Bulletin No. 1996–44

Bulletin No. 1996–44

October 28, 1996

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be relied

upon as authoritative interpretations.

SPECIAL ANNOUNCEMENT

Announcement 96–108, page 15.

Comments are invited on the development of interim

criteria for designating private delivery services for

purposes of the timely filing and payment rules of

section 7502 of the Code. A public hearing will be held

on December 6, 1996.

INCOME TAX

interest in certain natural resource recapture property by

S corporations and their shareholders.

EMPLOYEE PLANS

Notice 96–54, page 13.

Guidelines are set forth for determining for October

1996 the weighted average interest rate 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 as amended by the

Omnibus Budget Reconciliation Act of 1987 and by the

Uruguay Round Agreements Act (GATT).

T.D. 8683, page 9.

REG–209803–95, page 14.

Final, temporary, and proposed regulations under section 6011 of the Code relate to the requirements for

filing information returns on magnetic media or in other

machine-readable form. A public hearing on the proposed regulations will be held on February 5, 1997.

Announcement 96–113, page 18.

Plan sponsors may order Form 8837, Notice of Adoption

of Revenue Procedure Model Amendments, by telephone, by modem or on the Internet.

T.D. 8684, page 4.

Final regulations under section 1254 of the Code relate

to the tax treatment of gain from the disposition of

Announcement 96–111, page 16.

A list is given of organizations now classified as private

foundations.

Finding Lists begin on page 21.

Announcements of Disbarments and Suspensions begin on page 19.

EXEMPT ORGANIZATIONS

Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining of ficers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

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

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of view.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great cour tesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

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

provision and not to adopt a strained construction in

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

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

2

Introduction

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

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

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

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

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

single-copy basis.

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

cautioned against reaching the same conclusions in

other cases unless the facts and circumstances are

substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

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

substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published rulings

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

are not published; however, statements of internal

practices and procedures that affect the rights and

duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

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

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

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

stated in the revenue ruling. In those based on positions

taken in rulings to taxpayers or technical advice to

Service field offices, identifying details and information

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

requirements.

Part IV.—Items of General Interest.

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

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

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

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

as precedents by Service personnel in the disposition of

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

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin

of the succeeding quarterly and semi-annual period,

respectively.

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

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

3

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

Section 1254.—Gain From

Disposition of Interest in Oil, Gas,

Geothermal, or Other Mineral

Properties

26 CFR 1.1254–4: Special rules for S corporations and their shareholders.

T.D. 8684

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Treatment of Gain From the

Disposition of Interest in Certain

Natural Resource Recapture

Property by S Corporations and

Their Shareholders

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the tax treatment by S corporations and their shareholders of gain from the disposition by

an S corporation (and a corporation that

was formerly an S corporation) of certain natural resource recapture property

(section 1254 property after enactment

of the Tax Reform Act of 1986 and oil,

gas, or geothermal property before enactment of the Tax Reform Act of

1986), and also rules relating to the

disposition of stock in an S corporation

that holds certain natural resource recapture property. Changes to the applicable

tax law were made by the Tax Reform

Act of 1986, and the Subchapter S

Revision Act of 1982. The regulations

provide the public with guidance in

complying with the changed tax laws.

EFFECTIVE DATE: October 10, 1996.

FOR FURTHER INFORMATION CONTACT: James A. Quinn, 202–622–3060

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations has 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

1545–1493. This information is required

by the IRS to establish that a portion of

the gain recognized upon a sale or

exchange of S corporation stock is not

attributable to a shareholder’s section

1254 costs so as to qualify for the

exception contained in § 1.1254–

4(c)(2)(i)(A).

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

respond to, a collection of information

unless the collection of information displays a valid control number.

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

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

hour.

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, T: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 this collection of information must be retained

as long as their contents may become

material in the administration of any

internal revenue law. Generally, tax returns and tax return information are

confidential, as required by 26 U.S.C.

6103.

Background

On December 21, 1995, the IRS published in the Federal Register a notice

of proposed rulemaking (60 FR 66238)

providing rules for applying the provisions of section 1254 to the disposition

of natural resource recapture property by

an S corporation (and a corporation that

was formerly an S corporation) and the

disposition of S corporation stock. No

written comments responding to this

notice were received. No public hearing

was held because no hearing was requested. The proposed regulations are

adopted without any substantive change

by this Treasury decision. However, in

the course of preparing the final regulations for publication, the IRS and Treasury Department have determined that

§§ 1.1254–2 and 1.1254–3 are in need

of minor technical clarifications. Accordingly, §§ 1.1254–2 and 1.1254–3

are clarified as discussed below.

4

Clarification

1.1254–3

of

§§ 1.1254–2

and

Section 1.1254–2(d)(1) is amended to

state that § 1.1254– 2(d)(1) is applied

without regard to § 1.1254–1(b)(2)(vii).

This amendment clarifies that section

1254 costs must be recaptured in a

like-kind exchange or involuntary conversion that involves the acquisition of

property that is not natural resource

recapture property. The amendment

makes clear that the treatment of likekind exchanges and involuntary conversions involving natural resource recapture property is similar to the treatment

of these transactions involving section

1245 property. See §§ 1.1245–3(a)(3),

1.1245–4(d)(1), 1.1245–4(d)(2), Example 2, and 1.1245–5(a)(2), Example.

Section 1.1254–3(b)(1) provides that

if natural resource recapture property is

transferred in certain transactions the

amount of section 1254 costs with respect to the property in the hands of the

transferee equals the amount of section

1254 costs with respect to the property

in the hands of the transferor minus the

amount of any gain taken into account

as ordinary income under section

1254(a)(1) by the transferor upon the

disposition. The intent of this rule is that

in these transactions the section 1254

costs with respect to the property are to

be transferred to the transferee but reduced by any gain taken into account as

ordinary income. However, in the case

of an S corporation or partnership

transferor, the section 1254 costs have

generally been allocated among the

shareholders or partners. Consequently,

§ 1.1254–3(b)(1) is clarified to provide

that in the case of an S corporation

transferor the section 1254 costs include

the section 1254 costs of the shareholders minus any gain taken into account

by the shareholders as ordinary income.

A similar clarification is added for partnership transferors.

Similarly, § 1.1254–3(d) is clarified

for like-kind exchanges and involuntary

conversions to provide that in the case

of an S corporation the section 1254

costs include the section 1254 costs of

the shareholders minus any gain taken

into account by the shareholders as

ordinary income. A similar clarification

is added for a partnership.

Effective Date

Section 1.1254–4 applies to dispositions of natural resource recapture prop-

erty by an S corporation (and a corporation that was formerly an S corporation)

and dispositions of S corporation stock

occurring on or after October 10, 1996.

The clarifications to §§ 1.1254–2 and

1.1254–3 are effective for dispositions

of property occurring on or after October 10, 1996.

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 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 notice of proposed rulemaking

preceding the regulations was issued

prior to March 29, 1996, the Regulatory

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

not apply. Pursuant to section 7805(f) of

the Code, the notice of proposed

rulemaking preceding these regulations

was submitted to the Small Business

Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is James A. Quinn of the Office of

Assistant Chief Counsel (Passthroughs

and Special Industries), IRS. However,

other personnel from the IRS and Treasury Department participated in their

development.

*

*

*

*

*

Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as

follows:

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

Section 1.1254–4 also issued under 26

U.S.C. 1254(b). * * *

Par. 2. Section 1.1254–0 is amended

by revising the entry for § 1.1254–4 to

read as follows:

§ 1.1254–0 Table of contents for section 1254 recapture rules.

*

*

*

*

*

§ 1.1254–4 Special rules for S corporations and their shareholders.

(a) In general.

(b) Determination of gain treated as

ordinary income under section 1254

upon a disposition of natural resource

recapture property by an S corporation.

(1) General rule.

(2) Examples.

(c) Character of gain recognized by a

shareholder upon a sale or exchange of

S corporation stock.

(1) General rule.

(2) Exceptions.

(3) Examples.

(d) Section 1254 costs of a shareholder.

(e) Section 1254 costs of an acquiring shareholder after certain acquisitions.

(1) Basis determined under section

1012.

(2) Basis determined under section

1014(a).

(3) Basis determined under section

1014(b)(9).

(4) Gifts and section 1041 transfers.

(f) Special rules for a corporation that

was formerly an S corporation or formerly a C corporation.

(1) Section 1254 costs of an S corporation that was formerly a C corporation.

(2) Examples.

(3) Section 1254 costs of a C corporation that was formerly an S corporation.

(g) Determination of a shareholder’s

section 1254 costs upon certain stock

transactions

(1) Issuance of stock.

(2) Natural resource recapture property acquired in exchange for stock.

(3) Treatment of nonvested stock.

(4) Exception.

(5) Aggregate of S corporation shareholders’ section 1254 costs with respect

to natural resource recapture property

held by the S corporation

(6) Examples.

*

*

*

*

*

Par. 3. Section 1.1254–2 is amended

by revising paragraph (d)(1)(ii) to read

as follows:

§ 1.1254–2 Exceptions and limitations.

*

*

*

*

*

(d) * * * (1) * * *

(ii) The fair market value of property

acquired that is not natural resource

recapture property (determined without

regard to § 1.1254–1(b)(2)(vii)) and is

not taken into account under paragraph

(d)(1)(i) of this section (that is, qualify-

5

ing property under section 1031 or 1033

that is not natural resource recapture

property).

*

*

*

*

*

Par. 4. Section 1.1254–3 is amended

by revising paragraphs (b)(1)(i),

(b)(1)(ii), (d)(1)(i) and (d)(1)(ii) to read

as follows:

§ 1.1254–3 Section 1254 costs immediately after certain acquisitions.

*

*

*

*

*

(b) * * * (1) * * *

(i) The amount of section 1254 costs

with respect to the natural resource

recapture property in the hands of the

transferor immediately before the disposition (and in the case of an S corporation or partnership transferor, the section

1254 costs of the shareholders or partners with respect to the natural resource

recapture property); minus

(ii) The amount of any gain taken

into account as ordinary income under

section 1254(a)(1) by the transferor

upon the disposition (and in the case of

an S corporation or partnership

transferor, any such gain taken into

account as ordinary income by the

shareholders or partners).

*

*

*

*

*

(d) * * * (1) * * *

(i) The amount of section 1254 costs

with respect to the natural resource

recapture property disposed of (including the section 1254 costs of the shareholders of an S corporation or of the

partners of a partnership with respect to

the natural resource recapture property);

minus

(ii) The amount of any gain taken

into account as ordinary income under

section 1254(a)(1) by the transferor

upon the disposition (and in the case of

an S corporation or partnership

transferor, any such gain taken into

account as ordinary income by the

shareholders or partners).

*

*

*

*

*

Par. 5. Section 1.1254–4 is amended

by adding text to read as follows:

§ 1.1254–4 Special rules for S corporations and their shareholders.

(a) In general. This section provides

rules for applying the provisions of

section 1254 to S corporations and their

shareholders upon the disposition by an

S corporation (and a corporation that

was formerly an S corporation) of natural resource recapture property and upon

the disposition by a shareholder of stock

of an S corporation that holds natural

resource recapture property.

(b) Determination of gain treated as

ordinary income under section 1254

upon a disposition of natural resource

recapture property by an S corporation—(1) General rule. Upon a disposition of natural resource recapture property by an S corporation, the amount of

gain treated as ordinary income under

section 1254 is determined at the shareholder level. Each shareholder must recognize as ordinary income under section

1254 the lesser of—

(i) The shareholder’s section 1254

costs with respect to the property disposed of; or

(ii) The shareholder’s share of the

amount, if any, by which the amount

realized on the sale, exchange, or involuntary conversion, or the fair market

value of the property upon any other

disposition (including a distribution), exceeds the adjusted basis of the property.

(2) Examples. The following examples illustrate the provisions of paragraph (b)(1) of this section:

Example 1. Disposition of natural resource

recapture property other than oil and gas property.

A and B are equal shareholders in X, an S

corporation. On January 1, 1997, X acquires for

$90,000 an undeveloped mineral property, its sole

property. During 1997, X expends and deducts

$100,000 in developing the property. On January

15, 1998, X sells the property for $250,000 when

X’s basis in the property is $90,000. Thus, X

recognizes gain of $160,000 on the sale. A and B’s

share of the $160,000 gain recognized is $80,000

each. Each shareholder has $50,000 of section

1254 costs with respect to the property. Under

these circumstances, A and B each are required to

recognize $50,000 of the $80,000 of gain on the

sale of the property as ordinary income under

section 1254.

Example 2. Disposition of oil and gas property

the adjusted basis of which is allocated to the

shareholders under section 613A(c)(11). C and D

are equal shareholders in Y, an S corporation. On

January 1, 1997, Y acquires for $150,000 an

undeveloped oil and gas property, its sole property.

During 1997, Y expends in developing the property $40,000 in intangible drilling costs which it

elects to expense under section 263(c). On January

15, 1998, Y sells the property for $200,000. C and

D’s share of the $200,000 amount realized on the

sale is $100,000 each. C and D each have a basis

of $75,000 in the property and $20,000 of section

1254 costs with respect to the property. Under

these circumstances, C and D each are required to

recognize $20,000 of the $25,000 gain on the sale

of the property as ordinary income under section

1254.

(c) Character of gain recognized by a

shareholder upon a sale or exchange of

S corporation stock—(1) General rule.

Except as provided in paragraph (c)(2)

of this section, if an S corporation

shareholder recognizes gain upon a sale

or exchange of stock in the S corpora-

tion (determined without regard to section 1254), the gain is treated as ordinary income under section 1254 to the

extent of the shareholder’s section 1254

costs (with respect to the shares sold or

exchanged).

(2) Exceptions—(i) Gain not attributable to section 1254 costs—(A) General

rule. Paragraph (c)(1) of this section

does not apply to any portion of the

gain recognized on the sale or exchange

of the stock that the taxpayer establishes

is not attributable to section 1254 costs.

The portion of the gain recognized that

is not attributable to section 1254 costs

is that portion of the gain recognized

that exceeds the amount of ordinary

income that the shareholder would have

recognized under section 1254 (with

respect to the shares sold or exchanged)

if, immediately prior to the sale or

exchange of the stock, the corporation

had sold at fair market value all of the

corporation’s property the disposition of

which would result in the recognition by

the shareholder of ordinary income under section 1254.

(B) Substantiation. To establish that a

portion of the gain recognized is not

attributable to a shareholder’s section

1254 costs so as to qualify for the

exception contained in paragraph

(c)(2)(i)(A) of this section, the shareholder must attach to the shareholder’s

tax return a statement detailing the

shareholder’s share of the fair market

value and basis, and the shareholder’s

section 1254 costs, for each of the S

corporation’s natural resource recapture

properties held immediately before the

sale or exchange of stock.

(ii) Transactions entered into as part

of a plan to avoid recognition of ordinary income under section 1254. In the

case of a contribution of property prior

to a sale or exchange of stock pursuant

to a plan a principal purpose of which is

to avoid recognition of ordinary income

under section 1254, paragraph (c)(1) of

this section does not apply. Instead, the

amount recognized as ordinary income

under section 1254 is the amount of

ordinary income the selling or exchanging shareholder would have recognized

under section 1254 (with respect to the

shares sold or exchanged) had the S

corporation sold its natural resource recapture property the disposition of

which would have resulted in the recognition of ordinary income under section

1254. The amount recognized as ordinary income under the preceding sentence reduces the amount realized on the

sale or exchange of the stock. This

6

reduced amount realized is used in determining any gain or loss on the sale or

exchange.

(3) Examples. The following examples illustrate the provisions of this

paragraph (c):

Example 1. Application of general rule upon a

sale of S corporation stock. C and D are equal

shareholders in Y, an S corporation. As of January

1, 1997, Y holds two mining properties: Blackacre,

with an adjusted basis of $5,000 and a fair market

value of $35,000, and Whiteacre, with an adjusted

basis of $20,000 and a fair market value of

$15,000. Y also holds securities with a basis of

$5,000 and a fair market value of $10,000. On

January 1, 1997, D sells 50 percent of D’s Y stock

to E for $15,000. As of the date of the sale, D’s

adjusted basis in the Y stock sold is $7,500, and D

has $18,000 of section 1254 costs with respect to

Blackacre and $12,000 of section 1254 costs with

respect to Whiteacre. Under this paragraph (c), the

gain recognized by D upon the sale of Y stock is

treated as ordinary income to the extent of D’s

section 1254 costs with respect to the stock sold,

unless D establishes that a portion of such excess

is not attributable to D’s section 1254 costs.

However, because D would recognize $7,500 in

ordinary income under section 1254 with respect

to the stock sold if Y sold Blackacre (the only

asset the disposition of which would result in

ordinary income to D under section 1254), the

$7,500 of gain recognized by D upon the sale of

D’s Y stock is attributable to D’s section 1254

costs. Therefore, upon the sale of stock to E, D

recognizes $7,500 of ordinary income under this

paragraph (c).

Example 2. Sale of S corporation stock where

gain is not entirely attributable to section 1254

costs. Assume the same facts as in Example 1,

except that Blackacre has a fair market value of

$25,000, and the securities have a fair market

value of $20,000. Immediately prior to the sale of

stock to E, if Y had sold Blackacre (its only asset

the disposition of which would result in the

recognition of ordinary income to D under section

1254), D would recognize $5,000 in ordinary

income with respect to the stock sold under

section 1254. D attaches a statement to D’s tax

return for 1997 detailing D’s share of the fair

market values and bases, and D’s section 1254

costs with respect to Blackacre and Whiteacre.

Therefore, upon the sale of stock to E, of the

$7,500 gain recognized by D, $5,000 is ordinary

income under this paragraph (c).

Example 3. Contribution of property prior to

sale of S corporation stock as part of a plan to

avoid recognition of ordinary income under section 1254. H owns all of the stock of Z, an S

corporation. As of January 1, 1997, H has $3,000

of section 1254 costs with respect to property P,

which is natural resource recapture property and

Z’s only asset. Property P has an adjusted basis of

$5,000 and a fair market value of $8,000. H has a

basis of $5,000 in Z stock, which has a fair

market value of $8,000. On January 1, 1997, H

contributes securities to Z which have a basis of

$7,000 and a fair market value of $4,000. On

April 15, 1997, H sells all of the Z stock to J for

$12,000. On that date, H’s adjusted basis in the Z

stock is also $12,000. Based on all the facts and

circumstances, the sale of stock is part of a plan

(along with the contribution by H of the securities

to Z) that has a principal purpose to avoid

recognition of ordinary income under section

1254. Consequently, under paragraph (c)(2)(ii) of

this section, H must recognize $3,000 as ordinary

income under section 1254, the amount of ordinary income that H would recognize as ordinary

income under section 1254 if property P were sold

at fair market value. In addition, H reduces the

amount realized on the sale of the stock ($12,000)

by $3,000. As a result, H also recognizes a $3,000

capital loss on the sale of the stock ($9,000

amount realized less $12,000 adjusted basis).

(d) Section 1254 costs of a shareholder. An S corporation shareholder’s

section 1254 costs with respect to any

natural resource recapture property held

by the corporation include all of the

shareholder’s section 1254 costs with

respect to the property in the hands of

the S corporation. See § 1.1254–1(b)(1)

for the definition of section 1254 costs.

(e) Section 1254 costs of an acquiring shareholder after certain acquisitions—(1) Basis determined under section 1012. If stock in an S corporation

that holds natural resource recapture

property is acquired and the acquiring

shareholder’s basis for the stock is determined solely by reference to its cost

(within the meaning of section 1012),

the amount of section 1254 costs with

respect to the property held by the

corporation in the acquiring shareholder’s hands is zero on the acquisition

date.

(2) Basis determined under section

1014(a). If stock in an S corporation

that holds natural resource recapture

property is acquired from a decedent

and the acquiring shareholder’s basis is

determined, by reason of the application

of section 1014(a), solely by reference

to the fair market value of the stock on

the date of the decedent’s death or on

the applicable date provided in section

2032 (relating to alternate valuation

date), the amount of section 1254 costs

with respect to the property held by the

corporation in the acquiring shareholder’s hands is zero on the acquisition

date.

(3) Basis determined under section

1014(b)(9). If stock in an S corporation

that holds natural resource recapture

property is acquired before the death of

the decedent, the amount of section

1254 costs with respect to the property

held by the corporation in the acquiring

shareholder’s hands includes the

amount, if any, of the section 1254 costs

deducted by the acquiring shareholder

before the decedent’s death, to the extent that the basis of the stock (determined under section 1014(a)) is required

to be reduced under section 1014(b)(9)

(relating to adjustments to basis when

the property is acquired before the death

of the decedent).

(4) Gifts and section 1041 transfers.

If stock is acquired in a transfer that is a

gift, in a transfer that is a part sale or

exchange and part gift, or in a transfer

that is described in section 1041(a), the

amount of section 1254 costs with respect to the property held by the corporation in the acquiring shareholder’s

hands immediately after the transfer is

an amount equal to—

(i) The amount of section 1254 costs

with respect to the property held by the

corporation in the hands of the

transferor immediately before the transfer; minus

(ii) The amount of any gain recognized as ordinary income under section

1254 by the transferor upon the transfer.

(f) Special rules for a corporation

that was formerly an S corporation or

formerly a C corporation—(1) Section

1254 costs of an S corporation that was

formerly a C corporation. In the case of

a C corporation that holds natural resource recapture property and that elects

to be an S corporation, each shareholder’s section 1254 costs as of the beginning of the corporation’s first taxable

year as an S corporation include a pro

rata share of the section 1254 costs of

the corporation as of the close of the

last taxable year that the corporation

was a C corporation.

(2) Examples. The following examples illustrate the application of the

provisions of paragraph (f)(1) of this

section:

Example 1. Sale of natural resource recapture

property held by an S corporation that was

formerly a C corporation—(i) Y is a C corporation

that elects to be an S corporation effective January

1, 1997. On that date, Y owns Oil Well, which is

natural resource recapture property and a capital

asset. Y has section 1254 costs of $20,000 as of

the close of the last taxable year that it was a C

corporation. On January 1, 1997, Oil Well has a

value of $200,000 and a basis of $100,000. Thus,

under section 1374, Y’s net unrealized built-in

gain is $100,000. Also on that date, Y’s basis in

Oil Well is allocated to A, Y’s sole shareholder,

under section 613A(c)(11) and the section 1254

costs are allocated to A under paragraph (f)(1) of

this section. In addition, A has a basis in A’s Y

stock of $100,000.

(ii) On November 1, 1997, Y sells Oil Well for

$250,000. During 1997, Y has taxable income

greater than $100,000, and no other transactions or

items treated as recognized built-in gain or loss.

Under section 1374, Y has net recognized built-in

gain of $100,000. Assuming a tax rate of 35

percent on capital gain, Y has a tax of $35,000

under section 1374. The tax of $35,000 is treated

as a capital loss under section 1366(f)(2). A has a

realized gain on the sale of $150,000 ($250,000

minus $100,000) of which $20,000 is recognized

as ordinary income under section 1254, and

$130,000 is recognized as capital gain. Consequently, A recognizes ordinary income of $20,000

and net capital gain of $95,000 ($130,000 minus

$35,000) on the sale.

7

Example 2. Sale of stock followed by sale of

natural resource recapture property held by an S

corporation that was formerly a C corporation—

(i) Assume the same facts as in Example 1(i). On

November 1, 1997, A sells all of A’s Y stock to P

for $250,000. A has a realized gain on the sale of

$150,000 ($250,000 minus $100,000) of which

$20,000 is recognized as ordinary income under

section 1254, and $130,000 is recognized as

capital gain.

(ii) On November 2, 1997, Y sells Oil Well for

$250,000. During 1997, Y has taxable income

greater than $100,000, and no other transactions or

items treated as recognized built-in gain or loss.

Under section 1374, Y has net recognized built-in

gain of $100,000. Assuming a tax rate of 35

percent on capital gain, Y has a tax of $35,000

under section 1374. The tax of $35,000 is treated

as a capital loss under section 1366(f)(2). P has a

realized gain on the sale of $150,000 ($250,000

minus $100,000), which is recognized as capital

gain. Consequently, P recognizes net capital gain

of $115,000 ($150,000 minus $35,000) on the

sale.

(3) Section 1254 costs of a C corporation that was formerly an S corporation. In the case of an S corporation that

becomes a C corporation, the C corporation’s section 1254 costs with respect to

any natural resource recapture property

held by the corporation as of the beginning of the corporation’s first taxable

year as a C corporation include the sum

of its shareholders’ section 1254 costs

with respect to the property as of the

close of the last taxable year that the

corporation was an S corporation. In the

case of an S termination year as defined

in section 1362(e)(4), the shareholders’

section 1254 costs are determined as of

the close of the S short year as defined

in section 1362(e)(1)(A). See paragraph

(g)(5) of this section for rules on determining the aggregate amount of the

shareholders’ section 1254 costs.

(g) Determination of a shareholder’s

section 1254 costs upon certain stock

transactions—(1) Issuance of stock.

Upon an issuance of stock (whether

such stock is newly-issued or had been

held as treasury stock) by an S corporation in a reorganization described in

section 368 or otherwise—

(i) Each recipient of shares must be

allocated a pro rata share (determined

solely with respect to the shares issued

in the transaction) of the aggregate of

the S corporation shareholders’ section

1254 costs with respect to natural resource recapture property held by the S

corporation immediately before the issuance (as determined pursuant to paragraph (g)(5) of this section); and

(ii) Each pre-existing shareholder

must reduce his or her section 1254

costs with respect to natural resource

recapture property held by the S corporation immediately before the issuance

by an amount equal to the pre-existing

shareholder’s section 1254 costs immediately before the issuance multiplied by

the percentage of stock of the corporation issued in the transaction.

(2) Natural resource recapture property acquired in exchange for stock. If

natural resource recapture property is

transferred to an S corporation in exchange for stock of the S corporation

(for example, in a section 351 transaction, or in a reorganization described in

section 368), the S corporation must

allocate to its shareholders a pro rata

share of the S corporation’s section

1254 costs with respect to the property

immediately after the transaction (as

determined under § 1.1254– 3(b)(1)).

(3) Treatment of nonvested stock.

Stock issued in connection with the

performance of services that is substantially nonvested (within the meaning of

§ 1.83–3(b)) is treated as issued for

purposes of this section at the first time

it is treated as outstanding stock of the

S corporation for purposes of section

1361.

(4) Exception. Paragraph (g)(1) of

this section does not apply to stock

issued in exchange for stock of the same

S corporation (as for example, in a

recapitalization described in section

368(a)(1)(E)).

(5) Aggregate of S corporation shareholders’ section 1254 costs with respect

to natural resource recapture property

held by the S corporation—(i) In general. The aggregate of S corporation

shareholders’ section 1254 costs is equal

to the sum of each shareholder’s section

1254 costs. The S corporation must

determine each shareholder’s section

1254 costs under either paragraph

(g)(5)(ii) (written data) or paragraph

(g)(5)(iii) (assumptions) of this section.

The S corporation may determine the

section 1254 costs of some shareholders

under paragraph (g)(5)(ii) of this section

and of others under paragraph (g)(5)(iii)

of this section.

(ii) Written data. An S corporation

may determine a shareholder’s section

1254 costs by using written data provided by a shareholder showing the

shareholder’s section 1254 costs with

respect to natural resource recapture

property held by the S corporation unless the S corporation knows or has

reason to know that the written data is

inaccurate. If an S corporation does not

receive written data upon which it may

rely, the S corporation must use the

assumptions provided in paragraph

(g)(5)(iii) of this section in determining

a shareholder’s section 1254 costs.

(iii) Assumptions. An S corporation

that does not use written data pursuant

to paragraph (g)(5)(ii) of this section to

determine a shareholder’s section 1254

costs must use the following assumptions to determine the shareholder’s section 1254 costs—

(A) The shareholder deducted his or

her share of the amount of deductions

under sections 263(c), 616, and 617 in

the first year in which the shareholder

could claim a deduction for such

amounts, unless in the case of expenditures under sections 263(c) or 616 the S

corporation elected to capitalize such

amounts;

(B) The shareholder was not subject

to the following limitations with respect

to the shareholder’s depletion allowance

under section 611, except to the extent a

limitation applied at the corporate level:

the taxable income limitation of section

613(a); the depletable quantity limitations of section 613A(c); or the limitations of sections 613A(d)(2), (3), and

(4) (exclusion of retailers and refiners).

(6) Examples. The following examples illustrate the provisions of this

paragraph (g):

Example 1. Transfer of natural resource recapture property to an S corporation in a section 351

transaction. As of January 1, 1997, A owns all the

stock (20 shares) in X, an S corporation. X holds

property that is not natural resource recapture

property that has a fair market value of $2,000

and an adjusted basis of $2,000. On January 1,

1997, B transfers natural resource recapture property, Property P, to X in exchange for 80 shares of

X stock in a transaction that qualifies under

section 351. Property P has a fair market value of

$8,000 and an adjusted basis of $5,000. Pursuant

to section 351, B does not recognize gain on the

transaction. Immediately prior to the transaction,

B’s section 1254 costs with respect to Property P

equaled $6,000. Under § 1.1254–2(c)(1), B does

not recognize any gain under section 1254 on the

section 351 transaction and, under § 1.1254–

3(b)(1), X’s section 1254 costs with respect to

Property P immediately after the contribution

equal $6,000. Under paragraph (g)(2) of this

section, each shareholder is allocated a pro rata

share of X’s section 1254 costs. The pro rata share

of X’s section 1254 costs that is allocated to A

equals $1,200 (20 percent interest in X multiplied

by X’s $6,000 of section 1254 costs). The pro rata

share of X’s section 1254 costs that is allocated to

B equals $4,800 (80 percent interest in X multiplied by X’s $6,000 of section 1254 costs).

Example 2. Contribution of money in exchange

for stock of an S corporation holding natural

resource recapture property. As of January 1,

1997, A and B each own 50 percent of the stock

(50 shares each) in X, an S corporation. X holds

natural resource recapture property, Property P,

which has a fair market value of $20,000 and an

adjusted basis of $14,000. A’s and B’s section

1254 costs with respect to Property P are $4,000

and $1,500, respectively. On January 1, 1997, C

8

contributes $20,000 to X in exchange for 100

shares of X’s stock. Under paragraph (g)(1)(i) of

this section, X must allocate to C a pro rata share

of its shareholders’ section 1254 costs. Using the

assumptions set forth in paragraph (g)(5)(iii) of

this section, X determines that A’s section 1254

costs with respect to natural resource recapture

property held by X equal $4,500. Using written

data provided by B, X determines that B’s section

1254 costs with respect to Property P equal

$1,500. Thus, the aggregate of X’s shareholders’

section 1254 costs equals $6,000. C’s pro rata

share of the $6,000 of section 1254 costs equals

$3,000 (C’s 50 percent interest in X multiplied by

$6,000). Under paragraph (g)(1)(ii) of this section,

A’s section 1254 costs are reduced by $2,000 (A’s

actual section 1254 costs ($4,000) multiplied by

50 percent). B’s section 1254 costs are reduced by

$750 (B’s actual section 1254 costs ($1,500)

multiplied by 50 percent).

Example 3. Merger involving an S corporation

that holds natural resource recapture property. X,

an S corporation with one shareholder, A, holds as

its sole asset natural resource recapture property

that has a fair market value of $120,000 and an

adjusted basis of $40,000. A has section 1254

costs with respect to the property of $60,000. For

valid business reasons, X merges into Y, an S

corporation with one shareholder, B, in a reorganization described in section 368(a)(1)(A). Y holds

property that is not natural resource recapture

property that has a fair market value of $120,000

and basis of $120,000. Under paragraph (c) of this

section, A does not recognize ordinary income

under section 1254 upon the exchange of stock in

the merger because A did not otherwise recognize

gain on the merger. Under paragraph (g)(2) of this

section, Y must allocate to A and B a pro rata

share of its $60,000 of section 1254 costs. Thus, A

and B are each allocated $30,000 of section 1254

costs (50 percent interest in X, each, multiplied by

$60,000).

Par. 6. Section 1.1254–6 is amended

by adding two sentences at the end of

this section to read as follows:

§ 1.1254–6 Effective date of regulations.

* * * Section 1.1254–4 applies to

dispositions of natural resource recapture property by an S corporation (and a

corporation that was formerly an S

corporation) and dispositions of S corporation stock occurring on or after

October 10, 1996. Sections 1.1254–

2(d)(1)(ii) and 1.1254–3(b)(1)(i) and (ii)

and (d)(1)(i) and (ii) are effective for

dispositions of property occurring on or

after October 10, 1996.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 7. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 8. In § 602.101, paragraph (c) is

amended by adding an entry in numerical order to the table to read as follows.

§ 602.101 OMB Control numbers.

*

*

*

*

*

(c) * * *

CFR part of section

where identified

and described

Current OMB

control No.

*

*

*

*

*

1.1254–4 . . . . . . . . . . . . . 1545–1493

*

*

*

*

*

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved September 10, 1996.

Donald C. Lubick,

Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on

October 9, 1996, 8:45 a.m., and published in the

issue of the Federal Register for October 10, 1996,

61 F.R. 53062)

Section 6011.—General

Requirement of Return, Statement,

or List

26 CFR 301.6011–2T: Required use of magnetic

media (temporary).

T.D. 8683

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

Magnetic Media Filing

Requirements for Information

Returns

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

regulations relating to the requirements

for filing information returns on magnetic media or in other machinereadable form under section 6011(e) of

the Internal Revenue Code (Code).

These regulations affect persons filing

information returns. These regulations

prescribe new magnetic media filing

requirements for employers filing wage

and tax statements for employees in

Puerto Rico, U.S. Virgin Islands, Guam,

and American Samoa. In addition, these

regulations provide taxpayers with the

guidance to comply with the changes

made to the Code and to the administrative practices with respect to filing on

magnetic media or in other machine-

readable form. The text of these temporary regulations also serves as the text

of the proposed regulations set forth in

REG–209803–95, page 14.

EFFECTIVE DATE: These regulations

are effective on January 1, 1997.

FOR FURTHER INFORMATION

CONTACT: Donna Welch, Internal

Revenue Service, 1111 Constitution

Ave., NW., Washington, DC 20224; telephone (202) 622–4910 (not a toll-free

call), if the inquiry relates to provisions

of these regulations. For further information, see telephone numbers listed at

the beginning of SUPPLEMENTARY

INFORMATION.

SUPPLEMENTARY INFORMATION:

For persons residing in the following

locations, contact the following offices

of the Social Security Administration

(not a toll-free call), if the inquiry

relates to magnetic media filing and

magnetic media specifications for Form

W–2, Form 499R–2/W–2PR, Form

W–2VI, Form W–2GU, and Form

W–2AS:

Alabama (404) 331–2587 (Atlanta),

Alaska (206) 615–2125 (Seattle),

American Samoa (415) 744–4559

(San Francisco),

Arizona (415) 744–4559 (San Francisco),

Arkansas (501) 324–5466 (Little

Rock),

California (415) 744–4559 (San Francisco),

Colorado (303) 844–2364 (Denver),

Connecticut (617) 565–2895 (Boston),

Delaware (215) 597–4632 (Philadelphia),

District of Columbia (215) 597–4632

(Philadelphia),

Florida (404) 331–2587 (Atlanta),

Georgia (404) 331–2587 (Atlanta),

Guam (415) 744–4559 (San Francisco),

Hawaii (415) 744–4559 (San Francisco),

Idaho (206) 615–2125 (Seattle),

Illinois (312) 353–6717 (Chicago),

Indiana (312) 353–6717 (Chicago),

Iowa (816) 426–2095 (Kansas City),

Kansas (816) 426–2095 (Kansas

City),

Kentucky (404) 331–2587 (Atlanta),

Louisiana (504) 389–0426 (Baton

Rouge),

Maine (617) 565–2895 (Boston),

Maryland (215) 597–4632 (Philadelphia),

9

Massachusetts (617) 565–2895 (Boston),

Michigan (312) 353–6717 (Chicago),

Minnesota (312) 353–6717 (Chicago),

Mississippi (404) 331–2587 (Atlanta),

Missouri (816) 426–2095 (Kansas

City),

Montana (303) 844–2364 (Denver),

Nebraska (816) 426–2095 (Kansas

City),

Nevada (415) 744–4559 (San Francisco),

New Hampshire (617) 565–2895

(Boston),

New Jersey (212) 264–0258 (New

York),

New Mexico (505) 262–6048 (Albuquerque),

New York (212) 264–0258 (New

York),

North Carolina (404) 331–2587 (Atlanta),

North Dakota (303) 844–2364 (Denver),

Ohio (312) 353–6717 (Chicago),

Oklahoma (405) 951–3007 (Oklahoma City),

Oregon (206) 615–2125 (Seattle),

Pennsylvania (215) 597–4632 (Philadelphia),

Puerto Rico (809) 766–5574 (San

Juan),

Rhode Island (617) 565–2895 (Boston),

South Carolina (404) 331–2587 (Atlanta),

South Dakota (303) 844–2364 (Denver),

Tennessee (404) 331–2587 (Atlanta),

Texas-Central/South (210) 229–6433

(San Antonio),

Texas-Dallas County (214) 767–6777

(Dallas),

Texas-North (817) 334–3123 (Forth

Worth),

Texas-Southeast (713) 653–4722

(Houston),

Texas-West (505) 262–6048 (Albuquerque),

Utah (303) 844–2364 (Denver),

Vermont (617) 565–2895 (Boston),

Virgin Islands (809) 766–5574 (San

Juan),

Virginia (215) 597–4632 (Philadelphia),

Washington (206) 615–2125 (Seattle),

West Virginia (215) 597–4632 (Philadelphia),

Wisconsin (312) 353–6717 (Chicago),

and

Wyoming (303) 844–2364 (Denver).

Magnetic Media Reporting, Internal

Revenue Service, Martinsburg Computing Center, P.O. Box 1359, Martinsburg,

West Virginia 25401–1359; telephone

(304) 263–8700 (not a toll-free call), if

the inquiry relates to either the waiver

procedure for all forms described in

these regulations or to the magnetic

media specifications for Forms 1042–S,

1098, 1099 series, 5498, 8027, or

W–2G.

Background

This document contains amendments

to the Procedure and Administration

Regulations (26 CFR Part 301) relating

to the requirement under section 6011(e)

to file information returns on magnetic

media or in other machine-readable

form. Section 6011(e) authorizes the

Secretary to prescribe regulations providing the standards for determining

which returns must be filed on magnetic

media or in other machine-readable

form. Section 6011(e) of the Internal

Revenue Code (Code) was added to the

Code by section 319 of the Tax Equity

and Fiscal Responsibility Act of 1982,

Public Law 97–248, 96 Stat. 610; and

was amended by section 109 of the

Interest and Dividend Tax Compliance

Act of 1983, Public Law 98–67, 97 Stat.

383; and section 7713 of the Revenue

Reconciliation Act of 1989 (1989 Act),

Public Law 101–239, 103 Stat. 2394.

This document also contains conforming amendments to the Income Tax

Regulations (26 CFR Part 1) relating to

returns of information of brokers and

barter exchanges required under section

6045.

Explanation of Provisions

In order to reduce its administrative

burden and increase accurate processing

of information, the Social Security Administration (the SSA) requested that

regulations be issued to require Forms

499R–2/W–2PR (Withholding Statement), Forms W–2VI (U.S. Virgin Islands Wage and Tax Statement), Forms

W–2GU (Guam Wage and Tax Statement), and Forms W–2AS (American

Samoa Wage and Tax Statement) to be

filed on magnetic media. In Notice

95–64 (1995–2 C.B. 342), the IRS informed taxpayers of its intention to

issue regulations requiring these forms

to be filed on magnetic media with the

SSA and invited public comment on the

matter. The Notice stated that the requirement would be effective for wage

and tax statements required to be filed

after December 31, 1996. No comments

were received in response to the Notice.

These regulations expand the wage and

tax statements required to be filed on

magnetic media with the SSA to include

Form 499R–2/W–2PR, Form W–2VI,

Form W–2GU, and Form W–2AS.

In addition, these regulations reflect

the current provisions of section

6011(e). As amended by the 1989 Act,

section 6011(e)(2)(A) provides that the

Secretary shall not require any person to

file returns on magnetic media unless

the person is required to file at least 250

returns during the calendar year (250threshold). Consistent with the provisions of section 6011(e)(2)(A), these

regulations provide that no person is

required to file on magnetic media unless the person is required to file 250 or

more returns during the calendar year.

Further, these regulations clarify that

each type of information return is considered a separate return, and the 250threshold applies separately to each type

of form required to be filed.

In addition, these regulations reflect

the current administrative practices with

respect to filing information returns on

magnetic media or in other machinereadable form. The IRS and the SSA

now permit filing on tape cartridge but

no longer permit filing on cassette.

Further, the IRS currently permits electronic filing as an alternative method of

filing, and the SSA is considering permitting electronic filing in the future.

Thus, under these regulations, magnetic

media generally include magnetic tape,

tape cartridge, diskette, and other media

(such as electronic filing) specifically

permitted under the applicable regulations, procedures, or publications.

Further, these regulations reflect the

current procedures for obtaining consent

and authorization from the IRS before

filing on magnetic media. These regulations refer to Form 4419 (Application

for Filing Information Returns

Magnetically/Electronically), which must

be filed by a transmitter with the IRS

before filing Forms 1042–S, 1098, 1099

series, 5498, 8027, and W–2G on magnetic media or electronically. These

regulations also remove any reference to

obtaining consent from the SSA because

it no longer requires consent or authorization before filing on magnetic media.

Under the existing regulations, a taxpayer may request a hardship waiver

from the magnetic media filing requirements. The principal factor for demonstrating hardship is the amount, if any,

by which the cost of filing on magnetic

media exceeds the cost of filing on

paper. The existing regulations provide

that, if an employer is required to make

10

a final return on Form 941, or a variation thereof, and expedited filing of

Form W–2 is required, the unavailability

of the specifications for magnetic media

filing will be treated as creating a

hardship, and a waiver of the magnetic

media filing requirements for the expedited Forms W–2 may be granted. This

document extends this waiver provision

to expedited filing of Forms 499R–2/W–

2PR, Forms W–2VI, Forms W–2GU,

and Forms W–2AS.

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 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 these regulations impose no additional reporting or recordkeeping requirement and only prescribe the

method of filing information returns that

are already required to be filed. Further,

these regulations are consistent with the

requirements imposed by statute. Section

6011(e)(2)(A) provides that, in prescribing regulations providing standards for

determining which returns must be filed

on magnetic media or in other machinereadable form, the Secretary shall not

require any person to file returns on

magnetic media unless the person is

required to file at least 250 returns

during the calendar year. Consistent with

the statutory provision, these regulations

do not require information returns to be

filed on magnetic media unless 250 or

more returns are required to be filed.

Further, the economic impact caused by

filing on magnetic media should be

minimal. If a taxpayer’s operations are

computerized, reporting in accordance

with the regulations should be less

costly than filing on paper. If the taxpayer’s operations are not computerized,

the incremental cost of magnetic media

reporting should be minimal in most

cases because of the availability of

computer service bureaus. In addition,

the existing regulations provide that the

IRS may waive the magnetic media

filing requirements upon a showing of

hardship. It is anticipated that the waiver

authority will be exercised so as not to

unduly burden taxpayers lacking both

the necessary data processing facilities

and access at a reasonable cost to

computer service bureaus. 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.

hardship. For information returns filed

prior to January 1, 1997, see § 1.6045–

1(l).

Par. 4. Section 1.6045–2 is amended

by adding a sentence at the end of

paragraph (i) to read as follows:

§ 1.6045–2 Furnishing statement required with respect to certain substitute

payments.

*

Drafting Information

The principal author of these regulations is Donna Welch, 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.

*

*

*

*

*

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. Section 1.6045–1 is amended

by adding a sentence at the end of

paragraph (q) to read as follows:

§ 1.6045–1 Returns of information of

brokers and barter exchanges.

*

*

*

*

*

*

*

*

(i) * * * With regard to paragraph

(g)(2) of this section, see section

6011(e) of the Internal Revenue Code

for information returns required to be

filed after December 31, 1989, and

before January 1, 1997; and see

§ 1.6045–2T(g)(2) for information returns required to be filed after December 31, 1996.

Par. 5. Section 1.6045–2T is added to

read as follows:

§ 1.6045–2T Furnishing statement required with respect to certain substitute

payments (temporary).

(a) through (g)(1) [Reserved] For further guidance, see § 1.6045–2(a)

through (g)(1).

(g)(2) Use of magnetic media. For

information returns filed after December

31, 1996, see § 301.6011–2T of this

chapter for rules relating to filing information returns on magnetic media and

for rules relating to waivers granted for

undue hardship. For information returns

filed prior to January 1, 1997, see

§ 1.6045–2(g)(2).

*

(q) * * * With regard to paragraph (l)

of this section, see section 6011(e) of

the Internal Revenue Code for information returns required to be filed after

December 31, 1989, and before January

1, 1997; and see § 1.6045–1T(l) for

information returns required to be filed

after December 31, 1996.

Par. 3. Section 1.6045–1T is added to

read as follows:

§ 1.6045–1T Returns of information of

brokers and barter exchanges (temporary).

(a) through (k) [Reserved] For further

guidance, see § 1.6045–1(a) through

(k).

(l) Use of magnetic media. For information returns filed after December 31,

1996, see § 301.6011–2T of this chapter

for rules relating to filing information

returns on magnetic media and for rules

relating to waivers granted for undue

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 4. The authority citation for part

301 continues to read in part as follows:

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

Par. 5. Section 301.6011–2T is added

to read as follows:

§ 301.6011–2T Required use of magnetic media (temporary).

This section applies to information

returns required to be filed after December 31, 1996. For information returns

required to be filed after December 31,

1989, and before January 1, 1997, see

section 6011(e) of the Internal Revenue

Code and § 301.6011–2.

(a) Meaning of terms. The following

definitions apply for purposes of this

section:

(1) Magnetic media. The term magnetic media means any magnetic media

permitted under applicable regulations,

11

revenue procedures, or, in the case of

returns filed with the Social Security

Administration, Social Security Administration publications. These generally

include magnetic tape, tape cartridge,

and diskette, as well as other media

(such as electronic filing) specifically

permitted under the applicable regulations, procedures, or publications.

(2) and (3) [Reserved] For further

guidance, see § 301.6011– 2(a)(2) and

(3).

(b) Returns required on magnetic media. (1) If the use of Form 1042–S,

1098, 1099 series, 5498, 8027, W–2G,

or other form treated as a form specified

in this paragraph (b)(1) is required by

the applicable regulations or revenue

procedures for the purpose of making an

information return, the information required by the form must be submitted

on magnetic media, except as otherwise

provided in paragraph (c) of this section.

Returns on magnetic media must be

made in accordance with applicable revenue procedures or publications. See

§ 601.601(d)(2)(ii)(b) of this chapter.

Pursuant to these procedures, the consent of the Commissioner of Internal

Revenue (or other authorized officer or

employee of the Internal Revenue Service) to a magnetic medium must be

obtained by submitting Form 4419 (Application for Filing Information Returns

Magnetically/Electronically) prior to

submitting a return described in this

paragraph (b)(1) on the magnetic medium.

(2) If the use of Form W–2 (Wage

and Tax Statement), Form 499R–2/W–

2PR (Withholding Statement), Form

W–2VI (U.S. Virgin Islands Wage and

Tax Statement), Form W–2GU (Guam

Wage and Tax Statement), Form W–2AS

(American Samoa Wage and Tax Statement), or other form treated as a form

specified in this paragraph (b)(2) is

required for the purpose of making an

information return, the information required by the form must be submitted

on magnetic media, except as otherwise

provided in paragraph (c) of this section.

Returns described in this paragraph

(b)(2) must be made in accordance with

applicable Social Security Administration procedures or publications (which

may be obtained from the local office of

the Social Security Administration).

(3) [Reserved] For further guidance,

see § 301.6011–2(b)(3).

(c) Exceptions—(1) Low-volume filers/250-threshold—(i) In general. No

person is required to file information

returns on magnetic media unless the

person is required to file 250 or more

returns during the calendar year. Persons

filing fewer than 250 returns during the

calendar year may make the returns on

the prescribed paper form, or, alternatively, such persons may make returns

on magnetic media in accordance with

paragraph (b) of this section.

(ii) [Reserved] For further guidance,

see § 301.6011– 2(c)(1)(ii).

(iii) No aggregation. Each type of

information return described in paragraphs (b)(1) and (2) of this section is

considered a separate return for purposes of this paragraph (c)(1). Therefore, the 250-threshold applies separately to each type of form required to

be filed.

(iv) Examples. The provisions of

paragraph (c)(1)(iii) of this section are

illustrated by the following examples:

Example 1. For the calendar year ending December 31, 1996, Company X is required to file

200 returns on Form 1099–INT and 350 returns on

Form 1099–MISC. Company X is not required to

file Forms 1099–INT on magnetic media but is

required to file Forms 1099–MISC on magnetic

media.

Example 2. During the calendar year ending

December 31, 1996, Company Y has 275 employees in Puerto Rico and 50 employees in American

Samoa. Company Y is required to file Forms

499R–2/W–2PR on magnetic media but is not

required to file Forms W–2AS on magnetic media.

Example 3. For the calendar year ending December 31, 1996, Company Z files 300 original

returns on Form 1099–DIV and later files 70

corrected returns on Form 1099–DIV. Company Z

is required to file the original returns on magnetic

media. However, Company Z is not required to

file the corrected returns on magnetic media

because the corrected returns fall under the 250threshold. See § 301.6721–1(a)(2)(ii).

(2) Waiver. (i) The Commissioner

may waive the requirements of this

section if hardship is shown in a request

for waiver filed in accordance with this

paragraph (c)(2)(i). The principal factor

in determining hardship will be the

amount, if any, by which the cost of

filing the information returns in accordance with this section exceeds the cost

of filing the returns on other media.

Notwithstanding the foregoing, if an

employer is required to make a final

return on Form 941, or a variation

thereof, and expedited filing of Forms

W–2, Forms 499R–2/W–2PR, Forms

W–2VI, Forms W–2GU, or Form

W–2AS is required, the unavailability of

the specifications for magnetic media

filing will be treated as creating a

hardship. See § 31.6071(a)–1(a)(3)(ii).

A request for waiver must be made in

accordance with applicable revenue procedures or publications. See § 601.601(d)(2)(ii)(b) of this chapter. Pursuant to

these procedures, a request for waiver

should be filed at least 45 days before

the due date of the information return in

order for the Service to have adequate

time to respond to the request for

waiver. The waiver will specify the type

of information return and the period to

which it applies and will be subject to

such terms and conditions regarding the

method of reporting as may be prescribed by the Commissioner.

(ii) The Commissioner may prescribe

rules that supplement the provisions of

paragraph (c)(2)(i) of this section.

(c)(3) and (4) [Reserved]. For further

guidance, see § 301.6011–2(c)(3) and

(4).

(d) and (e) [Reserved] For further

guidance, see § 301.6011–2(d) and (e).

(f) Failure to file. If a person fails to

12

file an information return on magnetic

media when required to do so by this

section, the person is deemed to have

failed to file the return. In addition, if a

person making returns on a paper form

under paragraph (c) of this section fails

to file a return on machine-readable

paper form when required to do so by

this section, the person is deemed to

have failed to file the return. See sections 6652, 6693, and 6721 for penalties

for failure to file certain returns. See

also section 6724 and the regulations

under section 6721 for the specific rules

and limitations regarding the penalty

imposed under section 6721 for failure

to file on magnetic media.

(g) Effective date. (1) [Reserved] For

further guidance, see § 301.6011–

2(g)(1).

(2) Paragraphs (a)(1), (b)(1) and (2),

(c)(1)(i), (iii), and (iv), (c)(2), and (f) of

this section are effective for information

returns required to be filed after December 31, 1996. For information returns

required to be filed after December 31,

1989, and before January 1, 1997, see

section 6011(e) of the Internal Revenue

Code and § 301.6011–2.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved September 10, 1996.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on

October 9, 1996, 8:45 a.m., and published in the

issue of the Federal Register for October 10, 1996,

61 F.R. 53058)

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rate

Update

Notice 96–54

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,

Month

Year

Weighted

Average

October

1996

6.91

Drafting Information

The principal author of this notice is

Donna Prestia of the Employee Plans

90% to 108%

Permissible

Range

90% to 110%

Permissible

Range

6.22 to 7.47

6.22 to 7.61

Division. For further information regarding this notice, call (202) 622–6076

between 2:30 and 4:00 p.m. Eastern

time (not a toll-free number). Ms.

13

P.L. 103–465 (GATT).

The average yield on the 30-year

Treasury Constant Maturities for September 1996 is 7.03 percent.

The following rates were determined

for the plan years beginning in the

month shown below.

Prestia’s number is (202) 622–7377

(also not a toll-free number).

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Magnetic Media Filing

Requirements for Information

Returns

REG–209803–95

AGENCY: Internal Revenue Service

(IRS), Treasury.

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

SUMMARY: In ***T.D. 8683, page 9,

the IRS is issuing temporary regulations

relating to the requirements for filing

information returns on magnetic media

or in other machine-readable form under

section 6011(e) of the Internal Revenue

Code. The text of those temporary regulations also serves as the text of the

proposed regulations. This document

also contains a proposed amendment to

§ 301.6011–2(g)(2). This document also

provides notice of a public hearing on

these proposed regulations.

DATES: Written comments must be received by January 8, 1997. Outlines of

topics to be discussed at the public

hearing scheduled for February 5, 1997,

must be received by January 15, 1997.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–209803–95),

room 5228, Internal Revenue Service,

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

submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–209803–95),

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. The public hearing will

be held in Room 3313 of the Internal

Revenue Building, 1111 Constitution

Ave., NW., Washington, DC.

FOR FURTHER INFORMATION

CONTACT: Concerning the regulations,

Donna Welch, (202) 622–4910; concerning submissions and the hearing, Mike

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

numbers).

1996–44

I.R.B.

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in T.D. 8683

amend the Income Tax Regulations (26

CFR part 1) relating to section 6045 and

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

section 6011(e). The temporary regulations contain rules relating to the filing

requirements of information returns on

magnetic media or in other machinereadable form under section 6011(e).

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

proposed regulations. The preamble to

the temporary regulations explains the

temporary regulations.

Special Analyses

computer service bureaus. In addition,

the existing regulations provide that the

IRS may waive the magnetic media

filing requirements upon a showing of

hardship. It is anticipated that the waiver

authority will be exercised so as not to

unduly burden taxpayers lacking both

the necessary data processing facilities

and access at a reasonable cost to

computer service bureaus. 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 proposed

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

It has been determined that these

proposed regulations are not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required.

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 these regulations impose no additional reporting or recordkeeping requirement and only prescribe the

method of filing information returns that

are already required to be filed. Further,

these regulations are consistent with the

requirements imposed by statute. Section

6011(e)(2)(A) provides that, in prescribing regulations providing standards for

determining which returns must be filed

on magnetic media or in other machinereadable form, the Secretary shall not

require any person to file returns on

magnetic media unless the person is

required to file at least 250 returns

during the calendar year. Consistent with

the statutory provision, these regulations

do not require information returns to be

filed on magnetic media unless 250 or

more returns are required to be filed.

Further, the economic impact caused by

requiring filing on magnetic media

should be minimal. If a taxpayer’s operations are computerized, reporting in

accordance with the regulations should

be less costly than filing on paper. If the

taxpayer’s operations are not computerized, the incremental cost of magnetic

media reporting should be minimal in

most cases because of the availability of

14

Before these proposed regulations are

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

copies) that are submitted timely to the

IRS. All comments will be available for

public inspection and copying.

A public hearing has been scheduled

for February 5, 1997, at 10 am. The

hearing will be held in room 3313 of

the Internal Revenue Building, 1111

Constitution Ave., 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 who wish to present oral

comments at the hearing must submit

written comments by January 8, 1997,

and submit an outline of the topics to be

discussed and the time to be devoted to

each topic (signed original and eight (8)

copies) by January 15, 1997.

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

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of the regulations is Donna Welch, Office of Assis-

tant 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 parts 1 and 301

are proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. In § 1.6045–1, paragraph (l)

is revised to read as follows:

§ 1.6045–1 Returns of information of

brokers and barter exchanges.

[The text of paragraph (l) as proposed

is the same as the first sentence of

§ 1.6045–1T(l) published in T.D. 8683,

page 9.

Par. 3. In § 1.6045–2, paragraph

(g)(2) is revised to read as follows:

§ 1.6045–2 Furnishing statement required with respect to certain substitute

payments.

[The text of paragraph (g)(2) as proposed is the same as the text of the first

sentence of § 1.6045–2T(g)(2) published in T.D. 8683, page 9.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 4. The authority citation for part

301 continues to read in part as follows:

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

Par. 5. Section 301.6011–2 is

amended by revising paragraphs (a)(1),

(b)(1) and (2), (c)(1)(i) and (iii), (c)(2),

(f) and (g)(2), and by adding (c)(1)(iv),

and by removing paragraphs (c)(3) and

(4) and the last sentence of paragraph

(e). The revisions and additions read as

follows:

§ 301.6011–2 Required use of magnetic

media.

[The text of paragraphs (a)(1), (b)(1)

and (2), (c)(1)(i), (iii), and (iv), (c)(2),

(f), and (g)(2) as proposed is the same

as the text in § 301.6011–2T(a)(1),

(b)(1) and (2), (c)(1)(i), (iii), and (iv),

(c)(2), (f), and the first sentence of

(g)(2) published in T.D. 8683, page 9.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on

October 9, 1996, 8:45 a.m., and published in the

issue of the Federal Register for October 10, 1996,

61 F.R. 53161)

Developing Interim Requirements

for Designated Delivery Services

Under Section 7502(f) of the

Internal Revenue Code

Announcement 96–108

SUMMARY: This announcement invites

comments, and provides notice of a

public hearing, with respect to interim

criteria for designating private delivery

services for purposes of the ‘‘timely

mailing as timely filing/paying’’ rule of

§ 7502 of the Internal Revenue Code.

BACKGROUND: The Internal Revenue

Service currently accepts mail from both

the United States Postal Service

(‘‘USPS’’) and private delivery services.

However, the ‘‘timely mailing as timely

filing/paying’’ rule of § 7502(a) has

applied only to documents and payments

delivered by the USPS. Thus, taxpayers

who assumed that using a private delivery service was adequate to show timely

filing of their documents or timely making of their payments could inadvertently fail to qualify under the ‘‘timely

mailing as timely filing/paying’’ rule.

Similarly, the rule of section 7502(c)

that proof of proper registration of a

document, or that a postmarked certified

mail sender’s receipt was properly issued for a document, is prima facie

evidence of delivery applies only to

documents sent by United States registered or certified mail.

Section 1210 of the Taxpayer Bill of

Rights 2 authorized the Service to expand the ‘‘timely mailing as timely

filing/paying’’ rule to documents and

payments delivered by certain private

delivery services that meet the USPS’s

ability to deliver items timely, reliably,

and securely. A private delivery service

must be designated by the Service before it will qualify for the ‘‘timely

mailing as timely filing/paying’’ rule.

The new statute also authorized an additional designation under § 7502(f)(3)

for those private delivery services that

provide a service equivalent to United

States registered or certified mail. The

15

new statute is not intended to limit the

mailing options that taxpayers currently

use, but rather to expand the ‘‘timely

mailing as timely filing/paying’’ rule to

more delivery services.

After consideration of public comments received in response to this announcement, the Service intends to issue

interim guidance that will establish the

criteria to be used to designate private

delivery services for a limited period of

time, starting in the first quarter of

1997. Once that interim guidance is

issued, private delivery services will be

able to apply to the Service to become

‘‘designated delivery services’’ under

§ 7502(f). After consideration of those

applications, the Service will publish a

list of the designated delivery services

for the interim period. That list will

indicate whether the designation is

solely for purposes of § 7502(f)(2)

(timely mailing as timely filing/paying)

or whether it is also for purposes of

§ 7502(f)(3) (services that are equivalent to United States registered or certified mail).

Following its designation of private

delivery services for the interim period,

the Service intends to publish permanent

guidance.

INTERIM REQUIREMENTS: Section

7502(f)(2) provides that the Service may

designate a private delivery service only

if it meets the following requirements:

(A) it must be available to the general public,

(B) it must be at least as timely and

reliable on a regular basis as United

States mail,

(C) it must record electronically to its

data base (kept in the regular course of

its business) the date on which the item

was given to the private delivery service

for delivery, or mark such date on the

cover of the item to be delivered, and

(D) it must meet such other criteria

as the Service may prescribe.

Congress intended to allow the designation of private delivery services which

meet the USPS’s ability to deliver documents quickly and securely. See H.R.

Rep. No. 506, 104th Cong., 2d Sess. 51

(1996).

The Service is developing guidance

that will implement the statutory criteria

during the interim period in accordance

with Congress’s intent. For example, the

USPS postmarks First-Class Mail on the

date an item is received for delivery by

indelibly marking such date on the

1996–44

I.R.B.

cover of the item so that it is readable

by the human eye without mechanical

assistance. The Service anticipates that a

similar marking or labeling requirement

may be appropriate under clause (C)

above, even for a private delivery service that records the date of receipt

electronically to its data base. Further,

there are special rules under § 7502 for

United States mail that has a postmark

made other than by the USPS. See

Treas. Reg. § 301.7502–1(c)(1)(iii)(b).

For example, if privately metered mail

is incorrectly dated, an envelope may

have a postmark made by the USPS in

addition to the postmark from a private

postage meter. In that situation, the

postmark made by the private postage

meter is disregarded and the USPS

postmark is used for purposes of

§ 7502. Similarly, if a private delivery

service permits the sender (or the sender’s agent or intermediary) to identify

the date under (C), the private delivery

service may be required to have established procedures to verify the date and

to correct the date if the item is incorrectly dated.

The Service invites written comments

concerning the additional criteria that

should be prescribed, under clause (D)

above, in order to guarantee the same

levels of timeliness, reliability, security,

and scope of delivery as are available

from the USPS. Comments are also

requested on what, if any, different or

additional criteria should be applied to

determine the equivalence of a private

delivery service to United States registered or certified mail within the scope

of § 7502(f)(3).

Taxpayers should note that no private

delivery service has yet been designated

pursuant to § 7502(f), nor will the Service accept applications for designation

until the interim guidance is issued.

Until such designation is announced, the

‘‘timely mailing as timely filing/paying’’

rule of § 7502 is available only with

respect to items sent by United States

mail.

COMMENTS AND PUBLIC HEARING: In order to meet the Service’s

objective of publishing a list of the

designated delivery services for the interim period in the first quarter of 1997,

it is necessary to receive comments and

hold the public hearing (discussed below) as soon as possible. Accordingly, a

signed original and eight copies of all

comments should be submitted by November 22, 1996, by either mailing

them to:

1996–44

I.R.B.

Internal Revenue Service

P.O. Box 7604

Ben Franklin Station

Attn: CC:DOM:CORP:T:R:IT&A

(Branch 4) Room 5228

Washington, D.C. 20044,

or hand delivering them between the

hours of 8:00 a.m. and 5:00 p.m. to:

Courier’s Desk

Internal Revenue Service

1111 Constitution Avenue, N.W.

Attn: CC:DOM:CORP:T:R:IT&A

(Branch 4) Room 5228

Washington, D.C.

Alternatively, comments may be submitted electronically via the Service’s

Internet site at ‘‘http://www.irs.ustreas.

gov/prod/tax_regs/comments.html’’. All

comments will be available for public

inspection and copying.

A public hearing has been scheduled

for Friday, December 6, 1996, at 10:00

a.m. in Room 3313; Internal Revenue

Building; 1111 Constitution Avenue,

N.W.; Washington, D.C. Because of access restrictions, visitors will not be

admitted beyond the building lobby

more than 15 minutes before the hearing

starts. Persons who wish to present oral

comments at the hearing must submit

written comments as well as an outline

of the topics to be discussed and the

time to be devoted to each topic (a

signed original and eight copies) by

November 22, 1996. Each speaker (or

group of speakers representing a single

entity) will be limited to 10 minutes for

an oral presentation, exclusive of the

time consumed by the questions from

the panel and the answers thereto. An

agenda showing the scheduling of the

speakers will be made after the outlines

are received from the persons testifying.

Copies of the agenda will be available

free of charge at the hearing.

FOR FURTHER INFORMATION: For

further information regarding the substance of this announcement, contact

Robert J. Basso of the Office of Assistant Chief Counsel (Income Tax and

Accounting) at (202) 622–6232 (not a

toll-free call). For further information

regarding the submission of comments

and the public hearing, contact

Evangelista Lee of the Regulations Unit,

Office of Assistant Chief Counsel (Corporate) at (202) 622–7190 (not a tollfree call).

16

Foundations Status of Certain

Organizations

Announcement 96–111

The following organizations have

failed to establish or have been unable

to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not,

after this date, rely on previous rulings

or designations in the Cumulative List

of Organizations (Publication 78), or on

the presumption arising from the filing

of notices under section 508(b) of the

Code. This listing does not indicate that

the organizations have lost their status

as organizations described in section

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

contributions.

Former Public Charities. The following organizations (which have been

treated as organizations that are not

private foundations described in section

509(a) of the Code) are now classified

as private foundations:

Assembly of Aethiopian Hebrews, Inc.,

Atlanta, GA

Canids Wildlife Management

Association, Greenbrier, AR

Community Health Foundation of

Central Florida Inc., Aopoka, FL

Festival of Trees Sheboygan County,

Sheboygan, WI

Firethorn Institution, Chicago, IL

Fitzhugh Interventions Inc., Chicago, IL

Fort Ripley-St. Mathias First Response

Inc., Fort Ripley, MN

Fox Valley AIDS Project Inc., Appleton,

WI

Freeport Area Housing Ministry,

Freeport, IL

French Canadian-Acadian Genealogists

of Wisc Inc., New Berlin, WI

Friends for St. Coletta Illinois, Park

Ridge, IL

Friends for the Popular Movement of

Ukraine, Chicago, IL

Friends of Central, Lake Geneva, WI

Friends of Dade County Elderly Inc.,

Miami, FL

Friends of the Chicago Cultural Center,

Chicago, IL

Fulton County Crime Stoppers Inc.,

Canton, IL

Fund for Jewish Education Inc., Skokie,

IL

Genesius Theater Foundation, Rock

Island, IL

Grand Gardens Inc., Grand Rapids, MN

Greater Brown County Committee, Inc.,

Green Bay, WI

Greater Minneapolis Interfaith Network,

Minneapolis, MN

Greater Minnesota Christian Counseling

Services, Minneapolis, MN

Gold Coast Communities Foundation,

Metaieie, LA

Hamlin Park Development Corporation,

Buffalo, NY

Harvey Video & Productions, Harvey,

IL

Hemlock of Wisconsin, Inc., Madison,

WI

Hmong International Organization Inc.,

St. Paul, MN

Hmong U.S.A. Foundation Inc., St.

Paul, MN

Home-Free-Inc., Stevens Point, WI

Hopkins Wrestling Booster Club,

Minnetonka, MN

Human Rights Foundation of Illinois

Inc., Chicago, IL

Marine Life Preservation Society, Coral

Gables, FL

Mexican Folkloric Dance Company of

Chicago Inc., Chicago, IL

Michal Foundation, Chicago, IL

Military Veterans Museum Inc., Neenah,

WI

Minority Family Progress Center Inc

Center Without Walls, Fayetteville,

NC

Mission of Hope, Lockport, IL

New Haven Festivals, Inc., Hamden, CT

Old Abe Booster Club, Eau Claire, WI

Opening Doors of Denver, Aurora, CO

Park Pals, Inc., Clermont, FL

Patrick Randall Sawyer Memorial Fund

Inc., Hartsville, SC

Paxton Area Health Care Foundation,

Paxton, IL

Pickett Steam & Gas Engine Club Inc.,

Oshkosh, WI

Polish Childrens Welfare Fund Inc.,

Chicago, IL

Prayas Inc., Chicago, IL

Prince Georges County Foster Parents

Association Inc., Oxon Hill, MD

Prism Projects Inc., Washington, DC

Proclamation Ministries Inc., Salem, VA

Redirect Inc., Alexandria, VA

Regional Center for Child Protection,

Scranton, PA

Regis Gable Trust Fund, Johnstown, PA

Residents for a Safe Georgetown,

Washington, DC

Results Educational Fund of Maryland

Inc., Baltimore, MD

Richardson Dilworth Memorial Fund,

Philadelphia, PA

Ringgold Historical Foundation,

Danville, VA

Roanoke Valley Museum of Theatre

History Inc., Roanoke, VA

Roanoke Valley Therapeutic Riding

Program Inc., Roanoke, VA

Roaring Spring Ambulance Service,

Roaring Spring, PA

Robert Burns Club of Milwaukee WI,

New Berlin, WI

Rockbridge Regional Fairs Inc.,

Lexington, VA

Rowland Theatre Inc., Philipsburg, PA

Salacoa Valley Day Care Inc.,

Fairmount, GA

Say Nope to Dope, Ventnor, NJ

Second Helpings, Hilton Head Island,

SC

Sherwood Park Civic Association,

Philadelphia, PA

Silica Research Foundation Inc., Silver

Spring, MD

Silver Spoons Inc., King of Prussia, PA

Simple Sacrifice for the Homeless Inc.,

Severn, MD

Skaters Education and Training Fund

Inc., Baltimore, MD

Ski for Light Montana Inc., Bozeman,

MT

Small Important People Inc., Richmond,

VA

Society of Primitive Technology Inc.,

Dover, DE

Software National Resource Inc., Silver

Spring, MD

Somerset Project, Philadelphia, PA

Southeast Como Improvement

Association Inc., Minneapolis, MN

South Side Childrens Advisory Council,

Pittsburgh, PA

South Suburban Development, South

Holland, IL

Springfield Parks Foundation Inc.,

Springfield, IL

Square Wheelers of Pittsburgh Inc.,

Pittsburgh, PA

St. Theresa School Development Fund

Inc., Rolling Meadows, IL

Student Outreach of Richmond Inc.,

Richmond, VA

Sube Inc., Washington, DC

Sudan Relief and Rehabilitation

Association Incorporated, Washington,

DC

Sunset Christian Academy Inc., Newark,

NJ

Support American Troops Fund,

McHenry, IL

Survivors and Victims Empowered,

Lancaster, PA

17

Talent Outreach for Underpriviledged

Career Hunters Inc., Cleveland, OH

Team Center, Chicago, IL

Token Study Group, Round Lake, IL

Tomah Youth Hockey Club Inc., Tomah,

WI

Trevor E. Ewing Memorial Foundation,

Inc., Old Greenwich, CT

Washington Irish RFC Inc., Arlington,

VA

Washington Square Village Creative

Steps Play Group, New York, NY

Washington Village Academy, Antioch,

IL

Waterworks Foundation Inc., Annapolis,

MD

Welcome Home, Inc., Brockton, MA

West Bluff Resident Management

Corporation, Kansas City, MO

West Chester Baseball Association Inc.,

West Chester, PA

Western Pennsylvania Head Start

Organization Inc., New Castle, PA

West Newton Rutland East Springfield

St. Neighborhood Fund, Inc., Boston,

MA

West Philadelphia Housing Development

Corporation, Philadelphia, PA

Williamsburg Growing Projects, Inc.,

Brooklyn, NY

Wolf Lodge Cultural Foundation, Orcas,

WA

Women Inc., East Orange, NJ

Wood Hollow Childrens Center Inc.,

Madison, WI

Worcester Fights Back, Inc., Worcester,

MA

Work Force Development Agency - A,

Everett, WA

WJPZ Radio, Inc., Syracuse, NY

Yale 50-50 Fund, Inc., Woodrbridge, CT

Yellow Ribbon Celebrity Golf Classic at

Forsgate Inc., Montclair, NJ

Yeshiva Zichron Dovid, Inc., Brooklyn,

NY

Youth World Institute, Rockford, IL

ZAS-Wings of Hope Inc., Washington,

DC

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

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

issue a ruling or determination letter

with the revised classification as to

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

1996–44

I.R.B.

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

Regulations. It is not the practice of the

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

New Form 8837, Notice of

Adoption of Revenue Procedure

Model Amendments

Announcement 96–113

New Form 8837, Notice of Adoption

of Revenue Procedure Model Amend-

1996–44

I.R.B.

ments, has been developed for use

by sponsors of ‘‘master or prototype’’

plans, regional prototype plans, masssubmitter plans, and volume submitter

plans, to transmit documents relating to

the adoption of model plan amendments.

The form is now available by modem

or on the Internet. The IRS distribution

centers will have the form by early

November 1996. Plan sponsors may order Form 8837 by telephone or they

may use IRS electronic information services to get copies.

18

Request by—

Number or Address

Telephone

800–TAX–FORM

(800–829–3676)

Computer and

modem

703–321–8020

(modem settings are

N, 8, 1)

Internet:

World

Wide Web

FTP

Telnet

http://

www.irs.ustreas.gov

ftp.irs.ustreas.gov

iris.irs.ustreas.gov

Announcement of the Disbarment, Suspension, or Consent to Voluntary

Suspension of Attorneys, Certified Public Accountants, Enrolled Agents, and

Enrolled Actuaries From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid the

institution or conclusion of a proceeding

for his disbarment or suspension from

practice before the Internal Revenue Service, may offer his consent to suspension

from such practice. The Director of

Practice, in his discretion, may suspend

an attorney, certified public accountant,

enrolled agent or enrolled actuary in

accordance with the consent offered.

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

enue Service matter from directly or

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

or suspended from practice before the

Internal Revenue Service.

To enable attorneys, certified public

accountants, enrolled agents, and enrolled actuaries to identify practitioners

under consent suspension from practice

before the Internal Revenue Service, the

Director of Practice will announce in the

Internal Revenue Bulletin the names and

addresses of practitioners who have

been suspended from such practice, their

designation as attorney, certified public

accountant, enrolled agent, or enrolled

actuary, and date or period of suspension. This announcement will appear in

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

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

many weeks as is practicable for each

attorney, certified public accountant, enrolled agent, or enrolled actuary so

suspended and will be consolidated and

published in the Cumulative Bulletin.

The following individuals have been

placed under consent suspension from

practice before the Internal Revenue

Service:

Name

Address

Designation

Date of Suspension

Lamb, Gordon W.

Anderson, Randall S.

Broderick, William J.

Ruggiero, John M.

Eklund, Mark

Stayner, G. Craig

Allen, Lehman D.

Hardgrove, David L.

Trader, John H.

Schmertz, Carl D.

Bengston, Wessel

Pullman, WA

Arlington Hgts, IL

Farmington Hills, MI

Rutland, VT

Portland, OR

Salt Lake City, UT

Lubbock, TX

Amarillo, TX

Kansas City, MO

Wilmette, IL

Chicago, IL

CPA

CPA

CPA

Attorney

CPA

CPA

CPA

CPA

Attorney

CPA

CPA

September 1, 1996 to January 31, 1997

September 1, 1996 to February 28, 1998

September 1, 1996 to November 30, 1996

September 1, 1996 to October 31, 1996

September 1, 1996 to February 28, 1997

September 15, 1996 to June 14, 1997

September 20, 1996 to September 19, 1998

September 21, 1996 to June 20, 1997

September 30, 1996 to March 29, 1997

October 1, 1996 to March 31, 1999

October 15, 1996 to April 14, 1997

19

Announcement of the Expedited Suspension of Attorneys, Certified Public

Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before The

Internal Revenue Service

Under title 31 of the Code of Federal

Regulations, section 10.76, the Director

of Practice is authorized to immediately

suspend from practice before the Internal

Revenue Service any practitioner who,

within five years, from the date the

expedited proceeding is instituted, (1)

has had a license to practice as an

attorney, certified public accountant, or

actuary suspended or revoked for cause;

or (2) has been convicted of any crime

under title 26 of the United States Code

or, of a felony under title 18 of the

United States Code involving dishonesty

or breach of trust.

Attorneys, certified public accountants, enrolled agents, and enrolled actu-

aries are prohibited in any Internal Revenue Service matter from directly or

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

or suspended from practice before the

Internal Revenue Service.

To enable attorneys, certified public

accountants, enrolled agents, and enrolled actuaries to identify practitioners

under expedited suspension from practice before the Internal Revenue Service,

the Director of Practice will announce in

the Internal Revenue Bulletin the names

and addresses of practitioners who have

been suspended from such practice, their

designation as attorney, certified public

accountant, enrolled agent, or enrolled

actuary, and date or period of suspension. This announcement will appear in

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

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

many weeks as is practicable for each

attorney, certified public accountant, enrolled agent, or enrolled actuary so

suspended and will be consolidated and

published in the Cumulative Bulletin.

The following individuals have been

placed under suspension from practice

before the Internal Revenue Service by

virtue of the expedited proceeding provisions of the applicable regulations:

Name

Address

Designation

Date of Suspension

Alleva, Donald

Rose, Robert M.

McGrath, Gregory

Finch, Kenneth L. Jr.

Mount Vernon, NY

Dallas, TX

New Smyrna Bch, FL

Pelham, AL

Enrolled Agent

Attorney

CPA

CPA

Indefinite from September 5, 1996

Indefinite from September 5, 1996

Indefinite from September 8, 1996

Indefinite from September 8, 1996

20

Numerical Finding List1

Bulletins 1996–27 through 1996–43

Announcements:

96–61, 1996–27 I.R.B. 72

96–62, 1996–28 I.R.B. 55

96–63, 1996–29 I.R.B. 18

96–64, 1996–29 I.R.B. 18

96–65, 1996–29 I.R.B. 18

96–66, 1996–29 I.R.B. 19

96–67, 1996–30 I.R.B. 27

96–68, 1996–31 I.R.B. 45

96–69, 1996–32 I.R.B. 38

96–70, 1996–32 I.R.B. 40

96–71, 1996–33 I.R.B. 16

96–72, 1996–33 I.R.B. 16

96–73, 1996–33 I.R.B. 18

96–74, 1996–33 I.R.B. 19

96–75, 1996–34 I.R.B. 29

96–76, 1996–34 I.R.B. 29

96–77, 1996–35 I.R.B. 15

96–78, 1996–35 I.R.B. 15

96–79, 1996–35 I.R.B. 15

96–80, 1996–35 I.R.B. 16

96–81, 1996–36 I.R.B. 13

96–82, 1996–36 I.R.B. 14

96–83, 1996–36 I.R.B. 14

96–84, 1996–36 I.R.B. 14

96–85, 1996–37 I.R.B. 20

96–86, 1996–37 I.R.B. 21

96–87, 1996–37 I.R.B. 21

96–88, 1996–38 I.R.B. 150

96–89, 1996–37 I.R.B. 22

96–90, 1996–37 I.R.B. 22

96–91, 1996–37 I.R.B. 23

96–92, 1996–38 I.R.B. 151

96–93, 1996–38 I.R.B. 151

96–94, 1996–38 I.R.B. 153

96–96, 1996–39 I.R.B. 41

96–97, 1996–39 I.R.B. 41

96–98, 1996–39 I.R.B. 42

96–99, 1996–39 I.R.B. 42

96–100, 1996–40 I.R.B. 10

96–101, 1996–40 I.R.B. 10

96–102, 1996–40 I.R.B. 11

96–103, 1996–40 I.R.B. 12

96–104, 1996–41 I.R.B. 10

96–105, 1996–42 I.R.B. 19

96–106, 1996–42 I.R.B. 23

96–107, 1996–42 I.R.B. 27

96–109, 1996–43 I.R.B. 76

96–110, 1996–43 I.R.B. 77

Court Decisions:

2058, 1996–34 I.R.B. 13

2059, 1996–34 I.R.B. 10

2060, 1996–34 I.R.B. 5

Delegation Orders:

155 (Rev. 4), 1996–40 I.R.B. 9

Notices:

96–36, 1996–27 I.R.B. 11

96–37, 1996–31 I.R.B. 29

96–38, 1996–31 I.R.B. 29

96–39, 1996–32 I.R.B. 8

96–40, 1996–33 I.R.B. 11

Notices—Continued

Revenue Rulings—Continued

96–41, 1996–35 I.R.B. 6

96–42, 1996–35 I.R.B. 6

96–43, 1996–36 I.R.B. 7

96–44, 1996–36 I.R.B. 7

96–45, 1996–39 I.R.B. 7

96–46, 1996–39 I.R.B. 7

96–47, 1996–39 I.R.B. 8

96–48, 1996–39 I.R.B. 8

96–49, 1996–41 I.R.B. 6

96–50, 1996–41 I.R.B. 6

96–51, 1996–42 I.R.B. 6

96–52, 1996–42 I.R.B. 8

96–42, 1996–35 I.R.B. 4

96–43, 1996–36 I.R.B. 4

96–44, 1996–38 I.R.B. 4

96–45, 1996–39 I.R.B. 5

96–46, 1996–39 I.R.B. 5

96–47, 1996–40 I.R.B. 7

96–48, 1996–40 I.R.B. 4

96–49, 1996–41 I.R.B. 4

96–50, 1996–42 I.R.B. 4

96–51, 1996–43 I.R.B. 5

Proposed Regulations:

CO–9–96, 1996–34 I.R.B. 20

CO–24–96, 1996–30 I.R.B. 22

CO–25–96, 1996–31 I.R.B. 30

CO–26–96, 1996–31 I.R.B. 31

FI–59–94, 1996–30 I.R.B. 23

FI–32–95, 1996–34 I.R.B. 21

FI–48–95, 1996–31 I.R.B. 36

FI–28–96, 1996–31, I.R.B. 33

GL–7–96, 1996–33 I.R.B. 13

IA–292–84, 1996–28 I.R.B. 38

IA–26–94, 1996–30 I.R.B. 24

IA–29–96, 1996–33 I.R.B. 14

INTL–4–95, 1996–36 I.R.B. 8

PS–39–93, 1996–34 I.R.B. 27

PS–22–96, 1996–33 I.R.B. 15

REG–208215–91, 1996–38 I.R.B. 145

REG–209826–96, 1996–42 I.R.B. 10

REG–209827–96, 1996–37 I.R.B. 19

REG–245562–96, 1996–41 I.R.B. 8

Public Laws:

104–117, 1996–34 I.R.B. 19

104–134, 1996–38 I.R.B. 7

104–168, 1996–38 I.R.B. 8

104–191, 1996–43 I.R.B. 7

Railroad Retirement Quarterly Rate

1996–29 I.R.B. 14

Revenue Procedures:

96–36, 1996–27 I.R.B. 11

96–37, 1996–29 I.R.B. 16

96–39, 1996–33 I.R.B. 11

96–40, 1996–32 I.R.B. 8

96–41, 1996–32 I.R.B. 9

96–42, 1996–32 I.R.B. 14

96–43, 1996–35 I.R.B. 6

96–44, 1996–35 I.R.B. 7

96–45, 1996–35 I.R.B. 12

96–46, 1996–38 I.R.B. 144

96–47, 1996–39 I.R.B. 10

96–48, 1996–39 I.R.B. 10

96–49, 1996–43 I.R.B. 74

Revenue Rulings:

96–33, 1996–27 I.R.B. 4

96–34, 1996–28 I.R.B. 4

96–35, 1996–31 I.R.B. 4

96–36, 1996–30 I.R.B. 6

96–37, 1996–32 I.R.B. 4

96–38, 1996–33 I.R.B. 4

96–39, 1996–34 I.R.B. 4

1

A cumulative list of all Revenue Rulings, Revenue Procedures, Treasury Decisions, etc., published in Internal Revenue Bulletins 1996–1

through 1996–26 will be found in Internal Revenue Bulletin 1996–27, dated July 1, 1996.

21

Tax Conventions:

1996–28 I.R.B. 36

1996–36 I.R.B. 6

1996–40 I.R.B. 8

Treasury Decisions:

8673, 1996–27 I.R.B. 4

8674, 1996–28 I.R.B. 7

8675, 1996–29 I.R.B. 5

8676, 1996–30 I.R.B. 4

8677, 1996–30 I.R.B. 7

8678, 1996–31 I.R.B. 11

8679, 1996–31 I.R.B. 4

8680, 1996–33 I.R.B. 5

8681, 1996–37 I.R.B. 17

8682, 1996–37 I.R.B. 4

Finding List of Current Action on

Previously Published Items1

Bulletins 1996–27 through 1996–43

*Denotes entry since last publication

Revenue Procedures:

80–27

Modified by

96–40, 1996–32 I.R.B. 8

87–32

Modified by

TD 8680, 1996–33 I.R.B. 5

92–20

Modified by

TD 8680, 1996–33 I.R.B. 5

95–16

Superseded by

96–48, 1996–39 I.R.B. 10

95–29

Superseded by

96–36, 1996–27 I.R.B. 11

95–29A

Superseded by

96–36, 1996–27 I.R.B. 11

95–30

Superseded by

96–42, 1996–32 I.R.B. 14

95–46

Superseded by

96–48, 1996–39 I.R.B. 10

96–41

Modified by

Notice 96–49, 1996–41 I.R.B. 6

1

A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1996–1 through 1996–26 will be found in Internal

Revenue Bulletin 1996–27, dated July 1, 1996.

22