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Bulletin No. 1996–5

January 29, 1996

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

EXCISE TAXES

EE–20–95, page 15.

Proposed regulations under section 125 of the Code

relating to the effect of the Family and Medical Leave

Act of 1993 on the operation of cafeteria plans.

T.D. 8639, page 12.

Final regulations under section 4941 of the Code that

clarify the definition of self-dealing for private

foundations.

EE–35–95, page 19.

Proposed regulations under section 411 of the Code

provide guidance on calculation of an employee’s

accrued benefit derived from the employee’s contributions to a qualified defined benefit pension plan.

ADMINISTRATIVE

Notice 96–6, page 27.

Closing of study project and moving of related no-rule

provisions. The IRS and the Treasury Department have

decided not to issue guidance at this time regarding

corporate combining transactions and are closing the

study project. In Rev. Proc. 96–22, this Bulletin, page

27, Rev. Proc. 96–3 is amplified and modified by

moving the provision in section 5.15 from section 5

(Areas Under Extensive Study) to section 3 (Areas In

Which Rulings or Determination Letters Will Not Be

Issued).

EE–53–95, page 23.

Proposed regulations clarifying certain requirements for

tax-exempt section 501(c)(5) organizations.

T.D. 8638, page 5.

INTL–9–95, page 24.

Temporary and proposed regulations under section 367

of the Code relating to certain transfers of domestic

stock or securities by U.S. persons to foreign corporations. A public hearing will be held on April 11, 1996.

Rev. Proc. 96–22, page 27.

Areas in which advance rulings will not be issued

(Associate Chief Counsel (Domestic)). The No-Rule

provision with respect to ‘‘Combining Transactions’’

presently in section 5.15 of Rev. Proc. 96–3, 1996–1

I.R.B. 82, is moved from section 5 (Areas Under

Extensive Study) to section 3 (Areas In Which Rulings

or Determination Letters Will Not Be Issued). Rev.

Proc. 96–3 amplified and modified. See Notice 96–6,

this Bulletin, page 27, regarding the closing of the

study project.

EXEMPT ORGANIZATIONS

Announcement 96–6, page 43.

A list is given of organizations now classified as private

foundations.

Announcement 96–7, page 44.

A list is provided of organizations that no longer qualify

as organizations to which contributions are deductible

under section 170 of the Code.

(Continued on page 4)

Finding Lists begin on page 46.

Announcement of Declaratory Judgment Proceeding Under Section 7428 on page 44.

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Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

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

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of

view.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

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

provision and not to adopt a strained construction in

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

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

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining officers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great courtesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

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Introduction

The Internal Revenue Bulletin is the authoritative

instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the

Internal Revenue Service and for publishing Treasury

Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general

interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription basis. Bulletin contents of a permanent nature are

consolidated semiannually into Cumulative Bulletins,

which are sold on a single-copy basis.

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.

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.

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 procedures must be

considered, and Service personnel and others concerned are cautioned against reaching the same

conclusions in other cases unless the facts and

circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

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 Miscellanous.

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).

Part IV.—Items of General Interest.

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

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

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly

and semiannual basis, and are published in the first

Bulletin of the succeeding quarterly and semi-annual

period, respectively.

The Bulletin Index-Digest System, a research and

reference service supplementing the Bulletin, may be

obtained from the Superintendent of Documents on a

subscription basis. It consists of four Services: Service

No. 1, Income Tax; Service No. 2, Estate and Gift

Taxes; Service No. 3, Employment Taxes; Service No.

4, Excise Taxes. Each Service consists of a basic

volume and a cumulative supplement that provides (1)

finding lists of items published in the Bulletin, (2)

digests of revenue rulings, revenue procedures, and

other published items, and (3) indexes of Public Laws,

Treasury Decisions, and Tax Conventions.

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

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

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HIGHLIGHTS

OF THIS ISSUE—Continued

section 842(b) for foreign companies conducting

insurance business for taxable years beginning after

December 31, 1994.

ADMINISTRATIVE—Continued

Rev. Proc. 96–23, page 27.

Domestic asset/liability and investment yield percentages.

This procedure provides the domestic asset/liability

percentages and domestic investment yield percentages

for taxable years beginning after December 31, 1994,

for foreign companies doing insurance business in the

U.S. The percentages are necessary for computation of

the minimum effectively connected income under

Rev. Proc. 96–24, page 28.

General rules and specifications for private printing of

Forms W–2 and W–3. Specifications are set forth for the

private printing of paper substitutes for tax year 1995

Form W–2, Wage and Tax Statement, and Form W–3,

Transmittal of Wage and Tax Statements. Rev. Prov.

95–20 superseded.

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

Section 367.—Foreign Corporations

26 CFR 1.367(a)–3T: Treatment of transfers of

stock or securities to foreign corporations

(temporary).

T.D. 8638

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Certain Transfers of Domestic Stock

or Securities by U.S. Persons to

Foreign Corporations

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: These temporary regulations provide the public with guidance

necessary to comply with the Tax Reform Act of 1984. These regulations

amend the Income Tax Regulations

with respect to certain transfers of

stock or securities of domestic corporations by United States persons to

foreign corporations pursuant to the

corporate organization, reorganization,

or liquidation provisions of the Internal

Revenue Code. This Treasury decision

also removes certain of the existing

temporary regulations regarding transfers by U.S. persons of stock or

securities of both domestic and foreign

corporations. This action is necessary

to update the existing temporary regulations and to reflect certain of the

changes announced by Notice 87–85

(1987–2 C.B. 395) (with respect to

transfers of both domestic and foreign

stock or securities) and by Notice 94–

46 (1994–1 C.B. 356) (with respect to

transfers of stock or securities of a

domestic corporation). The text of

these temporary regulations also serves

as the text of the proposed regulations

set forth in the notice of proposed

rulemaking on this subject *** [INTL–

9–95, page 24, this Bulletin]. When

finalized, the regulations under section

367(a) relating to the transfer of stock

or securities will integrate the regulations herein with the 1991 proposed

regulations relating to transfers of stock

or securities (see Proposed Rule

§§ 1.367(a)–3 and 1.367(a)–8, published at 56 FR 41993, August 26,

1991).

EFFECTIVE DATE: April 17, 1994.

For further information, see the Applicability and Effective Dates section under

SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION

CONTACT: Philip L. Tretiak at (202)

622–3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Applicability and Effective Dates

These regulations are generally applicable to transfers occurring after

April 17, 1994, the effective date of

Notice 94–46. However, the active

trade or business requirement (described in §1.367(a)–3T(c)(1)(iii) of the

temporary regulations herein), which

was not contained in Notice 94–46, is

effective for transfers occurring after

January 25, 1996. Moreover, these

regulations remove as ‘‘deadwood’’

paragraphs (c)(1) through (c)(4), (d),

(e), (f), (g)(1)(iii) and (h)(1) of

§1.367(a)–3T of the existing temporary

regulations with respect to transfers

occurring after December 16, 1987, the

effective date of Notice 87–85.

Paperwork Reduction Act

These regulations are being issued

without prior notice and public procedure pursuant to the Administrative

Procedure Act (5 U.S.C. 553). For this

reason, the collection of information

contained in these regulations has been

reviewed and, pending receipt and

evaluation of public comments, approved by the Office of Management

and Budget under control number

1545–1478. Responses to this collection of information are required in

order for U.S. shareholders that transfer

stock or securities in section 367(a)

exchanges to qualify for an exception

to the general rule of taxation under

section 367(a)(1).

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

For further information concerning

this collection of information, and

where to submit comments on the

collection of information and the accuracy of the estimated burden, and

suggestions for reducing this burden,

please refer to the preamble to the

cross-referencing notice of proposed

rulemaking published in *** [INTL–9–

95, page 24, this Bulletin].

Books or records relating to a

collection of information must be retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

On May 16, 1986, temporary and

proposed regulations under sections

367(a) and (d) and section 6038B were

published in the Federal Register (51

FR 17936). These regulations were

published to provide the public with

guidance necessary to comply with

changes made to the Internal Revenue

Code by the Tax Reform Act of 1984.

Included in the 1986 temporary regulations was §1.367(a)–3T, concerning

transfers of stock or securities of

domestic or foreign corporations by

U.S. persons to foreign corporations.

Subsequently, the IRS and the Treasury

Department issued Notice 87–85

(1987–2 C.B. 395), which set forth

substantial changes to be made to

§1.367(a)–3T, effective with respect to

transfers occurring after December 16,

1987. A further notice of proposed

rulemaking, containing rules under section 367(a), as well as under section

367(b), was published in the Federal

Reister on August 26, 1991 (56 FR

41993). The 1991 proposed section

367(a) regulations were generally based

upon the positions announced in Notice

87–85, but the regulations made certain

modifications to Notice 87–85, particularly with respect to transfers of

stock or securities of foreign

corporations.

Most recently, the IRS and the

Treasury Department issued Notice 94–

46 (1994–1 C.B. 356), announcing

modifications to the positions set forth

in Notice 87–85 (and the 1991 proposed regulations) with respect to

transfers of stock or securities of

domestic corporations occurring after

April 17, 1994. The temporary regulations set forth herein generally incorporate the modifications announced in

Notice 94–46. The notice of proposed

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rulemaking on this subject in ***

[INTL–9–95, this Bulletin] supplements

and, where inconsistent with, supersedes, the 1991 proposed regulations

with respect to transfers of domestic

stock or securities occurring after April

17, 1994.

Notice 94–46 announced that the

regulations under section 367(a) would

be amended to deny nonrecognition

treatment to the transfer of stock or

securities of a domestic corporation by

a U.S. person to a foreign corporation

if all U.S. transferors owned in the

aggregate 50 percent or more of either

the total voting power or the total value

of the stock of the transferee foreign

corporation immediately after the exchange. (Under the approach taken in

Notice 87–85, transfers of domestic

stock or securities occurring prior to

April 18, 1994 (and after December 16,

1987) were generally denied nonrecognition treatment only in the case of a

single U.S. transferor that owned more

than 50 percent of the total voting

power or the total value of the stock of

the transferee foreign corporation immediately after the transfer or of a U.S.

transferor that held at least 5 percent

(but no more than 50 percent) of the

total voting power or the total value of

the stock of the transferee foreign

corporation immediately after the transfer and that failed to enter into a gain

recognition agreement.)

In Notice 94–46, the IRS and the

Treasury Department invited comments

on possible exceptions to the general

rule set forth in the Notice, specifically

with respect to cases where (i) a

domestic corporation is acquired by a

foreign corporation that is engaged in

an active trade or business and that,

prior to the transaction, is unrelated to

the acquired corporation or its shareholders, or (ii) the transferee foreign

corporation is a controlled foreign

corporation (within the meaning of

section 957) after the transfer. After

consideration of the comments received, the IRS and the Treasury

Department have concluded that no

exceptions to the general rule are

warranted.

In the Notice, the IRS and the

Treasury Department also invited specific comment on whether special rules

should be provided to determine the

ownership of the transferee foreign

corporation in cases where the corporation is publicly traded. As described

below, in response to comments received, the ‘‘cross-ownership’’ rules of

Notice 94–46 have been modified in a

way that will ameliorate the burdens of

identifying shareholders of publicly

traded (or widely-held) corporations

and that should reduce the impact of

the general rule on business combinations involving unrelated U.S. and

foreign corporations that are engaged in

the active conduct of a trade or

business.

Need for Temporary Regulations

The rules contained in this Treasury

decision provide taxpayers with guidance necessary to comply with Notice

94–46, which was effective with respect to transfers of stock or securities

of domestic corporations to foreign

corporations occurring after April 17,

1994. The provisions of Notice 94–46

were made immediately effective to

forestall certain tax-avoidance transfers

by U.S. persons of the stock of U.S.based multinationals to foreign corporations. Because of the Notice’s immediate effective date, there is a need for

implementing regulations on which

both taxpayers and the Service may

rely with respect to current transfers.

Based on these considerations, it is

determined that immediate regulatory

guidance will ensure the efficient administration of the tax laws and that it

would be impracticable and contrary to

the public interest to issue this Treasury decision with prior notice under

section 553(b) or subject to the effective date limitation of section 553(d) of

title 5 of the United States Code.

Explanation of Provisions

Section 367(a)(1) generally treats a

transfer of property (including stock or

securities) by a U.S. person to a

foreign corporation in connection with

an exchange described in section 332,

351, 354, 356 or 361 as a taxable

exchange unless the transfer qualifies

for an exception to this general rule.

Temporary regulations published on

May, 16, 1986 (TD 8087) provided

exceptions in the case of certain

transfers of stock or securities of

domestic and foreign corporations (see

§1.367(a)–3T). Notice 87–85 announced modifications to those exceptions for transfers of domestic or

foreign stock or securities occurring

after December 16, 1987. Proposed

regulations issued on August 26, 1991

largely incorporated the positions set

forth in Notice 87–85, and expanded

the application of section 367(a) with

respect to certain transfers of stock or

securities of foreign corporations.

Notice 94–46 announced modifications

to the exceptions originally announced

in Notice 87–85, effective with respect

to certain transfers of stock or securities of domestic corporations occurring after April 17, 1994.

Both the temporary regulations

herein and the notice of proposed

rulemaking on this subject in ***

[INTL–9–95, this Bulletin] generally

incorporate the positions taken in

Notice 94–46, with modifications as

described below. As indicated previously, Notice 94–46 did not modify

the positions taken in Notice 87–85

governing the transfer of stock or

securities of a foreign corporation.

Until the 1991 proposed regulations are

finalized, the positions originally announced in Notice 87–85 will continue

to govern the availability of section

367(a) exceptions for transfers of stock

or securities of foreign corporations.

In addition to implementing the positions announced in Notice 94–46, this

Treasury decision removes those portions of §1.367(a)–3T of the 1986

temporary regulations that Notice 87–

85 announced would no longer be applicable with respect to stock transfers

occurring after December 16, 1987.

This includes removal of the exceptions

in paragraphs (c)(1) through (4) (providing exceptions for certain transfers

of domestic stock or securities); of

paragraph (d) (providing exceptions for

certain transfers of foreign stock or

securities, including an exception for

transfers to a foreign corporation

organized in the same foreign country

as the corporation the stock of which is

being transferred); of paragraph (e)

(involving exceptions where stock is an

operating asset or where there is a

consolidation of an integrated business); and of paragraph (f) (exceptions

where U.S. transferors obtain a limited

interest in the transferee foreign

corporation).

The temporary regulations herein

also incorporate (in paragraph (a)) the

1991 proposed regulations’ restatement

of the general rule applicable to outbound stock transfers (see Prop. Reg.

§1.367(a)–3(a)). This restatement revises the general rule contained in the

1986 temporary regulations to reflect

changes to section 367 made by Congress after promulgation of those regulations. For example, the 1986 tempo-

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rary regulations’ statement of the general rule included transfers of stock or

securities in section 332 liquidations as

one of the transactions covered by

section 367(a) (see §1.367(a)–3T(a)).

The restatement of the general rule in

the temporary regulations herein removes the reference to section 332

because an outbound transfer of stock

or securities pursuant to a section 332

liquidation is now covered by section

367(e)(2) and the regulations under

§1.367(e)–2T. Even though the temporary regulations under §1.367(e)–2T

have sunset (because they were promulgated as temporary regulations on

January 12, 1990 (TD 8280) and were

not finalized within three years of that

date), the Service announced its intention to follow the principles of those

regulations in the preamble to the final

regulations under section 367(e)(1) (see

the preamble to the final section

367(e)(1) regulations in TD 8472,

adopted January 15, 1993).

The revised statement of the general

rule herein refers explicitly to transfers

that may be indirect or constructive.

Thus, transactions that are recharacterized as indirect or constructive stock

transfers will be subject to the section

367(a) stock transfer regulations and

will be taxable unless an exception

applies.

The restatement of the general rule

herein is not intended to change the

1986 temporary regulations’ treatment

of a case in which stock or securities

of a foreign corporation are transferred

pursuant to a reorganization described

in section 368(a)(1)(B), including a

transaction that is described in both

section 368(a)(1)(B) and section 351. It

is anticipated, however, that the final

regulations issued with respect to an

outbound transfer of foreign stock or

securities will incorporate the principles of the 1991 proposed regulations,

and thus, for example, a transaction

described in both section 368(a)(1)(B)

and section 351 will be subject to

section 367(a).

Notice 87–85 and the 1991 Proposed

Regulations

Under Notice 87–85 and the 1991

proposed regulations, a U.S. transferor

of stock or securities that owns five

percent or more of either the total

voting power or the total value of the

transferee foreign corporation immediately after the transfer generally is

not subject to current taxation under

section 367(a)(1) if that transferor

enters into a gain recognition agreement (GRA). The term of the GRA is

five years if all U.S. transferors, in the

aggregate, own less than 50 percent of

both the total voting power and the

total value of the stock of the transferee foreign corporation immediately

after the transfer, or ten years if the

U.S. transferors, in the aggregate, own

50 percent or more of either the total

voting power or the total value of the

stock of the transferee foreign corporation immediately after the transfer. U.S.

transferors that own an interest of less

than 5 percent in the transferee foreign

corporation immediately after the transfer are not taxable under section

367(a)(1) and are not required to enter

into a GRA. If a single U.S. transferor

transfers stock or securities of a domestic corporation and owns directly or by

attribution more than 50 percent of

either the total voting power or the

total value of the stock of the transferee foreign corporation immediately

after the transfer, gain is recognized on

the exchange.

The determination whether (i) a U.S.

transferor owns five percent or more of

the transferee foreign corporation immediately after the transfer, (ii) U.S.

transferors own in the aggregate 50

percent or more of the transferee

foreign corporation (and, thus, whether

a 10-year GRA is required), or (iii) a

single U.S. transferor owns more than

50 percent of the transferee foreign

corporation (and, thus, whether gain is

recognized) takes into account both

stock of the transferee foreign corporation received by the U.S. transferor(s)

in the exchange and stock in the

transferee foreign corporation owned

by the U.S. transferor(s) independent of

the exchange (referred to as crossownership).

Notice 87–85 and the 1991 proposed

regulations presume that U.S. transferors own in the aggregate 50 percent

or more of the total voting power or

the total value of the transferee foreign

corporation immediately after the transfer (and thus a ten-year GRA is required), unless U.S. transferors can

demonstrate otherwise (referred to as

the ownership presumption). The

ownership presumption contained in

both the Notice and the 1991 proposed

regulations actually consists of two

rebuttable presumptions, one relating to

ownership of stock in the U.S. corporation the stock or securities of which are

transferred (referred to as the U.S.

target company) and the other relating

to ownership of stock in the transferee

foreign corporation.

Under the first presumption, all

persons that exchange U.S. target company stock (or other property) for stock

of the transferee foreign corporation in

the exchange are presumed to be U.S.

persons. Thus, if shareholders of the

U.S. target company receive 50 percent

or more of the stock of the transferee

foreign corporation in the exchange,

U.S. transferors are presumed to own

50 percent or more of the stock of the

transferee foreign corporation immediately after the transfer. Even if

application of this first presumption

does not result in U.S. transferors being

deemed to own at least 50 percent of

the total voting power or the total value

of the transferee foreign corporation

immediately after the transfer, the

second presumption may do so. The

second presumption is that U.S. transferors also own stock of the transferee

foreign corporation independent of the

exchange in an amount sufficient to

bring their total ownership immediately

after the exchange up to 50 percent.

This second component of the ownership presumption is referred to as the

cross-ownership presumption.

Notice 94–46

Notice 94–46 modified the exceptions set forth in Notice 87–85 with

respect to post-April 17, 1994 transfers

of stock or securities of domestic

corporations. The purpose of Notice

94–46 was to forestall outbound transfers that are structured to avoid or that

lay a foundation for future avoidance

of the Internal Revenue Code antideferral regimes by imposing a shareholder-level tax on such transfers.

Notice 94–46 stated that regulations

would provide that the transfer of stock

or securities of a domestic corporation

by a U.S. person to a foreign corporation described in section 367(a) would

be taxable if all U.S. transferors owned,

in the aggregate, 50 percent or more of

either the total voting power or the

total value of the stock of the transferee corporation immediately after the

exchange. All U.S. transferors, regardless of their level of ownership, would

be subject to tax in such a case.

The rules of Notice 94–46 incorporated the ownership presumption of

Notice 87–85. As a result of the cross-

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ownership aspect of that presumption,

even if U.S. shareholders receive significantly less than 50 percent of the

stock of a transferee foreign corporation in an exchange described in

section 367(a), the transaction could

still be taxable. If, for example, U.S.

shareholders of a U.S. target company

received 30 percent of the stock of a

transferee foreign corporation in an

exchange described in section

367(a)(1), those shareholders would be

presumed to own independently at least

an additional 20 percent of the stock of

the transferee foreign corporation immediately after the transfer, with the

result that the exchange would be

taxable (unless the cross-ownership

presumption were rebutted). Commentators argued that where a U.S. target

company and a foreign acquirer were

publicly traded or widely-held, taxpayers’ ability to rebut the crossownership aspect of the ownership

presumption was limited. As a result,

Notice 94–46 potentially had the effect

of forestalling acquisitions of U.S.

public companies by larger foreign

corporations in cases where they were

unrelated and both engaged in the

active conduct of a trade or business.

In response to comments received

from taxpayers, and in particular with

respect to the difficulties of rebutting

the cross-ownership presumption, these

temporary regulations modify positions

taken in Notice 94–46 in two significant ways. First, the regulations shift

the ownership threshold from ‘‘50

percent or more’’ to ‘‘more than 50

percent’’ so that a U.S. transferor may

qualify for an exception to section

367(a) in cases where U.S. transferors,

in the aggregate, receive exactly 50

percent of the stock of the transferee

foreign corporation in the exchange.

The relaxation of the ownership threshold was intended to give 50-50 joint

ventures involving unrelated U.S. and

foreign corporations that are engaged in

active businesses the option of using a

foreign transferee corporation. Where a

foreign corporation is smaller than a

U.S. corporation that it acquires, the

transaction will still generally be taxable; it would not be taxable if the U.S.

participant were the acquiring corporation in the transaction (or if another

U.S. holding company were the acquiring corporation). Second, although the

regulation retains the presumption that

shareholders of the U.S. target company are U.S. persons, it does not, in

general, retain the cross-ownership pre-

sumption and no longer, as a general

matter, takes cross-ownership into account. The regulation counts crossownership only in the limited circumstance where U.S. officers, directors,

and 5-percent or greater shareholders of

the U.S. target company own, in the

aggregate, more than 50 percent of the

total voting power or the total value of

the transferee foreign corporation immediately after the transfer (a control

group case). In such a case, the

exchange is taxable to all U.S. transferors. The regulation allows taxpayers

to rely on Schedule 13–D or 13–G

filings made under the Securities Exchange Act of 1934 (15 USC 78m) to

identify 5-percent shareholders of public companies for this purpose.

Although cross-ownership does not

count toward the 50 percent ownership

threshold (unless the control group case

applies), it is still relevant in determining whether a U.S. transferor owns five

percent or more of the transferee

foreign corporation under the rules

originally announced in Notice 87–85.

Moreover, cross-ownership continues to

be relevant for determining whether a

5-year or 10-year GRA is required

under the rules originally announced in

87–85, and, for these purposes, there

continues to be a rebuttable presumption.

In addition to the two modifications

described above that were made in

response to comments received with

respect to Notice 94–46, these regulations contain a new active trade or

business requirement not contained in

Notice 94–46, which taxpayers must

meet in order to qualify for an

exception to the general rule of taxation under section 367(a). The IRS and

the Treasury Department added the

active trade or business requirement to

address abuse potential, in particular, in

a case in which a U.S. target company

is smaller than a foreign acquirer that

was formed and capitalized with a view

to enabling the smaller U.S. company

to move offshore. The IRS and the

Treasury Department believe that this

type of transaction presents an inappropriate opportunity for avoiding the

anti-deferral regime without payment of

the tax envisioned by Notice 94–46.

The IRS and the Treasury Department

believe that an exception to taxation is

proper only in cases where a combination of two active businesses is contemplated and that the opportunity for

tax avoidance is ameliorated when such

businesses have been conducted for a

period of at least 36 months prior to

the exchange. Under the requirement

contained in the regulations, no exception to taxation is available unless

either the transferee foreign corporation

or an affiliate of that corporation was

engaged in the active conduct of a

trade or business for the entire 36month period prior to the exchange,

and unless such business is substantial

in relation to the business conducted by

the U.S. target company. For this

purpose, an affiliate is generally defined by reference to the rules in

section 1504(a) (without the exclusion

of foreign corporations), and generally

includes a parent, subsidiary or brothersister corporation of the transferee

foreign corporation.

To summarize, under the temporary

regulations, a U.S. person that exchanges stock or securities in a U.S.

corporation for stock of a foreign

corporation in an exchange described in

section 367(a) will be taxable in cases

where:

(i) the 50 percent ownership threshold

is exceeded;

(ii) the control group case applies;

(iii) the active trade or business requirement is not met; or

(iv) the exchanging U.S. shareholder

owns five percent or more of the stock

of the transferee foreign corporation

and fails to enter into a GRA and/or

satisfy the requirements of section

6038B.

The duration of the GRA in case (iv) is

5 years if the transferor can demonstrate that all U.S. transferors in the

aggregate own less than 50 percent of

the total voting power or the total value

of the stock of the transferee foreign

corporation immediately after the transfer or 10 years if U.S. transferors own

exactly 50 percent (or more than 50

percent as a result of cross-ownership)

of the transferee foreign corporation

immediately after the transfer. In all

cases other than those enumerated in (i)

through (iv) above, a U.S. person that

transfers stock or securities of a domestic corporation in exchange for stock of

a transferee foreign corporation will not

be taxable under section 367(a) if

certain reporting requirements described in the regulations are met.

Final regulations under section

367(a) are expected to address the

transfer of stock or securities of foreign

corporations and other matters contained in the 1991 proposed regulations

that are not addressed herein.

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Special Analyses

It has been determined that this

temporary regulation is not a significant

regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also

has been determined that this regulation

does not have a significant impact on a

substantial number of small entities.

Thus, the Regulatory Flexibility Act (5

U.S.C. chapter 6) does not apply to

these regulations, and therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, a copy of

these temporary regulations will be

submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their impact on

small business.

Drafting Information

The principal author of these regulations is Philip L. Tretiak of the Office

of Associate Chief Counsel (International), within the Office of Chief

Counsel, Internal Revenue Service.

However, other personnel from the IRS

and Treasury Department participated

in their development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and

602 are amended as follows:

Part 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. Section 1.367(a)–3T is

amended by revising paragraphs (a),

(c), (d), (e), (f), (g)(1) and (h)(1) to

read as follows:

§1.367(a)–3T Treatment of transfers

of stock or securities to foreign

corporations (temporary).

(a) In general. This section provides

rules concerning the transfer of stock

or securities by a U.S. person to a

foreign corporation in an exchange

described in section 367(a). In general,

a transfer of stock or securities by a

U.S. person (directly, indirectly or

constructively) to a foreign corporation

that is described in section 351, 354

(pursuant to a reorganization described

in section 368(a)(1)(B)) or section

361(a) or (b) is subject to section

367(a)(1) and, therefore, is treated as a

taxable exchange, unless one of the

exceptions set forth in paragraph (b),

additional rules relating to an exchange

involving a foreign corporation in

connection with which there is a

transfer of stock, see section 367(b)

and the regulations under that section.

For additional rules regarding a transfer

of stock or securities in an exchange

described in section 361(a) or (b), see

section 367(a)(5) and any regulations

under that section.

stock or securities of domestic corporations to foreign corporations—(1) In

general. Except as provided in section

367(a)(5), a transfer of stock or securities of a domestic corporation by a

U.S. person to a foreign corporation

that would otherwise be subject to

section 367(a)(1) under paragraph (a)

of this section shall not be subject to

section 367(a)(1) if the domestic corporation the stock or securities of which

are transferred (referred to as the U.S.

target company) complies with the reporting requirements in paragraph

(c)(4) of this section and if each of the

following four conditions is met:

(i) Fifty percent or less of both the

total voting power and the total value

of the stock of the transferee foreign

corporation is received in the transaction, in the aggregate, by U.S. transferors (i.e., the amount of stock received does not exceed the 50 percent

threshold).

(ii) No more than 50 percent of each

of the total voting power and the total

value of the stock of the transferee

foreign corporation is owned, in the

aggregate, immediately after the transfer by U.S. persons who are either

officers or directors of the U.S. target

company or who are five-percent target

shareholders (as defined in paragraph

(c)(6)(iii) of this section) (i.e., there is

no control group). For purposes of this

paragraph (c)(1)(ii), any stock of the

transferee foreign corporation owned

by U.S. persons immediately after the

transfer will be taken into account,

whether or not it was received in the

exchange for stock or securities of the

U.S. target company.

(iii) In the case of a transfer occurring after January 25, 1996, the

transferee foreign corporation or an

affiliate of the transferee foreign corporation has been engaged in the active

conduct of a trade or business, within

the meaning of §1.367(a)–2T(b)(2) and

(3), that is substantial in comparison to

the trade or business of the U.S. target

company, for the entire 36-month

period immediately preceding the date

of the transfer.

(iv) Either—

(A) The U.S. person is not a fivepercent transferee shareholder (as defined in paragraph (c)(6)(ii) of this

section); or

(B) The U.S. person is a five-percent

transferee shareholder and enters into an

agreement to recognize gain with respect to the U.S. target company stock

or securities it exchanged in the form

provided in paragraph (g) of this section, as modified by paragraph (c)(3) of

this section (setting the duration of the

gain recognition agreement).

(2) Ownership Presumption. For

purposes of paragraph (c)(1) of this

section, persons who transfer stock or

securities of the U.S. target company or

other property in exchange for stock of

the transferee foreign corporation are

presumed to be U.S. persons. This presumption may be rebutted in accordance with paragraph (c)(4)(ii) of this

section.

(3) Term of the gain recognition

agreement. If, immediately after the

transfer described in section 367(a)(1),

all U.S. transferors own in the aggregate less than fifty percent of both the

total voting power and the total value

of the stock of the transferee foreign

corporation (counting both stock of the

transferee foreign corporation owned as

a result of the exchange as well as

stock of the transferee foreign corporation owned independently by such U.S.

transferors), the agreement to recognize

gain shall be in the form specified in

paragraph (g)(3) of this section. The

term of the agreement shall be ten

years, rather than the five years specified in paragraph (g)(3) of this section,

the waiver described in paragraph

(g)(4) of this section shall extend the

period for assessment of tax for an

additional five years, and the certification and waiver described in paragraph

(g)(5) of this section must be filed for

an additional five years if—

(i) The five-percent transferee shareholder cannot determine whether the

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condition in the preceding sentence is

satisfied; or

(ii) Immediately after the transfer,

all U.S. transferors own in the aggregate fifty percent or more of either the

total voting power or the total value of

the stock of the transferee foreign

corporation (counting both stock of the

transferee foreign corporation owned as

a result of the exchange, as well as

stock of the transferee foreign corporation owned independently by such U.S.

transferors).

(4) Reporting requirements of U.S.

target company. (i) In order for a U.S.

person that transfers stock or securities

of a domestic corporation to qualify for

the exception to the general rule under

section 367(a)(1) provided by this

paragraph (c), the U.S. target company

must comply with the reporting requirements contained in this paragraph

(c)(4). The U.S. target company must

attach to its timely filed U.S. income

tax return (or a subsequent, timely filed

amended return) for the taxable year in

which the transfer occurs a statement

titled ‘‘Section 367(a)—Reporting of

Cross-Border Transfer Under Reg.

§1.367(a)–3T(c)(4),’’ signed under

penalties of perjury by an officer of the

corporation, disclosing the following

information—

(A) A description of the transaction

in which a U.S. person or persons

transferred stock or securities in the

U.S. target company to the transferee

foreign corporation in a transfer otherwise subject to section 367(a)(1);

(B) The amount (specified as to the

percentage of the total voting power

and the total value) of stock of the

transferee foreign corporation received

in the transaction, in the aggregate, by

persons who transferred stock or securities of the U.S. target company or

other property. For additional information that may be required to rebut the

ownership presumption of paragraph

(c)(2) of this section in cases where

more than 50 percent of either the total

voting power or the total value of the

stock of the transferee foreign corporation is received in the transaction, in

the aggregate, by persons who transferred stock or securities of the U.S.

target company or other property, see

paragraph (c)(4)(ii) of this section;

directly or indirectly (applying the

attribution rules of sections 267(c)(1)

and (5)) immediately after the exchange by the U.S. target company;

(D) A statement that there is no

control group within the meaning of

paragraph (c)(1)(ii) of this section;

(E) A list of U.S. persons who are

officers, directors or five-percent target

shareholders and the percentage of the

total voting power and the total value

of the stock of the transferee foreign

corporation owned by such persons

both immediately before and immediately after the transaction; and

(F) A statement that the active trade

or business test described in paragraph

(c)(1)(iii) of this section is satisfied by

the transferee foreign corporation or an

affiliate and a description of such

business.

(ii) To rebut the ownership presumption of paragraph (c)(2) of this section,

the U.S. target company must obtain

ownership statements (described in paragraph (c)(6)(i) of this section) from a

sufficient number of persons that transfer U.S. target company stock or securities (or other property) in the

transaction that are not U.S. persons to

demonstrate that the 50 percent threshold is not exceeded. In addition, the

U.S. target company must attach to its

timely filed U.S. income tax return (or a

subsequent, timely filed amended return)

for the taxable year in which the

transfer occurs a statement, titled ‘‘Section 367(a)—Compilation of Ownership

Statements under Reg. §1.367(a)–

3T(c),’’ signed under penalties of perjury by an officer of the corporation,

disclosing the following information:

(A) The amount (specified as to the

percentage of the total voting power

and the total value) of stock of the

transferee foreign corporation received,

in the aggregate, by U.S. transferors;

(B) The amount (specified as to the

percentage of total voting power and

total value) of stock of the transferee

foreign corporation received, in the

aggregate, by foreign persons that filed

ownership statements;

tabulated from the ownership statements, including—

(1) The names of the persons that

filed ownership statements stating that

they are not U.S. persons;

(2) The countries of residence and

citizenship of such persons; and

(3) The ownership of such persons

(by voting power and by value) in the

U.S. target company prior to the

exchange and the amount of stock of

the transferee foreign corporation (by

voting power and value) received by

such persons in the exchange.

(iii) For purposes of paragraph

(c)(4), an income tax return (including

an amended return) will be considered

timely filed if it is filed prior to the

time that the Internal Revenue Service

discovers that the reporting requirements of this paragraph have not been

satisfied.

(5) Special Rules—(i) Treatment of

partnerships. For purposes of paragraph (c), if a partnership (whether

domestic or foreign) owns or transfers

stock or securities or other property in

an exchange described in section

367(a), each partner in the partnership,

and not the partnership itself, is treated

as owning and as having transferred a

proportionate share of the stock or

securities or other property. See

§1.367(a)–1T(c)(3).

(ii) Treatment of options. For purposes of paragraph (c) of this section,

one or more options (or an interest

similar to an option) will be treated as

exercised and thus will be counted as

stock for purposes of determining

whether the 50 percent threshold is

exceeded or whether a control group

exists if a principal purpose of the

issuance or the acquisition of the

option (or other interest) was the

avoidance of the general rule contained

in section 367(a).

(iii) U.S. target has a vestigial

ownership interest in transferee foreign

corporation. In cases where, immediately after the transfer, the U.S. target

company owns, directly or indirectly

(applying the attribution rules of sections 267(c)(1) and (5)) stock of the

transferee foreign corporation, that

stock will not in any way be taken into

account (and, thus, will not be treated

as outstanding) in determining whether

the 50 percent threshold under paragraph (c)(1)(i) of this section is exceeded or whether a control group

under paragraph (c)(1)(ii) of this section exists.

(iv) Attribution rule. The rules of

section 958 shall apply for purposes of

determining the ownership of stock,

securities or other property under this

paragraph (c).

(6) Definitions—(i) Ownership statement. An ownership statement is a

statement, signed under penalties of

perjury, stating—

(A) The identity and taxpayer identification number, if any, of the person

making the statement;

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(B) That the person making the

statement is not a U.S. person (as defined in paragraph (c)(6)(iv) of this

section);

statement is not related to any U.S.

person to whom the stock or securities

owned by the person making the statement are attributable under the rules of

section 958, or, if stock or securities

are so attributable, the identity and

taxpayer identification number of the

relevant U.S. person;

(D) The citizenship, permanent residence, home address, and U.S. address, if any, of the person making the

statement; and

(E) The ownership such person has

(by voting power and by value) in the

U.S. target company prior to the

exchange and the amount of stock of

the transferee foreign corporation (by

voting power and value) received by

such person in the exchange.

(ii) Five-percent transferee shareholder. A five-percent transferee shareholder is a person that owns at least

five percent of either the total voting

power or the total value of the stock of

the transferee foreign corporation immediately after the transfer described in

section 367(a)(1). For special rules

involving cases in which stock is held

by a partnership, see paragraph (c)(5)(i)

of this section.

(iii) Five-percent target shareholder.

A five-percent target shareholder is a

person that owns at least five percent

of either the total voting power or the

total value of the stock of the U.S.

target company immediately prior to

the transfer described in section

367(a)(1). If the stock of the U.S.

target company is described in Rule

13d–1(d) of Regulation 13D (17 CFR

240.13d–1(d)) (or any rule or regulation to generally the same effect),

promulgated by the Securities and

Exchange Commission under the Securities Exchange Act of 1934 (15 USC

78m), the existence or absence of

filings of Schedule 13–D or 13–G (or

any similar schedules) may be relied

upon for purposes of identifying fivepercent target shareholders. For special

rules involving cases in which U.S.

target company stock is held by a

partnership, see paragraph (c)(5)(i) of

this section.

(iv) U.S. Person. For purposes of

this section, a U.S. person is defined by

reference to §1.367(a)–1T(d)(1). For

application of the rules of this section

to stock or securities owned or transferred by a partnership that is a U.S.

person, however, see paragraph (c)(5)(i) of this section.

(v) U.S. Transferor. A U.S. transferor is a U.S. person (as defined in

paragraph (c)(6)(iv) of this section)

who transfers directly, indirectly or

constructively stock or securities of the

U.S. target company or other property

in exchange for stock of the transferee

foreign corporation in an exchange

described in section 367.

(vi) Transferee foreign corporation.

A transferee foreign corporation is the

foreign corporation whose stock is received in the exchange by U.S. persons.

(vii) Affiliate. An affiliate is a corporation that is a member of the same

affiliated group (as defined in section

1504(a), without regard to section

1504(b)(3)) as the transferee foreign

corporation.

(7) Certain transfers in connection

with performance of services. Section

367(a)(1) shall not apply to a domestic

corporation’s transfer of its own stock

or securities in connection with the performance of services, if the transfer is

considered to be to a foreign corporation

solely by reason of §1.83–6(d)(1).

(8) Examples. This paragraph (c) may

be illustrated by the following examples:

Example 1. Ownership presumption. (i) FC, a

foreign corporation, issues 51 percent of its stock

to the shareholders of S, a domestic corporation,

in exchange for their S stock, in a transaction

described in section 367(a)(1).

(ii) Under paragraph (c)(2) of this section, all

shareholders of S who receive stock of FC in the

exchange are presumed to be U.S. persons. Unless

this ownership presumption is rebutted, the

condition set forth in paragraph (c)(1)(i) of this

section will not be satisfied, and the exception in

paragraph (c)(1) of this section will not be

available. As a result, all U.S. persons that

transferred S stock will recognize gain on the

exchange. To rebut the ownership presumption, S

must comply with the reporting requirements contained in paragraph (c)(4)(ii) of this section, obtaining ownership statements (described in paragraph (c)(6)(i) of this section) from a sufficient

number of non-U.S. persons who received FC

stock in the exchange to demonstrate that the

amount of FC stock received by U.S. persons in

the exchange does not exceed 50 percent.

Example 2. Filing of Gain Recognition Agreement. (i) The facts are the same as in Example 1,

except that FC issues only 40 percent of its stock

to the shareholders of S in the exchange. FC

satisfies the active trade or business test (described in paragraph (c)(1)(iii) of this section).

A, a U.S. person, owns 10 percent of S’s stock

immediately before the transfer. All other shareholders of S own less than five percent of its

stock. None of S’s officers or directors owns any

stock in FC immediately after the transfer. A will

own 15 percent of the stock of FC immediately

after the transfer, 4 percent received in the

exchange, and the balance being stock in FC that

A owned prior to and independent of the

transaction. No S shareholder besides A owns

five percent or more of FC immediately after the

transfer. The reporting requirements under paragraph (c)(4)(i) of this section are satisfied.

(ii) The condition set forth in paragraph

(c)(1)(i) of this section is satisfied because, even

after application of the presumption in paragraph

(c)(2) of this section, U.S. transferors could not

receive more than 50 percent of FC’s stock in

the transaction. There is no control group

because five-percent target shareholders and

officers and directors of S do not, in the

aggregate, own more than 50 percent of the stock

of FC immediately after the transfer (A, the sole

five-percent target shareholder, owns 15 percent

of the stock of FC immediately after the transfer,

and no officers or directors of S own any stock

of FC immediately after the transfer). Therefore,

the condition set forth in paragraph (c)(1)(ii) of

this section is satisfied (and A’s cross-ownership

of FC stock is not taken into account). The facts

assume that the condition set forth in paragraph

(c)(1)(iii) of this section is satisfied. Thus, U.S.

persons that are not five-percent transferee

shareholders will not recognize gain on the

exchange of S shares for FC shares. A, a fivepercent transferee shareholder, will not be

required to include in income any gain realized

on the exchange in the year of the transfer if he

files a gain recognition agreement (GRA) and

complies with section 6038B. The duration of the

GRA is five years if all U.S. transferors own in

the aggregate less than 50 percent of the total

voting power and the total value of FC immediately after the transfer, and ten years if this

condition is not satisfied. If A lacks the information to determine whether he is eligible to

file a five-year GRA (because the determination

includes a cross-ownership inquiry for all U.S.

transferors), he is required to file a ten-year

GRA.

Example 3. Control Group. (i) The facts are

the same as in Example 2, except that B, another

U.S. person, is a 5-percent target shareholder,

owning 25 percent of S’s stock immediately

before the transfer. B owns 40 percent of the

stock of FC immediately after the transfer, 10

percent received in the exchange, and the balance

being stock in FC that B owned prior to and

independent of the transaction.

(ii) A control group exists because A and B,

each a five-percent target shareholder within the

meaning of paragraph (c)(6)(iii) of this section,

together own more than 50 percent of FC immediately after the transfer (counting both stock

received in the exchange and stock owned prior

to and independent of the exchange). As a result,

the condition set forth in paragraph (c)(1)(ii) of

this section is not satisfied, and all U.S. persons

(not merely A and B) who transferred S stock

will recognize gain on the exchange.

Example 4. Partnerships. (i) The facts are the

same as in Example 3, except that B is a

partnership (domestic or foreign) that has five

equal partners, only two of whom, X and Y, are

U.S. persons. X and Y are treated as the owners

and transferors of 5 percent each of the S stock

owned and transferred by B and as owners of 8

percent each of the FC stock owned by B immediately after the transfer. Five-percent target

shareholders thus own a total of 31 percent of

the stock of FC immediately after the transfer

(A’s 15 percent, plus X’s 8 percent, plus Y’s 8

percent).

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(ii) Because no control group exists, the

condition in paragraph (c)(1)(ii) of this section is

satisfied. The conditions in paragraphs (c)(1)(i)

and (iii) of this section also are satisfied. Thus,

U.S. persons that are not five-percent transferee

shareholders will not recognize gain on the

exchange of S shares for FC shares. A, X, and

Y, each a five-percent transferee shareholder,

will not be required to include in income in the

year of the transfer any gain realized on the

exchange if they file GRAs and comply with

section 6038B. The duration of the GRA is five

years if all U.S. transferors own in the aggregate

less than 50 percent of the total voting power

and the total value of FC immediately after the

transfer, and ten years if this condition is not

satisfied. If A, X, and Y lack the information to

determine whether they are eligible to file fiveyear GRAs (because the determination includes a

cross-ownership inquiry for all U.S. transferors),

they are required to file ten-year GRAs.

(9) Effective date. This paragraph (c)

applies to transfers occurring after

April 17, 1994. However, paragraph

(c)(1)(iii) of this section applies only to

transfers occurring after January 25,

1996. For transfers occurring before

December 17, 1987, see §1.367(a)–

3T(c)(1) through (4) as contained in 26

CFR Part 1 revised April 1, 1995.

(d) Transfers of stock or securities

of foreign corporations. For guidance,

see Notice 87–85 (1987–2 C.B. 395).

See §601.601(d)(2) of this chapter.

(e) [Reserved.] For transfers occurring before December 17, 1987, see

§1.367(a)–3T(e) as contained in 26

CFR Part 1 revised April 1, 1995.

(f) [Reserved.] For transfers occurring before December 17, 1987, see

§1.367(a)–3T(f) as contained in 26

CFR Part 1 revised April 1, 1995.

(g) Transferor’s agreement to recognize gain upon later disposition by

transferee—(1) In general. A transfer

of stock or securities shall not be

subject to section 367(a)(1) if—

(i) The transferor complies with the

reporting requirements of section 6038B

and any regulations thereunder; and

(ii) The transferor files a binding

agreement to recognize gain upon the

transferee corporation’s later disposition of the transferred stock or securities, in accordance with the rules of

this section.

(h) Anti-abuse rules.

(1) [Reserved.] For transfers occurring before December 17, 1987, see

§1.367(a)–3T(h)(1) as contained in 26

CFR Part 1 revised April 1, 1995.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 3. The authority for citation for

part 602 continues to read as follows:

Authority: 26 U.S.C. 7805

Par. 4. In §602.101, paragraph (c) is

amended by revising the entry in the

table for ‘‘1.367(a)–3T’’ to read as

follows:

‘‘1.367(a)–3T . . . . . . . . . . . . . 0026

. . . . . . . . . . . . . 1478’’.

Dated: December 13, 1995.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

Approved:

Leslie Samuels,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

December 22, 1995, 8:45 a.m., and published

in the issue of the Federal Register for

December 26, 1995, 60 F.R. 66739)

Section 368.—Definitions relating to

corporate reorganizations

26 CFR 1.368–1: Purpose and scope of

exception of reorganization exchanges.

The No-Rule provision with respect to ‘‘Combining Transactions’’ presently in section 5.15 of

Rev. Proc. 96–3, 1996–1 I.R.B. 82, is moved

from section 5 (Areas Under Extensive Study) to

section 3 (Areas In Which Rulings or Determination Letters Will Not Be Issued). Rev. Proc. 96–

3 amplified and modified. See also, Notice 96–6,

this Bulletin, regarding the closing of the study

project. See Rev. Proc. 96–22, page 27.

Section 842.—Foreign Companies

Carrying on Insurance Business

The domestic asset/liability percentages and

domestic investment yields necessary for foreign

companies doing insurance business in the U.S.

to compute their minimum effectively connected

net investment income under section 842(b) of

the Code are provided for taxable years beginning after December 31, 1994. See Rev. Proc.

96–23, page 27.

Section 4941.—Taxes on SelfDealing

26 CFR 53.4941(d)–2: Specific acts of selfdealing.

T.D. 8639

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 53

Excise Tax On Self-Dealing By

Private Foundations.

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final Regulations.

SUMMARY: This document contains

final regulations that clarify the definition of self-dealing for private foundations. These regulations modify the

application of the self-dealing rules to

the provision by a private foundation of

directors’ and officers’ liability insurance to disqualified persons. In general,

these regulations provide that indemnification by a private foundation or

provision of insurance for purposes of

covering the liabilities of the person in

his/her capacity as a manager of the

private foundation is not self-dealing.

Additionally, the amounts expended by

the private foundation for insurance or

indemnification generally are not included in the compensation of the

disqualified person for purposes of

determining whether the disqualified

person’s compensation is reasonable.

DATES: These regulations are effective

December 20, 1995.

FOR FURTHER INFORMATION

CONTACT: Terri Harris or Paul Accettura of the Office of the Associate

Chief Counsel (Employee Benefits and

Exempt Organizations), IRS, at

202-622-6070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On January 3, 1995 proposed regulations amending §53.4941(d)–2(f) [EE–

56–94, 1995–1 C.B. 855] under section

4941 of the Internal Revenue Code of

1986 were published in the Federal

regulations provided that generally it

would not be self-dealing, nor treated

as the payment of compensation, if a

private foundation were to indemnify

or provide insurance to a foundation

manager in any civil judicial or civil

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administrative proceeding arising out of

the manager’s performance of services

on behalf of the foundation. After IRS

and Treasury consideration of the public comments received regarding the

proposed regulations, the regulations

are adopted as revised by this Treasury

decision.

Explanation of Provisions

Section 4941(a) imposes a tax on

each act of self-dealing between a

disqualified person and a private foundation. Section 4941(d)(1)(E) defines

self-dealing to include any direct or

indirect transfer to, or use by or for the

benefit of, a disqualified person of the

income or assets of a private foundation. Prior to this Treasury decision,

§53.4941(d)–2(f)(1) provided that

provision of insurance for the payment

of chapter 42 taxes by a private

foundation for a foundation manager

was self-dealing unless the premium

amounts were included in the compensation of the foundation manager. The

payment of chapter 42 taxes by the

private foundation on behalf of the

foundation manager was self-dealing

whether or not the amounts were included in the manager’s compensation.

Section 53.4941(d)–2(f)(3) provided

that the indemnification of certain

expenses by a private foundation for a

foundation manager’s defense in a

judicial or administrative proceeding

involving chapter 42 taxes was not

self-dealing. Such expenses must have

been reasonably incurred by the manager in connection with such proceeding. Also, the manager must have been

successful in such defense, or such

proceeding must have been terminated

by settlement, and the manager must

not have acted willfully and without

reasonable cause with respect to the act

or failure to act which led to the

liability for tax under chapter 42.

This Treasury decision expands the

scope of the regulations to cover

indemnification and insurance payments made by a private foundation to

or on behalf of a foundation manager

in connection with any civil proceeding

arising from the manager’s performance of services for the private foundation. The regulations also clarify the

distinction between the treatment of

indemnification and insurance payments under chapter 42 and the treatment of these same items for income

tax purposes.

The proposed regulations resulted in

some confusion as to whether certain

indemnification and insurance payments would be considered compensatory or non-compensatory. The final

regulations have been revised to

provide greater clarity. They divide

indemnification payments and insurance coverage into non-compensatory

and compensatory categories, described

comprehensively in §53.4941(d)–2(f)(3)

and (4). The second and third sentences

of §53.4941(d)–2(f)(1) of the proposed

regulations have been removed because

their substance was incorporated into

§53.4941(d)–2(f)(4). Generally, the

non-compensatory category includes indemnification and insurance payments

that cover expenses reasonably incurred

in proceedings that do not result from a

willful act or omission of the manager

undertaken without reasonable cause.

These payments are viewed as expenses

for the foundation’s administration and

operation rather than compensation for

the manager’s services. The compensatory category includes indemnification

or insurance payments that cover taxes

(including taxes imposed by chapter

42), penalties or expenses of correction,

expenses that were not reasonably incurred, or expenses for proceedings

that result from a willful act or

omission of the manager undertaken

without reasonable cause. These payments are viewed as being exclusively

for the benefit of the manager, not the

foundation.

The regulations provide that noncompensatory indemnification and insurance payments are not affected by

the prohibition against self-dealing.

Conversely, compensatory indemnification and insurance payments are considered acts of self-dealing unless they

are added to the benefiting manager’s

total compensation for purposes of

determining whether that compensation

is reasonable. If the total compensation

is not reasonable, the foundation will

have engaged in an act of self-dealing.

In some instances, a foundation may

purchase an insurance policy that provides both non-compensatory and compensatory coverage. Some commentators have recommended that no allocation of insurance premiums be required

when a single policy of this sort is

purchased. These commentators argue

that the allocation requirement places

an undue burden on private foundations. After careful consideration, the

IRS and the Treasury Department have

decided to retain the allocation provi-

sion in the final regulations. The selfdealing rules were meant to discourage

foundations from relieving managers of

penalties, taxes and expenses of correction, as well as expenses ultimately

resulting from the manager’s willful

violation of the law. A rule that did not

require an allocation to determine

whether the disqualified person’s compensation is reasonable for purposes of

chapter 42 could have the opposite

effect. The insurance allocation rules

are now set forth in §53.4941(d)–

2(f)(5).

Some commentators requested a

clearer statement of what is meant by

the statement that indemnification or

insurance premiums are to be treated as

compensation to the benefiting foundation manager. The IRS and the Treasury Department agree that further clarification is desirable. Accordingly,

§53.4941(d)–2(f)(7) has been added. It

provides that treatment as compensation for the limited purpose of determining whether compensation is reasonable under chapter 42 is separate

and distinct from treatment as income

to the benefiting manager under the

income tax provisions. Whether any

amount of indemnification or insurance

is included in the manager’s gross

income for individual income tax purposes is determined in accordance with

section 132, without regard to the

treatment of such amounts under chapter 42.

Finally, a provision has been added

to the regulations specifying that a

foundation may disregard de minimis

benefits when calculating the total

amount of compensation paid to an

officer, director or foundation manager

for purposes of determining whether

that compensation is reasonable. In this

context, a de minimis benefit is one

excluded from gross income under

section 132(a)(4). This provision makes

explicit a Service position that has

previously been reflected in the instructions to the Form 990–PF.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It has also been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not

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apply to these regulations, and, therefore, a Regulatory Flexibility Analysis

is not required. Pursuant to section

7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking

preceding these regulations was submitted to the Chief Counsel for Advocacy

of the Small Business Administration

for comment on its impact on small

business.

Drafting Information

The principal author of this Treasury

decision is Terri Harris, Office of the

Associate Chief Counsel (Employee

Benefits and Exempt Organizations),

IRS. However, personnel from other

offices of the IRS and the Treasury

Department participated in their

development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 53 is

amended as follows:

PART 53—FOUNDATION AND

SIMILAR EXCISE TAXES

Paragraph 1. The authority for part

53 continues to read as follows:

Authority 26 U.S.C. 7805.

Par. 2. Section 53.4941(d)–2 is

amended as follows:

1. Paragraph (f)(1) is amended by

removing the second and third

sentences and revising the fourth

sentence.

2. Paragraph (f)(3) is revised.

3. Paragraph (f)(4) is redesignated

as paragraph (f)(9).

4. New paragraphs (f)(4) through

(f)(8) are added.

The additions and revisions read as

follows:

§53.4941(d)–2 Specific acts of selfdealing.

(f) Transfer or use of the income or

assets of a private foundation—(1) In

general. * * * For purposes of the

preceding sentence, the purchase or

sale of stock or other securities by a

private foundation shall be an act of

self-dealing if such purchase or sale is

made in an attempt to manipulate the

price of the stock or other securities to

the advantage of a disqualified person.

* * *

(3) Non-compensatory indemnification of foundation managers against

liability for defense in civil proceedings. (i) Except as provided in

§53.4941(d)–3(c), section 4941(d)(1)

shall not apply to the indemnification

by a private foundation of a foundation

manager, with respect to the manager’s

defense in any civil judicial or civil

administrative proceeding arising out of

the manager’s performance of services

(or failure to perform services) on

behalf of the foundation, against all

expenses (other than taxes, including

taxes imposed by chapter 42, penalties,

or expenses of correction) including

attorneys’ fees, judgments and settlement expenditures if—

(A) Such expenses are reasonably

incurred by the manager in connection

with such proceeding; and

(B) The manager has not acted

willfully and without reasonable cause

with respect to the act or failure to act

which led to such proceeding or to

liability for tax under chapter 42.

(ii) Similarly, except as provided in

§53.4941(d)–3(c), section 4941(d)(1)

shall not apply to premiums for insurance to make or to reimburse a foundation for an indemnification payment

allowed pursuant to this paragraph

(f)(3). Neither shall an indemnification

or payment of insurance allowed pursuant to this paragraph (f)(3) be treated

as part of the compensation paid to

such manager for purposes of determining whether the compensation is reasonable under chapter 42.

(4) Compensatory indemnification of

foundation managers against liability

for defense in civil proceedings. (i) The

indemnification by a private foundation

of a foundation manager for compensatory expenses shall be an act of selfdealing under this paragraph unless

when such payment is added to other

compensation paid to such manager the

total compensation is reasonable under

chapter 42. A compensatory expense

for purposes of this paragraph (f) is—

(A) Any penalty, tax (including a

tax imposed by chapter 42), or expense

of correction that is owed by the

foundation manager;

(B) Any expense not reasonably incurred by the manager in connection

with a civil judicial or civil administrative proceeding arising out of the

manager’s performance of services on

behalf of the foundation; or

act or failure to act with respect to

which the manager has acted willfully

and without reasonable cause.

(ii) Similarly, the payment by a

private foundation of the premiums for

an insurance policy providing liability

insurance to a foundation manager for

expenses described in this paragraph

(f)(4) shall be an act of self-dealing

under this paragraph (f) unless when

such premiums are added to other

compensation paid to such manager the

total compensation is reasonable under

chapter 42.

(5) Insurance Allocation. A private

foundation shall not be engaged in an

act of self-dealing if the foundation

purchases a single insurance policy to

provide its managers both the noncompensatory and the compensatory coverage discussed in this paragraph (f),

provided that the total insurance premium is allocated and that each manager’s portion of the premium attributable to the compensatory coverage is

included in that manager’s compensation for purposes of determining reasonable compensation under chapter 42.

(6) Indemnification. For purposes of

this paragraph (f), the term indemnification shall include not only reimbursement by the foundation for expenses that the foundation manager has

already incurred or anticipates incurring

but also direct payment by the foundation of such expenses as the expenses

arise.

(7) Taxable Income. The determination of whether any amount of indemnification or insurance premium discussed in this paragraph (f) is included

in the manager’s gross income for

individual income tax purposes is made

on the basis of the provisions of

chapter 1 and without regard to the

treatment of such amount for purposes

of determining whether the manager’s

compensation is reasonable under chapter 42.

(8) De minimis items. Any property

or service that is excluded from income

under section 132(a)(4) may be disregarded for purposes of determining

whether the recipient’s compensation is

reasonable under chapter 42.

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Margaret Milner Richardson.

Commissioner of

Internal Revenue.

Approved December 12, 1995.

Section 6071.—Time for Filing

Returns and Other Documents

26 CFR 31.6071(a)–1: Time for filing returns

and other documents.

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:R (EE–20–95),

Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC.

Leslie Samuels,

Assistant Secretary of

the Treasury.

Printing of substitutes for Form W–2, Wage

and Tax Statement, and Form W–3, Transmittal

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

(Filed by the Office of the Federal Register on

December 19, 1995, 8:45 a.m., and published

in the issue of the Federal Register for

December 20, 1995, 60 F.R. 65566)

Section 6081.—Extension of Time for

Filing Returns

FOR FURTHER INFORMATION

CONTACT: Concerning the regulations, Catherine Fuller, (202) 622-6080;

concerning submissions and the hearing, Mike Slaughter, (202) 622-8452

(not toll-free numbers).

26 CFR 31.6081(a)–1: Extension of time for

filing returns.

SUPPLEMENTARY INFORMATION:

Printing of substitutes for Form W–2, Wage

and Tax Statement, and Form W–3, Transmittal

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

Background

Section 6011.—General Requirement

of Return, State or List

Printing of substitutes for Form W–2, Wage

and Tax Statements, and Form W–3, Transmittals

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

Section 6041.—Information at Source

26 CFR 1.6041–1: Return of information as to

payments of $600 or more.

Printing of substitutes for Form W–2, Wage

and Tax Statements, and Form W–3, Transmittal

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

26 CFR 1.6041–2: Return of information as to

payments to employees.

Printing of substitutes for Form W–2, Wage

and Tax Statement, and Form W–3, Transmittal

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

Section 6091.—Place for Filing

Returns or Other Documents

Printing of substitutes for Form W–2, Wage

and Tax Statement, and Form W–3, Transmittal

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

Notice of Proposed Rulemaking

Effect of the Family and Medical

Leave Act on the Operation of

Cafeteria Plans

EE–20–95

AGENCY: Internal Revenue Service

(IRS), Treasury

ACTION: Notice of proposed rulemaking.

Section 6051.—Receipts for

Employees

26 CFR 31.6051–1: Statements for employees.

Printing of substitutes for Form W–2, Wage

and Tax Statement, and Form W–3, Transmittal

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

SUMMARY: This document contains

proposed regulations relating to cafeteria plans that reflect changes made

by the Family and Medical Leave Act

of 1993. The proposed regulations provide the public with guidance needed

to comply with the Act and affect

employees who participate in cafeteria

plans.

26 CFR 31.6051–2: Information on Form W–3

and Internal Revenue Service copies of Form

W–2.

DATES: Written comments and requests for a public hearing must be

received by March 20, 1996.

Printing of substitutes for Form W–2, Wage

and Tax Statement, and Form W–3, Transmittal

of Income and Tax Statements. See Rev. Proc.

96–23, page 27.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (EE–20–95), Room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington, DC 20044. In the alternative,

This document contains proposed

additions to the Income Tax Regulations (26 CFR Part 1) under section

125 of the Internal Revenue Code of

1986 (Code). These additions are proposed to conform the regulations to the

Family and Medical Leave Act of 1993

(FMLA), Public Law 103–3. FMLA

imposes certain requirements on

employers regarding coverage, including family coverage, under group

health plans for employees taking

FMLA leave, and regarding the restoration of benefits to employees who

return from FMLA leave. This notice

of proposed rulemaking addresses a

number of the principle questions that

have been raised about how these

FMLA requirements affect the operation of cafeteria plans (including flexible spending arrangements) maintained

under section 125 of the Code. The

rules in this notice of proposed

rulemaking supplement the proposed

Income Tax Regulations under section

125 of the Code. Except as otherwise

provided in this notice of proposed

rulemaking, all of the existing rules

governing cafeteria plans, including the

nondiscrimination rules, continue to

apply.

The requirements pertaining to

FMLA leave, including the employer’s

obligation to maintain coverage under a

group health plan during FMLA leave

and to restore benefits upon return

from FMLA leave, are established by

FMLA, not the Code. The U.S. Department of Labor, in 29 CFR Part 825,

has published rules interpreting the

requirements of FMLA, and the Department of Labor has jurisdiction

relating to those rights or obligations.

This notice of proposed rulemaking

does not interpret FMLA; it provides

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guidance on the cafeteria plan rules

that apply to an employee in circumstances to which FMLA and the Labor

Regulations thereunder also apply. The

Department of Labor has advised the

Department of the Treasury, including

the Internal Revenue Service (IRS),

that the provisions of this notice of

proposed rulemaking do not conflict

with, and are not inconsistent with, the

provisions of FMLA or the Labor

Regulations thereunder.

List of Subjects in 26 CFR Part 1

Special Analyses

Paragraph 1. The authority for part 1

continues to read in part as follows:

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

Par. 2. Section 1.125–3 is added to

read as follows:

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the 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 Requests for a Public

Hearing

Before these proposed regulations

are adopted as final regulations, consideration will be given to any written

comments (a signed original and eight

(8) copies) that are submitted timely to

the IRS. All comments will be available for public inspection and copying.

A public hearing may be scheduled if

requested in writing by a person that

timely submits written comments. If a

public hearing is scheduled, notice of

the date, time, and place for the

hearing will be published in the Federal

Drafting Information

The principal author of these regulations is Catherine Fuller, Office of

Associate Chief Counsel (Employee

Benefits and Exempt Organizations).

However, other personnel from the IRS

and Department of the Treasury participated in their development.

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

§1.125–3 Effect of the Family and

Medical Leave Act (FMLA) on the

operation of cafeteria plans.

Q-1: May an employee taking FMLA

leave revoke an existing election of

group health plan coverage under a

cafeteria plan?

A-1: Yes. An employee taking

FMLA leave may revoke an existing

election of group health plan coverage

(including a health flexible spending

arrangement (FSA)) under a cafeteria

plan for the remaining portion of the

coverage period. See 29 CFR 825.209(e). FMLA also requires that an

employee be permitted to choose to be

reinstated in the group health plan

coverage (including a health FSA)

provided under a cafeteria plan upon

returning from FMLA leave if the

employee’s group health plan coverage

terminated while on FMLA leave

(either by revocation or nonpayment of

premiums). Such an employee is entitled, under FMLA, to be reinstated on

the same terms as prior to taking

FMLA leave (including family or

dependent coverage). See 29 CFR

825.209(e) and 825.215(d). However,

the employee has no greater right to

benefits for the remainder of the plan

year than an employee who has been

continuously working during the plan

year. In addition to the rights granted

under FMLA, such an employee has

the right to revoke or change elections

(e.g., because of changes in family

status or significant cost or coverage

changes imposed by a third-party

provider) under the same terms and

conditions as are available to employees participating in the cafeteria

plan who are not on FMLA leave.

Q-2: Who is responsible for making

premium payments under a cafeteria

plan when an employee on FMLA leave

continues group health plan coverage?

A-2: An employee is entitled to

continue group health plan coverage

(including a health FSA) during FMLA

leave whether or not provided under a

health FSA or other component of a

cafeteria plan. See 29 CFR 825.209(b).

An employee making premium payments under a cafeteria plan who

chooses to continue group health plan

coverage (including a health FSA)

while on FMLA leave is responsible

for the share of group health premiums

that the employee was paying while

working, such as amounts paid pursuant to a salary reduction agreement.

The employer must continue to contribute the share of the cost of the

employee’s coverage that the employer

was paying before the employee commenced FMLA leave. See 29 CFR

825.100(b) and 825.210(a).

Q-3: What payment options are required or permitted to be offered under

a cafeteria plan to an employee who

continues group health plan coverage

(including a health FSA) while on

unpaid FMLA leave, and what is the

tax treatment of these payments?

A-3: (a) In general A cafeteria plan

may, on a nondiscriminatory basis,

offer one or more of the following

payment options (subject to the limitations described in paragraph (b) of this

Q&A-3) to an employee who continues

group health plan coverage (including a

health FSA) while on unpaid FMLA

leave. These options are referred to in

this section as pre-pay, pay-as-you-go

and catch-up.

(1) Pre-pay. (i) Under the pre-pay

option, a cafeteria plan may permit an

employee to pay, prior to commencement of the FMLA leave period, the

amounts due for the FMLA leave

period. However, the Labor Regulations under FMLA provide that under

no circumstances may the employer

mandate that an employee pre-pay the

amounts due for the leave period. See

29 CFR 825.210(c)(3) and (4).

(ii) Contributions under the pre-pay

option may be made on a pre-tax salary

reduction basis from any taxable compensation (including the cashing out of

unused sick days or vacation days).

These contributions will not be included in the employee’s gross income,

provided that all cafeteria plan requirements are satisfied. For example, see

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Q&A-5 of this section regarding

restrictions on pre-tax salary reduction

contributions when an employee’s

FMLA leave spans two cafeteria plan

years.

(iii) Contributions under the pre-pay

option may also be made on an aftertax basis. See §1.125–1, Q&A-5.1

(2) Pay-as-you-go. (i) Under the

pay-as-you-go option, employees may

pay their share of the premium payments on the same schedule as payments would be made if the employee

were not on leave or under any other

payment schedule permitted by the

Labor Regulations at 29 CFR 825.210(c) (i.e., on the same schedule as

payments are made under the Consolidated Omnibus Reconciliation Act of

1985, Public Law 99–272; under the

employer’s existing rules for payment

by employees on leave without pay; or

under any other system voluntarily

agreed to between the employer and the

employee that is not inconsistent with

this section or with 29 CFR

825.210(c)).

(ii) Contributions under the pay-asyou-go option are generally made by

the employee on an after-tax basis.

However, contributions may be made

on a pre-tax basis to the extent that the

contributions are made from taxable

compensation (e.g., cashing out unused

sick or vacation days) that is due the

employee during the leave period, and

provided that all cafeteria plan requirements are satisfied.

(iii) An employer is not required to

continue the health coverage of an

employee who fails to make required

premium payments while on FMLA

leave. See 29 CFR 825.212. However,

if the employer chooses to continue the

health coverage of an employee who

fails to make required premium payments while on FMLA leave, the

employer is entitled to recoup those

payments as set forth in paragraph

(a)(3)(i) of this Q&A-3. See also

Q&A-6 of this section regarding

coverage under a health FSA when an

employee fails to make the required

premium payments while on FMLA

leave.

(3) Catch-up. (i) An employer that

continues providing group health

coverage to an employee who does not

pay premiums on FMLA leave is, to

the extent provided under the Labor

Regulations, permitted to utilize the

catch-up option to recoup the

employee’s share of premium payments. See, e.g., 29 CFR 825.212(b).

(ii) Where an employee is electing

to use the catch-up option, the

employer and the employee must agree

in advance of the coverage period that:

the employee elects to continue health

coverage while on unpaid FMLA leave;

the employer will assume responsibility

for advancing payment of the premiums

on the employee’s behalf during the

FMLA leave; and these advance

amounts must be paid by the employee

when the employee returns from FMLA

leave.

(iii) Contributions under the catchup option may be made on a pre-tax

salary reduction basis when the

employee returns from FMLA leave

from any available taxable compensation (including the cashing out of

unused sick days and vacation days).

These contributions will not be included in the employee’s gross income,

provided that all cafeteria plan requirements are satisfied.

(iv) Contributions under the catch-up

option may also be made on an aftertax basis. See §1.125–1, Q&A-5.2

(b) Exceptions Cafeteria plans may

offer (pursuant to 29 CFR 825.210(c))

one or more of the payment options

described in paragraph (a) of this

Q&A-3, with the following exceptions:

(1) The pre-pay option cannot be

the sole option offered to employees on

FMLA leave. However, the cafeteria

plan may include pre-payment as an

option for employees on FMLA leave,

even if such option is not offered to

employees on non-FMLA leavewithout-pay.

(2) The catch-up option can be the

sole option offered to employees on

FMLA leave if and only if the catch-up

option is the sole option offered to

employees on non-FMLA leavewithout-pay.

(3) A cafeteria plan cannot offer

employees on FMLA leave a choice of

either the pre-pay option or the catchup option without also offering the

pay-as-you-go option, if the pay-asyou-go option is offered to employees

on non-FMLA leave-without-pay.

payments In addition to the foregoing

payment options, an employer may

voluntarily waive, on a nondiscriminatory basis, the requirement that

employees who elect to continue health

coverage while on FMLA leave pay the

amounts the employees would otherwise be required to pay for the leave

period.

Q-4: Do the special FMLA requirements concerning an employee who

continues group health plan coverage

under a cafeteria plan apply if the

employee is on paid FMLA leave?

A-4: No. The Labor Regulations

provide that, if an employee’s FMLA

leave is substituted paid leave as

described at 29 CFR 825.207 and the

employee continues group health plan

coverage while on FMLA leave, the

employee’s share of the premiums must

be paid by the method normally used

during any paid leave (i.e., salary

reduction). See 29 CFR 825.210(b).

Q-5: What restrictions apply to contributions when an employee’s FMLA

leave spans two cafeteria plan years?

A-5: (a) Contributions to a cafeteria

plan during FMLA leave will not be

included in an employee’s gross income, provided that the plan complies

with all cafeteria plan requirements.

Among other requirements, a plan may

not operate in a manner that enables

employees on FMLA leave to defer

compensation from one cafeteria plan

year to a subsequent cafeteria plan

year. See §1.125-2, Q&A-5.3

(b) The following example illustrates

this Q&A-5:

1Published as a proposed rule at 49 FR 19321

[EE–16–79, 1984–1 C.B. 563] (May 7, 1984).

2Published as a proposed rule at 49 FR 19321

(May 7, 1984).

3Published as a proposed rule at 54 FR 9460

[EE–130–86, 1989–1 C.B. 944] (March 7, 1989).

Example. Employee A elects health coverage

under a calendar year cafeteria plan maintained

by Employer X. A’s premium for health coverage is $100 per month throughout the 12-month

period of coverage. A takes FMLA leave for 12

weeks beginning on October 31 after making 10

months worth of premiums totalling $1000 (10

months 3 $100 = $1000). A maintains health

coverage while on FMLA leave. A utilizes the

pre-pay option by cashing-out A’s unused sick

days in order to make the required premium

payments due while A is on FMLA leave.

Because A cannot defer compensation from one

plan year to a subsequent plan year, A may prepay the premiums due in November and December (i.e., $100 per month) on a pre-tax basis, but

A cannot pre-pay the premium payment due in

January on a pre-tax basis. If A participates in

the cafeteria plan in the subsequent plan year, A

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must use another option (e.g., pay-as-you-go or

catch-up) to make the premium payment due in

January.

Q-6: Are there special rules concerning employees taking FMLA leave

who participate in health FSAs offered

under a cafeteria plan?

A-6: (a) In general (1) A health plan

that is a flexible spending arrangement

(FSA) offered under a cafeteria plan

must conform to the generally applicable rules in this section concerning

employees who take FMLA leave.

Thus, FMLA requires that an employee

taking FMLA leave be permitted to—

(i) continue coverage under a health

FSA while on FMLA leave; or

(ii) revoke an existing health FSA

election under the cafeteria plan for the

remainder of the coverage period. See

29 CFR 825.209(e).

(2) FMLA also requires the plan to

permit the employee to be reinstated in

the health FSA upon return from

FMLA leave on the same terms as

prior to taking FMLA leave. See 29

CFR 825.215(d) and paragraph (b)(2)

of this Q&A-6. However, reinstatement

is at the employee’s election and under

no circumstances may an employer

require an employee whose coverage

has terminated while on FMLA leave

to reinstate coverage under a health

FSA upon return from FMLA leave.

See 29 CFR 825.214(a).

(b) Uniform Coverage Rule (1)

Q&A-7(b)(2) of §1.125–24 (the uniform coverage rule) applies during the

FMLA leave period as long as the

employee continues health coverage.

Therefore, regardless of the payment

option selected under Q&A-3 of this

section, for so long as the employee

continues coverage (or for so long as

the employer continues the coverage of

an employee who fails to make the

required contributions as described in

Q&A-3(a)(2)(iii) of this section), the

full amount of the elected coverage,

less any prior reimbursements, must be

available to the employee at all times,

including the FMLA leave period.

(2)(i) If an employee’s coverage

under the health FSA terminates while

the employee is on FMLA leave, the

employee is not entitled to receive

reimbursements for claims incurred

during the period when the coverage is

terminated. If that employee subse4Published as a proposed rule at 54 FR 9460

(March 7, 1989).

quently elects to be reinstated in the

health FSA upon return from FMLA

leave for the remainder of the plan

year, the employee may not retroactively elect health FSA coverage for

claims incurred during the period when

the coverage was terminated. Further,

the employee is not entitled to greater

FSA benefits relative to premiums paid

than an employee who has been continuously working during the plan year.

See 29 CFR 825.216. Therefore, if an

employee elects to be reinstated in a

health FSA upon return from FMLA

leave, the employee’s coverage for the

remainder of the plan year is equal to

the employee’s election for the 12month period of coverage (or such

shorter period as provided under

§1.125–25), prorated for the period

during the FMLA leave for which no

premiums were paid, and reduced by

prior reimbursements.

(ii) An employee on FMLA leave

has the right to revoke or change

elections (e.g., because of changes in

family status) under the same terms

and conditions that apply to employees

participating in the cafeteria plan who

are not on FMLA leave. Thus, notwithstanding the rules described in paragraph (b)(2)(i) of this Q&A-6, an

employee who returns from FMLA

leave may make a new health FSA

election for the remainder of the plan

year if return from leave without pay

constitutes a change of family status

under the employer’s cafeteria plan.

(3) The following examples illustrate

the rules in this Q&A-6:

Example 1: (a) Employee A elects $1200

worth of coverage under a calendar year health

FSA provided under a cafeteria plan, with an

annual premium of $1200. A is permitted to pay

the $1200 through pre-tax salary reduction

amounts of $100 per month throughout the 12month period of coverage. A incurs no medical

expenses prior to April 1. On April 1, A takes

FMLA leave after making three months worth of

contributions totalling $300 (3 months 3 $100 =

$300). The plan does not permit a revocation of

election on account of a change in family status.

However, pursuant to A’s rights under FMLA, A

elects to terminate coverage upon going on

FMLA leave. Consequently, A makes no premium payments for the months of April, May,

and June, and A is not entitled to submit claims

or receive reimbursements for expenses incurred

during this period. A returns from FMLA leave

and elects to be reinstated in the health FSA on

July 1.

(b) Under FMLA, A has no greater right to

benefits upon reinstatement than if A had been

5Published as a proposed rule at 54 FR 9460

(March 7, 1989).

continuously working during the plan year.

Therefore, A is reinstated to A’s annual election

(i.e., $1200) prorated for the period during the

FMLA leave for which no premiums were paid

(i.e., reduced for 3 months or 1/4 of the plan

year) less prior reimbursements (i.e., $0). Consequently, A’s coverage for the remainder of the

plan year equals $900. A must also begin making

premium payments of $100 per month for the

remainder of the plan year.

Example 2: Assume the same facts as Example

1 except that A incurs medical expenses totaling

$200 in February and obtains reimbursement of

these expenses. The results are the same as in

Example 1, except that A’s coverage for the

remainder of the plan year equals $700.

Example 3: Assume the same facts as Example

1 except that prior to taking FMLA leave, A

elects to continue health FSA coverage during

the FMLA leave. The plan permits A (and A

elects) to use the catch-up payment option

described in Q&A-3 of this section, and as

further permitted under the plan, A chooses to

repay the $300 in missed payments on a ratable

basis over the remaining six-month period of

coverage (i.e., $50 per month). Thus, A’s

monthly premium payments for the remainder of

the plan year will be $150 ($100 + $50).

Q-7: Are employees entitled to nonhealth benefits while taking FMLA

leave?

A-7: FMLA does not require an employer to maintain an employee’s nonhealth benefits (e.g., life insurance)

during FMLA leave. An employee’s

entitlement to benefits other than group

health benefits under a cafeteria plan

during a period of FMLA leave is to be

determined by the employer’s established policy for providing such benefits when the employee is on nonFMLA leave (paid or unpaid). See 29

CFR 825.209(h). Therefore, an employee who takes FMLA leave is

entitled to revoke an election of nonhealth benefits under a cafeteria plan to

the same extent employees taking nonFMLA leave are permitted to revoke

elections of non-health benefits under a

cafeteria plan. For example, election

changes are permitted due to changes

of family status or upon enrollment for

a new plan year. See §1.125–2,

Q&A-6(c)6 and §1.125–1, Q&A-87.

However, the FMLA regulations

provide that, in certain cases, an

employer may continue an employee’s

non-health benefits under the employer’s cafeteria plan while the

employee is on FMLA leave to ensure

that the employer can meet its responsibility to provide equivalent benefits to

6Published as a proposed rule at 54 FR 9460

(March 7, 1989).

7Published as a proposed rule at 49 FR 19321

(May 7, 1984).

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the employee upon return from unpaid

FMLA. If the employer continues an

employee’s non-health benefits during

FMLA leave, the employer is entitled

to recoup the costs incurred for paying

the employee’s share of the premiums

during the FMLA leave period. See 29

CFR 825.213(b). In addition, a cafeteria plan must, as required by FMLA,

permit an employee whose coverage

terminated while on FMLA leave

(either by revocation or nonpayment of

premiums) to be reinstated in the

cafeteria plan on return from FMLA

leave. See 29 CFR 825.214(a) and

825.215(d).

Q-8: How may taxpayers rely on

these proposed regulations?

A-8: (a) The guidance provided by

the questions and answers in this

section may be relied upon to comply

with provisions of section 125 and will

be applied by the Internal Revenue

Service in resolving issues arising

under cafeteria plans and related Internal Revenue Code sections. If final

regulations are more restrictive than the

guidance in this section, the regulations

will not be applied retroactively. No

inference, however, should be drawn

regarding issues not expressly raised

that may be suggested by a particular

question or answer or by the inclusion

or exclusion of certain questions.

(b) The Department of Labor has

advised the Department of the Treasury, including the Internal Revenue

Service, that the provisions of this

section are not inconsistent with the

provisions of FMLA and the Labor

Regulations thereunder.

SUMMARY: This document contains

proposed regulations that provide guidance on calculation of an employee’s

accrued benefit derived from the

employee’s contributions to a qualified

defined benefit pension plan. These

regulations are issued to reflect changes

to the applicable law made by the

Omnibus Budget Reconciliation Act of

1987 (OBRA ’87) and the Omnibus

Budget Reconciliation Act of 1989

(OBRA ’89). OBRA ’87 and OBRA

’89 amended the law to change the

accumulation of employee contributions

and the conversion of those accumulated contributions to employee-derived

accrued benefits.

DATES: Written comments and requests for a public hearing must be

received by March 21, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (EE–35–95), Room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington, DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:R (EE–35–95),

Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION

CONTACT: Concerning the regulations, Janet A. Laufer, (202) 622-4606,

concerning submissions, Michael

Slaughter, (202) 622-7190 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

December 20, 1995, 8:45 a.m., and published

in the issue of the Federal Register for

December 21, 1995, 60 F.R. 66229)

Notice of Proposed Rulemaking

Allocation of Accrued Benefits

Between Employer and Employee

Contributions

EE–35–95

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

Background

This document contains proposed

amendments to regulations containing

rules for computing an employee’s

accrued benefit derived from the

employee’s contributions to a qualified

defined benefit pension plan. The proposed amendments reflect changes

made to section 411(c)(2) by the

Omnibus Budget Reconciliation Act of

1987, Public Law 100–203 (OBRA

’87), and the Omnibus Budget Reconciliation Act of 1989, Public Law 101–

239 (OBRA ’89). OBRA ’87 and

OBRA ’89 changed the interest rates

used to accumulate an employee’s

contributions to normal retirement age.

OBRA ’89 also changed the manner in

which the accumulated contributions

are converted to an annual benefit

payable at normal retirement age, and

removed a limitation on the employeederived accrued benefit contained in

prior law.

Section 411(c)(1) provides that an

employee’s accrued benefit derived

from employer contributions as of any

applicable date is the excess, if any, of

the accrued benefit for the employee as

of that date over the accrued benefit

derived from contributions made by the

employee as of that date. Section

411(c)(2)(B) provides that in the case

of a defined benefit plan, the accrued

benefit derived from contributions

made by an employee as of any applicable date is the amount equal to the

employee’s contributions accumulated

to normal retirement age using the

interest rate(s) specified in section

411(c)(2)(C), expressed as an actuarially equivalent annual benefit commencing at normal retirement age using

an interest rate which would be used by

the plan under section 417(e)(3), as of

the determination date. If the employee-derived accrued benefit is determined with respect to a benefit other

than an annual benefit in the form of a

single life annuity (without ancillary

benefits) commencing at normal retirement age, section 411(c)(3) requires

that the employee-derived accrued benefit be the actuarial equivalent of the

benefit determined under section

411(c)(2).

Under section 411(c)(2)(C)(iii)(I),

effective for plan years beginning after

December 31, 1987, the interest rate

used to accumulate an employee’s contributions until the determination date

is 120 percent of the Federal mid-term

rate under section 1274 of the Internal

Revenue Code (Code). For the period

between the determination date and

normal retirement age, section

411(c)(2)(C)(iii)(II) provides that the

interest rate used to accumulate an

employee’s contributions is the interest

rate which would be used under the

plan under section 417(e)(3) as of the

determination date. As noted above,

section 411(c)(2)(B) provides that the

interest rate which would be used

under the plan under section 417(e)(3)

as of the determination date also

applies for purposes of converting the

accumulated contributions to an annual

benefit commencing at normal retirement age. The Retirement Protection

Act of 1994, Public Law 103–465

(RPA ’94) amended section 417(e) to

change the applicable interest rate

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under section 417(e)(3) and to specify

the applicable mortality table under that

section. Examples contained in

§1.411(c)–1(c)(6) of these proposed

regulations reflect a plan that has been

amended to comply with the interest

rate and mortality table specifications

enacted in RPA ’94.

Explanation of Provisions

1. Conversion calculation

Prior to OBRA ’89, section 411(c)(2)(B) specified that the conversion

factor to be used for purposes of

computing the employee-derived accrued benefit was 10 percent for a

straight life annuity commencing at

normal retirement age of 65 (i.e.,

multiply the accumulated contributions

by .10), and that for other normal

retirement ages the conversion factor

was to be determined in accordance

with regulations prescribed by the

Secretary. Section 1.411(c)–1(c)(2) of

the existing regulations provides that

for normal retirement ages other than

age 65, the conversion factor shall be

the factor as determined by the

Commissioner.

Rev. Rul. 76–47 (1976–1 C.B. 109)

sets forth in tabular form the conversion factors to be used for determining

the accrued benefit derived from

employee contributions when the normal retirement age under the plan is

other than age 65 or when the normal

form of benefit is other than a single

life annuity (without ancillary benefits).

Rev. Rul 76–47 further provides that

where no standard factor is available, a

conversion factor must be determined

using an interest rate of 5 percent and

the UP–1984 mortality table (without

age setback).

OBRA ’89 deleted the ten percent

conversion factor in section 411(c)(2)(B) and replaced it with the requirement that the accumulated contributions

at normal retirement age be expressed

as an annual benefit commencing at

normal retirement age using an interest

rate which would be used under the

plan under section 417(e)(3) (as of the

determination date). This change was

effective retroactively to the effective

date of the OBRA ’87 provision

relating to section 411(c)(2)(C) (the

first day of the first plan year beginning after December 31, 1987).

To reflect the OBRA ’89 amendments, these proposed regulations de-

fine appropriate conversion factor with

respect to an accrued benefit expressed

in the form of an annual benefit that is

nondecreasing for the life of the

participant as the present value of an

annuity in the form of that annual

benefit commencing at normal retirement age at a rate of $1 per year. This

amount is to be computed using the

interest rate and mortality table which

would be used under the plan under

section 417(e)(3) and §1.417(e)–1T. To

reflect the post-OBRA ’89 conversion

factor definition and to conform to

common actuarial practice, these proposed regulations would change the

multiplied by language in §1.411(c)–

1(c)(1) to divided by.

2. Accumulated contributions

As added by the Employee Retirement Income Security Act of 1974

(ERISA), section 411(c)(2)(C) provided

that employee contributions were to be

accumulated using a standard interest

rate of 5 percent for years beginning on

or after the effective date of that

section. OBRA ’87 changed the interest

rate under section 411(c)(2)(C) to 120

percent of the applicable Federal midterm rate under section 1274 for plan

years after 1987. OBRA ’89 again

amended section 411(c)(2)(C) to provide that 120 percent of the applicable

Federal mid-term rate under section

1274 is to be used for accumulating

contributions only up to the determination date. For the period from the

determination date to normal retirement

age, the interest rate which would be

used under the plan under section

417(e)(3) (as of the determination date)

must be used for accumulating contributions for the period from the determination date to normal retirement age.

Accordingly, these proposed regulations would amend paragraph (3) of

§1.411(c)–1(c) to reflect those rates. As

stated above, RPA ’94 amended section

417(e)(3) to change the applicable

interest rate. See §1.417(e)–1T.

3. Determination date

Section 1.411(c)–1(c)(5)(i) defines

the term determination date for purposes of section 411(c)(2)(C)(iii), in a

case in which a participant will receive

his or her entire accrued benefit derived from employee contributions in

any one of the following forms (described in paragraph (c)(5)(ii)): an

annuity that is substantially nonincreasing, substantially nonincreasing installment payments for a fixed number of

years, or a single sum distribution. In

such a case, the term determination

date means the date on which distribution of such benefit commences. For

this purpose, an annuity that is nonincreasing except for automatic increases to reflect increases in the

consumer price index is considered to

be an annuity that is substantially

nonincreasing.

Thus, for example, for purposes of

section 411(c)(2)(C)(iii), in the case of

a distribution of the employee’s entire

accrued benefit (or the employee’s

entire employee-derived accrued benefit) in the form of a nonincreasing

single life annuity payable commencing

either at normal retirement age or at

early retirement age, the determination

date is the date the annuity commences.

Similarly, in the case of a single sum

distribution of accumulated employee

contributions (i.e., employee contributions plus interest computed at or

above the section 411(c) required rates)

upon termination of employment with a

deferred annuity benefit derived solely

from employer contributions, the determination date is the date of distribution

of the single sum of accumulated employee contributions.

Alternatively, the plan may provide

that the determination date is the

annuity starting date, as defined in

§1.401(a)–20, Q&A-10.

Under §1.411(c)–1(c)(5)(iii) of these

regulations, where a participant will

receive a distribution that is not described in paragraph (c)(5)(i), the determination date will be as provided by

the Commissioner.

4. Elimination of limitation on

employee-derived accrued benefit

Prior to OBRA ’89, section

411(c)(2)(E) of the Code limited the

accrued benefit derived from employee

contributions to the greater of (1) the

employee’s accrued benefit under the

plan, or (2) the sum of the employee’s

mandatory contributions, without interest. Section 7881(m)(1)(C) of OBRA

’89 deleted that provision. Section

7881(m)(1)(D) of OBRA ’89 added

section 411(a)(7)(D) to the Code,

which provides that the accrued benefit

of an employee shall not be less than

the amount determined under section

411(c)(2)(B) with respect to the

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employee’s accumulated contributions.

Accordingly, these proposed regulations delete the rule included in

§1.411(c)–1(d) of the existing regulations, which reflects the pre-OBRA ’89

rule.

5. Delegation of authority

Section 1.411(c)–1(d) of these proposed regulations provides that the

Commissioner may prescribe additional

guidance on calculating the accrued

benefit derived from employer or

employee contributions under a defined

benefit plan.

Effective Date

These amendments are proposed to

be effective for plan years beginning

on or after January 1, 1997. For

example, assume that under a plan the

employee’s date of termination of

employment is treated as the determination date, and distribution of the

employee’s entire employee-derived accrued benefit (as determined under the

terms of the plan then in effect) occurs

or commences prior to the first day of

the plan year beginning in 1997. In that

case, with respect to interest credits

under section 411(c)(2)(C)(iii) for plan

years beginning after 1987, the Service

will not treat the plan as having failed

to satisfy the requirements of section

411(c), nor will it require that additional amounts be credited in the calculation of the employee-derived accrued benefit in order to satisfy the

requirements of section 411(c) after

final regulations become effective,

merely because the date the employee’s

employment terminated was treated as

the determination date, provided that

interest is credited in accordance with

section 411(c)(2)(C)(iii)(I) for the

period before the date the employee

terminated employment and in accordance with section 411(c)(2)(C)(iii)(II)

thereafter.

Once amendments to the regulations

under §1.411(c)–1 are adopted in final

form, the Service will obsolete or

modify Rev. Rul. 76–47, Rev. Rul. 78–

202 (1978–2 C.B. 124) and Rev. Rul.

89–60 (1989–1 C.B. 113) as necessary

or appropriate.

Taxpayers may rely on these proposed regulations for guidance pending

the issuance of final regulations.

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis 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 Requests for a Public

Hearing

Before these proposed regulations

are adopted as final regulations, consideration will be given to any written

comments (a signed original and eight

(8) copies) that are submitted timely to

the IRS. All comments will be available for public inspection and copying.

A public hearing may be scheduled if

requested in writing by a person that

timely submits written comments. If a

public hearing is scheduled, notice of

the date, time, and place for the

hearing will be published in the Federal

Drafting Information

The principal author of these regulations is Janet A. Laufer, Office of the

Associate Chief Counsel (Employee

Benefits and Exempt Organizations).

However, other personnel from the IRS

and Treasury Department participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

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 1.411(c)–1 is

amended by:

1. Revising paragraphs (c)(1), (c)(2),

(c)(3), (c)(5) and (c)(6).

2. Revising paragraph (d).

3. Adding paragraph (g).

The additions and revisions read as

follows:

§1.411(c)–1 Allocation of accrued

benefits between employer and

employee contributions.

* * * * * *

mandatory employee contributions to a

defined benefit plan—(1) General Rule.

In the case of a defined benefit plan (as

defined in section 414(j)), the accrued

benefit derived from contributions

made by an employee under the plan as

of any applicable date in the form of an

annual benefit commencing at normal

retirement age and nondecreasing for

the life of the participant is equal to the

amount of the employee’s accumulated

contributions (determined under paragraph (c)(3) of this section) divided by

the appropriate conversion factor with

respect to that form of benefit (determined under paragraph (c)(2) of this

section). Paragraph (e) of this section

provides rules for actuarial adjustments

where the benefit is to be determined

in a form other than the form described

in this paragraph (c)(1).

(2) Appropriate conversion factor.

For purposes of this paragraph, with

respect to a form of annual benefit

commencing at normal retirement age

described in paragraph (c)(1), the term

appropriate conversion factor means

the present value of an annuity in the

form of that annual benefit commencing at normal retirement age at a rate

of $1 per year, computed using an

interest rate and mortality table which

would be used under the plan under

section 417(e)(3) and §1.417(e)–1T (as

of the determination date).

(3) Accumulated contributions. For

purposes of section 411(c) and this

section, the term accumulated contributions means the total of—

(i) All mandatory contributions made

by the employee (determined under

paragraph (c)(4) of this section);

(ii) Interest (if any) on such contributions, computed at the rate provided

by the plan to the end of the last plan

year to which section 411(a)(2) does

not apply (by reason of the applicable

effective dates);

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(iii) Interest on the sum of the

amounts determined under paragraphs

(c)(3)(i) and (ii) of this section compounded annually at the rate of 5

percent per annum from the beginning

of the first plan year to which section

411(a)(2) applies (by reason of the

applicable effective date) to the beginning of the first plan year beginning

after December 31, 1987;

(iv) Interest on the sum of the

amounts determined under paragraphs

(c)(3)(i) through (iii) of this section

compounded annually at 120 percent of

the Federal mid-term rate(s) (as in

effect under section 1274(d) of the

Internal Revenue Code for the first

month of a plan year) for the period

beginning with the first plan year

beginning after December 31, 1987 and

ending on the determination date; and

(v) Interest on the sum of the

amounts determined under paragraphs

(c)(3)(i) through (iv) of this section

compounded annually, using an interest

rate which would be used under the

plan under section 417(e)(3) and

§1.417(e)–1T (as of the determination

date), from the determination date to

the date on which the employee would

attain normal retirement age.

* * * * * *

(5) Determination date—(i) For purposes of section 411(c) and this section, in a case in which a participant

will receive his or her entire accrued

benefit derived from employee contributions in any one of the forms described in paragraph (c)(5)(ii), the term

determination date means the date on

which distribution of such benefit

commences. Alternatively, in such a

case, the plan may provide that the

determination date is the annuity starting date with respect to that benefit, as

defined in §1.401(a)–20, Q&A-10.

(ii) Paragraph (c)(5)(i) applies to the

following forms: an annuity that is

substantially nonincreasing (e.g., an

annuity that is nonincreasing except for

automatic increases to reflect increases

in the consumer price index), substantially nonincreasing installment payments for a fixed number of years, or a

single sum distribution.

(iii) In a case in which a participant

will receive a distribution that is not

described in paragraph (c)(5)(i), the

determination date will be as provided

by the Commissioner.

(6) Examples.

(i) Facts. (A) In the following examples,

Employer X maintains a qualified defined benefit

plan that required mandatory employee contributions for 1987 and prior years, but not for years

after 1987. The plan year is the calendar year.

The plan provides for a normal retirement age of

65 and for 100 percent vesting in the employerderived portion of a participant’s accrued benefit

after 5 years of service.

(B) The terms of the plan provide that the

normal form of benefit is a level monthly amount

commencing at normal retirement age and

payable for the life of the participant. A plan

participant who elects not to receive benefits in

the form of the qualified joint and survivor

annuity provided by the plan may elect to

receive a single-sum distribution of the present

value of his or her accrued benefit upon

termination of employment.

amended to provide that, for purposes of

computing actuarially equivalent benefits, the

single sum is calculated using the unisex version

of the 1983 GAM mortality table (as provided in

Revenue Ruling 95–6 (1995–1 C.B. 80)), and

interest at the rate equal to the annual rate of

interest on 30-year Treasury securities for the

first calendar month preceding the first day of

the plan year during which the annuity starting

date occurs.

(D) Under the plan, employee contributions

are accumulated at 3 percent interest for plan

years beginning before 1976, 5 percent interest

for plan years beginning after 1975 and before

1988, and interest at 120 percent of the Federal

mid-term rate (as in effect under section 1274(d)

for the first month of the plan year) for plan

years beginning after 1987 until the determination date. Under the plan, the determination date

is defined as the annuity starting date. For the

period from the determination date until the date

on which the employee attains normal retirement

age, interest is credited at the interest rate which

would be used under the plan under section

417(e)(3) as of the determination date.

(E) A, an unmarried participant, terminates

employment with X on January 1, 1997 at age 56

with 15 years of service. As of December 31,

1987, A’s total accumulated mandatory employee

contributions to the plan, including interest

compounded annually at 5 percent for plan years

beginning after 1975 and before 1988, equaled

$3,021. A receives his or her accrued benefit in

the form of an annual single life annuity

commencing at normal retirement age. A’s

annuity starting date is January 1, 2006, and

therefore the determination date is January 1,

2006.

(ii) Annuity at Normal Retirement Age—

Determination of Employee-Derived and Total

Plan Vested Accrued Benefit.

Example 1.

For purposes of this example, it is assumed

that A’s total accrued benefit under the plan in

the normal form of benefit commencing at

normal retirement age is $2,949 per year. A’s

benefit, as of January 1, 2006, would be

determined as follows:

(1) Determine A’s total accrued benefit in the

form of an annual single life annuity commencing at normal retirement age under the plan’s

formula ($2,949 per year payable at age 65).

(2) Determine A’s accumulated contributions

with interest to January 1, 1997. As of December

31, 1987, A’s accumulated contributions with

interest under the plan provisions were $3,021.

A’s employee contributions are accumulated

from December 31, 1987 to January 1, 1997

using 120 percent of the Federal mid-term rate

under section 1274(d). This rate is 10.61 percent

for 1988, 11.11 percent for 1989, 9.57 percent

for 1990, 9.78 percent for 1991, 8.10 percent for

1992, 7.63 percent for 1993, 6.40 percent for

1994, and 9.54 percent for 1995. It is assumed

for purposes of this example that 120 percent of

the Federal mid-term rate is 7.00 percent for

each year between 1996 and 2006, and that the

30-year Treasury rate for December 2005 is 8.00

percent. Thus, A’s contributions accumulated to

January 1, 1997, equal $6,480.

(3) Determine A’s accumulated contributions

with interest to normal retirement age (January 1,

2006) using, for the 1996 plan year and for years

until normal retirement age, 120 percent of the

Federal mid-term rate under section 1274(d),

which is assumed to be 7.00 percent ($11,913).

(4) Determine the accrued annual annuity

benefit derived from A’s contributions by dividing A’s accumulated contributions determined in

paragraph (3) of this Example 1 by the plan’s

appropriate conversion factor. The plan’s appropriate conversion factor at age 65 is 9.196, and

the accrued benefit derived from A’s contributions would be $11,913 / 9.196 = $1,295.

(5) Determine the accrued benefit derived

from employer contributions as the excess, if

any, of the employee’s accrued benefit under the

plan over the accrued benefit derived from

employee contributions ($2,949 – $1,295 =

$1,654 per year).

(6) Determine the vested percentage of the

accrued benefit derived from employer contributions under the plan’s vesting schedule (100

percent).

(7) Determine the vested accrued benefit

derived from employer contributions by multiplying the accrued benefit derived from employer

contributions by the vested percentage ($1,654 x

100 percent = $1,654 per year).

(8) Determine A’s vested accrued benefit in

the form of an annual single life annuity

commencing at normal retirement age by adding

the accrued benefit derived from employee

contributions and the vested accrued benefit

derived from employer contributions, the sum of

paragraphs (4) and (7) of this Example 1 ($1,295

+ $1,654 = $2,949 per year).

Example 2.

This example assumes the same facts as

Example 1 except that A’s total accrued benefit

under the plan in the normal form of benefit

commencing at normal retirement age is $1,000

per year. A’s benefit, as of January 1, 2006,

would be determined as follows:

(1) Determine A’s total accrued benefit in the

form of an annual single life annuity commencing at normal retirement age under the plan’s

formula ($1,000 per year payable at age 65).

(2) Determine A’s accumulated contributions

with interest to January 1, 1997 ($6,480 from

paragraph 2 of Example 1).

(3) Determine A’s accumulated contributions

with interest to normal retirement age (January 1,

2006) ($11,913 from paragraph 3 of Example 1).

(4) Determine the accrued annual annuity

benefit derived from A’s contributions by dividing A’s accumulated contributions determined in

paragraph (3) of this Example 2 by the plan’s

appropriate conversion factor ($1,295 from paragraph 4 of Example 1).

(5) Determine the accrued benefit derived

from employer contributions as the excess, if

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any, of the employee’s accrued benefit under the

plan over the accrued benefit derived from

employee contributions. Because the accrued

benefit derived from employee contributions

($1,295) is greater than the employee’s accrued

benefit under the plan ($1,000), the accrued

benefit derived from employer contributions is

zero, and A’s vested accrued benefit in the form

of an annual single life annuity commencing at

normal retirement age is $1,295 per year.

(d) Delegation to Commissioner.

The Commissioner may prescribe additional guidance on calculating the

accrued benefit derived from employee

contributions under a defined benefit

plan through publication in the Internal

Revenue Bulletin of revenue rulings,

notices, or other documents (see

§601.601(d)(2) of this chapter).

(e) * * *

(f) * * *

(g) Effective date. Paragraphs (c)(1),

(c)(2), (c)(3), (c)(5), (c)(6) and (d) of

this section are effective for plan years

beginning on or after January 1, 1997.

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

December 21, 1995, 8:45 a.m., and published

in the issue of the Federal Register for

December 22, 1995, 60 F.R. 66532)

Notice of Proposed Rulemaking

Requirements for Tax Exempt Section

501(c)(5) Organizations

EE–53–95

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of Proposed Rulemaking.

SUMMARY: This document contains

proposed regulations clarifying certain

requirements of section 501(c)(5). The

requirements are being clarified to

provide needed guidance to organizations as to the requirements an organization must meet in order to be exempt

from tax as an organization described

in section 501(c)(5).

DATES: Written comments and requests for a public hearing must be

received by March 20, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:T:R (EE–53–95),

Room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5

p.m. to: CC:DOM:CORP:T:R (EE–53–

95), Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue

NW., Washington, DC.

FOR FURTHER INFORMATION

CONTACT: Robin Ehrenberg, (202)

622-6080 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This notice of proposed rulemaking

clarifies the scope of the exemption

provided in section 501(c)(5) of the

Internal Revenue Code for labor, agricultural and horticultural organizations.

An income tax exemption for labor

organizations was first provided in the

Corporation Excise Tax Act of 1909,

Public Law No. 61–5, 36 Stat. 11, 112–

118, and has been in effect continuously since that time. A labor organization is an entity that is organized ‘‘to

protect and promote the interests of

labor.’’ Portland Cooperative Labor

Temple Association v. Commissioner,

39 B.T.A. 450 (1939), acq., 1939–1

C.B. 28. The principal purpose of the

organization must be to better the

working conditions of people engaged

in a common pursuit. See, Treas. Reg.

§1.501(c)(5)–1. Organizations meeting

this requirement have traditionally

engaged in collective action directed

toward the workers’ common objective

of improving working conditions. They

include labor unions that negotiate with

employers on behalf of workers for

improved wages, fringe benefits, hours

and similar working conditions, and

certain union-controlled organizations,

like strike funds, that provide benefits

to workers that enhance the union’s

ability to bargain effectively. See Rev.

Rul. 67–7 (1967–1 C.B. 137). They do

not include strike funds that provide

income to union members but are not

controlled by unions. See Rev. Rul.

76–420 (1976–2 C.B. 153). Such an

organization will not pay the strike

benefits ‘‘with the objective of bettering conditions of employment, but by

reason of its contractual agreements

with the workers.’’

Labor organizations may also meet

the requirements of section 501(c)(5)

by providing benefits that directly

improve working conditions or compensate for unpredictable hazards that

interrupt work. Examples of such benefits include operating a dispatch hall to

match union members with work assignments and providing industry stewards who represent employees with

grievances against management. See

Rev. Rul. 75–473 (1975–2 C.B. 213);

Rev. Rul. 77–5 (1977–1 C.B. 148). On

the other hand, managing saving and

investment plans for workers, including

retirement plans, does not bear directly

on working conditions. See Rev. Rul.

77–46 (1977–1 C.B. 147). Accordingly,

section 501(c)(5) has not been applied

to organizations that manage retirement

savings plans as their principal activity.

Nevertheless, in Morganbesser v.

United States, 984 F.2d 560 (2d Cir.

1993), the court held that a trust

managing a pension benefit plan pursuant to a collective bargaining agreement qualified as a labor organization

described in section 501(c)(5). The IRS

and the Treasury Department believe

that this decision is contrary to existing

law, and the IRS is issuing an action

on decision reflecting its view that the

Morganbesser court erred in its holding. These proposed regulations are a

clarification of the existing legal

standard.

Like labor organizations, agricultural

and horticultural organizations must

also better the conditions of those

engaged in a common pursuit in order

to be described in section 501(c)(5).

See § 1.501(c)(5)–1. There is no authority indicating that the law is to be

interpreted differently for agricultural

and horticultural organizations than for

labor organizations. Accordingly, the

proposed regulations clarify the law as

it applies to all section 501(c)(5)

organizations.

Certain organizations have taken the

position in refund actions that they are

labor organizations described in section

501(c)(5) even though their principal

activity was to manage retirement

savings plans for workers. In addition,

some such foreign organizations have

claimed exemption from withholding

on dividend, interest and similar income that they have earned. The IRS

will continue to oppose these claims

for refund and exemption from withholding.

A health plan is not a retirement

savings plan. Thus, the IRS will

continue to follow Rev. Rul. 62–17

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(1962–1 C.B. 87) (regarding a labor

organization providing health benefits)

even in circumstances where a majority

of the organization’s members are

retired. Furthermore, the IRS will continue to recognize that negotiating the

terms of a retirement plan and other

postretirement benefits and designating

one or more representatives to the

board of a multiemployer pension trust

are proper activities for a labor organization. The proposed regulations are

not intended to apply to or affect any

other provision of federal law, including provisions of the Employee Retirement Income Security Act of 1974

(ERISA) administered by the Secretary

of Labor.

Explanation of Provisions

The proposed regulations add a new

paragraph to §1.501(c)(5)–1 providing

that an organization is not an organization within the meaning of section

501(c)(5) if the organization’s principal

activity is to manage savings or investment plans or programs, including

retirement savings plans. Proposed Effective Date These regulations are proposed to be effective December 21,

1995.

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations

are adopted as final regulations, consideration will be given to any written

comments (a signed original and eight

(8) copies) that are submitted timely to

the IRS. All comments will be available for public inspection and copying.

A public hearing may be scheduled if

requested in writing by a person that

timely submits written comments. If a

public hearing is scheduled, notice of

the date, time, and place for the

hearing will be published in the Federal

Drafting Information

The principal author of these regulations is Robin Ehrenberg, Office of

Associate Chief Counsel (Employee

Benefits and Exempt Organizations).

However, other personnel from the IRS

and Treasury Department participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the

Regulations

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

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. Section 1.501(c)(5)-1 is

amended by:

1. Redesignating paragraph (b) as

paragraph (c).

2. Adding a new paragraph (b) to

read as follows:

§ 1.501(c)(5)–1 Labor, agricultural,

and horticultural organizations.

(b)(1) An organization is not an

organization described in section

501(c)(5) if the principal activity of the

organization is to receive, hold, invest,

disburse, or otherwise manage funds

associated with savings or investment

plans or programs, including pension or

other retirement savings plans or programs.

(2) Example. Trust A is organized

in accordance with a collective bargaining agreement between a labor union

and multiple employers. Representatives of both the employers and the

union serve as trustees. Trust A re-

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

December 20, 1995, 8:45 a.m., and published

in the issue of the Federal Register for

December 21, 1995, 60 F.R. 66228)

Notice of Proposed Rulemaking and

Notice of Public Hearing

Part 1—Income Taxes

ceives funds from the employers who

are subject to the agreement, invests

the funds and uses the funds and

accumulated earnings to pay pension

benefits to union members as specified

in the agreement. It also provides

information to union members about

their retirement benefits and assists

them with administrative tasks associated with the benefits. Most of Trust

A’s activities are devoted to these

functions. From time to time, Trust A

also participates in the renegotiation of

the collective bargaining agreement.

Because Trust A’s principal activity is

to manage funds associated with a

pension plan, it is not an organization

described in section 501(c)(5).

Certain Transfers of Domestic Stock

or Securities by U.S. Persons to

Foreign Corporations

INTL–9–95

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary

regulations and notice of public

hearing.

SUMMARY: In *** [T.D. 8638, page

5, this Bulletin], the IRS is issuing

temporary regulations revising the rules

under section 367(a) with respect to

certain transfers of stock or securities

of domestic corporations by United

States persons pursuant to the corporate

organization, reorganization or liquidation provisions of the Internal Revenue

Code. The text of those temporary

regulations also serves as the text of

these proposed regulations. This document also provides notice of a public

hearing on these proposed regulations.

DATES: Written comments must be

received by March 25, 1996. Outlines

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of topics to be discussed at the public

hearing scheduled for April 11, 1996,

at 10 a.m. must be received by March

21, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (INTL 0009–95),

Room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5

p.m. to: CC:DOM:CORP:R (INTL–

0009–95), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Ave. NW., Washington, DC. The public hearing will be held in the IRS

Auditorium, Internal Revenue Building,

1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION

CONTACT: Concerning the regulations, Philip L. Tretiak at (202)

622-3860; concerning submissions and

the hearing, Christina Vasquez 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).

Comments on the collection of information should be sent to the Office of

Management and Budget, Attn: Desk

Officer for the Department of Treasury,

Office of Information and Regulatory

Affairs, Washington, DC 20503, with

copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer,

T:FP, Washington, DC 20224. Comments on the collection of information

should be received by February 26,

1996.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The collection of information is in

§1.367(a)–3T(c)(4). This information is

required by the IRS as a condition for a

taxpayer to qualify for an exception to

the general rule of taxation under

section 367(a)(1). This information will

be used to determine whether a tax-

payer properly qualifies for a claimed

exception. The respondents generally

will be U.S. corporations, probably

U.S. multinationals, that are acquired

by foreign companies pursuant to nonrecognition exchanges or that engage in

joint ventures with foreign companies.

Responses to this collection of information by the relevant U.S. corporations

are required in order for the shareholders of such corporations to qualify

for an exception to the general rule

under section 367(a)(1).

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.

Estimated total annual reporting burden: 1,000 hours. The estimated annual

burden per respondent varies from 1

hour to 20 hours, depending on individual circumstances, with an estimated

average of 10 hours.

Estimated number of respondents:

100.

Estimated annual frequency of responses: Once.

Background

The temporary regulations published

in the *** [T.D. 8638, page 00, this

Bulletin] amend the Income Tax Regulations (26 CFR part 1) relating to

section 367(a). The temporary regulations contain rules relating to the

transfer of stock or securities by a

United States person to a foreign

corporation in an exchange described in

section 367(a).

The text of those temporary regulations also serves as the text of these

proposed regulations. The preamble to

the temporary regulations explains the

temporary regulations. Final regulations

under section 367(a) regarding transfers

of stock or securities will integrate the

proposed regulations herein with the

notice of proposed rulemaking published on August 26, 1991, in the

Federal Register (56 FR 41993). Thus,

the proposed regulations herein supplement and, where inconsistent with,

supersede, the 1991 proposed

regulations.

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 this

regulation does not have a significant

impact on a substantial number of

small entities. Thus, the Regulatory

Flexibility Act (5 U.S.C. chapter 6)

does not apply to these regulations, and

therefore, a Regulatory Flexibility

Analysis 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 their impact on small business.

Comments and Notice of Public

Hearing

Before these proposed regulations

are adopted as final regulations, consideration will be given to any written

comments (a signed original and eight

(8) copies) that are submitted timely to

the Internal Revenue Service. All comments will be available for public

inspection and copying.

A public hearing has been scheduled

for April 11, 1996, at 10 a.m. in the

IRS Auditorium. Because of access

restrictions, visitors will not be admitted beyond the building lobby more

than 15 minutes before the hearing

starts.

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

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by March 25, 1996,

and submit an outline of the topics to

be discussed and the time to be devoted

to each topic (signed original and eight

(8) copies) by March 21, 1996.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling

of the speakers will be prepared after

the deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these proposed regulations is Philip L. Tretiak

of the Office of Associate Chief

Counsel (International), Internal Revenue Service. However, other personnel

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from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income tax, Reporting and recordkeeping requirements.

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. New §1.367–9 is added to

read as follows:

§1.367(a)–9 Transfers by U.S. persons

of stock or securities of domestic

corporations to foreign corporations.

[The text of this proposed section is

the same as the text of paragraphs (a),

(c), (d), (e), (f), (g)(1) and (h)(1) of

§1.367–3T published elsewhere in ***

[T.D. 8638, this Bulletin].]

Margaret Milner Richardson,

Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

December 22, 1995, 8:45 a.m., and published

in the issue of the Federal Register for

December 26, 1995, 60 F.R. 66771)

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Part III. Administrative, Procedural, and Miscellaneous

Notice 96–6

In Rev. Proc. 94–76, 1994–2 C.B.

825, the Internal Revenue Service

announced that it had commenced a

project to study whether certain transactions qualifying as corporate reorganizations under § 368 circumvent the

purposes of General Utilities repeal,

necessitating corrective regulations under § 337(d). The transactions under

study included any transaction in which

one corporation owns stock in a second

corporation, the first corporation is not

an ‘‘80-percent distributee’’ of the

second corporation under § 337(c), and

the two corporations are combined (a

‘‘corporate combining transactions’’).

The IRS and the Treasury Department

have decided not to issue guidance at

this time regarding corporate combining transactions and are closing this

project.

Rev. Proc. 94–76 and section 5.15 of

Rev. Proc. 96–3, 1996–1 I.R.B. 82,

state that the IRS will not issue

advance rulings on the tax consequences of corporate combining

transactions while the study of such

transactions is being undertaken. The

IRS will amplify and modify Rev.

Proc. 96–3 by moving section 5.15

from section 5 (Areas Under Extensive

Study) to section 3 (Areas In Which

Rulings Or Determination Letters Will

Not Be Issued). No inference is intended by this notice as to the tax

treatment of corporate combining transactions under current law.

For further information regarding

this notice, contact Keith Stanley of the

Office of Assistant Chief Counsel

(Corporate) at (202) 622-7530 (not a

toll-free call).

26 CFR 601.201: Rulings and determination

letters.

(Also §§ 368; 1.368–1.)

Rev. Proc. 96–22

SECTION 1. PURPOSE

This revenue procedure amplifies and

modifies Rev. Proc. 96–3, 1996–1

I.R.B. 82, which sets forth areas of the

Internal Revenue Code under the jurisdiction of the Associate Chief Counsel

(Domestic) and the Associate Chief

Counsel (Employee Benefits and Ex-

empt Organizations) relating to issues

on which the Internal Revenue Service

will not issue advance letter rulings or

determination letters.

SECTION 2. BACKGROUND

In Rev. Proc. 94–76, 1994–2 C.B.

825, currently reflected in section 5.15

of Rev. Proc. 96–3, the IRS stated that

while it was studying whether certain

transactions qualifying as corporate

reorganizations under § 368 circumvent

the purposes of General Utilities repeal, the IRS would not issue advance

rulings on the tax consequences of the

transactions under study. In notice 96–

6, the IRS announced that this study is

being closed.

SECTION 3. PROCEDURE

Rev. Proc. 96–3 is amplified by

adding to section 3 (Areas In Which

Rulings Or Determination Letters Will

Not Be Issued) the provision presently

in section 5.15, and is modified by

deleting the provision from section 5

(Areas Under Extensive Study).

DRAFTING INFORMATION

For further information regarding

this revenue procedure, contact Keith

Stanley of the Office of Assistant Chief

Counsel (Corporate) at (202) 622-7530

(not a toll-free call).

26 CFR 601.105: Examination of returns and

claims for refund, credit or abatement;

determination of correct tax liability.

(Also Part I, § 842.)

Rev. Proc. 96–23

SECTION 1. PURPOSE

This revenue procedure provides the

domestic asset/liability percentages and

domestic investment yields needed by

foreign life insurance companies and

foreign property and liability insurance

companies to compute their minimum

effectively connected net investment

income under § 842(b) of the Internal

Revenue Code for taxable years beginning after December 31, 1994. Instructions are provided for computing foreign insurance companies’ liabilities for

the estimated tax and installment pay-

ments of estimated tax for taxable

years beginning after December 31,

1994. For more specific guidance regarding the computation of the amount

of net investment income to be included by a foreign insurance company

on its U.S. income tax return, see

Notice 89–96, 1989–2 C.B. 417. For

the domestic asset/liability percentage

and domestic investment yield, as well

as instructions for computing foreign

insurance companies’ liabilities for

estimated tax and installment payments

of estimated tax for taxable years

beginning after December 31, 1993, see

Rev. Proc. 95–26, 1995–1 C.B. 703.

SEC. 2. CHANGES.

.01 DOMESTIC ASSET/LIABILITY

PERCENTAGES FOR 1995. The Secretary determines the domestic asset/

liability percentage separately for life

insurance companies and property and

liability insurance companies. For the

first taxable year beginning after December 31, 1994, the relevant domestic

asset/liability percentages are:

114.7 percent for foreign life insurance companies, and

165.8 percent for foreign property

and liability insurance companies.

.02 DOMESTIC INVESTMENT

YIELDS FOR 1995. The Secretary is

required to prescribe separate domestic

investment yields for foreign life insurance companies and for foreign property and liability insurance companies.

For the first taxable year beginning

after December 31, 1994, the relevant

domestic investment yields are:

8.4 percent for foreign life insurance

companies, and

6.4 percent for foreign property and

liability insurance companies.

The domestic investment yields provided in this revenue procedure are

based on tax return data rather than

NAIC statement data.

SEC. 3. APPLICATION—

ESTIMATED TAXES

To compute estimated tax and the

installment payments of estimated tax

due for taxable years beginning after

December 31, 1994, a foreign insurance company must compute its estimated tax payments by adding to its

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income other than net investment income the greater of (i) its net investment income as determined under

§ 842(b)(5) that is actually effectively

connected with the conduct of a trade

or business within the United States for

the relevant period, or (ii) the minimum

effectively connected net investment

income under § 842(b) that would

result from using the most recently

available domestic asset/liability percentage and domestic investment yield.

Thus, for installment payments due

after the release of this revenue procedure, the domestic asset/liability percentages and the domestic investment

yields provided in this revenue procedure must be used to compute the

minimum effectively connected net investment income. However, if the due

date of an installment is less than 20

days after the date this revenue procedure is published in the Internal Revenue Bulletin, the asset/liability percentages and domestic investment yields

provided in Rev. Proc. 95–26 may be

used to compute the minimum effectively connected net investment income

for such installment. For further guidance in computing estimated tax, see

Notice 89–96.

SEC. 4. EFFECTIVE DATE

This revenue procedure is effective

for taxable years beginning after December 31, 1994.

SEC. 5. DRAFTING INFORMATION

The principal author of this revenue

procedure is Mary Gillmarten of the

Office of the Associate Chief Counsel

(International). For further information

about this revenue procedure, please

contact Ms. Gillmarten at (202)

622-3870 (not a toll free call), or write

to the Internal Revenue Service, Office

of the Associate Chief Counsel (International), 1111 Constitution Avenue,

N.W., Washington, D.C. 20224, Attention: CC:INTL:Br.5, Room 4562.

General Rules for Filing and

Specifications for the Private Printing

of Substitute Forms W–2 and W–3

26 CFR 601.602: Forms and instructions.

(Also Part I, Sections 6011, 6041, 6051, 6071,

6081, 6091; 1.6041–1, 1.6041–2, 31.6051–1,

31.6051–2, 31.6071(a)–1, 31.6081(a)–1.)

Rev. Proc. 96–24

PART A. GENERAL

SECTION 1. PURPOSE

.01 The purpose of this revenue

procedure is to provide the general

rules for filing and to state the

requirements of the Internal Revenue

Service (IRS) and the Social Security

Administration (SSA) for reproducing

paper substitutes for Form W–2, Wage

and Tax Statement, and Form W–3,

Transmittal of Wage and Tax Statements, for amounts paid during the

1996 calendar year. The information

reported on Forms W–2 and W–3 is

required to establish tax liability for

employees and their eligibility for

Social Security and Medicare benefits.

.02 Forms W–2 and W–

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