exchanges (including section 1031 exchanges) that qualify for nonrecognition treatment in their entirety (thus, a notice of nonrecog- nition may not be used if the transferor receives money or other property,i.e., boot). Consistent with the proposed reg- ulations, these final regulations provide that in the case of a simultaneous ex- change of like-kind U.S. real property interests (where there is no boot), the foreign transferor can provide a notice of nonrecognition under §1.1445–2(d)(2) to the transferee, and the transferee can rely on such notice, because the like-kind exchange will be fully completed on the day of the exchange. In the case of a deferred like-kind exchange of U.S. real property interests, the transferee cannot rely on a notice of nonrecognition, be- cause the transferee cannot be assured that the exchange will qualify for non- recognition treatment under section 1031 (e.g., that the property to be received by the foreign transferor will be identified within the 45-day period required under section 1031(a)), or even if the exchange qualifies under section 1031, that the for- eign transferor will not receive boot in the transaction. Although a notice of non- recognition is not available in a deferred like-kind exchange, the transferee may withhold a reduced amount based on a claim of nonrecognition upon receipt of a withholding certificate pursuant to the procedures of §1.1445–3. Commentators have proposed that us- ing a notice of nonrecognition for deferred like-kind exchanges should be permitted if a “claim of intent” to engage in an ex- change qualifying for nonrecognition un- der section 1031 is provided. The IRS con- tinues to believe that notices of nonrecog- nition are inappropriate for deferred like- kind exchanges. In a deferred like-kind ex- change, until the replacement property has been identified and a contract for its pur- chase is executed, the transferor does not know with certainty that the exchange will qualify for nonrecognition under section 1031. Moreover, it is uncertain whether boot will be received in the exchange if the replacement property is not identified at the time the relinquished property is trans- ferred to the transferee. Accordingly, the regulations do not permit a notice of non- recognition in the case of a deferred like- kind exchange and require the taxpayer to obtain a withholding certificate. Special Analyses It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Order 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) does not apply to these regulations. These reg- ulations impose no new collection of in- formation on small entities; therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chap- ter 6) is not required. Pursuant to section 7805(f) of the Code, the proposed regula- tions preceding these regulations were sub- mitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal author of these regula- tions is Robert W. Lorence, Jr., Office of Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR parts 1, 301 a nd 602 are amended as follows: PART 1— INCOME TAXES Paragraph 1. The authority for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * §1.897–1 [Amended] Par. 2. In §1.897–1, paragraph (p), the first sentence is amended by adding the language “or the identification number assigned by the Internal Revenue Service (see §301.6109–1 of this chapter)” imme- diately after the language “United States social security number”. §1.897–2 [Amended] Par. 3. Section 1.897–2 is amended as follows: For each of the paragraphs listed in the first column, remove the language in the second column and add in its place the language in the third column: October 14, 20038082003-41 I.R.B. ParagraphsRemoveAdd (g)(1)(i)(B)Director, Foreign Operations District (“Director”) Commissioner, Small Business/Self Employed Division (SB/SE) (g)(1)(i), fourth sentence of concluding text immediately following paragraph (g)(1)(i)(B) DirectorCommissioner (g)(1)(iii) headingDirectorCommissioner (g)(1)(iii)(A), first, fourth, and last sentences DirectorCommissioner (g)(1)(iii)(A), third sentenceDirector, Foreign Operations District; 1325 K St., N.W.; Washington, D.C. 20225 Commissioner, Small Business/Self Employed Division (SB/SE); S C3-413 NCFB, 500 Ellin Road, Lanham, MD 20706 (g)(1)(iii)(B) headingDirector’sCommissioner’s (g)(1)(iii)(B) introductory textDirectorCommissioner (g)(1)(iii)(B) concluding text immediately following (g)(1)(iii)(B)(2) DirectorCommissioner (g)(1)(iii)(C) both places it appearsDirectorCommissioner (g)(1)(iii)(D) headingDirectorCommissioner (g)(1)(iii)(D)DirectorCommissioner (g)(2)(i)(B)DirectorCommissioner (g)(2)(iii) headingDirectorCommissioner (g)(2)(iii)(A), first, fourth, and fifth sentence (both places it appears). DirectorCommissioner (g)(2)(iii)(A), third sentenceDirector, Foreign Operations District; 1325 K St. N.W.; Washington, D.C. 20225 Commissioner, Small Business/Self Employed Division (SB/SE); S C3-413 NCFB, 500 Ellin Road, Lanham, MD 20706 (g)(2)(iii)(B) headingDirector’sCommissioner’s (g)(2)(iii)(B) introductory textDirectorCommissioner (g)(2)(iii)(B) concluding text immediately following (g)(2)(iii)(B)(2) DirectorCommissioner (g)(2)(iii)(C), first and second sentencesDirectorCommissioner (g)(2)(iii)(D) headingDirectorCommissioner (g)(2)(iii)(D)DirectorCommissioner (g)(2)(iv), fourth sentenceDirectorCommissioner 2003-41 I.R.B.809October 14, 2003 (h)(2)(v), third sentenceAssistant Commissioner (International), Director, Office of Compliance, OP:I:C:E:666, 950 L’Enfant Plaza South, SW, COMSAT Building, Washington, D.C. 20024 Director, Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, PA 19114-0586 (h)(4)(ii), first sentenceAssistant Commissioner (International), Director, Office of Compliance, OP:I:C:E:666, 950 L’Enfant Plaza South, SW, COMSAT Building, Washington, D.C. 20024 Director, Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, PA 19114-0586 Par. 4. Section 1.897–3 is amended as follows: 1. For each of the paragraphs listed in the first column, remove the language in the second column and add in its place the language in the third column: ParagraphsRemoveAdd (c), introductory textDirector of the Foreign Operations District, 1325 K St., N.W., Washington, D.C. 20225 Director, Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, PA 19114-0586 (c)(1), introductory text, last sentencewhich must set forthwhich must contain all the following information (d)(1), fourth sentenceForeign Operations DistrictPhiladelphia Service Center (d)(2)(i), penultimate sentenceDirector, Foreign Operations DistrictU.S. Treasury (f)(1), second sentenceDirector, Foreign Operations District, 1325 K St., N.W., Washington, D.C. 20225 Director, Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, PA 19114-0586 (f)(1), fifth sentenceForeign Operations DistrictPhiladelphia Service Center (g)(1), second sentenceDirector of the Foreign Operations District Director, Philadelphia Service Center 2. In paragraph (c)(1)(i), remove the parenthetical “(if any)” after the words “identifying number”. 3. Paragraph (h) is added to read as follows: §1.897–3 Election by foreign corporation to be treated as a domestic corporation under section 897(i). ***** (h)Effective date. The requirement in paragraph (c)(1)(i) of this section that the statement making the section 897(i) elec- tion contain the identifying number of the foreign corporation (in all cases) is appli- cable November 4, 2003. Par. 5. Section 1.897–5 is added to read as follows: §1.897–5 Corporate Distributions. (a) through (d)(1)(iii)(E) [Reserved]. For further guidance, see §1.897–5T(a) through (d)(1)(iii)(E). (d)(1)(iii)(F) Identification by name and address of the distributee or transferee, including the distributee’s or transferee’s taxpayer identification number; (d)(1)(iii)(G) through (d)(4) [Re- served]. For further guidance, see §1.897–5T(d)(1)(iii)(G) through (d)(4). (e)Effective date. Thissectionisap- plicable to transfers and distributions after November 4, 2003. Par. 6. In §1.897–5T, paragraph (d)(1) (iii)(F) is revised to read as follows: §1.897–5T Corporate distributions (temporary). ***** (d)***(1)*** (iii) * * * (F) [Reserved]. For further guidance, see §1.897–5(d)(1)(iii)(F). ***** §1.897–6T [Amended] Par. 7. Section 1.897–6T is amended as follows: October 14, 20038102003-41 I.R.B. 1. In paragraph (a)(2), second sentence, thelanguage“,1034”isremoved. 2. Paragraph (a)(5) is removed and re- served. 3. Paragraph (a)(7),Example 2andEx- ample 3are removed and reserved. Par. 8. Section 1.1445–1 is amended as follows: 1. In paragraph (c)(1), second sen- tence, remove the language “filed with the Internal Revenue Service Center, Philadel- phia, PA 19255” and add in its place the language “filed at the location as provided in the instructions to Forms 8288 and 8288–A”. 2. In paragraph (c)(1), two sentences are added at the end. 3. In paragraph (c)(2)(i)(B), second sentence, remove the phrase “,if any,” af- ter the words “taxpayer identification num- ber”. 4. In paragraphs (d)(1)(i) and (d)(1)(ii), remove the parenthetical “(if any)” after the words “identifying number”. 5. In paragraphs (d)(2)(i), (d)(2)(iv)(B), and (d)(2)(vi)(B), remove the parentheti- cal “(if any)” after the words “identifying number”. 6. In paragraph (f)(2), the first sentence is revised, and a sentence is added after the first sentence. 7. In paragraph (f)(3)(i), the last sen- tence is revised. 8. Paragraphs (g)(9) and (g)(10) are revised. 9. Paragraph (h) is added. The additions and revisions read as fol- lows: §1.1445–1 Withholding on dispositions of U.S. real property interests by foreign persons: In general. ***** (c) * * * (1)***Forms8288and8288–Aare required to include the ident ifying num- bers of both the transferor an dthetrans- feree, as provided in paragr aph (d) of this section. If any identifying number as re- quired by such forms is not p rovided, the transferee must still rep ort and pay over any tax withheld on Form 8288, although the transferor cannot o btain a credit or re- fund of tax on the basis of a Form 8288–A that does not include thetransferor’s iden- tifying number (see paragraph (f)(2) of this section). ***** (f) * * * (2) * * * A stamped copy of Form 8288–A will be provided to the transferor by the Service (under paragraph (c) of this section) if the Form 8288–A is complete, including the transferor’s identifying number. Except as provided in paragraph (f)(3) of this section, a stamped copy of Form 8288–A must be attached to the transferor’s return to establish the amount withheld that is available as a credit. * * * (3) * * * (i) * * * Such a transferor must attach to its return a statement which supplies all of the information required by §1.1445–1(d), including the transferor’s identifying num- ber. ***** (g) * * * (9)Identifying number.Pursuantto §1.897–1(p), an individual’s identifying number is the social security number or the identification number assigned by the In- ternal Revenue Service (see §301.6109–1 of this chapter). The identifying number of any other person is its United States employer identification number. (10)Address of the Director, Philadel- phia Service Center. Any written commu - nication directed to the Director, Ph iladel- phia Service Center is to be addressed as follows: P.O. Box 21086, Drop Poin t 8731, FIRPTA Unit, Philadelphia, P A 19114–0586. (h)Effective date for taxpayer ide n- tification numbers. The requir ement in paragraphs (c)(2)(i)(B), (d)( 1)(i) and (ii), (d)(2)(i), (d)(2)(iv)(B), an d (d)(2)(vi)(B) of this section that taxpayer i dentifica- tion numbers be provided (in a ll cases) is applicable for dispositi ons of U.S. real property interests occur ring after Novem- ber 4, 2003. Par. 9. Section 1.1445–2 i s amended as follows: 1. Paragraph (b)(2)(iii) is redesignated as paragraph (b)(2)(iv) , and new paragraph (b)(2)(iii) is added. 2.Newly designated par agraph (b)(2)(iv)(B) is revis ed. 3. In paragraph (d)(2)(i)(B), the lan- guage “Assistant Commissioner (Inter- national)” is removed, and “Director, Philadelphia Service Center” is added in its place, and the parenthetical “(if any),” is removed after the words “identifying number”. 4. Paragraphs (d)(2)(iii) and (d)(2)(iv) are added immediately following the concluding text following paragraph (d)(2)(ii)(B). 5. In paragraphs (d)(3)(iii)(A)(2)and (d)(3)(iii)(A)(3), the parenthetical “(if any)” is removed after the words “identi- fying number”. 6. Paragraph (e) is added. The revision and additions read as fol- lows: §1.1445–2 Situations in which withholding is not required under section 1445(a). ***** (b) * * * (2) * * * (iii)Disregarded entities.Adisre- garded entity may notcertify that it is the transferor of a U.S. real property inter- est, as the disregarded entity is not the transferor for U.S. tax purposes, including sections 897 and 1445. Rather, the owner of the disregarded entity is treated as the transferor of property and must provide a certificate of non-foreign status to avoid withholding under section 1445. A disre- garded entity for these purposes means an entity that is disregarded as an entity sepa- rate from its owner under §301.7701–3 of this chapter, a qualified REIT subsidiary as defined in section 856(i), or a qualified subchapter S subsidiary under section 1361(b)(3)(B). Any domestic entity must include in its certification of non-for- eign status with respect to the transfer a certification that it is not a disregarded entity. This paragraph (b)(2)(iii) and the sample certification provided in paragraph (b)(2)(iv)(B) of this section (to the extent it addresses disregarded entities) is appli- cable for dispositions occurring on or after September 5, 2003. (iv)*** (B)Entity transferor. 2003-41 I.R.B.811October 14, 2003 “Section 1445 of the Internal Revenue Code provides that a transferee of a U.S. real prope rty interest must withhold tax if the transferor is a foreign person. For U.S. taxpurposes (including section 1445), the own er of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the pro perty and not the disregarded entity. To inform the transferee that withholding of tax is notrequired upon the disposition of a U.S. real property interest by [name of transferor] , the undersigned hereby certifies the following on behalf of [name of the transfero r]: 1. [Name of transferor] is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations); 2. [Name of transferor] is not a disregarded entity as defined in §1.1445–2(b)(2)(iii); 3. [Name of transferor]’s U.S. employer identification number is ;and 4. [Name of transferor]’s office address is [Name of transferor] understands that this certification may be disclosedtotheInternalRevenueService by transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalties of perjury I declare that I have examined this certifica tion and to the best of my knowledge and belief it is true, correct, and complete, and I further declare that I have authority to si gn this document on behalf of [name of transferor]. [Signature(s) and date] [Title(s)]” ***** (d) * * * (2) * * * (iii)Contents of the notice. No partic- ular form is required for a transferor’s no- tice to a transferee that the transferor is not required to recognize gain or loss with re- spect to a transfer. The notice must be ver- ified as true and signed under penalties of perjury by the transferor, by a responsible officer in the case of a corporation, by a general partner in the case of a partnership, and by a trustee or equivalent fiduciary in the case of a trust or estate. The following information must be set forth in paragraphs labeled to correspond with the designation set forth as follows— (A) A statement that the document submitted constitutes a notice of a non- recognition transaction or a treaty pro- vision pursuant to the requirements of §1.1445–2(d)(2); (B) The name, identifying number, and home address (in the case of an individual) or office address (in the case of an entity) of the transferor submitting the notice; (C) A statement that the transferor is not required to recognize any gain or loss with respect to the transfer; (D) A brief description of the transfer; and (E)Abriefsummaryofthelawand facts supporting the claim that recognition of gain or loss is not required with respect to the transfer. (iv)No notice allowed. The provisions of this paragraph (d)(2) do not apply to ex- clusions from income under section 121, to simultaneous like-kind exchanges un- der section 1031 that do not qualify for nonrecognition treatment in their entirety (see paragraph (d)(2)(ii)(A) of this sec- tion), and to non-simultaneous like-kind exchanges under section 1031 where the transferee cannot determine that the ex- change has been completed and all the con- ditions for nonrecognition have been sat- isfied at the time it is otherwise required to pay the section 1445 withholding tax and file the withholding tax return (Form 8288,“U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests”). In these cases, the transferee is excused from withhold- ing only upon the timely application for and receipt of a withholding certificate un- der §1.1445–3 (see §1.1445–3(b)(5) and (6) for specific rules applicable to transac- tions under sections 121 and 1031). This paragraph (d)(2)(iv) is applicable for dis- positions and exchanges occurring on or after September 5, 2003. ***** (e)Effective date for taxpayer iden- tification numbers. The requirement in paragraphs (d)(2)(i)(B), (d)(2)(iii)(B), and (d)(3)(iii)(A)(2)and(3) of this section that taxpayer identification numbers be provided (in all cases) is effective for dispositions of U.S. real property interests occurring after November 4, 2003. ***** Par. 10. Section 1.1445–3 is amended as follows: 1. In paragraph (a), after the seventh sentence, one sentence is added. 2. For each of the paragraphs listed in the column below, remove the language “Assistant Commissioner (International)”, and add “Director, Philadelphia Service Center” in its place. Paragraphs (b)(1), first sentence (f)(1), first sentence (f)(2)(iii), heading (f)(2)(iii), first sentence (g), third sentence, introductory text 3. In paragraph (b)(1), last sentence, re- move the language “of this section” and add “, and to the extent applicable, para- graph (b)(5) or (6) of this section” in its place. 4. Paragraph (b)(2) is revised. 5. Paragraphs (b)(5) and (b)(6) are added. October 14, 20038122003-41 I.R.B. 6. In paragraphs (f)(3)(i) and (g)(1), remove the parenthetical “(if any)” after the words “identifying number”. 7. Paragraph (h) is added. The revision and additions read as fol- lows: §1.1445–3 Adjustments to amount required to be withheld pursuant to withholding certificate. (a)***Innoevent,however,willa withholding certificate be issued without the transferor’s identifying number. * * * (b) * * * (2)Parties to the transaction.Theap- plication must set forth the name, address, and identifying number of the person submitting the application (specifying whether that person is the transferee or transferor), and the name, address, and identifying number of other parties to the transaction (specifying whether each such party is a transferee or transferor). The Service will deny the application if complete information, including the iden- tifying numbers of all the parties, is not provided. Thus, for example, the applicant should determine if an identifying number exists for each party, and, if none exists for a particular party, the applicant should notify the particular party of the obliga- tion to get an identifying number before the application can be submitted to the Service. The address provided in the case of an individual must be that individual’s home address, and the address provided in the case of an entity must be that entity’s office address. A mailing address may be provided in addition to, but not in lieu of, a home address or office address. ***** (5)Special rule for exclusions from in- come under section 121. A withholding certificate may be sought on the basis of a section 121 exclusion as a reduction in the amount of tax due under paragraph (c)(2)(v) of this section. The application must include information establishing that the transferor, who is a nonresident alien individual at the time of the sale (and is therefore subject to sections 897 and 1445) is entitled to claim the benefits of section 121. For example, a claim for reduced withholding as a result of section 121 must include information that the transferor oc- cupied the U.S. real property interest as his or her personal residence for the required period of time. (6)Special rule for like-kind exchanges under Section 1031. A withholding cer- tificate may be requested with respect to a like-kind exchange under section 1031 as a transaction subject to a nonrecognition provision under paragraph (c)(2)(ii) of this section. The application must include in- formation substantiating the requirements of section 1031. The IRS may require additional information during the course of the application process to determine that the requirements of section 1031 are satisfied. In the case of a deferred like-kind exchange, the withholding agent is excused from reporting and paying the withholding tax to the IRS within 20 days after the transfer only if an application for a withholding certificate is submitted prior to or on the date of transfer. See §1.1445–1(c)(2) for rules concerning de- layed reporting and payment where an application for a withholding certificate has been submitted to the IRS prior to or onthedateoftransfer. ***** (h)Effective date for taxpayer identifi- cation numbers. The requirement in para- graphs (b)(2), (f)(3)(i), and (g)(1) of this section that taxpayer identification num- bers be provided (in all cases) is applicable for dispositions of U.S. real property inter- ests occurring after November 4, 2003. ***** §1.1445–4 [Amended] Par. 11. In §1.1445–4, paragraph (c)(2), second sentence, is amended by removing the language “Assistant Com- missioner (International)” and adding “Director, Philadelphia Service Center” in its place. Par. 12. Section 1.1445–5 is amended as follows: 1. In paragraph (b)(2)(ii), first sentence, remove the language “Assistant Commis- sioner (International)” and add “Director, Philadelphia Service Center” in its place. 2. In paragraphs (b)(2)(ii)(B) and (b)(2)(ii)(C), remove the parenthetical “(if any)” after the words “identifying num- ber”. 3. In paragraph (b)(5)(i), second sen- tence, remove the language “filed with the Internal Revenue Service Center, Philadel- phia, PA 19255” and add in its place the language “filed at the location as provided in the instructions to Forms 8288 and 8288–A”. 4. In paragraph (b)(5)(i), the fifth sen- tence is revised. 5. In paragraph (b)(7), the fifth sen- tence is revised. 6. Paragraph (b)(8)(iii) is revised. 7. In paragraph (c)(3)(v), first and fifth sentences, remove the language “Assistant Commissioner (International)” and add “Director, Philadelphia Service Center” in its place. 8. Paragraph (e)(1)(ii) is revised. 9. Paragraph (e)(2) is redesignated as paragraph (e)(3), and new paragraph (e)(2) is added, 10.In newly designated para- graph (e)(3)(iii)(B), remove the lan- guage “§1.1445–5(e)(2)(iii)(B)” and add “§1.1445–5(e)(3)(iii)(B)” in its place; and remove the language “para- graph (e)(2)(iii)(B)” and add “paragraph (e)(3)(iii)(B)” in its place. 11. Paragraph (h) is added. The revisions and additions read as fol- lows: §1.1445–5 Special rules concerning distributions and other transactions by corporations, partnerships, trusts and estates. ***** (b) * * * (5) * * * (i) * * * Form 8288–A will be stamped by the Internal Revenue Service to show receipt, and a stamped copy will be mailed by the Service to the interest holder if the Form 8288 is complete, including the transferor’s identifying number, at the ad- dress shown on the form, for the inter- est-holder’s use. * * * (7)***Suchaninterest-holdermust attach to its return a statement which sup- plies all of the information required by §1.1445–1(d)(2). * * * (8) * * * (iii)Distributions by certain domestic corporations to foreign shareholders.The provisions of section 1445(e)(3) and para- graph (e)(1) of this section, requiring with- holding upon distributions in redemption 2003-41 I.R.B.813October 14, 2003 of stock under section 302(a) or liquidat- ing distributions under Part II of subchap- ter C of the Internal Revenue Code by U.S. real property holding corporations to for- eign shareholders, shall apply to distribu- tions made on or after January 1, 1985. The provisions of section 1445(e)(3) and paragraph (e)(1) of this section requiring withholding on distributions under section 301 by U.S. real property holding corpora- tions to foreign shareholders shall apply to distributions made after August 20, 1996. The provisions of paragraph (e) of this sec- tion providing for the coordination of with- holding between sections 1445 and 1441 (or 1442 or 1443) for distributions under section 301 by U.S. real property holding corporations to foreign shareholders apply to distributions after December 31, 2000 (see §1.1441–3(c)(4) and (h)). ***** (e)***(1)*** (ii) There is a distribution of property in redemption of stock treated as an exchange under section 302(a), in liquidation of the corporation pursuant to the provisions of Part II of subchapter C of the Internal Rev- enue Code (sections 331 through section 346), or with respect to stock under sec- tion 301 that is not made out of earnings and profits of the corporation. (2)Coordination rules for Section 301 distributions. If a domestic corporation makes a distribution of property under sec- tion 301 to a foreign person whose interest in such corporation constitutes a U.S. real property interest under the provisions of section 897 and the regulations thereunder, then see §1.1441–3(c)(4) for rules coordi- nating withholding obligations under sec- tions 1445 and 1441 (or 1442 or 1443)). ***** (h)Effective date for taxpayer identifi- cation numbers. The requirement in para- graphs (b)(2)(ii)(B) and (C) of this sec- tion that taxpayer identification numbers be provided (in all cases) is applicable for dispositions of U.S. real property interests occurring after November 4, 2003. ***** Par. 13. Section 1.1445–6 is amended as follows: 1. In paragraph (a), after the seventh sentence, one sentence is added. 2. Paragraph (b)(3) is revised. 3. For each of the paragraphs listed in the column below, remove the language “Assistant Commissioner (International)” and add “Director, Philadelphia Service Center” in its place. Paragraphs (f)(1), first sentence (f)(2)(iii), heading (f)(2)(iii) (g), introductory text, second sentence 4. Paragraphs (f)(3)(i) and (g)(1) are amended by removing the parenthetical “(if any)” after the words “identifying number”. 5. Paragraph (h) is added. The revision and additions read as fol- lows: §1.1445–6 Adjustments pursuant to withholding certificate of amount required to be withheld under section 1445(e). ***** (a)***Innoevent,however,willa withholding certificate be issued without the transferor’s identifying number.* * * (b) * * * (3)Relevant taxpayers. An application for withholding certificate pursuant to this section must include all of the following information: the name, identifying num- ber, and home address (in the case of an individual) or office address (in the case of an entity) of each relevant taxpayer with respect to which adjusted withholding is sought. ***** (h)Effective date for taxpayer identifi- cation numbers. The requirement in para- graphs (b)(3), (f)(3)(i), and (g)(1) of this section that taxpayer identification num- bers be provided (in all cases) is applicable for dispositions of U.S. real property inter- ests occurring after November 4, 2003. ***** §1.1445–9T [Removed] Par. 14. Section 1.1445–9T is removed. PART 301—PROCEDURE AND ADMINISTRATION Par. 15. The authority for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 16. Section 301.6109–1 is amended as follows: 1. In paragraph (b)(2)(v), remove the word “and”. 2. In paragraph (b)(2)(vi), remove the period at the end of the paragraph and add “; and” in its place. 3. Paragraph (b)(2)(vii) is added. 4. In paragraph (c), first and third sen- tences, remove the language “or (vi) of this section” and add “(vi), or (vii) of this sec- tion” in its place. The addition reads as follows: §301.6109–1 Identifying numbers. ***** (b) * * * (2) * * * (vii) A foreign person whose taxpayer identifying number is required to be fur- nished on any return, statement, or other document as required by the income tax regulations under section 897 or 1445. This paragraph (b)(2)(vii) applies after November 4, 2003. ***** PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 17. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 18. In §602.101, paragraph (b) is amended by revising the entries for 1.1445–2 and 1.1445–3 to read as follows: §601.601 OMB Control numbers. ***** (b) * * * October 14, 20038142003-41 I.R.B. CFR part or section where identified and described Current OMB control No. ***** 1.1445–2............................................................................. 1545–0902 ...................................................................................... 1545–1060 ...................................................................................... 1545–1797 1.1.445–3............................................................................. 1545–0902 ...................................................................................... 1545–1060 ...................................................................................... 1545–1797 ***** Robert E. Wenzel, Deputy Commissioner for Services and Enforcement. Approved July 9, 2003. Pamela F. Olson, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on August 4, 2003, 8:45 a.m., and published in the issue of the Federal Register for August 5, 2003, 68 F.R. 46081) Section 1274.—Determina- tion of Issue Price in the Case of Certain Debt Instruments Issued for Property (Also sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.) Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate.For purposes of sections 382, 1274, 1288, and other sec- tions of the Code, tables set forth the rates for October 2003. Rev. Rul. 2003–107 This revenue ruling provides various prescribed rates for federal income tax purposes for October 2003 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable fed- eral rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for de- termining the present value of annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. 2003-41 I.R.B.815October 14, 2003 REV. RUL. 2003–107 TABLE 1 Applicable Federal Rates (AFR) for October 2003 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-Term AFR1.68%1.67%1.67%1.66% 110% AFR1.85%1.84%1.84%1.83% 120% AFR2.01%2.00%2.00%1.99% 130% AFR2.18%2.17%2.16%2.16% Mid-Term AFR3.65%3.62%3.60%3.59% 110% AFR4.02%3.98%3.96%3.95% 120% AFR4.39%4.34%4.32%4.30% 130% AFR4.77%4.71%4.68%4.66% 150% AFR5.50%5.43%5.39%5.37% 175% AFR6.44%6.34%6.29%6.26% Long-Term AFR5.23%5.16%5.13%5.11% 110% AFR5.76%5.68%5.64%5.61% 120% AFR6.29%6.19%6.14%6.11% 130% AFR6.82%6.71%6.65%6.62% REV. RUL. 2003–107 TABLE 2 Adjusted AFR for October 2003 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-term adjusted AFR 1.36%1.36%1.36%1.36% Mid-term adjusted AFR2.98%2.96%2.95%2.94% Long-term adjusted AFR 4.74%4.69%4.66%4.64% REV. RUL. 2003–107 TABLE 3 Rates Under Section 382 for October 2003 Adjusted federal long-term rate for the current month4.74% Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the currentmonth and the prior two months.)4.74% October 14, 20038162003-41 I.R.B. REV. RUL. 2003–107 TABLE 4 Appropriate Percentages Under Section 42(b)(2) for October 2003 Appropriate percentage for the 70% present value low-income housing credit8.03% Appropriate percentage for the 30% present value low-income housing credit3.44% REV. RUL. 2003–107 TABLE 5 Rate Under Section 7520 for October 2003 Applicable federal rate for determini ng the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary intere st 4.4% Section 1288.—Treatment of Original Issue Doscounts on Tax-Exempt Obligations The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 1445.—Withholding of Tax on Dispositions of United States Real Property Interests Final and temporary regulations under sections 897 and 1445 of the Code require the use of taxpayer identifying numbers on submissions. See T.D. 9082, page 807. Section 6109.—Identifying Numbers Final and temporary regulations under sections 897 and 1445 of the Code require the use of taxpayer identifying numbers on submissions. See T.D. 9082, page 807. Section 7122.—Compromises 26 CFR 300.3: Offer to compromise fee. T.D. 9086 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 300 User Fees for Processing Offers to Compromise AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains amendments to the regulations relating to user fees to provide for the imposition of user fees for the processing of offers to compromise. The charging of user fees implements the Independent Offices Appropriations Act. EFFECTIVE DATE:NOVEMBER 1, 2003. FOR FURTHER INFORMATION CONTACT: Concerning cost method- ology, Eva Williams, 301–492–5395; concerning the regulations, G. William Beard, 202–622–3620 (not toll-free num- bers). SUPPLEMENTARY INFORMATION: Background This document amends the regulations relating to user fees to provide for the im- position of user fees for the processing of offers to compromise. The charging of user fees implements the Independent Of- fices Appropriations Act (IOAA), which is codified at 31 U.S.C. 9701. On November 6, 2002, a notice of proposed rulemaking (REG–103777–02, 2002–2 C.B. 889) was published in theFederal Register.Ap- proximately 149 comments were received. A public hearing on the regulations was held on February 13, 2003. The final regu- lations adopt the rules of the proposed reg- ulations. Offers to Compromise Section 7122 of the Internal Revenue Code (Code) gives the IRS the authority to compromise any civil or criminal case aris- ing under the internal revenue laws, prior to the referral of that case to the Depart- ment of Justice. Section 7122 also directs the IRS to prescribe guidelines for officers and employees of the IRS to determine whether an offer to compromise is ade- quate and should be accepted. Guidelines are contained in §301.7122–1. Pursuant to §301.7122–1(b), an offer may be accepted if there is doubt as to liability, if there is doubt as to collectibility, or if acceptance will promote effective tax administration. Pursuant to §301.7122–1(b)(3), offers may be accepted to promote effective tax administration if either: (1) the IRS determines that, although collection in full could be achieved, collection of the full liability would cause the taxpayer economic hardship within the meaning of §301.6343–1, or (2) there are no other grounds for compromise and there are compelling public policy or equity consid- erations. When an offer to compromise is re- ceived, an initial determination is made as to whether the offer is processable. Cur- rently, an offer is returned as nonprocess- able if the taxpayer is in bankruptcy, has not filed required tax returns, or has not submitted the offer to compromise on the proper form. Absent these conditions, the offer is accepted for processing and can- not be rejected without an independent ad- ministrative review of the decision to re- ject and, if the taxpayer chooses to appeal the rejection, independent review by the Office of Appeals. Even though an of- fer accepted for processing may later be returned to the taxpayer if the taxpayer fails to provide requested information or the IRS determines that the offer was sub- mitted solely to delay collection, such an 2003-41 I.R.B.817October 14, 2003 offer may not be returned before a manage- rial review of the proposed return is com- pleted pursuant to §301.7122–1(f)(5)(ii). Explanation of Provisions The final regulations establish a $150 user fee for the processing of certain of- fers to compromise tax liabilities pursuant to §301.7122–1. The user fee will not ap- ply to offers based solely on doubt as to li- ability and offers made by low income tax- payers whose incomes are at or below the poverty guidelines set by the Department of Health and Human Services (DHHS), or such other measure the IRS may adopt. Offers based on doubt as to liability are excepted from the user fee based on the in- equity of the IRS charging a fee to com- promise an uncertain liability when a com- promise is based upon a redetermination or reevaluation of the taxpayer’s liability for a tax (and the agreed upon amount may, in fact, provide for the full payment of the amount actually owed). Offers from low income taxpayers are excepted from the fee in light of section 7122(c)(3)(A), which prohibits the IRS from rejecting an offer from a low income taxpayer solely on the basis of the amount offered. Section 7122(c)(3)(A) literally applies to the rejection of an offer, rather than the return of an offer for failure to pay a user fee. Requiring payment of a user fee from a low income taxpayer would undermine section 7122(c)(3)(A) in cases where the taxpayer does not have the ability to pay the fee. Offers from low income taxpayers are therefore excepted. Taxpayers with offers that do not fall within the doubt as to liability or low in- come exceptions will submit the user fee along with the offerto compromise. If the offer is accepted to promote effective tax administration or is accepted based on doubt as to collectibility and a determina- tion that collecting more than the amount offered would create economic hardship within the meaning of §§301.6343–1, the fee will be applied to the amount of the of- fer or, if the taxpayer requests, refunded to the taxpayer. In other cases, the payment of the fee will be taken into account in de- termining the acceptable amount of the of- fer and therefore the taxpayer in total will pay no more than the taxpayer would have paid without the fee. While the fee will not be refunded if an offer is withdrawn, re- jected, or returned as nonprocessable after acceptance for processing, no additional fee will be charged if a taxpayer resubmits an offer the IRS determines to have been rejected or returned in error. Comments on the Proposed Regulation Most of the comments on the proposed regulations did not favor the fee. The com- ments focused on three concerns: the fee would create an additional financial hard- ship on taxpayers who are already experi- encing hardship; the income level for the low income exception to the fee was too low; and the fee should not be imposed until the offer to compromise is adminis- tered more effectively and efficiently. For the following reasons, these final regula- tions follow the proposed regulations with- out change. The most frequent concern in the comments was that the fee would cause additional financial hardship for taxpayers who are already experiencing financial hardship. The exception for low income taxpayers, however, excludes those tax- payers most likely to be disadvantaged by the user fee. Further, the imposition of the fee on other taxpayers will not change the net amount paid by the taxpayer to reach a compromise; the fee will be taken into account when considering whether the amount offered is acceptable. Although taxpayers who must pay the fee will not receive a refund if the offer is withdrawn, rejected, or returned after being accepted for processing, the IRS will work closely with taxpayers to perfect incomplete or inadequate offers before returning or re- jecting them. A number of commentators were con- cerned that the DHHS poverty guidelines used for purposes of the low income excep- tion are too low and recommended that the exception for low income taxpayers should be extended to 250% of the DHHS guide- lines. The 250% level corresponds to one of the criteria used for funding low income taxpayer clinics: in order to receive fund- ing pursuant to section 7526 of the Code, 90% of a clinic’s clients must fall below 250% of the DHHS poverty level. The commentators pointed to the relationship between section 7526 and offers to com- promise. Section 7526 was enacted con- temporaneously with section 7122(c)(3), which prohibits the IRS from rejecting an offer from a low income taxpayer based on the amount of the offer. Commentators ar- gued that imposing a user fee on taxpay- ers whose incomes are within 250% of the poverty level thwarts the objective of sec- tion 7526 to assist such taxpayers. The DHHS poverty guidelines are re- tained as the measure of the exception for the low income taxpayer. The 250% cri- teria in section 7526 only applies for pur- poses of that section; it does not extend to offers to compromise under section 7122. Had Congress intended to extend the 250% criteria to offers in compromise under sec- tion 7122, it could have done so. The DHHS poverty guidelines are a reasonable standard for offers to compromise in light of the fact that the amount of the fee will be reflected in the amount of the offer. Al- though some taxpayers may not be able to pay the fee because the fee exceeds their collectible assets and income, the DHHS standard will generally cover such taxpay- ers. Further, the IRS retains the author- ity under the final regulations to adjust the definition of low income taxpayer. The IRS could, therefore, change the low in- come standard if, in practice, there are a significant number of taxpayers with in- comes above the DHHS standard who are experiencing hardship as a result of the fee. A number of commentators urged that the fee should not be imposed until ineffi- ciencies and errors in the processing of of- fers to compromise are eliminated. In the past year, however, the IRS made substan- tial improvements to its offer in compro- mise program and is now able to process offers to compromise much more accu- rately, effectively and efficiently. The IRS acknowledges that further improvements are needed and is taking steps to achieve greater accuracy and efficiency, but the user fee is an integral part of that effort. The user fee should help reduce the num- ber of frivolous offers and the number of offers that are either withdrawn, returned, or rejected because the offeror would not provide adequate information for the IRS to process the offer or would not offer an amount that reflects the taxpayer’s ability to pay. Limiting the number of offers that will be withdrawn, returned, or rejected will enable the IRS to direct its resources towards the timely and efficient processing of acceptable offers. In addition, the fi- nal regulation was amended to make clear October 14, 20038182003-41 I.R.B. that no additional fee will be charged if a taxpayer resubmits an offer the IRS deter- mines to have been rejected or returned in error after acceptance for processing. Authority The IOAA authorizes agencies to pre- scribe regulations that establish charges for services provided by the agency (user fees). The charges must be fair and be basedonthecoststotheGovernment, the value of the service to the recipient, the public policy or interest served, and other relevant facts. The IOAA provides that regulations implementing user fees are subject to policies prescribed by the President, which are currently set forth in OMB Circular A–25, 58 FR 38142 (July 15, 1993). The OMB Circular encourages user fees for Government-provided services that confer benefits on identifiable recipi- ents over and above those benefits received by the general public. Under the OMB Circular, an agency that seeks to impose a user fee for Government-provided services must calculate its full cost of providing those services. In general, the amount of a user fee should recover the cost of providing the special service, unless the Office of Management and Budget grants an exception. Pursuant to the guidelines in the OMB Circular, the IRS calculated its cost of providing services under the offer in compromise program. The IRS determined that the full cost of investigat- ing doubt as to collectibility and effective tax administration offers averages $471 when streamlined procedures are used to investigate the financial condition of the taxpayer, and $3,983 when more detailed investigations are used. The IRS estimates that 70% of offers are processed under streamlined procedures. OMB granted an exception to the "full cost" requirement of the OMB Circular. The Treasury, Postal Service, and Gen- eral Government Appropriations Act of 1995, Public Law 103–329 (108 Stat. 2382) (the 1995 Appropriations Act) pro- vides that the Secretary may establish new fees for services provided by the IRS where such fees are authorized by another law, such as the IOAA. The user fees are implemented under the authority of the IOAA, the OMB Cir- cular, and the 1995 Appropriations Act. Special Analysis It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Or- der 12866. Therefore, a regulatory assess- ment is not required. It is hereby certi- fied that these regulations will not have a significant economic impact on a substan- tial number of small entities. Accordingly, a regulatory flexibility analysis is not re- quired. This certification is based on the information that follows. The economic impact of these regulations on any small entity will result from the entity being re- quired to pay a fee prescribed by these regulations in order to obtain a particular service. The dollar amount of the fee is not, however, substantial enough to have a significant economic impact on any en- tity subject to the fee. Pursuant to sec- tion 7805(f) of the Code, the preceding no- tice of proposed rulemaking was submitted to the Chief Counsel for Advocacy of the Small Business Administration for com- ment on its impact on small business. Drafting Information The principal author of these regula- tions is G. William Beard, Office of As- sociate Chief Counsel (Procedure and Ad- ministration), Collection, Bankruptcy and Summonses Division. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR part 300 is amended as follows: PART 300—USER FEES Paragraph 1. The authority citation for part 300 continues to read as follows: Authority: 31 U.S.C. 9701. Par. 2. Section 300.0 is amended as follows: 1. Paragraph (b)(3) is added. 2. Paragraph (c) is revised. The addition and revision read as fol- lows: §300.0 User fees; in general. ***** (b) * * * (3) Processing an offer to compromise. (c)Effective Date. This part 300 is ap- plicable March 16, 1995, except that the user fee for processing offers to compro- mise is applicableNOVEMBER 1, 2003. Par. 3. Section 300.3 is added to read as follows: §300.3 Offer to compromise fee. (a)Applicability. This section applies to the processing of offers to compromise tax liabilities pursuant to §301.7122–1 of this chapter. Except as provided in this sec- tion, this fee applies to all offers to com- promise accepted for processing. (b)Fee. (1) The fee for processing an offer to compromise is $150.00, except that no fee will be charged if an offer is— (i) Based solely on doubt as to liabil- ity as defined in §301.7122–1(b)(1) of this chapter; or (ii) Made by a low income taxpayer, that is, an individual who falls at or be- low the dollar criteria established by the poverty guidelines updated annually in the Federal Registerby the U.S. Department of Health and Human Services under au- thority of section 673(2) of the Omnibus Budget Reconciliation Act of 1981 (95 Stat. 357, 511) or such other measure that is adopted by the Secretary. (2) The fee will be applied against the amount of the offer, unless the taxpayer requests that it be refunded, if the offer is— (i) Accepted to promote effec- tive tax administration pursuant to §301.7122–1(b)(3) of this chapter; or (ii) Accepted based on doubt as to col- lectibility and a determination that collec- tion of an amount greater than the amount offered would create economic hardship within the meaning of §301.6343–1 of this chapter. (3) Except as otherwise provided in this paragraph (b), the fee will not be refunded to the taxpayer if the offer is accepted, re- jected, withdrawn, or returned as nonpro- cessable after acceptance for processing. (4) No additional fee will be charged if a taxpayer resubmits an offer the Secretary determines to have been rejected in error or returned in error after acceptance for processing. (c)Person liable for the fee. The person liable for the processing fee is the taxpayer whose tax liabilities are the subject of the offer. 2003-41 I.R.B.819October 14, 2003 Robert E. Wenzel, Deputy Commissioner for Services and Enforcement. Approved July 17, 2003. Pamela F. Olson, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on August 14, 2003, 8:45 a.m., and published in the issue of the Federal Register for August 15, 2003, 68 F.R. 48785) Section 7520.—Valuation Tables The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. Section 7872.—Treatment of Loans With Below-Market Interest Rates The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of October 2003. See Rev. Rul. 2003-107, page 815. October 14, 20038202003-41 I.R.B. Part II. Treaties and Tax Legislation Subpart A.—Tax Conventions and Other Related Items Supplemental Tables of Income Tax Rates Under New Income Tax Conventions Announcement 2003–62 The United States recently exchanged instruments of ratification for a new in- come tax treaty with the United Kingdom and new protocols for the income tax treaties with Australia and Mexico. The effective dates are as follows: United Kingdom. The provisions for withholding tax at source are effective for amounts paid or credited after May 1, 2003. For all other taxes, the treaty is effective for tax periods beginning on or after January 1, 2004. Students who have claimed treaty benefits under Article 21 of the former treaty can continue to apply those provisions. A person entitled to benefits under the previous treaty with the United Kingdom can elect to have that treaty apply in its en- tirety for a twelve-month period following the date the new treaty would otherwise ap- ply. Australia. The provisions for with- holding tax at source are effective for amounts paid or credited after July 1, 2003. For all other taxes, the protocol is effective for tax periods beginning on or after January 1, 2004. Mexico. The provisions for with- holding tax on dividends are effective for amounts paid or credited on or after September 1, 2003. For all other taxes, the treaty is effective for tax periods beginning on or after January 1, 2004. The tables below replace the entries in Tables 1 and 2 in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (For Withholding in 2003), and in Publication 901,U.S. Tax Treaties. The footnotes in those publica- tions that relate to the column headings in these tables generally apply to these replacement entries. The complete text of the U.K. treaty and the Australia and Mexico proto- cols are available on the IRS website at www.irs.gov. 2003-41 I.R.B.821October 14, 2003 October 14, 20038222003-41 I.R.B. 2003-41 I.R.B.823October 14, 2003 Part III. Administrative, Procedural, and Miscellaneous Section 45D.—New Markets Tax Credit Notice 2003–68 PURPOSE The purpose of this notice is to an- nounce that the Treasury Department and the Internal Revenue Service will clarify and amend the definition of a qualified low-income community investment under § 1.45D–1T(d)(1)(ii) of the temporary In- come Tax Regulations. BACKGROUND Section 45D(a)(1) of the Internal Rev- enue Code provides a new markets tax credit on certain credit allowance dates de- scribed in § 45D(a)(3) with respect to a qualified equity investment in a qualified community development entity (CDE) de- scribedin§45D(c). Section 45D(b)(1) provides that an eq- uity investment in a CDE is a “qualified eq- uity investment” if, among other require- ments: (A) the investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash; (B) substantially all of the cash is used by the CDE to make qualified low-in- come community investments; and (C) the investment is designated for purposes of § 45D by the CDE. Section 45D(b)(2) provides that the maximum amount of equity investments issued by a CDE that may be designated by the CDE as qualified equity invest- ments shall not exceed the portion of the new markets tax credit limitation set forth in § 45D(f)(1) that is allocated to the CDE by the Secretary under § 45D(f)(2). Section 45D(c)(1) provides that an en- tity is a CDE only if, among other require- ments, the entity is certified by the Secre- tary of the Treasury Department as a CDE. Section 45D(d)(1) provides that the term “qualified low-income community investment” means: (A) any capital or equity investment in, or loan to, any qualified active low-income community business (as defined in § 45D(d)(2)); (B) the purchase from another CDE of any loan made by such entity that is a qualified low-income community investment; (C) financial counseling and other services to businesses located in, and residents of, low-income communities; and (D) any equity investment in, or loan to, any CDE. Section 1.45D–1T(d)(1)(ii) provides that the term qualified low-income com- munity investment includes the purchase from another CDE (whether or not that CDE has received an allocation from the Secretary under § 45D(f)(2)) of any loan made by such entity that is a qualified low-income community investment. Sec- tion 1.45D–1T(d)(1)(ii) further provides that a loan purchased from another CDE is a qualified low-income community investment if it qualifies as a qualified low-income community investment either: (A) at the time the selling CDE made the loan; or (B) at the time the loan is purchased from the selling CDE. DISCUSSION Comments have been received re- questing clarification of whether, under § 1.45D–1T(d)(1)(ii), the purchase of a loan may be a qualified low-income community investment if the loan was made by an entity before the entity became a CDE. In response to these comments, § 1.45D–1T(d)(1)(ii) will be amended to provide that, for purposes of § 45D(d)(1)(B), a loan by an entity is treated as made by a CDE, notwithstand- ingthattheentitywasnotaCDEatthe time it made the loan, if the entity is a CDE at the time it sells the loan. Comments have also been received requesting guidance on whether the pur- chase of a loan by a CDE (the ultimate CDE) from a second CDE may be a qualified low-income community in- vestment under § 45D(d)(1)(B) if the loan was made by a third CDE (the originating CDE). In response to these comments, § 1.45D–1T(d)(1)(ii) will be amended to provide that, for purposes of § 45D(d)(1)(B): 1. The purchase of a loan by the ulti- mate CDE from a second CDE that pur- chased the loan from the originating CDE (or from another CDE) is treated as a pur- chase of the loan by the ultimate CDE from the originating CDE, provided that each entity that sold the loan was a CDE at the time it sold the loan; and 2. A loan purchased by the ultimate CDE from another CDE is a qualified low- income community investment if it quali- fies as a qualified low-income community investment either (A) at the time the loan was made or (B) at the time the ultimate CDE purchases the loan. The temporary regulations will be re- vised to incorporate the guidance set forth in this notice. Taxpayers may rely on this noticepriortotheissuanceoftherevised temporary regulations. DRAFTING INFORMATION The principal author of this notice is Paul Handleman of the Office of Asso- ciate Chief Counsel(Passthroughs and Special Industries). For further infor- mation regarding this notice, contact Mr. Handleman at (202) 622–3040 (not a toll-free call). October 14, 20038242003-41 I.R.B. Part IV. Items of General Interest Notice of Proposed Rulemaking Property Exempt From Levy REG–140378–01 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains pro- posed amendments to regulations relating to property exempt from levy, currently published under Internal Revenue Code section 6334. The regulation has been revised to provide guidance with respect to the following items and reflect changes made by the IRS Restructuring and Re- form Act of 1998 (RRA 98): procedures for obtaining prior judicial approval of cer- tain principal residence levies; exemption from levy for certain residences in small deficiency cases and for certain business assets in the absence of administrative approval or jeopardy; applicable dollar amounts for certain exemptions and the relevant dates for calculating the inflation adjustment for certain exemptions; and changes in titles of certain employees as a result of the reorganization of the IRS mandated by that Act. The proposed regulations also permit levy on certain specified payments with the prior approval of the Secretary, reflecting changes made by the Taxpayer Relief Act of 1997. DATES: Written comments and requests for a public hearing must be received by November 17, 2003. ADDRESSES: Send submissions to: CC:PA:RU (REG–140378–01), Room 5226, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC 20044. Submissions may be hand-de- livered between the hours of 8 a.m. and 5 p.m. to CC:PA:RU (REG–140378–01), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washing- ton, DC or sent electronically, via the IRS Internet site at:www.irs.gov/regs. FOR FURTHER INFORMATION CONTACT: Robin Ferguson at (202) 622–3610 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains proposed reg- ulations amending the Procedure and Administration Regulations (26 CFR part 301) under section 6334 of the Internal RevenueCodeof1986.Theproposedreg- ulations provide guidance on the amend- mentstosection6334madebytheIRS Restructuring and Reform Act of 1998 (Public Law 105–206) (RRA 98), and the Taxpayer Relief Act of 1997 (Public Law 105–34) (TRA 97). Explanation of Provisions Overview Section 6334 enumerates items of prop- erty exempt from levy and provides spe- cial rules for levies. In RRA 98, Con- gress amended section 6334 and created new requirements for levy upon certain residential property and business assets. Specifically, section 6334 was amended to provide for an exemption, in small de- ficiency cases, from levy for certain real property used as a residence by any in- dividual; to require judicial approval of the levy of certain principal residences; to require administrative approval of the levy of certain business assets; to increase certain exemption amounts; and to make certain conforming amendments. RRA 98 also mandated an IRS reorganization, which changed or eliminated certain posi- tion titles. TRA 97 amended section 6334 to provide that certain payments shall not be exempt from levy if the Secretary ap- proves. The proposed regulations provide guidance on each of these provisions. Levy Exemption for Residences in Small Deficiency Cases As amended, section 6334(a)(13) pro- vides an exemption from levy for any real property used as a residence by the tax- payer or any other individual (except for real property that is rented) if the amount of the levy does not exceed $5,000. The proposed regulations provide guidance on this exemption. Judicial Approval for Levies of Certain Principal Residences Prior to RRA 98, section 6334(a)(13) provided that the principal residence of the taxpayer, within the meaning of section 121, was exempt from levy in the absence of jeopardy or certain approval. Section 6334(e) permitted levy if an IRS district di- rector or assistant district director person- ally approved, in writing, the levy of prop- erty, or the Secretary determined that the collection of tax was in jeopardy. As amended, section 6334(a)(13)(B)(i) provides that the principal residence of the taxpayer, within the meaning of section 121, is exempt from levy except to the extent provided in section 6334(e). Sec- tion 6334(e)(1)(A) provides that a prin- cipal residence shall not be exempt from levy if a judge or magistrate of a district court of the United States approves, in writing, the levy of such residence. Sec- tion 6334(e)(1)(B) provides that the dis- trict courts of the United States shall have exclusive jurisdiction to approve such levy. Accordingly, judicialapproval is required prior to levy of a taxpayer’s principal resi- dence (hereinafter referred to as the section 6334(e)(1) proceeding). The Conference Report for RRA 98 states that no seizure of a dwelling that is the principal residence of the taxpayer or the taxpayer’s spouse, former spouse, or minor child will be allowed without prior judicial approval. The Conference Report further provides that notice of the judicial hearing must be provided to the taxpayer and family members residing in the prop- erty. The Conference Report also states that at the judicial hearing, the Secretary will be required to demonstrate (1) that the requirements of any applicable law or administrative procedures relevant to the levy have been met, (2) that the liability is owed, and (3) that no reasonable alter- native for the collection of the taxpayer’s debt exists. IRS Restructuring and Reform Act of 1998, Conference Report to Ac- company H.R. 2676, H.R. Conf. Rep. No. 105–599, 105th Cong., 2d Sess., at 267. With respect to whether a liability is owed, these proposed regulations interpret the legislative history to require the IRS 2003-41 I.R.B.825October 14, 2003 to demonstrate only that an assessed li- ability has not been satisfied. The pro- posed regulations specifically do not re- quire the IRS to demonstrate the merits of the underlying liability. Treasury and the IRS have concluded that the purpose of a section 6334(e)(1) proceeding is to deter- mine whether the proposed seizure is ap- propriate rather than to afford the taxpayer with an additional opportunity to contest the merits of the underlying tax liability. As discussed below, a section 6334(e)(1) proceeding, therefore, looks to whether the IRS has followed applicable law and pro- cedural rules relating to the levy and the existence of reasonable collection alterna- tives, in addition to whether an unsatis- fied liability exists. Other provisions of the Code, such as the deficiency proce- dures for income taxes, provide taxpay- ers with the opportunity to challenge the merits of an asserted liability. In the levy context, section 6330 gives taxpayers the right to request a hearing prior to levy, including levies that also are the subject of a section 6334(e)(1) proceeding. Sec- tion 6330(c)(2)(B) specifically gives the taxpayer the right to challenge the merits of the underlying liability if the taxpayer did not receive the statutory notice of defi- ciency or did not otherwise have an oppor- tunity to dispute thetax liability. In con- trast, nothing in section 6334(e)(1) indi- cates that Congress intended to provide a taxpayer with a further opportunity to con- test the merits of the underlying tax liabil- ity. Consistent with the language of section 6334(e)(1) and the legislative history, the proposed regulations provide that judicial approval is required prior to levy of the principal residence of the taxpayer, tax- payer’s spouse, taxpayer’s former spouse, or taxpayer’s minor child. Also in accor- dance with this legislative history, the pro- posed regulations provide that the Gov- ernment will request that the taxpayer be given notice and an opportunity to partici- pate in the section 6334(e)(1) proceeding. The Government will initiate the sec- tion 6334(e)(1) proceeding by filing with a district court of the United States a pe- tition seeking judicial approval of a prin- cipal residence levy. In its petition, the Government will set forth itsprima facie case by demonstrating that 1) the under- lying tax liability has not been satisfied, 2) the requirements of any applicable law or administrative procedure relevant to the levy have been met, and 3) no reasonable alternative for collection of the taxpayer’s debt exists. The petition will ask the court to issue to the taxpayer an order to show cause why the principal residence property should not be levied and a notice of hear- ing. The taxpayer will be granted a hearing to rebut the Government’sprima faciecase if the taxpayer files an objection within the time period required by the court raising a genuine issue of material fact demonstrat- ing that 1) the assessed tax liability has been satisfied, 2) the taxpayer has other as- sets from which the liability can be satis- fied, or 3) the IRS did not follow the appli- cable laws or procedures pertaining to the levy. The taxpayer is not permitted to chal- lenge the merits underlying the tax liabil- ity in the proceeding. Unless the taxpayer makes a timely and appropriate showing, the court would be expected to enter an or- der approving the levy of the principal res- idence property. Ifthepropertytobeleviedistheprin- cipal residence of the taxpayer’s spouse, former spouse, or minor child, the Gov- ernment will send each such person a letter providing notice of the commence- ment of the proceeding. The letter will be addressed in the name of the taxpayer’s spouse or ex-spouse, individually or on be- half of any minor children. If it is unclear who is living in the principal residence and/or what such person’s relationship is to the taxpayer, a letter will be addressed to “Occupant”. The purpose of the letter is to make the family members aware that their living arrangements may be placed in jeopardy if the court approves levy of the principal residence property. The proposed regulations provide that family members who receive notice of the commencement of a section 6334(e)(1) proceeding may not be joined as parties to the proceeding. As noted above, Treasury and the IRS believe that the purpose of such notification is to ensure that family members living at the residence that is the subject of the proposed levy understand that their living arrangements may be placed in jeopardy. A levy by the IRS, however, can reach only the taxpayer’s interest in property. The property rights (if any) of family members living at the residence are outside of the scope of that levy and are not at issue when an order approving the levy is sought from the court. Accordingly, because only the taxpayer’s property rights are at issue in a section 6334(e)(1) proceeding, the proposed regulations do not permit other family members to contest a request for judicial approval of aprincipal residence levy. This rule is similar to those for actions by the IRS to foreclose on tax liens on property under section 7403. In those actions, the Government names as defendants all individuals who may claim an interest in the property; residents who do not otherwise have a legal interest in property, such as by co-tenancy, are not named as defendants. The proposed regulations incorporate the procedures for obtaining judicial ap- proval of a principal residence levy. PriorApprovalofLeviesofCertain Business Assets In enacting RRA 98, Congress cre- ated new approval requirements for levies of certain business assets. Specif- ically, Congress enacted new section 6334(a)(13)(B)(ii), which provides that, except to the extent provided in section 6334(e), tangible personal property or real property (other than real property that is rented) used in the trade or business of an individual taxpayer shall be exempt from levy. Section 6334(e) was amended to provide that such property shall not be exempt from levy if a district director or assistant district director of the IRS personally approves (in writing) the levy of such property, or the Secretary finds that the collection of tax is in jeopardy. Section 6334(e)(2) of the Internal Revenue Code (Code). Section 6334(e) was further amended to provide that an official may not approve such levy unless the official determines that the taxpayer’s other assets subject to collection are insufficient to pay the amount due, together with expenses of the proceedings. RRA 98 section 3445(c)(1) clarifies that, with respect to permits issued by a state and required under state law for the harvest of fish or wildlife in the trade or business of an individual taxpayer, the term other assets as used in section 6334(e)(2) includes future income that may be derived by such taxpayer from the commercial sale of fish or wildlife under such permit. RRA 98 section 3445(c)(2) October 14, 20038262003-41 I.R.B. provides that section 3445(c)(1) shall not be construed to invalidate or in any way prejudice any assertion that the privilege embodied in such permits is not property or a right to property under the Code. The proposed regulations provide guid- ance on the current requirements of section 6334(e) relating to the procedures for ap- proval of the levy of certain business as- sets. Exemption Amounts and Conforming Amendments In RRA 98, Congress amended sections 6334(a)(2) and (a)(3) to increase the appli- cable exemption dollar amounts (which are indexed for inflation). Congress also en- acted a conforming amendment to section 6334(g)(1) to revise the dates to be used in calculating the inflation adjustment to the section 6334(a)(2) and (a)(3) exemp- tions. The proposed regulations provide guidance on these provisions. IRS Reorganization Pursuant to the reorganization of the IRS after RRA 98, the titles of district di - rector and assistant district director cited in section 6334(e)(2)(A) no longer exis t. The proposed regulations replace thes eti- tles with the current title, which is A rea Di- rector. Levy on Certain Payments In TRA 97, Congress amended section 6334 by adding new section 6334(f) and redesignating former section 6334(f) as section 6334(g). Section 6334(f) provides that any payment described in section 6331(h)(2)(B) or (h)(2)(C) (certain pay- ments upon which continuous levy may be authorized) shall not be exempt from levy if the Secretary approves the levy thereon under section 6331(h). The pro- posed regulations provide guidance on this provision. Proposed Effective Dat es The proposed regulations will apply on the date corresponding final regulations are published in theFederal Register. Special Analyses It has been determine d that this notice of proposed rulemaki ng is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory as- sessment is not required. It also has been determined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 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. Pur- suant to section 7805(f) of the Code, this notice of proposed rulemaking will be sub- mitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed orig- inal and 8 copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be avail- able for public inspection and copy ing. A public hearing will be scheduled if requested in writing by any person that timely submits written comments .Ifa public hearing is scheduled, no tice of the date, time, and place for the pu blic hearing will be published in theFede ral Register. Drafting Information The principal author of the proposed regulations is Robin Ferguson of the Office of Associate Chief Counsel, Pro- cedure and Administration (Collection, Bankruptcy and Summonses Division). ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 301 is pro- posedtobeamendedasfollows: PART 301—PROCEDURE AND ADMINISTRATION Paragraph 1. The au thority citation for part 301 continues to read in part as fol- lows: Authority: 26 U.S. C. 7805 * * * Par. 2. Section 301 .6334–1 is amended as follows: 1. Paragraphs (a)(2), (a)(3), (a)(8), (a)(13), (d), (e), and (f) are revised. 2. Paragraphs (g) and (h) are added. The revisions and additions read as fol- lows: §301.6334–1 Property exempt from levy. (a) * * * (2)Fuel, provisions, furniture, and per- sonal effects. So much of the fuel, provi- sions, furniture, and personal effects in the taxpayer’s household, and of the arms for personal use, livestock, and poultry of the taxpayer, that does not exceed $6,250 in value. (3)Books and tools of a trade, busi- ness or profession. So many of the books and tools necessary for the trade, business, or profession of an individual taxpayer as do not exceed in the aggregate $3,125 in value. ***** (8)Judgments for support of minor chil- dren. If the taxpayer is required under any type of order or decree (including an in- terlocutory decree or a decree of support pendente lite) of a court of competent juris- diction, entered prior to the date of levy, to contribute to the support of that taxpayer’s minor children, so much of that taxpayer’s salary, wages, or other income as is neces- sary to comply with such order or decree. The taxpayer must establish the amount necessary to comply with the order or de- cree. The Service is not required to re- lease a levy until such time as it is estab- lished that the amount to be released from levy actually will be applied in satisfac- tion of the support obligation. The Service may make arrangements with a delinquent taxpayer to establish a specific amount of such taxpayer’s salary, wage, or other in- come for each pay period that shall be exempt from levy, for purposes of com- plying with a support obligation. If the taxpayer has more than one source of in- come sufficient to satisfy the support obli- gation imposed by the order or decree, the amount exempt from levy, at the discretion of the Service, may be allocated entirely to one salary, wage or source of other in- come or be apportioned between the sev- eral salaries, wages, or other sources of in- come. ***** (13)Residences e xempt in small defi- ciency cases and principal residences and 2003-41 I.R.B.827October 14, 2003 certain business assets exempt in absence of certain approval or jeopardy—(i) Res- idences in small deficiency cases. If the amount of the levy does not exceed $5,000, any real property used as a residence of the taxpayer or any real property of the tax- payer (other than real property which is rented) used by any other individual as a residence. (ii)Principal residences and certain business assets. Except to the extent pro- vided in section 6334(e), the principal residence (within the meaning of section 121) of the taxpayer and tangible personal property or real property (other than real property which is rented) used in the trade or business of an individual taxpayer. ***** (d)Levy allowed on principal resi- dence. The Service will seek approval, in writing, by a judge or magistrate of a dis- trict court of the United States prior to levy of property that is owned by the taxpayer and used as the principal residence of the taxpayer, the taxpayer’s spouse, the tax- payer’s former spouse, or the taxpayer’s minor child. (1)Nature of judicial proceeding.The Government will initiate a proceeding for judicial approval of levy on a principal res- idence by filing a petition with the appro- priate United States District Court demon- strating that the underlying liability has not been satisfied, the requirements of any ap- plicable law or administrative procedure relevant to the levy have been met, and no reasonable alternative for collection of the taxpayer’s debt exists. The petition will ask the court to issue to the taxpayer an or- der to show cause why the principal res- idence property should not be levied and will also ask the court to issue a notice of hearing. (2) The taxpayer will be granted a hear- ingtorebuttheGovernment’sprima fa- ciecase if the taxpayer files an objec- tion within the time period required by the court raising a genuine issue of material fact demonstrating that the underlying tax liability has been satisfied, that the tax- payer has other assets from which the li- ability can be satisfied, or that the Service did not follow the applicable laws or proce- dures pertaining to the levy. The taxpayer is not permitted to challenge the merits un- derlying the tax liability in the proceeding. Unless the taxpayer files a timely and ap- propriate objection, the court would be ex- pected to enter an order approving the levy of the principal residence property. (3)Notice letter to be issued to cer- tain family members. If the property to be levied is owned by the taxpayer but is used as the principal residence of the taxpayer’s spouse, the taxpayer’s former spouse, or the taxpayer’s minor child, the Government will send a letter to each such person providing notice of the commence- ment of the proceeding. The letter will be addressed in the name of the taxpayer’s spouse or ex-spouse, individually or on be- half of any minor children. If it is unclear who is living in the principal residence property and/or what such person’s rela- tionship is to the taxpayer, a letter will be addressed to “Occupant”. The purpose of the letter is to provide notice to the family members that the property may be levied. The family members may not be joined as parties to the judicial proceeding because the levy attaches only to the taxpayer’s le- gal interest in the subject property and the family members have no legal standing to contest the proposed levy. (e)Levy allowed on certain business assets. The property described in sec- tion 6334(a)(13)(B)(ii) shall not be exempt from levy if— (1) An Area Director of the Service per- sonally approves (in writing) the levy of such property; or (2) The Secretary finds that the collec- tionoftaxisinjeopardy. AnAreaDi- rector may not approve a levy under para- graph (e)(1) unless the Area Director de- termines that the taxpayer’s other assets subject to collection are insufficient to pay the amount due, together with expenses of the proceeding. When other assets of an individual taxpayer include permits issued by a state and required under state law for the harvest of fish or wildlife in the tax- payer’s trade or business, the taxpayer’s other assets also include future income that may be derived by such taxpayer from the commercial sale of fish or wildlife under such permit. (f)Levy allowed on certain specified payments. Any payment described in sec- tion 6331(h)(2)(B) or (C) shall not be ex- empt from levy if the Secretary approves the levy thereon under section 6331(h). (g)Inflation adjustment. For any cal- endar year beginning after 1999, each dol- lar amount referred to in paragraphs (a)(2) and (3) of this section will be increased by an amount equal to the dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for the calendar year (using the language “calen- dar year 1998” instead of “calendar year 1992” in section 1(f)(3)(B)). If any dollar amount as adjusted is not a multiple of $10, the dollar amount will be rounded to the nearest multiple of $10 (rounding up if the amount is a multiple of $5). (h)Effective date. This section will ap- ply as of the date final regulations are pub- lished in theFederal Register. Robert E. Wenzel, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on August 18, 2003, 8:45 a.m., and published in the issue of the Federal Register for August 19, 2003, 68 F.R. 49729) Notice of Proposed Rulemaking Partnership Transactions Involving Long-Term Contracts REG–128203–02 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains pro- posed regulations relating to partnership transactions involving contracts accounted for under a long-term contract method of accounting. The regulations are necessary to resolve issues that were reserved in fi- nal regulations under section 460 that were published in theFederal Registeron May 15, 2002, addressing other mid-contract changes in taxpayer engaged in complet- ing such contracts. The effect of the regu- lations is to explain the tax consequences of these partnership transactions. DATES: Written and electronic comments and requests for a public hearing must be received by November 4, 2003. ADDRESSES: Send submissions to: CC:PA:RU (REG–128203–02), room 5226, Internal Revenue Service, POB October 14, 20038282003-41 I.R.B. 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday be- tween the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG–128203–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the inter- net directly to the IRS internet site at www.irs.gov/regs. FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Richard Probst, (202) 622–3060; con- cerning submissions, Guy Traynor, (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION Background Section 460 of the Internal Revenue Code generally requires that taxpayers de- termine taxable income from a long-term contract using the percentage-of-comple- tion method (PCM). Under regulations finalized in 2001 (T.D. 8929, 2001–1 C.B. 756), a taxpayer using the PCM generally includes a portion of the total contract price in income for each taxable year that the taxpayer incurs contract costs allocable to the long-term contract. More specifically, to determine the income from a long-term contract, the taxpayer first computes the completion factor for the contract, which is the percentage of the estimated total allocable contract costs that the taxpayer has incurred (based on the all events test of section 461, includ- ing economic performance, regardless of the taxpayer’s method of accounting) through the end of the taxable year. Sec- ond, the taxpayer computes the amount of cumulative gross receipts from the contract by multiplying the completion factor by the total contract price, which is the amount that the taxpayer reason- ably expects to receive under the contract. Third, the taxpayer computes the amount of current-year gross receipts, which is the difference between the cumulative gross receipts for the current taxable year and the cumulative gross receipts for the immediately preceding taxable year. This difference may be a loss (a negative number) based on revisions to estimates of total allocable contract costs or total contract price. Fourth, the taxpayer takes into account both the current-year gross receipts and the amount of allocable con- tract costs actually incurred during the taxable year. To the extent any portion of the total contract price has not been included in taxable income by the com- pletion year, section 460(b)(1) and the regulations require the taxpayer to include that portion in income for the taxable year following the completion year. A long-term contract or a portion of a long-term contract that is exempt from the PCM may be accounted for under any per- missible method, including the completed contract method (CCM). Under the CCM, a taxpayer does not take into account the gross contract price and allocable contract costs until the contract is complete, even though progress payments are received in years prior to completion. A taxpayer generally must allocate costs to a contract subject to section 460(a) in the same manner as direct and indirect costs are capitalized to property produced by a taxpayer under section 263A. The regulations provide exceptions, however, that reflect the differences in the cost allocation rules of sections 263A and 460. Section 460(h) directs the Secretary to prescribe regulations to the extent neces- sary or appropriate to carry out the pur- pose of section 460, including regulations to prevent a taxpayer from avoiding section 460 by using related parties, pass-through entities, intermediaries, options, and other similar arrangements. On May 15, 2002, final regulations un- der section 460 were issued to address a mid-contract change in taxpayer engaged in completing a contract accounted for un- der a long-term contract method of ac- counting (T.D. 8995; 2002–1 C.B. 1070). The regulations divide the rules regard- ing a mid-contract change in taxpayer into two categories—constructive completion transactions and step-in-the-shoes transac- tions. In a constructive completion transac- tion, the taxpayer that originally accounted for the long-term contract (old taxpayer) must recognize income from the contract as of the time of the transaction. The con- tract price used to determine the amount of income recognized by the taxpayer is the amount realized from the transaction, reduced by any amounts paid by the old taxpayer to the taxpayer subsequently ac- counting for the long-term contract (new taxpayer) that are allocable to the contract. Similarly, the new taxpayer in a construc- tive completion transaction is treated as though it entered into a new contract as of the date of the transaction. The new tax- payer’s contract price is the amount that the new taxpayer reasonably expects to re- ceive under the contract, reduced by the price paid by the new taxpayer for the con- tract, and increased by any amounts paid by the old taxpayer to the new taxpayer that are allocable to the contract. In contrast, in a step-in-the-shoes transaction, the old tax- payer’s obligation to account for the con- tract terminates on the date of the transac- tion and is assumed by the new taxpayer. The new taxpayer must assume the old tax- payer’s methods of accounting for the con- tract, with both the contract price and al- locable contract costs based on amounts taken into account by both parties. The final section 460 regulations pro- vide that a contribution to a partnership in a transaction described in section 721(a), a transfer of a partnership interest, and a distribution by a partnership to which sec- tion 731 applies (other than a distribution of a contract accounted for under a long- term contract method of accounting) are step-in-the-shoes transactions. In a notice issued concurrently with the final regula- tions, Notice 2002–37, 2002–1 C.B. 1095, Treasury and the IRS announced their in- tention to publish regulations setting forth the special rules that apply to these part- nership transactions and described many of these rules. The notice further provided that these regulations would apply to con- tributions, transfers, and distributions oc- curring on or after May 15, 2002. The IRS requested comments as to the appropriate scope and substance of the regulations. No comments were received. Explanation and Summary of Contents 1.Contribution of a Contract to a Partnership The final section 460 regulations provide that a contribution of a con- tract accounted for under a long-term contract method of accounting in a trans- action described in section 721(a) is a step-in-the-shoes transaction.Under 2003-41 I.R.B.829October 14, 2003 section 722, the partner’s basis in the partnership interest is increased by the adjusted basis of the contributed contract (including the uncompleted property, if applicable). Under section 723, the part- nership’s basis in the contributed contract (including the uncompleted property, if applicable) equals the partner’s basis in the contributed contract (including the uncompleted property, if applicable). Under the final section 460 regulations, the basis of a long-term contract (includ- ing the uncompleted property, if applica- ble) is determined by reference to the al- locable contract costs incurred by the tax- payer but not taken into account in comput- ing taxable income. Thus, if the contract is accounted for under the PCM, then the taxpayer’s basis in the contract is $0, even though the taxpayer has incurred costs and recognized income under the contract. If, on the other hand, the contract is accounted for under the CCM, then the taxpayer’s ba- sis in the contract is equal to the costs in- curred by the taxpayer, unreduced by any progress payments that the taxpayer has re- ceived but not taken into income with re- spect to the contract. Under these rules, a partner accounting for a long-term con- tract under the CCM that incurs $400 of allocable contract costs, receives $500 of progress payments with respect to the con- tract, and the contributes the contract, but not the progress payments, to a partnership would be able to claim a $400 basis in the partnership interest received. Without any adjustments, such an analysis would give rise to erroneous results. For this reason, these proposed regu- lations, like the rules in the final section 460 regulations applicable to corporate step-in-the-shoes transactions, such as transactions described in section 351(a), require a partner that contributes a contract accounted for under a long-term contract method of accounting to a partnership to adjust the basis of the partnership inter- est received. Specifically, the proposed regulations require the partner to increase the basis of the partnership interest by the amount of gross receipts that the partner has recognized under the contract, and reduce the basis of the partnership inter- est by the amount of gross receipts the partner has received or reasonably expects to receive under the contract. If the de- crease exceeds the partner’s basis in the partnership interest, then the partner must recognize income equal to the excess. To ensure that the partnership is not taxed again on any income taken into account by the partner under this rule, the pro- posed regulations require the partnership to reduce its total contract price (or gross contract price) by the amount of income recognized by the contributing partner. 2.Built-in Income and Loss Section 704(c) generally provides that income, gain, loss, or deduction attribut- able to property that is contributed to a partnership must be allocated to the con- tributing partner. The purpose of section 704(c) is to prevent the shifting of tax con- sequences among partners with respect to precontribution gain or loss. These proposed regulations provide that the principles of section 704(c) and §1.704–3 apply to allocations of income or loss with respect to a contract accounted for under a long-term contract method of accounting that is contributed to a partnership (or that is revalued by a partnership under §1.704–1(b)(2)(iv)(f)). The proposed reg- ulations provide that the partnership must apply section 704(c) to such income or loss in a manner that reasonably accounts for the section 704(c) income or loss over the remaining term of the contract. Under the proposed regulations, the amount of built-in income or built-in loss attributable to a contributed contract that is subject to section 704(c) is determined as follows. First, the contributing partner must take into account any income or loss required under the step-in-the-shoes rules for the period ending on the date of the contribution. Second, the partnership de- termines the amount of income or loss that the contributing partner would take into account if the contract were disposed of for its fair market value in a constructive completion transaction. This calculation is treated as occurring immediately after the partner has applied the step-in-the-shoes rules, but before the contribution to the partnership. Finally, this amount is re- duced by the amount of income, if any, that the contributing partner is required to recognize as a result of the contribution. 3.Transfer of a Partnership Interest The transfer of an interest in a part- nership engaged in a contract accounted for under a long-term contract method of accounting is a step-in-the-shoes transac- tion. Section 741 provides that gain or loss recognized on the sale or exchange of an interest in a partnership is consid- ered as gain or loss from a capital asset, except as provided in section 751. Sec- tion 751(a) provides that the amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or any part of the part- ner’s interest in the partnership attribut- able to unrealized receivables (as defined in section 751(c)) or inventory items (as defined in section 751(d)) of the partner- ship shall be considered as an amount re- alized from the sale or exchange of prop- erty other than a capital asset. In Rev. Rul. 79–51, 1979–1 C.B. 225, the IRS addressed a transaction in which a partner sold the partner’s entire interest in a part- nership holding partially completed con- tracts, the income from which was being accounted for under the CCM. The IRS ruled that the value of the contracts at the time of sale are unrealized receivables for purposes of section 751(c). Consistent with Rev. Rul. 79–51, the proposed regulations provide that con- tracts accounted for under a long-term contract method of accounting are unre- alized receivables within the meaning of section 751(c). The amount of ordinary income or loss attributable to a contract is the amount of income or loss that the partnership would take into account under the constructive completion rules if, at the time of a transfer of a partnership interest, the partnership disposed of the contract for its fair market value in a constructive completion transaction. 4.Adjustments to the Basis of Partnership Property Section 743(b) allows a partnership to adjust the basis of partnership property in the case of a transfer of an interest in the partnership by sale or exchange or on the death of a partner. If all or part of a ba- sis adjustment under section 743(b) is al- located to a contract accounted for under a long-term contract method of account- ing, the proposed regulations provide that the adjustment shall reduce or increase, as the case may be, the transferee partner’s distributive share of income or loss from October 14, 20038302003-41 I.R.B. the contract. In the case of a contract ac- counted for under the CCM, the basis ad- justment is taken into account in the year in which the contract is completed. In the case of a contract accounted for under a long-term contract method of account- ing other than the CCM, the portion of the basis adjustment that is recovered in each taxable year of the partnership must be determined by the partnership in a man- ner that reasonably accounts for the ad- justment over the remaining term of the contract. Similar rules apply if all or part of an adjustment to the basis of partner- ship property under section 734(b) is allo- cated to a contract accounted for under a long-term contract method of accounting. 5.Closing of the Books Generally, under the step-in-the-shoes rules, an old taxpayer’s obligation to ac- count for the contract terminates on the date of the transaction and is assumed by the new taxpayer. As a result, an old taxpayer using the PCM is required to recognize income from the contract based on the cumulative allocable contract costs incurred as of the date of the transaction. This rule differs from §1.706–1(c)(2)(ii), which provides that, if a partner’s interest in the partnership terminates during the taxable year, the partnership may deter- mine the partner’s distributive share of partnership items either by closing the partnership’s books as of the termination date or by prorating the partnership’s in- come for the entire year between the pre- and post-termination periods. Consistent with §1.706–1(c)(2)(ii), these regulations generally provide that upon the transfer or liquidation of an interest in a partnership holding a con- tract accounted for under a long-term contract method of accounting, the step-in-the-shoes rules apply to a con- tract accounted for under a long-term contract method of accounting only if the partnership’s books are properly closed with respect to that contract under section 706. If the partnership’s books are not closed with respect to the contract, the partnership shall compute its income or loss from each contract accounted for under a long-term contract method of accounting for the period that includes the date of the transfer or liquidation as though no change in taxpayer had oc- curred with respect to that contract, and may pro rate income from the contract un- der a reasonable method complying with section 706. Similar rules are provided for distributions of property (other than a contract accounted for under a long-term contract method of accounting) from a partnership holding a long-term contract, and for contributions of property (other than a contract accounted for under a long-term contractmethod of account- ing) to a partnership holding a contract accounted for under a long-term contract method of accounting. Comments are requested regarding whether similar rules should be provided with respect to transfers of stock in an S corporation holding a contract accounted for under a long-term contract method of accounting. See section 1377(a)(1) and §1.1377–1(a) (providing that each share- holder’spro ratashare of any S corpora- tion item for any taxable year is generally 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 portionpro rataamong the shares outstanding on that day); and section 1377(a)(2) and §1.1377–1(b) (pro- viding that an S corporation may elect to close its books if a shareholder’s entire interest in an S corporation is terminated during the S corporation’s taxable year, and the corporation and all affected share- holders agree). 6.Look-Back Method The final section 460 regulations gen- erally require any old taxpayer that ac- counted for income from a long-term con- tract under the PCM, and that transfers the contract to a new taxpayer in a step-in-the- shoes transaction, to provide the informa- tion described in §1.460–6(g)(3)(ii)(D) to the new taxpayer. The proposed regula- tions provide that, if the step-in-the-shoes transaction is a contribution of property (other than a contract accounted for under a long-term contract method of account- ing) to a partnership, the distribution of property (other than a contract accounted for under a long-term contract method of accounting) by a partnership, or a transfer of a partnership interest, the old taxpayer is not required to provide this information, because information necessary for the new taxpayer to apply the look-back method is provided by the partnership. A similar ex- ception is provided if the step-in-the-shoes transaction is a transfer of stock in an S corporation, or a conversion to or from an S corporation. 7.Distribution of a Contract by a Partnership The distribution of a contract accounted for under a long-term contract method of accounting by a partnership to a partner is a constructive completion transaction. The proposed regulations provide that, in determining the partnership’s income on the constructive completion transaction, the fair market value of the contract is treated as the amount realized from the transaction. The proposed regulations also clarify that, for purposes of determining each partner’s distributive share of part- nership items, any income or loss resulting from the constructive completion must be allocated among the partners of the part- nership as though the partnership closed its books on the date of the distribution. Section 732 determines the basis of property (other than money) distributed by a partnership to a partner. Section 734(b) provides for an adjustment to the basis of partnership property as a result of certain distributions from partnerships that have a section 754 election in effect. The proposed regulations provide that, if a contract accounted for under a long-term contract method of accounting is dis- tributed to a partner, then, for purposes of determining the partner’s basis in the contract (including the uncompleted prop- erty, if applicable) under section 732 and the amount of any basis adjustment under section 734(b), the partnership’s basis in the contract (including the uncompleted property, if applicable) immediately prior to the distribution is the partnership’s allo- cable contract costs (including transaction costs), increased (or decreased) by the amount of cumulative taxable income (or loss) recognized by the partnership on the contract through the date of the distribu- tion (including amounts recognized as a result of the constructive completion), and decreased by the amounts that the partner- ship has received or reasonably expects to receive under the contract. 2003-41 I.R.B.831October 14, 2003 The proposed regulations provide that, if a contract accounted for under a long- term contract method of accounting is dis- tributed to a partner, then, in computing the total contract price (or gross contract price) for the new contract, the partner’s basis in the contract (including the uncom- pleted property, if applicable) after the dis- tribution (as determined under section 732) is treated as consideration paid by the part- ner that is allocable to the contract. Thus, the total contract price (or gross contract price) of the new contract is reduced by the partner’s basis in the contract (includ- ing the uncompleted property, if applica- ble) immediately after the distribution. Section 751(b)(1) provides that, to the extent a partner receives in a distribution partnership property which is unrealized receivables or inventory items which have appreciated substantially in value, in ex- change for all or a part of the partner’s interest in other partnership property (in- cluding money), the transaction is consid- ered a sale or exchange of the property be- tween the distributee partner and the part- nership. The same treatment applies if a partner receives in a distribution part- nership property (including money) other than unrealized receivables and substan- tially appreciated inventory in exchange for the partner’s interest in the partner- ship’s unrealized receivables or substan- tially appreciated inventory. Because the distribution of a contract accounted for un- der a long-term contract method of ac- counting is the distribution of an unreal- ized receivable, section 751(b) may ap- ply to the distribution. Therefore, the pro- posed regulations provide an ordering rule under which a partnership that distributes a contract accounted for under a long-term contract method of accounting to apply the constructive completion rules before ap- plying the rules of section 751(b) to the distribution. 6.Treatment of progress payments under section 752 In Rev. Rul. 73–301, 1973–2 C.B. 215, the IRS addressed whether unre- stricted progress payments received by a partnership reporting its income under the CCM constitute a partnership liability under section 752. In that revenue rul- ing, the partnership performed all of the services required to be entitled to receive the progress payments, and there was no obligation to return the payments or per- form any additional services in order to retain the payments. The IRS ruled that the progress payments described in the ruling did not constitute a liability within the meaning of section 752. See also Rev. Rul. 81–241, 1981–2 C.B. 146, (citing and following Rev. Rul. 73–301). Treasury and the IRS request comments regarding whether there are circumstances under which the receipt of progress payments under a contract accounted for under a long-term contract method of accounting could give rise to a liability under section 752, and, if so, how the regulations would need to be revised to account for such liabilities. Proposed Effective Date As indicated in Notice 2002–37, the regulations are proposed to apply to con- tributions, transfers, and distributions that occur on or after May 15, 2002. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory as- sessment is not required. It also has been determined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to these regulations, and because the regulations do not im- pose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Ad- ministration for comment on its impact on small businesses. 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 copies) that are submitted timely to the IRS. Alternatively, taxpayers may submit comments electron- ically directly to the IRS Internet site at www.irs.gov/regs. Treasury and the IRS request comments on the clarity of the pro- posed rules and how they can be made eas- ier to understand. All comments will be available for public inspection and copy- ing. 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 theFederal Register. Drafting Information The principal authors of these proposed regulations are Matthew Lay and Richard Probst of the Office of the Associate Chief Counsel (Passthroughs and Special Indus- tries). However, personnel from other of- fices of Treasury and the IRS participated in their development. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authorit y citation for part 1 continues to read i npartasfollows: Authority: 26 U.S.C. 7805 *** Par. 2. Section1.460–0i s amended as follows: 1. Revising the entry for paragraph 1.460–4(k)(2)(iv). 2. Adding entries for §1. 460–4(k) (2)(iv)(A) through (E) . 3. Revising the entry f or §1.460–4(k) (3)(iv). 4. Revising the entry f or §1.460–4(k) (3)(iv)(A)(2)andadd inganentryfor § 1.460–4(k)(3)(iv) (C). 5. Revising the entry f or §1.460–4(k) (3)(v). 6. Adding entries fo r §1.460–4(k) (3)(v)(A) through ( D). 7. Adding entries fo r §1.460–6(g) (3)(ii)(D)(1)and( 2). The revisions and ad ditions read as fol- lows: §1.460–0 Outline of regulations under section 460. ***** October 14, 20038322003-41 I.R.B. §1.460–4 Methods of accounting for long-term contracts. ***** (k)*** (2)*** (iv) Special rules relating to distributions of certain contracts by a partnership. (A) In general. (B) Old taxpayer. (C) New taxpayer. (D) Basis rules. (E) Section 751. (1) In general. (2) Ordering rules. (3)*** (iv) Special rules related to certain corpo- rate and partnership transactions. (A)*** (2) Basis adjustment in excess of stock or partnership interest basis. ***** (C) Definition of old taxpayer and new tax- payer for certain partnership transactions. (v) Special rules relating to certain partner- ship transactions. (A) Section 704(c). (1) Contributions of contracts. (2) Revaluations of partnership property. (3) Allocation methods. (B) Basis adjustments under sections 743(b) and 734(b). (C) Cross reference. (D) Exceptions to step-in-the-shoes rules. ***** §1.460–6 Look-back method. ***** (g) * * * (3) * * * (ii)* * * (D) * * * (1) In general. (2) Special rules for certain pass-through entity transactions. ***** Par. 3. Section 1.460–4 is amended as follows: 1. Revising the sixth sentence in para- graph (k)(1). 2. Revising paragraph (k)(2)(iv). 3. Removing the first word “The” in paragraph (k)(3)(i), adding in its place “Except as otherwise provided in para- graph (k)(3)(v)(D) of this section, the”. 4. Revising paragraph (k)(3)(i)(I). 5. Redesignating paragraphs (k)(3) (i)(J), (K) and (L) as paragraphs (k)(3)(i)(K), (L) and (M), respectively. 6. Adding a new paragraph (k)(3)(i)(J). 7. Revising paragraph (k)(3)(iv). 8. Adding text to paragraph (k)(3)(v). 9. Adding to paragraph (k)(5)Example 9throughExample 13. The additions and revisions read as fol- lows. §1.460–4 Methods of accounting for long-term contracts. ***** (k) * * * (1)***Specialrulesrelatingtothe treatment of certain partnership transac- tions are provided in paragraphs (k)(2)(iv) and (k)(3)(v) of this section. * * * (2) * * * (iv)Special rules relating to distribu- tions of certain contracts by a partnership —(A)In general. The constructive completion rules of paragraph (k)(2) of this section apply to the distribution of a contract accounted for under a long-term contract method of accounting by a part- nership to a partner. The constructive completion rules of paragraph (k)(2) of this section do not apply to a transfer by a partnership (transferor partnership) of all of its assets and liabilities to a second partnership (transferee partner- ship) in an exchange described in section 721, followed by a distribution of the interest in the transferee partnership in liquidation of the transferor partnership, under §1.708–1(b)(4) (relating to termi- nations under section 708(b)(1)(B)) or §1.708–1(c)(3)(i) (relating to certain part- nership mergers). (B)Old taxpayer. The partnership that distributes the contract is treated as the old taxpayer for purposes of paragraph (k)(2)(ii) of this section. For purposes of determining the total contract price (or gross contract price) under paragraph (k)(2)(ii) of this section, the fair market value of the contract is treated as the amount realized from the transaction. For purposes of determining each partner’s distributive share of partnership items, any income or loss resulting from the constructive completion must be allocated among the partners of the old taxpayer as though the partnership closed its books on the date of the distribution. (C)New taxpayer. The partner receiv- ing the distributed contract is treated as the new taxpayer for purposes of paragraph (k)(2)(iii) of this section. For purposes of determining the total contract price (or gross contract price) under paragraph (k)(2)(iii) of this section, the new tax- payer’s basis in the contract (including the uncompleted property, if applicable) after the distribution (as determined under section 732) is treated as consideration paid by the new taxpayer that is allocable to the contract. Thus, the total contract price (or gross contract price) of the new contract is reduced by the partner’s basis in the contract (including the uncompleted property, if applicable) immediately after the distribution. (D)Basis rules. For purposes of deter- mining the new taxpayer’s basis in the con- tract (including the uncompleted property, if applicable) under section 732, and the amount of any basis adjustment under sec- tion 734(b), the partnership’s basis in the contract (including the uncompleted prop- erty, if applicable) immediately prior to the distribution is equal to— (1) The partnership’s allocable contract costs (including transaction costs); (2) Increased (or decreased) by the amount of cumulative taxable income (or loss) recognized by the partnership on the contract through the date of the distribu- tion (including amounts recognized as a result of the constructive completion); and (3) Decreased by the amounts that the partnership has received or reasonably ex- pects to receive under the contract. (E)Section 751—(1)In general. Con- tracts accounted forunder a long-term con- tract method of accounting are unrealized receivables within the meaning of section 751(c). For purposes of section 751, the amount of ordinary income or loss attrib- utable to a contract accounted for under a long-term contract method of accounting is the amount of income or loss that the partnership would take into account under the constructive completion rules of para- graph (k)(2) of this section if the contract were disposed of for its fair market value in a constructive completion transaction, ad- justed to account for any income or loss from the contract that is allocated under section 706 to that portion of the taxable year of the partnership ending on the date of the distribution, sale, or exchange. 2003-41 I.R.B.833October 14, 2003 (2)Ordering rules. Because the distri- bution of a contract accounted for under a long-term contract method of accounting is the distribution of an unrealized receiv- able, section 751(b) may apply to the dis- tribution. A partnership that distributes a contract accounted for under a long-term contract method of accounting must apply paragraph (k)(2)(ii) of this section before applying the rules of section 751(b) to the distribution. ***** (3) * * * (i) * * * (I) Contributions of contracts accounted for under a long-term contract method of accounting to which section 721(a) ap- plies; (J) Contributions of property (other than contracts accounted for under a long-term contract method of accounting) to a partnership that holds a contract ac- counted for under a long-term contract method of accounting; ***** (iv)Special rules related to certain corporate and partnership transactions —(A)Old taxpayer—basis adjustment —(1)In general. Except as provided in paragraph (k)(3)(iv)(A)(2)ofthissection, in the case of a transaction described in paragraph (k)(3)(i)(D), (E), or (I) of this section, the old taxpayer must adjust its basis in the stock or partnership interest of the new taxpayer by — (i) Increasing such basis by the amount of gross receipts the old taxpayer has rec- ognized under the contract; and (ii)Reducingsuchbasisbytheamount of gross receipts the old taxpayer has re- ceived or reasonably expects to receive un- der the contract. (2)Basis adjustment in excess of stock or partnership interest basis. If the old and new taxpayer do not join in the filing of a consolidated federal income tax return, the old taxpayer may not adjust its basis in the stock or partnership interest of the new taxpayer under paragraph (k)(3)(iv)(A)(1) of this section below zero and the old tax- payer must recognize ordinary income to the extent the basis in the stock or partner- ship interest of the new taxpayer otherwise would be adjusted below zero. If the old and new taxpayer join in the filing of a con- solidated federal income tax return, the old taxpayer must create an (or increase an ex- isting) excess loss account to the extent the basis in the stock of the new taxpayer oth- erwise would be adjusted below zero under paragraph (k)(3)(iv)(A)(1)ofthissection. See §§1.1502–19 and 1.1502–32(a)(3)(ii). (3)Subsequent dispositions of certain contracts. If the old taxpayer disposes of a contract in a transaction described in para- graph (k)(3)(i)(D), (E), or (I) of this section that the old taxpayer acquired in a trans- action described in paragraph (k)(3)(i)(D), (E), or (I) of this section, the basis adjust- ment rule of this paragraph (k)(3)(iv)(A) is applied by treating the old taxpayer as having recognized the amount of gross re- ceipts recognized by the previous old tax- payer under the contract and any amount recognized by the previous old taxpayer with respect to the contract in connection with the transaction in which the old tax- payer acquired the contract. In addition, the old taxpayer is treated as having re- ceived or as reasonably expecting to re- ceive under the contract any amount the previous old taxpayer received or reason- ably expects to receive under the contract. Similar principles will apply in the case of multiple successive transfers described in paragraph (k)(3)(i)(D), (E), or (I) of this section involving the contract. (B)New Taxpayer—(1)Contract price adjustment. Generally, payments between the old taxpayer and the new taxpayer with respect to the contract in connection with the transaction do not affect the contract price. Notwithstanding the preceding sen- tence and paragraph (k)(3)(iii)(B) of this section, however, in the case of transac- tions described in paragraph (k)(3)(i)(B), (D), (E), or (I) of this section, the total con- tract price (or gross contract price) must be reduced to the extent of any amount recog- nized by the old taxpayer with respect to the contract in connection with the trans- action (e.g., any amount recognized under section 351(b) or section 357 that is at- tributable to the contract and any income recognized by the old taxpayer pursuant to the basis adjustment rule of paragraph (k)(3)(iv)(A) of this section). (2)Basis in contract.Thenewtax- payer’s basis in a contract (including the uncompleted property, if applicable) ac- quired in a transaction described in para- graphs (k)(3)(i)(A) through (E) or para- graph (k)(3)(i)(I) of this section will be computed under section 362, section 334, or section 723, as applicable. Upon a new taxpayer’s completion (actual or construc- tive) of a CCM or a PCM contract ac- quired in a transaction described in para- graphs (k)(3)(i)(A) through (E) or para- graph (k)(3)(i)(I) of this section, the new taxpayer’s basis in the contract (including the uncompleted property, if applicable) is reduced to zero. The new taxpayer is not entitled to a deduction or loss in connec- tion with any basis reduction pursuant to this paragraph (k)(3)(iv)(B)(2). (C)Definition of old taxpayer and new taxpayer for certain partnership transactions. For purposes of paragraphs (k)(3)(ii), (iii) and (iv) of this section, in the case of a transaction described in paragraph (k)(3)(i)(I) of this section, the partner contributing the contract to the partnership is treated as the old taxpayer, and the partnership receiving the contract from the partner is treated as the new taxpayer. (v)Special rules relating to certain partnership transactions—(A)Section 704(c)—(1)Contributions of contracts. The principles of section 704(c) and §1.704–3 apply to income or loss with respect to a contract accounted for under a long-term contract method of accounting that is contributed to a partnership. The amount of built-in income or built-in loss attributable to a contributed contract that is subject to section 704(c) is determined as follows. First, the contributing partner must take into account any income or loss required under paragraph (k)(3)(ii)(A) of this section for the period ending on the date of the contribution. Second, the partnership must determine the amount of income or loss that the contributing part- ner would take intoaccount if the contract were disposed of for its fair market value in a constructive completion transaction. This calculation is treated as occurring immediately after the partner has applied paragraph (k)(3)(ii)(A) of this section, but before the contribution to the partnership. Finally, this amount is reduced by the amount of income, if any, that the con- tributing partner is required to recognize as a result of the contribution. (2)Revaluations of partnership prop- erty. The principles of sections 704(c) and 1.704–3 apply to allocations of income or loss with respect to a long-term con- tract that is revalued by a partnership un- der §1.704–1(b)(2)(iv)(f). The amount of built-in income or built-in loss attributable October 14, 20038342003-41 I.R.B. to such a contract is equal to the amount of income or loss that would be taken into account if, immediately before the revalu- ation, the contract were disposed of for its fair market value in a constructive comple- tion transaction. (3)Allocation methods. In the case of a contract accounted for under the CCM, any built-in income or loss under section 704(c) is taken into account in the year the contract is completed. In the case of a contract accounted for under a long-term contract method of accounting other than the CCM, any built-in income or loss under section 704(c) must be taken into account in a manner that reasonably accounts for the section 704(c) income or loss over the remaining term of the contract. (B)Basis adjustments under sec- tions 743(b) and 734(b). For pur- poses of §§1.743–1(d), 1.755–1(b), and 1.755–1(c), the amount of ordinary in- come or loss attributable to a contract accounted for under a long-term contract method of accounting is the amount of income or loss that the partnership would take into account under the constructive completion rules of paragraph (k)(2) of this section if, at the time of the sale of a partnership interest or the distribution to a partner, the partnership disposed of the contract for its fair market value in a constructive completion transaction. If all or part of the transferee’s basis adjustment under section 743(b) or the partnership’s basis adjustment under section 734(b) is allocated to a contract accounted for under a long-term contract method of account- ing, the basis adjustment shall reduce or increase, as the case may be, the affected party’s income or loss from the contract. In the case of a contract accounted for under the CCM, the basis adjustment is taken into account in the year in which the contract is completed. In the case of a contract accounted for under a long-term contract method of accounting other than the CCM, the portion of that basis adjust- ment that is recovered in each taxable year of the partnership must be determined by the partnership in a manner that reason- ably accounts for the adjustment over the remaining term of the contract. (C)Cross reference. See paragraph (k)(2)(iv)(E) of this section for rules re- latingtotheapplicationofsection751to the transfer of an interest in a partnership holding a contract accounted for under a long-term contract method of accounting. (D)Exceptions to step-in-the-shoes rules. Upon a contribution described in paragraph (k)(3)(i)(J) of this sec- tion, a transfer described in paragraph (k)(3)(i)(K) of this section, or a distribu- tion described in paragraph (k)(3)(i)(L) of this section, paragraphs (k)(3)(ii) and (iii) of this section apply to a contract accounted for under a long-term contract method of accounting only if the part- nership’s books are properly closed with respect to that contract under section 706. In these cases, the partnership is treated as both the old taxpayer and the new taxpayer for purposes of paragraphs (k)(3)(ii) and (iii) of this section. In all other cases in- volving these transactions, the partnership shall compute its income or loss from each contract accounted for under a long-term contract method of accounting for the period that includesthedateofthetrans- action as though no change in taxpayer had occurred with respect to the contract, and must allocate the income or loss from the contract for that period under a reasonable method complying with section 706. ***** (5) * * * Example 9.Constructive completion—PCM— distribution of contract by partne rship—(i)Facts. In Year 1, W, X, Y, and Z each contribute $100,000 to form equal partnership PRS. In Year 1, PRS enters into a contract. The total cont ract price is $1,000,000 and the estimated total allocable contract costs are $800,000. In Year 1, PRS incurs costs of $600,000 and receives $650,000 in pro gress payments under the contract. Under the contract, PRS performed all of the services required in order to be entitled to receive the progress payments, and there was no obligation to return the payments or perform any additional ser- vices in order to retain the payments. PRS properly accounts for the contr act under the PCM. In Year 2, PRS distributes the contract to X in liquidation of X’s interest. PRS incurs no costs and receives no progress payments in Year 2 pri or to the distribution. At the time of the distribution, PRS’s only asset other than the long-term contract and the partially constructed property is $450, 000 cash ($400,000 initially con- tributed and $50,000 in excess progress payments). The fair market value of the contract is $150,000. Pursuant to the d istribution, X assumes PRS’s con- tract obligations and rights. In Year 2, X incurs ad- ditional allocable contract costs of $50,000. X cor- rectly estima tes at the end of Year 2 that X will have to incur an additional $75,000 of allocable contract costs in Year 3 to complete the contract (rather than $150,000 as originally estimated by PRS). Assume that X properly accounts for the contract under the PCM, that PRS has no income or loss other than in- come or los s from the contract, and that PRS has an election under section 754 in effect in Year 2. (ii)Tax consequences to PRS. For Year 1, PRS reports receipts of $750,000 (the completion factor multiplied by total contract price ($600,000/$800,000 x $1,000,000)) and costs of $600,000, for a profit of $150,000, which is allocated equally among W, X, Y, and Z ($37,500 each). Immediately prior to the dis- tribution of the contract to X in Year 2, the contract is deemed completed. Under paragraph (k)(2)(iv)(B) of this section, the fair market value of the contract ($150,000) is treated as the amount realized from the transaction. For purposes of applying the PCM in Year 2, the total contract price is $800,000 (the sum of the amounts received under the contract and the amount treated as realized from the transaction ($650,000 + $150,000)) and the total allocable con- tract costs are $600,000. Thus, in Year 2 PRS re- ports receipts of $50,000 (total contract price minus receipts already reported ($800,000 - $750,000)), and costs incurred in year 2 of $0, for a profit of $50,000. Under paragraph (k)(2)(iv)(B) of this section, this profit must be allocated among W, X, Y, and Z as though the partnership closed its books on the date of the distribution. Accordingly, each partner’s dis- tributive share of this income is $12,500. (iii)Tax consequences to X.X’sbasisinits interest in PRS immediately prior to the distribution is $150,000 (X’s $100,000 initial contri bution, in- creased by $37,500, X’s distributive share of Year 1 income, and $12,500, X’s distributive share of Year 2 income). Under paragraph (k)(2)(iv) (D)ofthis section, PRS’s basis in the contract (including the uncompleted property, if applicable) immediately prior to the distribution is equal to $150,000 (the partnership’s allocable contract costs, $600,000, increased by the amount of income recognized by PRS on the contract through th edateofthe distribution (including amounts recognized as a result of the constructive completion), $200,000, decreased by the amounts that the partnership has received or reasonably expects to receive under the contract, $650,000). Under section 732, X’s basis in the contract (includi ng the uncompleted property) after the distribution is $150,000. Under paragraph (k)(2)(iv)(C) of this section, X’s basis in the contract (including the uncompl eted property) is treated as consideration paid by X that is allocable to the contract. X’s total contract price is $200,000 (the amount remaining to be paid under the terms of the contract less the consideration allocable to the con- tract ($350,000 - $150,000)). For Year 2, X reports receipts of $80,0 00 (the completion factor multiplied by the total contract price [($50,000/$125,000) x $200,000]) and costs of $50,000 (the costs incurred after the distri bution of the contract), for a profit of $30,000. For Year3, X reports receipts of $120,000 (the total contract price minus receipts already re- ported ($200 ,000 - $80,000)) and costs of $75,000, for a profit of $45,000. (iv)Section 734(b). Because X’s basis in the contract (in cluding the uncompleted property) imme- diately after the distribution, $150,000, is equal to PRS’s basis in the contract (including the uncom- pleted pro perty) immediately prior to the distribution, a basis adjustment under section 734(b) is not re- quired. Example 10 .Constructive completion—CCM —distribution of contract by partnership—(i)Facts. The facts are the same as inExample 9, except that 2003-41 I.R.B.835October 14, 2003 PRS and X properly account for the contract under the CCM. (ii)Tax consequences to PRS. PRS reports no in- come or costs from the contract in Year 1. Imme- diately prior to the distribution of the contract to X in Year 2, the contract is deemed completed. Under paragraph (k)(2)(iv)(B) of this section, the fair mar- ket value of the contract ($150,000) is treated as the amount realized from the transaction. For purposes of applying the CCM in Year 2, the gross contract price is $800,000 (the sum of the amounts received under the contract and the amount treated as realized from the transaction ($650,000 + $150,000)) and the total allocable contract costs are $600,000. Thus, in Year 2 PRS reports profits of $200,000 ($800,000 - $600,000). This profit must be allocated among W, X, Y, and Z as though the partnership closed its books on the date of the distribution. Accordingly, each part- ner’s distributive share of this income is $50,000. (iii)Tax consequences to X.X’sbasisinits interest in PRS immediately prior to the distribution is $150,000 ($100,000 initial contribution, increased by $50,000, X’s distributive share of Year 2 income). Under paragraph (k)(2)(iv)(D) of this section, PR S’s basis in the contract (including the uncompleted property, if applicable) immediately prior to the distribution is equal to $150,000 (the part nership’s allocable contract costs, $600,000, increased by the amount of cumulative taxable income recognized by PRS on the contract through the date of t he distribution (including amounts recognized as a result of the constructive completion), $200,000, decreased by the amounts that the pa rtnership has received or reasonably expects to receive under the contract, $650,000). Under section 732, X’s basis in the contract (including the uncompleted property) after the distribution is $150,000. Under paragraph (k)(2)(iv)(C) of this section, X’s basis in the contract is treated as cons iderationpaidbyX that is allocable to the contract. Under the CCM, X reports no gross receipts or costs in Year 2. For Year 3, the completion year, X re ports its gross contract price of $200,000 (the amount remaining to be paid under the terms of the contract less the consideration allocable to the contrac t ($350,000 - $150,000)) and its total allocable contract costs of $125,000 (the allocable contract costs that X incurred to complete the contract ($50,00 0 + $75,000)), for a profit of $75,000. (iv)Section 734(b). The results under section 734(b)arethesameas inExample 9. Example 11.Step-in-the-shoes—PCM—con- tribution of contract to partnership—(i)Facts.In Year 1, X enters into a contract that X properly ac- counts for under the PCM. The total contract price is $1,000,000 and the estimated total allocable con- tract costs are $8 00,000. In Year 1, X incurs costs of $600,000 and receives $650,000 in progress pay- ments under the contract. Under the contract, X per- formed all of th e services required in order to be entitled to receive the progress payments, and there was no obligation to return the payments or perform any addition al services in order to retain the pay- ments. In Year 2, X contributes the contract (includ- ing the uncompleted property) with a basis of $0 and $125,000 of cash to partnership PRS in exchange for a one-fourth partnership interest. X incurs costs of $10,000, and receives no progress payments in Year 2priorto the contribution of the contract. X and the other three partners of PRS share equally in its cap- ital, profits, and losses. The parties determine that, at the time of the contribution, the fair market value of the contract is $160,000. Following the contribu- tion in Year 2, PRS incurs additional allocable con- tract costs of $40,000. PRS correctly estimates at the end of Year 2 that it will have to incur an additional $75,000 of allocable contract costs in Year 3 to com- plete the contract (rather than $150,000 as originally estimated by PRS). (ii)Tax consequences to X. For Year 1, X reports receipts of $750,000 (the completion factor multi- plied by the total contract price ($600,000/$800,000 x $1,000,000)) and costs of $600,000, for a profit of $150,000. Because the mid-contract change in taxpayer results from a transaction described in para- graph (k)(3)(i)(I) of this section, X is not treated as completing the contract in Year 2. Under paragraph (k)(3)(ii)(A) of this section, for Year 2, X reports receipts of $12,500 (the completion factor multiplied by the total contract price ($610,000/$800,000 x $1,000,000), $762,500, decreased by receipts al- ready reported, $750,000) and costs of $10,000, for a profit of $2,500. Under section 722, X’s initial basis in its interest in PRS is $125,000. Pursuant to paragraph (k)(3)(iv)(A)(1) of this section, X must increase its basis in its interest in PRS b y the amount of gross receipts X recognized under the contract, $762,500, and reduce its basis by the amount of gross receipts X received under the contract , the $650,000 in progress payments. Accordingly, X’s basis in its interest in PRS is $237,500. (iii)Tax consequences to PRS. Beca use the mid- contract change in taxpayer results from a step-in- the-shoes transaction, PRS must account for the con- tract using the same methods of ac countingusedbyX prior to the transaction. The total contract price is the sum of any amounts that X and PRS have received or reasonably expect to receive u nder the contract, and total allocable contract costs are the allocable con- tract costs of X and PRS. For Year 2, PRS reports receipts of $134,052 (the c ompletion factor multi- plied by the total contract price [($650,000/$725,000) x $1,000,000], $896,552, decreased by receipts re- ported by X, $762,500) an d costs of $40,000, for a profit of $94,052. For Year 3, PRS reports receipts of $103,448 (the total contract price minus prior year re- ceipts ($1,000,000 - $896,552)) and costs of $75,000, for a profit of $28,448. (iv)Section 704(c). The principles of section 704(c) and §1.704–3 a pply to allocations of income orlosswithrespecttothecontractcontributedbyX. In this case, the amount of built-in income that is sub- ject to section 704 (c) is the amount of income or loss that the contributing partner would take into account if the contract were disposed of for its fair market value in a const ructive completion transaction. This calculation is treated as occurring immediately after the partner has applied paragraph (k)(3)(ii)(A) of this section, but b efore the contribution to the partnership. In a constructive completion transaction, the total contract price would be $810,000 (the sum of the amounts rec eived under the contract and the amount realized in the deemed sale ($650,000 + $160,000)). X would report receipts of $47,500 (total contract price minu s receipts already reported ($810,000 - $762,500)) and costs of $0, for a profit of $47,500. Thus, the amount of built-in income that is subject to secti on 704(c) is $47,500. The partnership must apply section 704(c) to this income in a manner that reasonably accounts for the income over the remain- ing term of the contract. For example, in Year 2, PRS could allocate $26,810 to X under section 704(c) (the amount of built-in income, $47,500, multiplied by a fraction, the numerator of which is the completion factor for the year, $650,000/725,000, less the com- pletion factor for the prior year, $610,000/$800,000, and the denominator of which is 100 percent re- duced by the completion factor for the taxable year preceding the event creating the section 704(c) in- come or loss, $610,000/$800,000). The remaining $67,242 would be allocated equally among all of the partners. In Year 3, the completion year, PRS could allocate $20,690 to X under section 704(c) ($47,500 x [($725,000/$725,000 - $650,000/$725,000) / (100 percent - $610,000/$800,000)]). The remaining $7,758 would be allocated equally among all the partners. Example 12.Step-in-the-shoes—CCM—con- tribution of contract to partnership—(i)Facts.Th e factsarethesameasinExample 11,exceptthatX and PRS properly account for the contract under the CCM, and X has a basis of $610,000 in the contract (including the uncompleted property). (ii)Tax consequences to X. X reports no income or costs from the contract in Years 1 or 2. X is not treated as completing the contract in Year 2. Under section 722, X’s initial basis in its interest in PRS is $735,000 (the sum of $125,000 cash and X’s basis of $610,000 in the contract (including the uncompleted property)). Pursuant to paragraph (k)(3)(iv)(A)(1)(ii) of this section, X must reduce its ba sis in its interest in PRS by the amount of gross receipts X received under the contract, or $650,000. Accordingly, X’s basis in its interest in PRS is $85,000. (iii)Tax consequences to PRS. PRS must account for the contract using the same methods of accounting used by X prior to the transaction . Under the CCM, PRS reports no gross receipts or costs in Year 2. For Year 3, the completion year, PRS reports its gross contract price of $1,000,00 0 (the sum of any amounts that X and PRS have received or reasonably expect to receive under the contract), and total allocable con- tract costs of $725,000 (t he allocable contract costs of X and PRS), for a profit of $275,000. (iv)Section 704(c). In this case, the amount of built-in income that is subject to section 704(c) is the amount of income or loss that the contributing part- ner would take into account if the contract were dis- posed of for its fair ma rket value in a constructive completion transaction. This calculation is treated as occurring immediately after the partner has ap- plied paragraph (k) (3)(ii)(A) of this section, but be- fore the contribution to the partnership. In a construc- tive completion transaction, X would report its gross contract price of $810,000 (the sum of the amounts received under the contract and the amount realized in the deemed sale ($650,000 + $160,000)) and its to- tal allocable c ontract costs of $610,000, for a profit of $200,000. Thus, the amount of built-in income that is subject to section 704(c) is $200,000. Out of PRS’s income of $27 5,000, in Year 3, $200,000 must be al- located to X under section 704(c), and the remaining $75,000 is allocated equally among all of the partners. Example 13.S tep-in-the-shoes—PCM—trans- fer of a partnership interest—(i)Facts.InYear1,W, X, Y, and Z each contribute $100,000 to form equal October 14, 20038362003-41 I.R.B. partnership PRS. In Year 1, PRS enters into a con- tract. The total contract price is $1,000,000 and the estimated total allocable contract costs are $800,000. In Year 1, PRS incurs costs of $600,000 and receives $650,000 in progress payments under the contract. Under the contract, PRS performed all of the services required in order to be entitled to receive the progress payments, and there was no obligation to return the payment or perform any additional services in order to retain the payments. PRS properly accounts for the contract under the PCM. In Year 2, W transfers W’s interest in PRS to T for $150,000. Assume that $10,000 of PRS’s Year 2 costs are incurred prior to the transfer, $40,000 are incurred after the transfer; and that PRS receives no progress payments in Year 2. Also assume that the fair market value of the con- tract on the date of the transfer is $160,000, that PRS closes its books with respect to the contract under s ec- tion 706 on the date of the transfer, and that PRS cor- rectly estimates at the end of Year 2 that it will have to incur an additional $75,000 of allocable contr act costs in Year 3 to complete the contract (rather than $150,000 as originally estimated by PRS). (ii)Income reporting for period ending on date of transfer. For Year 1, PRS reports receipts of $750,000 (the completion factor multiplied by total contract price ($600,000/$800,000 x $1, 000,000)) and costs of $600,000, for a profit of $150,000. This profit is allocated equally among W, X, Y, and Z ($37,500 each). Under paragraph (k)(3 )(ii)(A) of this section, for the part of Year 2 ending on the date of the transfer of W’s interest, PRS reports receipts of $12,500 (the completion factor mu ltiplied by the to- tal contract price ($610,000/$800,000 x $1,000,000) minus receipts already reported ($750,000)) and costs of $10,000 for a profit of $ 2,500. This profit is allocated equally among W, X, Y, and Z ($625 each). (iii)Income reporting for period after transfer. PRS must continue to use the PCM .Forthepart of Year 2 beginning on the day after the transfer, PRS reports receipts of $134,052 (the completion factor multiplied by the to tal contract price decreased by receipts reported by PRS for the period ending on the date of the transfer [($650,000/$725,000 x $1,000,000) - $762,500] ) and costs of $40,000, for a profit of $94,052. This profit is shared equally among T, X, Y, and Z ($23,513 each). For Year 3, PRS reports receip ts of $103,448 (the total con- tract price minus prior year receipts ($1,000,000 - $896,552)) and costs of $75,000, for a profit of $28,448. The profi tforYear3issharedequally among T, X, Y, and Z ($7,112 each). (iv)Tax Consequences to W. W’s amount real- ized is $150,000. W ’s adjusted basis in its interest in PRS is $138,125 ($100,000 originally contributed, plus $37,500, W’s distributive share of PRS’s Year 1 income, and $62 5, W’s distributive share of PRS’s Year 2 income prior to the transfer). Accordingly, W’s income from the sale of W’s interest in PRS is $11,875. Unde r paragraph (k)(2)(iv)(E) of this sec- tion, for purposes of section 751(a), the amount of ordinary income attributable to the contract is deter- mined as fol lows. First, the partnership must deter- mine the amount of income or loss from the contract that is allocated under section 706 to the period end- ing on the d ate of the sale ($625). Second, the part- nership must determine the amount of income or loss that the partnership would take into account under the constru ctive completion rules of paragraph (k)(2) of this section if the contract were disposed of for its fair market value in a constructive completion transac- tion. Because PRS closed its books under section 706 with respect to the contract on the date of the sale, this calculation is treated as occurring immediately after the partnership has applied paragraph (k)(3)(ii)(A) of this section on the date of the sale. In a constructive completion transaction, the total contract price would be $810,000 (the sum of the amounts received under the contract and the amount realized in the deemed sale ($650,000 + $160,000)). PRS would report re- ceipts of $47,500 (total contract price minus receipts already reported ($810,000 - $762,500)) and costs of $0, for a profit of $47,500. Thus, the amount of or- dinary income attributable to the contract is $47,500, and W’s share of that income is $11,875. Thus, under §1.751–1(a), all of W’s $11,875 of income from the sale of W’s interest in PRS is ordinary income. (v)Tax Consequences to T. T’s adjusted ba- sis for its interest in PRS is $150,000. Under §1.743–1(d)(2), the amount of income that would be allocated to T if the contract were disposed of for its fair market value (adjusted to account for income from the contract for the portion of PRS’s taxable year that ends on the date of the transfer) is $11,875. Under §1.743–1(b), the amount of T’s basis adjustment under section 743(b) is $11,875. Under paragraph (k)(3)(v)(B) of this section, the portion of T’s basis adjustment that is recovered in Year 2 and Year 3 must be determined by PR Sin a manner that reasonably accounts for the adjust- ment over the remaining term of the contract. For example, PRS could recover $6,703 of the adjust- ment in Year 2 (the amount of the basis adjustment, $11,875, multiplied by a fraction, the numerator of which is the excess of the comp letion factor for the year, $650,000/$725,000, less the completion factor for the prior year, $610,000/$800,000, and the denominator of which is 10 0 percent reduced by the completion factor for the taxable year preceding the transfer, $610,000/$800,000). T’s distributive shareofincomeinYear2f rom the contract would be adjusted from $23,513 to $16,810 as a result of the basis adjustment. In Year 3, the completion year, PRS could recover $5,17 2 of the adjustment ($11,875 x [($725,000/$725,000 - $650,000/$725,000) / (100 percent - $610,000/$800,000)]). T’s distributive share of income in Ye ar 3, the completion year, from the contract would be adjusted from $7,112 to $1,940 as a result of the basis adjustment. ***** Par. 4. Section 1.46 0–6 is amended as follows: 1. Paragraph (g)(3) (ii)(D) is revised. 2. Paragraph (g)(4 )isrevised. The revisions read a sfollows: §1.460–6 Look-back method. ***** (g) * * * (3) * * * (ii) * * * (D)Information old t axpayer must provide—(1)In gene ral. Except as pro- videdinparagraph( g)(3)(ii)(D)(2)ofthis section, in order to help the new taxpayer to apply the look-back method with re- spect to pre-transaction taxable years, any old taxpayer that accounted for income from a long-term contract under the PCM or PCCM for either regular or alterna- tive minimum tax purposes is required to provide the information described in this paragraph to the new taxpayer by the due date (not including extensions) of the old taxpayer’s income tax return for the first taxable year ending on or after a step-in-the-shoes transaction described in §1.460–4(k)(3)(i). The required informa- tion is as follows - (i) The portion of the contract reported by the old taxpayer under PCM for regu- lar and alternative minimum tax purposes (i.e., whether the old taxpayer used PCM, the 40/60 PCCM method, or the 70/30 PCCM method); (ii) Any submethods used in the appli- cation of PCM (e.g., the simplified cost-to- cost method or the 10-percent method); (iii) The amount of total contract price reportedbyyear; (iv) The numerator and the denominator of the completion factor by year; (v) The due date (not including exten- sions) of the old taxpayer’s income tax re- turns for each taxable year in which in- come was required to be reported; (vi) Whether the old taxpayer was a cor- porate or a noncorporate taxpayer by year; and (vii) Any other information required by the Commissioner by administrative pro- nouncement. (2)Special rules for certain pass-through entity transactions.For purposes of paragraph (g)(3)(ii)(D)(1) of this section, in the case of a transac- tion described in §1.460–4(k)(3)(i)(I), the contributing partner is treated as the old taxpayer, and the partnership is treated as the new taxpayer. In the case of transac- tions described in §§1.460–4(k)(3)(i)(F), (G), (J), (K), or (L), the old taxpayer is not required to provide the information described in paragraph (g)(3)(ii)(D)(1) of this section, because information nec- essary for the new taxpayer to apply the look-back method is provided by the pass-through entity. This paragraph (g)(3)(ii)(D) is applicable for transactions on or after August 6, 2003. ***** 2003-41 I.R.B.837October 14, 2003 (4)Effective date. Except as provided in paragraph (g)(3)(ii)(D) of this section, this paragraph (g) is applicable for trans- actions on or after May 15, 2002. ***** Par. 5. In §1.704–3, a sentence is added at the end of paragraph (a)(3)(ii) to read as follows: §1.704–3 Contributed property. (a) * * * (3) * * * (ii) * * * See §1.460–4(k)(3)(v)(A) for a rule relating to the amount of built-in in- come or built-in loss attributable to a con- tract accounted for under a long-term con- tract method of accounting. ***** Par. 6. Section 1.722–1 is amended by adding a new sentence between the sixth and seventh sentences to read as follows: §1.722–1 Basis of contributing partner’s interest. * * *See §1.460–4(k)(3)(iv)(A) for rules relating to basis adjustments re- quired where a contract accounted for under a long-term contract method of ac- counting is transferred in a contribution to which section 721(a) applies. ***** Par. 7. A sentence is added at the end of §1.723–1 to read as follows: §1.723–1 Basis of property contributed to partnership. * * * See §1.460–4(k)(3)(iv)(B)(2)for rules relating to adjustments to the basis of contracts accounted for using a long-term contract method of accounting that are ac- quired in certain contributions to which section 721(a) applies. Par. 8. In §1.732–1, a sentence is added at the end of paragraph (c)(1)(i) to read as follows: §1.732–1 Basis of distributed property other than money. ***** (c) * * * (1) * * * (i) * * * See §1.460–4(k)(2)(iv)(D) for a rule determining the partnership’s basis in a long-term contract accounted for under a long-term contract method of accounting. ***** Par. 9. In §1.734–1, the undesig- nated paragraph immediately following paragraph (b)(1)(ii) is revised to read as follows: §1.734–1 Optional adjustment to basis of undistributed partnership property. ***** (b) * * * (1) * * * (ii) * * * See §1.460–4(k)(2)(iv)(D) for a rule de- termining the partnership’s basis in a long- term contract accounted for under a long- term contract method of accounting. The provisions of this paragraph (b)(1) are il- lustrated by the following examples: ***** Par. 10. Section 1.743–1 is amended as follows: 1. A sentence is added at the end of paragraph (d)(2). 2. A sentence is added at the end of paragraph (j)(2). The additions read as follows: §1.743–1 Optional adjustment to basis of partnership property. ***** (d) * * * (2) * * * See §1.460–4(k)(3)(v)(B) for a rule relating to the computation of income or loss that would be allocated to the trans- feree from a contract accounted for under a long-term contract method of accounting as a result of the hypothetical transactio n. ***** (j) * * * (2)***See§1.460–4(k)(3)(v)(B)for rules relating to the effect of a basis ad- justment under section 743(b) that is allo- cated to a contract accounted for under a long-term contract method of accounting in determining the transferee’s distributive share of income or loss from the contract. ***** Par. 11. In §1.751–1, a sentence is added at the end of paragraph (a)(2) to read as follows: §1.751–1 Unrealized receivables and inventory items. (a) * * * (2) * * * See §1.460–4(k)(2)(iv)(E) for rules relating to the amount of ordinary income or loss attributable to a contract accounted for under a long-term contract method of accounting. ***** Par. 12. Section 1.755–1 is amended as follows. 1. Adding a sentence at the end of para- graph (b)(1)(ii). 2. Paragraph (c)(5) is redesignated as paragraph (c)(6). 3. New paragraph (c)(5) is added. The additions read as follows: §1.755–1 Rules for allocation of basis. ***** (b) * * * (1) * * * (ii)***See§1.460–4(k)(3)(v)(B)fora rule relating to the computation of income or loss that would be allocated to the trans- feree from a contract accounted for under a long-term contract method of accounting as a result of the hypothetical transaction. *** (c) * * * (5)Cross reference. See §1.460–4(k) (3)(v)(B) for a rule relating to the compu- tation of unrealized appreciation or depre- ciation in a contract accounted for under a long-term contract method of accounting. ***** Dale F. Hart, Acting Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Reg ister on August 5, 2003, 8:45 a.m., and published in the issue of the Federal Register for August 6, 2003, 68 F.R. 46516) October 14, 20038382003-41 I.R.B. Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the ef- fect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is be- ingextendedtoapplytoavariationofthe fact situation set forth therein. Thus, if an earlier ruling held that a principle ap- plied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodi- fied,below). Clarifiedis used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously pub- lished ruling and points out an essential difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare withamplifiedandclarified,above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rul- ings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published ruling is not correct and the correct position is beingstatedinanewruling. Supersededdescribes a situation where the new ruling does nothing more than re- state the substance and situation of a previ- ously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same po- sition published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single rul- ing a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new rul- ing does more than restate the substance of a prior ruling, a combination of terms is used. For example,modifiedandsu- persededdescribes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously pub- lished ruling is first modified and then, as modified, is superseded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original rul- ing has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the ad- ditions, and supersedes all prior rulings in the series. Suspendedis used in rare situations to show that the previous published rul- ings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The following abbreviations in current use and formerly used will appear in material published in the Bulletin. A—Individual. Acq.—Acquiescence. B—Individual. BE—Beneficiary. BK—Bank. B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cumulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Cooperative. Ct.D.—Court Decision. CY—County. D—Decedent. DC—Dummy Corporation. DE—Donee. Del. Order—Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Employer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduciary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Foreign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Federal Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grantee. GP—General Partner. GR—Grantor. IC—Insurance Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—Nonacquiescence. O—Organization. P—Parent Corporation. PHC—Personal Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Partnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Real Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsidiary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Transferee. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpayer. TR—Trust. TT—Trustee. U.S.C.—United States Code. X—Corporation. Y—Corporation. Z—Corporation. 2003-41 I.R.B.iOctober 14, 2003 Numerical Finding List 1 Bulletins 2003–27 through 2003–41 Announcements: 2003-45, 2003-28 I.R.B.73 2003-46, 2003-30 I.R.B.222 2003-47, 2003-29 I.R.B.124 2003-48, 2003-28 I.R.B.73 2003-49, 2003-32 I.R.B.339 2003-50, 2003-30 I.R.B.222 2003-51, 2003-37 I.R.B.555 2003-52, 2003-32 I.R.B.345 2003-53, 2003-32 I.R.B.345 2003-54, 2003-40 I.R.B.762 2003-55, 2003-38 I.R.B.597 2003-56, 2003-39 I.R.B.694 2003-57, 2003-37 I.R.B.555 2003-58, 2003-40 I.R.B.746 2003-59, 2003-40 I.R.B.746 2003-62, 2003-41 I.R.B.821 Notices: 2003-38, 2003-27 I.R.B.9 2003-39, 2003-27 I.R.B.10 2003-40, 2003-27 I.R.B.10 2003-41, 2003-28 I.R.B.49 2003-42, 2003-28 I.R.B.49 2003-43, 2003-28 I.R.B.50 2003-44, 2003-28 I.R.B.52 2003-45, 2003-29 I.R.B.86 2003-46, 2003-28 I.R.B.53 2003-47, 2003-30 I.R.B.132 2003-48, 2003-30 I.R.B.133 2003-49, 2003-32 I.R.B.294 2003-50, 2003-32 I.R.B.295 2003-51, 2003-33 I.R.B.361 2003-52, 2003-32 I.R.B.296 2003-53, 2003-33 I.R.B.362 2003-54, 2003-33 I.R.B.363 2003-55, 2003-34 I.R.B.395 2003-56, 2003-34 I.R.B.396 2003-57, 2003-34 I.R.B.397 2003-58, 2003-35 I.R.B.429 2003-59, 2003-35 I.R.B.429 2003-60, 2003-39 I.R.B.643 2003-62, 2003-38 I.R.B.576 2003-63, 2003-38 I.R.B.577 2003-64, 2003-39 I.R.B.646 2003-65, 2003-40 I.R.B.748 2003-67, 2003-40 I.R.B.753 2003-68, 2003-41 I.R.B.824 Proposed Regulations: REG-209377-89, 2003-36 I.R.B.521 REG-208199-91, 2003-40 I.R.B.757 Proposed Regulations— Continued: REG-108639-99, 2003-35 I.R.B.431 REG-106736-00, 2003-28 I.R.B.60 REG-140378-01, 2003-41 I.R.B.825 REG-107618-02, 2003-27 I.R.B.13 REG-122917-02, 2003-27 I.R.B.15 REG-128203-02, 2003-41 I.R.B.828 REG-131997-02, 2003-33 I.R.B.366 REG-133791-02, 2003-35 I.R.B.493 REG-138495-02, 2003-37 I.R.B.541 REG-138499-02, 2003-37 I.R.B.541 REG-140808-02, 2003-38 I.R.B.582 REG-140930-02, 2003-38 I.R.B.583 REG-141669-02, 2003-34 I.R.B.408 REG-142538-02, 2003-38 I.R.B.590 REG-143679-02, 2003-38 I.R.B.592 REG-144908-02, 2003-38 I.R.B.593 REG-162625-02, 2003-35 I.R.B.500 REG-163974-02, 2003-38 I.R.B.595 REG-108676-03, 2003-36 I.R.B.523 REG-112039-03, 2003-35 I.R.B.504 REG-113112-03, 2003-40 I.R.B.761 REG-116914-03, 2003-32 I.R.B.338 REG-121122-03, 2003-37 I.R.B.550 REG-129709-03, 2003-35 I.R.B.506 REG-130262-03, 2003-37 I.R.B.553 REG-132483-03, 2003-34 I.R.B.410 Revenue Procedures: 2003-45, 2003-27 I.R.B.11 2003-46, 2003-28 I.R.B.54 2003-47, 2003-28 I.R.B.55 2003-48, 2003-29 I.R.B.86 2003-49, 2003-29 I.R.B.89 2003-50, 2003-29 I.R.B.119 2003-51, 2003-29 I.R.B.121 2003-52, 2003-30 I.R.B.134 2003-53, 2003-31 I.R.B.230 2003-54, 2003-31 I.R.B.236 2003-55, 2003-31 I.R.B.242 2003-56, 2003-31 I.R.B.249 2003-57, 2003-31 I.R.B.257 2003-58, 2003-31 I.R.B.262 2003-59, 2003-31 I.R.B.268 2003-60, 2003-31 I.R.B.274 2003-61, 2003-32 I.R.B.296 2003-62, 2003-32 I.R.B.299 2003-63, 2003-32 I.R.B.304 2003-64, 2003-32 I.R.B.306 2003-65, 2003-32 I.R.B.336 2003-66, 2003-33 I.R.B.364 2003-67, 2003-34 I.R.B.397 2003-68, 2003-34 I.R.B.398 2003-69, 2003-34 I.R.B.403 2003-70, 2003-34 I.R.B.406 Revenue Procedures— Continued: 2003-71, 2003-36 I.R.B.517 2003-72, 2003-38 I.R.B.578 2003-73, 2003-39 I.R.B.647 Revenue Rulings: 2003-70, 2003-27 I.R.B.3 2003-71, 2003-27 I.R.B.1 2003-72, 2003-33 I.R.B.346 2003-73, 2003-28 I.R.B.44 2003-74, 2003-29 I.R.B.77 2003-75, 2003-29 I.R.B.79 2003-76, 2003-33 I.R.B.355 2003-77, 2003-29 I.R.B.75 2003-78, 2003-29 I.R.B.76 2003-79, 2003-29 I.R.B.80 2003-80, 2003-29 I.R.B.83 2003-81, 2003-30 I.R.B.126 2003-82, 2003-30 I.R.B.125 2003-83, 2003-30 I.R.B.128 2003-84, 2003-32 I.R.B.289 2003-85, 2003-32 I.R.B.291 2003-86, 2003-32 I.R.B.290 2003-87, 2003-29 I.R.B.82 2003-88, 2003-32 I.R.B.292 2003-89, 2003-37 I.R.B.525 2003-90, 2003-33 I.R.B.353 2003-91, 2003-33 I.R.B.347 2003-92, 2003-33 I.R.B.350 2003-93, 2003-33 I.R.B.346 2003-94, 2003-33 I.R.B.357 2003-95, 2003-33 I.R.B.358 2003-96, 2003-34 I.R.B.386 2003-97, 2003-34 I.R.B.380 2003-98, 2003-34 I.R.B.378 2003-99, 2003-34 I.R.B.388 2003-100, 2003-34 I.R.B.385 2003-101, 2003-36 I.R.B.513 2003-102, 2003-38 I.R.B.559 2003-103, 2003-38 I.R.B.568 2003-104, 2003-39 I.R.B.636 2003-105, 2003-40 I.R.B.696 2003-107, 2003-41 I.R.B.815 Tax Conventions: 2003-58, 2003-40 I.R.B.746 2003-59, 2003-40 I.R.B.746 2003-62, 2003-41 I.R.B.821 Treasury Decisions: 9061, 2003-27 I.R.B.5 9062, 2003-28 I.R.B.46 9063, 2003-36 I.R.B.510 9064, 2003-36 I.R.B.508 9065, 2003-36 I.R.B.515 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27, dated July 7, 2003. October 14, 2003ii2003-41 I.R.B. Treasury Decisions— Continued: 9066, 2003-36 I.R.B.509 9067, 2003-32 I.R.B.287 9068, 2003-37 I.R.B.538 9069, 2003-37 I.R.B.525 9070, 2003-38 I.R.B.574 9071, 2003-38 I.R.B.560 9072, 2003-37 I.R.B.527 9073, 2003-38 I.R.B.570 9074, 2003-39 I.R.B.601 9075, 2003-39 I.R.B.608 9076, 2003-38 I.R.B.562 9077, 2003-39 I.R.B.634 9078, 2003-39 I.R.B.630 9079, 2003-40 I.R.B.729 9080, 2003-40 I.R.B.696 9081, 2003-35 I.R.B.420 9082, 2003-41 I.R.B.807 9083, 2003-40 I.R.B.700 9084, 2003-40 I.R.B.742 9085, 2003-41 I.R.B.775 9086, 2003-41 I.R.B.817 9087, 2003-41 I.R.B.781 2003-41 I.R.B.iiiOctober 14, 2003 Findings List of Current Actions on Previously Published Items 1 Bulletins 2003-27 through 2003-41 Notices: 87-5 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 87-66 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 87-79 Modified by Notice 2003-65, 2003-40 I.R.B.748 89-79 Modified and superseded by Rev. Proc. 2003-47, 2003-28 I.R.B.55 89-94 Modified by Notice 2003-50, 2003-32 I.R.B.295 94-46 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 95-50 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 95-53 Modified and superseded by Notice 2003-55, 2003-34 I.R.B.395 2001-4 Section III.C. superseded for 2004 and subsequent calendar years by Rev. Proc. 2003-64, 2003-32 I.R.B.306 2001-70 Amplified by Notice 2003-45, 2003-29 I.R.B.86 2001-74 Amplified by Notice 2003-45, 2003-29 I.R.B.86 2002-1 Amplified by Notice 2003-49, 2003-32 I.R.B.294 2003-36 Modified by Notice 2003-59, 2003-35 I.R.B.429 Proposed Regulations: REG-EE-86-88 (LR-279-81) Withdrawn by REG-122917-02, 2003-27 I.R.B.15 Proposed Regulations— Continued: REG-105606-99 Withdrawn by REG-133791-02, 2003-35 I.R.B.493 Revenue Procedures: 66-50 Modified, amplified, and superseded by Rev. Proc. 2003-62, 2003-32 I.R.B.299 68-23 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-41 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-12 Amplified, modified, and superseded by Rev. Proc. 2003-51, 2003-29 I.R.B.121 81-40 Modified and superseded by Rev. Proc. 2003-62, 2003-32 I.R.B.299 89-12 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 89-21 Superseded by Rev. Proc. 2003-53, 2003-31 I.R.B.230 90-19 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 90-32 Section4supersededby Rev. Proc. 2003-55, 2003-31 I.R.B.242 Section5supersededby Rev. Proc. 2003-56, 2003-31 I.R.B.249 Section6supersededby Rev. Proc. 2003-57, 2003-31 I.R.B.257 Section7supersededby Rev. Proc. 2003-59, 2003-31 I.R.B.268 Section8supersededby Rev. Proc. 2003-60, 2003-31 I.R.B.274 91-11 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 91-13 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 91-39 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 92-33 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Procedures— Continued: 92-35 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 92-88 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 93-17 Obsoleted by REG-132483-03, 2003-34 I.R.B.408 94-46 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 95-10 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 95-11 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 95-39 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 96-17 Modified and superseded by Rev. Proc. 2003-69, 2003-34 I.R.B.402 96-30 Modified and amplified by Rev. Proc. 2003-48, 2003-29 I.R.B.86 96-38 Obsoleted by Rev. Proc. 2003-71, 2003-36 I.R.B.517 2000-12 Modified by Rev. Proc. 2003-64, 2003-32 I.R.B.306 2000-15 Superseded by Rev. Proc. 2003-61, 2003-32 I.R.B.296 2000-20 Modified by Rev. Proc. 2003-72, 2003-38 I.R.B.578 2002-9 Modified by Rev. Proc. 2003-45, 2003-27 I.R.B.11 Amplified and modified by Rev. Proc. 2003-50, 2003-29 I.R.B.119 Modified and amplified by Rev. Proc. 2003-63, 2003-32 I.R.B.304 Rev. Rul. 2003-81, 2003-30 I.R.B.126 2002-13 Revoked by Rev. Proc. 2003-68, 2003-34 I.R.B.398 1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27, dated July 7, 2003. October 14, 2003iv2003-41 I.R.B. Revenue Procedures— Continued: 2002-29 Modified by Rev. Proc. 2003-72, 2003-38 I.R.B.578 2002-33 Amplified and modified by Rev. Proc. 2003-50, 2003-29 I.R.B.119 2002-34 Superseded by Rev. Proc. 2003-52, 2003-30 I.R.B.134 2002-45 Revoked by Rev. Proc. 2003-68, 2003-34 I.R.B.398 2002-60 Superseded by Rev. Proc. 2003-73, 2003-39 I.R.B.647 2003-3 Modified by Rev. Proc. 2003-48, 2003-29 I.R.B.86 2003-15 Modified and superseded by Rev. Proc. 2003-49, 2003-29 I.R.B.89 2003-28 Modified by Ann. 2003-35, 2003-38 I.R.B.597 2003-44 Modified by Rev. Proc. 2003-72, 2003-38 I.R.B.578 Revenue Rulings: 53-56 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 54-139 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 54-396 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 55-105 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 55-372 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-128 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-160 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 56-212 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-220 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-271 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-344 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-448 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-451 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-586 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-680 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 56-681 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 57-116 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 57-296 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 57-542 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 58-92 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 58-618 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 59-108 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 59-120 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 59-122 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 59-233 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 59-326 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 59-356 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 59-400 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 59-412 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 60-49 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 60-246 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 60-262 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 60-307 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 61-96 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 63-157 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 63-224 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 63-248 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 64-147 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 64-177 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 64-285 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 65-110 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 2003-41 I.R.B.vOctober 14, 2003 Revenue Rulings— Continued: 62-260 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 65-273 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 66-4 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 66-23 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 66-610 Partially obsoleted by Rev. Rul. 2003-105, 2003-40 I.R.B.696 66-290 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 67-186 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 67-189 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 67-326 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-309 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-388 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-434 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-477 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-522 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-608 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-640 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 68-641 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 69-18 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 69-20 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 69-241 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 69-361 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 69-426 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 69-485 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 69-517 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-6 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-111 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-229 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-230 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-264 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-286 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-378 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-409 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 70-496 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-13 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 71-384 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-440 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-453 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-454 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-495 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-518 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-565 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 71-582 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-61 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-116 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-212 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-357 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-472 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-526 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-599 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 72-603 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 73-46 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 October 14, 2003vi2003-41 I.R.B. Revenue Rulings— Continued: 73-119 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 73-182 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 73-257 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 73-277 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 73-473 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 73-490 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 73-498 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-6 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-59 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-73 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-83 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-87 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-211 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-376 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-476 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-521 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 74-610 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 75-53 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-54 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-105 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-106 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-107 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-111 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-134 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-160 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-174 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-179 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-212 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-248 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-298 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-341 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-426 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-468 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 75-515 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 75-561 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 76-44 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 76-67 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 76-90 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 76-225 Revoked by T.D. 9068, 2003–37538 76-239 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 76-329 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 76-347 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 76-535 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-41 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-81 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-150 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-256 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-284 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-321 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-343 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-405 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 2003-41 I.R.B.viiOctober 14, 2003 Revenue Rulings— Continued: 77-456 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-482 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 77-483 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 78-89 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 78-287 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 78-420 Obsoleted by Rev. Rul. 2003-105, 2003-40 I.R.B.696 78-441 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 79-29 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 79-50 Obsoleted by Rev. Rul. 2003-105, 2003-40 I.R.B.696 79-71 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 79-82 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 79-104 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 79-116 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 79-314 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 79-410 Amplified by Rev. Rul. 2003-90, 2003-33 I.R.B.353 79-424 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 80-78 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 80-79 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 80-101 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 80-167 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 80-170 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 80-358 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 81-190 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 81-225 Clarified and amplified by Rev. Rul. 2003-92, 2003-33 I.R.B.350 81-247 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 82-164 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 82-226 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 83-101 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 83-119 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 84-28 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 84-30 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 85-55 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 85-136 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 86-52 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 Revenue Rulings— Continued: 87-1 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 88-7 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 89-72 Obsoleted by Rev. Rul. 2003-99, 2003-34 I.R.B.388 2003-58 Distinguished by Rev. Rul. 2003-102, 2003-38 I.R.B.559 Treasury Decisions: 9033 Removed by T.D. 9065, 2003-36 I.R.B.515 October 14, 2003 viii2003-41 I.R.B. *U.S. Government Printing Office: 2003—496–919/60104
Continua la tua ricerca in ChatGPT o Claude
Collega Omnilex per cercare nel corpus legale dal tuo assistente IA.