Bulletin No. 1999–23
Agency decision
Ask Donna
What actually matters in this document.
Text
Internal Revenue
bulletin
Bulletin No. 1999–23
June 7, 1999
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 99–25, page 3.
Federal rates; adjusted federal rates; adjusted federal
long-term rate, and the long-term exempt rate. For
purposes of sections 1274, 1288, 382, and other sections
of the Code, tables set forth the rates for June 1999.
ADMINISTRATIVE
REG–113910–98, page 17.
Proposed regulations under section 263A of the Code relate
to accounting for costs incurred in producing property and
acquiring property for resale. A public hearing is scheduled
for September 1, 1999.
Notice 99–31, page 6.
The deadline for special reformations under section 664 of
the Code will be extended from June 8, 1999, to June 30,
2000.
Rev. Proc. 99–27, page 7.
Insurance companies; modified endowment contracts;
uniform closing agreement. This revenue procedure provides procedures by which an issuer may remedy an inadvertent non-egregious failure to comply with the modified endowment contract rules under section 7702A of the Code.
REG–105312–98, page 14.
Proposed regulations under section 6045 of the Code relate
to reporting payments of gross proceeds to attorneys. A
public hearing is scheduled for September 22, 1999.
Finding Lists begin on page 25.
Department of the Treasury
Internal Revenue Service
Notice 99–32, page 6.
Hope Scholarship credit; Lifetime Learning credit;
election. Final regulations under section 25A of the Code
will permit taxpayers to elect to claim the Hope Scholarship
Credit and the Lifetime Learning Credit by attaching Form
8863 to a timely filed original Federal income tax return or
to an original or amended return filed after the due date of
the return.
Mission of the Service
and by applying the tax law with integrity and fairness to
all.
Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities
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 are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
dures 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.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semiannual period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, on this page.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of June 1999. See
Rev. Rul. 99–25, on this page.
Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of June 1999. See
Rev. Rul. 99–25, on this page.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, on this page.
Section 642.—Special Rules for
Credits and Deductions
The adjusted applicable federal long-term rate is
set forth for the month of June 1999. See Rev. Rul.
99–25, on this page.
Federal short-term, mid-term, and long-term
rates are set forth for the month of June 1999. See
Rev. Rul. 99–25, on this page.
Section 412.—Minimum
Funding Standards
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, on this page.
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, on this page.
Section 467.—Certain
Payments for the Use of
Property or Services
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, on this page.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, on this page.
1999–23 I.R.B.
Rev. Rul. 99–25
Federal rates; adjusted federal rates;
adjusted federal long-term rate, and
the long-term exempt rate. For purposes
of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the
rates for June 1999.
This revenue ruling provides various
prescribed rates for federal income tax
purposes for June 1999 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable federal rates (AFR) for the current month for
purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the appropriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for determining the present value of an annuity, an
interest for life or for a term of years, or a
remainder or a reversionary interest for
purposes of section 7520.
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, on this page.
Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
3
June 7, 1999
REV. RUL. 99–25 TABLE 1
Applicable Federal Rates (AFR) for June 1999
Period for Compounding
Annual
Semiannual
Quarterly
Monthly
Short-Term
AFR
110% AFR
120% AFR
130% AFR
4.98%
5.48%
5.99%
6.50%
4.92%
5.41%
5.90%
6.40%
4.89%
5.37%
5.86%
6.35%
4.87%
5.35%
5.83%
6.32%
Mid-Term
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
5.37%
5.91%
6.46%
7.01%
8.11%
9.50%
5.30%
5.83%
6.36%
6.89%
7.95%
9.28%
5.27%
5.79%
6.31%
6.83%
7.87%
9.17%
5.24%
5.76%
6.28%
6.79%
7.82%
9.11%
Long-Term
AFR
110% AFR
120% AFR
130% AFR
5.79%
6.38%
6.97%
7.56%
5.71%
6.28%
6.85%
7.42%
5.67%
6.23%
6.79%
7.35%
5.64%
6.20%
6.75%
7.31%
REV. RUL. 99–25 TABLE 2
Adjusted AFR for June 1999
Period for Compounding
Annual
Semiannual
Quarterly
Monthly
Short-term
adjusted AFR
3.32%
3.29%
3.28%
3.27%
Mid-term
adjusted AFR
3.91%
3.87%
3.85%
3.84%
Long-term
adjusted AFR
4.85%
4.79%
4.76%
4.74%
REV. RUL. 99–25 TABLE 3
Rates Under Section 382 for June 1999
Adjusted federal long-term rate for the current month
4.85%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)
4.85%
June 7, 1999
4
1999–23 I.R.B.
REV. RUL. 99–25 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for June 1999
Appropriate percentage for the 70% present value low-income housing credit
8.30%
Appropriate percentage for the 30% present value low-income housing credit
3.56%
REV. RUL. 99–25 TABLE 5
Rate Under Section 7520 for June 1999
Applicable federal rate for determining the present value of an annuity, an interest for life or a term
of years, or a remainder or reversionary interest
Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, page 3.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, page 3.
1999–23 I.R.B.
6.4%
Section 7702A.—Modified
Endowment Contract Defined
Procedures are provided by which an issuer may
remedy an inadvertent non-egregious failure to comply with the modified endowment contract rules
under § 7702A. See Rev. Proc. 99–27, page 7.
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of June 1999. See Rev. Rul. 99–25, page 3.
5
June 7, 1999
Part III. Administrative, Procedural, and Miscellaneous
Guidance Regarding Section
664 Regulations
Notice 99–31
This notice informs taxpayers that the
deadline for special reformations of charitable remainder unitrusts (CRUTs) provided in § 1.664–3(a)(1)(i)(f )(3) of the Income Tax Regulations will be extended
from June 8, 1999, until June 30, 2000.
This notice also explains that the term
“legal proceedings” in § 1.664–3(a)(1)(i)(f )(3) includes certain non-judicial reformations provided they are completed
by June 30, 2000.
BACKGROUND
Section 1.664–3(a)(1)(i)(c) contains
the rules for CRUTs that use a combination of methods to compute the unitrust
amount. If certain requirements are satisfied, the governing instrument of a CRUT
may provide that the unitrust amount is
computed using one of the income exception methods during an initial period and
thereafter using the fixed percentage
method (flip provision). The same fixed
percentage must be used throughout the
term of the CRUT.
Under § 1.664–3(a)(1)(i)(f )(1), the flip
provision is available for CRUTs created
on or after December 10, 1998. However,
§ 1.664–3(a)(1)(i)(f )(3) permits reformations of a CRUT whose governing instrument either contains an impermissible flip
provision or uses only one of the income
exception methods. Such a CRUT may
be reformed to include a permitted flip
provision if the trustee begins legal proceedings to reform by June 8, 1999.
DISCUSSION
Since the issuance of § 1.664–3(a)(1)(i)(f )(3), a number of practitioners have
requested additional time to begin legal
proceedings to reform a CRUT. The
Treasury Department and the Service also
understand that there may be state law impediments to meeting the June 8, 1999,
deadline. In response, the Treasury Department and the Service intend to amend
§ 1.664–3(a)(1)(i)(f )(3) to extend the
June 8, 1999, deadline to June 30, 2000.
June 7, 1999
Many practitioners have also inquired
whether the term “legal proceedings” in
§ 1.664–3(a)(1)(i)(f )(3) requires a judicial
reformation if non-judicial reformations
are permitted under state law. The Treasury Department and the Service will
clarify that the term “legal proceedings”
includes a non-judicial reformation that is
valid under state law, but that a non-judicial reformation must be completed by
June 30, 2000.
Taxpayers seeking a non-judicial reformation should ascertain what their state
law requires for such a reformation to be
valid. For example, in some states, a nonjudicial reformation requires the consent
of all beneficiaries, including potential
beneficiaries. In addition, in some states,
the state’s Attorney General has jurisdiction over charitable remainder trusts and
must be notified of or consent to a reformation on behalf of the named or unnamed charitable beneficiaries. In some
cases, the state’s Attorney General may
more closely oversee charitable remainder trusts in which the specific charitable
organization is not named in the governing instrument or is subject to change by
the grantor or another person.
EFFECTIVE DATE
The amendments to § 1.664–3(a)(1)(i)(f )(3) described in this notice will be
effective December 10, 1998.
DRAFTING INFORMATION
The principal author of this notice is
Mary Beth Collins of the Office of Assistant Chief Counsel (Passthroughs and
Special Industries). For further information regarding this notice, contact Ms.
Collins on (202) 622-3080 (not a toll-free
call).
Election to Claim Education
Tax Credit
Notice 99–32
PURPOSE
This notice announces that the final
regulations under § 25A of the Internal
6
Revenue Code will permit taxpayers to
elect to claim the Hope Scholarship
Credit and the Lifetime Learning Credit
by attaching Form 8863, Education Credits (Hope and Lifetime Learning Credits),
to a Federal income tax return (or
amended return) for the taxable year in
which the credit is claimed.
BACKGROUND
Section 25A provides two education
tax credits, the Hope Scholarship Credit
and the Lifetime Learning Credit. In general, § 25A provides that, if certain requirements are met, a taxpayer may claim
an education tax credit based on the qualified tuition and related expenses of the
taxpayer, the taxpayer’s spouse, and any
dependent of the taxpayer for whom the
taxpayer properly claims a dependency
deduction under § 151. The education tax
credits are available for taxable years beginning after 1997. Section 25A(e)(1)
provides that a taxpayer must elect to
claim an education tax credit.
DISCUSSION
On January 6, 1999, the Treasury Department and the Internal Revenue Service issued proposed regulations under
§ 25A. See 64 Fed. Reg. 794 (1999).
Section 1.25A–1(d) of the proposed regulations provides that no education tax
credit is allowed unless a taxpayer elects
to claim the credit on the taxpayer’s
timely filed (including extensions) Federal income tax return for the taxable year
in which the credit is claimed. The proposed regulations provide that the election is made by attaching Form 8863 to
that Federal income tax return.
The Treasury Department and the Service have determined that taxpayers
should be able to make the election under
§ 25A on an original or amended return.
Thus, the regulations when finalized will
provide that a taxpayer claims an education tax credit by attaching Form 8863 to
a Federal income tax return for the taxable year in which the credit is claimed.
The election procedure provided in the
final regulations will apply to taxable
years beginning after 1997. Therefore,
1999–23 I.R.B.
for taxable year 1998 and later years, a
taxpayer may elect to claim an education
tax credit by attaching Form 8863 to a
timely filed original Federal income tax
return, or an original Federal income tax
return or an amended return filed after the
due date of the return and before the expiration of the period of limitation for filing
a claim for credit or refund for the taxable
year in which the credit is claimed.
DRAFTING INFORMATION
The principal author of this notice is
Donna Welch of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice contact her on (202)
622-4910 (not a toll-free call).
26 CFR § 301.7121-1: Closing agreements.
(Also Part I, section 7702A)
Rev. Proc. 99–27
SECTION 1. PURPOSE
This revenue procedure provides the
procedures by which an issuer may remedy an inadvertent non-egregious failure
to comply with the modified endowment
contract rules under § 7702A of the Internal Revenue Code.
SECTION 2. BACKGROUND
.01 Definition of a modified endowment
contract (“MEC”).
(1) Section 7702A(a) provides that a
life insurance contract is a MEC if the
contract—
(a) is entered into on or after June
21, 1988, and fails to meet the “7-pay
test” of § 7702A(b), or
(b) is received in exchange for a
contract described in paragraph (a) of this
section 2.01(1).
(2) A contract fails to meet the 7-pay
test if the accumulated amount paid under
the contract at any time during the first 7
contract years exceeds the sum of the net
level premiums which would have to be
paid on or before such time if the contract
were to provide for paid-up “future benefits” (as defined in §§ 7702A(e)(3) and
7702(f)(4)) after the payment of 7 level
annual premiums.
(3) Section 72(e)(11) provides that,
for purposes of determining amounts includible in gross income, all MECs issued
1999–23 I.R.B.
by the same company to the same contract
holder during any calendar year are
treated as one MEC.
.02 Tax treatment of amounts received
under a MEC. Section 72(e)(10) provides
that a MEC is subject to the rules of
§ 72(e)(2)(B), which tax non-annuity distributions on an income-out-first basis,
and the rules of § 72(e)(4)(A) (as modified by §§ 72(e)(10)(A)(ii) and 72(e)(10)(B)), which generally deem loans and
assignments or pledges of any portion of
the value of a MEC to be non-annuity distributions. Moreover, under § 72(v), the
portion of any annuity or non-annuity distribution received under a MEC that is includible in gross income is subject to a
10% additional tax unless the distribution
is made on or after the date on which the
taxpayer attains age 591⁄2, is attributable to
the taxpayer’s becoming disabled (within
the meaning of § 72(m)(7)), or is part of a
series of substantially equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and the
taxpayer’s beneficiary.
.03 Need for a correction mechanism.
The Internal Revenue Service (“Service”)
has become aware of situations in which,
as a result of inadvertent non-egregious
failures to comply with the MEC rules,
life insurance premiums have been collected which exceed the 7-pay limit provided by § 7702A(b). This may produce
significant unforeseen tax consequences
for the contract holders. To allow issuers
to remedy such situations, the Service
under the circumstances described below
will enter into closing agreements which
will provide that contracts identified in
the closing agreements will not be treated
as MECs.
SECTION 3. DEFINITIONS
The following definitions and rules
apply solely for purposes of this revenue
procedure.
.01 Testing period. The 7-year period
described in § 7702A(b) or such additional period as may be required under
§ 7702A(c)(3) if a contract undergoes a
material change.
.02 Amount paid. The amount paid
under a contract in any “contract year” (as
defined in § 7702A(e)(2)) equals the premiums paid for the contract during the
7
year, reduced by amounts to which
§ 72(e) applies (determined without regard to § 72(e)(4)(A)) but not including
amounts includible in gross income. For
this purpose, premiums paid do not include—
(1) any portion of any premium paid
during the contract year that is returned
(with interest) to the contract holder
within 60 days after the end of the contract year in order to comply with the 7pay test, or
(2) the “cash surrender value” (as defined in § 7702(f)(2)(A)) of another life
insurance contract (other than a contract
that fails the 7-pay test) exchanged for the
contract.
.03 7-pay premium. (1) In general. Except as otherwise provided in section
3.03(2) of this revenue procedure, the 7pay premium for a contract is the net level
premium (computed in accordance with
the rules in § 7702A(c)) that would have to
be paid for the contract if the contract were
to provide for paid up future benefits after
the payment of 7 level annual premiums.
(2) 7-pay premium for a contract
that undergoes a material change. If a
contract (other than a contract that fails
the 7- pay test) is materially changed, the
contract is treated as newly issued on the
date of the material change and the 7-pay
premium for the changed contract is an
amount equal to the excess, if any, of—
(a) the net level premium (computed in accordance with the rules in
§ 7702A(c)) that would have to be paid for
the changed contract if the contract were to
provide for paid up future benefits after the
payment of 7 level annual premiums, over
(b) a “proportionate share of the
cash surrender value” (as defined in section 3.04 of this revenue procedure) under
the contract.
(3) Assumed 7-pay premium. The 7pay premium assumed by the issuer when
the contract was issued.
.04 Proportionate share of cash surrender value. The proportionate share of the
cash surrender value of a contract is the
amount obtained by multiplying—
(1) the “cash surrender value” (as defined in § 7702(f)(2)(A)) of the contract,
by
(2) a fraction, the numerator of
which is the net level premium (computed
in accordance with the rules in
§ 7702A(c)) that would have to be paid
June 7, 1999
for the changed or new contract if such
contract were to provide for paid up future benefits after the payment of 7 level
annual premiums, and the denominator of
which is the net single premium (determined using the rules in § 7702) for such
contract at that time.
.05 Overage. A contract’s overage is
the amount of the excess, if any, of—
(1) the sum of amounts paid under
the contract during the testing period for
the contract year and all prior contract
years, over
(2) the sum of the 7-pay premiums
for the contract year and all prior contract
years of the testing period.
.06 Overage earnings. The overage
earnings for a contract year is the amount
obtained by multiplyingó
(1) the sum of a contract’s overage
for the contract year and its cumulative
overage earnings for all prior contract
years, by—
(2) the earnings rate set forth in section 3.07 of this revenue procedure.
.07 Earnings rates. (1) Contracts other
than variable contracts. Except as otherwise provided in sections 3.07(3) and
3.07(8) of this revenue procedure, the
earnings rate applicable to a contract year
is the “general account total return” (as
defined in section 3.07(2) of this revenue
procedure) for the calendar year in which
the contract year begins.
(2) General account total return.
The general account total return is the calendar year arithmetic average of the
monthly interest rates described as
Moody’s Corporate Bond Yield Average Monthly Average Corporates as published
by Moody’s Investors Service Inc., or any
successor thereto.
(3) Variable contracts described in
§ 817(d). (a) Pre-1999 contract years.
The earnings rate applicable to a contract
year that begins before January 1, 1999, is
the rate set forth in the following table for
the calendar year in which the contract
year begins.
Calendar Year
1988
1989
1990
1991
1992
1993
June 7, 1999
Earnings Rate
13.5%
17.4%
1.4%
25.4%
5.9%
13.9%
Calendar Year
Earnings Rate
1994
1995
1996
1997
1998
–1.0%
23.0%
14.3%
17.8%
19.7%
(b) Post-1998 contract years. Except as otherwise provided in section
3.07(8), the earnings rate applicable to a
contract year that begins after December
31, 1998, is equal to the sum of—
(i) 10 percent of the general account total return (as defined in section
3.07(2) of this revenue procedure), and
(ii) 90 percent of the “separate
account total return” (as defined in section 3.07(4) of this revenue procedure),
for the calendar year in which the contract
year begins.
(4) Separate account total return.
Except as otherwise provided in section
3.07(8), the separate account total return
equals—
(a) 75 percent of the “equity fund
total return” (as defined in section 3.07(5)
of this revenue procedure), plus
(b) 25 percent of the “bond fund
total return” (as defined in section 3.07(6)
of this revenue procedure), less
(c) 1.1 percentage point.
(5) Equity fund total return. The equity fund total return equals—
(a) the “calendar year percentage
return” (as defined in section 3.07(7) of
this revenue procedure) represented by
the end-of-year values of the Standard
and Poor’s (S&P) 500 Total Return Index,
with daily dividend reinvestment, as published by The McGraw-Hill Companies,
Inc., or any successor thereto, less
(b) 1.5 percentage point.
(6) Bond Fund Total Return. The
bond fund total return equals—
(a) the “calendar year percentage
return” (as defined in section 3.07(7) of
this revenue procedure) represented by
the end-of-year values of the Merrill
Lynch Corporate Bond Master Bond
Index, Total Return, as published by Merrill Lynch & Company, Inc., or any successor thereto, less
(b) 1.0 percentage point.
(7) Calendar year percentage return.
The calendar year percentage return for
an index described in section 3.07(5) or
section 3.07(6) of this revenue procedure
is calculated by–
8
(a) dividing the end-of-year value
of the index for the calendar year by the
end-of-year value of the index for the immediately preceding calendar year, and
(b) subtracting 1 from the result
obtained under paragraph (a) of this section 3.07(7).
(8) If the general account total return
or the separate account total return for a
calendar year cannot be determined because the calendar year in which the contract year begins has not ended, then the
earnings rate for the contract year (or portion thereof) is determined using the general account total return and, if applicable,
the average separate account total return,
for the 3 calendar years immediately preceding the calendar year in which the contract year begins.
.08 Proportionate share of overage
earnings allocable to taxable distributions. The proportionate share of overage
earnings allocable to taxable distributions
under a contract is the amount obtained
by multiplying—
(1) the total amount of the taxable
distributions under the contract, by
(2) a fraction, the numerator of
which is the contract’s cumulative overage earnings and the denominator of
which is the total income on the contract.
.09 Total income on a contract. The
total income on a contract as of any date
is an amount equal to the excess, if any,
of—
(1) the contract’s cash surrender
value (as defined in § 7702(f)(2)(A)) on
such date, over
(2) the premiums paid under the contract before such date, reduced by
amounts to which § 72(e) applies (determined without regard to § 72(e)(4)(A))
but not including amounts includible in
the contract holder’s gross income.
.10 Distribution frequency factor. The
distribution frequency factor for a contract is—
(1) .8, if—
(a) the interest rate with respect to
any portion of a policy loan that could be
made under the contract at any time (including policy loans that could be made
after a contractually specified date in the
future) is guaranteed not to exceed the
sum of:
(i) 1 percentage point, plus
(ii) the rate at which earnings
are credited to the portion of the con-
1999–23 I.R.B.
tract’s cash surrender value (as defined in
§ 7702(f)(2)(A)) that is allocable to such
portion of the policy loan; or
(b) the contract holder has an option to make a partial withdrawal of the
contract’s cash surrender value that reduces the “death benefit” (as defined in
§ 7702(f)(3)) under the contract by less
than an amount determined by multiplying—
(i) the death benefit under the
contract immediately before the withdrawal, by
(ii) the percentage obtained by
dividing the withdrawn amount by the
contract’s cash surrender value (as defined in § 7702(f)(2)(A)) immediately before the withdrawal; and
(2) .5 for all other contracts.
.11 Applicable percentage. The applicable percentage for a contract is(1) 15%, if the death benefit under
the contract is less than $50,000,
(2) 28% if the death benefit under
the contract is equal to or exceeds
$50,000 but is less than $180,000, and
(3) 36%, if the death benefit under
the contract is equal to or exceeds
$180,000.
.12 Reported amount. The reported
amount for a contract is the amount that—
(1) the issuer reports on a timely
filed information return as includible in
the contract holder’s gross income, or
(2) the contract holder includes in
gross income on a timely filed income tax
return.
.13 Aggregation of contracts. All
MECs issued by the same issuer to the
same contract holder during any calendar
year are treated as one MEC.
SECTION 4. SCOPE
.01 Applicability. Except as provided
in sections 4.02 and 4.03 of this revenue
procedure, the issuer of a contract can use
this revenue procedure to remedy the failure of the contract to comply with the requirements of § 7702A. See section 8 of
this revenue procedure, below, for its date
of expiration.
.02 Inapplicability. This revenue procedure does not apply to a MEC if—
(1) the contract insures the life of
any individual (other than a “key person”
as defined in § 264(e)(3)) who is or was(a) an officer, director, or employee of, or
1999–23 I.R.B.
(b) financially interested in, any
trade or business carried on by the contract holder;
(2) the contract’s status as a MEC resulted from a failure to comply with the
requirements of § 7702A that—
(a) are attributable to one or more
defective interpretations or positions that
the Service determines to be a significant
feature of a program to sell investment
oriented contracts, or
(b) arises where the controlling
statutory provision, as supplemented by
any legislative history or guidance published by the Service, is clear on its face
and the Service determines that failure to
follow the provision results in a significant increase in the investment orientation
of a contract; or
(3) except as provided in this section
4.02(3), the issuer previously entered into
a closing agreement to remedy a failure of
any contract to comply with the requirements of § 7702A. Upon an application
by the issuer setting forth unusual or special facts and circumstances, the Service
in its sole discretion may waive the limitation imposed by this section 4.02(3).
However, the Service will not waive the
limitation if the issuer requests to enter
into a closing agreement to cure the same
or similar failures to comply with the requirements of § 7702A that were identified in a previous closing agreement. Examples of unusual or special facts and
circumstances include:
(a) The issuer analyzed each of its
contracts as of the date of its first submission under this revenue procedure, using
all of the legal and factual assumptions
described in its first submission, and requested a closing agreement for all of its
contracts eligible for relief under this revenue procedure to remedy the contracts’
failure comply with the requirements of
§ 7702A. The issuer subsequently acquired a company that had inadvertently
issued contracts that failed to comply with
the requirements of § 7702A, which had
not previously requested a closing agreement to remedy the failure of any of its
contracts to comply with the requirements
of § 7702A. In this situation, the issuer
may request a closing agreement with respect to all of the acquired company’s
contracts that otherwise are eligible for
relief under this revenue procedure.
(b) The issuer analyzed each of its
contracts as of the date of its first submis-
9
sion under this revenue procedure, using
all legal and factual assumptions described in its first submission, and requested a closing agreement for each contract eligible for relief under this revenue
procedure. The issuer subsequently discovers that it inadvertently failed to identify other legal and factual assumptions
not described in its first submission,
which would cause the same and additional contracts to fail to comply with the
requirements of § 7702A. In this situation, the issuer may request a closing
agreement for all of its contracts otherwise eligible for relief under this revenue
procedure to remedy the contracts’ failure
to comply with the requirements of §
7702A based on the combination of its
previously and its newly identified legal
and factual assumptions.
.03 Examples. Pursuant to section
4.02(2) of this revenue procedure, this
revenue procedure does not apply to a
MEC if—
(1) the contract provides for paid-up
future benefits after the payment of less
than 7 level annual premiums,
(2) the amount paid under the contract in any contract year of the testing period exceeds 300 percent of the 7-pay premium for the contract year, or
(3) the cash surrender value of the
contract (within the meaning of § 7702(f)(2)(A)) exceeded (or was illustrated or
projected to exceed) the contract holder’s
investment in the contract (as defined in §
72(e)(6)) within 3 years after the issuance
of the contract and the assumed 7-pay
premium for the contract was more than
150 percent of the correct 7-pay premium
for the contract.
SECTION 5. PROCEDURE
.01 Request for a ruling. An issuer that
seeks relief under this revenue procedure
must submit a request for a ruling that
meets the requirements of Rev. Proc. 99–
1, 1999–1 I.R.B. at 6 (or any successor).
Additionally, the submission must contain
the following information:
(1) a specimen copy of each contract
form;
(2) the policy number for each contract;
(3) the taxpayer identification number of each contract holder;
(4) the original issue date of each
contract;
June 7, 1999
(5) the death benefit (as defined in
section 7702(f)(3)) under each contract;
(6) the 7-pay premium assumed by
the issuer when the contract was issued;
(7) the cash surrender value (within
the meaning of § 7702(f)(2)(A)) of each
contract at the end of each contract year;
(8) a description of the defect[s] that
caused the contract[s] to fail to comply
with the 7-pay test, including an explanation of how and why the defect[s] arose;
(9) a description of the administrative
procedures the issuer has implemented to
ensure that none of its contracts will inadvertently fail the 7-pay test in the future;
(10) a description of any material
change[s] in the benefits under (or in the
other terms of) any contract together with
the date[s] on which the material
change[s] occurred;
(11) for any contract with regard to
which a contract holder directly or indirectly received (or was deemed to have received) any distribution to which § 72 applies—
(a) the date and amount of each
distribution,
(b) the amount of the distribution
includible in the contract holder’s gross
income,
(c) the amount of gross income reported to the contract holder and to the
Service on a timely filed information return as a result of the distribution,
(d) the date on which the contract
holder attained [or will attain] age 591⁄2,
(e) whether the distribution is attributable to the contract holder becoming
disabled (within the meaning of
§ 72(m)(7)), and,
(f) whether the distribution is part
of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life expectancy)
of the contract holder or the joint lives (or
joint life expectancies) of the contract
holder and his or her beneficiary;
(12) a template (see, for example,
section 5.04(3) of this revenue procedure)
setting forth the following information for
each contract:
(a) the cumulative amounts paid
under the contract within each contract
year of the testing period;
(b) the contract’s cumulative 7-pay
premium;
(c) the overage, if any, for each
contract year;
June 7, 1999
(d) the earnings rate applicable for
each contract year;
(e) the overage earnings for each
contract year; and
(13) representations, signed under
penalties of perjury by a representative of
the issuer with authority to sign tax returns on behalf of the issuer, that—
(a) no contract identified in the ruling request insures the life of any individual (other than a “key person” as defined
in § 264(e)(3)) who is or was an officer,
director, or employee of, or financially interested in, any trade or business carried
on by the contract holder;
(b) no contract identified in the
ruling request provides for paid-up future
benefits after the payment of less than 7
level annual premiums;
(c) no contract identified in the
ruling request had an amount paid in any
contract year of the testing period that exceeded 300 percent of the 7-pay premium
for such contract year;
(d) none of the contracts identified
in the ruling request meet both of the following conditions:
(i) the assumed 7-pay premium
for the contract exceeded 150 percent of
the correct 7-pay premium for such contract; and
(ii) the cash surrender value of
the contract (within the meaning of
§ 7702(f)(2)(A)) exceeded the contract
holder’s investment in the contract (as defined in § 72(e)(6)) within three years
after the issuance of the contract; and
(e) set forth the details of any previous request by the issuer to cure any
failure of any contract to comply with the
requirements of § 7702A.
.02 Time for filing request. The request
for a ruling must be filed on or before
May 31, 2001.
.03 Closing agreement. The issuer also
must submit a proposed closing agreement, executed by the issuer, in substantially the same form as the model closing
agreement in section 6 of this revenue
procedure. The amount shown in section
1(A) of the closing agreement is the sum
of the amounts required to be paid (determined under section 5.04 of this revenue
procedure) for all of the contracts covered
by the agreement.
.04 Determination of amount required
to be paid with regard to a contract.
(1) Except as provided in section
5.04(2) of this revenue procedure, the
10
amount required to be paid with regard to
a contract is the sum of—
(a) the income tax (determined
using the applicable percentage for the
contract under section 3.11 of this revenue
procedure) and the additional tax under
section 72(v) with regard to amounts
(other than reported amounts (as defined
in section 3.12 of this revenue procedure))
received (or deemed received) under the
contract during the period commencing
with the date 2 years before the date on
which the contract first failed to satisfy the
MEC rules and ending on the effective
date of the closing agreement;
(b) any interest computed under
§ 6621(a)(2) as if the amounts determined
under section 5.04(1)(a) of this revenue
procedure are underpayments by the contract holder[s] for the tax year[s] in which
the amounts are received (or deemed received); and
(c) an amount, not less than $0,
obtained by multiplying—
(i) the excess, if any, of the contract’s cumulative overage earnings over
the proportionate share of overage earnings allocable to taxable distributions
under the contract, by
(ii) the applicable percentage
for the contract, and by
(iii) the distribution frequency
factor for the contract under section 3.10
of this revenue procedure.
(2) Special rule for pre-1999 contracts with de minimis overage earnings.
If the overage earnings of a contract issued before January 1, 1999, at all times
during the testing period do not exceed
$75, then the amount required to be paid
with regard to the contract is determined
without regard to paragraphs (a) and (b)
of section 5.04(1) of this revenue procedure.
(3) Examples of the determination of
the amount required to be paid with regard to a contract.
(a) Example 1. A, an individual,
purchases a life insurance contract other
than a contract described in sections
3.07(3), 4.02(1), or 4.02(2) of this revenue procedure. The death benefit of the
contract exceeds $180,000. The net level
premium (assuming paid-up future benefits after 7 annual premium payments) for
the contract is $10,490. The contract provides that, within 60 days after the end of
a contract year, the issuer will return (with
1999–23 I.R.B.
interest) the amount of any excess premium that would cause the contract to be
a MEC under § 7702A.
The interest rate on all portions of any
policy loans will always exceed the rate at
which interest is credited to the contract’s
associated cash value by more than 1 percentage point. A partial withdrawal of the
cash surrender value (within the meaning
of § 7702(f)(2)(A)) always reduces the
death benefit by an amount not less than
the amount determined by multiplying the
death benefit immediately before the
withdrawal by the percentage obtained by
dividing the withdrawn amount by the
cash surrender value immediately before
the withdrawal.
A pays a premium of $10,000 when
the contract is issued on January 1, 1991.
At the beginning of each of the next 6
contract years, A pays additional premiums of $10,750, $10,800, $10,700,
$11,500, $11,000, and $10,000, respectively. Due to an inadvertent error, the
issuer fails to return any of the excess
premiums.
The issuer desires to enter into a closing agreement to remedy the failure to
comply with § 7702A. The issuer has not
previously used this revenue procedure to
remedy the failure of any contract to comply with the MEC rules.
Pursuant to section 5.01(12) of this
revenue procedure, the issuer prepares
the following template with regard to the
contract.
Contract
Year
Cumulative
Premiums
Paid
Cumulative
7-Pay
Premiums
Overage
Earnings
Rate
Overage
Earnings
1 (1991)
2 (1992)
3 (1993)
4 (1994)
5 (1995)
6 (1996)
7 (1997)
10,000
20,750
31,550
42,250
53,750
64,750
74,750
10,490
20,980
31,470
41,960
52,450
62,940
73,430
0
0
80
290
1,300
1,810
1,320
9.2%
8.6%
7.5%
8.3%
7.8%
7.7%
7.5%
0
0
6.00
24.57
103.78
149.71
120.30
Prior to A’s payment of the $10,800
premium at the beginning of contract year
3, the cumulative premiums paid for the
contract do not exceed the contract’s cumulative 7-pay premiums. Therefore,
there are no overage earnings in contract
years 1 and 2.
Upon payment of the $10,800 premium
at the beginning of contract year 3, however, the cumulative amount paid for the
contract ($31,550) exceeds the contract’s
cumulative 7-pay premiums ($31,470) by
$80. As the earnings rate for the calendar
year in which contract year 3 begins is
7.5%, the contract’s overage earnings for
contract year 3 equal $6 ($80 ⫻ 7.5%).
For contract year 4, the overage is $290
($42,250 – $41,960). The cumulative
overage earnings for all prior contract
years equal $6.00. The earnings rate is
8.3%. The overage earnings for contract
year 4 equal $24.57 (($290 + $6) ⫻
8.3%).
For contract year 5, the overage is
$1,300 ($53,750 – $52,450). The cumulative overage earnings for all prior contract years equal $30.57 ($6 + $24.57).
The earnings rate is 7.8%. The overage
earnings for contract year 5 equal $103.78
(($1,300 + $30.57) ⫻ 7.8%).
1999–23 I.R.B.
For contract year 6, the overage is
$1,810 ($64,750 – $62,940). The cumulative overage earnings for all prior contract years equal $134.35 ($6 + $24.57 +
$103.78). The earnings rate is 7.7%. The
overage earnings for contract year 6 equal
$149.71 ($1,810 + $134.35) ⫻ 7.7%).
For contract year 7, the overage is
$1,320 ($74,750 – $73,430). The cumulative overage earnings for all prior contract years equal $284.06 ($6 + $24.57 +
$103.78 + $149.71). The earnings rate is
7.5%. The overage earnings for contract
year 7 equal $120.30 (($1,320 + $284.06)
⫻ 7.5%).
The cumulative overage earnings for
the contract equal $404.36 ($6 + $24.57 +
$103.78 + $149.71 + $120.30). Under
sections 3.10 and 3.11 of this revenue
procedure, the distribution frequency factor is .5 and the applicable percentage is
36%. Accordingly, the amount required
to be paid with regard to the contract
under section 5.04 of this revenue procedure is $72.78 ($404.36 ⫻ .5 ⫻ 36%).
(b) Example 2. The facts are the same
as in example 1 except that, at the beginning of contract year 5, A receives $3,000
as a policy loan. The contract’s cash
value (within the meaning of§ 72(e)-
11
(3)(A)(i)) immediately prior to the loan is
$58,500, which exceeds A’s investment in
the contract ($53,750) by $4,750. Each
year A pays the interest on the policy
loan. The issuer does not file a timely information return with regard to the
deemed distribution resulting from the
policy loan and A does not include the
distribution in gross income reported on
the income tax return for the taxable years
in which the deemed distribution is received. The total income on the contract
(as defined in section 3.09 of this revenue
procedure) is $14,500.
The amount required to be paid with regard to the contract under section 5.04 of
this revenue procedure is the sum of–
(1) an amount equal to the income
tax (determined using a 36% tax rate) and
the additional tax under section 72(v)
with regard to the $3,000 deemed distribution in contract year 5;
(2) interest computed under section
6621(a)(2) as if the amounts determined
under (1) were underpayments for the taxable year in which the distributions are
deemed to have occurred; and
(3) 36% of $160.35, which is the excess of the contract’s cumulative overage
earnings over the proportionate share of
June 7, 1999
the overage earnings allocable to taxable
distributions ($404.36 – $83.66), multiplied by the distribution frequency factor
(.5).
The proportionate share of overage
earnings allocable to taxable distributions
is obtained by multiplying the total
amount of the taxable distribution under
the contract ($3,000), by a fraction, the
numerator of which is the contract’s cumulative overage earnings ($404.36) and
the denominator of which is the total income on the contract ($14,500).
.05 Payment of amount. The issuer is
required to pay the amount determined
under section 5.04 of this revenue procedure within thirty (30) days of the date of
execution of the closing agreement by the
Service. Payment shall be made by check
payable to the “United States Treasury”
delivered, together with a fully executed
copy of the closing agreement, to Internal
Revenue Service, Philadelphia Service
Center, 11601 Roosevelt Boulevard,
Philadelphia, Pennsylvania 19154, Attention: Chief, Receipt and Control Branch,
DP319.
.06 Correction of contracts. The issuer
also must bring each contract into compliance with § 7702A, either by an increase
in death benefit[s] or the return of excess
premiums and earnings thereon, within
ninety (90) days of the date of execution
of the closing agreement by the Service.
SECTION 6. MODEL CLOSING
AGREEMENT
Effective as of the date executed by Internal Revenue Service ____________
CLOSING AGREEMENT AS TO
FINAL DETERMINATION COVERING
SPECIFIC MATTERS
THIS CLOSING AGREEMENT
(“Agreement”), made pursuant to section
7121 of the Internal Revenue Code (the
“Code”) by and between [taxpayer’s
name, address, and identifying number]
(“Taxpayer”), and the Commissioner of
Internal Revenue (the “Service”).
WHEREAS,
A. Taxpayer is the issuer of one or
more modified endowment contracts, as
defined in section 7702A of the Code;
B. On___________, Taxpayer pursuant
to Rev. Proc. 99–27, 1999-23 I.R.B., sub-
June 7, 1999
mitted to the Service a request for a ruling
that one or more modified endowment
contracts (the “Contract[s]”), which are
identified on Exhibit A to this Agreement,
be treated as contracts that are not modified endowment contracts.
C. Taxpayer represents that the Contract[s] is [are] not described in section
4.02 or 4.03 of Rev. Proc. 99–27.
D. Taxpayer represents that the cumulative “overage earnings,” within the
meaning of section 3.06 of Rev. Proc. 99–
27, for the Contract[s] equal $_____.
E. Taxpayer represents that the total of
the amounts determined under section
5.04(1)(a), (b), and (c) of Rev. Proc. 99–
27, after taking the special rule in section
5.04(2) of the revenue procedure into account, with regard to the Contract[s] are
$______, $______, and $______, respectively.
F. To ensure that the Contracts are not
treated as modified endowment contracts,
Taxpayer and the Service have entered
into this Agreement.
NOW THEREFORE, IT IS HEREBY
FURTHER DETERMINED AND
AGREED BETWEEN TAXPAYER AND
THE SERVICE AS FOLLOWS:
1. In consideration for the agreement of
the Service as set forth in Section 2
below, Taxpayer agrees as follows:
(A) To pay to the Service the sum of
_________ dollars and _________ cents
($_______) at the time and in the manner
described in Section 3 below;
(B) The amount paid pursuant to
Section 1(A) above is not deductible by
Taxpayer, nor is such amount refundable,
subject to credit or offset, or otherwise recoverable by Taxpayer from the Service;
(C) For purposes of its information
reporting and withholding obligations
under the Code, no holder’s investment in
any Contract may be increased by any
portion of—
(i) the sum set forth in Section
1(A) above, or
(ii) the excess of the cumulative
overage earnings over the proportionate
share of overage earnings included in
gross income reported to the Service on a
timely filed information return or income
tax return with regard to amounts received under any Contract; and
(D) To bring the Contract[s] into
compliance with § 7702A, either by an in-
12
crease in death benefit[s] or the return of
excess premiums and earnings thereon.
2. In consideration of the agreement of
Taxpayer set forth in Section 1 above, the
Service and Taxpayer agree as follows:
(A) To treat each Contract as having
satisfied the requirements of section
7702A during the period from the date of
issuance of the Contract through and including the later of—
(i) date of the execution of this
Agreement, and
(ii) the date of the corrective actions described in Section 1(D) above;
(B) To treat the corrective action described in 1(D) above as having no effect
on the date the Contract was issued or entered into;
(C) To waive civil penalties for failure of Taxpayer to satisfy the reporting,
withholding, and/or deposit requirements
for income subject to tax under § 72(e)(10) that was received or deemed received
by a contract holder under a Contract in a
calendar year ending prior to the date of
execution of this Agreement; and
(D) To treat no portion of the sum described in Section 1(A) above as income
to the holders of the Contracts.
3. The actions required of Taxpayer in
Section 1(D) above shall be taken by Taxpayer within ninety (90) days of the date
of execution of this Agreement by the Service. Payment of the amount described in
Section 1(A) above shall be made within
thirty (30) days of the date of execution of
this Agreement by the Service by check
payable to the “United States Treasury,”
delivered together with a fully executed
copy of this Agreement, to Internal Revenue Service, Philadelphia Service Center,
11601 Roosevelt Boulevard, Philadelphia,
Pennsylvania 19154, Attention: Chief, Receipt and Control Branch, DP319.
4. This Agreement is, and shall be construed as being, for the benefit of Taxpayer. The holder[s] of Contract[s] covered by this Agreement are intended
beneficiaries of this Agreement. This
Agreement shall not be construed as creating any liability of an issuer to the holders
of the Contract[s].
5. Neither the Service nor Taxpayer
shall endeavor by litigation or other means
to attack the validity of this Agreement.
6. This Agreement may not be cited or
relied upon as precedent in the disposition
of any other matter.
1999–23 I.R.B.
NOW THIS CLOSING AGREEMENT
FURTHER WITNESSETH, that Taxpayer and the Service mutually agree that
the matters so determined shall be final
and conclusive, except as follows:
1. The matter to which this Agreement
relates may be reopened in the event of
fraud, malfeasance, or misrepresentation
of material facts set forth herein.
2. This Agreement is subject to sections
of the Code that expressly provide that effect be given to their provisions notwithstanding any other law or rule of law except § 7122 of the Code.
3. This Agreement is subject to any legislation enacted subsequent to the date of
execution hereof if the legislation provides that it is effective with respect to
closing agreements.
IN WITNESS WHEREOF, the parties have subscribed their names in triplicate.
Taxpayer
Date Signed: ________________________________
By: ______________________________________
Title/Office
Commissioner of Internal Revenue
By: ______________________________________
______________________________________
Title/Office
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective
May 18,1999, the date this revenue procedure was made available to the public.
SECTION 8. EXPIRATION DATE
This revenue procedure is available
only for requests for relief that are received on or before May 31, 2001.
SECTION 9. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure have
been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545-1625.
1999–23 I.R.B.
The collection of information and reporting burden are in section 5 of this revenue procedure. This information will be
used to determine whether an issuer may
remedy failures to comply with the requirements of § 7702A. The likely respondents are insurance companies.
The estimated total annual reporting
burden is 20,000 hours.
The estimated annual burden per respondent varies from 50 hour to 150
hours with an average of 100 hours. The
estimated number of respondents is 200.
The estimated annual frequency of the
responses is one time.
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
OMB control number.
13
Books and 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.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Katherine Hossofsky of the
Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue
procedure, contact Ms. Hossofsky on
(202) 622-3477 (not a toll-free call).
June 7, 1999
Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Reporting of Gross Proceeds
Payments to Attorneys
REG–105312–98
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 reporting of payments of gross proceeds to attorneys. The regulations reflect changes to
the law made by the Taxpayer Relief Act
of 1997. The regulations will affect attorneys who receive payments of gross proceeds on behalf of their clients, and certain
payors (defendants in lawsuits and their
insurance companies and agents) that in
the course of their trades or businesses
make payments to these attorneys. This
document also provides notice of a public
hearing on these proposed regulations.
DATES: Written and electronic comments must be received by August 19,
1999. Outlines of topics to be discussed
at the public hearing scheduled for September 22, 1999, at 10 a.m., must be received by September 1, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–105312–98),
Room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–105312–98),
Courier’s Desk, Internal Revenue Service, 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/
tax_regs/regslist.html. The public hearing will be held in the IRS Auditorium,
7th Floor, Internal Revenue Building,
1111 Constitution Avenue, NW, Washington, DC.
June 7, 1999
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, A. Katharine Jacob Kiss at (202)
622-4920; concerning submissions of
comments, the hearing, and/or to be
placed on the building access list to attend
the hearing, Michael Slaughter at (202)
622-7180 (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, OP:FS:FP,
Washington, DC 20224. Comments on
the collection of information should be received by July 20, 1999. 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 §1.6045–5(a).
This information is required by the IRS to
implement section 1021 of the Taxpayer
14
Relief Act of 1997. This information will
be used to verify compliance with section
6045 and to determine that the taxable
amount of these payments has been computed correctly. The collection of information is mandatory. The likely respondents are businesses and other for profit
institutions.
Respondent taxpayers (payors) provide
the information by completing one Form
1099-MISC, Miscellaneous Income, for
each attorney who has received one or
more payments of gross proceeds from
the payor during the calendar year. The
burden for this requirement is reflected in
the burden estimate for Form 1099MISC. The estimated burden of information collection for the 1999 Form 1099MISC is 14 minutes per return.
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
OMB 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
This document contains proposed
amendments to the Income Tax Regulations (26 CFR Part 1) under section 6045
of the Internal Revenue Code. A new reporting requirement, section 6045(f), was
added to the Code by section 1021 of the
Taxpayer Relief Act of 1997 (1997 Act)
(Public Law 105–34, 111 Stat. 922).
Section 6045(f) provides for information
reporting for payments of gross proceeds
made in the course of a trade or business
to attorneys in connection with legal services (whether or not the services are performed for the payor). No information return is required under section 6045(f) for
the portion of any payment that is required to be reported under section
6041(a) (or that would be required except
for the $600 limitation) or under section
6051 (employee compensation). The
1997 Act also provides that the general
1999–23 I.R.B.
exception for reporting to corporations in
§1.6041–3(c) does not apply to corporations providing legal services.
Explanation of Provisions
The proposed regulations take into account comments made by, among others,
insurance companies and other payors,
the American Bar Association, and the
members of the Commissioner’s Information Reporting Program Advisory Committee (IRPAC). The operation of section
6045(f) was the subject of a paper presented at the IRPAC meeting held in
Washington, DC., on October 28 and 29,
1997, and comments were also received
at that meeting.
The proposed regulations clarify that
there is no threshold amount below which
reporting under section 6045(f) is not required. Additionally, payments made to
corporations engaged in providing legal
services are reportable.
Several commentators asked whether
reporting under section 6045(f) relieves
the payor of all other reporting obligations by shifting the reporting obligations
to the attorney. The proposed regulations
do not adopt this approach. Section 6045
imposes an additional reporting requirement on payors and does not relieve them
of any other pre-existing or concurrently
existing reporting requirement. The exception in section 6045(f)(2)(B) is limited
to situations in which the amount of the
attorney fee is already reportable to the attorney as income or wages. The legislative history clearly supports this determination. See, H.R. Conf. Rep. No. 220,
105th Cong., 1st Sess. 546 (1997) and
Joint Committee on Taxation Staff, General Explanation of Tax Legislation Enacted in 1997, 105th Cong., 1st Sess. 21415 (1997).
Several commentators stated that in
certain situations, a gross proceeds payment is delivered to the attorney, but the
attorney is not listed as a payee on the
check. In some instances this results from
the operation of local law; in other instances, attorneys request that their names
not appear on the check. The proposed
regulations provide that when a payment
is delivered to an attorney, even if that attorney is not listed as a payee, the payor is
required to file an information return
under section 6045(f).
1999–23 I.R.B.
Wherever possible, however, the proposed regulations provide exceptions to
the reporting requirement. For example,
the proposed regulations provide for a
rule of administrative convenience if multiple attorneys are listed as payees. Generally, in those situations, the payor is
only required to report on the attorney
who receives the payment. The IRS and
Treasury Department continue to welcome comments on whether additional
exceptions to the reporting requirement
are appropriate.
Many commentators suggested that
Form 1099-B is not the best form for reporting under section 6045(f). The proposed regulations provide that the information return is made on Form
1099-MISC.
Several commentators asked the IRS to
define legal services. Some commentators requested a narrow definition that
would exclude any services that did not
require that the provider be an attorney,
e.g., property or financial management
services. However, those commentators
also stated that the attorney would most
likely be collecting a fee for rendering
those services. The IRS and Treasury Department have proposed a broad definition of legal services that includes any
services performed by or under the supervision of an attorney.
One commentator asked whether the
attorney’s TIN must be certified. The
proposed regulations provide that, consistent with the general rule under sections
6045 and 6041, the attorney’s TIN need
not be certified.
The proposed regulations clarify that
payments of gross proceeds are subject to
backup withholding if the attorney does
not provide a TIN. This is consistent with
the legislative history that provides:
Third, attorneys are required to promptly supply
their TINS to persons required to file these information reports, pursuant to section 6109. Failure
to do so could result in the attorney being subject
to penalty under section 6723 and the payments
being subject to backup withholding under section 3406.
H.R. Conf. Rep. No. 220, at 546 (1997).
Finally, all of the examples in the proposed regulations follow the generally
well-established principle of tax law that
the income portion of a plaintiff’s settlement is not reportable net of the attorneys
15
fees. But, cf., Rev. Rul. 80–364, 1980–2
C.B. 294 (Situation 3 holding that the attorney’s fees portion of the settlement is a
reimbursement for expenses incurred by
the union to enforce the collective bargaining agreement and not includible in
the gross income of the individual employees), and Davis v. Commissioner,
T.C.M. 1998–248 (following Cotnam v.
Commissioner, 263 F.2d 119 (5th Cir.
1959) for determinations under Alabama
law).
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 has also been
determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
Chapter 5) does not apply to these regulations.
It is hereby certified that the collection
of information in these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the facts
that: (1) the time required to prepare and
file a Form 1099-MISC is minimal (currently estimated at 14 minutes per form);
and (2) it is not anticipated that, as a result
of these regulations, small entities will
have to prepare and file more than a few,
at most, forms per year. 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 electronic or
written comments (a signed original and
eight (8) copies) that are submitted timely
to the IRS. The IRS and Treasury Department request comments on the clarity of
the proposed rules and how they can be
made easier to understand. All comments
will be available for public inspection and
copying.
June 7, 1999
A public hearing has been scheduled
for September 22, 1999, beginning at 10
a.m. in the IRS Auditorium of the Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to
building security procedures, visitors
must enter at the 10th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to
enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more
than 15 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of
this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral comments at the hearing must submit written
comments and an outline of the topics to
be discussed and the time to be devoted to
each topic (signed original and 8 copies)
by September 1, 1999. 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 author of these proposed
regulations is A. Katharine Jacob Kiss,
Office of Assistant Chief Counsel (Income Tax and Accounting). 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6041–3, effective on
January 1, 2000, is amended by revising
June 7, 1999
the first sentence of paragraph (q)(1) to
read as follows:
§1.6041–3 Payments for which no return
of information is required under section
6041.
* * * * *
(q) * * *
(1) A corporation described in
§1.6049–4(c)(1)(ii)(A), except a corporation engaged in providing legal services,
and except a corporation engaged in providing medical and health care services or
engaged in the billing and collecting of
payments in respect to the providing of
medical and health care services. * * *
* * * * *
Par. 3. Section 1.6041–3, currently in
effect as of May 21, 1999, is amended by
revising the introductory text of paragraph (c) to read as follows:
§1.6041–3 Payments for which no return
of information is required under section
6041.
* * * * *
(c) Payments to a corporation, except
payments made after December 31, 1997,
to a corporation engaged in providing
legal services, and except payments made
after December 31, 1970, to a corporation
engaged in providing medical and health
care services or engaged in the billing and
collecting of payments in respect to the
providing of medical and health care services, other than payments to—
* * * * *
Par. 4. Section 1.6045–5 is added to
read as follows:
§1.6045–5 Information reporting on
payments to attorneys.
(a) Requirement of reporting—(1) In
general. A person engaged in a trade or
business that makes a payment in the
course of that trade or business to an attorney in connection with legal services
(whether or not the services were performed for the payor) must, except as provided in paragraph (c) of this section, file
an information return on Form 1099MISC, “Miscellaneous Income”, with the
Internal Revenue Service for the calendar
16
year in which the payment is made. For
the time and place of filing Form 1099MISC, see §1.6041–6. The requirements
of this paragraph (a)(1) apply whether or
not—
(i) Payments to the attorney aggregate
less than $600 for the calendar year;
(ii) A portion of a payment is kept by
the attorney as compensation for legal
services rendered; or
(iii) Other information returns are required with respect to some or all of a
payment under other applicable provisions of the Internal Revenue Code and
the regulations thereunder.
(2) Information required. The information return required under paragraph
(a)(1) of this section must include the following information:
(i) The name, address, and taxpayer
identification number (TIN) (as defined in
section 7701(a)) of the person making the
payment.
(ii) The name, address, and TIN of the
attorney to whom the payment was made.
(iii) The aggregate amount of payments for the calendar year.
(iv) Any other information required by
Form 1099-MISC and its instructions.
(3) Requirement to furnish statement.
A person required to file an information
return under paragraph (a)(1) of this section must furnish to the attorney a written
statement of the information required to
be shown on the return. This requirement
may be met by furnishing a copy of the
return to the attorney. The written statement must be furnished to the attorney on
or before January 31 of the year following
the year in which the payment was made.
(b) Special rules—(1) Check delivered
to non-payee attorney. If a check is delivered to an attorney who is not a payee, an
information return must be filed under
paragraph (a)(1) of this section with respect to the attorney if, under the circumstances, it is reasonable for the payor to
believe that the attorney is receiving the
check in connection with legal services.
(2) Joint or multiple payees—(i)
Check delivered to attorney. If more than
one attorney is listed as a payee on a
check, an information return must be filed
under paragraph (a)(1) of this section with
respect to the attorney who received the
check.
1999–23 I.R.B.
(ii) Check delivered to non-attorney. If
a check has attorney and non-attorney
payees and the check is delivered to a nonattorney, an information return must be
filed under paragraph (a)(1) of this section
with respect to the first listed attorney.
(3) Attorney required to report payments made to the other attorneys. An attorney with respect to whom an information return is filed under paragraph (b)(1)
or (2) of this section must file information
returns, as required under this section, for
payments the attorney makes to any other
attorneys.
(c) Exceptions. A return of information is not required under paragraph (a)(1)
of this section with respect to the following payments:
(1) Payments of wages or other compensation paid to an attorney by the attorney’s employer.
(2) Payments of compensation or profits paid or distributed to its individual
partner by a partnership engaged in providing legal services.
(3) Payments of dividends or corporate
earnings and profits paid to its shareholder by a corporation engaged in providing legal services.
(4) Payments of income to an attorney
of a fixed or determinable amount required to be reported (or payments that
would be required to be reported were it
not for failing to meet the dollar amount
limitation contained in section 6041(a))
pursuant to section 6041(a) and §1.6041–
1(a).
(5) Payments of the balance of the
gross proceeds made to an attorney if a
payment described in paragraph (c)(4) of
this section is made.
(6) Payments made to a foreign attorney, if the foreign attorney can clearly
demonstrate that the attorney is not subject to U.S. tax.
(d) Definitions. The following definitions apply for purposes of this section:
(1) Attorney means a person engaged
in the practice of law, whether as a sole
proprietor, partnership, corporation, or
joint venture.
(2) Legal services means all services
performed by, or under the supervision of,
an attorney.
(e) Attorney to furnish TIN. A payor
that is required to make an information return under this section must solicit a TIN
1999–23 I.R.B.
from the attorney at or before the time the
payor pays gross proceeds to the attorney.
Any attorney whose TIN is solicited must
furnish the TIN to the payor, but is not required to certify that the TIN is correct.
Except as otherwise provided under section 3406, if the attorney does not furnish
the attorney’s TIN, the payment is subject
to backup withholding.
(f) Examples. The provisions of this
section are illustrated by the following examples:
Example 1. A, a plaintiff in a suit for lost wages
against T, is represented by attorney B. A settles her
suit for $300,000. Payment is made by a check
payable jointly to A and B. T does not know the
amount of the attorney fee. B retains $100,000 and
disburses the remaining $200,000 net proceeds to A.
T must file a Form W-2 for $300,000 with respect
to A under section 6051. T must also file a Form
1099-MISC with respect to B for $300,000 (see
paragraph (a)(1)(iii) of this section).
Example 2. The facts are the same as in Example
1, except that T knows that the attorney fee is onethird of the settlement amount, or $100,000. T must
file a Form W-2 for $300,000 with respect to A
under section 6051. T must also file a Form 1099MISC with respect to B for $100,000 under section
6041. T is not required to file an information return
with respect to B for $200,000 (the balance of the
gross proceeds) because of the exception provided
in paragraph (c)(5) of this section.
Example 3. C, a plaintiff in a suit for physical
personal injury against V, is represented by attorney
D. C settles his suit for damages that are excludable
from C’s gross income under section 104(a)(2). The
settlement check is payable jointly to C and D. V
does not know the amount of the attorney fee. V
must file a return of information with respect to D
under paragraph (a)(1) of this section. V is not required to file a return of information with respect to
C under section 6041 because the settlement amount
is excludable from C’s income under section
104(a)(2).
Example 4. W, a defendant in a suit for wrongful
injury, knows that D, the plaintiff, has been represented by attorney E throughout the proceeding.
State O, where the suit is brought, mandates that certain benefits and settlement awards be made payable
to the claimant only. W makes a check payable
solely to D and delivers the payment to E’s office.
W has made a payment to an attorney (see paragraph
(b)(1) of this section) and must file a return of information under paragraph (a) of this section.
Example 5. X, a defendant in a suit for lost
wages, reasonably believes that F, the plaintiff, has
been represented by attorney G throughout the proceeding as evidenced by filings and correspondence
signed by G. X makes a check for damages payable
solely to F and delivers it to G’s office. X has made
a payment to an attorney (see paragraph (b)(1) of
this section) and must file a return of information
under paragraph (a) of this section.
Example 6. Y, a defendant in a suit, makes a payment of the gross proceeds of the amount awarded
under the suit to the plaintiff’s attorneys, H, I, and J.
17
H, I, and J are not related parties. The payment is
delivered to J’s office. J deposits the monies into her
trust account and pays H and I their respective
shares. Y must file a return of information with respect to J (see paragraph (b)(2)(i) of this section). J
must file a return of information with respect to H
and I (see paragraph (b)(3) of this section).
(g) Cross reference to penalties. See
the following sections regarding penalties
for failure to comply with the requirements of section 6045(f) and this section:
(1) Section 6721 for failure to file a
correct information return.
(2) Section 6722 for failure to furnish a
correct payee statement.
(3) Section 6723 for failure to comply
with other information reporting requirements (including the requirement to furnish a TIN).
(4) Section 7203 for willful failure to
supply information (including a taxpayer
identification number).
(h) Effective date. The rules in this
section apply to payments made after December 31, 1999.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on May
20, 1999, 8:45 a.m., and published in the issue of the
Federal Register for May 21, 1999, 64 F.R. 27730)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Special Rules Regarding the
Simplified Production and
Resale Methods With Historic
Absorption Ratio Election
REG–113910–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations under section 263A
that relate to accounting for costs incurred
in producing property and acquiring property for resale. The proposed regulations
are necessary to address specific problems in the current section 263A regulations and affect persons who elect to use
the simplified production or resale meth-
June 7, 1999
ods with historic absorption ratio election.
This document also provides notice of a
public hearing on these proposed regulations.
DATES: Written and electronic comments must be received by August 23,
1999. Outlines of topics to be discussed
at the public hearing scheduled for September 1, 1999, at 10 a.m., must be received by August 11, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–113910–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–113910–98),
Courier’s Desk, Internal Revenue Service, 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/
tax_regs/regslist.html. The public hearing will be held in room 2615, Internal
Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jennifer Nuding, (202)622-4970; concerning
submissions of comments, the hearing,
and/or to be placed on the building access
list to attend the hearing, LaNita Van
Dyke at (202) 622-7180 (not toll-free
calls).
SUPPLEMENTARY INFORMATION:
Background
Section 263A provides uniform rules
for capitalization of certain expenses.
Section 263A requires the capitalization
of the direct, and an allocable portion of
the indirect, costs of real or tangible personal property produced by a taxpayer or
real and personal property described in
section 1221(1) that is acquired by the
taxpayer for resale. The rules under section 263A, which were added by the Tax
Reform Act of 1986, Public Law 99-514,
section 803, 100 Stat. 2085, 2350, were
designed, in part, to properly match in-
June 7, 1999
come with related expenses and, thus,
more accurately reflect income. They
also were intended to make the tax system
more neutral by eliminating the differences in capitalization rules that created
distortions in the allocation of economic
resources and the manner in which certain
economic activity was organized. See S.
Rep. No. 313, 99th Cong., 2d Sess. 140
(1986), 1986–3 C.B. Vol. 3 140. However, the legislative history provides authority to the Secretary to prescribe simplifying methods and assumptions where
the costs and other burdens of literal compliance with section 263A may outweigh
the benefits of the provision (e.g., matching and neutrality). S. Rep. No. 313, 99th
Cong., 2d Sess. 142 (1986).
Section 263A costs are the costs that a
taxpayer must capitalize under section
263A and equal the sum of a taxpayer’s
section 471 costs, its additional section
263A costs, and interest capitalizable
under section 263A(f). Additional section
263A costs are the costs, other than interest, that were not capitalized under the
taxpayer’s method of accounting immediately prior to the effective date of section
263A, but that are required to be capitalized under section 263A.
Sections 1.263A–1 through 1.263A–3
of the final regulations (T.D. 8482,
1993–2 C.B. 77) were published in the
Federal Register for August 9, 1993 (58
F.R. 42207) and amended by T.D. 8559
(59 F.R. 39958), T.D. 8584 (59 F.R.
67187), T.D. 8597 (60 F.R. 36671), T.D.
8728 (62 F.R. 42051) and T.D. 8729 (62
F.R. 44542). The final regulations provide simplified methods for determining
the additional section 263A costs properly
allocable to eligible property on hand at
the end of the taxable year, including ending inventories of property produced and
property acquired for resale. The final
regulations include the simplified production method contained in the temporary
regulations issued under 263A,
§1.263A–1T(b)(5), T.D. 8131 (58 F.R.
151), and the simplified resale method, a
redesignation of the modified resale
method set forth in Notice 89-67, 1989–1
C.B. 723. A taxpayer using either the
simplified production method or the simplified resale method determines the additional section 263A costs properly allocable to eligible property on hand at the end
18
of the taxable year by multiplying its absorption ratio by the section 471 costs on
hand at year-end. Under both the simplified production method and the simplified
resale method, an absorption ratio is calculated annually and applied to determine
the additional section 263A costs allocated to ending inventory.
In response to requests for additional
simplification, the final regulations provide an election to use an historic absorption ratio to determine additional section
263A costs allocable to eligible property
on hand at year-end that may be used in
connection with either the simplified production method or the simplified resale
method.
The final regulations permit a taxpayer
that properly elects to use the historic absorption ratio to determine the additional
section 263A costs allocable to eligible
property on hand at the end of the taxable
year by using an historic absorption ratio
in lieu of an actual absorption ratio, i.e.,
by multiplying the historic absorption
ratio by section 471 costs on hand at yearend. The historic absorption ratio is
based on costs capitalized by a taxpayer
during its test period, generally the three
taxable-year period immediately prior to
the taxable year that the taxpayer elects
the historic absorption ratio. The historic
absorption ratio equals the taxpayer’s additional section 263A costs incurred during the test period divided by the section
471 costs incurred by the taxpayer during
the test period. Under the final regulations, taxpayers are required to test the accuracy of the historic absorption ratio
every six years. If the test of the ratio indicates more than one-half of one percentage point difference (plus or minus) from
the historic absorption ratio, the taxpayer
must redetermine its historic absorption
ratio using a new updated test period.
The final regulations provide that, if
elected, the historic absorption ratio must
be used for each taxable year within the
qualifying period. Generally, the qualifying period includes each of the first five
taxable years beginning with the first taxable year after a test period (or an updated
test period).
Explanation of Provisions
This document contains proposed
amendments to the Income Tax Regula-
1999–23 I.R.B.
tions (26 CFR part 1) that relate to the
capitalization of certain costs under section 263A. More specifically, this document contains proposed amendments with
respect to the historic absorption ratio
election that are necessary to carry out the
purpose of section 263A. The rules under
section 263A were designed to properly
match income with related expenses by
requiring all of the costs relating to an
item produced or acquired for resale to be
included in the basis or inventoriable cost
of that item. The simplified production
method and the simplified resale method
were included in the regulations to provide taxpayers with a simplified method
for determining the additional section
263A costs allocable to items on hand at
year end. The historic absorption ratio
election was provided in response to commentators’ concerns that computations
under the simplified production method
and the simplified resale method are
costly and time consuming because taxpayers must determine absorption ratios
annually, even though there may have
been little or no change in the taxpayers’
business operations that would cause the
absorption ratios to vary from year to
year.
The historic absorption ratio election in
the final regulations is intended to permit
taxpayers to determine additional section
263A costs allocable to items on hand at
year-end without calculating actual absorption ratios while still capitalizing the
costs properly allocable to property produced or acquired for resale. The historic
absorption ratio was selected in lieu of an
industry-based ratio because the IRS and
Treasury Department believed that a ratio
based on taxpayer specific historical data
would more reasonably approximate the
taxpayer’s annual absorption ratio than an
industry-based ratio.
The IRS and Treasury Department have
become aware that the historic absorption
ratio may become materially inaccurate
generally as the result of a significant
change in a taxpayer’s circumstances during the qualifying period, thus resulting in
a failure to allocate the proper amount of
additional section 263A costs to items on
hand at year-end. Although the regulations provide that a taxpayer must test its
historic absorption ratio every six years, a
significant deviation from the taxpayer’s
1999–23 I.R.B.
actual absorption ratio could result in a
substantial mismatching of the taxpayer’s
income and related expenses during the
qualifying period.
The IRS and Treasury Department considered many alternate approaches to revising the historic absorption ratio regulations in order to prevent a substantial
mismatching of income and related expenses. Among the approaches considered and rejected were the following: (1)
eliminate the historic absorption ratio
election entirely; (2) limit use of the historic absorption ratio election to small
taxpayers; (3) require taxpayers to retest
their historic absorption ratio more frequently, e.g., every three years; and (4)
provide a general anti-abuse rule.
These proposed regulations provide for
early termination of the qualifying period
if the taxpayer’s historic absorption ratio
is materially inaccurate. In such a case,
the taxpayer must calculate a new historic
absorption ratio beginning with the year
in which the taxpayer’s historic absorption ratio became materially inaccurate.
Generally, a taxpayer’s historic absorption ratio may become materially inaccurate when the taxpayer experiences a significant change in the taxpayer’s normal
business operations and that change has
an effect on the taxpayer’s section 263A
absorption ratio. For example, the following changes may cause a taxpayer’s
historic absorption ratio to become materially inaccurate: a significant change in
the taxpayer’s manufacturing process, e.g.
implementation of a new inventory management system; a significant change in
the taxpayer’s product offering; a significant addition or retirement of equipment
used for manufacturing; a significant
change in the taxpayer’s components of
cost, e.g., a manufacturing operation that
becomes significantly more or less labor
intensive; a significant change in the taxpayer’s overhead costs, e.g. a new plant,
building or building addition; and a significant change in the taxpayer’s trade or
business, e.g., the sale or acquisition of a
division.
The proposed regulations establish a
high threshold for when the historic absorption ratio will be regarded as materially inaccurate. The regulations provide a
definition of materially inaccurate that incorporates both a percentage test and a
19
specific dollar amount test. The regulations provide that the historic absorption
ratio is materially inaccurate if: (1) the
taxpayer’s actual absorption ratio deviates
by more than 50% and by more than onehalf of one percentage point from the taxpayer’s historic absorption ratio; and (2)
the amount of additional section 263A
costs capitalizable to items on hand at
year-end using the actual absorption ratio
deviates by more than $100,000 from the
amount of additional section 263A costs
capitalizable to items on hand at year-end
using the historic absorption ratio. This
high threshold is provided so that annual
actual absorption ratio computations will
be unnecessary in the overwhelming majority of situations. For example, the
placement in service of a significant
amount of property may have a significant effect on a taxpayer’s actual absorption ratio. However, it may not be necessary for a taxpayer to compute its actual
absorption ratio for a year that the taxpayer placed property in service if, based
on the taxpayer’s knowledge of the difference between its tax depreciation and
book depreciation, and its inventory
turnover, the taxpayer knows that it would
be impossible for the amount of additional section 263A costs allocable to
items on hand at year-end to increase by
$100,000 if the taxpayer used the simplified production method without the historic absorption ratio election. Therefore,
the taxpayer would not need to calculate
an actual absorption ratio for that year.
Proposed Effective Date
The provisions of these regulations are
proposed to be effective for taxable years
beginning after May 24, 1999.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in EO
12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
June 7, 1999
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) and electronic comments that are
submitted timely to the IRS. The IRS and
Treasury Department request comments
on the clarity of the proposed rules and
how they can be made easier to understand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Wednesday, September 1, 1999, in
room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the 10th
Street entrance, located between Constitution and Pennsylvania Avenues, NW. In
addition, all visitors must present photo
identification to enter the building. Because of access restrictions, visitors will
not be admitted beyond the immediate entrance area more than 15 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral comments at the hearing must submit written
or electronic comments by August 23,
1999 and submit an outline of the topics
to be discussed and the time to be devoted
to each topic (a signed original and eight
(8) copies) by August 11, 1999.
A period of 10 minutes will be allocated 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 author of these regulations is Jennifer Nuding of the Office of
June 7, 1999
Assistant Chief Counsel (Income Tax and
Accounting). 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.263A–2 is amended
as follows:
1. Paragraphs (b)(4)(ii)(C)(1) and (2)
are revised;
2. New paragraphs (b)(4)(ii)(C)(3) and
(4) are added;
3. Paragraph (b)(4)(vi) is amended by:
a. Revising the paragraph heading
and introductory text;
b. Redesignating the Example as Example 1;
c. Adding new Example 2 and Example 3.
The revisions and additions read as follows:
§1.263A–2 Rules relating to property
produced by the taxpayer.
* * * * *
(b) * * *
(4) * * *
(ii) * * *
(C) Qualifying period—(1) In general.
A qualifying period generally includes
each of the first five taxable years beginning with the first taxable year after a test
period (or an updated test period). However, a qualifying period may be extended
under the provisions of paragraph
(b)(4)(ii)(C)(2) of this section or may terminate early under the provisions of paragraph (b)(4)(ii)(C)(3) of this section.
(2) Extension of qualifying period. In
the first taxable year following the close
of each qualifying period, (e.g., the sixth
taxable year following the test period),
the taxpayer must compute the actual absorption ratio under the simplified production method. If the actual absorption
ratio computed for this taxable year (the
recomputation year) is within one-half of
one percentage point (plus or minus) of
20
the historic absorption ratio used in determining capitalizable costs for the qualifying period (e.g., the previous five taxable
years), the qualifying period is extended
to include the recomputation year and the
following five taxable years (or a shorter
period if the qualifying period is terminated early under the provisions of paragraph (b)(4)(ii)(C)(3) of this section), and
the taxpayer must continue to use the historic absorption ratio throughout the extended qualifying period. If, however, the
actual absorption ratio computed for the
recomputation year is not within one-half
of one percentage point (plus or minus) of
the historic absorption ratio, the taxpayer
must use actual absorption ratios beginning with the recomputation year under
the simplified production method and
throughout the updated test period. The
taxpayer must resume using the historic
absorption ratio (determined with reference to the updated test period) in the
third taxable year following the recomputation year.
(3) Earlier termination of the qualifying period. For taxable years beginning
afterMay 24, 1999, a qualifying period
closes immediately prior to a taxable year
in which the taxpayer’s historic absorption ratio becomes materially inaccurate
(early recomputation year). If the taxpayer’s historic absorption ratio is materially inaccurate, as defined in paragraph
(b)(4)(ii)(C)(4) of this section, the taxpayer must use its actual absorption ratios
computed using the simplified production
method beginning with the early recomputation year and throughout the updated
test period. The taxpayer must resume
using the historic absorption ratio (determined with reference to the updated test
period) in the third taxable year following
the early recomputation year.
(4) Materially inaccurate. For purposes
of this paragraph (b)(4), an historic absorption ratio becomes materially inaccurate in a taxable year that—
(i) The taxpayer’s actual absorption
ratio computed using the simplified production method deviates by more than 50
percent and by more than one-half of one
percentage point from the taxpayer’s historic absorption ratio for that year; and
(ii) The amount of additional section
263A costs capitalizable to eligible property remaining on hand at the close of that
year under the simplified production
1999–23 I.R.B.
method (using the taxpayer’s actual absorption ratio) deviates by more than
$100,000 from the amount of additional
section 263A costs capitalizable to that
property under the simplified production
method with historic absorption ratio
election for that year.
* * * * *
(vi) Examples. The provisions of this
paragraph (b)(4) are illustrated by the following examples:
Example 1. * * *
Example 2. (i) Taxpayer K uses the FIFO method
of accounting for inventories and properly elects to
use the historic absorption ratio with the simplified
production method for 1998. K identifies the following costs incurred during the test period:
Historic absorption ratio =
(iii) In 1998, K incurs $90,000,000 of section 471
costs of which $15,000,000 remain in inventory at
the end of the year. In addition, K places
$50,000,000 of plant and equipment into service.
K’s book depreciation on the new plant and equipment is $5,000,000, while K’s tax depreciation on
1999–23 I.R.B.
(ii) Therefore, K computes a 5% historic absorption ratio as follows:
$3,500,000 + 4,000,000 + 4,500,000
= 5%
$75,000,000 + 80,000,000 + 85,000,000
the new plant and equipment is $10,000,000. K’s
book depreciation is a section 471 cost as described
in §1.263A–1(d)(2) and the excess of K’s tax depreciation over K’s book depreciation, $5,000,000, is
an additional section 263A cost. K also has
$4,500,000 in other additional section 263A costs.
Actual absorption Ratio =
(v) The difference between K’s actual absorption
ratio (10%) under the simplified production method
for 1998 and K’s historic absorption ratio (5%) is
5%, which is greater than 50 percent of K’s historic
absorption ratio for that year (5% x 50% = 2.5%).
Under the simplified production method without the
historic absorption ratio election, K determines the
additional section 263A costs allocable to its ending
inventory by multiplying its actual absorption ratio
(10%) by the section 471 costs remaining in its ending inventory as follows:
Add’l section 263A costs = 10% ⫻ $15,000,000
= $1,500,000
(vi) Under the simplified production method
using the historic absorption ratio, K determines the
additional section 263A costs allocable to its ending
inventory by multiplying its historic absorption ratio
(5%) by the section 471 costs remaining in its ending inventory as follows:
Add’l section 263A costs = 5% ⫻ $15,000,000 =
$750,000
(vii) The difference between the amount of additional section 263A costs allocable to eligible property remaining on hand at the close of 1998 under
the simplified production method using the taxpayer’s actual absorption ratio and the amount of additional section 263A costs allocable to that property
under the simplified production method with historic absorption ratio election ($1,500,000 –
$750,000 = $750,000) exceeds $100,000. Accordingly, K’s historic absorption ratio is materially inaccurate for 1998.
(viii) Since K’s historic absorption ratio is materially inaccurate in 1998, K’s qualifying period
closes immediately prior to the beginning of K’s
1998 taxable year. Therefore, K must update its test
period beginning in 1998. K must use actual absorption ratios under the simplified production method
beginning in 1998 and throughout the updated test
period (1999 and 2000). K must resume using the
historic absorption ratio (determined with reference
to the updated test period) in 2001, the third taxable
year following 1998.
Example 3. (i) Taxpayer L properly elects to use
the historic absorption ratio with the simplified pro-
1995:
Add’l section 263A costs — $3,500,000 Section 471
costs — $75,000,000
1996:
Add’l section 263A costs — $4,000,000 Section 471
costs — $80,000,000
1997:
Add’l section 263A costs — $4,500,000 Section 471
costs — $85,000,000
(iv) K must determine whether K’s historic absorption ratio is materially inaccurate in 1998.
Under the simplified production method without the
historic absorption ratio election, K determines its
actual absorption ratio for 1998 as follows:
$4,500,000 + $5,000,000
= 10%
$90,000,000 + $5,000,000
duction method for 1999. L computes a 10% historic absorption ratio. On average, L’s inventory
turns over approximately fifteen times a year.
(ii) In 1999, L incurs $8,000,000 of section 471
costs of which $500,000 remain in inventory at the
end of the year. In addition, L places $5,000,000 of
plant and equipment into service. The difference between L’s tax depreciation on the new plant and
equipment and L’s book depreciation on that plant
and equipment for 1999 is $500,000, which is an additional section 263A cost. There were no other
changes in L’s additional 263A costs.
(iii) L can determine, without calculating an actual
absorption ratio, that its historic absorption ratio is not
materially inaccurate for 1999. The difference between the amount of additional section 263A costs allocated to its ending inventory using its actual absorption ratio and the amount of additional section 263A
costs allocated to its ending inventory using its historic absorption ratio will not exceed $100,000 and,
therefore, L does not fall within the specific dollar
amount test of paragraph (b)(4)(ii)(C)(4)(ii) of this
section. Although L’s additional section 263A costs
increased by over $100,000 in 1999 (they increased
by $500,000) as a result of placing the plant and
equipment into service, only a portion of that amount
will be allocated to ending inventory. L’s inventory
turns over approximately fifteen times a year. Of the
$500,000 of additional section 263A costs incurred as
the result of placing the plant and equipment into service in 1999, only about $33,000 ($500,000 ⫼ 15)
will be allocated to ending inventory. Since $33,000
is well below the $100,000 threshold, L can determine without calculating an actual absorption ratio
for 1999 that its historic absorption ratio is not materially inaccurate. Since L’s historic absorption ratio is
not materially inaccurate in 1999, L’s qualifying period does not terminate early.
* * * * *
Par. 3. Section 1.263A-3 is amended as
follows:
1. Paragraphs (d)(4)(ii)(C)(1) and (2)
are revised;
21
2. New paragraphs (d)(4)(ii)(C)(3) and
(4) are added;
3. Paragraph (d)(4)(vi) is amended by:
a. Revising the paragraph heading
and introductory text;
b. Redesignating the Example as Example 1;
c. Adding new Example 2.
The revisions and additions read as follows:
§1.263A–3 Rules relating to property
acquired for resale.
* * * * *
(d) * * *
(4) * * *
(ii) * * *
(C) Qualifying period—(1) In general.
A qualifying period generally includes
each of the first five taxable years beginning with the first taxable year after a test
period (or an updated test period). However, a qualifying period may be extended
under the provisions of paragraph
(d)(4)(ii)(C)(2) of this section or may terminate early under the provisions of paragraph (d)(4)(ii)(C)(3) of this section.
(2) Extension of qualifying period. In
the first taxable year following the close
of each qualifying period, (e.g., the sixth
taxable year following the test period),
the taxpayer must compute the actual
combined absorption ratio under the simplified resale method. If the actual combined absorption ratio computed for this
taxable year (the recomputation year) is
within one-half of one percentage point
June 7, 1999
(plus or minus) of the historic absorption
ratio used in determining capitalizable
costs for the qualifying period (e.g., the
previous five taxable years), the qualifying period is extended to include the recomputation year and the following five
taxable years (or a shorter period if the
qualifying period is terminated early
under the provisions of paragraph
(d)(4)(ii)(C)(3) of this section), and the
taxpayer must continue to use the historic
absorption ratio throughout the extended
qualifying period. If, however, the actual
combined absorption ratio computed for
the recomputation year is not within onehalf of one percentage point (plus or
minus) of the historic absorption ratio, the
taxpayer must use actual combined absorption ratios beginning with the recomputation year under the simplified resale
method and throughout the updated test
period. The taxpayer must resume using
the historic absorption ratio (determined
with reference to the updated test period)
in the third taxable year following the recomputation year.
(3) Earlier termination of the qualifying period. For taxable years beginning
after [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE
FEDERAL REGISTER], a qualifying period closes immediately prior to a taxable
year in which the taxpayer’s historic absorption ratio becomes materially inaccurate (early recomputation year). If the taxpayer ’s historic absorption ratio is
materially inaccurate, as defined in paragraph (d)(4)(ii)(C)(4) of this section, the
taxpayer must use its actual combined absorption ratios computed using the simplified resale method beginning with the
early recomputation year and throughout
the updated test period. The taxpayer
must resume using the historic absorption
ratio (determined with reference to the
updated test period) in the third taxable
year following the early recomputation
year.
(4) Materially inaccurate. For purposes
of this paragraph (d)(4), an historic absorption ratio becomes materially inaccurate in a taxable year that—
(i) The taxpayer’s actual combined absorption ratio computed using the simplified resale method deviates by more than
50 percent and by more than one-half of
one percentage point from the taxpayer’s
historic absorption ratio for that year; and
(ii) The amount of additional section
263A costs capitalizable to eligible property remaining on hand at the close of that
year under the simplified resale method
(using the taxpayer’s actual combined absorption ratio) deviates by more than
Historic absorption ratio =
(iii) In 1999, W decides to automate part of its
repackaging activities. Accordingly, W places new
repackaging equipment into service. The repackaging equipment has a basis of $15,000,000 for tax
purposes. W’s tax depreciation on the new equipment for 1999 is $3,000,000. This depreciation allowance is an additional section 263A cost and is a
handling cost as defined in paragraph (c)(4) of this
section. As a result of the new equipment, W’s direct labor costs with respect to its repackaging activities decrease by $500,000 during 1999. In 1999, W
incurs $60,000,000 of section 471 costs, of which
$6,000,000 remain on hand at the end of the year. W
identifies $6,000,000 of storage and handling costs,
including W’s tax depreciation on the new equipment and taking into account the reduction in direct
labor costs, and $450,000 of purchasing costs incurred in 1999.
(iv) W must determine whether W’s historic absorption ratio is materially inaccurate in 1999. In
order to do so, W calculates W’s actual combined
absorption ratio for 1999 as follows:
Storage & handling costs
absorption ratio
Purchasing costs
absorption ratio
June 7, 1999
$6,000,000
= 10%
$60,000,000
$450,000
=
= 0.75%
$60,000,000
=
$100,000 from the amount of additional
section 263A costs capitalizable to that
property under the simplified resale
method with historic absorption ratio
election for that year.
* * * * *
(vi) Examples. The provisions of this
paragraph (d)(4) are illustrated by the following examples:
Example 1. * * *
Example 2. (i) Taxpayer W operates a mail-order
retail business and uses the FIFO method of accounting for inventories. In 1996, 1997 and 1998,
W used the simplified resale method without the historic absorption ratio election with the variation permitted in paragraph (d)(3)(iii)(A) of this section, exclusion of beginning inventories from the
denominator in the storage and handling costs absorption ratio formula. Taxpayer W elects to use the
historic absorption ratio with the simplified resale
method for 1999. W identifies the following costs
incurred during the test period:
1996:
Add’l section 263A costs — $2,000,000 Section 471
costs — $45,000,000
1997:
Add’l section 263A costs — $2,500,000 Section 471
costs — $50,000,000
1998:
Add’l section 263A costs — $3,000,000 Section 471
costs — $55,000,000
(ii) Therefore, W computes a 5% historic absorption ratio as follows:
$2,000,000 + 2,500,000 + 3,000,000
= 5%
$45,000,000 + 50,000,000 + 55,000,000
Combined absorption ratio = 10% + 0.75% =
10.75%
(v) The difference between W’s actual
combined absorption ratio (10.75%)
under the simplified resale method for
1999 and W’s historic absorption ratio
(5%) is 5.75%, which is greater than 50
percent of W’s historic absorption ratio
for that year (5% ⫻ 50% = 2.5%). Under
the simplified resale method without the
historic absorption ratio election, W determines the additional section 263A costs
allocable to its ending inventory by multiplying its actual combined absorption
ratio (10.75%) by the section 471 costs
remaining in its ending inventory as follows:
Add’l section 263A costs = 10.75% ⫻
$6,000,000 = $645,000
(vi) Under the simplified resale method
using the historic absorption ratio, W determines the additional section 263A costs
22
allocable to its ending inventory by multiplying its historic absorption ratio (5%) by
the section 471 costs remaining in its ending inventory as follows:
Add’l section 263A costs = 5% ⫻
$6,000,000 = $300,000
(vii) The difference between the
amount of additional section 263A costs
allocable to eligible property remaining
on hand at the close of 1999 under the
simplified resale method using the taxpayer’s actual combined absorption ratio
and the amount of additional section
263A costs allocable to that property
under the simplified resale method with
historic absorption ratio election
($645,000 – $300,000 = $345,000) exceeds $100,000. Accordingly, W’s historic absorption ratio is materially inaccurate for 1999.
(viii) Since W’s historic absorption
ratio was materially inaccurate in 1999,
1999–23 I.R.B.
W’s qualifying period closes immediately
prior to the beginning of W’s 1999 taxable year. Therefore, W must update its
test period beginning in 1999. W must
use actual combined absorption ratios
under the simplified resale method beginning in 1999 and throughout the updated
test period (2000 and 2001). W must re-
1999–23 I.R.B.
sume using the historic absorption ratio
(determined with reference to the updated
test period) in 2002, the third taxable year
following 1999.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
23
(Filed by the Office of the Federal Register on May
21, 1999, 8:45 a.m., and published in the issue of the
Federal Register for May 24, 1999, 64 F.R. 27936)
June 7, 1999
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to describe the effect:
Amplified describes a situation where
no change is being made in a prior published position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confusion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the substance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published ruling is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously published ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be published that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
The following abbreviations in current use and formerly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
June 7, 1999
24
1999–23 I.R.B.
Numerical Finding List1
Bulletins 1999–1 through 1999–22
Notices—Continued
Revenue Procedures—Continued
99–11, 1999–8 I.R.B. 56
99–12, 1999–9 I.R.B. 44
99–13, 1999–10 I.R.B. 26
99–14, 1999–11 I.R.B. 7
99–15, 1999–12 I.R.B. 20
99–16, 1999–13 I.R.B. 10
99–17, 1999–14 I.R.B. 6
99–18, 1999–16 I.R.B. 4
99–19, 1999–16 I.R.B. 4
99–20, 1999–17 I.R.B. 16
99–21, 1999–17 I.R.B. 19
99–22, 1999–19 I.R.B. 5
99–23, 1999–20 I.R.B. 73
99–24, 1999–20 I.R.B. 74
99–25, 1999–20 I.R.B. 75
99–26, 1999–21 I.R.B. 3
99–27, 1999–21 I.R.B. 4
99–28, 1999–21 I.R.B. 8
99–29, 1999–21 I.R.B. 8
99–30, 1999–22 I.R.B. 5
99–8, 1999–1 I.R.B. 229
99–9, 1999–2 I.R.B. 17
99–10, 1999–2 I.R.B. 11
99–11, 1999–2 I.R.B. 14
99–12, 1999–3 I.R.B. 13
99–13, 1999–5 I.R.B. 52
99–14, 1999–5 I.R.B. 56
99–15, 1999–7 I.R.B. 42
99–16, 1999–7 I.R.B. 50
99–17, 1999–7 I.R.B. 52
99–18, 1999–11 I.R.B. 7
99–19, 1999–13 I.R.B. 10
99–20, 1999–14 I.R.B. 7
99–21, 1999–17 I.R.B. 18
99–22, 1999–15 I.R.B. 5
99–23, 1999–16 I.R.B. 5
99–24, 1999–21 I.R.B. 8
99–25, 1999–21 I.R.B. 24
Announcements:
99–1, 1999–2 I.R.B. 41
99–2, 1999–2 I.R.B. 44
99–3, 1999–3 I.R.B. 15
99–4, 1999–3 I.R.B. 15
99–5, 1999–3 I.R.B. 16
99–6, 1999–4 I.R.B. 24
99–7, 1999–2 I.R.B. 45
99–8, 1999–4 I.R.B. 24
99–9, 1999–4 I.R.B. 24
99–10, 1999–5 I.R.B. 63
99–11, 1999–5 I.R.B. 64
99–12, 1999–5 I.R.B. 65
99–13, 1999–6 I.R.B. 18
99–14, 1999–7 I.R.B. 60
99–15, 1999–8 I.R.B. 78
99–16, 1999–8 I.R.B. 80
99–17, 1999–9 I.R.B. 59
99–18, 1999–13 I.R.B. 21
99–19, 1999–10 I.R.B. 63
99–20, 1999–11 I.R.B. 53
99–21, 1999–11 I.R.B. 55
99–22, 1999–12 I.R.B. 32
99–23, 1999–15 I.R.B. 7
99–24, 1999–14 I.R.B. 12
99–25, 1999–12 I.R.B. 35
99–26, 1999–14 I.R.B. 20
99–27, 1999–13 I.R.B. 22
99–28, 1999–13 I.R.B. 25
99–29, 1999–13 I.R.B. 25
99–30, 1999–13 I.R.B. 26
99–31, 1999–13 I.R.B. 26
99–32, 1999–14 I.R.B. 20
99–33, 1999–14 I.R.B. 21
99–34, 1999–15 I.R.B. 8
99–35, 1999–14 I.R.B. 22
99–36, 1999–16 I.R.B. 10
99–37, 1999–15 I.R.B. 9
99–38, 1999–15 I.R.B. 9
99–39, 1999–15 I.R.B. 10
99–40, 1999–16 I.R.B. 10
99–41, 1999–16 I.R.B. 10
99–42, 1999–16 I.R.B. 11
99–43, 1999–16 I.R.B. 11
99–44, 1999–16 I.R.B. 12
99–45, 1999–16 I.R.B. 12
99–46, 1999–16 I.R.B. 13
99–48, 1999–17 I.R.B. 20
99–49, 1999–18 I.R.B. 7
99–50, 1999–19 I.R.B. 6
99–51, 1999–19 I.R.B. 6
99–52, 1999–19 I.R.B. 9
99–53, 1999–20 I.R.B. 95
99–54, 1999–21 I.R.B. 32
99–55, 1999–22 I.R.B. 34
99–56, 1999–22 I.R.B. 37
REG–209103–89, 1999–11 I.R.B. 10
REG–208156–91, 1999–22 I.R.B. 11
REG–209619–93, 1999–10 I.R.B. 28
REG–245562–96, 1999–9 I.R.B. 45
REG–100905–97, 1999–22 I.R.B. 10
REG–104072–97, 1999–11 I.R.B. 12
REG–114663–97, 1999–6 I.R.B. 15
REG–114664–97, 1999–11 I.R.B. 21
REG–116826–97, 1999–10 I.R.B. 40
REG–118620–97, 1999–9 I.R.B. 46
REG–120168–97, 1999–12 I.R.B. 21
REG–121806–97, 1999–10 I.R.B. 46
REG–100729–98, 1999–14 I.R.B. 9
REG–104924–98, 1999–10 I.R.B. 47
REG–105964–98, 1999–12 I.R.B. 22
REG–106004–98, 1999–20 I.R.B. 77
REG–106177–98, 1999–12 I.R.B. 25
REG–106219–98, 1999–9 I.R.B. 51
REG–106386–98, 1999–12 I.R.B. 31
REG–106388–98, 1999–11 I.R.B. 27
REG–106564–98, 1999–10 I.R.B. 53
REG–106902–98, 1999–8 I.R.B. 57
REG–106905–98, 1999–11 I.R.B. 39
REG–110524–98, 1999–10 I.R.B. 55
REG–111435–98, 1999–7 I.R.B. 55
REG–113694–98, 1999–7 I.R.B. 56
REG–111435–98, 1999–7 I.R.B. 55
REG–113744–98, 1999–10 I.R.B. 59
REG–114841–98, 1999–11 I.R.B. 41
REG–115433–98, 1999–9 I.R.B. 54
REG–116099–98, 1999–12 I.R.B. 34
REG–116824–98, 1999–7 I.R.B. 57
REG–117620–98, 1999–7 I.R.B. 59
REG–118662–98, 1999–13 I.R.B. 13
REG–119192–98, 1999–11 I.R.B. 45
REG–121865–98, 1999–8 I.R.B. 63
REG–103851–99, 1999–20 I.R.B. 93
Notices:
Railroad Retirement Quarterly Rate:
99–1, 1999–2 I.R.B. 8
99–2, 1999–2 I.R.B. 8
99–3, 1999–2 I.R.B. 10
99–4, 1999–3 I.R.B. 9
99–5, 1999–3 I.R.B. 10
99–6, 1999–3 I.R.B. 12
99–7, 1999–4 I.R.B. 23
99–8, 1999–5 I.R.B. 26
99–9, 1999–4 I.R.B. 23
99–10, 1999–6 I.R.B. 14
1999–22 I.R.B. 3
Proposed Regulations:
Revenue Procedures:
99–1, 1999–1 I.R.B. 6
99–2, 1999–1 I.R.B. 73
99–3, 1999–1 I.R.B. 103
99–4, 1999–1 I.R.B. 115
99–5, 1999–1 I.R.B. 158
99–6, 1999–1 I.R.B. 187
99–7, 1999–1 I.R.B. 226
Revenue Rulings:
99–1, 1999–2 I.R.B. 4
99–2, 1999–2 I.R.B. 5
99–3, 1999–3 I.R.B. 4
99–4, 1999–4 I.R.B. 19
99–5, 1999–6 I.R.B. 8
99–6, 1999–6 I.R.B. 6
99–7, 1999–5 I.R.B. 4
99–8, 1999–6 I.R.B. 8
99–9, 1999–7 I.R.B. 14
99–10, 1999–10 I.R.B. 10
99–11, 1999–10 I.R.B. 18
99–12, 1999–11 I.R.B. 6
99–13, 1999–10 I.R.B. 4
99–14, 1999–13 I.R.B. 3
99–15, 1999–12 I.R.B. 4
99–16, 1999–13 I.R.B. 5
99–17, 1999–14 I.R.B. 4
99–18, 1999–14 I.R.B. 3
99–19, 1999–15 I.R.B. 3
99–20, 1999–18 I.R.B. 5
99–21, 1999–18 I.R.B. 3
99–22, 1999–19 I.R.B. 3
99–23, 1999–20 I.R.B. 3
99–24, 1999–21 I.R.B. 3
Tax Convention:
1999–22 I.R.B. 4
Treasury Decisions:
8789, 1999–3 I.R.B. 5
8791, 1999–5 I.R.B. 7
8792, 1999–7 I.R.B. 36
8793, 1999–7 I.R.B. 15
8794, 1999–7 I.R.B. 4
8795, 1999–7 I.R.B. 8
8796, 1999–4 I.R.B. 16
8797, 1999–5 I.R.B. 5
8798, 1999–12 I.R.B. 16
8799, 1999–6 I.R.B. 10
8800, 1999–4 I.R.B. 20
8801, 1999–4 I.R.B. 5
8802, 1999–4 I.R.B. 10
8803, 1999–12 I.R.B. 15
8804, 1999–12 I.R.B. 5
8805, 1999–5 I.R.B. 14
8806, 1999–6 I.R.B. 4
8807, 1999–9 I.R.B. 33
8808, 1999–10 I.R.B. 21
8809, 1999–7 I.R.B. 27
8810, 1999–7 I.R.B. 19
8811, 1999–10 I.R.B. 19
1 See footnote at end of list.
1999–23 I.R.B.
25
June 7, 1999
Numerical Finding List–Continued
Bulletins 1999–1 through 1999–22
Treasury Decisions—Continued
8812, 1999–8 I.R.B. 19
8813, 1999–9 I.R.B. 34
8814, 1999–9 I.R.B. 4
8815, 1999–9 I.R.B. 31
8816, 1999–8 I.R.B. 4
8817, 1999–8 I.R.B. 51
8818, 1999–17 I.R.B. 3
8819, 1999–20 I.R.B. 5
1 A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–52
will be found in Internal Revenue Bulletin 1999–1,
dated January 4, 1999.
June 7, 1999
26
1999–23 I.R.B.
Finding List of Current Action on
Previously Published Items1
Bulletins 1999–1 through 1999–22
Notices:
92–36
Modified by
Rev. Proc. 99–23, 1999–16 I.R.B. 5
94–16
Obsoleted by
Notice 99–22, 1999–19 I.R.B. 5
96–64
Modified by
Rev. Proc. 99–23, 1999–16 I.R.B. 5
98–39
Modified by
Rev. Proc. 99–23, 1999–16 I.R.B. 5
98–52
Modified by
Rev. Proc. 99–23, 1999–16 I.R.B. 5
98–61
Modified by
99–29, 1999–21 I.R.B. 8
99–5
Modified by
Rev. Proc. 99–23, 1999–16 I.R.B. 5
Revenue Procedures—Continued
98–4
Superseded by
99–4, 1999–1 I.R.B. 115
98–5
Superseded by
99–5, 1999–1 I.R.B. 158
98–6
Superseded by
99–6, 1999–1 I.R.B. 187
98–7
Superseded by
99–7, 1999–1 I.R.B. 226
98–8
Superseded by
99–8, 1999–1 I.R.B. 229
98–14
Modified by
99–23, 1999–16 I.R.B. 5
98–22
Modified and amplified by
99–13, 1999–5 I.R.B. 52
98–28
Obsoleted by (except as provided in section 5.02 of)
99–22, 1999–15 I.R.B. 5
Revenue Procedures:
98–33
Superseded by
99–24, 1999–21 I.R.B. 8
78–10
Obsoleted by
99–12, 1999–3 I.R.B. 13
98–36
Superseded by
99–25, 1999–21 I.R.B. 24
89–9
Modified by
99–23, 1999–16 I.R.B. 5
98–56
Superseded by
99–3, 1999–1 I.R.B. 103
89–13
Modified by
99–23, 1999–16 I.R.B. 5
98–63
Modified by announcement
99–7, 1999–2 I.R.B. 45
93–39, section 13
Modified by
99–23, 1999–16 I.R.B. 5
Revenue Rulings:
94–56
Superseded by
99–9, 1999–2 I.R.B. 17
92–19
Supplemented in part by
99–10, 1999–10 I.R.B. 10
95–12
Modified by
99–23, 1999–16 I.R.B. 5
97–23
Superseded by
99–3, 1999–1 I.R.B. 103
97–41
Modified by
99–23, 1999–16 I.R.B. 5
98–1
Superseded by
99–1, 1999–1 I.R.B. 6
98–2
Superseded by
99–2, 1999–1 I.R.B. 73
98–3
Superseded by
99–3, 1999–1 I.R.B. 103
1 A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–52 will be found in Internal
Revenue Bulletin 1999–1, dated January 4, 1999.
1999–23 I.R.B.
27
June 7, 1999
Notes
June 7, 1999
28
1999–23 I.R.B.
Notes
1999–23 I.R.B.
29
June 7, 1999
Notes
June 7, 1999
30
1999–23 I.R.B.
INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, OP:FS:FP:P:1, Room 5617, 1111 Constitution Avenue NW, Washington,
DC 20224.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.