# Bulletin No. 1997–11

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Bulletin No. 1997–11
March 17, 1997

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

INCOME TAX

EMPLOYEE PLANS

Rev. Rul. 97–12, page 5.
Interest rates; underpayments and overpayments.
The rate of interest determined under section 6621 of
the Code for the calendar quarter beginning April 1,
1997, will be 8 percent for overpayments, 9 percent for
underpayments, and 11 percent for large corporate
underpayments. The rate of interest paid on the portion
of a corporate overpayment exceeding $10,000 is 6.5
percent.

Announcement 97–20, page 22.
Beginning April 1, 1997, requests for employee plan
determination letters and applications for recognition of
tax exemption, formerly sent to the district office in Los
Angeles, CA, should be sent to the Internal Revenue
Service Center in Covington, KY.

Rev. Rul. 97–14, page 5.
Fringe benefits aircraft valuation formula. For purposes of section 1.61–21(g) of the regulations, relating
to the rule for valuing noncommercial flights on
employer-provided aircraft, the Standard Industry Fare
Level (SIFL), cents-per-mile rates, and terminal charges
in effect for the first half of 1997 are set forth.
REG–208288–90, page 14.
Proposed regulations under section 905 of the Code
relate to the substantiation requirements for taxpayers
claiming foreign tax credits.
REG–209121–89, page 15.
Proposed regulations under section 337 of the Code
generally affect a taxable corporation that transfers all
or substantially all of its assets to a tax-exempt entity or
converts from a taxable corporation to a tax-exempt
entity, and generally requires the taxable corporation to
recognize gain or loss in such a transaction. A public
hearing will be held on May 6, 1997.
REG–209824–96, page 19.
Proposed regulations under section 1402 of the Code
relate to the definition of limited partner for selfemployment tax purposes. A public hearing will be held
on May 21, 1997.

Announcement 97–24, page 24.
An amendment to section 401(a)(9)(C) of the Code,
pertaining to the required beginning date for minimum
distributions in the instance of certain plan participants
(other than 5% owners) that was made by section
1404(a) of the Small Business Job Protection Act of
1996, is described.

EXEMPT ORGANIZATIONS
Announcement 97–23, page 23.
A list is given of organizations now classified as private
foundations.

ADMINISTRATIVE
REG–209729–94, page 19.
EE–45–94, 1995–1 C.B. 853, relating to the selfemployment tax treatment of members of certain limited
liability companies, is withdrawn.
Rev. Proc. 97–20, page 10.
Automobile owners and lessees. This procedure provides owners and lessees of passenger automobiles
with tables detailing the limitations on depreciation
deductions for automobiles first placed in service during
calendar year 1997 and the amounts to be included in
income for automobiles first leased during calendar year
1997. In addition, this procedure provides the maximum

Finding Lists begin on page 29.
Announcement of Disbarments and Suspensions begins on page 26.
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 26.

(Continued on page 4)

HIGHLIGHTS
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued

prevent tax avoidance. In cases where certain conduit
financing entities issue ‘‘equity’’ interests that are
economically self-amortizing, it is expected that the
regulations will treat the owners of the conduits as
having invested directly in the conduit’s incomeproducing assets.

allowable value of employer-provided automobiles first
made available to employees for personal use in calendar year 1997 for which the vehicle cents-per-mile
valuation rule provided under section 1.61–21(e) of the
Income Tax Regulations may be applicable.
Notice 97–21, page 9.
Self-amortizing investments in conduit financing entities. The Service and Treasury expect to issue regulations under section 7701(l) of the Code in order to

Announcement 97–21, page 23.
A list is provided of organizations that no longer qualify
as organizations to which contributions are deductible
under section 170 of the Code.

4

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 61.—Gross Income Defined
26 CFR 61–21: Taxation of fringe benefits.
This procedure provides the maximum value of
employer-provided automobiles first made available to employees for personal use in calendar
year 1997 for which the vehicle cents-per-mile
valuation rule provided under § 1.61–21(e) of the
Income Tax Regulations may be applicable. See
Rev. Proc. 97–20, page 10.
26 CFR 1.61–21: Taxation of fringe benefits.

Fringe benefits aircraft valuation
formula. For purposes of section 1.61–
21(g) of the regulations, relating to the
rule for valuing noncommercial flights
on employer-provided aircraft, the Stan-

dard Industry Fare Level (SIFL), centsper-mile rates, and terminal charges in
effect for the first half of 1997 are set
forth.
Rev. Rul. 97–14
For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61–21(g) of
the Income Tax Regulations provides a
rule for valuing noncommercial flights
on employer-provided aircraft. Section
1.61–21(g)(5) provides an aircraft valuation formula to determine the value of
such flights. The value of a flight is

determined under the base aircraft valuation formula (also known as the Standard Industry Fare Level formula or
SIFL) by multiplying the SIFL centsper-mile rates applicable for the period
during which the flight was taken by the
appropriate aircraft multiple provided in
section 1.61–21(g)(7) and then adding
the applicable terminal charge. The SIFL
cents-per-mile rates in the formula and
the terminal charge are calculated by the
Department of Transportation and are
reviewed semi-annually.
The following chart sets forth the
terminal charges and SIFL mileage
rates:

Period During Which the Flight Was Taken

Terminal Charge

SIFL Mileage Rates

1/1/97–6/30/97

$31.73

Up to 500 miles = $.1735 per mile
501–1500 miles = $.1323 per mile
Over 1500 miles = $.1272 per mile

DRAFTING INFORMATION
The principal author of this revenue
ruling is Felicia A. Daniels of the Office
of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding
this revenue ruling contact, Ms. Daniels
on (202) 622–6050 (not a toll-free call).
Section 280F.—Limitation on
Depreciation for Luxury
Automobiles; Limitation Where
Certain Property Used for Personal
Purposes
26 CFR 280F–7: Property leased after December
31, 1986.
This procedure provides owners and lessees of
passenger automobiles with tables detailing the
limitations on depreciation deductions for automobiles first placed in service during calendar year
1997 and the amounts to be included in income
for automobiles first leased during calendar year
1997. See Rev. Proc. 97–20, page 10.

Section 6621.—Determination of
Interest Rate
26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and
overpayments. The rate of interest determined under section 6621 of the
Code for the calendar quarter beginning
April 1, 1997, will be 8 percent for
overpayments, 9 percent for underpayments, and 11 percent for large corporate underpayments. The rate of interest

paid on the portion of a corporate
overpayment exceeding $10,000 is 6.5
percent.
Rev. Rul. 97–12
Section 6621 of the Internal Revenue
Code establishes different rates for interest on tax overpayments and interest on
tax underpayments. Under § 6621(a)(1),
the overpayment rate is the sum of the
federal short-term rate plus 2 percentage
points, except the rate for the portion of
a corporate overpayment of tax exceeding $10,000 for a taxable period is the
sum of the federal short-term rate plus
0.5 of a percentage point for interest
computations made after December 31,
1994. Under § 6621(a)(2), the underpayment rate is the sum of the federal
short-term rate plus 3 percentage points.
Section 6621(c) provides that for purposes of interest payable under § 6601
on any large corporate underpayment,
the
underpayment
rate
under
§ 6621(a)(2) is determined by substituting ‘‘5 percentage points’’ for ‘‘3 percentage points.’’ See § 6621(c) and
§ 301.6621–3 of the Regulations on
Procedure and Administration for the
definition of a large corporate underpayment and for the rules for determining
the applicable rate. Section 6621(c) and
§ 301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal

5

short-term rate for the first month in
each calendar quarter.
Section 6621(b)(2)(A) provides that
the federal short-term rate determined
under § 6621(b)(1) for any month applies during the first calendar quarter
beginning after such month.
Section 6621(b)(2)(B) provides that in
determining the addition to tax under
§ 6654 for failure to pay individual
estimated tax for any taxable year, the
federal short-term rate that applies during the third month following such
taxable year also applies during the first
15 days of the fourth month following
such taxable year.
Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in
accordance with § 1274(d), rounded to
the nearest full percent (or, if a multiple
of 1/2 of 1 percent, the rate is increased
to the next highest full percent).
Notice 88–59, 1988–1 C.B. 546, announced that in determining the quarterly interest rates to be used for overpayments and underpayments of tax
under § 6621, the Internal Revenue Service will use the federal short-term rate
based on daily compounding because
that rate is most consistent with § 6621
which, pursuant to § 6622, is subject to
daily compounding.
Rounded to the nearest full percent,
the federal short-term rate based on
daily compounding determined during

the month of January 1997 is 6 percent.
Accordingly, an overpayment rate of 8
percent and an underpayment rate of 9
percent are established for the calendar
quarter beginning April 1, 1997. The
overpayment rate for the portion of
corporate overpayments exceeding
$10,000 for the calendar quarter beginning April 1, 1997, is 6.5 percent. The
underpayment rate for large corporate
underpayments for the calendar quarter
beginning April 1, 1997, is 11 percent.
These rates apply to amounts bearing
interest during that calendar quarter.

pounded daily pursuant to § 6622 that
apply for prior periods are set forth in
the tables accompanying this revenue
ruling.

Under § 6621(b)(2)(B), the 9 percent
rate that applies to individual estimated
tax underpayments for the first calendar
quarter in 1997, as provided in Rev.
Rul. 96–61, 1996–52 I.R.B. 24, also
applies to such underpayments for the
first 15 days in April 1997.
Interest factors for daily compound
interest for annual rates of 6.5 percent, 8
percent, 9 percent, and 11 percent are
published in Tables 18, 21, 23, and 27
of Rev. Proc. 95–17, 1995–1 C.B. 556,
572, 575, 577, and 581.
Annual interest rates to be com-

DRAFTING INFORMATION
The principal author of this revenue
ruling is Marcia Rachy of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue ruling, contact
Ms. Rachy on (202) 622–4940 (not a
toll-free call).

TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975–PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
PERIOD
Before Jul. 1, 1975
Jul. 1, 1975—Jan. 31, 1976
Feb. 1, 1976—Jan. 31, 1978
Feb. 1, 1978—Jan. 31, 1980
Feb. 1, 1980—Jan. 31, 1982
Feb. 1, 1982—Dec. 31, 1982
Jan. 1, 1983—Jun. 30, 1983
Jul. 1, 1983—Dec. 31, 1983
Jan. 1, 1984—Jun. 30, 1984
Jul. 1, 1984—Dec. 31, 1984
Jan. 1, 1985—Jun. 30, 1985
Jul. 1, 1985—Dec. 31, 1985
Jan. 1, 1986—Jun. 30, 1986
Jul. 1, 1986—Dec. 31, 1986

RATE

DAILY RATE TABLE
IN 1995–1 C.B.

6%
9%
7%
6%
12%
20%
16%
11%
11%
11%
13%
11%
10%
9%

Table 2, pg. 557
Table 4, pg. 559
Table 3, pg. 558
Table 2, pg. 557
Table 5, pg. 560
Table 6, pg. 560
Table 37, pg. 591
Table 27, pg. 581
Table 75, pg. 629
Table 75, pg. 629
Table 31, pg. 585
Table 27, pg. 581
Table 25, pg. 579
Table 23, pg. 577

TABLE OF INTEREST RATES
FROM JAN. 1, 1987–PRESENT
OVERPAYMENTS

Jan. 1, 1987—Mar. 31, 1987
Apr. 1, 1987—Jun. 30, 1987
Jul. 1, 1987—Sep. 30, 1987
Oct. 1, 1987—Dec. 31, 1987
Jan. 1, 1988—Mar. 31, 1988
Apr. 1, 1988—Jun. 30, 1988
Jul. 1, 1988—Sep. 30, 1988
Oct. 1, 1988—Dec. 31, 1988
Jan. 1, 1989—Mar. 31, 1989
Apr. 1, 1989—Jun. 30, 1989
Jul. 1, 1989—Sep. 30, 1989
Oct. 1, 1989—Dec. 31, 1989
Jan. 1, 1990—Mar. 31, 1990
Apr. 1, 1990—Jun. 30, 1990
Jul. 1, 1990—Sep. 30, 1990
Oct. 1, 1990—Dec. 31, 1990

UNDERPAYMENTS

RATE
TABLE
1995–1 C.B.

PG

RATE
TABLE
1995–1 C.B.

PG

8%
8%
8%
9%
10%
9%
9%
10%
10%
11%
11%
10%
10%
10%
10%
10%

575
575
575
577
627
625
625
627
579
581
581
579
579
579
579
579

9%
9%
9%
10%
11%
10%
10%
11%
11%
12%
12%
11%
11%
11%
11%
11%

577
577
577
579
629
627
627
629
581
583
583
581
581
581
581
581

6

21
21
21
23
73
71
71
73
25
27
27
25
25
25
25
25

23
23
23
25
75
73
73
75
27
29
29
27
27
27
27
27

TABLE OF INTEREST RATES—Continued
FROM JAN. 1, 1987–PRESENT
OVERPAYMENTS

Jan. 1, 1991—Mar. 31, 1991
Apr. 1, 1991—Jun. 30, 1991
Jul. 1, 1991—Sep. 30, 1991
Oct. 1, 1991—Dec. 31, 1991
Jan. 1, 1992—Mar. 31, 1992
Apr. 1, 1992—Jun. 30, 1992
Jul. 1, 1992—Sep. 30, 1992
Oct. 1, 1992—Dec. 31, 1992
Jan. 1, 1993—Mar. 31, 1993
Apr. 1, 1993—Jun. 30, 1993
Jul. 1, 1993—Sep. 30, 1993
Oct. 1, 1993—Dec. 31, 1993
Jan. 1, 1994—Mar. 31, 1994
Apr. 1, 1994—Jun. 30, 1994
Jul. 1, 1994—Sep. 30, 1994
Oct. 1, 1994—Dec. 31, 1994
Jan. 1, 1995—Mar. 31, 1995
Apr. 1, 1995—Jun. 30, 1995
Jul. 1, 1995—Sep. 30, 1995
Oct. 1, 1995—Dec. 31, 1995
Jan. 1, 1996—Mar. 31, 1996
Apr. 1, 1996—Jun. 30, 1996
Jul. 1, 1996—Sep. 30, 1996
Oct. 1, 1996—Dec. 31, 1996
Jan. 1, 1997—Mar. 31, 1997
Apr. 1, 1997—Jun. 30, 1997

UNDERPAYMENTS

RATE
TABLE
1995–1 C.B.

PG

RATE
TABLE
1995–1 C.B.

PG

10%
9%
9%
9%
8%
7%
7%
6%
6%
6%
6%
6%
6%
6%
7%
8%
8%
9%
8%
8%
8%
7%
8%
8%
8%
8%

579
577
577
577
623
621
621
619
571
571
571
571
571
571
573
575
575
577
575
575
623
621
623
623
575
575

11%
10%
10%
10%
9%
8%
8%
7%
7%
7%
7%
7%
7%
7%
8%
9%
9%
10%
9%
9%
9%
8%
9%
9%
9%
9%

581
579
579
579
625
623
623
621
573
573
573
573
573
573
575
577
577
579
577
577
625
623
625
625
577
577

25
23
23
23
69
67
67
65
17
17
17
17
17
17
19
21
21
23
21
21
69
67
69
69
21
21

27
25
25
25
71
69
69
67
19
19
19
19
19
19
21
23
23
25
23
23
71
69
71
71
23
23

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991–PRESENT

Jan. 1, 1991—Mar. 31, 1991
Apr. 1, 1991—Jun. 30, 1991
Jul. 1, 1991—Sep. 30, 1991
Oct. 1, 1991—Dec. 31, 1991
Jan. 1, 1992—Mar. 31, 1992
Apr. 1, 1992—Jun. 30, 1992
Jul. 1, 1992—Sep. 30, 1992
Oct. 1, 1992—Dec. 31, 1992
Jan. 1, 1993—Mar. 31, 1993
Apr. 1, 1993—Jun. 30, 1993
Jul. 1, 1993—Sep. 30, 1993
Oct. 1, 1993—Dec. 31, 1993
Jan. 1, 1994—Mar. 31, 1994
Apr. 1, 1994—Jun. 30, 1994
Jul. 1, 1994—Sep. 30, 1994
Oct. 1, 1994—Dec. 31, 1994
Jan. 1, 1995—Mar. 31, 1995
Apr. 1, 1995—Jun. 30, 1995
Jul. 1, 1995—Sep. 30, 1995

7

RATE
TABLE
1995–1 C.B.

PG

13%
12%
12%
12%
11%
10%
10%
9%
9%
9%
9%
9%
9%
9%
10%
11%
11%
12%
11%

585
583
583
583
629
627
627
625
577
577
577
577
577
577
579
581
581
583
581

31
29
29
29
75
73
73
71
23
23
23
23
23
23
25
27
27
29
27

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS—Continued
FROM JANUARY 1, 1991–PRESENT

Oct. 1, 1995—Dec. 31, 1995
Jan. 1, 1996—Mar. 31, 1996
Apr. 1, 1996—Jun. 30, 1996
Jul. 1, 1996—Sep. 30, 1996
Oct. 1, 1996—Dec. 31, 1996
Jan. 1, 1997—Mar. 31, 1997
Apr. 1, 1997—Jun. 30, 1997

RATE
TABLE
1995–1 C.B.

PG

11%
11%
10%
11%
11%
11%
11%

581
629
627
629
629
581
581

27
75
73
75
75
27
27

TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995–PRESENT

Jan. 1, 1995—Mar. 31, 1995
Apr. 1, 1995—Jun. 30, 1995
Jul. 1, 1995—Sep. 30, 1995
Oct. 1, 1995—Dec. 31, 1995
Jan. 1, 1996—Mar. 31, 1996
Apr. 1, 1996—Jun. 30, 1996
Jul. 1, 1996—Sep. 30, 1996
Oct. 1, 1996—Dec. 31, 1996
Jan. 1, 1997—Mar. 31, 1997
Apr. 1, 1997—Jun. 30, 1997

8

RATE
TABLE
1995–1 C.B.

PG

6.5%
7.5%
6.5%
6.5%
6.5%
5.5%
6.5%
6.5%
6.5%
6.5%

572
574
572
572
620
618
620
620
572
572

18
20
18
18
66
64
66
66
18
18

Part III. Administrative, Procedural, and Miscellaneous
Tax Avoidance Using
Self-Amortizing Investments In
Conduit Financing Entities
Notice 97–21
The Internal Revenue Service understands that certain persons are engaging
in multiple-party financing transactions
to avoid taxes imposed by the Internal
Revenue Code. These transactions are
designed to allow a person (the ‘‘sponsor’’) to avoid tax on substantial
amounts of income (or to shelter substantial amounts of other income) by
using a conduit entity whose income tax
treatment artificially allocates the conduit entity’s income to participants that
are not subject to federal income tax.
Example
An example of these transactions is as
follows:
A corporate sponsor forms a real estate
investment trust or a foreign corporation (the
‘‘Company’’). The Company issues two classes
of stock. The corporate sponsor holds substantially all of the common stock of the Company.
The other class (the ‘‘fast-pay preferred stock’’)
is held by persons that are not subject to
federal income tax (the ‘‘exempt participants’’).
The fast-pay preferred stock has limited voting
rights and provides for preferred ‘‘dividends’’
equal to 13 percent of the stock’s issue price
each year for 10 years.
The Company holds income-producing assets
(such as one or more mortgage loans) that are
the obligations of or guaranteed by the corporate sponsor or that are guaranteed by a federal
agency. At all times during the first 10 years
after the fast-pay preferred stock is issued, the
Company is required to invest in assets that
will produce income, and cash flows, at least
equal to 101 percent of the dividends payable
on the fast-pay preferred stock.
During the first 10 years, the Company may
also make distributions on its common stock. It
is not, however, permitted to distribute more
than 105 percent of its income in any year.
Accordingly, it is not permitted to make any
distributions representing a meaningful return
of initial investment to the holders of the
common stock during the first 10 years.
In year 11, and thereafter, the fast-pay preferred stock provides for distributions in each
year of 1 percent of its original issue price. As
a result, after the first 10 years, the fair market
value of the fast-pay preferred stock is substantially less than the amount for which the
exempt participants purchased it.
Beginning in year 11, the Company may be
merged into another corporation without the
separate approval of the exempt participants
provided that the exempt participants receive a
formula payment equal to the present value of
the annual 1-percent dividend payments on the
fast-pay preferred stock (computed using a
discount rate of 10 percent). Otherwise the
fast-pay preferred stock cannot be called by the
Company.

As illustrated by this example, the
fast-pay preferred stock performs economically much like a 10-year, selfamortizing debt instrument. That is, payments on the fast-pay preferred stock
reflect in part recoveries of the amount
originally invested by the exempt participants and in part a market yield on
the unamortized portion of the original
investment. The economic selfamortization of the fast-pay preferred
stock is conceptually inconsistent with
characterizing the full amount of each
payment as a ‘‘dividend’’ (and thus as
income on an investment).
At the end of 10 years, the Company’s obligation to make distributions on
the fast-pay preferred stock will have
virtually ceased, and substantially all of
the net value of the Company will be
represented by its common stock. Because only the current income of the
Company will have been distributed
during the first 10 years, the value of
the Company’s assets is unlikely to have
declined significantly. Accordingly, the
sponsor’s investment in the Company
economically performs like a zerocoupon investment, substantially increasing in value as the exempt participants’
interest in the Company declines. If the
Company makes the formula payment to
the exempt participants after the initial
10-year period, the Company may be
merged into or consolidated with a
corporate sponsor or its affiliate. In the
event of a merger, the corporate sponsor
expects to receive substantially all of the
Company’s assets with the Company’s
high basis and to avoid recognizing any
gain.
Thus, in the example, the corporate
sponsor’s expectation in investing in the
Company is that it will realize a predictable economic benefit at the end of the
10-year period without ever incurring
any tax liability for that benefit. Alternatively, if the principal asset of the
Company is a debt instrument or other
obligation issued by the sponsor, the
sponsor could be viewed as attempting
to use deductions from that debt instrument or obligation to shelter income,
without ever having to recognize its
share of the income that corresponds to
those deductions. These expectations result from the parties’ treatment of the
full amount of the payments to the
exempt participants as dividends. This
treatment causes substantially all of the
Company’s income to be allocated to
the exempt participants, even though a

9

significant portion of that income inures
economically to the sponsor.
Alternative tax-avoidance structures
may involve the use of other conduit
entities whose income is generally subject to U.S. income tax only at the
shareholder level, where the amount of
the tax depends on the receipt or nonreceipt by the shareholder of earnings
and profits from the conduit entity. The
terms of the stock issued by the conduit
entity may also vary, and the stock may
be subject to options to buy or sell.
Proper Characterization of the
Transactions
Under section 7701(l) of the Internal
Revenue Code, the Secretary may prescribe regulations recharacterizing any
multiple-party financing transaction as a
transaction directly among two or more
of the parties in order to prevent the
avoidance of tax. Treasury and the Service expect to issue regulations
recharacterizing any transaction (for example, the transaction described above)
in which (1) a conduit entity is interposed between two or more parties, (2)
an investment in the conduit entity is
economically, taking into account all
relevant factors including options to buy
or sell, partially or fully self-amortizing
(that is, the value of the investor’s
interest in the conduit entity is expected
to decrease over time as payments are
received), and (3) payments by the conduit entity that represent a recovery of
investment to the investor are treated by
the conduit entity as a distribution of
earnings and profits or otherwise as
reducing the conduit entity’s or any
other taxpayer’s taxable income.
It is expected that, under these regulations, the sponsor will be treated as
having engaged in a transaction directly
with the other parties to the debt instruments, leases, or other assets held by the
conduit entity, and the holders of the
self-amortizing interests in the conduit
entity will be treated either as having
engaged in the transaction directly with
the other parties or as having engaged in
an income ‘‘stripping’’ transaction with
the sponsor. See, e.g., section 1286 of
the Code. If the sponsor is the issuer of
a debt instrument held by the conduit
entity, the sponsor may be treated as
having issued one or more instruments
directly to the holders of the selfamortizing interests in the conduit entity.
In that event, the sponsor’s obligation

under any asset held by the conduit
entity will be ignored for purposes of
determining the sponsor’s taxable income. The regulations issued under section 7701(l) of the Code will be applicable to taxable years ending on or after
February 27, 1997. Thus, all amounts
accrued or paid on or after the first day
of the first taxable year ending on or
after February 27, 1997, will be subject
to the regulations, regardless of when a
particular share of stock or a particular
debt instrument was issued or acquired.
To the extent that a payment or accrual
under a conduit financing transaction is
not subject to these regulations, the
Service may determine under existing
tax principles, depending on the facts of
the particular case, that the transaction
does not produce the results intended by
the participants.
Persons that wish to comment on the
subject matter of this notice may submit
comments to: CC:DOM:CORP:R (OGI–
103642–97), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin
Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (OGI–103642–97),
Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers may submit comments electronically
via the Internet by selecting the ‘‘Tax
Regs’’ option of the IRS Home Page, or
by submitting comments directly to the
IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.
html. Comments will be available for
public inspection.
This notice was issued to the public
on February 27, 1997.
For further information regarding this
notice, contact Jonathan Zelnik of the
Office of Assistant Chief Counsel (Financial Institutions & Products) at (202)
622–3940 (not a toll-free call).
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement; determination of correct tax liability.
(Also Part I, § 280F; 1.280F–7, 1.61–21.)

Rev. Proc. 97–20
SECTION 1. PURPOSE
This revenue procedure provides: (1)
limitations on depreciation deductions
for owners of passenger automobiles
first placed in service during calendar
year 1997; (2) the amounts to be included in income by lessees of passenger automobiles first leased during cal-

endar year 1997; and (3) the maximum
allowable value of employer-provided
automobiles first made available to employees for personal use in calendar
year 1997 for which the vehicle centsper-mile valuation rule provided under
§ 1.61–21(e) of the Income Tax Regulations may be applicable. The tables
detailing these depreciation limitations
and lessee inclusion amounts reflect the
automobile price inflation adjustments
required by § 280F(d)(7) of the Internal
Revenue Code. The maximum allowable
automobile value for applying the vehicle cents-per-mile valuation rule reflects the automobile price inflation adjustment of § 280F(d)(7) as required by
§ 1.61–21(e)(1)(iii)(A).
SECTION 2. BACKGROUND
For owners of automobiles, § 280F(a)
imposes dollar limitations on the depreciation deduction for both the year that
the automobile is placed in service and
each
succeeding
year.
Section
280F(d)(7) requires the amounts allowable as depreciation deductions to be
increased by a price inflation adjustment
amount for passenger automobiles
placed in service after calendar year
1988.
For leased automobiles, § 280F(c) requires a reduction in the deduction allowed to the lessee of the automobile.
The reduction must be substantially
equivalent to the limitations on the
depreciation deductions imposed on
owners
of
automobiles.
Under
§ 1.280F–7(a), this reduction requires
the lessees to include in gross income
an inclusion amount determined by applying a formula to the amount obtained
from a table. The table shows inclusion
amounts for a range of fair market
values for each tax year after the automobile is first leased.
For automobiles first provided by employers to employees that meet the
requirements of § 1.61–21(e)(1), the
value to the employee of the use of the
automobile may be determined under
the vehicle cents-per-mile valuation rule
of § 1.61–21(e). Section 1.61–
21(e)(1)(iii)(A) provides that for an automobile first made available after 1988
to any employee of the employer for
personal use, the value of the use of the
automobile may not be determined under the vehicle cents-per-mile valuation
rule for a calendar year if the fair
market value of the automobile (determined pursuant to § 1.61–21(d)(5)(i)
through (iv)) on the first date the auto-

10

mobile is made available to the employee exceeds $12,800 as adjusted by
§ 280F(d)(7).
SECTION 3. SCOPE AND
OBJECTIVE
01. The limitations on depreciation
deductions in section 4.02 of this revenue procedure apply to automobiles
(other than leased automobiles) that are
placed in service in calendar year 1997
and continue to apply for each tax year
that the automobile remains in service.
02. The table in section 4.03 of this
revenue procedure applies to leased automobiles for which the lease term begins in calendar year 1997. Lessees of
such automobiles must use this table to
determine the inclusion amount for each
tax year during which the automobile is
leased. See Rev. Proc. 96–25, 1996–8
I.R.B. 19, which provides information
on determining inclusion amounts for
automobiles first leased before January
1, 1997.
03. The maximum fair market value
figure in section 4.04(2) of this revenue
procedure applies to employer-provided
automobiles first made available to any
employee for personal use in calendar
year 1997.
SECTION 4. APPLICATION
01. A taxpayer placing an automobile
in service for the first time during
calendar year 1997 is limited to the
depreciation deduction shown in Table 1
of section 4.02(2). A taxpayer first leasing an automobile in calendar year 1997
must use Table 2 in section 4.03 to
determine the inclusion amount that is
added to gross income. Otherwise, the
procedures of § 1.280F–7(a) must be
followed. An employer providing an
automobile for the first time in calendar
year 1997 for the personal use of any
employee may determine the value of
the use of the automobile by using the
cents-per-mile valuation rule in § 1.61–
21(e) if the fair market value of the
automobile does not exceed the amount
specified in section 4.04(2). If the fair
market value of the automobile does
exceed the amount specified in section
4.04(2), the employer may determine the
value of the use of the automobile under
the general valuation rules of § 1.61–
21(b) or under the special valuation
rules of § 1.61–21(d) (Automobile lease
valuation) or § 1.61–21(f) (Commuting
valuation) if the applicable requirements
are met.

02. Limitations on Depreciation Deductions for Certain Automobiles.
(1) Amount of the Inflation Adjustment. Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for
any calendar year is the percentage (if
any) by which the CPI automobile component for October of the preceding
calendar year exceeds the CPI automobile component for October 1987. The
term ‘‘CPI automobile component’’ is
defined in § 280F(d)(7)(B)(ii) as the
‘‘automobile component’’ of the Con-

sumer Price Index for all Urban Consumers published by the Department of
Labor (the CPI). The new car component of the CPI was 115.2 for October
1987 and 141.5 for October 1996. The
October 1996 index exceeded the October 1987 index by 26.3. The Internal
Revenue Service has, therefore, determined that the automobile price inflation
adjustment for 1997 is 22.83 percent
(26.3/115.2 x 100%). This adjustment is
applicable to all automobiles that are
first placed in service in calendar year

1997. The dollar limitations in
§ 280F(a) must therefore be multiplied
by a factor of 0.2283, and the resulting
increases, after rounding to the nearest
$100, are added to the 1988 limitations
to give the depreciation limitations for
1997.
(2) Amount of the Limitation. For
automobiles placed in service in calendar year 1997, Table 1 contains the
dollar amount of the depreciation limitations for each tax year.

REV. PROC. 97–20 TABLE 1
DEPRECIATION LIMITATIONS FOR AUTOMOBILES FIRST PLACED IN SERVICE IN CALENDAR YEAR 1997
Tax Year

Amount

1st Tax Year
2nd Tax Year
3rd Tax Year
Each Succeeding Year

$3,160
$5,000
$3,050
$1,775

03. Inclusions in Income of Lessees of Automobiles.
The inclusion amounts for automobiles first leased in calendar year 1997 are calculated under the procedures described in
§ 1.280F–7(a). Table 2 of this revenue procedure is the applicable table to be used in applying those procedures.
REV. PROC. 97–20 TABLE 2
DOLLAR AMOUNTS FOR AUTOMOBILES
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1997
Fair Market Value of Automobile

Tax Year During Lease

Over

Not Over

1st

2nd

3rd

4th

5th and Later

$ 15,800
16,100
16,400
16,700
17,000
17,500
18,000
18,500
19,000
19,500
20,000
20,500
21,000
21,500
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
33,000

16,100
16,400
16,700
17,000
17,500
18,000
18,500
19,000
19,500
20,000
20,500
21,000
21,500
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
33,000
34,000

1
4
6
9
12
16
20
24
28
32
36
40
45
49
55
63
71
79
88
96
104
112
120
128
137
145

5
10
15
20
28
37
46
55
64
73
82
91
99
108
122
140
158
176
193
211
229
247
265
283
301
319

5
13
22
30
40
53
66
80
93
106
120
133
147
160
180
206
233
259
287
313
340
366
393
420
446
472

8
18
27
36
49
65
82
97
113
129
145
161
177
193
216
249
280
313
344
377
408
441
472
504
536
568

10
21
32
44
58
77
95
114
132
151
169
187
205
224
252
288
326
362
399
435
473
509
546
583
620
657

11

REV. PROC. 97–20 TABLE 2—Continued
DOLLAR AMOUNTS FOR AUTOMOBILES
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1997
Fair Market Value of Automobile

Tax Year During Lease

Over

Not Over

1st

2nd

3rd

4th

5th and Later

34,000
35,000
36,000
37,000
38,000
39,000
40,000
41,000
42,000
43,000
44,000
45,000
46,000
47,000
48,000
49,000
50,000
51,000
52,000
53,000
54,000
55,000
56,000
57,000
58,000
59,000
60,000
62,000
64,000
66,000
68,000
70,000
72,000
74,000
76,000
78,000
80,000
85,000
90,000
95,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
220,000
230,000
240,000

35,000
36,000
37,000
38,000
39,000
40,000
41,000
42,000
43,000
44,000
45,000
46,000
47,000
48,000
49,000
50,000
51,000
52,000
53,000
54,000
55,000
56,000
57,000
58,000
59,000
60,000
62,000
64,000
66,000
68,000
70,000
72,000
74,000
76,000
78,000
80,000
85,000
90,000
95,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
220,000
230,000
240,000
250,000

153
161
169
178
186
194
202
210
218
227
235
243
251
259
268
276
284
292
300
308
317
325
333
341
349
358
370
386
403
419
435
452
468
484
501
517
546
587
627
668
730
812
893
975
1,057
1,139
1,221
1,302
1,384
1,466
1,548
1,630
1,712
1,793
1,875

337
355
373
391
409
427
445
463
481
498
516
534
552
570
588
606
624
642
660
678
695
713
732
750
768
785
812
848
884
920
956
991
1,027
1,063
1,099
1,135
1,198
1,287
1,377
1,467
1,601
1,780
1,960
2,139
2,318
2,498
2,677
2,857
3,036
3,215
3,394
3,574
3,753
3,932
4,112

499
526
552
578
605
632
658
685
712
739
765
792
819
845
871
898
925
951
978
1,004
1,032
1,058
1,084
1,110
1,137
1,164
1,204
1,257
1,310
1,363
1,417
1,470
1,524
1,577
1,630
1,683
1,776
1,909
2,042
2,175
2,375
2,641
2,907
3,173
3,439
3,704
3,971
4,236
4,503
4,769
5,035
5,300
5,567
5,833
6,099

600
631
664
696
727
759
791
823
854
886
919
951
982
1,015
1,047
1,078
1,110
1,142
1,174
1,206
1,237
1,270
1,301
1,334
1,365
1,397
1,445
1,509
1,573
1,637
1,700
1,764
1,827
1,891
1,955
2,019
2,130
2,291
2,450
2,609
2,848
3,167
3,486
3,805
4,125
4,444
4,762
5,082
5,400
5,719
6,039
6,358
6,676
6,996
7,314

693
731
767
804
841
878
915
951
989
1,026
1,062
1,098
1,136
1,172
1,209
1,246
1,282
1,320
1,356
1,394
1,430
1,467
1,504
1,540
1,578
1,615
1,670
1,743
1,817
1,890
1,964
2,038
2,112
2,186
2,259
2,333
2,462
2,645
2,830
3,014
3,290
3,659
4,027
4,395
4,763
5,131
5,500
5,868
6,237
6,605
6,973
7,341
7,710
8,078
8,446

12

04. Maximum Automobile Value for
Using the Cents-per-mile Valuation
Rule.
(1) Amount of Adjustment. Under
§ 1.61–21(e)(1)(iii)(A), the limitation on
the fair market value of an employerprovided automobile first made available
to any employee for personal use after
1988 is to be adjusted in accordance
with § 280F(d)(7). Accordingly, the adjustment for any calendar year is the
percentage (if any) by which the CPI
automobile component for October of
the preceding calendar year exceeds the
CPI automobile component for October
1987 (See, section 4.02(1).) The new car
component of the CPI was 115.2 for
October 1987 and 141.5 for October
1996. The October 1996 index exceeded
the October 1987 index by 26.3. The
Internal Revenue Service has, therefore,
determined that the adjustment for 1997
is 22.83 percent (26.3/115.2 x 100%).
This adjustment is applicable to all

employer-provided automobiles first
made available to any employee for
personal use in calendar year 1997. The
maximum fair market value specified in
§ 1.61–21(e)(1)(iii)(A) must therefore
be multiplied by a factor of 0.2283, and
the resulting increase, after rounding to
the nearest $100, is added to $12,800 to
give the maximum value for 1997.
(2) The Maximum Automobile Value.
For automobiles first made available in
calendar year 1997 to any employee of
the employer for personal use, the vehicle cents-per-mile valuation rule may
be applicable if the fair market value of
the automobile on the date it is first
made available does not exceed
$15,700.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective
for automobiles (other than leased automobiles) that are first placed in service
during calendar year 1997, to leased

13

automobiles that are first leased during
calendar year 1997, and to employerprovided automobiles first made available to employees for personal use in
calendar year 1997.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Bernard P. Harvey of the
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding the
depreciation limitations and lessee inclusion amounts in this revenue procedure,
contact Mr. Harvey at (202) 622–3110;
for further information regarding the
maximum automobile value for applying
the vehicle cents-per-mile valuation rule,
contact Ms. Janine Cook of the Office
of the Associate Chief Counsel (Employee Benefits and Exempt Organizations) at (202) 622–6040 (not toll-free
calls).

Part IV. Items of General Interest
Notice of Proposed Rulemaking
Filing Requirements for Returns
Claiming the Foreign Tax Credit
REG–208288–90
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains a
proposed regulation relating to the substantiation requirements for taxpayers
claiming foreign tax credits. The proposed regulation is necessary to provide
guidance to U.S. taxpayers who claim
foreign tax credits.
DATES: Written comments and requests
for a public hearing must be received by
April 14, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–208288–90),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–208288–90), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may submit
comments electronically via the internet
by selecting the ‘‘Tax Regs’’ option on
the IRS Home Page, or by submitting
comments directly to the IRS internet
site at HTTP://www.irs.ustreas.gov/prod/
tax_regs/comments.html.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joan
Thomsen, (202) 622–3840 (not a tollfree call); concerning submissions,
Evangelista Lee, (202) 622–7190 (not a
toll-free call).
SUPPLEMENTARY
INFORMATION:
Background
On June 3, 1988, the Internal Revenue Service issued a Notice (Notice
88–65, 1988–1 C.B. 552) which stated
that regulations would be issued suspending portions of § 1.905–2 of the
Treasury Regulations. Section 1.905–2
requires taxpayers who claim foreign tax
credits to attach documents to their
returns substantiating the credits. The
Notice was issued in response to problems taxpayers were experiencing be-

1997–11

I.R.B.

cause they could not timely obtain and
prepare the necessary documentation in
a form suitable for submission with their
tax returns. The intent of the Notice was
to advise taxpayers that Treasury and
the IRS would issue a new regulation
that would suspend, beginning on January 1, 1988, the existing regulation
requiring the submission of this documentation with a tax return. This new
regulation has not been issued. Instead
of suspending the relevant portions of
the existing regulation, Treasury and the
IRS now have decided to permanently
eliminate the requirement that documentation be submitted with the tax return,
effective January 1, 1988.
Explanation of Provisions
§ 1.905–2(a)(1), 1.905–2(b)(1) and (2),
and 1.905–2(c)
Sections 1.905–2(a)(1), 1.905–2(b)(1)
and (2), and 1.905–2(c) are unchanged
from the final regulations.
§ 1.905–2(a)(2)
Under § 1.905–2(a)(2), taxpayers
generally are required to attach to their
income tax returns either (1) the receipt
for the foreign tax payment, or (2) a
foreign tax return for accrued foreign
taxes. Proposed § 1.905–2(a)(2) removes the requirement that the documentation must be attached to the income tax return. The proposed
regulation now provides that such evidence of foreign taxes must be presented to the district director upon request.
§ 1.905–2(b)(3)
Section 1.905–2(b)(3) addresses issues
for taxes withheld at the source. The
section allows the district director to
accept secondary evidence of such withholding. The proposed regulation clarifies that evidence of a tax withheld at
the source and the amount withheld is
only sufficient for an interim credit.
Upon request of the district director,
taxpayers must provide evidence, as provided in § 1.905–2(a)(2), that the tax
withheld was actually paid to the foreign country. Although this regulation
will be effective on the date that is 30
days after the date the final regulation is
published in the Federal Register, it
reflects an IRS requirement upheld as a
reasonable interpretation of current law
by the Tax Court and the Court of

14

Appeals for the Seventh Circuit in Continental Illinois Corp. v. Commissioner,
T.C. Memo. 1991–66, 61 T.C.M. (CCH)
1916, 1939–42 (1991), aff’d in part and
rev’d in part, 998 F.2d 513, 516–17 (7th
Cir. 1993).
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of
the Administrative Procedures Act (5
U.S.C. chapter 5) does not apply to this
regulation, and because the regulation
does not impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Comments and Requests for a Public
Hearing
Before this proposed regulation is
adopted as a final regulation, consideration will be given to any comments
that are submitted timely to the IRS. All
comments will be available for public
inspection and copying. A public hearing may be scheduled if requested in
writing by any person that timely submits comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published
in the Federal Register.
Drafting Information
The principal author of this regulation
is Joan Thomsen of the Office of the
Associate Chief Counsel (International),
IRS. However, other personnel from the
IRS and Treasury Department participated in their development.
*

*

*

*

*

Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
26 CFR part 1 continues to read in part
as follows:

Authority: 26 U.S.C. 7805 * * *
Par 2. Section 1.905–2 is amended
by:
1. Revising the second through fourth
sentences in paragraph (a)(2).
2. Adding two sentences to the end
of paragraph (b)(3).
The revision and addition read as
follows:

Notice of Proposed Rulemaking
and Notice of Public Hearing

SUPPLEMENTARY
INFORMATION:

Certain Asset Transfers to a
Tax-Exempt Entity

Background

§ 1.905–2 Conditions of allowance of
credit.

ACTION: Notice of proposed rulemaking and notice of public hearing

(a) * * *
(2) * * * Except where it is established to the satisfaction of the district
director that it is impossible for the
taxpayer to furnish such evidence, the
taxpayer must provide upon request the
receipt for each such tax payment if
credit is sought for taxes already paid or
withheld, or the return on which each
such accrued tax was based if credit is
sought for taxes accrued. This receipt or
return must be either the original, a
duplicate original, or a duly certified or
authenticated copy. The preceding two
sentences are effective for returns whose
original due date falls on or after January 1, 1988. * * *
(b) * * *
(3) * * * Any foreign tax credit
claimed for taxes withheld at the source
is an interim credit and the taxpayer
must prove that any taxes withheld at
the source were paid to the foreign
country, as required in paragraph (a) of
this section. The preceding sentence is
effective the date that is 30 days after
the date this regulation is published in
the Federal Register as a final regulation, however, for periods prior to the
date that is 30 days after the date this
regulation is published in the Federal
Register as a final regulation, see Continental Illinois Corp. v. Commissioner,
T.C. Memo. 1991–66, 61 T.C.M. (CCH)
1916, 1939–42 (1991), aff’d in part and
rev’d in part, 998 F.2d 513, 516–17 (7th
Cir. 1993), wherein the court upheld this
rule as a reasonable interpretation of
section 905(b) of the Internal Revenue
Code.

SUMMARY: This document contains
proposed regulations. The proposed
regulations effectuate provisions of the
Tax Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of
1988. The proposed regulations generally affect a taxable corporation that
transfers all or substantially all of its
assets to a tax-exempt entity or converts
from a taxable corporation to a taxexempt entity, and generally require the
taxable corporation to recognize gain or
loss in such a transaction.

*

*

*

*

*

Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
January 10, 1997, 8:45 a.m., and published in the
issue of the Federal Register for January 13, 1997,
62 F.R. 1700)

REG–209121–89
AGENCY: Internal Revenue Service
(IRS), Treasury

DATES: Written comments must be received by April 15, 1997. Requests to
speak (with outlines of oral comments
to be discussed) at the public hearing
scheduled for May 6, 1997, at 10 a.m.
must be submitted by April 15, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209121–89),
Room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions also
may be hand delivered between the
hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–209121–89),
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 the IRS
Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations,
Stephen R. Cleary (202) 622–7530; concerning submissions and the hearing,
Evangelista Lee, (202) 622–7180, (not
toll-free numbers).

15

This document contains proposed
amendments to the Income Tax Regulations (26 CFR Part 1) relating to the
repeal of the General Utilities doctrine
in the Tax Reform Act of 1986. Under
the General Utilities doctrine, which
took its name from General Utilities &
Operating Co. v. Helvering, 296 U.S.
200 (1935), corporations were not required to recognize gain or loss when
they distributed appreciated or depreciated property to their shareholders. The
General Utilities doctrine applied to
distributions of property in complete
liquidation, certain sales of property that
were in connection with a complete
liquidation, and nonliquidating distributions of property. It was codified in
former sections 311, 336, and 337 of the
Internal Revenue Code of 1954.
The General Utilities doctrine was an
exception to the general rule that income earned by a corporation is taxed
twice, once to the corporation when the
income is earned and a second time to
the corporation’s shareholders when the
earnings are distributed. The General
Utilities doctrine generally permitted the
permanent elimination of corporate-level
tax on the disposition of appreciated
assets because the transferee received a
fair market value basis in the assets and
the corporation generally did not recognize any gain. Thus, the appreciated
assets left corporate solution without
any corporate-level tax having been
paid.
Beginning in 1969, the scope of the
General Utilities doctrine was restricted
by a series of amendments (initially
relating to nonliquidating distributions
governed by section 311), until ultimately the General Utilities doctrine
was repealed, with limited exceptions, in
the Tax Reform Act of 1986. Sections
336 and 337 were amended to generally
require corporations to recognize gain or
loss when appreciated or depreciated
property is distributed in complete liquidation or sold in connection with a
complete liquidation.
Section 337(a) provides one of the
limited exceptions from the repeal of the
General Utilities doctrine by allowing a
subsidiary to liquidate into its 80percent distributee (a corporation meeting the stock ownership requirements of
section 332(b) in the liquidating corporation) without recognizing gain or loss.

1997–11

I.R.B.

The 80-percent distributee takes a carryover basis in the distributed property.
However, under section 337(b)(2), this
nonrecognition exception generally does
not apply if the 80-percent distributee is
a tax-exempt entity.
The Tax Reform Act of 1986 added
section 337(d), directing the Secretary to
prescribe regulations as may be necessary to carry out the purposes of the
repeal of the General Utilities doctrine.
The legislative history of the Tax Reform Act of 1986 indicates that the
General Utilities doctrine was repealed
because it tended to undermine the
corporate income tax by allowing appreciated property to leave corporate solution without imposition of a corporate
level tax. H.R. Rep. No. 99–426, 99th
Cong., 1st Sess. 282 (1985). The Technical and Miscellaneous Revenue Act of
1988 amended section 337(d) to specify
that the section authorizes regulations to
‘‘ensure that these purposes shall not be
circumvented . . . through the use of a
. . . tax-exempt entity.’’ The legislative
history concerning the 1988 amendment
to section 337(d) explains:
The bill also clarifies in connection
with the built-in gain provisions of
the Act that the Treasury Department
shall prescribe such regulations as
may be necessary or appropriate to
carry out those provisions . . . . For
example, this includes rules to require
the recognition of gain if appreciated
property of a C corporation is transferred to a . . . tax-exempt entity
[footnote 32] in a carryover basis
transaction that would otherwise
eliminate corporate level tax on the
built-in appreciation.
[footnote 32] The Act generally requires recognition of gain if a C
corporation transfers appreciated assets to a tax exempt entity in a
section 332 liquidation. See Code section 337(b)(2).
S. Rep. No. 145, 100th Cong., 2d Sess.
66 (1988).
Explanation of Provision
An acquisition by a tax-exempt entity
of all or substantially all of the assets of
a taxable corporation or a change in
status of a taxable corporation to a
tax-exempt entity, like a liquidation into
an 80-percent tax-exempt distributee that
is taxable under section 337(b)(2), could
eliminate the corporate level tax on the
appreciation in the taxable corporation’s
assets. Accordingly, the proposed regulations apply rules similar to section

1997–11

I.R.B.

337(b)(2) to these transactions. The proposed regulations generally do not affect
the tax treatment of the taxable corporation’s shareholders or the availability of
any charitable contribution deduction.
The proposed regulations provide that
a taxable corporation that transfers all or
substantially all of its assets to one or
more tax-exempt entities is required to
recognize gain or loss as if the assets
transferred were sold at their fair market
values. Like section 337(b)(2), the proposed regulations provide that no gain
or loss will be recognized on any of the
assets transferred that are used by the
tax-exempt entity in an activity the
income from which is subject to the
unrelated business tax under section
511(a). However, gain on such assets
will later be recognized as unrelated
business taxable income if the taxexempt entity disposes of the assets or
ceases to use the assets in an unrelated
trade or business activity.
The proposed regulations generally
treat a taxable corporation that changes
its status to a tax-exempt entity as
having transferred all of its assets to a
tax-exempt entity immediately before
the change in status becomes effective,
irrespective of whether an actual transfer
of the assets has occurred. For this
purpose, if a state, a political subdivision thereof, or an entity any portion of
whose income is excluded from gross
income under section 115, acquires the
stock of a taxable corporation and thereafter any of the taxable corporation’s
income is excluded from gross income
under section 115, the taxable corporation will be treated as if it transferred all
of its assets to a tax-exempt entity
immediately before the stock acquisition.
Certain exceptions are provided to the
change in status rule for organizations
that are tax-exempt or are seeking taxexempt status under section 501(a).
These exceptions provide relief for corporations needing a brief start-up period
to establish their tax-exempt status and
for those that temporarily lose their
tax-exempt status. Under the proposed
regulations, the change in status rule
does not apply to a corporation that is
tax-exempt within three taxable years of
the taxable year of its formation, or to a
corporation that regains its tax-exempt
status within three years after either a
final adverse adjudication on its taxexempt status or filing a tax return as a
taxable corporation. The change in status rule also does not apply to an
organization that before publication of

16

these proposed regulations was exempt
or unsuccessfully applied for exemption,
if the organization is tax-exempt within
three years after the date of publication
of final regulations. An organization that
files for recognition of its exempt status
during one of the three-year periods will
be deemed to have or regain tax-exempt
status if the application ultimately results in recognition as of a date during
the three-year period. An anti-abuse rule
makes all these exceptions unavailable
to a taxable corporation that acquires all
or substantially all of the assets of
another taxable corporation and then
changes its status with a principal purpose of avoiding the gain or loss recognition rule made applicable by these
regulations.
The proposed regulations disallow the
recognition of loss if assets are acquired
by the taxable corporation in a section
351 transaction or a contribution to
capital, or if assets are distributed by the
taxable corporation to a shareholder,
with a principal purpose to recognize
loss by the taxable corporation on the
transfer of its assets to a tax-exempt
entity (loss limitation rule). For example, the loss limitation rule may apply if (a) a loss asset is contributed to a
taxable corporation and then is transferred with substantially all of the taxable corporation’s assets to a tax-exempt
entity; (b) loss assets not constituting
substantially all of a taxable corporation’s assets are contributed to a new
subsidiary and then the new subsidiary
transfers the loss assets which are its
only assets to a tax-exempt entity, or (c)
assets are distributed by a taxable corporation to its parent and then the taxable
corporation transfers loss assets now
constituting substantially all of its assets
to a tax-exempt entity. For purposes of
the loss limitation rule, the principles of
section 336(d)(2) apply.
Under the proposed regulations, a
‘‘taxable corporation’’ is any corporation
that is not a tax-exempt entity as defined in the proposed regulations. Thus,
taxable corporations include all S corporations whether or not subject to tax on
built-in gain under section 1374. After
the repeal of the General Utilities doctrine, an S corporation like a C corporation is required to recognize gain or loss
when it liquidates. This gain or loss
passes through to the S corporation’s
shareholders under section 1366. The
proposed regulations parallel this treatment.
Under the proposed regulations, a
‘‘tax-exempt entity’’ includes organiza-

tions exempt from tax under section
501, section 527, section 528, or section
529; Federal, state, and local governments; Indian tribal governments and
federally chartered Indian tribal corporations; foreign governments and international organizations; and entities any
portion of whose income is excluded
from gross income under section 115.
The term does not, however, include a
cooperative described in section 521,
paralleling the exception to section
337(b)(2).
A transaction conveying all or substantially all of the assets of a taxable
corporation to an Indian tribal government or a corporation organized under
section 17 of the Indian Reorganization
Act (IRA) or section 3 of the Oklahoma
Welfare Act (OWA) will be covered by
these regulations. Rev. Rul. 94–16,
1994–1 C.B. 19, held that an unincorporated Indian tribe or a corporation organized under section 17 of the IRA is not
subject to federal income tax, but a
corporation wholly owned by an Indian
tribe and organized under state law is
subject to federal income tax. Rev. Rul.
94–65, 1994–2 C.B. 14, held that a
corporation organized under section 3 of
the OWA also was not subject to federal
income tax. In that ruling, the Service
announced that an Indian tribe seeking
to dissolve a corporation organized under state law and organize into a federally chartered corporation (corporation
organized under either section 17 of the
IRA or section 3 of the OWA) will be
granted relief under section 7805(b) of
the Code upon application for such
relief provided it demonstrates to the
Service that it has acted reasonably and
in good faith to achieve the dissolution
and organization. The relief described in
that ruling applied to taxes on income
earned after September 30, 1994, by a
corporation organized by an Indian tribe
under state law from income earned
within the boundaries of the reservation
(including gain or loss properly allocable to such activities from the sale
or exchange of assets). The Service
intends to provide similar relief from tax
resulting from any gain or loss recognized under the rules provided in these
regulations. The relief will be available
to state law corporations wholly owned
by Indian tribes that have acted reasonably and in good faith to dissolve and
reorganize as federally chartered corporations.

Proposed Effective Date
These regulations are proposed to be
applicable to transfers of assets as described in the regulations occurring after
the date that is 30 days after publication
in the Federal Register of these regulations as final regulations, unless the
transfer is pursuant to a written agreement which is (subject to customary
conditions) binding on or before the
date that is 30 days after publication in
the Federal Register of these regulations
as final regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in EO
12866. Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these
regulations and because the regulations
do not impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. Chapter 6)
does not apply. Pursuant to section
7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will
be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Tuesday, May 6, 1997, at 10 a.m. in
the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue,
NW, Washington, DC. Because of access restrictions, visitors will not be
admitted beyond the Internal Revenue
Service Building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by April 15, 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 April 15, 1997.

17

A period of 10 minutes will be allotted to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Stephen R. Cleary of the Office
of Assistant Chief Counsel (Corporate),
IRS. However, other personnel from the
IRS and the Treasury Department participated in their development.
*

*

*

*

*

Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is proposed to be amended as follows:
PART I—INCOME TAXES
Paragraph 1. The authority citation for
26 CFR Part 1 is amended by adding an
entry in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.337(d)–4 also issued under
26 U.S.C. 337. * * *
Par. 2. Section 1.337(d)–4 is added to
read as follows:
§ 1.337(d)–4 Taxable to tax-exempt.
(a) Gain or loss recognition—(1)
General rule. If a taxable corporation
transfers all or substantially all of its
assets to one or more tax-exempt entities, the taxable corporation must recognize gain or loss immediately before the
transfer as if the assets transferred were
sold at their fair market values. But see
section 267 and paragraph (d) of this
section concerning limitations on the
recognition of loss.
(2) Change in corporation’s tax status treated as asset transfer. Except as
provided in paragraph (a)(3) of this
section, a taxable corporation’s change
in status to a tax-exempt entity will be
treated as if it transferred all of its
assets to a tax-exempt entity immediately before the change in status becomes effective in a transaction to
which paragraph (a)(1) of this section
applies. For purposes of this paragraph
(a), if a state, a political subdivision
thereof, or an entity any portion of
whose income is excluded from gross
income under section 115, acquires the
stock of a taxable corporation and thereafter any of the taxable corporation’s

1997–11

I.R.B.

income is excluded from gross income
under section 115, the taxable corporation will be treated as if it transferred all
of its assets to a tax-exempt entity
immediately before the stock acquisition.
(3) Exceptions for certain changes in
status— (i) To whom available. Paragraph (a)(2) of this section does not
apply to the following corporations—
(A) A corporation previously exempt
under section 501(a) which regains its
tax-exempt status under section 501(a)
within three years from the later of a
final adverse adjudication on the corporation’s tax exempt status, or the filing
by the corporation, or by the Secretary
or his delegate under section 6020(b), of
a federal income tax return of the type
filed by a taxable corporation;
(B) A newly-formed corporation that
is tax-exempt under section 501(a)
within three taxable years from the end
of the taxable year in which it was
formed;
(C) A corporation previously exempt
under section 501(a) or that applied for
but did not receive recognition of exemption under section 501(a), before
January 15, 1997, if such corporation is
tax-exempt under section 501(a) within
three years from the date of publication
of these regulations in the Federal Register as final regulations.
(ii) Application for recognition. An
organization is deemed to have or regain
tax-exempt status within one of the
three-year periods described in paragraph (a)(3)(i) of this section if it files
an application for recognition of exemption with the Commissioner within the
three-year period and the application
either results in a determination by the
Commissioner or a final adjudication
that the organization is tax-exempt under section 501(a) during any part of the
three-year period. The preceding sentence does not require the filing of an
application for recognition of exemption
by any organization not otherwise required, such as by § 1.501(a)–1,
§ 1.505(c)–1T, and § 1.508–1(a), to apply for recognition of exemption.
(iii) Anti-abuse rule. This paragraph
(a)(3) does not apply to a corporation
that, with a principal purpose of avoiding the application of paragraphs (a)(1)
and (a)(2) of this section, acquires all or
substantially all of the assets of another
taxable corporation and then changes its
status to that of a tax-exempt entity.

1997–11

I.R.B.

(4) Related transactions. This section
applies to any series of related transactions having an effect similar to any of
the transactions to which this section
applies.
(b) Exceptions. Paragraph (a) of this
section does not apply to—
(1) Any assets transferred to a taxexempt entity if the assets are used in
an activity the income from which is
subject to tax under section 511(a).
However, if assets on which no gain or
loss was recognized by reason of the
preceding sentence are disposed of by
the tax-exempt entity, then, notwithstanding any other provision of law, any
gain (not in excess of the amount not
recognized by reason of the preceding
sentence) shall be included in the taxexempt entity’s unrelated business taxable income. If the tax-exempt entity
ceases to use the assets in an activity
the income from which is subject to tax
under section 511(a), the entity will be
treated for purposes of this subparagraph
as having disposed of the assets on the
date of the cessation;
(2) Any transfer of assets to the extent gain or loss otherwise is recognized
by the taxable corporation on the transfer. See, for example, sections 336,
337(b)(2), 367, and 1001;
(3) Any forfeiture of a taxable corporation’s assets in a criminal or civil
action to the United States, the government of a possession of the United
States, a state, the District of Columbia,
the government of a foreign country, or
a political subdivision of any of the
foregoing; or any expropriation of a
taxable corporation’s assets by the government of a foreign country; and
(4) Any transfer of assets to a cooperative described in section 521.
(c) Definitions. For purposes of this
section—
(1) Taxable corporation. A taxable
corporation is any corporation that is
not a tax-exempt entity as defined in
paragraph (c)(2) of this section.
(2) Tax-exempt entity. A tax-exempt
entity is—
(i) Any entity that is exempt from tax
under section 501(a), section 527, section 528, or section 529;
(ii) A charitable remainder annuity
trust or charitable remainder unitrust as
defined in section 664(d);
(iii) The United States, the government of a possession of the United
States, a state, the District of Columbia,
the government of a foreign country, or
a political subdivision of any of the
foregoing;

18

(iv) An Indian Tribal Government as
defined in section 7701(a)(40), a subdivision of an Indian tribal government
determined in accordance with section
7871(d), or an agency or instrumentality
of an Indian tribal government or subdivision thereof;
(v) An Indian Tribal Corporation organized under section 17 of the Indian
Reorganization Act of 1934, 25 U.S.C.
477, or section 3 of the Oklahoma
Welfare Act, 25 U.S.C. 503;
(vi) An international organization as
defined in section 7701(a)(18);
(vii) An entity any portion of whose
income is excluded under section 115;
or
(viii) An entity that would not be
taxable under the Internal Revenue Code
for reasons substantially similar to those
applicable to any entity listed in this
paragraph (c)(2) unless otherwise explicitly made exempt from the application
of this section by statute or by action of
the Commissioner.
(3) Substantially all. The term substantially all has the same meaning as
under section 368(a)(1)(C).
(d) Loss limitation rule. For purposes
of determining the amount of loss recognized by a taxable corporation on the
transfer of its assets to a tax-exempt
entity under paragraph (a) of this section, if assets are acquired by the taxable corporation in a transaction to
which section 351 applied or as a
contribution to capital, or assets are
distributed from the taxable corporation
to a shareholder or another member of
the taxable corporation’s affiliated
group, and in either case as part of a
plan a principal purpose of which is to
recognize loss by the taxable corporation on the transfer of its assets to the
tax-exempt entity, the losses recognized
by the taxable corporation on the assets
transferred to the tax-exempt entity will
be disallowed. For purposes of the preceding sentence, the principles of section 336(d)(2) apply.
(e) Effective date. This section is applicable to transfers of assets as described in paragraph (a) of this section
occurring after the date that is 30 days
after publication in the Federal Register
of these regulations as final regulations,
unless the transfer is pursuant to a
written agreement which is (subject to
customary conditions) binding on or
before the date that is 30 days after

publication in the Federal Register of
these regulations as final regulations.

Federal Register on Thursday, December
29, 1994, at 59 FR 67253, is withdrawn.

Margaret Milner Richardson,
Commissioner of Internal Revenue.

Margaret Milner Richardson,
Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on
January 10, 1997, 8:45 a.m., and published in the
issue of the Federal Register for January 15, 1997,
62 F.R. 2064)

(Filed by the Office of the Federal Register on
January 10, 1997, 8:45 a.m., and published in the
issue of the Federal Register for January 13, 1997,
62 F.R. 1701)

Withdrawal of Notice of Proposed
Rulemaking

Notice of Proposed Rulemaking
and Notice of Public Hearing

Self-Employment Tax Treatment of
Members of Certain Limited
Liability Companies

Definition of Limited Partner for
Self-Employment Tax Purposes

AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of notice of proposed rulemaking.
SUMMARY: This document withdraws
the notice of proposed rulemaking relating to the self-employment tax treatment
of members of certain limited liability
companies that was published in the
Federal Register on Thursday, December 29, 1994. The proposed regulations
sought to provide guidance concerning
the applicability of certain selfemployment tax rules to certain members of limited liability companies. The
IRS and Treasury have issued new proposed regulations that will provide guidance on this issue.
FOR FURTHER INFORMATION CONTACT: Robert Honigman, (202) 622–
3050 (not a toll-free number).
SUPPLEMENTARY
INFORMATION:
Background
On Thursday, December 29, 1994, the
IRS issued proposed regulations (EE–
45–94 [1995–1 C.B. 853]) relating to
the self-employment tax treatment of
members of certain limited liability
companies (59 FR 67253). Upon consideration of the written comments received and the oral comments made at
the public hearing held on June 23,
1995, the IRS has decided to withdraw
those proposed regulations.
*

*

*

*

*

Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed
rulemaking that was published in the

SUPPLEMENTARY
INFORMATION:
Background

REG–209824–96

REG–209729–94

FOR FURTHER INFORMATION CONTACT: Concerning the regulation, Robert Honigman, (202) 622–3050; concerning submissions and the hearing,
Christina Vasquez, (202) 622–6808 (not
toll-free numbers).

AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains
proposed amendments to the regulations
relating to the self-employment income
tax imposed under section 1402 of the
Internal Revenue Code of 1986. These
regulations permit individuals to determine whether they are limited partners
for purposes of section 1402(a)(13),
eliminating the uncertainty in calculating
an individual’s net earnings from selfemployment under existing law. This
document also contains a notice of public hearing on the proposed regulations.
DATES: Written comments must be received by April 14, 1997. Requests to
speak and outlines of oral comments to
be discussed at the public hearing
scheduled for May 21, 1997, at 10 a.m.
must be received by April 30, 1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209824–96),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–209824–96), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet
by selecting the ‘‘Tax Regs’’ option on
the IRS Home Page, or by submitting
comments directly to the IRS Internet
site at http://www.irs.ustreas.gov/prod/
tax_regs/comments.html. The public
hearing will be held in the Auditorium,
Internal Revenue Service building, 1111
Constitution Avenue, NW, Washington,
DC.

19

This document contains proposed
amendments to the Income Tax Regulations (26 CFR part 1) under section
1402 of the Internal Revenue Code and
replaces the notice of proposed rulemaking published in the Federal Register
on December 29, 1994, at 59 FR 67253
(EE–45–94, 1995–1 C.B. 853), that
treated certain members of a limited
liability company (LLC) as limited partners for self-employment tax purposes.
Written comments responding to the
proposed regulations were received, and
a public hearing was held on June 23,
1995.
Under the 1994 proposed regulations,
an individual owning an interest in an
LLC was treated as a limited partner if
(1) the individual lacked the authority to
make management decisions necessary
to conduct the LLC’s business (the
management test), and (2) the LLC
could have been formed as a limited
partnership rather than an LLC in the
same jurisdiction, and the member could
have qualified as a limited partner in the
limited partnership under applicable law
(the limited partner equivalence test).
The intent of the 1994 proposed regulations was to treat owners of an LLC
interest in the same manner as similarly
situated partners in a state law partnership.
Public comments on the 1994 proposed regulations were mixed. While
some commentators were pleased with
the proposed regulations for attempting
to conform the treatment of LLCs with
state law partnerships, others criticized
the 1994 proposed regulations based on
a variety of arguments.
A number of commentators discussed
administrative and compliance problems
with the 1994 proposed regulations. For
example, it was noted that both the
management test and the limited partner
equivalence test depend upon legal or
factual determinations that may be difficult for taxpayers or the IRS to make
with certainty.
Another commentator pointed out that
basing the self-employment tax treatment of LLC members on state law

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limited partnership rules would lead to
disparate treatment between members of
different LLCs with identical rights
based solely on differences in the limited partnership statutes of the states in
which the members form their LLC. For
example, State A’s limited partnership
act may allow a limited partner to
participate in a partnership’s business
while State B’s limited partnership act
may not. Thus, an LLC member, who is
not a manager, that participates in the
LLC’s business would be a limited
partner under the proposed regulations if
the LLC is formed in State A, but not if
the LLC is formed in State B. Commentators asserted that this disparate treatment is inherently unfair for federal tax
purposes.
Some commentators argued for a
‘‘material participation’’ test to determine whether an LLC member’s distributive share is included in the individual’s net earnings from selfemployment. The proposed regulations
did not contain a participation test.
Commentators advocating a participation
test stressed that such a test would
eliminate uncertainty concerning many
LLC members’ limited partner status
and would better implement the selfemployment tax goal of taxing compensation for services.
Other commentators argued for a
more uniform approach, stating that a
single test should govern all business
entities (i.e., partnerships, LLCs, LLPs,
sole proprietorships, et al.) whose members may be subject to self-employment
tax. These commentators generally recognized, however, that a change in the
treatment of a sole proprietorship or an
entity that is not characterized as a
partnership for federal tax purposes
would be beyond the scope of regulations to be issued under section
1402(a)(13).
Finally, some commentators focused
on whether the Service would respect
the ownership of more than one class of
partnership interest for self-employment
tax purposes (bifurcation of interests).
The proposed regulations treated an
LLC member as a limited partner with
respect to his or her entire interest (if
the member was not a manager and
satisfied the limited partner equivalence
test), or not at all (if either the management test or limited partner equivalence
test was not satisfied). Commentators,
however, pointed to the legislative history of section 1402(a)(13) to support
their argument that Congress only intended to tax a partner’s distributive

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I.R.B.

share attributable to a general partner
interest. Under this argument, a partner
that holds both a general partner interest
and a limited partner interest is only
subject to self-employment tax on the
distributive share attributable to the partner’s general partner interest. This intent
also may be inferred from the statutory
language of section 1402(a)(13) that the
self-employment tax does not apply to
‘‘. . . the distributive share of any item
of income or loss of a limited partner,
as such . . ..’’ Based on this evidence,
these commentators requested that the
proposed regulations be revised to allow
the bifurcation of interests for selfemployment tax purposes.
After considering the comments received, the IRS and Treasury have decided to withdraw the 1994 notice of
proposed rulemaking and to re-propose
amendments to the Income Tax Regulations (26 CFR part 1) under section
1402 of the Code. Explanation of Provisions
The proposed regulations contained in
this document define which partners of
a federal tax partnership are considered
limited partners for section 1402(a)(13)
purposes. These proposed regulations
apply to all entities classified as a
partnership for federal tax purposes, regardless of the state law characterization
of the entity. Thus, the same standards
apply when determining the status of an
individual owning an interest in a state
law limited partnership or the status of
an individual owning an interest in an
LLC. In order to achieve this conformity, the proposed regulations adopt an
approach which depends on the relationship between the partner, the partnership, and the partnership’s business.
State law characterizations of an individual as a ‘‘limited partner’’ or otherwise are not determinative.
Generally, an individual will be
treated as a limited partner under the
proposed regulations unless the individual (1) has personal liability (as
defined in § 301.7701–3(b)(2)(ii) of the
Procedure and Administration Regulations) for the debts of or claims against
the partnership by reason of being a
partner; (2) has authority to contract on
behalf of the partnership under the statute or law pursuant to which the partnership is organized; or, (3) participates
in the partnership’s trade or business for
more than 500 hours during the taxable
year. If, however, substantially all of the
activities of a partnership involve the
performance of services in the fields of
health, law, engineering, architecture,

20

accounting, actuarial science, or consulting, any individual who provides services as part of that trade or business
will not be considered a limited partner.
By adopting these functional tests, the
proposed regulations ensure that similarly situated individuals owning interests in entities formed under different
statutes or in different jurisdictions will
be treated similarly. The need for a
functional approach results not only
from the proliferation of new business
entities such as LLCs, but also from the
evolution of state limited partnership
statutes. When Congress enacted the
limited partner exclusion found in section 1402(a)(13), state laws generally
did not allow limited partners to participate in the partnership’s trade or business to the extent that state laws allow
limited partners to participate today.
Thus, even in the case of a state law
limited partnership, a functional approach is necessary to ensure that the
self-employment tax consequences to
similarly situated taxpayers do not differ
depending upon where the partnership
organized.
The proposed regulations allow an
individual who is not a limited partner
for section 1402(a)(13) purposes to
nonetheless exclude from net earnings
from self-employment a portion of that
individual’s distributive share if the individual holds more than one class of
interest in the partnership. Similarly, the
proposed regulations permit an individual that participates in the trade or
business of the partnership to bifurcate
his or her distributive share by disregarding guaranteed payments for services. In each case, however, such bifurcation of interests is permitted only to
the extent the individual’s distributive
share is identical to the distributive
share of partners who qualify as limited
partners under the proposed regulation
(without regard to the bifurcation rules)
and who own a substantial interest in
the partnership. Together, these rules
exclude from an individual’s net earnings from self-employment amounts that
are demonstrably returns on capital invested in the partnership.
Proposed Effective Date
These regulations are proposed to be
effective beginning with the individual’s
first taxable year beginning on or after
the date these regulations are published
as final regulations in the Federal Register.

Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in EO
12866. Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these
regulations, and, because the regulations
do not impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Wednesday, May 21, 1997, at 10
a.m. in the Auditorium, Internal Revenue Service building, 1111 Constitution
Avenue, NW, Washington, DC. Because
of access restrictions, visitors will not be
admitted beyond the Internal Revenue
Service building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by April 14, 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 April 30, 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 these regulations is Robert Honigman of the Office
of Assistant Chief Counsel (Passthroughs & Special Industries). How-

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

*

*

*

*

Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1402(a)–2 is
amended by:
1. Revising the first sentence of paragraph (d).
2. Removing the reference ‘‘section
702(a)(9)’’ in the first sentence of paragraph (e) and adding ‘‘section
702(a)(8)’’ in its place.
3. Revising the last sentence of paragraph (f).
4. Revising paragraphs (g) and (h).
5. Adding new paragraphs (i) and (j).
The revisions and additions read as
follows:
§ 1.1402(a)–2 Computation of net earnings from self-employment.
*

*

*

*

*

(d) * * * Except as otherwise provided in section 1402(a) and paragraph
(g) of this section, an individual’s net
earnings from self-employment include
the individual’s distributive share
(whether or not distributed) of income
or loss described in section 702(a)(8)
from any trade or business carried on by
each partnership of which the individual
is a partner. * * *
*

*

*

*

*

(f) * * * For rules governing the
classification of an organization as a
partnership
or
otherwise,
see
§ § 301.7701–1, 301.7701–2, and
301.7701–3 of this chapter.
(g) Distributive share of limited partner. An individual’s net earnings from
self-employment do not include the individual’s distributive share of income or
loss as a limited partner described in
paragraph (h) of this section. However,
guaranteed payments described in section 707(c) made to the individual for
services actually rendered to or on behalf of the partnership engaged in a
trade or business are included in the
individual’s net earnings from selfemployment.

21

(h) Definition of limited partner—(1)
In general. Solely for purposes of section 1402(a)(13) and paragraph (g) of
this section, an individual is considered
to be a limited partner to the extent
provided in paragraphs (h)(2), (h)(3),
(h)(4), and (h)(5) of this section.
(2) Limited partner. An individual is
treated as a limited partner under this
paragraph (h)(2) unless the individual—
(i) Has personal liability (as defined
in § 301.7701–3(b)(2)(ii) of this chapter
for the debts of or claims against the
partnership by reason of being a partner;
(ii) Has authority (under the law of
the jurisdiction in which the partnership
is formed) to contract on behalf of the
partnership; or
(iii) Participates in the partnership’s
trade or business for more than 500
hours during the partnership’s taxable
year.
(3) Exception for holders of more
than one class of interest. An individual
holding more than one class of interest
in the partnership who is not treated as
a limited partner under paragraph (h)(2)
of this section is treated as a limited
partner under this paragraph (h)(3) with
respect to a specific class of partnership
interest held by such individual if, immediately after the individual acquires
that class of interest—
(i) Limited partners within the meaning of paragraph (h)(2) of this section
own a substantial, continuing interest in
that specific class of partnership interest;
and,
(ii) The individual’s rights and obligations with respect to that specific
class of interest are identical to the
rights and obligations of that specific
class of partnership interest held by the
limited partners described in paragraph
(h)(3)(i) of this section.
(4) Exception for holders of only one
class of interest. An individual who is
not treated as a limited partner under
paragraph (h)(2) of this section solely
because that individual participates in
the partnership’s trade or business for
more than 500 hours during the partnership’s taxable year is treated as a limited
partner under this paragraph (h)(4) with
respect to the individual’s partnership
interest if, immediately after the individual acquires that interest—
(i) Limited partners within the meaning of paragraph (h)(2) of this section
own a substantial, continuing interest in
that specific class of partnership interest;
and
(ii) The individual’s rights and obligations with respect to the specific class

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I.R.B.

of interest are identical to the rights and
obligations of the specific class of partnership interest held by the limited
partners described in paragraph (h)(4)(i)
of this section.
(5) Exception for service partners in
service partnerships. An individual who
is a service partner in a service partnership may not be a limited partner under
paragraphs (h)(2), (h)(3), or (h)(4) of
this section.
(6) Additional definitions. Solely for
purposes of this paragraph (h)—
(i) A class of interest is an interest
that grants the holder specific rights and
obligations. If a holder’s rights and
obligations from an interest are different
from another holder’s rights and obligations, each holder’s interest belongs to a
separate class of interest. An individual
may hold more than one class of interest
in the same partnership provided that
each class grants the individual different
rights or obligations. The existence of a
guaranteed payment described in section
707(c) made to an individual for services rendered to or on behalf of a
partnership, however, is not a factor in
determining the rights and obligations of
a class of interest.
(ii) A service partner is a partner
who provides services to or on behalf of
the service partnership’s trade or business. A partner is not considered to be a
service partner if that partner only provides a de minimis amount of services
to or on behalf of the partnership.
(iii) A service partnership is a partnership substantially all the activities of
which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting.
(iv) A substantial interest in a class
of interest is determined based on all of
the relevant facts and circumstances. In
all cases, however, ownership of 20
percent or more of a specific class of
interest is considered substantial.
(i) Example. The following example
illustrates the principles of paragraphs
(g) and (h) of this section:
Example. (i) A, B, and C form LLC, a limited
liability company, under the laws of State to
engage in a business that is not a service partnership described in paragraph (h)(6)(iii) of this
section. LLC, classified as a partnership for federal tax purposes, allocates all items of income,
deduction, and credit of LLC to A, B, and C in
proportion to their ownership of LLC. A and C
each contribute $1x for one LLC unit. B contributes $2x for two LLC units. Each LLC unit
entitles its holder to receive 25 percent of LLC’s
tax items, including profits. A does not perform
services for LLC; however, each year B receives a

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I.R.B.

guaranteed payment of $6x for 600 hours of
services rendered to LLC and C receives a
guaranteed payment of $10x for 1000 hours of
services rendered to LLC. C also is elected LLC’s
manager. Under State’s law, C has the authority to
contract on behalf of LLC.
(ii) Application of general rule of paragraph
(h)(2) of this section. A is treated as a limited
partner in LLC under paragraph (h)(2) of this
section because A is not liable personally for debts
of or claims against LLC, A does not have
authority to contract for LLC under State’s law,
and A does not participate in LLC’s trade or
business for more than 500 hours during the
taxable year. Therefore, A’s distributive share
attributable to A’s LLC unit is excluded from A’s
net earnings from self-employment under section
1402(a)(13).
(iii) Distributive share not included in net earnings from self-employment under paragraph (h)(4)
of this section. B’s guaranteed payment of $6x is
included in B’s net earnings from self-employment
under section 1402(a)(13). B is not treated as a
limited partner under paragraph (h)(2) of this
section because, although B is not liable for debts
of or claims against LLC and B does not have
authority to contract for LLC under State’s law, B
does participates in LLC’s trade or business for
more than 500 hours during the taxable year.
Further, B is not treated as a limited partner under
paragraph (h)(3) of this section because B does
not hold more than one class of interest in LLC.
However, B is treated as a limited partner under
paragraph (h)(4) of this section because B is not
treated as a limited partner under paragraph (h)(2)
of this section solely because B participated in
LLC’s business for more than 500 hours and
because A is a limited partner under paragraph
(h)(2) of this section who owns a substantial
interest with rights and obligations that are identical to B’s rights and obligations. In this example,
B’s distributive share is deemed to be a return on
B’s investment in LLC and not remuneration for
B’s service to LLC. Thus, B’s distributive share
attributable to B’s two LLC units is not net
earnings from self-employment under section
1402(a)(13).
(iv) Distributive share included in net earnings
from self-employment. C’s guaranteed payment of
$10x is included in C’s net earnings from selfemployment under section 1402(a). In addition,
C’s distributive share attributable to C’s LLC unit
also is net earnings from self-employment under
section 1402(a) because C is not a limited partner
under paragraphs (h)(2), (h)(3), or (h)(4) of this
section. C is not treated as a limited partner under
paragraph (h)(2) of this section because C has the
authority under State’s law to enter into a binding
contract on behalf of LLC and because C participates in LLC’s trade or business for more than
500 hours during the taxable year. Further, C is
not treated as a limited partner under paragraph
(h)(3) of this section because C does not hold
more than one class of interest in LLC. Finally, C
is not treated as a limited partner under paragraph
(h)(4) of this section because C has the power to
bind LLC. Thus, C’s guaranteed payment and
distributive share both are included in C’s net
earnings from self-employment under section
1402(a).

(j) Effective date. Paragraphs (d), (e),
(f), (g), (h), and (i) are applicable beginning with the individual’s first taxable
year beginning on or after the date this

22

section is published as a final regulation
in the Federal Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
January 10, 1997, 8:45 a.m., and published in the
issue of the Federal Register for January 13, 1997,
62 F.R. 1702)

Employee Plans and Exempt
Organizations; Requests for Certain
Determination Letters and
Applications for Recognition of
Exemption
Announcement 97–20
PURPOSE
This is to announce new ‘‘Where to
File’’ instructions for applications for
employee plan determination and other
letters, as well as exempt organization
applications for recognition of exemption from federal income tax, previously
submitted to the Los Angeles Key District Office of Internal Revenue.
BACKGROUND
The Internal Revenue Service is in
the process of centralizing the filing of
requests for determination and other
letters and applications for recognition
of tax exemption. Announcement 95–51,
published in Internal Revenue Bulletin
1995–25 at page 132, announced that
centralization will be phased in by district. Announcement 96–92, published in
Internal Revenue Bulletin 1996–38 at
page 151, announced that beginning
September 1, 1996, requests formerly
sent to the key district offices in Atlanta,
Georgia, and Baltimore, Maryland,
should be sent to the Internal Revenue
Service Center in Covington, Kentucky.
Announcement 96–133, published in Internal Revenue Bulletin 1996–53 at page
60, announced that beginning January 1,
1997, requests formerly sent to the key
district offices in Chicago, Illinois, and
Dallas, Texas, should also be sent to the
Covington address.
In addition, the Service is consolidating the employee plan volume submitter
and regional prototype programs that are
presently maintained by each individual
key district office. Plans previously approved by a key district office, whose
determination letter processing program
is being transferred to Cincinnati, will
be reviewed using the same criteria and
procedures used by the original district
office. New guidelines are being devel-

oped that will combine the best features
and procedures currently in use by the
districts. Guidelines for the revised volume submitter and regional prototype
programs will be explained in a future
announcement.
INSTRUCTIONS
Beginning April 1, 1997, letter requests and applications previously submitted to the Key District Office in Los
Angeles, California, should be sent to
the Internal Revenue Service Center in
Covington, Kentucky, at the address
shown below. (For a period of time,
requests and applications mistakenly
sent to the Los Angeles Key District
Office will be forwarded.) The new
address applies to requests for determination letters, regional prototype notification letters and volume submitter advisory letters, on the qualified status of
employee plans under sections 401,
403(a), and 409, and the exempt status
of any related trust under section 501 of
the Internal Revenue Code, applications
for recognition of tax exemption on
Form 1023, Form 1024, and Form 1028
and other applications for recognition of
qualification or exemption. The affected
plan sponsors and organizations are
those whose principal office or place of
business is located in Alaska, California,
Hawaii, Idaho, Nevada, Oregon, and
Washington. These requests and applications, as well as those formerly submitted to the Atlanta, Baltimore, Cincinnati,
Chicago, and Dallas Key Districts,
should be sent to:
Internal Revenue Service
P.O. Box 192
Covington, KY 41012–0192
Until further notice, plans and organizations in all other locations, i.e., those
located within the jurisdiction of the
Brooklyn Key District Office, will continue to file their requests or applications in accordance with the applicable
user fee instructions, currently in Section 7 of Revenue Procedure 97–8,
published in Internal Revenue Bulletin
1997–1, at page 187, and the instructions for Form 8717, User Fee for
Employee Plan Determination Letter Request, or Form 8718, User Fee for
Exempt Organization Determination Letter Request.
Comments or concerns regarding the
centralization of the determination process or applications submitted to the
Covington address, may be directed to

the EP/EO Customer Service Unit in
Cincinnati at (513) 684–3957 (not a
toll-free number).

Deletions From Cumulative List of
Organizations Contributions to
Which Are Deductible Under
Section 170 of the Code
Announcement 97–21
The name of an organization that no
longer qualifies as an organization described in section 170(c)(2) of the Internal Revenue Code of 1986 is listed
below.
Generally, the Service will not disallow deductions for contributions made
to a listed organization on or before the
date of announcement in the Internal
Revenue Bulletin that an organization
no longer qualifies. However, the Service is not precluded from disallowing a
deduction for any contributions made
after an organization ceases to qualify
under section 170(c)(2) if the organization has not timely filed a suit for
declaratory judgment under section 7428
and if the contributor (1) had knowledge
of the revocation of the ruling or determination letter, (2) was aware that such
revocation was imminent, or (3) was in
part responsible for or was aware of the
activities or omissions of the organization that brought about this revocation.
If on the other hand a suit for declaratory judgment has been timely
filed, contributions from individuals and
organizations described in section
170(c)(2) that are otherwise allowable
will continue to be deductible. Protection under section 7428(c) would begin
on March 17, 1997, and would end on
the date the court first determines that
the organization is not described in
section 170(c)(2) as more particularly
set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor.
This benefit is not extended to any
individual who was responsible, in
whole or in part, for the acts or omissions of the organization that were the
basis for revocation.
Gilpin Grammar School
Denver, CO
The National Organization for the
Reform of Marijuana Laws
Washington, DC

23

Foundations Status of Certain
Organizations
Announcement 97–23
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:
Abilene Cultural Foundation, Abilene,
TX
Academy of Mount St. Scholastica
Endowment Association, Inc.,
Atchison, KS
Accessible Parks Incorporated, Austin,
TX
Acorn-Pacific Foundation, Port Collins,
CO
Advocates for Incest Survival, Houston,
TX
American Association for Advancement
Core Curriculum, Denver, CO
American Awareness Institute, Inc.,
Kansas City, KS
American Economic Defense
Foundation, Denver, CO
American Indian Anti-Defamation
Council, Denver, CO
American Indian Resource and
Education Coalition, San Antonio, TX
American Pow-Mia Coalition, Shawnee
Mission, KS
A. M. G. Foundation, Inc., Lewisville,
TX
Andale Nogales Foundation, Nogales,
AZ
Ardra Foundation, Lawrence, KS
Arizona Childrens Heart Fund, Inc.,
Phoenix, AZ
Blummer 100 KN Trail Run, Boulder,
CO
Bob Rich Memorial Scholarship
Foundation Trust, Williamsburg, VA
Boys and Girls Club of La Joya Texas,
Inc., La Joya, TX
Brazos Valley Christian Home School
Sports Association, Bryan, TX

1997–11

I.R.B.

Bread of Love Outreach Ministries of
Texas, Houston, TX
Bright Hopes Foundation, Albuquerque,
NM
Broken Bow Summer Baseball, Inc.,
Broken Bow, OK
Businesswomen Unlimited, Inc., Olathe,
KS
Cerebral Palsy Foundation of Nassau,
Inc., Roosevelt, NY
Charles Schwartz Foundation for Music,
Inc., New York, NY
David Bowen Memorial Scholarship
Inc., Yokum, TX
Decatur County Retirement Housing
Inc., Oberlin, KS
Denver Broncos Alumni Charities,
Englewood, CO
East Texas Arboretum & Botanical
Society, Inc., Athens, TX
East Texas Center for Independent
Living, Tyler, TX
East Valley Pony Baseball, Sandy, UT
Eberle Puppet Player, Dallas, TX
Ellis County Sheriffs Posse Inc.,
Waxahachie, TX
Employees Helping Employees Inc.,
Phoenix, AZ
Environmental Literacy Project,
McAllen, TX
Executive Womens Coalition for
Children, Phoenix, AZ
Faith Victory Ministries Inc., Tulsa, OK
Families of Murder Victims, Watauga,
TX
Family Service Network, Irving, TX
Family Therapy Training Center of
Colorado, Denver, CO
Family Watch Inc., Albuquerque, NM
Fatima Foundation, Houston, TX
First Colorado Regiment United States
Volunteers LTD, Englewood, CO
First Step Shelter Inc., Pratt, KS
Flying Start Foundation, Tucson, AZ
Georgetown Little Dribblers, Inc.,
Georgetown, TX
G H F Ministries Inc., Keene, TX
Gloria Russell Childrens Ministry Inc.,
Lufkin, TX
Golden Earth Days, Golden, CO
Grady County Child Welfare Services
Advisory Board, Inc., Chickasha, OK
Greater New Bedford Aglas, Inc., New
Bedford, MA
Great Western Trail—Wasatch Section,
Farmington, NM
Gulf Coast Drum Corps Associates Inc.,
Spring, TX
Healthcare Solutions for America, Inc.,
Belmont, MA
Henry Lukas Foundation, Inc., Blue
Point, NY
Hercules Athletic Association, Inc., New
York, NY

1997–11

I.R.B.

He’s Not Heavy He’s My Brother, Inc.,
Roxbury, MA
Home Base, Inc., Ipswich, MA
Humanitarian Foundation for Nicaragua,
Incorporated, New York, NY
Jacksonville College Foundation, Inc.,
Jacksonville, TX
Jasper Fire Department, Jasper, TX
Jefferson County Domestic Violence
Task Force, Inc., Valley Falls, KS
Labette County Humane Society,
Parsons, KS
LaDonia Foundation, Inc., LaDonia, TX
Lake Powell Project, Page, AZ
Lamda Phoenix Center, Inc., Phoenix,
AZ
Lane Ranch Corporation, Cheyenne,
WY
Laughter to Go, Inc., Shawnee Mission,
KS
Make a Kid Smile Inc., Houston, TX
Marlin Volunteer Fire Department,
Marlin, TX
Metro-Rail Inc., Boulder, CO
Narciso Martinez Cultural Arts Center,
San Benito, TX
Northeast Mens Center, Denver, CO
North Texas Drug Awareness Library,
Ennis, TX
Operation Exaltation, Inc., Cedar Hill,
TX
Opportunity is Through Education,
Denver, CO
Orthodox Community Services, Inc.,
Denver, CO
Our Home, Inc., Tulsa, OK
Paces Foundation Inc., Atlanta, GA
Scottish Rite Charitable Trust Valley of
Kansas City Orient Kansas, Kansas
City, KS
Seguin Tri-Party Club, Seguin, TX
Seminole Youth Soccer Association,
Seminole, TX
Share Parents of Northern Utah, Ogden,
UT
Sheridan County Soccer Association,
Sheridan, WY
Sheridan Historical Society, Inc.,
Sheridan, CO
Shoebox Ministry, Inc., Phoenix, AZ
St. Augustine Technical Center
Foundation Inc., St. Augustine, FL
10-4 Ministries, Bellingham, MA
Tamina Action Committee, Inc., Spring,
TX
Tarrant County Opportunities
Industrialization Center, Inc., Fort
Worth, TX
Tecumseh Beautiful, Inc., Tecumseh,
OK
Telluride Youth Foundation, Telluride,
CO
United States Helicopter Museum,
Tucson, AZ

24

United Way of Choctaw County, Inc.,
Hugo, OK
University of Tulsa Lettermens
Association, Tulsa, OK
Unlimited Handi-Capable, Inc., Fowler,
CO
Wadley Partners, Inc., Dallas, TX
Walter Smith Ministry, Houston, TX
Water and Sanitation Consultancy
Group, Denver, CO
Welch Evangelistic Association,
Franklin, TX
Westbury High School Area
Improvement Corporation, Houston,
TX
West Roosevelt Community
Development Corporation, Phoenix,
AZ
Zinser Elementary Parent & Teacher
Organization, Grand Rapids, MI
If an organization listed above submits information that warrants the renewal of its classification as a public
charity or as a private operating foundation, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and contributors may thereafter rely upon such
ruling or determination letter as provided in section 1.509(a)–7 of the
Income Tax Regulations. It is not
the practice of the Service to announce
such revised classification of foundation
status in the Internal Revenue Bulletin.
Timing of Certain Plan
Amendments Relating to Section
401(a)(9)
Announcement 97–24
PURPOSE
This announcement provides that an
employer is not precluded from offering,
to employees (other than 5-percent owners) who attain age 70½ after 1995 and
have not retired, an option to defer
commencement of benefit distributions
under a qualified plan merely because
the plan has not yet been amended to
provide for the option.
BACKGROUND
Section 1404(a) of the Small Business
Job Protection Act of 1996 (SBJPA)
amended section 401(a)(9) of the Internal Revenue Code to provide that, in the
case of an employee who is not a
5-percent owner, the required beginning
date for minimum distributions from a
qualified plan is April 1 of the calendar
year following the later of the calendar

year in which the employee attains age
70½ or the calendar year in which the
employee retires. The amendment to
section 401(a)(9) applies to years beginning after December 31, 1996.
Notice 96–67, 1996–53 I.R.B. 12,
Q&A–2, provides that, under section
401(a)(9) as amended by the SBJPA, an
employee (other than a 5-percent owner)
who attained age 70½ in 1996, but who
had not retired from employment with
the employer maintaining the plan by
the end of 1996, is not required to
receive a minimum distribution by April
1, 1997.
Many qualified plans continue to contain provisions (consistent with section
401(a)(9) prior to its amendment by the
SBJPA) requiring an employee who attains age 70½ in a calendar year to
begin receiving distributions by April 1
of the following calendar year. Some
employers wish to give employees
(other than 5-percent owners) who have
not retired the option to defer commencement of distributions beyond April
1 following the calendar year the employees attain age 70½ and have requested guidance as to whether such an
option may be offered before their plans
are amended to provide for the option.
This announcement responds to these
requests concerning the addition of an
option to defer commencement of distributions before plan amendment. It does
not address the elimination of the option
to receive in-service distributions after
age 70½.
As noted in Notice 96–67, an amendment that eliminates the right to receive
a distribution prior to retirement after
age 70½ is precluded by section
411(d)(6) if the amendment applies to
benefits accrued as of the later of the
adoption date or the effective date of the

amendment. In Notice 96–67, the Service and Treasury requested comments
concerning the extent to which a relaxation of section 411(d)(6) protection is
appropriate for amendments that eliminate in-service distributions after age
70½, and the Service and Treasury are
currently considering the comments received.
TIMING OF PLAN AMENDMENTS
Under a qualified plan, an employer
is permitted to offer an employee (other
than a 5-percent owner) who attains age
70½ in a calendar year after 1995 and
has not retired by the end of that
calendar year the option to delay commencement of benefit distributions until
no later than April 1 following the
calendar year in which the employee
retires from employment with the employer maintaining the plan. A plan that
continues to contain provisions requiring
an employee to begin receiving distributions by April 1 following the calendar
year in which the employee attains age
70½ will not fail to satisfy section
401(a) merely because the employer
offers the option described in the preceding sentence prior to amending the
plan to include this option. Thus, if
employees (other than 5-percent owners)
who attained age 70½ in 1996 and did
not retire from employment with the
employer maintaining the plan by the
end of 1996 are offered the opportunity
to make an election to defer commencement of benefits rather than to begin
receiving benefits from the plan by
April 1, 1997, the plan will not fail to
satisfy section 401(a) merely because
the plan has not yet been amended to
provide for this election.
Future guidance will provide that an
employer that offers this option under a

25

plan must amend the plan retroactively,
no later than the date specified in that
guidance, to provide for the option. The
retroactive plan amendment will have to
conform the plan to its pre-amendment
operation regarding the option to defer
commencement of benefits. The date by
which a plan providing for this option
must be retroactively amended will not
be earlier than 90 days after the future
guidance is published and in no event
will be earlier than January 1, 1998.
This announcement also applies to an
employer that has adopted a master or
prototype or a regional prototype plan.
Such an employer should note that if a
conforming amendment is not an available option under the sponsor’s prototype plan document, the required
amendment may result in the loss of
prototype status.
ELECTIONS TO STOP RECEIVING
DISTRIBUTIONS
This announcement does not address
the conditions under which employers
may offer employees who have attained
age 70½ and have begun to receive
distributions under a plan an election to
stop receiving distributions until a date
no later than April 1 of the calendar
year following retirement. Employers
are cautioned that, under certain circumstances, an election to stop receiving
distributions may violate the qualification requirements under section 401(a),
such as sections 401(a)(11) and 417
(relating to participant and spousal consent, join

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A69839318b6f8923b. Public record. Not legal advice.