Bulletin No. 1999–10

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Internal Revenue

bulletin

Bulletin No. 1999–10

March 8, 1999

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

ADMINISTRATIVE

Rev. Rul. 99–10, page 10.

Notice 99–13, page 26.

Insurance companies; interest rate tables. Prevailing

state assumed interest rates are provided for the determination of reserves under section 807 of the Code for contracts

issued in 1998 and 1999. Rev. Rul. 92–19 supplemented in

part.

The “differential earnings rate” under section 809 of the

Code is tentatively determined for 1998 together with the

“recomputed differential rate” for 1997.

Rev. Rul. 99–11, page 18.

Determination of issue price in the case of certain

debt instruments issued for property. This ruling provides various prescribed rates for federal income tax purposes for March 1999.

REG–209619–93, page 28.

Proposed regulations under section 468 of the Code relate

to the designation of the person required to report the income earned on qualified settlement funds and certain other

funds, trusts, and escrow accounts, and other related rules.

A public hearing is scheduled for May 12, 1999.

REG–116826–97, page 40.

Rev. Rul. 99–13, page 4.

Election in respect of losses attributable to a disaster.

This ruling lists the areas declared by the President to qualify

as major disaster areas during 1998 under the Disaster Relief and Emergency Assistance Act.

Proposed regulations under section 221 of the Code relate

to the deduction for interest paid on qualified education

loans. The service will publish the time and date of the public

hearing in an announcement in the Federal Register.

REG–104924–98, page 47.

T.D. 8808, page 21.

REG–106564–98, page 53.

Temporary, proposed, and final regulations under sections

6221 through 6233 of the Code relate to the unified partnership audit procedure added to the Code by the Tax Equity

and Fiscal Responsibility Act of 1982 (TEFRA). A public hearing is scheduled for April 14, 1999.

T.D. 8811, page 19.

REG–121806–97, page 46.

Temporary, proposed, and final regulations under section

6103 of the Code relate to additions to, and deletions from,

the list of items of information disclosed to the Bureau of the

Census for use in certain statistical programs.

EXEMPT ORGANIZATIONS

Announcement 99–19, page 63.

A list is given of organizations now classified as private foundations.

Finding Lists begin on page 66.

Department of the Treasury

Internal Revenue Service

Proposed regulations under section 475 of the Code are set

forth for dealers in commodities and traders in securities or

commodities regarding the election to use the mark-to-market method of accounting for their businesses. A public

hearing is scheduled for June 3, 1999.

REG–110524–98, page 55.

Proposed amendments to the regulations under section 453

of the Code relate to the taxation of capital gains on installment sales of depreciable real property.

REG–113744–98, page 59.

Proposed regulations under section 1296 of the Code relate

to the new mark-to-market election for stock of a passive

foreign investment company (PFIC).

Mission of the Service

and by applying the tax law with integrity and fairness to

all.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

Introduction

The Internal Revenue Bulletin is the authoritative instrument

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

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

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

on a single-copy basis.

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

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

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

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

modify, or amend any of those previously published in the

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

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

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

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

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

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

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

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

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

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

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

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and semiannual period, respectively.

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

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

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

Section 42.—Low-Income

Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Section 165.—Losses

26 CFR 1.165–11: Election in respect of losses

attributable to a disaster.

Insurance companies; interest rate

tables. Prevailing state assumed interest

rates are provided for the determination of

the reserves under section 807 of the Code

for contracts issued in 1998 and 1999.

Rev. Rul. 92–19 supplemented in part.

Rev. Rul. 99–13

Under § 165(i) of the Internal Revenue

Code, if a taxpayer suffers a loss attributable to a disaster occurring in an area subsequently determined by the President of

the United States to warrant assistance by

the Federal Government under the Disaster Relief and Emergency Assistance Act,

42 U.S.C. §§ 5121–5204c (1988 & Supp.

V 1993) (the Act), the taxpayer may elect

to claim a deduction for that loss on the

taxpayer’s federal income tax return for

the taxable year immediately preceding

the taxable year in which the disaster

occurred.

Section 1.165–11(e) of the Income Tax

Regulations provides that the election to

deduct a disaster loss for the preceding

year must be made by filing a return, an

amended return, or a claim for refund on

or before the later of (1) the due date of

the taxpayer’s income tax return (determined without regard to any extension of

time to file the return) for the taxable year

in which the disaster actually occurred, or

(2) the due date of the taxpayer’s income

tax return (determined with regard to any

extension of time to file the return) for the

taxable year immediately preceding the

taxable year in which the disaster actually

occurred.

The provisions of § 165(i) apply only

to losses that are otherwise deductible

under § 165(a). An individual taxpayer

may deduct losses if they are incurred in a

trade or business, if they are incurred in a

transaction entered into for profit, or if

they are casualty losses under § 165(c)(3).

The President has determined that during 1998 the areas listed below have been

adversely affected by disasters of sufficient severity and magnitude to warrant

assistance by the Federal Government

under the Act.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Timothy Sheppard of the Office

of Assistant Chief Counsel (Income Tax

and Accounting). For further information

regarding this revenue ruling, contact Mr.

Sheppard on (202) 622-4960 (not a tollfree call).

Disaster Areas

in 1998

Type of

Disaster

Date of

Disaster

Alabama

Counties of Barbour, Butler, Coffee, Conecuh, Covington,

Crenshaw, Dale, Escambia, Geneva, Henry, Houston, and

Randolph

Severe storms

and flooding

March 7-21, 1998

Counties of Covington, Cullman, Jefferson, St. Clair, Tuscaloosa,

and Walke

Severe storms

and tornadoes

April 8-20, 1998

Counties of Baldwin, Butler, Choctaw, Clarke, Coffee, Conecuh,

Covington, Crenshaw, Escambia, Geneva, Lowndes, Mobile,

Monroe, and Washington

Hurricane

Georges

September 25October 6, 1998

Severe winter

storms and

flooding

February 2April 30, 1998

Severe winter

storms, high winds,

and flooding

January 28February 6, 1998

California

Counties of Alameda, Amador, Butte, Calaveras, Colusa,

Contra Costa, Del Norte, Fresno, Glenn, Humboldt, Kern, Lake,

Los Angeles, Marin, Mendocino, Merced, Monterey, Napa, Orange,

Riverside, Sacramento, San Benito, San Bernadino, San Diego,

San Francisco, San Joaquin, San Luis Obispo, San Mateo,

Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus,

Sutter, Tehama, Trinity, Tulare, Ventura, Yolo, and Yuba

Delaware

County of Sussex

March 8, 1999

1999–10 I.R.B.

Florida

Counties of Alachua, Baker, Bay, Bradford, Brevard,

Broward, Calhoun, Citrus, Clay, Collier, Columbia, DeSoto,

Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist,

Glades, Gulf, Hamilton, Hardee, Hernando, Highlands,

Hillsborough, Holmes, Jackson, Lafayette, Lake, Levy, Liberty,

Madison, Manatee, Marion, Nassau, Okaloosa, Okeechobee,

Orange, Osceola, Pasco, Pinellas, Polk, Putnam, Santa Rosa,

Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor,

Union, Volusia, Walton, and Washington

Severe storms,

high winds, tornadoes,

and flooding

December 25, 1997April 24, 1998

Counties of Broward, Dade, and Monroe

Severe storms, high

winds, tornadoes, and

flooding

February 2-4, 1998

Counties of Alachua, Baker, Bay, Bradford, Brevard, Broward,

Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, Dade, DeSoto,

Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist,

Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands,

Hillsborough, Holmes, Indian River, Jackson, Jefferson, Lafayette,

Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Martin,

Monroe, Nassau, Okaloosa, Okeechobee, Orange, Osceola,

Palm Beach, Pasco, Pinellas, Polk, Putnam, Santa Rosa, Sarasota,

St. Johns, St. Lucie, Seminole, Sumter, Suwannee, Taylor, Union,

Volusia, Wakulla, Walton, and Washington

Extreme fire hazards

May 25-July 22, 1998

Counties of Bay, Dixie, Franklin, Gulf, Taylor, and Wakulla

Hurricane Earl

September 3, 1998

Counties of Bay, Calhoun, Columbia, Escambia, Franklin, Gadsden,

Gulf, Holmes, Jackson, Jefferson, Liberty, Monroe, Okaloosa,

Santa Rosa, Suwannee, Walton, and Washington

Hurricane Georges

September 25October 7, 1998

Counties of Monroe and Palm Beach

Tropical Storm Mitch

November 4-5, 1998

Severe storms and

flooding

February 14May 11, 1998

Severe storms, tornadoes

and flooding

June 11-Jully7, 1998

Georgia

Counties of Appling, Atkinson, Bacon, Baldwin, Baker, Barrow,

Bartow, Ben Hill, Berrien, Bibb, Bleckley, Brantley, Brooks, Bryan,

Bulloch, Burke, Butts, Calhoun, Candler, Carroll, Charlton, Chatham,

Cherokee, Clay, Clayton, Clinch, Cobb, Coffee, Colquitt, Columbia,

Cook, Crawford, Crisp, Dade, Dawson, DeCatur, Dekalb, Dodge,

Dooly, Dougherty, Douglas, Early, Echols, Effingham, Emanuel,

Evans, Floyd, Forsyth, Fulton, Glynn, Gordon, Grady, Gwinnett,

Habersham, Hall, Haralson, Heard, Henry, Houston, Irwin,

Jeff Davis, Jefferson, Jenkins, Johnson, Jones, Lamar, Lanier,

Laurens, Lee, Liberty, Lincoln, Long, Lowndes, Lumpkin, Macon,

McIntosh, Miller, Mitchell, Monroe, Montgomery, Murray,

Muscogee, Newton, Paulding, Peach, Pickens, Pike, Pulaski,

Quitman, Rabun, Randolph, Richmond, Rockdale, Screven,

Seminole, Spalding, Stewart, Sumter, Talbot, Tattnall, Telfair,

Terrell, Thomas, Tift, Toombs, Towns, Treutlen, Turner, Twiggs,

Union, Walker, Ware, Wayne, Webster, Wheeler, White,

Wilcox, Wilkinson, and Worth

Indiana

Counties of Benton, Jasper, Lake, LaPorte, Newton, Porter,

Pulaski, Saint Joseph, and Starke

1999–10 I.R.B.

March 8, 1999

Counties of Benton, Clay, Crawford, Fayette, Franklin, Gibson,

Greene, Howard, Knox, Lawrence, Madison, Miami, Monroe,

Montgomery, Orange, Owen, Parke, Pike, Putnam, Rush,

Sullivan, Union, Vigo, Wayne, and Warren

Iowa

Counties of Adair, Allamakee, Appanoose, Audubon, Benton,

Black Hawk, Boone, Buchanan, Buena Vista, Butler, Calhoun,

Carroll, Cass, Cedar, Cerro Gordo, Chickasaw, Clarke, Clay,

Clayton, Clinton, Crawford, Dallas, Davis, Decatur, Delaware,

Des Moines, Dickinson, Emmet, Fayette, Floyd, Franklin, Fremont,

Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison,

Henry, Howard, Humboldt, Iowa, Jasper, Jefferson, Johnson,

Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska,

Marion, Marshall, Mills, Monona, Montgomery, Muscatine,

Osceola, Page, Palo Alto, Pocahontas, Polk, Pottawattamie,

Poweshiek, Ringgold, Sac, Shelby, Story, Tama, Taylor, Union,

Wapello, Warren, Washington, Webster, Winnebago,

Winneshiek, and Wright

Kansas

Counties of Bourbon, Cherokee, Douglas, Franklin, Jackson,

Jefferson, Johnson, Leavenworth, Linn, Seward, Wabaunsee,

and Wyandotte

Counties of Butler, Chase, Coffey, Cowley, Douglas, Franklin,

Greenwood, Harper, Harvey, Johnson, Leavenworth, Lyon,

Marion, Neosho, Saline, Sedgwick, Sumner, Wilson, Woodson,

and Wyandotte

Kentucky

Counties of Adair, Bath, Boyle, Breathitt, Carter, Casey, Clark,

Clay, Clinton, Elliott, Estill, Fleming, Garrard, Greenup, Jackson,

Johnson, Knox, Laurel, Lawrence, Lee, Lewis, Lincoln, Madison,

Magoffin, McCreary, Menifee, Mercer, Montgomery, Morgan,

Nicholas, Owsley, Powell, Pulaski, Robertson, Rockcastle, Rowan,

Russell, Wayne, Whitley, and Wolfe

Counties of Adair, Barren, Bell, Breathitt, Casey, Clay, Floyd,

Johnson, Knott, Knox, Lawrence, Lee, Leslie, Letcher, Magoffin,

Metcalfe, Owsley, Perry, Pike, Warren, and Whitley

Louisiana

Parishes of Acadia, Ascension, Assumption, Baptist, Cameron,

Evangeline, Jefferson, Lafourche, Livingston, Orleans, Plaquemines,

St. Bernard, St. Charles, St. James, St. John, St. Martin, St. Mary,

St. Tammany, Tangipahoa, Terrebone, Vermilion, and Washington

Maine

Counties of Androscoggin, Aroostook, Cumberland, Franklin,

Hancock, Kennebec, Knox, Lincoln, Penobscot, Piscataquis, Oxford,

Sagadahoc, Somerset, Waldo, Washington, and York

Counties of Androscoggin, Franklin, Kennebec, Oxford,

Somerset, and York

March 8, 1999

Severe storms, tornadoes,

and flooding

June 11-July 7, 1998

Severe storms, tornadoes,

and flooding

June 14, 1998July 15, 1998

Severe storms, flooding,

and tornadoes

October 1-8, 1998

Severe storms and

flooding

October 30November 15, 1998

Severe winter storm

February 4-6, 1998

Severe storms, tornadoes,

and flooding

April 16May 10, 1998

Tropical Storm Frances

and Hurricane Georges

September 9October 4, 1998

Severe ice storms, rain,

and heavy winds

January 5-25, 1998

Severe storms and

flooding

June 13-July 1, 1998

1999–10 I.R.B.

Marshall Islands

Ailinglaplap, Ailuk, Arno, Aur, Bikini, Ebeye, Ebon, Enewetak,

Jabat, Jaluit, Kili, Kwajalein, Lae, Lib, Likiep, Majuro, Maloelap,

Mejit, Mili, Namorik, Namu, Ujae, Utrik, Wotho, and Wotje

Severe drought

January 17-June 30, 1998

Massachusetts

Counties of Bristol, Essex, Middlesex, Norfolk, Plymouth,

Suffolk, and Worcester

Heavy rains and

flooding

June 13-July 6, 1998

Michigan

Counties of Bay, Clinton, Gratiot, Ionia, Kent, Mason, Montcalm,

Newaygo, Oceana, Ottawa, Saginaw, and Shiawassee

Severe storms and

straight-line winds

May 31, 1998

County of Muskegon

Severe storms and

straight-line winds

May 29-31, 1998

Counties of Macomb and Wayne

Severe storms and

high winds

July 21-22, 1998

Severe drought

January 25June 30, 1998

Severe storms and

tornadoes

March 29, 1998

Severe storms,

straight-line winds, and

tornadoes

May 15June 28, 1998

Hurricane Georges

September 25October 5, 1998

Severe storms and

flooding

July 10-31, 1998

Severe storms and

flooding

October 4-11, 1998

Severe ice storms, rain,

and high winds

January 7-25, 1998

Micronesia

State of Chuuk: Eot, Ettal, Etten, Fanapanges, Fefen, Fonanu,

Fono, Houk, Kuttu, Lekinioch, Losap, Makur, Moch, Murillo,

Nama, Namoluk, Nomwin, Oneop, Onou, Onoun, Paata, Parem,

Piherach, Piis-Emwar, Piis-Paneu, Pollap, Polle, Polowat,

Romanum, Ruo, Satowan, Siis, Ta, Tetiw, Tol, Tomatam, Tonoas,

Udot, Uman, Unanu, Weno, and Wonei.

State of Phonpei: the areas of Kipingamarangi, Mwoakilloa,

Nukuoro, Oroluk, Pakin, Pingelap, and Sapwuahfik.

State of Yap: Eauripik, Elato, Fais, Faraulap, Ifalik,

Lamotrek, Ngulu, Satawal, Sorol, Ulithi, Wolei, and Yap Proper.

Minnesota

Counties of Blue Earth, Brown, Cottonwood, LaSueur, Nicollet,

Nobles, and Rice

Counties of Anoka, Blue Earth, Carver, Dakota, Faribault,

Fillmore, Freeborn, Goodhue, Hennepin, Houston, Jackson,

Mower, Olmsted, Ramsey, Rice, Scott, Wabasha, Washington,

and Winona

Mississippi

Counties of Covington, Forrest, George, Greene, Hancock,

Harrison, Jackson, Jasper, Jefferson Davis, Jones, Lamar,

Marion, Pearl River, Perry, Pike, Stone, and Wayne

Missouri

Counties of Jackson and St. Louis; and City of St. Louis

Counties of Andrew, Barton, Caldwell, Carroll, Cedar, Chariton,

Clay, Dade, DeKalb, Jackson, Linn, Livingston, Macon, Miller,

Moniteau, Morgan, Platte, Polk, and Ray

New Hampshire

Counties of Belknap, Carroll, Cheshire, Coos, Grafton,

Hillsborough, Merrimack, Stafford, and Sullivan

1999–10 I.R.B.

March 8, 1999

Counties of Belknap, Carroll, Grafton, Hillsborough,

Merrimack, Rockingham, and Sullivan

Severe storms and

flooding

July 12-July 2, 1998

Severe winter coastal

storm, high winds, and

flooding

February 4-9, 1998

Severe winter and ice

storms, high winds, and

flooding

January 5-17, 1998

Counties of Broome, Chenango, Otsego, Rensselaer, Saratoga,

and Wyoming

Severe thunderstorms

and tornadoes

May 31-June 2, 1998

Counties of Allegany, Cattaraugus, Clinton, Delaware, Erie,

Essex, Franklin, Genesee, Livingston, Monroe, Steuben,

Sullivan, Tioga, Tompkins, and Wyoming

Severe storms and

flooding

June 25-July 10, 1998

Counties of Cayuga, Fulton, Herkimer, Madison, Monroe,

Nassau, Oneida, Onondaga, Ontario, Orleans, and Wayne

Severe storms and

high winds

September 7, 1998

North Carolina

Counties of Ashe, Avery, Dare, Haywood, Madison, Mitchell,

Robeson, Transylvania, Watauga, and Yancey

Severe storms and

flooding

January 7February 12, 1998

Counties of Durham, Edgecombe, Lenoir, Nash, Rockingham,

Wake, and Wayne

Severe storms, tornadoes,

and flooding

March 20April 1, 1998

Counties of Beaufort, Bertie, Bladen, Brunswick, Camden,

Carteret, Chowan, Columbus, Craven, Cumberland, Currituck,

Dare, Duplin, Greene, Hyde, Jones, Lenoir, Martin,

New Hanover, Onslow, Pamlico, Pasquotank, Pender, Perquimans,

Pitt, Robeson, Sampson, Tyrrell, Washington, and Wayne

Hurricane Bonnie

August 25September 1, 1998

Flooding ground

saturation, and severe

storms

March 2-July

18, 1998

Typhoon Paka and

associated torrential rains

December 16-17, 1998

Severe storms, flooding,

and tornadoes

June 24-July 5, 1998

Oregon

County of Crook

Flooding

May 28-June 3, 1998

Pennsylvania

Counties of Allegheny, Beaver, Berks, Pike, Susquehanna,

Somerset, and Wyoming

Severe storms, tornadoes

and flooding

May 31-June 2, 1998

New Jersey

Counties of Atlantic, Cape May, and Ocean

New York

Counties of Clinton, Essex, Franklin, Genessee, Jefferson,

Lewis, Monroe, Niagara, Saratoga, and St. Lawrence

North Dakota

Counties of Barnes, Benson, Cass, Dickey, LaMoure, Nelson,

Pembina, Pierce, Ramsey, Ransom, Richland, Rolette, Sargent,

Stutsman, Towner, Walsh; and Indian Reservations of the Spirit

Lake Sioux Tribe and the Turtle Mountain Band of Chippewa

Northern Mariana Islands

Island of Rota

Ohio

Counties of Athens, Belmont, Coshocton, Franklin, Guernsey,

Harrison, Holmes, Jackson, Jefferson, Knox, Meigs, Monroe,

Morgan, Morrow, Muskingum, Noble, Ottawa, Perry, Pickaway,

Richland, Sandusky, Tuscarawas, and Washington

March 8, 1999

1999–10 I.R.B.

Puerto Rico

All municipios

Hurricane Georges

September 20October 27, 1998

South Carolina

County of Horry

Hurricane Bonnie

August 25September 1, 1998

South Dakota

Counties of Brown, Clark, Codington, Day, Hanson, Marshall,

McCook, Roberts, and Spink

Flooding, severe storms,

and tornadoes

April 25-June 22, 1998

Severe storms and

flooding

January 6February 12, 1998

Counties of Anderson, Blount, Bradley, Campbell, Carroll,

Cheatham, Claiborne, Crockett, Davidson, Dickson, Dyer, Gibson,

Giles, Grainger, Hamblen, Hancock, Hardin, Hawkins, Humphreys,

Jackson, Jefferson, Knox, Lauderdale, Lawrence, Loudon, Macon,

Madison, Maury, Monroe, Morgan, Pickett, Polk, Rhea, Roane,

Robertson, Scott, Sevier, Shelby, Sumner, Union, Wayne,

Williamson, and Wilson

Severe storms, tornadoes,

and flooding

April 16-May 18, 1998

Counties of Lawrence and Lewis

Flooding and severe

storms

July 13-July 28, 1998

Tropical Storm Charley

August 22-31, 1998

Counties of Brazoria, Galveston, Harris, Jefferson, and

Matagorda

Severe storms and

flooding associated with

Tropical Storm Frances

September 9October 5, 1998

Counties of Austin, Atascosa, Bastrop, Bexar, Blanco, Brazoria,

Burleson, Caldwell, Calhoun, Colorado, Comal, DeWitt, Fayette,

Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe,

Harris, Hays, Jackson, Jefferson, Jim Wells, Karnes, Kendall,

Lavaca, Liberty, Matagorda, Medina, Montgomery, Nueces, Polk,

Refugio, San Jacinto, San Patricio, Travis, Trinity, Victoria,

Walker, Waller, Wharton, and Wilson

Severe storms, flooding,

and tornadoes

October 17November 15, 1998

U.S. Virgin Islands

Islands of St. Croix, St. John, St. Thomas, and Water Island

Hurricane Georges

September 19-22, 1998

Vermont

Counties of Addison, Chittenden, Franklin, Grand Isle, Orange,

and Windsor

Severe ice storms, rain,

high winds, and flooding

January 6-16, 1998

Severe storms and

flooding

June 17-August

17, 1998

Tennessee

Counties of Bledsoe, Bradley, Campbell, Cannon, Carter, Chester,

Clay, Cocke, Crockett, Cumberland, DeKalb, Fentress, Gibson,

Greene, Grundy, Hawkins, Haywood, Jackson, Jefferson, Johnson,

Madison, Meigs, Morgan, Overton, Pickett, Polk, Putnam, Rhea,

Roane, Scott, Sequatchie, Sevier, Sullivan, Tipton, Unicoi,

Van Buren, Warren, Washington, and White

Texas

Counties of Edwards, Kimble, Kinney, Maverick, Real,

Uvalde, Val Verde, and Webb

Counties of Addison, Caledonia, Chittenden, Essex, Franklin,

Lamoille, Orange, Orleans, Rutland, Washington, and Windsor

1999–10 I.R.B.

March 8, 1999

Virginia

Cities of Chesapeake, Norfolk, Portsmouth, Suffolk, and

Virginia Beach

Washington

Counties of Ferry and Stevens

City of Kelso (Cowlitz County), specifically the Aldercrest-Banyon

subdivision

West Virginia

Counties of Braxton, Cabell, Calhoun, Clay, Doddridge, Gilmer,

Harrison, Jackson, Kanawha, Lewis, Marion, Marshall, Ohio,

Pleasants, Ritchie, Roane, Tyler, Webster, Wetzel, Wirt, and Wood

Wisconsin

Counties of Buffalo, Clark, Crawford, Dunn, Grant, Jackson,

La Crosse, Monroe, Pepin, Pierce, Richland, St. Croix, Trempealeau,

and Vernon

Counties of Milwaukee, Racine, Rock, Sheboygan, and Waukesha

Section 280G.—Golden

Parachute Payments

Federal short-term, mid-term, and long-term

rates are set forth for the month of March 1999. See

Rev. Rul. 99–11, page 18.

Section 382.—Limitation on Net

Operating Loss Carryforwards

and Certain Built-In Losses

Following Ownership Change

The adjusted federal long-term rate is set forth

for the month of March 1999. See Rev. Rul. 99–11,

page 18.

Section 412.—Minimum

Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Hurricane Bonnie

August 25September 1, 1998

Severe storms and

flooding

May 26-29, 1998

Landslide

March 6-November

19, 1998

Severe storms,

flooding, and

tornadoes

June 26-July 27, 1998

Severe storms,

straight-line winds,

tornadoes, heavy rain,

and flooding

June 18-30, 1998

Severe storms and

flooding

August 5-15, 1998

Section 468.—Special Rules for

Mining and Solid Waste

Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Section 482.—Allocation of

Income and Deductions Among

Taxpayers

Federal short-term, mid-term, and long-term

rates are set forth for the month of March 1999. See

Rev. Rul. 99–11, page 18.

Section 483.—Interest on

Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Section 467.—Certain

Payments for the Use of

Property or Services

Section 642.—Special Rules for

Credits and Deductions

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Federal short-term, mid-term, and long-term

rates are set forth for the month of March 1999. See

Rev. Rul. 99–11, page 18.

March 8, 1999

Section 807.—Rules for Certain

Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Insurance companies; interest rate

tables. Prevailing state assumed interest

rates are provided for the determination of

reserves under section 807 of the Code for

contracts issued in 1998 and 1999. Rev.

Rul. 92–19 supplemented in part.

Rev. Rul. 99–10

For purposes of § 807(d)(4) of the Internal Revenue Code, for taxable years

beginning after December 31, 1997, this

ruling supplements the schedules of prevailing state assumed interest rates set

forth in Rev. Rul. 92–19, 1992–1 C.B.

227. This information is to be used by insurance companies in computing their reserves for (1) life insurance and supplementary total and permanent disability

benefits, (2) individual annuities and pure

endowments, and (3) group annuities and

pure endowments. As § 807(d)(2)(B) requires that the interest rate used to compute these reserves be the greater of (1)

the applicable federal interest rate, or (2)

the prevailing state assumed interest rate,

1999–10 I.R.B.

the table of applicable federal interest

rates in Rev. Rul. 92–19 is also supplemented.

Following are supplements to schedules A, B, C, and D to Part III of Rev. Rul.

92–19, providing prevailing state assumed interest rates for insurance products with different features issued in 1998

and 1999, and a supplement to the table in

Part IV of Rev. Rul. 92–19, providing the

applicable federal interest rate under

§ 807(d) for 1998 and 1999. This ruling

does not supplement Parts I and II of Rev.

Rul. 92–19.

This is the seventh supplement to the

interest rates provided in Rev. Rul. 92–19.

Earlier supplements were published in

Rev. Rul. 93–58, 1993–2 C.B. 241 (inter-

est rates for insurance products issued in

1992 and 1993), Rev. Rul. 94–11, 1994–1

C.B. 196 (1993 and 1994), Rev. Rul.

95–4, 1995–1 C.B. 141 (1994 and 1995),

Rev. Rul. 96–2, 1996–1 C.B. 141 (1995

and 1996), Rev. Rul. 97–2, 1997–1 C.B. 8

(1996 and 1997), and Rev. Rul. 98–2,

1998–2 I.R.B. 15 (1997 and 1998).

Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*

Schedule A

STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TO

THE NAIC STANDARD VALUATION LAW

A. Life insurance valuation:

Guarantee Duration

(years)

Calendar Year

of Issue

1999

10 or fewer

5.00**

More than 10

but not more than 20

4.75**

More than 20

4.50**

Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s Corporate

Bond Yield Average — Monthly Average Corporates.

** As the applicable federal interest rate for 1999 of 6.30 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under § 807 is 6.30 percent.

* The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92–19 are those used in the Standard Valuation

Law; the terms are defined in Rev. Rul. 92–19.

Part III, Schedule B

STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TO

THE NAIC STANDARD VALUATION LAW

B. Single premium immediate annuities and annuity benefits involving life contingencies arising

from other annuities with cash settlement options and from guaranteed interest contracts with cash

settlement options:

Calendar Year of Issue

1998

Valuation Interest Rate

6.25*

Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s Corporate

Bond Yield Average — Monthly Average Corporates. The terms used in this schedule are those

used in the Standard Valuation Law as defined in Rev. Rul. 92–19.

*As this prevailing state assumed interest does not exceed the applicable federal interest rate for 1998 of 6.31 percent, the

applicable federal interest rate of 6.31 percent is to be used for this product under § 807.

1999–10 I.R.B.

March 8, 1999

Part III, Schedule C16 – 1998

STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR

1998 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS

C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:

Cash

Settlement

Options?

Future

Interest

Guarantee?

Yes

Yes or No

Guarantee Duration

(years)

Valuation Interest Rate

For Plan Type

5 or fewer

6.25*

5.50*

5.00*

More than 5, but not more than 10

6.00*

5.50*

5.00*

More than 10, but not more than 20

5.75*

5.00*

4.75*

More than 20

4.75*

4.50*

5 or fewer

6.50

5.75*

5.25*

More than 5, but not more than 10

6.25*

5.75*

5.25*

More than 10, but not more than 20

6.00*

5.25*

5.00*

More than 20

5.00*

4.75*

5 or fewer

6.25*

More than 5, but not more than 10

6.00*

More than 10, but not more than 20

5.75*

More than 20

4.75*

NOT APPLICABLE

Source: Rates calculated from the monthly averages, ending June 30, 1998 of Moody’s Corporate Bond Yield Average — Monthly

Average Corporates.

*As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under

§ 807 is 6.31 percent.

Part III, Schedule D16 – 1998

STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR

1998 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS

D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options and

that are valued on a change in fund basis:

Cash

Settlement

Options?

Yes

Future

Interest

Guarantee?

Yes

Guarantee Duration

(years)

Valuation Interest Rate

For Plan Type

5 or fewer

7.00

6.50

5.25*

More than 5, but not more than 10

6.75

6.50

5.25*

More than 10, but not more than 20

6.25*

6.00*

5.00*

More than 20

5.50*

4.75*

5 or fewer

7.00

6.75

5.50*

More than 5, but not more than 10

7.00

6.75

5.50*

More than 10, but not more than 20

6.50

6.25*

5.25*

More than 20

5.75*

4.75*

Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s Corporate Bond Yield Average — Monthly

Average Corporates.

*As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under

§ 807 is 6.31 percent.

March 8, 1999

1999–10 I.R.B.

Part IV. Applicable Federal Interest

Rates.

EFFECT ON OTHER REVENUE

RULINGS

TABLE OF APPLICABLE FEDERAL

INTEREST RATES FOR PURPOSES

OF § 807

Rev. Rul. 92–19 is supplemented by the

addition to Part III of that ruling of prevailing state assumed interest rates under

§ 807 for certain insurance products issued in 1998 and 1999 and is further supplemented by an addition to the table in

Part IV of Rev. Rul. 92–19 listing applicable federal interest rates. Parts I and II of

Rev. Rul. 92–19 are not affected by this

ruling.

Year

Interest Rate

1998

1999

6.31

6.30

Sources: Rev. Rul. 97–50, 1997–49 C.B.

5 for the 1998 rate and Rev. Rul. 98–57,

1998–49 I.R.B. 4 for the 1999 rate.

1999–10 I.R.B.

DRAFTING INFORMATIONThe

principal author of this revenue ruling is

Ann H. Logan of the Office of Assistant

Chief Counsel (Financial Institutions and

Products). For further information

regarding this revenue ruling contact her

on (202) 622-3970 (not a toll-free call).

March 8, 1999

1999–10 I.R.B.

March 8, 1999

1999–10 I.R.B.

March 8, 1999

Section 846.—Discounted

Unpaid Losses Defined

The adjusted applicable federal short-term, and

long-term rates are set forth for the month of March

1999. See Rev. Rul. 99–11, page 18.

Section 1274.—Determination

of Issue Price in the Case of

Certain Debt Instruments Issued

for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,

483, 642, 807, 846, 1288, 7520, 7872.)

Determination of issue price in the

case of certain debt instruments issued

for property. This ruling provides various prescribed rates for federal income

tax purposes for March 1999.

Rev. Rul. 99–11

This revenue ruling provides various

prescribed rates for federal income tax

purposes for March 1999 (the current

month.) Table 1 contains the short-term,

mid-term, and long-term applicable federal rates (AFR) for the current month for

purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the

short-term, mid-term, and long-term adjusted applicable federal rates (adjusted

AFR) for the current month for purposes

of section 1288(b). Table 3 sets forth the

adjusted federal long-term rate and the

long-term tax-exempt rate described in

section 382(f). Table 4 contains the appropriate percentages for determining the

low-income housing credit described in

section 42(b)(2) for buildings placed in

service during the current month. Finally,

Table 5 contains the federal rate for determining the present value of an annuity, an

interest for life or for a term of years, or a

remainder or a reversionary interest for

purposes of section 7520.

REV. RUL. 99–11 TABLE 1

Applicable Federal Rates (AFR) for March 1999

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-Term

AFR

110% AFR

120% AFR

130% AFR

4.67%

5.14%

5.62%

6.10%

4.62%

5.08%

5.54%

6.01%

4.59%

5.05%

5.50%

5.97%

4.58%

5.03%

5.48%

5.94%

Mid-Term

AFR

110% AFR

120% AFR

130% AFR

150% AFR

175% AFR

4.83%

5.32%

5.80%

6.30%

7.29%

8.52%

4.77%

5.25%

5.72%

6.20%

7.16%

8.35%

4.74%

5.22%

5.68%

6.15%

7.10%

8.26%

4.72%

5.19%

5.65%

6.12%

7.06%

8.21%

Long-Term

AFR

110% AFR

120% AFR

130% AFR

5.30%

5.83%

6.38%

6.92%

5.23%

5.75%

6.28%

6.80%

5.20%

5.71%

6.23%

6.74%

5.17%

5.68%

6.20%

6.71%

REV. RUL. 99–11 TABLE 2

Adjusted AFR for March 1999

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term

adjusted AFR

3.09%

3.07%

3.06%

3.05%

Mid-term

adjusted AFR

3.77%

3.74%

3.72%

3.71%

Long-term

adjusted AFR

4.68%

4.63%

4.60%

4.59%

March 8, 1999

1999–10 I.R.B.

REV. RUL. 99–11 TABLE 3

Rates Under Section 382 for March 1999

Adjusted federal long-term rate for the current month

4.68%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the

adjusted federal long-term rates for the current month and the prior two months.)

4.71%

REV. RUL. 99–11 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for March 1999

Appropriate percentage for the 70% present value low-income housing credit

8.18%

Appropriate percentage for the 30% present value low-income housing credit

3.51%

REV. RUL. 99–11 TABLE 5

Rate Under Section 7520 for March 1999

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of

years, or a remainder or reversionary interest

Section 1288.—Treatment of

Original Issue Discount on

Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Section 6103.—Confidentiality

and Disclosure of Returns and

Return Information

26 CFR 6103.301.6103(j)(1)–1: Department of

Commerce

T.D. 8811

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

Disclosure of Return Information

to the Bureau of the Census

AGENCY: Internal Revenue Service

(IRS), Treasury.

1999–10 I.R.B.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final and temporary regulations relating to

additions to, and deletions from, the list of

items of information disclosed to the

Bureau of the Census for use in certain

statistical programs. These regulations

provide guidance to IRS personnel responsible for disclosing the information.

The text of the temporary regulations also

serves as the text of the proposed regulations set forth in the notice of proposed

rulemaking on this subject in REG–

121806–97, on page 46.

DATES: Effective Date: These regulations are effective January 25, 1999.

Applicability Date: For dates of applicability, see §301.6103(j)(1)–1T(e) of

these regulations.

FOR FURTHER INFORMATION CONTACT: Jamie Bernstein, (202) 622-4570

(not a toll-free number).

5.8%

SUPPLEMENTARY INFORMATION:

Background

Under section 6103(j)(1) of the Internal Revenue Code, upon written request

from the Secretary of Commerce, the

Secretary is to furnish to the Bureau of

the Census (“Bureau”) tax return information that is prescribed by Treasury regulations for the purpose of structuring

censuses and national economic accounts

and conducting related statistical activities. Section 301.6103(j)(1)–1 of the regulations provides an itemized description

of the return information authorized to be

disclosed for this purpose. Periodically,

the disclosure regulations are amended to

reflect the changing needs of the Bureau

for data for its statutorily authorized statistical activities.

This document adopts temporary regulations that authorize IRS personnel to

disclose the additional items of return information that have been requested by the

Secretary of Commerce. The temporary

March 8, 1999

regulations also delete certain items of return information that are enumerated in

the existing regulations but that the Secretary of Commerce has indicated are no

longer needed.

Except for §301.6103(j)(1)–1T(b)(3),

(b)(6)(i)(A) and (b)(6)(iii), the text of the

temporary regulations is the same as 26

CFR 301.6103(j)(1)–1. The changes

made by §301.6103(j)(1)–1T(b)(3),

(b)(6)(i)(A) and (b)(6)(iii) are discussed

below.

Explanation of Provisions

The request by the Secretary of Commerce for additional items of return information has indicated several areas in

which changes to existing Bureau access

to tax return information either would improve present statistical programs or are

necessary to implement new programs.

To reduce small businesses’ direct reporting burden in quinquennial economic

censuses and current economic surveys,

and to improve the quality of the data received, the Bureau needs certain items of

information set forth in tax returns. These

items include total expenses or deductions, beginning- and end-of-year inventories, net gain from sales of business

property, other income, and total income.

The Secretary of Commerce also has

requested identity information of parent

corporations as shown on corporate tax

returns. This information will enable the

Bureau to collect data for various economic surveys at the subsidiary or division level rather than at the establishment

level. Restructuring data collection in accordance with such new organizational

linkages will reduce the burden on individual business establishments to estimate

data relating to their affiliates, enhance

the quality of the data collected, and provide the Bureau with an efficient sampling frame for surveys collecting certain

data, such as capital expenditures, that are

typically not available at the establishment level.

To eliminate the follow-up contact of

corporate taxpayers presently required

under the Quarterly Financial Report

(QFR) program in order to establish S

corporation status, the Bureau needs the

document code and district office code

from corporate returns. Another improvement to the QFR program would be ef-

March 8, 1999

fected by the requested disclosure of parent corporation identity information, because subsidiaries could then be linked

before a sample was selected and would

be relieved of the separate Census reporting requirements. Finally, the Bureau

seeks to enhance the quality and reduce

the size of sample frames under the QFR

program by identifying inactive corporations so that they can be excluded from

the universe subject to sampling. This requires that certain items of corporate employment tax information (employer identification number, tax period, total

compensation, and taxable wages and

tips), available to the Bureau under the

existing regulations for economic census

purposes, be available to the Bureau as

well for QFR purposes.

The Secretary of Commerce has advised that the Bureau no longer uses certain items of information listed in the existing regulations: sales of livestock and

produce raised, Schedule E information

filed with the Form 1120 series, and, with

respect to the QFR program, net income

or loss. Accordingly, the temporary regulations have deleted these items from the

enumeration of return information to be

disclosed to the Bureau.

The transfer of the Census of Agriculture to the Department of Agriculture

under the Census of Agriculture Act of

1997 (Public Law 105–113) has also obviated the need for the Secretary of Commerce to receive certain items of information. These items are: Schedule F filed

with the Form 1040 series, net farm profits, agricultural activity code, and answers

to material participation questions. These

items have been deleted in the temporary

regulations.

For simplification and consistency, the

term “loss” is not expressly stated in these

regulations as an alternative to “income”

or “gain,” but it is the intent of the Secretary to interpret “income” or “gain” as including negative or loss figures and to

provide any such figures to the Bureau.

cedure Act (5 U.S.C. chapter 5) does not

apply to these regulations. For the applicability of the Regulatory Flexibility Act (5

U.S.C. chapter 6) see the Special Analyses section of the preamble to the cross

reference notice of proposed rulemaking

published in the Proposed Rules section

in this issue of the Federal Register. Pursuant to section 7805(f) of the Internal

Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on their impact on small business.

Special Analyses

(b)(3)[Reserved]. For further guidance, see §301.6103(j)(1)–1T(b)(3).

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 553(b) of the Administrative Pro-

Drafting Information

The principal author of these regulations is Douglas Giblen, Office of the Associate Chief Counsel (International) (formerly of the Office of Assistant Chief

Counsel (Disclosure Litigation)). However, other personnel from the IRS and

Treasury Department participated in their

development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR Part 301 is

amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 is amended by adding an entry in

numerical order to read as follows:

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

Section 301.6103(j)(1)–1T also issued

under 26 U.S.C. 6103(j)(1);* * *

Par. 2. Section 301.6103(j)(1)–1 is

amended by revising paragraphs (b)(3)

and (b)(6)(i)(A) to read as follows:

§301.6103(j)(1)–1 Disclosures of return

information to officers and employees of

the Department of Commerce for certain

statistical purposes and related activities.

* * * * *

(b)(6)(i)(A)[Reserved]. For further

guidance, see §301.6103(j)(1)–1T(b)(6)(i)(A).

* * * * *

1999–10 I.R.B.

Par. 3. Section 301.6103(j)(1)–1T is

added to read as follows:

§301.6103(j)(1)–1T Disclosure of return

information to officers and employees of

the Department of Commerce for certain

statistical purposes and related activities

(temporary).

(a) through (b)(2)[Reserved]. For further guidance, see §301.6103(j)(1)–1(a)

through (b)(2).

(b)(3) Officers or employees of the Internal Revenue Service will disclose the

following business related return information reflected on the return of a taxpayer

to officers and employees of the Bureau

of the Census for purposes of, but only to

the extent necessary in, conducting and

preparing, as authorized by chapter 5 of

title 13, United States Code, demographic, economic, and agricultural statistics programs, censuses, and surveys. The

“return of a taxpayer” includes, but is not

limited to, Form 941; Form 990 series;

Form 1040 series and Schedules C and

SE; Form 1065 and all attending schedules and Form 8825; Form 1120 series

and all attending schedules and Form

8825; Form 851; Form 1096; and other

business returns, schedules and forms that

the Internal Revenue Service may issue—

(i) Taxpayer identity information (as

defined in section 6103(b)(6)) including

parent corporation, shareholder, partner,

and employer identity information;

(ii) Gross income, profits, or receipts;

(iii) Returns and allowances;

(iv) Cost of labor, salaries, and wages;

(v) Total expenses or deductions;

(vi) Total assets;

(vii) Beginning- and end-of-year inventory;

(viii) Royalty income;

(ix) Interest income, including portfolio interest;

(x) Rental income, including gross

rents;

(xi) Tax-exempt interest income;

(xii) Net gain from sales of business

property;

(xiii) Other income;

(xiv) Total income;

(xv) Percentage of stock owned by

each shareholder;

(xvi) Percentage of capital ownership

of each partner;

(xvii) End-of-year code;

(xviii) Months actively operated;

1999–10 I.R.B.

(xix) Principal industrial activity code,

including the business description;

(xx) Total number of documents and

the total amount reported on the Form

1096 transmitting Forms 1099-MISC;

(xxi) Form 941 indicator and business

address on Schedule C; and

(xxii) Consolidated return indicator.

(b)(4) and (5)[Reserved]. For further

guidance, see §301.6103(j)(1)–1(b)(4)

and (5).

(b)(6)(i) Officers or employees of the

Internal Revenue Service will disclose the

following return information (but not including return information described in

section 6103(o)(2)) reflected on the return

of a corporation with respect to the tax

imposed by Chapter 1 to officers and employees of the Bureau of the Census for

purposes of, but only to the extent necessary in, developing and preparing, as authorized by law, the Quarterly Financial

Report—

(A) From the business master files of

the Internal Revenue Service—

(1) Taxpayer identity information (as

defined in section 6103(b)(6)), including

parent corporation identity information;

(2) Document code;

(3) District office code;

(4) Consolidated return and final return indicators;

(5) Principal industrial activity code;

(6) Partial year indicator;

(7) Annual accounting period;

(8) Gross receipts less returns and allowances; and

(9) Total assets.

(b)(6)(i)(B) and (ii)[Reserved]. For

further guidance, see §301.6103(j)(1)–

1(b)(6)(i)(B) and (ii).

(iii) Information from an employment

tax return disclosed pursuant to

§301.6103(j)(1)–1(b)(2)(iii)(A), (B), (D),

(I) and (J) may be used by officers and

employees of the Bureau of the Census

for the purpose described in and subject to

the limitations of this paragraph (b)(6).

(e) Effective date. This section is applicable to the Bureau of the Census on

January 25, 1999, through January 22,

2002.

Robert E. Wenzel,

Deputy Commissioner of

Internal Revenue.

Approved December 29, 1998.

Donald C. Lubick,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on January 22, 1999, 8:45 a.m., and published in the issue of

the Federal Register for January 25, 1999, 64 F.R.

3669)

Section 6221.—Tax Treatment

Determined at Partnership Level

26 CFR 6221–1T: Tax treatment determined at

partnership level (Temporary)

T.D. 8808

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

Modifications and Additions to

the Unified Partnership Audit

Procedures

AGENCY: Internal Revenue Service,

Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final and temporary regulations relating to

the unified partnership audit procedures

added to the Internal Revenue Code by

the Tax Equity and Fiscal Responsibility

Act of 1982 (TEFRA). The unified partnership audit procedures generally provide administrative rules for the auditing

of partnership items at the partnership

level. These regulations modify the existing unified partnership audit procedures

to comply with the Taxpayer Relief Act of

1997 (1997 Act) and the Internal Revenue

Service Restructuring and Reform Act of

1998 (1998 Act), and add new regulations

to administer the new unified partnership

audit provisions added by the 1997 Act.

In general, the text of these temporary

regulations also serves as the text of the

proposed regulations set forth in the notice of proposed rulemaking on this subject in REG–106564–98, on page 53.

DATES: Effective Date: These regulations are effective January 26, 1999.

March 8, 1999

FOR FURTHER INFORMATION CONTACT: Robert G. Honigman, (202) 6223050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains temporary

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

relating to the unified partnership audit

procedures found in sections 6221 through

6233 of the Internal Revenue Code (Code)

and final regulations pertaining to the applicable dates of §301.6231(a)(7)–

1T(p)(2) and §301.6231(a)(7)–1T(r)(1).

Sections 1231 through 1243 of the Taxpayer Relief Act of 1997, Public Law

105–34, 111 Stat. 788, modified some of

the existing procedures and added certain

new rules. Section 3507 of the Internal

Revenue Service Restructuring and Reform Act of 1998, Public Law 105–206,

112 Stat. 685, modified section 6231.

This document modifies existing regulations that, because of the 1997 Act or the

1998 Act, no longer reflect current law.

Explanation of Provisions

Penalties Determined At The Partnership

Level

Before the 1997 Act, the Internal Revenue Service (Service) could impose

penalties on a partner only through the application of the deficiency procedures

after the completion of a partnership level

proceeding. Forcing the Service to open

deficiency proceedings against the individual partners was inconsistent with the

efficiency goal of the unified partnership

audit rules. The 1997 Act cured this problem by providing that, for partnerships

under audit for taxable years ending after

August 5, 1997, partnership level proceedings include the determination of applicable penalties at the partnership level.

Partners now may raise any partner level

defenses to the imposition of penalties

only in a subsequent refund action.

Consistent with these statutory

changes, the temporary regulations mandate that the partnership’s penalty defenses are to be resolved during the partnership proceeding. Nevertheless, any

individual defenses that a partner may

have to the imposition of a penalty may

March 8, 1999

be brought by the partner in a refund action subsequent to the partnership level

determination. In order to minimize the

burden on individual partners to defend

themselves by bringing their own refund

suits, the temporary regulations incorporate a large number of defenses at the

partnership level. The majority of a partner’s defenses to the imposition of penalties are not specific to a particular partner,

but can be determined by reference to the

activities of the partnership. The applicability of these defenses may be resolved at

the partnership level during the partnership proceeding. In addition, the temporary regulations modify the computational

adjustment rules to allow the Service to

assess penalties under those procedures.

Partial Settlements

The period for assessing tax with respect to partnership items generally is the

longer of the periods provided by section

6229 or section 6501. For partnership

items that convert to nonpartnership

items, section 6229(f) provides that the

period for assessing tax shall not expire

before the date which is one year after the

date that the items became nonpartnership

items. Section 6231(b)(1)(C) provides

that the partnership items of a partner for

a partnership taxable year become nonpartnership items as of the date the partner enters into a settlement agreement

with the Service with respect to such

items. In some audits, however, the taxpayer and the Service will enter into a settlement agreement regarding some, but

not all, of the taxpayer’s partnership

items. The 1997 Act added a special rule

for these partial settlement agreements in

section 6229(f)(2), providing that the period for assessing any tax attributable to

the settled items is determined as if the

partial settlement had not been executed.

Thus, the limitations period applicable to

the last partnership item to be resolved for

the partnership’s taxable year under audit

is controlling with respect to all disputed

partnership items (including settled items)

for such partnership taxable year.

The temporary regulations state that the

one year period for assessing partnership

items that convert to nonpartnership items

applicable to settlement agreements under

section 6231(b)(1)(C) does not apply to

partial settlement agreements under sec-

tion 6229(f)(2). Moreover, the temporary

regulations clarify that the partner remains subject to the unified audit procedures regarding the nonsettled items.

Tax Matters Partner As A Debtor In

Bankruptcy

Section 6229(b)(1)(B) provides that the

statute of limitations under section 6229

is extended with respect to all partners in

the partnership by an agreement entered

into between the tax matters partner

(TMP) and the Service. Treas. Reg.

§301.6231(a)(7)–1(l)(1)(iv) (1996) and

Temp. Treas. Reg. §301.6231(c)–7T(a)

(1987), however, provide that upon the

filing of a petition naming a partner as a

debtor in a bankruptcy proceeding, the

partner/debtor’s partnership items convert

to nonpartnership items, and if the partner/debtor was the TMP, that status terminates. These rules were promulgated to

avoid the complications that the automatic stay provision contained in 11

U.S.C. 362(a)(8) would have on a unified

partnership audit. As a result, if a TMP

executed a consent to extend the statute of

limitations during a period when the TMP

was a debtor in a bankruptcy proceeding,

the consent would not be binding on the

other partners. Under the regulations, the

person signing the agreement was ineligible to act as the TMP and extend the

statute as to all partners.

To resolve the uncertainty under prior

law in the situation where a TMP executes

an agreement extending the statute of limitations as to all partners while, unknown

to the Service, the TMP is a debtor in a

bankruptcy proceeding, the 1997 Act provides that the Service may rely on the executed statute extension agreement unless

it is notified of the TMP’s bankruptcy

proceeding. If the Service is not notified

of the TMP’s bankruptcy proceeding,

statute extensions granted by the TMP are

binding on all partners in the partnership.

The temporary regulations provide a

mechanism for the TMP, or other partners,

to provide notice to the Service that the

TMP is a debtor in a bankruptcy proceeding and therefore is ineligible to serve as

TMP and extend the statute under section

6229. This mechanism is derived from

existing regulations that provide guidance

on how to notify the Service of information concerning a partnership’s partners.

1999–10 I.R.B.

Small Partnership Exception

The 1997 Act amended the small partnership exception to the unified partnership audit procedures found in section

6231. Formerly, in order to qualify for

the small partnership exception, the partnership had to have 10 or fewer partners

at all times during the tax year, each of

whom was a natural person (other than a

nonresident alien) or an estate, and for

which each partner’s share of each partnership item was the same as that partner’s share of every other partnership

item. The 1997 Act amended the small

partnership exception by allowing partnerships to qualify for the exception even

if they have a C corporation for a partner

or specially allocate some partnership

items. The temporary regulations modify

the existing regulations interpreting the

small partnership exception to take account of this change in the law.

Effective Date

These final and temporary regulations

are applicable January 26, 1999. In accordance with section 7805(e)(2), the

temporary regulations contained herein

shall expire January 25, 2002.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 533(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does not

apply to these regulations. For the applicability of the Regulatory Flexibility Act (5

U.S.C. chapter 6) refer to the Special

Analyses section of the preamble to the

cross reference notice of proposed rulemaking published in the Proposed Rules

section in this issue of the Federal Register. Pursuant to section 7805(f) of the Internal Revenue Code, these final and temporary regulations will be submitted to

the Chief Counsel for Advocacy of the

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

Drafting Information

The principal authors of these temporary regulations are Robert G. Honigman,

Office of the Assistant Chief Counsel

1999–10 I.R.B.

(Passthroughs & Special Industries), and

William A. Heard, Office of the Assistant

Chief Counsel (Field Service). However,

other personnel from the Service and

Treasury Department participated in their

development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 301 is

amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 continues to read in part as follows:

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

Par. 2. Amend §301.6221–1T by:

1. Redesignating paragraph (c) as paragraph (e).

2. Adding new paragraphs (c) and (d).

The additions read as follows:

§301.6221–1T Tax treatment determined

at partnership level (temporary).

* * * * *

addition to tax, or additional amount that

relates to an adjustment to a partnership

item, shall be determined at the partnership level. Partner level defenses to such

items can only be asserted through refund

actions following assessment and payment. Assessment of any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership

item shall be made based on partnership

level determinations. Partnership level

determinations include all the legal and

factual determinations that underlie the

determination of any penalty, addition to

tax, or additional amount, other than partner level defenses specified in paragraph

(d) of this section.

(d) Partner level defenses. Partner

level defenses to any penalty, addition to

tax, or additional amount that relates to an

adjustment to a partnership item, may not

be asserted in the partnership level proceeding, but may be asserted through separate refund actions following assessment

and payment. See section 6230(c)(4).

Partner level defenses are limited to those

that are personal to the partner or are dependant upon the partner’s separate return, and cannot be determined at the

partnership level. Examples of these determinations are: whether any applicable

threshold underpayment of tax has been

met with respect to the partner or whether

the partner has met the criteria of section

6664(b)(penalties applicable only where

return is filed), or section 6664(c)(1)(reasonable cause exception) subject to partnership level determinations as to the applicability of section 6664(c)(2).

* * * * *

Par. 3. Amend §301.6223(c)–1T by

adding a sentence to the end of paragraph

§301.6223(c)–1T Additional information

regarding partners furnished to the

Service (temporary).

* * * * *

prior general notification to the Service

that a partner who would otherwise be the

tax matters partner is a debtor in a bankruptcy proceeding or has had a receiver

appointed for him in a receivership proceeding is not sufficient unless a copy of

the notification document referred to is attached to the statement.

* * * * *

Par. 4. Amend §301.6224(c)–3T by:

1. Revising the section heading.

2. Revising paragraphs (b), (c)(3)(ii),

and (d), Example (1).

The revisions read as follows:

§301.6224(c)–3T Consistent settlement

terms (temporary).

* * * * *

(b) Requirements for consistent settlement terms—(1) In general. Consistent

settlement terms are those based on the

same determinations with respect to partnership items. However, consistent settlement terms also may include partnership level determinations of any penalty,

addition to tax, or additional amount that

relates to partnership items. Settlements

with respect to partnership items shall be

self-contained; thus, a concession by one

party with respect to a partnership item

March 8, 1999

may not be based upon a concession by

another party with respect to any item that

is not a partnership item other than any

penalty, addition to tax, or additional

amount that relates to an adjustment to a

partnership item. Consistent agreements,

whether comprehensive or partial, must

be identical to the original settlement (that

is, the settlement upon which the offered

settlement terms are based). A consistent

agreement must mirror the original settlement and may not be limited to selected

items from the original settlement. Once

a partner has settled a partnership item, or

penalty, addition to tax, or additional

amount that relates to an adjustment to a

partnership item, that partner may not

subsequently request settlement terms

consistent with a settlement that contains

the previously settled item. The requirement for consistent settlement terms applies only if—

(i) The items were partnership items

(and any related penalty, addition to tax,

or additional amount) for the partner entering into the original settlement immediately before the original settlement; and

(ii) The items are partnership items

(and any related penalty, addition to tax,

or additional amount) for the partner requesting the consistent settlement at the

time the partner files the request.

(2) Effect of consistent agreement.

Consistent settlement terms are reflected

in a consistent agreement. A consistent

agreement is not a settlement agreement

which gives rise to further consistent settlement rights because it is required to be

given without volitional agreement of the

Secretary. Therefore, a consistent agreement required to be offered to a requesting taxpayer is not a settlement agreement

under section 6224(c)(2) of the Internal

Revenue Code, or paragraph (c)(3) of this

section which starts a new period for requesting consistent settlement terms. For

all other purposes of the Internal Revenue

Code, however, (e.g., binding effect under

section 6224(c)(1), and conversion to

nonpartnership items under section

6231(b)(1)(C)) a consistent agreement is

treated as a settlement agreement.

(3) * * *

(ii) The 60th day after the day on

which the settlement agreement was entered into.

(d) * * *

March 8, 1999

Example (1). The Service seeks to disallow a

$100,000 loss reported by Partnership P. The Service agrees to a settlement with X, a partner in P, in

which the Service allows 60 percent of the loss, accepts the treatment of all other partnership items on

the partnership return, and imposes a penalty for

negligence related to the loss disallowance. Partner

Y, which owns a 10 percent interest in the partnership, requests settlement terms which are consistent

with the settlement made between X and the Service. The items are partnership items (and a related

penalty) for X immediately before X enters into the

settlement agreement and are partnership items (and

a related penalty) for Y at the time of the request.

The Service must offer Y settlement terms allowing

a $6,000 loss, a negligence penalty on the $4,000

disallowance, and otherwise reflecting the treatment

of partnership items on the partnership return.

* * * * *

Par. 5. Add §301.6229(b)–2T to read

as follows:

§301.6229(b)–2T Special rule with

respect to debtors in Title 11 cases

(temporary).

(a) In general. Notwithstanding any

other law or rule of law, if an agreement is

entered into under section 6229(b)(1)(B),

and the agreement is signed by a person

who would be the tax matters partner but

for the fact that, at the time that the agreement is executed, the person is a debtor in

a bankruptcy proceeding under Title 11 of

the United States Code, such agreement

shall be binding on all partners in the

partnership unless the Service has been

notified of the bankruptcy proceeding in

accordance with paragraph (b) of this

section.

(b) Procedures for notifying the Service of a partner’s bankruptcy proceeding. (1) The Service shall be notified of

the bankruptcy proceeding of the tax matters partner in accordance with the procedures set forth in §301.6223(c)–1T.

(2) In addition to the information specified in §301.6223(c)–1T, notification that

a person is (or was) a debtor in a bankruptcy proceeding shall include the date

the bankruptcy proceeding was filed, the

name and address of the court in which

the bankruptcy proceeding exists (or took

place), the caption of the bankruptcy proceeding (including the docket number or

other identification number used by the

court), and the status of the proceeding as

of the date of notification.

Par. 6. Add §301.6229(f)–1T to read as

follows:

§301.6229(f)–1T Special rule for partial

settlement agreements (temporary).

(a) In general. If a partner enters into a

settlement agreement with the Service

with respect to the treatment of some of

the partnership items in dispute for a partnership taxable year, but other partnership

items for such year remain in dispute, the

period of limitations for assessing any tax

attributable to the settled items shall be

determined as if such agreement had not

been entered into.

(b) Other items remaining in dispute.

Pursuant to section 6226(c), a partner is a

party to a partnership level judicial proceeding with respect to partnership items.

When a partner settles partnership items,

the settled partnership items convert to

nonpartnership items under section

6231(b)(1)(C) and will not be subject to

any future or pending partnership level

proceeding pursuant to section 6226(d)(1). The remaining unsettled partnership

items, however, will remain subject to determination under partnership level administrative and judicial procedures.

Consequently, any remaining unsettled

items will be deemed to remain in dispute. Thus, the period for assessing settled items will be governed by the period

for assessing the remaining unsettled

items.

Par. 7. Amend §301.6231(a)(1)–1T by:

1. Revising the first two sentences of

paragraph (a)(1).

2. Removing paragraph (a)(3).

3. Redesignating paragraph (a)(4) as

paragraph (a)(3).

The revision reads as follows:

§301.6231(a)(1)–1T Exception for small

partnerships (temporary).

(a) * * *

(1) “10 or fewer.” The “10 or fewer”

limitation described in section 6231(a)(1)(B)(i) is applied to the number of natural persons (other than nonresident

aliens), C corporations, and estates of deceased partners that were partners at any

one time during the partnership taxable

year. Thus, for example, a partnership

that at no time during the taxable year had

more than 10 partners may be treated as a

small partnership even if, because of

transfers of interests in the partnership, 11

or more natural persons, C corporations,

or estates of deceased partners owned in-

1999–10 I.R.B.

terests in the partnership for some portion

of the taxable year. * * *

* * * * *

Par. 8. Amend §301.6231(a)(6)–1T by:

1. Revising paragraph (a).

2. Removing paragraph (c).

The revision reads as follows:

§301.6231(a)(6)–1T Computational

adjustments (temporary).

(a) In general. A change in the tax liability of a partner to properly reflect the

treatment of a partnership item under subchapter C of chapter 63 of the Internal

Revenue Code is made through a computational adjustment. A computational adjustment includes a change in tax liability

that reflects a change in an affected item

where that change is necessary to properly reflect the treatment of a partnership

item, or any penalty, addition to tax, or

additional amount that relates to an adjustment to a partnership item. However,

if a change in a partner’s tax liability cannot be made without making one or more

partner level determinations, that portion

of the change in tax liability attributable

to the partner level determinations shall

be made under the provisions of subchapter B of chapter 63 of the Internal Revenue Code (relating to deficiency procedures), except for any penalty, addition to

tax, or additional amount which relates to

an adjustment to a partnership item.

(1) Changes in a partner’s tax liability

with respect to affected items that do not

require partner level determinations (such

as the threshold amount of medical deductions under section 213 that changes

as the result of determinations made at the

partnership level) are computational adjustments that are directly assessed.

When making computational adjustments, the Service may assume that

amounts the partner reported on the partner ’s individual return include all

amounts reported to the partner by the

partnership, absent contrary notice to the

Service (for example, a “Notice of Inconsistent Treatment”). Such an assumption

by the Service does not constitute a partner level determination. Moreover, substituting redetermined partnership items

for the partner’s previously reported partnership items (including partnership items

included in carryover amounts) does not

constitute a partner level determination

1999–10 I.R.B.

where the Service otherwise accepts all

nonpartnership items (including, for example, nonpartnership item components

of carryover amounts) as reported.

(2) Changes in a partner’s tax liability

with respect to affected items that require

partner level determinations (such as a

partner’s at-risk amount to the extent it

depends upon the source from which the

partner obtained the funds that the partner

contributed to the partnership) are computational adjustments subject to deficiency

procedures. Nevertheless, any penalty,

addition to tax, or additional amount that

relates to an adjustment to a partnership

item may be directly assessed following a

partnership proceeding, based on determinations in that proceeding, regardless of

whether partner level determinations are

required.

* * * * *

Par. 9. Amend §301.6231(a)(7)–1 by

adding a sentence at the end of paragraphs

(p)(2) and (r)(1) to read as follows:

§301.6231(a)(7)–1 Designation or

selection of tax matters partner.

* * * * *

(p) * * *

(2) * * * For regulations applicable on

or after January 26, 1999 (reflecting statutory changes made effective July 22,

1998) and before January 25, 2002, see

§301.6231(a)(7)–1T(p)(2).

* * * * *

(r) * * * (1) * * * For regulations applicable on or after January 26, 1999 (reflecting statutory changes made effective

July 22, 1998) and before January 25,

2002, see §301.6231(a)(7)–1T(r)(1).

largest-profits-interest rule of §301.6231(a)(7)–1(m)(2), the Commissioner will select a partner (including a general or limited partner) as the tax matters partner in

accordance with the criteria set forth in

§301.6231(a)(7)–1(q). The Commissioner will notify, within 30 days of the

selection, the partner selected, the partnership, and all partners required to receive notice under section 6223(a), effective as of the date specified in the notice.

For regulations applicable before July 22,

1998, see §301.6231(a)(7)–1(p)(2).

(p)(3) through (q) [Reserved]. For further guidance, see §301.6231(a)(7)–

1(p)(3) through (q).

(r) Notification of partnership—(1) In

general. If the Commissioner selects a

tax matters partner under the provisions

of §301.6231(a)(7)–1(p)(1) or (3)(i), the

Commissioner will notify, within 30 days

of the selection, the partner selected, the

partnership, and all partners required to

receive notice under section 6223(a), effective as of the date specified in the notice. For regulations applicable before

July 22, 1998, see §301.6231(a)(7)–

1(r)(1).

(r)(2) [Reserved]. For further guidance, see §301.6231(a)(7)–1(r)(2).

Robert E. Wenzel,

Deputy Commissioner of

Internal Revenue Service.

Approved December 30, 1998.

Donald C. Lubick,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on January 25, 1999, 8:45 a.m., and published in the issue of

the Federal Register for January 26, 1999, 64 F.R.

3837)

* * * * *

Par. 10. Add §301.6231(a)(7)–1T to

read as follows:

§301.6231(a)(7)–1T Designation or

selection of tax matters partner

(temporary).

(a) through (p)(1) [Reserved]. For further guidance, see §301.6231(a)(7)–1(a)

through (p)(1).

(p)(2) When each general partner is

deemed to have no profits interest in the

partnership. If it is impracticable under

§301.6231(a)(7)–1(o)(2) to apply the

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

Section 7872.—Treatment of

Loans With Below-Market

Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of March 1999. See Rev. Rul. 99–11, page 18.

March 8, 1999

Part III. Administrative, Procedural, and Miscellaneous

Differential Earnings Rate for

Mutual Life Insurance

Companies

Notice 99–13

This notice publishes a tentative determination under § 809 of the Internal Revenue Code of the “differential earnings

rate” for 1998 and the rate that is used to

calculate the “recomputed differential

earnings amount” for 1997. (The latter

rate is referred to in this notice as the “recomputed differential earnings rate” for

1997.) These rates are used by mutual

life insurance companies to calculate their

federal income tax liability for taxable

years beginning in 1998.

BACKGROUND

Section 809(a) provides that, in the

case of any mutual life insurance company, the amount of the deduction allowable under § 808 for policyholder dividends is reduced (but not below zero) by

the “differential earnings amount.” Any

excess of the differential earnings amount

over the amount of the deduction allowable under § 808 is taken into account as a

reduction in the closing balance of reserves under subsections (a) and (b) of

§ 807. The “differential earnings

amount” for any taxable year is the

amount equal to the product of (a) the life

insurance company’s average equity base

for the taxable year multiplied by (b) the

“differential earnings rate” for that taxable year. The “differential earnings rate”

for the taxable year is the excess of (a) the

“imputed earnings rate” for the taxable

year over (b) the “average mutual earnings rate” for the second calendar year

preceding the calendar year in which the

taxable year begins. The “imputed earnings rate” for any taxable year is the

amount that bears the same ratio to 16.5

percent as the “current stock earnings

rate” for the taxable year bears to the

“base period stock earnings rate.”

Section 809(f) provides that, in the case

of any mutual life insurance company, if

the “recomputed differential earnings

amount” for any taxable year exceeds the

differential earnings amount for that taxable year, the excess is included in life in-

March 8, 1999

surance gross income for the succeeding

taxable year. If the differential earnings

amount for any taxable year exceeds the

recomputed differential earnings amount

for that taxable year, the excess is allowed

as a life insurance deduction for the succeeding taxable year. The “recomputed

differential earnings amount” for any taxable year is an amount calculated in the

same manner as the differential earnings

amount for that taxable year, except that

the average mutual earnings rate for the

calendar year in which the taxable year

begins is substituted for the average mutual earnings rate for the second calendar

year preceding the calendar year in which

the taxable year begins.

The stock earnings rates and mutual

earnings rates taken into account under

§ 809 generally are determined by dividing statement gain from operations by the

average equity base. For this purpose, the

term “statement gain from operations”

means “the net gain or loss from operations required to be set forth in the annual

statement, determined without regard to

Federal income taxes, and . . . properly

adjusted for realized capital gains and

losses. . . .” See § 809(g)(1). The term

“equity base” is defined as an amount determined in the manner prescribed by regulations equal to surplus and capital increased by the amount of nonadmitted

financial assets, the excess of statutory reserves over the amount of tax reserves,

the sum of certain other reserves, and 50

percent of any policyholder dividends (or

other similar liability) payable in the following taxable year. See § 809(b)(2), (3),

(4), (5) and (6). Section 1.809–10 of the

Income Tax Regulations provides that the

equity base includes both the asset valuation reserve and the interest maintenance

reserve for taxable years ending after December 31, 1991.

Section 1.809–9(a) of the regulations

provides that neither the differential earnings rate under § 809(c) nor the recomputed differential earnings rate that is

used in computing the recomputed differential earnings amount under § 809(f)(3)

may be less than zero.

Rev. Rul. 99–3, 1999–3 I.R.B. 4, provides that a life insurance subsidiary of a

mutual holding company is not a mutual

life insurance company for which the deduction for policyholder dividends is reduced pursuant to §§ 808(c)(2) and 809.

As described above, the differential

earnings rate for 1998 and the recomputed

differential earnings rate for 1997 affect

the income and deductions reported by

mutual life insurance companies on their

federal income tax returns for the 1998

taxable year.

Data necessary to determine the tentative differential earnings rate for 1998 and

the tentative recomputed differential earnings rate for 1997 have been compiled

from returns filed by mutual life insurance

companies and certain stock life insurance

companies. The Internal Revenue Service

is currently examining these returns. This

examination will not be completed before

the March 15, 1999, due date for filing

1998 calendar year returns.

NOTICE OF TENTATIVE RATES

This notice publishes a tentative determination of the differential earnings rate

for 1998 and of the recomputed differential earnings rate for 1997. This notice

also publishes a tentative determination of

the rates on which the calculation of the

differential earnings rate for 1998 and the

recomputed differential earnings rate for

1997 are based. The final determination

of these rates is expected to be published

before September 1, 1999.

The tentative determination of the differential earnings rate for 1998 and the

tentative determination of the recomputed

differential earnings rate for 1997 that are

published in this notice should be used by

mutual life insurance companies to calculate the amount of tax liability for taxable

years beginning in 1998 (in the case of

companies that file returns before publication of the final determination of these

rates) or to calculate the amount of estimated unpaid tax liability for taxable

years beginning in 1998 (in the case of

companies that are allowed an extension

of time to file returns). Companies that

file returns before publication of the final

determination of these rates should file

amended returns after the final determination of these rates is published. If there is

a failure to pay tax for a taxable year beginning in 1998 and the failure is attribut-

1999–10 I.R.B.

able to a difference between (a) the tentative determination of the differential earnings rate for 1998 and recomputed differential earnings rate for 1997 and (b) the

final determination of these rates, then

any such failure through September 15,

1999, will be treated as due to reasonable

cause and will not give rise to any addition to tax under § 6651.

The tentative determination of the rates

is set forth in Table 1.

formation regarding this notice, contact

Ms. Hossofsky on (202) 622-3477 (not a

toll-free call).

DRAFTING INFORMATION

The principal author of this notice is

Katherine A. Hossofsky of the Office of

the Assistant Chief Counsel (Financial Institutions and Products). For further in-

Notice 99–13

Table 1

Tentative Determination of Rates To Be Used

For Taxable Years Beginning in 1998

Differential earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.081

Recomputed differential earnings rate for 1997 . . . . . . . . . . . . . . . . . . . .

Imputed earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.813

Imputed earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.193

Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.221

Current stock earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.882

Stock earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.087

Stock earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.238

Stock earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.321

Average mutual earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 16.112

Average mutual earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 15.566

1999–10 I.R.B.

March 8, 1999

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

2615, Internal Revenue Building, 1111

Constitution Avenue, Washington, DC.

Escrow Funds and Other Similar

Funds

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,

Michael L. Gompertz of the Office of Assistant Chief Counsel (Income Tax & Accounting), (202) 622-4910; concerning

submissions of comments, the hearing,

and/or to be placed on the building access

list to attend the hearing, Michael Slaughter, (202) 622-7190 (not toll-free numbers).

REG–209619–93

AGENCY: Internal Revenue Service

(IRS), Treasury.

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

SUMMARY: This document contains

proposed regulations relating to the designation of the person required to report the

income earned on qualified settlement

funds and certain other funds, trusts, and

escrow accounts, and other related rules.

The proposed regulations would affect

qualified settlement funds, qualified

escrow accounts and qualified trusts established in connection with deferred

like-kind exchanges, escrow accounts established in connection with sales of

property, disputed ownership funds, and

parties to these escrow accounts, trusts,

and funds. This document also provides

notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by May 3, 1999. Requests to

speak and outlines of topics to be discussed at the public hearing scheduled for

May 12, 1999, at 10 a.m., must be received by April 21, 1999.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–209619–93),

room 5226, Internal Revenue Service,

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

hand delivered Monday through Friday

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

CC:DOM:CORP:R (REG–209619–93),

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 Room

March 8, 1999

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed rulemaking have been submitted to the Office of

Management and Budget for review in accordance with the Paperwork Reduction

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

should be sent to the Office of Management and Budget, Attn: Desk Officer for

the Department of the Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503, with copies to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, OP:FS:FP,

Washington, DC 20224. Comments on

the collections of information should be

received by April 1, 1999. Comments are

specifically requested concerning:

Whether the proposed collections of information are necessary for the proper

performance of the functions of the Internal Revenue Service, including whether

the information will have practical utility;

The accuracy of the estimated burden

associated with the proposed collections

of information (see below);

How the quality, utility, and clarity of

the information to be collected may be enhanced;

How the burden of complying with the

proposed collections of information may

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

Estimates of capital or start-up costs and

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

The collections of information in this

proposed regulation are in §§1.468B–

1(k)(2), 1.468B–1(k)(3)(iv), 1.468B–

6(e)(1), 1.468B–6(f), 1.468B–7(d),

1.468B–8(f), 1.468B–8(g)(1), 1.468B–

9(c)(1), and 1.468B–9(f)(3).

The collections of information in

§§1.468B–1(k)(3)(iv), 1.468B–6(e)(1),

1.468B–7(d), 1.468B–8(g)(1), and

1.468B–9(c)(1) are satisfied by including

the required information on Forms 1099,

1041, 1120, or 1120-SF. The burden for

these requirements is reflected in the burden estimates for these forms.

The other collections of information in

this proposed regulation (in §§1.468B–

1(k)(2), 1.468B–6(f), 1.468B–8(f), and

1.468B–9(f)(3)) are discussed below.

The collection of information in

§1.468B–1(k)(2) is an election statement

attached to a tax return filed for a qualified settlement fund (QSF). The statement notifies the IRS that the transferor to

the QSF has elected grantor trust treatment for the QSF. This collection is required to obtain a benefit.

The collections of information in

§§1.468B–6(f) and 1.468B–8(f) are statements that third parties must provide to an

escrow holder, trustee, or administrator to

enable the escrow holder, trustee, or administrator to properly report the income

of an escrow account or trust on Form

1099. These collections are mandatory.

The collection of information in

§1.468B–9(f)(3) is a statement that a

transferor must provide with respect to

the transfer of cash or property to a disputed ownership fund. This collection is

mandatory.

The likely respondents are individuals,

business or other for-profit institutions,

small businesses or organizations, nonprofit institutions, and government entities.

Estimated total annual reporting burden: 4,650 hours.

Estimated average annual burden per

respondent: .5 hours.

Estimated number of respondents:

9,300.

Estimated annual frequency of responses: on occasion.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the col-

1999–10 I.R.B.

lection of information displays a valid

control number assigned by the Office of

Management and Budget.

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

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

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This notice contains proposed amendments to the Income Tax Regulations (26

CFR Part 1) under section 468B of the Internal Revenue Code. Section 468B was

added to the Code by section 1807(a)(7)(A) of the Tax Reform Act of 1986

(Public Law 99-514, 100 Stat. 2814) and

was amended by section 1018(f) of the

Technical and Miscellaneous Revenue

Act of 1988 (Public Law 100–647, 102

Stat. 3582). Section 468B(g) provides

that nothing in any provision of law shall

be construed as providing that an escrow

account, settlement fund, or similar fund

is not subject to current income tax. Section 468B(g) further provides that the

Secretary shall prescribe regulations providing for the taxation of any such account or fund whether as a grantor trust or

otherwise.

On December 23, 1992, final regulations (TD 8459, 1993–1 C.B. 68) under

section 468B(g) were published in the

Federal Register (57 F.R. 60983). The

regulations provide guidance concerning

qualified settlement funds, but do not address other types of funds, escrow accounts, or trusts subject to current taxation under section 468B(g).

Section 1.468B–1(c) defines a qualified settlement fund (QSF) as a fund, account, or trust meeting three requirements. A QSF is a separate taxpayer

subject to tax on its modified gross income. QSF classification is not elective.

The preamble to the QSF regulations (see

1993–1 C.B. 69) states that the IRS and

the Treasury Department rejected an elective approach because it would result in

inconsistent tax treatment for similar

funds, claimants, or transferors, and accompanying complexity.

The preamble to the QSF regulations

also states (see 1993–1 C.B. 73) that future regulations will address the tax treat-

1999–10 I.R.B.

ment of funds, accounts, or trusts other

than QSFs, specifically, escrow accounts

used in the sale of property and section

1031 qualified escrow accounts.

Section 1031(a)(3) was added to the Internal Revenue Code by section 77 of the

Tax Reform Act of 1984 (Public Law 98369, 98 Stat. 595). On May 1, 1991, final

regulations (TD 8346, 1991–1 C.B. 150)

under section 1031(a)(3) were published

in the Federal Register (56 F.R. 19933).

These regulations were amended by final

regulations (TD 8535, 1994–1 C.B. 202)

published in the Federal Register for

April 20, 1994 (59 F.R. 18747). The regulations provide four safe harbors, the use

of any of which will result in a determination that the taxpayer (i.e., the party transferring the property in the exchange) is

not in actual or constructive receipt of

money or other property for purposes of

section 1031. In particular, the regulations provide that the taxpayer is not in

actual or constructive receipt of money or

other property held in a qualified escrow

account or qualified trust. Section

1.1031(k)–1(g)(3) defines qualified escrow account and qualified trust.

The regulations under section 1031(a)(3) do not address the taxation of income

earned on a qualified escrow or qualified

trust. The preamble to these regulations

(see 1991–1 C.B. 154) states that this issue

will be addressed in future regulations.

Explanation of Provisions

1. Election to Treat a QSF as a Grantor

Trust Under §1.468B–1(k) of the

Proposed Regulations.

The proposed regulations provide that

if there is only one transferor to a QSF,

the transferor is allowed to make an election that results in the QSF being treated

as a grantor trust all of which is treated as

owned by the transferor. In general, the

election is made on a statement attached

to the first Form 1041 filed on behalf of

the QSF. The transferor may make a

grantor trust election whether or not the

requirements are otherwise satisfied for

classification of the QSF as a grantor

trust.

In general, grantor trust treatment for a

QSF is available under the proposed regulations only if the QSF is established after

the date final regulations are published in

the Federal Register. However, the pro-

posed regulations provide a narrow exception applicable to any QSF established

by the U.S. government on or before the

date final regulations are published if the

QSF would otherwise have been classified as a grantor trust in the absence of the

QSF regulations (see Rev. Rul. 77–230

(1977–2 C.B. 214)). Under the exception,

such a QSF will be automatically treated

as a grantor trust for all taxable years and

a grantor trust election is thus unnecessary. If a QSF is established after the date

final regulations are published, a grantor

trust election will be required in order for

the QSF to be treated as a grantor trust.

This rule applies whether or not the U.S.

government is the grantor.

2. Section 1031 Qualified Escrow

Accounts and Qualified Trusts Under

§1.468B–6 of the Proposed

Regulations.

In general, the proposed regulations

treat the assets of a qualified escrow account or qualified trust established in connection with a deferred exchange under

section 1031(a)(3) as owned by the taxpayer, i.e., the party that transfers the relinquished property. Thus, the taxpayer is

taxable on the income earned on these assets. However, if the transferee or the

qualified intermediary has all the beneficial use and enjoyment of the assets of a

qualified escrow account or qualified

trust, then the assets of the escrow account or trust are treated as owned by the

transferee or qualified intermediary, and

the income earned on the assets is taxable

to the transferee or qualified intermediary.

Further, the proposed regulations require the escrow holder of a qualified escrow account or trustee of a qualified trust

to report the income of the escrow account or trust on Forms 1099 to the extent

the information reporting provisions of

the Code otherwise require the filing of

Forms 1099. In general, the taxpayer is

treated as the payee of the income of the

escrow account or trust unless the parties

to the transaction provide a statement to

the escrow holder or trustee indicating

that the transferee or qualified intermediary is the payee. Such a statement must

be provided if the transferee or qualified

intermediary has all the beneficial use and

enjoyment of the assets of the escrow account or trust.

March 8, 1999

The proposed regulations provide that

the escrow holder or trustee is not liable

for penalties under sections 6721 and

6722 if the escrow holder or trustee relies

on an incorrect statement provided to the

escrow holder or trustee (see above) or relies on the parties’ failure to provide such

a statement.

The proposed regulations also provide

that if the transferee or the qualified

intermediary has all the beneficial use

and enjoyment of the assets of a qualified

escrow account or trust, the deferred

exchange may involve a below-market

loan of these assets from the taxpayer to

the transferee or qualified intermediary

subject to the provisions of section 7872.

3. Pre-closing Escrows Under

§1.468B–7 of the Proposed

Regulations.

A pre-closing escrow is an escrow account, trust, or fund that satisfies five requirements. First, it must be established

in connection with a sale or exchange of

real or personal property. Second, it must

be funded with a down payment, earnest

money, or similar payment prior to the

sale or exchange of the property (as determined for federal income tax purposes).

Third, its assets must be used to secure

the purchaser’s obligation to pay the purchase price (in the case of an exchange of

property, the term purchaser means the

transferee of the property and the term

purchase price means the required consideration for the property). Fourth, its assets (including income earned thereon)

must be paid to the purchaser or otherwise

used for the purchaser’s benefit, for example, as a credit against the purchase

price. Fifth, it must not be a qualified escrow or qualified trust established in connection with a deferred section 1031 exchange.

The proposed regulations treat the assets of a pre-closing escrow as owned by

the purchaser for federal income tax purposes. Thus, the income earned on the assets is taxable to the purchaser. The escrow holder, trustee, or other person

responsible for administering a pre-closing escrow must report the income of the

escrow on Forms 1099 to the extent the

information reporting provisions of the

Code otherwise require the filing of

Forms 1099.

March 8, 1999

4. Contingent At-closing Escrows Under

§1.468B–8 of the Proposed

Regulations.

The proposed regulations provide rules

for taxing the income of a contingent atclosing escrow, which is an escrow account, trust, or fund satisfying three requirements. First, a contingent at-closing

escrow must be established in connection

with the sale or exchange of real or personal property used in a trade or business

or held for investment (other than an exchange to which section 354, 355, or 356

applies). Second, the assets of the escrow

must be distributable to the purchaser or

seller based on bona fide contingencies

that will be resolved after the sale or exchange (as determined for federal income

tax purposes). (If a contingent at-closing

escrow is established in connection with

an exchange of property, rather than a

sale, the term purchaser refers to the

transferee of the property and the term

seller refers to the transferor of the property.) Thus, for example, the agreement

between the parties may provide that all

or a portion of the assets of the escrow are

distributable to the purchaser if specified

liabilities associated with the property

arise within a specified period of time

after closing or if certain earnings targets

are not met by a specified date. Third, the

escrow must not be a qualified escrow account or qualified trust established in connection with a deferred section 1031 exchange.

Prior to the date (called the determination date) on which the specified events

occur or fail to occur, thereby fixing the

amounts payable from the escrow to the

purchaser and seller, the proposed regulations provide that the assets of the escrow

are treated as owned by the purchaser, and

the income earned on the assets is thus

taxable to the purchaser.

Beginning on the determination date,

the proposed regulations provide that the

purchaser and the seller are taxable on the

income of the escrow corresponding to

their respective ownership interests in

each asset of the escrow. Further, the proposed regulations require the purchaser

and seller to provide the escrow holder,

trustee, or other administrator of the escrow with a statement within 30 days of

the determination date indicating what

these ownership interests are. Also, the

escrow holder, trustee, or other adminis-

trator is required to prepare Forms 1099

to report the income of a contingent atclosing escrow to the extent the information reporting provisions of the Code otherwise require the filing of Forms 1099.

In preparing the Forms 1099, the escrow holder, trustee, or other administrator may rely on the statement (discussed

above) provided to the administrator

within 30 days of the determination date.

Also, if the statement is not provided, the

escrow holder, trustee, or other administrator may rely on the parties’ failure to

provide a statement and continue to treat

the purchaser as the owner. The administrator’s ability to rely on a statement, or

its absence, protects the administrator

from liability for penalties under sections

6721 and 6722.

5. Disputed Ownership Funds Under

§1.468B–9 of the Proposed

Regulations.

A disputed ownership fund (DOF) is an

escrow account, trust, or fund other than a

QSF that satisfies three requirements.

First, a DOF must be established to hold

money or property subject to conflicting

claims of ownership. Second, a DOF

must be subject to the continuing jurisdiction of a court of law or equity. Third,

money or property cannot be paid or distributed from a DOF to a claimant without

court approval. An interpleader fund may

qualify as a DOF.

In general, a DOF is taxed under the

proposed regulations as if it were a qualified settlement fund if all the DOF’s assets are passive investment assets, for example, cash or cash equivalents, stock,

and debt obligations. However, if the

DOF holds assets other than passive investment assets (for example, real estate

or business property the ownership of

which is in dispute), the DOF is taxed as

if it were a C corporation. The claimants

to the fund may, however, submit a letter

ruling request proposing an alternative

method of taxation if they believe that

there is a more appropriate method of taxing a DOF than under the rules stated

above.

In addition to providing rules for the

taxation of the income of a DOF, the proposed regulations also provide rules concerning the transfer of property to and

from a DOF. In particular, a transfer of

property to a DOF is not a sale or other

1999–10 I.R.B.

disposition by the transferor under section

1001(a) if the transferor claims ownership

of the transferred property. Also, a DOF

is not allowed a deduction for a distribution of disputed property to a claimant

and the distribution is not a taxable event

to the DOF.

6. Request for Comments

Comments are requested on the appropriate tax treatment of a fund, account, or

trust that meets the requirements for more

than one type of entity subject to the proposed regulations. Comments are also requested on the appropriate tax treatment

of a fund, account, or trust that changes

over time so that a different portion of the

proposed regulations would apply to it.

For example, an escrow initially may

meet the requirements for a contingent atclosing escrow, but may subsequently satisfy the requirements for a DOF. This

could occur if a dispute were to arise between the purchaser and the seller concerning their respective interests in the escrow after the determination date and the

administrator of the DOF files an interpleader action to resolve the dispute.

Comments are also requested concerning the appropriate tax treatment of a contingent-at-closing escrow if multiple contingencies are specified in the agreement

between the purchaser and the seller. The

proposed regulations provide that (1) the

income of a contingent at-closing escrow

is taxable entirely to the purchaser prior to

the determination date, and (2) the determination date is the date on which (or by

which) the last of the contingent events

has either occurred or failed to occur.

Therefore, if multiple contingencies are

provided for in the agreement between the

parties and some, but not all, of the contingencies have been resolved, the proposed regulations provide that the income

of the escrow is taxable entirely to the

purchaser (because the determination date

has not yet occurred) regardless of the effect of the contingencies that have been

resolved. The purchaser is thus taxed on

all the income earned on the escrow even

though it may be known (based on the

resolution of one or more contingencies)

that a fixed portion of the escrowed assets

will be distributed to the seller. The proposed rule is simple and easy to administer because it treats the escrow in a unitary manner and avoids the need for

1999–10 I.R.B.

multiple determination dates. Arguably,

however, a more complex approach

should be adopted involving a separate

determination date for each contingency.

Under the more complex approach, as

each contingency is resolved, a new determination would be made concerning

the taxation of the fund’s income. The income earned on the fund’s assets would

be taxable to the purchaser and seller in

accordance with their ownership interests

as determined on each determination date

as each separate contingency is resolved.

Comments are also requested on the requirement that the assets of a contingent

at-closing escrow must be distributable to

the purchaser or seller based on bona fide

contingencies that are resolved after the

sale or exchange. Issues may arise as to

whether a particular contingency is bona

fide in at least two ways: whether the outcome is sufficiently in doubt and whether

the effect of the outcome on the fund is

significant. A contingency may not be

bona fide if the parties can reasonably be

expected to know the outcome, e.g., a contingency based on whether, in ten years,

the consumer price index will be at least

equal to the consumer price index today.

In addition, a contingency may not be

bona fide if the effect on the fund is minimal even though the outcome is uncertain.

Finally, comments are requested regarding whether there are other types of

funds for which rules under section 468B

are required.

posed rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment on

its impact on small business. An initial

regulatory flexibility analysis has been

prepared for the collections of information contained in this notice of proposed

rulemaking under 5 U.S.C. 603. The

analysis is set forth below.

7. Proposed Effective Date.

Under §1.468B–1(k), the transferor to a

QSF may elect to have the QSF treated as

a grantor trust all of which is treated as

owned by the transferor (grantor trust

election). If the transferor makes the

grantor trust election, the administrator of

the QSF must file Form 1041 rather than

the QSF income tax return, Form 1120-SF.

Approximately 900 QSF returns are

filed each year. Only a small number of

these returns are filed for newly created

QSFs. Because a grantor trust election

may be made only for the year in which a

QSF is established, and may only be

made for a QSF that has one transferor,

the IRS and Treasury Department believe

that a very small number of grantor trust

elections will be made each year.

Because of the availability of the

grantor trust election, the proposed regulations provide a choice of filing Form

1041 or Form 1120-SF in certain situa-

In general, the regulations are proposed to be applicable for QSFs, qualified escrow accounts and qualified trusts,

pre-closing escrows, contingent at-closing escrows, and DOFs established after

the date final regulations are published in

the Federal Register. However, the proposed regulations contain transition rules.

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. Pursuant to section 7805(f) of the

Internal Revenue Code, this notice of pro-

Initial Regulatory Flexibility Act Analysis

The objective of the proposed regulations is to ensure that the income of certain escrow accounts, trusts, and funds is

subject to current taxation by identifying

the proper party or parties subject to tax

and by requiring appropriate information

reporting for the income of the escrow account, trust, or fund. Section 468B(g)

provides the legal basis for the requirements of the proposed regulations. The

IRS and Treasury Department are not

aware of any federal rules that may duplicate, overlap, or conflict with the proposed regulations.

An explanation is provided below of

the burdens on small entities resulting

from the requirements of the proposed

regulations. Also, a description is provided of alternative rules that were considered by the IRS and the Treasury Department but rejected as too burdensome.

1. Grantor Trust Election Under

§1.468B–1(k).

March 8, 1999

tions. Small entities may choose the filing requirement that is less burdensome.

The alternative to the proposed regulations is to retain the current rules for

QSFs and not provide qualifying taxpayers with the opportunity to make a grantor

trust election.

2. Qualified Escrow Accounts and

Qualified Trusts Established in

Connection with Deferred Exchanges;

Pre-closing Escrows; and Contingent

At-closing Escrows.

Sections 1.468B–6(e)(1), 1.468B–7(d),

and 1.468B–8(g)(1) require specified escrow holders, trustees, and administrators

to file Forms 1099 with the IRS and furnish payee statements in accordance with

the information reporting requirements of

subpart B, Part III, subchapter A, chapter

61, Subtitle F of the Internal Revenue

Code.

Also, §1.468B–6(f) requires the parties

to a qualified escrow account or qualified

trust to provide a statement to the escrow

holder or trustee if the qualified intermediary or transferee has all the beneficial

use and enjoyment of the assets of the escrow account or trust. This statement facilitates the filing of Forms 1099 by the

escrow holder or trustee.

Similarly, §1.468B–8(f) requires the

parties to a contingent at-closing escrow

to provide statements to the escrow holder

or other administrator. These statements

facilitate the filing of Forms 1099 by the

escrow holder or other administrator.

The IRS and Treasury Department estimate that annually there are approximately 16,000 deferred exchange transactions involving the creation of a qualified

escrow account or qualified trust; approximately 200,000 transactions involving

the creation of a pre-closing escrow; and

approximately 10,000 transactions involving the creation of a contingent atclosing escrow.

As an alternative to the proposed regulations, the IRS and the Treasury Department considered, but rejected as too burdensome, a rule that would have required

the filing of grantor trust returns (Form

1041) for qualified escrow accounts and

qualified trusts, pre-closing escrows, and

contingent at-closing escrows. Instead of

requiring grantor trust returns, the proposed regulations require the filing of

Forms 1099. This is less burdensome on

March 8, 1999

small entities because, unlike Form 1041,

Form 1099 is simple, does not require a

signature, and requires only the reporting

of gross income.

Further, the IRS and the Treasury Department considered an alternative rule for

contingent at-closing escrows under which

the income of the escrow for the period before the determination date would have

been taxable to the purchaser or the seller

depending on the required tax treatment by

the purchaser and seller of the principal

amount deposited into the escrow. This alternative rule would not have provided certainty, would have required a difficult legal

analysis (namely, the determination of the

required tax treatment of the principal

amount deposited into the escrow), and

would have required the purchaser and

seller to provide a signed statement to the

administrator of the escrow identifying the

party to whom the administrator should report the income for the period before the

determination date. Under the proposed

regulations, the income of the escrow is always taxable to the purchaser for the period before the determination date, thereby

eliminating the need for a signed statement

to be provided to the administrator and the

need to determine the required tax treatment of the principal amount deposited

into the escrow. This rule is simpler than

the alternative.

lations, the IRS and the Treasury Department considered, but rejected as too burdensome, a rule that would have required

all DOFs to file corporate income tax returns (Form 1120) regardless of the nature

of the assets held by the DOF. This alternative was rejected because it was concluded that a QSF return (Form 1120-SF)

is more appropriate than a corporate income tax return if all the assets of the

DOF are passive investment assets. The

proposed regulations thus impose less of

an administrative burden on small entities

than would have resulted from the alternative rule as Form 1120-SF is generally

easier to prepare than Form 1120. Only

DOFs that hold assets other than passive

investment assets will be required to file

Form 1120 under the proposed regulations. In addition, the proposed regulations provide taxpayers with the additional flexibility of being able to request

an alternative method of taxation if that

method is more appropriate than QSF or

C corporation treatment as provided

under the general rule.

There are no known alternative rules

that are less burdensome to small entities

but that accomplish the purpose of the

statute. The IRS and Treasury Department request comments from small entities concerning possible alternatives to

these rules.

3. Disputed Ownership Funds (DOFs).

Comments and Public Hearing

Section 1.468B–9(c)(1) of the proposed regulations generally provides that

a DOF is taxable as a QSF if all its assets

are passive investment assets or taxable as

a C corporation in all other cases. However, the regulations also provide that if

there is a more appropriate method of taxing a DOF, the claimants to the fund may

request a private letter ruling to permit the

use of that method.

Section 1.468B–9(f)(3) of the proposed

regulations requires that a transferor provide a statement to the administrator of a

DOF that itemizes the cash or property

transferred to the DOF during the calendar year. The statement must also indicate the DOF’s basis and holding period

in the property.

The IRS and the Treasury Department

estimate that annually there are approximately 5,000 transactions involving the

creation of a disputed ownership fund.

As an alternative to the proposed regu-

Before these proposed regulations are

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

copies) or electronic comments that are

submitted timely (in the manner described

in the ADDRESSES portion of the preamble) to the IRS. The IRS and Treasury

Department request comments on the

clarity of the proposed rules and how they

can be made easier to understand. All

comments will be available for public inspection and copying.

A public hearing is scheduled for May

12, 1999, at 10 a.m. in Room 2615, Internal Revenue Building, 1111 Constitution

Avenue NW, Washington, DC. Due to

building security procedures, visitors

must enter at the 10th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to

enter the building. Because of access re-

1999–10 I.R.B.

strictions, visitors will not be admitted beyond the immediate entrance area more

than 15 minutes before the hearing starts.

For information about having your name

placed on the building access list to attend

the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of

this preamble.

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

apply to the hearing. Persons who wish to

present oral comments at the hearing must

submit written comments by May 3,

1999, and submit an outline of the topics

to be discussed and the time devoted to

each topic (signed original and eight (8)

copies) by April 21, 1999.

A period of 10 minutes will be allotted

to each person for making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these proposed

regulations is Michael L. Gompertz of the

Office of Assistant Chief Counsel (Income Tax and Accounting). However,

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

* * * * *

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding entries in numerical order to read as follows:

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

Section 1.468B–6 also issued under 26

U.S.C. 468B.

Section 1.468B–7 also issued under 26

U.S.C. 468B.

Section 1.468B–8 also issued under 26

U.S.C. 468B.

Section 1.468B–9 also issued under 26

U.S.C. 468B. * * *

Par. 2. Section 1.468B-0 is amended as

follows:

1. The introductory text is revised.

2. The entry for §1.468B–1, paragraph

(k), is redesignated as paragraph (l).

1999–10 I.R.B.

3. A new entry for §1.468B–1, paragraph (k), is added.

4. The section heading in the entry for

§1.468B–5 is revised.

5. New entries are added for

§§1.468B–5, paragraph (c), 1.468B–6,

1.468B–7, 1.468B–8, and 1.468B–9.

6. The revised and added provisions

read as follows:

§1.468B–0 Table of contents.

This section lists the table of contents

for §§1.468B–1 through 1.468B–9.

§1.468B–1 Qualified settlement funds.

* * * * *

(k) Election to treat a qualified settlement fund as a subpart E trust.

(1) In general.

(2) Manner of making grantor trust election.

(i) In general.

(ii) Requirements for election statement.

(3) Effect of making the election.

* * * * *

§1.468B–5 Effective dates and transition

rules applicable to qualified settlement

funds.

* * * * *

§1.468B–1(k).

(1) In general.

(2) Qualified settlement funds established by the U.S. government on or

before the date of publication of final

regulations in the Federal Register.

§1.468B–6 Qualified escrow accounts

and qualified trusts used in deferred

exchanges of like-kind property under

section 1031(a)(3).

(a) Scope.

(b) Definitions.

or qualified trust.

(1) In general.

(2) Transferee or qualified intermediary

has all the beneficial use and enjoyment of assets of a qualified escrow

account or qualified trust.

(d) Application of section 7872.

(e) Reporting obligations of the escrow

holder or trustee.

(1) In general.

(2) Person treated as payee.

(3) Relief from penalties for filing incorrect information return or payee

statement.

(f) Statement provided to escrow holder

or trustee.

(g) Effective date.

(1) In general.

(2) Transition rule.

(h) Examples.

§1.468B–7 Pre-closing escrows.

(a)

(b)

(c)

(d)

(e)

(1)

(2)

(f)

Scope.

Definition.

Taxation of pre-closing escrows.

Reporting obligations of the administrator.

Effective date.

In general.

Transition rule.

Example.

§1.468B–8 Contingent at-closing

escrows.

(a) Scope.

(b) Definitions.

for the period prior to the determination date.

(d) Transfer of interest in the assets of

the escrow on the determination date.

(e) Tax liability of purchaser and seller

for the period beginning on the determination date.

(f) Statement required to be provided to

administrator within 30 days after the

determination date.

(g) Reporting obligations of the administrator.

(1) In general.

(2) Person treated as payee.

(3) Relief from penalties for filing incorrect information return or payee

statement.

(h) Effective date.

(1) In general.

(2) Transition rule.

(i) [Reserved]

(j) Example.

§1.468B–9 Disputed ownership funds.

(a) In general.

(b) Definitions.

fund.

(1) In general.

(2) Exception.

March 8, 1999

(3) Special rules.

(d) Basis of property held by a disputed

ownership fund.

(e) Request for prompt assessment.

(f) Rules applicable to the transferor.

(1) Transfer of property.

(i) In general.

(ii) Exceptions.

(2) Economic performance.

(i) In general.

(ii) Obligations of the transferor.

(3) Statement to the disputed ownership

fund and the Internal Revenue Service.

(i) In general.

(ii) Information required on statement.

(A) In general.

(B) Combined statements.

(4) Distributions to transferors.

(i) In general.

(ii) Exception.

(iii) Deemed distributions.

(g) Distribution to a claimant other than

a transferor.

(h) Effective date.

(1) In general.

(2) Transition rule.

(i) [Reserved]

(j) Examples.

Par. 3. Section 1.468B–1 is amended

by redesignating paragraph (k) as paragraph (l) and adding a new paragraph (k)

to read as follows:

§1.468B–1 Qualified settlement funds.

* * * * *

(k) Election to treat a qualified settlement fund as a subpart E trust—(1) In general. If a qualified settlement fund has

only one transferor (see paragraph (d)(1) of

this section for the definition of transferor),

the transferor may make an irrevocable

election (grantor trust election) to treat the

qualified settlement fund as a trust all of

which is treated as owned by the transferor

under section 671 and the regulations

thereunder. A grantor trust election may be

made whether or not the qualified settlement fund would be classified, in the absence of paragraph (b) of this section, as a

trust all of which is treated as owned by the

transferor under section 671 and the regulations thereunder.

(2) Manner of making grantor trust

election—(i) In general. To make a

grantor trust election, a transferor must attach an election statement satisfying the

March 8, 1999

requirements of paragraph (k)(2)(ii) of this

section to a timely filed (including extensions) Form 1041 that the administrator

files on behalf of the qualified settlement

fund for the taxable year in which the

qualified settlement fund is established.

However, if a Form 1041 would not otherwise be required to be filed (for example,

because the provisions of §1.671–4(b) are

applicable), then the transferor makes a

grantor trust election by attaching an election statement satisfying the requirements

of paragraph (k)(2)(ii) of this section to a

timely filed (including extensions) income

tax return of the transferor for the taxable

year in which the qualified settlement

fund is established.

(ii) Requirements for election statement. The election statement must include a statement by the transferor that

the transferor will treat the qualified settlement fund as a grantor trust. The election statement must also include the transferor’s name, signature, address, taxpayer

identification number, and the legend,

“§1.468B–1(k) Election”. The election

statement and the statement described in

§1.671–4(a) may be combined into a single statement.

(3) Effect of making the election. If a

grantor trust election is made—

(i) Paragraph (b) of this section, and

§§1.468B–2, 1.468B–3, and 1.468B–5 do

not apply to the qualified settlement fund.

However, this section (except for paragraph (b) of this section) and §1.468B–4

apply to the qualified settlement fund;

(ii) The qualified settlement fund is

treated for federal income tax purposes as

a trust all of which is treated as owned by

the transferor under section 671 and the

regulations thereunder;

(iii) The transferor must take into account in computing the transferor’s income tax liability all items of income, deduction, and credit (including capital

gains and losses) of the qualified settlement fund in accordance with §1.671–

3(a)(1); and

(iv) The reporting obligations imposed

by §1.671–4 on the trustee of a trust apply

to the administrator.

* * * * *

Par. 4. Section 1.468B–5 is amended

by revising the section heading and

adding paragraph (c) to read as follows:

§1.468B-5 Effective dates and transition

rules applicable to qualified settlement

funds.

* * * * *

§1.468B–1(k)—(1) In general. A transferor may make a grantor trust election

under §1.468B–1(k) only if the qualified

settlement fund is established after the

date of publication of final regulations in

the Federal Register.

(2) Qualified settlement funds established by the U.S. government on or before the date of publication of final regulations in the Federal Register. If the

U.S. government, or any agency or instrumentality thereof, establishes a qualified

settlement fund on or before the date of

publication of final regulations in the

Federal Register, and the fund would

have been classified as a trust all of which

is treated as owned by the U.S. government under section 671 and the regulations thereunder without regard to the regulations under section 468B, then the U.S.

government is deemed to have made a

grantor trust election under §1.468B–

1(k), and the election is effective for all

taxable years of the fund.

Par. 5. Sections 1.468B–6 through

1.468B–9 are added to read as follows:

§1.468B–6 Qualified escrow accounts

and qualified trusts used in deferred

exchanges of like-kind property under

section 1031(a)(3).

(a) Scope. This section provides rules

under section 468B(g) relating to the current taxation of income of a qualified escrow account or qualified trust established in connection with a deferred

exchange under section 1031(a)(3).

(b) Definitions. As used in this section,

deferred exchange, relinquished property,

replacement property, qualified escrow

account, qualified trust, qualified intermediary, exchange period, and escrow

holder have the same meanings as in

§1.1031(k)–. Also, as used in this section,

taxpayer means the transferor of the relinquished property, and transferee means

the person who is treated as owning the

relinquished property for federal income

tax purposes after its transfer by the taxpayer. Further, owner means the person

treated as owning the assets of the quali-

1999–10 I.R.B.

fied escrow account or qualified trust

under paragraph (c) of this section.

or qualified trust—(1) In general. Except

as otherwise provided in paragraph (c)(2)

of this section, and except for purposes of

determining whether a transaction qualifies as a deferred exchange, the taxpayer

is the owner. Thus, the taxpayer must

take into account in computing the taxpayer’s income tax liability all items of

income, deduction, and credit (including

capital gains and losses) of the qualified

escrow account or qualified trust.

(2) Transferee or qualified intermediary has all the beneficial use and enjoyment of assets of a qualified escrow account or qualified trust. If the transferee

or the qualified intermediary has all the

beneficial use and enjoyment of assets of

a qualified escrow account or qualified

trust, the transferee or qualified intermediary is the owner. Thus, the transferee or

qualified intermediary must take into account in computing its income tax liability all items of income, deduction, and

credit (including capital gains and losses)

of the account or trust. The following

factors, and other relevant facts and circumstances in a particular case, will be

considered in determining whether the

transferee or the qualified intermediary,

rather than the taxpayer, has the beneficial

use and enjoyment of assets of an account

or trust and thus is the owner—

(i) Which person enjoys the use of the

earnings of the account or trust;

(ii) Which person receives the benefit

from appreciation, if any, in the value of

the assets of the account or trust; and

(iii) Which person is subject to a risk of

loss from a decline, if any, in the value of

the assets of the account or trust.

(d) Application of section 7872. If the

transferee or the qualified intermediary is

the owner under paragraph (c)(2) of this

section, section 7872 may apply if the deferred exchange involves a below-market

loan from the taxpayer to the owner. See

section 7872(c)(1) for the loans to which

section 7872 applies.

(e) Reporting obligations of the escrow

holder or trustee—(1) In general. The

escrow holder of a qualified escrow account and the trustee of a qualified trust

must, for each calendar year (or portion

thereof) that the account or trust is in existence, report the income of the account or

1999–10 I.R.B.

trust on Forms 1099 in accordance with

the information reporting requirements of

subpart B, Part III, subchapter A, chapter

61, Subtitle F of the Internal Revenue

Code. The Forms 1099 must show the escrow holder or trustee as the payor and

must show the proper payee. See paragraph (e)(2) of this section for the determination of the proper payee.

(2) Person treated as payee. In satisfying the reporting obligations of paragraph

(e)(1) of this section, the following rules

apply to the escrow holder of a qualified

escrow account and the trustee of a qualified trust—

(i) If no written statement described in

paragraph (f) of this section is provided to

the escrow holder or trustee, the escrow

holder or trustee must treat the taxpayer

as the owner and the payee of the income

of the account or trust; and

(ii) If a written statement described in

paragraph (f) of this section is provided to

the escrow holder or trustee, the escrow

holder or trustee must treat the person

specified on the statement (see paragraph

(f)(3) of this section) as the owner and the

payee of the income of the account or

trust.

(3) Relief from penalties for filing incorrect information return or payee statement. For purposes of sections 6721 and

6722, the escrow holder of a qualified escrow account or trustee of a qualified trust

will not be treated as failing to file or furnish a correct information return or payee

statement solely because, in preparing a

Form 1099, the escrow holder or trustee

relies on a statement described in paragraph (f) of this section and therefore

treats the person specified on the statement (see paragraph (f)(3) of this section)

as the owner and the payee of the income

of the account or trust. If a statement described in paragraph (f) of this section is

not provided to the escrow holder or

trustee, the escrow holder or trustee will

not be treated as failing to file or furnish a

correct information return or payee statement solely because, in preparing a Form

1099, the escrow holder or trustee relies

on the absence of the statement and therefore treats the taxpayer as the owner and

the payee of the income of the account or

trust.

(f) Statement provided to escrow holder

or trustee. If under paragraph (c)(2) of

this section, the qualified intermediary or

transferee is the owner, the taxpayer and

the owner must furnish to the escrow

holder or trustee a statement that—

(1) Is signed by the taxpayer and the

owner;

(2) Is furnished to the escrow holder or

trustee within 30 days after the taxpayer

transfers the relinquished property; and

(3) Specifies the person treated as the

owner and thus as the payee of the income

of the account or trust.

(g) Effective date—(1) In general. This

section applies to qualified escrow accounts and qualified trusts established

after the date of publication of final regulations in the Federal Register.

(2) Transition rule. With respect to a

qualified escrow account or qualified trust

established after August 16, 1986, but on

or before the date of publication of final

regulations in the Federal Register, the

Internal Revenue Service will not challenge a reasonable, consistently applied

method of taxation for income earned by

the account or trust. The Internal Revenue Service will also not challenge a reasonable, consistently applied method for

reporting such income.

(h) Examples. The provisions of this

section may be illustrated by the following examples in which T is the taxpayer,

B is the transferee, and QI is the qualified

intermediary:

Example 1. (i) T uses the calendar year as the

taxable year and the cash receipts and disbursements

method of accounting. T enters into a deferred exchange agreement with B. Under the agreement, T

will transfer property (the relinquished property) to

B, and B must transfer to T within the exchange period consideration (cash or replacement property or

both) having the same market value as that of the relinquished property. B’s obligations under the

agreement are secured by the assets of a qualified

escrow account. The deferred exchange does not involve the use of a qualified intermediary.

(ii) Under the agreement, B must deposit cash

into the qualified escrow account equal to the agreed

upon fair market value of the relinquished property

on the date the property is transferred to B. The

agreement provides that the cash deposited into the

escrow account must be invested in a money market

fund.

(iii) The agreement provides that B is entitled to

receive the interest earned on the escrow account in

consideration for B’s performance of services in

connection with the exchange.

(iv) On September 1, 1999, T transfers the relinquished property to B. The property is unencumbered and has a fair market value of $100,000 on

September 1, 1999. B deposits $100,000 into a

qualified escrow account. The $100,000 is invested

in accordance with the exchange agreement in a

March 8, 1999

money market fund. During 1999, $2,000 of interest

is earned on the escrow account. During January

2000, an additional $400 of interest is earned on the

escrow account. On February 1, 2000, B uses

$100,000 of the funds in the escrow account to purchase replacement property identified by T, and on

this same date B transfers the replacement property

to T. The interest earned on the escrow account,

$2,400, is paid to B from the escrow account in consideration for B’s performance of services.

(v) Paragraph (c)(1) of this section applies and T

must take into account in computing T’s income tax

liability for 1999 and 2000 the $2400 of interest

earned on the escrow account in those years even

though the interest is paid to B as compensation for

B’s services. Paragraph (c)(1) of this section applies

for the following reasons. T, rather than B, enjoys

the use of the earnings of the escrow account since

the earnings are used to discharge T’s obligation to

pay B for B’s services. B is not considered to have

all the beneficial use and enjoyment of the assets of

the escrow account merely because the compensation that B is entitled to receive is based on the earnings of the escrow account.

(vi) The escrow holder must file Forms 1099 for

1999 and 2000 and furnish T with payee statements

with respect to the interest earned on the escrow in

1999 and 2000. See paragraph (e)(1) of this section.

Example 2. (i) The facts are the same as in Example 1 except that the agreement between B and T

requires B to pay $100,000 to QI; under the agreement between T and QI, QI is obligated to transfer to

T within the exchange period consideration (cash or

replacement property or both) equal to $100,000

plus interest thereon at 4 percent compounded semiannually; QI’s obligation to transfer this consideration is secured by the $100,000 received from B,

which QI must deposit into a qualified escrow account; the assets of the escrow account must be invested in a money market fund; and, as compensation for QI’s performance of services to facilitate the

deferred exchange, QI is entitled to receive the excess of the interest earned on the escrow account

over the amount of interest (computed at 4 percent

compounded semiannually) payable to T in cash or

property.

(ii) QI deposits the $100,000 received from B

into a qualified escrow account, and the $100,000 is

invested in a money market fund earning interest at

4.8 percent compounded semiannually. During

1999, $1,600 of interest is earned on the escrow account. During January 2000, an additional $400 of

interest is earned on the escrow account. On February 1, 2000, QI uses $101,667 of the funds in the escrow account to purchase replacement property,

which is transferred to T. This transfer satisfies QI’s

obligations under the agreement because $1,667 is

the amount of interest that is earned on $100,000 at

4 percent compounded semiannually for 5 months.

Of the $2,000 in interest earned on the escrow account in 1999 and 2000, $1,667 is used to purchase

replacement property, and the remaining $333 is

paid in cash to QI as compensation for QI’s services.

(iii) Paragraph (c)(1) of this section applies and T

must take into account in computing T’s income tax

liability for 1999 and 2000 the $2000 of interest

earned on the escrow account in those years even

though $333 of the interest is paid to QI as compensation for QI’s services.

March 8, 1999

(iv) The escrow holder must file Forms 1099 and

furnish T with payee statements with respect to the

$2000 of interest earned on the escrow in 1999 and

2000. See paragraph (e)(1) of this section.

§1.468B–7 Pre-closing escrows.

(a) Scope. This section provides rules

under section 468B(g) for the taxation of

income earned on pre-closing escrows.

(b) Definition. A pre-closing escrow is

an escrow account, trust, or fund—

(1) Established in connection with the

sale or exchange of real or personal

property;

(2) Funded with a down payment,

earnest money, or similar payment that is

deposited into the escrow prior to the sale

or exchange of the property;

(3) Used to secure the obligation of the

purchaser to pay the purchase price for the

property (in the case of an exchange, purchaser means the transferee of the property, and purchase price means the required consideration for the property);

(4) The assets of which, including the

income earned thereon, will be paid to the

purchaser or otherwise distributed for the

purchaser’s benefit when the property is

sold or exchanged (for example, by being

distributed to the seller as a credit against

the purchase price); and

(5) Which is not a qualified escrow account or qualified trust established in connection with a deferred exchange under

section 1031(a)(3).

The purchaser is treated for federal income

tax purposes as owning the assets of a preclosing escrow. Thus, the purchaser must

take into account in computing the purchaser’s income tax liability all items of income, deduction, and credit (including

capital gains and losses) of the escrow.

(d) Reporting obligations of the administrator. For each calendar year (or portion

thereof) that a pre-closing escrow is in existence, the escrow agent, escrow holder,

trustee, or other person responsible for administering the escrow (the administrator)

must report the income of the escrow on

Forms 1099 in accordance with the information reporting requirements of subpart

B, Part III, subchapter A, chapter 61, Subtitle F of the Internal Revenue Code. The

Form 1099 must show the administrator as

the payor and the purchaser as the payee.

(e) Effective date—(1) In general. The

provisions of this section apply to pre-

closing escrows established after the date

of publication of final regulations in the

Federal Register.

(2) Transition rule. With respect to a

pre-closing escrow established after August 16, 1986, but on or before the date of

publication of final regulations in the

Federal Register, the Internal Revenue

Service will not challenge a reasonable,

consistently applied method of taxation

for income earned by the escrow. The Internal Revenue Service will also not challenge a reasonable, consistently applied

method for reporting such income.

(f) Example. The provisions of this

section may be illustrated by the following example:

Example. P enters into a contract with S for the

purchase of residential property owned by S for the

price of $200,000. P is required to deposit $10,000

of earnest money into an escrow. At closing, the

$10,000 and the interest earned thereon will be credited against the purchase price of the property. The

escrow is a pre-closing escrow. P is treated as owning the assets of the escrow, and P is taxable on the

interest earned on the escrow prior to closing. The

escrow holder must report the income earned on the

escrow on Forms 1099 and furnish payee statements

to P. The Forms 1099 must show the escrow holder

as the payor and P as the payee.

§1.468B–8 Contingent at-closing

escrows.

(a) Scope. This section provides rules

under section 468B(g) for the taxation of

income earned on a contingent at-closing

escrow, which is defined in paragraph (b)

of this section. No inference should be

drawn from this section concerning the

tax treatment of a contingent at-closing

escrow, or of parties to the escrow, under

sections of the Internal Revenue Code

other than section 468B. See also paragraph (d) of this section.

(b) Definitions. For purposes of this

section, the following definitions apply—

Administrator means an escrow agent,

escrow holder, trustee, or other person responsible for administering an escrow account, trust, or fund (the purchaser or the

seller may be the administrator);

Contingent at-closing escrow means an

escrow account, trust, or fund that satisfies the following requirements—

(1) The escrow is established in connection with the sale or exchange (other

than an exchange to which section 354,

355, or 356 applies) of real or personal

property used in a trade or business or

1999–10 I.R.B.

held for investment (including stock in a

corporation or an interest in a partnership);

(2) Depending on whether events specified in the agreement between the purchaser and the seller that are subject to

bona fide contingencies (not including

events that are certain, or reasonably certain, to occur, such as the passage of time,

or that are certain, or reasonably certain,

not to occur) either occur or fail to occur,

the escrow’s assets (except for assets set

aside for taxes or expenses) will be distributable—

(i) Entirely to the purchaser;

(ii) Entirely to the seller; or

(iii) In part, to the purchaser with the

remainder to the seller; and

(3) The escrow is not a qualified escrow account or qualified trust established in connection with a deferred exchange under section 1031(a)(3);

Determination date means the date on

which (or by which) the last of the events

subject to a bona fide contingency specified in the agreement between the purchaser and the seller (referred to in the definition of contingent at-closing escrow)

has either occurred or failed to occur;

Purchaser means, in the case of an exchange of property, the transferee of the

property; and

Seller means, in the case of an exchange of property, the transferor of the

property.

for the period prior to the determination

date. For the period prior to the determination date, the purchaser is treated as

owning the assets of the contingent atclosing escrow for federal income tax

purposes. Thus, in computing the purchaser’s income tax liability, the purchaser must take into account all items of

income, deduction, and credit (including

capital gains and losses) of the escrow

until the determination date.

(d) Transfer of interest in the assets of

the escrow on the determination date. No

inference should be drawn from this section whether, for purposes of Internal

Revenue Code sections other than 468B,

there is a transfer of ownership of the assets of a contingent at-closing escrow on

the determination date from the purchaser

to the seller or from the seller to the purchaser, or the tax consequences of such a

transfer. Thus, for example, if there is a

1999–10 I.R.B.

transfer of ownership of the assets of the

escrow from the purchaser to the seller on

the determination date for purposes of

other Code sections, no inference should

be drawn from this section whether any

portion of the amount transferred is unstated interest. See §1.483-4.

(e) Tax liability of purchaser and seller

for the period beginning on the determination date. For the period beginning on

the determination date, the purchaser and

the seller must each take into account in

determining their income tax liabilities

the income, deductions, and credits (including capital gains and losses) corresponding to their ownership interests in

the assets of the escrow.

(f) Statement required to be provided to

administrator within 30 days after the determination date. Within 30 days after

the determination date, the purchaser and

the seller must provide the administrator

with a written statement that—

(1) Is signed by the purchaser and the

seller;

(2) Specifies the determination date;

and

(3) Specifies the purchaser ’s and

seller’s ownership interests in each asset

of the escrow.

(g) Reporting obligations of the administrator—(1) In general. The administrator of a contingent at-closing escrow must,

for each calendar year (or portion thereof)

that the escrow is in existence, report the

income of the escrow on Forms 1099 in

accordance with the information reporting

requirements of subpart B, Part III, subchapter A, chapter 61, Subtitle F of the Internal Revenue Code. The Forms 1099

must show as payor the administrator of

the escrow and as payee the person (or

persons) treated as the payee (or payees)

under paragraph (g)(2) of this section.

(2) Person treated as payee. In satisfying the reporting obligations of paragraph

(g)(1) of this section, the following rules

apply to the administrator—

(i) For the period prior to the determination date, the administrator must treat

the purchaser as the payee of the income

of the escrow;

(ii) For the period beginning on the determination date, if the written statement

described in paragraph (f) of this section

is timely provided to the administrator,

the administrator must treat as the payee

(or payees) of the income of the escrow

the purchaser or seller (or both) in accordance with their respective ownership interests as shown on the statement; and

(iii) If the written statement described

in paragraph (f) of this section is not provided to the administrator, the administrator must continue to treat the purchaser as

the payee of the income of the escrow.

(3) Relief from penalties for filing incorrect information return or payee statement. For purposes of sections 6721 and

6722, the administrator will not be treated

as failing to file or furnish a correct information return or payee statement solely

because, in preparing a Form 1099, the

administrator relies on a statement described in paragraph (f) of this section and

therefore treats the purchaser or seller (or

both) as the payee (or payees) of the income of the escrow in accordance with

their respective ownership interests in the

assets of the escrow as shown on the

statement. If a statement described in

paragraph (f) of this section is not provided to the administrator, the administrator will not be treated as failing to file or

furnish a correct information return or

payee statement solely because, in preparing a Form 1099, the administrator relies

on the absence of the statement and therefore treats the purchaser as the payee.

(h) Effective date—(1) In general. The

provisions of this section apply to contingent at-closing escrows that are established after the date of publication of final

regulations in the Federal Register.

(2) Transition rule. With respect to a

contingent at- closing escrow established

after August 16, 1986, but on or before the

date of publication of final regulations in

the Federal Register, the Internal Revenue Service will not challenge a reasonable, consistently applied method of taxation for income earned by the escrow. The

Internal Revenue Service will also not

challenge a reasonable, consistently applied method for reporting such income.

(i) [Reserved]

(j) Example. The provisions of this

section may be illustrated by the following example:

Example. (i) P and S are corporations. In 1999, P

enters into a contract with S for the purchase of

rental real estate. On October 1, 1999, the date of

sale, S transfers the real estate to P, and P pays S a

portion of the purchase price, $9,000,000. P deposits the remaining portion of the purchase price,

$850,000, into an escrow account as required by the

contract. H is the escrow holder.

March 8, 1999

(ii) The contract provides that the escrow balance as of November 1, 2000, is payable entirely to

P, entirely to S, or partially to P and partially to S depending on the amount, if any, by which the average

rental income from the real estate during a specified

testing period ending on September 30, 2000, exceeds one or more specified earnings targets.

(iii) According to the terms of the contract, the

income earned on the escrow must be accumulated

and is not currently distributable to P or S during the

period prior to November 1, 2000.

(iv) During the testing period specified in the

contract between P and S, the average rental income

earned on the property exceeds one (but not all) of

the specified earnings targets. As a result, on September 30, 2000, the end of the testing period, P became entitled to 40% of the escrow assets and S became entitled to 60% of the escrow assets.

(v) On October 30, 2000, P and S provide H with

the written statement described in paragraph (f) of

this section. The written statement is thus provided

within 30 days of September 30, 2000. The statement indicates that P’s ownership interest in each

asset of the escrow is 40 percent and S’s ownership

interest in each asset is 60 percent.

(vi) The escrow is a contingent at-closing escrow.

September 30, 2000, is the determination date because this is the date on which the testing period

ends. As of this date, all contingencies specified in

the contract are resolved.

(vii) P must take into account all of the income,

deductions, and credits (including capital gains and

losses) of the escrow in computing P’s income tax liability for the period prior to September 30, 2000.

See paragraph (c) of this section.

(viii) For the period beginning on September 30,

2000, P must take into account in computing P’s income tax liability 40 percent of each item of income,

deduction, and credit of the escrow (including capital gains and losses), and S must take into account in

computing S’s income tax liability 60 percent of

these items. See paragraph (e) of this section.

(ix) H is subject to the information reporting requirements of paragraph (g)(1) of this section. H

must file Forms 1099 and furnish payee statements

to reflect the fact that prior to September 30, 2000, P

is the payee of all the income of the escrow, and for

the period beginning on September 30, 2000, P is the

payee of 40 percent of the income, and S is the

payee of 60 percent of the income.

§1.468B–9 Disputed ownership funds.

(a) In general. An escrow account,

trust, or fund that is not a qualified settlement fund is a disputed ownership fund

if—

(1) It is established to hold money or

property subject to conflicting claims of

ownership;

(2) The escrow account, trust, or fund

is subject to the continuing jurisdiction of

a court; and

(3) Money or property cannot be paid

or distributed from the escrow account,

trust, or fund to, or on behalf of, a

March 8, 1999

claimant or a transferor without the approval of the court.

(b) Definitions. For purposes of this

section—

(1) Administrator means the person

designated as such by the court having jurisdiction over a disputed ownership fund.

If no person is designated, the administrator is the escrow agent, escrow holder,

trustee, receiver, or other person responsible for administering the fund;

(2) Claimant means a person, including

a transferor, who claims ownership of, or

a legal or equitable interest in, money or

property held by a disputed ownership

fund;

(3) Court means a court of law or equity of the United States, any state (including the District of Columbia), territory, possession, or political subdivision

thereof;

(4) Related person means any person

who is related to the transferor within the

meaning of section 267(b) or 707(b)(1);

(5) Transferor means, in general, a person that transfers to a disputed ownership

fund money or property that is subject to

conflicting claims of claimants. However, a payor of interest or other income

earned by a disputed ownership fund is

not a transferor (unless the payor is also a

claimant). A transferor may also be a

claimant.

fund—(1) In general. For federal income

tax purposes, a disputed ownership fund

is treated as the owner of all assets that it

holds. A disputed ownership fund is

treated as a C corporation for purposes of

subtitle F of the Internal Revenue Code,

and the administrator of the fund must obtain an employer identification number

for the fund, make all required income tax

and information returns, and deposit all

payments of tax. Also, except as otherwise provided in this section, a disputed

ownership fund is taxable as if it were either—

(i) A qualified settlement fund under

§1.468B–2 if all the assets transferred to

the fund by or on behalf of transferors are

passive investment assets, for example,

cash or cash equivalents, stock, and debt

obligations; or

(ii) A C corporation in all other cases.

(2) Exception. If there is a more appropriate method of taxing a disputed owner-

ship fund than as provided in paragraph

(c)(1) of this section, the claimants to the

fund may submit a private letter ruling request proposing an alternative method of

taxation.

(3) Special rules. (i) In general, money

or property subject to conflicting claims of

claimants (disputed property) that is transferred to a disputed ownership fund by, or

on behalf of, a transferor is excluded from

the gross income of the fund. However,

this exclusion does not apply to income

earned on assets of the fund such as—

(A) Payments to a disputed ownership

fund made in compensation for late or delayed transfers of money or property;

(B) Dividends on stock of a transferor

(or a related person) held by the fund; and

related person) held by the fund.

(ii) A distribution to a claimant of disputed property by a disputed ownership

fund is not a taxable event to the fund.

(iii) A disputed ownership fund is not

allowed a deduction for a distribution of

disputed property to, or on behalf of, a

transferor or a claimant.

(iv) Upon the termination of a disputed

ownership fund, if the fund has an unused

net operating loss carryover under section

172, an unused capital loss carryover

under section 1212, or an unused tax

credit carryover, or if the fund has, for its

last taxable year, deductions in excess of

gross income, the claimant to whom the

fund’s net assets are distributable will

succeed to and take into account the

fund’s unused net operating loss carryover, unused capital loss carryover, unused tax credit carryover, or excess of deductions over gross income for the last

taxable year of the fund. If the fund’s net

assets are distributable to more than one

claimant, the unused net operating loss

carryover, unused capital loss carryover,

unused tax credit carryover, or excess of

deductions over gross income for the last

taxable year must be allocated among the

claimants in proportion to the value of the

assets distributable to each claimant from

the fund.

(v) In the case of a disputed ownership

fund taxable as if it were a C corporation

under paragraph (c)(1)(ii) of this section,

this section does not, in general, restrict

the fund’s use of an otherwise allowable

method of accounting or taxable year.

1999–10 I.R.B.

(vi) Appropriate adjustments must be

made by a disputed ownership fund or

transferors to the fund to prevent the fund

and the transferors from taking into account the same item of income, deduction, gain, loss, or credit more than once

or from omitting such items.

(d) Basis of property held by a disputed

ownership fund. In general, the initial

basis of property transferred by, or on behalf of, a transferor to a disputed ownership fund is the fair market value of the

property on the date of transfer to the fund

as determined by the transferor for purposes of the rules in paragraph (f)(1)(i) of

this section. However, if paragraph

(f)(1)(ii) of this section applies, the fund’s

initial basis in the property is the same as

the basis of the transferor immediately before the transfer to the fund.

(e) Request for prompt assessment. A

disputed ownership fund is eligible to request the prompt assessment of tax under

section 6501(d). For purposes of section

6501(d), a disputed ownership fund is

treated as dissolving on the date the fund

no longer has any assets (other than a reasonable reserve for potential tax liabilities

and related professional fees) and will not

receive any more transfers.

(f) Rules applicable to the transferor—

(1) Transfer of property—(i) In general.

A transferor must treat a transfer of property to a disputed ownership fund as a sale

or other disposition of that property for

purposes of section 1001(a). In computing the gain or loss, the amount realized

by the transferor is the fair market value

of the property on the date the transfer is

made to the disputed ownership fund.

(ii) Exceptions. A transfer of property

to a disputed ownership fund is not a sale

or other disposition of the property for

purposes of section 1001(a) if—

(A) The transferor claims ownership of

the transferred property immediately before and immediately after the transfer to

the fund; or

(B) The transferor is an agent, fiduciary, or other person acting in a similar

capacity acting on behalf of a person

claiming ownership of the transferred

property immediately before and immediately after the transfer to the fund.

(2) Economic performance—(i) In general. For purposes of section 461(h), if a

transferor has a liability to one or more

claimants for which economic perfor-

1999–10 I.R.B.

mance would otherwise occur under

§1.461–4(g) when the transferor makes a

payment to the claimant or claimants,

economic performance occurs with respect to the liability to the extent the

transferor makes a transfer to a disputed

ownership fund to resolve or satisfy that

liability, but only if the transferor and related persons are not claimants and have

no right to receive payments or distributions from the fund.

(ii) Obligations of the transferor. With

respect to a transferor described in paragraph (f)(2)(i) of this section, economic

performance does not occur when the

transferor transfers to a disputed ownership fund its debt (or the debt of a related

person). Instead, economic performance

occurs as the transferor (or related person)

makes principal payments on the debt.

Similarly, economic performance does

not occur when the transferor transfers to

a disputed ownership fund its obligation

(or the obligation of a related person) to

provide property in the future or to make

a payment described in §1.461–4(g). Instead, econ

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