Internal Revenue bulletin - IRS tax forms

INCOME TAX

Rev. Rul. 99–10, page 10.Insurance companies; interest rate tables. Prevailingstate assumed interest rates are provided for the determina-tion of reserves under section 807 of the Code for contractsissued in 1998 and 1999. Rev. Rul. 92–19 supplemented inpart.

Rev. Rul. 99–11, page 18.Determination of issue price in the case of certaindebt instruments issued for property. This ruling pro-vides various prescribed rates for federal income tax pur-poses for March 1999.

Rev. Rul. 99–13, page 4.Election in respect of losses attributable to a disaster.This ruling lists the areas declared by the President to qualifyas major disaster areas during 1998 under the Disaster Re-lief and Emergency Assistance Act.

T.D. 8808, page 21.REG–106564–98, page 53.Temporary, proposed, and final regulations under sections6221 through 6233 of the Code relate to the unified part-nership audit procedure added to the Code by the Tax Equityand Fiscal Responsibility Act of 1982 (TEFRA). A public hear-ing is scheduled for April 14, 1999.

T.D. 8811, page 19.REG–121806–97, page 46.Temporary, proposed, and final regulations under section6103 of the Code relate to additions to, and deletions from,the list of items of information disclosed to the Bureau of theCensus for use in certain statistical programs.

EXEMPT ORGANIZATIONSAnnouncement 99–19, page 63.A list is given of organizations now classified as private foun-dations.

ADMINISTRATIVE

Notice 99–13, page 26.The “differential earnings rate” under section 809 of theCode is tentatively determined for 1998 together with the“recomputed differential rate” for 1997.

REG–209619–93, page 28.Proposed regulations under section 468 of the Code relateto the designation of the person required to report the in-come earned on qualified settlement funds and certain otherfunds, trusts, and escrow accounts, and other related rules.A public hearing is scheduled for May 12, 1999.

REG–116826–97, page 40.Proposed regulations under section 221 of the Code relateto the deduction for interest paid on qualified educationloans. The service will publish the time and date of the publichearing in an announcement in the Federal Register.

REG–104924–98, page 47.Proposed regulations under section 475 of the Code are setforth for dealers in commodities and traders in securities orcommodities regarding the election to use the mark-to-mar-ket method of accounting for their businesses. A publichearing is scheduled for June 3, 1999.

REG–110524–98, page 55.Proposed amendments to the regulations under section 453of the Code relate to the taxation of capital gains on install-ment sales of depreciable real property.

REG–113744–98, page 59.Proposed regulations under section 1296 of the Code relateto the new mark-to-market election for stock of a passiveforeign investment company (PFIC).

Internal Revenue

bbuulllleettiinnBulletin No. 1999–10

March 8, 1999

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page 66.

Mission of the Service

Provide America’s taxpayers top quality service by help-ing them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness toall.

2

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents of a permanent nature are consoli-dated semiannually into Cumulative Bulletins, which are soldon a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof 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 RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemakingand the disbarment and suspension list included in this part,none of these announcements are consolidated in the Cumu-lative Bulletins.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a quarterly andsemiannual basis, and are published in the first Bulletin of thesucceeding quarterly and semiannual period, respectively.

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Introduction

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, DC 20402.

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof March 1999. See Rev. Rul. 99–11, page 18.

Section 165.—Losses

26 CFR 1.165–11: Election in respect of lossesattributable to a disaster.

Insurance companies; interest ratetables. Prevailing state assumed interestrates are provided for the determination ofthe reserves under section 807 of the Codefor contracts issued in 1998 and 1999.Rev. Rul. 92–19 supplemented in part.

Rev. Rul. 99–13Under § 165(i) of the Internal Revenue

Code, if a taxpayer suffers a loss attribut-able to a disaster occurring in an area sub-sequently determined by the President of

the United States to warrant assistance bythe Federal Government under the Disas-ter Relief and Emergency Assistance Act,42 U.S.C. §§ 5121–5204c (1988 & Supp.V 1993) (the Act), the taxpayer may electto claim a deduction for that loss on thetaxpayer’s federal income tax return forthe taxable year immediately precedingthe taxable year in which the disaster occurred.

Section 1.165–11(e) of the Income TaxRegulations provides that the election todeduct a disaster loss for the precedingyear must be made by filing a return, anamended return, or a claim for refund onor before the later of (1) the due date ofthe taxpayer’s income tax return (deter-mined without regard to any extension oftime to file the return) for the taxable yearin which the disaster actually occurred, or(2) the due date of the taxpayer’s incometax return (determined with regard to anyextension of time to file the return) for thetaxable year immediately preceding the

taxable year in which the disaster actuallyoccurred.

The provisions of § 165(i) apply onlyto losses that are otherwise deductibleunder § 165(a). An individual taxpayermay deduct losses if they are incurred in atrade or business, if they are incurred in atransaction entered into for profit, or ifthey are casualty losses under § 165(c)(3).

The President has determined that dur-ing 1998 the areas listed below have beenadversely affected by disasters of suffi-cient severity and magnitude to warrantassistance by the Federal Governmentunder the Act.

DRAFTING INFORMATION

The principal author of this revenueruling is Timothy Sheppard of the Officeof Assistant Chief Counsel (Income Taxand Accounting). For further informationregarding this revenue ruling, contact Mr.Sheppard on (202) 622-4960 (not a toll-free call).

March 8, 1999 4 1999–10 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Disaster Areas Type of Date ofin 1998 Disaster Disaster

AlabamaCounties of Barbour, Butler, Coffee, Conecuh, Covington, Severe storms March 7-21, 1998Crenshaw, Dale, Escambia, Geneva, Henry, Houston, and and floodingRandolph

Counties of Covington, Cullman, Jefferson, St. Clair, Tuscaloosa, Severe storms April 8-20, 1998and Walke and tornadoes

Counties of Baldwin, Butler, Choctaw, Clarke, Coffee, Conecuh, Hurricane September 25-Covington, Crenshaw, Escambia, Geneva, Lowndes, Mobile, Georges October 6, 1998Monroe, and Washington

CaliforniaCounties of Alameda, Amador, Butte, Calaveras, Colusa, Severe winter February 2-Contra Costa, Del Norte, Fresno, Glenn, Humboldt, Kern, Lake, storms and April 30, 1998Los Angeles, Marin, Mendocino, Merced, Monterey, Napa, Orange, floodingRiverside, Sacramento, San Benito, San Bernadino, San Diego,

San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Ventura, Yolo, and Yuba

DelawareCounty of Sussex Severe winter January 28-

storms, high winds, February 6, 1998and flooding

FloridaCounties of Alachua, Baker, Bay, Bradford, Brevard, Severe storms, December 25, 1997-Broward, Calhoun, Citrus, Clay, Collier, Columbia, DeSoto, high winds, tornadoes, April 24, 1998Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist, and floodingGlades, Gulf, Hamilton, Hardee, Hernando, Highlands, Hillsborough, Holmes, Jackson, Lafayette, Lake, Levy, Liberty, Madison, Manatee, Marion, Nassau, Okaloosa, Okeechobee, Orange, Osceola, Pasco, Pinellas, Polk, Putnam, Santa Rosa, Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor, Union, Volusia, Walton, and Washington

Counties of Broward, Dade, and Monroe Severe storms, high February 2-4, 1998winds, tornadoes, andflooding

Counties of Alachua, Baker, Bay, Bradford, Brevard, Broward, Extreme fire hazards May 25-July 22, 1998Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, Dade, DeSoto, Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist, Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Holmes, Indian River, Jackson, Jefferson, Lafayette, Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Martin, Monroe, Nassau, Okaloosa, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Santa Rosa, Sarasota, St. Johns, St. Lucie, Seminole, Sumter, Suwannee, Taylor, Union, Volusia, Wakulla, Walton, and Washington

Counties of Bay, Dixie, Franklin, Gulf, Taylor, and Wakulla Hurricane Earl September 3, 1998

Counties of Bay, Calhoun, Columbia, Escambia, Franklin, Gadsden, Hurricane Georges September 25-Gulf, Holmes, Jackson, Jefferson, Liberty, Monroe, Okaloosa, October 7, 1998Santa Rosa, Suwannee, Walton, and Washington

Counties of Monroe and Palm Beach Tropical Storm Mitch November 4-5, 1998

GeorgiaCounties of Appling, Atkinson, Bacon, Baldwin, Baker, Barrow, Severe storms and February 14-Bartow, Ben Hill, Berrien, Bibb, Bleckley, Brantley, Brooks, Bryan, flooding May 11, 1998Bulloch, Burke, Butts, Calhoun, Candler, Carroll, Charlton, Chatham, Cherokee, Clay, Clayton, Clinch, Cobb, Coffee, Colquitt, Columbia, Cook, Crawford, Crisp, Dade, Dawson, DeCatur, Dekalb, Dodge, Dooly, Dougherty, Douglas, Early, Echols, Effingham, Emanuel, Evans, Floyd, Forsyth, Fulton, Glynn, Gordon, Grady, Gwinnett, Habersham, Hall, Haralson, Heard, Henry, Houston, Irwin, Jeff Davis, Jefferson, Jenkins, Johnson, Jones, Lamar, Lanier, Laurens, Lee, Liberty, Lincoln, Long, Lowndes, Lumpkin, Macon, McIntosh, Miller, Mitchell, Monroe, Montgomery, Murray, Muscogee, Newton, Paulding, Peach, Pickens, Pike, Pulaski, Quitman, Rabun, Randolph, Richmond, Rockdale, Screven, Seminole, Spalding, Stewart, Sumter, Talbot, Tattnall, Telfair, Terrell, Thomas, Tift, Toombs, Towns, Treutlen, Turner, Twiggs, Union, Walker, Ware, Wayne, Webster, Wheeler, White, Wilcox, Wilkinson, and Worth

IndianaCounties of Benton, Jasper, Lake, LaPorte, Newton, Porter, Severe storms, tornadoes June 11-Jully7, 1998Pulaski, Saint Joseph, and Starke and flooding

1999–10 I.R.B. 5 March 8, 1999

Counties of Benton, Clay, Crawford, Fayette, Franklin, Gibson, Severe storms, tornadoes, June 11-July 7, 1998Greene, Howard, Knox, Lawrence, Madison, Miami, Monroe, and floodingMontgomery, Orange, Owen, Parke, Pike, Putnam, Rush, Sullivan, Union, Vigo, Wayne, and Warren

IowaCounties of Adair, Allamakee, Appanoose, Audubon, Benton, Severe storms, tornadoes, June 14, 1998-Black Hawk, Boone, Buchanan, Buena Vista, Butler, Calhoun, and flooding July 15, 1998Carroll, Cass, Cedar, Cerro Gordo, Chickasaw, Clarke, Clay, Clayton, Clinton, Crawford, Dallas, Davis, Decatur, Delaware, Des Moines, Dickinson, Emmet, Fayette, Floyd, Franklin, Fremont, Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison, Henry, Howard, Humboldt, Iowa, Jasper, Jefferson, Johnson, Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska, Marion, Marshall, Mills, Monona, Montgomery, Muscatine, Osceola, Page, Palo Alto, Pocahontas, Polk, Pottawattamie, Poweshiek, Ringgold, Sac, Shelby, Story, Tama, Taylor, Union, Wapello, Warren, Washington, Webster, Winnebago, Winneshiek, and Wright

KansasCounties of Bourbon, Cherokee, Douglas, Franklin, Jackson, Severe storms, flooding, October 1-8, 1998Jefferson, Johnson, Leavenworth, Linn, Seward, Wabaunsee, and tornadoesand Wyandotte

Counties of Butler, Chase, Coffey, Cowley, Douglas, Franklin, Severe storms and October 30-Greenwood, Harper, Harvey, Johnson, Leavenworth, Lyon, flooding November 15, 1998Marion, Neosho, Saline, Sedgwick, Sumner, Wilson, Woodson,and Wyandotte

KentuckyCounties of Adair, Bath, Boyle, Breathitt, Carter, Casey, Clark, Severe winter storm February 4-6, 1998Clay, Clinton, Elliott, Estill, Fleming, Garrard, Greenup, Jackson, Johnson, Knox, Laurel, Lawrence, Lee, Lewis, Lincoln, Madison, Magoffin, McCreary, Menifee, Mercer, Montgomery, Morgan, Nicholas, Owsley, Powell, Pulaski, Robertson, Rockcastle, Rowan, Russell, Wayne, Whitley, and Wolfe

Counties of Adair, Barren, Bell, Breathitt, Casey, Clay, Floyd, Severe storms, tornadoes, April 16-Johnson, Knott, Knox, Lawrence, Lee, Leslie, Letcher, Magoffin, and flooding May 10, 1998Metcalfe, Owsley, Perry, Pike, Warren, and Whitley

LouisianaParishes of Acadia, Ascension, Assumption, Baptist, Cameron, Tropical Storm Frances September 9-Evangeline, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, and Hurricane Georges October 4, 1998St. Bernard, St. Charles, St. James, St. John, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebone, Vermilion, and Washington

MaineCounties of Androscoggin, Aroostook, Cumberland, Franklin, Severe ice storms, rain, January 5-25, 1998Hancock, Kennebec, Knox, Lincoln, Penobscot, Piscataquis, Oxford, and heavy windsSagadahoc, Somerset, Waldo, Washington, and York

Counties of Androscoggin, Franklin, Kennebec, Oxford, Severe storms and June 13-July 1, 1998Somerset, and York flooding

March 8, 1999 6 1999–10 I.R.B.

1999–10 I.R.B. 7 March 8, 1999

Marshall IslandsAilinglaplap, Ailuk, Arno, Aur, Bikini, Ebeye, Ebon, Enewetak, Severe drought January 17-June 30, 1998Jabat, Jaluit, Kili, Kwajalein, Lae, Lib, Likiep, Majuro, Maloelap, Mejit, Mili, Namorik, Namu, Ujae, Utrik, Wotho, and Wotje

MassachusettsCounties of Bristol, Essex, Middlesex, Norfolk, Plymouth, Heavy rains and June 13-July 6, 1998Suffolk, and Worcester flooding

MichiganCounties of Bay, Clinton, Gratiot, Ionia, Kent, Mason, Montcalm, Severe storms and May 31, 1998Newaygo, Oceana, Ottawa, Saginaw, and Shiawassee straight-line winds

County of Muskegon Severe storms and May 29-31, 1998straight-line winds

Counties of Macomb and Wayne Severe storms and July 21-22, 1998high winds

MicronesiaState of Chuuk: Eot, Ettal, Etten, Fanapanges, Fefen, Fonanu, Severe drought January 25-Fono, Houk, Kuttu, Lekinioch, Losap, Makur, Moch, Murillo, June 30, 1998Nama, Namoluk, Nomwin, Oneop, Onou, Onoun, Paata, Parem, Piherach, Piis-Emwar, Piis-Paneu, Pollap, Polle, Polowat, Romanum, Ruo, Satowan, Siis, Ta, Tetiw, Tol, Tomatam, Tonoas, Udot, Uman, Unanu, Weno, and Wonei. State of Phonpei: the areas of Kipingamarangi, Mwoakilloa, Nukuoro, Oroluk, Pakin, Pingelap, and Sapwuahfik. State of Yap: Eauripik, Elato, Fais, Faraulap, Ifalik, Lamotrek, Ngulu, Satawal, Sorol, Ulithi, Wolei, and Yap Proper.

MinnesotaCounties of Blue Earth, Brown, Cottonwood, LaSueur, Nicollet, Severe storms and March 29, 1998Nobles, and Rice tornadoes

Counties of Anoka, Blue Earth, Carver, Dakota, Faribault, Severe storms, May 15-Fillmore, Freeborn, Goodhue, Hennepin, Houston, Jackson, straight-line winds, and June 28, 1998Mower, Olmsted, Ramsey, Rice, Scott, Wabasha, Washington, tornadoesand Winona

MississippiCounties of Covington, Forrest, George, Greene, Hancock, Hurricane Georges September 25-Harrison, Jackson, Jasper, Jefferson Davis, Jones, Lamar, October 5, 1998Marion, Pearl River, Perry, Pike, Stone, and Wayne

MissouriCounties of Jackson and St. Louis; and City of St. Louis Severe storms and July 10-31, 1998

flooding

Counties of Andrew, Barton, Caldwell, Carroll, Cedar, Chariton, Severe storms and October 4-11, 1998Clay, Dade, DeKalb, Jackson, Linn, Livingston, Macon, Miller, floodingMoniteau, Morgan, Platte, Polk, and Ray

New HampshireCounties of Belknap, Carroll, Cheshire, Coos, Grafton, Severe ice storms, rain, January 7-25, 1998Hillsborough, Merrimack, Stafford, and Sullivan and high winds

Counties of Belknap, Carroll, Grafton, Hillsborough, Severe storms and July 12-July 2, 1998Merrimack, Rockingham, and Sullivan flooding

New JerseyCounties of Atlantic, Cape May, and Ocean Severe winter coastal February 4-9, 1998

storm, high winds, andflooding

New YorkCounties of Clinton, Essex, Franklin, Genessee, Jefferson, Severe winter and ice January 5-17, 1998Lewis, Monroe, Niagara, Saratoga, and St. Lawrence storms, high winds, and

flooding

Counties of Broome, Chenango, Otsego, Rensselaer, Saratoga, Severe thunderstorms May 31-June 2, 1998and Wyoming and tornadoes

Counties of Allegany, Cattaraugus, Clinton, Delaware, Erie, Severe storms and June 25-July 10, 1998Essex, Franklin, Genesee, Livingston, Monroe, Steuben, floodingSullivan, Tioga, Tompkins, and Wyoming

Counties of Cayuga, Fulton, Herkimer, Madison, Monroe, Severe storms and September 7, 1998Nassau, Oneida, Onondaga, Ontario, Orleans, and Wayne high winds

North CarolinaCounties of Ashe, Avery, Dare, Haywood, Madison, Mitchell, Severe storms and January 7-Robeson, Transylvania, Watauga, and Yancey flooding February 12, 1998

Counties of Durham, Edgecombe, Lenoir, Nash, Rockingham, Severe storms, tornadoes, March 20-Wake, and Wayne and flooding April 1, 1998

Counties of Beaufort, Bertie, Bladen, Brunswick, Camden, Hurricane Bonnie August 25-Carteret, Chowan, Columbus, Craven, Cumberland, Currituck, September 1, 1998Dare, Duplin, Greene, Hyde, Jones, Lenoir, Martin, New Hanover, Onslow, Pamlico, Pasquotank, Pender, Perquimans, Pitt, Robeson, Sampson, Tyrrell, Washington, and Wayne

North DakotaCounties of Barnes, Benson, Cass, Dickey, LaMoure, Nelson, Flooding ground March 2-JulyPembina, Pierce, Ramsey, Ransom, Richland, Rolette, Sargent, saturation, and severe 18, 1998Stutsman, Towner, Walsh; and Indian Reservations of the Spirit stormsLake Sioux Tribe and the Turtle Mountain Band of Chippewa

Northern Mariana IslandsIsland of Rota Typhoon Paka and December 16-17, 1998

associated torrential rains

OhioCounties of Athens, Belmont, Coshocton, Franklin, Guernsey, Severe storms, flooding, June 24-July 5, 1998Harrison, Holmes, Jackson, Jefferson, Knox, Meigs, Monroe, and tornadoesMorgan, Morrow, Muskingum, Noble, Ottawa, Perry, Pickaway, Richland, Sandusky, Tuscarawas, and Washington

OregonCounty of Crook Flooding May 28-June 3, 1998

PennsylvaniaCounties of Allegheny, Beaver, Berks, Pike, Susquehanna, Severe storms, tornadoes May 31-June 2, 1998Somerset, and Wyoming and flooding

March 8, 1999 8 1999–10 I.R.B.

Puerto RicoAll municipios Hurricane Georges September 20-

October 27, 1998

South CarolinaCounty of Horry Hurricane Bonnie August 25-

September 1, 1998

South DakotaCounties of Brown, Clark, Codington, Day, Hanson, Marshall, Flooding, severe storms, April 25-June 22, 1998McCook, Roberts, and Spink and tornadoes

TennesseeCounties of Bledsoe, Bradley, Campbell, Cannon, Carter, Chester, Severe storms and January 6-Clay, Cocke, Crockett, Cumberland, DeKalb, Fentress, Gibson, flooding February 12, 1998Greene, Grundy, Hawkins, Haywood, Jackson, Jefferson, Johnson, Madison, Meigs, Morgan, Overton, Pickett, Polk, Putnam, Rhea, Roane, Scott, Sequatchie, Sevier, Sullivan, Tipton, Unicoi, Van Buren, Warren, Washington, and White

Counties of Anderson, Blount, Bradley, Campbell, Carroll, Severe storms, tornadoes, April 16-May 18, 1998Cheatham, Claiborne, Crockett, Davidson, Dickson, Dyer, Gibson, and floodingGiles, Grainger, Hamblen, Hancock, Hardin, Hawkins, Humphreys, Jackson, Jefferson, Knox, Lauderdale, Lawrence, Loudon, Macon, Madison, Maury, Monroe, Morgan, Pickett, Polk, Rhea, Roane, Robertson, Scott, Sevier, Shelby, Sumner, Union, Wayne, Williamson, and Wilson

Counties of Lawrence and Lewis Flooding and severe July 13-July 28, 1998storms

TexasCounties of Edwards, Kimble, Kinney, Maverick, Real, Tropical Storm Charley August 22-31, 1998Uvalde, Val Verde, and Webb

Counties of Brazoria, Galveston, Harris, Jefferson, and Severe storms and September 9-Matagorda flooding associated with October 5, 1998

Tropical Storm Frances

Counties of Austin, Atascosa, Bastrop, Bexar, Blanco, Brazoria, Severe storms, flooding, October 17-Burleson, Caldwell, Calhoun, Colorado, Comal, DeWitt, Fayette, and tornadoes November 15, 1998Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe, Harris, Hays, Jackson, Jefferson, Jim Wells, Karnes, Kendall, Lavaca, Liberty, Matagorda, Medina, Montgomery, Nueces, Polk, Refugio, San Jacinto, San Patricio, Travis, Trinity, Victoria, Walker, Waller, Wharton, and Wilson

U.S. Virgin IslandsIslands of St. Croix, St. John, St. Thomas, and Water Island Hurricane Georges September 19-22, 1998

VermontCounties of Addison, Chittenden, Franklin, Grand Isle, Orange, Severe ice storms, rain, January 6-16, 1998and Windsor high winds, and flooding

Counties of Addison, Caledonia, Chittenden, Essex, Franklin, Severe storms and June 17-AugustLamoille, Orange, Orleans, Rutland, Washington, and Windsor flooding 17, 1998

1999–10 I.R.B. 9 March 8, 1999

VirginiaCities of Chesapeake, Norfolk, Portsmouth, Suffolk, and Hurricane Bonnie August 25-Virginia Beach September 1, 1998

WashingtonCounties of Ferry and Stevens Severe storms and May 26-29, 1998

flooding

City of Kelso (Cowlitz County), specifically the Aldercrest-Banyon Landslide March 6-Novembersubdivision 19, 1998

West VirginiaCounties of Braxton, Cabell, Calhoun, Clay, Doddridge, Gilmer, Severe storms, June 26-July 27, 1998Harrison, Jackson, Kanawha, Lewis, Marion, Marshall, Ohio, flooding, andPleasants, Ritchie, Roane, Tyler, Webster, Wetzel, Wirt, and Wood tornadoes

WisconsinCounties of Buffalo, Clark, Crawford, Dunn, Grant, Jackson, Severe storms, June 18-30, 1998La Crosse, Monroe, Pepin, Pierce, Richland, St. Croix, Trempealeau, straight-line winds,and Vernon tornadoes, heavy rain,

and flooding

Counties of Milwaukee, Racine, Rock, Sheboygan, and Waukesha Severe storms and August 5-15, 1998flooding

March 8, 1999 10 1999–10 I.R.B.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of March 1999. SeeRev. Rul. 99–11, page 18.

Section 382.—Limitation on NetOperating Loss Carryforwardsand Certain Built-In LossesFollowing Ownership Change

The adjusted federal long-term rate is set forthfor the month of March 1999. See Rev. Rul. 99–11,page 18.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—Special Rules forMining and Solid WasteReclamation and Closing Costs


Section 482.—Allocation ofIncome and Deductions AmongTaxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—Special Rules forCredits and Deductions


Section 807.—Rules for CertainReserves


Insurance companies; interest ratetables. Prevailing state assumed interestrates are provided for the determination ofreserves under section 807 of the Code forcontracts issued in 1998 and 1999. Rev.Rul. 92–19 supplemented in part.

Rev. Rul. 99–10 For purposes of § 807(d)(4) of the In-

ternal Revenue Code, for taxable yearsbeginning after December 31, 1997, thisruling supplements the schedules of pre-vailing state assumed interest rates setforth in Rev. Rul. 92–19, 1992–1 C.B.227. This information is to be used by in-surance companies in computing their re-serves for (1) life insurance and supple-mentary total and permanent disabilitybenefits, (2) individual annuities and pureendowments, and (3) group annuities andpure endowments. As § 807(d)(2)(B) re-quires that the interest rate used to com-pute these reserves be the greater of (1)the applicable federal interest rate, or (2)the prevailing state assumed interest rate,

the table of applicable federal interestrates in Rev. Rul. 92–19 is also supple-mented.

Following are supplements to sched-ules A, B, C, and D to Part III of Rev. Rul.92–19, providing prevailing state as-sumed interest rates for insurance prod-ucts with different features issued in 1998and 1999, and a supplement to the table in

Part IV of Rev. Rul. 92–19, providing theapplicable federal interest rate under § 807(d) for 1998 and 1999. This rulingdoes not supplement Parts I and II of Rev.Rul. 92–19.

This is the seventh supplement to theinterest rates provided in Rev. Rul. 92–19.Earlier supplements were published inRev. Rul. 93–58, 1993–2 C.B. 241 (inter-

est rates for insurance products issued in

1992 and 1993), Rev. Rul. 94–11, 1994–1

C.B. 196 (1993 and 1994), Rev. Rul.

95–4, 1995–1 C.B. 141 (1994 and 1995),

Rev. Rul. 96–2, 1996–1 C.B. 141 (1995

and 1996), Rev. Rul. 97–2, 1997–1 C.B. 8

(1996 and 1997), and Rev. Rul. 98–2,

1998–2 I.R.B. 15 (1997 and 1998).

1999–10 I.R.B. 11 March 8, 1999

Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*

Schedule A

STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TOTHE NAIC STANDARD VALUATION LAW

A. Life insurance valuation:

Guarantee Duration Calendar Year(years) of Issue

1999

10 or fewer 5.00**

More than 10 4.75**but not more than 20

More than 20 4.50**

Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s CorporateBond Yield Average — Monthly Average Corporates.

** As the applicable federal interest rate for 1999 of 6.30 percent exceeds this prevailing state as-sumed interest rate, the interest rate to be used for this product under § 807 is 6.30 percent.

* The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92–19 are those used in the Standard ValuationLaw; the terms are defined in Rev. Rul. 92–19.

Part III, Schedule B

STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TOTHE NAIC STANDARD VALUATION LAW

B. Single premium immediate annuities and annuity benefits involving life contingencies arisingfrom other annuities with cash settlement options and from guaranteed interest contracts with cashsettlement options:

Calendar Year of Issue Valuation Interest Rate1998 6.25*

Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s CorporateBond Yield Average — Monthly Average Corporates. The terms used in this schedule are thoseused in the Standard Valuation Law as defined in Rev. Rul. 92–19.

*As this prevailing state assumed interest does not exceed the applicable federal interest rate for 1998 of 6.31 percent, theapplicable federal interest rate of 6.31 percent is to be used for this product under § 807.

Part III, Schedule C16 – 1998

STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR 1998CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS

C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:

Cash Future Valuation Interest RateSettlement Interest Guarantee Duration For Plan TypeOptions? Guarantee? (years) A B C

Yes Yes 5 or fewer 6.25* 5.50* 5.00*

More than 5, but not more than 10 6.00* 5.50* 5.00*


More than 20 4.75* 4.50* 4.50*

Yes No 5 or fewer 6.50 5.75* 5.25*



More than 20 5.00* 4.75* 4.75*

No Yes or No 5 or fewer 6.25*

More than 5, but not more than 10 6.00* NOT APPLICABLE

More than 10, but not more than 20 5.75*

More than 20 4.75*

Source: Rates calculated from the monthly averages, ending June 30, 1998 of Moody’s Corporate Bond Yield Average — MonthlyAverage Corporates.

*As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under § 807 is 6.31 percent.

Part III, Schedule D16 – 1998

STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR 1998 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS

D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options andthat are valued on a change in fund basis:

Cash Future Valuation Interest RateSettlement Interest Guarantee Duration For Plan TypeOptions? Guarantee? (years) A B C

Yes Yes 5 or fewer 7.00 6.50 5.25*

More than 5, but not more than 10 6.75 6.50 5.25*


More than 20 5.50* 5.50* 4.75*

Yes No 5 or fewer 7.00 6.75 5.50*

More than 5, but not more than 10 7.00 6.75 5.50*

More than 10, but not more than 20 6.50 6.25* 5.25*

More than 20 5.75* 5.75* 4.75*

Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s Corporate Bond Yield Average — MonthlyAverage Corporates.

*As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under § 807 is 6.31 percent.

March 8, 1999 12 1999–10 I.R.B.

Part IV. Applicable Federal InterestRates.

TABLE OF APPLICABLE FEDERALINTEREST RATES FOR PURPOSES

OF § 807

Year Interest Rate

1998 6.311999 6.30

Sources: Rev. Rul. 97–50, 1997–49 C.B.5 for the 1998 rate and Rev. Rul. 98–57,1998–49 I.R.B. 4 for the 1999 rate.

EFFECT ON OTHER REVENUERULINGS

Rev. Rul. 92–19 is supplemented by theaddition to Part III of that ruling of pre-vailing state assumed interest rates under§ 807 for certain insurance products is-sued in 1998 and 1999 and is further sup-plemented by an addition to the table inPart IV of Rev. Rul. 92–19 listing applica-ble federal interest rates. Parts I and II ofRev. Rul. 92–19 are not affected by thisruling.

DRAFTING INFORMATIONTheprincipal author of this revenue ruling isAnn H. Logan of the Office of AssistantChief Counsel (Financial Institutions andProducts). For further informationregarding this revenue ruling contact heron (202) 622-3970 (not a toll-free call).

1999–10 I.R.B. 13 March 8, 1999

March 8, 1999 14 1999–10 I.R.B.

1999–10 I.R.B. 15 March 8, 1999

March 8, 1999 16 1999–10 I.R.B.

1999–10 I.R.B. 17 March 8, 1999

Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, andlong-term rates are set forth for the month of March1999. See Rev. Rul. 99–11, page 18.

Section 1274.—Determinationof Issue Price in the Case ofCertain Debt Instruments Issuedfor Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Determination of issue price in the

case of certain debt instruments issuedfor property. This ruling provides vari-ous prescribed rates for federal incometax purposes for March 1999.

Rev. Rul. 99–11This revenue ruling provides various

prescribed rates for federal income taxpurposes for March 1999 (the currentmonth.) Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month forpurposes of section 1274(d) of the Inter-nal Revenue Code. Table 2 contains theshort-term, mid-term, and long-term ad-justed applicable federal rates (adjusted

AFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Finally,Table 5 contains the federal rate for deter-mining the present value of an annuity, aninterest for life or for a term of years, or aremainder or a reversionary interest forpurposes of section 7520.

March 8, 1999 18 1999–10 I.R.B.

REV. RUL. 99–11 TABLE 1

Applicable Federal Rates (AFR) for March 1999

Period for Compounding

Annual Semiannual Quarterly MonthlyShort-Term

AFR 4.67% 4.62% 4.59% 4.58%110% AFR 5.14% 5.08% 5.05% 5.03%120% AFR 5.62% 5.54% 5.50% 5.48%130% AFR 6.10% 6.01% 5.97% 5.94%

Mid-TermAFR 4.83% 4.77% 4.74% 4.72%

110% AFR 5.32% 5.25% 5.22% 5.19%120% AFR 5.80% 5.72% 5.68% 5.65%130% AFR 6.30% 6.20% 6.15% 6.12%150% AFR 7.29% 7.16% 7.10% 7.06%175% AFR 8.52% 8.35% 8.26% 8.21%

Long-TermAFR 5.30% 5.23% 5.20% 5.17%

110% AFR 5.83% 5.75% 5.71% 5.68%120% AFR 6.38% 6.28% 6.23% 6.20%130% AFR 6.92% 6.80% 6.74% 6.71%


Adjusted AFR for March 1999

Period for Compounding

Annual Semiannual Quarterly MonthlyShort-term adjusted AFR 3.09% 3.07% 3.06% 3.05%

Mid-termadjusted AFR 3.77% 3.74% 3.72% 3.71%

Long-term adjusted AFR 4.68% 4.63% 4.60% 4.59%


Rates Under Section 382 for March 1999

Adjusted federal long-term rate for the current month 4.68%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.71%

1999–10 I.R.B. 19 March 8, 1999


Appropriate Percentages Under Section 42(b)(2) for March 1999

Appropriate percentage for the 70% present value low-income housing credit 8.18%

Appropriate percentage for the 30% present value low-income housing credit 3.51%


Rate Under Section 7520 for March 1999

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 5.8%

Section 1288.—Treatment ofOriginal Issue Discount on Tax-Exempt Obligations


Section 6103.—Confidentialityand Disclosure of Returns andReturn Information

26 CFR 6103.301.6103(j)(1)–1: Department ofCommerce

T.D. 8811

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 301

Disclosure of Return Informationto the Bureau of the Census

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document containsfinal and temporary regulations relating toadditions to, and deletions from, the list ofitems of information disclosed to the Bureau of the Census for use in certainstatistical programs. These regulationsprovide guidance to IRS personnel re-sponsible for disclosing the information.The text of the temporary regulations alsoserves as the text of the proposed regula-tions set forth in the notice of proposedrulemaking on this subject in REG–121806–97, on page 46.

DATES: Effective Date:These regula-tions are effective January 25, 1999.

Applicability Date:For dates of applic-ability, see §301.6103(j)(1)–1T(e) ofthese regulations.

FOR FURTHER INFORMATION CON-TACT: Jamie Bernstein, (202) 622-4570(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Under section 6103(j)(1) of the Inter-nal Revenue Code, upon written requestfrom the Secretary of Commerce, theSecretary is to furnish to the Bureau ofthe Census (“Bureau”) tax return infor-mation that is prescribed by Treasury reg-ulations for the purpose of structuringcensuses and national economic accountsand conducting related statistical activi-ties. Section 301.6103(j)(1)–1 of the reg-ulations provides an itemized descriptionof the return information authorized to bedisclosed for this purpose. Periodically,the disclosure regulations are amended toreflect the changing needs of the Bureaufor data for its statutorily authorized sta-tistical activities.

This document adopts temporary regu-lations that authorize IRS personnel todisclose the additional items of return in-formation that have been requested by theSecretary of Commerce. The temporary

regulations also delete certain items of re-turn information that are enumerated inthe existing regulations but that the Secre-tary of Commerce has indicated are nolonger needed.

Except for §301.6103(j)(1)–1T(b)(3),(b)(6)(i)(A) and (b)(6)(iii), the text of thetemporary regulations is the same as 26CFR 301.6103(j)(1)–1. The changesmade by §301.6103(j)(1)–1T(b)(3),(b)(6)(i)(A) and (b)(6)(iii) are discussedbelow.

Explanation of Provisions

The request by the Secretary of Com-merce for additional items of return infor-mation has indicated several areas inwhich changes to existing Bureau accessto tax return information either would im-prove present statistical programs or arenecessary to implement new programs.

To reduce small businesses’ direct re-porting burden in quinquennial economiccensuses and current economic surveys,and to improve the quality of the data re-ceived, the Bureau needs certain items ofinformation set forth in tax returns. Theseitems include total expenses or deduc-tions, beginning- and end-of-year inven-tories, net gain from sales of businessproperty, other income, and total income.

The Secretary of Commerce also hasrequested identity information of parentcorporations as shown on corporate taxreturns. This information will enable theBureau to collect data for various eco-nomic surveys at the subsidiary or divi-sion level rather than at the establishmentlevel. Restructuring data collection in ac-cordance with such new organizationallinkages will reduce the burden on indi-vidual business establishments to estimatedata relating to their affiliates, enhancethe quality of the data collected, and pro-vide the Bureau with an efficient sam-pling frame for surveys collecting certaindata, such as capital expenditures, that aretypically not available at the establish-ment level.

To eliminate the follow-up contact ofcorporate taxpayers presently requiredunder the Quarterly Financial Report(QFR) program in order to establish Scorporation status, the Bureau needs thedocument code and district office codefrom corporate returns. Another improve-ment to the QFR program would be ef-

fected by the requested disclosure of par-ent corporation identity information, be-cause subsidiaries could then be linkedbefore a sample was selected and wouldbe relieved of the separate Census report-ing requirements. Finally, the Bureauseeks to enhance the quality and reducethe size of sample frames under the QFRprogram by identifying inactive corpora-tions so that they can be excluded fromthe universe subject to sampling. This re-quires that certain items of corporate em-ployment tax information (employer iden-tification number, tax period, totalcompensation, and taxable wages andtips), available to the Bureau under theexisting regulations for economic censuspurposes, be available to the Bureau aswell for QFR purposes.

The Secretary of Commerce has ad-vised that the Bureau no longer uses cer-tain items of information listed in the ex-isting regulations: sales of livestock andproduce raised, Schedule E informationfiled with the Form 1120 series, and, withrespect to the QFR program, net incomeor loss. Accordingly, the temporary regu-lations have deleted these items from theenumeration of return information to bedisclosed to the Bureau.

The transfer of the Census of Agricul-ture to the Department of Agricultureunder the Census of Agriculture Act of1997 (Public Law 105–113) has also ob-viated the need for the Secretary of Com-merce to receive certain items of informa-tion. These items are: Schedule F filedwith the Form 1040 series, net farm prof-its, agricultural activity code, and answersto material participation questions. Theseitems have been deleted in the temporaryregulations.

For simplification and consistency, theterm “loss” is not expressly stated in theseregulations as an alternative to “income”or “gain,” but it is the intent of the Secre-tary to interpret “income” or “gain” as in-cluding negative or loss figures and toprovide any such figures to the Bureau.

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 notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-

cedure Act (5 U.S.C. chapter 5) does notapply to these regulations. For the applic-ability of the Regulatory Flexibility Act (5U.S.C. chapter 6) see the Special Analy-ses section of the preamble to the crossreference notice of proposed rulemakingpublished in the Proposed Rules sectionin this issue of the Federal Register.Pur-suant to section 7805(f) of the InternalRevenue Code, these temporary regula-tions will be submitted to the Chief Coun-sel for Advocacy of the Small BusinessAdministration for comment on their im-pact on small business.

Drafting Information

The principal author of these regula-tions is Douglas Giblen, Office of the As-sociate Chief Counsel (International) (for-merly of the Office of Assistant ChiefCounsel (Disclosure Litigation)). How-ever, other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR Part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.6103(j)(1)–1T also issued

under 26 U.S.C. 6103(j)(1);* * *Par. 2. Section 301.6103(j)(1)–1 is

amended by revising paragraphs (b)(3)and (b)(6)(i)(A) to read as follows:

§301.6103(j)(1)–1 Disclosures of returninformation to officers and employees ofthe Department of Commerce for certainstatistical purposes and related activities.

* * * * *

(b)(3)[Reserved]. For further guid-ance, see §301.6103(j)(1)–1T(b)(3).

* * * * *

(b)(6)(i)(A)[Reserved]. For furtherguidance, see §301.6103(j)(1)–1T(b)-(6)(i)(A).

* * * * *

March 8, 1999 20 1999–10 I.R.B.

Par. 3. Section 301.6103(j)(1)–1T isadded to read as follows:

§301.6103(j)(1)–1T Disclosure of returninformation to officers and employees ofthe Department of Commerce for certainstatistical purposes and related activities(temporary).

(a) through (b)(2)[Reserved]. For fur-ther guidance, see §301.6103(j)(1)–1(a)through (b)(2).

(b)(3) Officers or employees of the In-ternal Revenue Service will disclose thefollowing business related return informa-tion reflected on the return of a taxpayerto officers and employees of the Bureauof the Census for purposes of, but only tothe extent necessary in, conducting andpreparing, as authorized by chapter 5 oftitle 13, United States Code, demo-graphic, economic, and agricultural statis-tics programs, censuses, and surveys. The“return of a taxpayer” includes, but is notlimited to, Form 941; Form 990 series;Form 1040 series and Schedules C andSE; Form 1065 and all attending sched-ules and Form 8825; Form 1120 seriesand all attending schedules and Form8825; Form 851; Form 1096; and otherbusiness returns, schedules and forms thatthe Internal Revenue Service may issue—

(i) Taxpayer identity information (asdefined in section 6103(b)(6)) includingparent corporation, shareholder, partner,and employer identity information;

(ii) Gross income, profits, or receipts;(iii) Returns and allowances;(iv) Cost of labor, salaries, and wages;(v) Total expenses or deductions;(vi) Total assets;(vii) Beginning- and end-of-year in-

ventory;(viii) Royalty income;(ix) Interest income, including portfo-

lio interest;(x) Rental income, including gross

rents;(xi) Tax-exempt interest income;(xii) Net gain from sales of business

property;(xiii) Other income;(xiv) Total income;(xv) Percentage of stock owned by

each shareholder;(xvi) Percentage of capital ownership

of each partner;(xvii) End-of-year code;(xviii) Months actively operated;

(xix) Principal industrial activity code,including the business description;

(xx) Total number of documents andthe total amount reported on the Form1096 transmitting Forms 1099-MISC;

(xxi) Form 941 indicator and businessaddress on Schedule C; and

(xxii) Consolidated return indicator.(b)(4) and (5)[Reserved]. For further

guidance, see §301.6103(j)(1)–1(b)(4)and (5).

(b)(6)(i) Officers or employees of theInternal Revenue Service will disclose thefollowing return information (but not in-cluding return information described insection 6103(o)(2)) reflected on the returnof a corporation with respect to the taximposed by Chapter 1 to officers and em-ployees of the Bureau of the Census forpurposes of, but only to the extent neces-sary in, developing and preparing, as au-thorized by law, the Quarterly FinancialReport—

(A) From the business master files ofthe Internal Revenue Service—

(1) Taxpayer identity information (asdefined in section 6103(b)(6)), includingparent corporation identity information;

(2) Document code;(3) District office code;(4) Consolidated return and final re-

turn indicators;(5) Principal industrial activity code;(6) Partial year indicator;(7) Annual accounting period;(8) Gross receipts less returns and al-

lowances; and(9) Total assets.(b)(6)(i)(B) and (ii)[Reserved]. For

further guidance, see §301.6103(j)(1)–1(b)(6)(i)(B) and (ii).

(iii) Information from an employmenttax return disclosed pursuant to§301.6103(j)(1)–1(b)(2)(iii)(A), (B), (D),(I) and (J) may be used by officers andemployees of the Bureau of the Censusfor the purpose described in and subject tothe limitations of this paragraph (b)(6).

(c) and (d) [Reserved]. For further guid-ance, see §301.6103(j)(1)–1(c) and (d).

(e) Effective date.This section is ap-plicable to the Bureau of the Census onJanuary 25, 1999, through January 22,2002.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

Approved December 29, 1998.

Donald C. Lubick,Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on Janu-ary 22, 1999, 8:45 a.m., and published in the issue ofthe Federal Register for January 25, 1999, 64 F.R.3669)

Section 6221.—Tax TreatmentDetermined at Partnership Level

26 CFR 6221–1T: Tax treatment determined atpartnership level (Temporary)

T.D. 8808DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 301

Modifications and Additions tothe Unified Partnership AuditProcedures

AGENCY: Internal Revenue Service,Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document containsfinal and temporary regulations relating tothe unified partnership audit proceduresadded to the Internal Revenue Code bythe Tax Equity and Fiscal ResponsibilityAct of 1982 (TEFRA). The unified part-nership audit procedures generally pro-vide administrative rules for the auditingof partnership items at the partnershiplevel. These regulations modify the exist-ing unified partnership audit proceduresto comply with the Taxpayer Relief Act of1997 (1997 Act) and the Internal RevenueService Restructuring and Reform Act of1998 (1998 Act), and add new regulationsto administer the new unified partnershipaudit provisions added by the 1997 Act.In general, the text of these temporaryregulations also serves as the text of theproposed regulations set forth in the no-tice of proposed rulemaking on this sub-ject in REG–106564–98, on page 53.

DATES: Effective Date: These regula-tions are effective January 26, 1999.

1999–10 I.R.B. 21 March 8, 1999

FOR FURTHER INFORMATION CON-TACT: Robert G. Honigman, (202) 622-3050 (not a toll-free number).


Background

This document contains temporaryamendments to the Procedure and Admin-istration Regulations (26 CFR Part 301)relating to the unified partnership auditprocedures found in sections 6221 through6233 of the Internal Revenue Code (Code)and final regulations pertaining to the ap-plicable dates of §301.6231(a)(7)–1T(p)(2) and §301.6231(a)(7)–1T(r)(1).Sections 1231 through 1243 of the Tax-payer Relief Act of 1997, Public Law105–34, 111 Stat. 788, modified some ofthe existing procedures and added certainnew rules. Section 3507 of the InternalRevenue Service Restructuring and Re-form Act of 1998, Public Law 105–206,112 Stat. 685, modified section 6231.This document modifies existing regula-tions that, because of the 1997 Act or the1998 Act, no longer reflect current law.


Penalties Determined At The PartnershipLevel

Before the 1997 Act, the Internal Rev-enue Service (Service) could imposepenalties on a partner only through the ap-plication of the deficiency proceduresafter the completion of a partnership levelproceeding. Forcing the Service to opendeficiency proceedings against the indi-vidual partners was inconsistent with theefficiency goal of the unified partnershipaudit rules. The 1997 Act cured this prob-lem by providing that, for partnershipsunder audit for taxable years ending afterAugust 5, 1997, partnership level pro-ceedings include the determination of ap-plicable penalties at the partnership level.Partners now may raise any partner leveldefenses to the imposition of penaltiesonly in a subsequent refund action.

Consistent with these statutorychanges, the temporary regulations man-date that the partnership’s penalty de-fenses are to be resolved during the part-nership proceeding. Nevertheless, anyindividual defenses that a partner mayhave to the imposition of a penalty may

be brought by the partner in a refund ac-tion subsequent to the partnership leveldetermination. In order to minimize theburden on individual partners to defendthemselves by bringing their own refundsuits, the temporary regulations incorpo-rate a large number of defenses at thepartnership level. The majority of a part-ner’s defenses to the imposition of penal-ties are not specific to a particular partner,but can be determined by reference to theactivities of the partnership. The applica-bility of these defenses may be resolved atthe partnership level during the partner-ship proceeding. In addition, the tempo-rary regulations modify the computationaladjustment rules to allow the Service toassess penalties under those procedures.

Partial Settlements

The period for assessing tax with re-spect to partnership items generally is thelonger of the periods provided by section6229 or section 6501. For partnershipitems that convert to nonpartnershipitems, section 6229(f) provides that theperiod for assessing tax shall not expirebefore the date which is one year after thedate that the items became nonpartnershipitems. Section 6231(b)(1)(C) providesthat the partnership items of a partner fora partnership taxable year become non-partnership items as of the date the part-ner enters into a settlement agreementwith the Service with respect to suchitems. In some audits, however, the tax-payer and the Service will enter into a set-tlement agreement regarding some, butnot all, of the taxpayer’s partnershipitems. The 1997 Act added a special rulefor these partial settlement agreements insection 6229(f)(2), providing that the pe-riod for assessing any tax attributable tothe settled items is determined as if thepartial settlement had not been executed.Thus, the limitations period applicable tothe last partnership item to be resolved forthe partnership’s taxable year under auditis controlling with respect to all disputedpartnership items (including settled items)for such partnership taxable year.

The temporary regulations state that theone year period for assessing partnershipitems that convert to nonpartnership itemsapplicable to settlement agreements undersection 6231(b)(1)(C) does not apply topartial settlement agreements under sec-

tion 6229(f)(2). Moreover, the temporaryregulations clarify that the partner re-mains subject to the unified audit proce-dures regarding the nonsettled items.

Tax Matters Partner As A Debtor InBankruptcy

Section 6229(b)(1)(B) provides that thestatute of limitations under section 6229is extended with respect to all partners inthe partnership by an agreement enteredinto between the tax matters partner(TMP) and the Service. Treas. Reg.§301.6231(a)(7)–1(l)(1)(iv) (1996) andTemp. Treas. Reg. §301.6231(c)–7T(a)(1987), however, provide that upon thefiling of a petition naming a partner as adebtor in a bankruptcy proceeding, thepartner/debtor’s partnership items convertto nonpartnership items, and if the part-ner/debtor was the TMP, that status termi-nates. These rules were promulgated toavoid the complications that the auto-matic stay provision contained in 11U.S.C. 362(a)(8) would have on a unifiedpartnership audit. As a result, if a TMPexecuted a consent to extend the statute oflimitations during a period when the TMPwas a debtor in a bankruptcy proceeding,the consent would not be binding on theother partners. Under the regulations, theperson signing the agreement was ineligi-ble to act as the TMP and extend thestatute as to all partners.

To resolve the uncertainty under priorlaw in the situation where a TMP executesan agreement extending the statute of lim-itations as to all partners while, unknownto the Service, the TMP is a debtor in abankruptcy proceeding, the 1997 Act pro-vides that the Service may rely on the ex-ecuted statute extension agreement unlessit is notified of the TMP’s bankruptcyproceeding. If the Service is not notifiedof the TMP’s bankruptcy proceeding,statute extensions granted by the TMP arebinding on all partners in the partnership.

The temporary regulations provide amechanism for the TMP, or other partners,to provide notice to the Service that theTMP is a debtor in a bankruptcy proceed-ing and therefore is ineligible to serve asTMP and extend the statute under section6229. This mechanism is derived fromexisting regulations that provide guidanceon how to notify the Service of informa-tion concerning a partnership’s partners.

March 8, 1999 22 1999–10 I.R.B.

Small Partnership Exception

The 1997 Act amended the small part-nership exception to the unified partner-ship audit procedures found in section6231. Formerly, in order to qualify forthe small partnership exception, the part-nership had to have 10 or fewer partnersat all times during the tax year, each ofwhom was a natural person (other than anonresident alien) or an estate, and forwhich each partner’s share of each part-nership item was the same as that part-ner’s share of every other partnershipitem. The 1997 Act amended the smallpartnership exception by allowing part-nerships to qualify for the exception evenif they have a C corporation for a partneror specially allocate some partnershipitems. The temporary regulations modifythe existing regulations interpreting thesmall partnership exception to take ac-count of this change in the law.

Effective Date

These final and temporary regulationsare applicable January 26, 1999. In ac-cordance with section 7805(e)(2), thetemporary regulations contained hereinshall expire January 25, 2002.

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 notrequired. It also has been determined thatsection 533(b) of the Administrative Pro-cedures Act (5 U.S.C. chapter 5) does notapply to these regulations. For the applic-ability of the Regulatory Flexibility Act (5U.S.C. chapter 6) refer to the SpecialAnalyses section of the preamble to thecross reference notice of proposed rule-making published in the Proposed Rulessection in this issue of the Federal Regis-ter. Pursuant to section 7805(f) of the In-ternal Revenue Code, these final and tem-porary regulations will be submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on their impact on small business.


The principal authors of these tempo-rary regulations are Robert G. Honigman,Office of the Assistant Chief Counsel

(Passthroughs & Special Industries), andWilliam A. Heard, Office of the AssistantChief Counsel (Field Service). However,other personnel from the Service andTreasury Department participated in theirdevelopment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 301 isamended as follows:


Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Amend §301.6221–1T by:1. Redesignating paragraph (c) as para-

graph (e).2. Adding new paragraphs (c) and (d).The additions read as follows:

§301.6221–1T Tax treatment determinedat partnership level (temporary).

* * * * *

(c) Penalties determined at partner-ship level (partnership taxable years end-ing after August 5, 1997).Any penalty,addition to tax, or additional amount thatrelates to an adjustment to a partnershipitem, shall be determined at the partner-ship level. Partner level defenses to suchitems can only be asserted through refundactions following assessment and pay-ment. Assessment of any penalty, addi-tion to tax, or additional amount that re-lates to an adjustment to a partnershipitem shall be made based on partnershiplevel determinations. Partnership leveldeterminations include all the legal andfactual determinations that underlie thedetermination of any penalty, addition totax, or additional amount, other than part-ner level defenses specified in paragraph(d) of this section.

(d) Partner level defenses.Partnerlevel defenses to any penalty, addition totax, or additional amount that relates to anadjustment to a partnership item, may notbe asserted in the partnership level pro-ceeding, but may be asserted through sep-arate refund actions following assessmentand payment. See section 6230(c)(4).

Partner level defenses are limited to thosethat are personal to the partner or are de-pendant upon the partner’s separate re-turn, and cannot be determined at thepartnership level. Examples of these de-terminations are: whether any applicablethreshold underpayment of tax has beenmet with respect to the partner or whetherthe partner has met the criteria of section6664(b)(penalties applicable only wherereturn is filed), or section 6664(c)(1)(rea-sonable cause exception) subject to part-nership level determinations as to the ap-plicability of section 6664(c)(2).

* * * * *

Par. 3. Amend §301.6223(c)–1T byadding a sentence to the end of paragraph(c) to read as follows:

§301.6223(c)–1T Additional informationregarding partners furnished to theService (temporary).

* * * * *

(c) * * * Furthermore, reference to aprior general notification to the Servicethat a partner who would otherwise be thetax matters partner is a debtor in a bank-ruptcy proceeding or has had a receiverappointed for him in a receivership pro-ceeding is not sufficient unless a copy ofthe notification document referred to is at-tached to the statement.

* * * * *

Par. 4. Amend §301.6224(c)–3T by:1. Revising the section heading.2. Revising paragraphs (b), (c)(3)(ii),

and (d), Example (1).The revisions read as follows:

§301.6224(c)–3T Consistent settlementterms (temporary).

* * * * *

(b) Requirements for consistent settle-ment terms—(1) In general. Consistentsettlement terms are those based on thesame determinations with respect to part-nership items. However, consistent set-tlement terms also may include partner-ship level determinations of any penalty,addition to tax, or additional amount thatrelates to partnership items. Settlementswith respect to partnership items shall beself-contained; thus, a concession by oneparty with respect to a partnership item

1999–10 I.R.B. 23 March 8, 1999

may not be based upon a concession byanother party with respect to any item thatis not a partnership item other than anypenalty, addition to tax, or additionalamount that relates to an adjustment to apartnership item. Consistent agreements,whether comprehensive or partial, mustbe identical to the original settlement (thatis, the settlement upon which the offeredsettlement terms are based). A consistentagreement must mirror the original settle-ment and may not be limited to selecteditems from the original settlement. Oncea partner has settled a partnership item, orpenalty, addition to tax, or additionalamount that relates to an adjustment to apartnership item, that partner may notsubsequently request settlement termsconsistent with a settlement that containsthe previously settled item. The require-ment for consistent settlement terms ap-plies only if—

(i) The items were partnership items(and any related penalty, addition to tax,or additional amount) for the partner en-tering into the original settlement imme-diately before the original settlement; and

(ii) The items are partnership items(and any related penalty, addition to tax,or additional amount) for the partner re-questing the consistent settlement at thetime the partner files the request.

(2) Effect of consistent agreement.Consistent settlement terms are reflectedin a consistent agreement. A consistentagreement is not a settlement agreementwhich gives rise to further consistent set-tlement rights because it is required to begiven without volitional agreement of theSecretary. Therefore, a consistent agree-ment required to be offered to a request-ing taxpayer is not a settlement agreementunder section 6224(c)(2) of the InternalRevenue Code, or paragraph (c)(3) of thissection which starts a new period for re-questing consistent settlement terms. Forall other purposes of the Internal RevenueCode, however, (e.g., binding effect undersection 6224(c)(1), and conversion tononpartnership items under section6231(b)(1)(C)) a consistent agreement istreated as a settlement agreement.

(c) * * *(3) * * *(ii) The 60th day after the day on

which the settlement agreement was en-tered into.

(d) * * *

Example (1). The Service seeks to disallow a$100,000 loss reported by Partnership P. The Ser-vice agrees to a settlement with X, a partner in P, inwhich the Service allows 60 percent of the loss, ac-cepts the treatment of all other partnership items onthe partnership return, and imposes a penalty fornegligence related to the loss disallowance. PartnerY, which owns a 10 percent interest in the partner-ship, requests settlement terms which are consistentwith the settlement made between X and the Ser-vice. The items are partnership items (and a relatedpenalty) for X immediately before X enters into thesettlement agreement and are partnership items (anda related penalty) for Y at the time of the request.The Service must offer Y settlement terms allowinga $6,000 loss, a negligence penalty on the $4,000disallowance, and otherwise reflecting the treatmentof partnership items on the partnership return.

* * * * *

Par. 5. Add §301.6229(b)–2T to readas follows:

§301.6229(b)–2T Special rule withrespect to debtors in Title 11 cases(temporary).

(a) In general. Notwithstanding anyother law or rule of law, if an agreement isentered into under section 6229(b)(1)(B),and the agreement is signed by a personwho would be the tax matters partner butfor the fact that, at the time that the agree-ment is executed, the person is a debtor ina bankruptcy proceeding under Title 11 ofthe United States Code, such agreementshall be binding on all partners in the partnership unless the Service has beennotified of the bankruptcy proceeding inaccordance with paragraph (b) of this section.

(b) Procedures for notifying the Ser-vice of a partner’s bankruptcy proceed-ing. (1) The Service shall be notified ofthe bankruptcy proceeding of the tax mat-ters partner in accordance with the proce-dures set forth in §301.6223(c)–1T.

(2) In addition to the information spec-ified in §301.6223(c)–1T, notification thata person is (or was) a debtor in a bank-ruptcy proceeding shall include the datethe bankruptcy proceeding was filed, thename and address of the court in whichthe bankruptcy proceeding exists (or tookplace), the caption of the bankruptcy pro-ceeding (including the docket number orother identification number used by thecourt), and the status of the proceeding asof the date of notification.

Par. 6. Add §301.6229(f)–1T to read asfollows:

§301.6229(f)–1T Special rule for partialsettlement agreements (temporary).

(a) In general.If a partner enters into asettlement agreement with the Servicewith respect to the treatment of some ofthe partnership items in dispute for a part-nership taxable year, but other partnershipitems for such year remain in dispute, theperiod of limitations for assessing any taxattributable to the settled items shall bedetermined as if such agreement had notbeen entered into.

(b) Other items remaining in dispute.Pursuant to section 6226(c), a partner is aparty to a partnership level judicial pro-ceeding with respect to partnership items.When a partner settles partnership items,the settled partnership items convert tononpartnership items under section6231(b)(1)(C) and will not be subject toany future or pending partnership levelproceeding pursuant to section 6226(d)-(1). The remaining unsettled partnershipitems, however, will remain subject to de-termination under partnership level ad-ministrative and judicial procedures.Consequently, any remaining unsettleditems will be deemed to remain in dis-pute. Thus, the period for assessing set-tled items will be governed by the periodfor assessing the remaining unsettleditems.

Par. 7. Amend §301.6231(a)(1)–1T by:1. Revising the first two sentences of

paragraph (a)(1).2. Removing paragraph (a)(3).3. Redesignating paragraph (a)(4) as

paragraph (a)(3).The revision reads as follows:

§301.6231(a)(1)–1T Exception for smallpartnerships (temporary).

(a) * * * (1) “10 or fewer.” The “10 or fewer”

limitation described in section 6231(a)-(1)(B)(i) is applied to the number of nat-ural persons (other than nonresidentaliens), C corporations, and estates of de-ceased partners that were partners at anyone time during the partnership taxableyear. Thus, for example, a partnershipthat at no time during the taxable year hadmore than 10 partners may be treated as asmall partnership even if, because oftransfers of interests in the partnership, 11or more natural persons, C corporations,or estates of deceased partners owned in-

March 8, 1999 24 1999–10 I.R.B.

terests in the partnership for some portionof the taxable year. * * *

* * * * *

Par. 8. Amend §301.6231(a)(6)–1T by:1. Revising paragraph (a).2. Removing paragraph (c).The revision reads as follows:

§301.6231(a)(6)–1T Computationaladjustments (temporary).

(a) In general.A change in the tax lia-bility of a partner to properly reflect thetreatment of a partnership item under sub-chapter C of chapter 63 of the InternalRevenue Code is made through a compu-tational adjustment. A computational ad-justment includes a change in tax liabilitythat reflects a change in an affected itemwhere that change is necessary to prop-erly reflect the treatment of a partnershipitem, or any penalty, addition to tax, oradditional amount that relates to an ad-justment to a partnership item. However,if a change in a partner’s tax liability can-not be made without making one or morepartner level determinations, that portionof the change in tax liability attributableto the partner level determinations shallbe made under the provisions of subchap-ter B of chapter 63 of the Internal Rev-enue Code (relating to deficiency proce-dures), except for any penalty, addition totax, or additional amount which relates toan adjustment to a partnership item.

(1) Changes in a partner’s tax liabilitywith respect to affected items that do notrequire partner level determinations (suchas the threshold amount of medical de-ductions under section 213 that changesas the result of determinations made at thepartnership level) are computational ad-justments that are directly assessed.When making computational adjust-ments, the Service may assume thatamounts the partner reported on the part-ner ’s individual return include allamounts reported to the partner by thepartnership, absent contrary notice to theService (for example, a “Notice of Incon-sistent Treatment”). Such an assumptionby the Service does not constitute a part-ner level determination. Moreover, sub-stituting redetermined partnership itemsfor the partner’s previously reported part-nership items (including partnership itemsincluded in carryover amounts) does notconstitute a partner level determination

where the Service otherwise accepts allnonpartnership items (including, for ex-ample, nonpartnership item componentsof carryover amounts) as reported.

(2) Changes in a partner’s tax liabilitywith respect to affected items that requirepartner level determinations (such as apartner’s at-risk amount to the extent itdepends upon the source from which thepartner obtained the funds that the partnercontributed to the partnership) are compu-tational adjustments subject to deficiencyprocedures. Nevertheless, any penalty,addition to tax, or additional amount thatrelates to an adjustment to a partnershipitem may be directly assessed following apartnership proceeding, based on determi-nations in that proceeding, regardless ofwhether partner level determinations arerequired.

* * * * *

Par. 9. Amend §301.6231(a)(7)–1 byadding a sentence at the end of paragraphs(p)(2) and (r)(1) to read as follows:

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

* * * * *

(p) * * *(2) * * * For regulations applicable on

or after January 26, 1999 (reflecting statu-tory changes made effective July 22,1998) and before January 25, 2002, see§301.6231(a)(7)–1T(p)(2).

* * * * *

(r) * * * (1) * * * For regulations ap-plicable on or after January 26, 1999 (re-flecting statutory changes made effectiveJuly 22, 1998) and before January 25,2002, see §301.6231(a)(7)–1T(r)(1).

* * * * *

Par. 10. Add §301.6231(a)(7)–1T toread as follows:

§301.6231(a)(7)–1T Designation orselection of tax matters partner(temporary).

(a) through (p)(1) [Reserved]. For fur-ther guidance, see §301.6231(a)(7)–1(a)through (p)(1).

(p)(2) When each general partner isdeemed to have no profits interest in thepartnership. If it is impracticable under§301.6231(a)(7)–1(o)(2) to apply the

largest-profits-interest rule of §301.6231(a)-(7)–1(m)(2), the Commissioner will se-lect a partner (including a general or lim-ited partner) as the tax matters partner inaccordance with the criteria set forth in§301.6231(a)(7)–1(q). The Commis-sioner will notify, within 30 days of theselection, the partner selected, the part-nership, and all partners required to re-ceive notice under section 6223(a), effec-tive as of the date specified in the notice.For regulations applicable before July 22,1998, see §301.6231(a)(7)–1(p)(2).

(p)(3) through (q) [Reserved]. For fur-ther guidance, see §301.6231(a)(7)–1(p)(3) through (q).

(r) Notification of partnership—(1) Ingeneral. If the Commissioner selects atax matters partner under the provisionsof §301.6231(a)(7)–1(p)(1) or (3)(i), theCommissioner will notify, within 30 daysof the selection, the partner selected, thepartnership, and all partners required toreceive notice under section 6223(a), ef-fective as of the date specified in the no-tice. For regulations applicable beforeJuly 22, 1998, see §301.6231(a)(7)–1(r)(1).

(r)(2) [Reserved]. For further guid-ance, see §301.6231(a)(7)–1(r)(2).


Internal Revenue Service.

Approved December 30, 1998.

Donald C. Lubick,Assistant Secretary of

the Treasury.


Section 7520.—Valuation TablesThe adjusted applicable federal short-term, mid-

term, and long-term rates are set forth for the monthof March 1999. See Rev. Rul. 99–11, page 18.

Section 7872.—Treatment ofLoans With Below-MarketInterest Rates


1999–10 I.R.B. 25 March 8, 1999

March 8, 1999 26 1999–10 I.R.B.

Differential Earnings Rate forMutual Life InsuranceCompanies

Notice 99–13

This notice publishes a tentative deter-mination under § 809 of the Internal Rev-enue Code of the “differential earningsrate” for 1998 and the rate that is used tocalculate the “recomputed differentialearnings amount” for 1997. (The latterrate is referred to in this notice as the “re-computed differential earnings rate” for1997.) These rates are used by mutuallife insurance companies to calculate theirfederal income tax liability for taxableyears beginning in 1998.

BACKGROUND

Section 809(a) provides that, in thecase of any mutual life insurance com-pany, the amount of the deduction allow-able under § 808 for policyholder divi-dends is reduced (but not below zero) bythe “differential earnings amount.” Anyexcess of the differential earnings amountover the amount of the deduction allow-able under § 808 is taken into account as areduction in the closing balance of re-serves under subsections (a) and (b) of § 807. The “differential earningsamount” for any taxable year is theamount equal to the product of (a) the lifeinsurance company’s average equity basefor the taxable year multiplied by (b) the“differential earnings rate” for that tax-able year. The “differential earnings rate”for the taxable year is the excess of (a) the“imputed earnings rate” for the taxableyear over (b) the “average mutual earn-ings rate” for the second calendar yearpreceding the calendar year in which thetaxable year begins. The “imputed earn-ings rate” for any taxable year is theamount that bears the same ratio to 16.5percent as the “current stock earningsrate” for the taxable year bears to the“base period stock earnings rate.”

Section 809(f) provides that, in the caseof any mutual life insurance company, ifthe “recomputed differential earningsamount” for any taxable year exceeds thedifferential earnings amount for that tax-able year, the excess is included in life in-

surance gross income for the succeedingtaxable year. If the differential earningsamount for any taxable year exceeds therecomputed differential earnings amountfor that taxable year, the excess is allowedas a life insurance deduction for the suc-ceeding taxable year. The “recomputeddifferential earnings amount” for any tax-able year is an amount calculated in thesame manner as the differential earningsamount for that taxable year, except thatthe average mutual earnings rate for thecalendar year in which the taxable yearbegins is substituted for the average mu-tual earnings rate for the second calendaryear preceding the calendar year in whichthe taxable year begins.

The stock earnings rates and mutualearnings rates taken into account under § 809 generally are determined by divid-ing statement gain from operations by theaverage equity base. For this purpose, theterm “statement gain from operations”means “the net gain or loss from opera-tions required to be set forth in the annualstatement, determined without regard toFederal income taxes, and . . . properlyadjusted for realized capital gains andlosses. . . .” See § 809(g)(1). The term“equity base” is defined as an amount de-termined in the manner prescribed by reg-ulations equal to surplus and capital in-creased by the amount of nonadmittedfinancial assets, the excess of statutory re-serves over the amount of tax reserves,the sum of certain other reserves, and 50percent of any policyholder dividends (orother similar liability) payable in the fol-lowing taxable year. See§ 809(b)(2), (3),(4), (5) and (6). Section 1.809–10 of theIncome Tax Regulations provides that theequity base includes both the asset valua-tion reserve and the interest maintenancereserve for taxable years ending after De-cember 31, 1991.

Section 1.809–9(a) of the regulationsprovides that neither the differential earn-ings rate under § 809(c) nor the recom-puted differential earnings rate that isused in computing the recomputed differ-ential earnings amount under § 809(f)(3)may be less than zero.

Rev. Rul. 99–3, 1999–3 I.R.B. 4, pro-vides that a life insurance subsidiary of amutual holding company is not a mutual

life insurance company for which the de-duction for policyholder dividends is re-duced pursuant to §§ 808(c)(2) and 809.

As described above, the differentialearnings rate for 1998 and the recomputeddifferential earnings rate for 1997 affectthe income and deductions reported bymutual life insurance companies on theirfederal income tax returns for the 1998taxable year.

Data necessary to determine the tenta-tive differential earnings rate for 1998 andthe tentative recomputed differential earn-ings rate for 1997 have been compiledfrom returns filed by mutual life insurancecompanies and certain stock life insurancecompanies. The Internal Revenue Serviceis currently examining these returns. Thisexamination will not be completed beforethe March 15, 1999, due date for filing1998 calendar year returns.

NOTICE OF TENTATIVE RATES

This notice publishes a tentative deter-mination of the differential earnings ratefor 1998 and of the recomputed differen-tial earnings rate for 1997. This noticealso publishes a tentative determination ofthe rates on which the calculation of thedifferential earnings rate for 1998 and therecomputed differential earnings rate for1997 are based. The final determinationof these rates is expected to be publishedbefore September 1, 1999.

The tentative determination of the dif-ferential earnings rate for 1998 and thetentative determination of the recomputeddifferential earnings rate for 1997 that arepublished in this notice should be used bymutual life insurance companies to calcu-late the amount of tax liability for taxableyears beginning in 1998 (in the case ofcompanies that file returns before publi-cation of the final determination of theserates) or to calculate the amount of esti-mated unpaid tax liability for taxableyears beginning in 1998 (in the case ofcompanies that are allowed an extensionof time to file returns). Companies thatfile returns before publication of the finaldetermination of these rates should fileamended returns after the final determina-tion of these rates is published. If there isa failure to pay tax for a taxable year be-ginning in 1998 and the failure is attribut-

Part III. Administrative, Procedural, and Miscellaneous

able to a difference between (a) the tenta-tive determination of the differential earn-ings rate for 1998 and recomputed differ-ential earnings rate for 1997 and (b) thefinal determination of these rates, thenany such failure through September 15,1999, will be treated as due to reasonablecause and will not give rise to any addi-tion to tax under § 6651.

The tentative determination of the ratesis set forth in Table 1.

DRAFTING INFORMATION

The principal author of this notice isKatherine A. Hossofsky of the Office ofthe Assistant Chief Counsel (Financial In-stitutions and Products). For further in-

formation regarding this notice, contactMs. Hossofsky on (202) 622-3477 (not atoll-free call).

1999–10 I.R.B. 27 March 8, 1999

Notice 99–13 Table 1

Tentative Determination of Rates To Be Used For Taxable Years Beginning in 1998

Differential earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.081

Recomputed differential earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . 0

Imputed earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.813

Imputed earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.193

Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.221

Current stock earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.882

Stock earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.087



Average mutual earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 16.112

Average mutual earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 15.566

March 8, 1999 28 1999–10 I.R.B.

Notice of Proposed Rulemakingand Notice of Public Hearing

Escrow Funds and Other SimilarFunds

REG–209619–93


ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations relating to the desig-nation of the person required to report theincome earned on qualified settlementfunds and certain other funds, trusts, andescrow accounts, and other related rules.The proposed regulations would affectqualified settlement funds, qualified escrow accounts and qualified trusts es-tablished in connection with deferredlike-kind exchanges, escrow accounts es-tablished in connection with sales ofproperty, disputed ownership funds, andparties to these escrow accounts, trusts,and funds. This document also providesnotice of a public hearing on these pro-posed regulations.

DATES: Written comments must be re-ceived by May 3, 1999. Requests tospeak and outlines of topics to be dis-cussed at the public hearing scheduled forMay 12, 1999, at 10 a.m., must be re-ceived by April 21, 1999.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–209619–93),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–209619–93),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe INTERNET by selecting the “TaxRegs” option on the IRS Home Page, orby submitting comments directly to theIRS INTERNET site at http://www.irs.us-treas.gov/prod/tax_regs/comments.html.The public hearing will be held in Room

2615, Internal Revenue Building, 1111Constitution Avenue, Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations,Michael L. Gompertz of the Office of As-sistant Chief Counsel (Income Tax & Ac-counting), (202) 622-4910; concerningsubmissions of comments, the hearing,and/or to be placed on the building accesslist to attend the hearing, Michael Slaugh-ter, (202) 622-7190 (not toll-free num-bers).


Paperwork Reduction Act

The collections of information con-tained in this notice of proposed rulemak-ing have been submitted to the Office ofManagement and Budget for review in ac-cordance with the Paperwork ReductionAct of 1995 (44 U.S.C. 3507(d)). Com-ments on the collections of informationshould be sent to the Office of Manage-ment and Budget,Attn: Desk Officer forthe Department of the Treasury, Office ofInformation and Regulatory Affairs,Washington, DC 20503, with copies tothe Internal Revenue Service,Attn: IRSReports Clearance Officer, OP:FS:FP,Washington, DC 20224. Comments onthe collections of information should bereceived by April 1, 1999. Comments arespecifically requested concerning:

Whether the proposed collections of in-formation are necessary for the properperformance of the functions of the Inter-nal Revenue Service, including whetherthe information will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collectionsof information (see below);

How the quality, utility, and clarity ofthe information to be collected may be en-hanced;

How the burden of complying with theproposed collections of information maybe minimized, including through the ap-plication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costs andcosts of operation, maintenance, and pur-chase of service to provide information.

The collections of information in thisproposed regulation are in §§1.468B–1(k)(2), 1.468B–1(k)(3)(iv), 1.468B–6(e)(1), 1.468B–6(f), 1.468B–7(d),1.468B–8(f), 1.468B–8(g)(1), 1.468B–9(c)(1), and 1.468B–9(f)(3).

The collections of information in§§1.468B–1(k)(3)(iv), 1.468B–6(e)(1),1.468B–7(d), 1.468B–8(g)(1), and1.468B–9(c)(1) are satisfied by includingthe required information on Forms 1099,1041, 1120, or 1120-SF. The burden forthese requirements is reflected in the bur-den estimates for these forms.

The other collections of information inthis proposed regulation (in §§1.468B–1(k)(2), 1.468B–6(f), 1.468B–8(f), and1.468B–9(f)(3)) are discussed below.

The collection of information in§1.468B–1(k)(2) is an election statementattached to a tax return filed for a quali-fied settlement fund (QSF). The state-ment notifies the IRS that the transferor tothe QSF has elected grantor trust treat-ment for the QSF. This collection is re-quired to obtain a benefit.

The collections of information in§§1.468B–6(f) and 1.468B–8(f) are state-ments that third parties must provide to anescrow holder, trustee, or administrator toenable the escrow holder, trustee, or ad-ministrator to properly report the incomeof an escrow account or trust on Form1099. These collections are mandatory.

The collection of information in§1.468B–9(f)(3) is a statement that atransferor must provide with respect tothe transfer of cash or property to a dis-puted ownership fund. This collection ismandatory.

The likely respondents are individuals,business or other for-profit institutions,small businesses or organizations, non-profit institutions, and government entities.

Estimated total annual reporting bur-den: 4,650 hours.

Estimated average annual burden perrespondent: .5 hours.

Estimated number of respondents:9,300.

Estimated annual frequency of re-sponses: on occasion.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-

Part IV. Items of General Interest

1999–10 I.R.B. 29 March 8, 1999

lection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

Books and records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

This notice contains proposed amend-ments to the Income Tax Regulations (26CFR Part 1) under section 468B of the In-ternal Revenue Code. Section 468B wasadded to the Code by section 1807(a)-(7)(A) of the Tax Reform Act of 1986(Public Law 99-514, 100 Stat. 2814) andwas amended by section 1018(f) of theTechnical and Miscellaneous RevenueAct of 1988 (Public Law 100–647, 102Stat. 3582). Section 468B(g) providesthat nothing in any provision of law shallbe construed as providing that an escrowaccount, settlement fund, or similar fundis not subject to current income tax. Sec-tion 468B(g) further provides that theSecretary shall prescribe regulations pro-viding for the taxation of any such ac-count or fund whether as a grantor trust orotherwise.

On December 23, 1992, final regula-tions (TD 8459, 1993–1 C.B. 68) undersection 468B(g) were published in theFederal Register(57 F.R. 60983). Theregulations provide guidance concerningqualified settlement funds, but do not ad-dress other types of funds, escrow ac-counts, or trusts subject to current taxa-tion under section 468B(g).

Section 1.468B–1(c) defines a quali-fied settlement fund (QSF) as a fund, ac-count, or trust meeting three require-ments. A QSF is a separate taxpayersubject to tax on its modified gross in-come. QSF classification is not elective.The preamble to the QSF regulations (see1993–1 C.B. 69) states that the IRS andthe Treasury Department rejected an elec-tive approach because it would result ininconsistent tax treatment for similarfunds, claimants, or transferors, and ac-companying complexity.

The preamble to the QSF regulationsalso states (see 1993–1 C.B. 73) that fu-ture regulations will address the tax treat-

ment of funds, accounts, or trusts otherthan QSFs, specifically, escrow accountsused in the sale of property and section1031 qualified escrow accounts.

Section 1031(a)(3) was added to the In-ternal Revenue Code by section 77 of theTax Reform Act of 1984 (Public Law 98-369, 98 Stat. 595). On May 1, 1991, finalregulations (TD 8346, 1991–1 C.B. 150)under section 1031(a)(3) were publishedin the Federal Register(56 F.R. 19933).These regulations were amended by finalregulations (TD 8535, 1994–1 C.B. 202)published in the Federal Register forApril 20, 1994 (59 F.R. 18747). The reg-ulations provide four safe harbors, the useof any of which will result in a determina-tion that the taxpayer (i.e., the party trans-ferring the property in the exchange) isnot in actual or constructive receipt ofmoney or other property for purposes ofsection 1031. In particular, the regula-tions provide that the taxpayer is not inactual or constructive receipt of money orother property held in a qualified escrowaccount or qualified trust. Section1.1031(k)–1(g)(3) defines qualified es-crow accountand qualified trust.

The regulations under section 1031(a)-(3) do not address the taxation of incomeearned on a qualified escrow or qualifiedtrust. The preamble to these regulations(see 1991–1 C.B. 154) states that this issuewill be addressed in future regulations.


1. Election to Treat a QSF as a GrantorTrust Under §1.468B–1(k) of theProposed Regulations.

The proposed regulations provide thatif there is only one transferor to a QSF,the transferor is allowed to make an elec-tion that results in the QSF being treatedas a grantor trust all of which is treated asowned by the transferor. In general, theelection is made on a statement attachedto the first Form 1041 filed on behalf ofthe QSF. The transferor may make agrantor trust election whether or not therequirements are otherwise satisfied forclassification of the QSF as a grantortrust.

In general, grantor trust treatment for aQSF is available under the proposed regu-lations only if the QSF is established afterthe date final regulations are published inthe Federal Register. However, the pro-

posed regulations provide a narrow ex-ception applicable to any QSF establishedby the U.S. government on or before thedate final regulations are published if theQSF would otherwise have been classi-fied as a grantor trust in the absence of theQSF regulations (see Rev. Rul. 77–230(1977–2 C.B. 214)). Under the exception,such a QSF will be automatically treatedas a grantor trust for all taxable years anda grantor trust election is thus unneces-sary. If a QSF is established after the datefinal regulations are published, a grantortrust election will be required in order forthe QSF to be treated as a grantor trust.This rule applies whether or not the U.S.government is the grantor.

2. Section 1031 Qualified EscrowAccounts and Qualified Trusts Under§1.468B–6 of the ProposedRegulations.

In general, the proposed regulationstreat the assets of a qualified escrow ac-count or qualified trust established in con-nection with a deferred exchange undersection 1031(a)(3) as owned by the tax-payer, i.e., the party that transfers the re-linquished property. Thus, the taxpayer istaxable on the income earned on these as-sets. However, if the transferee or thequalified intermediary has all the benefi-cial use and enjoyment of the assets of aqualified escrow account or qualifiedtrust, then the assets of the escrow ac-count or trust are treated as owned by thetransferee or qualified intermediary, andthe income earned on the assets is taxableto the transferee or qualified intermediary.

Further, the proposed regulations re-quire the escrow holder of a qualified es-crow account or trustee of a qualified trustto report the income of the escrow ac-count or trust on Forms 1099 to the extentthe information reporting provisions ofthe Code otherwise require the filing ofForms 1099. In general, the taxpayer istreated as the payee of the income of theescrow account or trust unless the partiesto the transaction provide a statement tothe escrow holder or trustee indicatingthat the transferee or qualified intermedi-ary is the payee. Such a statement mustbe provided if the transferee or qualifiedintermediary has all the beneficial use andenjoyment of the assets of the escrow ac-count or trust.

March 8, 1999 30 1999–10 I.R.B.

The proposed regulations provide thatthe escrow holder or trustee is not liablefor penalties under sections 6721 and6722 if the escrow holder or trustee relieson an incorrect statement provided to theescrow holder or trustee (see above) or re-lies on the parties’ failure to provide sucha statement.

The proposed regulations also providethat if the transferee or the qualifiedintermediary has all the beneficial useand enjoyment of the assets of a qualifiedescrow account or trust, the deferredexchange may involve a below-marketloan of these assets from the taxpayer tothe transferee or qualified intermediarysubject to the provisions of section 7872.

3. Pre-closing Escrows Under§1.468B–7 of the ProposedRegulations.

A pre-closing escrow is an escrow ac-count, trust, or fund that satisfies five re-quirements. First, it must be establishedin connection with a sale or exchange ofreal or personal property. Second, it mustbe funded with a down payment, earnestmoney, or similar payment prior to thesale or exchange of the property (as deter-mined for federal income tax purposes).Third, its assets must be used to securethe purchaser’s obligation to pay the pur-chase price (in the case of an exchange ofproperty, the term purchaser means thetransferee of the property and the termpurchase price means the required consid-eration for the property). Fourth, its as-sets (including income earned thereon)must be paid to the purchaser or otherwiseused for the purchaser’s benefit, for ex-ample, as a credit against the purchaseprice. Fifth, it must not be a qualified es-crow or qualified trust established in con-nection with a deferred section 1031 ex-change.

The proposed regulations treat the as-sets of a pre-closing escrow as owned bythe purchaser for federal income tax pur-poses. Thus, the income earned on the as-sets is taxable to the purchaser. The es-crow holder, trustee, or other personresponsible for administering a pre-clos-ing escrow must report the income of theescrow on Forms 1099 to the extent theinformation reporting provisions of theCode otherwise require the filing ofForms 1099.

4. Contingent At-closing Escrows Under§1.468B–8 of the ProposedRegulations.

The proposed regulations provide rulesfor taxing the income of a contingent at-closing escrow, which is an escrow ac-count, trust, or fund satisfying three re-quirements. First, a contingent at-closingescrow must be established in connectionwith the sale or exchange of real or per-sonal property used in a trade or businessor held for investment (other than an ex-change to which section 354, 355, or 356applies). Second, the assets of the escrowmust be distributable to the purchaser orseller based on bona fide contingenciesthat will be resolved after the sale or ex-change (as determined for federal incometax purposes). (If a contingent at-closingescrow is established in connection withan exchange of property, rather than asale, the term purchaserrefers to thetransferee of the property and the termseller refers to the transferor of the prop-erty.) Thus, for example, the agreementbetween the parties may provide that allor a portion of the assets of the escrow aredistributable to the purchaser if specifiedliabilities associated with the propertyarise within a specified period of timeafter closing or if certain earnings targetsare not met by a specified date. Third, theescrow must not be a qualified escrow ac-count or qualified trust established in con-nection with a deferred section 1031 ex-change.

Prior to the date (called the determina-tion date) on which the specified eventsoccur or fail to occur, thereby fixing theamounts payable from the escrow to thepurchaser and seller, the proposed regula-tions provide that the assets of the escroware treated as owned by the purchaser, andthe income earned on the assets is thustaxable to the purchaser.

Beginning on the determination date,the proposed regulations provide that thepurchaser and the seller are taxable on theincome of the escrow corresponding totheir respective ownership interests ineach asset of the escrow. Further, the pro-posed regulations require the purchaserand seller to provide the escrow holder,trustee, or other administrator of the es-crow with a statement within 30 days ofthe determination date indicating whatthese ownership interests are. Also, theescrow holder, trustee, or other adminis-

trator is required to prepare Forms 1099to report the income of a contingent at-closing escrow to the extent the informa-tion reporting provisions of the Code oth-erwise require the filing of Forms 1099.

In preparing the Forms 1099, the es-crow holder, trustee, or other administra-tor may rely on the statement (discussedabove) provided to the administratorwithin 30 days of the determination date.Also, if the statement is not provided, theescrow holder, trustee, or other adminis-trator may rely on the parties’ failure toprovide a statement and continue to treatthe purchaser as the owner. The adminis-trator’s ability to rely on a statement, orits absence, protects the administratorfrom liability for penalties under sections6721 and 6722.

5. Disputed Ownership Funds Under§1.468B–9 of the ProposedRegulations.

A disputed ownership fund (DOF) is anescrow account, trust, or fund other than aQSF that satisfies three requirements.First, a DOF must be established to holdmoney or property subject to conflictingclaims of ownership. Second, a DOFmust be subject to the continuing jurisdic-tion of a court of law or equity. Third,money or property cannot be paid or dis-tributed from a DOF to a claimant withoutcourt approval. An interpleader fund mayqualify as a DOF.

In general, a DOF is taxed under theproposed regulations as if it were a quali-fied settlement fund if all the DOF’s as-sets are passive investment assets, for ex-ample, cash or cash equivalents, stock,and debt obligations. However, if theDOF holds assets other than passive in-vestment assets (for example, real estateor business property the ownership ofwhich is in dispute), the DOF is taxed asif it were a C corporation. The claimantsto the fund may, however, submit a letterruling request proposing an alternativemethod of taxation if they believe thatthere is a more appropriate method of tax-ing a DOF than under the rules statedabove.

In addition to providing rules for thetaxation of the income of a DOF, the pro-posed regulations also provide rules con-cerning the transfer of property to andfrom a DOF. In particular, a transfer ofproperty to a DOF is not a sale or other

1999–10 I.R.B. 31 March 8, 1999

disposition by the transferor under section1001(a) if the transferor claims ownershipof the transferred property. Also, a DOFis not allowed a deduction for a distribu-tion of disputed property to a claimantand the distribution is not a taxable eventto the DOF.

6. Request for Comments

Comments are requested on the appro-priate tax treatment of a fund, account, ortrust that meets the requirements for morethan one type of entity subject to the pro-posed regulations. Comments are also re-quested on the appropriate tax treatmentof a fund, account, or trust that changesover time so that a different portion of theproposed regulations would apply to it.For example, an escrow initially maymeet the requirements for a contingent at-closing escrow, but may subsequently sat-isfy the requirements for a DOF. Thiscould occur if a dispute were to arise be-tween the purchaser and the seller con-cerning their respective interests in the es-crow after the determination date and theadministrator of the DOF files an inter-pleader action to resolve the dispute.

Comments are also requested concern-ing the appropriate tax treatment of a con-tingent-at-closing escrow if multiple con-tingencies are specified in the agreementbetween the purchaser and the seller. Theproposed regulations provide that (1) theincome of a contingent at-closing escrowis taxable entirely to the purchaser prior tothe determination date, and (2) the deter-mination date is the date on which (or bywhich) the last of the contingent eventshas either occurred or failed to occur.Therefore, if multiple contingencies areprovided for in the agreement between theparties and some, but not all, of the con-tingencies have been resolved, the pro-posed regulations provide that the incomeof the escrow is taxable entirely to thepurchaser (because the determination datehas not yet occurred) regardless of the ef-fect of the contingencies that have beenresolved. The purchaser is thus taxed onall the income earned on the escrow eventhough it may be known (based on theresolution of one or more contingencies)that a fixed portion of the escrowed assetswill be distributed to the seller. The pro-posed rule is simple and easy to adminis-ter because it treats the escrow in a uni-tary manner and avoids the need for

multiple determination dates. Arguably,however, a more complex approachshould be adopted involving a separatedetermination date for each contingency.Under the more complex approach, aseach contingency is resolved, a new de-termination would be made concerningthe taxation of the fund’s income. The in-come earned on the fund’s assets wouldbe taxable to the purchaser and seller inaccordance with their ownership interestsas determined on each determination dateas each separate contingency is resolved.

Comments are also requested on the re-quirement that the assets of a contingentat-closing escrow must be distributable tothe purchaser or seller based on bona fidecontingencies that are resolved after thesale or exchange. Issues may arise as towhether a particular contingency is bonafide in at least two ways: whether the out-come is sufficiently in doubt and whetherthe effect of the outcome on the fund issignificant. A contingency may not bebona fide if the parties can reasonably beexpected to know the outcome, e.g., a con-tingency based on whether, in ten years,the consumer price index will be at leastequal to the consumer price index today.In addition, a contingency may not bebona fide if the effect on the fund is mini-mal even though the outcome is uncertain.

Finally, comments are requested re-garding whether there are other types offunds for which rules under section 468Bare required.

7. Proposed Effective Date.

In general, the regulations are pro-posed to be applicable for QSFs, quali-fied escrow accounts and qualified trusts,pre-closing escrows, contingent at-clos-ing escrows, and DOFs established afterthe date final regulations are published inthe Federal Register. However, the pro-posed regulations contain transition rules.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. Pursuant to section 7805(f) of theInternal Revenue Code, this notice of pro-

posed rulemaking will be submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business. An initialregulatory flexibility analysis has beenprepared for the collections of informa-tion contained in this notice of proposedrulemaking under 5 U.S.C. 603. Theanalysis is set forth below.

Initial Regulatory Flexibility Act Analysis

The objective of the proposed regula-tions is to ensure that the income of cer-tain escrow accounts, trusts, and funds issubject to current taxation by identifyingthe proper party or parties subject to taxand by requiring appropriate informationreporting for the income of the escrow ac-count, trust, or fund. Section 468B(g)provides the legal basis for the require-ments of the proposed regulations. TheIRS and Treasury Department are notaware of any federal rules that may dupli-cate, overlap, or conflict with the pro-posed regulations.

An explanation is provided below ofthe burdens on small entities resultingfrom the requirements of the proposedregulations. Also, a description is pro-vided of alternative rules that were con-sidered by the IRS and the Treasury De-partment but rejected as too burdensome.

1. Grantor Trust Election Under§1.468B–1(k).

Under §1.468B–1(k), the transferor to aQSF may elect to have the QSF treated asa grantor trust all of which is treated asowned by the transferor (grantor trustelection). If the transferor makes thegrantor trust election, the administrator ofthe QSF must file Form 1041 rather thanthe QSF income tax return, Form 1120-SF.

Approximately 900 QSF returns arefiled each year. Only a small number ofthese returns are filed for newly createdQSFs. Because a grantor trust electionmay be made only for the year in which aQSF is established, and may only bemade for a QSF that has one transferor,the IRS and Treasury Department believethat a very small number of grantor trustelections will be made each year.

Because of the availability of thegrantor trust election, the proposed regu-lations provide a choice of filing Form1041 or Form 1120-SF in certain situa-

March 8, 1999 32 1999–10 I.R.B.

tions. Small entities may choose the fil-ing requirement that is less burdensome.

The alternative to the proposed regula-tions is to retain the current rules forQSFs and not provide qualifying taxpay-ers with the opportunity to make a grantortrust election.

2. Qualified Escrow Accounts andQualified Trusts Established inConnection with Deferred Exchanges;Pre-closing Escrows; and ContingentAt-closing Escrows.

Sections 1.468B–6(e)(1), 1.468B–7(d),and 1.468B–8(g)(1) require specified es-crow holders, trustees, and administratorsto file Forms 1099 with the IRS and fur-nish payee statements in accordance withthe information reporting requirements ofsubpart B, Part III, subchapter A, chapter61, Subtitle F of the Internal RevenueCode.

Also, §1.468B–6(f) requires the partiesto a qualified escrow account or qualifiedtrust to provide a statement to the escrowholder or trustee if the qualified interme-diary or transferee has all the beneficialuse and enjoyment of the assets of the es-crow account or trust. This statement fa-cilitates the filing of Forms 1099 by theescrow holder or trustee.

Similarly, §1.468B–8(f) requires theparties to a contingent at-closing escrowto provide statements to the escrow holderor other administrator. These statementsfacilitate the filing of Forms 1099 by theescrow holder or other administrator.

The IRS and Treasury Department esti-mate that annually there are approxi-mately 16,000 deferred exchange transac-tions involving the creation of a qualifiedescrow account or qualified trust; approx-imately 200,000 transactions involvingthe creation of a pre-closing escrow; andapproximately 10,000 transactions in-volving the creation of a contingent at-closing escrow.

As an alternative to the proposed regu-lations, the IRS and the Treasury Depart-ment considered, but rejected as too bur-densome, a rule that would have requiredthe filing of grantor trust returns (Form1041) for qualified escrow accounts andqualified trusts, pre-closing escrows, andcontingent at-closing escrows. Instead ofrequiring grantor trust returns, the pro-posed regulations require the filing ofForms 1099. This is less burdensome on

small entities because, unlike Form 1041,Form 1099 is simple, does not require asignature, and requires only the reportingof gross income.

Further, the IRS and the Treasury De-partment considered an alternative rule forcontingent at-closing escrows under whichthe income of the escrow for the period be-fore the determination date would havebeen taxable to the purchaser or the sellerdepending on the required tax treatment bythe purchaser and seller of the principalamount deposited into the escrow. This al-ternative rule would not have provided cer-tainty, would have required a difficult legalanalysis (namely, the determination of therequired tax treatment of the principalamount deposited into the escrow), andwould have required the purchaser andseller to provide a signed statement to theadministrator of the escrow identifying theparty to whom the administrator should re-port the income for the period before thedetermination date. Under the proposedregulations, the income of the escrow is al-ways taxable to the purchaser for the pe-riod before the determination date, therebyeliminating the need for a signed statementto be provided to the administrator and theneed to determine the required tax treat-ment of the principal amount depositedinto the escrow. This rule is simpler thanthe alternative.

3. Disputed Ownership Funds (DOFs).

Section 1.468B–9(c)(1) of the pro-posed regulations generally provides thata DOF is taxable as a QSF if all its assetsare passive investment assets or taxable asa C corporation in all other cases. How-ever, the regulations also provide that ifthere is a more appropriate method of tax-ing a DOF, the claimants to the fund mayrequest a private letter ruling to permit theuse of that method.

Section 1.468B–9(f)(3) of the proposedregulations requires that a transferor pro-vide a statement to the administrator of aDOF that itemizes the cash or propertytransferred to the DOF during the calen-dar year. The statement must also indi-cate the DOF’s basis and holding periodin the property.

The IRS and the Treasury Departmentestimate that annually there are approxi-mately 5,000 transactions involving thecreation of a disputed ownership fund.

As an alternative to the proposed regu-

lations, the IRS and the Treasury Depart-ment considered, but rejected as too bur-densome, a rule that would have requiredall DOFs to file corporate income tax re-turns (Form 1120) regardless of the natureof the assets held by the DOF. This alter-native was rejected because it was con-cluded that a QSF return (Form 1120-SF)is more appropriate than a corporate in-come tax return if all the assets of theDOF are passive investment assets. Theproposed regulations thus impose less ofan administrative burden on small entitiesthan would have resulted from the alter-native rule as Form 1120-SF is generallyeasier to prepare than Form 1120. OnlyDOFs that hold assets other than passiveinvestment assets will be required to fileForm 1120 under the proposed regula-tions. In addition, the proposed regula-tions provide taxpayers with the addi-tional flexibility of being able to requestan alternative method of taxation if thatmethod is more appropriate than QSF orC corporation treatment as providedunder the general rule.

There are no known alternative rulesthat are less burdensome to small entitiesbut that accomplish the purpose of thestatute. The IRS and Treasury Depart-ment request comments from small enti-ties concerning possible alternatives tothese rules.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) or electronic comments that aresubmitted timely (in the manner describedin the ADDRESSES portion of the pream-ble) to the IRS. The IRS and TreasuryDepartment request comments on theclarity of the proposed rules and how theycan be made easier to understand. Allcomments will be available for public in-spection and copying.

A public hearing is scheduled for May12, 1999, at 10 a.m. in Room 2615, Inter-nal Revenue Building, 1111 ConstitutionAvenue NW, Washington, DC. Due tobuilding security procedures, visitorsmust enter at the 10th Street entrance, lo-cated between Constitution and Pennsyl-vania Avenues, NW. In addition, all visi-tors must present photo identification toenter the building. Because of access re-

1999–10 I.R.B. 33 March 8, 1999

strictions, visitors will not be admitted be-yond the immediate entrance area morethan 15 minutes before the hearing starts.For information about having your nameplaced on the building access list to attendthe hearing, see the “FOR FURTHER IN-FORMATION CONTACT” section ofthis preamble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written comments by May 3,1999, and submit an outline of the topicsto be discussed and the time devoted toeach topic (signed original and eight (8)copies) by April 21, 1999.

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

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal author of these proposedregulations is Michael L. Gompertz of theOffice of Assistant Chief Counsel (In-come Tax and Accounting). However,other personnel from the IRS and Trea-sury Department participated in their de-velopment.

* * * * *

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 forpart 1 is amended by adding entries in nu-merical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.468B–6 also issued under 26

U.S.C. 468B. Section 1.468B–7 also issued under 26



U.S.C. 468B. * * *Par. 2. Section 1.468B-0 is amended as

follows:1. The introductory text is revised.2. The entry for §1.468B–1, paragraph

(k), is redesignated as paragraph (l).

3. A new entry for §1.468B–1, para-graph (k), is added.

4. The section heading in the entry for§1.468B–5 is revised.

5. New entries are added for§§1.468B–5, paragraph (c), 1.468B–6,1.468B–7, 1.468B–8, and 1.468B–9.

6. The revised and added provisionsread as follows:

§1.468B–0 Table of contents.

This section lists the table of contentsfor §§1.468B–1 through 1.468B–9.

§1.468B–1 Qualified settlement funds.

* * * * *

(k) Election to treat a qualified settle-ment fund as a subpart E trust.(1) In general.(2) Manner of making grantor trust elec-

tion.(i) In general.(ii) Requirements for election statement.(3) Effect of making the election.

* * * * *

§1.468B–5 Effective dates and transitionrules applicable to qualified settlementfunds.

* * * * *

(c) Grantor trust elections under§1.468B–1(k).

(1) In general.(2) Qualified settlement funds estab-

lished by the U.S. government on orbefore the date of publication of finalregulations in the Federal Register.

§1.468B–6 Qualified escrow accountsand qualified trusts used in deferredexchanges of like-kind property undersection 1031(a)(3).

(a) Scope.(b) Definitions.(c) Income of qualified escrow account

or qualified trust.(1) In general.(2) Transferee or qualified intermediary

has all the beneficial use and enjoy-ment of assets of a qualified escrowaccount or qualified trust.

(d) Application of section 7872.(e) Reporting obligations of the escrow

holder or trustee.(1) In general.

(2) Person treated as payee.(3) Relief from penalties for filing incor-

rect information return or payeestatement.

(f) Statement provided to escrow holderor trustee.

(g) Effective date.(1) In general.(2) Transition rule.(h) Examples.

§1.468B–7 Pre-closing escrows.

(a) Scope.(b) Definition.(c) Taxation of pre-closing escrows.(d) Reporting obligations of the adminis-

trator.(e) Effective date.(1) In general.(2) Transition rule.(f) Example.

§1.468B–8 Contingent at-closingescrows.

(a) Scope.(b) Definitions.(c) Tax liability of purchaser and seller

for the period prior to the determina-tion date.

(d) Transfer of interest in the assets ofthe escrow on the determination date.

(e) Tax liability of purchaser and sellerfor the period beginning on the deter-mination date.

(f) Statement required to be provided toadministrator within 30 days after thedetermination date.

(g) Reporting obligations of the adminis-trator.

(1) In general.(2) Person treated as payee.(3) Relief from penalties for filing incor-

rect information return or payeestatement.

(h) Effective date.(1) In general.(2) Transition rule.(i) [Reserved](j) Example.

§1.468B–9 Disputed ownership funds.

(a) In general.(b) Definitions.(c) Taxation of a disputed ownership

fund.(1) In general.(2) Exception.

March 8, 1999 34 1999–10 I.R.B.

(3) Special rules.(d) Basis of property held by a disputed

ownership fund.(e) Request for prompt assessment.(f) Rules applicable to the transferor.(1) Transfer of property.(i) In general.(ii) Exceptions.(2) Economic performance.(i) In general.(ii) Obligations of the transferor.(3) Statement to the disputed ownership

fund and the Internal Revenue Ser-vice.

(i) In general.(ii) Information required on statement.(A) In general.(B) Combined statements.(4) Distributions to transferors.(i) In general.(ii) Exception.(iii) Deemed distributions.(g) Distribution to a claimant other than

a transferor.(h) Effective date.(1) In general.(2) Transition rule.(i) [Reserved](j) Examples.

Par. 3. Section 1.468B–1 is amendedby redesignating paragraph (k) as para-graph (l) and adding a new paragraph (k)to read as follows:

§1.468B–1 Qualified settlement funds.

* * * * *

(k) Election to treat a qualified settle-ment fund as a subpart E trust—(1) In gen-eral. If a qualified settlement fund hasonly one transferor (see paragraph (d)(1) ofthis section for the definition of transferor),the transferor may make an irrevocableelection (grantor trust election) to treat thequalified settlement fund as a trust all ofwhich is treated as owned by the transferorunder section 671 and the regulationsthereunder. A grantor trust election may bemade whether or not the qualified settle-ment fund would be classified, in the ab-sence of paragraph (b) of this section, as atrust all of which is treated as owned by thetransferor under section 671 and the regu-lations thereunder.

(2) Manner of making grantor trustelection—(i) In general. To make agrantor trust election, a transferor must at-tach an election statement satisfying the

requirements of paragraph (k)(2)(ii) of thissection to a timely filed (including exten-sions) Form 1041 that the administratorfiles on behalf of the qualified settlementfund for the taxable year in which thequalified settlement fund is established.However, if a Form 1041 would not other-wise be required to be filed (for example,because the provisions of §1.671–4(b) areapplicable), then the transferor makes agrantor trust election by attaching an elec-tion statement satisfying the requirementsof paragraph (k)(2)(ii) of this section to atimely filed (including extensions) incometax return of the transferor for the taxableyear in which the qualified settlementfund is established.

(ii) Requirements for election state-ment. The election statement must in-clude a statement by the transferor thatthe transferor will treat the qualified set-tlement fund as a grantor trust. The elec-tion statement must also include the trans-feror’s name, signature, address, taxpayeridentification number, and the legend,“§1.468B–1(k) Election”. The electionstatement and the statement described in§1.671–4(a) may be combined into a sin-gle statement.

(3) Effect of making the election.If agrantor trust election is made—

(i) Paragraph (b) of this section, and§§1.468B–2, 1.468B–3, and 1.468B–5 donot apply to the qualified settlement fund.However, this section (except for para-graph (b) of this section) and §1.468B–4apply to the qualified settlement fund;

(ii) The qualified settlement fund istreated for federal income tax purposes asa trust all of which is treated as owned bythe transferor under section 671 and theregulations thereunder;

(iii) The transferor must take into ac-count in computing the transferor’s in-come tax liability all items of income, de-duction, and credit (including capitalgains and losses) of the qualified settle-ment fund in accordance with §1.671–3(a)(1); and

(iv) The reporting obligations imposedby §1.671–4 on the trustee of a trust applyto the administrator.

* * * * *Par. 4. Section 1.468B–5 is amended

by revising the section heading andadding paragraph (c) to read as follows:

§1.468B-5 Effective dates and transitionrules applicable to qualified settlementfunds.

* * * * *

(c) Grantor trust elections under§1.468B–1(k)—(1) In general. A trans-feror may make a grantor trust electionunder §1.468B–1(k) only if the qualifiedsettlement fund is established after thedate of publication of final regulations inthe Federal Register.

(2) Qualified settlement funds estab-lished by the U.S. government on or be-fore the date of publication of final regu-lations in theFederal Register. If theU.S. government, or any agency or instru-mentality thereof, establishes a qualifiedsettlement fund on or before the date ofpublication of final regulations in theFederal Register,and the fund wouldhave been classified as a trust all of whichis treated as owned by the U.S. govern-ment under section 671 and the regula-tions thereunder without regard to the reg-ulations under section 468B, then the U.S.government is deemed to have made agrantor trust election under §1.468B–1(k), and the election is effective for alltaxable years of the fund.

Par. 5. Sections 1.468B–6 through1.468B–9 are added to read as follows:

§1.468B–6 Qualified escrow accountsand qualified trusts used in deferredexchanges of like-kind property undersection 1031(a)(3).

(a) Scope. This section provides rulesunder section 468B(g) relating to the cur-rent taxation of income of a qualified es-crow account or qualified trust estab-lished in connection with a deferredexchange under section 1031(a)(3).

(b) Definitions. As used in this section,deferred exchange, relinquished property,replacement property, qualified escrowaccount, qualified trust, qualified inter-mediary, exchange period,and escrowholder have the same meanings as in§1.1031(k)–. Also, as used in this section,taxpayermeans the transferor of the relin-quished property, and transfereemeansthe person who is treated as owning therelinquished property for federal incometax purposes after its transfer by the tax-payer. Further, owner means the persontreated as owning the assets of the quali-

1999–10 I.R.B. 35 March 8, 1999

fied escrow account or qualified trustunder paragraph (c) of this section.

(c) Income of qualified escrow accountor qualified trust—(1) In general. Exceptas otherwise provided in paragraph (c)(2)of this section, and except for purposes ofdetermining whether a transaction quali-fies as a deferred exchange, the taxpayeris the owner. Thus, the taxpayer musttake into account in computing the tax-payer’s income tax liability all items ofincome, deduction, and credit (includingcapital gains and losses) of the qualifiedescrow account or qualified trust.

(2) Transferee or qualified intermedi-ary has all the beneficial use and enjoy-ment of assets of a qualified escrow ac-count or qualified trust.If the transfereeor the qualified intermediary has all thebeneficial use and enjoyment of assets ofa qualified escrow account or qualifiedtrust, the transferee or qualified interme-diary is the owner. Thus, the transferee orqualified intermediary must take into ac-count in computing its income tax liabil-ity all items of income, deduction, andcredit (including capital gains and losses)of the account or trust. The followingfactors, and other relevant facts and cir-cumstances in a particular case, will beconsidered in determining whether thetransferee or the qualified intermediary,rather than the taxpayer, has the beneficialuse and enjoyment of assets of an accountor trust and thus is the owner—

(i) Which person enjoys the use of theearnings of the account or trust;

(ii) Which person receives the benefitfrom appreciation, if any, in the value ofthe assets of the account or trust; and

(iii) Which person is subject to a risk ofloss from a decline, if any, in the value ofthe assets of the account or trust.

(d) Application of section 7872.If thetransferee or the qualified intermediary isthe owner under paragraph (c)(2) of thissection, section 7872 may apply if the de-ferred exchange involves a below-marketloan from the taxpayer to the owner. Seesection 7872(c)(1) for the loans to whichsection 7872 applies.

(e) Reporting obligations of the escrowholder or trustee—(1) In general. Theescrow holder of a qualified escrow ac-count and the trustee of a qualified trustmust, for each calendar year (or portionthereof) that the account or trust is in exis-tence, report the income of the account or

trust on Forms 1099 in accordance withthe information reporting requirements ofsubpart B, Part III, subchapter A, chapter61, Subtitle F of the Internal RevenueCode. The Forms 1099 must show the es-crow holder or trustee as the payor andmust show the proper payee. See para-graph (e)(2) of this section for the deter-mination of the proper payee.

(2) Person treated as payee.In satisfy-ing the reporting obligations of paragraph(e)(1) of this section, the following rulesapply to the escrow holder of a qualifiedescrow account and the trustee of a quali-fied trust—

(i) If no written statement described inparagraph (f) of this section is provided tothe escrow holder or trustee, the escrowholder or trustee must treat the taxpayeras the owner and the payee of the incomeof the account or trust; and

(ii) If a written statement described inparagraph (f) of this section is provided tothe escrow holder or trustee, the escrowholder or trustee must treat the personspecified on the statement (see paragraph(f)(3) of this section) as the owner and thepayee of the income of the account ortrust.

(3) Relief from penalties for filing in-correct information return or payee state-ment. For purposes of sections 6721 and6722, the escrow holder of a qualified es-crow account or trustee of a qualified trustwill not be treated as failing to file or fur-nish a correct information return or payeestatement solely because, in preparing aForm 1099, the escrow holder or trusteerelies on a statement described in para-graph (f) of this section and thereforetreats the person specified on the state-ment (see paragraph (f)(3) of this section)as the owner and the payee of the incomeof the account or trust. If a statement de-scribed in paragraph (f) of this section isnot provided to the escrow holder ortrustee, the escrow holder or trustee willnot be treated as failing to file or furnish acorrect information return or payee state-ment solely because, in preparing a Form1099, the escrow holder or trustee relieson the absence of the statement and there-fore treats the taxpayer as the owner andthe payee of the income of the account ortrust.

(f) Statement provided to escrow holderor trustee. If under paragraph (c)(2) ofthis section, the qualified intermediary or

transferee is the owner, the taxpayer andthe owner must furnish to the escrowholder or trustee a statement that—

(1) Is signed by the taxpayer and theowner;

(2) Is furnished to the escrow holder ortrustee within 30 days after the taxpayertransfers the relinquished property; and

(3) Specifies the person treated as theowner and thus as the payee of the incomeof the account or trust.

(g) Effective date—(1) In general.Thissection applies to qualified escrow ac-counts and qualified trusts establishedafter the date of publication of final regu-lations in the Federal Register.

(2) Transition rule. With respect to aqualified escrow account or qualified trustestablished after August 16, 1986, but onor before the date of publication of finalregulations in the Federal Register,theInternal Revenue Service will not chal-lenge a reasonable, consistently appliedmethod of taxation for income earned bythe account or trust. The Internal Rev-enue Service will also not challenge a rea-sonable, consistently applied method forreporting such income.

(h) Examples. The provisions of thissection may be illustrated by the follow-ing examples in which T is the taxpayer,B is the transferee, and QI is the qualifiedintermediary:

Example 1. (i) T uses the calendar year as thetaxable year and the cash receipts and disbursementsmethod of accounting. T enters into a deferred ex-change agreement with B. Under the agreement, Twill transfer property (the relinquished property) toB, and B must transfer to T within the exchange pe-riod consideration (cash or replacement property orboth) having the same market value as that of the re-linquished property. B’s obligations under theagreement are secured by the assets of a qualifiedescrow account. The deferred exchange does not in-volve the use of a qualified intermediary.

(ii) Under the agreement, B must deposit cashinto the qualified escrow account equal to the agreedupon fair market value of the relinquished propertyon the date the property is transferred to B. Theagreement provides that the cash deposited into theescrow account must be invested in a money marketfund.

(iii) The agreement provides that B is entitled toreceive the interest earned on the escrow account inconsideration for B’s performance of services inconnection with the exchange.

(iv) On September 1, 1999, T transfers the relin-quished property to B. The property is unencum-bered and has a fair market value of $100,000 onSeptember 1, 1999. B deposits $100,000 into aqualified escrow account. The $100,000 is investedin accordance with the exchange agreement in a

March 8, 1999 36 1999–10 I.R.B.

money market fund. During 1999, $2,000 of interestis earned on the escrow account. During January2000, an additional $400 of interest is earned on theescrow account. On February 1, 2000, B uses$100,000 of the funds in the escrow account to pur-chase replacement property identified by T, and onthis same date B transfers the replacement propertyto T. The interest earned on the escrow account,$2,400, is paid to B from the escrow account in con-sideration for B’s performance of services.

(v) Paragraph (c)(1) of this section applies and Tmust take into account in computing T’s income taxliability for 1999 and 2000 the $2400 of interestearned on the escrow account in those years eventhough the interest is paid to B as compensation forB’s services. Paragraph (c)(1) of this section appliesfor the following reasons. T, rather than B, enjoysthe use of the earnings of the escrow account sincethe earnings are used to discharge T’s obligation topay B for B’s services. B is not considered to haveall the beneficial use and enjoyment of the assets ofthe escrow account merely because the compensa-tion that B is entitled to receive is based on the earn-ings of the escrow account.

(vi) The escrow holder must file Forms 1099 for1999 and 2000 and furnish T with payee statementswith respect to the interest earned on the escrow in1999 and 2000. See paragraph (e)(1) of this section.

Example 2. (i) The facts are the same as in Ex-ample 1except that the agreement between B and Trequires B to pay $100,000 to QI; under the agree-ment between T and QI, QI is obligated to transfer toT within the exchange period consideration (cash orreplacement property or both) equal to $100,000plus interest thereon at 4 percent compounded semi-annually; QI’s obligation to transfer this considera-tion is secured by the $100,000 received from B,which QI must deposit into a qualified escrow ac-count; the assets of the escrow account must be in-vested in a money market fund; and, as compensa-tion for QI’s performance of services to facilitate thedeferred exchange, QI is entitled to receive the ex-cess of the interest earned on the escrow accountover the amount of interest (computed at 4 percentcompounded semiannually) payable to T in cash orproperty.

(ii) QI deposits the $100,000 received from Binto a qualified escrow account, and the $100,000 isinvested in a money market fund earning interest at4.8 percent compounded semiannually. During1999, $1,600 of interest is earned on the escrow ac-count. During January 2000, an additional $400 ofinterest is earned on the escrow account. On Febru-ary 1, 2000, QI uses $101,667 of the funds in the es-crow account to purchase replacement property,which is transferred to T. This transfer satisfies QI’sobligations under the agreement because $1,667 isthe amount of interest that is earned on $100,000 at4 percent compounded semiannually for 5 months.Of the $2,000 in interest earned on the escrow ac-count in 1999 and 2000, $1,667 is used to purchasereplacement property, and the remaining $333 ispaid in cash to QI as compensation for QI’s services.

(iii) Paragraph (c)(1) of this section applies and Tmust take into account in computing T’s income taxliability for 1999 and 2000 the $2000 of interestearned on the escrow account in those years eventhough $333 of the interest is paid to QI as compen-sation for QI’s services.

(iv) The escrow holder must file Forms 1099 andfurnish T with payee statements with respect to the$2000 of interest earned on the escrow in 1999 and2000. See paragraph (e)(1) of this section.

§1.468B–7 Pre-closing escrows.

(a) Scope. This section provides rulesunder section 468B(g) for the taxation ofincome earned on pre-closing escrows.

(b) Definition. A pre-closing escrowisan escrow account, trust, or fund—

(1) Established in connection with thesale or exchange of real or personal property;

(2) Funded with a down payment,earnest money, or similar payment that isdeposited into the escrow prior to the saleor exchange of the property;

(3) Used to secure the obligation of thepurchaser to pay the purchase price for theproperty (in the case of an exchange, pur-chasermeans the transferee of the prop-erty, and purchase pricemeans the re-quired consideration for the property);

(4) The assets of which, including theincome earned thereon, will be paid to thepurchaser or otherwise distributed for thepurchaser’s benefit when the property issold or exchanged (for example, by beingdistributed to the seller as a credit againstthe purchase price); and

(5) Which is not a qualified escrow ac-count or qualified trust established in con-nection with a deferred exchange undersection 1031(a)(3).

(c) Taxation of pre-closing escrows.The purchaser is treated for federal incometax purposes as owning the assets of a pre-closing escrow. Thus, the purchaser musttake into account in computing the pur-chaser’s income tax liability all items of in-come, deduction, and credit (includingcapital gains and losses) of the escrow.

(d) Reporting obligations of the admin-istrator. For each calendar year (or portionthereof) that a pre-closing escrow is in ex-istence, the escrow agent, escrow holder,trustee, or other person responsible for ad-ministering the escrow (the administrator)must report the income of the escrow onForms 1099 in accordance with the infor-mation reporting requirements of subpartB, Part III, subchapter A, chapter 61, Subti-tle F of the Internal Revenue Code. TheForm 1099 must show the administrator asthe payor and the purchaser as the payee.

(e) Effective date—(1) In general. Theprovisions of this section apply to pre-

closing escrows established after the dateof publication of final regulations in theFederal Register.

(2) Transition rule. With respect to apre-closing escrow established after Au-gust 16, 1986, but on or before the date ofpublication of final regulations in theFederal Register,the Internal RevenueService will not challenge a reasonable,consistently applied method of taxationfor income earned by the escrow. The In-ternal Revenue Service will also not chal-lenge a reasonable, consistently appliedmethod for reporting such income.

(f) Example. The provisions of thissection may be illustrated by the follow-ing example:

Example. P enters into a contract with S for thepurchase of residential property owned by S for theprice of $200,000. P is required to deposit $10,000of earnest money into an escrow. At closing, the$10,000 and the interest earned thereon will be cred-ited against the purchase price of the property. Theescrow is a pre-closing escrow. P is treated as own-ing the assets of the escrow, and P is taxable on theinterest earned on the escrow prior to closing. Theescrow holder must report the income earned on theescrow on Forms 1099 and furnish payee statementsto P. The Forms 1099 must show the escrow holderas the payor and P as the payee.

§1.468B–8 Contingent at-closingescrows.

(a) Scope. This section provides rulesunder section 468B(g) for the taxation ofincome earned on a contingent at-closingescrow, which is defined in paragraph (b)of this section. No inference should bedrawn from this section concerning thetax treatment of a contingent at-closingescrow, or of parties to the escrow, undersections of the Internal Revenue Codeother than section 468B. See also para-graph (d) of this section.

(b) Definitions. For purposes of thissection, the following definitions apply—

Administratormeans an escrow agent,escrow holder, trustee, or other person re-sponsible for administering an escrow ac-count, trust, or fund (the purchaser or theseller may be the administrator);

Contingent at-closing escrow means anescrow account, trust, or fund that satis-fies the following requirements—

(1) The escrow is established in con-nection with the sale or exchange (otherthan an exchange to which section 354,355, or 356 applies) of real or personalproperty used in a trade or business or

1999–10 I.R.B. 37 March 8, 1999

held for investment (including stock in acorporation or an interest in a partner-ship);

(2) Depending on whether events spec-ified in the agreement between the pur-chaser and the seller that are subject tobona fide contingencies (not includingevents that are certain, or reasonably cer-tain, to occur, such as the passage of time,or that are certain, or reasonably certain,not to occur) either occur or fail to occur,the escrow’s assets (except for assets setaside for taxes or expenses) will be dis-tributable—

(i) Entirely to the purchaser;(ii) Entirely to the seller; or(iii) In part, to the purchaser with the

remainder to the seller; and(3) The escrow is not a qualified es-

crow account or qualified trust estab-lished in connection with a deferred ex-change under section 1031(a)(3);

Determination datemeans the date onwhich (or by which) the last of the eventssubject to a bona fide contingency speci-fied in the agreement between the pur-chaser and the seller (referred to in the de-finition of contingent at-closing escrow)has either occurred or failed to occur;

Purchaser means, in the case of an ex-change of property, the transferee of theproperty; and

Seller means, in the case of an ex-change of property, the transferor of theproperty.

(c) Tax liability of purchaser and sellerfor the period prior to the determinationdate. For the period prior to the determi-nation date, the purchaser is treated asowning the assets of the contingent at-closing escrow for federal income taxpurposes. Thus, in computing the pur-chaser’s income tax liability, the pur-chaser must take into account all items ofincome, deduction, and credit (includingcapital gains and losses) of the escrowuntil the determination date.

(d) Transfer of interest in the assets ofthe escrow on the determination date.Noinference should be drawn from this sec-tion whether, for purposes of InternalRevenue Code sections other than 468B,there is a transfer of ownership of the as-sets of a contingent at-closing escrow onthe determination date from the purchaserto the seller or from the seller to the pur-chaser, or the tax consequences of such atransfer. Thus, for example, if there is a

transfer of ownership of the assets of theescrow from the purchaser to the seller onthe determination date for purposes ofother Code sections, no inference shouldbe drawn from this section whether anyportion of the amount transferred is un-stated interest. See §1.483-4.

(e) Tax liability of purchaser and sellerfor the period beginning on the determi-nation date. For the period beginning onthe determination date, the purchaser andthe seller must each take into account indetermining their income tax liabilitiesthe income, deductions, and credits (in-cluding capital gains and losses) corre-sponding to their ownership interests inthe assets of the escrow.

(f) Statement required to be provided toadministrator within 30 days after the de-termination date. Within 30 days afterthe determination date, the purchaser andthe seller must provide the administratorwith a written statement that—

(1) Is signed by the purchaser and theseller;

(2) Specifies the determination date;and

(3) Specifies the purchaser ’s andseller’s ownership interests in each assetof the escrow.

(g) Reporting obligations of the admin-istrator—(1) In general. The administra-tor of a contingent at-closing escrow must,for each calendar year (or portion thereof)that the escrow is in existence, report theincome of the escrow on Forms 1099 inaccordance with the information reportingrequirements of subpart B, Part III, sub-chapter A, chapter 61, Subtitle F of the In-ternal Revenue Code. The Forms 1099must show as payor the administrator ofthe escrow and as payee the person (orpersons) treated as the payee (or payees)under paragraph (g)(2) of this section.

(2) Person treated as payee.In satisfy-ing the reporting obligations of paragraph(g)(1) of this section, the following rulesapply to the administrator—

(i) For the period prior to the determi-nation date, the administrator must treatthe purchaser as the payee of the incomeof the escrow;

(ii) For the period beginning on the de-termination date, if the written statementdescribed in paragraph (f) of this sectionis timely provided to the administrator,the administrator must treat as the payee(or payees) of the income of the escrow

the purchaser or seller (or both) in accor-dance with their respective ownership in-terests as shown on the statement; and

(iii) If the written statement describedin paragraph (f) of this section is not pro-vided to the administrator, the administra-tor must continue to treat the purchaser asthe payee of the income of the escrow.

(3) Relief from penalties for filing in-correct information return or payee state-ment. For purposes of sections 6721 and6722, the administrator will not be treatedas failing to file or furnish a correct infor-mation return or payee statement solelybecause, in preparing a Form 1099, theadministrator relies on a statement de-scribed in paragraph (f) of this section andtherefore treats the purchaser or seller (orboth) as the payee (or payees) of the in-come of the escrow in accordance withtheir respective ownership interests in theassets of the escrow as shown on thestatement. If a statement described inparagraph (f) of this section is not pro-vided to the administrator, the administra-tor will not be treated as failing to file orfurnish a correct information return orpayee statement solely because, in prepar-ing a Form 1099, the administrator relieson the absence of the statement and there-fore treats the purchaser as the payee.

(h) Effective date—(1) In general. Theprovisions of this section apply to contin-gent at-closing escrows that are estab-lished after the date of publication of finalregulations in the Federal Register.

(2) Transition rule. With respect to acontingent at- closing escrow establishedafter August 16, 1986, but on or before thedate of publication of final regulations inthe Federal Register,the Internal Rev-enue Service will not challenge a reason-able, consistently applied method of taxa-tion for income earned by the escrow. TheInternal Revenue Service will also notchallenge a reasonable, consistently ap-plied method for reporting such income.

(i) [Reserved](j) Example. The provisions of this

section may be illustrated by the follow-ing example:

Example.(i) P and S are corporations. In 1999, Penters into a contract with S for the purchase ofrental real estate. On October 1, 1999, the date ofsale, S transfers the real estate to P, and P pays S aportion of the purchase price, $9,000,000. P de-posits the remaining portion of the purchase price,$850,000, into an escrow account as required by thecontract. H is the escrow holder.

March 8, 1999 38 1999–10 I.R.B.

(ii) The contract provides that the escrow bal-ance as of November 1, 2000, is payable entirely toP, entirely to S, or partially to P and partially to S de-pending on the amount, if any, by which the averagerental income from the real estate during a specifiedtesting period ending on September 30, 2000, ex-ceeds one or more specified earnings targets.

(iii) According to the terms of the contract, theincome earned on the escrow must be accumulatedand is not currently distributable to P or S during theperiod prior to November 1, 2000.

(iv) During the testing period specified in thecontract between P and S, the average rental incomeearned on the property exceeds one (but not all) ofthe specified earnings targets. As a result, on Sep-tember 30, 2000, the end of the testing period, P be-came entitled to 40% of the escrow assets and S be-came entitled to 60% of the escrow assets.

(v) On October 30, 2000, P and S provide H withthe written statement described in paragraph (f) ofthis section. The written statement is thus providedwithin 30 days of September 30, 2000. The state-ment indicates that P’s ownership interest in eachasset of the escrow is 40 percent and S’s ownershipinterest in each asset is 60 percent.

(vi) The escrow is a contingent at-closing escrow.September 30, 2000, is the determination date be-cause this is the date on which the testing periodends. As of this date, all contingencies specified inthe contract are resolved.

(vii) P must take into account all of the income,deductions, and credits (including capital gains andlosses) of the escrow in computing P’s income tax li-ability for the period prior to September 30, 2000.See paragraph (c) of this section.

(viii) For the period beginning on September 30,2000, P must take into account in computing P’s in-come tax liability 40 percent of each item of income,deduction, and credit of the escrow (including capi-tal gains and losses), and S must take into account incomputing S’s income tax liability 60 percent ofthese items. See paragraph (e) of this section.

(ix) H is subject to the information reporting re-quirements of paragraph (g)(1) of this section. Hmust file Forms 1099 and furnish payee statementsto reflect the fact that prior to September 30, 2000, Pis the payee of all the income of the escrow, and forthe period beginning on September 30, 2000, P is thepayee of 40 percent of the income, and S is thepayee of 60 percent of the income.

§1.468B–9 Disputed ownership funds.

(a) In general. An escrow account,trust, or fund that is not a qualified settle-ment fund is a disputed ownership fundif—

(1) It is established to hold money orproperty subject to conflicting claims ofownership;

(2) The escrow account, trust, or fundis subject to the continuing jurisdiction ofa court; and

(3) Money or property cannot be paidor distributed from the escrow account,trust, or fund to, or on behalf of, a

claimant or a transferor without the ap-proval of the court.

(b) Definitions. For purposes of thissection—

(1) Administratormeans the persondesignated as such by the court having ju-risdiction over a disputed ownership fund.If no person is designated, the administra-tor is the escrow agent, escrow holder,trustee, receiver, or other person responsi-ble for administering the fund;

(2) Claimant means a person, includinga transferor, who claims ownership of, ora legal or equitable interest in, money orproperty held by a disputed ownershipfund;

(3) Court means a court of law or eq-uity of the United States, any state (in-cluding the District of Columbia), terri-tory, possession, or political subdivisionthereof;

(4) Related personmeans any personwho is related to the transferor within themeaning of section 267(b) or 707(b)(1);

(5) Transferormeans, in general, a per-son that transfers to a disputed ownershipfund money or property that is subject toconflicting claims of claimants. How-ever, a payor of interest or other incomeearned by a disputed ownership fund isnot a transferor (unless the payor is also aclaimant). A transferor may also be aclaimant.

(c) Taxation of a disputed ownershipfund—(1) In general. For federal incometax purposes, a disputed ownership fundis treated as the owner of all assets that itholds. A disputed ownership fund istreated as a C corporation for purposes ofsubtitle F of the Internal Revenue Code,and the administrator of the fund must ob-tain an employer identification numberfor the fund, make all required income taxand information returns, and deposit allpayments of tax. Also, except as other-wise provided in this section, a disputedownership fund is taxable as if it were ei-ther—

(i) A qualified settlement fund under§1.468B–2 if all the assets transferred tothe fund by or on behalf of transferors arepassive investment assets, for example,cash or cash equivalents, stock, and debtobligations; or

(ii) A C corporation in all other cases.(2) Exception.If there is a more appro-

priate method of taxing a disputed owner-

ship fund than as provided in paragraph(c)(1) of this section, the claimants to thefund may submit a private letter ruling re-quest proposing an alternative method oftaxation.

(3) Special rules.(i) In general, moneyor property subject to conflicting claims ofclaimants (disputed property) that is trans-ferred to a disputed ownership fund by, oron behalf of, a transferor is excluded fromthe gross income of the fund. However,this exclusion does not apply to incomeearned on assets of the fund such as—

(A) Payments to a disputed ownershipfund made in compensation for late or de-layed transfers of money or property;

(B) Dividends on stock of a transferor(or a related person) held by the fund; and

(C) Interest on debt of a transferor (or arelated person) held by the fund.

(ii) A distribution to a claimant of dis-puted property by a disputed ownershipfund is not a taxable event to the fund.

(iii) A disputed ownership fund is notallowed a deduction for a distribution ofdisputed property to, or on behalf of, atransferor or a claimant.

(iv) Upon the termination of a disputedownership fund, if the fund has an unusednet operating loss carryover under section172, an unused capital loss carryoverunder section 1212, or an unused taxcredit carryover, or if the fund has, for itslast taxable year, deductions in excess ofgross income, the claimant to whom thefund’s net assets are distributable willsucceed to and take into account thefund’s unused net operating loss carry-over, unused capital loss carryover, un-used tax credit carryover, or excess of de-ductions over gross income for the lasttaxable year of the fund. If the fund’s netassets are distributable to more than oneclaimant, the unused net operating losscarryover, unused capital loss carryover,unused tax credit carryover, or excess ofdeductions over gross income for the lasttaxable year must be allocated among theclaimants in proportion to the value of theassets distributable to each claimant fromthe fund.

(v) In the case of a disputed ownershipfund taxable as if it were a C corporationunder paragraph (c)(1)(ii) of this section,this section does not, in general, restrictthe fund’s use of an otherwise allowablemethod of accounting or taxable year.

1999–10 I.R.B. 39 March 8, 1999

(vi) Appropriate adjustments must bemade by a disputed ownership fund ortransferors to the fund to prevent the fundand the transferors from taking into ac-count the same item of income, deduc-tion, gain, loss, or credit more than onceor from omitting such items.

(d) Basis of property held by a disputedownership fund. In general, the initialbasis of property transferred by, or on be-half of, a transferor to a disputed owner-ship fund is the fair market value of theproperty on the date of transfer to the fundas determined by the transferor for pur-poses of the rules in paragraph (f)(1)(i) ofthis section. However, if paragraph(f)(1)(ii) of this section applies, the fund’sinitial basis in the property is the same asthe basis of the transferor immediately be-fore the transfer to the fund.

(e) Request for prompt assessment.Adisputed ownership fund is eligible to re-quest the prompt assessment of tax undersection 6501(d). For purposes of section6501(d), a disputed ownership fund istreated as dissolving on the date the fundno longer has any assets (other than a rea-sonable reserve for potential tax liabilitiesand related professional fees) and will notreceive any more transfers.

(f) Rules applicable to the transferor—(1) Transfer of property—(i) In general.A transferor must treat a transfer of prop-erty to a disputed ownership fund as a saleor other disposition of that property forpurposes of section 1001(a). In comput-ing the gain or loss, the amount realizedby the transferor is the fair market valueof the property on the date the transfer ismade to the disputed ownership fund.

(ii) Exceptions.A transfer of propertyto a disputed ownership fund is not a saleor other disposition of the property forpurposes of section 1001(a) if—

(A) The transferor claims ownership ofthe transferred property immediately be-fore and immediately after the transfer tothe fund; or

(B) The transferor is an agent, fidu-ciary, or other person acting in a similarcapacity acting on behalf of a personclaiming ownership of the transferredproperty immediately before and immedi-ately after the transfer to the fund.

(2) Economic performance—(i) In gen-eral. For purposes of section 461(h), if atransferor has a liability to one or moreclaimants for which economic perfor-

mance would otherwise occur under§1.461–4(g) when the transferor makes apayment to the claimant or claimants,economic performance occurs with re-spect to the liability to the extent thetransferor makes a transfer to a disputedownership fund to resolve or satisfy thatliability, but only if the transferor and re-lated persons are not claimants and haveno right to receive payments or distribu-tions from the fund.

(ii) Obligations of the transferor.Withrespect to a transferor described in para-graph (f)(2)(i) of this section, economicperformance does not occur when thetransferor transfers to a disputed owner-ship fund its debt (or the debt of a relatedperson). Instead, economic performanceoccurs as the transferor (or related person)makes principal payments on the debt.Similarly, economic performance doesnot occur when the transferor transfers toa disputed ownership fund its obligation(or the obligation of a related person) toprovide property in the future or to makea payment described in §1.461–4(g). In-stead, economic performance occurs withrespect to such an obligation as propertyor payments are provided or made to thedisputed ownership fund or a claimant.

(3) Statement to the disputed ownershipfund and the Internal Revenue Service—(i) In general. By February 15 of the yearfollowing each calendar year in which atransferor (or other person acting on be-half of a transferor) makes a transfer to adisputed ownership fund, the transferor(or other person) must provide a state-ment to the administrator of the fund set-ting forth the information described inparagraph (f)(3)(ii) of this section. Thetransferor must attach a copy of the state-ment to (and as part of) its timely filed in-come tax return (including extensions) forthe taxable year of the transferor in whichthe transfer is made.

(ii) Information required on state-ment—(A) In general. The statement re-quired by paragraph (f)(3)(i) of this sec-tion must include the followinginformation—

(1) A legend, “§1.468B–9(f) State-ment”, at the top of the first page;

(2) The transferor’s name, address, andtaxpayer identification number;

(3) The disputed ownership fund’sname, address, and employer identifica-tion number;

(4) The date of each transfer;(5) The amount of cash transferred;(6) A description of property trans-

ferred, the disputed ownership fund’sbasis in the property as provided in para-graph (d) of this section, and, if the rulesof paragraph (f)(1)(ii) of this sectionapply, the fund’s holding period on thedate of transfer; and

(7) Whether or not the transferor is alsoa claimant.

(B) Combined statements.If a disputedownership fund has more than one trans-feror, any two or more of the transferorsmay provide a combined statement to theadministrator that does not identify theamount of cash or the property transferredby a particular transferor. If a combinedstatement is used, however, each trans-feror must include with its copy of thestatement that is attached to its income taxreturn a schedule describing each assetthat the transferor transferred to the dis-puted ownership fund.

(4) Distributions to transferors—(i) Ingeneral. A transferor must include ingross income any distribution to a trans-feror (including a deemed distribution described in paragraph (f)(4)(iii) of thissection) from a disputed ownership fund.If property is distributed, the amount in-cludible in gross income and the basis inthat property is generally the fair marketvalue of the property on the date of distri-bution.

(ii) Exception. The gross income of atransferor does not include a distributionto the transferor of property from a dis-puted ownership fund if the transferorpreviously transferred the property to thefund and paragraph (f)(1)(ii) of this sec-tion applied to that transfer. Also, thetransferor’s gross income does not in-clude a distribution of money from thedisputed ownership fund equal to the netincome earned on that property while itwas held by the fund. Further, the trans-feror’s basis in the property is the same asthe disputed ownership fund’s basis in theproperty immediately before the distribu-tion to the transferor.

(iii) Deemed distributions. If a disputedownership fund makes a distribution onbehalf of a transferor to a person that is nota claimant, the distribution is deemedmade by the fund to the transferor. Thetransferor, in turn, is deemed to have madea payment to the actual recipient.

March 8, 1999 40 1999–10 I.R.B.

(g) Distribution to a claimant otherthan a transferor. Whether a claimantother than a transferor must include ingross income a distribution of money orproperty from a disputed ownership fundis generally determined by reference tothe claim in respect of which the distribu-tion is made. If a disputed ownershipfund distributes property to a claimantother than a transferor in satisfaction ofthe claimant’s claim of ownership to thatproperty, the claimant’s basis in the prop-erty must be adjusted to reflect the adjust-ments to the basis of the property requiredunder section 1016 for the period theproperty was held by the fund.

(h) Effective date—(1) In general.This section applies to disputed owner-ship funds established after the date ofpublication of final regulations in theFederal Register.

(2) Transition rule. With respect to adisputed ownership fund established afterAugust 16, 1986, but on or before the dateof publication of final regulations in theFederal Register,the Internal RevenueService will not challenge a reasonable,consistently applied method of taxationfor income earned by the fund, transfersto the fund, and distributions made by thefund.

(i) [Reserved].(j) Examples.The following examples

illustrate the rules of this section:

Example 1.(i) Prior to A’s death, A was the in-sured under a life insurance contract (policy) issuedby X, an insurance company. A’s current spouse andA’s former spouse each claim to be the beneficiaryunder the policy and thus entitled to the policy pro-ceeds ($1 million). In 1999, X files an interpleaderaction and deposits the policy proceeds into the reg-istry of the court. On June 1, 2000, a final determi-nation is made that A’s current spouse is the benefi-ciary under the policy and thus entitled to the fundsheld in the registry of the court. These funds are dis-tributed to A’s current spouse.

(ii) The funds held in the registry of the courtconsisting of the policy proceeds and the earningsthereon are a disputed ownership fund taxable as if itwere a qualified settlement fund. See paragraph(c)(1)(i) of this section. The fund’s gross incomedoes not include the $1 million transferred to thefund by X.

Example 2.(i) Two unrelated individuals, A andB, claim ownership of certain rental property. Aclaims to have purchased the property from B’s fa-ther. However, B asserts that the purported sale to Awas ineffective and that B acquired ownership of theproperty through intestate succession upon the deathof B’s father. For several years, A has maintainedthe property and received the rent from the property.

(ii) Pending the resolution of the title dispute be-tween A and B, the title to the property is transferredinto a court-supervised escrow on February 1, 2000.Also, on that date the court appoints R as receiverfor the property. R collects the rent earned on theproperty and hires employees necessary for themaintenance of the property. The rents paid to Rcannot be distributed to A or B without the court’sapproval.

(iii) On June 1, 2001, the court makes a final de-termination that the rental property is owned by B.The court orders B to refund to A the purchase pricepaid by A to B’s father plus interest on that amountfrom February 1, 2000. Also, the court orders that adistribution be made to B of all funds held in thecourt registry consisting of the rent collected by Rand the income earned thereon. In addition, title tothe property is returned to B.

(iv) The rental property and the funds held by thecourt registry are held in a disputed ownership fund.

(v) A is the transferor to the fund. A does not re-alize gain or loss under section 1001(a) on A’s trans-fer of the property to the disputed ownership fund.

(vi) The fund is taxable as if it were a C corpora-tion because the rental property is not a passive in-vestment asset. See paragraph (c)(1)(ii) of this sec-tion. The fund is not taxable upon receipt of theproperty. The fund’s initial basis in the property isthe same as A’s adjusted basis immediately beforethe transfer to the fund. The fund’s gross income in-cludes the rents paid to R and the income earnedthereon. For the period between February 1, 2000,and June 1, 2001, the fund may be allowed deduc-tions for depreciation and for the costs of mainte-nance of the property because the fund is treated asowning the property during this period. See sections162, 167, and 168.

(vii) The fund is not allowed a deduction for thedistribution to B of the rent earned on the propertywhile held by the fund (or the income earnedthereon). No tax consequences to the fund resultfrom this distribution or from the fund’s transfer ofthe rental property to B pursuant to the court’s deter-mination that B owns the property.

Par. 6. Section 1.1031(k)–1 isamended by adding a sentence at the endof paragraphs (g)(3)(i) and (h)(2) to readas follows:

§1.1031(k)–1 Treatment of deferredexchanges.

* * * * *

(g) * * *(3) * * * (i) * * * For rules under sec-

tion 468B(g) relating to the current taxa-tion of income of a qualified escrow ac-count or qualified trust, see §1.468B–6.

* * * * *

(h) * * *(2) * * * For rules under section

468B(g) relating to the current taxation of

income of a qualified escrow account orqualified trust, see §1.468B–6.

* * * * *

Michael P. Dolan,Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on Janu-ary 29, 1999, 8:45 a.m., and published in the issue ofthe Federal Register for February 1, 1999, 64 F.R.4801)


Deduction for Interest onQualified Education Loans

REG–116826–97


ACTION: Notice of proposed rulemakingand requests to videoconference the pub-lic hearing.

SUMMARY: This document containsproposed regulations relating to the de-duction for interest paid on qualified edu-cation loans. The proposed regulationsreflect changes to the law made by theTaxpayer Relief Act of 1997, the InternalRevenue Service Restructuring and Re-form Act of 1998, and the Omnibus Con-solidated and Emergency SupplementalAppropriations Act, 1999. The proposedregulations affect taxpayers who pay in-terest on qualified education loans. Thisdocument also provides notice that a pub-lic hearing will be held on the proposedregulations and that persons outside theWashington, DC, area who wish to testifyat the hearing may request that the IRSvideoconference the hearing to their sites.

DATES: Written or electronically gener-ated comments must be received by April21, 1999. Requests to videoconferencethe hearing to other sites must be receivedby March 22, 1999.

ADDRESSES: Send submissions toCC:DOM:CORP:R (REG–116826–97),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may be

1999–10 I.R.B. 41 March 8, 1999

hand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–116826–97),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe Internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS In-ternet site at http://www.irs.ustreas.gov/prod/tax_regs/comments. html. The IRSwill publish the time and date of the pub-lic hearing and the locations of any video-conferencing sites in an announcement inthe Federal Register.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, con-tact John P. Moriarty, (202) 622-4950 (nota toll-free number); concerning submis-sions of comments, the hearing, and/or tobe placed on the building access list to at-tend the hearing, contact Michael L.Slaughter (202) 622-7190 (not toll-freenumbers).

SUPPLEMENTARY INFORMATION

Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR part 1). Section 202 of theTaxpayer Relief Act of 1997 (Public Law105–34 (111 Stat. 778) (TRA 97)) addedsection 221 of the Internal Revenue Codeto allow a deduction from gross incomefor certain interest paid on qualified edu-cation loans. On November 17, 1997, theIRS published Notice 97–60 (1997–46I.R.B. 8) to provide guidance on thehigher education tax incentives enactedby TRA 97, including the deduction forinterest paid on qualified education loans.Section 6004(b) of the Internal RevenueService Restructuring and Reform Act of1998 (Public Law 105–206 (112 Stat.685)) (RRA 98) and section 4003(a) ofthe Omnibus Consolidated and Emer-gency Supplemental Appropriations Act,1999 (Public Law 105–277 (112 Stat.2681)) (Omnibus Act 99) made technicalamendments to section 221. TRA 97 alsoadded section 6050S to the Internal Rev-enue Code, which requires the filing ofinformation returns by certain personswho receive payments of interest that maybe deductible as interest on a qualified ed-

ucation loan. In 1998, the IRS publishedtwo notices describing the information re-turns that are required under section6050S for 1998 and 1999. On January 20,1998, the IRS published Notice 98-7(1998–3 I.R.B. 54), which describes theinformation reporting required under sec-tion 6050S for 1998. On November 16,1998, the IRS published Notice 98–54(1998–46 I.R.B. 25), which modified No-tice 98–7 to reflect a technical amend-ment made by RRA 98 and extended theapplication of Notice 98–7, as so modi-fied, to information reporting requiredunder section 6050S for 1999.


Section 221 allows taxpayers who arelegally obligated to pay interest on quali-fied education loans a federal income taxdeduction for their interest payments.The deduction is an adjustment to grossincome and, therefore, is available to eli-gible taxpayers regardless of whether theyitemize deductions. The deduction is lim-ited to $2,500 for taxable years beginningafter 2000. For taxable years 1998, 1999and 2000, the limits are $1,000, $1,500and $2,000, respectively. Consistent withthe income limitations in section221(b)(2), the proposed regulations pro-vide that the deduction is phased-out fortaxpayers with modified adjusted grossincome between $40,000 and $55,000($60,000 and $75,000 for taxpayers filinga joint return) for the taxable year. Fortaxable years beginning after 2002, theseamounts will be adjusted for inflation.

No deduction under section 221 is al-lowed in a taxable year to an individualwho is properly claimed as a dependenton another taxpayer’s federal income taxreturn for the taxable year. In addition, ataxpayer who is married as of the end of ataxable year is allowed a deduction undersection 221 only if the taxpayer and thetaxpayer’s spouse file a joint return forthe taxable year.

Consistent with section 221(e)(1), theproposed regulations define a qualifiededucation loanto mean any indebtednessincurred by the taxpayer solely to payqualified higher education expenses onbehalf of a student enrolled at least half-time in a program leading to a degree,certificate, or other recognized educa-tional credential. The student must be the

taxpayer, the taxpayer’s spouse, or thetaxpayer’s dependent at the time the in-debtedness is incurred. In addition, thequalified higher education expenses mustbe incurred within a reasonable period oftime before or after the indebtedness is in-curred. The requirement that the indebt-edness be incurred solely to pay qualifiedhigher education expenses was added byRRA ’98. Accordingly, mixed useloansare not qualified education loans. Simi-larly, revolving lines of credit (e.g., creditcard debt) generally are not qualified edu-cation loans, unless the borrower uses theline of credit solely to pay qualifiedhigher education expenses.

Consistent with section 221(e)(1), theproposed regulations provide that a loanmade by an individual who is related tothe borrower, within the meaning of sec-tion 267(b) or 707(b)(1), is not a qualifiededucation loan. For example, a loan froma parent or grandparent of the borrower isnot a qualified education loan. In addi-tion, consistent with a technical amend-ment to section 221(e) contained in theOmnibus Act ‘99, the proposed regula-tions provide that loans made under anyqualified employer plan (within the mean-ing of section 72(p)(4)) or made pursuantto any contract referred to in section72(p)(5) are not qualified education loans.The proposed regulations also providethat loans that are not issued or guaran-teed as part of a federal postsecondary ed-ucation loan program nonetheless may bequalified education loans.

The proposed regulations provide thatwhether or not qualified higher educationexpenses are paid within a reasonable pe-riod of time before or after the indebted-ness is incurred depends on all the factsand circumstances. However, the pro-posed regulations provide two safe har-bors. The first safe harbor treats any edu-cation loan that is issued as part of afederal postsecondary education loan pro-gram as meeting the reasonable period re-quirement. The second safe harbor treatsqualified higher education expenses aspaid or incurred within a reasonable pe-riod of time before or after the indebted-ness is incurred if the expenses relate to aparticular academic period and the pro-ceeds of the loan are disbursed within aperiod that begins 60 days prior to thestart of that academic period and ends 60days after the end of that academic pe-

March 8, 1999 42 1999–10 I.R.B.

riod. The proposed regulations do not re-quire actual tracing of loan proceeds tothe payment of qualified higher educationexpenses.

The proposed regulations define an eli-gible educational institutionby referenceto section 25A to mean any college, uni-versity, vocational school, or other post-secondary educational institution that isdescribed in section 481 of the Higher Ed-ucation Act of 1965 (20 U.S.C. 1088) asin effect on August 5, 1997, and certifiedby the U.S. Department of Education tobe eligible to participate in a student aidprogram administered by that department.This category includes generally all ac-credited public, nonprofit, and proprietarypostsecondary institutions. Consistentwith section 221(e)(2), the proposed regu-lations provide that, for purposes of thequalified education loan interest deduc-tion, eligible educational institutions alsoinclude institutions that conduct an intern-ship or residency program leading to a de-gree or certificate awarded by an institu-tion of higher education, a hospital, or ahealth care facility that offers postgradu-ate training.

Qualified higher education expensesare generally the same as the cost of atten-dance as determined by the eligible edu-cational institution for purposes of calcu-lating a student’s financial need, inaccordance with section 472 of the HigherEducation Act of 1965, 20 U.S.C. 1087ll,as in effect on August 4, 1997. Such ex-penses generally include tuition, fees,room, board, books, equipment, and othernecessary expenses, such as transporta-tion. However, for purposes of calculat-ing qualified higher education expenses,the amount of such expenses must be re-duced by educational assistance that thestudent receives and excludes from grossincome under section 117 (qualifiedscholarships), section 127 (employer-pro-vided educational assistance), section 135(redemption of U.S. savings bonds), andsection 530 (distributions from educationIRAs). In addition, such expenses mustbe reduced by a veterans’ or member ofthe armed forces’ educational assistanceallowance under chapter 30, 31, 32, 34 or35 of title 38 United States Code, or underchapter 1606 of title 10, United StatesCode, and any other educational assis-tance that is excludable from the student’sgross income (other than as a gift, be-

quest, devise or inheritance within themeaning of section 102(a)).

The qualified education loan interestdeduction generally is available only forinterest payments made during the first 60months in which interest payments are re-quired on the qualified education loan.The proposed regulations provide that the60-month period commences with themonth in which a loan first enters manda-tory repayment status and continues toelapse regardless of whether payments areactually made, unless the repayment pe-riod is suspended for a period of defer-ment or forbearance. The 60-month pe-riod may expire at different times fordifferent loans of the same borrower.

The date on which a qualified educa-tion loan enters repayment status is deter-mined by reference to the loan agreementor the federal regulations governing theapplicable federal postsecondary educa-tion loan program.

The proposed regulations provide that adeduction is allowed for a payment of in-terest that was required to be made in onemonth but that actually is made in a subse-quent month prior to the expiration of the60-month period. A deduction is not al-lowed for a payment of interest that wasrequired to be made in one month but thatactually is made in a subsequent monthafter the expiration of the 60-month period.

The proposed regulations provide that aqualified education loan and all refinanc-ings of that loan are treated as a singleloan for purposes of calculating the 60-month period.

Consistent with section 221(d), asamended by RRA ‘98, the proposed regu-lations provide special rules for calculat-ing the 60-month period for consolidatedloans or collapsed loans. These rules gen-erally mirror the guidance contained inNotice 98-7 and provide that the 60-monthperiod begins on the most recent date onwhich any of the underlying loans enteredrepayment status. See Conf. Rep. No.599, 105th Cong., 2d Sess., at 339 (1998).

If a qualified education loan entered re-payment status prior to January 1, 1998(the effective date of section 221), the tax-payer is not entitled to deduct any interestpaid during that portion of the 60-monthperiod occurring prior to January 1, 1998.A deduction is allowed only for interestdue and paid during that portion, if any, of

the 60-month period remaining after De-cember 31, 1997.

General tax principles apply in deter-mining what is deductible interest for pur-poses of section 221. However, to assisttaxpayers, the proposed regulationsspecifically provide that loan originationfees and capitalized interest are interestand are deductible under section 221 asthe stated principal amount of the quali-fied education loan is repaid.

Proposed Effective Date

These regulations are proposed to beeffective for interest paid after the datethey are published in the Federal Regis-ter as final regulations. Taxpayers mayrely on these proposed regulations forguidance pending the issuance of finalregulations. If, and to the extent, futureguidance is more restrictive than the guid-ance in these proposed regulations, the fu-ture guidance will be applied withoutretroactive effect.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and, because the regulations do notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any comments thatare submitted timely to the IRS. The IRSand Treasury Department request com-ments on the clarity of the proposed rulesand on how they can be made easier tounderstand. All comments will be avail-able for public inspection and copying.

1999–10 I.R.B. 43 March 8, 1999

A public hearing will be scheduled inthe Internal Revenue Building, 1111 Con-stitution Avenue, NW, Washington, DC.The IRS recognizes that persons outsidethe Washington, DC, area may also wishto testify at the public hearing throughvideoconferencing. Requests to includevideoconferencing sites must be receivedby March 22, 1999. If the IRS receivessufficient indications of interest to war-rant videoconferencing to a particularcity, and if the IRS has videoconferencingfacilities available in that city on the datethe public hearing is to be scheduled, theIRS will try to accommodate the requests.

The IRS will publish the time and dateof the public hearing and the locations ofany videoconferencing sites in an an-nouncement in the Federal Register.


The principal author of these regula-tions is John P. Moriarty of the Office ofthe Assistant Chief Counsel (Income Taxand Accounting). However, other person-nel from the IRS and Treasury Depart-ment participated in their development.

* * * * *





Authority: 26 U.S.C. 7805 * * * Section 1.221–1 also issued under 26

U.S.C. 221(d). * * *Par. 2. Section 1.221–1 is added under

the undesignated centerheading “Addi-tional Itemized Deductions For Individu-als” to read as follows:

§1.221–1 Deduction for interest onqualified education loans.

(a) In general. An individual taxpayeris allowed a deduction under section 221from gross income for certain interestpaid during the taxable year on a qualifiededucation loan. The deduction is allowedonly with respect to interest paid on aqualified education loan during the first60 months that interest payments are re-quired under the terms of the loan. See

paragraph (e) of this section for rules re-lating to the 60-month rule.

(b) Eligibility—(1) Taxpayer must belegally obligated to make interest pay-ments.A taxpayer is allowed a deductionunder section 221 only if the taxpayer islegally obligated to make interest pay-ments under the terms of the qualified ed-ucation loan.

(2) Claimed dependents not eligible—(i) In general. An individual is not al-lowed a deduction under section 221 for ataxable year if the individual is a depen-dent (as defined in section 152) for whoma deduction under section 151 is claimedon another taxpayer’s federal income taxreturn for the same taxable year (or, in thecase of a fiscal year taxpayer, the taxableyear beginning in the same calendar yearas the individual’s taxable year).

(ii) Examples. The following exam-ples illustrate the rules of this paragraph(b):

Example 1. Student not claimed as dependent.Student A pays $750 of interest on qualified educa-tion loans during 1998. Student A’s parents do notclaim her as a dependent for 1998. Assuming allother relevant requirements are met, Student A maydeduct the $750 of interest paid in 1998 under sec-tion 221.

Example 2. Student claimed as dependent.Stu-dent B pays $750 of interest on qualified educationloans during 1998. Only Student B is legally oblig-ated to make the payments. Student B’s parentclaims him as a dependent and a deduction undersection 151 is allowed with respect to Student B incomputing the parent’s 1998 federal income tax.Neither Student B nor Student B’s parent maydeduct the $750 of interest paid in 1998 under sec-tion 221.

(3) Married taxpayers.If a taxpayer ismarried as of the close of the taxable year,a deduction under this section is allowedonly if the taxpayer and the taxpayer’sspouse file a joint return for that taxableyear.

(c) Maximum deduction.In any tax-able year, the amount allowed as a deduc-tion under section 221 may not exceed theamount determined in accordance withthe following table:

Taxable year Maximum beginning in: Deduction

1998 $1,0001999 $1,5002000 $2,0002001 and thereafter $2,500

(d) Limitation based on modified ad-

justed gross income—(1) In general. Thededuction allowed under section 221 isphased out ratably for taxpayers withmodified adjusted gross income between$40,000 and $55,000 ($60,000 and$75,000 for married individuals who filea joint return). Taxpayers with modifiedadjusted gross income of $55,000 orabove (or $75,000 or above for joint fil-ers) are not allowed a deduction undersection 221.

(2) Modified adjusted gross income de-fined. The term modified adjusted grossincomemeans the adjusted gross income(as defined in section 62) of the taxpayerfor the taxable year increased by anyamount excluded from gross incomeunder section 911, 931, or 933 (relating toincome earned abroad or from certainU.S. possessions or Puerto Rico). Ad-justed gross income must be determinedunder this section after taking into ac-count the exclusions, deductions and limi-tations provided for by sections 86 (socialsecurity and tier 1 railroad retirement ben-efits), 135 (redemption of qualified U.S.savings bonds), 137 (adoption assistanceprograms), 219 (deductible IRA contribu-tions) and 469 (limitation on passive ac-tivity losses and credits).

(3) Inflation adjustment.For taxableyears beginning after 2002, the amountsin paragraph (d)(1) of this section will beincreased for inflation occurring after2001 in accordance with section 1(f)(3).If any amount adjusted under this para-graph (d)(3) is not a multiple of $5,000,the amount will be rounded to the nextlowest multiple of $5,000.

(e) 60-month rule—(1) General rule.A deduction for interest paid on a quali-fied education loan is allowed only forpayments made during the first 60 monthsthat interest payments are required on theloan. The 60-month period begins on thedate the qualified education loan first en-ters repayment status and ends 60 monthslater, unless the period is suspended forperiods of deferment or forbearancewithin the meaning of paragraph (e)(3) ofthis section. The 60-month period contin-ues to elapse regardless of whether the re-quired interest payments are actuallymade. The date on which the qualifiededucation loan first enters repayment sta-tus is determined under the terms of theloan agreement or, in the case of a loan is-sued or guaranteed under a federal post-

March 8, 1999 44 1999–10 I.R.B.

secondary education loan program, underapplicable federal regulations. For spe-cial rules relating to loan refinancings,consolidated loans, and collapsed loans,see paragraph (h)(1) of this section.

(2) Loans that entered repayment statusprior to January 1, 1998.In the case ofany qualified education loan that enteredrepayment status prior to January 1, 1998,no deduction is allowed under section 221for interest paid during the portion of the60-month period described in paragraph(e)(1) of this section that occurred prior toJanuary 1, 1998. A deduction is allowedonly for interest due and paid during thatportion, if any, of the 60-month period re-maining after December 31, 1997.

(3) Periods of deferment or forbear-ance. The 60-month period described inparagraph (e)(1) of this section is sus-pended for any period when interest pay-ments are not required on a qualified edu-cation loan because the borrower has beengranted deferment or forbearance (includ-ing postponement in anticipation of can-cellation). However, in the case of a qual-ified education loan that is not issued orguaranteed under a federal postsecondaryeducation loan program, the 60-month pe-riod will be suspended under this para-graph (e)(3) only if the borrower satisfiesone of the conditions for deferment or for-bearance established by the U.S. Depart-ment of Education for federal student loanprograms under Title IV of the Higher Ed-ucation Act of 1965, such as half-timestudy at a postsecondary educational in-stitution, study in an approved graduatefellowship program or in an approved re-habilitation program for the disabled, in-ability to find full-time employment, eco-nomic hardship, or the performance ofservices in certain occupations or federalprograms. The 60-month period is notsuspended if, under the terms of theloan—

(i) Interest continues to accrue whilethe loan is in deferment or forbearance;and

(ii) The taxpayer has the option of pay-ing the interest currently or requestingthat the interest be capitalized, and thetaxpayer elects to make current interestpayments.

(4) Late payments.A deduction is al-lowed for a payment of interest that wasrequired to be made in one month but thatactually is made in a subsequent month

prior to the expiration of the 60-month pe-riod. A deduction is not allowed for apayment of interest that was required tobe made in one month but that actually ismade in a subsequent month after the ex-piration of the 60-month period.

(5) Examples.The following examplesillustrate the rules of this paragraph (e). Inthe examples, assume that the institution isan eligible educational institution, the loanis a qualified education loan, and the stu-dent is legally obligated to make interestpayments under the terms of the loan:

Example 1. Payment prior to 60-month period.Student C obtains a loan to attend College V. Theterms of the loan provide that interest accrues on theloan while C earns his undergraduate degree but thatC is not required to begin making payments of inter-est until six full calendar months after he graduates.Nevertheless, C voluntarily pays interest on the loanwhile attending College V. C is not allowed a de-duction for interest paid while attending College Vbecause the payments were made during a monthprior to the start of the 60-month period.

Example 2. Deferment option not exercised. Thefacts are the same as Example 1,except that StudentC makes no payments on the loan while C is en-rolled at College V. C graduates in June, 1999 and isrequired to begin making monthly payments of prin-cipal and interest on the loan in January, 2000. The60-month period described in paragraph (e)(1) ofthis section begins in January, 2000. In August,2000, C enrolls in graduate school on a full-timebasis. Under the terms of the loan, C may apply fordeferment of the loan payments while C is enrolledin graduate school. However, C elects not to applyfor deferment and continues to make monthly pay-ments on the loan during graduate school. Assum-ing all other relevant requirements are met, C maydeduct interest paid on the loan during the 60-monthperiod beginning in January, 2000, including interestpaid while C was enrolled in graduate school, butelected not to defer payment.

Example 3. Late payment, within 60-month pe-riod. The facts are the same as Example 2,exceptthat, after the loan enters repayment status in Janu-ary, 2000, Student C makes no interest paymentsuntil March, 2000. In March, 2000, C pays interestrequired to be paid for the months of January, Febru-ary, and March, 2000. Assuming all other relevantrequirements are met, C is allowed a deduction forthe interest paid in March for the months of January,February, and March because the interest paymentswere required under the terms of the loan and werepaid within the 60-month period, even though theJanuary and February interest payments may be late.

Example 4. Late payment during deferment butwithin 60- month period.The terms of Student D’squalified education loan require her to begin makingmonthly payments of interest on the loan in January,2000. The 60-month period described in paragraph(e)(1) of this section begins in January, 2000. Dfails to make the required interest payments for themonths of November and December, 2000. In Janu-ary, 2001, D enrolls in graduate school on a half-time basis. Under the terms of the loan, D is eligible

for deferment of the loan payments due while D isenrolled in graduate school. The deferment isgranted effective January 1, 2001. In March, 2001,while the loan is in deferment, D pays the interestdue for the months of November and December,2000. Assuming all other relevant requirements aremet, D is allowed a deduction for interest paid inMarch, 2001 for the months of November and De-cember, 2000 because the interest payments weremade paid prior to the expiration of the 60-monthperiod, even though the November and Decemberinterest payments were late and were made while theloan was in deferment.

Example 5. 60-month period.The facts are thesame as Example 4except that Student D graduatesfrom graduate school in December, 2004 and is re-quired to begin making monthly payments of inter-est on the loan in June, 2005. As of January, 2001,when the loan entered deferment status, 12 monthsof the 60-month period had elapsed (January-De-cember, 2000). As of June, 2005, when the loan re-enters repayment status, there are 48 months remain-ing in the 60-month period for that loan.

Example 6. 60-month period.The terms of Stu-dent E’s qualified education loan require him tobegin making monthly payments of interest on theloan in November, 1999. The 60-month period de-scribed in paragraph (e)(1) of this section begins inNovember, 1999. In January, 2000, E enrolls ingraduate school on a half-time basis. As permittedunder the terms of the loan, E applies for defermentof the loan payments due while E is enrolled in grad-uate school. While awaiting formal notificationfrom the lender that his request for deferment hasbeen granted, E pays interest due for the month ofJanuary, 2000. In February, 2000, E receives notifi-cation from the lender that deferment has beengranted, effective as January 1, 2000. Assuming allother requirements are met, E is allowed a deductionfor interest paid in January, 2000, prior to his receiptof the notification, even though the deferment wasgranted retroactive to January 1, 2000. As of Febru-ary, 2000, there are 57 months remaining in the 60-month period for that loan.

Example 7. Reduction of 60-month period formonths prior to January 1, 1998.The first paymenton a qualified education loan is due on January 1,1997. Thereafter, interest is required to be paid on amonthly basis. The 60-month period for this loanbegins on January 1, 1997. However, no deductionis allowed for interest paid by the borrower prior toJanuary 1, 1998, the effective date of section 221.Assuming all other relevant requirements are met,the borrower may deduct interest due and paid onthe loan during the 48 months beginning on January1, 1998 (unless such period is extended for periodsof deferment or forbearance under paragraph (e)(3)of this section).

(f) Definitions—(1) Eligible educa-tional institution. In general, an eligibleeducational institution means any college,university, vocational school or otherpost-secondary educational institutionthat is described in section 481 of theHigher Education Act of 1965 (20 U.S.C.1088), as in effect on August 5, 1997, andis certified by the U.S. Department of Ed-

1999–10 I.R.B. 45 March 8, 1999

ucation to be eligible to participate in stu-dent aid programs administered by theDepartment, as described in section25A(f)(2). In addition, for purposes ofthis section, an eligible educational insti-tution also includes an institution thatconducts an internship or residency pro-gram leading to a degree or certificateawarded by an institution, a hospital, or ahealth care facility that offers postgradu-ate training.

(2) Qualified higher education ex-penses—(i) In general. Qualified highereducation expensesmeans the cost of at-tendance (as defined in section 472 of theHigher Education Act of 1965, 20 U.S.C.1087ll, as in effect on August 4, 1997), atan eligible educational institution, reducedby the amounts described in paragraph(f)(2)(ii) of this section. Consistent withsection 472 of the Higher Education Act of1965, 20 U.S.C. 1087ll, the cost of atten-dance is determined by the eligible educa-tional institution and includes tuition andfees normally assessed a student carryingthe same academic workload, an al-lowance for room and board, and an al-lowance for books, supplies, transportationand miscellaneous expenses of the student.

(ii) Reductions.Qualified higher edu-cation expenses must be reduced by anyamount paid to or on behalf of a studentwith respect to such expenses that is—

(A) A qualified scholarship that is ex-cludable from income under section 117;

(B) A veterans’ or member of the armedforces’ educational assistance allowanceunder chapter 30, 31, 32, 34 or 35 of title38 United States Code, or under chapter1606 of title 10, United States Code;

(C) Employer-provided educational as-sistance that is excludable from incomeunder section 127;

(D) Any other educational assistancethat is excludable from gross income(other than as a gift, bequest, devise, orinheritance within the meaning of section102(a));

(E) Any amount excluded from grossincome under section 135 (relating to theredemption of United States savingsbonds); or

(F) Any amount distributed from an ed-ucation individual retirement account de-scribed in section 530 and excluded fromgross income.

(3) Qualified education loan—(i) Ingeneral. Qualified education loan means

indebtedness incurred by a taxpayersolely to pay qualified higher educationexpenses that are—

(A) Incurred on behalf of a student whois the taxpayer, the taxpayer’s spouse, or adependent (as defined in section 151) ofthe taxpayer at the time the indebtednessis incurred;

(B) Paid or incurred within a reason-able period of time before or after the in-debtedness is incurred. Qualified highereducation expenses that are paid with theproceeds of education loans that are partof a federal postsecondary education loanprogram are deemed to meet this require-ment. For other loans, except as providedin paragraph (f)(3)(ii) of this section,what constitutes a reasonable period oftime is determined based on all the rele-vant facts and circumstances; and

(C) Attributable to education providedduring an academic period, as describedin section 25A and the regulations there-under, when the student is an eligible stu-dent as defined in section 25A(b)(3) (re-quiring that the student be a degreecandidate carrying at least one-half thenormal full-time workload).

(ii) Reasonable period safe harbor.Forpurposes of paragraph (f)(3)(i)(B) of thissection, qualified higher education ex-penses are treated as paid or incurredwithin a reasonable period of time beforeor after the indebtedness is incurred if theexpenses relate to a particular academicperiod and the loan proceeds are dis-bursed within a period that begins 60 daysprior to the start of that academic periodand ends 60 days after the end of that aca-demic period.

(iii) Related party.A loan made by aperson who is related to the borrower,within the meaning of section 267(b) or707(b)(1), is not a qualified educationloan. For example, a parent or grandpar-ent of the borrower is a related person. Inaddition, a loan made under any qualifiedemployer plan as defined in section72(p)(4) or under any contract referred toin section 72(p)(5) is not a qualified edu-cation loan.

(iv) Not federally issued or guaranteed.A loan does not have to be issued or guar-anteed under a federal postsecondary edu-cation loan program to be a qualified edu-cation loan.

(4) Examples. The following exam-

ples illustrate the rules in this paragraph(f):

Example 1. Eligible educational institution.University Z is a postsecondary educational institu-tion described in section 481 of the Higher Educa-tion Act of 1965. University Z has completed thenecessary paperwork and has been certified by theU.S. Department of Education as eligible to partici-pate in federal financial aid programs administeredby the Department, although University Z choosesnot to participate. University Z is an eligible educa-tional institution.

Example 2. Qualified education loan.Student Fborrows money from a commercial bank to payqualified higher education expenses related to hisenrollment on a half-time basis in a graduate pro-gram at an eligible educational institution. All theloan proceeds are used to pay qualified higher edu-cation expenses incurred within a reasonable periodof time after the indebtedness is incurred. The loanis not federally guaranteed. The commercial bank isnot related to Student F within the meaning of sec-tion 267(b) or 707(b)(1). The fact that Student F’sloan is not federally issued or guaranteed does notprevent the loan from being a qualified educationloan within the meaning of section 221.

Example 3. Qualified higher education expenses.Student G receives a $3,000 qualified scholarship forthe 1999 Fall semester, that is excludable from F’sgross income under section 117. Student G receivesno other forms of financial assistance with respect tothe 1999 Fall semester. Student G’s cost of atten-dance for the Fall semester, as determined by StudentG’s eligible educational institution for purposes ofcalculating a student’s financial need in accordancewith section 472 of the Higher Education Act, is$16,000. For the 1999 Fall semester, Student G hasqualified higher education expenses of $13,000 (thecost of attendance as determined by the institution($16,000) reduced by the qualified scholarship pro-ceeds excludable from gross income ($3,000)).

Example 4. Qualified education loan.Student Hsigns a promissory note for a loan on August 15,1999, to pay for qualified higher education expensesfor the 1999 Fall and 2000 Spring semesters. OnAugust 20, 1999, loan proceeds are disbursed by thelender to Student H’s college and credited to H’s ac-count to pay qualified higher education expenses forthe 1999 Fall semester, that begins on August 23,1999. On January 25, 2000, additional loan pro-ceeds are disbursed by the lender to Student H’s col-lege and credited to H’s account to pay qualifiedhigher education expenses for the 2000 Spring se-mester, that began on January 10, 2000. Student H’squalified higher education expenses for the two se-mesters are paid within a reasonable period of time,as the first loan disbursement was made within 60days prior to the start of the Fall 1999 semester andthe second loan disbursement was made during theSpring 2000 semester.

Example 5. Mixed-use loans. Student I signs apromissory note for a loan which is secured by I’spersonal residence. Part of the loan proceeds will beused to pay for certain improvements to I’s resi-dence and part of the loan proceeds will be used topay qualified higher education expenses of I’sspouse. Because the loan is not incurred by I solely

March 8, 1999 46 1999–10 I.R.B.

to pay qualified higher education expenses, the loanis not a qualified education loan.

(g) Denial of double benefit. No de-duction is allowed under this section forany amount for which a deduction is al-lowed under another provision of Chapter1 of the Internal Revenue Code.

(h) Special rules—(1) 60-month limita-tion—(i) Refinancing.A qualified educa-tion loan and all refinancings of that loanare treated as a single loan for purposes ofcalculating the 60-month period describedin paragraph (e)(1) of this section.

(ii) Consolidated loans.A consoli-dated loan is a single loan that refinancesmore than one qualified education loan ofa borrower. For consolidated loans, the60-month period described in paragraph(e)(1) of this section begins on the mostrecent date on which any of the underly-ing loans entered repayment status and in-cludes any subsequent month in which theconsolidated loan is in repayment status.

(iii) Collapsed loans. A collapsed loanis two or more qualified education loansof a single borrower that are treated as asingle qualified education loan for loanservicing purposes and are not separatelyaccounted for by the lender or servicer.For a collapsed loan, the 60-month perioddescribed in paragraph (e)(1) of this sec-tion begins on the most recent date onwhich any of the underlying loans enteredrepayment status and includes any subse-quent month in which any of the underly-ing loans is in repayment status.

(2) Loan origination fees and capital-ized interest—(i) In general. Loan origi-nation fees (other than any fees for ser-vices) and capitalized interest are interestand are deductible under this section.

(ii) Capitalized interest defined. Capi-talized interestmeans any accrued andunpaid interest on a qualified educationloan that is capitalized by the lender (inaccordance with the terms of the loan)and added to the outstanding principalbalance of the qualified education loan.

(iii) Allocation of payments.Loanorigination fees and capitalized interestare deemed to be paid by the taxpayerwhen principal is repaid on the qualifiededucation loan. Accordingly, the taxpayermay deduct the portion of a stated princi-pal payment that is treated as the paymentof any loan origination fees or capitalizedinterest on the loan. See §§1.446–2(e)and 1.1275–2(a) for rules on how to allo-

cate payments between interest and prin-cipal. In general, under these rules, a pay-ment (regardless of its label) is treatedfirst as a payment of interest to the extentof the interest that has accrued and re-mains unpaid as of the date the payment isdue, second as a payment of any loanorigination fees or capitalized interest,until such amounts have been reduced tozero, and third as a payment of principal.

(3) Examples.The following examplesillustrate the rules of this paragraph (h):

Example 1. Refinancing.Student J obtains aqualified education loan to pay for an undergraduatedegree at an eligible educational institution. Aftergraduation, Student J is required to make monthlyinterest payments on the loan beginning in January2000. Student J makes the required interest pay-ments for 15 months. In April 2001, Student J bor-rows money from another lender to be used exclu-sively to repay the first qualified education loan.The new loan requires interest payments to start im-mediately. At the time Student J is required to makeinterest payments on the new loan there are fortyfive months remaining of the original 60-month pe-riod referred to in paragraph (e)(1) of this section.

Example 2. Collapsed loans.To finance his edu-cation, Student K obtains four separate qualified ed-ucation loans from Lender B. The loans enter repay-ment status on different dates. After all of StudentK’s loans have entered repayment status, Lender Binforms Student K that all four loans will be trans-ferred to Lender C. Following the transfer, LenderC treats the loans as a single loan for loan servicingpurposes; Lender C sends Student K a single state-ment that shows the total principal and interest, anddoes not keep separate records with respect to eachloan. The 60-month period described in paragraph(e)(1) of this section begins on the most recent dateon which any of Student K’s four loans entered re-payment status.

Example 3. Capitalized interest.Interest on Stu-dent L’s qualified education loan accrues while Stu-dent L is in school, but Student L is not required tomake any payments on the loan until six monthsafter he graduates. At that time, all accrued but un-paid interest is capitalized by the lender and is addedto the outstanding principal amount of the loan.Thereafter, Student L is required to make monthlypayments of interest and principal on the loan. Forpurposes of section 221, interest includes both statedinterest and capitalized interest. Therefore, in deter-mining the total amount of interest paid on the quali-fied education loan during the 60-month period de-scribed in paragraph (e)(1) of this section, Student Lmay deduct any principal payments that are treatedas payments of capitalized interest under paragraph(h)(4) of this section.

(i) Effective date. This section appliesto interest due and paid after December31, 1997, on a qualified education loan.


Internal Revenue.


Notice of Proposed Rulemaking

Disclosure of Return Informationto the Bureau of the Census

REG–121806–97


ACTION: Notice of proposed rulemak-ing by cross-reference to temporary regu-lations.

SUMMARY: In T.D. 8811, on page 19,the IRS is issuing temporary regulationsrelating to additions to, and deletionsfrom, the list of items of information dis-closed to the Bureau of the Census for usein certain statistical programs. The text ofthose temporary regulations also serves asthe text of these proposed regulations.

DATES: Written and electronic com-ments and requests for a public hearingmust be received by February 24, 1999.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–121806–97),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–121806–97),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe Internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS In-ternet site at: http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CON-TACT: Jamie Bernstein, (202) 622-4570(not a toll-free number).


Background

Under section 6103(j)(1) of the Inter-nal Revenue Code, upon written request

1999–10 I.R.B. 47 March 8, 1999

from the Secretary of Commerce, theSecretary is to furnish to the Bureau ofthe Census (“Bureau”) tax return infor-mation that is prescribed by Treasury reg-ulations for the purpose of structuringcensuses and national economic accountsand conducting related statistical activi-ties. Section 301.6103(j)(1)–1 of the reg-ulations provides an itemized descriptionof the return information authorized to bedisclosed for this purpose. Periodically,the disclosure regulations are amended toreflect the changing needs of the Bureaufor data for its statutorily authorized sta-tistical activities.

This document contains proposedamendments to the regulations authoriz-ing Internal Revenue Service personnel todisclose additional items of return infor-mation that have been requested by theSecretary of Commerce, and to delete cer-tain items of return information that areenumerated in the regulations but that theSecretary of Commerce has indicated areno longer needed.

The text of the temporary regulationsalso serves as the text of these proposedregulations. The preamble to the tempo-rary regulations explains the regulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and because the regulations do notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any electronic andwritten comments (a signed original andeight (8) copies) that are submitted timely

to the IRS. The IRS and Treasury Depart-ment specifically request comments onthe clarity of the proposed regulation andhow they can be made easier to under-stand. All comments will be available forpublic inspection and copying. A publichearing may be scheduled if requested inwriting by a person that timely submitscomments. If a public hearing is sched-uled, notice of the date, time, and placefor the hearing will be published in theFederal Register.


The principal author of these regula-tions is Douglas Giblen, Office of the As-sociate Chief Counsel (International)(for-merly of the Office of Assistant ChiefCounsel (Disclosure Litigation)). How-ever, other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *


Accordingly, 26 CFR Part 301 is pro-posed to be amended as follows:



Authority: 26 U.S.C. 7805 * * *Section 301.6103(j)(1)–1 also issued

under 26 U.S.C. 6103(j)(1);* * *Par. 2. Section 301.6103(j)(1)–1 is

amended by:1. Revising paragraphs (b)(3) and

(b)(6)(i)(A).2. Adding paragraph (b)(6)(iii). The revisions and addition read as fol-

lows:

§301.6103(j)(1)–1 Disclosure of returninformation to officers and employees ofthe Department of Commerce for certainstatistical purposes and related activities.

* * * * *

(b) * * * (3) [The text of this proposed para-

graph (b)(3) is the same as the text of§301.6103(j)(1)–1T (b)(3) published inT.D. 8811.]

* * * * *

(6)(i) * * *(A) [The text of this proposed para-

graph (b)(6)(i)(A) is the same as the textof §301.6103(j)(1)–T(b)(6)(i)(A) pub-lished in T.D. 8811.]

* * * * *

(iii) [The text of this proposed para-graph (b)(6)(iii) is the same as the text of§301.6103(j)(1)–1T(b)(6)(iii) publishedin T.D. 8811.]

* * * * *

Robert E. Wenzel,Deputy Commissioner

of the Internal Revenue.



Mark-to-Market Accounting forDealers in Commodities andTraders in Securities orCommodities

REG–104924–98


ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations for dealers in com-modities and traders in securities or com-modities regarding the election to use themark-to-market method of accounting fortheir businesses. Section 1001(b) of theTaxpayer Relief Act of 1997 amended theapplicable tax law for these taxpayers.This document also contains proposedregulations providing guidance on statu-tory changes to section 475 contained inthe Internal Revenue Service Restructur-ing and Reform Act of 1998 (IRS Re-structuring Act). This guidance is neces-sary because section 7003 of the IRSRestructuring Act generally prohibited theapplication of mark-to-market accountingto nonfinancial customer paper. Amongother things, the proposed regulationsprovide guidance to taxpayers who are

March 8, 1999 48 1999–10 I.R.B.

using mark-to-market accounting for non-financial customer paper. This documentalso provides notice of a public hearingon these proposed regulations.

DATES: Written comments and outlinesof topics to be discussed at the publichearing scheduled for June 3, 1999, at 10a.m. must be received by May 13, 1999.

ADDRESSES: Send submissions toCC:DOM:CORP:R (REG–104924–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–104924–98),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe Internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS In-ternet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The pub-lic hearing will be held in room 2615, In-ternal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations aboutelections by commodities dealers and se-curities and commodities traders, Jo LynnRicks, 202-622-3920; concerning the reg-ulations about nonfinancial customerpaper, Pamela Lew, 202-622-3950; con-cerning submissions and the hearing,Michael L. Slaughter, Jr., 202-622-7190(not toll-free numbers).


Paperwork Reduction Act

The collection of information containedin this notice of proposed rulemaking hasbeen submitted to the Office of Manage-ment and Budget for review in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)). Comments onthe collection of information should besent to the Office of Management andBudget, Attn: Desk Officer for the De-partment of Treasury, Office of Informa-tion and Regulatory Affairs, Washington,DC, 20503, with copies to the InternalRevenue Service,Attn: IRS ReportsClearance Officer, OP:FS:FP, Washington,

DC 20224. Comments concerning thecollection of information must be receivedby March 29, 1999.

The first collection of information inthis proposed regulation is described inthe Explanation of Provisions section ofthis document (rather than being includedin the text of the proposed regulations).That description indicates that the elec-tions under section 475(e)(1) and (f)(1)and (2) may be required to be made on aform to be developed by the IRS. Thisburden will be reflected on that new form.

The second collection of information inthis proposed regulation is in §§1.475(e)–1 and 1.475(f)–2. The information re-quired to be recorded under §§1.475(e)–1and 1.475(f)–2 is required by the IRS todetermine whether an exemption frommark- to-market accounting is properlyclaimed. This information will be used tomake that determination upon audit oftaxpayers’ books and records. The likelyrecordkeepers are businesses or other for-profit institutions.

Estimated total annual recordkeepingburden: 1,000 hours.

The estimated annual burden perrecordkeeper varies from 15 minutes to 3hours, depending on individual circum-stances, with an estimated average of 1hour.

Estimated number of recordkeepers:1,000.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless it dis-plays a valid control number assigned bythe Office of Management and Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

Section 475 provides that dealers in securities generally must use mark-to-market accounting for all securities. Ex-ceptions from the mark-to-market re-quirement are generally provided forsecurities not held for sale to customersand certain securities held as a hedge,provided that the securities are identifiedas exempt in a proper and timely manner.

For purposes of section 475, a securityincludes any note, bond, debenture, orother evidence of indebtedness. RevenueRuling 97–37 (1997–39 I.R.B. 4), clari-fied that “other evidence of indebtedness”includes customer paper, commonly re-ferred to as trade accounts receivable.The IRS provided procedures for a tax-payer to change its method of accountingfor customer paper in Revenue Procedure97–43 (1997–39 I.R.B. 12).

The IRS Restructuring Act modifiedthe definition of security for purposes ofsection 475 to exclude nonfinancial cus-tomer paper. For this purpose, nonfinan-cial customer paper is any receivable aris-ing out of the sale of nonfinancial goodsor services by a person the principal activ-ity of which is the selling or providing ofnonfinancial goods or services if the re-ceivable is held by that person (or a relatedperson) at all times since its issuance.Section 475(c)(4), added by the IRS Re-structuring Act, precludes a taxpayer fromusing mark-to-market accounting undersection 475 for nonfinancial customerpaper. In addition, the legislative historyof the IRS Restructuring Act indicates thattaxpayers may not account for nonfinan-cial customer paper using a mark-to-mar-ket or lower-of-cost-or-market method ofaccounting under other sections of theCode. See H.R. Conf. Rep. No. 599,105th Cong., 2d Sess. 353–54 (1998).Congress, however, authorized the Secre-tary to issue regulations describing situa-tions where taxpayers must use mark-to-market accounting for nonfinancialcustomer paper in order to prevent taxpay-ers from using the exclusion in section475(c)(4) to avoid marking to market re-ceivables that are inventory in the hands ofthe taxpayer or a related person.

Section 475(e) and (f), added by section1001(b) of the Taxpayer Relief Act of1997, allows securities traders and com-modities traders and dealers to elect mark-to-market accounting similar to that cur-rently required for securities dealers.These provisions are effective for all tax-able years ending after August 5, 1997, thedate of enactment of the Taxpayer ReliefAct. The proposed regulations clarify sev-eral issues relating to these elections, in-cluding the identification of securities andcommodities as exempt from mark-to-mar-ket accounting, the character of marked se-

1999–10 I.R.B. 49 March 8, 1999

curities and commodities, and the time andmanner for making the elections.


Nonfinancial Customer Paper

Sections 1.446–1(c)(2)(iii), 1.471–12,and 1.475(c)–2(d) of the proposed regula-tions provide that taxpayers may not usemark-to-market or lower-of-cost-or-mar-ket accounting for any nonfinancial cus-tomer paper unless a regulation affirma-tively provides that the nonfinancialcustomer paper is to be marked to marketas inventory.

The remaining proposed regulationspertaining to section 475(c)(4) are crossreferences or minor technical changes re-quired by the addition of §1.475(c)–2(d).

Dealers in Commodities

The proposed regulations generallyprovide that, except as provided in guid-ance prescribed by the Commissioner, therules for mark-to-market accounting forsecurities dealers apply to commoditiesdealers that make an election under sec-tion 475(e)(1) (electing commoditiesdealers). Comments are requestedwhether there are circumstances wherethe specific rules applicable to securitiesdealers should not be applied to electingcommodities dealers.

Under the proposed regulations, unlessthe Commissioner otherwise provides in arevenue ruling, revenue procedure, or let-ter ruling, the exemption from mark-to-market accounting for assets held for in-vestment does not apply to a commodityderivative held by an electing dealer incommodities. If the rule described in thepreceding sentence applies (and conse-quently requires a commodity derivativeto be marked to market), the gain or lossis ordinary. The IRS and the Treasury De-partment believe that it would be ex-tremely rare for a commodity derivativeheld by a commodities derivative dealerto be acquired other than in a dealer ca-pacity. See §1.475(c)–1(a)(2). Moreover,the IRS and the Treasury Department be-lieve that a dealer in physical commodi-ties generally engages in derivatives ac-tivities that are virtually indistinguishablefrom its dealings in physical commodi-ties. This situation invokes many of thepractical concerns that led Congress to

enact section 475(b)(4). The IRS and theTreasury Department welcome commentson whether, and under what circum-stances, it may be appropriate for a dealerin physical commodities to identify com-modity derivatives as held for investment.

The proposed regulations also providethat, in all cases, if a dealer in commodi-ties identifies a commodity as exemptfrom mark-to-market accounting undersection 475(b)(2), the identification is in-effective unless it is made before the closeof the day on which the commodity wasacquired, originated, or entered into.Thus, a rule similar to the 30-day identifi-cation rule for certain securities in Hold-ing 8 of Rev. Rul. 97–39 (1997–39 I.R.B.4), does not apply to commodities dealers.

Traders in Securities or Commodities

The proposed regulations provide thatthe principles underlying the rules and ad-ministrative interpretations applicable tosecurities dealers also apply to electingtraders, unless the proposed regulations orthe Commissioner provides otherwise.The IRS and the Treasury Department re-quest comments on whether there are cir-cumstances under which a specific ruleapplicable to securities dealers should notapply to electing securities traders.

The proposed regulations provide rulesfor the identification of investment securi-ties as exempt from mark-to-market ac-counting. The proposed regulations clar-ify that a trader in securities who electsmark-to-market accounting under section475(f)(1) for its trading business (anelecting trader) must identify, in accor-dance with section 475(f)(1)(B)(ii), anysecurity held other than in connectionwith the trading business. If the electingtrader is also a dealer in securities, thetrader need only identify under section475(f)(1)(B)(ii) securities that are notheld in connection with the trading busi-ness and that are also described in section475(b)(1) (without regard to section475(b)(2)). That is, the trader need notidentify securities that could not properlybe identified as being exempt from sec-tion 475(a).

The IRS and the Treasury Departmentbelieve that in making the section 475election available to securities traders,Congress did not want taxpayers selec-tively to mark to market some securities

but selectively to identify other securitiesas exempt from this treatment. Congressaddressed this concern by establishing ahigher burden of proof for electing securi-ties traders to identify securities as notsubject to section 475 than is applicable tosecurities dealers. The IRS and the Trea-sury Department share this concern, par-ticularly because it traditionally has beeneasier to distinguish investment securitiesfrom dealer securities than to distinguishinvestment securities from trading securi-ties. Accordingly, the proposed regula-tions provide that in no event is the re-quirement of section 475(f)(1)(B)(i)satisfied unless the electing trader demon-strates by clear and convincing evidencethat a security has no connection to itstrading activities. The IRS and TreasuryDepartment request comments on whetherany trader of securities could meet thisburden and under what circumstances.

In addition, the IRS and the TreasuryDepartment seek comments on the man-ner in which securities are identified asnot held in connection with trading activi-ties and, in particular, comments thatfocus on the administrability of rules inthis area.

Because of the fungible nature of cer-tain securities, the proposed regulationsprovide a special rule for identifying se-curities held other than in connection withthe electing trader’s trading businesswhen the electing trader also trades otherof the same or substantially similar secu-rities. In this circumstance, the electingtrader does not satisfy section 475(f)-(1)(B)(i) unless the security is held in aseparate, nontrading account maintainedwith a third party. The IRS and the Trea-sury Department are considering extend-ing this special identification rule to allsecurities, rather than solely to those thatare fungible, and request comments onthe advisability of doing so.

Under the proposed regulations, allidentifications under section 475(f)(1)-(B)(ii) must be made on the same day theelecting trader acquires, originates, or en-ters into the security. Thus, a rule similarto the 30-day identification rule for cer-tain securities in Holding 8 of Rev. Rul.97–39 does not apply to electing traders.

Because the principles of the rules andadministrative interpretations applicableto securities dealers apply to electingtraders, if an electing trader improperly

March 8, 1999 50 1999–10 I.R.B.

identifies as exempt a security that is ac-tually held in connection with that busi-ness, the gain or loss with respect to thesecurity is ordinary, and the consequencesdescribed in section 475(d)(2) apply tothe security (i.e., the security is marked tomarket and any losses realized with re-spect to the security prior to its disposi-tion are recognized only to the extent ofgain previously recognized with respectto the security). Similarly, under the pro-posed regulations, if an electing traderfails to identify a security that is not heldin connection with its trading business,the consequences of section 475(d)(2)apply to the security, and the gain or losswith respect to the security is ordinary.Moreover, in the event of this failure, theCommissioner may nevertheless treat thesecurity as if the requirements for exemp-tion from mark-to-market accountingwere satisfied.

The proposed regulations further pro-vide that the gain or loss with respect to asecurity that is marked to market undersection 475(f)(1)(A) is ordinary. Underthis rule, if an electing trader disposes of asecurity before the close of the taxableyear, proposed §1.475(a)–2 applies, andthe gain or loss is ordinary income or loss.See sections 475(f)(1)(D) and 475(d)(3)and the legislative history to section475(f). H.R. Rep. No. 148, 105th Cong.,1st Sess. 445 (1997).

Under the proposed regulations, theabove rules for electing securities tradersalso apply to electing commoditiestraders. In addition, the proposed regula-tions provide a special character rule fortraders in section 1256 commodity con-tracts who elect mark-to-market account-ing for their businesses. For these traders,the proposed regulations clarify that thecapital character rule of section 1256 doesnot apply to these contracts and, thus, thegain or loss with respect to such contractsis ordinary.

Making the Elections

The proposed regulations clarify that ifa dealer in securities also has a securitiesor commodities trading business or acommodities dealing business, the dealermay make an election for that business.

The proposed regulations also providethat the mark-to-market elections fordealers in commodities and for traders in

securities or commodities must be madein the time and manner prescribed by theCommissioner. The IRS and the TreasuryDepartment anticipate requiring taxpayersto make the election by filing a form, tobe developed by the IRS, not later than 2_months after the beginning of the taxableyear for which the election is made. (Seethe Paperwork Reduction Act section ofthis preamble, which requests commentson the burden that may be imposed by thisrequirement.) Interim procedures arebeing provided in a revenue procedure.

Proposed Effective Dates

The proposed regulations in §1.475(c)–2(d)(1) apply to every taxpayer who is re-quired by section 475(c)(4) to cease usingmark-to-market accounting for nonfinan-cial customer paper. These regulationsare applicable for all taxable years endingafter July 22, 1998. Proposed §§1.446–1(c)(2)(iii), 1.471–12, and 1.475(c)–2(d)(2) are applicable for all taxable yearsending on or after January 28, 1999. Theproposed regulations in §§1.475(e)–1 and1.475(f)–2 generally apply to securities orcommodities acquired on or after March1, 1999. The rules concerning the timeand manner for making the mark-to-mar-ket elections for commodities dealers andsecurities and commodities traders aregenerally applicable for taxable yearsending on or after January 28, 1999.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory impactanalysis is not required. It is hereby certi-fied that the collection of information inthese regulations will not have a signifi-cant economic impact on a substantialnumber of small entities. As previouslynoted, in those instances where a smallentity elects to apply the rules in theseregulations, the burden of the collectionof information is not significant. Accord-ingly, a Regulatory Flexibility Analysis isnot required. Pursuant to section 7805(f),this notice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) that are submitted timely to theIRS. The IRS and the Treasury Depart-ment specifically request comments onthe clarity of the proposed regulations andhow they can be made easier to under-stand. All comments will be available forpublic inspection and copying.

A public hearing has been scheduled forJune 3, 1999, beginning at 10 a.m. in room2615 of the Internal Revenue Building,1111 Constitution Avenue, NW, Washing-ton, DC. Due to building security proce-dures, visitors must enter at the 10th Streetentrance, located between Constitutionand Pennsylvania Avenues, NW. In addi-tion, all visitors must present photo identi-fication to enter the building. Because ofaccess restrictions, visitors will not be ad-mitted beyond the immediate entrancearea more than 15 minutes before thehearing starts. For information about hav-ing your name placed on the building ac-cess list to attend the hearing, see the“FOR FURTHER INFORMATION CON-TACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written comments and an outlineof the topics to be discussed and the timeto be devoted to each topic (signed origi-nal and eight (8) copies) by May 13,1999. A period of 10 minutes will be al-lotted to each person for making com-ments. An agenda showing the schedul-ing of the speakers will be prepared afterthe deadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal authors of these regula-tions are Jo Lynn Ricks and Pamela Lewof the Office of Assistant Chief Counsel(Financial Institutions & Products).However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *

1999–10 I.R.B. 51 March 8, 1999




Paragraph 1. The authority citation forpart 1 is amended by removing the entriesfor §§1.475(a)–3 through 1.475(e)–1 andadding the following entries in numericalorder to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.475(a)–3 also issued under

26 U.S.C. 475(g).Section 1.475(b)–1 also issued under 26

U.S.C. 475(b)(4) and 26 U.S.C. 475(g).Section 1.475(b)–2 also issued under

26 U.S.C. 475(b)(2) and 26 U.S.C.475(g).

Section 1.475(b)–4 also issued under26 U.S.C. 475(b)(2), 26 U.S.C. 475(g),and 26 U.S.C. 6001.

Section 1.475(c)–1 also issued under26 U.S.C. 475(g).

Section 1.475(c)–2 also issued under26 U.S.C. 475(g) and 26 U.S.C. 860G(e).

Section 1.475(d)–1 also issued under26 U.S.C. 475(g).

Section 1.475(e)–1 also issued under26 U.S.C. 475(g).

Section 1.475(f)–1 also issued under 26U.S.C. 475(g).

Section 1.475(f)–2 also issued under 26U.S.C. 475(g).***

Par. 2. In §1.446–1, paragraph(c)(2)(iii) is added to read as follows:

§1.446–1 General rule for methods ofaccounting.

* * * * *

(c) * * *(2) * * *(iii) Section 475 is the exclusive au-

thority on which a taxpayer may rely touse the mark-to-market method of ac-counting for nonfinancial customer paper,as defined in section 475(c)(4)(B). Thus,except to the extent provided in§1.475(c)–2(d), the mark-to-marketmethod of accounting is not a permissiblemethod of accounting for nonfinancialcustomer paper. In addition, the lower-of-cost-or-market method of accounting isnot a permissible method of accountingfor these assets. See §1.471–12. Thisparagraph (c)(2)(iii) applies to all taxyears ending on or after January 28, 1999.

* * * * *

Par. 3. Section 1.471–12 is added asfollows:

§1.471–12 Nonfinancial customer paper.

Nonfinancial customer paper, as de-fined in section 475(c)(4)(B), may not betreated as inventory except as provided in§1.475(c)–2(d). This section applies totaxable years ending on or after January28, 1999.

Par. 4. In §1.475(c)–1, paragraphs(b)(3)(i) and (b)(4)(ii) are revised to readas follows:

§1.475(c)–1 Definitions—dealer insecurities.

* * * * *(b) * * *(3) * * *(i) For purposes of section 471, the

taxpayer accounts for any security (as de-fined in section 475(c)) as inventory;

* * * * *

(4) * * *(ii) Continued applicability of an elec-

tion—(A) In general.Except as providedin paragraph (b)(4)(ii)(B) of this section,an election under this paragraph (b)(4)continues in effect for subsequent taxableyears until revoked. The election may berevoked only with the consent of theCommissioner.

(B) Taxable years ending after July 22,1998. An election under this paragraph(b)(4) is ineffective for taxable years end-ing after July 22, 1998.

* * * * *

Par. 5. In §1.475(c)–2, paragraph (d) isadded to read as follows:

§1.475(c)–2 Definitions—security.

* * * * *

(d) Inventory—(1) Nonfinancial cus-tomer paper is generally not marked tomarket under section 475.Except as pro-vided in paragraph (d)(3) of this section,nonfinancial customer paper (as definedin section 475(c)(4)(B)) is not a securityeven if it is inventory.

(2) Treatment of nonfinancial customerpaper under other sections of the InternalRevenue Code.For nonfinancial cus-tomer paper that is not a security, the

mark-to-market method of accountingand the lower-of-cost-or-market methodof accounting are not permissible meth-ods of accounting. See §§1.446–1(c)(2)(iii) and 1.471-12.

(3) Nonfinancial customer papertreated as inventory.[Reserved].

§1.475(e)–1 [Redesignated as§1.475(g)–1]

Par. 6. Section 1.475(e)–1 is redesig-nated as §1.475(g)–1.

Par. 7. New §1.475(e)–1 and§§1.475(f)–1 and 1.475(f)–2 are added toread as follows:

§1.475(e)–1 Election of mark-to-marketaccounting for dealers in commodities.

(a) Time and manner of making elec-tion. An election under section 475(e)(1)must be made in the time and manner pre-scribed by the Commissioner.

(b) Application of securities dealerrules to electing commodities dealers.Except as otherwise provided in this sec-tion or in other guidance prescribed by theCommissioner, the rules and administra-tive interpretations under section 475 fordealers in securities apply to dealers incommodities that make an election undersection 475(e)(1).

(c) Commodity derivatives deemed notheld for investment—(1) In general. Ex-cept as otherwise determined by the Com-missioner in a revenue ruling, revenueprocedure, or letter ruling, if a dealer incommodities that made an election undersection 475(e)(1) holds a commodity de-scribed in section 475(e)(2)(B) or (C) (de-scribing certain notional principal con-tracts and commodity derivatives),section 475(b)(1)(A) (exempting frommark-to-market accounting certain posi-tions that are held for investment) doesnot apply to that commodity.

(2) Character of commodity derivativesrequired to be marked to market.If acommodity is required to be marked tomarket because of the application of para-graph (c)(1) of this section, the gain orloss with respect to that commodity is ordinary.

(d) Same day identification. An identi-fication of a commodity as exempt frommark-to-market accounting under section475(b)(2) is not effective unless it is madebefore the close of the day on which the

March 8, 1999 52 1999–10 I.R.B.

commodity was acquired, originated, orentered into.

§1.475(f)–1 Procedures for electingmark-to-market accounting for traders.

(a) Time and manner of making elec-tion. An election under section 475(f)(1)or (2) must be made in the time and man-ner prescribed by the Commissioner.

(b) Coordination with section 475(a). Ifa dealer in securities also has a securities orcommodities trading business or a com-modities dealing business, the dealer maymake an election under section 475(e)(1),(f)(1), or (f)(2) for that business.

§1.475(f)–2 Election of mark-to-marketaccounting for traders in securities orcommodities.

(a) Securities not held in connectionwith trading activities—(1) Taxpayeridentification of investment securities.If atrader in securities makes an electionunder section 475(f)(1)(A) (electingtrader) and holds a security other than inconnection with that trading business, theelecting trader must identify that securityin accordance with section 475(f)(1)(B)-(ii). If the electing trader is also a dealerin securities, however, the preceding sen-tence applies only to securities describedin section 475(b)(1) (without regard tosection 475(b)(2)).

(2) Satisfaction of Commissioner.In noevent is the requirement of section475(f)(1)(B)(i) satisfied unless the elect-ing trader demonstrates by clear and con-vincing evidence that a security has noconnection to its trading activities.

(3) Substantially similar securities heldfor trading and investment.An electingtrader that holds a security other than inconnection with its trading business andalso trades the same or substantially simi-lar securities in no event satisfies the re-quirement of section 475(f)(1)(B)(i) un-less the security is held in a separate,nontrading account maintained with athird party.

(4) Consequences of failure to identifyinvestment securities.If an electingtrader holds a security that is not held inconnection with its trading business andfails to identify the security in a mannerthat satisfies the requirements of section475(f)(1)(B)(ii)—

(i) The consequences described in sec-

tion 475(d)(2) apply to the security; and(ii) The character of the gain or loss

with respect to the security is ordinary.(5) Commissioner identification of in-

vestment securities.Notwithstandingparagraph (a)(4) of this section, the Com-missioner may treat a security describedin that paragraph as meeting the require-ments of section 475(f)(1)(B)(i) and (ii).

(b) Character of securities marked tomarket. The gain or loss with respect to asecurity that is marked to market undersection 475(f)(1)(A) is ordinary.

(c) Application of securities dealerrules to electing traders.Except as other-wise provided in this section or in otherguidance prescribed by the Commis-sioner, the principles of the rules and ad-ministrative interpretations under section475 for dealers in securities apply totraders in securities that make an electionunder section 475(f)(1).

(d) Same day identification.An identi-fication of a security as exempt frommark-to-market accounting under section475(f)(1)(B) is not effective unless it ismade before the close of the day on whichthe security was acquired, originated, orentered into.

(e) Application to traders in commodi-ties—(1) General rule.If a trader in com-modities makes an election under section475(f)(2), paragraphs (a), (b), (c), and (d)of this section apply to the trader in thesame manner that they apply to a trader insecurities who makes an election undersection 475(f)(1).

(2) Coordination with section 1256.Ifa trader in commodities makes an electionunder section 475(f)(2) and trades section1256 contracts that are commodities asdefined in section 475(e)(2), then therules of section 475(f) and paragraph(e)(1) of this section apply to those con-tracts, and not the capital character rulesof section 1256.

Par. 8. Newly designated §1.475(g)–1is amended by revising paragraphs (h)(2)and (i) and adding paragraphs (k), (l), and(m) to read as follows:

§1.475(g)–1 Effective dates.

* * * * *

(h) * * *(2) Section 1.475(c)–1(b) (concerning

sellers of nonfinancial goods and ser-vices) applies as follows:

(i) Except as otherwise provided in thisparagraph (h)(2), §1.475(c)–1(b) appliesto taxable years ending on or after De-cember 31, 1993.

(ii) Section 1.475(c)–1(b)(4)(ii)(B) ap-plies to taxable years ending after July 22,1998.

* * * * *

(i) Section 1.475(c)–2 (concerning thedefinition of security) applies as follows:

(1) Section 1.475(c)–2(a), (b), and (c)(concerning the definition of security) ap-plies to taxable years ending on or afterDecember 31, 1993. By its terms, how-ever, §1.475(c)–2(a)(3) applies only toresidual interests or to interests orarrangements acquired on or after January4, 1995; and the integrated transactionsthat are referred to in §1.475(c)–2(a)(2)and (b) exist only after August 13, 1996(the effective date of §1.1275–6).

(2) Section 1.475(c)–2(d) applies asfollows:

(i) Section 1.475(c)–2(d)(1) applies totaxable years ending after July 22, 1998.

(ii) Section 1.475(c)–2(d)(2) applies totaxable years ending on or after January28, 1999.

* * * * *

(k) Section 1.475(e)–1(a) (concerningthe time and manner for making the mark-to-market election for dealers in commodi-ties) applies to taxable years ending on orafter January 28, 1999. Section 1.475(e)–1(b), (c) and (d) applies to commodities ac-quired on or after March 1, 1999.

(l) Section 1.475(f)–1 (procedures forelecting mark-to-market accounting fortraders in securities or commodities) ap-plies to taxable years ending on or afterJanuary 28, 1999.

(m) Section 1.475(f)–2 (concerning themark-to-market rules for traders in securi-ties or commodities) applies to securitiesor commodities acquired on or afterMarch 1, 1999.


Internal Revenue.


1999–10 I.R.B. 53 March 8, 1999


Modifications and Additions tothe Unified Partnership AuditProcedures

REG–106564–98

AGENCY: Internal Revenue Service,Treasury.

ACTION: Notice of proposed rulemak-ing, notice of proposed rulemaking bycross-reference to temporary regulations,and notice of public hearing.

SUMMARY: In T.D. 8808 on page 21,the Internal Revenue Service (Service) isissuing temporary regulations relating tothe unified partnership audit proceduresadded to the Internal Revenue Code bythe Tax Equity and Fiscal ResponsibilityAct of 1982 (TEFRA). The text of thosetemporary regulations also generallyserves as the text of these proposed regu-lations. This document also provides anotice of public hearing on these pro-posed regulations.

DATES: Written and electronic com-ments must be received by April 26, 1999.Outlines of topics to be discussed at thepublic hearing scheduled for April 14,1999, at 10 a.m. must be received byMarch 24, 1999.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–106564–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–106564–98),Courier’s desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC. Alternatively, taxpayers maysubmit comments electronically via theInternet by selecting the “Tax Regs” op-tion on the IRS Home Page, or by submit-ting comments directly to the IRS Internetsite at http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The publichearing will be held in Room 2615, Inter-nal Revenue Building, 1111 ConstitutionAvenue, NW, Washington, DC.

FOR FURTHER INFORMATION CON-

TACT: Concerning the proposed andtemporary regulations, Robert G. Honig-man, (202) 622-3050; concerning sub-missions of comments, the hearing,and/or to be placed on the building accesslist to attend the hearing Michael L.Slaughter, Jr., (202) 622-7180 (not toll-free numbers).


Background

Temporary and final regulations in T.D.8808 amend the Procedure and Adminis-tration Regulations (26 CFR part 301) re-lating to the unified partnership audit pro-cedures found in sections 6221 through6233 of the Internal Revenue Code(Code).

The text of those temporary regulationsalso generally serves as the text of theseproposed regulations. The preamble tothe temporary regulations explains thetemporary and proposed regulations.

Temporary regulations previously werepublished on December 13, 1984 (49 F.R.48536), and March 5, 1987 (52 F.R.6779) (the existing regulations). The Ser-vice intends to finalize such regulationssimultaneously with finalizing these reg-ulations. Comments previously receivedin connection with the existing regula-tions will be considered as well as new oradditional comments with respect to suchregulations.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. It also has been determined thatsection 533(b) of the Administrative Pro-cedures Act (5 U.S.C. chapter 5) does notapply to these regulations, and becausethese regulations do not impose a collec-tion of information on small entities, theRegulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Internal RevenueCode, this notice of proposed rulemakingwill be submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on its impact onsmall business.


Before these proposed regulations are

adopted as final regulations, considera-tion will be given to any elecronic andwritten comments (a signed original andeight (8) copies) that are submitted timelyto the Service. All comments will beavailable for public inspection and copy-ing. The Service and Treasury Depart-ment specifically request comments onthe clarity of the proposed regulations andhow they may be made easier to under-stand.

A public hearing has been scheduledfor April 14, 1999, at 10 a.m. in room2615, Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC. Due to building security procedures,visitors must enter at the 10th Street en-trance, located between Constitution andPennsylvania Avenues, NW. In addition,all visitors must present photo identifica-tion to enter the building. Because of ac-cess restrictions, visitors will not be ad-mitted beyond the immediate entrancearea more than 15 minutes before thehearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the“FOR FURTHER INFORMATIONCONTACT” section of this preamble.

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

Persons who wish to present oral com-ments at the hearing must submit elec-tronic or written comments by April 26,1999, and an outline of the topics to bediscussed and the time devoted to eachtopic (a signed original and eight (8)copies) by March 24, 1999.

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

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal authors of these proposedregulations are Robert G. Honigman, Of-fice of the Assistant Chief Counsel(Passthroughs & Special Industries), andWilliam A. Heard, Office of the AssistantChief Counsel (Field Service). However,other personnel from the Service andTreasury Department participated in theirdevelopment.

* * * * *

March 8, 1999 54 1999–10 I.R.B.




Paragraph 1. The authority citation forpart 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.6221–1 as proposed

to be added at 51 F.R. 13235, April 18,1986, is amended by:

1. Redesignating paragraph (c) asparagraph (e);

2. Adding paragraphs (c) and (d).The additions read as follows:

§301.6221–1 Tax treatment determined atpartnership level.

* * * * *

(c) and (d) [The text of proposed para-graphs (c) and (d) are the same as the textof §301.6221–1T(c) and (d) published inT.D. 8808.]

* * * * *

Par. 3. Section 301.6223(c)–1 as pro-posed to be added at 51 F.R. 13238, April18, 1986, is amended by adding a sen-tence at the end of paragraph (c) to read asfollows:

§301.6223(c)–1 Additional informationregarding partners furnished to theService.

* * * * *

(c) * * * [The text of the proposed lastsentence in paragraph (c) is the same asthe text of the last sentence in§301.6223(c)–1T(c) published in T.D.8808.]

* * * * *

Par. 4. Section 301.6224(c)–3 as pro-posed to be added at 51 F.R. 13241, April18, 1986, is amended by revising the sec-tion heading and paragraphs (b), (c)(3)(ii)and (d), Example (1)to read as follows:

§301.6224(c)–3 Consistent settlementterms.

* * * * *

(b) [The text of proposed paragraph (b)is the same as the text of §301.6224(c)–3T(b) published in T.D. 8808.]

(c) * * *(3) * * *(ii) [The text of proposed paragraph

(c)(3)(ii) is the same as the text of§301.6224(c)–3T(c)(3)(ii) published inT.D. 8808.]

(d) * * *Example (1).[The text of proposed

paragraph (d) Example (1). is the same asthe text of §301.6224(c)–3T(d) Example(1). published in T.D. 8808.]

* * * * *

Par. 5. Section 301-6229(b)–2 is addedto read as follow:

§301.6229(b)–2 Special rule with respectto debtors in Title 11 cases.

[The text of this proposed section is thesame as the text of §301.6229(b)–2T pub-lished in T.D. 8808.]

Par. 6. Section 301.6229(f)–1 is addedto read as follows:

[The text of this proposed section is thesame as the text of §301.6229(f)–1T pub-lished in T.D. 8808.]

Par. 7. Section 301.6231(a)(1)–1 asproposed to be added at 51 F.R. 13243,April 18, 1986, is amended by:

1. Revising the first two sentences ofparagraph (a)(1);

2. Removing paragraph (a)(3);3. Redesignating paragraph (a)(4) as

paragraph (a)(3).The revision reads as follows:

§301.6231(a)(1)–1 Exception for smallpartnerships.

(a) * * *(1) [The text of the proposed first two

sentences of paragraph (a)(1) is the sameas the text of the first two sentences of§301.6231(a)(1)–1T(a)(1) published inT.D. 8808]. * * *

* * * * *

Par. 8. Section 301.6231(a)(6)–1 asproposed to be added at 51 F.R. 13245,April 18, 1986, is amended by:

1. Revising paragraph (a);2. Removing paragraph (c).The revision reads as follows:

§301.6231(a)(6)–1 Computationaladjustments.

(a) [The text of proposed paragraph (a)is the same as the text of §301.6231(a)(6)–1T(a) published in T.D. 8808.]

* * * * *Par. 9. Section 301.6231(a)(7)–1 is

amended by revising paragraphs (p)(2),(r)(1) and (s) to read as follows:

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

* * * * *

(p) * * *(2) When each general partner is

deemed to have no profits interest in thepartnership. If it is impracticable underparagraph (o)(2) of this section to applythe largest-profits-interest rule of para-graph (m)(2) of this section, the Commis-sioner will select a partner (including ageneral or limited partner) as the tax mat-ters partner in accordance with the crite-ria set forth in paragraph (q) of this sec-tion. The Commissioner will notify,within 30 days of the selection, the part-ner selected, the partnership, and all part-ners required to receive notice under sec-tion 6223(a), effective as of the datespecified in the notice.

* * * * *

(r) * * * (1) In general. If the Com-missioner selects a tax matters partnerunder the provisions of paragraph (p)(1)or (3)(i) of this section, the Commissionerwill notify, within 30 days of the selec-tion, the partner selected, the partnership,and all partners required to receive noticeunder section 6223(a), effective as of thedate specified in the notice.

* * * * *

(s) Effective date. This section appliesto all designations, selections, and termi-nations of a tax matters partner occurringon or after December 23, 1996, except forparagraphs (p)(2) and (r)(1), that are ap-plicable on the date they are published asfinal regulations in the Federal Register.


Internal Revenue Service.

1999–10 I.R.B. 55 March 8, 1999



Capital Gains, Installment Sales,Unrecaptured Section 1250Gain

REG–110524–98


ACTION: Notice of proposed rulemak-ing.

SUMMARY: This document containsproposed amendments to the regulationsrelating to the taxation of capital gains oninstallment sales of depreciable real prop-erty. The proposed regulations interpretchanges made by the Taxpayer Relief Actof 1997, as amended by the Internal Rev-enue Service Restructuring and ReformAct of 1998 and the Omnibus Consoli-dated and Emergency Supplemental Ap-propriations Act of 1999. The proposedregulations affect persons required to re-port capital gain from an installment salewhere a portion of the capital gain is unre-captured section 1250 gain and a portionis adjusted net capital gain.

DATES: Written comments or requestsfor a public hearing must be received byApril 22, 1999.

ADDRESSES: Send submissions toCC:DOM:CORP:R (REG–110524–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. In the alternative, sub-missions may be hand delivered Mondaythrough Friday between the hours of 8a.m. and 5 p.m. to: CC:DOM:CORP:R(REG–110524–98), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC. Alterna-tively, taxpayers may submit commentselectronically via the Internet by selectingthe “Tax Regs” option on the IRS HomePage, or by submitting comments directlyto the IRS Internet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CON-

TACT: Concerning the regulations,Susan Kassell, (202) 622-4930; concern-ing submissions, LaNita VanDyke, (202)622-7190 (not toll-free numbers).


Background

This document contains proposed amend-ments to the Income Tax Regulations (26CFR Part 1) relating to the taxation ofcapital gains on installment sales of de-preciable real property.

Prior to 1997, the maximum rate on netcapital gain for individuals was 28 per-cent. In the Taxpayer Relief Act of 1997,Public Law 105–34 (111 Stat. 788, 831)(1997 Act), Congress amended section1(h) generally to reduce the maximumcapital gain tax rates for individuals. Cer-tain substantive changes and technicalcorrections to section 1(h) were enactedas part of the Internal Revenue ServiceRestructuring and Reform Act of 1998,Public Law 105–206 (112 Stat. 685), in-cluding the repeal of an 18-month holdingperiod requirement for amounts properlytaken into account after December 31,1997, and by the Omnibus Consolidatedand Emergency Supplemental Appropria-tions Act, 1999, Public Law 105–277(112 Stat. 2681).

As amended, section 1(h) generally di-vides net capital gain into three rategroups based on the nature of the prop-erty, the nature of the gain, and the hold-ing period of the property.

A maximum marginal rate of 28 per-cent applies to 28-percent rate gain (28-percent gain), the combination of (1) cap-ital gains and losses from the sale orexchange of collectibles held for morethan one year; (2) an amount equal to gainexcluded from income on the sale or ex-change of certain small business stockunder section 1202; (3) capital gains andlosses determined under special transitionrules in section 1(h)(13) for certainamounts taken into account in 1997; (4)net short-term capital loss for the tax year;and (5) any long-term capital loss carry-over to the tax year under section 1212.

A maximum marginal rate of 25 per-cent applies to unrecaptured section 1250gain (25-percent gain), which is definedin section 1(h)(7)(A) as the amount oflong-term capital gain (not otherwise

treated as ordinary income) that would betreated as ordinary income if section1250(b)(1) included all depreciation andthe applicable percentage under section1250(a) were 100 percent, reduced by anynet loss in the 28-percent rate category.Effectively, the amount of gain taxed at25 percent is the amount of straight-linedepreciation allowed for the property.Thus, the 25-percent rate category par-tially recaptures such depreciation, butthe recapture is limited, inter alia, in thatthe recapture rate may be less than themarginal rates that applied to the depreci-ation deductions. Section 1(h)(7)(B) lim-its the unrecaptured section 1250 gainfrom section 1231 assets for any tax yearto the net section 1231 gain for that year.

A maximum marginal rate of 20 per-cent generally applies to adjusted net cap-ital gain (20/10-percent gain), defined insection 1(h)(4) as the portion of net capi-tal gain that is not taxed at the 28-percentor 25-percent rates. Under section1(h)(1)(B), a 10-percent rate applies toany portion of adjusted net capital gainthat would otherwise be taxed at a 15-per-cent rate if capital gains were taxed as or-dinary income.

For amounts properly taken into ac-count after July 28, 1997, and before Jan-uary 1, 1998, an 18-month holding periodis required to obtain the maximum 25-percent, 20-percent, or 10-percent rates.

Section 453 provides that, unless tax-payers elect out, gain from an installmentsale is recognized as payments on the in-stallment obligation are received. Beforethe 1997 Act, reporting capital gain underthe installment method was relativelystraightforward: the capital gain portionof each payment was taxed at the maxi-mum capital gain rate of 28 percent. Sec-tion 1(h) provides for multiple rates, butdoes not address how to treat an install-ment sale of depreciable real propertywhen the gain to be reported consists ofboth 25-percent gain and 20/10-percentgain.


Front-Loaded Allocation of UnrecapturedSection 1250 Gain

Under the proposed regulations, if aportion of the capital gain from an install-ment sale is 25-percent gain and a portion

March 8, 1999 56 1999–10 I.R.B.

is 20/10-percent gain, the taxpayer is re-quired to take the 25-percent gain into ac-count before the 20/10-percent gain, aspayments are received. (Because salesthat result in 28-percent gain cannot alsoyield 25-percent gain or 20/10-percentgain, an allocation rule for 28-percentgain is unnecessary.)

A front-loaded allocation method for25-percent gain is generally consistentwith the statute, under which 20/10-per-cent gain (that is, adjusted net capital gain)is defined as the residual category of capi-tal gain not taxed at maximum rates of 28percent or 25 percent. The front-loadedmethod precludes taxpayers from recog-nizing some 20/10-percent gain from aninstallment sale even when the amount ul-timately recognized proves to be less thanthe amount subject to recapture at the 25-percent rate. Absent a front-loaded alloca-tion method this inappropriate result couldarise, for example, when a taxpayer laterdisposes of an installment obligation at adiscounted price or when the amount to bereceived is contingent.

The IRS and Treasury Department havepreviously adopted analogous front-loaded allocation methods with respect toinstallment sales. For example, before1984—when Congress enacted section453(i), which requires immediate recog-nition of recapture gain at ordinary ratesunder sections 1245 and 1250—taxpayerswere permitted to defer recognition of thisordinary-rate recapture gain under the in-stallment method. Thus, an installmentpayment could contain both capital gainand gain taxed at ordinary rates. By regu-lation, a front-loaded allocation of the or-dinary-rate recapture gain was required.§§1.1245–6(d); 1.1250–1(c)(6). SeeDunn Construction v. United States,323F. Supp. 440 (N.D. Ala. 1971) (upholding§1.1245–6(d) as “reasonable and consis-tent with the underlying statute” and avalid exercise of the regulatory authorityunder section 453). See also §§1.1251–1(e)(6), 1.1252–1(d)(3), 1.1254–1(d), and16A.1255–1(c)(3).

Interaction with Section 1231

Section 1(h) also does not address theinteraction of the capital gain rates, the in-stallment method, and the rules in section1231. Section 1231(a) generally providesthat, when gains from the sale or ex-change of property used in a trade or busi-

ness exceed losses from such property,the gains and losses are treated as long-term capital gains and losses. Conversely,when section 1231 losses exceed section1231 gains, the gains and losses aretreated as ordinary. The capital nature ofnet section 1231 gain is subject to an ex-ception: under section 1231(c), net sec-tion 1231 gain is treated as ordinary in-come to the extent of the taxpayer’snon-recaptured net section 1231 losses forthe preceding five years.

With respect to the interaction of sec-tion 1231(c) and the capital gain rates, theIRS and Treasury Department have al-ready provided that section 1231 gain thatis recharacterized as ordinary gain undersection 1231(c) is deemed to consist firstof 28-percent gain, then 25-percent gain,and finally 20/10-percent gain. See No-tice 97–59 (1997–45 IRB 7, 8). An exam-ple in the proposed regulations illustratesthe application of this principle in the in-stallment sale context. Consistent withthis treatment and with the general rulethat 25-percent gain is front-loaded, an-other example in the proposed regulationsillustrates that—in a year in which install-ment gain is characterized as ordinarygain under section 1231(a) because thereis a net section 1231 loss for the year—the gain is treated as consisting of 25-per-cent gain first, before 20/10-percent gain,for purposes of determining how much25-percent gain remains to be taken intoaccount in later payments.

The examples in the proposed regula-tions—regarding the interaction of sec-tions 1(h), 453, and 1231—are specificapplications of the general rule that, forany given installment payment, gain fromall previous payments is treated as con-sisting first of 25-percent gain, rather than20/10-percent gain, in determining howmuch of each category of gain remains tobe reported with respect to current andsubsequent payments. Under the regula-tions, in making this determination it isgenerally irrelevant how such prior gainwas actually reported and taxed. For ex-ample, an installment payment that istaxed at 15 percent because the taxpayeris in a low tax bracket may be treated asconsisting of 25-percent gain (that is, un-recaptured section 1250 gain) for alloca-tion purposes, even though the gain is notactually taxed at 25 percent. The pro-posed regulations focus on examples in-

volving section 1231 since they are themost common.

Treatment of Installment Payments fromSales Prior to the Effective Date of the1997 Act

The capital gains provisions of the1997 Act were effective for taxable yearsending after May 6, 1997. However, themaximum rate of 28 percent was not re-duced for gains properly taken into ac-count before May 7, 1997. Under settledauthority, originating in Snell v. Commis-sioner,97 F.2d 891 (5th Cir. 1938), thelaw in effect when an installment pay-ment is received controls the tax treat-ment of the payment. Unless otherwiseprovided, installment payments receivedafter a change in the law are taxed underthe new law, whether favorable or unfa-vorable, looking back to the originaltransaction for the facts necessary toapply the changed law. In Snell, for ex-ample, installment payments from whatwas a capital asset in the sale year weretaxed as ordinary income after Congresschanged the definition of a capital asset.See also Estate of Kearns v. Commis-sioner, 73 T.C. 1223 (1980); Klein v.Commissioner,42 T.C. 1000 (1964); Rev.Rul. 79–22 (1979–1 CB 275). Congressalso implicitly has recognized the Snellprinciple by enacting grandfather excep-tions when the application of Snellwouldbe unfavorable. For example, when Con-gress extended the holding period require-ment for capital gain in 1976, the legisla-tion specifically excepted from the new,harsher requirements post-1976 install-ment gain from pre-1976 sales.

The legislative history of the 1997 Actreflects the Snellprinciple, providing thatsection 1(h) “generally applies to salesand exchanges (and installment paymentsreceived) after May 6, 1997.” Conf. Rep.105–220, 105th Cong., 1st Sess. 382, 383(1997). Thus, under these settled princi-ples, gain on installment payments re-ceived after May 6, 1997, from sales on orbefore that date, is taxed at the new, lowermaximum rates of 25 percent, 20 percent,or 10 percent if it qualifies as unrecap-tured section 1250 gain or adjusted netcapital gain. However, as in the case ofgain from post-effective-date sales, sec-tion 1(h) does not specify how to allocatethe two categories of gain.

1999–10 I.R.B. 57 March 8, 1999

The proposed regulations provide thatthe capital gain rates applicable to install-ment payments that are received on orafter the effective date of the 1997 Actfrom sales prior to the effective date aredetermined as if, for all payments re-ceived after the date of sale but before theeffective date, 25-percent gain had beentaken into account before 20/10-percentgain. This approach is consistent with theSnell principle in that it provides for thesame method of allocation, whether thesale occurred before or after the effectivedate of the 1997 Act. For taxpayers whosold property and received installmentpayments before the effective date of the1997 Act, this provision is favorable,since it generally reduces or eliminatesthe amount of 25-percent gain to be re-ported on installment payments receivedafter the effective date. The approach isalso simple — because it is generally ir-relevant how the prior gain was actuallyreported and taxed, in most cases taxpay-ers will simply calculate the total amountof 25-percent gain on the sale and subtractfrom that all gain previously reported, inorder to arrive at the amount of 25-per-cent gain remaining to be reported.

Treatment of Installment PaymentsReceived Between the Effective Date ofthe Statute and the Effective Date of theFinal Regulations.

The proposed regulations also addressthe treatment of gain in installment pay-ments that are received during the periodbetween the effective date of section 1(h)and the effective date of the final regula-tions. The proposed regulations providethat, in the event the cumulative amountof 25-percent gain actually reported in in-stallment payments received during thisperiod was less than the amount thatwould have been reported using the front-loaded allocation method of the regula-tions, the amount of 25-percent gain actu-ally reported, rather than an amountdetermined under a front-loaded alloca-tion method, must be used in determiningthe amount of 25-percent gain that re-mains to be reported. This provision en-sures that taxpayers cannot underreportthe total amount of 25-percent gain bytaking inconsistent positions with respectto payments received before and after theeffective date of the regulations. By pro-viding for this rule, no inference is in-

tended that any allocation method otherthan the method provided for by the regu-lations was a reasonable interpretation ofsection 1(h) in this context. However, theIRS will not challenge the use of a prorata allocation method—that is, a methodunder which the amounts of 25-percentgain and 20/10-percent gain in each in-stallment payment bear the same relation-ship as the total amounts of 25-percentand 20/10-percent gain to be reported onthe sale—for installment payments re-ceived before the effective date of thefinal regulations, if the taxpayer used thesame pro rata method for all installmentpayments during such period.


The regulations are proposed to be ef-fective for payments properly taken intoaccount after the date the regulations arepublished as final regulations in the Fed-eral Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and, because the regulations do notimpose a requirement for the collection ofinformation on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section7805(f) of the Internal Revenue Code,this notice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) that are submitted timely to theIRS. The IRS and Treasury Departmentrequest comments on the clarity of theproposed rules and how they can be madeeasier to understand. All comments willbe available for public inspection and

copying. A public hearing may be sched-uled if requested in writing by a personthat timely submits written comments. Ifa public hearing is scheduled, notice ofthe date, time, and place for the hearingwill be published in the Federal Register.


The principal authors of these regula-tions are Susan Kassell and Rob Laude-man, Office of the Assistant Chief Coun-sel (Income Tax & Accounting).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *

Proposed Amendment to the Regulations

Accordingly, the IRS proposes toamend 26 CFR part 1 as follows:


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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.453–12 is added to

read as follows:

§1.453–12 Allocation of unrecapturedsection 1250 gain reported on theinstallment method.

(a) General rule.Unrecaptured section1250 gain, as defined in section 1(h)(7), isreported on the installment method if thatmethod otherwise applies under section453 or 453A and the corresponding regu-lations. If gain from an installment saleincludes unrecaptured section 1250 gainand adjusted net capital gain (as definedin section 1(h)(4)), the unrecaptured sec-tion 1250 gain is taken into account be-fore the adjusted net capital gain.

(b) Installment payments from sales be-fore May 7, 1997.The amount of unre-captured section 1250 gain in an install-ment payment that is properly taken intoaccount after May 6, 1997, from a sale be-fore May 7, 1997, is determined as if, forall payments properly taken into accountafter the date of sale but before May 7,1997, unrecaptured section 1250 gain hadbeen taken into account before adjustednet capital gain.

(c) Installment payments received afterMay 6, 1997, and before the effective dateof the final regulations.If the amount of

March 8, 1999 58 1999–10 I.R.B.

unrecaptured section 1250 gain in an in-stallment payment that is properly takeninto account after May 6, 1997, and beforethe effective date of the final regulations,is less than the amount that would havebeen taken into account under this section,the lesser amount is used to determine theamount of unrecaptured section 1250 gainthat remains to be taken into account.

(d) Examples. In each example, thetaxpayer, an individual whose taxableyear is the calendar year, does not electout of the installment method. The in-stallment obligation bears adequate stated

interest, and the property sold is realproperty held in a trade or business thatqualifies as both section 1231 propertyand section 1250 property. In all taxableyears, the taxpayer’s marginal tax rate onordinary income is 28 percent. The fol-lowing examples illustrate the rules ofthis section:

Example 1. General rule.This example illus-trates the rule of paragraph (a) of this section.

(i) In 1998, A sells property for $10,000, to bepaid in ten equal annual installments beginning onDecember 1, 1998. A originally purchased the prop-erty for $5,000, held the property for several years,and took straight-line depreciation deductions in the

amount of $3,000. In each of the years 1998-2007, Ahas no other capital or section 1231 gains or losses.

(ii) A’s adjusted basis at the time of the sale is$2,000. Of A’s $8,000 of section 1231 gain on thesale of the property, $3,000 is attributable to priorstraight-line depreciation deductions and is unrecap-tured section 1250 gain. The gain on each install-ment payment is $800.

(iii) As illustrated in the following table, A takesinto account the unrecaptured section 1250 gainfirst. Therefore, the gain on A’s first three payments,received in 1998, 1999, and 2000, is taxed at 25 per-cent. Of the $800 of gain on the fourth payment, re-ceived in 2001, $600 is taxed at 25 percent and theremaining $200 is taxed at 20 percent. The gain onA’s remaining six installment payments is taxed at20 percent. The table is as follows:

1998 1999 2000 2001 2002 2003-2007 Total gain

Installment gain 800 800 800 800 800 4000 8000

Taxed at 25% 800 800 800 600 3000

Taxed at 20% 200 800 4000 5000

Remaining to be taxed at 25% 2200 1400 600

1994 1995 1996 1997 1998 1999-2003 Total gain


Taxed at 28% 800 800 800 2400

Taxed at 25% 600 600

Taxed at 20% 200 800 4000 5000


Example 2. Installment payments from salesprior to May 7, 1997.This example illustrates therule of paragraph (b) of this section.

(i) The facts are the same as in Example 1exceptthat A sold the property in 1994, received the first ofthe ten annual installment payments on December 1,1994, and had no other capital or section 1231 gainsor losses in the years 1994-2003.

(ii) As in Example 1,of A’s $8000 of gain on the

sale of the property, $3000 was attributable to priorstraight-line depreciation deductions and is unrecap-tured section 1250 gain.

(iii) As illustrated in the following table, A’s firstthree payments, in 1994, 1995, and 1996, were re-ceived before May 7, 1997, and taxed at 28 percent.Under the rule described in paragraph (b) of this sec-tion, A determines the allocation of unrecapturedsection 1250 gain for each installment payment after

May 6, 1997, by taking unrecaptured section 1250gain into account first, treating the general rule ofparagraph (a) of this section as having applied sincethe time the property was sold, in 1994. Conse-quently, of the $800 of gain on the fourth payment,received in 1997, $600 is taxed at 25 percent and theremaining $200 is taxed at 20 percent. The gain onA’s remaining six installment payments is taxed at20 percent. The table is as follows:

Example 3. Effect of section 1231(c) recapture.This example illustrates the rule of paragraph (a) ofthis section when there are non-recaptured net sec-tion 1231 losses, as defined in section 1231(c)(2),from prior years.

(i) The facts are the same as in Example 1,exceptthat in 1998 A has non-recaptured net section 1231losses from the previous four years of $1000.

(ii) As illustrated in the following table, in 1998,all of A’s $800 installment gain is recaptured as or-dinary income under section 1231(c). Under therule described in paragraph (a) of this section, for

purposes of determining the amount of unrecap-tured section 1250 gain remaining to be taken intoaccount, the $800 recaptured as ordinary incomeunder section 1231(c) is treated as reducing unre-captured section 1250 gain, rather than adjusted netcapital gain. Therefore, A has $2200 of unrecap-tured section 1250 gain remaining to be taken intoaccount.

(iii) In 1999, A’s installment gain is taxed at tworates. First, $200 is recaptured as ordinary incomeunder section 1231(c). Second, the remaining $600of gain on A’s 1999 installment payment is taxed at

25 percent. Because the full $800 of gain reducesunrecaptured section 1250 gain, A has $1400 of un-recaptured section 1250 gain remaining to be takeninto account.

(iv) The gain on A’s installment payment re-ceived in 2000 is taxed at 25 percent. Of the $800 ofgain on the fourth payment, received in 2001, $600is taxed at 25 percent and the remaining $200 istaxed at 20 percent. The gain on A’s remaining sixinstallment payments is taxed at 20 percent. Thetable is as follows:

1998 1999 2000 2001 2002 2003-2007 Total gain


Taxed at ordinary rates under section 1231(c) 800 200 1000

Taxed at 25% 600 800 600 2000

Taxed at 20% 200 800 4000 5000

Remaining non-recaptured net section 1231 losses 200


1999–10 I.R.B. 59 March 8, 1999

Example 4. Effect of a net section 1231 loss.This example illustrates the application of paragraph(a) of this section when there is a net section 1231loss.

(i) The facts are the same as in Example 1exceptthat A has section 1231 losses of $1000 in 1998.

(ii) In 1998, A’s section 1231 installment gain of$800 does not exceed A’s section 1231 losses of$1000. Therefore, A has a net section 1231 loss of$200. As a result, under section 1231(a) all of A’ssection 1231 gains and losses are treated as ordinarygains and losses. As illustrated in the followingtable, A’s entire $800 of installment gain is ordinarygain. Under the rule described in paragraph (a) of

this section, for purposes of determining the amountof unrecaptured section 1250 gain remaining to betaken into account, A’s $800 of ordinary section1231 installment gain in 1998 is treated as reducingunrecaptured section 1250 gain. Therefore, A has$2200 of unrecaptured section 1250 gain remainingto be taken into account.

(iii) In 1999, A has $800 of section 1231 install-ment gain, resulting in a net section 1231 gain of$800. A also has $200 of non-recaptured net section1231 losses. The $800 gain is taxed at two rates.First, $200 is taxed at ordinary rates under section1231(c), recapturing the $200 net section 1231 losssustained in 1998. Second, the remaining $600 of

gain on A’s 1999 installment payment is taxed at 25percent. As in Example 3,the $200 of section1231(c) gain is treated as reducing unrecaptured sec-tion 1250 gain, rather than adjusted net capital gain.Therefore, A has $1400 of unrecaptured section1250 gain remaining to be taken into account.

(iv) The gain on A’s installment payment re-ceived in 2000 is taxed at 25 percent, reducing theremaining unrecaptured section 1250 gain to $600.Of the $800 of gain on the fourth payment, receivedin 2001, $600 is taxed at 25 percent and the remain-ing $200 is taxed at 20 percent. The gain on A’s re-maining six installment payments is taxed at 20 per-cent. The table is as follows:

1998 1999 2000 2001 2002 2003-2007 Total gain


Ordinary gain under section 1231(a) 800 800

Taxed at ordinary rates under section 1231(c) 200 200

Taxed at 25% 600 800 600 2000

Taxed at 20% 200 800 4000 5000

Net section 1231 loss 200


(e) Effective date.This section appliesto installment payments properly takeninto account after the date these regula-tions are published as final regulations inthe Federal Register.


Internal Revenue.



Passive Foreign InvestmentCompanies; Definition of Marketable Stock

REG–113744–98


ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations relating to the new

mark to market election for stock of a pas-sive foreign investment company (PFIC).The proposed regulations interpretchanges made by the Taxpayer Relief Actof 1997. The proposed regulations affectpersons holding PFIC stock that is regu-larly traded on certain U.S. or foreign ex-changes or markets or holding stock incertain PFICs comparable to U.S. regu-lated investment companies (RICs). Theproposed regulations also reserve treat-ment of and request comments on makingthe mark to market election for options onmarketable stock.

DATES: Written comments or requestsfor a public hearing must be received byMay 3, 1999.

ADDRESSES: Send submissions toCC:DOM:CORP:R (REG–113744–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. In the alternative, sub-missions may be hand delivered Mondaythrough Friday between the hours of 8a.m. and 5 p.m. to: CC:DOM:CORP:R(REG–110524–98), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC. Alterna-tively, taxpayers may submit commentselectronically via the Internet by selectingthe “Tax Regs” option on the IRS HomePage, or by submitting comments directlyto the IRS Internet site at: http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Robert Laudeman, (202) 622-3840;concerning submissions, LaNitaVanDyke, (202) 622-7190 (not toll-freenumbers).


Background

This notice contains proposed amend-ments to the Income Tax Regulations (26CFR Part 1) regarding the taxation of U.S.holders of PFIC stock.

Since the enactment of the Tax ReformAct of 1986, U.S. holders of PFIC stockhave been subject to two alternative setsof inclusion rules: the interest chargerules under section 1291 of the InternalRevenue Code and the qualified electingfund (QEF) rules under section 1293.

The interest charge rules apply toshareholders of PFICs that are not QEFsor for which a QEF election is unavail-able. Under the interest charge rules, thePFIC shareholders pay tax and an interestcharge that is attributable to the value ofdeferral on receipt of certain distributionsand on disposition of the PFIC stock. Bycontrast, PFIC shareholders who make aQEF election include currently in grossincome their respective shares of thePFIC’s total earnings, with a separateelection to defer payment of tax, subjectto an interest charge, on income not cur-rently received.

Congress recognized that the interestcharge rules are a substantial source ofcomplexity for PFIC shareholders andthat some shareholders would prefer thecurrent inclusion method afforded by theQEF election, but are unable to make theelection because they cannot obtain thenecessary information from the PFIC.Congress accordingly enacted new sec-tion 1296 in the Tax Reform Act of 1997to provide PFIC shareholders with an al-ternative method to include income cur-rently with respect to their interests in aPFIC by allowing PFIC shareholders toelect to mark to market PFIC stock thatqualifies as marketable stock.

In general, a PFIC shareholder whoelects under section 1296 to mark to mar-ket the marketable stock of a PFIC in-cludes in income each year an amountequal to the excess, if any, of the fair mar-ket value of the PFIC stock as of the closeof the taxable year over the shareholder’sadjusted basis in such stock. A share-holder is also generally allowed a deduc-tion for the excess, if any, of the adjustedbasis of the PFIC stock over the fair mar-ket value as of the close of the taxableyear. Deductions under this rule, however,are allowable only to the extent of any netmark to market gains with respect to thestock included by the shareholder forprior taxable years.

Section 1296(e)(1) defines marketablestockas including several categories ofstock. First, section 1296(e)(1)(A) statesthat marketable stock includes any stockwhich is regularly traded on (i) a nationalsecurities exchange which is registeredwith the Securities and Exchange Com-mission (SEC) or the national market sys-tem established pursuant to section 11Aof the Securities Exchange Act of 1934,or (ii) any exchange or other marketwhich the Secretary determines has rulesadequate to carry out the purposes of thePFIC provisions. With respect to (ii)above, the conference report specifies that“PFIC stock is considered marketable if itis regularly traded on any exchange ormarket that the Secretary of the Treasurydetermines has rules sufficient to ensurethat the market price represents a legiti-mate and sound fair market value.” H.R.Conf. Rep. No. 2014, 105th Cong., 1stSess. 625 (1997). Second, section1296(e)(1)(B) states that, to the extentprovided in regulations, stock in any for-

eign corporation which is comparable to aRIC and which offers for sale or has out-standing any stock of which it is the issuerand which is redeemable at its net assetvalue will be marketable stock. Third,section 1296(e)(1)(C) states that, to theextent provided in regulations, any optionon stock described in section 1296(e)-(1)(A) or (B) will constitute marketablestock.

Section 1296(e)(2) provides that in thecase of any RIC which is offering for saleor has outstanding any stock of which it isthe issuer and which is redeemable at netasset value, all stock in a PFIC which itowns directly or indirectly shall be treatedas marketable stock for purposes of sec-tion 1296. Section 1296(e)(2) further pro-vides that except as provided in regula-tions, similar treatment as marketablestock shall apply in the case of any otherRIC which publishes net asset valuationsat least annually.

The proposed regulations define mar-ketable stock for purposes of section1296. Specifically, the proposed regula-tions define regularly traded and list at-tributes that a foreign exchange or marketmust have in order for PFIC stock tradedon such an exchange or market to be eligi-ble for the mark to market election. Thedefinition of regularly traded and the at-tributes required of foreign exchanges ormarkets are intended to ensure that theprices of PFIC shares listed on the ex-change or market represent legitimate andsound fair market values. The proposedregulations also list the attributes that aforeign corporation must satisfy to becomparable to a RIC, and thus for itsstock to be marketable stock. The attrib-utes are intended to ensure that the for-eign corporation is an investment vehiclesimilar in relevant respects to a U.S. mu-tual fund and that its representations ofnet asset value represent a legitimate fairmarket value.


Regularly Traded

Under the proposed regulations, theclass of PFIC stock held by the share-holder must be traded, other than in deminimis quantities, on at least 15 daysduring each calendar quarter. The pro-posed regulations also include an anti-abuse rule to prevent persons from manip-

March 8, 1999 60 1999–10 I.R.B.

ulating the number of trades in order tomeet this test.

Exchange or Other Market

The proposed regulations require that aforeign exchange or market be regulatedor supervised by a governmental authorityof the country in which the market is lo-cated. This requirement will help to en-sure that the prices of the stock listed bythe exchange are legitimate and sound fairmarket values. Because the degree ofgovernmental regulation or supervisionfor each foreign exchange or market mayvary by exchange or market or country,the proposed regulations also list addi-tional characteristics that the foreign ex-change or market must have for stock thatis regularly traded on the exchange ormarket to be considered marketable stockfor purposes of section 1296.

First, the exchange must have tradingvolume, listing, financial disclosure andother requirements, designed to preventfraud, perfect the mechanism of a free andopen market, and protect investors. Seesection 6 of the Securities Exchange Actof 1934, 15 U.S.C. 78f. There must beactual enforcement of these requirementsby the exchange and government of thecountry in which the exchange is located.

Second, the rules of the exchange mustensure active trading of listed stocks.

Finally, the IRS and Treasury Depart-ment invite comments on whether PFICstock that is regularly traded on any othertype of exchange or market, such as anover-the-counter market, should be con-sidered marketable stock. Additionalcomments are requested about what fea-tures those exchanges or markets shouldhave to ensure that the stock prices quotedon such markets are legitimate and soundfair market values.

Stock in Certain PFICs

The proposed regulations provide thatstock in certain PFICs will be marketablestock if the PFIC is a corporation de-scribed in section 1296(e)(1)(B) (foreigncorporations comparable to RICs) and ifthe PFIC offers for sale or has outstandingstock of which it is the issuer and which isredeemable at its net asset value. A PFICwill be a corporation described in section1296(e)(1)(B) if the PFIC satisfies theconditions listed in the proposed regula-

tions and described below, with respect tothe class of shares held by the electingtaxpayer. These conditions are intendedto describe PFICs that are comparable toU.S. RICs in relevant respects and to im-plement the intent of the statute by ensur-ing that the net asset valuations of suchcompanies represent legitimate and soundfair market values for the companies’stock.

First, the class of stock held by anelecting shareholder must be held by onehundred or more unrelated shareholders.The relationships set forth in section267(b) are used to define related share-holders that are excluded from satisfyingthis test. This condition is consistent withthe requirements for RICs under section851(a) and §1.851–1 of the income taxregulations.

Second, the applicable class of sharesof the foreign corporation must be regu-larly available for purchase by the generalpublic at its net asset value in initialamounts not greater than $10,000 (U.S.).The IRS and Treasury Department invitecomments on whether $10,000 is the ap-propriate ceiling to ensure that the sharesof the company will be widely availableto the general public. The IRS and Trea-sury Department also invite comments onwhether and under what conditions theregulations should allow shares of a for-eign corporation to be purchased atamounts different from their net assetvalue, such as for a price that includes asales load. Additional comments are re-quested about whether the regulationsshould cover foreign corporations thatotherwise qualify but are closed to newinvestors.

Third, the proposed regulations requirethat quotations for the class of shares of theforeign corporation be determined andpublished on a daily basis in a widely-available medium, such as a newspaper ofgeneral circulation. This requirement ap-proximates the practice of U.S. RICs and isintended to ensure that shareholders andprospective purchasers have regular accessto publicly available price information.

Fourth, financial statements of the for-eign corporation prepared by independentauditors that include balance sheets (state-ments of assets, liabilities, and net assets)and statements of income and expenses,must be prepared and made available tothe public no less frequently than annu-

ally. This requirement approximates therequirements imposed on U.S. mutualfunds by the SEC and is intended to en-sure that shareholders and prospectivepurchasers have regular access to financialinformation for the foreign corporation.

Fifth, the foreign corporation must besupervised or regulated as an investmentcompany by a foreign government or anagency or instrumentality thereof. Thiscondition is intended to approximate theSEC’s regulation of U.S. RICs while tak-ing into account the variety of regulatoryregimes used by different governments.

Sixth, the foreign corporation may nothave any senior securities authorized oroutstanding, including any debt other thande minimisamounts. This requirement issimilar to the requirement imposed onU.S. RICs by the SEC.

Finally, the foreign corporation mustmeet the PFIC income and asset tests insections 1297(a)(1) and (2) with the requi-site percentages increased from 75 percentto 90 percent and from 50 percent to 90percent respectively. This condition is in-tended to approximate the characteristic ofU.S. RICs as passive investment vehicles.

The proposed regulations also includean anti-abuse rule to prevent a foreigncorporation from improperly manipulat-ing its net asset valuations to reduce theU.S. tax under section 1296 of one ormore shareholders of the corporation.

Options on Marketable Stock

The proposed regulations reserve theparagraph for defining how and when op-tions on marketable stock, as defined bythese regulations, will be eligible formark to market treatment. The IRS andTreasury Department invite comments re-garding the conditions under which theregulations should define options on mar-ketable stock to be marketable stock.

Special Rules for RICs

The proposed regulations clarify thatshares in a PFIC that are owned directly orindirectly by a U.S. RIC, which is offeringfor sale or has outstanding any stock ofwhich it is the issuer and which is re-deemable at net asset value, shall betreated as marketable stock for purposes ofsection 1296. The IRS and Treasury De-partment invite comments regarding situa-tions where PFIC stock held by other U.S.

1999–10 I.R.B. 61 March 8, 1999

RICs that publish asset valuations at leastannually should not be treated as mar-ketable stock for purposes of section 1296.


The regulations are proposed to be ap-plicable for shareholders whose taxableyears end on or after the date these regula-tions are published as final regulations inthe Federal Register. In addition, it isproposed that shareholders may elect toapply these regulations to taxable yearsbeginning after December 31, 1997.

Special Analyses

It has been determined that this notice ofproposed rulemaking is not a significantregulatory action as defined in EO 12866.Therefore, a regulatory assessment is notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations, and, because theregulations do not impose a requirementfor the collection of information on smallentities, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pursuantto section 7805(f) of the Internal RevenueCode, this notice of proposed rulemakingwill be submitted to the Chief Counsel forAdvocacy of the Small Business Adminis-tration for comment on its impact on smallbusiness.


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) that are submitted timely to theIRS. The IRS and Treasury Departmentrequest comments on the clarity of theproposed rules and how they can be madeeasier to understand. All comments willbe available for public inspection andcopying. A public hearing may be sched-uled if requested by any person thattimely submits comments. If a publichearing is scheduled, notice of the date,time, and place for the hearing will bepublished in the Federal Register.


The principal author of these regula-tions is Robert Laudeman, Office of the

Associate Chief Counsel (International).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *





Authority: 26 U.S.C. 7805 * * *Section 1.1296(e)–1 also issued under

26 U.S.C. 1296(e). * * *Par. 2. Section 1.1296(e)–1 is added to

read as follows:

§1.1296(e)–1 Definition of marketablestock.

(a) General rule. For purposes of sec-tion 1296, the term marketable stockmeans—

(1) Passive foreign investment com-pany (PFIC) stock that is regularly traded,as defined in paragraph (b) of this section,on a qualified exchange or other market,as defined in paragraph (c) of this section;

(2) Stock in certain PFICs, as describedin paragraph (d) of this section; and

(3) Options on stock that is described inparagraph (a)(1) or (2) of this section, tothe extent provided in paragraph (e) ofthis section.

(b) Regularly traded—(1) Generalrule. For purposes of paragraph (a)(1) ofthis section, a class of stock that is tradedon one or more qualified exchanges orother markets, as defined in paragraph (c)of this section, is considered to be regu-larly traded on such exchanges or marketsfor any calendar year during which suchclass of stock is traded, other than in deminimis quantities, on at least 15 daysduring each calendar quarter.

(2) Anti-abuse rule. Trades that haveas one of their principal purposes themeeting of the trading requirement ofparagraph (b)(1) of this section shall bedisregarded. Further, a class of stockshall not be treated as meeting the tradingrequirement of paragraph (b)(1) of thissection if there is a pattern of trades con-

ducted to meet the requirement of para-graph (b)(1) of this section.

(c) Qualified exchange or othermarket—(1) General rule.For purposesof paragraph (a)(1) of this section, theterm qualified exchange or other marketmeans, for any taxable year—

(i) A national securities exchangewhich is registered with the Securities andExchange Commission or the nationalmarket system established pursuant tosection 11A of the Securities ExchangeAct of 1934 (15 U.S.C. 78f); or

(ii) A foreign securities exchange that isregulated or supervised by a governmen-tal authority of the country in which themarket is located and which has the fol-lowing characteristics—

(A) The exchange has trading volume,listing, financial disclosure, and other re-quirements designed to prevent fraudulentand manipulative acts and practices, to re-move impediments to and perfect themechanism of a free and open market,and to protect investors; and the laws ofthe country in which the exchange is lo-cated and the rules of the exchange ensurethat such requirements are actually en-forced; and

(B) The rules of the exchange ensureactive trading of listed stocks.

(2) Exchange with multiple tiers. If anexchange in a foreign country has morethan one tier or market level on whichstock may be separately listed or traded,each such tier shall be treated as a sepa-rate exchange.

(d) Stock in certain PFICs—(1) Gen-eral rule. Except as provided in para-graph (d)(2) of this section, a foreign cor-poration will be a corporation describedin section 1296(e)(1)(B), and paragraph(a)(2) of this section, if the foreign corpo-ration offers for sale or has outstandingstock of which it is the issuer and which isredeemable at its net asset value and if theforeign corporation satisfies the following

conditions with respect to the class ofshares held by the electing taxpayer—

(i) The foreign corporation has onehundred or more shareholders with re-spect to the class, other than shareholderswho are related under section 267(b);

(ii) The class of shares of the foreigncorporation is readily available for pur-chase by the general public at its net asset

March 8, 1999 62 1999–10 I.R.B.

value by new investors in initial amountsnot greater than $10,000 (U.S.);

(iii) Quotations for the class of sharesof the foreign corporation are determinedand published on a daily basis in awidely-available medium, such as anewspaper of general circulation;

(iv) No less frequently than annually,independent auditors must prepare finan-cial statements of the foreign corporationthat include balance sheets (statements ofassets, liabilities, and net assets) andstatements of income and expenses, andthose statements must be made availableto the public;

(v) The foreign corporation is super-vised or regulated as an investment com-pany by a foreign government or anagency or instrumentality thereof;

(vi) The foreign corporation has no se-nior securities authorized or outstanding,including any debt other than in de min-imis amounts;

(vii) Ninety percent or more of thegross income of the foreign corporationfor its taxable year is passive income, asdefined in section 1297(a)(1) and the reg-ulations thereunder; and

(viii) The average percentage of assetsheld by the foreign corporation during itstaxable year which produce passive in-come or which are held for the productionof passive income, as defined in section1297(a)(2) and the regulations thereunder,is at least 90 percent.

(2) Anti-abuse rule.If a foreign corpo-ration undertakes any action with a princi-pal purpose of manipulating the net assetvalue of a class of its shares in order to re-duce the United States tax under section1296 of one or more of its shareholders,the class of shares will not qualify as mar-ketable stock for purposes of paragraph(d)(1) of this section.

(e) [Reserved](f) Special rules for regulated invest-

ment companies (RICs)—(1) Generalrule. In the case of any RIC which is of-fering for sale or has outstanding anystock of which it is the issuer and which isredeemable at net asset value, its stock inany passive foreign investment companywhich it owns directly or indirectly, as de-fined in sections 958(a)(1) and (2), shallbe treated as marketable stock owned bythat RIC for purposes of section 1296.

(2) [Reserved](g) Effective date.This section applies

to shareholders whose taxable year endson or after the date these regulations arepublished as final regulations in the Fed-eral Registerfor stock in a foreign corpo-ration whose taxable year ends with orwithin the shareholder’s taxable year. Inaddition, shareholders may elect to applythese regulations to any taxable year be-ginning after December 31, 1997, forstock in a foreign corporation whose tax-able year ends with or within the share-holder’s taxable year.


Internal Revenue.

(Filed by the Office of the Federal Register on Feb-ruary 1, 1999, 8:45 a.m., and published in the issueof the Federal Register for February 2, 1999, 64 F.R.5012)

Foundations Status of CertainOrganizations

Announcement 99–19The following organizations have

failed to establish or have been unable tomaintain their status as public charities oras operating foundations. Accordingly,grantors and contributors may not, afterthis date, rely on previous rulings or des-ignations in the Cumulative List of Orga-nizations (Publication 78), or on the pre-sumption arising from the filing of noticesunder section 508(b) of the Code. Thislisting does not indicate that the organiza-tions have lost their status as organiza-tions described in section 501(c)(3), eligi-ble to receive deductible contributions.

Former Public Charities.The followingorganizations (which have been treated asorganizations that are not private founda-tions described in section 509(a) of theCode) are now classified as private foun-dations:Financial Assistance counseling and

Training Services, St. Paul, MNFinger Lakes youth Sports Inc., Geneva,

NYFire Safety Education Inc., Plymouth,

MIFire Safety Education Task Force,

Cleveland, OHFirm Foundation Ministries, Lincoln

Park, MIFirst Coast Business Investment

Corporation, Jacksonville, FL

First Coast Crisis Pregnancy Center,Jacksonville, FL

First Freedom Coalition EducationalFund, Washington, DC

First International Fellowship,Philadelphia, PA

First Light Dance Theatre, Knoxville, TN

First Step Crisis Pregnancy Center Inc.,Smithfield, NC

First Step I Inc., Knoxville, TNFirst Step II Inc., Knoxville, TNFirst Step Inc. of the Fifth Judicial

Circuit, Tavares, FLFish Forever, Seattle, WAFitspatrick Tennis Association Inc., New

York, NYFlagler County Historical Society Inc.,

Bunnell, FLFlatbush Youth Inc., Brooklyn, NYFlemister Housing Development Fund

Corporation, New York, NYFlickinger Center Foundation Inc.,

Alamogordo, NMFlood Care Inc., Ursa, ILFlorala EMS, Florala, ALFlorence Griffith Joyner Youth

Foundation, Mission Viejo, CAFlorida Bio Diversity Project Inc.,

Fort Lauderdale, FLFlorida Classic Association Inc., Tampa,

FLFlorida Community Learning and

Information Network Inc., FortLauderdale, FL

Florida Foundation for the Preservationof Sight Inc., Zephryhills, FL

Florida Youth Foundation Inc., Plant City,FL

Floyd Wickman Courses Family toFamily Inc., Troy, MI

Food for the Mind Inc., Miller Place, NY

Footprints, Tacoma, WAFor His Glory Ministries, Inc., Virginia

Beach, VAFor Petes Sake Productions, Upper

Marlboro, MDFor the Lord, Federal Way, WAFor the People Inc., Brooklyn, NYForeign Student Education Foundation

Inc., Charlotte, NCForensic Artists International, Towson,

MDForest Hills Parent Network Inc., Grand

Rapids, MIFort Collins Community Computer

Network, Fort Collins, CO

1999–10 I.R.B. 63 March 8, 1999

Fort Phil Kearny-Bozeman TrailEndowment Foundation Inc., Buffalo,WY

Fort Smith Volunteer Connection Inc.,Fort Smith, AR

Fort Worth Area Convention Committee,Fort Worth, TX

Fort Worth Citizen Police AcademyAssociation, Fort Worth, TX

Forty Five North Kingston Avenue Inc.,Cranford, NJ

Foundation De Manana Inc., Riverdale,GA

Foundation for Agency ManagementExcellence Inc., Washington, DC

Foundation for Aid to Needy Children inBerkshire County, Stockbridge, MA

Foundation for Educational InnovationInc., Washington, DC

Foundation for Equine FacilitatedPsychotherapy, Englewood, CO

Foundation for Excellence in ArtsEducation, Tucson, AZ

Foundation for Headache and Neuro-Rehabilitation, Denver, CO

Foundation for Hospice of RowanCounty Inc., Salsbury, NC

Foundation for InternationalDevelopment Alternative Inc., LongIsland City, NY

Foundation for International CancerControl Studies Inc., Madison, WI

Foundation for Mens Health, Dallas, TX

Foundation for Religion and the Arts,New Haven, CT

Foundation for Reproductive Health,Birmingham, AL

Foundation for Sustainable Development,Washington, DC

Foundation for Tax Education Inc.,Boston, MA

Foundation for the Advancement of Artsand Sciences from India Inc., Flushing,NY

Foundation for the Benefit of DisabledPersons, New York, NY

Foundation for the Children of PanamaInc., New York, NY

Foundation for the Collegiate, NewRochelle, NY

Foundation of the Interreligious Councilof Central New York Inc., Syracuse,NY

Foundation to Eliminate E ColiOutbreaks, Gig Harbor, WA

Foundation to Eliminate the NationalDebt Inc., Madison, WI

Fountain Hills Schools PartnershipFoundation, Fountain Hills, AZ

Four Square Hospice Inc., Madill, OKFoxs Den Goodwill Club Incorporated,

Baltimore, MDFrameworks Education Project,

Minneapolis, MNFran Crosby Memorial Fund Inc.,

Leonardo, NJFrankford Senior Housing Associates,

Philadelphia, PAFranklin County Citizens for Historic

Preservation, Cedar Grove, INFranklin Lakes Youth & Recreation

Foundation Inc., Franklin Lakes, NJFred N Stones Jr Memorial Scholarship

Fund, Waxahachie, TXFree Africa Foundation Inc., Washington,

DCFree Clinic for Substance Abuse Inc.,

Richmond, VAFree Spirit Ranch Inc., Plains, GAFreedom Adventures Inc., Jacksonville,

FLFreedom in Motion Inc., Princeton, WVFreedom League Inc., Miami, FLFreedom Today Not Tomorrow Inc.,

Olathe, KSFrench Heritage Relief Committee-

Operation Mississippi, Chicago, ILFriends and Former Students of Bolling

School Inc., Lewisburg, WVFriends and Neighbors Ltd., Denver, COFriends for Conservation of the San

Antonio River Basin, Goliad, TXFriends of Africa Inc., Los Angeles, CAFriends of Ams Green Tree Health Center

Inc., Glendale, WIFriends of Anzar Hills, Aromas, CAFriends of British Virgin Island National

Parks USA Inc., British Virgin IslandsFriends of CASA Association, Newark,

DEFriends of CMH Sumner Community

Memorial Hospital Foundation,Sumner, IA

Friends of Companion Animals Inc.,Lathrop, MO

Friends of Confide Inc., Rockville Centre,NY

Friends of Crossroads Center, Bellevue,WA

Friends of E M U Ltd., Ypsilanti, MIFriends of Feral Felines Inc., Atascadero,

CAFriends of Greenfield Recreation Inc.,

Greenfield, MAFriends of ICA Moscow Inc., New York,

NY

Friends of Italian Culture Amici Dei BeniCulturali Inc., New York, NY

Friends of Kidtown Playground,Brookings, OR

Friends of Leverett Pond Inc., Amherst,MA

Friends of Lynn & Nahant Beach, Lynn,MA

Friends of Maitland Middle School Inc.,Maitland, FL

Friends of Monona Inc., Monona, WIFriends of Refugees of Eastern Europe

Inc., W. Bloomfield, MIFriends of Rodeo Inc., Chowchilla, CAFriends of Rosevilles Harriet Alexander

Nature Center Inc., Minneapolis, MNFriends of Roxaboxen, Yuma, AZFriends of Russell Latimer Inc.,

San Diego, CAFriends of Santa Inc., Chicago, ILFriends of Shaarei Mevaseret Inc.,

Monsey, NYFriends of Staraya Russia, Canandaigua,

NYFriends of the Bowerston Public Library

Inc., Bowerston, OHFriends of the Business Resource Center,

Glen Allen, VAFriends of the Dr Eugene Clark Library

Lockhart TX, Lockhart, TXFriends of the Golan Settlements

Committee Inc., Brooklyn, NYFriends of the International School of Art

Inc., Brooklyn, NYFriends of the Limestone Country Trail

Inc., Bloomington, INFriends of the Mary M Campbell Library

Inc., Marcus Hook, PAFriends of the Mississippi River, St. Paul,

MNFriends of the Norton-Dare House Inc.,

Selden, NYFriends of the Old Synagogue in The

Hague Holland, Stamford, CTFriends of the Raanana Symphonette

Orchestra Inc., New York, NYFriends of the Seige & Battle of Corinth

Inc., Corinth, MSFriends of the University of the Holly

Spirit of Kaslik Inc., Miami, FLFriends of the Wicomico County Free

Library Inc., Salisbury, MDFriends of the Youth Study Center Inc.,

Philadelphia, PAFriends of Tikvatenu Youth Centers,

Dallas, TXFriends of Tiverton Library Services Inc.,

Tiverton, RI

March 8, 1999 64 1999–10 I.R.B.

Friends of Van Voorhees Park Inc.,Brooklyn, NY

Friends of Washington Adventist HospitalInc., Potomac, MD

Friends of Women and Children, Chicago,IL

Friendship Foundation of American-Vietnamese Inc., Lorain, OH

Friendship Home of Wells Inc., Wells, MNFriendship Hospice Memorial Foundation

Inc., Nashville, TNFriendship House of India, Warren, MIFriendship Project Corporation, Larkspur,

CAFrost Parent Teacher Organization, Mesa,

AZFund for Labor Education Inc., New York,

NYFundacion Pro-Desarrollo De Barahona

Inc., Bronx, NYFuture Generations Inc., Little Rock, ARFuture Problem Solving Program of

Alabama Inc., Homewood, ALFuente De Agua Viva, Arlington, VAFull Moon Theatre Inc., Providence, RI

Fulton Church & Community WorkersInc., Fulton, NY

Genesis II Hamilton Heights DevelopmentCorporation, New York, NY

Grace Mining Company, Fountain Valley,CA

Graceland Ministries, Inc., Benton, KYGround Zero, Colorado Springs, COGroup for Research and Aid to Abductees,

Cary, NCGrowth Adventures Inc., Houston, TXGuadalupe Foundation Inc., Evanston, ILGuardian Care of Madison Inc., Portage,

WIGuardian Society, Villa Park, CAGuatemala Information Documentation

and Education Center Inc., Arlington,VA

Guatemaltecos Unidos en Accion ofRhode Island Inc., Cranston, RI

Gulfcoast C A D R E Inc., Bradenton, FLGunnison Basin Community Forum,

Crested Butte, COGymnastics Oregon, Ashland, ORHancock Family Foundation, Inc.,

Annapolis, MD

Hickory Nut Gorge Wilderness, LakeLure, NC

Interdisciplinary Council onDevelopmental & Learning Disorders,Inc., Bethesda, MD

Interpower Group, Inc., Detroit, MINutritional Research and Educational

Foundation Inc., New York, NYProject Turnabout, Claremont, CAScranton Lockawanna Resource

Development Corp., Scranton, PAIf an organization listed above submits

information that warrants the renewal ofits classification as a public charity or as aprivate operating foundation, the InternalRevenue Service will issue a ruling or de-termination letter with the revised classi-fication as to foundation status. Grantorsand contributors may thereafter rely uponsuch ruling or determination letter as pro-vided in section 1.509(a)–7 of the IncomeTax Regulations. It is not the practice ofthe Service to announce such revised clas-sification of foundation status in the Inter-nal Revenue Bulletin.

1999–10 I.R.B. 65 March 8, 1999

March 8, 1999 66 1999–10 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguisheddescribes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

1999–10 I.R.B. 67 March 8, 1999

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1998–1 through 1998–52will be found in Internal Revenue Bulletin 1999–1,dated January 4, 1999.

Numerical Finding List1

Bulletins 1999–1 through 1999–9

Announcements:

99–1, 1999–2 I.R.B. 4199–2, 1999–2 I.R.B. 4499–3, 1999–3 I.R.B. 1599–4, 1999–3 I.R.B. 1599–5, 1999–3 I.R.B. 1699–6, 1999–4 I.R.B.2499–7, 1999–2 I.R.B. 4599–8, 1999–4 I.R.B.2499–9, 1999–4 I.R.B. 2499–10, 1999–5 I.R.B. 6399–11, 1999–5 I.R.B. 6499–12, 1999–5 I.R.B. 6599–13, 1999–6 I.R.B. 1899–14, 1999–7 I.R.B.6099–15, 1999–8 I.R.B.7899–16, 1999–8 I.R.B. 8099–17, 1999–9 I.R.B.59

Notices:

99–1, 1999–2 I.R.B. 899–2, 1999–2 I.R.B. 899–3, 1999–2 I.R.B. 1099–4, 1999–3 I.R.B. 999–5, 1999–3 I.R.B. 1099–6, 1999–3 I.R.B. 1299–7, 1999–4 I.R.B.2399–8, 1999–5 I.R.B. 2699–9, 1999–4 I.R.B. 2399–10, 1999–6 I.R.B. 1499–11, 1999–8 I.R.B.5699–12, 1999–9 I.R.B.44

Proposed Regulations:

REG–245562–96, 1999–9 I.R.B. 45REG–114663–97, 1999–6 I.R.B. 15REG–118620–97, 1999–9 I.R.B. 46REG–106219–98, 1999–9 I.R.B. 51REG–115433–98, 1999–9 I.R.B. 54REG–106902–98, 1999–8 I.R.B. 57REG–111435–98, 1999–7 I.R.B. 55REG–113694–98, 1999–7 I.R.B. 56REG–116824–98, 1999–7 I.R.B.57REG–117620–98, 1999–7 I.R.B. 59REG–121865–98, 1999–8 I.R.B.63

Revenue Procedures:

99–1, 1999–1 I.R.B. 699–2, 1999–1 I.R.B. 7399–3, 1999–1 I.R.B. 10399–4, 1999–1 I.R.B. 11599–5, 1999–1 I.R.B. 15899–6, 1999–1 I.R.B. 18799–7, 1999–1 I.R.B. 22699–8, 1999–1 I.R.B. 22999–9, 1999–2 I.R.B. 1799–10, 1999–2 I.R.B. 1199–11, 1999–2 I.R.B. 1499–12, 1999–3 I.R.B. 1399–13, 1999–5 I.R.B. 5299–14, 1999–5 I.R.B. 5699–15, 1999–7 I.R.B. 4299–16, 1999–7 I.R.B. 5099–17, 1999–7 I.R.B. 52

Revenue Rulings:

99–1, 1999–2 I.R.B. 499–2, 1999–2 I.R.B. 599–3, 1999–3 I.R.B. 499–4, 1999–4 I.R.B.1999–5, 1999–6 I.R.B.899–6, 1999–6 I.R.B. 699–7, 1999–5 I.R.B. 499–8, 1999–6 I.R.B.899–9, 1999–7 I.R.B.14

Treasury Decisions:

8789, 1999–3 I.R.B. 58791, 1999–5 I.R.B. 78792, 1999–7 I.R.B.368793, 1999–7 I.R.B.158794, 1999–7 I.R.B.48795, 1999–7 I.R.B.88796, 1999–4 I.R.B. 168797, 1999–5 I.R.B. 58799, 1999–6 I.R.B. 108800, 1999–4 I.R.B. 208801, 1999–4 I.R.B. 58802, 1999–4 I.R.B. 108805, 1999–5 I.R.B. 148806, 1999–6 I.R.B.48807, 1999–9 I.R.B. 338809, 1999–7 I.R.B.278810, 1999–7 I.R.B.198812, 1999–8 I.R.B. 198813, 1999–9 I.R.B. 348814, 1999–9 I.R.B. 48815, 1999–9 I.R.B. 318816, 1999–8 I.R.B. 48817, 1999–8 I.R.B. 51

March 8, 1999 68 1999–10 I.R.B.

Finding List of Current Action onPreviously Published Items1

Bulletins 1999–1 through 1999–9

Revenue Procedures:

78–10Obsoleted by99–12, 1999–3 I.R.B. 13

94–56Superseded by99–9, 1999–2 I.R.B. 17










98–22Modified and amplified by99–13, 1999–5 I.R.B. 52


98–63Modified by announcement99–7, 1999–2 I.R.B. 45

1 A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1998–1 through 1998–52 will be found in InternalRevenue Bulletin 1999–1, dated January 4, 1999.

1999–10 I.R.B. 69 March 8, 1999

Notes

March 8, 1999 70 1999–10 I.R.B.

Notes

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