us-irs-revenue-rulings-irb-1997-11-pdf•Internal Revenue Bulletin 1997-11 (PDF rendition): IRS Revenue Rulings
Internal Revenue Bulletin 1997-11 (PDF rendition): IRS Revenue Rulings
us-irs-revenue-rulings-irb-1997-11-pdfInternal Revenue Bulletin 1997-11 (PDF rendition): IRS Revenue RulingsGuidance
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INCOME TAX Rev. Rul. 97–12, page 5. Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning April 1, 1997, will be 8 percent for overpayments, 9 percent for underpayments, and 11 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 is 6.5 percent. Rev. Rul. 97–14, page 5. Fringe benefits aircraft valuation formula.For pur- poses of section 1.61–21(g) of the regulations, relating to the rule for valuing noncommercial flights on employer-provided aircraft, the Standard Industry Fare Level (SIFL), cents-per-mile rates, and terminal charges in effect for the first half of 1997 are set forth. REG–208288–90, page 14. Proposed regulations under section 905 of the Code relate to the substantiation requirements for taxpayers claiming foreign tax credits. REG–209121–89, page 15. Proposed regulations under section 337 of the Code generally affect a taxable corporation that transfers all or substantially all of its assets to a tax-exempt entity or converts from a taxable corporation to a tax-exempt entity, and generally requires the taxable corporation to recognize gain or loss in such a transaction. A public hearing will be held on May 6, 1997. REG–209824–96, page 19. Proposed regulations under section 1402 of the Code relate to the definition of limited partner for self- employment tax purposes. A public hearing will be held on May 21, 1997. EMPLOYEE PLANS Announcement 97–20, page 22. Beginning April 1, 1997, requests for employee plan determination letters and applications for recognition of tax exemption, formerly sent to the district office in Los Angeles, CA, should be sent to the Internal Revenue Service Center in Covington, KY. Announcement 97–24, page 24. An amendment to section 401(a)(9)(C) of the Code, pertaining to the required beginning date for minimum distributions in the instance of certain plan participants (other than 5% owners) that was made by section 1404(a) of the Small Business Job Protection Act of 1996, is described. EXEMPT ORGANIZATIONS Announcement 97–23, page 23. A list is given of organizations now classified as private foundations. ADMINISTRATIVE REG–209729–94, page 19. EE–45–94, 1995–1 C.B. 853, relating to the self- employment tax treatment of members of certain limited liability companies, is withdrawn. Rev. Proc. 97–20, page 10. Automobile owners and lessees.This procedure pro- vides owners and lessees of passenger automobiles with tables detailing the limitations on depreciation deductions for automobiles first placed in service during calendar year 1997 and the amounts to be included in income for automobiles first leased during calendar year 1997. In addition, this procedure provides the maximum (Continued on page 4) Finding Lists begin on page 29. Announcement of Disbarments and Suspensions begins on page 26. Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 26. Bulletin No. 1997–11 March 17, 1997 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. HIGHLIGHTS OF THIS ISSUE—Continued ADMINISTRATIVE—Continued allowable value of employer-provided automobiles first made available to employees for personal use in calen- dar year 1997 for which the vehicle cents-per-mile valuation rule provided under section 1.61–21(e) of the Income Tax Regulations may be applicable. Notice 97–21, page 9. Self-amortizing investments in conduit financing enti- ties.The Service and Treasury expect to issue regula- tions under section 7701(l) of the Code in order to prevent tax avoidance. In cases where certain conduit financing entities issue ‘‘equity’’ interests that are economically self-amortizing, it is expected that the regulations will treat the owners of the conduits as having invested directly in the conduit’s income- producing assets. Announcement 97–21, page 23. A list is provided of organizations that no longer qualify as organizations to which contributions are deductible under section 170 of the Code. 4 Mission of the Service The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity, efficiency and fairness. Statement of Principles of Internal Revenue Tax Administration The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue is determined by Congress. With this in mind, it is the duty of the Service to carry out that policy by correctly applying the laws enacted by Congress; to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them; and to perform this work in a fair and impartial manner, with neither a government nor a taxpayer point of view. At the heart of administration is interpretation of the Code. It is the responsibility of each person in the Service, charged with the duty of interpreting the law, to try to find the true meaning of the statutory provision and not to adopt a strained construction in the belief that he or she is ‘‘protecting the revenue.’’ The revenue is properly protected only when we as- certain and apply the true meaning of the statute. The Service also has the responsibility of applying and administering the law in a reasonable, practical manner. Issues should only be raised by examining officers when they have merit, never arbitrarily or for trading purposes. At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that care be exercised not to raise an issue or to ask a court to adopt a position inconsistent with an established Service position. Administration should be both reasonable and vigorous. It should be conducted with as little delay as possible and with great courtesy and considerateness. It should never try to overreach, and should be reasonable within the bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it should be relentless in its attack on unreal tax devices and fraud. 2 Introduction The Internal Revenue Bulletin is the authoritative instru- ment of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Inter- nal Revenue Service and for publishing Treasury Deci- sions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superin- tendent of Documents on a subscription basis. Bulletin contents of a permanent nature are consolidated semi- annually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Proce- dures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Ser- vice 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 unwar- ranted 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 proce- dures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be consid- ered, 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 Subpart B, Legislation 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 Rulings. Bank Secrecy Act Administra- tive Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforce- ment). Part IV.—Items of General Interest. With the exception of the Notice of Proposed Rulemak- ing and the disbarment and suspension list included in this part, none of these announcements are consoli- dated in the Cumulative Bulletins. The first Bulletin for each month includes an index for the matters published during the preceding month. These monthly indexes are cumulated on a quarterly and semiannual basis, and are published in the first Bulletin of the succeeding quarterly and semi-annual period, respectively. The contents of this publication 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, D.C. 20402. 3 Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 61.—Gross Income Defined 26 CFR 61–21: Taxation of fringe benefits. This procedure provides the maximum value of employer-provided automobiles first made avail- able to employees for personal use in calendar year 1997 for which the vehicle cents-per-mile valuation rule provided under § 1.61–21(e) of the Income Tax Regulations may be applicable. See Rev. Proc. 97–20, page 10. 26 CFR 1.61–21: Taxation of fringe benefits. Fringe benefits aircraft valuation formula.For purposes of section 1.61– 21(g) of the regulations, relating to the rule for valuing noncommercial flights on employer-provided aircraft, the Stan- dard Industry Fare Level (SIFL), cents- per-mile rates, and terminal charges in effect for the first half of 1997 are set forth. Rev. Rul. 97–14 For purposes of the taxation of fringe benefits under section 61 of the Internal Revenue Code, section 1.61–21(g) of the Income Tax Regulations provides a rule for valuing noncommercial flights on employer-provided aircraft. Section 1.61–21(g)(5) provides an aircraft valua- tion formula to determine the value of such flights. The value of a flight is determined under the base aircraft valu- ation formula (also known as the Stan- dard Industry Fare Level formula or SIFL) by multiplying the SIFL cents- per-mile rates applicable for the period during which the flight was taken by the appropriate aircraft multiple provided in section 1.61–21(g)(7) and then adding the applicable terminal charge. The SIFL cents-per-mile rates in the formula and the terminal charge are calculated by the Department of Transportation and are reviewed semi-annually. The following chart sets forth the terminal charges and SIFL mileage rates: Period During Which the Flight Was TakenTerminal ChargeSIFL Mileage Rates 1/1/97–6/30/97$31.73Up to 500 miles = $.1735 per mile 501–1500 miles = $.1323 per mile Over 1500 miles = $.1272 per mile DRAFTING INFORMATION The principal author of this revenue ruling is Felicia A. Daniels of the Office of the Associate Chief Counsel (Em- ployee Benefits and Exempt Organiza- tions). For further information regarding this revenue ruling contact, Ms. Daniels on (202) 622–6050 (not a toll-free call). Section 280F.—Limitation on Depreciation for Luxury Automobiles; Limitation Where Certain Property Used for Personal Purposes 26 CFR 280F–7: Property leased after December 31, 1986. This procedure provides owners and lessees of passenger automobiles with tables detailing the limitations on depreciation deductions for automo- biles first placed in service during calendar year 1997 and the amounts to be included in income for automobiles first leased during calendar year 1997. See Rev. Proc. 97–20, page 10. Section 6621.—Determination of Interest Rate 26 CFR 301.6621–1: Interest rate. Interest rates; underpayments and overpayments.The rate of interest de- termined under section 6621 of the Code for the calendar quarter beginning April 1, 1997, will be 8 percent for overpayments, 9 percent for underpay- ments, and 11 percent for large corpo- rate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 is 6.5 percent. Rev. Rul. 97–12 Section 6621 of the Internal Revenue Code establishes different rates for inter- est on tax overpayments and interest on tax underpayments. Under § 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 2 percentage points, except the rate for the portion of a corporate overpayment of tax exceed- ing $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under § 6621(a)(2), the under- payment rate is the sum of the federal short-term rate plus 3 percentage points. Section 6621(c) provides that for pur- poses of interest payable under § 6601 on any large corporate underpayment, the underpayment rate under § 6621(a)(2) is determined by substitut- ing ‘‘5 percentage points’’ for ‘‘3 per- centage points.’’ See § 6621(c) and § 301.6621–3 of the Regulations on Procedure and Administration for the definition of a large corporate underpay- ment and for the rules for determining the applicable rate. Section 6621(c) and § 301.6621–3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under § 6621(b)(1) for any month ap- plies during the first calendar quarter beginning after such month. Section 6621(b)(2)(B) provides that in determining the addition to tax under § 6654 for failure to pay individual estimated tax for any taxable year, the federal short-term rate that applies dur- ing the third month following such taxable year also applies during the first 15 days of the fourth month following such taxable year. Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent). Notice 88–59, 1988–1 C.B. 546, an- nounced that in determining the quar- terly interest rates to be used for over- payments and underpayments of tax under § 6621, the Internal Revenue Ser- vice will use the federal short-term rate based on daily compounding because that rate is most consistent with § 6621 which, pursuant to § 6622, is subject to daily compounding. Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during 5 the month of January 1997 is 6 percent. Accordingly, an overpayment rate of 8 percent and an underpayment rate of 9 percent are established for the calendar quarter beginning April 1, 1997. The overpayment rate for the portion of corporate overpayments exceeding $10,000 for the calendar quarter begin- ning April 1, 1997, is 6.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning April 1, 1997, is 11 percent. These rates apply to amounts bearing interest during that calendar quarter. Under § 6621(b)(2)(B), the 9 percent rate that applies to individual estimated tax underpayments for the first calendar quarter in 1997, as provided in Rev. Rul. 96–61, 1996–52 I.R.B. 24, also applies to such underpayments for the first 15 days in April 1997. Interest factors for daily compound interest for annual rates of 6.5 percent, 8 percent, 9 percent, and 11 percent are published in Tables 18, 21, 23, and 27 of Rev. Proc. 95–17, 1995–1 C.B. 556, 572, 575, 577, and 581. Annual interest rates to be com- pounded daily pursuant to § 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling. DRAFTING INFORMATION The principal author of this revenue ruling is Marcia Rachy of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Rachy on (202) 622–4940 (not a toll-free call). TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975–PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS PERIODDAILY RATE TABLE RATEIN 1995–1 C.B. Before Jul. 1, 19756%Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 19769%Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 19787%Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 19806%Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 198212%Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 198220%Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 198316%Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 198311%Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 198411%Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 198411%Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 198513%Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 198511%Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 198610%Table 25, pg. 579 Jul. 1, 1986—Dec. 31, 19869%Table 23, pg. 577 TABLE OF INTEREST RATES FROM JAN. 1, 1987–PRESENT OVERPAYMENTSUNDERPAYMENTS RATE TABLEPGRATE TABLEPG 1995–1 C.B.1995–1 C.B. Jan. 1, 1987—Mar. 31, 19878%215759%23577 Apr. 1, 1987—Jun. 30, 19878%215759%23577 Jul. 1, 1987—Sep. 30, 19878%215759%23577 Oct. 1, 1987—Dec. 31, 19879%2357710%25579 Jan. 1, 1988—Mar. 31, 198810%7362711%75629 Apr. 1, 1988—Jun. 30, 19889%7162510%73627 Jul. 1, 1988—Sep. 30, 19889%7162510%73627 Oct. 1, 1988—Dec. 31, 198810%7362711%75629 Jan. 1, 1989—Mar. 31, 198910%2557911%27581 Apr. 1, 1989—Jun. 30, 198911%2758112%29583 Jul. 1, 1989—Sep. 30, 198911%2758112%29583 Oct. 1, 1989—Dec. 31, 198910%2557911%27581 Jan. 1, 1990—Mar. 31, 199010%2557911%27581 Apr. 1, 1990—Jun. 30, 199010%2557911%27581 Jul. 1, 1990—Sep. 30, 199010%2557911%27581 Oct. 1, 1990—Dec. 31, 199010%2557911%27581 6 TABLE OF INTEREST RATES—Continued FROM JAN. 1, 1987–PRESENT OVERPAYMENTSUNDERPAYMENTS RATE TABLEPGRATE TABLEPG 1995–1 C.B.1995–1 C.B. Jan. 1, 1991—Mar. 31, 199110%2557911%27581 Apr. 1, 1991—Jun. 30, 19919%2357710%25579 Jul. 1, 1991—Sep. 30, 19919%2357710%25579 Oct. 1, 1991—Dec. 31, 19919%2357710%25579 Jan. 1, 1992—Mar. 31, 19928%696239%71625 Apr. 1, 1992—Jun. 30, 19927%676218%69623 Jul. 1, 1992—Sep. 30, 19927%676218%69623 Oct. 1, 1992—Dec. 31, 19926%656197%67621 Jan. 1, 1993—Mar. 31, 19936%175717%19573 Apr. 1, 1993—Jun. 30, 19936%175717%19573 Jul. 1, 1993—Sep. 30, 19936%175717%19573 Oct. 1, 1993—Dec. 31, 19936%175717%19573 Jan. 1, 1994—Mar. 31, 19946%175717%19573 Apr. 1, 1994—Jun. 30, 19946%175717%19573 Jul. 1, 1994—Sep. 30, 19947%195738%21575 Oct. 1, 1994—Dec. 31, 19948%215759%23577 Jan. 1, 1995—Mar. 31, 19958%215759%23577 Apr. 1, 1995—Jun. 30, 19959%2357710%25579 Jul. 1, 1995—Sep. 30, 19958%215759%23577 Oct. 1, 1995—Dec. 31, 19958%215759%23577 Jan. 1, 1996—Mar. 31, 19968%696239%71625 Apr. 1, 1996—Jun. 30, 19967%676218%69623 Jul. 1, 1996—Sep. 30, 19968%696239%71625 Oct. 1, 1996—Dec. 31, 19968%696239%71625 Jan. 1, 1997—Mar. 31, 19978%215759%23577 Apr. 1, 1997—Jun. 30, 19978%215759%23577 TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991–PRESENT RATE TABLEPG 1995–1 C.B. Jan. 1, 1991—Mar. 31, 199113%31585 Apr. 1, 1991—Jun. 30, 199112%29583 Jul. 1, 1991—Sep. 30, 199112%29583 Oct. 1, 1991—Dec. 31, 199112%29583 Jan. 1, 1992—Mar. 31, 199211%75629 Apr. 1, 1992—Jun. 30, 199210%73627 Jul. 1, 1992—Sep. 30, 199210%73627 Oct. 1, 1992—Dec. 31, 19929%71625 Jan. 1, 1993—Mar. 31, 19939%23577 Apr. 1, 1993—Jun. 30, 19939%23577 Jul. 1, 1993—Sep. 30, 19939%23577 Oct. 1, 1993—Dec. 31, 19939%23577 Jan. 1, 1994—Mar. 31, 19949%23577 Apr. 1, 1994—Jun. 30, 19949%23577 Jul. 1, 1994—Sep. 30, 199410%25579 Oct. 1, 1994—Dec. 31, 199411%27581 Jan. 1, 1995—Mar. 31, 199511%27581 Apr. 1, 1995—Jun. 30, 199512%29583 Jul. 1, 1995—Sep. 30, 199511%27581 7 TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS—Continued FROM JANUARY 1, 1991–PRESENT RATE TABLEPG 1995–1 C.B. Oct. 1, 1995—Dec. 31, 199511%27581 Jan. 1, 1996—Mar. 31, 199611%75629 Apr. 1, 1996—Jun. 30, 199610%73627 Jul. 1, 1996—Sep. 30, 199611%75629 Oct. 1, 1996—Dec. 31, 199611%75629 Jan. 1, 1997—Mar. 31, 199711%27581 Apr. 1, 1997—Jun. 30, 199711%27581 TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995–PRESENT RATE TABLEPG 1995–1 C.B. Jan. 1, 1995—Mar. 31, 19956.5%18572 Apr. 1, 1995—Jun. 30, 19957.5%20574 Jul. 1, 1995—Sep. 30, 19956.5%18572 Oct. 1, 1995—Dec. 31, 19956.5%18572 Jan. 1, 1996—Mar. 31, 19966.5%66620 Apr. 1, 1996—Jun. 30, 19965.5%64618 Jul. 1, 1996—Sep. 30, 19966.5%66620 Oct. 1, 1996—Dec. 31, 19966.5%66620 Jan. 1, 1997—Mar. 31, 19976.5%18572 Apr. 1, 1997—Jun. 30, 19976.5%18572 8 Part III. Administrative, Procedural, and Miscellaneous Tax Avoidance Using Self-Amortizing Investments In Conduit Financing Entities Notice 97–21 The Internal Revenue Service under- stands that certain persons are engaging in multiple-party financing transactions to avoid taxes imposed by the Internal Revenue Code. These transactions are designed to allow a person (the ‘‘spon- sor’’) to avoid tax on substantial amounts of income (or to shelter sub- stantial amounts of other income) by using a conduit entity whose income tax treatment artificially allocates the con- duit entity’s income to participants that are not subject to federal income tax. Example An example of these transactions is as follows: A corporate sponsor forms a real estate investment trust or a foreign corporation (the ‘‘Company’’). The Company issues two classes of stock. The corporate sponsor holds substan- tially all of the common stock of the Company. The other class (the ‘‘fast-pay preferred stock’’) is held by persons that are not subject to federal income tax (the ‘‘exempt participants’’). The fast-pay preferred stock has limited voting rights and provides for preferred ‘‘dividends’’ equal to 13 percent of the stock’s issue price each year for 10 years. The Company holds income-producing assets (such as one or more mortgage loans) that are the obligations of or guaranteed by the corpo- rate sponsor or that are guaranteed by a federal agency. At all times during the first 10 years after the fast-pay preferred stock is issued, the Company is required to invest in assets that will produce income, and cash flows, at least equal to 101 percent of the dividends payable on the fast-pay preferred stock. During the first 10 years, the Company may also make distributions on its common stock. It is not, however, permitted to distribute more than 105 percent of its income in any year. Accordingly, it is not permitted to make any distributions representing a meaningful return of initial investment to the holders of the common stock during the first 10 years. In year 11, and thereafter, the fast-pay pre- ferred stock provides for distributions in each year of 1 percent of its original issue price. As a result, after the first 10 years, the fair market value of the fast-pay preferred stock is substan- tially less than the amount for which the exempt participants purchased it. Beginning in year 11, the Company may be merged into another corporation without the separate approval of the exempt participants provided that the exempt participants receive a formula payment equal to the present value of the annual 1-percent dividend payments on the fast-pay preferred stock (computed using a discount rate of 10 percent). Otherwise the fast-pay preferred stock cannot be called by the Company. As illustrated by this example, the fast-pay preferred stock performs eco- nomically much like a 10-year, self- amortizing debt instrument. That is, pay- ments on the fast-pay preferred stock reflect in part recoveries of the amount originally invested by the exempt par- ticipants and in part a market yield on the unamortized portion of the original investment. The economic self- amortization of the fast-pay preferred stock is conceptually inconsistent with characterizing the full amount of each payment as a ‘‘dividend’’ (and thus as income on an investment). At the end of 10 years, the Compa- ny’s obligation to make distributions on the fast-pay preferred stock will have virtually ceased, and substantially all of the net value of the Company will be represented by its common stock. Be- cause only the current income of the Company will have been distributed during the first 10 years, the value of the Company’s assets is unlikely to have declined significantly. Accordingly, the sponsor’s investment in the Company economically performs like a zero- coupon investment, substantially increas- ing in value as the exempt participants’ interest in the Company declines. If the Company makes the formula payment to the exempt participants after the initial 10-year period, the Company may be merged into or consolidated with a corporate sponsor or its affiliate. In the event of a merger, the corporate sponsor expects to receive substantially all of the Company’s assets with the Company’s high basis and to avoid recognizing any gain. Thus, in the example, the corporate sponsor’s expectation in investing in the Company is that it will realize a predict- able economic benefit at the end of the 10-year period without ever incurring any tax liability for that benefit. Alterna- tively, if the principal asset of the Company is a debt instrument or other obligation issued by the sponsor, the sponsor could be viewed as attempting to use deductions from that debt instru- ment or obligation to shelter income, without ever having to recognize its share of the income that corresponds to those deductions. These expectations re- sult from the parties’ treatment of the full amount of the payments to the exempt participants as dividends. This treatment causes substantially all of the Company’s income to be allocated to the exempt participants, even though a significant portion of that income inures economically to the sponsor. Alternative tax-avoidance structures may involve the use of other conduit entities whose income is generally sub- ject to U.S. income tax only at the shareholder level, where the amount of the tax depends on the receipt or non- receipt by the shareholder of earnings and profits from the conduit entity. The terms of the stock issued by the conduit entity may also vary, and the stock may be subject to options to buy or sell. Proper Characterization of the Transactions Under section 7701(l) of the Internal Revenue Code, the Secretary may pre- scribe regulations recharacterizing any multiple-party financing transaction as a transaction directly among two or more of the parties in order to prevent the avoidance of tax. Treasury and the Ser- vice expect to issue regulations recharacterizing any transaction (for ex- ample, the transaction described above) in which (1) a conduit entity is inter- posed between two or more parties, (2) an investment in the conduit entity is economically, taking into account all relevant factors including options to buy or sell, partially or fully self-amortizing (that is, the value of the investor’s interest in the conduit entity is expected to decrease over time as payments are received), and (3) payments by the con- duit entity that represent a recovery of investment to the investor are treated by the conduit entity as a distribution of earnings and profits or otherwise as reducing the conduit entity’s or any other taxpayer’s taxable income. It is expected that, under these regula- tions, the sponsor will be treated as having engaged in a transaction directly with the other parties to the debt instru- ments, leases, or other assets held by the conduit entity, and the holders of the self-amortizing interests in the conduit entity will be treated either as having engaged in the transaction directly with the other parties or as having engaged in an income ‘‘stripping’’ transaction with the sponsor.See,e.g., section 1286 of the Code. If the sponsor is the issuer of a debt instrument held by the conduit entity, the sponsor may be treated as having issued one or more instruments directly to the holders of the self- amortizing interests in the conduit entity. In that event, the sponsor’s obligation 9 under any asset held by the conduit entity will be ignored for purposes of determining the sponsor’s taxable in- come. The regulations issued under sec- tion 7701(l) of the Code will be appli- cable to taxable years ending on or after February 27, 1997. Thus, all amounts accrued or paid on or after the first day of the first taxable year ending on or after February 27, 1997, will be subject to the regulations, regardless of when a particular share of stock or a particular debt instrument was issued or acquired. To the extent that a payment or accrual under a conduit financing transaction is not subject to these regulations, the Service may determine under existing tax principles, depending on the facts of the particular case, that the transaction does not produce the results intended by the participants. Persons that wish to comment on the subject matter of this notice may submit comments to: CC:DOM:CORP:R (OGI– 103642–97), Room 5226, Internal Rev- enue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Sub- missions may be hand delivered be- tween the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (OGI–103642–97), Courier’s Desk, Internal Revenue Ser- vice, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpay- ers may submit comments electronically via the Internet by selecting the ‘‘Tax Regs’’ option of the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs. ustreas.gov/prod/tax_regs/comments. html. Comments will be available for public inspection. This notice was issued to the public on February 27, 1997. For further information regarding this notice, contact Jonathan Zelnik of the Office of Assistant Chief Counsel (Fi- nancial Institutions & Products) at (202) 622–3940 (not a toll-free call). 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determina- tion of correct tax liability. (Also Part I, § 280F; 1.280F–7, 1.61–21.) Rev. Proc. 97–20 SECTION 1. PURPOSE This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service during calendar year 1997; (2) the amounts to be in- cluded in income by lessees of passen- ger automobiles first leased during cal- endar year 1997; and (3) the maximum allowable value of employer-provided automobiles first made available to em- ployees for personal use in calendar year 1997 for which the vehicle cents- per-mile valuation rule provided under § 1.61–21(e) of the Income Tax Regula- tions may be applicable. The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7) of the Internal Revenue Code. The maximum allowable automobile value for applying the ve- hicle cents-per-mile valuation rule re- flects the automobile price inflation ad- justment of § 280F(d)(7) as required by § 1.61–21(e)(1)(iii)(A). SECTION 2. BACKGROUND For owners of automobiles, § 280F(a) imposes dollar limitations on the depre- ciation deduction for both the year that the automobile is placed in service and each succeeding year. Section 280F(d)(7) requires the amounts allow- able as depreciation deductions to be increased by a price inflation adjustment amount for passenger automobiles placed in service after calendar year 1988. For leased automobiles, § 280F(c) re- quires a reduction in the deduction al- lowed to the lessee of the automobile. The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of automobiles. Under § 1.280F–7(a), this reduction requires the lessees to include in gross income an inclusion amount determined by ap- plying a formula to the amount obtained from a table. The table shows inclusion amounts for a range of fair market values for each tax year after the auto- mobile is first leased. For automobiles first provided by em- ployers to employees that meet the requirements of § 1.61–21(e)(1), the value to the employee of the use of the automobile may be determined under the vehicle cents-per-mile valuation rule of § 1.61–21(e). Section 1.61– 21(e)(1)(iii)(A) provides that for an au- tomobile first made available after 1988 to any employee of the employer for personal use, the value of the use of the automobile may not be determined un- der the vehicle cents-per-mile valuation rule for a calendar year if the fair market value of the automobile (deter- mined pursuant to § 1.61–21(d)(5)(i) through (iv)) on the first date the auto- mobile is made available to the em- ployee exceeds $12,800 as adjusted by § 280F(d)(7). SECTION 3. SCOPE AND OBJECTIVE 01. The limitations on depreciation deductions in section 4.02 of this rev- enue procedure apply to automobiles (other than leased automobiles) that are placed in service in calendar year 1997 and continue to apply for each tax year that the automobile remains in service. 02. The table in section 4.03 of this revenue procedure applies to leased au- tomobiles for which the lease term be- gins in calendar year 1997. Lessees of such automobiles must use this table to determine the inclusion amount for each tax year during which the automobile is leased.SeeRev. Proc. 96–25, 1996–8 I.R.B. 19, which provides information on determining inclusion amounts for automobiles first leased before January 1, 1997. 03. The maximum fair market value figure in section 4.04(2) of this revenue procedure applies to employer-provided automobiles first made available to any employee for personal use in calendar year 1997. SECTION 4. APPLICATION 01. A taxpayer placing an automobile in service for the first time during calendar year 1997 is limited to the depreciation deduction shown in Table 1 of section 4.02(2). A taxpayer first leas- ing an automobile in calendar year 1997 must use Table 2 in section 4.03 to determine the inclusion amount that is added to gross income. Otherwise, the procedures of § 1.280F–7(a) must be followed. An employer providing an automobile for the first time in calendar year 1997 for the personal use of any employee may determine the value of the use of the automobile by using the cents-per-mile valuation rule in § 1.61– 21(e) if the fair market value of the automobile does not exceed the amount specified in section 4.04(2). If the fair market value of the automobile does exceed the amount specified in section 4.04(2), the employer may determine the value of the use of the automobile under the general valuation rules of § 1.61– 21(b) or under the special valuation rules of § 1.61–21(d) (Automobile lease valuation) or § 1.61–21(f) (Commuting valuation) if the applicable requirements are met. 10 02.Limitations on Depreciation De- ductions for Certain Automobiles. (1)Amount of the Inflation Adjust- ment.Under § 280F(d)(7)(B)(i), the au- tomobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile com- ponent for October of the preceding calendar year exceeds the CPI automo- bile component for October 1987. The term ‘‘CPI automobile component’’ is defined in § 280F(d)(7)(B)(ii) as the ‘‘automobile component’’ of the Con- sumer Price Index for all Urban Con- sumers published by the Department of Labor (the CPI). The new car compo- nent of the CPI was 115.2 for October 1987 and 141.5 for October 1996. The October 1996 index exceeded the Octo- ber 1987 index by 26.3. The Internal Revenue Service has, therefore, deter- mined that the automobile price inflation adjustment for 1997 is 22.83 percent (26.3/115.2 x 100%). This adjustment is applicable to all automobiles that are first placed in service in calendar year 1997. The dollar limitations in § 280F(a) must therefore be multiplied by a factor of 0.2283, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations for 1997. (2)Amount of the Limitation.For automobiles placed in service in calen- dar year 1997, Table 1 contains the dollar amount of the depreciation limita- tions for each tax year. REV. PROC. 97–20 TABLE 1 DEPRECIATION LIMITATIONS FOR AUTOMOBILES FIRST PLACED IN SERVICE IN CALENDAR YEAR 1997 Tax YearAmount 1st Tax Year$3,160 2nd Tax Year$5,000 3rd Tax Year$3,050 Each Succeeding Year$1,775 03.Inclusions in Income of Lessees of Automobiles. The inclusion amounts for automobiles first leased in calendar year 1997 are calculated under the procedures described in § 1.280F–7(a). Table 2 of this revenue procedure is the applicable table to be used in applying those procedures. REV. PROC. 97–20 TABLE 2 DOLLAR AMOUNTS FOR AUTOMOBILES WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1997 Fair Market Value of AutomobileTax Year During Lease OverNot Over1st2nd3rd4th5th and Later $ 15,80016,100155810 16,10016,400410131821 16,40016,700615222732 16,70017,000920303644 17,00017,5001228404958 17,50018,0001637536577 18,00018,5002046668295 18,50019,00024558097114 19,00019,500286493113132 19,50020,0003273106129151 20,00020,5003682120145169 20,50021,0004091133161187 21,00021,5004599147177205 21,50022,00049108160193224 22,00023,00055122180216252 23,00024,00063140206249288 24,00025,00071158233280326 25,00026,00079176259313362 26,00027,00088193287344399 27,00028,00096211313377435 28,00029,000104229340408473 29,00030,000112247366441509 30,00031,000120265393472546 31,00032,000128283420504583 32,00033,000137301446536620 33,00034,000145319472568657 11 REV. PROC. 97–20 TABLE 2—Continued DOLLAR AMOUNTS FOR AUTOMOBILES WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1997 Fair Market Value of AutomobileTax Year During Lease OverNot Over1st2nd3rd4th5th and Later 34,00035,000153337499600693 35,00036,000161355526631731 36,00037,000169373552664767 37,00038,000178391578696804 38,00039,000186409605727841 39,00040,000194427632759878 40,00041,000202445658791915 41,00042,000210463685823951 42,00043,000218481712854989 43,00044,0002274987398861,026 44,00045,0002355167659191,062 45,00046,0002435347929511,098 46,00047,0002515528199821,136 47,00048,0002595708451,0151,172 48,00049,0002685888711,0471,209 49,00050,0002766068981,0781,246 50,00051,0002846249251,1101,282 51,00052,0002926429511,1421,320 52,00053,0003006609781,1741,356 53,00054,0003086781,0041,2061,394 54,00055,0003176951,0321,2371,430 55,00056,0003257131,0581,2701,467 56,00057,0003337321,0841,3011,504 57,00058,0003417501,1101,3341,540 58,00059,0003497681,1371,3651,578 59,00060,0003587851,1641,3971,615 60,00062,0003708121,2041,4451,670 62,00064,0003868481,2571,5091,743 64,00066,0004038841,3101,5731,817 66,00068,0004199201,3631,6371,890 68,00070,0004359561,4171,7001,964 70,00072,0004529911,4701,7642,038 72,00074,0004681,0271,5241,8272,112 74,00076,0004841,0631,5771,8912,186 76,00078,0005011,0991,6301,9552,259 78,00080,0005171,1351,6832,0192,333 80,00085,0005461,1981,7762,1302,462 85,00090,0005871,2871,9092,2912,645 90,00095,0006271,3772,0422,4502,830 95,000100,0006681,4672,1752,6093,014 100,000110,0007301,6012,3752,8483,290 110,000120,0008121,7802,6413,1673,659 120,000130,0008931,9602,9073,4864,027 130,000140,0009752,1393,1733,8054,395 140,000150,0001,0572,3183,4394,1254,763 150,000160,0001,1392,4983,7044,4445,131 160,000170,0001,2212,6773,9714,7625,500 170,000180,0001,3022,8574,2365,0825,868 180,000190,0001,3843,0364,5035,4006,237 190,000200,0001,4663,2154,7695,7196,605 200,000210,0001,5483,3945,0356,0396,973 210,000220,0001,6303,5745,3006,3587,341 220,000230,0001,7123,7535,5676,6767,710 230,000240,0001,7933,9325,8336,9968,078 240,000250,0001,8754,1126,0997,3148,446 12 04.Maximum Automobile Value for Using the Cents-per-mile Valuation Rule. (1)Amount of Adjustment.Under § 1.61–21(e)(1)(iii)(A), the limitation on the fair market value of an employer- provided automobile first made available to any employee for personal use after 1988 is to be adjusted in accordance with § 280F(d)(7). Accordingly, the ad- justment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987 (See, section 4.02(1).) The new car component of the CPI was 115.2 for October 1987 and 141.5 for October 1996. The October 1996 index exceeded the October 1987 index by 26.3. The Internal Revenue Service has, therefore, determined that the adjustment for 1997 is 22.83 percent (26.3/115.2 x 100%). This adjustment is applicable to all employer-provided automobiles first made available to any employee for personal use in calendar year 1997. The maximum fair market value specified in § 1.61–21(e)(1)(iii)(A) must therefore be multiplied by a factor of 0.2283, and the resulting increase, after rounding to the nearest $100, is added to $12,800 to give the maximum value for 1997. (2)The Maximum Automobile Value. For automobiles first made available in calendar year 1997 to any employee of the employer for personal use, the ve- hicle cents-per-mile valuation rule may be applicable if the fair market value of the automobile on the date it is first made available does not exceed $15,700. SECTION 5. EFFECTIVE DATE This revenue procedure is effective for automobiles (other than leased auto- mobiles) that are first placed in service during calendar year 1997, to leased automobiles that are first leased during calendar year 1997, and to employer- provided automobiles first made avail- able to employees for personal use in calendar year 1997. DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. Harvey of the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding the depreciation limitations and lessee inclu- sion amounts in this revenue procedure, contact Mr. Harvey at (202) 622–3110; for further information regarding the maximum automobile value for applying the vehicle cents-per-mile valuation rule, contact Ms. Janine Cook of the Office of the Associate Chief Counsel (Em- ployee Benefits and Exempt Organiza- tions) at (202) 622–6040 (not toll-free calls). 13 Part IV. Items of General Interest Notice of Proposed Rulemaking Filing Requirements for Returns Claiming the Foreign Tax Credit REG–208288–90 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemak- ing. SUMMARY: This document contains a proposed regulation relating to the sub- stantiation requirements for taxpayers claiming foreign tax credits. The pro- posed regulation is necessary to provide guidance to U.S. taxpayers who claim foreign tax credits. DATES: Written comments and requests for a public hearing must be received by April 14, 1997. ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–208288–90), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Wash- ington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–208288–90), Courier’s Desk, In- ternal Revenue Service, 1111 Constitu- tion Avenue NW, Washington, DC. Al- ternatively, taxpayers may submit comments electronically via the internet by selecting the ‘‘Tax Regs’’ option on the IRS Home Page, or by submitting comments directly to the IRS internet site at HTTP://www.irs.ustreas.gov/prod/ tax_regs/comments.html. FOR FURTHER INFORMATION CON- TACT: Concerning the regulations, Joan Thomsen, (202) 622–3840 (not a toll- free call); concerning submissions, Evangelista Lee, (202) 622–7190 (not a toll-free call). SUPPLEMENTARY INFORMATION: Background On June 3, 1988, the Internal Rev- enue Service issued a Notice (Notice 88–65, 1988–1 C.B. 552) which stated that regulations would be issued sus- pending portions of § 1.905–2 of the Treasury Regulations. Section 1.905–2 requires taxpayers who claim foreign tax credits to attach documents to their returns substantiating the credits. The Notice was issued in response to prob- lems taxpayers were experiencing be- cause they could not timely obtain and prepare the necessary documentation in a form suitable for submission with their tax returns. The intent of the Notice was to advise taxpayers that Treasury and the IRS would issue a new regulation that would suspend, beginning on Janu- ary 1, 1988, the existing regulation requiring the submission of this docu- mentation with a tax return. This new regulation has not been issued. Instead of suspending the relevant portions of the existing regulation, Treasury and the IRS now have decided to permanently eliminate the requirement that documen- tation be submitted with the tax return, effective January 1, 1988. Explanation of Provisions § 1.905–2(a)(1), 1.905–2(b)(1) and (2), and 1.905–2(c) Sections 1.905–2(a)(1), 1.905–2(b)(1) and (2), and 1.905–2(c) are unchanged from the final regulations. § 1.905–2(a)(2) Under § 1.905–2(a)(2), taxpayers generally are required to attach to their income tax returns either (1) the receipt for the foreign tax payment, or (2) a foreign tax return for accrued foreign taxes. Proposed § 1.905–2(a)(2) re- moves the requirement that the docu- mentation must be attached to the in- come tax return. The proposed regulation now provides that such evi- dence of foreign taxes must be pre- sented to the district director upon re- quest. § 1.905–2(b)(3) Section 1.905–2(b)(3) addresses issues for taxes withheld at the source. The section allows the district director to accept secondary evidence of such with- holding. The proposed regulation clari- fies that evidence of a tax withheld at the source and the amount withheld is only sufficient for an interim credit. Upon request of the district director, taxpayers must provide evidence, as pro- vided in § 1.905–2(a)(2), that the tax withheld was actually paid to the for- eign country. Although this regulation will be effective on the date that is 30 days after the date the final regulation is published in theFederal Register, it reflects an IRS requirement upheld as a reasonable interpretation of current law by the Tax Court and the Court of Appeals for the Seventh Circuit inCon- tinental Illinois Corp. v. Commissioner, T.C. Memo. 1991–66, 61 T.C.M. (CCH) 1916, 1939–42 (1991),aff’d in part and rev’d in part, 998 F.2d 513, 516–17 (7th Cir. 1993). 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 Procedures Act (5 U.S.C. chapter 5) does not apply to this regulation, and because the regulation does not impose a collection of informa- tion 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 will be submit- ted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small busi- ness. Comments and Requests for a Public Hearing Before this proposed regulation is adopted as a final regulation, consider- ation will be given to any comments that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hear- ing may be scheduled if requested in writing by any person that timely sub- mits 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 author of this regulation is Joan Thomsen of the Office of the Associate Chief Counsel (International), IRS. However, other personnel from the IRS and Treasury Department partici- pated in their development. * * * * * Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is pro- posed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for 26 CFR part 1 continues to read in part as follows: 141997–11 I.R.B. Authority: 26 U.S.C. 7805 * * * Par 2. Section 1.905–2 is amended by: 1. Revising the second through fourth sentences in paragraph (a)(2). 2. Adding two sentences to the end of paragraph (b)(3). The revision and addition read as follows: § 1.905–2 Conditions of allowance of credit. (a) * * * (2) * * * Except where it is estab- lished to the satisfaction of the district director that it is impossible for the taxpayer to furnish such evidence, the taxpayer must provide upon request the receipt for each such tax payment if credit is sought for taxes already paid or withheld, or the return on which each such accrued tax was based if credit is sought for taxes accrued. This receipt or return must be either the original, a duplicate original, or a duly certified or authenticated copy. The preceding two sentences are effective for returns whose original due date falls on or after Janu- ary 1, 1988. * * * (b) * * * (3) * * * Any foreign tax credit claimed for taxes withheld at the source is an interim credit and the taxpayer must prove that any taxes withheld at the source were paid to the foreign country, as required in paragraph (a) of this section. The preceding sentence is effective the date that is 30 days after the date this regulation is published in theFederal Registeras a final regula- tion, however, for periods prior to the date that is 30 days after the date this regulation is published in theFederal Registeras a final regulation, seeConti- nental Illinois Corp. v. Commissioner, T.C. Memo. 1991–66, 61 T.C.M. (CCH) 1916, 1939–42 (1991),aff’d in part and rev’d in part, 998 F.2d 513, 516–17 (7th Cir. 1993), wherein the court upheld this rule as a reasonable interpretation of section 905(b) of the Internal Revenue Code. * * * * * Margaret Milner Richardson, Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 13, 1997, 62 F.R. 1700) Notice of Proposed Rulemaking and Notice of Public Hearing Certain Asset Transfers to a Tax-Exempt Entity REG–209121–89 AGENCY: Internal Revenue Service (IRS), Treasury ACTION: Notice of proposed rulemak- ing and notice of public hearing SUMMARY: This document contains proposed regulations. The proposed regulations effectuate provisions of the Tax Reform Act of 1986 and the Techni- cal and Miscellaneous Revenue Act of 1988. The proposed regulations gener- ally affect a taxable corporation that transfers all or substantially all of its assets to a tax-exempt entity or converts from a taxable corporation to a tax- exempt entity, and generally require the taxable corporation to recognize gain or loss in such a transaction. DATES: Written comments must be re- ceived by April 15, 1997. Requests to speak (with outlines of oral comments to be discussed) at the public hearing scheduled for May 6, 1997, at 10 a.m. must be submitted by April 15, 1997. ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–209121–89), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Wash- ington, DC 20044. Submissions also may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–209121–89), Courier’s Desk, Internal Revenue Ser- vice, 1111 Constitution Ave. NW, Wash- ington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the ‘‘Tax Regs’’ option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas. gov/prod/tax_regs/comments.html. The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Wash- ington, DC. FOR FURTHER INFORMATION CON- TACT: Concerning the regulations, Stephen R. Cleary (202) 622–7530; con- cerning submissions and the hearing, Evangelista Lee, (202) 622–7180, (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Income Tax Regula- tions (26 CFR Part 1) relating to the repeal of theGeneral Utilitiesdoctrine in the Tax Reform Act of 1986. Under theGeneral Utilitiesdoctrine, which took its name fromGeneral Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935), corporations were not re- quired to recognize gain or loss when they distributed appreciated or depreci- ated property to their shareholders. The General Utilitiesdoctrine applied to distributions of property in complete liquidation, certain sales of property that were in connection with a complete liquidation, and nonliquidating distribu- tions of property. It was codified in former sections 311, 336, and 337 of the Internal Revenue Code of 1954. TheGeneral Utilitiesdoctrine was an exception to the general rule that in- come earned by a corporation is taxed twice, once to the corporation when the income is earned and a second time to the corporation’s shareholders when the earnings are distributed. TheGeneral Utilitiesdoctrine generally permitted the permanent elimination of corporate-level tax on the disposition of appreciated assets because the transferee received a fair market value basis in the assets and the corporation generally did not recog- nize any gain. Thus, the appreciated assets left corporate solution without any corporate-level tax having been paid. Beginning in 1969, the scope of the General Utilitiesdoctrine was restricted by a series of amendments (initially relating to nonliquidating distributions governed by section 311), until ulti- mately theGeneral Utilitiesdoctrine was repealed, with limited exceptions, in the Tax Reform Act of 1986. Sections 336 and 337 were amended to generally require corporations to recognize gain or loss when appreciated or depreciated property is distributed in complete liqui- dation or sold in connection with a complete liquidation. Section 337(a) provides one of the limited exceptions from the repeal of the General Utilitiesdoctrine by allowing a subsidiary to liquidate into its 80- percent distributee (a corporation meet- ing the stock ownership requirements of section 332(b) in the liquidating corpo- ration) without recognizing gain or loss. 151997–11 I.R.B. The 80-percent distributee takes a car- ryover basis in the distributed property. However, under section 337(b)(2), this nonrecognition exception generally does not apply if the 80-percent distributee is a tax-exempt entity. The Tax Reform Act of 1986 added section 337(d), directing the Secretary to prescribe regulations as may be neces- sary to carry out the purposes of the repeal of theGeneral Utilities doctrine. The legislative history of the Tax Re- form Act of 1986 indicates that the General Utilitiesdoctrine was repealed because it tended to undermine the corporate income tax by allowing appre- ciated property to leave corporate solu- tion without imposition of a corporate level tax. H.R. Rep. No. 99–426, 99th Cong., 1st Sess. 282 (1985). The Tech- nical and Miscellaneous Revenue Act of 1988 amended section 337(d) to specify that the section authorizes regulations to ‘‘ensure that these purposes shall not be circumvented . . . through the use of a . . . tax-exempt entity.’’ The legislative history concerning the 1988 amendment to section 337(d) explains: The bill also clarifies in connection with the built-in gain provisions of the Act that the Treasury Department shall prescribe such regulations as may be necessary or appropriate to carry out those provisions . . . . For example, this includes rules to require the recognition of gain if appreciated property of a C corporation is trans- ferred to a . . . tax-exempt entity [footnote 32] in a carryover basis transaction that would otherwise eliminate corporate level tax on the built-in appreciation. [footnote 32] The Act generally re- quires recognition of gain if a C corporation transfers appreciated as- sets to a tax exempt entity in a section 332 liquidation. See Code sec- tion 337(b)(2). S. Rep. No. 145, 100th Cong., 2d Sess. 66 (1988). Explanation of Provision An acquisition by a tax-exempt entity of all or substantially all of the assets of a taxable corporation or a change in status of a taxable corporation to a tax-exempt entity, like a liquidation into an 80-percent tax-exempt distributee that is taxable under section 337(b)(2), could eliminate the corporate level tax on the appreciation in the taxable corporation’s assets. Accordingly, the proposed regula- tions apply rules similar to section 337(b)(2) to these transactions. The pro- posed regulations generally do not affect the tax treatment of the taxable corpora- tion’s shareholders or the availability of any charitable contribution deduction. The proposed regulations provide that a taxable corporation that transfers all or substantially all of its assets to one or more tax-exempt entities is required to recognize gain or loss as if the assets transferred were sold at their fair market values. Like section 337(b)(2), the pro- posed regulations provide that no gain or loss will be recognized on any of the assets transferred that are used by the tax-exempt entity in an activity the income from which is subject to the unrelated business tax under section 511(a). However, gain on such assets will later be recognized as unrelated business taxable income if the tax- exempt entity disposes of the assets or ceases to use the assets in an unrelated trade or business activity. The proposed regulations generally treat a taxable corporation that changes its status to a tax-exempt entity as having transferred all of its assets to a tax-exempt entity immediately before the change in status becomes effective, irrespective of whether an actual transfer of the assets has occurred. For this purpose, if a state, a political subdivi- sion thereof, or an entity any portion of whose income is excluded from gross income under section 115, acquires the stock of a taxable corporation and there- after any of the taxable corporation’s income is excluded from gross income under section 115, the taxable corpora- tion will be treated as if it transferred all of its assets to a tax-exempt entity immediately before the stock acquisi- tion. Certain exceptions are provided to the change in status rule for organizations that are tax-exempt or are seeking tax- exempt status under section 501(a). These exceptions provide relief for cor- porations needing a brief start-up period to establish their tax-exempt status and for those that temporarily lose their tax-exempt status. Under the proposed regulations, the change in status rule does not apply to a corporation that is tax-exempt within three taxable years of the taxable year of its formation, or to a corporation that regains its tax-exempt status within three years after either a final adverse adjudication on its tax- exempt status or filing a tax return as a taxable corporation. The change in sta- tus rule also does not apply to an organization that before publication of these proposed regulations was exempt or unsuccessfully applied for exemption, if the organization is tax-exempt within three years after the date of publication of final regulations. An organization that files for recognition of its exempt status during one of the three-year periods will be deemed to have or regain tax-exempt status if the application ultimately re- sults in recognition as of a date during the three-year period. An anti-abuse rule makes all these exceptions unavailable to a taxable corporation that acquires all or substantially all of the assets of another taxable corporation and then changes its status with a principal pur- pose of avoiding the gain or loss recog- nition rule made applicable by these regulations. The proposed regulations disallow the recognition of loss if assets are acquired by the taxable corporation in a section 351 transaction or a contribution to capital, or if assets are distributed by the taxable corporation to a shareholder, with a principal purpose to recognize loss by the taxable corporation on the transfer of its assets to a tax-exempt entity (loss limitation rule). For ex- ample, the loss limitation rule may ap- ply if (a) a loss asset is contributed to a taxable corporation and then is trans- ferred with substantially all of the tax- able corporation’s assets to a tax-exempt entity; (b) loss assets not constituting substantially all of a taxable corpora- tion’s assets are contributed to a new subsidiary and then the new subsidiary transfers the loss assets which are its only assets to a tax-exempt entity, or (c) assets are distributed by a taxable corpo- ration to its parent and then the taxable corporation transfers loss assets now constituting substantially all of its assets to a tax-exempt entity. For purposes of the loss limitation rule, the principles of section 336(d)(2) apply. Under the proposed regulations, a ‘‘taxable corporation’’ is any corporation that is not a tax-exempt entity as de- fined in the proposed regulations. Thus, taxable corporations include all S corpo- rations whether or not subject to tax on built-in gain under section 1374. After the repeal of theGeneral Utilitiesdoc- trine, an S corporation like a C corpora- tion is required to recognize gain or loss when it liquidates. This gain or loss passes through to the S corporation’s shareholders under section 1366. The proposed regulations parallel this treat- ment. Under the proposed regulations, a ‘‘tax-exempt entity’’ includes organiza- 161997–11 I.R.B. tions exempt from tax under section 501, section 527, section 528, or section 529; Federal, state, and local govern- ments; Indian tribal governments and federally chartered Indian tribal corpora- tions; foreign governments and interna- tional organizations; and entities any portion of whose income is excluded from gross income under section 115. The term does not, however, include a cooperative described in section 521, paralleling the exception to section 337(b)(2). A transaction conveying all or sub- stantially all of the assets of a taxable corporation to an Indian tribal govern- ment or a corporation organized under section 17 of the Indian Reorganization Act (IRA) or section 3 of the Oklahoma Welfare Act (OWA) will be covered by these regulations. Rev. Rul. 94–16, 1994–1 C.B. 19, held that an unincorpo- rated Indian tribe or a corporation orga- nized under section 17 of the IRA is not subject to federal income tax, but a corporation wholly owned by an Indian tribe and organized under state law is subject to federal income tax. Rev. Rul. 94–65, 1994–2 C.B. 14, held that a corporation organized under section 3 of the OWA also was not subject to federal income tax. In that ruling, the Service announced that an Indian tribe seeking to dissolve a corporation organized un- der state law and organize into a feder- ally chartered corporation (corporation organized under either section 17 of the IRA or section 3 of the OWA) will be granted relief under section 7805(b) of the Code upon application for such relief provided it demonstrates to the Service that it has acted reasonably and in good faith to achieve the dissolution and organization. The relief described in that ruling applied to taxes on income earned after September 30, 1994, by a corporation organized by an Indian tribe under state law from income earned within the boundaries of the reservation (including gain or loss properly al- locable to such activities from the sale or exchange of assets). The Service intends to provide similar relief from tax resulting from any gain or loss recog- nized under the rules provided in these regulations. The relief will be available to state law corporations wholly owned by Indian tribes that have acted reason- ably and in good faith to dissolve and reorganize as federally chartered corpo- rations. Proposed Effective Date These regulations are proposed to be applicable to transfers of assets as de- scribed in the regulations occurring after the date that is 30 days after publication in the Federal Register of these regula- tions as final regulations, unless the transfer is pursuant to a written agree- ment which is (subject to customary conditions) binding on or before the date that is 30 days after publication in the Federal Register of these regulations as final regulations. Special Analyses It has been determined that this notice of proposed rulemaking is not a signifi- cant regulatory action as defined in EO 12866. Therefore, a regulatory assess- ment 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 regulations do not impose a collection of informa- tion 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 will be submitted to the Chief Counsel for Advocacy of the Small Business Admin- istration for comment on its impact on small business. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consider- ation will be given to any written com- ments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing has been scheduled for Tuesday, May 6, 1997, at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Because of ac- cess restrictions, visitors will not be admitted beyond the Internal Revenue Service Building lobby more than 15 minutes before the hearing starts. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons that wish to present oral comments at the hearing must submit written comments by April 15, 1997, and submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 15, 1997. A period of 10 minutes will be allot- ted to each person for making com- ments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal author of these regula- tions is Stephen R. Cleary of the Office of Assistant Chief Counsel (Corporate), IRS. However, other personnel from the IRS and the Treasury Department par- ticipated in their development. * * * * * Proposed Amendments to the Regulations Accordingly, 26 CFR Part 1 is pro- posed to be amended as follows: PART I—INCOME TAXES Paragraph 1. The authority citation for 26 CFR Part 1 is amended by adding an entry in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.337(d)–4 also issued under 26 U.S.C. 337. * * * Par. 2. Section 1.337(d)–4 is added to read as follows: § 1.337(d)–4 Taxable to tax-exempt. (a)Gain or loss recognition—(1) General rule.If a taxable corporation transfers all or substantially all of its assets to one or more tax-exempt enti- ties, the taxable corporation must recog- nize gain or loss immediately before the transfer as if the assets transferred were sold at their fair market values. But see section 267 and paragraph (d) of this section concerning limitations on the recognition of loss. (2)Change in corporation’s tax sta- tus treated as asset transfer.Except as provided in paragraph (a)(3) of this section, a taxable corporation’s change in status to a tax-exempt entity will be treated as if it transferred all of its assets to a tax-exempt entity immedi- ately before the change in status be- comes effective in a transaction to which paragraph (a)(1) of this section applies. For purposes of this paragraph (a), if a state, a political subdivision thereof, or an entity any portion of whose income is excluded from gross income under section 115, acquires the stock of a taxable corporation and there- after any of the taxable corporation’s 171997–11 I.R.B. income is excluded from gross income under section 115, the taxable corpora- tion will be treated as if it transferred all of its assets to a tax-exempt entity immediately before the stock acquisi- tion. (3)Exceptions for certain changes in status— (i)To whom available.Para- graph (a)(2) of this section does not apply to the following corporations— (A) A corporation previously exempt under section 501(a) which regains its tax-exempt status under section 501(a) within three years from the later of a final adverse adjudication on the corpo- ration’s tax exempt status, or the filing by the corporation, or by the Secretary or his delegate under section 6020(b), of a federal income tax return of the type filed by a taxable corporation; (B) A newly-formed corporation that is tax-exempt under section 501(a) within three taxable years from the end of the taxable year in which it was formed; (C) A corporation previously exempt under section 501(a) or that applied for but did not receive recognition of ex- emption under section 501(a), before January 15, 1997, if such corporation is tax-exempt under section 501(a) within three years from the date of publication of these regulations in the Federal Reg- ister as final regulations. (ii)Application for recognition.An organization is deemed to have or regain tax-exempt status within one of the three-year periods described in para- graph (a)(3)(i) of this section if it files an application for recognition of exemp- tion with the Commissioner within the three-year period and the application either results in a determination by the Commissioner or a final adjudication that the organization is tax-exempt un- der section 501(a) during any part of the three-year period. The preceding sen- tence does not require the filing of an application for recognition of exemption by any organization not otherwise re- quired, such as by § 1.501(a)–1, § 1.505(c)–1T, and § 1.508–1(a), to ap- ply for recognition of exemption. (iii)Anti-abuse rule.This paragraph (a)(3) does not apply to a corporation that, with a principal purpose of avoid- ing the application of paragraphs (a)(1) and (a)(2) of this section, acquires all or substantially all of the assets of another taxable corporation and then changes its status to that of a tax-exempt entity. (4)Related transactions.This section applies to any series of related transac- tions having an effect similar to any of the transactions to which this section applies. (b)Exceptions.Paragraph (a) of this section does not apply to— (1) Any assets transferred to a tax- exempt entity if the assets are used in an activity the income from which is subject to tax under section 511(a). However, if assets on which no gain or loss was recognized by reason of the preceding sentence are disposed of by the tax-exempt entity, then, notwith- standing any other provision of law, any gain (not in excess of the amount not recognized by reason of the preceding sentence) shall be included in the tax- exempt entity’s unrelated business tax- able income. If the tax-exempt entity ceases to use the assets in an activity the income from which is subject to tax under section 511(a), the entity will be treated for purposes of this subparagraph as having disposed of the assets on the date of the cessation; (2) Any transfer of assets to the ex- tent gain or loss otherwise is recognized by the taxable corporation on the trans- fer. See, for example, sections 336, 337(b)(2), 367, and 1001; (3) Any forfeiture of a taxable corpo- ration’s assets in a criminal or civil action to the United States, the govern- ment of a possession of the United States, a state, the District of Columbia, the government of a foreign country, or a political subdivision of any of the foregoing; or any expropriation of a taxable corporation’s assets by the gov- ernment of a foreign country; and (4) Any transfer of assets to a coop- erative described in section 521. (c)Definitions.For purposes of this section— (1)Taxable corporation.Ataxable corporationis any corporation that is not a tax-exempt entity as defined in paragraph (c)(2) of this section. (2)Tax-exempt entity.Atax-exempt entityis— (i) Any entity that is exempt from tax under section 501(a), section 527, sec- tion 528, or section 529; (ii) A charitable remainder annuity trust or charitable remainder unitrust as defined in section 664(d); (iii) The United States, the govern- ment of a possession of the United States, a state, the District of Columbia, the government of a foreign country, or a political subdivision of any of the foregoing; (iv) An Indian Tribal Government as defined in section 7701(a)(40), a subdi- vision of an Indian tribal government determined in accordance with section 7871(d), or an agency or instrumentality of an Indian tribal government or subdi- vision thereof; (v) An Indian Tribal Corporation or- ganized under section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. 477, or section 3 of the Oklahoma Welfare Act, 25 U.S.C. 503; (vi) An international organization as defined in section 7701(a)(18); (vii) An entity any portion of whose income is excluded under section 115; or (viii) An entity that would not be taxable under the Internal Revenue Code for reasons substantially similar to those applicable to any entity listed in this paragraph (c)(2) unless otherwise explic- itly made exempt from the application of this section by statute or by action of the Commissioner. (3)Substantially all.The termsub- stantially allhas the same meaning as under section 368(a)(1)(C). (d)Loss limitation rule.For purposes of determining the amount of loss rec- ognized by a taxable corporation on the transfer of its assets to a tax-exempt entity under paragraph (a) of this sec- tion, if assets are acquired by the tax- able corporation in a transaction to which section 351 applied or as a contribution to capital, or assets are distributed from the taxable corporation to a shareholder or another member of the taxable corporation’s affiliated group, and in either case as part of a plan a principal purpose of which is to recognize loss by the taxable corpora- tion on the transfer of its assets to the tax-exempt entity, the losses recognized by the taxable corporation on the assets transferred to the tax-exempt entity will be disallowed. For purposes of the pre- ceding sentence, the principles of sec- tion 336(d)(2) apply. (e)Effective date.This section is ap- plicable to transfers of assets as de- scribed in paragraph (a) of this section occurring after the date that is 30 days after publication in the Federal Register of these regulations as final regulations, unless the transfer is pursuant to a written agreement which is (subject to customary conditions) binding on or before the date that is 30 days after 181997–11 I.R.B. publication in the Federal Register of these regulations as final regulations. Margaret Milner Richardson, Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 15, 1997, 62 F.R. 2064) Withdrawal of Notice of Proposed Rulemaking Self-Employment Tax Treatment of Members of Certain Limited Liability Companies REG–209729–94 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Withdrawal of notice of pro- posed rulemaking. SUMMARY: This document withdraws the notice of proposed rulemaking relat- ing to the self-employment tax treatment of members of certain limited liability companies that was published in the Federal Registeron Thursday, Decem- ber 29, 1994. The proposed regulations sought to provide guidance concerning the applicability of certain self- employment tax rules to certain mem- bers of limited liability companies. The IRS and Treasury have issued new pro- posed regulations that will provide guid- ance on this issue. FOR FURTHER INFORMATION CON- TACT: Robert Honigman, (202) 622– 3050 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background On Thursday, December 29, 1994, the IRS issued proposed regulations (EE– 45–94 [1995–1 C.B. 853]) relating to the self-employment tax treatment of members of certain limited liability companies (59 FR 67253). Upon consid- eration of the written comments re- ceived and the oral comments made at the public hearing held on June 23, 1995, the IRS has decided to withdraw those proposed regulations. * * * * * Withdrawal of Notice of Proposed Rulemaking Accordingly, under the authority of 26 U.S.C. 7805, the notice of proposed rulemaking that was published in the Federal Register on Thursday, December 29, 1994, at 59 FR 67253, is withdrawn. Margaret Milner Richardson, Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 13, 1997, 62 F.R. 1701) Notice of Proposed Rulemaking and Notice of Public Hearing Definition of Limited Partner for Self-Employment Tax Purposes REG–209824–96 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemak- ing and notice of public hearing. SUMMARY: This document contains proposed amendments to the regulations relating to the self-employment income tax imposed under section 1402 of the Internal Revenue Code of 1986. These regulations permit individuals to deter- mine whether they are limited partners for purposes of section 1402(a)(13), eliminating the uncertainty in calculating an individual’s net earnings from self- employment under existing law. This document also contains a notice of pub- lic hearing on the proposed regulations. DATES: Written comments must be re- ceived by April 14, 1997. Requests to speak and outlines of oral comments to be discussed at the public hearing scheduled for May 21, 1997, at 10 a.m. must be received by April 30, 1997. ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–209824–96), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Wash- ington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–209824–96), Courier’s Desk, In- ternal Revenue Service, 1111 Constitu- tion Avenue, NW, Washington, DC. Al- ternatively, taxpayers may submit comments electronically via the Internet by selecting the ‘‘Tax Regs’’ option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.gov/prod/ tax_regs/comments.html. The public hearing will be held in the Auditorium, Internal Revenue Service building, 1111 Constitution Avenue, NW, Washington, DC. FOR FURTHER INFORMATION CON- TACT: Concerning the regulation, Rob- ert Honigman, (202) 622–3050; concern- ing submissions and the hearing, Christina Vasquez, (202) 622–6808 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Income Tax Regula- tions (26 CFR part 1) under section 1402 of the Internal Revenue Code and replaces the notice of proposed rulemak- ing published in theFederal Register on December 29, 1994, at 59 FR 67253 (EE–45–94, 1995–1 C.B. 853), that treated certain members of a limited liability company (LLC) as limited part- ners for self-employment tax purposes. Written comments responding to the proposed regulations were received, and a public hearing was held on June 23, 1995. Under the 1994 proposed regulations, an individual owning an interest in an LLC was treated as a limited partner if (1) the individual lacked the authority to make management decisions necessary to conduct the LLC’s business (the management test), and (2) the LLC could have been formed as a limited partnership rather than an LLC in the same jurisdiction, and the member could have qualified as a limited partner in the limited partnership under applicable law (the limited partner equivalence test). The intent of the 1994 proposed regula- tions was to treat owners of an LLC interest in the same manner as similarly situated partners in a state law partner- ship. Public comments on the 1994 pro- posed regulations were mixed. While some commentators were pleased with the proposed regulations for attempting to conform the treatment of LLCs with state law partnerships, others criticized the 1994 proposed regulations based on a variety of arguments. A number of commentators discussed administrative and compliance problems with the 1994 proposed regulations. For example, it was noted that both the management test and the limited partner equivalence test depend upon legal or factual determinations that may be diffi- cult for taxpayers or the IRS to make with certainty. Another commentator pointed out that basing the self-employment tax treat- ment of LLC members on state law 191997–11 I.R.B. limited partnership rules would lead to disparate treatment between members of different LLCs with identical rights based solely on differences in the lim- ited partnership statutes of the states in which the members form their LLC. For example, State A’s limited partnership act may allow a limited partner to participate in a partnership’s business while State B’s limited partnership act may not. Thus, an LLC member, who is not a manager, that participates in the LLC’s business would be a limited partner under the proposed regulations if the LLC is formed in State A, but not if the LLC is formed in State B. Commen- tators asserted that this disparate treat- ment is inherently unfair for federal tax purposes. Some commentators argued for a ‘‘material participation’’ test to deter- mine whether an LLC member’s dis- tributive share is included in the indi- vidual’s net earnings from self- employment. The proposed regulations did not contain a participation test. Commentators advocating a participation test stressed that such a test would eliminate uncertainty concerning many LLC members’ limited partner status and would better implement the self- employment tax goal of taxing compen- sation for services. Other commentators argued for a more uniform approach, stating that a single test should govern all business entities (i.e., partnerships, LLCs, LLPs, sole proprietorships, et al.) whose mem- bers may be subject to self-employment tax. These commentators generally rec- ognized, however, that a change in the treatment of a sole proprietorship or an entity that is not characterized as a partnership for federal tax purposes would be beyond the scope of regula- tions to be issued under section 1402(a)(13). Finally, some commentators focused on whether the Service would respect the ownership of more than one class of partnership interest for self-employment tax purposes (bifurcation of interests). The proposed regulations treated an LLC member as a limited partner with respect to his or her entire interest (if the member was not a manager and satisfied the limited partner equivalence test), or not at all (if either the manage- ment test or limited partner equivalence test was not satisfied). Commentators, however, pointed to the legislative his- tory of section 1402(a)(13) to support their argument that Congress only in- tended to tax a partner’s distributive share attributable to a general partner interest. Under this argument, a partner that holds both a general partner interest and a limited partner interest is only subject to self-employment tax on the distributive share attributable to the part- ner’s general partner interest. This intent also may be inferred from the statutory language of section 1402(a)(13) that the self-employment tax does not apply to ‘‘. . . the distributive share of any item of income or loss of a limited partner, as such . . ..’’ Based on this evidence, these commentators requested that the proposed regulations be revised to allow the bifurcation of interests for self- employment tax purposes. After considering the comments re- ceived, the IRS and Treasury have de- cided to withdraw the 1994 notice of proposed rulemaking and to re-propose amendments to the Income Tax Regula- tions (26 CFR part 1) under section 1402 of the Code. Explanation of Provi- sions The proposed regulations contained in this document define which partners of a federal tax partnership are considered limited partners for section 1402(a)(13) purposes. These proposed regulations apply to all entities classified as a partnership for federal tax purposes, re- gardless of the state law characterization of the entity. Thus, the same standards apply when determining the status of an individual owning an interest in a state law limited partnership or the status of an individual owning an interest in an LLC. In order to achieve this confor- mity, the proposed regulations adopt an approach which depends on the relation- ship between the partner, the partner- ship, and the partnership’s business. State law characterizations of an indi- vidual as a ‘‘limited partner’’ or other- wise are not determinative. Generally, an individual will be treated as a limited partner under the proposed regulations unless the indi- vidual (1) has personal liability (as defined in § 301.7701–3(b)(2)(ii) of the Procedure and Administration Regula- tions) for the debts of or claims against the partnership by reason of being a partner; (2) has authority to contract on behalf of the partnership under the stat- ute or law pursuant to which the part- nership is organized; or, (3) participates in the partnership’s trade or business for more than 500 hours during the taxable year. If, however, substantially all of the activities of a partnership involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consult- ing, any individual who provides ser- vices as part of that trade or business will not be considered a limited partner. By adopting these functional tests, the proposed regulations ensure that simi- larly situated individuals owning inter- ests in entities formed under different statutes or in different jurisdictions will be treated similarly. The need for a functional approach results not only from the proliferation of new business entities such as LLCs, but also from the evolution of state limited partnership statutes. When Congress enacted the limited partner exclusion found in sec- tion 1402(a)(13), state laws generally did not allow limited partners to partici- pate in the partnership’s trade or busi- ness to the extent that state laws allow limited partners to participate today. Thus, even in the case of a state law limited partnership, a functional ap- proach is necessary to ensure that the self-employment tax consequences to similarly situated taxpayers do not differ depending upon where the partnership organized. The proposed regulations allow an individual who is not a limited partner for section 1402(a)(13) purposes to nonetheless exclude from net earnings from self-employment a portion of that individual’s distributive share if the indi- vidual holds more than one class of interest in the partnership. Similarly, the proposed regulations permit an indi- vidual that participates in the trade or business of the partnership to bifurcate his or her distributive share by disre- garding guaranteed payments for ser- vices. In each case, however, such bifur- cation of interests is permitted only to the extent the individual’s distributive share is identical to the distributive share of partners who qualify as limited partners under the proposed regulation (without regard to the bifurcation rules) and who own a substantial interest in the partnership. Together, these rules exclude from an individual’s net earn- ings from self-employment amounts that are demonstrably returns on capital in- vested in the partnership. Proposed Effective Date These regulations are proposed to be effective beginning with the individual’s first taxable year beginning on or after the date these regulations are published as final regulations in theFederal Reg- ister. 201997–11 I.R.B. Special Analyses It has been determined that this notice of proposed rulemaking is not a signifi- cant regulatory action as defined in EO 12866. Therefore, a regulatory assess- ment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and, because the regulations do not impose a collection of informa- tion 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 will be submit- ted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small busi- ness. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consider- ation will be given to any written com- ments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing has been scheduled for Wednesday, May 21, 1997, at 10 a.m. in the Auditorium, Internal Rev- enue Service building, 1111 Constitution Avenue, NW, Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Service building lobby more than 15 minutes before the hearing starts. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons that wish to present oral comments at the hearing must submit written comments by April 14, 1997, and submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 30, 1997. A period of 10 minutes will be allot- ted to each person for making com- ments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal author of these regula- tions is Robert Honigman of the Office of Assistant Chief Counsel (Pass- throughs & Special Industries). How- ever, other personnel from the IRS and Treasury Department participated in their development. * * * * * Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is pro- posed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1402(a)–2 is amended by: 1. Revising the first sentence of para- graph (d). 2. Removing the reference ‘‘section 702(a)(9)’’ in the first sentence of para- graph (e) and adding ‘‘section 702(a)(8)’’ in its place. 3. Revising the last sentence of para- graph (f). 4. Revising paragraphs (g) and (h). 5. Adding new paragraphs (i) and (j). The revisions and additions read as follows: § 1.1402(a)–2Computation of net earn- ings from self-employment. * * * * * (d) * * * Except as otherwise pro- vided in section 1402(a) and paragraph (g) of this section, an individual’s net earnings from self-employment include the individual’s distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by each partnership of which the individual is a partner. * * * * * * * * (f) * * * For rules governing the classification of an organization as a partnership or otherwise, see § § 301.7701–1, 301.7701–2, and 301.7701–3 of this chapter. (g)Distributive share of limited part- ner.An individual’s net earnings from self-employment do not include the indi- vidual’s distributive share of income or loss as a limited partner described in paragraph (h) of this section. However, guaranteed payments described in sec- tion 707(c) made to the individual for services actually rendered to or on be- half of the partnership engaged in a trade or business are included in the individual’s net earnings from self- employment. (h)Definition of limited partner—(1) In general.Solely for purposes of sec- tion 1402(a)(13) and paragraph (g) of this section, an individual is considered to be a limited partner to the extent provided in paragraphs (h)(2), (h)(3), (h)(4), and (h)(5) of this section. (2)Limited partner.An individual is treated as a limited partner under this paragraph (h)(2) unless the individual— (i) Has personal liability (as defined in § 301.7701–3(b)(2)(ii) of this chapter for the debts of or claims against the partnership by reason of being a partner; (ii) Has authority (under the law of the jurisdiction in which the partnership is formed) to contract on behalf of the partnership; or (iii) Participates in the partnership’s trade or business for more than 500 hours during the partnership’s taxable year. (3)Exception for holders of more than one class of interest.An individual holding more than one class of interest in the partnership who is not treated as a limited partner under paragraph (h)(2) of this section is treated as a limited partner under this paragraph (h)(3) with respect to a specific class of partnership interest held by such individual if, im- mediately after the individual acquires that class of interest— (i) Limited partners within the mean- ing of paragraph (h)(2) of this section own a substantial, continuing interest in that specific class of partnership interest; and, (ii) The individual’s rights and obli- gations with respect to that specific class of interest are identical to the rights and obligations of that specific class of partnership interest held by the limited partners described in paragraph (h)(3)(i) of this section. (4)Exception for holders of only one class of interest.An individual who is not treated as a limited partner under paragraph (h)(2) of this section solely because that individual participates in the partnership’s trade or business for more than 500 hours during the partner- ship’s taxable year is treated as a limited partner under this paragraph (h)(4) with respect to the individual’s partnership interest if, immediately after the indi- vidual acquires that interest— (i) Limited partners within the mean- ing of paragraph (h)(2) of this section own a substantial, continuing interest in that specific class of partnership interest; and (ii) The individual’s rights and obli- gations with respect to the specific class 211997–11 I.R.B. of interest are identical to the rights and obligations of the specific class of part- nership interest held by the limited partners described in paragraph (h)(4)(i) of this section. (5)Exception for service partners in service partnerships.An individual who is a service partner in a service partner- ship may not be a limited partner under paragraphs (h)(2), (h)(3), or (h)(4) of this section. (6)Additional definitions.Solely for purposes of this paragraph (h)— (i) Aclass of interestis an interest that grants the holder specific rights and obligations. If a holder’s rights and obligations from an interest are different from another holder’s rights and obliga- tions, each holder’s interest belongs to a separate class of interest. An individual may hold more than one class of interest in the same partnership provided that each class grants the individual different rights or obligations. The existence of a guaranteed payment described in section 707(c) made to an individual for ser- vices rendered to or on behalf of a partnership, however, is not a factor in determining the rights and obligations of a class of interest. (ii) Aservice partneris a partner who provides services to or on behalf of the service partnership’s trade or busi- ness. A partner is not considered to be a service partner if that partner only pro- vides a de minimis amount of services to or on behalf of the partnership. (iii) Aservice partnershipis a part- nership substantially all the activities of which involve the performance of ser- vices in the fields of health, law, engi- neering, architecture, accounting, actu- arial science, or consulting. (iv) Asubstantial interest in a class of interestis determined based on all of the relevant facts and circumstances. In all cases, however, ownership of 20 percent or more of a specific class of interest is considered substantial. (i)Example.The following example illustrates the principles of paragraphs (g) and (h) of this section: Example.(i) A, B, and C form LLC, a limited liability company, under the laws of State to engage in a business that is not a service partner- ship described in paragraph (h)(6)(iii) of this section. LLC, classified as a partnership for fed- eral tax purposes, allocates all items of income, deduction, and credit of LLC to A, B, and C in proportion to their ownership of LLC. A and C each contribute $1x for one LLC unit. B contrib- utes $2x for two LLC units. Each LLC unit entitles its holder to receive 25 percent of LLC’s tax items, including profits. A does not perform services for LLC; however, each year B receives a guaranteed payment of $6x for 600 hours of services rendered to LLC and C receives a guaranteed payment of $10x for 1000 hours of services rendered to LLC. C also is elected LLC’s manager. Under State’s law, C has the authority to contract on behalf of LLC. (ii)Application of general rule of paragraph (h)(2) of this section.A is treated as a limited partner in LLC under paragraph (h)(2) of this section because A is not liable personally for debts of or claims against LLC, A does not have authority to contract for LLC under State’s law, and A does not participate in LLC’s trade or business for more than 500 hours during the taxable year. Therefore, A’s distributive share attributable to A’s LLC unit is excluded from A’s net earnings from self-employment under section 1402(a)(13). (iii)Distributive share not included in net earn- ings from self-employment under paragraph (h)(4) of this section.B’s guaranteed payment of $6x is included in B’s net earnings from self-employment under section 1402(a)(13). B is not treated as a limited partner under paragraph (h)(2) of this section because, although B is not liable for debts of or claims against LLC and B does not have authority to contract for LLC under State’s law, B does participates in LLC’s trade or business for more than 500 hours during the taxable year. Further, B is not treated as a limited partner under paragraph (h)(3) of this section because B does not hold more than one class of interest in LLC. However, B is treated as a limited partner under paragraph (h)(4) of this section because B is not treated as a limited partner under paragraph (h)(2) of this section solely because B participated in LLC’s business for more than 500 hours and because A is a limited partner under paragraph (h)(2) of this section who owns a substantial interest with rights and obligations that are identi- cal to B’s rights and obligations. In this example, B’s distributive share is deemed to be a return on B’s investment in LLC and not remuneration for B’s service to LLC. Thus, B’s distributive share attributable to B’s two LLC units is not net earnings from self-employment under section 1402(a)(13). (iv)Distributive share included in net earnings from self-employment.C’s guaranteed payment of $10x is included in C’s net earnings from self- employment under section 1402(a). In addition, C’s distributive share attributable to C’s LLC unit also is net earnings from self-employment under section 1402(a) because C is not a limited partner under paragraphs (h)(2), (h)(3), or (h)(4) of this section. C is not treated as a limited partner under paragraph (h)(2) of this section because C has the authority under State’s law to enter into a binding contract on behalf of LLC and because C partici- pates in LLC’s trade or business for more than 500 hours during the taxable year. Further, C is not treated as a limited partner under paragraph (h)(3) of this section because C does not hold more than one class of interest in LLC. Finally, C is not treated as a limited partner under paragraph (h)(4) of this section because C has the power to bind LLC. Thus, C’s guaranteed payment and distributive share both are included in C’s net earnings from self-employment under section 1402(a). (j)Effective date.Paragraphs (d), (e), (f), (g), (h), and (i) are applicable begin- ning with the individual’s first taxable year beginning on or after the date this section is published as a final regulation in theFederal Register. Margaret Milner Richardson, Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 13, 1997, 62 F.R. 1702) Employee Plans and Exempt Organizations; Requests for Certain Determination Letters and Applications for Recognition of Exemption Announcement 97–20 PURPOSE This is to announce new ‘‘Where to File’’ instructions for applications for employee plan determination and other letters, as well as exempt organization applications for recognition of exemp- tion from federal income tax, previously submitted to the Los Angeles Key Dis- trict Office of Internal Revenue. BACKGROUND The Internal Revenue Service is in the process of centralizing the filing of requests for determination and other letters and applications for recognition of tax exemption. Announcement 95–51, published in Internal Revenue Bulletin 1995–25 at page 132, announced that centralization will be phased in by dis- trict. Announcement 96–92, published in Internal Revenue Bulletin 1996–38 at page 151, announced that beginning September 1, 1996, requests formerly sent to the key district offices in Atlanta, Georgia, and Baltimore, Maryland, should be sent to the Internal Revenue Service Center in Covington, Kentucky. Announcement 96–133, published in In- ternal Revenue Bulletin 1996–53 at page 60, announced that beginning January 1, 1997, requests formerly sent to the key district offices in Chicago, Illinois, and Dallas, Texas, should also be sent to the Covington address. In addition, the Service is consolidat- ing the employee plan volume submitter and regional prototype programs that are presently maintained by each individual key district office. Plans previously ap- proved by a key district office, whose determination letter processing program is being transferred to Cincinnati, will be reviewed using the same criteria and procedures used by the original district office. New guidelines are being devel- 221997–11 I.R.B. oped that will combine the best features and procedures currently in use by the districts. Guidelines for the revised vol- ume submitter and regional prototype programs will be explained in a future announcement. INSTRUCTIONS Beginning April 1, 1997, letter re- quests and applications previously sub- mitted to the Key District Office in Los Angeles, California, should be sent to the Internal Revenue Service Center in Covington, Kentucky, at the address shown below. (For a period of time, requests and applications mistakenly sent to the Los Angeles Key District Office will be forwarded.) The new address applies to requests for determi- nation letters, regional prototype notifi- cation letters and volume submitter ad- visory letters, on the qualified status of employee plans under sections 401, 403(a), and 409, and the exempt status of any related trust under section 501 of the Internal Revenue Code, applications for recognition of tax exemption on Form 1023, Form 1024, and Form 1028 and other applications for recognition of qualification or exemption. The affected plan sponsors and organizations are those whose principal office or place of business is located in Alaska, California, Hawaii, Idaho, Nevada, Oregon, and Washington. These requests and applica- tions, as well as those formerly submit- ted to the Atlanta, Baltimore, Cincinnati, Chicago, and Dallas Key Districts, should be sent to: Internal Revenue Service P.O. Box 192 Covington, KY 41012–0192 Until further notice, plans and organi- zations in all other locations, i.e., those located within the jurisdiction of the Brooklyn Key District Office, will con- tinue to file their requests or applica- tions in accordance with the applicable user fee instructions, currently in Sec- tion 7 of Revenue Procedure 97–8, published in Internal Revenue Bulletin 1997–1, at page 187, and the instruc- tions for Form 8717, User Fee for Employee Plan Determination Letter Re- quest, or Form 8718, User Fee for Exempt Organization Determination Let- ter Request. Comments or concerns regarding the centralization of the determination pro- cess or applications submitted to the Covington address, may be directed to the EP/EO Customer Service Unit in Cincinnati at (513) 684–3957 (not a toll-free number). Deletions From Cumulative List of Organizations Contributions to Which Are Deductible Under Section 170 of the Code Announcement 97–21 The name of an organization that no longer qualifies as an organization de- scribed in section 170(c)(2) of the Inter- nal Revenue Code of 1986 is listed below. Generally, the Service will not disal- low deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Ser- vice is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organiza- tion has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or deter- mination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organiza- tion that brought about this revocation. If on the other hand a suit for de- claratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protec- tion under section 7428(c) would begin on March 17, 1997, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For indi- vidual contributors, the maximum de- duction protected is $1,000, with a hus- band and wife treated as one contributor. This benefit is not extended to any individual who was responsible, in whole or in part, for the acts or omis- sions of the organization that were the basis for revocation. Gilpin Grammar School Denver, CO The National Organization for the Reform of Marijuana Laws Washington, DC Foundations Status of Certain Organizations Announcement 97–23 The following organizations have failed to establish or have been unable to maintain their status as public chari- ties or as operating foundations. Accord- ingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing doesnotindicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions. Former Public Charities. The follow- ing organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations: Abilene Cultural Foundation, Abilene, TX Academy of Mount St. Scholastica Endowment Association, Inc., Atchison, KS Accessible Parks Incorporated, Austin, TX Acorn-Pacific Foundation, Port Collins, CO Advocates for Incest Survival, Houston, TX American Association for Advancement Core Curriculum, Denver, CO American Awareness Institute, Inc., Kansas City, KS American Economic Defense Foundation, Denver, CO American Indian Anti-Defamation Council, Denver, CO American Indian Resource and Education Coalition, San Antonio, TX American Pow-Mia Coalition, Shawnee Mission, KS A. M. G. Foundation, Inc., Lewisville, TX Andale Nogales Foundation, Nogales, AZ Ardra Foundation, Lawrence, KS Arizona Childrens Heart Fund, Inc., Phoenix, AZ Blummer 100 KN Trail Run, Boulder, CO Bob Rich Memorial Scholarship Foundation Trust, Williamsburg, VA Boys and Girls Club of La Joya Texas, Inc., La Joya, TX Brazos Valley Christian Home School Sports Association, Bryan, TX 231997–11 I.R.B. Bread of Love Outreach Ministries of Texas, Houston, TX Bright Hopes Foundation, Albuquerque, NM Broken Bow Summer Baseball, Inc., Broken Bow, OK Businesswomen Unlimited, Inc., Olathe, KS Cerebral Palsy Foundation of Nassau, Inc., Roosevelt, NY Charles Schwartz Foundation for Music, Inc., New York, NY David Bowen Memorial Scholarship Inc., Yokum, TX Decatur County Retirement Housing Inc., Oberlin, KS Denver Broncos Alumni Charities, Englewood, CO East Texas Arboretum & Botanical Society, Inc., Athens, TX East Texas Center for Independent Living, Tyler, TX East Valley Pony Baseball, Sandy, UT Eberle Puppet Player, Dallas, TX Ellis County Sheriffs Posse Inc., Waxahachie, TX Employees Helping Employees Inc., Phoenix, AZ Environmental Literacy Project, McAllen, TX Executive Womens Coalition for Children, Phoenix, AZ Faith Victory Ministries Inc., Tulsa, OK Families of Murder Victims, Watauga, TX Family Service Network, Irving, TX Family Therapy Training Center of Colorado, Denver, CO Family Watch Inc., Albuquerque, NM Fatima Foundation, Houston, TX First Colorado Regiment United States Volunteers LTD, Englewood, CO First Step Shelter Inc., Pratt, KS Flying Start Foundation, Tucson, AZ Georgetown Little Dribblers, Inc., Georgetown, TX G H F Ministries Inc., Keene, TX Gloria Russell Childrens Ministry Inc., Lufkin, TX Golden Earth Days, Golden, CO Grady County Child Welfare Services Advisory Board, Inc., Chickasha, OK Greater New Bedford Aglas, Inc., New Bedford, MA Great Western Trail—Wasatch Section, Farmington, NM Gulf Coast Drum Corps Associates Inc., Spring, TX Healthcare Solutions for America, Inc., Belmont, MA Henry Lukas Foundation, Inc., Blue Point, NY Hercules Athletic Association, Inc., New York, NY He’s Not Heavy He’s My Brother, Inc., Roxbury, MA Home Base, Inc., Ipswich, MA Humanitarian Foundation for Nicaragua, Incorporated, New York, NY Jacksonville College Foundation, Inc., Jacksonville, TX Jasper Fire Department, Jasper, TX Jefferson County Domestic Violence Task Force, Inc., Valley Falls, KS Labette County Humane Society, Parsons, KS LaDonia Foundation, Inc., LaDonia, TX Lake Powell Project, Page, AZ Lamda Phoenix Center, Inc., Phoenix, AZ Lane Ranch Corporation, Cheyenne, WY Laughter to Go, Inc., Shawnee Mission, KS Make a Kid Smile Inc., Houston, TX Marlin Volunteer Fire Department, Marlin, TX Metro-Rail Inc., Boulder, CO Narciso Martinez Cultural Arts Center, San Benito, TX Northeast Mens Center, Denver, CO North Texas Drug Awareness Library, Ennis, TX Operation Exaltation, Inc., Cedar Hill, TX Opportunity is Through Education, Denver, CO Orthodox Community Services, Inc., Denver, CO Our Home, Inc., Tulsa, OK Paces Foundation Inc., Atlanta, GA Scottish Rite Charitable Trust Valley of Kansas City Orient Kansas, Kansas City, KS Seguin Tri-Party Club, Seguin, TX Seminole Youth Soccer Association, Seminole, TX Share Parents of Northern Utah, Ogden, UT Sheridan County Soccer Association, Sheridan, WY Sheridan Historical Society, Inc., Sheridan, CO Shoebox Ministry, Inc., Phoenix, AZ St. Augustine Technical Center Foundation Inc., St. Augustine, FL 10-4 Ministries, Bellingham, MA Tamina Action Committee, Inc., Spring, TX Tarrant County Opportunities Industrialization Center, Inc., Fort Worth, TX Tecumseh Beautiful, Inc., Tecumseh, OK Telluride Youth Foundation, Telluride, CO United States Helicopter Museum, Tucson, AZ United Way of Choctaw County, Inc., Hugo, OK University of Tulsa Lettermens Association, Tulsa, OK Unlimited Handi-Capable, Inc., Fowler, CO Wadley Partners, Inc., Dallas, TX Walter Smith Ministry, Houston, TX Water and Sanitation Consultancy Group, Denver, CO Welch Evangelistic Association, Franklin, TX Westbury High School Area Improvement Corporation, Houston, TX West Roosevelt Community Development Corporation, Phoenix, AZ Zinser Elementary Parent & Teacher Organization, Grand Rapids, MI If an organization listed above sub- mits information that warrants the re- newal of its classification as a public charity or as a private operating founda- tion, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and con- tributors may thereafter rely upon such ruling or determination letter as pro- vided in section 1.509(a)–7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin. Timing of Certain Plan Amendments Relating to Section 401(a)(9) Announcement 97–24 PURPOSE This announcement provides that an employer is not precluded from offering, to employees (other than 5-percent own- ers) who attain age 70½ after 1995 and have not retired, an option to defer commencement of benefit distributions under a qualified plan merely because the plan has not yet been amended to provide for the option. BACKGROUND Section 1404(a) of the Small Business Job Protection Act of 1996 (SBJPA) amended section 401(a)(9) of the Inter- nal Revenue Code to provide that, in the case of an employee who is not a 5-percent owner, the required beginning date for minimum distributions from a qualified plan is April 1 of the calendar year following the later of the calendar 241997–11 I.R.B. year in which the employee attains age 70½ or the calendar year in which the employee retires. The amendment to section 401(a)(9) applies to years begin- ning after December 31, 1996. Notice 96–67, 1996–53 I.R.B. 12, Q&A–2, provides that, under section 401(a)(9) as amended by the SBJPA, an employee (other than a 5-percent owner) who attained age 70½ in 1996, but who had not retired from employment with the employer maintaining the plan by the end of 1996, is not required to receive a minimum distribution by April 1, 1997. Many qualified plans continue to con- tain provisions (consistent with section 401(a)(9) prior to its amendment by the SBJPA) requiring an employee who at- tains age 70½ in a calendar year to begin receiving distributions by April 1 of the following calendar year. Some employers wish to give employees (other than 5-percent owners) who have not retired the option to defer com- mencement of distributions beyond April 1 following the calendar year the em- ployees attain age 70½ and have re- quested guidance as to whether such an option may be offered before their plans are amended to provide for the option. This announcement responds to these requests concerning the addition of an option to defer commencement of distri- butions before plan amendment. It does not address the elimination of the option to receive in-service distributions after age 70½. As noted in Notice 96–67, an amend- ment that eliminates the right to receive a distribution prior to retirement after age 70½ is precluded by section 411(d)(6) if the amendment applies to benefits accrued as of the later of the adoption date or the effective date of the amendment. In Notice 96–67, the Ser- vice and Treasury requested comments concerning the extent to which a relax- ation of section 411(d)(6) protection is appropriate for amendments that elimi- nate in-service distributions after age 70½, and the Service and Treasury are currently considering the comments re- ceived. TIMING OF PLAN AMENDMENTS Under a qualified plan, an employer is permitted to offer an employee (other than a 5-percent owner) who attains age 70½ in a calendar year after 1995 and has not retired by the end of that calendar year the option to delay com- mencement of benefit distributions until no later than April 1 following the calendar year in which the employee retires from employment with the em- ployer maintaining the plan. A plan that continues to contain provisions requiring an employee to begin receiving distribu- tions by April 1 following the calendar year in which the employee attains age 70½ will not fail to satisfy section 401(a) merely because the employer offers the option described in the pre- ceding sentence prior to amending the plan to include this option. Thus, if employees (other than 5-percent owners) who attained age 70½ in 1996 and did not retire from employment with the employer maintaining the plan by the end of 1996 are offered the opportunity to make an election to defer commence- ment of benefits rather than to begin receiving benefits from the plan by April 1, 1997, the plan will not fail to satisfy section 401(a) merely because the plan has not yet been amended to provide for this election. Future guidance will provide that an employer that offers this option under a plan must amend the plan retroactively, no later than the date specified in that guidance, to provide for the option. The retroactive plan amendment will have to conform the plan to its pre-amendment operation regarding the option to defer commencement of benefits. The date by which a plan providing for this option must be retroactively amended will not be earlier than 90 days after the future guidance is published and in no event will be earlier than January 1, 1998. This announcement also applies to an employer that has adopted a master or prototype or a regional prototype plan. Such an employer should note that if a conforming amendment is not an avail- able option under the sponsor’s proto- type plan document, the required amendment may result in the loss of prototype status. ELECTIONS TO STOP RECEIVING DISTRIBUTIONS This announcement does not address the conditions under which employers may offer employees who have attained age 70½ and have begun to receive distributions under a plan an election to stop receiving distributions until a date no later than April 1 of the calendar year following retirement. Employers are cautioned that, under certain circum- stances, an election to stop receiving distributions may violate the qualifica- tion requirements under section 401(a), such as sections 401(a)(11) and 417 (relating to participant and spousal con- sent, joint and survivor annuity require- ments, and related matters). Future guid- ance will address the conditions under which these types of elections may be made and the permitted timing of re- lated plan amendments. 251997–11 I.R.B. Announcement of the Disbarment, Suspension, or Consent to Voluntary Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and Enrolled Actuaries From Practice Before the Internal Revenue Service Under 31 Code of Federal Regula- tions, Part 10, an attorney, certified pub- lic accountant, enrolled agent or enrolled actuary, in order to avoid the institution or conclusion of a proceeding for his disbarment or suspension from practice before the Internal Revenue Service, may offer his consent to suspension from such practice. The Director of Practice, in his discretion, may suspend an attorney, certified public accountant, enrolled agent or enrolled actuary in accordance with the consent offered. Attorneys, certified public accoun- tants, enrolled agents and enrolled actu- aries are prohibited in any Internal Rev- enue Service matter from directly or indirectly employing, accepting assis- tance from, being employed by or shar- ing fees with, any practitioner disbarred or suspended from practice before the Internal Revenue Service. To enable attorneys, certified public accountants, enrolled agents and en- rolled actuaries to identify practitioners under consent suspension from practice before the Internal Revenue Service, the Director of Practice will announce in the Internal Revenue Bulletin the names and addresses of practitioners who have been suspended from such practice, their designation as attorney, certified public accountant, enrolled agent or enrolled actuary, and date or period of suspen- sion. This announcement will appear in the weekly Bulletin at the earliest practi- cable date after such action and will continue to appear in the weekly Bulle- tins for five successive weeks or for as many weeks as is practicable for each attorney, certified public accountant, en- rolled agent or enrolled actuary so sus- pended and will be consolidated and published in the Cumulative Bulletin. The following individuals have been placed under consent suspension from practice before the Internal Revenue Service: NameAddressDesignationDate of Suspension Vlymen, Neal VanSan Diego, CACPAIndefinite from November 1, 1996 Lombardi, TheresaLivonia, MICPANovember 1, 1996 to October 31, 1998 Orfall, WarrenHood River, ORCPANovember 1, 1996 to June 30, 1997 Oberman, JosephHighland Park, ILCPADecember 1, 1996 to August 31, 1997 Gazzola, FrankN. Mankato, MNCPADecember 1, 1996 to November 30, 1997 Tumminello, Anthony G.St. Louis, MOAttorneyDecember 17, 1996 to June 16, 1997 Heffelfinger, Harry N.Buffalo Grove, ILCPADecember 20, 1996 to June 19, 1998 Zintl Jr., Ernst J.Newport, MNCPADecember 23, 1996 to December 22, 1997 Alms, William R.Lake Forest, CACPAJanuary 1, 1997 to March 31, 1997 Smith, Arthur L.Athens, GACPAJanuary 1, 1997 to December 31, 1997 DeGroote Sr., Kevin J.Mesa, AZCPAJanuary 1, 1997 to October 31, 1997 Oliveri, RobertBensalem, PACPAJanuary 1, 1997 to December 31, 1997 Davies, Preston S.Deerfield, ILCPAJanuary 15, 1997 to December 14, 1997 Elbert, David L.Franktown, COCPAIndefinite from January 21, 1997 Smith Jr., Phillip M.Long Beach, CAAttorneyFebruary 1, 1997 to March 31, 1997 Pennington, Richard A.Vandergrift, PACPAFebruary 1, 1997 to January 31, 2000 Tameron, Joseph A.Chandler, AZCPAFebruary 1, 1997 to September 30, 1998 Kalb, Mary C.Kearny, NECPAFebruary 1, 1997 to March 31, 1997 Pritchard, John J.San Diego, CAEnrolled AgentFebruary 1, 1997 to March 31, 1997 Garrett, RichardTorrance, GAEnrolled AgentMarch 1, 1997 to May 30, 1997 Englert, Larry R.Eaton, OHCPAApril 1, 1997 to May 30, 1997 Section 7428(c) Validation of Certain Contributions Made During Pendency of Declaratory Judgment Proceedings This announcement serves notice to potential donors that the organization listed below has recently filed a timely declaratory judgment suit under section 7428 of the Code, challenging revoca- tion of its status as an eligible donee under section 170(c)(2). Protection under section 7428(c) of the Code begins on the date that the notice of revocation is published in the Internal Revenue Bulletin and ends on the date on which a court first deter- mines that an organization is not de- scribed in section 170(c)(2), as more particularly set forth in section 7428(c)(1). In the case of individual contributors, the maximum amount of contributions protected during this pe- riod is limited to $1,000.00, with a husband and wife being treated as one 26 contributor. This protection is not ex- tended to any individual who was re- sponsible, in whole or in part, for the acts or omissions of the organization that were the basis for the revocation. This protection also applies (but without limitation as to amount) to organizations described in section 170(c)(2) which are exempt from tax under section 501(a). If the organization ultimately prevails in its declaratory judgment suit, deductibil- ity of contributions would be subject to the normal limitations set forth under section 170. Society of Separationists, Inc. Austin, TX 27 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 de- scribe the effect: Amplifieddescribes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is ampli- fied. (Compare withmodified, 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 confu- sion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously published ruling and points out an es- sential 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 pub- lished position. (Compare withamplified andclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered de- terminative with respect to future trans- actions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted be- cause of changes in law or regulations. A ruling may also be obsoleted because the substance has been included in regu- lations subsequently adopted. Revokeddescribes situations where the position in the previously published ruling is not correct and the correct position is being stated in the new ruling. Supersededdescribes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previ- ously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example,modifiedandsuper- sededdescribes a situation where the substance of a previously published rul- ing 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 published ruling is first modified and then, as modified, is su- perseded. 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 ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series. Suspendedis used in rare situations to show that the previous published rulings 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 Contribution 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.—Statements 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. 28 Numerical Finding List 1 Bulletin 1997–1 through 1997–10 Announcements: 97–1, 1997–2 I.R.B.63 97–2, 1997–2 I.R.B.63 97–3, 1997–2 I.R.B.63 97–4, 1997–3 I.R.B.14 97–5, 1997–3 I.R.B.15 97–6, 1997–4 I.R.B.11 97–7, 1997–4 I.R.B.12 97–8, 1997–4 I.R.B.12 97–9, 1997–5 I.R.B.27 97–10, 1997–10 I.R.B.64 97–11, 1997–6 I.R.B.19 97–12, 1997–7 I.R.B.55 97–13, 1997–8 I.R.B.38 97–14, 1997–8 I.R.B.38 97–15, 1997–9 I.R.B.23 97–16, 1997–9 I.R.B.23 97–17, 1997–9 I.R.B.23 97–18, 1997–10 I.R.B.67 97–19, 1997–10 I.R.B.68 Notices: 97–1, 1997–2 I.R.B.22 97–2, 1997–2 I.R.B.22 97–3, 1997–1 I.R.B.8 97–4, 1997–2 I.R.B.24 97–5, 1997–2 I.R.B.25 97–6, 1997–2 I.R.B.26 97–7, 1997–1 I.R.B.8 97–8, 1997–4 I.R.B.7 97–9, 1997–2 I.R.B.35 97–10, 1997–2 I.R.B.41 97–11, 1997–2 I.R.B.50 97–12, 1997–3 I.R.B.11 97–13, 1997–6 I.R.B.13 97–14, 1997–8 I.R.B.23 97–15, 1997–8 I.R.B.23 97–16, 1997–9 I.R.B.15 97–17, 1997–10 I.R.B.34 97–18, 1997–10 I.R.B.35 97–19, 1997–10 I.R.B.40 97–20, 1997–10 I.R.B.52 Proposed Regulations: REG–209040–88, 1997–7 I.R.B.34 REG–209494–90, 1997–8 I.R.B.24 REG–208172–91, 1997–10 I.R.B.59 REG–209672–93, 1997–6 I.R.B.15 REG–209762–95, 1997–3 I.R.B.12 REG–209817–96, 1997–7 I.R.B.41 REG–209828–96, 1997–6 I.R.B.15 REG–209834–96, 1997–4 I.R.B.9 REG–209839–96, 1997–8 I.R.B.26 REG–242996–96, 1997–9 I.R.B.18 REG–246018–96, 1997–8 I.R.B.30 REG–247678–96, 1997–6 I.R.B.17 REG–247862–96, 1997–8 I.R.B.32 REG–248770–96, 1997–8 I.R.B.33 REG–249819–96, 1997–7 I.R.B.50 REG–252231–96, 1997–7 I.R.B.52 REG–252233–96, 1997–9 I.R.B.19 Revenue Procedures: 97–1, 1997–1 I.R.B.11 97–2, 1997–1 I.R.B.64 97–3, 1997–1 I.R.B.84 97–4, 1997–1 I.R.B.96 97–5, 1997–1 I.R.B.132 97–6, 1997–1 I.R.B.153 Revenue Procedures—Continued 97–7, 1997–1 I.R.B.185 97–8, 1997–1 I.R.B.187 97–9, 1997–2 I.R.B.56 97–10, 1997–2 I.R.B.59 97–11, 1997–6 I.R.B.13 97–12, 1997–4 I.R.B.7 97–13, 1997–5 I.R.B.18 97–14, 1997–5 I.R.B.20 97–15, 1997–5 I.R.B.21 97–16, 1997–5 I.R.B.25 97–17, 1997–9 I.R.B.15 97–18, 1997–10 I.R.B.53 97–19, 1997–10 I.R.B.55 Revenue Rulings: 97–1, 1997–2 I.R.B.10 97–2, 1997–2 I.R.B.7 97–3, 1997–2 I.R.B.5 97–4, 1997–3 I.R.B.6 97–5, 1997–4 I.R.B.5 97–6, 1997–4 I.R.B.4 97–7, 1997–5 I.R.B.14 97–8, 1997–7 I.R.B.4 97–9, 1997–9 I.R.B.4 97–10, 1997–10 I.R.B.31 97–11, 1997–10 I.R.B.5 Social Security Domestic Coverage Threshold 1997–9, I.R.B.17 Treasury Decisions: 8688, 1997–3 I.R.B.7 8689, 1997–3 I.R.B.9 8690, 1997–5 I.R.B.5 8691, 1997–5 I.R.B.16 8692, 1997–3 I.R.B.4 8693, 1997–6 I.R.B.9 8694, 1997–6 I.R.B.11 8695, 1997–4 I.R.B.5 8696, 1997–6 I.R.B.4 8697, 1997–2 I.R.B.11 8698, 1997–7 I.R.B.29 8699, 1997–6 I.R.B.4 8700, 1997–7 I.R.B.5 8701, 1997–7 I.R.B.23 8702, 1997–8 I.R.B.4 8703, 1997–8 I.R.B.18 8704, 1997–8 I.R.B.12 8705, 1997–8 I.R.B.16 8706, 1997–9 I.R.B.11 8707, 1997–7 I.R.B.17 8708, 1997–10 I.R.B.14 8709, 1997–9 I.R.B.5 1 A cumulative list of all Revenue Rulings, Revenue Procedures, Treasury Decisions, etc., published in Internal Revenue Bulletins 1996–27 through 1996–53 will be found in Internal Revenue Bulletin 1997–1, dated January 6, 1997. 29 Finding List of Current Action on Previously Published Items 1 Bulletin 1997–1 through 1997–10 *Denotes entry since last publication Revenue Procedures: 66–3 Modified by 97–11, 1997–6 I.R.B.13 87–21 Modified by 97–11, 1997–6 I.R.B.13 92–20 Modified by 97–1, 1997–1 I.R.B.11 92–20 Modified by 97–10, 1997–2 I.R.B.59 92–90 Superseded by 97–1, 1997–1 I.R.B.11 94–52 Revoked by 97–11, 1997–6 I.R.B.13 96–1 Superseded by 97–1, 1997–1 I.R.B.11 96–2 Superseded by 97–2, 1997–1 I.R.B.64 96–3 Superseded by 97–3, 1997–1 I.R.B.84 96–4 Superseded by 97–4, 1997–1 I.R.B.96 96–5 Superseded by 97–5, 1997–1 I.R.B.132 96–6 Superseded by 97–6, 1997–1 I.R.B.153 96–7 Superseded by 97–7, 1997–1 I.R.B.185 96–8 Superseded by 97–8, 1997–1 I.R.B.187 Revenue Rulings: 70–480 Revoked by 97–6, 1997–4 I.R.B.4 72–527 Obsoleted by 8704, 1997–8 I.R.B.12 74–59 Revoked by 8708, 1997–10 I.R.B.14 Revenue Rulings—Continued 92–19 Supplemented in part by 97–2, 1997–2 I.R.B.7 96–12 Superseded by 97–3, 1997–1 I.R.B.84 96–13 Modified by 97–1, 1997–1 I.R.B.11 96–22 Superseded by 97–3, 1997–1 I.R.B.84 96–34 Superseded by 97–3, 1997–1 I.R.B.84 96–39 Superseded by 97–3, 1997–1 I.R.B.84 96–43 Superseded by 97–3, 1997–1 I.R.B.84 96–56 Superseded by 97–3, 1997–1 I.R.B.84 1 A cumulative finding list for previously published items mentioned in Internal Revenue Bulletins 1996–27 through 1996–53 will be found in Inter- nal Revenue Bulletin 1997–1, dated January 6, 1997. 30
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