Internal Revenue Bulletin 1997-8 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
T.D. 8702, page 4.
Final regulations relate to certain transfers of stock or
securities of domestic corporations by U.S. persons to
foreign corporations pursuant to the corporate organiza-
tion, reorganization, or liquidation provisions of section
367 of the Code.
T.D. 8703, page 18.
Final regulations under section 6081 of the Code
provide new and simpler procedures for an individual to
obtain an automatic extension of time to file an indi-
vidual income tax return.
T.D. 8704, page 12.
Final regulations under sections 952, 954, and 960 of
the Code relate to the definitions of subpart F income
and foreign personal holding company income of a
controlled foreign corporation and the allocation of
deficits to compute the deemed-paid foreign tax credit.
T.D. 8705, page 16.
REG–247862–96, page 32.
Final and temporary regulations under section 6071 of
the Code provide that disqualified persons and organiza-
tion managers liable for Code section 4958 excise taxes
are required to file Form 4720.
REG–209494–90, page 24.
Proposed regulations under section 41 of the Code
describe when computer software that is developed by
(or for the benefit of) a taxpayer, primarily for the
taxpayer’s internal use, can qualify for the credit for
increasing research activities. A public hearing will be
held on May 13, 1997.
REG–209839–96, page 26.
Proposed regulations under section 832 of the Code
relate to the requirement that insurance companies
other than life insurance companies reduce, by 20
percent, their deductions for increases in unearned
premiums. A public hearing will be held on April 30,
1997.
REG–246018–96, page 30.
Proposed regulations under section 801 of the Code
relate to the definition of life insurance reserves. A
public hearing will be held on April 17, 1997.
REG–248770–96, page 33.
Proposed regulations under section 6601 of the Code
relate to joint returns, property exempt from levy,
interest, penalties, offers in compromise, and the award-
ing of costs and certain fees.
Notice 97–14, page 23.
Low-income housing tax credit.Resident populations
of the various states, for determining the 1997 calendar
year (1) state housing credit ceiling under section 42(h)
of the Code, and (2) private activity bond volume cap
under section 146, are reproduced.
EXEMPT ORGANIZATIONS
Announcement 97–13, page 38.
A Taste of Orange County, Inc., Irvine, CA, no longer
qualifies as an organization to which contributions are
deductible under section 170 of the Code.
Announcement 97–14, page 38.
A list is given of organizations now classified as private
foundations.
EXCISE TAX
Notice 97–15, page 23.
The Service intends to modify section 40.6302(c)–
1(c)(2) of the Excise Tax Procedural Regulations to
provide that the availability of the safe harbor deposit
rule based on look-back quarter liability is limited in
cases where a new excise tax is enacted or an expired
excise tax is reinstated.
Finding Lists begin on page 41.
Announcement of Disbarments and Suspensions begins on page 40.
Bulletin No. 1997–8
February 24, 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.

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 367.—Foreign
Corporations
26 CFR 1.367(a)–3: Treatment of transfers of
stock or securities to foreign corporations.
T.D. 8702
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Certain Transfers of Domestic
Stock or Securities by U.S. Persons
to Foreign Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to certain trans-
fers of stock or securities of domestic
corporations by United States persons to
foreign corporations pursuant to the cor-
porate organization, reorganization, or
liquidation provisions of the Internal
Revenue Code. These final regulations
modify the rules contained in the tempo-
rary regulations to reflect certain tax-
payer comments received in response to
those temporary regulations. This action
is necessary to provide the public with
guidance to comply with the Tax Re-
form Act of 1984.
DATES: These regulations are effective
January 29, 1997. For dates of applica-
bility of these regulations, see
§ 1.367(a)–3(c)(11).
FOR FURTHER INFORMATION CON-
TACT: Philip L. Tretiak at (202) 622–
3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1478. Responses to these collec-
tions of information are required in
order for U.S. shareholders that transfer
stock or securities in section 367(a)
exchanges to qualify for an exception to
the general rule of taxation under sec-
tion 367(a)(1).
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The estimated one-time burden per
respondent: 10 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
theInternal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to theOf-
fice of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background
On May 16, 1986, temporary and
proposed regulations under sections
367(a) and (d) and section 6038B were
published in theFederal Register(51
FR 17936 [LR–3–86, 1986–1 C.B.
902]). These regulations were published
to provide the public with guidance
necessary to comply with changes made
to the Internal Revenue Code by the Tax
Reform Act of 1984. The IRS and the
Treasury Department later issued Notice
87–85 (1987–2 C.B. 395), which set
forth substantial changes to the 1986
regulations, effective with respect to
transfers occurring after December 16,
1987. A further notice of proposed
rulemaking, containing rules under sec-
tion 367(a), as well as under section
367(b), was published in theFederal
Registeron August 26, 1991 (56 FR
41993 [INTL–54–91; INTL–178–86,
1991–2 C.B. 1070]). The 1991 proposed
section 367(a) regulations were gener-
ally based upon the positions announced
in Notice 87–85, but the regulations
made certain modifications to Notice
87–85, particularly with respect to trans-
fers of stock or securities of foreign
corporations. Subsequently, the IRS and
the Treasury Department issued Notice
94–46 (1994–1 C.B. 356), announcing
modifications to the positions set forth
in Notice 87–85 (and the 1991 proposed
regulations) with respect to transfers of
stock or securities of domestic corpora-
tions occurring after April 17, 1994.
Most recently, temporary and pro-
posed regulations were published in the
Federal Registeron December 26,
1995 (60 FR 66739 and 66771). The
temporary regulations, which are gener-
ally effective for transfers occurring af-
ter April 17, 1994, but cease to be
effective when the final regulations take
effect, generally incorporated the posi-
tions announced in Notice 94–46, with
certain modifications. These final regu-
lations generally follow the rules set
forth in the temporary regulations, with
changes as described below. Explanation
of provisions
Section 367(a)(1) generally treats a
transfer of property (including stock or
securities) by a U.S. person to a foreign
corporation in connection with an ex-
change described in section 332, 351,
354, 356 or 361 as a taxable exchange
unless the transfer qualifies for an ex-
ception to this general rule.
Rules that address transfers of stock
or securities of domestic corporations
are contained in the final regulations
described herein. Rules that address
transfers of stock or securities of foreign
corporations under section 367(a) are
contained in Notice 87–85.
The final regulations retain the gen-
eral rules set forth in the temporary
regulations, which provide that a U.S.
person that exchanges stock or securities
in a U.S. target company (UST) for
stock of a foreign corporation (the trans-
feree foreign corporation (or TFC)) in
an exchange described in section 367(a)
will qualify for nonrecognition treatment
if certain reporting requirements are sat-
isfied and each of the following condi-
tions is met:
(i) U.S. transferors must receive no
more than 50 percent of the voting
power and value of the stock of the
TFC in the transfer (i.e., the 50-percent
ownership threshold is not exceeded);
(ii) U.S. officers, directors and
5-percent or greater shareholders of the
U.S. target must not own, in the aggre-
gate, more than 50 percent of the voting
power and value of the TFC immedi-
ately after the transfer (i.e., the control
group case does not apply);
(iii) The U.S. person (exchanging
U.S. shareholder) either must not be a
5-percent transferee shareholder immedi-
ately after the transfer or, if the U.S.
person is a 5-percent transferee share-
holder, must enter into a 5-year gain
recognition agreement (GRA) with re-
spect to the UST stock or securities it
exchanged. (Without such GRA, the
transfer by the 5-percent transferee
4

shareholder will not qualify for nonrec-
ognition treatment; however, transfers
by other U.S. transferors not subject to
the GRA requirement may qualify if all
other requirements are met.); and
(iv) The active trade or business re-
quirement must be satisfied.
If one or more of the foregoing
requirements is not satisfied, the transfer
by the U.S. person of stock or securities
of a domestic corporation in exchange
for stock of a TFC is taxable under
section 367(a).
In response to suggestions from com-
mentators, however, the final regulations
make a number of modifications to the
temporary regulations, principally in two
areas: (i) the treatment of transfers of
‘‘other property’’ in the context of the
50-percent ownership threshold require-
ment, and (ii) the active trade or busi-
ness requirement.
Location:
Transfers of ‘‘Other Property’’
Under the temporary regulations, if
U.S. transferors receive more than 50
percent of the stock (by vote or value)
of the TFC, the 50-percent ownership
threshold is exceeded and the transfer is
taxable under section 367(a)(1). The
temporary regulations define a ‘‘U.S.
transferor’’ as a U.S. person who trans-
fers (directly, indirectly or construc-
tively) stock or securities of the U.S.
target company or ‘‘other property’’ for
stock of the TFC in an exchange de-
scribed in section 367. Persons who
transfer U.S. target company stock or
other property are presumed to be U.S.
persons.
The inclusion of ‘‘other property’’ in
the class of tainted transferred property
was designed to prevent the avoidance
of the 50-percent ownership threshold
through ‘‘stuffing’’ transactions. For ex-
ample, assume that FC, a foreign corpo-
ration, and UST, an unrelated U.S. cor-
poration, seek to combine their
operations in a new foreign joint venture
company (JV). The shareholders of each
company will transfer their respective
stock interests in UST and FC to JV in
a transaction that would qualify as a
section 351 exchange unless the transac-
tion was taxable under section 367(a)(1).
Assume that FC has all foreign share-
holders. The value of the stock of UST
is 550x; the value of the stock of FC is
450x. Because UST is more valuable
than FC, UST’s shareholders would re-
ceive more than 50 percent of JV’s
stock. Consequently, even if the transac-
tion would otherwise qualify for an
exception to the general rule of taxation
under section 367(a)(1), the transaction
would be taxable because the 50-percent
ownership threshold would be exceeded.
If, however, a U.S. person (X) contrib-
uted at least 100x in cash (or property)
to JV, JV would not issue more than 50
percent of its stock to the UST share-
holders, and, therefore, the 50-percent
ownership threshold would not be ex-
ceeded. The temporary regulations, how-
ever, treat X as a U.S. transferor, so that
the 50-percent ownership threshold
would be exceeded in this case.
Commentators have pointed out that
the term ‘‘other property’’ raises issues
in the joint venture context that are
broader than the ‘‘stuffing’’ example
described above. Because the term
‘‘other property’’ is broad enough to
include stock of a foreign company, the
transfer of UST stock could be taxable
under section 367(a)(1) even if UST
were less valuable than the foreign
‘‘target’’ company (i.e., in cases where
U.S. transferors would receive less than
50 percent of the stock of the joint
venture company/TFC). Assume similar
facts as in the earlier example, except
that FC is widely- held and the share-
holders of UST receive 40 percent of
the stock of JV, while the shareholders
of FC receive the remaining 60 percent.
No cash or any other property is trans-
ferred to the JV. In such case, if the
stock of FC constitutes ‘‘other prop-
erty,’’ UST shareholders would not
qualify for an exception to section
367(a)(1) if they were unable to prove
that the U.S. shareholders of FC, if any,
received no more than 10 percent of the
stock of JV in the exchange.
Although the IRS and the Treasury
Department remain concerned with
‘‘stuffing’’ transactions, the final regula-
tions consider the active trade or busi-
ness test to be the primary safeguard for
preventing tax-motivated transactions
from qualifying for an exception under
these section 367(a) regulations. In par-
ticular, because the active trade or busi-
ness test addresses ‘‘stuffing’’ transac-
tions that occur within the 36-month
period prior to the acquisition, the final
regulations eliminate consideration of
transfers of other property with regard
to the 50-percent ownership threshold.
Thus, any TFC stock received by U.S.
persons in exchange for transfers of
other property will not be taken into
account in determining whether the 50-
percent ownership threshold is exceeded.
Active trade or business test: in general
The final regulations modify the ‘‘ac-
tive trade or business’’ requirement that
must be satisfied for a U.S. transferor to
qualify for an exception to the general
rule of taxability under section
367(a)(1).
Under the requirement contained in
the temporary regulations, no exception
under section 367(a)(1) is available un-
less (i) the TFC or an affiliate was
engaged in an active trade or business
for the entire 36-month period prior to
the exchange (the 36-month test), and
(ii) such business was substantial in
relation to the business of the U.S.
target company (the substantiality test).
For this purpose, an affiliate is generally
defined by reference to the rules in
section 1504(a) (without the exclusion
of foreign corporations).
The active trade or business test un-
der the final regulations includes (i) a
modified 36-month test, (ii) a new anti-
avoidance rule requiring that the trans-
action not be undertaken with an inten-
tion that the TFC cease its active trade
or business, and (iii) a modified substan-
tiality test. The final regulations make a
number of other modifications and clari-
fications to the active trade or business
test. For example, the final regulations
permit the TFC to consider only an
80-percent owned foreign subsidiary (re-
ferred to as a ‘‘qualified subsidiary’’),
and not an affiliate, to satisfy the active
trade or business test on its behalf.
Active trade or business test: 36-month
test and intent test
Under the 36-month test contained in
the temporary regulations, the TFC or
an affiliate is required to be engaged in
an active trade or business for the entire
36 months immediately preceding the
date of the transfer. Under the final
regulations, this test can be satisfied by
acquired businesses that have a 36-
month operating history, unless they are
acquired with the principal purpose of
satisfying the active trade or business
test.
In addition to the 36-month test, the
active trade or business test in the final
regulations contains a requirement that
the transaction not be undertaken with
an intention that the TFC cease its
active business. The IRS and the Trea-
sury Department believe that if a TFC
with a 36- month active business history
does not intend to maintain such busi-
ness, but is only used as a vehicle to
acquire the UST, an ‘‘inversion’’ trans-
action rather than a synergy of two
businesses has been effected.
Under the temporary regulations,
there is uncertainty as to whether an
affiliate of a newly-formed TFC can
5

satisfy the active trade or business test
on behalf of the TFC for the (36-month)
period prior to the exchange. Subject to
a stuffing rule, the final regulations
clarify that, for purposes of determining
whether a TFC satisfies the 36-month
test, the TFC may take into account an
active business of a company that is a
qualified subsidiary immediately after
the transaction, even if such company
was not a qualified subsidiary for all or
part of the 36 months prior to the
transaction. Thus, for example, if the
TFC is a new foreign joint venture
company, it will not be disqualified
from satisfying the active trade or busi-
ness test solely because its qualifying
active trade or business was engaged in
by a qualified subsidiary whose stock is
received in the exchange.
Under the temporary regulations, it is
unclear whether a newly-formed joint
venture TFC could satisfy the active
trade or business test if, in the transac-
tion, it received both stock of a UST
(from U.S. transferors) and an active
trade or business (i.e., a foreign branch)
that had been operating for at least 36
months prior to the exchange (from
foreign transferors). This uncertainty
arose because the active trade or busi-
ness test in the temporary regulations
required that either the TFC or an
affiliate satisfy the 36-month require-
ment. Although the temporary regu-
lations did not intend to establish a
preference for transfers of stock (i.e.,
affiliates) vis-a-vis assets, the temporary
regulations did not expressly provide
that a TFC could utilize a newly-
transferred foreign branch to satisfy the
TFC’s active trade or business require-
ment.
The final regulations clarify that, sub-
ject to a stuffing rule, the TFC may
satisfy the active trade or business test if
it receives in the exchange foreign as-
sets that constituted an active trade or
business during such 36-month period.
Active trade or business test: qualified
subsidiaries
The final regulations permit a TFC to
take into account only qualified subsid-
iaries, rather than affiliates, to satisfy
the active trade or business test. This
aspect of the active trade or business
test has been narrowed because the IRS
and the Treasury Department do not
believe that a TFC should satisfy the
active trade or business exception
merely because its parent company (or
an affiliate of the parent company) is
engaged in an active trade or business.
For example, assume that foreign par-
ent (FP), which is engaged in an active
business outside the United States (ei-
ther directly or through a subsidiary),
forms a foreign subsidiary (FS) and
contributes cash to FS. Shareholders of
a U.S. target company (UST) then trans-
fer all of the stock of UST in exchange
for 20 percent of the stock of FS in a
transaction described in sections
368(a)(1)(B) and 367(a). If FS is permit-
ted to satisfy the active trade or business
test by taking into account FP’s busi-
ness, UST has effectively ‘‘gone off-
shore’’ in an inversion transaction. Be-
cause the shareholders of UST receive
stock of FS (which is the TFC), and not
FP, such shareholders will have no inter-
est in FP’s active business. In contrast,
if the shareholders received stock of FP
in an exchange described in section
367(a), such persons would participate
in FP’s active business, and the active
trade or business test under the final
regulations would be satisfied.
Active Trade or Business Test:
Partnership Interests
The temporary regulations did not
address whether the TFC could satisfy
the active trade or business requirement
by taking into account an interest in a
partnership engaged in an active trade or
business.
The final regulations permit a TFC
(or a qualified subsidiary) to take into
account the active trade or business
engaged in outside the United States by
any qualified partnership as there de-
fined. Active trade or business test:
substantiality test
Under the temporary regulations, the
second prong of the active trade or
business requirement is the substantiality
test. The active trade or business of the
TFC is required to be ‘‘substantial’’
vis-a-vis the active trade or business of
the UST, but the temporary regulations
do not define substantiality.
The final regulations modify the sub-
stantiality requirement. Under the final
regulations, the substantiality test no
longer compares the active trade or
business of the TFC vis-a-vis the UST.
Instead, it requires that the entire value
of the TFC be at least equal to the
entire value of the UST at the time of
the transaction. However, for this pur-
pose, the value of the TFC may include
the value of assets (including stock)
acquired within the 36-month period
prior to the transaction only if (i) such
assets were acquired in the ordinary
course of business, or (ii) such assets (or
their proceeds) do not produce and are
not held for the production of passive
income (as defined under section
1296(b)), and were not acquired with
the principal purpose of satisfying the
active trade or business test. A special
rule applies if the asset acquired by the
TFC in the 36-month period prior to the
exchange is stock of a qualified subsid-
iary or qualified partnership engaged in
an active trade or business. In such case,
the value of the stock or partnership
interest may be taken into account, but
must be reduced in accordance with the
principles described above.
When formulating the substantiality
test under the final regulations, the IRS
and the Treasury Department considered
and rejected other alternatives consid-
ered to be more complex and burden-
some for taxpayers. For example, a
comparison of the active business of the
TFC vis-a-vis the active business of the
UST for the 36-month period prior to
the acquisition, taking into account the
property, payroll and sales of the two
companies, was considered and rejected.
Indirect and constructive transfers
One commentator suggested that the
IRS clarify the definition of ‘‘U.S.
Transferor’’ contained in the temporary
regulations, which refers to a U.S. per-
son who transfers ‘‘directly, indirectly or
constructively’’ UST stock or other
property. The IRS and the Treasury
Department believe that the reference to
‘‘direct, indirect and constructive’’ trans-
fers may have been unclear and, thus,
the final regulations delete such refer-
ence. Such technical modification does
not modify the substantive law in which
indirect and constructive transfers may
be treated as transfers subject to section
367(a)(1) (see § 1.367(a)–1T(c)(2) with
respect to the ‘‘indirect’’ stock transfer
rules; constructive transfers include, but
are not limited to, section 367(a) trans-
fers that result from section 304 transac-
tions and section 367(a) transfers that
result from a change in classification of
an entity from a foreign partnership to a
foreign corporation). GRA term
Under the temporary regulations, a
5-percent transferee shareholder is re-
quired to file a GRA. The duration is 5
years if all U.S. transferors own less
than 50 percent of the total voting
power and total value of the TFC stock
immediately after the transfer. The dura-
tion of the GRA is 10 years if the U.S.
transferors own 50 percent or more of
the TFC stock immediately after the
transaction, or if the 5-percent transferee
shareholder is unable to prove that all
6

U.S. transferors own less than 50 per-
cent of the total voting power and total
value of the TFC immediately after the
transfer. Thus, in determining whether a
5- or 10-year GRA is appropriate, the
temporary regulations take into account
cross-ownership (i.e., consideration of
stock owned independently of the trans-
action) by all U.S. transferors, and con-
tain a presumption that a 10-year GRA
is required.
For example, assume that UST share-
holders receive 30 percent of the stock
of the TFC in a nonrecognition transac-
tion that qualifies for an exception under
section 367(a). Assume further that one
UST shareholder, X, a U.S. person,
transfers stock of UST in the section
367(a) exchange and owns 5 percent of
the TFC after the transaction. Under the
temporary regulations, X is required to
file a 10-year GRA unless X can prove
that all U.S. transferors in the aggregate
own less than 50 percent of the voting
power and value of the TFC immedi-
ately after the transfer (taking into ac-
count the 30 percent received in the
transaction by U.S. target shareholders
plus any other stock that such persons
may own independently of the transac-
tion). If the companies are publicly
traded or widely-held, it is burdensome
and may be impractical for X to rebut
the presumption that U.S. transferors
own 50 percent or more of the TFC
stock.
In response to comments received and
in the interest of simplification, the final
regulations provide that any 5-percent
transferee shareholder that is required to
file a GRA upon the transfer of domes-
tic stock or securities is required to file
a 5-year GRA; 10-year GRAs will no
longer be required in the case of
5-percent transferee shareholders who
transfer domestic stock or securities.
Other Areas in Which Comments Were
Received
After careful consideration by the IRS
and the Treasury Department, the posi-
tions set forth in the temporary regula-
tions were generally not modified in
response to certain comments other than
those described above. For example, the
final regulations did not modify: (i) the
amount of stock U.S. transferors could
receive without exceeding the ownership
threshold (i.e., not more than 50 per-
cent), (ii) testing the 50-percent owner-
ship threshold at the time of the ex-
change, and (iii) the presumption that all
shareholders of the U.S. target company
are U.S. persons.
PLR Option in Limited Instances
The final regulations provide that, in
limited instances, the IRS may consider
issuing private letter rulings to taxpayers
that (i) satisfy all of the requirements
contained in these regulations, with the
exception of the active trade or business
test, or (ii) make a good faith effort, but
are unable to establish non-adverse ap-
plicability of the ownership attribution
rules. The IRS and the Treasury Depart-
ment are aware that the active trade or
business test is mechanical in nature
and, thus, in limited instances, a tax-
payer may demonstrate an ongoing and
substantial active trade or business even
though it fails to meet the test set forth
in the final regulations. However, in no
event will the IRS rule on the issue of
whether a TFC acquired an active busi-
ness with the principal purpose of satis-
fying the 36-month test and/or the sub-
stantiality test.
Other Matters
The IRS and the Treasury Department
expect to issue additional final regula-
tions under section 367(a) to address the
transfer of stock or securities of foreign
corporations and other matters contained
in the 1991 proposed regulations not
addressed herein. Until the 1991 pro-
posed regulations are finalized, the posi-
tions originally announced in Notice
87–85 will continue to govern the avail-
ability of section 367(a) exceptions for
transfers of stock or securities of foreign
corporations. See § 1.367(a)–3(d).
Special Analyses
It has been determined that this regu-
lation is not a significant regulatory
action as defined in EO 12866. There-
fore, a regulatory assessment is not
required. It is hereby certified that this
regulation does not have a significant
economic impact on a substantial num-
ber of small entities. This certification is
based on the fact that the number of
U.S. target companies that are acquired
by foreign corporations in nonrecogni-
tion transactions subject to section
367(a), and thus are subject to collection
of information, is estimated to be only
100 per year. Moreover, because these
regulations will primarily affect large
shareholders and U.S. multinational cor-
porations with foreign operations, it is
estimated that very few of the 100
transactions will involve small entities.
Thus, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursu-
ant to section 7805(f) of the Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Philip L. Tretiak of the Office of
Associate Chief Counsel (International),
within the Office of Chief Counsel, IRS.
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1 and 602
are 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 1.367(a)–3 is added to
read as follows:
§ 1.367(a)–3 Treatment of transfers of
stock or securities to foreign corpora-
tions.
(a)In general.This section provides
rules concerning the transfer of stock or
securities by a U.S. person to a foreign
corporation in an exchange described in
section 367(a). In general, a transfer of
stock or securities by a U.S. person to a
foreign corporation that is described in
section 351, 354 (pursuant to a reorgani-
zation described in section 368(a)(1)(B))
or section 361(a) or (b) is subject to
section 367(a)(1) and, therefore, is
treated as a taxable exchange, unless
one of the exceptions set forth in para-
graph (c) or (d) of this section or
§ 1.367(a)–3T(b) applies. For additional
rules relating to an exchange involving a
foreign corporation in connection with
which there is a transfer of stock, see
section 367(b) and the regulations under
that section. For additional rules regard-
ing a transfer of stock or securities in an
exchange described in section 361(a) or
(b), see section 367(a)(5) and any regu-
lations under that section.
(b) [Reserved] For further guidance,
see § 1.367(a)– 3T(b).
(c)Transfers by U.S. persons of stock
or securities of domestic corporations to
foreign corporations—(1) In general.
Except as provided in section 367(a)(5),
a transfer of stock or securities of a
domestic corporation by a U.S. person
7

to a foreign corporation that would
otherwise be subject to section 367(a)(1)
under paragraph (a) of this section shall
not be subject to section 367(a)(1) if the
domestic corporation the stock or securi-
ties of which are transferred (referred to
as the U.S. target company) complies
with the reporting requirements in para-
graph (c)(6) of this section and if each
of the following four conditions is met:
(i) Fifty percent or less of both the
total voting power and the total value of
the stock of the transferee foreign cor-
poration is received in the transaction, in
the aggregate, by U.S. transferors (i.e.,
the amount of stock received does not
exceed the 50-percent ownership thresh-
old).
(ii) Fifty percent or less of each of
the total voting power and the total
value of the stock of the transferee
foreign corporation is owned, in the
aggregate, immediately after the transfer
by U.S. persons that are either officers
or directors of the U.S. target company
or that are five-percent target sharehold-
ers (as defined in paragraph (c)(5)(iii) of
this section) (i.e., there is no control
group). For purposes of this paragraph
(c)(1)(ii), any stock of the transferee
foreign corporation owned by U.S. per-
sons immediately after the transfer will
be taken into account, whether or not it
was received in the exchange for stock
or securities of the U.S. target company.
(iii) Either—
(A) The U.S. person is not a five-
percent transferee shareholder (as de-
fined in paragraph (c)(5)(ii) of this sec-
tion); or
(B) The U.S. person is a five-percent
transferee shareholder and enters into a
five-year agreement to recognize gain
with respect to the U.S. target company
stock or securities it exchanged in the
form provided in § 1.367(a)–3T(g); and
(iv) The active trade or business test
(as defined in paragraph (c)(3) of this
section) is satisfied.
(2)Ownership presumption.For pur-
poses of paragraph (c)(1) of this section,
persons who transfer stock or securities
of the U.S. target company in exchange
for stock of the transferee foreign corpo-
ration are presumed to be U.S. persons.
This presumption may be rebutted in
accordance with paragraph (c)(7) of this
section.
(3)Active trade or business test—(i)
In general. The tests of this paragraph
(c)(3), collectively referred to as the
active trade or business test, are satisfied
if:
(A) The transferee foreign corpora-
tion or any qualified subsidiary (as
defined in paragraph (c)(5)(vii) of this
section) or any qualified partnership (as
defined in paragraph (c)(5)(viii) of this
section) is engaged in an active trade or
business outside the United States,
within the meaning of § 1.367(a)–
2T(b)(2) and (3), for the entire 36-
month period immediately before the
transfer;
(B) At the time of the transfer, nei-
ther the transferors nor the transferee
foreign corporation (and, if applicable,
the qualified subsidiary or qualified
partnership engaged in the active trade
or business) have an intention to sub-
stantially dispose of or discontinue such
trade or business; and
(C) The substantiality test (as defined
in paragraph (c)(3)(iii) of this section) is
satisfied.
(ii)Special rules.For purposes of
paragraphs (c)(3)(i)(A) and (B) of this
section, the following special rules ap-
ply:
(A) The transferee foreign corpora-
tion, a qualified subsidiary, or a quali-
fied partnership will be considered to be
engaged in an active trade or business
for the entire 36-month period preceding
the exchange if it acquires at the time
of, or any time prior to, the exchange a
trade or business that has been active
throughout the entire 36-month period
preceding the exchange. This special
rule shall not apply, however, if the
acquired active trade or business assets
were owned by the U.S. target company
or any affiliate (within the meaning of
section 1504(a) but excluding the excep-
tions contained in section 1504(b) and
substituting ‘‘50 percent’’ for ‘‘80 per-
cent’’ where it appears therein) at any
time during the 36-month period prior to
the acquisition. Nor will this special rule
apply if the principal purpose of such
acquisition is to satisfy the active trade
or business test.
(B) An active trade or business does
not include the making or managing of
investments for the account of the trans-
feree foreign corporation or any affiliate
(within the meaning of section 1504(a)
but excluding the exceptions contained
in section 1504(b) and substituting ‘‘50
percent’’ for ‘‘80 percent’’ where it
appears therein). (This paragraph
(c)(3)(ii)(B) shall not create any infer-
ence as to the scope of § 1.367(a)–
2T(b)(2) and (3) for other purposes.)
(iii)Substantiality test—(A)General
rule.A transferee foreign corporation
will be deemed to satisfy the substanti-
ality test if, at the time of the transfer,
the fair market value of the transferee
foreign corporation is at least equal to
the fair market value of the U.S. target
company.
(B)Special rules.(1) For purposes of
paragraph (c)(3)(iii)(A) of this section,
the value of the transferee foreign cor-
poration shall include assets acquired
outside the ordinary course of business
by the transferee foreign corporation
within the 36-month period preceding
the exchange only if either—
(i) Both—
(A) At the time of the exchange, such
assets or, as applicable, the proceeds
thereof, do not produce, and are not
held for the production of, passive in-
come as defined in section 1296(b); and
(B) Such assets are not acquired for
the principal purpose of satisfying the
substantiality test; or
(ii) Such assets consist of the stock
of a qualified subsidiary or an interest in
a qualified partnership. See paragraph
(c)(3)(iii)(B)(2) of this section.
(2) For purposes of paragraph
(c)(3)(iii)(A) of this section, the value of
the transferee foreign corporation shall
not include the value of the stock of any
qualified subsidiary or the value of any
interest in a qualified partnership, held
directly or indirectly, to the extent that
such value is attributable to assets ac-
quired by such qualified subsidiary or
partnership outside the ordinary course
of business and within the 36-month
period preceding the exchange unless
those assets satisfy the requirements in
paragraph (c)(3)(iii)(B)(1) of this sec-
tion.
(3) For purposes of paragraph
(c)(3)(iii)(A) of this section, the value of
the transferee foreign corporation shall
not include the value of assets received
within the 36-month period prior to the
acquisition, notwithstanding the special
rule in paragraph (c)(3)(iii)(B)(1) of this
section, if such assets were owned by
the U.S. target company or an affiliate
(within the meaning of section 1504(a)
but without the exceptions under section
1504(b) and substituting ‘‘50 percent’’
for ‘‘80 percent’’ where it appears
therein) at any time during the 36-month
period prior to the transaction.
(4)Special rules—(i)Treatment of
partnerships. For purposes of this para-
graph (c), if a partnership (whether
domestic or foreign) owns stock or
securities in the U.S. target company or
the transferee foreign corporation, or
transfers stock or securities in an ex-
8

change described in section 367(a), each
partner in the partnership, and not the
partnership itself, is treated as owning
and as having transferred, or as owning,
a proportionate share of the stock or
securities. See § 1.367(a)–1T(c)(3).
(ii)Treatment of options. For pur-
poses of this paragraph (c), one or more
options (or an interest similar to an
option) will be treated as exercised and
thus will be counted as stock for pur-
poses of determining whether the 50-
percent threshold is exceeded or whether
a control group exists if a principal
purpose of the issuance or the acquisi-
tion of the option (or other interest) was
the avoidance of the general rule con-
tained in section 367(a)(1).
(iii)U.S. target has a vestigial own-
ership interest in transferee foreign cor-
poration.In cases where, immediately
after the transfer, the U.S. target com-
pany owns, directly or indirectly (apply-
ing the attribution rules of sections
267(c)(1) and (5)), stock of the trans-
feree foreign corporation, that stock will
not in any way be taken into account
(and, thus, will not be treated as out-
standing) in determining whether the
50-percent threshold under paragraph
(c)(1)(i) of this section is exceeded or
whether a control group under paragraph
(c)(1)(ii) of this section exists.
(iv)Attribution rule.Except as other-
wise provided in this section, the rules
of section 318, as modified by the rules
of section 958(b), shall apply for pur-
poses of determining the ownership or
receipt of stock, securities or other prop-
erty under this paragraph (c).
(5)Definitions—(i)Ownership state-
ment.An ownership statement is a state-
ment, signed under penalties of perjury,
stating—
(A) The identity and taxpayer identi-
fication number, if any, of the person
making the statement;
(B) That the person making the state-
ment is not a U.S. person (as defined in
paragraph (c)(5)(iv) of this section);
(C) That the person making the state-
ment either—
(1) Owns less than 1 percent of the
total voting power and total value of a
U.S. target company the stock of which
is described in Rule 13d–1(d) of Regu-
lation 13D (17 CFR 240.13d–1(d)) (or
any rule or regulation to generally the
same effect) promulgated by the Securi-
ties and Exchange Commission under
the Securities and Exchange Act of 1934
(15 USC 78m), and such person did not
acquire the stock with a principal pur-
pose to enable the U.S. transferors to
satisfy the requirement contained in
paragraph (c)(1)(i) of this section; or
(2) Is not related to any U.S. person
to whom the stock or securities owned
by the person making the statement are
attributable under the rules of section
958(b), and did not acquire the stock
with a principal purpose to enable the
U.S. transferors to satisfy the require-
ment contained in paragraph (c)(1)(i) of
this section;
(D) The citizenship, permanent resi-
dence, home address, and U.S. address,
if any, of the person making the state-
ment; and
(E) The ownership such person has
(by voting power and by value) in the
U.S. target company prior to the ex-
change and the amount of stock of the
transferee foreign corporation (by voting
power and value) received by such
person in the exchange.
(ii)Five-percent transferee share-
holder.A five-percent transferee share-
holder is a person that owns at least five
percent of either the total voting power
or the total value of the stock of the
transferee foreign corporation immedi-
ately after the transfer described in
section 367(a)(1). For special rules in-
volving cases in which stock is held by
a partnership, see paragraph (c)(4)(i) of
this section.
(iii)Five-percent target shareholder
and certain other 5-percent sharehold-
ers.A five-percent target shareholder is
a person that owns at least five percent
of either the total voting power or the
total value of the stock of the U.S.
target company immediately prior to the
transfer described in section 367(a)(1).
If the stock of the U.S. target company
(or any company through which stock of
the U.S. target company is owned indi-
rectly or constructively) is described in
Rule 13d–1(d) of Regulation 13D (17
CFR 240.13d–1(d)) (or any rule or regu-
lation to generally the same effect),
promulgated by the Securities and Ex-
change Commission under the Securities
Exchange Act of 1934 (15 USC 78m),
then, in the absence of actual knowledge
to the contrary, the existence or absence
of filings of Schedule 13–D or 13–G (or
any similar schedules) may be relied
upon for purposes of identifying five-
percent target shareholders (or a five-
percent shareholder of a corporation
which itself is a five-percent shareholder
of the U.S. target company). For special
rules involving cases in which U.S.
target company stock is held by a
partnership, see paragraph (c)(4)(i) of
this section.
(iv)U.S. Person.For purposes of this
section, a U.S. person is defined by
reference to § 1.367(a)–1T(d)(1). For
application of the rules of this section to
stock or securities owned or transferred
by a partnership that is a U.S. person,
however, see paragraph (c)(4)(i) of this
section.
(v)U.S. Transferor.A U.S. transferor
is a U.S. person (as defined in para-
graph (c)(5)(iv) of this section) that
transfers stock or securities of one or
more U.S. target companies in exchange
for stock of the transferee foreign corpo-
ration in an exchange described in sec-
tion 367.
(vi)Transferee foreign corporation.A
transferee foreign corporation is the for-
eign corporation whose stock is received
in the exchange by U.S. persons.
(vii)Qualified Subsidiary.A qualified
subsidiary is a foreign corporation
whose stock is at least 80-percent
owned (by total voting power and total
value), directly or indirectly, by the
transferee foreign corporation. However,
a corporation will not be treated as a
qualified subsidiary if it was affiliated
with the U.S. target company (within
the meaning of section 1504(a) but
without the exceptions under section
1504(b) and substituting ‘‘50 percent’’
for ‘‘80 percent’’ where it appears
therein) at any time during the 36-month
period prior to the transfer. Nor will a
corporation be treated as a qualified
subsidiary if it was acquired by the
transferee foreign corporation at any
time during the 36-month period prior to
the transfer for the principal purpose of
satisfying the active trade or business
test, including the substantiality test.
(viii)Qualified partnership.(A) Ex-
cept as provided in paragraph (c)(5)-
(viii)(B) or (C) of this section, a quali-
fied partnership is a partnership in
which the transferee foreign corpora-
tion—
(1) Has active and substantial man-
agement functions as a partner with
regard to the partnership business; or
(2) Has an interest representing a 25
percent or greater interest in the partner-
ship’s capital and profits.
(B) A partnership is not a qualified
partnership if the U.S. target company
or any affiliate of the U.S. target com-
pany (within the meaning of section
1504(a) but without the exceptions un-
der section 1504(b) and substituting ‘‘50
percent’’ for ‘‘80 percent’’ where it
appears therein) held a 5 percent or
greater interest in the partnership’s capi-
9

tal and profits at any time during the
36-month period prior to the transfer.
(C) A partnership is not a qualified
partnership if the transferee foreign cor-
poration’s interest was acquired by that
corporation at any time during the 36-
month period prior to the transfer for
the principal purpose of satisfying the
active trade or business test, including
the substantiality test.
(6)Reporting requirements of U.S.
target company.(i) In order for a U.S.
person that transfers stock or securities
of a domestic corporation to qualify for
the exception provided by this paragraph
(c) to the general rule under section
367(a)(1), in cases where 10 percent or
more of the total voting power or the
total value of the stock of the U.S.
target company is transferred by U.S.
persons in the transaction, the U.S.
target company must comply with the
reporting requirements contained in this
paragraph (c)(6). The U.S. target com-
pany must attach to its timely filed U.S.
income tax return for the taxable year in
which the transfer occurs a statement
titled ‘‘Section 367(a)—Reporting of
Cross-Border Transfer Under Reg.
§ 1.367(a)–3(c)(6),’’ signed under penal-
ties of perjury by an officer of the
corporation to the best of the officer’s
knowledge and belief, disclosing the
following information—
(A) A description of the transaction
in which a U.S. person or persons
transferred stock or securities in the
U.S. target company to the transferee
foreign corporation in a transfer other-
wise subject to section 367(a)(1);
(B) The amount (specified as to the
percentage of the total voting power and
the total value) of stock of the transferee
foreign corporation received in the
transaction, in the aggregate, by persons
who transferred stock or securities of
the U.S. target company. For additional
information that may be required to
rebut the ownership presumption of
paragraph (c)(2) of this section in cases
where more than 50 percent of either
the total voting power or the total value
of the stock of the transferee foreign
corporation is received in the transac-
tion, in the aggregate, by persons who
transferred stock or securities of the
U.S. target company, see paragraph
(c)(7) of this section;
(C) The amount (if any) of transferee
foreign corporation stock owned directly
or indirectly (applying the attribution
rules of sections 267(c)(1) and (5))
immediately after the exchange by the
U.S. target company;
(D) A statement that there is no con-
trol group within the meaning of para-
graph (c)(1)(ii) of this section;
(E) A list of U.S. persons who are
officers, directors or five-percent target
shareholders and the percentage of the
total voting power and the total value of
the stock of the transferee foreign cor-
poration owned by such persons both
immediately before and immediately af-
ter the transaction; and
(F) A statement that includes the fol-
lowing—
(1) A statement that the active trade
or business test described in paragraph
(c)(3) of this section is satisfied by the
transferee foreign corporation and a de-
scription of such business;
(2) A statement that on the day of the
transaction, there was no intent on the
part of the transferors or the transferee
foreign corporation (or any qualified
subsidiary or any qualified partnership,
if relevant) to substantially dispose of or
discontinue its active trade or business;
and
(3) A statement that the substantiality
test described in paragraph (c)(3)(iii) of
this section is satisfied, and documenta-
tion that such test is satisfied, including
the value of the transferee foreign cor-
poration and the value of the U.S. target
company on the day of the transfer, and
either one of the following—
(i) A statement demonstrating that the
value of the transferee foreign corpora-
tion 36 months prior to the acquisition,
plus the value of any assets described in
paragraph (c)(3)(iii)(B) of this section
(including stock) acquired by the trans-
feree foreign corporation within the 36-
month period, less the amount of any
liabilities acquired during that period,
exceeds the value of the U.S. target
company on the acquisition date; or
(ii) A statement demonstrating that
the value of the transferee foreign cor-
poration on the date of the acquisition,
reduced by the value of any assets not
described in paragraph (c)(3)(iii)(B) of
this section (including stock) acquired
by the transferee foreign corporation
within the 36-month period, exceeds the
value of the U.S. target company on the
date of the acquisition.
(ii) For purposes of this paragraph
(c)(6), an income tax return will be
considered timely filed if such return is
filed, together with the statement re-
quired by this paragraph (c)(6), on or
before the last date for filing a Federal
income tax return (taking into account
any extensions of time therefor) for the
taxable year in which the transfer oc-
curs. If a return is not timely filed
within the meaning of this paragraph
(c)(6), the District Director may make a
determination, based on all facts and
circumstances, that the taxpayer had
reasonable cause for its failure to file a
timely filed return and, if such a deter-
mination is made, the requirement con-
tained in this paragraph (c)(6) shall be
waived.
(7)Ownership statements.To rebut
the ownership presumption of paragraph
(c)(2) of this section, the U.S. target
company must obtain ownership state-
ments (described in paragraph (c)(5)(i)
of this section) from a sufficient number
of persons that transfer U.S. target com-
pany stock or securities in the transac-
tion that are not U.S. persons to demon-
strate that the 50-percent threshold of
paragraph (c)(1)(i) of this section is not
exceeded. In addition, the U.S. target
company must attach to its timely filed
U.S. income tax return (as described in
paragraph (c)(6)(ii) of this section) for
the taxable year in which the transfer
occurs a statement, titled ‘‘Section
367(a)–Compilation of Ownership State-
ments under Reg. § 1.367(a)–3(c),’’
signed under penalties of perjury by an
officer of the corporation, disclosing the
following information:
(i) The amount (specified as to the
percentage of the total voting power and
the total value) of stock of the transferee
foreign corporation received, in the ag-
gregate, by U.S. transferors;
(ii) The amount (specified as to the
percentage of total voting power and
total value) of stock of the transferee
foreign corporation received, in the ag-
gregate, by foreign persons that filed
ownership statements;
(iii) A summary of the information
tabulated from the ownership statements,
including—
(A) The names of the persons that
filed ownership statements stating that
they are not U.S. persons;
(B) The countries of residence and
citizenship of such persons; and
(C) Each of such person’s ownership
(by voting power and by value) in the
U.S. target company prior to the ex-
change and the amount of stock of the
transferee foreign corporation (by voting
power and value) received by such
persons in the exchange.
(8)Certain transfers in connection
with performance of services.Section
367(a)(1) shall not apply to a domestic
corporation’s transfer of its own stock or
securities in connection with the perfor-
mance of services, if the transfer is
10

considered to be to a foreign corporation
solely by reason of § 1.83–6(d)(1).
(9)Private letter ruling option.The
Internal Revenue Service may, in limited
circumstances, issue a private letter rul-
ing to permit the taxpayer to qualify for
an exception to the general rule under
section 367(a)(1) if—
(i) A taxpayer is unable to satisfy all
of the requirements of paragraph (c)(3)
of this section relating to the active
trade or business test of paragraph
(c)(1)(iv) of this section, but such tax-
payer meets all of the other require-
ments contained in paragraphs (c)(1)(i)
through (c)(1)(iii) of this section, and
such taxpayer is substantially in compli-
ance with the rules set forth in para-
graph (c)(3) of this section; or
(ii) A taxpayer is unable to satisfy
any requirement of paragraph (c)(1) of
this section due to the application of
paragraph (c)(4)(iv) of this section. Not-
withstanding the preceding sentence, in
no event will the Internal Revenue Ser-
vice rule on the issue of whether the
principal purpose of an acquisition was
to satisfy the active trade or business
test, including the substantiality test.
(10)Examples.This paragraph (c)
may be illustrated by the following
examples:
Example 1. Ownership presumption.(i) FC, a
foreign corporation, issues 51 percent of its stock
to the shareholders of S, a domestic corporation,
in exchange for their S stock, in a transaction
described in section 367(a)(1).
(ii) Under paragraph (c)(2) of this section, all
shareholders of S who receive stock of FC in the
exchange are presumed to be U.S. persons. Unless
this ownership presumption is rebutted, the condi-
tion set forth in paragraph (c)(1)(i) of this section
will not be satisfied, and the exception in para-
graph (c)(1) of this section will not be available.
As a result, all U.S. persons that transferred S
stock will recognize gain on the exchange. To
rebut the ownership presumption, S must comply
with the reporting requirements contained in para-
graph (c)(7) of this section, obtaining ownership
statements (described in paragraph (c)(5)(i) of this
section) from a sufficient number of non-U.S.
persons who received FC stock in the exchange to
demonstrate that the amount of FC stock received
by U.S. persons in the exchange does not exceed
50 percent.
Example 2. Filing of Gain Recognition Agree-
ment.(i) The facts are the same as inExample 1,
except that FC issues only 40 percent of its stock
to the shareholders of S in the exchange. FC
satisfies the active trade or business test of
paragraph (c)(1)(iv) of this section. A, a U.S.
person, owns 10 percent of S’s stock immediately
before the transfer. All other shareholders of S
own less than five percent of its stock. None of
S’s officers or directors owns any stock in FC
immediately after the transfer. A will own 15
percent of the stock of FC immediately after the
transfer, 4 percent received in the exchange, and
the balance being stock in FC that A owned prior
to and independent of the transaction. No S
shareholder besides A owns five percent or more
of FC immediately after the transfer. The reporting
requirements under paragraph (c)(6) of this section
are satisfied.
(ii) The condition set forth in paragraph
(c)(1)(i) of this section is satisfied because, even
after application of the presumption in paragraph
(c)(2) of this section, U.S. transferors could not
receive more than 50 percent of FC’s stock in the
transaction. There is no control group because
five-percent target shareholders and officers and
directors of S do not, in the aggregate, own more
than 50 percent of the stock of FC immediately
after the transfer (A, the sole five-percent target
shareholder, owns 15 percent of the stock of FC
immediately after the transfer, and no officers or
directors of S own any stock of FC immediately
after the transfer). Therefore, the condition set
forth in paragraph (c)(1)(ii) of this section is
satisfied. The facts assume that the condition set
forth in paragraph (c)(1)(iv) of this section is
satisfied. Thus, U.S. persons that are not five-
percent transferee shareholders will not recognize
gain on the exchange of S shares for FC shares. A,
a five-percent transferee shareholder, will not be
required to include in income any gain realized on
the exchange in the year of the transfer if he files
a 5-year gain recognition agreement (GRA) and
complies with section 6038B.
Example 3. Control Group.(i) The facts are the
same as inExample 2, except that B, another U.S.
person, is a 5-percent target shareholder, owning
25 percent of S’s stock immediately before the
transfer. B owns 40 percent of the stock of FC
immediately after the transfer, 10 percent received
in the exchange, and the balance being stock in
FC that B owned prior to and independent of the
transaction.
(ii) A control group exists because A and B,
each a five-percent target shareholder within the
meaning of paragraph (c)(5)(iii) of this section,
together own more than 50 percent of FC immedi-
ately after the transfer (counting both stock re-
ceived in the exchange and stock owned prior to
and independent of the exchange). As a result, the
condition set forth in paragraph (c)(1)(ii) of this
section is not satisfied, and all U.S. persons (not
merely A and B) who transferred S stock will
recognize gain on the exchange.
Example 4. Partnerships.(i) The facts are the
same as inExample 3, except that B is a
partnership (domestic or foreign) that has five
equal partners, only two of whom, X and Y, are
U.S. persons. Under paragraph (c)(4)(i) of this
section, X and Y are treated as the owners and
transferors of 5 percent each of the S stock owned
and transferred by B and as owners of 8 percent
each of the FC stock owned by B immediately
after the transfer. U.S. persons that are five-
percent target shareholders thus own a total of 31
percent of the stock of FC immediately after the
transfer (A’s 15 percent, plus X’s 8 percent, plus
Y’s 8 percent).
(ii) Because no control group exists, the condi-
tion in paragraph (c)(1)(ii) of this section is
satisfied. The conditions in paragraphs (c)(1)(i)
and (iv) of this section also are satisfied. Thus,
U.S. persons that are not five-percent transferee
shareholders will not recognize gain on the ex-
change of S shares for FC shares. A, X, and Y,
each a five-percent transferee shareholder, will not
be required to include in income in the year of the
transfer any gain realized on the exchange if they
file 5-year GRAs and comply with section 6038B.
(11)Effective date.This paragraph (c)
applies to transfers occurring after Janu-
ary 29, 1997. However, taxpayers may
elect to apply this section in its entirety
to all transfers occurring after April 17,
1994, provided that the statute of limita-
tions of the affected tax year or years is
open.
(d)Transfers of stock or securities of
foreign corporations.For guidance, see
Notice 87–85 (1987–2 C.B. 395). See
§ 601.601(d)(2) of this chapter.
(e) through (h) [Reserved] For further
guidance, see § 1.367(a)–3T(e) through
(h).
Par. 3. In § 1.367(a)–3T, paragraphs
(a), (c) and (d) are revised to read as
follows:
§ 1.367(a)–3T Treatment of transfers of
stock or securities to foreign corpora-
tions (temporary).
(a) [Reserved] For further informa-
tion, see § 1.367(a)–3(a).
* * * * *
(c) and (d) [Reserved] For further
information, see § 1.367(a)–3(c) and
(d).
* * * * *
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority for citation for
part 602 continues to read as follows:
Authority: 26 U.S.C. 7805
Par. 5. Section 602.101, paragraph (c)
is amended by revising the entry for
1.367(a)–3T and adding an entry to the
table in numerical order to read as
follows:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
1.367(a)–3. . . . . . . . . . . . 1545–0026
1545–1478
1.367(a)–3T. . . . . . . . . . . 1545–0026
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 11, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
11

(Filed by the Office of the Federal Register on
December 27, 1996, 8:45 a.m., and published in
the issue of the Federal Register for December 30,
1996, 61 F.R. 68633)
Section 952.—Subpart F Income
Defined
26 CFR 1.952–1: Subpart F income defined.
T.D. 8704
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Definition of Foreign Base
Company Income and Foreign
Personal Holding Company Income
of a Controlled Foreign Corporation
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the defini-
tions of subpart F income and foreign
personal holding company income of a
controlled foreign corporation and the
allocation of deficits for purposes of
computing the deemed-paid foreign tax
credit. These regulations are necessary
to provide guidance that coordinates
with previously published guidance un-
der section 954. These regulations will
affect United States shareholders of con-
trolled foreign corporations.
DATES: These regulations are effective
January 2, 1997.
For specific dates of applicability, see
§§ 1.952–1(f)(5), 1.952–2(c)(1), 1.954–
2(b)(3) and 1.960–1(i)(6).
FOR FURTHER INFORMATION CON-
TACT: Valerie Mark, (202) 622–3840
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
On September 7, 1995, proposed
regulations (IL–75–92 [1995–2 C.B.
480]) amending the Income Tax Regula-
tions (26 CFR Part 1) under sections
952, 954(c) and 960 of the Internal
Revenue Code (Code) were published in
theFederal Register(60 FR 46548). In
final regulations under section 954 (T.D.
8618 [1995–2 C.B. 89]), also published
on that date (60 FR 46500), a provision
relating to the treatment of tax-exempt
interest under the foreign personal hold-
ing company income rules was reserved.
The proposed regulations provided rules
for the treatment of tax-exempt interest
and also provided guidance under sec-
tions 952 and 960 to coordinate with the
final regulations. No public hearing was
requested or held. One written comment
was received on the proposed regula-
tions. After consideration of this com-
ment, the proposed regulations are
adopted as final regulations without
amendment.
Explanation of Provisions
§ 1.952–1(e) and (f) and 1.960–1(i)
Sections 1.952–1(e) and (f) and
1.960–1(i) are unchanged from the pro-
posed regulations.
§§ 1.952–2(c)(1) and 1.954–2(b)(3)
Under § 1.954–2T(b)(6), interest in-
come that was exempt from tax under
section 103 was included in the foreign
personal holding company income of the
controlled foreign corporation. However,
the net foreign base company income
that was attributable to tax-exempt inter-
est was treated as tax-exempt interest in
the hands of the United States share-
holder upon a deemed distribution under
subpart F and therefore excluded for
regular tax purposes but potentially sub-
ject to the alternative minimum tax.
Section 1.954–2(b)(3), as proposed and
finalized, amends the rule in the tempo-
rary regulations to provide that foreign
personal holding company income in-
cludes interest income that is exempt
from tax under section 103. The tax-
exempt interest would not retain its
character as such in the hands of the
United States shareholder upon a
deemed distribution under subpart F. As
a result of the treatment of tax-exempt
interest in these final regulations, Rev.
Rul. 72–527 (1972–2 C.B. 456) is obso-
leted.
A commentator argued that treatment
of tax-exempt interest in the proposed
regulations was contrary to section 103.
This comment was rejected. The Code
does not specifically address how sec-
tion 103 applies in the context of sub-
part F. Although § 1.952–2 provides
that, in general, U.S. tax principles
apply in computing subpart F income,
this regulation makes certain Code pro-
visions inapplicable when necessary to
serve the purposes of subpart F. See
§ 1.952–2(c)(1).
§ 1.954–1(d)(4)(iii)
The example in § 1.954–1(d)(4)(iii) is
amended to correct a mathematical error.
§ 1.954–2(g)(2)
The regulations are amended to
clarify that income derived in the trade
or business of trading foreign currency
is not excluded from foreign personal
holding company income under the
business needs exception. A technical
correction is made to § 1.954–2(g)-
(2)(ii)(B)(2).
§ 1.957–1(c)
Technical corrections are made to
§ 1.957–1(c)Examples 8and9.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and be-
cause these regulations do not impose a
collection of information on small enti-
ties, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal authors of these regula-
tions are Barbara Felker and Valerie
Mark of the Office of the Associate
Chief Counsel (International), IRS.
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.960–1 also issued under 26
U.S.C. 960(a). * * *
Par. 2. Section 1.952–1 is amended by
adding paragraphs (e) and (f) to read as
follows:
12

§ 1.952–1 Subpart F income defined.
* * * * *
(e)Application of current earnings
and profits limitation—(1)In general.If
the subpart F income (as defined in
section 952(a)) of a controlled foreign
corporation exceeds the foreign corpora-
tion’s earnings and profits for the tax-
able year, the subpart F income includ-
ible in the income of the corporation’s
United States shareholders is reduced
under section 952(c)(1)(A) in accor-
dance with the following rules. The
excess of subpart F income over current
year earnings and profits shall—
(i) First, proportionately reduce sub-
part F income in each separate category
of the controlled foreign corporation, as
defined in § 1.904–5(a)(1), in which
current earnings and profits are zero or
less than zero;
(ii) Second, proportionately reduce
subpart F income in each separate cat-
egory in which subpart F income ex-
ceeds current earnings and profits; and
(iii) Third, proportionately reduce
subpart F income in other separate cat-
egories.
(2)Allocation to a category of sub-
part F income.An excess amount that is
allocated under paragraph (e)(1) of this
section to a separate category must be
further allocated to a category of subpart
F income if the separate category con-
tains more than one category of subpart
F income described in section 952(a) or,
in the case of foreign base company
income, described in § 1.954–1(c)(1)-
(iii)(A)(1) or (2). In such case, the
excess amount that is allocated to the
separate category must be allocated to
the various categories of subpart F in-
come within that separate category on a
proportionate basis.
(3)Recapture of subpart F income
reduced by operation of earnings and
profits limitation.Any amount in a cat-
egory of subpart F income described in
section 952(a) or, in the case of foreign
base company income, described in
§ 1.954–1(c)(1)(iii)(A)(1) or (2) that is
reduced by operation of the current year
earnings and profits limitation of section
952(c)(1)(A) and this paragraph (e) shall
be subject to recapture in a subsequent
year under the rules of section 952(c)(2)
and paragraph (f) of this section.
(4)Coordination with sections 953
and 954.The rules of this paragraph (e)
shall be applied after the application of
sections 953 and 954 and the regulations
under those sections, except as provided
in § 1.954–1(d)(4)(ii).
(5)Earnings and deficits retain sepa-
rate limitation character.The income
reduction rules of paragraph (e)(1) of
this section shall apply only for pur-
poses of determining the amount of an
inclusion under section 951(a)(1)(A)
from each separate category as defined
in § 1.904–5(a)(1) and the separate cat-
egories in which recapture accounts are
established under section 952(c)(2) and
paragraph (f) of this section. For rules
applicable in computing post-1986 un-
distributed earnings, see generally sec-
tion 902 and the regulations under that
section. For rules relating to the allo-
cation of deficits for purposes of
computing foreign taxes deemed paid
under section 960 with respect to an
inclusion under section 951(a)(1)(A), see
§ 1.960–1(i).
(f)Recapture of subpart F income in
subsequent taxable year—(1)In gen-
eral.If a controlled foreign corpora-
tion’s subpart F income for a taxable
year is reduced under the current year
earnings and profits limitation of section
952(c)(1)(A) and paragraph (e) of this
section, recapture accounts will be es-
tablished and subject to recharacteriza-
tion in any subsequent taxable year to
the extent the recapture accounts were
not previously recharacterized or distrib-
uted, as provided in paragraphs (f)(2)
and (3) of this section.
(2)Rules of recapture—(i)Recapture
account.If a category of subpart F
income described in section 952(a) or,
in the case of foreign base company
income, described in § 1.954–1(c)(1)-
(iii)(A)(1) or (2) is reduced under the
current year earnings and profits limita-
tion of section 952(c)(1)(A) and para-
graph (e) of this section for a taxable
year, the amount of such reduction shall
constitute a recapture account.
(ii)Recapture.Each recapture ac-
count of the controlled foreign corpora-
tion will be recharacterized, on a pro-
portionate basis, as subpart F income in
the same separate category (as defined
in § 1.904–5(a)(1)) as the recapture ac-
count to the extent that current year
earnings and profits exceed subpart F
income in a taxable year. The United
States shareholder must include his pro
rata share (determined under the rules of
§ 1.951–1(e)) of each recharacterized
amount in income as subpart F income
in such separate category for the taxable
year.
(iii)Reduction of recapture account
and corresponding earnings.Each re-
capture account, and post-1986 undis-
tributed earnings in the separate cat-
egory containing the recapture account,
will be reduced in any taxable year by
the amount which is recharacterized un-
der paragraph (f)(2)(ii) of this section.
In addition, each recapture account, and
post-1986 undistributed earnings in the
separate category containing the recap-
ture account, will be reduced in the
amount of any distribution out of that
account (as determined under the order-
ing rules of section 959(c) and para-
graph (f)(3)(ii) of this section).
(3)Distribution ordering rules—
(i)Coordination of recapture and distri-
bution rules.If a controlled foreign
corporation distributes an amount out of
earnings and profits described in section
959(c)(3) in a year in which current
year earnings and profits exceed subpart
F income and there is an amount in a
recapture account for such year, the
recapture rules will apply first.
(ii)Distributions reduce recapture ac-
counts first.Any distribution made by a
controlled foreign corporation out of
earnings and profits described in section
959(c)(3) shall be treated as made first
on a proportionate basis out of the
recapture accounts in each separate cat-
egory to the extent thereof (even if the
amount in the recapture account exceeds
post-1986 undistributed earnings in the
separate category containing the recap-
ture account). Any remaining distribu-
tion shall be treated as made on a
proportionate basis out of the remaining
earnings and profits of the controlled
foreign corporation in each separate cat-
egory. See section 904(d)(3)(D).
(4)Examples.The application of
paragraphs (e) and (f) of this section
may be illustrated by the following
examples:
Example 1.(i) A, a U.S. person, is the sole
shareholder of CFC, a controlled foreign corpora-
tion formed on January 1, 1998, whose functional
currency is the u. In 1998, CFC earns 100u of
foreign base company sales income that is general
limitation income described in section 904(d)(1)(I)
and incurs a (200u) loss attributable to activities
that would have produced general limitation in-
come that is not subpart F income. In 1998 CFC
also earns 100u of foreign personal holding com-
pany income that is passive income described in
section 904(d)(1)(A), and 100u of foreign personal
holding company income that is dividend income
subject to a separate limitation described in section
904(d)(1)(E) for dividends from a noncontrolled
section 902 corporation. CFC’s subpart F income
for 1998, 300u, exceeds CFC’s current earnings
and profits, 100u, by 200u. Under section
952(c)(1)(A) and paragraph (e) of this section,
subpart F income is limited to CFC’s current
earnings and profits of 100u, all of which is
included in A’s gross income under section
951(a)(1)(A). The 200u of CFC’s 1998 subpart F
income that is not included in A’s income in 1998
13

by reason of section 952(c)(1)(A) is subject to
recapture under section 952(c)(2) and paragraph
(f) of this section.
(ii) For purposes of determining the amount and
type of income included in A’s gross income and
the amount and type of income in CFC’s recapture
account, the rules of paragraphs (e)(1) and (2) of
this section apply. Under paragraph (e)(1)(i) of
this section, the amount by which CFC’s subpart F
income exceeds its earnings and profits for 1998,
200u, first reduces from 100u to 0 CFC’s subpart
F income in the general limitation category, which
has a current year deficit of (100u) in earnings and
profits. Next, under paragraph (e)(1)(iii) of this
section, the remaining 100u by which CFC’s 1998
subpart F income exceeds earnings and profits is
applied proportionately to reduce CFC’s subpart F
income in the separate categories for passive
income (100u) and dividends from the
noncontrolled section 902 corporation (100u).
Thus, A includes 50u of passive limitation/foreign
personal holding company income and 50u of
dividends from the noncontrolled section 902
corporation/foreign personal holding company in-
come in gross income in 1998. CFC has 100u in
its general limitation/foreign base company sales
income recapture account attributable to the 100u
of foreign base company sales income that is not
included in A’s income by reason of the earnings
and profits limitation of section 952(c)(1)(A). CFC
also has 50u in its passive limitation recapture
account, all of which is attributable to foreign
personal holding company income, and 50u in its
recapture account for dividends from the
noncontrolled section 902 corporation, all of
which is attributable to foreign personal holding
company income.
(iii) For purposes of computing post-1986 un-
distributed earnings, the rules of sections 902 and
960, including the rules of § 1.960–1(i), apply.
Under § 1.960–1(i), the general limitation deficit
of (100u) is allocated proportionately to reduce
passive limitation earnings of 100u and
noncontrolled section 902 dividend earnings of
100u. Thus, passive limitation earnings are re-
duced by 50u to 50u (100u passive limitation
earnings/200u total earnings in positive separate
categories x (100u) general limitation deficit = 50u
reduction), and the noncontrolled section 902
corporation earnings are reduced by 50u to 50u
(100u noncontrolled section 902 corporation
earnings/200u total earnings in positive separate
categories x (100u) general limitation deficit = 50u
reduction). All of CFC’s post-1986 foreign income
taxes with respect to passive limitation income and
dividends from the noncontrolled section 902
corporation are deemed paid by A under section
960 with respect to the subpart F inclusions (50u
inclusion/50u earnings in each separate category).
After the inclusion and deemed-paid taxes are
computed, at the close of 1998 CFC has a (100u)
deficit in general limitation earnings (100u subpart
F earnings + (200u) nonsubpart F loss), 50u of
passive limitation earnings (100u of earnings at-
tributable to foreign personal holding company
income - 50u inclusion) with a corresponding
passive limitation/foreign personal holding com-
pany income recapture account of 50u, and 50u of
earnings subject to a separate limitation for divi-
dends from the noncontrolled section 902 corpora-
tion (100u earnings - 50u inclusion) with a
corresponding noncontrolled section 902
corporation/foreign personal holding company in-
come recapture account of 50u.
Example 2.(i) The facts are the same as in
Example 1with the addition of the following
facts. In 1999, CFC earns 100u of foreign base
company sales income that is general limitation
income and 100u of foreign personal holding
company income that is passive limitation income.
In addition, CFC incurs (10u) of expenses that are
allocable to its separate limitation for dividends
from the noncontrolled section 902 corporation.
Thus, CFC’s subpart F income for 1999, 200u,
exceeds CFC’s current earnings and profits, 190u,
by 10u. Under section 952(c)(1)(A) and paragraph
(e) of this section, subpart F income is limited to
CFC’s current earnings and profits of 190u, all of
which is included in A’s gross income under
section 951(a)(1)(A).
(ii) For purposes of determining the amount and
type of income included in A’s gross income and
the amount and type of income in CFC’s recapture
accounts, the rules of paragraphs (e)(1) and (2) of
this section apply. While CFC’s general limitation
post-1986 undistributed earnings for 1999 are 0
((100u) opening balance + 100u subpart F in-
come), CFC’s general limitation subpart F income
(100u) does not exceed its general limitation
current earnings and profits (100u) for 1999.
Accordingly, under paragraph (e)(1)(iii) of this
section, the amount by which CFC’s subpart F
income exceeds its earnings and profits for 1999,
10u, is applied proportionately to reduce CFC’s
subpart F income in the separate categories for
general limitation income, 100u, and passive in-
come, 100u. Thus, A includes 95u of general
limitation foreign base company sales income and
95u of passive limitation foreign personal holding
company income in gross income in 1999. At the
close of 1999 CFC has 105u in its general
limitation/foreign base company sales income re-
capture account (100u from 1998 + 5u from
1999), 55u in its passive limitation/foreign per-
sonal holding company income recapture account
(50u from 1998 + 5u from 1999), and 50u in its
dividends from the noncontrolled section 902
corporation/foreign personal holding company in-
come recapture account (all from 1998).
(iii) For purposes of computing post-1986 un-
distributed earnings in each separate category, the
rules of sections 902 and 960, including the rules
of § 1.960–1(i), apply. Thus, post-1986 undistrib-
uted earnings (or an accumulated deficit) in each
separate category are increased (or reduced) by
current earnings and profits or current deficits in
each separate category. The accumulated deficit in
CFC’s general limitation earnings and profits
(100u) is reduced to 0 by the addition of 100u of
1999 earnings and profits. CFC’s passive limita-
tion earnings of 50u are increased by 100u to
150u, and CFC’s noncontrolled section 902 corpo-
ration earnings of 50u are decreased by (10u) to
40u. After the addition of current year earnings
and profits and deficits to the separate categories
there are no deficits remaining in any separate
category. Thus, the allocation rules of § 1.960–
1(i)(4) do not apply in 1999. Accordingly, in
determining the post-1986 foreign income taxes
deemed paid by A, post-1986 undistributed earn-
ings in each separate category are unaffected by
earnings in the other categories. Foreign taxes
deemed paid under section 960 for 1999 would be
determined as follows for each separate category:
with respect to the inclusion of 95u of foreign
base company sales income out of general limita-
tion earnings, the section 960 fraction is 95u
inclusion/0 total earnings; with respect to the
inclusion of 95u of passive limitation income the
section 960 fraction is 95u inclusion/150u passive
earnings. Thus, no general limitation taxes would
be associated with the inclusion of the general
limitation earnings because there are no accumu-
lated earnings in the general limitation category.
After the deemed-paid taxes are computed, at the
close of 1999 CFC has a (95u) deficit in general
limitation earnings and profits ((100u) opening
balance + 100u current earnings - 95u inclusion),
55u of passive limitation earnings and profits (50u
opening balance + 100u current foreign personal
holding company income - 95u inclusion), and
40u of earnings and profits subject to the separate
limitation for dividends from the noncontrolled
section 902 corporation (50u opening balance +
(10u) expense).
Example 3.(i) A, a U.S. person, is the sole
shareholder ofCFC, a controlled foreign corpora-
tion whose functional currency is the u. At the
beginning of 1998, CFC has post-1986 undistrib-
uted earnings of 275u, all of which are general
limitation earnings described in section
904(d)(1)(I). CFC has no previously-taxed earn-
ings and profits described in section 959(c)(1) or
(c)(2). In 1998, CFC has a (200u) loss in the
shipping category described in section
904(d)(1)(D), 100u of foreign personal holding
company income that is passive income described
in section 904(d)(1)(A), and 125u of general
limitation manufacturing earnings that are not
subpart F income. CFC’s subpart F income for
1998, 100u, exceeds CFC’s current earnings and
profits, 25u, by 75u. Under section 952(c)(1)(A)
and paragraph (e) of this section, subpart F
income is limited to CFC’s current earnings and
profits of 25u, all of which is included in A’s
gross income under section 951(a)(1)(A). The 75u
of CFC’s 1998 subpart F income that is not
included in A’s income in 1998 by reason of
section 952(c)(1)(A) is subject to recapture under
section 952(c)(2) and paragraph (f) of this section.
(ii) For purposes of determining the amount and
type of income included in A’s gross income and
the amount and type of income in CFC’s recapture
account, the rules of paragraphs (e)(1) and (2) of
this section apply. Under paragraph (e)(1) of this
section, the amount of CFC’s subpart F income in
excess of earnings and profits for 1998, 75u,
reduces the 100u of passive limitation foreign
personal holding company income. Thus, A in-
cludes 25u of passive limitation foreign personal
holding company income in gross income, and
CFC has 75u in its passive limitation/foreign
personal holding company income recapture ac-
count.
(iii) For purposes of computing post-1986 un-
distributed earnings in each separate category the
rules of sections 902 and 960, including the rules
of § 1.960–1(i), apply. Under § 1.960– 1(i), the
shipping limitation deficit of (200u) is allocated
proportionately to reduce general limitation earn-
ings of 400u and passive limitation earnings of
100u. Thus, general limitation earnings are re-
duced by 160u to 240u (400u general limitation
earnings/500u total earnings in positive separate
categories x (200u) shipping deficit = 160u reduc-
tion), and passive limitation earnings are reduced
by 40u to 60u (100u passive earnings/500u total
earnings in positive separate categories x (200u)
shipping deficit = 40u reduction). Five-twelfths of
CFC’s post-1986 foreign income taxes with re-
spect to passive limitation earnings are deemed
paid by A under section 960 with respect to the
subpart F inclusion (25u inclusion/60u passive
earnings). After the inclusion and deemed-paid
taxes are computed, at the close of 1998 CFC has
400u of general limitation earnings (275u opening
balance + 125u current earnings), 75u of passive
limitation earnings (100u of foreign personal hold-
ing company income - 25u inclusion), and a
(200u) deficit in shipping limitation earnings.
14

Example 4.(i) The facts are the same as in
Example 3with the addition of the following
facts. In 1999, CFC earns 50u of general limita-
tion earnings that are not subpart F income and
75u of passive limitation income that is foreign
personal holding company income. Thus, CFC has
125u of current earnings and profits. CFC distrib-
utes 200u to A. Under paragraph (f)(3)(i) of this
section, the recapture rules are applied first. Thus,
the amount by which 1999 current earnings and
profits exceed subpart F income, 50u, is
recharacterized as passive limitation foreign per-
sonal holding company income. CFC’s total sub-
part F income for 1999 is 125u of passive
limitation foreign personal holding company in-
come (75u current earnings plus 50u recapture
account), and the passive limitation/foreign per-
sonal holding company income recapture account
is reduced from 75u to 25u.
(ii) CFC has 150u of previously-taxed earnings
and profits described in section 959(c)(2) (25u
attributable to 1998 and 125u attributable to
1999), all of which is passive limitation earnings
and profits. Under section 959(c), 150u of the
200u distribution is deemed to be made from
earnings and profits described in section 959(c)(2).
The remaining 50u is deemed to be made from
earnings and profits described in section 959(c)(3).
Under paragraph (f)(3)(ii) of this section, the
dividend distribution is deemed to be made first
out of the passive limitation recapture account to
the extent thereof (25u). Under paragraph
(f)(2)(iii) of this section, the passive limitation
recapture account is reduced from 25u to 0. The
remaining distribution of 25u is treated as made
out of CFC’s general limitation earnings and
profits.
(iii) For purposes of computing post-1986 un-
distributed earnings, the rules of section 902 and
960, including the rules of § 1.960–1(i), apply.
Thus, the shipping limitation accumulated deficit
of (200u) reduces general limitation earnings and
profits of 450u and passive limitation earnings and
profits of 150u on a proportionate basis. Thus,
100% of CFC’s post-1986 foreign income taxes
with respect to passive limitation earnings are
deemed paid by A under section 960 with respect
to the 1999 subpart F inclusion of 125u (100u
inclusion (numerator limited to denominator)/100u
passive earnings). No post-1986 foreign income
taxes remain to be deemed paid under section 902
in connection with the 25u distribution from the
passive limitation/foreign personal holding com-
pany income recapture account. One-twelfth of
CFC’s post-1986 foreign income taxes with re-
spect to general limitation earnings are deemed
paid by A under section 902 with respect to the
distribution of 25u general limitation earnings and
profits described in section 959(c)(3) (25u
inclusion/300u general limitation earnings). After
the deemed-paid taxes are computed, at the close
of 1999 CFC has 425u of general limitation
earnings and profits (400u opening balance + 50u
current earnings - 25u distribution), 0 of passive
limitation earnings (75u recapture account + 75u
current foreign personal holding company income
- 125u inclusion - 25u distribution), and a (200u)
deficit in shipping limitation earnings.
(5)Effective date.Paragraph (e) of
this section and this paragraph (f) apply
to taxable years of a controlled foreign
corporation beginning after March 3,
1997.
Par. 3. In § 1.952–2, paragraph (c)(1)
is revised to read as follows:
§ 1.952–2 Determination of gross in-
come and taxable income of a foreign
corporation.
* * * * *
(c)Special rules for purposes of this
section—(1) Nonapplication of certain
provisions.Except where otherwise dis-
tinctly expressed, the provisions of
subchapters F, G, H, L, M, N, S, and T
of chapter 1 of the Internal Revenue
Code shall not apply and, for taxable
years of a controlled foreign corporation
beginning after March 3, 1997, the
provisions of section 103 of the Internal
Revenue Code shall not apply.
* * * * *
Par. 4. In § 1.954–1, the Example in
paragraph (d)(4)(iii) is revised to read as
follows:
§ 1.954–1 Foreign base company in-
come.
* * * * *
(d) * * *
(4) * * *
(iii) * * *
Example.During its 1995 taxable year, CFC, a
controlled foreign corporation, earns royalty in-
come, net of taxes, of $100 that is foreign
personal holding company income. CFC has no
expenses associated with this royalty income. CFC
pays $50 of foreign income taxes with respect to
the royalty income. For 1995, CFC has current
earnings and profits of $50. CFC’s subpart F
income, as determined prior to the application of
this paragraph (d), exceeds its current earnings and
profits. Thus, under paragraph (d)(4)(ii) of this
section, the amount of CFC’s only net item of
income, the royalty income, will be limited to $50.
The remaining $50 will be subject to
recharacterization in a subsequent taxable year
under section 952(c)(2). Because the amount of
foreign income taxes paid with respect to this net
item of income is $50, the effective rate of tax on
the item, for purposes of this paragraph (d), is 50
percent ($50 of taxes/$50 net item + $50 of taxes).
Accordingly, an election under paragraph (d)(5) of
this section may be made to exclude the item of
income from the computation of subpart F income.
* * * * *
Par. 5. In § 1.954–2, paragraphs
(b)(3), (g)(2)(ii)(B)(1)(i) and (g)(2)(ii)-
(B)(2) are revised to read as follows:
§ 1.954–2 Foreign personal holding
company income.
* * * * *
(b) * * *
(3)Treatment of tax exempt interest.
For taxable years of a controlled foreign
corporation beginning after March 3,
1997, foreign personal holding company
income includes all interest income, in-
cluding interest that is described in
section 103 (see § 1.952–2(c)(1)).
* * * * *
(g) * * *
(2) * * *
(ii) * * *
(B) * * *
(1) * * *
(i) Arises from a transaction (other
than a hedging transaction) entered into,
or property used or held for use, in the
normal course of the controlled foreign
corporation’s trade or business, other
than the trade or business of trading
foreign currency;
* * * * *
(2) The foreign currency gain or loss
arises from a bona fide hedging transac-
tion, as defined in paragraph (a)(4)(ii) of
this section, with respect to a transaction
or property that satisfies the require-
ments of paragraphs (g)(2)(ii)(B)(1)(i)
through (iii) of this section, provided
that any gain or loss arising from such
transaction or property that is attribut-
able to changes in exchange rates is
clearly determinable from the records of
the CFC as being derived from such
transaction or property. For purposes of
this paragraph (g)(2)(ii)(B)(2), a hedging
transaction will satisfy the aggregate
hedging rules of § 1.1221–2(c)(7) only
if all (or all but a de minimis amount)
of the aggregate risk being hedged
arises in connection with transactions or
property that satisfy the requirements of
paragraphs (g)(2)(ii)(B)(1)(i) through
(iii) of this section, provided that any
gain or loss arising from such transac-
tions or property that is attributable to
changes in exchange rates is clearly
determinable from the records of the
CFC as being derived from such trans-
actions or property.
* * * * *
Par. 6. Section 1.957–1 is amended
by:
1. Removing the last sentence of
paragraph (c) Example 8 and adding
two sentences in its place.
2. Revising the last sentence of para-
graph (c) Example 9
The addition and revision read as
follows:
§ 1.957–1 Definition of controlled for-
eign corporation.
* * * * *
(c) * * *
Example 8.JV was a controlled foreign corp-
oration on the following day because over 50
percent of the total value in the corporation was
15

held by a person that was a United States
shareholder under section 951(b). See § 1.951–
1(f).
Example 9.JV became a controlled foreign
corporation on the following day because over 50
percent of the total value in the corporation was
held by a person that was a United States
shareholder under section 951(b).
* * * * *
Par. 7. In § 1.960–1, paragraph (i) is
added to read as follows:
§ 1.960–1 Foreign tax credit with re-
spect to taxes paid on earnings and
profits of controlled foreign corpora-
tions.
* * * * *
(i)Computation of deemed-paid taxes
in post-1986 taxable years—(1)Gen-
eral rule.If a domestic corporation is
eligible to compute deemed-paid taxes
under section 960(a)(1) with respect to
an amount included in gross income
under section 951(a), then, such domes-
tic corporation shall be deemed to have
paid a portion of the foreign corpora-
tion’s post-1986 foreign income taxes
determined under section 902 and the
regulations under that section in the
same manner as if the amount so in-
cluded were a dividend paid by such
foreign corporation (determined by ap-
plying section 902(c) in accordance with
section 904(d)(3)(B)).
(2)Ordering rule for computing
deemed-paid taxes under sections 902
and 960.If a domestic corporation com-
putes deemed-paid taxes under both sec-
tions 902 and 960 in the same taxable
year, section 960 shall be applied first.
After the deemed-paid taxes are com-
puted under section 960 with respect to
a deemed income inclusion, post-1986
undistributed earnings and post-1986
foreign income taxes in each separate
category shall be reduced by the appro-
priate amounts before deemed-paid taxes
are computed under section 902 with
respect to a dividend distribution.
(3)Computation of post-1986 undis-
tributed earnings.Post-1986 undistrib-
uted earnings (or an accumulated deficit
in post-1986 undistributed earnings) are
computed under section 902 and the
regulations under that section.
(4)Allocation of accumulated defi-
cits.For purposes of computing post-
1986 undistributed earnings under sec-
tions 902 and 960, a post-1986
accumulated deficit in a separate cat-
egory shall be allocated proportionately
to reduce post-1986 undistributed earn-
ings in the other separate categories.
However, a deficit in any separate cat-
egory shall not permanently reduce
earnings in other separate categories, but
after the deemed-paid taxes are com-
puted the separate limitation deficit shall
be carried forward in the same separate
category in which it was incurred. In
addition, because deemed-paid taxes
may not exceed taxes paid or accrued
by the controlled foreign corporation, in
computing deemed-paid taxes with re-
spect to an inclusion out of a separate
category that exceeds post-1986 undis-
tributed earnings in that separate cat-
egory, the numerator of the deemed-paid
credit fraction (deemed inclusion from
the separate category) may not exceed
the denominator (post-1986 undistrib-
uted earnings in the separate category).
(5)Examples.The application of this
paragraph (i) may be illustrated by the
following examples. See § 1.952–1(f)(4)
for additional illustrations of these rules.
Example 1.(i) A, a U.S. person, is the sole
shareholder of CFC, a controlled foreign corpora-
tion formed on January 1, 1998, whose functional
currency is the u. In 1998 CFC earns 100u of
general limitation income described in section
904(d)(1)(I) that is not subpart F income and 100u
of foreign personal holding company income that
is passive income described in section
904(d)(1)(A). In 1998 CFC also incurs a (50u)
loss in the shipping category described in section
904(d)(1)(D). CFC’s subpart F income for 1998,
100u, does not exceed CFC’s current earnings and
profits of 150u. Accordingly, all 100u of CFC’s
subpart F income is included in A’s gross income
under section 951(a)(1)(A). Under section
904(d)(3)(B) of the Internal Revenue Code and
paragraph (i)(1) of this section, A includes 100u of
passive limitation income in gross income for
1998.
(ii) For purposes of computing post-1986 undis-
tributed earnings under sections 902, 904(d) and
960 with respect to the subpart F inclusion, the
shipping limitation deficit of (50u) is allocated
proportionately to reduce general limitation earn-
ings of 100u and passive limitation earnings of
100u. Thus, general limitation earnings are re-
duced by 25u to 75u (100u general limitation
earnings/200u total earnings in positive separate
categories x (50u) shipping deficit = 25u reduc-
tion), and passive limitation earnings are reduced
by 25u to 75u (100u passive earnings/200u total
earnings in positive separate categories x (50u)
shipping deficit = 25u reduction). All of CFC’s
post-1986 foreign income taxes with respect to
passive limitation earnings are deemed paid by A
under section 960 with respect to the 100u subpart
F inclusion of passive income (75u inclusion
(numerator limited to denominator under para-
graph (i)(4) of this section)/75u passive earnings).
After the inclusion and deemed-paid taxes are
computed, at the close of 1998 CFC has 100u of
general limitation earnings, 0 of passive limitation
earnings (100u of foreign personal holding com-
pany income - 100u inclusion), and a (50u) deficit
in shipping limitation earnings.
Example 2.(i) The facts are the same as in
Example 1with the addition of the following
facts. In 1999, CFC distributes 150u to A. CFC
has 100u of previously-taxed earnings and profits
described in section 959(c)(2) attributable to 1998,
all of which is passive limitation earnings and
profits. Under section 959(c), 100u of the 150u
distribution is deemed to be made from earnings
and profits described in section 959(c)(2). The
remaining 50u is deemed to be made from earn-
ings and profits described in section 959(c)(3).
The entire dividend distribution of 50u is treated
as made out of CFC’s general limitation earnings
and profits. See section 904(d)(3)(D).
(ii) For purposes of computing post-1986 undis-
tributed earnings under section 902 with respect to
the 1999 dividend of 50u, the shipping limitation
accumulated deficit of (50u) reduces general limi-
tation earnings and profits of 100u to 50u. Thus,
100% of CFC’s post-1986 foreign income taxes
with respect to general limitation earnings are
deemed paid by A under section 902 with respect
to the 1999 dividend of 50u (50u dividend/50u
general limitation earnings). After the deemed-paid
taxes are computed, at the close of 1999 CFC has
50u of general limitation earnings (100u opening
balance - 50u distribution), 0 of passive limitation
earnings, and a (50u) deficit in shipping limitation
earnings. (6) Effective date. This paragraph (i)
applies to taxable years of a controlled foreign
corporation beginning after March 3, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 11, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 17)
Section 6071.—Time for Filing
Returns and Other Documents
26 CFR 53.6071–1T: Time for filing returns
(temporary).
T.D. 8705
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
Requirement of Return and Time
for Filing
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary regulations provid-
ing that disqualified persons and organi-
zation managers liable for Internal Rev-
enue Code section 4958 excise taxes are
required to file Form 4720. The regula-
tions also specify the filing date for
returns for the period to which the new
16

excise taxes applied retroactively. These
excise taxes are imposed on excess
benefit transactions between disqualified
persons, as statutorily defined, and sec-
tions 501(c)(3) and (4) organizations,
except for private foundations.
DATES: These regulations are effective
January 2, 1997.
For dates of applicability, see
§ 53.6071–1T(f) of these regulations.
FOR FURTHER INFORMATION CON-
TACT: Phyllis Haney, (202) 622–4290
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Foundation and Similar Excise
Taxes regulations (26 CFR part 53)
under sections 6011 and 6071. These
regulations provide guidance relating to
the requirement of a return to accom-
pany payment of section 4958 excise
taxes and the time for filing that return.
These rules were first published in No-
tice 96–46 (1996–39 I.R.B. 7) (Septem-
ber 23, 1996).
Taxpayer Bill of Rights 2, Public Law
104–168, 110 Stat. 1452 (TBOR2), en-
acted July 30, 1996, added section 4958
to the Code. As described more fully
below, section 4958 imposes excise
taxes on excess benefit transactions.
Section 4958 taxes apply retroactively to
excess benefit transactions occurring on
or after September 14, 1995. The taxes
do not, however, apply to any benefit
arising from a transaction pursuant to
any written contract which was binding
on September 13, 1995, and at all times
thereafter before such transaction oc-
curred.
An ‘‘excess benefit transaction’’ sub-
ject to tax under section 4958 is any
transaction in which an economic ben-
efit is provided by an organization de-
scribed in section 501(c)(3) (except for
a private foundation) or 501(c)(4) di-
rectly or indirectly to, or for the use of,
any disqualified person if the value of
the economic benefit provided exceeds
the value of the consideration (including
the performance of services) received
for providing the benefit. A ‘‘disquali-
fied person’’ is any person who was, at
any time during the 5-year period end-
ing on the date of the excess benefit
transaction, in a position to exercise
substantial influence over the affairs of
the organization. Disqualified persons
also include family members and certain
entities in which at least 35 percent of
the control or beneficial interest are held
by persons described in the preceding
sentence. An ‘‘organization manager’’ is
any officer, director, trustee, or any
individual having powers or responsi-
bilities similar to those of any officer,
director, or trustee.
Section 4958 imposes three taxes. The
first tax is equal to 25 percent of the
excess benefit amount, and is to be paid
by any disqualified person who engages
in an excess benefit transaction. The
second tax is equal to 200 percent of the
excess benefit amount, and is to be paid
by any disqualified person if the excess
benefit transaction is not corrected
within the taxable period. The third tax
is equal to 10 percent of the excess
benefit amount, and is to be paid by any
organization manager who knowingly
participates in an excess benefit transac-
tion. The maximum amount of this third
tax with respect to any one excess
benefit transaction may not exceed
$10,000. These regulations prescribe
Form 4720 for calculating and paying
the first and third taxes described above.
TBOR2 also amended section 6033(b)
to require section 501(c)(3) organiza-
tions to report the amounts of the taxes
paid under section 4958 with respect to
excess benefit transactions involving the
organization, as well as any other infor-
mation the Secretary may require con-
cerning those transactions. Section
6033(f) also was amended to impose the
same reporting requirements on section
501(c)(4) organizations. Those amend-
ments to section 6033 only apply to
organizations’ returns for taxable years
beginning after July 30, 1996. These
and other TBOR2 amendments to the
reporting requirements for section
501(c)(3) and (4) organizations are re-
flected on IRS Forms 990 and 990–EZ
beginning with the 1996 versions.
Explanation of Provisions
The regulations provide that disquali-
fied persons and organization managers,
as defined in sections 4958(f)(1) and
(2), who are liable for section 4958
excise taxes on excess benefit transac-
tions, as defined in section 4958(c)(1),
are required to file a return on Form
4720. The general rule is that returns
will be due on or before the 15th day of
the fifth month following the close of
the disqualified person’s or organization
manager’s taxable year. The regulations
also provide that returns on Form 4720
for taxable years ending after September
13, 1995, and on or before July 30,
1996, will be due on or before Decem-
ber 15, 1996. See Notice 96–46
(1996–39 I.R.B. 7) (September 23,
1996).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and be-
cause the regulation does not impose a
collection of information on small enti-
ties, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Internal
Revenue Code, these temporary regula-
tions will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of these regula-
tions is Phyllis Haney, Office of Associ-
ate Chief Counsel (Employee Benefits
and Exempt Organizations). However,
other personnel from the IRS and Trea-
sury Department participated in their
development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 53 is
amended as follows:
PART 53—FOUNDATION AND SIMI-
LAR EXCISE TAXES
Paragraph 1. The authority citation for
part 53 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 2. In § 53.6011–1, paragraph (b)
is amended by:
1. Removing from the first sentence,
the language ‘‘or 4955(a),’’ and adding
‘‘, 4955(a), or 4958(a),’’ in its place.
2. Removing from the last sentence,
the language ‘‘or 4955(a),’’ and adding
‘‘, 4955(a), or 4958(a),’’ in its place.
Par. 3. Section 53.6071–1T is added
to read as follows:
§ 53.6071–1T Time for filing returns
(temporary).
(a) through (e) [Reserved]. For further
guidance see § 53.6071–1(a) through
(e).
(f)Taxes imposed on excess benefit
transactions engaged in by organiza-
tions described in sections 501(c)(3)
17

(except private foundations) and
501(c)(4)—(1)General rule.A Form
4720 required by § 53.6011–1(b) for a
disqualified person or organization man-
ager liable for tax imposed by section
4958(a) shall be filed by that person on
or before the 15th day of the fifth
month following the close of such per-
son’s taxable year.
(2)Special rule for taxable years
ending after September 13, 1995, and
on or before July 30, 1996.A Form
4720 required by § 53.6011–1(b) for a
disqualified person or organization man-
ager liable for tax imposed by section
4958(a) on an excess benefit transaction
occurring in such person’s taxable year
ending after September 13, 1995, and on
or before July 30, 1996, is due on or
before December 15, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 10, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 25)
Section 6081.—Extension of Time
for Filing Returns
26 CFR 1.6081–4: Automatic extension of time for
filing individual income tax returns.
T.D. 8703
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
Automatic Extension of Time for
Filing Individual Income Tax
Returns; Automatic Extension of
Time to File Partnership Return of
Income, Trust Income Tax Return,
and U.S. Real Estate Mortgage
Investment Conduit Income Tax
Return
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations that reflect new and
simpler procedures for an individual to
obtain an automatic extension of time to
file an individual income tax return.
This document also contains final regu-
lations that provide new and simpler
procedures for a partnership, trust, and
Real Estate Mortgage Investment Con-
duit (REMIC) to obtain an automatic
extension of time to file partnership,
trust, and REMIC returns.
EFFECTIVE DATE: The regulations are
effective December 31, 1996.
FOR FURTHER INFORMATION CON-
TACT: Margaret A. Owens, (202) 622–
6232 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3504(h)) under control numbers
1545–1479 and 1545–0148. Responses
to this collection of information are
required to obtain a benefit (an auto-
matic 4-month extension of time to file
an individual income tax return or an
automatic 3-month extension of time to
file a partnership return of income, a
trust income tax return, or a REMIC
income tax return).
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
Estimates of the reporting burden in
these final regulations are reflected in
the burden estimates of either Form
4868, Application for Automatic Exten-
sion of Time to File U.S. Individual
Income Tax Return, or Form 8736,
Application for Automatic Extension of
Time To File U.S. Return for a Partner-
ship, REMIC or for Certain Trusts.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
theInternal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to theOf-
fice of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background
Extensions for Individual Income Tax
Returns
On January 4, 1996, temporary regu-
lations (T.D. 8651 [1996–1 C.B. 312])
providing new and simpler procedures
for individuals to obtain an automatic
extension of time to file an individual
income tax return were published in the
Federal Register(6l FR 260). A notice
of proposed rulemaking (IA–41–93
[1996–1 C.B. 770]) cross-referencing
the temporary regulations was published
in theFederal Registerfor the same
day (61 FR 338).
Written comments responding to the
notice of proposed rulemaking were re-
ceived. No public hearing was requested
or held. After consideration of all the
comments, the temporary regulations un-
der sections 6081 and 6651 relating to
the automatic extension of time to file
individual income tax returns are
adopted as revised by this Treasury
Decision, and the corresponding tempo-
rary regulations are removed. The com-
ments and revisions are discussed below
in the section on Explanation of Provi-
sions and Summary of Comments.
Extensions for Partnership Returns of
Income and Trust Income Tax Returns
On April 5, 1988, temporary regula-
tions (T.D. 8190 [1988–1 C.B. 394])
relating to the automatic extension of
time to file partnership returns of in-
come and trust income tax returns were
published in theFederal Register(53
FR 11066). A notice of proposed
rulemaking (LR–29–88 [1988–1 C.B.
934]) cross-referencing the temporary
regulations was published in theFed-
eral Registerfor the same day (53 FR
11103).
In accordance with section 860F(e),
REMICs have been generally treated as
partnerships with regard to extensions of
time to file. A REMIC has been allowed
an automatic 3-month extension of time
to file if (1) an application was prepared
on Form 8736, (2) the application was
signed by the person duly authorized,
(3) the application was filed on or
before the date Form 1066, U.S. Real
Estate Mortgage Investment Conduit In-
come Tax Return, was due, (4) the
application showed the full amount
properly estimated as tax, and (5) the
application was accompanied by full
remittance of the amount properly esti-
18

mated as tax that was unpaid as of the
date prescribed for filing Form 1066.
Written comments responding to the
notice of proposed rulemaking and the
request for comments were received. No
public hearing was requested or held.
After consideration of all the comments,
the temporary regulations under section
6081 relating to the automatic extension
of time to file partnership returns of
income, trust income tax returns, and
REMIC income tax returns are adopted
as revised by this Treasury decision, and
the corresponding temporary regulations
are removed. The comments and revi-
sions are discussed below.
Explanation of Provisions and Summary
of Comments
These final regulations provide that
individuals may obtain an automatic
4-month extension of time to file an
individual income tax return without
remitting the unpaid amount of any tax
properly estimated to be due with the
application for extension of time to file.
Under these final regulations, an indi-
vidual’s inability to pay is not a condi-
tion for obtaining an automatic 4-month
extension. However, taxpayers are en-
couraged to make payments in order to
minimize interest and penalties imposed
on unpaid amounts.
The final regulations remove the
regulatory requirement that Forms 4868
be signed.
Most commentators responded favor-
ably to the proposed and temporary
regulations. Some commentators sug-
gested that the IRS should develop a
bulk method for submitting applications
for automatic extensions so that return
preparers could submit a list of the
required information for all their clients
on one Form 4868. The final regulations
provide that the IRS may prescribe other
methods for submitting an application in
lieu of a paper application on Form
4868. In April 1996, the IRS provided a
method of filing Forms 4868 electroni-
cally through the Electronic Transmitted
Documents System. See Publication
1346. The IRS continues to offer this
method of filing Forms 4868. If there is
still a need for other methods, sugges-
tions should be sent to: CC:DOM:-
CORP:R (REG–209643–93), Room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044.
One commentator recommended that
the requirement to ‘‘properly estimate’’
the tax be dropped, since payment of the
unpaid amount of tax due is not a
condition of obtaining an automatic
4-month extension of time to file an
individual income tax return. The re-
quirement has been retained to assist
taxpayers in determining the amount of
interest and penalties for which they
will be liable if timely tax payments are
not made, and to thereby encourage
payments, as large as possible, with the
application for extension of time to file.
The final regulations provide the re-
quirements for partnerships, trusts, and
REMICs to obtain an automatic 3-month
extension of time to file partnership,
trust, and REMIC returns. The final
regulations remove the regulatory re-
quirement that Forms 8736 be signed.
Notwithstanding the current instructions
to Form 8736, an unsigned Form 8736
will be processed. In addition, these
final regulations provide that trusts and
REMICs may obtain an automatic
3-month extension of time to file a trust
income tax return or a REMIC income
tax return without remitting the unpaid
amount of any tax properly estimated to
be due with the application for exten-
sion of time to file.
The final regulations provide that the
IRS may prescribe additional methods
of obtaining an extension of time to file
in lieu of a paper application on Form
8736.
Some commentators suggested that
allowing automatic extensions for part-
nership returns of income and trust
income tax returns will give rise to
filing difficulties for partners and trust
beneficiaries. The Treasury and the IRS
took this concern into account when
limiting partnership and trust extensions
to 3 months rather than the 4 months
permitted individuals.
Special Analyses
It has been determined that these final
regulations are not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and be-
cause the notices of proposed rulemak-
ing preceding the regulations were is-
sued prior to March 29, 1996, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, a copy of
the notice of proposed rulemaking pro-
viding an automatic extension of time to
file an individual income tax return that
precedes these regulations was submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on their impact on small busi-
ness.
Drafting Information
The principal authors of these regula-
tions are Margaret A. Owens, and Philip
E. Bennet, Office of the Assistant Chief
Counsel (Income Tax & Accounting),
IRS. However, other personnel from the
IRS and the Treasury Department par-
ticipated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301,
and 602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding new entries
in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6081–2 also issued under 26
U.S.C. 6081(a).
Section 1.6081–4 also issued under 26
U.S.C. 6081(a).
Section 1.6081–6 also issued under 26
U.S.C. 6081(a).
Section 1.6081–7 also issued under 26
U.S.C. 6081(a).* * *
Par. 2. Section 1.6081–2 is added to
read as follows:
§ 1.6081–2 Automatic extension of time
to file partnership return of income.
(a)In general.A partnership required
to file a return of income on Form 1065,
U.S. Partnership Return of Income, for
any taxable year will be allowed an
automatic 3-month extension of time to
file the return after the date prescribed
for filing the return if an application
under this section is filed in accordance
with paragraph (b) of this section. In the
case of a partnership described in
§ 1.6081–5(a)(1), the automatic exten-
sion allowed under this section runs
concurrently with an extension of time
to file granted pursuant to § 1.6081–
5(a).
(b)Requirements.In order to satisfy
this paragraph (b), an application for an
automatic extension under this section
must be—
(1) Submitted on Form 8736, Appli-
cation for Automatic Extension of Time
19

To File U.S. Return for a Partnership,
REMIC or for Certain Trusts, or in any
other manner as may be prescribed by
the Commissioner;
(2) Filed on or before the later of—
(i) The date prescribed for filing the
partnership return (without regard to any
extensions of the time for filing such
return); or
(ii) The expiration of any extension
of time to file granted such partnership
pursuant to § 1.6081–5(a); and
(3) Filed with the Internal Revenue
Service office designated in the applica-
tion’s instructions.
(c)Payment of section 7519 amount.
An automatic extension of time for
filing a partnership return under this
section does not extend the time for
payment of any amount due under sec-
tion 7519, relating to required payments
for entities electing not to have a re-
quired taxable year.
(d)Section 444 election.An auto-
matic extension of time for filing a
partnership return will run concurrently
with any extension of time for filing a
return allowed because of section 444,
relating to the election of a taxable year
other than a required taxable year.
(e)Effect of extension on partner.An
automatic extension of time for filing a
partnership return under this section
does not operate to extend the time for
filing a partner’s income tax return or
the time for the payment of any tax due
on the partner’s income tax return.
(f)Termination of automatic exten-
sion.The district director, including the
Assistant Commissioner (International),
or the director of a service center may
terminate at any time an automatic ex-
tension by mailing to the partnership a
notice of termination. The notice must
be mailed at least 10 days prior to the
termination date designated in such no-
tice. The notice of termination must be
mailed to the address shown on Form
8736 or to the partnerships’s last known
address.
(g)Penalties.See section 6698 for
failure to file a partnership return.
(h)Coordination with § 1.6081–1.
Except in undue hardship cases, no
extension of time for filing a partnership
return of income will be granted under
§ 1.6081–1 until an automatic extension
has been allowed pursuant to the provi-
sions of this section.
(i)Effective date.This section is ef-
fective for applications for an automatic
extension of time to file a partnership
return of income filed on or after De-
cember 31, 1996.
§ 1.6081–2T [Removed]
Par. 3. Section 1.6081–2T is removed.
§ 1.6081–3T [Removed]
Par. 4. Section 1.6081–3T is removed.
Par. 5. Section 1.6081–4 is amended
as follows:
1. Paragraphs (a) and (c) are revised.
2. Paragraphs (d) and (e) are added.
The revised and added provisions
read as follows:
§ 1.6081–4 Automatic extension of time
for filing individual income tax returns.
(a)In general—(1)Period of exten-
sion.An individual who is required to
file an individual income tax return will
be allowed an automatic 4-month exten-
sion of time to file the return after the
date prescribed for filing the return
provided the requirements contained in
paragraphs (a)(2), (3), and (4) of this
section are met. In the case of an
individual described in § 1.6081–5(a)(5)
or (6), the automatic 4-month extension
will run concurrently with the extension
of time to file granted pursuant to
§ 1.6081–5.
(2)Manner for submitting an appli-
cation.An application must be submit-
ted—
(i) On Form 4868, Application for
Automatic Extension of Time to File
U.S. Individual Income Tax Return; or
(ii) In any other manner as may be
prescribed by the Commissioner.
(3)Time and place for filing applica-
tion.Except in the case of an individual
described in § 1.6081–5(a)(5) or (6), the
application must be filed on or before
the date prescribed for filing the indi-
vidual income tax return. In the case of
an individual described in § 1.6081–
5(a)(5) or (6), the application must be
filed on or before the expiration of the
extension of time to file granted pursu-
ant to § 1.6081–5. The application must
be filed with the Internal Revenue Ser-
vice office designated in the applica-
tion’s instructions.
(4)Proper estimate of tax.An appli-
cation for extension must show the full
amount properly estimated as tax for the
taxable year.
(5)Coordination with § 1.6081–1.
Except in undue hardship cases, no
extension of time for filing an individual
income tax return will be granted under
§ 1.6081–1 until an automatic extension
has been allowed pursuant to the provi-
sions of this paragraph (a).
* * * * *
(c)Termination of automatic exten-
sion.The district director, including the
Assistant Commissioner (International),
or the director of a service center may
terminate at any time an automatic ex-
tension by mailing to the taxpayer a
notice of termination. The notice must
be mailed at least 10 days prior to the
termination date designated in such no-
tice. The notice of termination must be
mailed to the taxpayer at the address
shown on Form 4868 or to the taxpay-
er’s last known address.
(d)Penalties.See section 6651 for
failure to file an individual income tax
return or failure to pay the amount
shown as tax on the return. In particular,
see § 301.6651–1(c)(3) of this chapter
(relating to a presumption of reasonable
cause in certain circumstances involving
an automatic extension of time for filing
an individual income tax return).
(e)Effective date.This section is ef-
fective for applications for an automatic
extension of time to file an individual
income tax return filed on or after
December 31, 1996.
§ 1.6081–4T [Removed]
Par. 6. Section 1.6081–4T is removed.
Par. 7. Section 1.6081–6 is added
under the undesignated centerheading
‘‘Extension of Time for Filing Returns’’
to read as follows:
§ 1.6081–6 Automatic extension of time
to file trust income tax return.
(a)In general.A trust required to file
an income tax return on Form 1041,
U.S. Income Tax Return for Estates and
Trusts, for any taxable year will be
allowed an automatic 3-month extension
of time to file the return after the date
prescribed for filing the return if an
application under this section is filed in
accordance with paragraph (b) of this
section.
(b)Requirements.To satisfy this
paragraph (b), an application for an
automatic extension under this section
must—
(1) Be submitted on Form 8736, Ap-
plication for Automatic Extension of
Time To File U.S. Return for a Partner-
ship, REMIC or for Certain Trusts, or in
20

any other manner as may be prescribed
by the Commissioner;
(2) Be filed on or before the date
prescribed for filing the trust income tax
return with the Internal Revenue Service
office designated in the application’s
instructions; and
(3) Show the full amount properly
estimated as tax for the trust for the
taxable year.
(c)Effect of extension on beneficiary.
An automatic extension of time to file a
trust income tax return under this sec-
tion will not operate to extend the time
for filing the income tax return of a
beneficiary of the trust or the time for
the payment of any tax due on the
beneficiary’s income tax return.
(d)Termination of automatic exten-
sion.The district director, including the
Assistant Commissioner (International),
or the director of a service center may
terminate at any time an automatic ex-
tension by mailing to the trust a notice
of termination. The notice must be
mailed at least 10 days prior to the
termination date designated in such no-
tice. The notice of termination must be
mailed to the address shown on Form
8736 or to the trust’s last known ad-
dress.
(e)Penalties.See section 6651 for
failure to file a trust income tax return
or failure to pay the amount shown as
tax on the return.
(f)Coordination with § 1.6081–1.
Except in undue hardship cases, no
extension of time for filing a trust
income tax return will be granted under
§ 1.6081–1 until an automatic extension
has been allowed pursuant to the provi-
sions of this section.
(g)Effective date.This section is ef-
fective for applications for an automatic
extension of time to file a trust income
tax return filed on or after December 31,
1996.
Par. 8. Section 1.6081–7 is added
under the undesignated centerheading
‘‘Extension of Time for Filing Returns’’
to read as follows:
§ 1.6081–7 Automatic extension of time
to file Real Estate Mortgage Investment
Conduit (REMIC) income tax return.
(a)In general.A Real Estate Mort-
gage Investment Conduit (REMIC) re-
quired to file an income tax return on
Form 1066, U.S. Real Estate Mortgage
Investment Conduit Income Tax Return,
for any taxable year will be allowed an
automatic 3-month extension of time to
file the return after the date prescribed
for filing the return if an application
under this section is filed in accordance
with paragraph (b) of this section.
(b)Requirements.To satisfy this
paragraph (b), an application for an
automatic extension under this section
must—
(1) Be submitted on Form 8736, Ap-
plication for Automatic Extension of
Time To File U.S. Return for a Partner-
ship, REMIC or for Certain Trusts, or in
any other manner as may be prescribed
by the Commissioner;
(2) Be filed on or before the date
prescribed for filing the REMIC income
tax return with the Internal Revenue
Service office designated in the applica-
tion’s instructions; and
(3) Show the full amount properly
estimated as tax for the REMIC for the
taxable year.
(c)Effect of extension on residual or
regular interest holders.An automatic
extension of time to file a REMIC
income tax return under this section will
not operate to extend the time for filing
the income tax return of a residual or
regular interest holder of the REMIC or
the time for the payment of any tax due
on the residual or regular interest hold-
er’s income tax return.
(d)Termination of automatic exten-
sion.The district director, including the
Assistant Commissioner (International),
or the director of a service center may
terminate at any time an automatic ex-
tension by mailing to the REMIC a
notice of termination. The notice must
be mailed at least 10 days prior to the
termination date designated in such no-
tice. The notice of termination must be
mailed to the address shown on Form
8736 or to the REMIC’s last known
address.
(e)Penalties.See sections 6698 and
6651 for failure to file a REMIC income
tax return or failure to pay the amount
shown as tax on the return.
(f)Coordination with § 1.6081–1.
Except in undue hardship cases, no
extension of time for filing a REMIC
income tax return will be granted under
§ 1.6081–1 until an automatic extension
has been allowed pursuant to the provi-
sions of this section.
(g)Effective date.This section is ef-
fective for applications for an automatic
extension of time to file a REMIC
income tax return filed on or after
December 31, 1996.
PART 301—PROCEDURE AND AD-
MINISTRATION
Par. 9. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 10. Section 301.6651–1 is
amended by revising paragraph (c)(3) to
read as follows:
§ 301.6651–1 Failure to file tax return
or to pay tax.
* * * * *
(c) * * *
(3) If, for a taxable year ending on or
after December 31, 1995, an individual
taxpayer satisfies the requirement of
§ 1.6081–4(a) of this chapter (relating
to automatic extension of time for filing
an individual income tax return), reason-
able cause will be presumed, for the
period of the extension of time to file,
with respect to any underpayment of tax
if—
(i) The excess of the amount of tax
shown on the individual income tax
return over the amount of tax paid on or
before the regular due date of the return
(by virtue of tax withheld by the em-
ployer, estimated tax payments, and any
payment with an application for exten-
sion of time to file pursuant to
§ 1.6081–4 of this chapter) is no greater
than 10 percent of the amount of tax
shown on the individual income tax
return; and
(ii) Any balance due shown on the
individual income tax return is remitted
with the return.
* * * * *
§ 301.6651–1T [Removed]
Par. 11. Section 301.6651–1T is re-
moved.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 12. The authority citation for part
602 continues to read as follow:
Authority: 26 U.S.C. 7805.
Par. 13. In § 602.101, paragraph (c)
is amended by removing the entries for
§ § 1.6081–2T, 1.6081–3T, and
1.6081–4T from the table, revising the
entry for § 1.6081–4, and adding the
following entries in numerical order to
the table to read as follows:
21

§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
1.6081–2 . . . . . . . . . . . . . 1545–0148
1545–1054
1545–1036
* * * * *
CFR part or section
where identified and
described
Current OMB
control No.
1.6081–4 . . . . . . . . . . . . . 1545–0188
1545–1479
1.6081–6 . . . . . . . . . . . . . 1545–0148
1545–1054
1.6081–7 . . . . . . . . . . . . . 1545–0148
1545–1054
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 17, 1996.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
December 29, 1996, and published in the issue of
the Federal Register for December 31, 1996, 61
F.R. 69027)
22

Part III. Administrative, Procedural, and Miscellaneous
Low-Income Housing Tax
Credit—1997 Calendar Year
Resident Population Estimates
Notice 97–14
This notice informs (1) state and local
housing credit agencies that allocate
low-income housing tax credits under
§ 42 of the Internal Revenue Code and
(2) states and other issuers of tax-
exempt private activity bonds under
§ 141, of the proper population figures
to be used for calculating the 1997
calendar year population-based compo-
nent of the state housing credit ceiling
(Credit Ceiling) under § 42(h)(3)(C)(i)
and the 1997 calendar year volume cap
(Volume Cap) under § 146.
The population figures both for the
population-based component of the
Credit Ceiling and for the Volume Cap
are determined by reference to § 146(j).
That section provides generally that de-
terminations of population for any cal-
endar year are made on the basis of the
most recent census estimate of the resi-
dent population of a state (or issuing
authority) released by the Bureau of the
Census before the beginning of such
calendar year.
The proper population figures for cal-
culating the Credit Ceiling and the Vol-
ume Cap for the 1997 calendar year are
the estimates of the resident population
of states for July 1, 1996, released by
the Bureau of the Census on December
30, 1996, in press release CB 96–224.
For convenience, these estimates are
reprinted below.
Resident Population Estimates
for July 1, 1996
StatePopulation
Alabama4,273,000
Alaska607,000
Arizona4,428,000
Arkansas2,510,000
California31,878,000
Colorado3,823,000
Connecticut3,274,000
Delaware725,000
D.C.543,000
Florida14,400,000
Georgia7,353,000
Hawaii1,184,000
Idaho1,189,000
Illinois11,847,000
StatePopulation
Indiana5,841,000
Iowa2,852,000
Kansas2,572,000
Kentucky3,884,000
Louisiana4,351,000
Maine1,243,000
Maryland5,072,000
Massachusetts6,092,000
Michigan9,594,000
Minnesota4,658,000
Mississippi2,716,000
Missouri5,359,000
Montana879,000
Nebraska1,652,000
Nevada1,603,000
New Hampshire1,162,000
New Jersey7,988,000
New Mexico1,713,000
New York18,185,000
North Carolina7,323,000
North Dakota644,000
Ohio11,173,000
Oklahoma3,301,000
Oregon3,204,000
Pennsylvania12,056,000
Rhode Island990,000
South Carolina3,699,000
South Dakota732,000
Tennessee5,320,000
Texas19,128,000
Utah2,000,000
Vermont589,000
Virginia6,675,000
Washington5,533,000
West Virginia1,826,000
Wisconsin5,160,000
Wyoming481,000
The principal authors of this notice
are Christopher J. Wilson of the Office
of Assistant Chief Counsel (Pass-
throughs and Special Industries) and
Timothy L. Jones of the Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products). For further infor-
mation regarding this notice contact Mr.
Wilson on (202) 622–3040 (not a toll-
free call).
Deposits of Excise Taxes
Notice 97–15
The Internal Revenue Service will
issue regulations amending the deposit
requirements under the Excise Tax Pro-
cedural Regulations to limit the avail-
ability of the look-back quarter safe
harbor in cases where a new excise tax
is enacted or an expired excise tax is
reinstated.
Section 40.6302(c)–1(c)(2) currently
provides, generally, that a person can
satisfy excise tax deposit obligations for
a calendar quarter by depositing an
amount equal to the person’s excise tax
liability for the second preceding quarter
(the look-back quarter). For this pur-
pose, the tax liability for the look-back
quarter must be computed at current
rates, but the safe harbor does not
specifically address the effect of the
enactment of a new tax law or the
reinstatement of an expired tax.
In 1996, the aviation excise taxes,
which expired on December 31, 1995,
were reinstated for the period from
August 27 through December 31, 1996.
Because the taxes were not in effect
during the first and second quarters of
1996, airlines relying on the safe harbor
have deposited very little of the air
transportation taxes they collected in
1996.
The Service believes such a delay is
inconsistent with the overall policy and
structure of the excise tax deposit rules.
Accordingly, the Service will modify the
look-back safe harbor to prevent similar
delays with respect to future tax law
changes.
The new regulations will provide that
the safe harbor based on look-back
quarter liability will not apply to depos-
its of a tax that was not in effect
throughout the look-back quarter. The
revised regulations will apply to liabili-
ties attributable to tax law changes after
February 10, 1997. Persons required to
remit air transportation taxes for the first
quarter of 1997 will satisfy their deposit
obligation for amounts billed or tickets
sold in December 1996 if they deposit
their look-back quarter safe harbor
amount in accordance with current regu-
lations.
The principal author of this notice is
Ruth Hoffman, Office of Assistant Chief
Counsel (Passthroughs and Special In-
dustries). For further information re-
garding this notice contact Ruth Hoff-
man on (202) 622–3130 (not a toll-free
number).
23

Part IV. Item of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Credit for Increasing Research
Activities
REG–209494–90
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations under section 41 of
the Internal Revenue Code of 1986
describing when computer software
which is developed by (or for the ben-
efit of) a taxpayer primarily for the
taxpayer’s internal use can qualify for
the credit for increasing research activi-
ties. The proposed regulations reflect a
change to section 41 made by the Tax
Reform Act of 1986. This document
also provides notice of a public hearing
on these proposed regulations.
DATES: Comments and outlines of top-
ics to be discussed at the public hearing
scheduled for May 13, 1997 must be
received by April 22, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209494–90),
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–209494–90), 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 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. The public
hearing will be held in the auditorium,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Lisa
J. Shuman or Robert B. Hanson, 202–
622–3120; concerning submissions and
the hearing, Christina Vasquez, 202–
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 41 of the Internal Revenue
Code provides a credit against tax for
increasing research activities. Eligibility
for the credit is determined in part on
the definition ofqualified researchun-
der section 41(d)(1). Section 231 of the
Tax Reform Act of 1986 (the 1986 Act),
1986–3 C.B. 1, 87, established a new
definition ofqualified researchfor pur-
poses of the research credit. Qualified
research was narrowed to require that
research be undertaken for the purpose
of discovering information that is tech-
nological in nature and the application
of which is intended to be useful in
developing a new or improved business
component of the taxpayer. In addition,
research is eligible for the credit only if
substantially all of the activities of the
research constitute elements of a process
of experimentation for a new or im-
proved function, performance, or reli-
ability or quality. Treasury and the IRS
request comments on the appropriate
explanation of the terms used in the
definition of qualified research under the
1986 Act, in particular, the termprocess
of experimentation.
Section 231 of the 1986 Act also
specified that expenditures incurred in
certain research, research-related, and
non-research activities are to be ex-
cluded from eligibility for the credit
without reference to the general require-
ments for credit eligibility. Under sec-
tion 41(d)(4)(E) of the Code, except to
the extent provided in regulations, quali-
fied research does not include research
with respect to computer software devel-
oped by (or for the benefit of) the
taxpayer primarily for the taxpayer’s
own use (internal-use software), other
than for use in (1) an activity which
constitutes qualified research, or (2) a
production process whose development
meets the requirements in section
41(d)(1) for qualified research (as where
the taxpayer is developing robotics and
software for the robotics for use in
operating a manufacturing process, and
the taxpayer’s research costs of develop-
ing the robotics are eligible for the
credit).
The legislative history indicates that
Congress intended to limit the credit for
the costs of developing internal-use soft-
ware to software meeting a high thresh-
old of innovation. In particular, Con-
gress intended that regulations would
permit internal-use software to qualify
for the credit only if, in addition to
satisfying the general requirements for
credit eligibility, the taxpayer can estab-
lish that the following three-part test is
satisfied: the software is innovative (as
where the software results in a reduction
in cost, or improvement in speed, that is
substantial and economically signifi-
cant); the software development in-
volves significant risk (as where the
taxpayer commits substantial resources
to the development of the software and
there is substantial uncertainty, because
of technical risk, that such resources
would not be recovered in a reasonable
period of time); and the software is not
commercially available for use by the
taxpayer (as where the software cannot
be purchased, leased, or licensed and
used for the intended purpose without
modifications that would satisfy the first
two requirements). See H.R. Rep. No.
841, 99th Cong., 2d Sess. II–73. Thus,
Congress did not intend that the three-
part test in the legislative history would
apply in lieu of the general requirements
for credit eligibility but, rather, intended
that the general requirements for credit
eligibility of section 41(d) also would
have to be satisfied. See H.R. Rep. No.
841 at II–73.
The legislative history indicates, how-
ever, that Congress did not intend the
internal-use software exclusion in sec-
tion 41(d)(4)(E) to apply to research
related to the development of a new or
improved package of software and hard-
ware developed as a single product of
which the software is an integral part,
and that is used directly by the taxpayer
in providing technological services to
customers in its trade or business (as
where a taxpayer develops together a
new or improved high technology medi-
cal or industrial instrument containing
software that processes and displays
data received by the instrument, or
where a telecommunications company
develops a package of new or improved
switching equipment plus software to
operate the switches). See H.R. Rep.
No. 841 at II–74.
Congress intended that regulations in-
corporating the three-part test in the
legislative history as an exception to the
exclusion from the definition of quali-
fied research under section 41(d)(4)(E)
would be effective on the same date
section 41(d)(4)(E) became effective. In
Notice 87–12 (1987–1 C.B. 432), the
IRS stated that regulations to be issued
under section 41(d)(4)(E) would be ef-
fective for taxable years beginning after
December 31, 1985.
241997–8 I.R.B.

Explanation of Provisions
The proposed regulations follow the
legislative history and provide that
internal-use software that meets the gen-
eral requirements of section 41(d), is
innovative, involves significant eco-
nomic risk, and is not commercially
available for use by the taxpayer is not
excluded from eligibility for the re-
search credit under section 41(d)(4)(E).
Under the proposed regulations, this is a
facts and circumstances test. Treasury
and the IRS request comments on facts
and circumstances, other than those fac-
tors enumerated in the legislative his-
tory, to be considered in determining
whether internal-use software satisfies
the three-part test.
Proposed Effective Dates
The amendments are proposed to be
effective for taxable years beginning
after December 31, 1985.
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 these regula-
tions do not impose a collection of
information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter
6) does not apply. Therefore, a Regula-
tory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, this notice of pro-
posed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment 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 comments
that are submitted timely (in the manner
described in the ADDRESSES portion
of this preamble) to the IRS. All com-
ments will be available for public in-
spection and copying.
A public hearing has been scheduled
for May 13, 1997, at 10 a.m. in the
auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW, Wash-
ington, DC. Because of access restric-
tions, visitors will not be admitted be-
yond the building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
(in the manner described in the AD-
DRESSES portion of this preamble)
comments and an outline of the topics
to be discussed and the time to be
devoted to each topic by April 22, 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.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.41–4 also issued under 26
U.S.C. 41(d)(4)(E). * * *
Par. 2. Section 1.41–0 is amended by
revising the entry for § 1.41–4 to read
as follows:
§ 1.41–0 Table of contents.
* * * * *
§ 1.41–4 Qualified research for taxable
years beginning after December 31,
1985.
(a) through (d) [Reserved].
(e) Internal-use computer software.
(1) General rule.
(2) Requirements.
(3) Computer software and hardware
developed as a single product.
(4) Primarily for internal use.
(5) Special rule.
(6) Application of special rule.
(7) Effective date.
* * * * *
Par. 3. Section 1.41–4 is revised to
read as follows:
§ 1.41–4 Qualified research for taxable
years beginning after December 31,
1985.
(a) through (d) [Reserved].
(e)Internal-use computer software—
(1)General rule.Research with respect
to computer software that is developed
by (or for the benefit of) the taxpayer
primarily for the taxpayer’s internal use
is eligible for the research credit only if
the software satisfies the requirements
of paragraph (e)(2) of this section. Gen-
erally, research with respect to computer
software is not eligible for the research
credit where software is used internally,
for example, in general and administra-
tive functions (such as payroll, book-
keeping, or personnel management) or
in providing noncomputer services (such
as accounting, consulting, or banking
services).
(2)Requirements.The requirements
of this paragraph (e)(2) are—
(i) The software satisfies the require-
ments of section 41(d)(1);
(ii) The software is not otherwise
excluded under section 41(d)(4) (other
than section 41(d)(4)(E)); and
(iii) One of the following conditions
is met—
(A) The taxpayer uses the software in
an activity that constitutes qualified re-
search (other than the development of
the internal-use software itself);
(B) The taxpayer uses the software in
a production process that meets the
requirements of section 41(d)(1); or
(C) The software satisfies the special
rule of paragraph (e)(5) of this section.
(3)Computer software and hardware
developed as a single product.This
paragraph (e) does not apply to the
development costs of a new or improved
package of computer software and hard-
ware developed together by the taxpayer
as a single product, of which the soft-
ware is an integral part, that is used
directly by the taxpayer in providing
technological services in its trade or
business to customers. In these cases,
eligibility for the research credit is to be
determined by examining the combined
hardware-software product as a single
product.
(4)Primarily for internal use.All
relevant facts and circumstances are to
be considered in determining if com-
puter software is developed primarily
for the taxpayer’s internal use. If com-
puter software is developed primarily
for the taxpayer’s internal use, the re-
quirements of this paragraph (e) apply
even though the taxpayer intends to, or
subsequently does, sell, lease, or license
the computer software.
(5)Special rule.Computer software
satisfies the special rule of this para-
251997–8 I.R.B.

graph (e)(5) only if the taxpayer can
establish that—
(i) The software is innovative (as
where the software results in a reduction
in cost, or improvement in speed, that is
substantial and economically signifi-
cant);
(ii) The software development in-
volves significant economic risk (as
where the taxpayer commits substantial
resources to the development and there
is a substantial uncertainty, because of
technical risk, that such resources would
be recovered within a reasonable pe-
riod); and
(iii) The software is not commercially
available for use by the taxpayer (as
where the software cannot be purchased,
leased, or licensed and used for the
intended purpose without modifications
that would satisfy the requirements of
paragraphs (e)(5)(i) and (ii) of this sec-
tion).
(6)Application of special rule.In
determining if the special rule of para-
graph (e)(5) of this section is satisfied
all of the facts and circumstances are
considered. The special rule allows the
costs of developing internal-use software
to be eligible for the research credit
only if the software meets a high thresh-
old of innovation. The facts and circum-
stances analysis takes into account only
the results attributable to the develop-
ment of the new or improved software
independent of the effect of any modifi-
cations to related hardware or other
software. The weight given to any fact
or circumstance will depend on the
particular case.
(7)Effective date.This paragraph (e)
is applicable for taxable years beginning
after December 31, 1985.
§§ 1.41–0A through
1.41–8A [Removed]
Par. 4. Sections 1.41–0A through
1.41–8A and the undesignated
centerheading preceding these sections
are removed.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 6. In § 602.101, paragraph (c) is
amended by removing the following
entries from the table:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified and
described
Current OMB
control No.
* * * * *
1.41–4A. . . . . . . . . . . . . . 1545–0074
1.41–4(b) and (c) . . . . . . 1545–0074
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 81)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Determination of Earned Premiums
REG–209839–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the re-
quirement that insurance companies
other than life insurance companies re-
duce by 20 percent their deductions for
increases in unearned premiums. This
requirement was enacted as part of the
Tax Reform Act of 1986. These regula-
tions are necessary in order to provide
guidance to nonlife insurance companies
that are subject to the 20 percent reduc-
tion rule. This document also contains a
notice of a public hearing on the pro-
posed regulations.
DATES: Written comments must be re-
ceived by April 2, 1997. Requests to
speak and outlines of oral comments to
be discussed at the public hearing
scheduled for April 30, 1997 at 10:00
a.m. must be received by April 2, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209839–96),
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–209839–96), 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 regulations, Gary
Geisler, (202) 622–3970; concerning
submissions and the hearing, Evangelista
Lee, (202) 622–7190 (not toll-free num-
bers).
SUPPLEMENTARY INFORMATION:
Background
A nonlife insurance company’s under-
writing income equals its premiums
earned on insurance contracts during the
taxable year less its losses incurred and
its expenses incurred. For taxable years
beginning on or after January 1, 1993, a
company’s premiums earned on insur-
ance contracts during the taxable year is
an amount equal to the gross premiums
written on insurance contracts during the
taxable year, less return premiums and
premiums paid for reinsurance, plus 80
percent of unearned premiums at the
end of the prior taxable year, less 80
percent of unearned premiums at the
end of the current taxable year.
The gross premiums written for an
insurance or reinsurance contract is the
total amount charged by the insurance
company for the insurance coverage
provided under the contract, including
amounts charged covering the compa-
ny’s expenses and overhead. Written
premiums are generally recorded for the
full term of coverage for the year in
which the contract is issued. Upon re-
cording a written premium, the company
establishes an unearned premium liabil-
ity to reflect the portion of the written
premium which relates to the unexpired
portion of the insurance coverage.
The term ‘‘unearned premium’’ his-
torically referred to the portion of the
gross premiums written that would have
to be returned to the policyholder upon
cancellation of the policy and that was
in direct proportion to the unexpired
term of the policy.See,e.g.,Buckeye
Union Casualty Co. v. Commissioner,
448 F.2d 228, 230 (6th Cir. 1971),aff’g
54 T.C. 13, 20 n.5 (1970). Cases and
rulings expanded this definition to in-
clude premiums paid for a future ben-
efit, the cost of which was fixed when
261997–8 I.R.B.

the policy was issued.See,e.g.,Massa-
chusetts Protective Ass’n. v. United
States, 114 F.2d 304 (1st Cir. 1940);
C.P.A. Co. v. Commissioner, 7 T.C. 912
(1946) (nonlife company), acq. 1947–1
C.B. 1; Rev. Rul. 55–705, 1955–2 C.B.
280.But cf. Bituminous Casualty Corp.
v. Commissioner, 57 T.C. 58 (1971),
acq. in result1973–2 C.B. 1 (stating in
dictum that ‘‘unearned premiums’’ had a
substantially broader definition than the
one developed in the cases and rulings
cited above).
Prior to 1987, the increase in un-
earned premiums during the taxable year
was deducted from gross premiums
written in the computation of premiums
earned. For example, if a company on
September 1st issued a one-year fire
insurance policy with a premium of
$1,200, the company on that date would
record a gross written premium of
$1,200 and establish a $1,200 unearned
premium reserve. On December 31st,
the company would have earned one-
third of the premium, $400, but would
have an $800 unearned premium reserve
liability for the remaining eight months
of coverage to be provided in periods
after the close of the taxable year. The
subtraction of the full amount of un-
earned premiums from the gross written
premium ‘‘generally reflect[ed]’’ the ac-
counting conventions (often referred to
as ‘‘statutory accounting principles’’)
used to prepare the annual statement for
state insurance regulatory purposes. 2
H.R. Conf. Rep. No. 841, 99th Cong.,
2d Sess. II–354 (1986), 1986–3 C.B.
(Vol. 4) 354; S. Rep. No. 313, 99th
Cong., 2d Sess. 495 (1986), 1986–3
C.B. (Vol. 3) 495; H.R. Rep. No. 426,
99th Cong., 1st Sess. 668 (1985),
1986–3 C.B. (Vol. 2) 668.
A nonlife company generally deducts
expenses incurred in the taxable year in
which the expenses are reported on the
company’s annual statement. These ex-
penses include premium acquisition ex-
penses attributable to unearned premi-
ums.
In 1986, Congress determined that the
combination of deferring unearned pre-
miums and currently deducting premium
acquisition expenses attributable to un-
earned premiums under the accounting
conventions used to prepare a nonlife
insurance company’s annual statement
resulted in a mismatch of income and
expense. Congress decided to require a
better measurement of income for Fed-
eral income tax purposes. H.R. Rep. No.
426, 1986–3 C.B. (Vol. 2) at 669; S.
Rep. No. 313, 1986–3 C.B. (Vol. 3) at
496. Rather than require a nonlife com-
pany to capitalize and amortize premium
acquisition expenses, Congress reduced
by 20 percent the current deduction for
unearned premiums. See section
832(b)(4)(B); 2 H.R. Conf. Rep. No.
841, 1986–3 C.B. (Vol. 4) at 354–55; S.
Rep. No. 313, 1986–3 C.B. (Vol. 3) at
495–98; H.R. Rep. No. 426, 1986–3
C.B. (Vol. 2) at 668–70. This reduction
in unearned premiums is sometimes re-
ferred to as the ‘‘20 percent haircut.’’
The acceleration of income as a result
of the 20 percent haircut is intended to
be roughly equivalent to denying current
deductibility for a portion of the pre-
mium acquisition expenses.
Congress intended the 20 percent
haircut to apply to all amounts (other
than life insurance reserves and title
insurance reserves) that were considered
unearned premiums for Federal income
tax purposes as of 1986. The House
Report states that ‘‘[a]ll items which are
included in unearned premiums under
section 832(b) of present law are subject
to this reduction in the deduction.’’ H.R.
Rep. No. 426, 1986–3 C.B. (Vol. 2) at
669. In describing the House bill, the
Conference Report reiterates that ‘‘[a]ll
items which are included in unearned
premiums under section 832(b) of
present law are subject to this reduction
in the deduction’’ and describes the
Senate amendment as ‘‘the same as the
House bill, except that life insurance
reserves which are included in unearned
premium reserves under section
832(b)(4) are not subject to this reduc-
tion.’’ 2 H.R. Conf. Rep. No. 841,
1986–3 C.B. (Vol. 4) at 354–55. The
Report’s description of the Conference
agreement states that the agreement
‘‘follows the Senate amendment’’ but
‘‘provides special treatment of title in-
surance unearned premium reserves.’’Id.
See sections 832(b)(7) and (8) for the
rules applicable to life insurance and
title insurance reserves.
Following the imposition of the 20
percent haircut on unearned premiums,
the National Association of Insurance
Commissioners (NAIC) revised the
statutory accounting principles used to
prepare a nonlife insurance company’s
annual statement. In general, these
changes permitted a nonlife company to
defer recording written premiums and/or
to reduce the amount of unearned pre-
miums reported on the company’s an-
nual statement. The affected items in-
cluded advance premiums, additional
premiums on retrospectively rated insur-
ance policies, and the reporting of writ-
ten premiums for workers’ compensation
policies and certain other casualty poli-
cies where the covered risk varies over
the policy term.
Prior to 1989, advance premiums
were required to be reported in written
premiums and unearned premiums on
the annual statement for the year in
which the advance premiums were re-
ceived. However, statutory accounting
principles now permit advance premi-
ums to be accumulated in a suspense
account and reported as a write-in liabil-
ity on the annual statement. A company
electing to use this alternative treatment
would not report advance premiums in
either written premiums or unearned
premiums on the annual statement until
the effective date of the underlying
coverage.
Statutory accounting principles also
required a nonlife insurance company to
record an estimated liability for payment
of return premiums under retrospectively
rated insurance policies (retro credits) as
part of the unearned premium liability.
Estimates of additional premiums due
from insureds under these policies (retro
debits) historically were not taken into
account except as an offset to the com-
pany’s estimated liability for payment of
retro credits. Thus, retro debits were not
permitted to be shown as assets on the
annual statement, and generally were not
included in written premiums prior to
the year in which the company billed
the policyholder for these additional
premiums. Beginning in 1988, however,
the NAIC permitted retro debits to be
shown in an insurance company’s admit-
ted assets, subject to certain limitations.
The NAIC currently has under consider-
ation a proposal that would require retro
credits to be recorded as a write-in
liability on the annual statement, rather
than as part of unearned premiums. This
proposal would also permit retro credits
and retro debits to be taken into account
either as adjustments to written premi-
ums or as adjustments to earned premi-
ums for purposes of determining under-
writing income on the annual statement.
A nonlife insurance company ordi-
narily reports the full amount of premi-
ums provided in a casualty insurance
policy (including any deferred premium
installments) in written premiums and
unearned premiums for the year in
which the policy is issued. However, for
workers’ compensation policies and cer-
tain other casualty policies where the
covered risk varies over the policy term,
some but not all state insurance regula-
tors permit written premiums to be
271997–8 I.R.B.

recorded based on installment billings to
the policyholder. If the insurance com-
pany issues these policies throughout the
year, and the premiums for the policies
are billed monthly, the portion of the
total written premiums that would be
shown as unearned premiums is substan-
tially smaller than would be the case if
the written premiums and unearned pre-
miums were determined based on the
entire policy term. The NAIC currently
has under consideration proposed guid-
ance that would require the full amount
of the premiums provided in all casualty
insurance policies to be reported in
written premiums and unearned premi-
ums on the effective date of the related
coverage.
Section 832(b)(1)(A) provides that a
nonlife insurance company’s income is
computed on the basis of the underwrit-
ing and investment exhibit of the annual
statement approved by the NAIC. Some
companies assert that section
832(b)(1)(A) limits application of the 20
percent haircut to the amount of un-
earned premiums reported on the annual
statement. Under this approach, a com-
pany that elects for annual statement
purposes to report advance premiums as
a write-in liability, to offset unearned
premiums by retro debits, or to include
deferred premiums on policies covering
fluctuating risks in written premiums
only when billed to the insured, reduces
the amount of unearned premiums sub-
ject to the 20 percent haircut.
The existing regulations under
§ 1.832–4(a)(2) state that ‘‘[t]he under-
writing and investment exhibit[,] . . .
insofar as it is not inconsistent with the
provisions of the Code will be recog-
nized and used as a basis for [comput-
ing the net income of a nonlife insur-
ance company].’’ However, the
regulations recognize that not all items
of the exhibit ‘‘reflect . . . income as
defined in the Code.’’ Where statutory
accounting principles permit a company
to elect among alternative accounting
practices, one or more of which do not
clearly reflect income as defined by the
Code, the company is required for Fed-
eral tax purposes to use a method that
clearly reflects income. Section 446(b)
and § 1.446–1(a)(2). Furthermore, an
accounting practice used on the annual
statement, although specifically man-
dated by statutory accounting principles,
is not used for purposes of computing
taxable income if that practice is incon-
sistent with the Code.
Overview of Proposed Regulations
The proposed regulations define gross
premiums written, return premiums, and
unearned premiums for tax purposes.
The proposed regulations also provide
rules for determining when gross premi-
ums written, return premiums, and un-
earned premiums are taken into account
for tax purposes. In this manner, the
proposed regulations ensure that items
such as advance premiums and retro-
spective premium adjustments are
treated consistently for purposes of the
20 percent haircut on unearned premi-
ums.
Explanation of Provisions
The starting point for determining a
nonlife insurance company’s premiums
earned for tax purposes is the ‘‘gross
premiums written on insurance contracts
during the taxable year.’’ Proposed
§ 1.832–4(a)(4)(i) defines ‘‘gross premi-
ums written on insurance contracts’’ as
the total amounts charged by the insur-
ance company for insurance coverage
under insurance or reinsurance contracts
issued or renewed during the taxable
year. Thus, ‘‘gross premiums written’’
includes collected and uncollected pre-
miums.
Proposed § 1.832–4(a)(4)(ii) ad-
dresses the treatment of retro debits,
which reflect estimates of additional
premiums to be received from the in-
sured or the reinsured based on the
insurance company’s loss experience
during expired coverage periods. Thus,
retro debits represent additional gross
premiums written rather than offsets to
the unearned premium liability for unex-
pired coverage periods. Treating retro
debits as offsets to unearned premiums
would reduce the acceleration of income
under the 20 percent haircut, and would
allow some companies with retro debits
exceeding their unearned premiums to
report a lesser amount of earned premi-
ums for Federal income tax purposes
than for annual statement reporting pur-
poses. This result is contrary to the
Congressional intent to accelerate the
rate at which premiums are earned for
tax purposes in order to correct the
mismatching of income and expenses on
the annual statement. Accordingly, pro-
posed § 1.832–4(a)(4)(ii) requires retro
debits to be included in gross premiums
written regardless of the manner in
which the retro debits are reported on
the underwriting exhibit of the annual
statement.
Under section 832(b)(4)(A), an insur-
ance company reduces the amount of
gross premiums written on insurance
contracts during the taxable year by
return premiums and premiums paid for
reinsurance. Proposed § 1.832–4(a)(5)(i)
defines return premiums as amounts
paid or credited to the policyholder in
accordance with the terms of an insur-
ance contract, other than policyholder
dividends or claims and benefit pay-
ments. Thus, return premiums include
amounts paid or credited to the policy-
holder with respect to endorsements and
modifications of the terms of coverage
of an insurance contract. Return premi-
ums also include amounts returned or
credited to the policyholder on cancella-
tion of an insurance contract, including
the unearned portion of any deferred or
uncollected premiums previously in-
cluded by the company in gross premi-
ums written and unearned premiums.
Finally, return premiums include
amounts contractually required to be
returned to the ceding company under a
reinsurance contract.
The proposed regulations modify the
treatment of retro credits under existing
law for purposes of determining earned
premiums. Since 1943, § 1.832–
4(a)(3)(ii) has provided that the liability
for return premiums under a retrospec-
tively rated policy is included in a
nonlife company’s unearned premiums
for tax purposes. Although retro credits
were included in unearned premiums in
1986, these amounts are based on an
insured’s loss experience during expired
coverage periods, for which the com-
pany has already earned the premium.
For this reason, proposed § 1.832–
4(a)(5)(ii) provides that a nonlife com-
pany’s provision for payment of a retro
credit generally is included in return
premiums that reduce gross premiums
written. However, proposed § 1.832–
4(a)(6)(iv) gives a company the option
to include retro credits in unearned
premiums to which the 20 percent hair-
cut applies.
The proposed regulations provide tim-
ing rules with respect to when a com-
pany reports gross premiums written and
unearned premiums for tax purposes.
Proposed § 1.832–4(a)(7) requires a
company to report gross premiums writ-
ten with respect to an insurance or
reinsurance contract for the earlier of
the taxable year which includes the
effective date of the contract or the
taxable year in which all or a part of the
gross premium for the contract is re-
ceived. Thus, the company must report
281997–8 I.R.B.

gross premiums written with respect to
an insurance contract for the year in
which it collects an advance premium.
By requiring advance premiums to be
included in gross premiums written and
unearned premiums, regardless of the
manner in which the advance premiums
are recorded on the annual statement,
the proposed regulations ensure that the
treatment of a nonlife insurance compa-
ny’s advance premiums conforms with
the treatment of advance premiums of a
life insurance company under section
807(e)(7).
The NAIC is considering proposed
guidance that would require the pre-
mium for the entire term of a property
and casualty insurance contract to be
recorded as written premium on the
effective date of the contract. The pro-
posed NAIC guidance rejects the previ-
ous NAIC position that permitted writ-
ten premiums for workers’ compensation
policies and certain other casualty poli-
cies where the covered risk varies over
the policy term to be recorded when
billed. For this reason, the method of
reporting gross premiums written for
workers’ compensation policies and cer-
tain other casualty insurance policies
covering fluctuating risks is reserved in
the proposed regulations.
Proposed Effective Date
The proposed regulations are pro-
posed to apply to the determination of
premiums earned for insurance contracts
issued or renewed in taxable years be-
ginning after the date on which final
regulations are published in theFederal
Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the
regulations do not impose a collection
of information on small entitles, 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 rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (a signed original and 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, April 30, 1997 in the
Auditorium, Internal Revenue Service
Building, 1111 Constitution Avenue NW,
Washington, DC. Because of access re-
strictions, visitors will not be admitted
beyond the Internal Revenue Building
lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by April 2, 1997 and
submit an outline of the topics to be
discussed and the time to be devoted to
each topic (a signed original and 8
copies) by April 2, 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 this regulation
is Gary Geisler, Office of Assistant
Chief Counsel (Financial Institutions
and Products). However, 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 1.832–4 is amended
as follows:
1. Paragraph (a)(3) is revised.
2. Paragraphs (a)(4) and (a)(5) are
redesignated as (a)(9) and (a)(10).
3. New paragraphs (a)(4) through
(a)(8) are added.
The additions and revisions read as
follows:
§ 1.832–4 Gross income.
(a) * * *
(3)Premiums earned.The determina-
tion of premiums earned on insurance
contracts during the taxable year begins
with the insurance company’s gross pre-
miums written on insurance contracts
during the taxable year, reduced by
return premiums and ceded reinsurance
premiums. Subject to the exceptions in
sections 832(b)(7), 832(b)(8), and
833(a)(3), this amount is increased by
80 percent of the unearned premiums at
the end of the preceding taxable year,
and is decreased by 80 percent of the
unearned premiums at the end of the
taxable year.
(4)Gross premiums written—(i)In
general.An insurance company’s ‘‘gross
premiums written on insurance contracts
during the taxable year’’ are the total
amounts charged by the insurance com-
pany for insurance coverage under in-
surance or reinsurance contracts issued
or renewed by the company during the
taxable year.
(ii)Debits on retrospectively rated
insurance policies.Gross premiums
written include an insurance company’s
estimate of the gross additional premi-
ums to be received from the insured or
the reinsured with respect to the expired
portion of a retrospectively rated insur-
ance or reinsurance contract (retro deb-
its). The retro debits are reported for the
taxable year in which the amounts can
be reasonably estimated based on infor-
mation used to compute the insurance
company’s loss reserves. An insurance
company adjusts gross premiums written
to reflect payments from the insured or
the reinsured with respect to retro deb-
its, as well as changes in the estimate of
retro debits.
(5)Return premiums—(i)In general.
Return premiums are amounts paid or
credited to the policyholder in accor-
dance with the terms of an insurance
contract, other than policyholder divi-
dends or claims and benefit payments.
For example, return premiums include
amounts returned or credited to the
policyholder based on modifications of
the terms of an insurance contract. Re-
turn premiums also include amounts
contractually required to be returned to
the ceding company pursuant to a
reinsurance contract.
(ii)Credits on retrospectively rated
insurance policies.Except as provided
in paragraph (a)(6)(iv) of this section,
return premiums include an insurance
company’s estimate of the gross liability
291997–8 I.R.B.

for return premiums to be paid or
credited to the insured or the reinsured
with respect to the expired portion of a
retrospectively rated insurance or
reinsurance contract (retro credits). The
retro credits are included in return pre-
miums for the taxable year in which the
insurance company’s liability to pay or
credit these amounts can be reasonably
estimated based on information used to
compute the company’s loss reserves.
An insurance company adjusts return
premiums to reflect payments made or
amounts credited to the insured or the
reinsured with respect to retro credits, as
well as changes in the estimate of retro
credits.
(iii)Unpaid premiums on cancelled
policies.If an insurance contract is
cancelled, an insurance company in-
cludes in return premiums the unearned
portion of any deferred or uncollected
premiums previously included in gross
premiums written and unearned premi-
ums.
(6)Unearned premiums—(i)In gen-
eral.The unearned premium for an
insurance or reinsurance contract is the
portion of the gross premiums written
which is attributable to future insurance
coverage to be provided under the con-
tract. An insurance company makes an
appropriate adjustment to its unearned
premiums for an insurance or reinsur-
ance contract if the contract is reinsured
with, or retroceded to, another insurance
company.
(ii)Special rules.In computing ‘‘pre-
miums earned on insurance contracts
during the taxable year,’’ the amount of
unearned premiums includes—
(A) Life insurance reserves (as de-
fined in section 816(b), but computed in
accordance with section 807(d));
(B) In the case of a mutual flood or
fire insurance company described in
section 832(b)(1)(D) (with respect to
contracts described in that section) the
amount of unabsorbed premium deposits
which the company would be obligated
to return to its policyholders at the close
of the taxable year if all its policies
were terminated at that time;
(C) In the case of an interinsurer or
reciprocal underwriter which reports un-
earned premiums on its annual statement
net of premium acquisition expenses, the
unearned premiums on the company’s
annual statement increased by the por-
tion of premium acquisition expenses
allocable to those unearned premiums;
(D) In the case of a title insurance
company, its discounted unearned premi-
ums (computed in accordance with sec-
tion 832(b)(8)); and
(E) Amounts treated as unearned pre-
miums pursuant to the optional treat-
ment provided in paragraph (a)(6)(iv) of
this section.
(iii)Method of determining unearned
premiums.If the risk of loss under an
insurance or reinsurance contract arises
uniformly over the contract period, the
unearned premium attributable to the
portion of the insurance coverage which
has not expired is computed on a pro
rata basis. If the risk of loss does not
arise uniformly over the contract period,
the insurance company may consider the
pattern or incidence of the risk in deter-
mining the portion of the gross premium
written which is attributable to the por-
tion of the insurance coverage which
has not yet expired.
(iv)Option to include retro credits in
unearned premiums.An insurance com-
pany may include retro credits in un-
earned premiums under section
832(b)(4) for its first taxable year begin-
ning after the date on which final regu-
lations are published in theFederal
Register. Any company exercising this
option must apply it consistently to all
retro credits with respect to retrospec-
tively rated insurance or reinsurance
contracts issued or renewed during the
taxable year and all subsequent years.
(7)Method of reporting gross premi-
ums written—(i)In general.An insur-
ance company reports gross premiums
written with respect to an insurance or
reinsurance contract for the earlier of
the taxable year which includes the
effective date of the contract or the
taxable year in which all or a part of the
gross premium for the contract is re-
ceived.
(ii)Method of reporting gross premi-
ums written on policies covering fluctu-
ating risks.[Reserved]
(iii)Examples.The provisions of this
paragraph (a)(7) are illustrated by the
following examples:
Example 1.(i) IC is a nonlife insurance com-
pany which, pursuant to section 843, files its
returns on a calendar year basis. On July 1, 1998,
IC issues a fire insurance policy to A, an indi-
vidual. The policy provides coverage for a one-
year term beginning on July 1, 1998 and ending
on June 30, 1999. The premium provided in the
policy is $500, which may be paid either in full
on the policy effective date or in quarterly install-
ments of $125. A selects the installment payment
option. As of December 31, 1998, the policy
issued to A remains in force, and IC has collected
a total of $250 of installment premiums from A.
Assume IC has issued no other policies.
(ii) For the taxable year ending December 31,
1998, IC reports the $500 premium provided in
A’s policy in gross premiums written under section
832(b)(4)(A). IC also claims a reduction under
section 832(b)(4)(B) for 80% of the $250 of
unearned premiums ($200) associated with the
policy at the end of the taxable year.
Example 2.(i) The facts are the same as
Example1, except that the term of coverage for
the fire insurance policy issued to A begins on
January 1, 1999 and ends on December 31, 1999.
On December 15, 1998, IC receives $125 from A
and agrees to apply this amount as the first
premium installment due on the policy.
(ii) Under paragraph (a)(7)(i) of this section, IC
reports gross premiums written for the policy
issued to A for the taxable year in which the
advance premium is received. Thus, for the tax-
able year ending December 31, 1998, IC includes
$500 in its gross premiums written under section
832(b)(4)(A). IC also claims a reduction under
section 832(b)(4)(B) for 80% of the $500 of
unearned premiums ($400) associated with the
policy at the end of the taxable year.
(8)Effective date.Paragraphs (a)(3)
through (a)(7) of this section are appli-
cable with respect to the determination
of premiums earned for insurance con-
tracts issued or renewed during taxable
years beginning after the date on which
final regulations are published in the
Federal Register.
* * * * *
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 72)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Recomputation of Life Insurance
Reserves
REG–246018–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the defi-
nition of life insurance reserves. The
proposed regulations permit the taxpayer
or the IRS to recompute certain reserves
if those reserves were initially computed
or estimated on other than an actuarial
basis. The proposed regulations affect
both life insurance companies and prop-
erty and casualty insurance companies.
This document also contains a notice of
a public hearing on the proposed regula-
tions.
301997–8 I.R.B.

DATES: Written comments must be re-
ceived by April 2, 1997. Requests to
speak and outlines of oral comments to
be discussed at the public hearing
scheduled for Thursday, April 17, 1997,
at 10 a.m. must be received by Thurs-
day, March 27, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–246018–96),
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–246018–96), 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 Commission-
er’s conference room, room 3313, Inter-
nal Revenue Service Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Ann
Cammack, (202) 622–3970; concerning
submissions and the hearing, Evangelista
Lee, (202) 622–7190 (not toll-free num-
bers).
SUPPLEMENTARY INFORMATION:
Background
To qualify as a life insurance reserve
for purposes of Part I of subchapter L of
the Internal Revenue Code, a reserve
must satisfy various requirements, in-
cluding the requirement in section
816(b)(1)(A) and § 1.801–4(a)(1) that it
be ‘‘computed or estimated on the basis
of recognized mortality or morbidity
tables and assumed rates of interest.’’
Qualifying as a life reserve under sec-
tion 816(b) has various consequences.
Life reserves are included in the nu-
merator and denominator of the reserve
ratio test of section 816(a), which is
used to determine when an insurance
company is taxed as a life insurance
companyunder Part I of subchapter L.
Increases in life reserves as defined in
section 816(b) are taken into account
under section 807(c)(1). In addition, life
reserves as defined in section 816(b) are
considered part of a nonlife company’s
unearned premiums under section
832(b)(4).
Two circuits have construed former
section 801(b)(1)(A), which was recodi-
fied as section 816(b)(1)(A) in 1984, to
prevent reserves held with respect to
life, annuity or noncancellable accident
and health policies but not computed or
estimated using actuarial tables from
qualifying as life reserves. The IRS also
has held that life reserves must be
computed or estimated using actuarial
tables under former section 801(b)(1)-
(A).See e.g., Rev. Rul. 69–302 (1969–2
C.B. 186). The Claims Court, in con-
trast, has concluded that the statute and
regulation do not necessarily require the
insurance company to compute its life
reserves using actuarial tables, when a
different method results in reserves that
‘‘reasonably approximate’’ actuarial re-
serves.
Rev. Rul. 69–302 held that not only
were life reserves required to be com-
puted or estimated on the basis of
recognized mortality or morbidity tables
and assumed rates of interest, but that
reserves for credit life insurance con-
tracts could not be retroactively recom-
puted in a manner that would enable
them to qualify as life reserves. Neither
of the cases cited in Rev. Rul. 69–302,
however, addressed the question of
whether taxpayers or the Commissioner
could recompute reserves based on in-
formation that was available at the end
of the applicable taxable year. Two
subsequent cases came to opposite con-
clusions on this issue.
The reserve ratio test of section
816(a) was intended to distinguish be-
tween life and nonlife insurance compa-
nies based on the nature of each compa-
ny’s business, as measured by its
reserves. This purpose is not achieved,
however, if a company that only issues
life insurance, annuity or noncancellable
accident and health contracts can elect
to be taxed as a nonlife company by
failing to use mortality and morbidity
tables and assumed rates of interest in
computing or estimating its reserves for
some of those contracts.
Explanation of Provisions
Proposed § 1.801–4(g)(1) provides
that if an insurance company does not
compute or estimate its reserves for
certain contracts on the basis of mortal-
ity or morbidity tables and assumed
rates of interest, then the taxpayer or the
Commissioner may recompute those re-
serves on the basis of mortality or
morbidity tables and assumed rates of
interest. This regulation will apply to
reserves for contracts involving, at the
time with respect to which the reserves
are computed, life, accident or health
contingencies, if such reserves were not
initially computed in accordance with
the requirements of section 816(b)-
(1)(A).
Proposed § 1.801–4(g)(2) provides
that if the taxpayer or the Commissioner
recomputes reserves pursuant to
§ 1.801–4(g)(1), the reserves satisfy the
section 816(b)(1)(A) requirement that a
life reserve be computed or estimated
using actuarial tables and assumed rates
of interest. Assuming that these amounts
satisfy the other requirements of section
816(b), the recomputed amounts will be
considered life insurance reserves under
section 816(b), and the recomputed re-
serves will be included in both the
numerator and the denominator of the
reserve ratio test under section 816(a).
In addition, the reserves for such con-
tracts will be taken into account under
section 807(c)(1) and will be used to
compute a nonlife company’s unearned
premiums under section 832(b)(4).
Proposed § 1.801–4(g)(3) provides
that for purposes of section 816(b)(4)
and § 1.801–3(i), which provide that the
mean of the beginning and end of year
reserves will be used for purposes of
section 816(a), (b) and (c), the reserves
on a life insurance, annuity or
noncancellable accident and health con-
tract must be recomputed for both the
beginning and the end of the year.
Proposed § 1.801–4(g)(4) requires
that no information acquired after the
date as of which the beginning of year
reserves were initially computed or esti-
mated may be taken into account in
recomputing those reserves under para-
graph (g)(1). It also requires that no
information acquired after the date as of
which the end of year reserves were
initially computed or estimated may be
taken into account in recomputing those
reserves under paragraph (g)(1).
The IRS is considering whether to
issue guidance under section 816, in-
cluding regulations regarding the defini-
tion of ‘‘total reserves’’ under section
816(c) as well as redesignating and
revising the regulations issued under
prior law section 801. The IRS invites
comments on this matter.
Proposed Effective Date
Proposed § 1.801–4(g) would be ef-
fective with respect to returns filed for
taxable years beginning after the publi-
cation of the final regulations.
311997–8 I.R.B.

Effect on Other Documents
The IRS will modify, clarify, or obso-
lete publications as necessary to con-
form with this regulation as of the date
of publication in theFederal Register
of the final regulations.See e.g., Rev.
Rul. 69–302 (1969–2 C.B. 186). The
IRS solicits comments as to whether
other publications should be modified or
obsoleted.
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 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 Thursday, April 17, 1997 in the
Commissioner’s conference room, room
3313, Internal Revenue Service Building
at 10:00 a.m. Because of access restric-
tions, visitors will not be admitted be-
yond the Internal Revenue Building
lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by March 27, 1997
and submit an outline of the topics to be
discussed and the time to be devoted to
each topic (a signed original and 8
copies) by March 27, 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 this regulation
is Ann B. Cammack, Office of Assistant
Chief Counsel (Financial Institutions
and Products). However, 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 1.801–4 is amended
by adding a new paragraph (g) to read
as follows:
§ 1.801–4 Life insurance reserves.
* * * * *
(g)Recomputation of life insurance
reserves—(1)General.If an insurance
company does not compute or estimate
its reserves for contracts involving, at
the time with respect to which the
reserves are computed, life, accident or
health contingencies, on the basis of
mortality or morbidity tables and as-
sumed rates of interest, then the tax-
payer or the Commissioner may recom-
pute reserves for those contracts on the
basis of mortality or morbidity tables
and assumed rates of interest.
(2)Effect of recomputation.If re-
serves are recomputed pursuant to para-
graph (g)(1) of this section, the recom-
puted reserves satisfy the requirements
of section 816(b)(1)(A).
(3)Mean reserve.For purposes of
section 816(b)(4) and § 1.801–3(i), if
reserves are recomputed pursuant to
paragraph (g)(1) of this section for a
taxable year, the reserves must be re-
computed for both the beginning and the
end of the taxable year.
(4)Subsequently acquired informa-
tion.No information acquired after the
date as of which a reserve was initially
computed or estimated may be taken
into account in recomputing that reserve
under paragraph (g)(1) of this section.
(5)Effective date.This section is ap-
plicable with respect to returns filed for
taxable years beginning after the date
final regulations are filed with the Of-
fice of the Federal Register.
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 71)
Notice of Proposed Rulemaking
Requirement of Return and Time
for Filing
REG–247862–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary
regulations.
SUMMARY: In T.D. 8705, page 16, the
IRS is issuing regulations that provide
that disqualified persons and organiza-
tion managers liable for section 4958
excise taxes are required to file Form
4720. The regulations also specify the
filing date for returns for the period to
which the new excise taxes apply retro-
actively. The text of those temporary
regulations also serves as the text of
these proposed regulations.
DATES: Written comments must be re-
ceived by April 2, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–247862–96),
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–247862–96), 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 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.
FOR FURTHER INFORMATION CON-
TACT: Phyllis Haney, (202) 622–4290
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Final and temporary regulations in
T.D. 8705 amend the Foundation and
321997–8 I.R.B.

Similar Excise Taxes Regulations (26
CFR part 53) relating to sections 6011
and 6071. The final regulations contain
rules relating to the requirement of a
return to accompany payment of section
4958 excise taxes; the temporary regula-
tions prescribe the time for filing that
return.
The text of those temporary regula-
tions also serves as the text of these
proposed regulations. The preamble to
the temporary regulations explains the
temporary regulations.
These rules were first published in
Notice 96–46 (1996–39 I.R.B. 7) (Sep-
tember 23, 1996). The new section 4958
excise taxes were added by section 1311
of the Taxpayer Bill of Rights 2, Public
Law 104–168, 110 Stat. 1452, enacted
July 30, 1996.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and be-
cause the regulation does not impose a
collection of information on small enti-
ties, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursu-
ant to section 7805(f) of the Internal
Revenue Code, these temporary regula-
tions will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Comments and Request for 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 may be scheduled if requested
in writing by a person that timely
submits written comments. If a public
hearing is scheduled, notice of the date,
time, and place for the hearing will be
published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Phyllis Haney, Office of Associ-
ate Chief Counsel (Employee Benefits
and Exempt Organizations). However,
other personnel from the IRS and Trea-
sury Department participated in their
development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 53 is pro-
posed to be amended as follows:
PART 53—FOUNDATION AND SIMI-
LAR EXCISE TAXES
Paragraph 1. The authority citation for
part 53 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 2. Section 53.6071–1 is amended
by adding paragraph (f) to read as
follows:
§ 53.6071–1 Time for filing returns.
* * * * *
(f) [The text of paragraph (f) of this
section is the same as the text of
§ 53.6071–1T(f) published in T.D.
8705, page 16.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F. R. 84)
Notice of Proposed Rulemaking
Miscellaneous Sections Affected by
the Taxpayer Bill of Rights 2 and
the Personal Responsibility and
Work Opportunity Reconciliation
Act of 1996
REG–248770–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to joint
returns, property exempt from levy, in-
terest, penalties, offers in compromise,
and the awarding of costs and certain
fees. The proposed regulations reflect
changes to the law made by the Tax-
payer Bill of Rights 2 and a conforming
amendment made by the Personal Re-
sponsibility and Work Opportunity Rec-
onciliation Act of 1996. The proposed
regulations affect taxpayers with respect
to filing of returns, interest, penalties,
court costs, and payment, deposit, and
collection of taxes.
DATES: Written comments and requests
for a public hearing must be received by
April 2, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–248770–96),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
submissions may be hand delivered be-
tween the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–248770–96),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC. Finally, 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.
u s t r e a s . g o v / p r o d / t a x _ r e g s /
comments.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Beverly A. Baughman, (202) 622–4940
regarding joint returns and penalties;
Robert A. Miller, (202) 622–3640 re-
garding levy; Donna J. Welch, (202)
622–4910 regarding interest; Thomas D.
Moffitt, (202) 622–7900 regarding court
costs; and Kevin B. Connelly, (202)
622–3640 regarding compromises (not
toll-free numbers). Concerning submis-
sions, Evangelista Lee, (202) 622–7190
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507(d)). Comments on the collection of
information should be sent to theOffice
of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to theInternal Rev-
enue Service, Attn: IRS Reports Clear-
ance Officer, T:FP, Washington, DC
20224. Comments on the collection of
information should be received by
March 3, 1997. Comments are specifi-
cally requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have prac-
tical utility;
331997–8 I.R.B.

The accuracy of the estimated burden
associated with the proposed collection
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the
application of automated collection tech-
niques or other forms of information
technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information in this
proposed regulation is in § 301.7430–
2(c)(3)(i)(B). This information is re-
quired to obtain an award of reasonable
administrative costs. This information
will be used to determine if a taxpayer
is entitled to an award of reasonable
administrative costs. The collection of
information is required to obtain the
award. The likely respondents are indi-
viduals, business or other for-profit in-
stitutions, nonprofit institutions, and
small businesses or organizations.
Estimated total annual reporting bur-
den: 10 hours.
The estimated annual burden per re-
spondent: 15 minutes.
Estimated number of respondents: 38
Estimated annual frequency of re-
sponses: On occasion.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background
This document contains proposed
amendments to the Income Tax Regula-
tions and the Regulations on Procedure
and Administration (26 CFR parts 1 and
301, respectively) relating to joint re-
turns under section 6013, levy under
section 6334, interest under section
6601, the failure to file penalty under
section 6651, the failure to deposit pen-
alty under section 6656, compromise
under section 7122, and awards of costs
and certain fees under section 7430.
These sections were amended by the
Taxpayer Bill of Rights 2 (TBOR2)
(Pub. L. No. 104–168, 110 Stat. 1452
(1996)) and the Personal Responsibility
and Work Opportunity Reconciliation
Act of 1996 (Pub. L. No. 104–193, 110
Stat. 2105 (1996)). The changes made
by TBOR2 and the Personal Responsi-
bility and Work Opportunity Reconcilia-
tion Act of 1996 are reflected in the
proposed regulations.
Explanation of Provisions
Interest and Penalties
Section 6601 requires a taxpayer to
pay interest on late payments of tax.
However, sections 6601(e)(2) and
6601(e)(3) provide an interest-free pe-
riod if a taxpayer pays the tax due
within a certain number of days after
the date of the notice and demand for
payment. Sections 303(a) and 303(b)(1)
of TBOR2 amended sections 6601(e)(2)
and 6601(e)(3) to extend this interest-
free period. Therefore, § 301.6601–1(f)
of the proposed regulations extends the
interest-free period from 10 days to 21
calendar days after the date of the notice
and demand (10 business days if the
amount for which the notice and de-
mand is made equals or exceeds
$100,000) with respect to any notice and
demand made after December 31, 1996.
The proposed regulations also define
business day and calendar day for pur-
poses of § 301.6601–1(f).
Section 6651(a)(3) imposes a penalty
on any person who fails to pay the
amount of tax that is required to be
shown on a return but that is not so
shown. However, a penalty-free period
is provided if a taxpayer pays the tax
due within a certain number of days
after the date of the notice and demand
for payment. Section 303(b)(2) of
TBOR2 amended section 6651(a)(3) to
extend the penalty-free period. There-
fore, proposed § 301.6651–1(a)(3) ex-
tends the penalty-free period from 10
days to 21 calendar days after the date
of the notice and demand (10 business
days if the amount for which the notice
and demand is made equals or exceeds
$100,000) with respect to any notice and
demand made after December 31, 1996.
In addition, the proposed regulations
amend § 301.6651–1(a)(3) to conform
with changes made by section 1502(b)
of the Tax Reform Act of 1986 (Pub. L.
No. 99–514, 100 Stat. 2085 (1986)) to
repeal the special coordination rule un-
der section 6651(c)(1)(B).
Section 6651(a)(2) imposes a penalty
on any person who fails to pay the
amount of tax shown on a return by the
payment due date (including extensions).
Pursuant to section 6020(b), if a tax-
payer does not file a tax return, the
Secretary can make a substitute return
for the taxpayer. Prior to TBOR2, a
taxpayer with a substitute return was not
subject to a section 6651(a)(2) penalty
because the substitute return was not
treated as a return for purposes of the
penalty. See Rev. Rul. 76–562, 1976–2
C.B. 430. Section 1301 of TBOR2
amended section 6651 to apply the
section 6651(a)(2) failure to pay penalty
to returns prepared by the Secretary
pursuant to section 6020(b). Thus, for
returns due (determined without regard
to extensions) after July 30, 1996, pro-
posed § 301.6651–1(g) provides that a
taxpayer with a substitute return may be
subject to a failure to pay penalty under
section 6651(a)(2).
Section 6656 imposes a penalty for
failure to deposit taxes with a govern-
ment depository by the prescribed due
date. Section 304 of TBOR2 amended
section 6656 to provide exceptions to
the failure to deposit penalty for first
time depositors of employment taxes.
Accordingly, § 301.6656–3(a) of the
proposed regulations provides that in the
case of first time depositors of employ-
ment taxes, the Secretary will generally
waive the penalty for failure to deposit
if (1) the failure to deposit is inadvertent
based on all the facts and circumstances,
(2) the depositing entity meets certain
net worth requirements, (3) the failure to
deposit occurs during the first quarter
the depositing entity is required to de-
posit any employment tax, and (4) the
return for the employment tax is filed
on time.
In addition, proposed § 301.6656–
3(b) provides that the Secretary may
abate any penalty for failure to make
deposits if the first time a depositor is
required to make a deposit, the amount
required to be deposited is inadvertently
sent to the Secretary instead of to the
appropriate government depository. Pro-
posed § 301.6656–3 applies to deposits
required to be made after July 30, 1996.
Joint Returns
Prior to TBOR2, married individuals
making an election under section
6013(b) to file a joint return after filing
a separate return for the same taxable
year were required to pay the full
amount of the tax shown on the joint
return at or before the time of filing the
341997–8 I.R.B.

joint return. With respect to taxable
years beginning after July 30, 1996,
section 402 of TBOR2 amended section
6013(b) to permit married individuals
who previously filed separate returns to
file joint returns for the same taxable
year without paying the full amount of
tax shown on the joint return. Accord-
ingly, § 1.6013–2(b)(1) of the proposed
regulations provides that the full pay-
ment requirement applies only to taxable
years beginning on or before July 30,
1996.
Levy and Compromise
Section 6334 lists the items of prop-
erty that are exempt from levy by the
IRS. Section 502 of TBOR2 amended
section 6334 to (1) increase the dollar
amount exempt from levy under section
6334(a)(2) and provide that this exemp-
tion amount applies to all taxpayers, not
just heads of a family; (2) increase the
dollar amount exempt from levy under
section 6334(a)(3); and (3) provide a
yearly inflation adjustment for the dollar
amounts exempt from levy. In addition,
section 110(l)(6) of the Personal Re-
sponsibility and Work Opportunity Rec-
onciliation Act of 1996, in a conforming
amendment, amended section 6334(a)-
(11)(A) to delete the language ‘‘(relating
to aid to families with dependent chil-
dren)’’.
Accordingly, § 301.6334–1(a)(2) of
the proposed regulations increases from
$1,650 ($1,550 in the case of levies
issued during 1989) to $2,500 the
amount exempt from levy for fuel, pro-
visions, furniture, and personal effects,
and makes this exemption applicable to
all taxpayers, not just taxpayers who are
heads of a family. The proposed regula-
tions also increase from $1,100 ($1,050
in the case of levies issued during 1989)
to $1,250 the amount exempt from levy
for books and tools of a trade, business,
or profession. These changes are effec-
tive with respect to levies issued after
December 31, 1996. In addition, for
calendar years beginning after 1997,
§ 301.6334–1(e) of the proposed regula-
tions provides an inflation adjustment
for the exemption amounts described
above and for rounding to the nearest
multiple of $10.
Prior to the enactment of TBOR2,
section 7122(b) required the General
Counsel of the Treasury or his delegate
to file an opinion with the Secretary
whenever the Secretary compromised a
case, unless the compromise involved a
civil case in which the unpaid amount
of the tax assessed (including any inter-
est, additional amount, addition to the
tax, or assessable penalty) was less than
$500. Effective July 30, 1996, section
503 of TBOR2 amended section 7122 to
raise the dollar threshold for mandatory
review of compromises of civil cases by
the General Counsel of the Department
of Treasury or his delegate from $500 to
$50,000. Accordingly, § 301.7122–1(e)
of the proposed regulations provides that
for compromises accepted on or after
July 30, 1996, no opinion is required if
the unpaid amount of tax is less than
$50,000.
Awarding of Costs and Certain Fees
In general, under section 7430 a pre-
vailing party may recover the reasonable
administrative or litigation costs in-
curred in an administrative or a civil
proceeding if the proceeding relates to
the determination, collection, or refund
of any tax, interest, or penalty. Prior to
TBOR2, the taxpayer had the burden of
proving that the position of the United
States was not substantially justified.
Section 701 of TBOR2 amended section
7430(c)(4) to place on the government
the burden of proving that the position
of the United States is substantially
justified. Under TBOR2, the position of
the government will be presumed not to
be substantially justified if the IRS did
not follow its applicable published guid-
ance. Section 701 defines applicable
published guidance.
The proposed regulations reflect these
changes. Further, § 301.7430–5(c)(3) of
the proposed regulations clarifies that in
the definition of applicable published
guidance, ‘‘regulations’’ means final and
temporary regulations. The proposed
regulations also clarify the period during
which and the issues upon which the
position of the United States is pre-
sumed to be not substantially justified.
Section 702 of TBOR2 amended sec-
tion 7430(c)(1) to increase the allowable
hourly rate of an award of attorney’s
fees and provide for a yearly inflation
adjustment and rounding. Sections
301.7430–2 and 301.7430–4 of the pro-
posed regulations reflect these changes.
Finally, section 703 of TBOR2
amended section 7430(b)(1) to clarify
that any failure to agree to an extension
of the statute of limitations will not
affect the determination of whether a
taxpayer has exhausted administrative
remedies as a prerequisite to recovery of
attorney’s fees. Although this is consis-
tent with an example in the prior regula-
tions (Example 4, § 301.7430–1(f)), the
proposed regulations add § 301.7430–
1(b)(4) to reflect the statutory language.
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 is hereby certi-
fied that the regulations in this docu-
ment will not have a significant
economic impact on a substantial num-
ber of small entities. This certification is
based on a determination that in the past
only an average of 38 taxpayers per
year, the majority of whom were indi-
viduals, have filed a request to recover
administrative costs. Accordingly, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required.
Pursuant to section 7805(f) of the In-
ternal Revenue Code, this notice of
proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small busi-
ness.
Comments and Requests for a 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) or electronic comments that are
submitted timely to the IRS. All com-
ments will be available for public in-
spection and copying. A public hearing
may be scheduled if requested in writing
by any person that timely submits writ-
ten comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published
in theFederal Register.
Drafting Information
The principal authors of these regula-
tions are Beverly A. Baughman and
Donna J. Welch, Office of Assistant
Chief Counsel (Income Tax and Ac-
counting), Robert A. Miller and Kevin
B. Connelly, Office of Assistant Chief
Counsel (General Litigation), and Tho-
mas D. Moffitt, Office of Assistant
Chief Counsel (Field Service). However,
other personnel from the IRS and Trea-
sury Department participated in their
development.
* * * * *
351997–8 I.R.B.

Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6013–2(b)(1) is
amended by removing the language
‘‘Unless’’ and adding ‘‘Beginning on or
before July 30, 1996, unless’’ in its
place.
PART 301—PROCEDURE AND AD-
MINISTRATION
Par. 3. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 301.6334–1 is
amended by:
1. Revising paragraph (a)(2).
2. Removing the language ‘‘$1,100
($1,050 for levies issued prior to Janu-
ary 1, 1990)’’ from paragraph (a)(3) and
adding ‘‘$1,250’’ in its place.
3. Removing the language ‘‘(relating
to aid to families with dependent chil-
dren)’’ from paragraph (a)(11)(i).
4. Redesignating paragraph (e) as
paragraph (f) and adding a new para-
graph (e).
5. Revising newly designated para-
graph (f).
The additions and revisions read as
follows:
§ 301.6334–1 Property exempt from
levy.
(a) * * *
(2)Fuel, provisions, furniture, and
personal effects.So much of the fuel,
provisions, furniture, and personal ef-
fects in the taxpayer’s household, and of
the arms for personal use, livestock, and
poultry of the taxpayer, that does not
exceed $2,500 in value.
* * * * *
(e)Inflation adjustment.For any
calendar year beginning after December
31, 1997, each dollar amount referred to
in paragraphs (a)(2) and (a)(3) of this
section will be increased by an amount
equal to the dollar amount multiplied by
the cost-of-living adjustment determined
under section 1(f)(3) for the calendar
year (substituting ‘‘calendar year 1996’’
for ‘‘calendar year 1992’’ in section
1(f)(3)(B)). If any dollar amount as
adjusted is not a multiple of $10, the
dollar amount will be rounded to the
nearest multiple of $10 (rounding up if
the amount is a multiple of $5).
(f)Effective date.Generally, these
provisions are effective with respect to
levies made on or after July 1, 1989.
However, any reasonable attempt by a
taxpayer to comply with the statutory
amendments addressed by the regula-
tions in this section prior to February
21, 1995, will be considered as meeting
the requirements of the regulations in
this section. In addition, paragraphs
(a)(2), (a)(3), (a)(11)(i) and (e) of this
section are applicable with respect to
levies issued after December 31, 1996.
Par. 5. Section 301.6601–1 is
amended by:
1. Revising paragraphs (f)(3) and
(f)(4).
2. Redesignating paragraph (f)(5) as
paragraph (f)(6) and adding new para-
graph (f)(5).
The additions and revisions read as
follows:
§ 301.6601–1 Interest on underpay-
ments.
* * * * *
(f) * * *
(3) Interest will not be imposed on
any assessable penalty, addition to the
tax, or additional amount if the amount
is paid within 21 calendar days (10
business days if the amount stated in the
notice and demand equals or exceeds
$100,000) from the date of the notice
and demand. If interest is imposed, it
will be imposed only for the period
from the date of the notice and demand
to the date on which payment is re-
ceived. This paragraph (f)(3) is appli-
cable with respect to any notice and
demand made after December 31, 1996.
(4) If notice and demand is made
after December 31, 1996, for any
amount and the amount is paid within
21 calendar days (10 business days if
the amount equals or exceeds $100,000)
from the date of the notice and demand,
interest will not be imposed for the
period after the date of the notice and
demand.
(5) For purposes of paragraphs (f)(3)
and (f)(4) of this section—
(i) The termbusiness daymeans any
day other than a Saturday, Sunday, legal
holiday in the District of Columbia, or a
statewide legal holiday in the state
where the taxpayer resides or where the
taxpayer’s principal place of business is
located. With respect to the tenth busi-
ness day (after taking into account the
first sentence of this paragraph (f)(5)(i)),
see section 7503 relating to time for
performance of acts where the last day
falls on a statewide legal holiday in the
state where the act is required to be
performed.
(ii) The termcalendar daymeans any
day. With respect to the twenty-first
calendar day, see section 7503 relating
to time for performance of acts where
the last day falls on a Saturday, Sunday,
or legal holiday.
* * * * *
Par. 6. Section 301.6651–1 is
amended by:
1. Revising paragraph (a)(3).
2. Adding paragraph (g).
The additions and revisions read as
follows:
§ 301.6651–1 Failure to file tax return
or to pay tax.
(a) * * *
(3)Failure to pay tax not shown on
return.In the case of failure to pay any
amount of any tax required to be shown
on a return specified in paragraph (a)(1)
of this section that is not so shown
(including an assessment made pursuant
to section 6213(b)) within 21 calendar
days from the date of the notice and
demand (10 business days if the amount
for which the notice and demand is
made equals or exceeds $100,000) with
respect to any notice and demand made
after December 31, 1996, there will be
added to the amount stated in the notice
and demand the amount specified below
unless the failure to pay the tax within
the prescribed time is shown to the
satisfaction of the district director or the
director of the service center to be due
to reasonable cause and not to willful
neglect. The amount added to the tax is
0.5 percent of the amount stated in the
notice and demand if the failure is for
not more than 1 month, with an addi-
tional 0.5 percent for each additional
month or fraction thereof during which
the failure continues, but not to exceed
25 percent in the aggregate.
* * * * *
(g)Treatment of returns prepared by
the Secretary—(1)In general.A return
prepared by the Secretary under section
6020(b) will be disregarded for purposes
of determining the amount of the addi-
tion to tax for failure to file any return
pursuant to paragraph (a)(1) of this
section. However, the return prepared by
the Secretary will be treated as a return
filed by the taxpayer for purposes of
determining the amount of the addition
to tax for failure to pay the tax shown
361997–8 I.R.B.

on any return and for failure to pay the
tax required to be shown on a return
that is not so shown pursuant to para-
graphs (a)(2) and (a)(3) of this section,
respectively.
(2)Effective date.This paragraph (g)
applies to returns the due date for which
(determined without regard to exten-
sions) is after July 30, 1996.
Par. 7. Section 301.6656–3 is added
to read as follows:
§ 301.6656–3 Abatement of penalty.
(a)Exception for first time depositors
of employment taxes—(1)Waiver.The
Secretary will generally waive the pen-
alty imposed by section 6656(a) on a
person’s failure to deposit any employ-
ment tax under subtitle C of the Internal
Revenue Code if—
(i) The failure is inadvertent;
(ii) The person meets the require-
ments referred to in section
7430(c)(4)(A)(ii) (relating to the net
worth requirements applicable for
awards of attorney’s fees);
(iii) The failure occurs during the
first quarter that the person is required
to deposit any employment tax; and
(iv) The return of the tax is filed on
or before the due date.
(2)Inadvertent failure.For purposes
of paragraph (a)(1)(i) of this section, the
Secretary will determine if a failure to
deposit is inadvertent based on all the
facts and circumstances.
(b)Deposit sent to Secretary.The
Secretary may abate the penalty im-
posed by section 6656(a) if the first
time a depositor is required to make a
deposit, the amount required to be de-
posited is inadvertently sent to the Sec-
retary instead of to the appropriate gov-
ernment depository.
(c)Effective date.This section ap-
plies to deposits required to be made
after July 30, 1996.
Par. 8. Paragraph (e) of § 301.7122–1
is revised to read as follows:
§ 301.7122–1 Compromises.
* * * * *
(e)Record—(1)In general.If an of-
fer in compromise is accepted, there will
be placed on file the opinion of the
Chief Counsel of the IRS with respect
to the compromise, with the reasons for
the opinion, and including a statement
of—
(i) The amount of tax assessed;
(ii) The amount of interest, additional
amount, addition to the tax, or assess-
able penalty, imposed by law on the
person against whom the tax is assessed;
and
(iii) The amount actually paid in ac-
cordance with the terms of the compro-
mise.
(2)Exception.For compromises ac-
cepted on or after July 30, 1996, no
opinion will be required with respect to
the compromise of any civil case in
which the unpaid amount of tax as-
sessed (including any interest, additional
amount, addition to the tax, or assess-
able penalty) is less than $50,000. How-
ever, the compromise will be subject to
continuing quality review by the Secre-
tary.
* * * * *
Par 9. Section 301.7430–0 is amended
by:
1. Adding under the heading
§ 301.7430–1, a caption (b)(4) to read
‘‘(4) Failure to agree to extension of
time for assessments.’’.
2. Adding under the heading
§ 301.7430–5, a caption (c)(3) to read
‘‘(3) Presumption.’’.
Par. 10. Section 301.7430–1 is
amended by adding paragraph (b)(4) to
read as follows:
§ 301.7430–1 Exhaustion of adminis-
trative remedies.
* * * * *
(b) * * *
(4)Failure to agree to extension of
time for assessments.Any failure by the
prevailing party to agree to an extension
of the time for the assessment of any
tax will not be taken into account for
purposes of determining whether the
prevailing party has exhausted the ad-
ministrative remedies available to the
party within the IRS.
* * * * *
Par. 11. Section 301.7430–2 is
amended by:
1. Removingthelanguage
‘‘7430(c)(4)(B)(ii)’’ from the third sen-
tence of paragraph (b)(2) and adding
‘‘7430(c)(4)(C)(ii)’’ in its place.
2. Revising paragraph (c)(3)(i)(B).
3. Removing the language ‘‘If more
than $75’’ from paragraph (c)(3)(ii)(C)
and adding ‘‘In the case of administra-
tive proceedings commenced after July
30, 1996, if more than $110’’ in its
place.
The revision reads as follows:
§ 301.7430–2 Requirements and proce-
dures for recovery of reasonable admin-
istrative costs.
* * * * *
(c) * * *
(3) * * *
(i) * * *
(B) A clear and concise statement of
the reasons why the taxpayer alleges
that the position of the IRS in the
administrative proceeding was not sub-
stantially justified. For administrative
proceedings commenced after July 30,
1996, if the taxpayer alleges that the
IRS did not follow any applicable pub-
lished guidance, the statement must
identify all applicable published guid-
ance that the taxpayer alleges that the
IRS did not follow. For purposes of this
paragraph (c)(3)(i)(B), the termappli-
cable published guidancemeans final or
temporary regulations, revenue rulings,
revenue procedures, information re-
leases, notices, announcements, and, if
issued to the taxpayer, private letter
rulings, technical advice memoranda,
and determination letters. Also, for pur-
poses of this paragraph (c)(3)(i)(B), the
termadministrative proceedingincludes
only those administrative proceedings or
portions of administrative proceedings
occurring on or after the administrative
proceeding date as defined in
§ 301.7430–3(c).
* * * * *
Par. 12. Section 301.7430–4 is
amended by:
1. Removing the language ‘‘$75’’
from paragraph (b)(3)(i) and adding
‘‘, in the case of proceedings com-
menced after July 30, 1996, $110’’ in its
place.
2. Revising paragraph (b)(3)(ii).
3. Removing the language ‘‘$75’’
from the first, second, and third sen-
tences of paragraph (b)(3)(iii)(B) and
adding ‘‘$110’’ in its place.
4. Removing the language ‘‘$75’’
from paragraph (b)(3)(iii)(C) and adding
‘‘$110’’ in its place.
5. Removing the language ‘‘$75’’
from the third sentence of the example
in paragraph (b)(3)(iii)(D) and adding
‘‘$110’’ in its place.
6. Removing the language ‘‘$75’’
from the second and third sentences of
paragraph (c)(2)(ii) and adding ‘‘$110’’
in its place.
The revision reads as follows:
§ 301.7430–4 Reasonable administra-
tive costs.
* * * * *
(b) * * *
371997–8 I.R.B.

(3) * * *
(ii)Cost of living adjustment.The
IRS will make a cost of living adjust-
ment to the $110 per hour limitation for
fees incurred in any calendar year be-
ginning after December 31, 1996. The
cost of living adjustment will be an
amount equal to $110 multiplied by the
cost-of-living adjustment determined un-
der section 1(f)(3) for the calendar year
(substituting ‘‘calendar year 1995’’ for
‘‘calendar year 1992’’ in section
1(f)(3)(B)). If the dollar limitation as
adjusted by this cost-of-living increase
is not a multiple of $10, the dollar
amount will be rounded to the nearest
multiple of $10 (rounding up if the
amount is a multiple of $5).
* * * * *
Par. 13. Section 301.7430–5 is
amended by:
1. Revising paragraph (a).
2. Adding paragraph (c)(3).
The addition and revision read as
follows:
§ 301.7430–5 Prevailing party.
(a)In general.For purposes of an
award of reasonable administrative costs
under section 7430 in the case of ad-
ministrative proceedings commenced af-
ter July 30, 1996, a taxpayer is a
prevailing party only if—
(1) The position of the IRS was not
substantially justified;
(2) The taxpayer substantially pre-
vails as to the amount in controversy or
with respect to the most significant issue
or set of issues presented; and
(3) The taxpayer satisfies the net
worth and size limitations referenced in
paragraph (f) of this section.
* * * * *
(c) * * *
(3)Presumption.If the IRS did not
follow any applicable published guid-
ance in an administrative proceeding
commenced after July 30, 1996, the
position of the IRS, on those issues to
which the guidance applies and for all
periods during which the guidance was
not followed, will be presumed not to be
substantially justified. This presumption
may be rebutted. For purposes of this
paragraph (c)(3), the termapplicable
published guidancemeans final or tem-
porary regulations, revenue rulings, rev-
enue procedures, information releases,
notices, announcements, and, if issued to
the taxpayer, private letter rulings, tech-
nical advice memoranda, and determina-
tion letters. Also, for purposes of this
paragraph (c)(3), the termadministrative
proceedingincludes only those adminis-
trative proceedings or portions of ad-
ministrative proceedings occurring on or
after the administrative proceeding date
as defined in § 301.7430–3(c).
* * * * *
Par. 14. Section 301.7430–6 is re-
vised to read as follows:
§ 301.7430–6 Effective date.
Sections 301.7430–2 through 301.7430–
6, other than §§ 301.7430–2(b)(2),
(c)(3)(i)(B), (c)(3)(ii)(C), and (c)(5);
§§ 301.7430–4(b)(3)(i), (b)(3)(ii), (b)-
(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D),
and (c)(2)(ii); and §§ 301.7430–5(a) and
(c)(3), apply to claims for reasonable
administrative costs filed with the IRS
after December 23, 1992, with respect
to costs incurred in administrative pro-
ceedings commenced after November
10, 1988. Section 301.7430–2(c)(5) is
applicable March 23, 1993. Sec-
tion 301.7430–0, §§ 301.7430–2(b)-
(2), (c)(3)(i)(B), and (c)(3)(ii)(C);
§§ 301.7430–4(b)(3)(i), (b)(3)(ii), (b)-
(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)-
(D), and (c)(2)(ii); and §§ 301.7430–
5(a) and (c)(3) are applicable for admin-
istrative proceedings commenced after
July 30, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
December 31, 1996, 8:45 a.m., and published in
the issue of the Federal Register for January 2,
1997, 62 F.R. 77)
Deletions From Cumulative List of
Organizations Contributions to
Which Are Deductible Under
Section 170 of the Code
Announcement 97-13
The name of an organization that no
longer qualifies as 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 February 24, 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.
A Taste of Orange County, Inc., Irvine,
CA
Foundations Status of Certain
Organizations
Announcement 97–14
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:
Aikanes O Hawaii Inc., Tampa, FL
Armi Housing Corporation, New York,
NY
Chimes for Charity Inc., Union City, TN
Chittenden County Senior Citizens
Alliance Inc., Burlington, VT
381997–8 I.R.B.

Clifford L. Williams Memorial
Foundation, Jena, LA
CNCA Foundation, Grand Island, NE
Commission on Interprofessional
Education and Practice Inc.,
Columbus, OH
Concerned Citizens for Better Health
Care, Carrollton, IL
Cornelius R. Coffey Aviation Education
Foundation, Chicago, IL
Dixon Foundation, Dallas, TX
Dynamic Adventures, Nine Miles Falls,
WA
Educational Charities Corporation,
Chicago, IL
Educational Fund of the Bar Association
of McCracken County Kentucky, Inc.,
Paducah, KY
Emmaus Counseling Center, Springfield,
IL
Employment and Training Service
Providers Association, Chicago, IL
First United Methodist Church
Foundation, Anchorage, AK
Florida Education and Research
Foundation Inc., Palm Bay, FL
Foundation for Birmingham Senior
Residents, Birmingham, MI
Foundation for the Education of Future
Machinist, Northfield, IL
Friends of Ogden School Inc., Chicago,
IL
Genesis Project Industrial Magnate
School, Chicago, IL
Genetics Institute Research and
Education Foundation, Pasadena, CA
Help at Home Services, Inc., Chicago,
IL
Heritage Dance Foundation Inc.,
Goldsboro, NC
Ignatius De Cicco Veterans Charitable
Trust, Albuquerque, NM
Illinois Junior Golf Association, Golf, IL
Illinois Pediatric Brain Injury Resource
Center, Algonquin, IL
Independent Relation Organization,
Chicago, IL
In Focus Productions Inc., Evanston, IL
International Cinema Museum,
Glenview, IL
Iranian American Society, Chicago, IL
Jackson Park Golfers Association,
Chicago, IL
Jubilee Foundation Inc., Reedsburg, WI
Juvenile Charities Foundation, Chicago,
IL
Kids Say No Foundation, Elk Grove
Village, IL
Law Enforcement Racers Against Drugs
LERAD, Las Vegas, NV
Learning Logic Foundation, Chicago, IL
L H Geddes Memorial Fund, Rockford,
IL
Lift Up Our Heart Charitable Trust,
Leawood, KS
Little Village Community Corporation,
Chicago, IL
Love Inc. of Greater Rockford,
Rockford, IL
Maywood Phoenix Homes Inc.,
Indianapolis, IN
M B Fund, Chicago, IL
Midwest Migrant Health Consortium,
Chicago, IL
Monroe Foundation, Chicago, IL
MSAA Accessible Housing for the
Handicapped, Inc., Oaklyn, NJ
MSAA Housing for Independent Living,
Inc., Oaklyn, NJ
MSAA Housing for the Disabled, Inc.,
Oaklyn, NJ
National Industrial Belting Association
Scholarship Fund, Brookfield, WI
NBC-USA Housing Inc., Thirteenth,
Newark, OH
New Hope Multi Service Agency, Inc.,
New York, NY
No. Seven Township Rescue Squad Inc.,
New Bern, NC
Operation Christmas of Romeoville,
Romeoville, IL
Paradise Haven Outreach Inc., Los
Angeles, CA
Parent for a Manitowoc Teen Center
Inc., Manitowoc, WI
Phoenix Lodge Inc., Rockford, IL
Portsmouth Development Corporation,
Portsmouth, VA
Project Noahs Ark Foundation, Beverly
Hills, CA
PVC Trust Fund, Ann Arbor, MI
Restaurants United To Serve the
Homeless, Inc., Louisville, KY
Safe Haven Incorporated, Sacramento,
CA
S Avenue Big Brothers Inc., Riviera
Beach, FL
Senior Care Recreation Center Inc.,
Indianapolis, IN
Sian Ka An Biosphere Foundation,
Minneapolis, MN
Sigma Pi Fraternity Educational Fund of
San Diego Inc., San Diego, CA
Silk for Life Project, Inc., Milwaukee,
WI
Sind Medical Association of North
America, Milwaukee, WI
Society of Noise Reductionists Inc., St.
Paul, MN
Solid Rock Ministries Inc., Maplewood,
MN
Solu Foundation for Community
Development, St. Paul, MN
South Asian Ministries LTD, Greenfield,
WI
St. Cloud Area Golden Gloves Inc.,
Sauk Rapids, MN
St. Luke Residential Health Care
Facility, Inc., Oswego, NY
Thief River Falls Technical College
Foundation, Thief River Falls, MN
30th Street Industrial Corridor Corp.
Inc., Milwaukee, WI
Towing Operators Working To Eliminate
Drunk Driving, Champlin, MN
United Community Foundation Inc.,
Janesville, WI
United Soccer Club of West Bend Inc.,
West Bend, WI
Up and Out of Poverty-Minnesota,
Minneapolis, MN
Voiceprint, St. Paul, MN
Western North Carolina Sports, Inc.,
Asheville, NC
White Bear Lake Basketball Association,
Minneapolis, MN
Wings as Eagle Mission Air Service
Inc., Nevis, MN
Wisconsin Association of Nutrition
Directors Inc., Hayward, WI
Wisconsin Geriatrics Society Inc.,
Madison, WI
Wisconsin Mortgage Bankers Education
Foundation Inc., Madison, WI
Worlds Largest Snowmobile Museum,
Eden Valley, MN
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 founda-
tion status in the Internal Revenue Bul-
letin.
391997–8 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 Section 330, Title 31 of the
United States Code, the Secretary of the
Treasury, after due notice and opportu-
nity for hearing, is authorized to sus-
pend or disbar from practice before the
Internal Revenue Service any person
who has violated the rules and regula-
tions governing the recognition of attor-
neys, certified public accountants, en-
rolled agents or enrolled actuaries to
practice before the Internal Revenue
Service.
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 under suspension from practice be-
fore the Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify such dis-
barred or suspended practitioners, the
Director of Practice will announce in the
Internal Revenue Bulletin the names and
addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent, or enrolled
actuary, and date of disbarment or pe-
riod of suspension. This announcement
will appear in the weekly Bulletin for
five successive weeks or as long as it is
practicable for each attorney, certified
public accountant, enrolled agent, or
enrolled actuary so suspended or dis-
barred and will be consolidated and
published in the Cumulative Bulletin.
After due notice and opportunity for
hearing before an administrative law
judge, the following individuals have
been disbarred from further practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Noske, Joan MarieBismarck, NDCPASeptember 7, 1996
Dalrymple, John K.Troy, MICPASeptember 26, 1996
40

Numerical Finding List
1
Bulletin 1997–1 through 1997–7
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
97–11, 1997–6 I.R.B.19
97–12, 1997–7 I.R.B.55
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
Proposed Regulations:
REG–209040–88, 1997–7 I.R.B.34
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–247678–96, 1997–6 I.R.B.17
REG–249819–96, 1997–7 I.R.B.50
REG–252231–96, 1997–7 I.R.B.52
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
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
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
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
8707, 1997–7 I.R.B.17
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.
41

Finding List of Current Action on
Previously Published Items
1
Bulletin 1997–1 through 1997–7
*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
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
Revenue Rulings—Continued
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.
42