Bulletin No. 1996–42

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October 15, 1996

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be relied

upon as authoritative interpretations.

INCOME TAX

EXEMPT ORGANIZATIONS

Rev. Rul. 96–50, page 4.

LIFO; price indexes; department stores. The August

1996 Bureau of Labor Statistics price indexes are

accepted for use by department stores employing the

retail inventory and last-in, first-out inventory methods

for valuing inventories for tax years ended on, or with

reference to, August 31, 1996.

Announcement 96–107, page 27.

A list is given of organizations now classified as private

foundations.

REG–209826–96, page 10.

Proposed regulations under section 671 of the Code

relate to the application of the grantor trust rules to

nonexempt employees’ trusts. A public hearing will be

held on January 15, 1997.

Notice 96–51, page 6.

Inflation-indexed debt instruments. Proposed and temporary regulations under sections 1275(d) and 1286 of

the Code will be issued to provide guidance on the

federal income tax treatment of Treasury InflationProtection Securities and other debt instruments with

similar terms. This notice also describes, in general

terms, the debt instruments that are expected to be

subject to the regulations and how these instruments

are expected to be taxed under the regulations.

Finding Lists begin on page 33.

Announcements of Disbarments and Suspensions begin on page 30.

EMPLOYMENT TAX

Announcement 96–105, page 19.

Comments are solicited on a proposed tip reporting

agreement for use in the hairstyling industry.

Announcement 96–106, page 23.

Comments are solicited on a proposed tip reporting

agreement for use in the gaming industry.

ADMINISTRATIVE

Notice 96–52, page 8.

Work opportunity tax credit; notice of transition rule

under section 51 of the Code. The Service will provide

for a transition period for certain employers that did not

complete Form 8850 by the date an applicant is offered

a job. The transition period will allow employers to

complete and submit Form 8850 to the State Employment Security Agency, although the form was not completed on or before the day the employer offered the

applicant a job.

Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining of ficers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

With this in mind, it is the duty of the Service to

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of view.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great cour tesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,

court decisions, and other items of general interest. It is

published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin

contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a

single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are

cautioned against reaching the same conclusions in

other cases unless the facts and circumstances are

substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all

substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published rulings

apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management

are not published; however, statements of internal

practices and procedures that affect the rights and

duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on positions

taken in rulings to taxpayers or technical advice to

Service field offices, identifying details and information

of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory

requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in

this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin

of the succeeding quarterly and semi-annual period,

respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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

Section 472.—Last-in, First-out

Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department

stores. The August 1996 Bureau of

Labor Statistics price indexes are accepted for use by department stores

employing the retail inventory and lastin, first-out inventory methods for valuing inventories for tax years ended on,

or with reference to, August 31, 1996.

Rev. Rul. 96–50

The following Department Store Inventory Price Indexes for August 1996

were issued by the Bureau of Labor

Statistics on September 13, 1996. The

indexes are accepted by the Internal

Revenue Service, under § 1.472–1(k) of

the Income Tax Regulations and Rev.

Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of

department stores employing the retail

inventory and last-in, first-out inventory

methods for tax years ended on, or with

reference to, August 31, 1996.

The Department Store Inventory Price

Indexes are prepared on a national basis

and include (a) 23 major groups of

departments, (b) three special combinations of the major groups - soft goods,

durable goods, and miscellaneous goods,

and (c) a store total, which covers all

departments, including some not listed

separately, except for the following:

candy, foods, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups

Aug.

1995

Aug.

1996

Percent

Change from

Aug. 1995 to

Aug. 19961

Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . .

Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Infants’ Wear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . .

Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . .

Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . .

Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Toilet Articles and Drugs. . . . . . . . . . . . . . . . . . . . . . . . .

Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . .

Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . .

Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

534.7

663.1

622.3

923.8

620.6

519.0

287.5

550.4

404.5

604.6

542.4

477.3

1011.2

868.8

861.5

659.2

572.4

783.4

247.7

82.1

114.2

122.2

107.1

524.3

642.6

640.3

895.9

610.3

525.8

287.5

546.2

381.2

611.7

567.9

485.4

1023.8

770.0

885.1

669.2

588.7

810.6

244.8

78.8

112.1

125.9

107.2

21.9

23.1

2.9

23.0

21.7

1.3

0.0

20.8

25.8

1.2

4.7

1.7

1.2

211.4

2.7

1.5

2.8

3.5

21.2

24.0

21.8

3.0

0.1

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . .

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . .

585.2

465.3

114.1

582.9

469.2

113.1

20.4

0.8

20.9

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

544.9

544.0

20.2

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

Absence of a minus sign before percentage change in this column signifies price increase.

Indexes on a January 1986=100 base.

The store total index covers all departments, including some not listed separately, except for the following: candy, foods,

liquor, tobacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax

and Accounting). For further information

regarding this revenue ruling, contact

Mr. Michaels on (202) 622–4970 (not a

toll-free call).

Part III. Administrative, Procedural, and Miscellaneous

Inflation-Indexed Debt Instruments

Notice 96–51

The Department of the Treasury plans

to issue securities that are adjusted for

inflation and deflation (‘‘Treasury

Inflation-Protection Securities’’). See

Amendment to the Uniform Offering

Circular for the Sale and Issue of Marketable Book-Entry Treasury Bills,

Notes and Bonds, which was filed with

the Federal Register on September 25,

1996. To provide guidance on the federal income tax treatment of these securities and other debt instruments with

similar terms, the Internal Revenue Service (IRS) intends to issue proposed and

temporary regulations under §§ 1275(d)

and 1286 of the Internal Revenue Code

prior to the first issuance of the securities. This notice describes, in general

terms, the debt instruments that are

expected to be subject to the regulations

and how these instruments are expected

to be treated under the regulations.

TREASURY

INFLATION-PROTECTION

SECURITIES

As described in the Offering Circular,

a Treasury Inflation-Protection Security

will provide for semiannual payments of

interest and a payment of principal at

maturity. In general, each payment will

be adjusted to take into account any

inflation or deflation that occurs between the issue date of the security and

the payment date.

The principal amount of a Treasury

Inflation-Protection Security will be adjusted for inflation and deflation based

on monthly changes in the nonseasonally adjusted U.S. City Average

All Items Consumer Price Index for All

Urban Consumers (CPI-U), which is

published by the Bureau of Labor Statistics of the Department of Labor. The

inflation-adjusted principal amount of

the security for the first day of any

month will be determined by multiplying the principal amount at issuance by

a fraction, the numerator of which is the

value of the index for the adjustment

date and the denominator of which is

the value of the index for the issue date.

The inflation-adjusted principal amount

of the security for a day other than the

first day of a month will be determined

based on a straight-line interpolation

between the inflation-adjusted principal

amount for the first day of the month

and the inflation-adjusted principal

amount for the first day of the next

month. The value of the index used to

determine the adjustment for the first

day of a particular month will be the

value of the index reported for the third

preceding month.

Each semiannual payment of interest

will be determined by multiplying a

single fixed rate of interest by the

inflation-adjusted principal amount of

the security for the date of the interest

payment. Thus, although the interest rate

will be fixed, the amount of each interest payment will vary with changes in

the principal of the security as adjusted

for inflation and deflation.

A Treasury Inflation-Protection Security also will provide for an additional

payment at maturity if the security’s

inflation-adjusted principal amount for

the maturity date is less than the security’s principal amount at issuance. The

amount of the additional payment will

equal the excess of the security’s principal amount at issuance over the security’s inflation-adjusted principal amount

for the maturity date.

INFLATION-INDEXED DEBT

INSTRUMENTS

In general, the regulations will apply

to an inflation-indexed debt instrument,

regardless of the identity of the issuer.

An inflation-indexed debt instrument

generally will be defined in the regulations as a debt instrument that satisfies

the following conditions:

(1) The debt instrument is issued for

U.S. dollars and all payments of principal and interest on the instrument are

denominated in U.S. dollars.

(2) The principal amount of the debt

instrument is adjusted for inflation and

deflation. The adjustment must be measured by changes in the current value of

a single general price or wage index

published monthly by an agency of the

United States Government (e.g., the

CPI-U). A current value of an index is a

value of the index that has been updated

and published within the six month

period preceding the date of the adjustment.

(3) The debt instrument provides for

an appropriate method to calculate its

inflation-adjusted principal amount for

each day to reflect the monthly changes

in the current value of the price or wage

index. For example, the inflationadjusted principal amount for the first

day of each month is determined by

reference to the change in the index for

the third preceding month, and the

inflation-adjusted principal amount for

any other day is determined based on

straight-line interpolation between the

inflation-adjusted principal amount for

the first day of the month and the

inflation-adjusted principal amount for

the first day of the next month.

(4) Each stated interest payment on

the debt instrument, if any, is computed

by multiplying a single fixed rate of

interest by the inflation-adjusted principal amount for the date of the interest

payment.

(5) The payments on the debt instrument are not subject to any contingencies other than the inflation contingency.

For this purpose, a contingency that is

remote or incidental will be ignored. In

addition, a payment will not be contingent merely because of the possibility of

impairment by insolvency, default, or

similar circumstances.

Notwithstanding the condition described in paragraph (5) above, a debt

instrument will not fail to qualify as an

inflation-indexed debt instrument merely

because it provides for a minimum

guarantee payment. A minimum guarantee payment is an additional payment

that is made at maturity if the debt

instrument’s inflation-adjusted principal

amount for the maturity date is less than

the instrument’s principal amount at issuance. The amount of the additional

payment must be no more than the

excess of the debt instrument’s principal

amount at issuance over the instrument’s

inflation-adjusted principal amount for

the maturity date.

An example of a debt instrument that

satisfies the above conditions is a Treasury Inflation-Protection Security.

If a debt instrument qualifies as an

inflation-indexed debt instrument, one of

two methods will apply to account for

qualified stated interest and original issue discount (OID) on the instrument:

the coupon bond method or the discount

bond method. In general, both methods

will measure the amount of qualified

stated interest and OID that accrues on

an inflation-indexed debt instrument

based on changes in the principal

amount of the debt instrument and constant yield principles.

The discount bond method will apply

a formula to determine the amount of

OID that accrues during an accrual

period on an inflation-indexed debt instrument. This formula is based on

changes in the inflation index over the

term of the debt instrument and the

yield of the debt instrument at issuance.

In the case of certain inflation-indexed

debt instruments, however, the accruals

of OID on the debt instruments can

easily be determined without the use of

the formula. Therefore, the regulations

will provide a simplified version of the

discount bond method for these debt

instruments (the coupon bond method).

COUPON BOND METHOD

The coupon bond method will apply

to an inflation-indexed debt instrument

that satisfies two conditions: First, there

is no more than a de minimis difference

between the debt instrument’s issue

price and its principal amount at issuance. Second, all stated interest payable

on the debt instrument is qualified stated

interest. For purposes of the regulations,

stated interest will be qualified stated

interest if it is unconditionally payable

in cash at least annually. The coupon

bond method will apply to Treasury

Inflation-Protection Securities that are

not stripped into principal and interest

components.

If an inflation-indexed debt instrument qualifies for the coupon bond

method, the qualified stated interest payable on the debt instrument will be

taken into account under the taxpayer’s

regular method of accounting. Any increase in the inflation-adjusted principal

amount will be treated as OID for the

period in which the increase occurs. Any

decrease in the inflation-adjusted principal amount (a deflation adjustment) will

be taken into account under the rules for

deflation adjustments described below.

For example, if a taxpayer who uses

the cash receipts and disbursements

method of accounting (cash method)

holds a Treasury Inflation-Protection Security for an entire calendar year, the

taxpayer generally will include in income the interest payments received on

the security during the year. In addition,

the taxpayer will include in income an

amount of OID measured by subtracting

the inflation-adjusted principal amount

of the security for January 1 of the year

from the inflation-adjusted principal

amount of the security for January 1 of

the next year. If the taxpayer uses an

accrual method of accounting rather

than the cash method, the taxpayer will

include in income the qualified stated

interest that accrued on the debt instrument during the year and an amount of

OID measured by subtracting the

inflation-adjusted principal amount of

the security for January 1 of the year

from the inflation-adjusted principal

amount of the security for January 1 of

the next year.

DISCOUNT BOND METHOD

If an inflation-indexed debt instrument does not qualify for the coupon

bond method (e.g., because it is issued

at a discount), the instrument will be

subject to the discount bond method. In

general, the discount bond method will

require taxpayers to make current adjustments to their OID accruals on the

debt instrument to account for changes

in the inflation-adjusted principal

amount.

Under the discount bond method, a

taxpayer will accrue OID using the four

steps provided under § 1.1272-1(b)(1)

of the Income Tax Regulations (constant

yield method). However, the debt instrument’s yield to maturity will be determined as of the issue date by assuming

no inflation or deflation, and the OID

allocable to an accrual period (n) will be

determined by using the following formula:

OID(n) = {AIP(n) × [r + inf(n) +

(r × inf(n))]} 2 QSI(n) where,

r = yield of the debt instrument determined as

of the issue date by assuming no inflation or

deflation, adjusted for the length of the accrual

period;

inf(n) = percentage change in the inflation index

for period (n);

AIP(n) = adjusted issue price at the beginning of

period (n); and

QSI(n) = qualified stated interest allocable to

period (n).

If the formula produces a negative

amount of OID, this amount (deflation

adjustment) will be taken into account

under the rules for deflation adjustments

described below.

DEFLATION ADJUSTMENTS

In general, a deflation adjustment will

reduce the amount of interest includible

in income by a holder with respect to

the debt instrument for the taxable year.

If the amount of the deflation adjustment exceeds the interest otherwise includible in income for the taxable year,

the excess will be treated as an ordinary

loss by the holder for the taxable year.

However, the amount treated as an ordinary loss will be limited to the amount

by which the holder’s total interest

inclusions on the debt instrument in

prior taxable years exceed the total

amount treated by the holder as an

ordinary loss on the debt instrument in

prior taxable years. If the deflation adjustment exceeds the interest otherwise

includible in income by the holder with

respect to the debt instrument for the

taxable year and the amount treated as

an ordinary loss for the taxable year,

this excess will be carried forward to

offset interest income on the debt instrument in subsequent taxable years. In

general, any excess remaining upon the

sale, exchange, or retirement of the debt

instrument will result in a loss to the

holder for federal income tax purposes.

Similar rules will apply to determine an

issuer’s interest deductions and income

for the debt instrument.

MINIMUM GUARANTEE

Under both the coupon bond method

and the discount bond method, a minimum guarantee payment as described

above generally will be ignored until the

payment is made. If there is a minimum

guarantee payment, the payment will be

treated as a payment of interest.

ACCRUALS OF QUALIFIED STATED

INTEREST

In certain situations, a taxpayer will

have to determine how much qualified

stated interest, if any, has accrued as of

a certain date on an inflation-indexed

debt instrument. The regulations will

provide that the amount of accrued but

unpaid qualified stated interest as of any

date is determined by using the principles of § 1.446–3(e)(2)(ii) (relating to

notional principal contracts). For example, if the interval between interest

payment dates spans two taxable years,

a taxpayer using an accrual method of

accounting will determine the amount of

accrued qualified stated interest for the

first taxable year by reference to the

inflation-adjusted principal amount for

the last day of the taxable year.

SUBSEQUENT HOLDERS

For purposes of determining whether

a holder acquires an inflation-indexed

debt instrument at a premium or with

market discount, the amount payable at

maturity on the instrument will be

treated as equal to the instrument’s

inflation-adjusted principal amount for

the day the holder acquires the instrument. Any premium or market discount

will be taken into account over the

remaining term of the debt instrument

by making the same assumption.

STRIPS

A Treasury Inflation-Protection Security will be eligible upon issuance for

the Department of the Treasury’s Separate Trading of Registered Interest and

Principal of Securities (STRIPS) program. Under this program, the interest

and principal components of a Treasury

Inflation-Protection Security may be

transferred as separate instruments

(stripped bonds and coupons). In general, § 1286 treats the holder of a

stripped bond (or coupon) as if the

holder purchased a newly issued debt

instrument that has OID. The regulations

will provide that the holder of a component of a Treasury Inflation-Protection

Security that is stripped under the Treasury STRIPS program must use the

discount bond method to account for the

OID on the component.

REOPENINGS

The regulations will provide that a

reopening of Treasury InflationProtection Securities will be a qualified

reopening for purposes of § 1.1275–

2(d)(2), provided the reopening occurs

not more than one year after the original

securities were first issued to the public.

EFFECTIVE DATE

The regulations will apply to debt

instruments issued on or after the date

the regulations are published in the

Federal Register.

REQUEST FOR COMMENTS

The IRS and the Department of the

Treasury request comments on the rules

described in this notice. Comments

should be submitted in writing on or

before October 28, 1996 to: CC:DOM:

CORP:R (Notice 96–51), Room 5226,

Internal Revenue Service, POB 7604,

Ben Franklin Station, Washington, DC

20044. In the alternative, comments (1)

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to CC:DOM:

CORP:R (Notice 96–51), Courier’s

Desk, Internal Revenue Service, 1111

Constitution Ave., NW, Washington, DC,

or (2) may be submitted electronically

via the IRS internet site at http://

www.irs.ustreas.gov/prod/tax_regs/

comments.html. All comments will be

available for public inspection and copying.

CONTACT PERSONS

For further information regarding this

notice, contact Jeffrey W. Maddrey on

(202) 622–4443 or William E. Blanchard on (202) 622–3950 (not toll-free

numbers).

Work Opportunity Tax Credit —

Pre-Screening Notice

Notice 96–52

This Notice provides temporary transition relief for employers with respect

to the Work Opportunity Tax Credit

(WOTC) that was enacted as part of the

Small Business Job Protection Act of

1996, Pub. L. No. 104–188 (August 20,

1996).

BACKGROUND

The WOTC provides a tax credit for

employers who hire individuals belonging to one of the following groups: (1)

qualified recipients of benefits under

AFDC or a successor program; (2)

qualified veterans; (3) qualified exfelons; (4) high-risk youth; (5) vocational rehabilitation referrals; (6) qualified summer youth employees; or (7)

qualified food stamp recipients. See Internal Revenue Code section 51. The

WOTC is effective for wages paid to

qualified individuals whose first day of

work for the employer is on or after

October 1, 1996.

For purposes of the WOTC, a prospective employee is not considered a

member of one of the targeted groups

unless the individual is certified as such

by a State Employment Security Agency

(SESA). The SESA certification requirement may be satisfied in either of two

ways:

Under one approach, an employer

may receive a certification from a

SESA, on or before the day the prospective employee begins work, stating that

the individual is a member of a targeted

group. Section 51(d)(11)(A)(i).

Under the other approach, the employer must complete a ‘‘pre-screening

notice’’ with respect to the prospective

employee on or before the day the

individual is offered employment, and

then, within 21 days after the individual

begins work, must submit that notice,

signed by the individual and the employer under penalties of perjury, to the

SESA as part of a request for certification. Section 51(d)(11)(A)(ii). If an employer uses this approach, the employer

must also receive a certification from

the SESA that the individual is, in fact,

a member of a targeted group before

claiming the WOTC with respect to the

individual.

The IRS on September 26, 1996,

issued Form 8850, Work Opportunity

Credit Pre-Screening Notice and Certification Request, to serve as the prescreening notice. This Form will be

available electronically beginning September 27, 1996, through the IRS Home

Page on the World Wide Web (http://

www.irs.ustreas.gov) or by modem directly to 703–321–8020 (not a toll-free

number). Employers may also request

copies of Form 8850 by calling 1–800–

TAX–FORM (1–800–829–3676); however, copies of Form 8850 will not be

available through this toll-free service

until approximately October 15, 1996.

TEMPORARY TRANSITION RELIEF

This Notice provides temporary transition relief for employers that did not

complete Form 8850 at the time a job

offer was made if the following conditions are satisfied:

(1) The job offer was made on or

after August 20, 1996, and on or before

October 31, 1996.

(2) At the time the job offer was

made, the employer reasonably believed,

based on information provided by the

prospective employee, that the individual was a member of a targeted

group.

(3) Form 8850 is properly completed

and signed by both the employer and

the individual, and submitted to the

SESA, by the later of (a) November 21,

1996, or (b) 21 days after the individual begins work for the employer.

An employer seeking to rely on the

temporary transition relief provided by

this Notice should write ‘‘FILED PURSUANT TO NOTICE 96–52’’ across the

top of the Form 8850. The employer

should also strike the words ‘‘I completed this form on or before the day a

job was offered to the applicant and

that’’ from the jurat preceding the signature line of the form.

If these conditions are satisfied, the

Service will treat the Form 8850 as

having been timely completed and submitted to the SESA in accordance with

Code section 51(d)(11)(A)(ii). The

SESA must, however, certify that the

individual named in the form is, in fact,

a member of a targeted group before the

employer may claim the WOTC with

respect to the individual.

Drafting Information

The principal author of this Notice is

Robert Wheeler of the Office of the

Associate Chief Counsel (Employee

Benefits and Exempt Organizations). For

further information regarding this Notice, contact Mr. Wheeler on (202) 622–

6060 (not a toll-free call).

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Application of the Grantor Trust

Rules to Nonexempt Employees’

Trusts

REG–209826–96

AGENCY: Internal Revenue Service

(IRS), Treasury.

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

SUMMARY: This document contains

proposed regulations relating to the application of the grantor trust rules to

nonexempt employees’ trusts. The proposed regulations clarify that the grantor

trust rules generally do not apply to

domestic nonexempt employees’ trusts,

and clarify the interaction between the

grantor trust rules, the rules generally

governing the taxation of nonqualified

deferred compensation arrangements,

and the antideferral rules for United

States persons holding interests in foreign entities. The proposed regulations

affect nonexempt employees’ trusts

funding deferred compensation arrangements, as well as U.S. persons holding

interests in certain foreign corporations

and foreign partnerships with deferred

compensation arrangements funded

through foreign nonexempt employees’

trusts. In addition, the proposed regulations affect U.S. persons that have deferred compensation arrangements

funded through certain foreign

nonexempt employees’ trusts. This document also provides notice of a public

hearing on these proposed regulations.

DATES: Written comments must be received by December 26, 1996. Requests

to speak (with outlines of oral comments to be discussed) at the public

hearing scheduled for January 15, 1997,

at 10:00 a.m. must be submitted by

December 24, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–209826–96),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be

hand delivered between the hours of 8

a.m. and 5 p.m. to: CC:DOM:CORP:R

(REG– 209826–96), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. The

public hearing will be held in room

2615, Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC. Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option on

the IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/prod/

tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,

James A. Quinn, (202) 622–3060; Linda

S. F. Marshall, (202) 622– 6030;

Kristine K. Schlaman (202) 622–3840;

and M. Grace Fleeman (202) 622–3850;

concerning submissions and the hearing,

Michael Slaughter, (202) 622–7190 (not

toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3507(d)). Comments on the collection of

information should be sent to the Office

of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received by November 26, 1996. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper

performance of the functions of the

Internal Revenue Service, including

whether the information will have practical utility;

The accuracy of the estimated burden

associated with the proposed collection

of information (see below);

How the quality, utility, and clarity of

the information to be collected may be

enhanced;

How the burden of complying with the

proposed collection of information may

be minimized, including through the

application of automated collection techniques or other forms of information

technology; and

Estimates of capital or start-up costs and

costs of operation, maintenance, and

purchase of services to provide information.

The collection of information in this

proposed regulation is in § 1.671–

1(h)(3)(iii). This information is required

by the IRS to determine accurately the

portion of certain foreign employees’

trusts properly treated as owned by the

employer. This information will be used

to notify the Commissioner that certain

entities are relying on an exception for

reasonable funding. The collection of

information is mandatory. The likely

respondents are businesses or other forprofit organizations.

Estimated total annual reporting burden: 1,000 hours.

The estimated annual burden per respondent varies from .5 hours to 1.5

hours, depending on individual circumstances, with an estimated average of 1

hour.

Estimated number of respondents:

1,000.

Estimated annual frequency of responses: On occasion.

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

respond to, a collection of information

unless the collection of information displays a valid control number assigned

by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal revenue law. Generally, tax returns

and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

On May 7, 1993, the IRS issued

proposed regulations under section 404A

(58 FR 27219). The section 404A proposed regulations provide that section

404A is the exclusive means by which

an employer may take a deduction or

reduce earnings and profits for amounts

used to fund deferred compensation in

situations other than those in which a

deduction or reduction of earnings and

profits is permitted under section 404

(the ‘‘exclusive means’’ rule).

The section 404A proposed regulations do not provide rules regarding the

treatment of income and ownership of

assets of foreign trusts established to

fund deferred compensation arrangements, but refer to ‘‘other applicable

provisions,’’ including the grantor trust

rules of subpart E of the Internal Revenue Code of 1986, as amended. Thus,

the 1993 proposed section 404A regulations imply that, if an employer cannot

or does not elect section 404A treatment

for a foreign trust established to fund

the employer’s deferred compensation

arrangements, the employer may be

treated as the owner of the entire trust

for purposes of subtitle A of the Code

under sections 671 through 679 even

though all or part of the trust assets are

set aside for purposes of satisfying liabilities under the plan. Conversely,

some commentators believe that, for

U.S. tax purposes, a foreign employer

would not be treated as the owner of

any portion of a foreign trust established

to fund a section 404A qualified foreign

plan even though all or part of the trust

assets might be used for purposes other

than satisfying liabilities under the plan.

A number of different rules, in addition

to the grantor trust rules, potentially

affect the taxation of foreign trusts established to fund deferred compensation

arrangements. These rules include: the

nonexempt deferred compensation trust

rules of sections 402(b) and 404(a)(5);

the partnership rules of subchapter K;

and the antideferral rules, which include

subpart F and the passive foreign investment company (PFIC) rules (sections

1291 through 1297).

Following publication of the proposed

1993 regulations and enactment of section 956A in August of 1993, comments

were received concerning both the asset

ownership rules for foreign employees’

trusts and the ‘‘exclusive means’’ rule

for deductions or reductions in earnings

and profits. These proposed regulations

address only comments concerning income and asset ownership rules for

foreign employees’ trusts for federal

income tax purposes. A foreign employees’ trust is a nonexempt employees’

trust described in section 402(b) that is

part of a deferred compensation plan,

and that is a foreign trust within the

meaning of section 7701(a)(31). Comments concerning the ‘‘exclusive

means’’ rule will be addressed in future

regulations.

Statutory Background

1. Transfers of Property Not Complete

for Tax Purposes

In certain situations, assets that are

owned by a trust as a legal matter may

be treated as owned by another person

for tax purposes. Thus, assets may be

treated as owned by a pension trust for

non-tax legal purposes but not for tax

purposes. This occurs, for example, if

the person who has purportedly transferred assets to the trust retains the

benefits and burdens of ownership. See,

e.g., Frank Lyon Co. v. United States,

435 U.S. 561 (1978); Corliss v. Bowers,

281 U.S. 376 (1930); Grodt & McKay

Realty, Inc. v. Commissioner, 77 T.C.

1221 (1981); Rev. Proc. 75–21 (1975–1

C.B. 715). If, under these principles, no

assets have been transferred to an employees’ trust for federal tax purposes,

these proposed regulations do not apply.

2. Subpart E—Grantors and others

treated as substantial owners

Even if there has been a completed

transfer of trust assets, the subpart E

rules may apply to treat the grantor as

the owner of a portion of the trust for

federal income tax purposes. Subpart E

of part I of subchapter J, chapter 1 of

the Code (sections 671 through 679)

taxes income of a trust to the grantor or

another person notwithstanding that the

grantor or other person may not be a

beneficiary of the trust. Under section

671, a grantor or another person includes in computing taxable income and

credits those items of income, deduction, and credit against tax that are

attributable to or included in any portion

of a trust of which that person is treated

as the owner.

Sections 673 through 679 set forth the

rules for determining when the grantor

or another person is treated as the owner

of a portion of a trust for federal income

tax purposes. Under sections 673

through 678, the grantor trust rules

apply only if the grantor or other person

has certain powers or interests. For

example, section 676 provides that the

grantor is treated as the owner of a

portion of a trust where, at any time, the

power to revest in the grantor title to

that portion is exercisable by the grantor

or a nonadverse party, or both. A grantor

who is the owner of a trust under

subpart E is treated as the owner of the

trust property for federal income tax

purposes. See Rev. Rul. 85–13 (1985–1

C.B. 184). This document is made available by the Superintendent of Documents, U.S. Government Printing Office,

Washington, DC 20402.

Section 679 generally applies to a

U.S. person who directly or indirectly

transfers property to a foreign trust,

subject to certain exceptions described

below. Section 679 generally treats a

U.S. person transferring property to a

foreign trust as the owner of the portion

of the trust attributable to the transferred

property for any taxable year of that

person for which there is a U.S. beneficiary of any portion of the trust. In

general, a trust is treated as having a

U.S. beneficiary for a taxable year of

the U.S. transferor unless, under the

terms of the trust, no part of the income

or corpus of the trust may be paid or

accumulated during the taxable year to

or for the benefit of a U.S. person, and

unless no part of the income or corpus

of the trust could be paid to or for the

benefit of a U.S. person if the trust were

terminated at any time during the taxable year. A U.S. person is treated as

having made an indirect transfer to the

foreign trust of property if a non-U.S.

person acts as a conduit with respect to

the transfer or if the U.S. person has

sufficient control over the non-U.S. person to direct the transfer by the nonU.S. person rather than itself.

Section 679(a) provides several exceptions from the application of section

679 for certain compensatory trusts. Under these exceptions, section 679 does

not apply to a trust described in section

404(a)(4) or section 404A. Pursuant to

amendments made in section 1903(b) of

the Small Business Job Protection Act

of 1996 (SBJPA), section 679 also does

not apply to any transfer of property

after February 6, 1995, to a trust described in section 402(b).

3. Taxability

beneficiary

nonexempt employees’ trust

Section 402(b) provides rules for the

taxability of beneficiaries of a

nonexempt employees’ trust. Under section 402(b)(1), employer contributions to

a nonexempt employees’ trust generally

are included in the gross income of the

employee in accordance with section 83.

Section 402(b)(2) provides that amounts

distributed or made available from a

nonexempt employees’ trust generally

are taxable to the distributee under the

rules of section 72 in the taxable year in

which distributed or made available.

Section 402(b)(4) provides that, under

certain circumstances, a highly compensated employee is taxed each year on

the employee’s vested accrued benefit

(other than the employee’s investment in

the contract) in a nonexempt employees’

trust. Under section 402(b)(3), a beneficiary of a nonexempt employees’ trust

generally is not treated as the owner of

any portion of the trust under subpart E.

The rules of section 402(b) apply to a

beneficiary of a nonexempt employees’

trust regardless of whether the trust is a

domestic trust or a foreign trust.

4. Employer deduction for contributions

to a nonexempt employees’ trust

Section 404(a)(5) provides rules regarding the deductibility of contributions

to a nonqualified deferred compensation

plan. Under section 404(a)(5), any contribution paid by an employer under a

deferred compensation plan, if otherwise

deductible under chapter 1 of the Code,

is deductible only in the taxable year in

which an amount attributable to the

contribution is includible in the gross

income of employees participating in the

plan, and only if separate accounts are

maintained for each employee. Section

1.404(a)–12(b)(1) clarifies that an employer’s deduction for contributions to a

nonexempt employees’ trust is restricted

to the amount of the contribution, and

excludes any income received by the

trust with respect to contributed

amounts.

5. The partnership rules of

subchapter K

A partnership is not subject to income

taxation. However, a partner must take

into account separately on its return its

distributive share of the partnership’s

income, gain, loss, deduction, or credit.

A U.S. partner of a foreign partnership

is subject to U.S. tax on its distributive

share of partnership income. In addition,

a foreign partnership may have a controlled foreign corporation (CFC) partner which must take into account its

distributive share of partnership income,

gain, loss, or deduction in determining

its taxable income. These distributive

share inclusions of the CFC may result

in subpart F income and thus income to

a U.S. shareholder of the CFC. If the

grantor trust rules do not apply to any

portion of a foreign employees’ trust, a

foreign partnership could fund a foreign

employees’ trust in excess of the amount

needed to meet its obligations to its

employees under its deferred compensation plan and yet retain control over the

excess amount. As a result, the foreign

partnership would not have to include

items in taxable income attributable to

the excess amount, and consequently the

U.S. partner or CFC would not have to

include those items in its income.

6. The antideferral rules of subpart F,

including section 956A, and PFIC

A U.S. person that owns stock in a

foreign corporation generally pays no

U.S. tax currently on income earned by

the foreign corporation. Instead, the

United States defers taxation of that

income until it is distributed to the U.S.

person. The antideferral rules, however,

which include subpart F and the PFIC

rules, limit this deferral in certain situations.

Subpart F of part III of Subchapter N

(sections 951 through 964) applies to

CFCs. A foreign corporation is a CFC if

more than 50 percent of the total voting

power of all classes of stock entitled to

vote, or the total value of the stock in

the corporation, is owned by ‘‘U.S.

shareholders’’ (defined as U.S. persons

who own ten percent or more of the

voting power of all classes of stock

entitled to vote) on any day during the

foreign corporation’s taxable year. The

United States generally taxes U.S. shareholders of the CFC currently on their

pro rata share of the CFC’s subpart F

income and sections 956 and 956A

amounts. In effect, the U.S. shareholders

are treated as having received a distribution out of the earnings and profits

(E&P) of the CFC.

The types of income earned by a

foreign employees’ trust (dividends, interest, income equivalent to interest,

rents and royalties, and annuities) are

generally subpart F income. The inclusion under section 956 is based on the

CFC’s investment in U.S. property,

which generally includes stock of a U.S.

shareholder of the CFC. A U.S. shareholder’s section 956A amount for a

taxable year is the lesser of two

amounts. The first amount is the excess

of the U.S. shareholder’s pro rata share

of the CFC’s ‘‘excess passive assets’’

over the portion of the CFC’s E&P

treated as previously included in gross

income by the U.S. shareholder under

section 956A. For purposes of section

956A, ‘‘passive asset’’ includes any asset which produces (or is held for the

production of) passive income, and generally includes property that produces

dividends, interest, income equivalent to

interest, rents and royalties, and annuities, subject to exceptions that generally

are not relevant in this context. The

second amount is the U.S. shareholder’s

pro rata share of the CFC’s ‘‘applicable

earnings’’ to the extent accumulated in

taxable years beginning after September

30, 1993.

Section 1501(a)(2) of SBJPA repeals

section 956A. The repeal is effective for

taxable years of foreign corporations

beginning after December 31, 1996, and

for taxable years of U.S. shareholders

with or within which such taxable years

of foreign corporations end.

If a CFC employer is not treated for

federal income tax purposes as the

owner of any portion of a foreign

employees’ trust under the grantor trust

rules, then to the extent that passive

assets contributed by a CFC to a

nonexempt employees’ trust would otherwise result in subpart F consequences

for the CFC and its shareholders, the

CFC’s contribution could allow those

consequences to be avoided. For example, a contribution by a CFC of

passive assets to its foreign employees’

trust could reduce the CFC’s subpart F

earnings and profits, and its applicable

earnings or passive assets for section

956A purposes, and could affect the

CFC’s increase in investment in U.S.

property for purposes of section 956, all

of which could affect a U.S. shareholder’s pro rata subpart F inclusions for the

taxable year.

In contrast to the subpart F rules, the

PFIC rules apply to any U.S. person

who directly or indirectly owns any

stock in a foreign corporation that is a

PFIC under either an income or asset

test. A foreign corporation, including a

CFC, is a PFIC if either (1) 75 percent

or more of its gross income for the

taxable year is passive income or (2) at

least 50 percent of the value of the

corporation’s assets produce passive income or are held for the production of

passive income. For this purpose, passive income generally is the same type

of income (dividends, interest, income

equivalent to interest, rents and royalties, and annuities) that would be earned

by a foreign employees’ trust.

Under the PFIC rules, a U.S. person

who is a direct or indirect shareholder

of a PFIC is subject to a special tax

regime upon either disposition of the

PFIC’s stock or receipt of certain distributions (excess distributions) from the

PFIC. A shareholder, however, may

avoid the application of this special

regime by electing to include its pro rata

share of certain of the PFIC’s passive

income in the year in which the foreign

corporation earns it.

If the grantor trust rules did not apply

to any portion of a foreign employees’

trust, a contribution by a foreign corporation of passive assets to a nonexempt

employees’ trust would enable a U.S.

person to avoid the PFIC rules if those

assets would otherwise generate PFIC

consequences for the foreign corporation

and its shareholders. For example, by

transferring passive assets to its

nonexempt employees’ trust in excess of

the amount needed to meet obligations

to its employees under its deferred compensation plan while retaining control

over the excess amount, a foreign corporation could divest itself of a sufficient

amount of passive assets and the passive

income they produce to avoid meeting

the income and asset tests. Furthermore,

a foreign corporation that is a PFIC

could minimize income inclusions for a

U.S. shareholder that has made an election to include PFIC income currently

by transferring income-producing assets

to a foreign employees’ trust.

Overview of proposed regulations

Under the proposed regulations, an

employer is not treated as an owner of

any portion of a domestic nonexempt

employees’ trust described in section

402(b) for federal income tax purposes.

Section 404(a)(5) and § 1.404(a)–12(b)

provide a deduction to the employer

solely for contributions to a nonexempt

employees’ trust, and not for any income of the trust. This rule is inconsistent with treating the employer as owning any portion of a nonexempt

employees’ trust, which would require

the employer to recognize the trust’s

income that it may not deduct under

section 404(a)(5). Accordingly, such a

trust is treated as a separate taxable trust

that is taxed under the rules of section

641 et seq. The rule in the proposed

regulations is consistent with the holdings of a number of private letter rulings

with respect to nonexempt employees’

trusts and with the Service’s treatment

of trusts that no longer qualify as exempt under 501(a) (because they are no

longer described in section 401(a)) as

separate taxable trusts rather than as

grantor trusts. See also Rev. Rul. 74–

299 (1974–1 C.B. 154). This document

is made available by the Superintendent

of Documents, U.S. Government Printing Office, Washington, DC 20402.

Under the proposed regulations, an

employer generally is not treated as the

owner of any portion of a foreign

nonexempt employees’ trust for federal

income tax purposes, except as provided

under section 679. The proposed regulations, however, also provide that the

grantor trust rules apply to determine

whether an employer that is a CFC or a

U.S. employer is treated as the owner of

a specified ‘‘fractional interest’’ in a

foreign employees’ trust. This rule applies whether or not the employer elects

section 404A treatment for the trust.

Under the proposed regulations, this rule

also applies in the case of an employer

that is a foreign partnership with one or

more partners that are U.S. persons or

CFCs (U.S.-related partnership). Such an

employer is treated as the owner of a

portion of a foreign employees’ trust

under these proposed regulations only if

the employer retains a grantor trust

power or interest over a foreign employees’ trust and has a specified ‘‘fractional

interest’’ in the trust.

Under these proposed regulations, the

grantor trust rules of subpart E do not

apply to a foreign employees’ trust with

respect to a foreign employer other than

a CFC or a U.S.-related foreign partnership, except for cases in which assets

are transferred to a foreign employees’

trust with a principal purpose of avoiding the PFIC rules. The IRS and Treasury will continue to consider whether

these regulations should provide additional antiabuse rules that may be necessary for other purposes, including for

purposes of calculating earnings and

profits, determining the foreign tax

credit limitation, and applying the interest allocation rules of § 1.882–5.

Explanation of provisions

1. § 1.671–1(g): Domestic nonexempt

employees’ trusts

The proposed regulations provide that

an employer is not treated for federal

income tax purposes as an owner of any

portion of a nonexempt employees’ trust

described in section 402(b) that is part

of a deferred compensation plan, and

that is not a foreign trust within the

meaning of section 7701(a)(31), regardless of whether the employer has a

power or interest described in sections

673 through 677 over any portion of the

trust. This rule is analogous to the rule

set forth in § 1.641(a)–0, which provides that subchapter J, including the

grantor trust rules, does not apply to

tax-exempt employees’ trusts.

2. § 1.671–1(h): Subpart E rules for

certain foreign employees’ trusts

The proposed regulations provide

Subpart E rules for foreign employees’

trusts of CFCs, foreign partnerships, and

U.S. employers that apply for all federal

income tax purposes. Under the proposed regulations, except as provided

under section 679 or the proposed regulations (as described below), an employer is not treated as an owner of any

portion of a foreign employees’ trust for

federal income tax purposes. If an employer is treated as the owner of a

portion of a foreign employees’ trust for

federal income tax purposes as de-

scribed below, then the employer is

considered to own the trust assets attributable to that portion of the trust for all

federal income tax purposes. Thus, for

example, if an employer is treated as the

owner of a portion of a foreign employees’ trust for federal income tax purposes as described below, then income

of the trust that is attributable to that

portion of the trust increases the employer’s earnings and profits for purposes of sections 312 and 964.

A foreign employees’ trust is a

nonexempt employees’ trust described in

section 402(b) that is part of a deferred

compensation plan, and that is a foreign

trust within the meaning of section

7701(a)(31). The proposed regulations

apply to any foreign employees’ trust of

a CFC or U.S.-related foreign partnership, whether or not a trust funds a

qualified foreign plan (as defined in

section 404A(e)). The proposed regulations clarify that the income inclusion

and asset ownership rules apply to the

entity whose employees or independent

contractors are covered under the deferred compensation plan.

A. Plan of CFC employer

The proposed regulations provide that,

if a CFC maintains a deferred compensation plan funded through a foreign

employees’ trust, then, with respect to

the CFC, the provisions of subpart E

apply to the portion of the trust that is

the fractional interest of the trust described in the proposed regulations.

B. Plan of U.S. employer

The proposed regulations provide that

if a U.S. person maintains a deferred

compensation plan funded through a

foreign employees’ trust, then, with respect to the U.S. person, the provisions

of subpart E apply to the portion of the

trust that is the fractional interest of the

trust described in the proposed regulations.

C. Plan of U.S.-related foreign partnership employer

The proposed regulations provide that,

if a U.S.-related foreign partnership

maintains a deferred compensation plan

funded through a foreign employees’

trust, then, with respect to the U.S.related foreign partnership, the provisions of subpart E apply to the portion

of the trust that is the fractional interest

of the trust described in the proposed

regulations. The IRS and Treasury solicit comments on whether these regulations should provide a safe harbor rule

for a U.S.-related foreign partnership

that maintains a deferred compensation

plan funded through a foreign employees’ trust if U.S. or CFC partnership

interests are de minimis. The IRS and

Treasury specifically solicit comments

concerning the amount of U.S. or CFC

partnership interests that would qualify

as ‘‘de minimis.’’

D. Plan of non-CFC foreign employer

The proposed regulations provide that

a foreign employer that is not a CFC is

treated as an owner of a portion of a

foreign employees’ trust only as provided in the antiabuse rule of § 1.1297–

E. Fractional interest

The fractional interest of a foreign

employees’ trust described above is defined in the proposed regulations as an

undivided fractional interest in the trust

for which the fraction is equal to the

relevant amount determined for the employer’s taxable year divided by the fair

market value of trust assets determined

for the employer’s taxable year.

F. Relevant amount

The relevant amount for the employer’s taxable year is defined in the proposed regulations as the amount, if any,

by which the fair market value of trust

assets, plus the fair market value of any

assets available to pay plan liabilities

(including any amount held under an

annuity contract that exceeds the amount

that is needed to satisfy the liabilities

provided for under the contract) that are

held in the equivalent of a trust within

the meaning of section 404A(b)(5)(A),

exceed the plan’s accrued liability, determined using a projected unit credit

funding method.

The relevant amount is reduced to the

extent the taxpayer demonstrates to the

Commissioner that the relevant amount

is attributable to amounts that were

properly contributed to the trust pursuant to a reasonable funding method, or

experience that is favorable relative to

any actuarial assumptions used that the

Commissioner determines to be reasonable. In addition, if an employer that is

a controlled foreign corporation otherwise would be treated as the owner of a

fractional interest in a foreign employees’ trust, the taxpayer may rely on this

rule only if it so indicates on a statement attached to a timely filed Form

5471. The IRS and Treasury solicit

comments regarding the most appropriate way in which to extend a filing

requirement to partners in U.S.-related

foreign partnerships and other affected

taxpayers.

G. Plan’s accrued liability

Under the proposed regulations, the

plan’s accrued liability for a taxable

year of the employer is computed as of

the plan’s measurement date for the

employer’s taxable year. The plan’s accrued liability is determined using a

projected unit credit funding method,

taking into account only liabilities relating to services performed for the employer or a predecessor employer. In

addition, the plan’s accrued liability is

reduced (but not below zero) by any

liabilities that are provided for under

annuity contracts held to satisfy plan

liabilities.

Because CFCs generally are required

to determine their taxable income by

reference to U.S. tax principles, the

definition of a plan’s ‘‘accrued liability’’

refers to § 1.412(c)(3)–1. This definition generally is intended to track the

method used for calculating pension

costs under Statement of Financial Accounting Standards No. 87, Employers’

Accounting for Pensions (FAS 87),

available from the Financial Accounting

Standards Board, 401 Merritt 7,

Norwalk, CT 06856. Under the method

required to be used to calculate FAS

87’s projected benefit obligation (PBO),

plan costs are based on projected salary

levels. Because many taxpayers already

compute PBO annually to determine the

pension costs of their nonexempt employees’ trusts for financial reporting,

the timing, interval and method to compute plan liabilities under § 1.671–1(h)

should minimize taxpayer burden. The

IRS and Treasury solicit comments regarding the extent to which the proposed regulations conform to existing

procedures under FAS 87 and applicable

foreign law, and regarding appropriate

conforming adjustments.

H. Fair market value of trust assets

Under the proposed regulations, for a

taxable year of the employer, the fair

market value of trust assets, and the fair

market value of retirement annuities or

other assets held in the equivalent of a

trust, equals the fair market value of

those assets, as of the measurement date

for the employer’s taxable year. The fair

market value of these assets is adjusted

to include contributions made between

the measurement date and the end of the

employer’s taxable year.

I. De minimis exception

The proposed regulations provide an

exception to the general rule for determining the relevant amount. If the relevant amount would not otherwise be

greater than the plan’s normal cost for

the plan year ending with or within the

employer’s taxable year, then the relevant amount is considered to be zero.

J. Proposed effective date and transition

rules

The proposed regulations are proposed to be prospective. For taxable

years ending prior to September 27,

1996, employers generally would not be

treated for federal income tax purposes

as owning the assets of foreign

nonexempt employees’ trusts (except as

provided under section 679), consistent

with the rules applying to domestic

nonexempt employees’ trusts. A transition rule, for purposes of § 1.671–1(h),

exempts certain amounts from the application of the proposed regulations. This

exemption is phased out over a ten-year

period. There is a special transition rule

for any foreign corporation that becomes

a CFC after September 27, 1996. In

addition, there is a special transition rule

for certain entities that become U.S.related foreign partnerships after September 27, 1996.

3. § 1.671–2: General asset ownership

rules

The proposed regulations provide that

a person who is treated as the owner of

any portion of a trust under subpart E is

considered to own the trust assets attributable to that portion of the trust for all

federal income tax purposes.

4. § 1.1297–4: Subpart E rules for foreign employers that are not controlled

foreign corporations

Under the proposed regulations, a

foreign employer other than a CFC is

not treated as the owner of any portion

of a foreign nonexempt employees’ trust

for purposes of sections 1291 through

1297, except for cases in which a principal purpose for transferring property to

the trust is to avoid classification of a

foreign corporation as a PFIC (as defined in section 1296) or, if the foreign

corporation is classified as a PFIC, in

cases in which a principal purpose for

transferring property to the trust is to

avoid or to reduce taxation of U.S.

shareholders of the PFIC under section

1291 or 1293. The effective date of this

rule is September 27, 1996.

Income inclusion and related asset ownership rules for foreign welfare benefit

plans

The IRS and Treasury solicit comments on the need for (and content of)

income inclusion and asset ownership

rules for foreign welfare benefit trusts.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in

Executive Order 12866. Therefore, a

regulatory assessment is not required. It

is hereby certified that these regulations

do not have a significant economic

impact on a substantial number of small

entities. This certification is based on

the fact that these regulations will primarily affect U.S. owners of significant

interests in foreign entities, which owners generally are large multinational corporations. This certification is also based

on the fact that the burden imposed by

the collection of information in the

regulation, which is a requirement that

certain entities may rely on an exception

for reasonable funding only if they

indicate such reliance on a statement

attached to a timely filed Form 5471, is

minimal, and, therefore, the collection of

information will not impose a significant

economic impact on such entities.

Therefore, a Regulatory Flexibility

Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not

required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice

of proposed rulemaking will be submitted to the Chief Counsel for Advocacy

of the Small Business Administration for

comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)

copies) that are submitted timely to the

IRS. All comments will be available for

public inspection and copying.

A public hearing has been scheduled

for January 15, 1997, at 10:00 a.m. in

room 2615, Internal Revenue Building,

1111 Constitution Avenue, NW., Washington DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building

lobby more than 15 minutes before the

hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by December 26,

1996, and submit an outline of the

topics to be discussed and the time to be

devoted to each topic (signed original

and eight (8) copies) by December 24,

1996.

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

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal authors of these regulations are James A. Quinn of the Office

of Assistant Chief Counsel (Passthroughs and Special Industries), Linda

S. F. Marshall of the Office of Associate

Chief Counsel (Employee Benefits and

Exempt Organizations), and Kristine K.

Schlaman and M. Grace Fleeman of the

Office of Associate Chief Counsel (International). However, other personnel

from the IRS and Treasury Department

participated in their development.

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by removing the entry

for sections 1.1291–10T, 1.1294–1T,

1.1295–1T, and 1.1297–3T and adding

entries in numerical order to read as

follows:

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

Section 1.671–1 also issued under 26

U.S.C. 404A(h) and 672(f)(2)(B). * * *

Section 1.1291–10T also issued under

26 U.S.C. 1291(d)(2).

Section 1.1294–1T also issued under

26 U.S.C. 1294.

Section 1.1295–1T also issued under

26 U.S.C. 1295.

Section 1.1297–3T also issued under

26 U.S.C. 1297(b)(1).

Section 1.1297–4 also issued under 26

U.S.C. 1297(f). * * *

Par. 2. Section 1.671–1 is amended by

adding paragraphs (g) and (h) to read as

follows:

§ 1.671–1 Grantors and others treated

as substantial owners; scope.

(g) Domestic nonexempt employees’

trust—(1) General rule. An employer is

not treated as an owner of any portion

of a nonexempt employees’ trust described in section 402(b) that is part of

a deferred compensation plan, and that

is not a foreign trust within the meaning

of section 7701(a)(31), regardless of

whether the employer has a power or

interest described in sections 673

through 677 over any portion of the

trust. See section 402(b)(3) and

§ 1.402(b)–1(b)(6) for rules relating to

treatment of a beneficiary of a

nonexempt employees’ trust as the

owner of a portion of the trust.

(2) Example. The following example

illustrates the rules of paragraph (g)(1)

of this section:

Example. Employer X provides nonqualified

deferred compensation through Plan A to certain

of its management employees. Employer X has

created Trust T to fund the benefits under Plan A.

Assets of Trust T may not be used for any purpose

other than to satisfy benefits provided under Plan

A until all plan liabilities have been satisfied.

Trust T is classified as a trust under § 301.7701–4

of this chapter, and is not a foreign trust within

the meaning of section 7701(a)(31). Under

§ 1.83– 3(e), contributions to Trust T are considered transfers of property to participants within the

meaning of section 83. On these facts, Trust T is a

nonexempt employees’ trust described in section

402(b). Because Trust T is a nonexempt employees’ trust described in section 402(b) that is part of

a deferred compensation plan, and that is not a

foreign trust within the meaning of section

7701(a)(31), Employer X is not treated as an

owner of any portion of Trust T.

(h) Foreign employees’ trust—

(1) General rules. Except as provided

under section 679 or as provided under

this paragraph (h)(1), an employer is not

treated as an owner of any portion of a

foreign employees’ trust (as defined in

paragraph (h)(2) of this section), regardless of whether the employer has a

power or interest described in sections

673 through 677 over any portion of the

trust.

(i) Plan of CFC employer. If a controlled foreign corporation (as defined in

section 957) maintains a deferred compensation plan funded through a foreign

employees’ trust, then, with respect to

the controlled foreign corporation, the

provisions of subpart E apply to the

portion of the trust that is the fractional

interest described in paragraph (h)(3) of

this section.

(ii) Plan of U.S. employer. If a United

States person (as defined in section

7701(a)(30)) maintains a deferred compensation plan that is funded through a

foreign employees’ trust, then, with respect to the U.S. person, the provisions

of subpart E apply to the portion of the

trust that is the fractional interest described in paragraph (h)(3) of this section.

(iii) Plan of U.S.-related foreign partnership employer— (A) General rule. If

a U.S.-related foreign partnership (as

defined in paragraph (h)(1)(iii)(B) of

this section) maintains a deferred compensation plan funded through a foreign

employees’ trust, then, with respect to

the U.S.-related foreign partnership, the

provisions of subpart E apply to the

portion of the trust that is the fractional

interest described in paragraph (h)(3) of

this section.

(B) U.S.-related foreign partnership.

For purposes of this paragraph (h), a

U.S.-related foreign partnership is a foreign partnership in which a U.S. person

or a controlled foreign corporation owns

a partnership interest either directly or

indirectly through one or more partnerships.

(iv) Application of § 1.1297–4 to

plan of foreign non-CFC employer. A

foreign employer that is not a controlled

foreign corporation may be treated as an

owner of a portion of a foreign employees’ trust as provided in § 1.1297–4.

(v) Application to employer entity.

The rules of paragraphs (h)(1)(i) through

(h)(1)(iv) of this section apply to the

employer whose employees benefit under the deferred compensation plan

funded through a foreign employees’

trust, or, in the case of a deferred

compensation plan covering independent

contractors, the recipient of services performed by those independent contractors, regardless of whether the plan is

maintained through another entity. Thus,

for example, where a deferred compensation plan benefitting employees of a

controlled foreign corporation is funded

through a foreign employees’ trust, the

controlled foreign corporation is considered to be the grantor of the foreign

employees’ trust for purposes of applying paragraph (h)(1)(i) of this section.

(2) Foreign employees’ trust. A foreign employees’ trust is a nonexempt

employees’ trust described in section

402(b) that is part of a deferred compensation plan, and that is a foreign

trust within the meaning of section

7701(a)(31).

(3) Fractional interest for paragraph

(h)(1)—(i) In general. The fractional interest for a foreign employees’ trust

used for purposes of paragraph (h)(1) of

this section for a taxable year of the

employer is an undivided fractional interest in the trust for which the fraction

is equal to the relevant amount for the

employer’s taxable year divided by the

fair market value of trust assets for the

employer’s taxable year.

(ii) Relevant amount—(A) In general.

For purposes of applying paragraph

(h)(3)(i) of this section, and except as

provided in paragraph (h)(3)(iii) of this

section, the relevant amount for the

employer’s taxable year is the amount,

if any, by which the fair market value of

trust assets, plus the fair market value of

any assets available to pay plan liabilities that are held in the equivalent of a

trust within the meaning of section

404A(b)(5)(A), exceed the plan’s accrued liability. The following rules apply

for this purpose:

(1) The plan’s accrued liability is

determined using a projected unit credit

funding method that satisfies the requirements of § 1.412(c)(3)–1, taking

into account only liabilities relating to

services performed through the measurement date for the employer or a predecessor employer.

(2) The plan’s accrued liability is

reduced (but not below zero) by any

liabilities that are provided for under

annuity contracts held to satisfy plan

liabilities.

(3) Any amount held under an annuity contract that exceeds the amount that

is needed to satisfy the liabilities provided for under the contract (e.g., the

value of a participation right under a

participating annuity contract) is added

to the fair market value of any assets

available to pay plan liabilities that are

held in the equivalent of a trust.

(4) If the relevant amount as determined under this paragraph (h)(3)(ii),

without regard to this paragraph

(h)(3)(ii)(A)(4), is greater than the fair

market value of trust assets, then the

relevant amount is equal to the fair

market value of trust assets.

(B) Permissible actuarial assumptions for accrued liability. For purposes

of paragraph (h)(3)(ii)(A) of this section,

a plan’s accrued liability must be calculated using an interest rate and other

actuarial assumptions that the Commissioner determines to be reasonable. It is

appropriate in determining this interest

rate to look to available information

about rates implicit in current prices of

annuity contracts, and to look to rates of

return on high-quality fixed-income investments currently available and expected to be available during the period

prior to maturity of the plan benefits. If

the qualified business unit computes its

income or earnings and profits in dollars

pursuant to the dollar approximate separate transactions method under § 1.985–

3, the employer must use an exchange

rate that can be demonstrated to clearly

reflect income, based on all relevant

facts and circumstances, including appropriate rates of inflation and commercial practices.

(iii) Exception for reasonable funding. The relevant amount does not include an amount that the taxpayer demonstrates to the Commissioner is

attributable to amounts that were properly contributed to the trust pursuant to

a reasonable funding method, applied

using actuarial assumptions that the

Commissioner determines to be reasonable, or any amount that the taxpayer

demonstrates to the Commissioner is

attributable to experience that is favorable relative to any actuarial assumptions used that the Commissioner determines to be reasonable. For this

paragraph (h)(3)(iii) to apply to a controlled foreign corporation employer described in paragraph (h)(1)(i) of this

section, the taxpayer must indicate on a

statement attached to a timely filed

Form 5471 that the taxpayer is relying

on this rule. For purposes of this paragraph (h)(3)(iii), an amount is considered contributed pursuant to a reasonable funding method if the amount is

contributed pursuant to a funding

method permitted to be used under

section 412 (e.g., the entry age normal

funding method) that is consistently

used to determine plan contributions. In

addition, for purposes of this paragraph

(h)(3)(iii), if there has been a change to

that method from another funding

method, an amount is considered contributed pursuant to a reasonable funding method only if the prior funding

method is also a funding method described in the preceding sentence that

was consistently used to determine plan

contributions. For purposes of this paragraph (h)(3)(iii), a funding method is

considered reasonable only if the

method provides for any initial unfunded liability to be amortized over a

period of at least 6 years, and for any

net change in accrued liability resulting

from a change in funding method to be

amortized over a period of at least 6

years.

(iv) Reduction for transition amount.

The relevant amount is reduced (but not

below zero) by any transition amount

described in paragraphs (h)(5), (h)(6), or

(h)(7) of this section.

(v) Fair market value of assets. For

purposes of paragraphs (h)(3)(i) and (ii)

of this section, for a taxable year of the

employer, the fair market value of trust

assets, and the fair market value of other

assets held in the equivalent of a trust

within the meaning of section

404A(b)(5)(A), equals the fair market

value of those assets, as of the measurement date for the employer’s taxable

year, adjusted to include contributions

made after the measurement date and by

the end of the employer’s taxable year.

(vi) Annual valuation. For purposes

of determining the relevant amount for a

taxable year of the employer, the fair

market value of plan assets, and the

plan’s accrued liability as described in

paragraphs (h)(3)(ii) and (iii) of this

section, and the normal cost as described in paragraph (h)(4) of this section, must be determined as of a consistently used annual measurement date

within the employer’s taxable year.

(vii) Special rule for plan funded

through multiple trusts. In cases in

which a plan is funded through more

than one foreign employees’ trust, the

fractional interest determined under

paragraph (h)(3)(i) of this section in

each trust is determined by treating all

of the trusts as if their assets were held

in a single trust for which the fraction is

determined in accordance with the rules

of this paragraph (h)(3).

(4) De minimis exception. If the relevant amount is not greater than the

plan’s normal cost for the plan year

ending with or within the employer’s

taxable year, computed using a funding

method and actuarial assumptions as

described in paragraph (h)(3)(ii) of this

section or as described in paragraph

(h)(3)(iii) of this section if the requirements of that paragraph are met, that are

used to determine plan contributions,

then the relevant amount is considered

to be zero for purposes of applying

paragraph (h)(3)(i) of this section.

(5) General rule for transition

amount—(i) General rule. If paragraphs

(h)(6) and (h)(7) of this section do not

apply to the employer, the transition

amount for purposes of paragraph

(h)(3)(iv) of this section is equal to the

preexisting amount multiplied by the

applicable percentage for the year in

which the employer’s taxable year begins.

(ii) Preexisting amount. The preexisting amount is equal to the relevant

amount of the trust, determined without

regard to paragraphs (h)(3)(iv) and

(h)(4) of this section, computed as of

the measurement date that immediately

precedes September 27, 1996, disregarding contributions to the trust made after

the measurement date.

(iii) Applicable percentage. The applicable percentage is equal to 100 percent for the employer’s first taxable year

ending after this document is published

as a final regulation in the Federal

employer, and is reduced (but not below

zero) by 10 percentage points for each

subsequent taxable year of the employer.

(6) Transition amount for new

CFCs—(i) General rule. In the case of

a new controlled foreign corporation

employer, the transition amount for purposes of paragraph (h)(3)(iv) is equal to

the pre-change amount multiplied by the

applicable percentage for the year in

which the new controlled foreign corporation employer’s taxable year begins.

(ii) Pre-change amount. The prechange amount for purposes of paragraph (h)(6)(i) is equal to the relevant

amount of the trust, determined without

regard to paragraphs (h)(3)(iv) and

(h)(4) of this section and disregarding

contributions to the trust made after the

measurement date, for the new controlled foreign corporation employer’s

last taxable year ending before the corporation becomes a new controlled foreign corporation employer.

(iii) Applicable percentage—(A) General rule. Except as provided in paragraph (h)(6)(iii)(B) of this section, the

applicable percentage is equal to 100

percent for a new controlled foreign

corporation employer’s first taxable year

ending after the corporation becomes a

controlled foreign corporation. The applicable percentage is reduced (but not

below zero) by 10 percentage points for

each subsequent taxable year of the new

controlled foreign corporation.

(B) Interim rule. For any taxable year

of a new controlled foreign corporation

employer that ends on or before the date

this document is published as a final

regulation in the Federal Register, the

applicable percentage is equal to 100

percent. The applicable percentage is

reduced by 10 percentage points for

each subsequent taxable year of the new

controlled foreign corporation employer

that ends after the date this document is

published as a final regulation in the

Federal Register.

(iv) New CFC employer. For purposes

of paragraph (h)(6) of this section, a

new controlled foreign corporation employer is a corporation that first becomes a controlled foreign corporation

within the meaning of section 957 after

September 27, 1996. A new controlled

foreign corporation employer includes a

corporation that was a controlled foreign

corporation prior to, but not on, September 27, 1996, and that first becomes a

controlled foreign corporation again after September 27, 1996.

(v) Anti-stuffing rule. Notwithstanding paragraph (h)(6)(iii) of this section,

if, prior to becoming a controlled foreign corporation, a corporation contributes amounts to a foreign employees’

trust with a principal purpose of obtaining tax benefits by increasing the prechange amount, the applicable percentage with respect to those amounts is 0

percent for all taxable years of the new

controlled foreign corporation employer.

(7) Transition amount for new U.S.related foreign partnerships—(i) General rule. In the case of a new U.S.related foreign partnership employer, the

transition amount for purposes of paragraph (h)(3)(iv) of this section is equal

to the pre-change amount multiplied by

the applicable percentage for the year in

which the new U.S.-related foreign partnership employer’s taxable year begins.

(ii) Pre-change amount. The prechange amount for purposes of paragraph (h)(7)(i) of this section is equal to

the relevant amount of the trust, determined without regard to paragraphs

(h)(3)(iv) and (h)(4) of this section and

disregarding contributions to the trust

made after the measurement date, for

the entity’s last taxable year ending

before the entity becomes a new U.S.related foreign partnership employer.

(iii) Applicable percentage—(A) General rule. Except as provided in paragraph (h)(7)(iii)(B) of this section, the

applicable percentage is equal to 100

percent for a new U.S.- related foreign

partnership employer’s first taxable year

ending after the entity becomes a new

U.S.-related foreign partnership employer. The applicable percentage is reduced (but not below zero) by 10 percentage points for each subsequent

taxable year of the new U.S.-related

foreign partnership employer.

(B) Interim rule. For any taxable year

of a new U.S.- related foreign partnership employer that ends on or before the

date this document is published as a

final regulation in the Federal Register,

the applicable percentage is equal to 100

percent. The applicable percentage is

reduced by 10 percentage points for

each subsequent taxable year of the new

U.S.-related foreign partnership employer that ends after the date this

document is published as a final regulation in the Federal Register.

(iv) New U.S.-related foreign partnership employer. For purposes of paragraph (h)(7) of this section, a new

U.S.-related foreign partnership employer is an entity that was a foreign

corporation other than a controlled foreign corporation, or that was a foreign

partnership other than a U.S.-related

foreign partnership, and that changes

from this status to a U.S.-related foreign

partnership after September 27, 1996. A

new U.S.-related foreign partnership employer includes a corporation that was a

U.S.-related foreign partnership prior to,

but not on, September 27, 1996, and

that first becomes a U.S.-related foreign

partnership again after September 27,

1996.

(v) Anti-stuffing rule. Notwithstanding paragraph (h)(7)(iii) of this section,

if, prior to becoming a new U.S.- related

foreign partnership employer, an entity

contributes amounts to a foreign employees’ trust with a principal purpose

of obtaining tax benefits by increasing

the pre-change amount, the applicable

percentage with respect to those

amounts is 0 percent for all taxable

years of the new U.S.-related foreign

partnership employer.

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

(h) of this section. In each example, the

employer has a power or interest described in sections 673 through 677 over

the foreign employees’ trust, and the

monetary unit is the applicable functional currency (FC) determined in accordance with section 985(b) and the

regulations thereunder.

Example 1. (i) Employer X is a controlled

foreign corporation (as defined in section 957).

Employer X maintains a defined benefit retirement

plan for its employees. Employer X’s taxable year

is the calendar year. Trust T, a foreign employees’

trust, is the sole funding vehicle for the plan. Both

the plan year of the plan and the taxable year of

Trust T are the calendar year.

(ii) As of December 31, 1997, Trust T’s measurement date, the fair market value (as described

in paragraph (h)(3)(iv) of this section) of Trust T’s

assets is FC 1,000,000, and the amount of the

plan’s accrued liability is FC 800,000, which

includes a normal cost for 1997 of FC 50,000. The

preexisting amount for Trust T is FC 40,000.

Thus, the relevant amount for 1997 is FC 160,000

(which is greater than the plan’s normal cost for

the year). Employer X’s shareholder does not

indicate on a statement attached to a timely filed

Form 5471 that any of the relevant amount

qualifies for the exception described in paragraph

(h)(3)(iii) of this section. Therefore, the fractional

interest for Employer X’s taxable year ending on

December 31, 1997, is 16 percent. Employer X is

treated as the owner for federal income tax

purposes of an undivided 16 percent interest in

each of Trust T’s assets for the period from

January 1, 1997 through December 31, 1997.

Employer X must take into account a 16 percent

pro rata share of each item of income, deduction

or credit of Trust T during this period in computing its federal income tax liability.

Example 2. Assume the same facts as in

Example 1, except that Employer X’s shareholder

indicates on a statement attached to a timely filed

Form 5471 and can demonstrate to the satisfaction

of the Commissioner that, in reliance on paragraph

(h)(3)(iii) of this section, FC 100,000 of the fair

market value of Trust T’s assets is attributable to

favorable experience relative to reasonable actuarial assumptions used. Accordingly, the relevant

amount for 1997 is FC 60,000. Because the plan’s

normal cost for 1997 is less than FC 60,000, the

de minimis exception of paragraph (h)(4) of this

section does not apply. Therefore, the fractional

interest for Employer X’s taxable year ending on

December 31, 1997, is 6 percent. Employer X is

treated as the owner for federal income tax

purposes of an undivided 6 percent interest in each

of Trust T’s assets for the period from January 1,

1997, through December 31, 1997. Employer X

must take into account a 6 percent pro rata share

of each item of income, deduction or credit of

Trust T during this period in computing its federal

income tax liability.

(9) Effective date. Paragraphs (g) and

(h) of this section apply to taxable years

of an employer ending after September

27, 1996.

Par. 3. Section 1.671–2 is amended by

adding paragraph (f) to read as follows:

§ 1.671–2 Applicable principles

(f) For purposes of subtitle A of the

Internal Revenue Code, a person that is

treated as the owner of any portion of a

trust under subpart E is considered to

own the trust assets attributable to that

portion of the trust.

Par. 4. Section 1.1297–4 is added to

read as follows:

§ 1.1297–4 Application of subpart E of

subchapter J with respect to foreign

employees’ trusts.

(a) General rules. For purposes of

part VI of subchapter P, chapter 1 of the

Code, a foreign employer that is not a

controlled foreign corporation is not

treated as the owner of any portion of a

foreign employees’ trust (as defined in

§ 1.671–1(h)(2)) except as provided in

this paragraph (a), regardless of whether

the employer has a power or interest

described in sections 673 through 677

over any portion of the trust.

(1) Principal purpose to avoid classification as a passive foreign investment

company. If a principal purpose for a

transfer of property by any person to a

foreign employees’ trust (as defined in

§ 1.671–1(h)(2)) is to avoid classification of a foreign corporation as a passive foreign investment company, then

the following rule applies. If the foreign

employer has a power or interest described in sections 673 through 677 over

the trust, then the grantor trust rules of

subpart E of part I of subchapter J,

chapter 1 of the Code will apply, for

purposes of part VI of subchapter P, to a

fixed dollar amount in the trust that is

equal to the fair market value of the

property that is transferred for the purpose of avoiding classification as a

passive foreign investment company.

Whether a principal purpose for a transfer is the avoidance of classification as a

passive foreign investment company will

be determined on the basis of all of the

facts and circumstances, including

whether the amount of assets held by

the foreign employees’ trust is reasonably related to the plan’s anticipated

liabilities, taking into account any local

law and practice relating to proper funding levels.

(2) Principal purpose to reduce or

eliminate taxation under section 1291 or

1293. If a principal purpose for a transfer of property by any person to a

foreign employees’ trust (as defined in

§ 1.671–1(h)(2)) is to reduce or eliminate taxation under section 1291 or

1293, then the following rule applies. If

the foreign employer has a power or

interest described in sections 673

through 677 over the trust, then the

provisions of subpart E will apply, for

purposes of part VI of subchapter P, to a

fixed dollar amount in the trust that is

equal to the fair market value of the

property transferred for the purpose of

reducing or eliminating taxation under

section 1291 or 1293. Whether a principal purpose for a transfer is to reduce or

eliminate taxation under section 1291 or

1293 will be determined on the basis of

all the facts and circumstances, including whether the amount of assets held

by the foreign employees’ trust is reasonably related to the plan’s anticipated

liabilities, taking into account any local

law and practice relating to proper funding levels.

(3) Application to employer entity.

The rules of this section apply to the

employer whose employees benefit under the deferred compensation plan

funded through the foreign employees’

trust, or, in the case of a deferred

compensation plan covering independent

contractors, the recipient of services performed by those independent contractors, regardless of whether the plan is

maintained through another entity. Thus,

for example, where a deferred compensation plan benefitting employees of a

foreign employer that is not a controlled

foreign corporation is funded through a

foreign employees’ trust, the foreign

employer is considered to be the grantor

of the foreign employees’ trust for purposes of this paragraph (a).

(b) Effective date. This section applies to taxable years of a foreign

corporation ending after September 27,

1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on

September 26, 1996, 8:45 a.m., and published in

the issue of the Federal Register for September 27,

1996, 61 F.R. 50778)

Proposed Tip Reporting Agreement

for Use in the Hairstyling Industry

Announcement 96–105

SUMMARY

The Internal Revenue Service is considering expansion of its Market Segment Understanding (MSU) Program as

a means to enhance tax compliance

through taxpayer education and voluntary advance agreements instead of traditional audit techniques. This announcement solicits comments on a

draft model MSU Agreement entitled

Tip Reporting Alternative Commitment

(Hairstyling Industry).

OVERVIEW

The Service developed its MSU Program in 1993 as a means of enhancing

tax compliance while reducing taxpayer

burden. In essence, the Program envisions that the Service and taxpayers in

particular market segments would work

together to improve tax compliance in

those areas through educational efforts

and other collaborative approaches

rather than through traditional audit

techniques.

Since 1995, the Service has entered

into Tip Reporting Alternative Commitment (TRAC) agreements with taxpayers in the food service industry. In

general, these TRAC agreements involve

an educational program for tipped employees and tip reporting procedures for

cash and charged tips. The agreements

also set forth an understanding that both

the employer and employees who comply with the terms of the TRAC agreement will generally not be subject to

challenge by the District Director. The

decision to enter into a TRAC agreement is entirely optional on the part of

the employer.

Taxpayers in the hairstyling industry

have expressed interest in entering into

a TRAC agreement with the Service. To

ensure consistency in these agreements

and provide an opportunity for public

comment prior to expanding this aspect

of the MSU Program, the Service has

developed a draft form of TRAC agreement that could be used as a model for

the hairstyling industry. This draft model

Agreement is entitled ‘‘Tip Reporting

Alternative Commitment (Hairstyling Industry)’’ and is attached to this announcement.

COMMENTS

Written comments must be received

by December 14, 1996. Send submissions to Office of Specialty Taxes, c/o

CC:DOM:CORP:R (Announcement 96–

105), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Alternatively,

taxpayers may submit comments electronically via the Internet by selecting

the ‘‘Tax Regs’’ option on the IRS

Home Page, or by submitting comments

directly to the IRS Internet site at

http://www.irs.ustreas.gov/prod/tax_regs/

comments.html. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to

Office of Specialty Taxes, c/o

CC:DOM:CORP:R (Announcement 96–

105), Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW,

Washington, DC.

DRAFTING INFORMATION

The principal author of this announcement is Karin Loverud of the Office of

the Associate Chief Counsel (Employee

Benefits and Exempt Organizations). For

further information regarding this announcement, contact Kathy Mort, MSU

program administrator, Office of Specialty Taxes, on (202) 376–0687 (not a

toll-free call).

Draft release date: 10/15/96

TIP REPORTING ALTERNATIVE

COMMITMENT

(Hairstyling Industry)

between

Department of the Treasury-Internal

Revenue Service

and

[Name of Employer]

(Taxpayer-Employer’s

name, address, and identifying number)

(‘‘Employer’’) and the

District Director of Internal Revenue

(‘‘District Director’’) hereby agree to the

following Tip Reporting Alternative

Commitment (‘‘TRAC’’).

The parties agree that the current law

requirements for reporting cash and

charged tips and for determining the

Employer’s liability for Federal Insurance Contribution Act (‘‘FICA’’) taxes

with respect to those tips operate as

described below:

A. Section 6053(a) of the Internal

Revenue Code of 1986, as amended

(‘‘Code’’), requires employees to furnish

one or more written statements to their

employers reporting all tips received in

each calendar month. The statements

must be furnished to the employer by

the 10th day of the following month.

For purposes of both the employer and

employee shares of FICA taxes, the tips

are deemed to be ‘‘remuneration’’ at the

time the employee’s report is furnished

to the employer. Section 3121(q) of the

Code was amended by section 9006 of

the Omnibus Reconciliation Act of

1987, Pub. L. No. 100–203, effective

January 1, 1988, to cross-reference sections 3111(a) and (b) of the Code,

thereby obligating employers to pay the

employer share of FICA taxes on employees’ tip income ‘‘remuneration.’’ Accordingly, effective for tips received

after 1987, an employer must pay its

share of FICA taxes on the tip income

reported to it by its employees under

section 6053(a) of the Code at the time

the income is deemed to be remuneration by section 3121(q) of the Code.

B. If an employee fails to report tip

income to the employer as required by

section 6053(a) of the Code, or underreports tip income to the employer, the

employer’s liability for the portion of

FICA taxes attributable to such tip income is collectible only under the ‘‘notice and demand’’ procedure found in

the last clause of section 3121(q) of the

Code. Under this procedure, the Internal

Revenue Service (‘‘Service’’) provides a

‘‘notice and demand’’ to the employer to

reflect tip income not previously reported by the employee to the employer.

This tip income then becomes ‘‘remuneration’’ under section 3121(q) for purposes of determining the employer’s

share of FICA taxes under sections

3111(a) and (b) of the Code.

C. Under section 6652(b) of the

Code, if an employee fails to report the

tip income received in any calendar

month as required by section 6053(a),

the employee can be assessed a penalty

equal to 50 percent of the additional

employee FICA tax due with respect to

the tip income, unless the employee can

show that the failure is due to reasonable cause and not willful neglect.

In October 1993, the Service implemented nationally its Tip Rate Education

Program (‘‘Program’’). The purpose of

the Program is to ensure maximum

compliance by employees with the provisions of the Code relating to tip

income.

The Service will accept a TRAC

agreement in every District, will permit

all eligible employers to enter into a

TRAC agreement, and will assist applicants in understanding and meeting the

requirements for participation in a

TRAC agreement.

The District Director and the Employer have agreed to resolve disputes

concerning the responsibilities of the

Employer and the District Director under section 3121(q) of the Code and to

establish procedures to prevent such

disputes in the future. Therefore, the

parties agree as follows:

I. DEFINITIONS

A. Employer means

[insert name].

B. Establishment means each of the

establishments listed by name, address,

and identifying number in Attachment

A. [sample attached] If the Employer

has one place of business, that place of

business is an Establishment.

C. Employee means a person employed by the Establishment who directly or indirectly receives tips of at

least $20.00 per month during the

course of the employee’s employment.

D. TRAC application means a signed

request to enter into a TRAC agreement

submitted by mail.

E. District Director means the District Director of Internal Revenue for

[insert name of District] or designee.

II. EFFECTIVE DATE OF

AGREEMENT

A. General rule. Except as described

below, this Agreement is effective on

the first day of the first calendar quarter

following the date the District Director

signs the Agreement.

B. Special rules.

1. Employer with Establishment open

to the public before [insert date program is to go into effect (‘‘date A’’)]—

Applications submitted before [insert

date 1 year later (‘‘date B’’)]. In the

case of an Employer who (1) had one or

more Establishments open to the public

before [insert date A], and (2) submits

its TRAC application before [insert date

B], the TRAC agreement is effective on

the first day of the first calendar quarter

following the quarter in which the application is submitted to the District Director, unless the District Director rejects

the application (with respect to any or

all of the Establishments) in writing

within 3 months after the date of submission. (Section II. B. 5. sets forth the

reasons for which the District Director

may reject a TRAC application.)

2. Employer with no Establishment

open to the public before [insert Date

A]—Applications submitted within 12

months after first Establishment opens.

In the case of an Employer who (1) had

no Establishment open to the public

before [insert date A], and (2) submits

its TRAC application within 12 months

after its first Establishment opens to the

public, the TRAC agreement is effective

on the first day of the first calendar

quarter following the quarter in which

the application is submitted to the District Director, unless the District Director rejects the application (with respect

to any or all of the Establishments) in

writing within 3 months after the date of

submission. (Section II. B. 5. sets forth

the reasons for which a District Director

may reject a TRAC application.)

3. Employer acquisition or public

opening of Establishment—Participation

and nonparticipation in Agreement. If an

Employer acquires or opens to the public an additional Establishment and the

Employer wishes to include the Establishment in the Employer’s TRAC

agreement, the Employer must provide

an addendum to Attachment A to the

District Director within six months after

the date of any such acquisition or

public opening. The addendum will include the name, address, and identifying

number of the acquired or opened Establishment. Such Establishment will be

treated as participating in the TRAC

agreement beginning on the date of

acquisition or public opening, unless the

District Director rejects the application

in writing within three months after the

date of submission of the addendum. If

the Employer does not furnish a timely

addendum, the general rule of Section

II.A. applies, and thus the TRAC agreement will not become effective with

respect to the additional Establishment

until the first day of the first calendar

quarter following the date the District

Director agrees in writing to the addendum.

4. Change in Ownership or Control.

If an Employer or Establishment currently participating in a TRAC agreement undergoes a change in ownership

or control, such Employer or Establishment must provide an addendum to

Attachment A to the District Director

within six months after the effective

date of the change. The addendum will

include the name, address, and identifying number of the acquiring entity. The

acquiring entity will be treated as the

successor Employer under the original

TRAC agreement beginning on the date

of change in ownership or control unless

the District Director rejects the addendum in writing within three months of

its submission, in whole or in part, for

the reasons set forth in Section II. B. 5.

Failure to furnish an addendum may

result in a revocation under Section V.B.

as of the last day of the six-month

period.

5. Rejection by the District Director.

The District Director may reject a

TRAC application or addendum for one

of the following reasons:

a. the failure of the Employer to

comply with the rules relating to the

filing of any federal tax return, paying

the amount of any undisputed federal

tax, or making any deposit of federal

taxes;

b. the inability of an Establishment to

comply with the procedures set forth in

Section III.; or

c. the pursuit, by the Internal Revenue Service or another federal agency,

of administrative or judicial action relating to the applicant or related party.

C. Ongoing tip examination. A tip

examination in progress on the date the

Employer submits its TRAC application

will not affect the effective date of this

Agreement.

III. COMMITMENT OF

EMPLOYER

While this Agreement is in effect, the

Employer agrees to the following provisions:

A. Educational Program. The Employer must institute and maintain for

each calendar quarter an educational

program that trains newly hired Employees and periodically updates existing

Employees as to their reporting obligations with respect to tip income received

as either cash tips or charged tips. This

educational program may include on-site

or off-site training by the Establishment,

video programs, and written materials,

such as tip reporting booklets offered as

part of new employee informational materials.

This educational program must emphasize that, in addition to charged tips

attributable to Employees, all cash tips

paid to and retained by the Employees

must be reported to their employing

Establishment. The Employer may illustrate this by informing the Employees of

the Establishment’s charged sales to

cash sales ratio and explaining the correlation between charged tips and cash

tips.

The Employer as part of this program

must explain to the employees their

obligation to maintain for their records

the information required in Form

4070A, Employee’s Daily Record of

Tips. This educational program also

should advise all participants of the

benefits of proper tip reporting (e.g.,

Social Security wage credit history, increased retirement plan contributions,

and creation of adequate records of tip

income).

B. Requirements regarding returns,

taxes, and records.

1. Filing returns.

a. Form 941. Each calendar quarter,

the Employer must comply with the

requirements for filing Form 941, Employer’s Quarterly Federal Tax Return.

The Form 941 must include all charged

and cash tips reported by the Employees

to the employing Establishment(s) in

accordance with the procedures set forth

in Section III. C.

b. Forms W–2. The Employer (or

employing Establishment) must comply

with the requirements for filing Forms

W–2 for all the Employees and include

all reported charged and cash tips on the

Employees’ Forms W–2, including tips

verified or corrected pursuant to Section

III. C.

c. Other returns. The Employer must

comply with the requirements for filing

all other required federal tax returns.

2. Payment and deposit of taxes. The

Employer must comply with the requirements for paying the amount of any

undisputed federal tax that is due and

depositing federal taxes.

3. Maintenance of records. Each Establishment must maintain records of the

following:

a. Gross receipts subject to tipping,

and

b. Charge receipts showing charged

tips.

The Employer must retain these records

for at least 4 years after the April 15

following the calendar year to which the

records relate.

4. Availability of records. Upon the

request of the District Director, the

Employer will make the following quarterly totals available, by Establishment,

for statistical samplings of its Establishments:

a. Gross receipts subject to tipping,

b. Charge receipts showing charged

tips,

c. Total charged tips, and

d. Total tips reported.

C. Employee tip-reporting procedures.

1. Charged Tips. Each Establishment

must establish a procedure under which

a written statement is prepared and

processed on a regular basis (no less

frequently than monthly), reflecting all

charged tips for sales attributable to

each directly tipped Employee. The Establishment must implement reasonable

procedures under which each directly

tipped Employee is given the opportunity to verify or correct any statement of

proposed attribution of charged tips, in

order to reflect tip outs, tip sharing, tip

pooling, and other adjustments. For example, the Establishment would satisfy

this paragraph if it provided a written

statement that contained the following

information: Employee’s charged sales,

Employee’s total charged tips, and the

ratio, as a percentage, of charged tips to

charged sales.

The Establishment must also adopt a

reasonable method for reporting charged

tips received by indirectly tipped Employees. For example, the Employee

may report to the Establishment the

amount and with whom tips were

shared. Alternatively, the directly tipped

Employee may provide to the Establishment a copy of Form 4070A indicating

the shared tips. As another example, the

Establishment could furnish the indirectly tipped Employee a written statement, which that Employee would verify

or correct in a manner similar to the

procedure for directly tipped Employees.

The Employer’s procedures must enable Employees to meet their reporting

requirements under section 6053(a) of

the Code. To meet these requirements,

the Employee must sign the verified or

corrected statement of attributed tips (no

less frequently than monthly) and give

the statement to the Establishment no

later than the 10th day of the month

following the month in which the Employee received the tips.

This verified or corrected statement

(if completed by the 10th of the month

for tips received during the preceding

month) will satisfy the Employee’s requirement of reporting charged tips to

the Employer under section 6053(a).

The Employer may satisfy the requirements of the section if it remits charged

tips to the Employees through the payroll system under a method that ensures

reporting of tips by Employees and is

consistent with sections 3102 and 3402

of the Code.

2. Cash Tips. Each Establishment

must establish a procedure under which

a written statement is prepared and

processed on a regular basis (no less

frequently than monthly), reflecting all

cash tips for sales attributable to each

directly tipped Employee. For example,

if the Employee signs for charged tips

on a daily basis, the Employee may

record the amount of cash tips received

at the same time. As another example, a

procedure comparable to the procedure

for charged tips would be appropriate

for cash tips. The Employer may also

provide a separate procedure for reporting cash tips.

IV. COMMITMENT OF DISTRICT

DIRECTOR

A. General rule. Except as provided

in B. below, any section 3121(q) notice

and demand issued to the Employer (or

Establishment) by the District Director

shall be based solely on amounts reflected on one or more of the following

forms:

1. Form 4137, Social Security and

Medicare Tax on Unreported Tip Income, filed by an Employee with his or

her Form 1040, or

2. Form 885–T, Adjustment of Social

Security Tax on Tip Income Not Reported to Employer, prepared at the

conclusion of an employee tip examination.

B. Special rules.

1. Retroactive revocation. In the

event the District Director revokes the

Agreement retroactively as provided under Section V. A. 1., the general rule of

Section IV. A. does not apply.

2. Prospective revocation. In the

event of a revocation under Section V.

A. 2. or 3., or Section V. B., the general

rule in Section IV. A. will apply with

respect to tip income actually received

by (or deemed under section 3121(q) of

the Code to have been paid to) Employees at the Establishment during the

period from the effective date of the

TRAC agreement until the effective date

of revocation.

3. Ongoing Tip Examination. If the

District Director has initiated a tip examination of one or more Establishments prior to the filing of the TRAC

application, the District Director will not

be bound by the general rule of Section

IV. A., with respect to any tip income

actually received by Employees at the

Establishment during any calendar quarters under tip examination. TRAC will

be available to the Employer for all

other calendar quarters as provided in

this Agreement.

C. Compliance review. The District

Director may not evaluate the Employer

(or Establishment) for compliance with

the provisions of Section III. A. (pertaining to the Employer’s educational

program) or Section III. C. (pertaining

to Employee tip-reporting procedures)

until the second calendar quarter following the quarter in which this Agreement

becomes effective. During the first two

calendar quarters of this Agreement the

District may review the Employer’s (or

Establishment’s) progress in complying

with the provisions of those Sections.

D. Examinations and/or inspections

of books and records. The inspection of

books of account or records pursuant to

a tip examination or compliance review

will not preclude or impede (under

section 7605(b) of the Code, section

530(a)(2) of the Revenue Act of 1978,

or any administrative provisions adopted

by the Service) a later examination of a

return or inspection of books of account

or records with respect to any tax period

involved in the tip examination or compliance review. The Service need not

comply with any applicable procedural

restrictions (for example, providing notice under section 7605(b)) before beginning such examination or inspection.

V. REVOCATION

A. Revocation by District Director.

The District Director will revoke this

Agreement only for the following reasons:

1. Failure to comply with Section III.

A. or Section III. C. If the District

Director determines that the Employer

(or any Establishment) has failed to

substantially comply with Section III. A.

(pertaining to the education program) or

Section III. C. (pertaining to employee

tip-reporting procedures), the District

Director may retroactively revoke this

Agreement. The revocation will be effective the first day of the first calendar

quarter of the Employer’s (or Establishment’s) substantial noncompliance. The

District Director must notify the Employer in writing of the revocation and

the Establishment(s) to which the revocation applies. If the revocation applies

to all the Establishments of the Employer, the Agreement will be terminated, as of the above-stated effective

date.

2. Failure to meet requirements of

Section III. B. 1., 2., 3, and 4. If the

Employer (or any Establishment) fails to

meet any of the requirements of Section

III. B. 1., 2., 3., or 4. (pertaining to

filing returns, paying and depositing

taxes, maintenance of records, and availability of records), the District Director

may revoke this Agreement. The revocation will be effective the first day of the

first calendar quarter after the District

Director notifies the Employer in writing that the Agreement no longer applies

to the Employer (or Establishment).

3. Employee underreporting of tips. If

the District Director determines that the

Employees of an Establishment have

collectively and substantially underreported tip income for at least two

continuous calendar quarters despite the

Employer’s (or Establishment’s) substantial compliance with the procedures

in Section III. C. (employee-tipreporting procedures), the District Director may revoke this Agreement with

respect to the Establishment. The revocation will be effective the first day of

the first calendar quarter after the District Director notifies the Employer in

writing that the Agreement no longer

applies to the Establishment. If the revocation applies to all the Establishments

of the Employer, the Agreement will be

terminated, as of the above-stated effective date.

4. Other. In addition to the reasons

for revocation listed in this section, the

District Director may revoke the Agreement when the Internal Revenue Service

or another federal agency pursues an

administrative or judicial action relating

to the Employer or Establishment that is

a party or related party to this Agreement.

B. Revocation by Employer. If the

Employer no longer wishes this Agreement to apply to one or more Establishments, the Employer may revoke this

Agreement with respect to the Establishment(s), by providing written notification to the District Director identifying

the Establishments(s). The revocation by

the Employer will be effective the first

day of the first calendar quarter after the

Employer notifies the District Director

in writing. If the revocation applies to

all the Establishments of the Employer,

the Agreement will be terminated, as of

the above-stated effective date. If an

Employer fails to furnish an addendum

pursuant to Section II.B.4., the Service

may treat the failure as an employer

revocation under this paragraph as of

the last day of the six-month period

described in Section II.B.4.

C. Reapplication by Employer. If the

District Director revokes this Agreement

either with respect to the Employer or

with respect to an Establishment(s), the

Employer may submit a new TRAC

application. In the event of a reapplication, the effective date provided in Section II. A. will apply.

VI. MISCELLANEOUS

A. Notices. All correspondence pertaining to this Agreement, including a

notice of revocation, must be sent to the

parties to this Agreement at the addresses stated below, unless notified in

writing of a change of address. In the

event of a change of address, all correspondence must be sent to the new

address.

B. Authority. The Employer represents that it has the authority to enter

into this Agreement on behalf of itself

and the Establishment(s) listed in Attachment A.

C. Date of notices. All notices and

TRAC applications are deemed to be

sent or submitted on the date of the

postmark stamped on the envelope or, in

the case of a notice or application sent

by certified mail, the sender’s receipt.

D. Statutory changes. The Commissioner may terminate this Agreement at

any time following a significant statutory change in the FICA taxation of tips.

E. Sunset provision. The Commissioner of Internal Revenue may terminate prospectively the Tip Rate Education Program or TRAC agreements after

[insert date 5 years after date A].

VII. PAPERWORK REDUCTION

ACT

The collections of information contained in this document will be submitted to the Office of Management and

Budget for review in accordance with

the Paperwork Reduction Act (44 U.S.C.

3507(c)).

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

respond to, a collection of information

unless the collection of information displays a valid control number. The collections of information in this document

are in sections I.B., I.D., II.B.3. and 4.,

III.A., III.B.3. and 4., III.C., and V.B.

This information is required to comply

with sections 6053(a) and 6001 of the

Internal Revenue Code and to assist the

Internal Revenue Service in its compliance efforts. This information will be

used to monitor the Employer’s performance under the Agreement. The collec-

tions of information are required to

obtain the benefits available under the

Agreement. The likely respondents are

business or other for-profit institutions.

The estimated total annual reporting

and/or recordkeeping burden is 47,733

hours.

The estimated annual burden per

respondent/recordkeeper varies from 12

hours to 51 hours, depending on individual circumstances, with an estimated

average of 15 hours. The estimated

number of respondents and/or recordkeepers is 3,200.

The estimated annual frequency of

responses (used for reporting requirements only) is on occasion.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal revenue law. Generally, tax returns

and tax return information are confidential, as required by section 6103 of the

Code.

VIII. SIGNATURES

By signing this Agreement, the parties certify that they have read and agreed to the terms of this document, including

Attachment A, Names, Addresses, and Employer Identification Numbers by Employer of Establishments Covered Under TRAC

Agreements.

EMPLOYER:

INTERNAL REVENUE SERVICE

District

(Name of Employer)

(Signature)

BY:

(Director’s Name)

TITLE:

TITLE: District Director

ADDRESS:

(Headquarters street address)

(Street address)

(City, state, ZIP code)

DATE:

TRAC AGREEMENT

(Hairstyling Industry)

Attachment A

[format for individual establishments]

Employer

A & B Hairstylists

xx–xxxxxxx

Street address

City, state, zip code

[format for chains]

Employer (parent, if applicable)

XYZ Corp.

yy–yyyyyyy

Street address

City, state, zip code

Establishments (if applicable)

AB Hairstyling

Street address

City, state, zip code

CD Hairstyling

Street address

City, state, zip code

Related entity (if applicable)

UVW Corp.

zz–zzzzzzz

Street address

City, state, zip code

Establishments (if applicable)

EF Hairstyling

Street address

City, state, zip code

GH Hairstyling

Street address

City, state, zip code

Proposed Tip Reporting Agreement

for Use in the Gaming Industry

Announcement 96–106

SUMMARY

The Internal Revenue Service is considering expansion of its Market Segment Understanding (MSU) Program as

a means to enhance tax compliance

through taxpayer education and voluntary advance agreements instead of traditional audit techniques. This announcement solicits comments on a

draft model MSU Agreement entitled

Tip Rate Determination Agreement

(Gaming Industry).

OVERVIEW

The Service developed its MSU Program in 1993 as a means of enhancing

tax compliance while reducing taxpayer

burden. In essence, the Program envisions that the Service and taxpayers in

particular market segments would work

together to improve tax compliance in

those areas through educational efforts

and other collaborative approaches

rather than through traditional audit

techniques.

Since 1992, the Service has entered

into tip agreements with taxpayers in the

gaming industry in Nevada. In general,

these tip agreements establish a ‘‘tip

rate’’ for dealers, based on information

provided by the employer, and set forth

an understanding that both the employer

and employees who report tips at the

established rate will generally not be

subject to challenge by the District

Director. The decision to enter into a tip

agreement is entirely optional on the

part of the employer and each employee; however, the Service will generally not agree to a tip agreement with a

particular taxpayer unless at least 75

percent of its affected employees elect

to participate.

A number of other taxpayers in the

gaming industry have expressed interest

in entering into a tip agreement with the

Service. To ensure consistency in these

agreements and provide an opportunity

for public comment prior to expanding

this aspect of the MSU Program, the

Service has developed a draft form of

tip agreement that could be used as a

model for the gaming industry. This

draft model Agreement is entitled ‘‘Tip

Rate Determination Agreement (Gaming

Industry)’’ and is attached to this announcement.

COMMENTS

Written comments must be received

by December 14, 1996. Send submissions to Office of Specialty Taxes, c/o

CC:DOM:CORP:R (Announcement 96–

106), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Alternatively,

taxpayers may submit comments electronically via the Internet by selecting

the ‘‘Tax Regs’’ option on the IRS

Home Page, or by submitting comments

directly to the IRS Internet site at

http://www.irs.ustreas.gov/prod/tax_regs/

comments.html. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to

Office of Specialty Taxes, c/o CC:DOM:CORP:R (Announcement 96–

106), Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW,

Washington, DC.

DRAFTING INFORMATION

The principal author of this announcement is Karin Loverud of the Office of

the Associate Chief Counsel (Employee

Benefits and Exempt Organizations). For

further information regarding this announcement, contact Kathy Mort, MSU

program administrator, Office of Specialty Taxes, on (202) 376–0687 (not a

toll-free call).

Draft release date: 10/15/96

TIP RATE DETERMINATION

AGREEMENT

(Gaming Industry)

between

Department of the Treasury-Internal

Revenue Service

and

[Name of Employer]

(Taxpayer-Employer’s name, address, and identifying

number) (‘‘Employer’’) and the District

Director of Internal Revenue (‘‘District

Director’’) hereby agree to the following

Tip Rate Determination Agreement

(‘‘Agreement’’ or ‘‘Gaming TRDA’’).

All employees who receive tips are

required (1) to keep contemporaneous

and accurate records of the tips received, (2) to report the tips received to

their employer at least monthly, and (3)

to report those tips on their federal

income tax returns.

This document has been developed

pursuant to the Market Segment Understanding (MSU) Program. The purpose

of this document is to implement a

program (1) to ensure maximum compliance by the employees of the Employer

with those provisions of the Internal

Revenue Code of 1986, as amended,

relating to tip income; and (2) to avoid

disputes under section 3121(q) of the

Code. This program will minimize the

burden on the Employer resulting from

tip compliance programs of the District

Director and reduce the enforcement

costs of the District Director.

The parties therefore agree as follows:

I. DEFINITIONS

A. District Director means the District Director of Internal Revenue for

[insert name of

District] or designee.

B. Gaming establishment means a casino or other building, vessel, or room

used for gambling. It includes land and

water based establishments, bingo parlors, card rooms, slot machine and keno

facilities, and any similar place where

wagering is conducted.

C. Employee means an individual

who:

1. is described in an Occupational

Category defined in section I.E.,

2. has completed more than 30 consecutive days of service with the Employer, and

3. receives tips (directly or indirectly)

of at least $20 a month during the

course of the Employee’s employment.

D. Employer means

[insert name].

E. Occupational Category means a

category listed in Attachment A.

F. Participating Employee means an

Employee who—

1. gives to the Employer a signed

Tipped Employee Participation Agreement (‘‘TEPA’’) (Attachment B), indicating participation in the tip reporting

program, and

2. in accordance with this Agreement,

reports tips to the Employer, as required

by law, at or above the tip rate established for the Employee’s Occupational

Category.

At the option of the Employer, a Participating Employee may also include a

tipped employee with 30 or fewer days

of service who has given the Employer

a signed TEPA.

G. Tip Rate means the applicable rate

described in Section III.

II. COMMITMENT OF EMPLOYER

A. Records maintenance requirements. While this Agreement is in effect, and in addition to records otherwise required to be maintained, the

Employer agrees to maintain the following records:

1. Employee records. For each Employee, the Employee’s name, address,

and social security number; the Employee’s Occupational Category or Categories (as defined in section I.E.); the

Employee’s wage rate or rates; the Employee’s reported tips and charged tips

(if any); and the Employee’s sales (if

appropriate), shift(s), and hours.

2. Gaming establishment records. If

the Employer is not otherwise required,

by state statute or regulation, to maintain records of tips received by gaming

establishment Employees,

a. For each instance of toke and

chip-cashing, the dollar amount of tokes

and chips presented to the cage for

cashing by the toke committee (or other

representatives of gaming establishment

Employees), and

b. For each instance of toke and

chip-cashing, a list of the tip splits

furnished to the Employer by its Employees or the toke committee (or other

representatives of gaming establishment

Employees).

3. Food and beverage operations

records. If the Occupational Categories

defined in section I.E. include food or

beverage servers,

a. Gross receipts subject to food or

beverage tipping, and

b. Charge receipts showing charged

tips.

4. Tip rates records. For each Occupational Category, all records of data

used to determine the tip rates.

The Employer must retain the records

listed in this section II.A. for at least 4

years after the April 15 following the

calendar year to which the records relate.

B. Requirements for furnishing information. The Employer will furnish to

the District Director the following documents:

1. Quarterly report of employees. A

quarterly report showing, as of the last

day of each quarter, (1) the total number

of Employees, and (2) the total number

of Participating Employees. The report

is due on the last day of the month

following each calendar quarter.

2. Annual report of nonparticipating

Employees.

a. General rule. For each Employee

who is a nonparticipating Employee on

the last day of the calendar year, an

annual report showing the Employee’s

name, address, and social security number; the Employee’s Occupational Category or Categories (as defined in section I.E.); the Employee’s wage rate; the

Employee’s reported tips and charged

tips (if any); and the Employee’s sales

(if appropriate), shift(s), and hours. The

report may list all Employees, indicating

those Employees who are nonparticipating Employees, as long as the required

information is included for all nonparticipating Employees. The report is due

on the last day of February following

each calendar year.

b. Exception. No report is required

for a calendar year if the Employees

reported tips for the calendar year at a

rate equal to or greater than the rates

established under section III. of this

Agreement.

3. Form 8027. If the Occupational

Categories defined in section I.E. include Employees of one or more food or

beverage establishments, a copy of the

Forms 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, filed for those establishments

with the service center. The copies are

due on the last day of February following each calendar year.

C. Requirements for making records

available at the request of the District

Director. At the request of the District

Director, the Employer will furnish any

of the records identified in section II.A.

D. Requirements for filing returns

and paying and depositing taxes. The

Employer will comply with the requirements for filing all required federal tax

returns and paying and depositing all

federal taxes.

III. TIP RATES

A. Methods of measuring tips. Depending on the Occupational Category

and the Employer’s business practices,

tips can be measured in different ways.

This Agreement contemplates the following types of measurements:

1. Actual tips. Actual tips generally

apply to Employees in Occupational

Categories where pooling of tips is

common. Generally, they pool the tips

collected during a shift and split the

total among the Employees of the Occupational Category who worked the shift.

2. Tip rates. Tip rates generally apply

to Employees in Occupational Categories where pooling of tips is not common. The rate may be a percentage of

sales, a dollar amount per hour or shift,

a dollar amount per drink served, a

dollar amount per dealing hour, or other

accurate basis of measurement.

B. Methods for determining tip rates.

The Employer will determine tip rates

for the Occupational Categories based

on information available to the Employer, historical information provided

by the District Director, and generally

accepted accounting principles. The

rates will specify whether the tips are

received as a percentage of sales, a

dollar amount per hour or shift, a dollar

amount per drink served, a dollar

amount per dealing hour, or on another

basis.

C. Initial tip rates. The initial tip rate

approved for each Occupational Category is shown on Attachment A. Where

Employees pool and split tips, the ‘‘Actual tips’’ method will be indicated on

Attachment A.

D. Determination of subsequent tip

rates and Occupational Categories.

1. Annual review. The Employer will

review annually, on a calendar year

basis, the tip rates assigned to its Occupational Categories. In connection with

this review, the Employer may review

its Occupational Categories. The initial

rates for each Occupational Category

shown on Attachment A will apply to

the first full calendar year of this Agreement.

2. Procedures.

a. Employer submission. If the Employer believes that a revision of one or

more rates or Occupational Categories is

appropriate, the Employer will submit

proposed revisions to the District Director by September 30. If the Employer

fails to submit a proposed rate revision

by September 30, the Employer will be

treated as having submitted the rate in

effect for the current year.

b. District Director review. The District Director will review the proposed

rates and notify the Employer in writing

of its approval or disapproval by November 30. If the District Director does

not approve one or more proposed rates,

the existing rate or rates will be continued until no later than the last day of

the following February. If the Employer

and the District Director are unable to

agree upon a rate or rates by the last

day of the following February, this

Agreement will terminate pursuant to

section V.C.

3. Effective date of revised rates and

Occupational Categories. Approved revised rates and Occupational Categories

for a calendar year will become effective on the later of (1) January 1 of the

calendar year, or (2) the first day of the

month following the date the Employer

and the District Director agree upon a

revised rate.

IV. COMMITMENT OF DISTRICT

DIRECTOR

A. Participating Employee. The District Director agrees that it may examine

a Participating Employee’s tip income

for any period for which a TEPA is in

effect only if the Employee reports tips

at a rate that is less than the tip rate for

the Employee’s Occupational Category.

B. Employer.

1. General rule. Except as provided

in section IV.B.2. below, any section

3121(q) notice and demand issued to the

Employer by the District Director with

respect to tips received by Employees in

the Occupational Categories defined in

section I.E. shall be based solely on

amounts reflected on one or more of the

following forms:

a. Form 4137, Social Security and

Medicare Tax on Unreported Tip Income, filed by an Employee with his or

her Form 1040, or

b. Form 885–T, Adjustment of Social

Security Tax on Tip Income Not Reported to Employer, prepared at the

conclusion of an employee tip examination.

2. Special rules.

a. Termination. In the event of a

termination under section V., the general

rule in section IV.B.1. will apply with

respect to tip income actually received

by (or deemed under section 3121(q) of

the Code to have been paid to) Employees during the period from the effective

date of this Agreement until the effective date of termination.

b. Ongoing tip examination or TRDA

validation. If the District Director initiated a tip examination or TRDA validation of the Employer prior to the date

the parties enter into this Agreement, the

District Director may issue a section

3121(q) notice and demand with respect

to any calendar quarters under tip examination or validation.

C. Compliance review. The District

Director may evaluate the Employer and

its Participating Employees for compliance with the provisions of this Agreement.

V. TERMINATION

A. Termination by Employer. The

Employer may terminate this Agreement

at any time.

B. Termination by District Director.

The District Director may terminate this

Agreement if:

1. Lack of Employee participation. At

the end of any two consecutive calendar

quarters, less than 75 percent of the

Employees in the Occupational Categories defined in section I.E. are Participating Employees,

2. Failure of Employer to comply

with section II. The Employer fails to

meet any of the requirements of section

II., or

3. Other. The Internal Revenue Service or another federal agency pursues

an administrative or judicial action relating to the Employer or a person that is a

related party to this Agreement.

C. Termination upon failure of parties

to agree to revision of tip rates. If the

Employer and the District Director fail

to agree to a revision of any of the tip

rates under the procedures set forth in

section III.B.2.b., this Agreement will

terminate.

D. Notice of termination and effective

date. Any termination under section

V.A. or B. must be in writing and will

be effective on the first day of the

calendar quarter following the date of

the notice.

VI. MISCELLANEOUS

A. Effective date of agreement. This

Agreement is effective when executed

by the District Director.

B. Examinations and/or inspections

of books and records. The inspection of

books of account or records pursuant to

a tip examination or compliance review

will not preclude or impede (under

section 7605(b) of the Code, section

530(a)(2) of the Revenue Act of 1978,

or any administrative provisions adopted

by the Service) a later examination of a

return or inspection of books of account

or records with respect to any tax period

involved in the tip examination or compliance review. The Service need not

comply with any applicable procedural

restrictions (for example, providing notice under section 7605(b)) before beginning such examination or inspection.

C. Notices. All correspondence pertaining to this Agreement must be sent

to the parties to this Agreement at the

addresses stated below, unless notified

in writing of a change of address. In the

event of a change of address, all correspondence must be sent to the new

address. All notices are deemed to be

sent or submitted on the date of the

postmark stamped on the envelope or, in

the case of a notice sent by certified

mail, the sender’s receipt.

D. Authority. The Employer represents that it has the authority to enter

into this Agreement.

E. Statutory changes. The Commissioner may terminate this Agreement at

any time following a significant statutory change in the FICA taxation of tips.

F. Sunset provision. The Commissioner of Internal Revenue may terminate prospectively the Tip Rate Education Program or this TRDA after, 200.

VII. PAPERWORK

ACT

REDUCTION

The collections of information contained in this document will be submitted to the Office of Management and

Budget for review in accordance with

the Paperwork Reduction Act (44 U.S.C.

3507(c)).

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

respond to, a collection of information

unless the collection of information displays a valid control number. The collections of information in this document

are in sections II.A, II.B., II.C., III.D.,

V.A., and V.D. This information is required to comply with sections 6053(a)

and 6001 of the Internal Revenue Code

and to assist the Internal Revenue Service in its compliance efforts. This information will be used to monitor the

Employer’s performance under the

Agreement. The collections of information are required to obtain the benefits

available under the Agreement. The

likely respondents are business or other

for-profit institutions.

The estimated total annual reporting

and/or recordkeeping burden is 4,342

hours.

The estimated annual burden per

respondent/recordkeeper varies from 12

hours to 99 hours, depending on individual circumstances, with an estimated

average of 43 hours. The estimated

number of respondents and/or recordkeepers is 100.

The estimated annual frequency of

responses (used for reporting requirements only) is on occasion.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal revenue law. Generally, tax returns

and tax return information are confidential, as required by section 6103 of the

Code.

VIII. SIGNATURES

By signing this Agreement, the parties certify that they have read and agreed to the terms of this document, including

Attachments A and B.

EMPLOYER:

INTERNAL REVENUE SERVICE

District

(Name of Employer)

(Signature)

BY:

(Director’s Name)

TITLE:

TITLE: District Director

ADDRESS:

(Headquarters street address)

(Street address)

(City, state, ZIP code)

DATE:

TRDA (Gaming Industry)

Attachment A

[sample format]

Occupational Categories

Initial Tip Rates

Dealers

Food servers

Cocktail servers

Bartenders

Room service food servers

Bell persons

Valets

actual tips

_% of sales

TRDA (Gaming Industry)

Attachment B

TIPPED EMPLOYEE PARTICIPATION AGREEMENT

and wish to participate in my employer’s tip

I am an employee of

reporting program.

In accordance with a Tip Rate Determination Agreement (Gaming Industry) between my employer and the District Director

of Internal Revenue, I agree to report my tips to my employer, as required by law, at or above the tip rate established by my

employer and approved by the District Director for my Occupational Category.

EMPLOYEE

Name (printed):

Signature:

Home address:

Social Security Number:

DATE:

Attachments:

Copy of TRDA (Gaming Industry) and Attachment A (Occupational Categories and Tip Rates)

Foundations Status of Certain

Organizations

Announcement 96–107

The following organizations have

failed to establish or have been unable

to maintain their status as public charities or as operating foundations. Accord-

ingly, grantors and contributors may not,

after this date, rely on previous rulings

or designations in the Cumulative List

of Organizations (Publication 78), or on

the presumption arising from the filing

of notices under section 508(b) of the

Code. This listing does not indicate that

the organizations have lost their status

as organizations described in section

501(c)(3), eligible to receive deductible

contributions.

Former Public Charities. The following organizations (which have been

treated as organizations that are not

private foundations described in section

509(a) of the Code) are now classified

as private foundations:

Abundant Grace Ministries Inc.,

Plainview, AR

African American Association for the

Family Inc., Birmingham, AL

African American Interdenominal

Ministerial Fellowship Inc., Athens,

Ahava Services Foundation Inc., Atlanta,

AIDS Coalition of Charlotte for

Education Service and Support Inc.,

Charlotte, NC

Alabama Family Center Inc.,

Montgomery, AL

Alabama Gymnastics Development

Program, Birmingham, AL

Alabama Spinal Cord Injury

Association, Atalla, AL

Alabama Vector Management Society

Inc., Auburn University, AL

Albany State College Sportsmans Club

Inc., Albany, GA

All Creatures Great and Small of

Henderson County Inc.,

Hendersonville, NC

Ambassador Community Choir &

Orchestra Association, Winston

Salem, NC

American Indian Heritage Council Inc.,

Charlotte, NC

Andrews Ministerial Association of

Andrews North Carolina, Andrews,

Anniston Christian Counseling Services

Inc., Anniston, AL

Arkansas Theatre Association, Beebe,

Associated Universities for Toxicology

Research & Education, Little Rock,

Association for Couples in Marriage

Enrichment NC Council, Greensboro,

Association of Environmentally

Responsible Businesses, Asheville,

Association on Displaced Youth Inc.,

Decatur, GA

Astronomical Society of the Atlantic

Inc., Atlanta, GA

Athens Clark Safe Cycling Association

Incorporated, Athens, GA

Atlanta Council for International

Cooperation Inc., Atlanta, GA

Atlanta Rehabilitation Institute

Foundation Inc., Atlanta, GA

Augusta Chaplaincy Inc., Augusta, GA

Augusta Metro AAU Basketball League

Inc., Augusta, GA

Augusta Right to Life Inc., Augusta, GA

Battle of Murfreesboro Reenactment

Association Inc., Smyrna, TN

Beta Epsilon Boule Foundation Inc.,

Greensboro, NC

Bird Island Trust Inc., Boynton Beach,

Birmingham Metro Jazz Institute,

Birmingham, AL

Black Men for the Development of

Black Males Inc., Jacksonville, AL

Blueprints of a Dream Inc., Conover,

Boonoonoonoos, Stone Mountain, GA

Cabarrus County Bicentennial

Commission Inc., Concord, NC

Calhoun Education Foundation Inc.,

Calhoun, GA

Calhoun-Gordon County Georgia

Scholarship Fund Inc., Calhoun, GA

Camden Area Players Inc., St. Marys,

Canterbury Health Care Inc., Waterford,

Canterbury School Foundation Inc.,

Atlanta, GA

Cape Fear Charitable Foundation,

Fayetteville, NC

Carolina Eagles Track and Field Club

Inc., Raleigh, NC

Carters Kids Foundation, Memphis, TN

Catholic Media Productions, Nashville,

Center for Community in the

Workplace, Raleigh, NC

Charlotte Foreign Policy Forum,

Charlotte, NC

Chattanooga Inner City Outreach Inc.,

Chattanooga, TN

Child at Rest Inc., Atlanta, GA

Child Care Alliance Inc., Nashville, TN

Child Educare Center Inc., Tuscaloosa,

Childrens Christmas Shopping Spree

Inc. of Jackson Tennessee, Jackson,

Childrens International Foundation,

Chattanooga, TN

Childrens Living Farm Inc., Cary, NC

Childrens Video Ministries LTD,

Charlotte, NC

Christians in Action, Corning, AR

Citizens Coalition for a Better

Tomorrow, Winston-Salem, NC

Citizens for a Clean Industry Inc., Tar

Heel, NC

City Federation of Colored Womens

Club Inc., Americus, GA

Class of 1967 Scholarship Fund, Jasper,

Clinton Band Boosters, Clinton, TN

Coalition for the Survival of the African

American Male in Tennessee, Inc.,

Brentwood, TN

Cocker Spaniel Rescue of Georgia Inc.,

Atlanta, GA

Columbia County Community Health

Coalition Inc., Appling, GA

Community Action on Drug Abuse Inc.,

Jonesboro, AR

Community Re-Development

Foundation Inc., Atlanta, GA

Concerned Citizens of Hartwell Inc.,

Hartwell, GA

Conquering Warriors Ministries,

Birmingham, AL

Conservative Society of North Carolina,

Wilmington, NC

Consumer Credit Counseling Service of

Wayne County Inc., Goldsboro, NC

Contra Costa Resources Development,

Martinez, CA

Cooperative Baptist Fellowship Inc.,

Decatur, GA

Dalton Preschool Inc., Dalton, GA

Davidson County Community

Socio-Economical Center of Hope,

Clemmons, NC

Dekalb Coalition for Public Education

Inc., Decatur, GA

Dekalb County Childrens Organization

Inc., Decatur, GA

Dickson County Soccer Association Inc.,

Dickson, TN

Down Syndrome Adult Residences Inc.,

Hoover, AL

Drug Prevention and Alternative Center

Inc., Cartersville, GA

Dystonia Medical Research

Foundation—Georgia Chapter Inc.,

Atlanta, GA

East Texas Rails to Trails, Tyler, TX

Educational Resource Inc., Montgomery,

Effingham County Victim Witness

Assistance Program Inc., Springfield,

Epiphany Ministry Inc., Montgomery,

Family Initiative, Inc., Norwalk, OH

Fayetteville Cumberland County

Advocacy Council for Persons With

Disabilities, Fort Bragg, NC

FIB Economic Development

Corporation Inc., Atlanta, GA

Firehouse Society, Greensboro, NC

First Friday of Charlotte Community

Foundation, Charlotte, NC

First Priority of Alabama Inc.,

Birmingham, AL

Food for the Lambs Inc., Columbus, GA

Frenchtown Community Association,

Houston, TX

Friends Incorporated of Howard County,

Nashville, AR

Friends of Hatteras Island Natural

Historic Maritime Forest Land Trust

for Preservation Inc., Buxton, NC

Friends of Hayes Taylor Inc.,

Greensboro, NC

Friends of Reliance Inc., Reliance, TN

Friends of the Cayce—West Columbia

Branch Library, West Columbia, SC

Friends of the Playground Inc., Raleigh,

Friends of the Wake County Guardian

Ad Litem Program, Raleigh, NC

Foundation for St. Michaels School,

Haleiwa, HI

Fuquay Varina Community Development

Corporation, Fuquay Varina, NC

George C. Nicholson Aepha CSRA

Chapter 407 Educational Fund Inc.,

Augusta, GA

Georgia Planning Group for Health

Promotion, Atlanta, GA

Georgia Striders Inc., Atlanta, GA

Gibsonville Friends of the Library Inc.,

Gibsonville, NC

Good Faith Child Nutrition Inc., Wynne,

Good News Day Care and Development

Center Inc., Lenoir, NC

Good Samaritan Center of Wayne

County Inc., Jesup, GA

Grand Guardian Council of Indiana

IOJD Educational Foundation Inc.,

Indianapolis, IN

Greater Little Rock Community

Development Corporation Inc., Little

Rock, AR

Greater Work Ministries Inc., New Bern,

Greenhill Human Development

Corporation, Clarksville, TN

Guilford Business and Health Alliance

Inc., Greensboro, NC

H. Lee Atwater Foundation Inc.,

Charlotte, NC

Harpeth Youth Soccer Association,

Nashville, TN

Harriett Tubman Resident Corporation,

Chattanooga, TN

Harry Bryce African American Dance

Theatre Inc., Atlanta, GA

Hart County Hospital Foundation Inc.,

Hartwell, GA

Hatteras Island Adult Care Inc., Dare,

Haven of Hope Inc., Alpharetta, GA

Helping Hands Incorporated,

Birmingham, AL

Henry County Prevention Alliance Inc.,

McDonough, GA

Heritage Dance Foundation Inc.,

Goldsboro, NC

Heritage Village of South Sebastian Inc.,

Fort Smith, AR

His Love, Dothan, AL

Hoke Kids Inc., Raeford, NC

Homeless Childrens Association Inc.,

Memphis, TN

Horton Gardens Residents Association,

Memphis, TN

Hospice of Americus and Sumter

County Georgia Inc., Americus, GA

House of Benefits Ministry, Russellville,

Houston County Jr. Pro Football

Association, Erin, TN

Ideals Foundation Inc., Stone Mountain,

Independence County Sheriffs Posse,

Batesville, AR

Institute for Creativity and Human

Genius, Monroe, NC

Institute for Languages and Culture,

Crestline, CA

Institute for the Harmonious

Development of Man, Silver Springs,

Institute of African American Studies

and Programs Inc., Little Rock, AR

International Athletic Center of Atlanta

Inc., Atlanta, GA

International Congress on Revival,

Chattanooga, TN

International Network for Higher

Learning Inc., Franklin, TN

Jabril World Institute for Community

and Human Enhancement Inc.,

Memphis, TN

Jaym Session Outreach Inc., Carolina

Beach, NC

Jeffersontown Youth Football League

Inc., Louisville, KY

Junior Hill Ministries Inc., Hartselle, AL

Keyboard Artists Foundation Inc.,

Memphis, TN

Kids are the Future Foundation Inc.,

Atlanta, GA

King-Chang Memorial Foundation Inc.,

Rockville, MD

Klowns for the Kingdom Inc., Atlanta,

Knoxville Rowing Association Inc.,

Knoxville, TN

Kokohead Keikis Playgroup, Honolulu,

Kokopelli Inc., Atlanta, GA

Ladies Soldiers Friend Society Inc.,

Nashville, TN

Larry Birgans Ministries Inc., Decatur,

Larry Hatchett Fishing Fund, Ellendale,

Last Generation Ministries, Berlin, PA

Law Enforcement Alliance of America

Foundation Inc., Falls Church, VA

Law Enforcement Family Training Inc.,

Montgomery, AL

Lebanon County Crime Stoppers Inc.,

Lebanon, PA

Lebanon Valley Catholic Home Inc.,

Lebanon, PA

Legal Resource Center for Nonprofit

Housing Sponsors Inc., Washington,

Liberia Committee for Relief

Resettlement & Reconstruction,

Washington, DC

Little Rock Air Force Base Historical

Foundation Inc., Jacksonville, AR

Living Hope Ministries Inc., Duluth, GA

Living Room Inc., Atlanta, GA

Loon Lake Village Development

Committee, Loon Lake, WA

Love Your Mother Inc., Chapel Hill, NC

Lovell Oklahoma Historical Foundation,

Magnolia, AR

Mandarin Athletic Association Inc.,

Jacksonville, FL

Mary Margaret Simmons Memorial

Scholarship Fund, Shelbyville, TN

MC-WAF My Child With a Future,

Talladega, AL

Medi Properties Inc., Germantown, TN

Memphis Biosphere 96, Memphis, TN

Messiah Ministries, Daphne, AL

Mid Hoosier Athletic Conference,

Edinburgh, IN

Mishoe Ministries Inc., Greensboro, NC

Mobile Scottish Rite Temple

Preservation Foundation Inc., Mobile,

Montgomery Guardianship Corporation

for Retarded Persons, Montgomery,

National Association for Education and

Motivation of Young People, Little

Rock, AR

National Association of Midnight

Basketball Leagues Inc., Landover,

National Association of Pupil Services

Administrators, Alexandria, VA

National Black College Alumni Hall of

Fame Foundation Inc., Atlanta, GA

National Coaltn. of Engnrng. Scts. for

Precllge. Math and Science Eduction,

Washington, DC

National Womens Theatre Festival,

Philadelphia, PA

If an organization listed above submits information that warrants the renewal of its classification as a public

charity or as a private operating foundation, the Internal Revenue Service will

issue a ruling or determination letter

with the revised classification as to

foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided

in section 1.509(a)–7 of the Income Tax

Regulations. It is not the practice of the

Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

Announcement of the Disbarment, Suspension, and Consent to Voluntary

Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and

Enrolled Actuaries From Practice Before the Internal Revenue Service

Under Section 330, Title 31 of the

United States Code, the Secretary of the

Treasury, after due notice and opportunity for hearing, is authorized to suspend or disbar from practice before the

Internal Revenue Service any person

who has violated the rules and regulations governing the recognition of attorneys, certified public accountants, enrolled agents or enrolled actuaries to

practice before the Internal Revenue

Service.

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

enue Service matter from directly or

indirectly employing, accepting assistance from, being employed by or sharing fees with, any practitioner disbarred

or under suspension from practice before the Internal Revenue Service.

To enable attorneys, certified public

accountants, enrolled agents and enrolled actuaries to identify such disbarred or suspended practitioners, the

Director of Practice will announce in the

Internal Revenue Bulletin the names and

addresses of practitioners who have

been suspended from such practice, their

designation as attorney, certified public

accountant, enrolled agent or enrolled

actuary, and the date of disbarment or

period of suspension. This announcement will appear in the weekly Bulletin

for five successive weeks or as long as

it is practicable for each attorney, certified public accountant, enrolled agent or

enrolled actuary so suspended or disbarred and will be consolidated and

published in the Cumulative Bulletin.

After due notice and opportunity for

hearing before an administrative law

judge, the following individuals have

been disbarred from further practice before the Internal Revenue Service:

Name

Address

Designation

Effective Date

Styvaert, Richard

Davis Jr., George L.

San Diego, CA

Washington, D.C.

CPA

Enrolled Agent

July 5, 1996

August 15, 1996

Under 31 Code of Federal Regulations, Part 10, an enrolled agent in order

to avoid the institution or conclusion of

a proceeding for his disbarment or suspension from practice before the Internal

Revenue Service, may offer his resignation from such practice. The Director of

Practice, in his discretion, may suspend

an enrolled agent in accordance with the

consent offered.

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

indirectly employing, accepting assistance from, being employed by or sharing fees with, any enrolled agent who

has resigned from practice before the

Internal Revenue Service.

To enable attorneys, certified public

accountants, enrolled agents and enrolled actuaries to identify former enrolled agents who have resigned from

practice before the Internal Revenue

Service, the Director of Practice will

announce in the Internal Revenue Bulletin the names and addresses of former

enrolled agents who have resigned from

such practice, and date of resignation.

This announcement will appear in the

weekly Bulletin at the earliest practicable date after such action and will

continue to appear in the weekly Bulletins for five successive weeks or for as

many weeks as is practicable for each

enrolled agent who has resigned, and

will be consolidated and published in

the Cumulative Bulletin.

The following individual has offered

his resignation as an enrolled agent:

Name

Address

Date of Resignation

Marchioli, Anthony

Dallas, TX

July 12, 1996

Under 31 Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent or enrolled

actuary, in order to avoid the institution

or conclusion of a proceeding for his

disbarment or suspension from practice

before the Internal Revenue Service,

may offer his consent to suspension

from such practice. The Director of

Practice, in his discretion, may suspend

an attorney, certified public accountant,

enrolled agent or enrolled actuary in

accordance with the consent offered.

Attorneys, certified public accountants, enrolled agents and enrolled act

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