Bulletin No. 1998–39

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September 28, 1998

Internal Revenue

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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

EMPLOYEE PLANS

Ct.D. 2065, page 7.

Notice 98–48, page 17.

Treasury Regulation section 1.846–3(c)(3) reasonably interprets that the term “reserve strengthening” is broad enough

to embrace all increases in the reserve’s amount. Atlantic

Mutual Insurance Company v. Commissioner of Internal Revenue.

Weighted average interest rate update. The weighted average interest rate for September 1998 and the resulting permissible range of interest rates used to calculate current liability for purposes of the full funding limitation of section

412(c)(7) of the Code are set forth.

T.D. 8780, page 14.

ADMINISTRATIVE

Final regulations under section 7623 of the Code relate to

rewards for information on violations of the internal revenue

laws.

Rev. Rul. 98–46, page 10.

Interest rates; underpayments and overpayments. The

rate of interest determined under section 6621 of the Code

for the calendar quarter beginning October 1, 1998, will be

7 percent for overpayments, 8 percent for underpayments,

and 10 percent for large corporate underpayments. The rate

of interest paid on the portion of a corporate overpayment

exceeding $10,000 is 5.5 percent.

Rev. Rul. 98–47, page 4.

Residential rental property. For purposes of section

142(d) and 145(d) of the Code, the ruling provides that the

availability of continual or frequent medical, nursing, or psychiatric services in a facility for the residents of the facility

will cause the facility to be other than residential rental property. Other non-housing services available in a facility for the

residents of the facility generally will not cause the facility to

be other than residential rental property.

Rev. Rul. 98–48, page 6.

LIFO; price indexes; department stores. The July 1998

Bureau of Labor Statistics price indexes are accepted for

use by department stores employing the retail inventory and

last-in, first-out inventory methods for valuing inventories for

tax years ended on, or with reference to, July 31, 1998.

REG–104565–97, page 21.

Proposed regulations under section 6402 of the Code relate

to the administration of the Tax Refund Offset Program

(TROP).

REG–115393–98, page 34.

Proposed regulations under section 408A of the Code relate

to Roth IRAs. A public hearing will be held on December 10,

1998.

REG–118926–97, page 23.

Proposed regulations under section 6038B of the Code relate to information reporting requirements for certain transfers by United States persons to foreign partnerships. A public hearing will be held on November 10, 1998.

REG–118966–97, page 29.

Proposed regulations under section 6038 of the Code relate

to information reporting requirements for certain United

States persons holding interests in controlled foreign partnerships. A public hearing will be held on November 10, 1998.

REG–209060–86, page 18.

Proposed regulations under section 6046A of the Code relate

to information reporting requirements for certain United

States persons who acquire or dispose of an interest in a foreign partnership, or whose interest in a foreign partnership

changes substantially. A public hearing will be held on November 10, 1998.

Finding Lists begin on page 54.

Announcement of Disbarments and Suspensions begins on page 50.

Department of the Treasury

Internal Revenue Service

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

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 prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining 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.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

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

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great 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.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a semiannual basis

and are published in the first Bulletin of the succeeding semiannual period, respectively.

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

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

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

Section 103.—Interest on State

and Local Bonds

26 CFR 1.103–8(b): Residential rental property.

For purposes of sections 142(d) and 145(d) of the

Code, the ruling provides that the availability of continual or frequent medical, nursing, or psychiatric

services in a facility for the residents of the facility

will cause the facility to be other than residential

rental property. Other non-housing services available

in a facility for the residents of the facility generally

will not cause the facility to be other than residential

rental property. See Rev. Rul. 98–47, page 4.

Section 142.—Exempt Facility

Bond

26 CFR 1.103–8(b): Residential rental property.

For purposes of sections 142(d) and 145(d) of the

Code, the ruling provides that the availability of continual or frequent medical, nursing, or psychiatric

services in a facility for the residents of the facility

will cause the facility to be other than residential

rental property. Other non-housing services available

in a facility for the residents of the facility generally

will not cause the facility to be other than residential

rental property. See Rev. Rul. 98–47, page 4.

26 CFR 1.103–8: Interest on bonds to finance

certain exempt facilities.

(Also sections 145 and 103)

Residential rental property. For purposes of section 142(d) and 145(d) of the

Code, the ruling provides that the availability of continual or frequent medical,

nursing, or psychiatric services in a facility for the residents of the facility will

cause the facility to be other than residential rental property. Other non-housing

services available in a facility for the residents of the facility generally will not

cause the facility to be other than residential rental property.

Rev. Rul. 98–47

ISSUE

Are the buildings described below residential rental property for purposes of

§ 142(d) and § 145(d) of the Internal Revenue Code?

FACTS

Complex M provides housing units on a

non-transient basis for individuals who are

September 28, 1998

of retirement age or older. All of the units

in Complex M are available to members of

the general public. Complex M is comprised of Building X, Building Y, and

Building Z, each of which is composed of

similarly constructed housing units that

have separate and complete facilities for

living, sleeping, eating, cooking, bathing,

and sanitation. The cooking and eating

area contains a small refrigerator, a sink, a

pull-down table, and a two-burner stove

with an oven. Each unit is designed so that

the stove can be replaced with a full-sized

microwave oven if the physical or mental

frailties of the resident make it imprudent

to provide a functioning cooking stove.

Each resident enters into a lease arrangement with Complex M. The amount

of the monthly payment under the lease

varies according to the level of care provided in the building in which the resident

resides, with Building Z commanding the

largest payment and Building X the

smallest payment. The monthly payment

is made in exchange for use of an individual unit, basic services and, with respect

to Buildings Y and Z, other services.

Under a lifetime lease payment option,

residents of Complex M may pay a fixed

monthly amount for the time they reside

in Complex M. The lifetime lease option

guarantees a resident the right to move to

a unit in Buildings Y or Z if the resident

requires additional care.

The basic services available to the residents in all three buildings include: laundry; housekeeping; regular daily meals in

the common dining areas; 24 hour monitored emergency call service using call

buttons and two-way communication devices located in each room of a unit;

planned social activities; and scheduled

transportation to various sites in the vicinity including commercial areas, shopping

centers, hospitals, and doctor’s offices.

Building X, Building Y, and Building Z

each contains a separate common dining

area. The dining area in each building

will be used exclusively by residents of

Complex M and visitors of those residents. The size of the dining area in any

building does not exceed that necessary to

serve the residents of the building and

their guests. The dining area serves the

special needs of the residents and provides the staff of Complex M an opportu-

nity to monitor the overall well-being, nutrition, and health of the residents.

Only the basic services are made available to residents of Building X. No other

services are included in the monthly payment. Continual or frequent nursing,

medical, or psychiatric services are not

made available in Building X.

The basic services and the Building Y

support services are made available to

residents of Building Y. The Building Y

support services are as follows: assistance by medication management technicians in medication management and intake; maintenance of detailed medication

records; consultation with a nurse as

needed about health concerns and medication plans; assistance by non-medically

certified aides each day during waking

hours in activities of daily living that include getting in and out of bed and chairs,

walking, using the toilet, dressing, eating,

and bathing; and routine checks by staff

members of Building Y to insure the residents’ general well-being. Some residents

of Building Y have incapacitating infirmities that require continual assistance, but

do not require continual or frequent nursing, medical, or psychiatric services.

Continual or frequent nursing, medical, or

psychiatric services are not made available in Building Y.

The basic services and the Building Y

support services are made available to

residents of Building Z. In addition,

Building Z is staffed in the following

manner: registered nurses are on duty for

12 hours each day; licensed practical

nurses are on duty for 24 hours each day;

and licensed nurses’ aides are available 24

hours each day. The nurses and nurses’

aides are available to provide nursing care

for residents’ medical or psychiatric

needs. Thus, continual or frequent nursing, medical, or psychiatric services are

made available in Building Z.

Residents in Building X are required to

move into Buildings Y or Z or another facility outside of Complex M if, because of

physical or mental disability, they require

additional care beyond that offered by

Building X. Residents in Buildings X and

Y are required to move into Building Z or

another facility outside of Complex M if

they require continual or frequent nursing, medical, or psychiatric services.

1998–39 I.R.B.

LAW AND ANALYSIS

Under the general rule of § 103(a),

gross income does not include interest on

any state or local bond. Section

103(b)(1), however, provides that the exclusion does not apply to any private activity bond unless it is one of the qualified

bonds under § 141(e). Among these qualified bonds are exempt facility bonds and

qualified § 501(c)(3) bonds.

Section 142(a) describes an exempt facility bond as any bond issued as part of

an issue of bonds if 95 percent or more of

the net proceeds of the issue are to be

used to provide listed types of projects or

facilities. Within the list, in § 142(a)(7),

are qualified residential rental projects.

Section 142(d) defines a qualified residential rental project as a project for residential rental property that houses occupants who meet one of the alternative

income tests at all times throughout a

qualified project period. In the Tax Reform Act of 1986, 1986–3 (Vol. 1) C.B.

519–575 (the “1986 Act”), Congress reorganized § 103 and § 103A of the Internal

Revenue Code of 1954 (the “1954 Code”)

regarding tax-exempt bonds into § 103

and §§ 141 through 150 of the Internal

Revenue Code of 1986. Congress intended that to the extent not amended by

the 1986 Act, all principles of pre-1986

Act law would continue to apply to the reorganized provisions. 2 H.R. Conf. Rep.

No. 841, 99th Cong., 2d Sess. II–686

(1986), 1986–3 (Vol. 4) C.B. 686. (Conference Report). Because no Income Tax

Regulations have been promulgated under

§ 142(d), the regulations promulgated

pursuant to § 103(b)(4) of the 1954 Code

continue to apply to residential rental

property except as otherwise modified by

the 1986 Act and subsequent law.

Section 145(a) describes a qualified

§ 501(c)(3) bond as any bond issued as

part of an issue of bonds if all of the property to be provided by the net proceeds of

the issue is to be owned by a § 501(c)(3)

organization or a governmental unit and

95 percent or more of the net proceeds of

the issue are used in a manner related to

the exempt purpose of the § 501(c)(3) organization. Under § 145(d)(1), however, a

bond generally is not a qualified

§ 501(c)(3) bond if net proceeds of the

issue are used directly or indirectly to provide residential rental property for family

1998–39 I.R.B.

units. Section 145(d)(2) provides certain

exceptions to § 145(d)(1). The legislative

history of § 145(d) indicates that the

phrase residential rental property for family units in § 145(d) has the same meaning

as residential rental property under

§ 1.103–8(b) of the Income Tax Regulations.

Under § 1.103–8(b)(4), a residential

rental project is residential rental property

that meets certain requirements including

occupancy requirements by low-income

tenants during the period when the units

must be continually rented or available for

rental. Residential rental property is a

building or structure, together with any

functionally related and subordinate facilities, containing one or more similarly constructed units that are available to members of the general public and used on

other than a transient basis. The regulations also provide that hotels, motels, dormitories, fraternity and sorority houses,

rooming houses, hospitals, nursing homes,

sanitariums, rest homes, and trailer parks

and courts for use on a transient basis are

not residential rental projects.

Section 1.103–8(b)(8) defines a “unit”

as any accommodation containing separate and complete facilities for living,

sleeping, eating, cooking, and sanitation.

The regulations note that an example of a

unit would be a separate and distinct

apartment containing a living area, a

sleeping area, bathing and sanitation facilities, and cooking facilities equipped

with a cooking range, refrigerator, and

sink.

Additional insight into the meaning of

residential rental property can be found

under § 42, which provides the low-income housing credit. 2 H.R. Conf. Rep.

No. 841, 99th Cong., 2d Sess. II–89

(1986), 1983–3 (Vol. 4) C.B. 89, states

that the phrase “residential rental property” generally has the same meaning

under both § 42 and § 142(d).

Section 1.42–11(b) provides a distinction between residential rental properties

and health care facilities by focusing on

whether frequent nursing, medical, or

psychiatric services are provided to residents. Under that section, if continual or

frequent nursing, medical, or psychiatric

services are provided to residents, it is

presumed that the building is ineligible

for the credit as is the case with a hospital

or nursing home. The distinction drawn

in the regulations under § 42 regarding

the nature of the facility based on the frequency of nursing, medical, or psychiatric

services available in the facility is also the

appropriate standard for determining

whether facilities are residential rental

property for purposes of § 142(d) and

§ 145(d).

For purposes of § 142(d) and § 145(d),

if a facility makes available continual or

frequent nursing, medical, or psychiatric

services, the facility will not be residential rental property under § 142(d) or

§ 145(d). In the case of a mixed use facility, the allocable portion of the facility in

which continual or frequent nursing, medical, or psychiatric services are made

available will not be residential rental

property under § 142(d) or § 145(d).

As set forth in the facts above, Building

X, Building Y, and Building Z each contains complete living units within the

meaning of § 1.103–8(b)(8), all of the living units within the respective buildings

are available to the general public, and all

of the living units are used on a non-transient basis. Since Complex M also provides significant non-housing services to

residents of the three buildings (including

continual or frequent nursing, medical, or

psychiatric services to the residents of

Building Z), the analysis must consider

the nature and extent of the non-housing

services. In the case of Complex M, the

analysis must examine whether the buildings of Complex M are hospitals, nursing

homes, sanitariums, or rest homes rather

than residential rental property. For purposes of § 142(d) and § 145(d), labels are

not determinative. The focus of these sections, their legislative histories, and the

applicable regulations thereunder, is

whether the facilities are, in substance,

residences or health care facilities. Therefore, the nature and degree of the services

provided by the facility controls.

Significant non-housing services are

made available to residents of Building X

and Building Y, including meals and various support services. The services available to residents of Building X and Building Y do not include continual or frequent

nursing, medical, or psychiatric services

although, under the lifetime lease option,

certain residents are assured that they will

receive continual or frequent nursing,

medical, or psychiatric services in Building Z if required. Thus, under the princi-

September 28, 1998

ples set forth above, Buildings X and Y

would be residential rental property.

Continual or frequent nursing, medical,

or psychiatric services are made available

to residents of Building Z in addition to

the same non-housing services that are

made available to residents of Building X

and Building Y. Thus, under the principles set forth above, Building Z would not

be a residential rental property.

ruling are Harold N. Diamond and Timothy L. Jones of the Office of Associate

Chief Counsel (Domestic) and Edwin G.

Oswald of the Department of the Treasury. For further information regarding

this revenue ruling contact Harold N. Diamond at 202-622-3980 (not a toll-free

call).

Section 145.—Qualified

501(c)(3) Bond

HOLDING

Building X and Building Y are residential rental property for purposes of

§ 142(d) and § 145(d). Because continual

or frequent nursing, medical, or psychiatric services are made available in Building Z, Building Z is not residential rental

property for purposes of § 142(d) and

§ 145(d).

Neither Building X nor Building Y

would fail to be residential rental property

under § 142(d) or § 145(d) merely because

it was called a hospital, a sanitarium, a rest

home, or a nursing home. Similarly,

Building Z would not be residential rental

property under § 142(d) or § 145(d)

merely because it was called an assisted

living facility or an elderly care facility.

DRAFTING INFORMATION

The principal authors of this revenue

26 CFR 1.103–8(b): Residential rental property.

For purpose of sections 142(d) and 145(d) of the

Code, the ruling provides that the availability of

continual or frequent medical, nursing, or psychiatric services in a facility for the residents of the facility will cause the facility to be other than residential rental property. Other non-housing services

available in a facility for the residents of the facility

generally will not cause the facility to be other than

residential rental property. See Rev. Rul. 98–47,

page 4.

Section 472.—Last-in, First-out

Inventories

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

use by department stores employing the

retail inventory and last-in, first-out inventory methods for valuing inventories

for tax years ended on, or with reference

to, July 31, 1998.

Rev. Rul. 98–48

The following Department Store Inventory Price Indexes for July 1998 were issued by the Bureau of Labor Statistics.

The indexes are accepted by the Internal

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

the Income Tax Regulations and Rev.

Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory

methods for tax years ended on, or with

reference to, July 31, 1998.

The Department Store Inventory Price

Indexes are prepared on a national basis

and include (a) 23 major groups of departments, (b) three special combinations of

the major groups - soft goods, durable

goods, and miscellaneous goods, and (c) a

store total, which covers all departments,

including some not listed separately, except for the following: candy, food,

liquor, tobacco, and contract departments.

LIFO; price indexes; department

stores. The July 1998 Bureau of Labor

Statistics price indexes are accepted for

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups

July

1997

July

1998

Percent Change

from July 1997

to July 19981

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

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

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

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

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

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

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

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

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

13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

539.8

656.1

641.6

902.6

637.9

543.5

297.8

544.5

395.0

621.6

585.9

495.9

1003.9

797.5

905.7

662.8

547.7

626.7

642.3

906.5

606.8

573.1

307.6

539.3

389.3

613.4

589.3

489.4

981.5

767.3

947.6

683.7

1.5

–4.5

0.1

0.4

–4.9

5.4

3.3

–1.0

–1.4

–1.3

0.6

–1.3

–2.2

–3.8

4.6

3.2

September 28, 1998

1998–39 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS (Continued)

(January 1941 = 100, unless otherwise noted)

Groups

July

1997

July

1998

Percent Change

from July 1997

to July 19981

17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

598.2

807.2

243.1

75.9

109.8

132.7

108.6

602.1

825.5

238.3

71.6

104.3

131.2

107.5

0.7

2.3

–2.0

–5.7

–5.0

–1.1

–1.0

Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

594.9

592.1

–0.5

Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . .

464.2

464.9

0.2

Groups 21 - 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

112.5

108.4

–3.6

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

549.8

545.9

–0.7

1Absence of a minus sign before percentage change in this column signifies price increase.

2Indexes on a January 1986=100 base.

3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-

bacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Michaels on (202) 622-4970 (not a tollfree call).

Section 846— Discounted

Unpaid Losses Defined

Ct.D. 2065

SUPREME COURT

OF THE UNITED STATES

No. 97–147

ATLANTIC MUTUAL INSURANCE

CO. v. COMMISSIONER OF

INTERNAL REVENUE

523 U.S.

(1998)

CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

April 21,1998

Syllabus

Before enactment of the Tax Reform

1998–39 I.R.B.

Act of 1986, the Internal Revenue Code

gave property and casualty (PC) insurers

a full deduction for “loss reserves: “ estimated amounts of losses reported but not

yet paid, losses incurred but not yet reported, and administrative costs of resolving claims. In each taxable year, not only

losses paid, but the full amount of the loss

reserves, reduced by the amount of the

loss reserves claimed for the prior taxable

year, were treated as a business expense.

Section 1023 of the 1986 Act required PC

insurers, beginning with the 1987 taxable

year, to discount unpaid losses to present

value when claiming them as a deduction.

Requiring insurers to subtract undiscounted year-end 1986 reserves from discounted year-end 1987 reserves in computing 1987 losses would produce

artificially low deductions, so the Act included a transitional rule requiring insurers to discount 1986 reserves as well. This

rule changed the “method of accounting”

for computing taxable income. To avoid

requiring PC insurers to recognize as income the difference between undiscounted and discounted year-end 1986

loss reserves, the Act afforded them a

“fresh start,” to-wit, an exclusion from

taxable income of the difference between

undiscounted and discounted year-end

1023(e)(3)(A). It foreclosed the possibil-

ity that they would inflate reserves to manipulate the “fresh start” by excepting

“reserve strengthening” from the exclusion. Sec. 1023(e)(3)(B). Treasury Regulation Sec. 1.846–3(c)(3)(ii) defmes “reserve strengthening” to include any net

additions to reserves. Respondent Commissioner determined that petitioner, Atlantic Mutual Insurance Co., and its subsidiary, a PC insurer, made net additions

to loss reserves in 1986, reducing the

“fresh start” entitlement and resulting in a

tax deficiency. The Tax Court disagreed,

holding that “reserve strengthening”

refers to only those increases that result

from changes in computation methods or

assumptions. In reversing, the Third Circuit concluded that the Treasury regulation’s definition of “reserve strengthening” is based on a permissible statutory

construction.

Held: The Treasury regulation represents a reasonable interpretation of the

term “reserve strengthening.” Neither

prior legislation nor industry use establishes the plain meaning Atlantic ascribes

to that term: reserve increases attributable

to changes in methods or assumptions.

Since the term is ambiguous, the question

is not whether the Treasury regulation

represents the best interpretation of the

statute, but whether it represents a reason-

September 28, 1998

able one. See Cottage Savings Assn. v.

Conunissioner, 499 U.S. 554, 560–561.

As a purely linguistic matter, the phrase is

broad enough to embrace all increases in

the reserve’s amount, for whatever reason

and from whatever source. The provision

at issue is a limitation upon an extraordinary deduction accorded to PC insurers.

There was no need for the deduction to be

microscopically fair, and the interpretation adopted in the Treasury regulation

seems to be a reasonable accommodation

of the competing interests of fairness, administrability, and avoidance of abuse.

Given the hundreds (or, more likely, thousands) of claims involved, claims resolved for less than estimated reserves

will tend to offset claims that settle for

more than estimated reserves. Any

discrepancy would not approach the unrealistic proportions claimed by Atlantic.

Pp.

111 F.3d 1056, affirmed.

SCALIA, J., delivered the opinion for a

unanimous Court.

SUPREME COURT

OF THE UNITED STATES

No. 97–147

ATLANTIC MUTUAL INSURANCE

CO. v. COMMISSIONER OF

INTERNAL REVENUE

CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

April 21, 1998

JUSTICE SCALIA delivered the opinion of the Court.

Property and casualty insurance companies maintain accounting reserves for

“unpaid losses.” Under the Tax Reform

Act of 1986, increases in loss reserves

that constitute “reserve strengthening” do

not qualify for a certain one-time tax benefit. We must decide whether the term

“reserve strengthening” reasonably encompasses any increase in reserves, or

only increases that result from changes in

the methods or assumptions used to compute them.

Atlantic Mutual Insurance Co. is the

common parent of an affiliated group of

September 28, 1998

corporations, including Centennial Insurance Co., a property and casualty (PC) insurer. From 1985 to 1993, the two corporations (Atlantic) maintained what

insurers call “loss reserves.” Loss reserves are estimates of amounts insurers

will have to pay for losses that have been

reported but not yet paid, for losses that

have been incurred but not yet reported,

and for administrative costs of resolving

claims.

Before enactment of the Tax Reform

Act of 1986, Pub.L. 99–514, 100 Stat.

2085, the Internal Revenue Code gave PC

insurers a fall deduction for loss reserves

as “losses incurred.” In each taxable year,

not only losses paid, but the full amount

of the loss reserves, reduced by the

amount of the loss reserves claimed for

the prior taxable year, would be treated as

a business expense. 26 U.S.C. Secs.

832(b)(5) and (c)(4) (1982 ed.). This designation enabled the PC insurer to take, in

effect, a current deduction for future loss

payments without adjusting for the “time

value of money” — the fact that “‘ [a]

dollar today is worth more than a dollar

tomorrow,”’ D. Herwitz & M. Barrett, Accounting for Lawyers 221 (2d ed. 1997).

Section 1023 of the 1986 Act amended

the Code to require PC insurers, for taxable years beginning after December 31,

1986, to discount unpaid losses to present

value when claiming them as a deduction.

100 Stat. 2399, 2404, 26 U.S.C. Secs.

832(b)(5)(A), 846 (1982 ed., Supp. V).

Absent a transitional rule, PC insurers

would have been left to subtract undiscounted year-end 1986 reserves from discounted year-end 1987 reserves for purposes of computing losses incurred for

taxable year 1987 — producing artificially low deductions. The 1986 Act softened this consequence by requiring PC insurers, for purposes of that 1987 tax

computation, to discount 1986 reserves as

well. 100 Stat. 2404, note following 26

U.S.C. Sec. 846.

Because the requirement that PC insurers discount 1986 reserves changed the

“method of accounting” for computing

taxable income, PC insurers, absent another transitional rule, would have been

required to recognize as income the difference between undiscounted and discounted year-end 1986 loss reserves. See

26 U.S.C. Sec. 481(a) (1988 ed.). To

avoid this consequence, Sec. 1023(e)-

(3)(A) ofthe 1986 Act afforded PC insurers a “fresh start,” to-wit, an exclusion

from taxable income of the difference between undiscounted and discounted yearend 1986 loss reserves. 100 Stat. 2404,

note following 26 U.S.C. Sec. 846. Of

course, the greater the 1986 reserves, the

greater the exclusion. Section 1023(e)(3)(B) of the 1986 Act foreclosed the possibility that insurers would inflate reserves to manipulate the “fresh start” by

excepting “reserve strengthening” from

the exclusion:

“(B) RESERVE STRENGTHENING IN YEARS AFTER 1985. —

Subparagraph (A) [the fresh-start

provision] shall not apply to any reserve strengthening in a taxable year

beginning in 1986, and such

strengthening shall be treated as occurring in the taxpayer’s 1st taxable

year beginning after December 31,

1986.” 100 Stat. 2404, note following 26 U.S.C. Sec. 846.

Regulations promulgated by the Treasury

Department set forth rules for determining the amount of “reserve strengthening”:

“(1) In general. The amount of reserve

strengthening (weakening) is the amount

that is determined under paragraph (c)(2)

or (3) to have been added to (subtracted

from) an unpaid loss reserve in a taxable

year beginning in 1986. For purposes of

section 1023 (e)(3)(B) of the 1986 Act,

the amount of reserve strengthening

(weakening) must be determined separately for each unpaid loss reserve by applying the rules of this paragraph (c). This

determination is made without regard to

the reasonableness of the amount of the

unpaid loss reserve and without regard to

the taxpayer’s discretion, or lack thereof,

in establishing the amount of the unpaid

loss reserve. . . . .

* * * *

“(3) Accident years before 1986 — (i)

In general. For each taxable year beginning in 1986, the amount of reserve

strengthening (weakening) for an unpaid

loss reserve for an accident year before

1986 is the amount by which the reserve

at the end of that taxable year exceeds (is

less than) —

(A) The reserve at the end of the immediately preceding taxable year; reduced

1998–39 I.R.B.

(B) Claims paid and loss adjustment

expenses paid (“loss payments”) in the

taxable year beginning in 1986 with respect to losses that are attributable to the

reserve. . . . Treas. Reg. 1.846–3(c), 26

CFR Sec. 1.846–3(c) (1997).

In short, any net additions to reserves

(with two exceptions not here at issue,

Sec. 1.846–3(c)(3)(ii)) constitute “reserve

strengthening” under the regulation.

The Commissioner of Internal Revenue

determined that Atlantic made net additions to reserves — “reserve strengthening” — during 1986, reducing the “fresh

start” entitlement by an amount that resulted in a tax deficiency of $519,987.

The Tax Court disagreed, holding that Atlantic had not strengthened its reserves.

“Reserve strengthening,” the Tax Court

held, refers only to increases in reserves

that result from changes in the methods or

assumptions used to compute them. (Atlantic’s reserve increases, there is no dispute, did not result from any such

change.) The United States Court of Appeals for the Third Circuit reversed the

Tax Court, concluding that the Treasury

regulation’s definition of “reserve

strengthening” to include any net additions to reserves is based on a permissible

construction of the statute. 111 F.3d 1056

(1997). (It expressly disagreed with the

Eighth Circuit’s conclusion in Western

National Mutual Insurance Co. v. Commissioner, 65 F.3d 90 (1995), that the

Treasury regulation is invalid.) We

granted certiorari. 522 U.S.

(1997).

The 1986 Act does not define “reserve

strengthening.” Atlantic contends that the

term has a plain meaning under the

statute: reserve increases attributable to

changes in methods or assumptions. If

that is what the term plainly means, Atlantic must prevail, “for the court, as well

as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S.

837, 842-843 (1984).

Atlantic contends that the plain meaning of “reserve strengthening” can be discerned, first, from its use in the PC insurance industry. It presented at trial two

expert reports which, by “constructing a

working definition of the term” that requires “a material change in methodology

1998–39 I.R.B.

and/or assumptions,” App. 68, 74, purport

to demonstrate that Atlantic “did not

strengthen reserves,” id. at 99. Our task,

of course, is to determine not what the

term ought to mean, but what it does

mean. Atlantic’s first expert, before “constructing” a definition, expressly acknowledged that “reserve strengthening”

is “not a well defined PC insurance or actuarial term of art to be found in PC actuarial, accounting, or insurance regulatory

literature.” Id. at 60. On this point, she

was in agreement with the Commissioner’s experts: “In the property-casualty

industry, the term ‘reserve strengthening’

has various meanings, rather than a single

universal meaning,” id. at 124. If the expert reports establish anything, it is that

“reserve strengthening” does not have an

established meaning in the PC insurance

industry.

Atlantic next contends that a plain

meaning can be discerned from prior use

of the term in life insurance tax legislation. According to Atlantic, the term has

its roots in the Life Insurance Company

Income Tax Act of 1959, which provided

tax consequences for changes in the

“basis” for determining life insurance reserves. 73 Stat. 125, 26 U.S.C. Sec.

810(d) (1958 ed., Supp. 1). But that provision does not define, or for that matter

even use, the term “reserve strengthening.” Though the regulation that implemented the provision uses the term “reserve strengthening” in a caption, Treas.

Reg. Sec. 1.810–3(a), 26 CFR Sec. 1.8103(a) (1997), its text does not mention the

term, and one of its Examples speaks only

of “reserve strengthening attributable to

the change in basis which occurred in

1959,” Sec. 1.810–3(b), Ex. 2. If, as Atlantic argues, “basis” and “assumptions or

methodologies” are interchangeable

terms, Brief for Petitioner 17, n. 8, and a

change in basis is necessary for “reserve

strengthening,” it is redundant to say “reserve strengthening attributable to the

change in basis which occurred in 1959,”

much as it would be to say “a sunburn attributable to the sun in 1959.” On Atlantic’s assumptions, the more natural formulation would have been simply

“reserve strengthening in 1959.” Thus,

the 1959 Act and implementing regulation

suggest, if anything, that a change in basis

is a sufficient, but not a necessary, condition for “reserve strengthening.”

Atlantic further contends that the term

“reserve strengthening” draws a plain

meaning from a provision of the Tax Reform Act of 1984 that accorded a “fresh

start” adjustment to life insurance reserves. Div. A., 98 Stat. 758, note following 26 U.S.C. Sec. 801 (1984 Act). That

provision, like the “fresh start” adjustment for PC insurers in the 1986 Act, said

that the “fresh start” would not apply to

reserve strengthening, specifically, “to

any reserve strengthening reported for

Federal income tax purposes after September 27, 1983, for a taxable year ending

before January 1, 1984.” 98 Stat. 759. Unlike the 1986 Act, however, the 1984 Act

expressly provided that “reserve strengthening” would not be excluded from the

“fresh start” if the insurer “employs the

reserve practice used for purposes of the

most recent annual statement filed before

September 27, 1983. . . . Ibid. If, as Atlantic contends, reserve strengthening encompasses only reserve increases that result from a change in reserve practices

(viz., change in methods or assumptions),

the saving clause is superfluous. Thus, to

the extent the definition of “reserve

strengthening” in the life insurance context is relevant to its meaning here (which

is questionable, see 111 F.3d at 1061–

1062), the 1984 Act, like the regulations

under the 1959 Act, tends to contradict,

rather than support, petitioner’s interpretation. We conclude that neither prior legislation nor industry use establishes the

plain meaning Atlantic ascribes to “reserve strengthening.”

III

Since the term “reserve strengthening”

is ambiguous, the task that confronts us is

to decide not whether the Treasury regulation represents the best interpretation of

the statute, but whether it represents a reasonable one. See Cottage Savings Assn. v.

Commissioner, 499 U.S. 554, 560–561

(1991). We conclude that it does.

As a purely linguistic matter, the phrase

is certainly broad enough to embrace all

increases in (all “strengthening of”) the

amount of the reserve, for whatever reason and from whatever source. Atlantic

contends that this interpretation is unreasonable because, in theory, it produces absurd results, as the following example

supposedly illustrates: assume that, in

1985, a PC insurer had four case reserves

September 28, 1998

of $500 each (total reserves of $2,000). If

two cases settled in 1986 for $750 each

($1,500 total), the remaining loss reserve

would be $1,000. Under the regulation,

according to Atlantic, the Commissioner

would find “reserve strengthening” of

$500 (1986 loss reserves ($1,000) less

(first year reserves ($2,000) less second

year payments ($1,500))), even though reserves did not increase. The Commissioner denies this consequence, contending that, under the stipulation in this case,

the increase in the reserve would be “reduced to zero” by an offsetting adjustment

when the payment is made, and that adjustments in the IBNR reserve (reserve for

claims “incurred but not reported”) may

result from payments in excess of prior reserve amounts, offsetting changes in other

reserves. Brief for Respondent 36–39.

We need not resolve that dispute, because we agree with the Commissioner

that Atlantic’s horrific example is, in any

event, unrealistic. The property and casualty insurer that had only four cases

would not be in business very long, with

or without the benefit of the tax adjustment — or, if he would, his talents could

be put to better use in Las Vegas. The

whole point of the insurance business is to

spread the insured risk over a large number of cases, where experience and the

law of probabilities can be relied upon.

And where hundreds (or more likely thousands) of claims are involved, claims resolved for less than estimated reserves

will tend to offset claims that settle for

more than estimated reserves. See Notice

of Proposed Rulemaking Discounted Unpaid Losses, FI–139–86, 1991–2 Cum.

Bull. 946, 947 (“For most unpaid loss reserves . . . , any potential inaccuracies are

likely to offset each other in the aggregate”). There may, to be sure, be some

discrepancy in one direction or the other,

but it would not approach the relative proportions claimed by Atlantic. It should be

borne in mind that the provision at issue

here is a limitation upon an extraordinary

deduction accorded to PC insurers. There

was certainly no need for that deduction

to be microscopically fair, and the interpretation adopted by the Treasury Regulation seems to us a reasonable accommodation — and one that the statute very

likely intended — of the competing interests of fairness, administrability, and

avoidance of abuse.

* * *

September 28, 1998

Because the Treasury regulation represents a reasonable interpretation of the

term “reserve strengthening,” we affirm

the judgment of the Court of Appeals.

It is so ordered.

Section 6621.— Determination

of Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and

overpayments. The rate of interest determined under section 6621 of the Code for

the calendar quarter beginning October 1,

1998, will be 7 percent for overpayments,

8 percent for underpayments, and 10 percent for large corporate underpayments.

The rate of interest paid on the portion of

a corporate overpayment exceeding

$10,000 is 5.5 percent.

Rev. Rul. 98–46

Section 6621 of the Internal Revenue

Code establishes different rates for interest on tax overpayments and interest on

tax underpayments. Under § 6621(a)(1),

the overpayment rate is the sum of the

federal short-term rate plus 2 percentage

points, except the rate for the portion of a

corporate overpayment of tax exceeding

$10,000 for a taxable period is the sum of

the federal short-term rate plus 0.5 of a

percentage point for interest computations

made after December 31, 1994. Under

§ 6621(a)(2), the underpayment rate is the

sum of the federal short-term rate plus 3

percentage points.

Section 6621(c) provides that for purposes of interest payable under § 6601 on

any large corporate underpayment, the

underpayment rate under § 6621(a)(2) is

determined by substituting “5 percentage

points” for “3 percentage points.” See

§ 6621(c) and § 301.6621–3 of the Regulations on Procedure and Administration

for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section

6621(c) and § 301.6621–3 are generally

effective for periods after December 31,

1990.

Section 6621(b)(1) provides that the

Secretary will determine the federal shortterm rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the

federal short-term rate determined under

§ 6621(b)(1) for any month applies during

the first calendar quarter beginning after

such month.

Section 6621(b)(3) provides that the

federal short-term rate for any month is

the federal short-term rate determined

during such month by the Secretary in accordance with § 1274(d), rounded to the

nearest full percent (or, if a multiple of 1⁄2

of 1 percent, the rate is increased to the

next highest full percent).

Notice 88–59, 1988–1 C.B. 546, announced that, in determining the quarterly

interest rates to be used for overpayments

and underpayments of tax under § 6621,

the Internal Revenue Service will use the

federal short-term rate based on daily

compounding because that rate is most

consistent with § 6621 which, pursuant to

§ 6622, is subject to daily compounding.

Rounded to the nearest full percent, the

federal short-term rate based on daily

compounding determined during the

month of July 1998 is 5 percent. Accordingly, an overpayment rate of 7 percent

and an underpayment rate of 8 percent are

established for the calendar quarter beginning October 1, 1998. The overpayment

rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning October 1, 1998, is

5.5 percent. The underpayment rate for

large corporate underpayments for the

calendar quarter beginning October 1,

1998, is 10 percent. These rates apply to

amounts bearing interest during that calendar quarter.

Interest factors for daily compound interest for annual rates of 5.5 percent, 7

percent, 8 percent, and 10 percent are

published in Tables 16, 19, 21, and 25 of

Rev. Proc. 95–17, 1995–1 C.B. 556, 570,

573, 575, and 579.

Annual interest rates to be compounded

daily pursuant to § 6622 that apply for

prior periods are set forth in the tables accompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Raymond Bailey of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Bailey on (202) 622-6226 (not a toll-free

call).

1998–39 I.R.B.

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

Before Jul. 1, 1975

Jul. 1, 1975—Jan. 31, 1976

Feb. 1, 1976—Jan. 31, 1978

Feb. 1, 1978—Jan. 31, 1980

Feb. 1, 1980—Jan. 31, 1982

Feb. 1, 1982—Dec. 31, 1982

Jan. 1, 1983—Jun. 30, 1983

Jul. 1, 1983—Dec. 31, 1983

Jan. 1, 1984—Jun. 30, 1984

Jul. 1, 1984—Dec. 31, 1984

Jan. 1, 1985—Jun. 30, 1985

Jul. 1, 1985—Dec. 31, 1985

Jan. 1, 1986—Jun. 30, 1986

Jul. 1, 1986—Dec. 31, 1986

RATE

12%

20%

16%

11%

13%

11%

10%

DAILY RATE TABLE

IN 1995–1 C.B.

Table 2, pg. 557

Table 4, pg. 559

Table 3, pg. 558

Table 2, pg. 557

Table 5, pg. 560

Table 6, pg. 560

Table 37, pg. 591

Table 27, pg. 581

Table 75, pg. 629

Table 31, pg. 585

Table 27, pg. 581

Table 25, pg. 579

Table 23, pg. 577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 - PRESENT

Jan. 1, 1987—Mar. 31, 1987

Apr. 1, 1987—Jun. 30, 1987

Jul. 1, 1987—Sep. 30, 1987

Oct. 1, 1987—Dec. 31, 1987

Jan. 1, 1988—Mar. 31, 1988

Apr. 1, 1988—Jun. 30, 1988

Jul. 1, 1988—Sep. 30, 1988

Oct. 1, 1988—Dec. 31, 1988

Jan. 1, 1989—Mar. 31, 1989

Apr. 1, 1989—Jun. 30, 1989

Jul. 1, 1989—Sep. 30, 1989

Oct. 1, 1989—Dec. 31, 1989

Jan. 1, 1990—Mar. 31, 1990

Apr. 1, 1990—Jun. 30, 1990

Jul. 1, 1990—Sep. 30, 1990

Oct. 1, 1990—Dec. 31, 1990

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

1998–39 I.R.B.

OVERPAYMENTS

UNDERPAYMENTS

RATE TABLE PG

1995–1 C.B.

RATE TABLE PG

1995–1 C.B.

10%

11%

10%

575

577

627

625

627

579

581

579

577

623

621

10%

11%

10%

11%

12%

11%

10%

577

579

629

627

629

581

583

581

579

625

623

September 28, 1998

TABLE OF INTEREST RATES (Continued)

FROM JAN. 1, 1987 - PRESENT

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

Jul. 1, 1998—Sep. 30, 1998

Oct. 1, 1998—Dec. 31, 1998

OVERPAYMENTS

UNDERPAYMENTS

RATE TABLE PG

1995–1 C.B.

RATE TABLE PG

1995–1 C.B.

619

571

573

575

577

575

623

621

623

575

573

10%

621

573

575

577

579

577

625

623

625

577

575

RATE TABLEPG

1995–1 C.B.

585

583

629

627

625

577

TABLE OF INTEREST RATES FOR

LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

September 28, 1998

13%

12%

11%

10%

1998–39 I.R.B.

TABLE OF INTEREST RATES FOR

LARGE CORPORATE UNDERPAYMENTS (Continued)

FROM JANUARY 1, 1991 - PRESENT

RATE TABLEPG

1995–1 C.B.

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

Jul. 1, 1998—Sep. 30, 1998

Oct. 1, 1998—Dec. 31, 1998

10%

11%

12%

11%

10%

11%

10%

579

581

583

581

629

627

629

581

579

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 - PRESENT

RATE TABLE PG

1995–1 C.B.

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

Jul. 1. 1998—Sep. 30, 1998

Oct. 1, 1998—Dec. 31, 1998

1998–39 I.R.B.

6.5%

7.5%

6.5%

5.5%

6.5%

5.5%

572

574

572

620

618

620

572

570

September 28, 1998

Section 7623—Expenses of

Detection of Underpayments

and Fraud, Etc.

26 CFR 301.7623–1: Rewards for information

relating to violations of internal revenue laws.

T.D. 8780

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 301 and 602

Rewards for Information

Relating to Violations of Internal

Revenue Laws

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final regulations relating to rewards for

information that relates to violations of

the internal revenue laws. The regulations reflect changes to the law made by

the Taxpayer Bill of Rights 2 and affect

persons that are eligible to receive an informant reward.

DATES: Effective date: These regulations are effective August 21, 1998.

Applicability date: For dates of applicability, see §301.7623-1(g).

FOR FURTHER INFORMATION CONTACT: Judith A. Lintz (202) 622-4940

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under control number

1545–1534. Responses to these collections of information are voluntary with respect to the provision of information relating to violations of the internal revenue

laws, but are required to obtain a benefit

with respect to filing a claim for reward.

An agency may not conduct or sponsor,

and a person is not required to respond to,

September 28, 1998

a collection of information unless it displays a valid control number.

The estimated annual burden per respondent varies from 2 to 4 hours, depending on individual circumstances,

with an estimated average of 3 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to the

Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of

Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

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

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This document contains amendments to

the Regulations on Procedure and Administration (26 CFR Part 301) under section

7623 relating to rewards for information

that relates to violations of the internal

revenue laws. This section was amended

by section 1209 of the Taxpayer Bill of

Rights 2 (TBOR 2) (Public Law 104–168,

110 Stat. 1452 (1996)).

On October 14, 1997, final and temporary regulations (TD 8737) relating to informant rewards under section 7623 were

published in the Federal Register (62

F.R. 53230). A notice of proposed rulemaking (REG–252936–96) cross-referencing the temporary regulations was

published in the Federal Register for the

same day (62 F.R. 53274).

No written comments responding to the

notice were received. No public hearing

was requested or held. The proposed regulations under section 7623 are adopted

as revised by this Treasury decision, and

the corresponding temporary regulations

are removed. The revisions are discussed

below.

and punishment persons guilty of violating the internal revenue laws or conniving

at the same, and for information that leads

to the detection of underpayments of tax.

In addition, the amendments to section

7623 provide that rewards will be paid

from the proceeds of amounts (other than

interest) collected by reason of the information provided.

Following the publication of the proposed regulations, it was determined that

the regulations should clarify that rewards

may also be paid in situations where information leads to the denial of a claim

for refund. Therefore, the final regulations provide that proceeds of amounts

(other than interest) collected by reason of

the information provided include both additional amounts collected because of the

information provided and amounts collected prior to receipt of the information if

the information leads to the denial of a

claim for refund that otherwise would

have been paid.

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) does not

apply to these regulations.

It is hereby certified that the regulations

in this document will not have a significant

economic impact on a substantial number

of small entities. This certification is based

on a determination that in the past approximately 10,000 persons have filed claims

for reward on an annual basis. Of these

persons, almost all have been individuals.

Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act (5

U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed

rulemaking preceding these regulations

was submitted to the Small Business Administration for comment on its impact on

small businesses.

Explanation of Provisions

Drafting Information

The amendments made by TBOR 2 to

section 7623 provide that the Secretary

may pay rewards for information that

leads to the detection and bringing to trial

The principal author of these regulations is Judith A. Lintz, Office of Assistant Chief Counsel (Income Tax and Accounting). However, other personnel

1998–39 I.R.B.

from the IRS and Treasury Department

participated in their development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 301 and

602 are amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 continues to read as follows:

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

Par. 2. Section 301.7623–1 is revised

to read as follows:

§301.7623–1 Rewards for information

relating to violations of internal revenue

laws.

(a) In general. In cases where rewards

are not otherwise provided for by law, a

district or service center director may approve a reward, in a suitable amount, for

information that leads to the detection of

underpayments of tax, or the detection

and bringing to trial and punishment of

persons guilty of violating the internal

revenue laws or conniving at the same.

The rewards provided for by section 7623

and this section will be paid from the proceeds of amounts (other than interest) collected by reason of the information provided. For purposes of section 7623 and

this section, proceeds of amounts (other

than interest) collected by reason of the

information provided include both additional amounts collected because of the

information provided and amounts collected prior to receipt of the information if

the information leads to the denial of a

claim for refund that otherwise would

have been paid.

(b) Eligibility to file claim for reward—

(1) In general. Any person, other than

certain present or former federal employees described in paragraph (b)(2) of this

section, that submits, in the manner described in paragraph (d) of this section,

information relating to the violation of an

internal revenue law is eligible to file a

claim for reward under section 7623 and

this section.

(2) Federal employees. No person who

was an officer or employee of the Department of the Treasury at the time the indi-

1998–39 I.R.B.

vidual came into possession of information relating to violations of the internal

revenue laws, or at the time the individual

divulged such information, is eligible for

a reward under section 7623 and this section. Any other current or former federal

employee is eligible to file a claim for reward if the information provided came to

the individual’s knowledge other than in

the course of the individual’s official

duties.

(3) Deceased informants. A claim for

reward may be filed by an executor, administrator, or other legal representative

on behalf of a deceased informant if, prior

to the informant’s death, the informant

was eligible to file a claim for such reward under section 7623 and this section.

Certified copies of the letters testamentary, letters of administration, or other

similar evidence must be attached to the

claim for reward on behalf of a deceased

informant in order to show the authority

of the legal representative to file the

claim.

All relevant factors, including the value

of the information furnished in relation to

the facts developed by the investigation of

the violation, will be taken into account

by a district or service center director in

determining whether a reward will be

paid, and, if so, the amount of the reward.

The amount of a reward will represent

what the district or service center director

deems to be adequate compensation in the

particular case, generally not to exceed

fifteen percent of the amounts (other than

interest) collected by reason of the information. Payment of a reward will be

made as promptly as the circumstances of

the case permit, but not until the taxes,

penalties, or fines involved have been collected. However, if the informant waives

any claim for reward with respect to an

uncollected portion of the taxes, penalties,

or fines involved, the claim may be immediately processed. Partial reward payments, without waiver of the uncollected

portion of the taxes, penalties, or fines involved, may be made when a criminal

fine has been collected prior to completion of the civil aspects of a case, and also

when there are multiple tax years involved and the deficiency for one or more

of the years has been paid in full. No person is authorized under this section to

make any offer, or promise, or otherwise

to bind a district or service center director

with respect to the payment of any reward

or the amount of the reward.

(d) Submission of information. A person that desires to claim a reward under

section 7623 and this section may submit

information relating to violations of the

internal revenue laws, in person, to the office of a district director, preferably to a

representative of the Criminal Investigation Division. Such information may also

be submitted in writing to the Commissioner of Internal Revenue, Attention:

Assistant Commissioner (Criminal Investigation), 1111 Constitution Avenue, NW.,

Washington, DC 20224, to any district director, Attention: Chief, Criminal Investigation Division, or to any service center

director. If the information is submitted

in person, either orally or in writing, the

name and official title of the person to

whom it is submitted and the date on

which it is submitted must be included in

the formal claim for reward.

(e) Identification of informant. No

unauthorized person will be advised of

the identity of an informant.

(f) Filing claim for reward. An informant that intends to claim a reward under

section 7623 and this section should notify

the person to whom the information is submitted of such intention, and must file a

formal claim on Form 211, Application for

Reward for Original Information, signed

by the informant in the informant’s true

name, as soon as practicable after the submission of the information. If other than

the informant’s true name was used in furnishing the information, satisfactory proof

of identity as that of the informant must be

included with the claim for reward.

(g) Effective date. This section is applicable with respect to rewards paid after

January 29, 1997.

§301.7623–1T [Removed]

Par. 3. Section 301.7623–1T is removed.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. In §602.101, paragraph (c) is

amended by removing the entry for

September 28, 1998

301.7623–1T from the table and by revising

the entry for 301.7623–1 to read as follows:

§602.101 OMB Control numbers.

* * * * *

CFR part or section

where identified and

described

Current OMB

control No.

* * * * *

301.7623–1 . . . . . . . . . . . . . .1545–0409

1545–1534

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved July 20, 1998.

Donald C. Lubick,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

August 20, 1998, 8:45 a.m., and published in the

issue of the Federal Register for August 21, 1998, 63

F.R. 44777)

*****

September 28, 1998

1998–39 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rate

Update

Notice 98–48

Notice 88–73 provides guidelines for

determining the weighted average interest

rate and the resulting permissible range of

interest rates used to calculate current liability for the purpose of the full funding

limitation of § 412(c)(7) of the Internal

Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987

and as further amended by the Uruguay

Round Agreements Act, Pub. L. 103–465

(GATT).

Month

Year

Weighted

Average

September

1998

6.46

Drafting Information

The principal author of this notice is

Donna Prestia of the Employee Plans Di-

1998–39 I.R.B.

90% to 106%

Permissible

Range

90% to 110%

Permissible

Range

5.82 to 6.85

5.82 to 7.11

vision. For further information regarding

this notice, call (202) 622-6076 between

2:30 and 3:30 p.m. Eastern time (not a

The average yield on the 30-year Treasury Constant Maturities for August 1998

is 5.54 percent.

The following rates were determined

for the plan years beginning in the month

shown below.

toll-free number). Ms. Prestia’s number

is (202) 622-7473 (also not a toll-free

number).

September 28, 1998

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Return Requirement for United

States Persons Owning Interests

in Foreign Partnerships

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,

Christopher Kelley, 202-622-3860; concerning the hearing and submissions of

written comments, Michael Slaughter,

202-622-7190 (not toll-free calls).

REG–209060–86

SUPPLEMENTARY INFORMATION:

AGENCY: Internal Revenue Service

(IRS), Treasury.

Paperwork Reduction Act

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

SUMMARY: This document contains

proposed regulations under section

6046A of the Internal Revenue Code relating to return requirements for certain

United States persons who acquire or dispose of an interest in a foreign partnership, or whose interest in a foreign partnership changes substantially. These

proposed regulations would provide guidance to United States persons who must

file such a return. This document also

provides notice of a public hearing on

these proposed regulations.

DATES: Written comments must be received by November 9, 1998. Outlines of

topics to be discussed at the public hearing scheduled for November 10, 1998, at

10 a.m., must be received by October 20,

1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–209060–86),

room 5226, Internal Revenue Service,

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

hand delivered between the hours of 8

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

(REG–209060–86), Courier’s Desk, Internal Revenue Service, 1111 Constitution

Avenue NW, Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting

the “Tax Regs” option of the IRS Home

Page, or by submitting comments directly

to the IRS Internet site at: http://www.irs.

ustreas.gov/prod/tax_regs/comments.html.

A public hearing has been scheduled to

be held in room 2615, Internal Revenue

Building, 1111 Constitution Avenue NW,

Washington, DC.

September 28, 1998

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of

Management and Budget for review in accordance with the Paperwork Reduction

Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information

should be sent to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury,

Office of Information and Regulatory Affairs, Washington, DC 20503, with copies

to the Internal Revenue Service, Attention: IRS Reports Clearance Officer

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

must be received by November 9, 1998.

Comments are specifically requested on:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection of

information (see below);

How the quality, utility, and clarity of

the information to be collected may be enhanced;

How the burden of complying with the

proposed collection of information may

be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of the capital or start-up

costs of operation, maintenance, and purchase of services to provide information.

The collection of information in these

regulations is in §1.6046A–1. This information is required by the IRS to identify

United States persons with significant interests in foreign partnerships and to ensure the correct reporting of items with re-

spect to these interests. The collection of

information is mandatory. The likely respondents will be individuals and businesses or other for-profit organizations.

The burden of complying with the proposed collection of information required

to be reported on Form 8865 is reflected

in the burden for Form 8865.

The burden of complying with the proposed collection of information in

§1.6046A–1(f)(1)(ii) is as follows:

Estimated total annual reporting burden: 250 hours.

Estimated annual burden per respondent: .25 hours to 1 hour, with an average

of .5 hours.

Estimated number of respondents:

500.

Estimated frequency of responses: On

occasion.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget.

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

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

Taxpayer Relief Act of 1997

In the Taxpayer Relief Act of 1997

(TRA 1997), Public Law 105–34 (111

Stat. 983 (1997)), Congress significantly

modified the information reporting requirements with respect to foreign partnerships under sections 6038, 6038B and

6046A (and also amended section

6501(c)(8) to provide that the statute of

limitations on the assessment of tax under

section 6038, 6038B and 6046A does not

expire until three years after the information required under those sections is reported). These regulations under section

6046A are being proposed along with regulations under sections 6038 (reporting

with respect to certain foreign partnerships) and 6038B (reporting of certain

transfers to foreign partnerships). The

IRS is also developing a comprehensive

1998–39 I.R.B.

form (Form 8865) for reporting under all

of these provisions. A draft version of the

form will be issued for public comment

while the proposed regulations are outstanding.

equal to 10 percent of the capital interest

or profits interest in a partnership, and an

interest to which 10 percent of the deductions or losses of a partnership are allocated.

Section 6046A

Partnerships Excluded From Application

of Subchapter K

Section 6046A was added to the Internal Revenue Code (Code) by section 405

of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Public Law 97–

248 (96 Stat. 669 (1982)), and, prior to

amendment by TRA 1997, required reporting of acquisitions and dispositions of

interests in foreign partnerships as well as

of substantial changes in proportional interests in such partnerships. Section 1143

of TRA 1997, Public Law 105–34 (111

Stat. 983 (1997)), amended section

6046A, to provide that reporting is required only when the interest acquired,

disposed of, or substantially changed is at

least a 10-percent interest in the partnership.

Explanation of Provisions

Filing Requirement

The proposed regulations require a

United States person to report the information required under section 6046A with

respect to a “reportable event” on Form

8865, “Information Return of U.S. Persons With Respect To Certain Foreign

Partnerships”. The proposed regulations

follow the statute and define a reportable

event to mean (1) an acquisition by a

United States person of at least a 10-percent interest in a foreign partnership, (2) a

disposition by a United States person of at

least a 10-percent interest in a foreign

partnership, or (3) a change in a United

States person’s proportional interest in a

foreign partnership that is equivalent to at

least a 10-percent interest in the partnership. However, the proposed regulations

exclude from the definition of a reportable event any acquisition of an interest in, or change in proportional interest

in a foreign partnership resulting from a

transfer by a partner also subject to the reporting requirements under section

6038B.

Under section 6046A(d), a 10-percent

interest is defined by cross-reference to

section 6038(e)(3)(C) and regulations issued under that provision, and means direct or indirect ownership of a interest

1998–39 I.R.B.

The reporting requirements of this section shall not apply in respect of any foreign partnership which is an eligible partnership described in §1.761–2(a) that has

validly elected pursuant to §1.761–

2(b)(2)(i) to be wholly excluded from the

application of subchapter K. Nor shall the

reporting requirements of these proposed

regulations apply to any foreign partnership validly deemed to have wholly

elected out of the provisions of subchapter

K as specified in §1.761–2(b)(2)(ii). Taxpayers are reminded, however, that a precondition to being an “electing-out” partnership is that, as provided in

§1.761–2(a)(1), “[t]he members of such

organization must be able to compute their

income without the necessity of computing partnership taxable income.” The IRS

and Treasury are concerned that in certain

cases the necessary books and records are

not being maintained to allow verification

that such computations can indeed be

made without regard to the partnership. If

it appears that, in the absence of a reporting requirement under this section, the

members of the “electing-out” partnership

cannot make such separate computations,

this exception to the reporting requirements will be reconsidered.

Exception for Certain International

Satellite Partnerships

The proposed regulations contain an

exception to the filing requirement for

certain international satellite partnerships.

Section 406 of TEFRA provides that section 6031 and 6046A do not apply to the

International Telecommunications Satellite Organization, the International Maritime Satellite Organization, or any organization which is a successor of either

organization. Although the International

Maritime Satellite Organization has been

subsequently renamed the International

Mobile Satellite Organization, no legislation has been enacted that would eliminate the exception provided by section

406 of TEFRA.

Time and Place for Filing Return

Section 6046A(c) provides that any return required by section 6046A(a) must

be filed on or before the 90th day after the

day on which the United States person becomes liable to file it, or on or before a

later day prescribed in regulations. After

section 6046A was enacted, the IRS announced that the regulations would provide that any return would be considered

timely filed if filed on or before the 90th

day following the date of publication of

the regulations, even if the date of filing

was more than 90 days after a reportable

event. Announcement 83–5 (1983–2

I.R.B. 31). Thus, no returns under section

6046A have been required to be filed to

date.

Rather than require a return to be made

within a specified period after a reportable event, under the proposed regulations a return under section 6046A

would generally be required to be filed

with the United States person’s income

tax return for the taxable year during

which a reportable event occurs (or on the

Form 8865 for the foreign partnership’s

taxable year in which the reportable event

occurs (filed in accordance with

§§1.6038–3(e) and (h)) if the United

States person is also required to report

under proposed regulation §1.6038–3(a)).

However, a return for a reportable event

would not be required to be filed before

the 90th day after the event. A reportable

event occurring within 90 days of the due

date for a taxpayer’s return may be reported on a Form 8865 filed with that return, or may be reported on a separate

Form 8865 filed with the taxpayer’s return for the next taxable year. If required

by the instructions to Form 8865, a duplicate return under section 6046A must also

be filed.

In certain circumstances, the proposed

regulations would also eliminate the need

for two or more United States persons to

file Form 8865 with respect to the same

reportable event in the case of attribution

of ownership.

Effective Dates

The proposed regulations are generally

effective for reportable events occurring

on or after January 1, 1998. The proposed

regulations would relieve a United States

person from having to file a return under

September 28, 1998

section 6046A for reportable events occurring prior to January 1, 1998. Furthermore, the return period for reportable

events occurring on or before the date that

final regulations are published in the Federal Register would generally be extended for one taxable year.

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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these proposed regulations. It is hereby certified

that the collection of information contained in these proposed regulations will

not have a significant economic impact on

a substantial number of small entities.

This certification is based on the fact that

the amount of time required to complete

the form and file the information required

under these regulations is brief and will

not have a significant impact on those

small entities that are required to provide

notification. Furthermore, the number of

small entities that will be required to file

the form is not significant. Accordingly, a

Regulatory Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, these regulations will be submitted

to the Chief Counsel for Advocacy of the

Small Business Administration for comment on their impact on small business.

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 and an outline of the topics to

be discussed (preferably a signed original

and eight (8) copies) by October 20, 1998.

A period of 10 minutes will be allotted

for each person 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 Christopher Kelley of the

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

the IRS and Treasury Department participated in their development.

* * * * *

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read in part as follows:

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

Section 1.6046A–1 also issued under 26

U.S.C. 6046A. * * *

Par. 2. Section 1.6046A–1 is added to

read as follows:

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be give to any written comments

(preferably a signed original and eight (8)

copies) that are submitted timely to the

Internal Revenue Service. All comments

will be made available for public inspection and copying.

A public hearing has been scheduled

for Tuesday, November 10, 1998, at 10

a.m., in room 2615, Internal Revenue

Building, 1111 Constitution Avenue NW,

Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby

more than 15 minutes before the hearing

starts.

September 28, 1998

§1.6046A–1 Return requirement for

United States persons owning interests in

foreign partnerships.

(a) Return requirement—(1) General

rule. If a reportable event occurs with respect to the interest of a United States person in a foreign partnership, the United

States person is required to report the

event on Form 8865, “Information Return

of U.S. Persons With Respect To Certain

Foreign Partnerships”, except as provided

in paragraphs (b)(1)(ii), (e), (g) or (h) of

this section.

(2) Separate return for each partnership. If a United States person is required

under section 6046A and this section to

report an event with respect to an interest

in more than one foreign partnership, the

United States person must file a separate

return for each partnership.

(b) Definitions—(1) Reportable

event—(i) General rule. For purposes of

section 6046A and this section, a reportable event means—

(A) An acquisition by a United States

person of at least a 10-percent interest in a

foreign partnership;

(B) A disposition by a United States

person of at least a 10-percent interest in a

foreign partnership; or

partnership that is equivalent to at least a

10-percent interest in the partnership.

(ii) Exception. If a United States person acquires an interest in a foreign partnership (or the amount of such interest

changes) as a result of a transfer subject to

the reporting requirements under section

6038B, the United States person will not

be required to also report the acquisition

(or change) under section 6046A(a).

(2) 10-percent interest. Under section

6046A and this section, a 10-percent interest in a partnership is an interest described in section 6038(e)(3)(C) and the

regulations thereunder.

(3) United States person. United States

person means a person described in section 7701(a)(30).

(4) Foreign partnership. Foreign partnership means any partnership that is a

foreign partnership under sections

7701(a)(2) and (5).

changes in interest described in section

6046A(a), the return must contain information in such form or manner as Form

8865 (and its accompanying instructions)

prescribes with respect to reportable

events, including–(1) The name, address, and taxpayer

identification number of the United States

person required to file the return;

(2) The name, address, and taxpayer

identification number, if any, of the foreign partnership;

(3) The name of the country under the

laws of which the foreign partnership was

organized, and the date of formation;

(4) For each reportable event, the date

of the event, the type of event (acquisition, disposition, or change in partnership

interest), and the United States person’s

1998–39 I.R.B.

percentage interest in the foreign partnership before and after the event; and

(5) For an acquisition, disposition or

change affecting the United States person’s interest in partnership capital, profits, losses, or deductions, the fair market

value of the interest acquired, disposed of,

or changed.

(d) Time and manner for filing

returns—(1) General rule. Except as provided in paragraph (d)(2) of this section,

the Form 8865 must be filed with the income tax return (including a partnership

return of income) of the United States

person for the taxable year in which the

reportable event occurs, and must be filed

by the due date (including extensions) of

the income tax return.

(2) Exceptions—(i) United States person also required to file under §1.60383(a). If the United States person required

to file under this section is also required

to file under §1.6038–3(a) for the period

in which the reportable event occurred,

then the United States person must report

under this section on the Form 8865 for

the foreign partnership’s annual accounting period in which the reportable event

occurred (not its own taxable year) and

file with its income tax return for that year

as provided in §1.6038–3(e) and (h).

(ii) Reportable event less than 90 days

before the due date of the United States

person’s income tax return. If the date of

a reportable event is less than 90 days before the due date of the United States person’s income tax return for the taxable

year in which the reportable event occurred, the United States person may file

the Form 8865 in respect of that reportable event with its income tax return

for that taxable year, or may file a separate Form 8865 in respect of that reportable event with its income tax return

for the next taxable year.

(3) Duplicate returns. If required by

the instructions to Form 8865, a duplicate

Form 8865 (including attachments and

schedules) must also be filed.

(e) Persons excepted from filing

return—(1) Requirements. A United

States person otherwise required to file a

return under this section with respect to a

foreign partnership need not file a return

provided all of the following conditions

are met—

(i) The person does not directly own an

interest in the foreign partnership;

1998–39 I.R.B.

(ii) The person is required to file a return solely by reason of attribution of

ownership from a United States person

(as determined under the rules of section

6038(e)(3) and the regulations thereunder); and

(iii) A person from whom ownership is

attributed furnishes all of the information

required under this section with respect to

the reportable event.

(2) Statement required. A United States

person who does not furnish an information return under the provisions of paragraph (e)(1) of this section must file a

statement with the person’s income tax return—

(i) Indicating that the filing requirement has been or will be satisfied;

(ii) Identifying the person who has or

will file the return;

(iii) Identifying the IRS Service Center

where the return was or will be filed; and

(iv) Providing any additional information as Form 8865 and the accompanying

instructions may require.

(f) Method of Reporting. Except as

otherwise provided on Form 8865, or the

accompanying instructions, any amounts

required to be reported under section

6046A and this section must be expressed

in United States dollars, with a statement

of the exchange rates used. All statements required on or with Form 8865 pursuant to this section must be in the English language.

(g) Reporting under this section not required of partnerships excluded from the

application of subchapter K—(1) Election to be wholly excluded. The reporting

requirements of this section will not apply

to any United States person in respect of

an eligible partnership as described in

§1.761–2(a) in which that United States

person is a partner, if such partnership has

validly elected to be excluded from all of

the provisions of subchapter K of chapter

1 of the Internal Revenue Code in the

manner specified in §1.761–2(b)(2)(i).

(2) Deemed excluded. The reporting requirements of this section will not apply

to any United States person in respect of

an eligible partnership as described in

§1.761–2(a) in which that United States

person is a partner, if such partnership is

validly deemed to have elected to be excluded from all of the provisions of subchapter K of chapter 1 of the Internal

Revenue Code in accordance with the

provisions of §1.761–2(b)(2)(ii).

(h) Exclusion for satellite organizations. The return requirement of section

6046A does not apply to the International

Telecommunications Satellite Organization (or a successor organization) or the

International Mobile Satellite Organization (or any other organization that is a

successor to the International Maritime

Satellite Organization).

(i) Failure to comply with reporting requirements—(1) Failure to comply. A

failure to comply with the requirements of

section 6046A includes—

(i) The failure to report at the proper

time and in the proper manner any information required to be reported under the

rules of this section; and

(ii) The provision of false or inaccurate

information in purported compliance with

the requirements of this section.

(2) Penalties. For penalties for failure

to comply with the reporting requirements

of section 6046A and this section, see sections 6679 and 7203.

(3) Statute of limitations. For exceptions to the limitations on assessment and

collection in the event of a failure to provide information under section 6046A,

see section 6501(c)(8).

(j) Effective date—(1) General rule.

This section applies to reportable events

occurring on or after January 1, 1998.

(2) Reportable event prior to issuance

of final regulations. If a reportable event

occurs on or before the date final regulations on this subject are published in the

Federal Register, the Form 8865 may be

filed with the United States person’s

timely filed (including extensions) income tax return for the taxable year immediately following the taxable year in

which the reportable event occurs.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

September 8, 1998, 8:45 a.m., and published in the

issue of the Federal Register for September 9, 1998,

63 F.R. 48154)

Notice of Proposed Rulemaking

Revision of the Tax Refund

Offset Program

REG–104565–97

September 28, 1998

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the administration of the Tax Refund Offset

Program (TROP). This action is necessary because TROP, which is currently

administered by the IRS, is being merged

into the centralized administrative offset

program known as the Treasury Offset

Program (TOP), which is administered by

the Financial Management Service

(FMS). These regulations will affect

State and Federal agencies that participate

in TROP.

DATES: Written comments and requests

for a public hearing must be received by

November 30, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–04565–97),

room 5226, Internal Revenue Service,

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

hand delivered between the hours of 8

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

(REG–104565–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution

Ave., NW, Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting

the “Tax Regs” option on the IRS Home

Page, or by submitting comments directly

to the IRS internet site at http://www.irs.

ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: John J. McGreevy, (202) 6224910 (not toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Procedure and Administration Regulations (26 CFR part 301)

relating to section 6402(c) and (d). The

proposed regulations contain revised effective dates for the regulations under

section 6402(c) and (d).

Explanation of Provisions

Section 6402(c) provides, in general,

that the amount of any overpayment to be

September 28, 1998

refunded to the person making the overpayment must be reduced by the amount

of any past-due support (as defined in section 464(c) of the Social Security Act)

owed by that person of which the Secretary has been notified by a State in accordance with section 464 of the Social Security Act.

Section 6402(d) provides, in general,

that upon receiving notice from any Federal agency that a named person owes a

past-due, legally enforceable debt to that

agency, the Secretary must reduce the

amount of any overpayment payable to

that person by the amount of the debt, pay

the amount by which the overpayment is

reduced to the agency, and notify the person making the overpayment that the

overpayment has been reduced.

The IRS currently makes offsets pursuant to section 6402(c) and (d) according

to regulations prescribed under those sections. See §§301.6402–5 and 301.6402–6

of the Regulations on Procedure and Administration.

Section 31001(v)(2) and (w) of the

Debt Collection Improvement Act of

1996 (110 Stat. 1321–375), amended 42

U.S.C. 664(a)(2)(A) and 31 U.S.C.

3720A(h), respectively, to clarify that the

disbursing agency of the Treasury Department may conduct tax refund offsets. The

disbursing agency of the Treasury Department is the FMS.

The IRS and FMS have agreed that the

Tax Refund Offset Program (TROP),

which is currently administered by the

IRS, will be merged into the centralized

administrative offset program known as

the Treasury Offset Program (TOP),

which is administered by the FMS. The

merger of the two programs is intended to

maximize and improve the Treasury Department’s government-wide collection of

nontax debts, including those subject to

offset against the debtor’s Federal tax refund. The full merger of TROP with TOP

is expected to occur by January 1, 1999.

Interim rules concerning the manner in

which the FMS will administer the collection of nontax federal debts after the

merger of TROP with TOP were published

by the FMS in the Federal Register on

June 25, 1997 (62 F.R. 34175) (codified at

31 CFR Part 285) effective for refunds

payable after January 1, 1998. The regulations proposed in this document provide

an ending effective date for §301.6402-6

to accommodate the beginning effective

date of the FMS regulations. Accordingly,

§301.6402–6 will not apply to refunds

payable after January 1, 1998.

A notice of proposed rulemaking concerning the manner in which the FMS will

administer the collection of past-due child

support payments was published by the

FMS in the Federal Register on August

4, 1998 (63 F.R. 41688) (which when finalized will be codified at 31 CFR Part

285), effective for refunds payable after

January 1, 1999. The regulations in this

document provide an ending effective

date for §301.6402–5 to accommodate the

expected beginning date for the full

merger of TROP with TOP. Accordingly,

it is expected that §301.6402–5 will not

apply to refunds payable after January 1,

1999.

Special Analyses

It has been determined that this notice

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

12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations, and because the regulation does not

impose a collection of information on

small entities, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Internal

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 electronic or

written comments (a signed original and

eight (8) copies of written comments) 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

1998–39 I.R.B.

Drafting Information

The principal author of these regulations is John J. McGreevy, Office of Assistant Chief Counsel (Income Tax and

Accounting). However, other personnel

from the IRS and the Treasury Department participated in the development of

the regulations.

* * * * *

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 continues to read in part as follows:

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

Par. 2. Section 301.6402–5 is amended

by adding paragraph (h) to read as follows:

§301.6402–5 Offset of past-due support

against overpayments.

* * * * *

(h) Effective dates. This section applies to refunds payable on or before January 1, 1999. For the rules applicable

after January 1, 1999, see 31 CFR part

285.

Par. 3. Section 301.6402–6 is amended

by revising paragraph (n) to read as follows:

§301.6402–6 Offset of past-due, legally

enforceable debt against overpayment.

* * * * *

(n) Effective dates. This section applies to refunds payable under section

6402 after April 15, 1992, and on or before January 1, 1998. For the rules applicable after January 1, 1998, see 31

CFR part 285.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

August 28, 1998, 8:45 a.m., and published in the

issue of the Federal Register for August 31, 1998, 63

F.R. 46205)

1998–39 I.R.B.

Notice of Proposed Rulemaking

and Notice of Public Hearing

Notice of Certain Transfers to

Foreign Partnerships and

Foreign Corporations

REG–118926–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

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

SUMMARY: This document contains

proposed regulations under section 6038B

of the Internal Revenue Code on information reporting requirements for certain

transfers by United States persons to foreign partnerships. The proposed regulations would implement the amendments

made by the Taxpayer Relief Act of 1997

that require a United States person who

transfers property to a foreign partnership

to furnish certain information with respect

to such transfers. This document also

contains proposed regulations that would

amend the information reporting requirements for certain transfers by United

States persons to foreign corporations to

require the reporting of the transfer of

cash. The proposed regulations would

provide guidance to United States persons

who must furnish this information. This

document also provides notice of a public

hearing on these proposed regulations.

DATES: Written comments must be received by November 9, 1998. Outlines of

topics to be discussed at the public hearing

scheduled for November 10, 1998, at 10

a.m., must be received by October 20,

1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–118926–97),

room 5226, Internal Revenue Service,

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

hand delivered between the hours of 8

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

(REG–118926–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution

Avenue NW, Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting

the “Tax Regs” option of the IRS Home

Page, or by submitting comments directly

to the IRS Internet site at: http://www.irs.

ustreas.gov/prod/tax_regs/comments.html.

A public hearing has been scheduled to

be held in room 2615, Internal Revenue

Building, 1111 Constitution Avenue NW,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning transfers of cash to

foreign corporations, Philip L. Tretiak,

and concerning transfers to foreign partnerships, Christopher Kelley, 202-6223860; concerning the hearing and submissions of written comments, Michael

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

calls).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of

Management and Budget for review in accordance with the Paperwork Reduction

Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information

should be sent to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury,

Office of Information and Regulatory Affairs, Washington, DC 20503, with copies

to the Internal Revenue Service, Attention: IRS Reports Clearance Officer

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

must be received by November 9, 1998.

Comments are specifically requested on:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection of

information (see below);

How the quality, utility, and clarity of

the information to be collected may be enhanced;

How the burden of complying with the

proposed collection of information may

be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of the capital or start-up

costs of operation, maintenance, and purchase of services to provide information.

September 28, 1998

The collection of information in these

regulations is in §§1.6038B–1(b) and

1.6038B–2. This information is required

by the IRS to identify United States persons who contribute property to foreign

partnerships and to ensure the correct reporting of items with respect to those

partnerships. The collection of information is mandatory. The likely respondents

will be individuals and businesses or

other for-profit organizations.

The burden of complying with the proposed collection of information required

to be reported on Form 8865 is reflected

in the burden for Form 8865.

The burden of complying with the proposed collection of information required

to be reported on Form 926 is reflected in

the burden for Form 926.

The burden of complying with the proposed collection of information in

§1.6038B–2(f)(2) is as follows:

Estimated total annual reporting burden: 250 hours.

Estimated annual burden per respondent: 0.25 hours to 1 hour, with an average of 0.5 hours.

Estimated number of respondents: 500.

Estimated frequency of responses:

Once per year.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget.

Books or records relating to a 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

Taxpayer Relief Act of 1997

In the Taxpayer Relief Act of 1997

(TRA 1997), Public Law 105–34 (111

Stat. 983 (1997)), Congress significantly

modified the information reporting requirements with respect to foreign partnerships under sections 6038, 6038B and

6046A (and also amended section

6501(c)(8) to provide that the statute of

limitations on the assessment of tax under

section 6038, 6038B and 6046A does not

expire until three years after the information required under those sections is re-

September 28, 1998

ported). Certain of these modifications

also affect reporting requirements with respect to foreign corporations. These regulations under section 6038B are being

proposed along with regulations under

sections 6038 (reporting with respect to

certain foreign partnerships) and 6046A

(reporting of certain ownership interests

in foreign partnerships). The IRS is also

developing a comprehensive form (Form

8865) for reporting under all of these provisions. A draft version of the form will

be issued for public comment while the

proposed regulations are outstanding.

Section 6038B and Transfers to Foreign

Corporations

Section 6038B, as enacted in 1984,

provided that United States persons that

made certain transfers of property to foreign corporations were required to report

those transfers in the manner prescribed

by regulations. Prior to the enactment of

TRA 1997, section 6038B imposed a

penalty for failure to comply with the regulations equal to 25 percent of the gain realized on the exchange, unless the failure

was due to reasonable cause and not to

willful neglect. Thus, in the case of a

transfer of cash or other unappreciated

property to a foreign corporation, no

penalty was imposed under section 6038B

if the transfer was not reported.

Section 1144(c) of TRA 1997 modified

the penalty applicable to the failure to furnish information required to be reported

under section 6038B. The modified

penalty is equal to 10 percent of the fair

market value of the property at the time of

the transfer.

In response to TRA 1997, Treasury and

the IRS issued final regulations under section 6038B (TD 8770 at 63 F.R. 33568;

June 19, 1998), in conjunction with regulations under section 367(a), to clarify that

transfers to corporations of unappreciated

property other than cash that occur on or

after July 20, 1998, generally are required

to be reported in accordance with

§1.6038B–1(b). The preamble to the final

regulations stated that rules regarding

transfers of cash to foreign corporations

would be provided in future regulations.

certain transfers of property by United

States persons to foreign corporations,

partnerships, estates, or trusts. The tax

was equal to 35 percent of the fair market

value of the property transferred in excess

of adjusted basis and any gain recognized

on the transfer (built-in gain). Section

1494(c), effective for transfers made after

August 20, 1996, imposed a further

penalty for a failure to report.

Section 1131(a) of TRA 1997 repealed

sections 1491 through 1494. Section

1144 of TRA 1997 amended section

6038B to require a United States person

who transfers property to a foreign partnership to report the transfer in the time

and manner provided in regulations. The

1997 amendments apply to transfers of

property made after August 5, 1997. Notice 98–17 (1998–11 C.B. 6) provided the

manner of reporting a transfer under section 6038B made after August 5, 1997,

and before January 1, 1998.

Explanation of Provisions

Reporting of Cash Transfers to Foreign

Corporations

These proposed regulations provide

that transfers of cash to foreign corporations are required to be reported if the

U.S. transferor holds, immediately after

the transfer, directly or indirectly, a 10percent interest in the foreign corporation,

or the amount of the cash transferred by

the transferor or any related person to

such foreign corporation or a related foreign corporation during the 12-month period ending on the date of the transfer exceeds $100,000. The transfer of cash to a

foreign corporation will not be required to

be reported unless made in a taxable year

beginning after the date that final regulations requiring reporting are published in

the Federal Register.

The IRS and Treasury invite comments

on these requirements and the corresponding requirement for foreign partnerships, including a description of the types

of transfers which could appropriately be

excepted (for example, capital contributions and returns of cash made as part of

the normal course of business operations).

Section 6038B and Transfers to Foreign

Partnerships

Reporting of Transfers to Foreign

Partnerships

Prior to the enactment of TRA 1997,

section 1491 imposed an excise tax on

The proposed regulations would implement the rules of section 6038B by gener-

1998–39 I.R.B.

ally requiring that a United States person

that transfers property (including cash) to

a foreign partnership in a contribution described in section 721 in exchange for a

partnership interest, file a return on Form

8865 “Information Return of U.S. Persons

With Respect To Certain Foreign Partnerships”, reporting the transfer. Under the

statutory exceptions in section

6038B(b)(1), a United States person must

report such a contribution only if (1) the

United States person holds (immediately

after the transfer), directly or indirectly, at

least a 10-percent interest in the partnership, or (2) the value of the property

transferred (when added to the value of

the property transferred by such person to

the partnership within the preceding 12

months) exceeds $100,000 (including the

value of property transferred in any transfer not described in section 721, a principal purpose of which is the avoidance of

the reporting requirements of these regulations). The proposed regulations would

also require a transferor, if still a partner,

to notify the IRS when a foreign partnership disposes of appreciated property contributed by the transferor. This information will help in determining whether

built-in gain has been properly allocated

to and recognized by the U.S. transferor.

The proposed regulations provide that

certain indirect transferors need not report

under this section if certain conditions are

met.

A 10-percent interest is defined by

cross-reference to section 6046A(d),

which in turn cross-references section

6038(e)(3)(C) and regulations issued

under that provision. The term means direct or indirect ownership of an interest

equal to 10 percent of the capital interest

or profits interest in a partnership, and an

interest to which 10 percent of the deductions or losses of a partnership are

allocated.

Partnerships Excluded From Application

of Subchapter K

The reporting requirements of this section shall not apply in respect of any foreign partnership which is an eligible partnership described in §1.761–2(a) that has

validly elected pursuant to §1.761–2(b)(2)(i) to be wholly excluded from the application of subchapter K. Nor shall the

reporting requirements of these proposed

regulations apply to any foreign partner-

1998–39 I.R.B.

ship validly deemed to have wholly

elected out of the provisions of subchapter K as specified in §1.761–2(b)(2)(ii).

Taxpayers are reminded, however, that a

precondition to being an “electing-out”

partnership is that, as provided in §1.761–

2(a)(1), “[t]he members of such organization must be able to compute their income

without the necessity of computing partnership taxable income.” The IRS and

Treasury are concerned that in certain

cases the necessary books and records are

not being maintained to allow verification

that such computations can indeed be

made without regard to the partnership. If

it appears that, in the absence of a reporting requirement under this section, the

members of the “electing-out” partnership

cannot make such separate computations,

this exception to the reporting requirements will be reconsidered.

Reporting of Cash Transfers to Foreign

Partnerships

The proposed regulations require the

reporting of a cash transfer to a foreign

partnership in a contribution otherwise required to be reported under section 6038B

and these regulations. Such transfers

were required to be reported under Notice

98–17. Reporting of cash transfers will

help to ensure that any earnings and appreciation attributable to the cash are reported by the U.S. transferor, and help to

prevent United States persons from avoiding the rules applicable to foreign trusts.

As noted above with respect to cash contributions to foreign corporations, Treasury and the IRS are interested in receiving comments on specific issues in

addition to general comments on this requirement.

Information Required

The proposed regulations would require a United States person to provide

certain information with respect to property transferred in a reportable contribution. Appreciated property and intangible

property must be listed item by item on

the Form 8865. Other items of property

may be aggregated and listed according to

the following categories: (1) inventory;

(2) other tangible trade or business property; (3) cash; (4) securities; and (5) other

property.

The proposed regulations provide that a

United States person reporting a transfer

to a foreign partnership under section

6038B must identify the other partners in

the partnership. This allows the IRS, for

example, to determine whether built-in

gain is being properly allocated to and recognized by the U.S. transferor under section 704(c). The proposed regulations except from this rule a United States person

only required to report because of a transfer of cash, if the transferor holds less than

a 10-percent interest in the partnership immediately following the transfer.

Time and Place for Filing

The proposed regulations would require Form 8865 to be filed with the

United States person’s income tax return

(including a partnership return of income)

for the year in which the reportable contribution occurs. However, if the transferor is also required to report under proposed regulation §1.6038–3(a), then the

transfer must be reported on the Form

8865 (and filed in accordance with

§§1.6038–3(e) and (h)) for the foreign

partnership’s taxable year in which the reportable contribution occurs. Additionally, if required by the instructions to

Form 8865, a duplicate Form 8865 must

also be filed. The proposed regulations

would provide alternative filing deadlines

with respect to reportable contributions

that occur on or before the date final regulations on this subject are published in the

Federal Register (see Effective Dates

portion of this preamble).

Failure to Provide Information

Section 6038B(c)(1) and the proposed

regulations provide that a failure by the

transferor to properly report a transfer that

is required to be reported under section

6038B and these regulations is subject to

a penalty equal to 10 percent of the fair

market value of the property transferred.

This penalty is subject to a $100,000 limit

under section 6038B(c)(3), unless the

failure is due to intentional disregard. In

addition, the transferor must recognize

gain (reduced by gain recognized, with

respect to that property, by the transferor

after the transfer) as if the property had

been sold for its fair market value at the

time of the transfer. In addition, section

6501(c)(8) keeps the statute of limitations

open with respect to the transferor in the

case of a failure to report. Any adjust-

September 28, 1998

ments to the basis of the partnership or

any partner (direct or indirect) as a result

of the gain recognized under this provision, shall be made as though the gain

was recognized in the year in which the

failure to report was finally determined.

Section 6038B(c)(2) and the proposed

regulations provide a reasonable cause

exception to the penalty and gain recognition provisions.

Effective Dates

The amendments to the regulations on

the reporting of cash transfers to foreign

corporations apply to taxable years beginning after these regulations are published as final regulations in the Federal

The proposed regulations on the reporting of transfers to foreign partnerships

apply to transfers made on or after January 1, 1998. Notice 98–17 (1998–11

I.R.B. 6) provides reporting requirements

for transfers made after August 5, 1997,

and before January 1, 1998. The proposed regulations would permit United

States persons who made transfers in that

period to rely on either Notice 98–17 or

the 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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these proposed regulations. It is hereby certified

that the collection of information contained in these proposed regulations will

not have a significant economic impact on

a substantial number of small entities.

This certification is based on the fact that

the amount of time required to complete

the form and file the information required

under these regulations is brief and will

not have a significant impact on those

small entities that are required to provide

notification. Furthermore, the number of

small entities that will be required to file

the form is not significant. Accordingly, a

Regulatory Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to

section 7805(f) of the Internal Revenue

September 28, 1998

Code, these regulations will be submitted

to the Chief Counsel for Advocacy of the

Small Business Administration for comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be give to any written comments

(preferably a signed original and eight (8)

copies) that are submitted timely to the

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

A public hearing has been scheduled for

Tuesday, November 10, 1998, at 10 a.m.,

in room 2615, Internal Revenue Building,

1111 Constitution Avenue NW, Washington, DC. Because of access restrictions,

visitors will not be admitted beyond the

Internal Revenue Building lobby more

than 15 minutes before the hearing starts.

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

apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written

comments and an outline of the topics to

be discussed (preferably a signed original

and eight (8) copies) by October 20, 1998.

A period of 10 minutes will be allotted

for each person making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal authors of these proposed

regulations are Christopher Kelley and

Philip Tretiak of the Office of Associate

Chief Counsel (International). However,

other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read in part as follows:

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

Section 1.6038B–1 also issued under 26

U.S.C. 6038B.

Section 1.6038B–2 also issued under 26

U.S.C. 6038B. * * *

Par. 2. Section 1.6038B–1 is amended

as follows:

1. The section heading is revised.

2. Paragraph (b)(1)(i), first sentence, is

revised.

3. The text of paragraph (b)(3) is

added.

4. Paragraph (c), first sentence, is revised

5. Paragraph (g) is revised.

The additions and revisions read as follows:

§1.6038B–1 Reporting of certain

transfers to foreign corporations.

* * * * *

(b) Time and manner of reporting—(1)

In general—(i) Reporting procedure.

Except for stock or securities qualifying

under the special reporting rule of paragraph (b)(2) of this section, or cash,

which is subject to special rules contained

in paragraph (b)(3) of this section, any

U.S. person that makes a transfer described in section 6038B(a)(1)(A), 367(d)

or (e)(1) is required to report pursuant to

section 6038B and the rules of this section

and must attach the required information

to Form 926 “Return by Transferor of

Property to a Foreign Corporation”.* * *

* * * * *

(3) Special rule for transfers of cash.

A U.S. person that transfers cash must report the transfer of cash to a foreign corporation if—

(i) Such U.S. person holds (immediately after the transfer) directly or indirectly (determined under the rules of sections 318(a) and 6038(e)(2)) at least 10

percent of the total voting power or the

total value of the foreign corporation; or

(ii) The amount of cash transferred by

such person or any related person (determined under section 267(b)) to such foreign corporation or a related foreign corporation during the 12-month period

ending on the date of the transfer exceeds

$100,000.

* * * * *

to transfers described in section

6038B(a)(1)(A). A U.S. person that transfers property to a foreign corporation in

1998–39 I.R.B.

an exchange described in section

6038B(a)(1)(A) (including cash and other

unappreciated property) must provide the

following information, in paragraphs labeled to correspond with the number or

letter set forth in this paragraph (c) and

§1.6038B–1T(c)(1) through

(5). * * *

* * * * *

(g) Effective dates. This section applies to transfers occurring on or after

July 20, 1998, except the first sentence of

paragraph (b)(1)(i), paragraph (b)(3), and

the first sentence of paragraph (c) apply to

taxable years beginning after the date that

final regulations are published in the Federal Register. See §1.6038B–1T for

transfers occurring prior to July 20, 1998.

Par. 6. Section 1.6038B–2 is added to

read as follows:

§1.6038B–2 Reporting of certain

transfers to foreign partnerships.

(a) Reporting requirements—(1) Requirement to report transfers. Any

United States person that makes a transfer

to a foreign partnership in a contribution

described in section 721 is required to report pursuant to section 6038B and the

rules of this section by filing Form 8865

“Information Return of U.S. Persons With

Respect To Certain Foreign Partnerships”

attached to the transferor’s income tax return (including a partnership return of income) for the taxable year that includes

the date of the transfer by the due date (including extensions) for that return, if—

(i) The United States person holds (immediately after the transfer) directly or indirectly at least a 10-percent interest in

the partnership; or

(ii) The value of the property transferred, when added to the value of the

property transferred by such person or

any related person (described in section

267(b) or 707(b)(1)) to such partnership

or a related partnership (described in section 707(b)(1)(B)) during the 12-month

period ending on the date of the transfer,

exceeds $100,000. For purposes of determining the relevant amounts, there shall

also be taken into account the value of

any property transferred in a transfer not

subject to section 721, where a principal

purpose of such transfer was the avoidance of these reporting requirements.

(2) Requirement to report dispositions—(i) In general. If a United States

1998–39 I.R.B.

person was required to report a transfer to

a foreign partnership under paragraph

(b)(1) of property with a fair market value

in excess of basis (built-in gain property),

and the partnership disposes of the property while such United States person remains a partner, that United States person

must report the disposition by filing Form

8865. The form must be attached to, and

filed by the due date (including extensions) of, the transferor’s income tax return for the year in which the disposition

occurred.

(ii) Disposition of property in nonrecognition transaction. If a foreign partnership disposes of contributed built-in

gain property in a nonrecognition transaction and substituted basis property is received in exchange, and the substituted

basis property has built-in gain under

§1.704–3(a)(8), the transferor must report

the disposition of the substituted basis

property in the same manner as provided

for the contributed property.

(3) Returns to be made—(i) Separate

returns for each partnership. If a United

States person transfers property to more

than one foreign partnership in a taxable

year, a separate return must be made by

the United States for each partnership.

(ii) Duplicate form to be filed. If required by the instructions to Form 8865, a

duplicate Form 8865 (including attachments and schedules) must also be filed.

(4) Time for filing when transferor also

required to report under §1.6038–3(a). If

the United States person required to file

under this section is also required to file

under §1.6038–3(a) for the period in

which the transfer occurs, then the United

States person must report under this section on the Form 8865 for the foreign

partnership’s annual accounting period in

which the transfer occurred (not its own

taxable year) and file with its income tax

return for that year as provided in

§§1.6038–3(e) and (h).

(b) Relief for indirect transferors—(1)

Requirements. A United States person

otherwise required to file a return under

this section with respect to a transfer to a

foreign partnership need not file a return if

all of the following conditions are met—

(i) The person does not directly own an

interest in the foreign partnership;

(ii) The person is required to file a return solely by reason of attribution of

ownership from a United States person

(as determined under the rules of section

6038(e)(3) and the regulations thereunder); and

(iii) A United States person from whom

the ownership is attributed files all of the

information required under section 6038B

and this section with respect to the transfer.

(2) Statement required. A United

States person who does not furnish an information return under the provisions of

paragraph (b)(1) of this section must file a

statement with the person’s income tax return—

(i) Indicating that the filing requirement has been or will be satisfied;

(ii) Identifying the person who has or

will file the return;

(iii) Identifying the IRS Service Center

where the return was or will be filed; and

(iv) Providing any additional information as Form 8865 and the accompanying

instructions may require.

transfers of property. In respect of transfers described in section 6038B(a)(1)(B),

the return must contain information in

such form or manner as Form 8865 (and

its accompanying instructions) prescribes

with respect to reportable events, including—

(1) The name, address, and U.S. taxpayer identification number of the United

States person making the transfer;

(2) The name, U.S. taxpayer identification number (if any), and address of the

transferee foreign partnership, and the

type of entity and country under whose

laws the partnership was created or organized;

(3) A general description of the transfer, and of any wider transaction of which

it forms a part, including the date of transfer;

(4) The names and addresses of the

other partners in the foreign partnership,

unless the transfer is solely of cash and

the transferor holds less than a 10-percent

interest in the transferee foreign partnership immediately after the transfer;

(5) A description of the partnership interest received by the United States person, including a change in partnership interest;

(6) A separate description of each item

of contributed property that is appreciated

property subject to the allocation rules of

section 704(c)(except to the extent that

September 28, 1998

the property is permitted to be aggregated

in making allocations under section

704(c)), or is intangible property, including its estimated fair market value and adjusted basis.

(7) A description of other contributed

property, not specified in paragraph (c)(6)

of this section, aggregated by the following categories (with, in each case, a brief

description of the property)—

(i) Stock in trade of the transferor (inventory);

(ii) Tangible property (other than stock

in trade) used in a trade or business of the

transferor;

(iii) Cash;

(iv) Stock, notes receivable and

payable, and other securities; and

(v) Other property.

(d) Information required with respect to

dispositions of property. In respect of dispositions, the return must contain information in such form or manner as Form

8865 (and its accompanying instructions)

prescribes with respect to reportable

events, including–(1) The date and manner of disposition;

(2) The gain and depreciation recapture amounts, if any, realized by the partnership; and

(3) Any such amounts allocated to the

United States person.

(e) Method of reporting. Except as otherwise provided on Form 8865, or the accompanying instructions, all amounts reported as required under this section must

be expressed in United States currency,

with a statement of the exchange rates

used. All statements required on or with

Form 8865 pursuant to this section must

be in the English language.

(f) Reporting under this section not required of partnerships excluded from the

application of subchapter K—(1) Election to be wholly excluded. The reporting

requirements of this section will not apply

to any United States person in respect of

an eligible partnership as described in

§1.761–2(a) in which that United States

person is a partner, if such partnership has

validly elected to be excluded from all of

the provisions of subchapter K of chapter

1 of the Internal Revenue Code in the

manner specified in §1.761–2(b)(2)(i).

(2) Deemed excluded. The reporting requirements of this section will not apply

to any United States person in respect of

September 28, 1998

an eligible partnership as described in

§1.761–2(a) in which that United States

person is a partner, if such partnership is

validly deemed to have elected to be excluded from all of the provisions of subchapter K of chapter 1 of the Internal

Revenue Code in accordance with the

provisions of §1.761–2(b)(2)(ii).

(g) Deemed contributions. If by reason

of an adjustment under section 482 or otherwise, a contribution required to be reported under section 6038B(a)(1)(B) and

this section is deemed to have been made,

the information required to be reported

will be furnished timely if filed by the due

date (including extensions) of, the taxable

year during which the adjustment is made.

(h) Failure to comply with reporting requirements—(1) Consequences of failure.

If a United States person is required to file

a return under paragraph (a) of this section and fails to comply with the reporting

requirements of section 6038B and this

section, then—

(i) The United States person is subject

to a penalty equal to 10 percent of the fair

market value of the property at the time of

the contribution;

(ii) The United States person will recognize gain (reduced by the amount of

any gain recognized, with respect to that

property, by the transferor after the transfer) as if the contributed property had

been sold for fair market value at the time

of the contribution; and

(iii) Adjustments to the basis of the

partnership and any relevant partner as a

result of gain being recognized under this

provision will be made as though the gain

was recognized in the year in which the

failure to report was finally determined.

(2) Failure to comply. A failure to

comply with the requirements of section

6038B includes—

(i) The failure to report at the proper

time and in the proper manner any information required to be reported under the

rules of this section; and

(ii) The provision of false or inaccurate

information in purported compliance with

the requirements of this section.

(3) Reasonable cause exception.

Under section 6038B(c)(3) and this section, the provisions of paragraph (h)(1) of

this section will not apply if the transferor

shows that a failure to comply was due to

reasonable cause and not willful neglect.

The transferor may attempt to do so by

providing a written statement to the district director having jurisdiction of the

taxpayer’s return for the year of the transfer, setting forth the reasons for the failure

to comply. Whether a failure to comply

was due to reasonable cause will be determined by the district director under all

facts and circumstances.

(4) Limitation on penalties. The

penalty under paragraph (h)(1)(i) of this

section with respect to any transfer cannot

exceed $100,000, unless the failure to

comply with respect to such transfer was

due to intentional disregard.

(5) Statute of limitations. For exceptions to the limitations on assessment and

collection in the event of a failure to provide information under section 6038B,

see section 6501(c)(8).

(i) Definitions—(1) 10-percent interest.

10-percent interest is defined in sections

6046A(d) and 6038(e)(3)(C) and the regulations thereunder.

(2) United States person. United States

person is defined in section 7701(a)(30).

(3) Foreign partnership. Foreign partnership is defined in section 7701(a)(2)

and (5).

(4) Substituted basis property. Substituted basis property is defined in section

7701(a)(42).

(5) Value of the property transferred.

Under section 6038B and this section, the

value of the property transferred is the fair

market value of the property at the time of

its transfer.

(j) Effective dates—(1) In general.

This section applies to transfers made on

or after January 1, 1998. However, for a

transfer made prior to the date final regulations are published in the Federal Register, Form 8865 will be considered

timely filed with respect to a transfer if

filed with the taxpayer’s income tax return for the first taxable year beginning

after the date that final regulations are

published in the Federal Register.

(2) Transfers after August 5, 1997 and

before January 1, 1998. A United States

person who made a transfer of property

required to be reported under section

6038B prior to the effective date of these

regulations may satisfy its reporting requirements by reporting in accordance

with the provisions of this section.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

1998–39 I.R.B.

(Filed by the Office of the Federal Register on

September 8, 1998, 8:45 a.m., and published in the

issue of the Federal Register for September 9, 1998,

63 F.R. 48148)

A public hearing has been scheduled to

be held in room 2615, Internal Revenue

Building, 1111 Constitution Avenue NW,

Washington, DC.

Notice of Proposed Rulemaking

and Notice of Public Hearing

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Victoria Scotto Balacek, 202-6223860; concerning submissions and

requests for a hearing, Michael Slaughter,

202-622-7190 (not toll-free numbers).

Information Reporting With

Respect to Certain Foreign

Partnerships

REG–118966–97

SUPPLEMENTARY INFORMATION:

AGENCY: Internal Revenue Service

(IRS), Treasury.

Paperwork Reduction Act

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

SUMMARY: This document contains

proposed regulations under section 6038

of the Internal Revenue Code providing

information reporting requirements for

certain United States persons holding interests in controlled foreign partnerships.

The proposed regulations reflect changes

to the law made by the Taxpayer Relief

Act of 1997. These proposed regulations

would provide guidance to United States

persons who must file such a return. This

document also provides notice of a public

hearing on these proposed regulations.

DATES: Written comments must be received by November 9, 1998. Outlines of

topics to be discussed at the public hearing scheduled for November 10, 1998, at

10 a.m., must be received by October 20,

1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–118966–97),

room 5226, 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 (REG–118966–97),

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

Washington, DC. Alternatively, taxpayers

may submit comments electronically via

the Internet by selecting the “Tax Regs”

option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.

gov/prod/tax_regs/comments.html.

1998–39 I.R.B.

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of

Management and Budget for review in accordance with the Paperwork Reduction

Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information

should be sent to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury,

Office of Information and Regulatory Affairs, Washington, DC 20503, with

copies to the Internal Revenue Service,

Attention: IRS Reports Clearance Officer

OP:FS:FP, Washington, DC 20224.

Comments on the collection of information must be received by November 9,

1998. Comments are specifically requested on:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection of

information (see below);

How the quality, utility, and clarity of

the information to be collected may be enhanced;

How the burden of complying with the

proposed collection of information may

be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of the capital or start-up

costs of operation, maintenance, and purchase of services to provide information.

The collection of information in these

regulations is in §1.6038–3. This information is required by the IRS to identify

foreign partnerships which are controlled

by United States persons and verify

amounts reported by the partners. The

collection of information is mandatory.

The likely respondents will be individuals

and businesses or other for-profit organizations.

The burden of complying with the proposed collection of information required

to be reported on Form 8865 is reflected

in the burden for Form 8865.

The burden of complying with the proposed collection of information in

§1.6038–3(c)(3) is as follows:

Estimated total annual reporting burden: 250 hours.

Estimated annual burden per respondent: .25 hours to 1 hour, with an average

of .5 hours.

Estimated number of respondents:

500.

Estimated frequency of responses: Annually.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget

Books or records relating to a 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

Taxpayer Relief Act of 1997

In the Taxpayer Relief Act of 1997

(TRA 1997), Public Law 105–34 (111

Stat. 983 (1997)), Congress significantly

modified the information reporting requirements with respect to foreign partnerships under sections 6038, 6038B and

6046A (and also amended section

6501(c)(8) to provide that the statute of

limitations on the assessment of tax under

sections 6038, 6038B and 6046A does not

expire until three years after the information required under those sections is reported). These regulations under section

6038 are being proposed along with regulations under sections 6038B (reporting of

certain transfers to foreign partnerships)

and 6046A (reporting of certain ownership interests in foreign partnerships).

September 28, 1998

The IRS is also developing a comprehensive form (Form 8865) for reporting

under all of these provisions. A draft version of the form will be issued for public

comment while the proposed regulations

are outstanding.

Section 6038

Prior to TRA 1997, reporting in respect

of foreign partnerships was governed by

section 6031 of the Internal Revenue

Code (Code). Regulations had been proposed, but never finalized, that would

have required reporting by foreign partnerships where United States persons

were allocated 25 percent or more of certain items. Section 1141 of TRA 1997,

amended section 6031 to provide that a

foreign partnership is required to file an

annual return of partnership income

(Form 1065) only if the partnership has

gross income from sources within the

United States, or gross income that is effectively connected with the conduct of a

U.S. trade or business. Section 1142 of

TRA 1997, amended section 6038 to require information reporting by certain

United States persons with direct or indirect interests in controlled foreign partnerships. Thus, these changes moved the

statutory authority to require annual reporting on a foreign partnership because

of the ownership interests of United

States persons from section 6031 to section 6038, and moved the reporting obligation in respect of foreign partnerships

from the partnership to the partner level.

Explanation of Provisions

Section 6038 requires certain United

States persons that own interests in controlled foreign partnerships to provide information with respect to the interests as

prescribed by the Secretary. The proposed regulations implement the statute

by requiring taxpayers to furnish the IRS

with annual information.

Reporting Requirements

The proposed regulations implement

the rules of section 6038 by requiring a

United States person that controls a foreign partnership to file an annual information return with respect to the foreign

partnership (Form 8865). Pursuant to

section 6038(e)(3), the proposed regulations define control as direct or indirect

September 28, 1998

ownership of more than a 50-percent interest in the partnership. The constructive

ownership rules of section 267(c) (other

than paragraph (3)) are applied to determine ownership interests (taking into account that such rules refer to corporations

and not to partnerships).

A 50-percent interest in a partnership is

defined as an interest equal to 50 percent

of the capital interest, 50 percent of the

profits interest, or, exercising the regulatory authority under section 6038(e)(3)(A)(ii), an interest to which 50 percent

of the deductions or losses are allocated.

Defining control by reference to losses or

deductions, as well as capital and profits,

is appropriate, because a partner with a

greater than 50-percent allocation of these

items has a level of control sufficient to

provide a significant amount of information about the partnership. Furthermore,

in the case of such allocations, certain information is required to ensure that the

rules of Code provisions such as section

704(b) (determination of distributive

share) are being followed.

To relieve taxpayers of unnecessary filing burdens, the regulations provide exceptions from the general rule that a controlling partner must provide information

to the IRS on Form 8865. If more than

one United States person is required to report as a controlling partner, then one

such controlling partner may file the required information in lieu of all such partners having to file separately. However, a

controlling partner with respect only to

losses or deductions may only satisfy this

requirement if there are no controlling

partners with respect to capital or profits.

The controlling partners not required to

file, must file the statement required by

the regulations with their tax return indicating that the filing requirement will be

met by another person and identifying

that person.

Pursuant to section 6038(a)(5), the proposed regulations provide that each

United States person that owns at least a

10-percent interest in a foreign partnership that is controlled by United States

persons holding at least 10-percent interests must file an annual information return with respect to the partnership. In

accordance with the statute, however,

such 10-percent partners will not be required to report such information where

there is a United States person that is a

controlling partner. The proposed regulations define a 10-percent interest in a partnership as an interest equal to 10 percent

of the capital or profits interest, and an interest to which 10 percent of the deductions or losses are allocated.

Because no one United States person

controls the partnership, Form 8865 will

require less information to be reported than

it will for controlling United States partners, and will be more similar to the information contained in Schedule K-1 to Form

1065. If there is a controlling partner (and,

thus, any other 10-percent partners are not

required to file), the controlling partner

must, generally, file the information that

would otherwise have been required from

such 10-percent partners.

Exceptions to Filing Requirements

The proposed regulations provide that

certain United States persons that are indirect partners need not file under section

6038 so long as the United States person

from whom ownership is attributed does

file the information, and the indirect partner files a statement with its income tax

return identifying the United States person that will meet the filing requirements.

The reporting requirements of this section shall not apply in respect of any foreign partnership which is an eligible partnership described in §1.761–2(a) that has

validly elected pursuant to §1.761–

2(b)(2)(i) to be wholly excluded from the

application of subchapter K. Nor shall

the reporting requirements of these proposed regulations apply to any foreign

partnership validly deemed to have

wholly elected out of the provisions of

subchapter K as specified in §1.761–

2(b)(2)(ii). Taxpayers are reminded,

however, that a precondition to being an

“electing-out” partnership is that, as provided in §1.761–2(a)(1), “[t]he members

of such organization must be able to compute their income without the necessity of

computing partnership taxable income.”

The IRS and Treasury are concerned that

in certain cases the necessary books and

records are not being maintained to allow

verification that such computations can

indeed be made without regard to the

partnership. If it appears that, in the absence of a reporting requirement under

this section, the members of the “electingout” partnership cannot make such separate computations, this exception to the

1998–39 I.R.B.

reporting requirements will be reconsidered.

Special Analyses

The proposed regulations require Form

8865 to be filed with the United States

person’s income tax return (including a

partnership return of income) for the taxable year in which the partnership’s annual accounting period ends. If required

by the instructions to Form 8865, a duplicate Form 8865 must also be filed.

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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these proposed regulations. It is hereby certified

that the collection of information contained in these proposed regulations will

not have a significant economic impact on

a substantial number of small entities.

This certification is based on the fact that

the amount of time required to complete

the form and file the information required

under these regulations is brief and will

not have a significant impact on those

small entities that are required to provide

notification. Furthermore, the number of

small entities that will be required to file

the form is not significant. Accordingly, a

Regulatory Flexibility Analysis under the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, these regulations will be submitted

to the Chief Counsel for Advocacy of the

Small Business Administration for comment on their impact on small business.

Failure to Provide Information

Comments and Public Hearing

As described in section 6038(b), the

proposed regulations provide that a failure to comply with the reporting requirements of section 6038 will result in a

penalty of $10,000 for each annual accounting period. Additional penalties

apply for failure to comply after notification by the IRS, up to a total of $50,000

for each annual accounting period. Also,

as provided in section 6038(c), the proposed regulations additionally provide a

penalty of reducing the United States person’s foreign tax credit (also with further

penalties for continued failure to report

after notification).

Before these proposed regulations are

adopted as final regulations, consideration will be give to any written comments

(preferably a signed original and eight (8)

copies) that are submitted timely to the

Internal Revenue Service. All comments

will be made available for public inspection and copying.

A public hearing has been scheduled

for Tuesday, November 10, 1998, at 10

a.m., in room 2615, Internal Revenue

Building, 1111 Constitution Avenue, NW,

Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby

more than 15 minutes before the hearing

starts.

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

apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written

comments by November 9, 1998, and an

outline of the topics to be discussed (a

Information Required

The proposed regulations require certain United States persons to provide information relating to the foreign partnership on Form 8865 (or successor form).

The form will require controlling partners

of foreign partnerships to report information concerning the income and assets of

the partnership, certain transactions with

the partnership, the names of the partners

in the partnership, and other specified information. The form will require a partner holding at least a 10-percent interest

in a controlled foreign partnership (where

there is no United States person that is a

controlling partner) to report information

with respect only to its own interest in the

partnership.

Time and Place for Filing

Effective Dates

The proposed regulations would apply

for annual accounting periods beginning

after the date that these regulations are

published as final regulations in the Federal Register.

1998–39 I.R.B.

signed original and eight (8) copies) by

October 20, 1998.

A period of 10 minutes will be allotted

for each person 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 this regulation

is Victoria Scotto Balacek, Office of the

Associate Chief Counsel (International).

However, other personnel from the IRS

and Treasury Department participated in

its development.

* * * * *

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read as follows:

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

Section 1.6038–3 is also issued under

26 U.S.C. 6038.* * *

Par. 2. Section 1.6038–3 is added to

read as follows:

§1.6038–3 Information returns required

of United States persons with respect to

foreign partnerships.

(a) Persons required to make return—

(1) Controlling partners. Every United

States person that controls a foreign partnership must file an annual information

return on Form 8865 “Information Return

of U.S. Persons With Respect To Certain

Foreign Partnerships” containing so much

of the information described in paragraph

(f) of this section, and such other information, as the form (or accompanying instructions) may prescribe. The information required to be filed by such

controlling partner will include such information regarding any other United

States persons that are 10-percent or

greater partners in the foreign partnership

as Form 8865 may require. (For exceptions to this rule, see paragraph (c) of this

section.)

September 28, 1998

(2) Certain 10-percent partners.

Every United States person that holds a

10-percent or greater interest in a foreign

partnership controlled by United States

persons holding at least 10-percent interests must complete and file an annual information return on Form 8865 containing so much of the information described

in paragraph (f) of this section, and such

other information, as the form (or accompanying instructions) may prescribe. (For

exceptions to this rule, see paragraph (c)

of this section.) However, no such person

will be required to file under this section

if a United States person is a controlling

partner of such partnership.

(3) Separate returns for each partnership. A United States person required to

report under this paragraph (a) must file a

separate annual information return for each

foreign partnership with respect to which

the person has a reporting obligation.

(b) Ownership determinations—(1)

Control. A person (or persons) is deemed

to be in control of a partnership if that

person (or persons) owns, directly or indirectly, more than a 50-percent interest in

the partnership (a controlling partner).

(2) 50-percent interest. A 50-percent

interest in a partnership is an interest

equal to 50 percent of the capital interest,

50 percent of the profits interest, or an interest to which 50 percent of the deductions or losses are allocated.

(3) 10-percent interest. A 10-percent

interest in a partnership is an interest

equal to 10 percent of the capital interest,

10 percent of the profits interest, or an interest to which 10 percent of the deductions or losses are allocated.

(4) Attribution rules. For purposes of

determining an interest in a partnership,

the rules of section 267(c) (other than section 267(c)(3)) apply (taking into account

such rules refer to corporations and not to

partnerships).

(5) Determination of amount of interest. Whether a person has a 50-percent

interest, or a 10-percent interest, as described in paragraphs (b)(2) and (3) of

this section, will be determined for each

taxable year by reference to the agreement of the partners relating to such interests during the taxable year.

partner is required to file duplicative information—(1) More than one controlling partner—(i) In general. If, with re-

September 28, 1998

spect to the same foreign partnership for

the same annual accounting period, more

than o

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