Bulletin No. 1997–29

Bulletin No. 1997–29

July 21, 1997

Internal Revenue

bulletin

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

EXEMPT ORGANIZATIONS

T.D. 8722, page 4.

REG-104893–97, page 13.

Announcement 97–72, page 15.

Temporary and proposed regulations under section 894 of

the Code relate to eligibility for benefits under income tax

treaties for payments to entities. The regulations set forth

rules for determining whether U.S. source payments made

to entities are eligible for treaty-reduced tax rates. A public

hearing on the proposed regulations will be held on September 24, 1997.

A list is provided of organizations that no longer qualify as

organizations to which contributions are deductible under

section 170 of the Code.

ADMINISTRATIVE

Notice 97–42, page 12.

EMPLOYEE PLANS

This notice modifies the guidance set forth in Notice 97–18,

1997–10 I.R.B. 35, regarding the time for reporting certain

transfers under section 1491 of the Code.

Announcement 97–70, page 14.

Announcement 97–61, page 13.

This announcement describes certain transition relief to the

minimum distribution rules of section 401(a)(9)(C) of the

Code as amended by section 1404 of the Small Business

Job Protection Act of 1996.

This announcement publicizes a Competent Authority agreement executed between the United States and France to resolve

a double taxation issue. The announcement states the double

taxation relief measures as provided under the agreement.

Announcement 97–71, page 15.

An updated edition of Publication 1542, Per Diem Rates,

(revised May 1997), is now available.

Finding Lists begin on page 19.

Announcement of Disbarments and Suspensions begins on page 16.

Mission of the Service

The purpose of the Internal Revenue Service is to collect

the proper amount of tax revenue at the least cost; serve

the public by continually improving the quality of our prod-

ucts and services; and perform in a manner warranting the

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

Statement of Principles

of Internal Revenue

Tax Administration

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

for raising revenue is determined by Congress.

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by examining officers when they have merit, never arbitrarily or for trading purposes. At the same time, t h e

examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

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

carry out that policy by correctly applying the laws enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It should be conducted with as little

delay as possible and with great courtesy and considerateness. It should never try to overreach, and

should be reasonable within the bounds of law and

sound administration. It should, however, be vigorous in requiring compliance with law and it should be

relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

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

provision and not to adopt a strained construction in

the belief that he or she is “protecting the revenue.”

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

July 21, 1997

2

1997-29␣ ␣ I.R.B.

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.

ings, and procedures must be considered, and Service

personnel and others concerned are cautioned against

reaching the same conclusions in other cases unless the

facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986.

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

substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede,

revoke, modify, or amend any of those previously published

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

statements of internal practices and procedures that affect

the rights and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart

A, Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office

of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service

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

the revenue ruling. In those based on positions taken in

rulings to taxpayers or technical advice to Service fied 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, rul-

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 semi-annual period, respectively.

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

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

1997-29␣ ␣ I.R.B.

3

July 21, 1997

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

Section 894.—Income Affected

by Treaty

26 CFR 1.894–1T: Income affected by treaty (temporary).

T.D. 8722

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Guidance Regarding Claims for

Certain Income Tax Convention

Benefits

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations relating to eligibility for benefits under income tax treaties

for payments to entities. The regulations

set forth rules for determining whether

U.S. source payments made to entities, including entities that are fiscally transparent in the United States and/or the applicable treaty jurisdiction, are eligible for

treaty-reduced tax rates. The regulations

affect the determination of tax treaty benefits with respect to U.S. source income of

foreign persons. The text of these temporary regulations also serves as the text of

REG–104893–97.

DATES: These regulations are effective

July 2, 1997.

These regulations apply to amounts

paid on or after January 1, 1998.

FOR FURTHER INFORMATION CONTACT: Elizabeth Karzon, (202) 622–

3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains temporary

regulations relating to the Income Tax

Regulations (CFR part 1) under section

894 of the Internal Revenue Code (Code).

Explanation of Provisions

These regulations prescribe rules for determining whether U.S. source income

paid to an entity is eligible for a reduced

rate of U.S. tax under an income tax treaty.

July 21, 1997

The regulations are designed principally to

clarify the availability of treaty-reduced tax

rates for a payment of U.S. source income

to an entity that is treated as fiscally transparent, including a hybrid entity (i.e., an

entity that is treated as fiscally transparent

in either (but not both) the United States or

the jurisdiction of residence of the person

that seeks to claim treaty benefits).

The regulations address only the treatment of U.S. source income that is not effectively connected with the conduct of a

U.S. trade or business. Treasury and the

IRS may issue additional regulations addressing the availability of other tax treaty

benefits, such as the application of business profits provisions, with respect to income of fiscally transparent entities.

Under the regulations, payments of

U.S. source income to an entity that is

treated as fiscally transparent for U.S. federal income tax purposes are eligible for

reduced tax rates under a tax treaty between the United States and another jurisdiction (the applicable treaty jurisdiction)

if the entity itself is a resident of the applicable treaty jurisdiction, or if, and only

to the extent that, the interest holders of

the entity are residents of the applicable

treaty jurisdiction and the entity is treated

as fiscally transparent for purposes of the

tax laws of such jurisdiction.

Accordingly, payments of U.S. source

income to an entity that is treated as fiscally transparent for U.S. federal income

tax purposes but as non-fiscally transparent for purposes of the tax laws of the applicable treaty jurisdiction are not eligible

for a treaty-reduced tax rate under the relevant treaty unless the entity itself is a

resident of the applicable treaty jurisdiction. Conversely, under the regulations, a

payment of U.S. source income to an entity that is treated as non-fiscally transparent for U.S. federal income tax purposes

(other than a domestic corporation) is eligible for a reduced tax rate under the relevant treaty if the entity itself is a resident

of the applicable treaty jurisdiction or if,

and only to the extent that, interest holders of the entity are residents of the applicable treaty jurisdiction and the entity is

treated as fiscally transparent for purposes

of the tax laws of such jurisdiction.

Under these temporary regulations, an

entity is treated as fiscally transparent by

4

a jurisdiction only if the jurisdiction requires interest holders in the entity to take

into account separately their respective

shares of the various items of income of

the entity on a current basis and to determine the character of such items as if such

items were realized directly from the

source from which realized by the entity

(for purposes of the tax laws of the jurisdiction). Accordingly, entities treated as

fiscally transparent by a jurisdiction are

entities subject in that jurisdiction to rules

analogous to the U.S. rules applicable to

entities that are treated as partnerships for

U.S. federal income tax purposes.

These regulations are consistent with

U.S. tax treaty obligations and basic tax

treaty principles. The regulations as applied to hybrid entities are based on the

principles discussed below. Treasury and

the Service will continue to coordinate

these issues with U.S. tax treaty partners

in order to resolve any difficulty arising

from the application of the principles set

forth in these regulations.

Problems Arising From Dual Classification

The United States generally applies its

tax rules to determine the classification of

both domestic and foreign entities. When

U.S. and foreign laws differ on classification principles, a hybrid entity may result. If income is paid to a hybrid entity,

the entity may be considered as deriving

the income under U.S. tax principles (e.g.,

as an association taxable as a corporation

under U.S. tax principles), but its interest

holders, rather than the entity, may be

considered to derive the income under

foreign tax principles (e.g., as an entity

equivalent to a U.S. partnership). This

dual classification may give rise to inappropriate and unintended results under tax

treaties, such as double exemptions or

double taxation, unless the tax treaties are

interpreted so as to take into account the

conflict of laws.

To avoid inappropriate and unintended

tax treaty results with respect to payments

to hybrid entities, these regulations rely on

the basic principle that income tax treaties

are designed to relieve double taxation or

excessive taxation. This objective is generally achieved with provisions in treaties

that limit the tax that a country may impose on income arising from sources

1997-29␣ ␣ I.R.B.

within its borders to the extent that the income is derived by a resident of a jurisdiction with which the source country has an

income tax treaty in effect (an applicable

treaty jurisdiction). However, the agreement by the source country to cede part or

all of its taxation rights to the treaty partner

is predicated on a mutual understanding

that the treaty partner is asserting tax jurisdiction over the income. Stated simply, tax

treaties contemplate that income relieved

from taxation in the source country will be

subject to tax in the treaty country. This

principle is central to the interpretation of

treaty provisions in determining the extent

to which payments received by a hybrid

entity are eligible for benefits under tax

treaties. Some treaties have specific rules

reflecting this principle that are helpful in

deciding how the treaties should be applied

in such cases. However, the lack of specific rules in a treaty does not suggest that

this principle does not apply under that

treaty.

In order to implement this principle,

virtually all U.S. income tax treaties limit

the eligibility for treaty benefits on the

condition that the person deriving the income must be a resident of the applicable

treaty country. Typical of this condition,

for example, is Article 12 of the U.S.–

German treaty, which provides that “Royalties derived and beneficially owned by a

resident of a Contracting State shall be

taxable only in that State.” Sometimes,

the term paid to is used instead of the

term derived by. However, those terms

are used interchangeably and a different

choice of words does not indicate that a

different result is intended. Generally, a

resident is defined as a person who is liable to tax in the treaty country as a resident of that country. See, for example,

Article 4.1 of the U.S.–German tax convention, which provides that “the term

‘resident of a Contracting State’ means

any person who, under the laws of that

State, is liable to tax therein by reason of

his domicile, residence, place of management, place of incorporation, or any other

criterion of a similar nature ....”

Limiting eligibility for treaty benefits

to residents provides assurance to the

source country that, when it limits its

taxation rights on income arising from

within its borders, it does so with the expectation that the income derived by a

resident of the treaty country is subject to

tax in the residence country.

1997-29␣ ␣ I.R.B.

Application of Principle to Hybrid Entities

Generally

Based on the typical residence provisions of U.S. tax treaties, if income is paid

to an entity that is treated as fiscally transparent in the treaty country in which it is

organized, the entity itself is not eligible

for benefits under the applicable treaty because it is not a resident of the treaty

country (i.e., by virtue of not being liable

to tax in that country). Whether the entity

is a resident of the treaty country is determined under the laws of that country and

not under the laws of the source country.

This observation is important if the entity

is a hybrid (i.e., an entity that is treated as

fiscally transparent in one jurisdiction and

treated as non-fiscally transparent in another jurisdiction). If the entity, treated as

fiscally transparent in the treaty country,

is treated as a taxable entity in the source

country, the entity is considered by the

source country as being liable to tax.

However, this determination under the

source country tax laws does not render

the entity a resident of the treaty country.

In order for the entity to be a resident of

the treaty country, it must be liable to tax

in that country, as determined under the

laws of that country.

Where the entity is not eligible for

treaty benefits (for lack of residence in the

treaty country), there is a question as to

whether the owners of the entity may be

eligible for benefits under an applicable

income tax treaty. As stated above, the

guiding principle is that income is eligible

for a rate reduction or an exemption in the

source country if “derived by” or “paid

to” a resident of that country. Where the

entity is treated as fiscally transparent, the

question is whether the income can be

considered “derived by” or “paid to” the

owner of the entity.

If the entity is treated as fiscally transparent by all tax jurisdictions involved

(i.e., the source country, the country

where the entity is organized, and the

country where the owners are resident), it

is well established under U.S. income tax

treaties that the entity is ignored and a

look-through approach is intended, with

the result that the entity’s owners are

treated as the persons who derive the income. This result is consistent with the

general principle that eligibility for treaty

benefits is conditioned upon the income

being subject to tax in the treaty country

5

as the income of a resident of that country. In fact, some treaties clarify this

point. For example, Article 4.1(b) of the

U.S.–German income tax convention provides, like several other U.S. tax conventions, that “in the case of income derived

or paid by a partnership, estate, or trust,

this term [resident] applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in

that State [the State other than the source

State] as the income of a resident, either

in its hands or in the hands of its partners

or beneficiaries.” Further, even where no

provisions are included, the Technical Explanation sometimes explains that the

look-through rule applies without the

need for a specific provision. See the

U.S. Treasury Department’s Technical Explanation of U.S.–Japan Income Tax Convention signed March 8, 1971, Article 3

(Fiscal Domicile).

Application of Principle to Reverse Hybrid Entity

If an entity is a “reverse” hybrid entity,

meaning that it is treated as a taxable entity under the tax laws of the source country but as a fiscally transparent entity in

the applicable treaty country, a conflict

arises because, under the source country’s

tax laws, the entity’s owners are not

treated as deriving the income. Yet, under

the tax laws of the jurisdiction where the

entity’s owners are resident, the owners

are treated as deriving the income paid to

the entity. Thus, the question is whether

the source country’s laws or the laws of

each owner’s jurisdiction of residence

should govern the determination of who is

the person deriving the income for tax

treaty purposes. Making that determination under the tax laws of the applicable

treaty jurisdiction where the owners are

resident leads to results consistent with

the principle discussed earlier that the

source country cedes its tax jurisdiction to

the treaty partner based on the understanding that the treaty partner asserts tax

jurisdiction over the income by insuring

that it is taxable in the hands of a resident.

In this case, the entity’s owners are resident in a treaty country that treats them as

liable to tax on the items of income paid

to the entity. On the other hand, applying

the tax laws of the source country would

lead to results inconsistent with that principle. In other words, tax benefits would

July 21, 1997

be denied under the applicable treaty (because, under the source country’s tax

laws, the entity’s owners are not treated as

deriving the income paid to the entity),

even though the income arising in the

source country is subject to tax in the

hands of persons who are resident in the

applicable treaty jurisdiction.

Application of Principle to Regular Hybrid

Entity

The same principle applies to a “regular” hybrid entity, i.e., an entity that is

treated as fiscally transparent in the

source country and as a non-fiscally transparent entity in the applicable treaty jurisdiction. If the entity is organized in a

treaty jurisdiction, the applicable treaty

with that country generally would treat

the entity as a resident. Therefore, under

that treaty, the entity should be eligible for

treaty benefits as an entity deriving the income as a resident of the treaty jurisdiction. On the other hand, the entity’s owners who are resident in that jurisdiction

(or in any other jurisdiction that treats the

entity as non-fiscally transparent) should

not be eligible for treaty benefits under

that treaty (or a treaty with the country

where they are resident that treats the entity as non-fiscally transparent). This result should occur irrespective of the fact

that the source country considers that the

taxpayers with respect to the income are

the entity’s owners and not the entity (by

virtue of treating the entity as fiscally

transparent under its own tax laws).

Again, applying the laws of the applicable

treaty jurisdiction to determine whether

the entity or its owners are deriving the

income as residents of that country leads

to results consistent with the basic principle that the source country cedes its tax

jurisdiction over income to the extent the

income is subject to tax in the hands of a

resident of the applicable treaty country.

Applying the tax laws of the source

country to determine the person deriving

the income for treaty purposes would not

only be inconsistent with the basic principle that income should be treated as derived by the person in the treaty country

who is liable to tax on that income, it also

potentially leads to tax avoidance under

tax conventions, including an inappropriate double exemption. For example, if the

entity does not fall within the taxing jurisdiction of the applicable treaty jurisdic-

July 21, 1997

tion (e.g., because the entity is organized

in a third country or as a fiscally transparent entity in the source country), the income could be eligible for a treaty-reduced tax rate in the source country and

yet not be subject to tax in the jurisdiction

where the owners are resident.

In such a case, the owners may eventually be taxed on the income when the entity makes a distribution of the income derived from the source country. The

Treasury and IRS believe that the potential for later taxation should not affect the

results under the treaty for two reasons:

first, the interposition of a hybrid entity

between the income and the owner of the

entity allows the taxation event in the

treaty jurisdiction to be deferred, perhaps

indefinitely; second, the income, when

distributed or deemed distributed (for example, pursuant to anti-deferral rules of

the treaty jurisdiction), may be transformed. In other words, the income derived by the partner will be treated in the

partner’s residence country as a distribution (or deemed distribution) of profits

from the entity and not as the type of income derived by the entity from the

source country. This disparity in treatment may lead to a double exemption if,

for example, the dividend distribution is

exempt from tax in the country where the

entity’s owners reside due to double tax

relief or a corporate integration regime

that grants preferential tax treatment to

corporate distributions. Interpreting conventions in a way that allows such a

double exemption would not be consistent

with the primary goal of treaties to relieve

double or excessive taxation. This is especially true where, as is the case here, an

alternative interpretation exists that would

produce results consistent with basic tax

convention principles.

Certain taxpayers have expressed the

view that this analysis of the treatment of

payments to hybrid entities under tax treaties is inconsistent with the treatment of

so-called hybrid securities that are treated

differently under the tax laws of the

source country and the relevant treaty jurisdiction (e.g., an instrument that is

treated as a debt instrument in the source

country but as an equity interest in the relevant treaty jurisdiction). In certain cases,

the use of hybrid securities can lead to

double exemptions, analogous to the

double exemptions possible with respect

to “regular” hybrid entities, based on the

6

availability of an exemption from tax in

the relevant treaty jurisdiction. Treasury

and the IRS recognize that hybrid securities can produce inappropriate and unintended results under income tax treaties.

Although the residence concept of tax

treaties, which incorporates the basic

“subject to tax” principle, generally is satisfied with respect to payments on a hybrid security for the reasons discussed

above, Treasury and the IRS are considering whether inappropriate and unintended

tax treaty consequences, including both

double exemptions and double taxation,

can arise with respect to hybrid securities

and, if so, what alternative avenues exist

for addressing them.

The hybrid entity analysis applies regardless of where the entity is organized

and where the owners are resident. One

example involves an entity organized in

one country and owned by persons residing in a third country. If the third country

and the source country treat the entity as

fiscally transparent, both the source country and the third country can ignore the

entity for purposes of granting treaty benefits under the third country’s convention

with the source country. In such a case,

the entity’s owners resident in the third

country are treated as deriving the income

received by the entity, under both the

source country tax laws and the tax laws

of the third country. In a three-country

situation, there may also be simultaneous

application of two treaties to the same

flow of income: the treaty with the country where the entity is organized, and the

treaty with the country where the entity’s

owners are resident.

The analysis applicable to fiscally

transparent entities does not depend on

whether the entity has multiple owners or

a single owner. Accordingly, the analysis

applies to a wholly-owned entity that is

disregarded for federal tax purposes as an

entity separate from its owner.

Application of Principle to Entity Organized in Source Country

The same analysis generally applies to

entities organized in the source country.

If both the source country and the treaty

jurisdiction where the entity’s owners are

resident treat the entity as fiscally transparent, then the entity is ignored and the

eligibility for treaty benefits is tested at

the owners’ level. If the entity, however,

is treated as non-fiscally transparent in the

1997-29␣ ␣ I.R.B.

treaty jurisdiction, then the income is not

treated by the treaty jurisdiction as being

derived by the owners. Therefore, the

owners are not eligible for benefits under

the treaty since they are not deriving the

income for purposes of the applicable

treaty.

Taxpayers may argue that treaty benefits should be allowed to the owners residing in the treaty country because,

viewed from the source country’s point of

view, the owners are deriving the income

from the source country and are resident

in the treaty country. While the provisions in current treaties do not explicitly

provide for this situation, the situation

raises exactly the same issues as in the

cases discussed above. For this purpose,

it is immaterial that the entity is organized

in the country of the owner, in a third

country, or in the source country.

The analysis does not apply, however,

if the entity is a reverse hybrid organized

in the United States because, in such a

case, the United States treats the entity as

a corporate entity, liable to tax in the

United States at the entity level. The right

of the United States to tax a domestic corporation is established under the “savings

clause” of all U.S. tax treaties which preserves the right of the United States to tax

its residents and citizens under its domestic law. Distributions from a domestic

corporation that is a reverse hybrid are

also subject to U.S. tax in the hands of the

foreign owners who are treated as shareholders for U.S. tax purposes.

Beneficial Ownership

The principles relied upon in these temporary regulations are consistent with the

proposed withholding tax regulations issued under §§1.1441–1(c)(6)(ii)(B) and

1.1441–6(b)(4) regarding claims of treatyreduced withholding rates for U.S. source

payments through foreign entities. The

temporary regulations, however, do not

utilize the same terminology as the proposed withholding tax regulations.

The proposed withholding tax regulations condition eligibility for treatybased withholding rates for payments to

an entity on a determination of “beneficial owner” status for the entity or the interest holders of the entity pursuant to

the laws of the applicable treaty jurisdiction. Accordingly, under the proposed

withholding tax regulations, the term

1997-29␣ ␣ I.R.B.

beneficial owner functions as a surrogate

for the principle that a person is eligible

for tax treaty benefits with respect to a

payment received by an entity only if the

person is a resident with respect to such

payment.

The term beneficial owner as used in

the proposed withholding tax regulations

may be confusing because this term has

other meaning in the tax treaty context.

Accordingly, the temporary regulations do

not utilize the term beneficial owner in

the same manner as the proposed withholding regulations. Rather, they condition eligibility for treaty-reduced tax rates

for income paid to an entity on a determination that the income is “treated as derived by a resident” of the applicable

treaty jurisdiction. Like the determination

of beneficial owner status required in the

proposed withholding tax regulations, the

determination of whether a payment to an

entity is “treated as derived by a resident”

is determined under the principles in effect under the laws of the applicable

treaty jurisdiction. Treasury and the Service intend to conform the final withholding tax regulations to the temporary regulations.

The temporary regulations reflect the

fact that the concept of beneficial ownership is an important separate condition for

claiming tax treaty benefits. In order to

address difficulties where the recipient

acts as a “nominee” or “conduit” for another person or in other situations involving a disconnect between legal and economic ownership, most income tax

treaties require that the resident be a beneficial owner of the income. This requirement is entirely separate from the beneficial ownership requirement with respect

to U.S. source payments to foreign entities reflected in the proposed withholding

tax regulations and the residence requirement with respect to U.S. source payments to all entities reflected in these temporary regulations.

As used in tax

treaties, the term beneficial owner is

meant to address “conduit”, “nominee”

and comparable situations in which the

person receives the payment in form (and

may even be taxed on that income in the

jurisdiction in which it resides), but is

nevertheless not treated as beneficially

owning the income for purposes of a particular treaty because, under the beneficial

owner rules of the source country, the income is deemed to belong to another per-

7

son who is determined to have a stronger

economic nexus to the income. See, for

example, section 7701(l) and §§1.7701(l)–1(b) and 1.881–3. Thus, the temporary regulations utilize the term beneficial

owner in a manner consistent with the

treaty approach.

Mutual Agreement

Treasury and IRS intend that the principles of the regulations should be applied

in a reciprocal manner by U.S. tax treaty

partners. For this reason, the regulations

include a special rule that provides that,

irrespective of any contrary rules in the

regulations, a reduced rate under a tax

treaty for a payment of U.S. source income will not be available to the extent

that the applicable treaty partner does not

grant a reduced rate under the tax treaty to

a U.S. resident in similar circumstances,

as evidenced by a mutual agreement between the relevant competent authorities

or a public notice of the treaty partner.

Denial of benefits under this provision

would be effective on a prospective basis

only.

Effective Date

The temporary regulations apply on a

prospective basis only to amounts paid on

or after January 1, 1998. Withholding

agents should consider the effect of these

regulations on their withholding obligations, including the need to obtain a new

withholding certificate to confirm claims

of treaty benefits for payments made on

or after the effective date. Treasury and

the IRS recognize that the applicable principles for determining eligibility of reduced treaty rates for income paid to hybrid entities may have been uncertain in

the past. Accordingly, the IRS does not

intend to challenge any claim of treaty

benefits for payments to hybrid entities

made before the effective date of these

regulations on the basis that the claim was

based on principles inconsistent with

those upon which these regulations are

based.

Special Analyses

It has been determined that these temporary regulations are not a significant

regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It has also been determined that

section 553(b) of the Administrative Pro-

July 21, 1997

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

apply to these regulations and, because

these regulations do not impose on small

entities a collection of information requirement, the Regulatory Flexibility Act

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

Therefore, a Regulatory Flexibility Analysis is not required. Because of rapidly increasing use of hybrid entities for crossborder transactions, immediate guidance

is needed on rules for determining

whether U.S. source payments made to

entities, including entities that are fiscally

transparent in the United States and/or the

applicable treaty jurisdiction, are eligible

for treaty-reduced tax rates. Therefore,

good cause is found to dispense with the

notice requirement of section 553(b) of

the Administrative Procedure Act. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy

of the Small Business Administration for

comment on its impact on small business.

*

*

*

*

*

Adoption of Amendments to the Regulations

Accordingly, CFR 26 part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

continues to read in part as follows:

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

Par. 2. §1.894–1T is added to read as

follows:

§1.894–1T: Income affected by treaty

(temporary).

(a) through (c) [Reserved]. For further

guidance, see §1.894–1(a) through (c).

(d) Determination of tax on income

paid to entities—(1) In general. The tax

imposed by sections 871(a), 881(a), 1461,

and 4948(a) on a payment received by an

entity organized in any country (including

the United States) shall be eligible for reduction under the terms of an income tax

treaty to which the United States is a party

if such payment is treated as derived by a

resident of an applicable treaty jurisdiction, such resident is a beneficial owner of

the payment, and all other applicable requirements for benefits under the treaty

are satisfied. A payment received by an

entity is treated as derived by a resident of

an applicable treaty jurisdiction only to

July 21, 1997

the extent the payment is subject to tax in

the hands of a resident of such jurisdiction. For this purpose, a payment received by an entity that is treated as fiscally transparent by the applicable treaty

jurisdiction shall be considered a payment

subject to tax in thehands of a resident of

the jurisdiction only to the extent that the

interest holders in the entity are residents

of the jurisdiction. For purposes of the

preceding sentence, interest holders shall

not include any direct or indirect interest

holders that are themselves treated as fiscally transparent entities by the applicable

treaty jurisdiction. A payment received

by an entity that is not treated as fiscally

transparent by the applicable treaty jurisdiction shall be considered a payment

subject to tax in the hands of a resident of

such jurisdiction only if the entity is itself

a resident of that jurisdiction.

(2) Application of beneficial ownership

requirement in respect of certain payments received by entities—(i) Entities

treated as fiscally transparent for U.S. tax

purposes. An entity that is treated as fiscally transparent under the laws of the

United States and that is resident in an applicable treaty jurisdiction shall be treated

as the beneficial owner of a payment if

the entity would be treated as the beneficial owner if it were treated as nonfiscally

transparent by the United States.

(ii) Entity’s owners as beneficial owners—(A) A resident of an applicable

treaty jurisdiction that derives a payment

received by an entity that is fiscally transparent under the laws of the applicable tax

jurisdiction shall be treated as the beneficial owner of the payment unless—

(1) Such resident would not have been

treated as the beneficial owner of the payment had such payment been received directly by the resident; or

(2) The entity receiving the payment is

not treated as a beneficial owner of the

payment.

(B) For example, persons residing in

treaty Country X and treated under the

laws of Country X as interest holders in a

fiscally transparent entity created under

the laws of Country Y are treated as the

beneficial owners of the payments received by the entity from sources within

the United States unless the interest holders would not have been treated as beneficial owners had they received the payment directly (e.g., the partners act as

nominees or conduits for other persons).

8

However, if the entity itself is acting as a

nominee or conduit for another person

and, therefore, is not itself a beneficial

owner, then none of the interest holders

can be treated as beneficial owners, even

if the interest holders own their interests

in the entity as beneficial owners. For

this purpose, the determination of whether

a person is a beneficial owner of a payment shall be made under U.S. tax laws.

(3) Application to certain domestic entities. Notwithstanding paragraph (d)(1)

of this section, an income tax treaty may

not apply to reduce the amount of tax on

income received by an entity that is

treated as a domestic corporation for U.S.

tax purposes. Therefore, neither the domestic corporation nor its shareholders

are entitled to the benefits of a reduction

of U.S. income tax on income received

from U.S. sources by the corporation.

(4) Definitions—(i) Entity. For purposes of this paragraph (d), the term entity

shall mean any person that is treated by

the United States or the applicable treaty

jurisdiction as other than an individual.

(ii) Fiscally transparent. For purposes

of this paragraph (d), an entity is treated

as fiscally transparent by a jurisdiction to

the extent the jurisdiction requires interest

holders in the entity to take into account

separately on a current basis their respective shares of the items of income paid to

the entity and to determine the character

of such items as if such items were realized directly from the source from which

realized by the entity (for purposes of the

tax laws of the jurisdiction). Entities that

are fiscally transparent for U.S. federal income tax purposes include partnerships,

common trust funds described under section 584, simple trusts, grantor trusts, as

well as certain other entities (including

entities that have a single interest holder)

that are treated as partnerships or as disregarded entities for U.S. federal income tax

purposes.

(iii)

Applicable treaty jurisdiction.

The term applicable treaty jurisdiction

means the jurisdiction whose income tax

treaty with the United States is invoked

for purposes of reducing the rate of tax

imposed under section 871(a), 881(a),

1461, and 4948(a).

(iv) Resident. The term resident shall

have the meaning assigned to such term in

the applicable income tax treaty.

(5) Application to all income tax treaties. Unless otherwise explicitly agreed

1997-29␣ ␣ I.R.B.

upon in the text of an income tax treaty, the

rules contained in this paragraph (d) shall

apply in respect of all income tax treaties to

which the United States is a party. However, a reduced rate under a tax treaty for a

payment of U.S. source income will not be

available irrespective of the provisions in

this paragraph (d) to the extent that the applicable treaty partner would not grant a reduced rate under the tax treaty to a U.S.

resident in similar circumstances, as evidenced by a mutual agreement between the

relevant competent authorities or by a public notice of the treaty partner. The Internal

Revenue Service shall announce the terms

of any such mutual agreement or treaty

partner’s position. Any denial of tax treaty

benefits as a consequence of such a mutual

agreement or treaty partner’s position shall

affect only U.S. source payments made after announcement of the terms of the agreement or of the position.

(6) Examples. This paragraph (d) is illustrated by the following examples. Unless stated otherwise, each example assumes that all conditions for claiming a

treaty-reduced tax rate under a U.S. income tax treaty with respect to a payment

of U.S. source income are satisfied (other

than the condition that the income is

treated as derived by a resident of the applicable treaty jurisdiction), including the

beneficial ownership requirement and all

requirements relating to applicable limitation on benefits provisions. The examples

are as follows:

Example 1. (i) Facts. Entity A is a business organization formed under the laws of Country X that

has an income tax treaty with the United States. Under the laws of Country X, A is liable to tax at the

entity level. A is treated as a partnership for U.S. income tax purposes and receives royalties from U.S.

sources that are not effectively connected with the

conduct of a trade or business in the United States.

Some of A’s partners are resident in Country X and

the other partners are resident in Country Y. Country Y has no income tax treaty in effect with the

United States. Article 12 of the U.S.–X tax treaty

provides that “royalties derived from sources within

a Contracting State by a resident of the other Contracting State shall not exceed 5 percent of the gross

amount thereof...”. Article 4.1 of the treaty provides

that for purposes of the treaty, “a ‘resident’ of a Contracting State means any person who, under the laws

of that State, is liable to tax therein by reason of his

domicile, residence, place of management, place of

incorporation, or any other criterion of a similar nature...”. Article 4.2 of the treaty provides that in the

case of income “derived or paid by a partnership...”,

the term resident applies only to the extent that the

income derived by such partnership is subject to tax

in that State as the income of a resident, either in its

hands or in the hands of its partners.

(ii) Analysis. Under the U.S.–X income tax

treaty, A is a resident of Country X within the mean-

1997-29␣ ␣ I.R.B.

ing of Article 4.1 of the treaty. Also, as a resident of

Country X taxable on the U.S. source royalty under

the tax laws of Country X, A meets the condition under Article 12 of the treaty that it derive the income

from sources within the United States. Accordingly,

the U.S. source royalty income is treated as derived

by a resident of X. Further, A is a beneficial owner

of the royalty income, as determined under paragraph (d)(2)(i) of this section. The fact that A’s interest holders are also beneficial owners of the royalty income under U.S. tax principles (as partners of

A) does not preclude A from qualifying as a beneficial owner for purposes of the treaty. In addition, A

may claim benefits under the U.S.–X income tax

treaty even though some of its interest holders do not

reside in X or reside in a country that does not have

an income tax treaty in effect with the United States.

Example 2. (i) Facts. The facts are the same as

under Example 1 except that Article 12 of the U.S.–

X income tax treaty provides that royalties “paid” to

a resident of a treaty country from sources within the

other may be taxed in both countries but the tax is

limited to 10 percent of the gross amount of the royalties in the source country. Further the U.S.-X income tax treaty includes no provision relating to income paid or derived through a partnership.

(ii) Analysis. As in Example 1, A is entitled to

claim the benefit of the U.S.-X income tax treaty

with respect to the U.S. source royalty income paid

to A. The term paid and the term derived are used

interchangeably in U.S. income tax treaties. Accordingly, the U.S. source royalty income is treated as

derived by a resident of X. It is irrelevant that the

U.S.–X treaty does not include a provision relating

to income paid or derived through a partnership.

Example 3. (i) Facts. The facts are the same as

under Example 2, except that Country Y has an income tax treaty in effect with the United States. Article 12 of the U.S.–Y income tax treaty reduces the

rate on U.S. source royalty income to zero if the income is paid to a resident of Country Y who beneficially owns the income. Article 4.1 of the U.S.–Y

treaty provides that for purposes of the treaty, “a

‘resident’ of a Contracting State means any person

who, under the laws of that State, is liable to tax

therein by reason of his domicile, residence, place of

management, place of incorporation, or any other

criterion of a similar nature...”. The U.S.–Y treaty

does not include a provision relating to income paid

or derived through a partnership. Under the laws of

Country Y, A is treated as fiscally transparent entity.

Thus, A’s partner, T, a corporation organized in

Country Y is required to include in income on a current basis its allocable share of A’s income. T is a

beneficial owner of the income paid to A, as determined under paragraph (d)(2)(ii) of this section.

(ii) Analysis. As in Example 2, A is entitled to

claim the benefit of the U.S.–X income tax treaty

with respect to the U.S. source royalty income paid

to A. However, T is also entitled to claim the benefit

of the exemption under the U.S.–Y treaty for its allocable share of the U.S. source royalty income. T

meets the conditions of Article 12 because it is a

resident of Country Y within the meaning of Article

4.1 of the treaty. Also, as a resident of Country Y

taxable on the U.S. source royalty under the tax laws

of Country Y, it meets the condition under Article 12

of the treaty that income from sources within the

United States be paid to a resident. Accordingly, T’s

allocable share of the U.S. source royalty income is

treated as derived by a resident of Y. It is irrelevant

that the U.S.–Y treaty does not include a provision

relating to income paid or derived through a partnership.

Example 4. (i) Facts. Entity A is a business organization organized under the laws of Country V

that has no income tax treaty with the United States.

A is treated as a partnership for U.S. tax purposes

9

and receives royalty income from U.S. sources that

is not effectively connected with the conduct of a

trade or business in the United States. G, one of A’s

interest holders, is a corporation organized under the

laws of Country X. X treats A as an entity taxable at

the entity level and not as a fiscally transparent entity. Therefore, G is not required to include in income on a current basis its share of A’s income. Instead, G is taxed in X on its share of A’s profits when

distributed by A and such distribution is taxed to G

as a dividend. H, A’s other interest holder, is a corporation organized in Country Y. Y treats A as a fiscally transparent entity and requires H to include in

income on a current basis its allocable share of A’s

income. Both X and Y have an income tax treaty in

effect with the United States. Article 12 of the U.S.–

X income tax treaty provides that royalties paid to a

resident of a treaty country from sources within the

other may be taxed in both countries but the tax is

limited to 5 percent of the gross amount of the royalties in the source country. Article 4.1 of the U.S.–X

treaty provides that for purposes of the treaty, a

“‘resident’ of a Contracting State means any person

who, under the laws of that State, is liable to tax

therein by reason of his domicile, residence, place of

management, place of incorporation, or any other

criterion of a similar nature...”. The U.S.–X treaty

does not include a provision relating to income paid

or derived through a partnership. Article 12 of the

U.S.–Y treaty provides that “royalties derived and

beneficially owned by a resident of a Contracting

State shall be taxable only in that State.” Article 4.1

of the U.S.–Y treaty provides that, for purposes of

the treaty, a “‘resident’ of a Contracting State means

any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation,

or any other criterion of a similar nature...”. Article

4.2 of the U.S.–Y treaty provides that in the case of

income “derived or paid by a partnership...”, the

term resident applies only to the extent that the income derived by such partnership is subject to tax in

that State as the income of a resident, either, in its

hands or in the hands of its partners.

(ii) Analysis. A may not claim the benefit of any

income tax treaty since it is not a resident of a country with which the United States has such a treaty.

This result occurs regardless of how A is treated for

U.S. tax purposes or for purposes of the tax laws of

Country V. G may not claim the benefits of Article

12 of the U.S.–X treaty. Under the tax laws of X,

G’s share of the U.S. source royalty income paid to

A is not treated as derived by a resident of X since,

under X’s tax laws, A, rather than G, is required to

account for income received by A. This result occurs even if A distributes the royalty amount immediately after receiving it because, in such a case, G

would be taxable on an amount treated as a profit

distribution from A and not on royalty income received from sources within the United States. The

fact that, for U.S. tax purposes, G is treated as the

taxpayer for its allocable share of A’s income is not

relevant for purposes of determining whether, for

purposes of Article 12 of the U.S.–X income tax

treaty, G’s share of the income paid to A is treated as

derived by a resident of X. For this purpose, the

laws of Country X govern the determination of

whether G meets this condition. On the other hand,

H may claim an exemption from U.S. tax on its

share of the royalty income received by A under Article 12 of the U.S.–Y treaty because, under the tax

laws of Y, H rather than A, is required to account for

income received by A. Accordingly, H’s share of the

U.S. source royalty income paid to A is treated as

derived by a resident of Y.

Example 5. The facts are the same as in Example

4, except that A is a business organization formed

under the laws of a U.S. State as a limited liability

July 21, 1997

company. The consequences are the same as described in Example 4. G is not eligible for benefits

under Article 12 of the U.S.–X income tax treaty

since, under X’s tax laws, A, rather than G, is required to account for income received by A. Under

section 881(a), G is liable for U.S. income tax on its

allocable share of A’s U.S. source royalty income at

a 30 percent rate and A must withhold 30 percent

from G’s allocable share under section 1442. Similarly, H may claim an exemption from U.S. tax on its

share of the royalty income received by A under Article 12 of the U.S.–Y treaty because, under the tax

laws of Y, H rather than A, is required to account for

income received by A.

Example 6. The facts are the same as in Example

4, except that A is a so-called dual organized entity.

In addition to being organized under the laws of

Country V, A has also been organized under the laws

of the United States pursuant to the State Z domestication statute. Accordingly, both Country V and the

United States regard entity A as a domestic entity existing only in that jurisdiction. Further, Country X

and Country Y regard A as a Country V entity. A is

treated as a partnership for U.S. tax purposes. The

fact that A is a dual organized entity that is regarded

differently in Countries X or Y and the United States

does not impact the relevant tax treaty analysis. As

in Example 4, A may not claim the benefit of any income tax treaty since it is not a resident of a country

with which the United States has such a treaty.

Similarly, G is not eligible for benefits under Article

12 of the U.S.–X income tax treaty since, under X’s

tax laws, A, rather than G, is required to account for

income received by A. Under section 881(a), G is liable for U.S. income tax on its allocable share of A’s

U.S. source royalty income at a 30 percent rate. Because A is treated as a U.S. partnership for U.S. tax

purposes, A must withhold 30 percent from G’s allocable share under section 1442. H may claim an exemption from U.S. tax on its share of the royalty income received by A under Article 12 of the U.S.–Y

income tax treaty because, under the tax laws of Y,

H rather than A, is required to account for the income received by A.

Example 7. The facts are the same as in Example

5, except that A distributes all U.S. source royalty income to its interest holders immediately following

A’s receipt of such income. The consequences are

the same as described in Example 5. G remains ineligible for benefits under Article 12 of the U.S.–X

income tax treaty since, under X’s tax laws, A, rather

than G, is required to account for the royalty income

received by A. The fact that A distributes income on

a current basis to G is irrelevant even if Country X

taxes G on such distributions on a current basis.

Country X regards such distributions to G as a distribution of profits from A to G rather than an item of

U.S. source royalty income of G. H remains eligible

for benefits under Article 12 of the U.S.–Y income

tax treaty with respect to H’s allocable share of the

U.S. source royalty treatment received by A.

Example 8. The facts are the same as in Example

5, except that Country X pursuant to a Country X

anti-deferral regime requires that G account for on a

current basis as a deemed distribution G’s pro rata

share of A’s net passive income. For purposes of the

anti-deferral regime, the U.S. source royalty income

of G is regarded as passive income. The consequences are the same as described in Example 5. G

remains ineligible for benefits under Article 12 of

the U.S.–X income tax treaty because, under X’s tax

laws, A, rather than G, is required to account for the

royalty income received by A. The fact that G receives a current deemed distribution of net passive

income is irrelevant even if Country X taxes G on

such deemed distributions on a current basis. Country X regards such deemed distributions to G as a

distribution of profits from A to G rather than an al-

July 21, 1997

location to G of G’s share of A’s U.S. source royalty

income. H remains eligible for benefits under Article 12 of the U.S.–Y income tax treaty with respect

to H’s allocable share of the U.S. source royalty

treatment received by A.

Example 9. (i) Facts. Entity A is a business organization formed under the laws of Country X that

has an income tax treaty with the United States. A

has made a valid election under §301.7701–3(c) of

this chapter to be treated as a corporation for U.S.

tax purposes and receives royalty income from

sources within the United States that is not effectively connected with the conduct of a trade or business in the United States. G, A’s sole shareholder, is

a corporation organized under the laws of Country

X. Under the tax laws of X, A is treated as a fiscally

transparent entity and, therefore, G is required to include in income on a current basis its share of A’s income. Article 12 of the U.S.–X tax treaty provides

that “royalties derived from sources within a Contracting State by a resident of the other Contracting

State shall not exceed 5 percent of the gross amount

thereof...”. Article 4.1 of the treaty provides that for

purposes of the treaty, a “‘resident’ of a Contracting

State means any person who, under the laws of that

State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature...”. Article 4.2 of the treaty provides that in the

case of income “derived or paid by a partnership...”,

the term resident applies only to the extent that the

income derived by such partnership is subject to tax

in that State as the income of a resident, either, in its

hands or in the hands of its partners.

(ii) Analysis. A does not qualify for benefits under the U.S.-X income tax treaty because A is treated

as a fiscally transparent entity under the tax laws of

X and thus is not a resident of X for purposes of the

treaty. G, on the other hand, qualifies for benefits

under the U.S.–X treaty with respect to the U.S.

source royalty income received by A because, under

the tax laws of X, G is required to account for the income received by A on a current basis. This result

applies even though, for U.S. tax purposes, A is

treated as a corporate entity. Accordingly, the U.S.

royalty income paid to A is treated as derived by G,

a resident of X, as determined under the tax laws of

X. Based on G’s qualification for treaty benefits

with respect to the U.S. source royalty income, A, as

the taxpayer under U.S. tax laws, may claim that the

income that it receives for U.S. tax purposes is eligible for benefit under the U.S.–X treaty.

Example 10. The facts are the same as in Example 9, except that A is a corporation organized under the laws of a U.S. State and is, therefore, a domestic corporation. A may not claim under the

U.S.–X income tax treaty a reduction of the rate of

U.S. tax otherwise imposed on its income under section 11. A reduced rate of tax is unavailable under

the U.S.–X treaty based upon the savings clause in

Article 1 of the U.S.–X treaty. Thus, A remains fully

taxable under U.S. tax laws as a domestic corporation.

Example 11. (i) Facts. Entity A is a business organization organized under the laws of Country V

that has no income tax treaty with the United States.

A is treated as a partnership for U.S. tax purposes

and receives royalty income from U.S. sources that

is not effectively connected with the conduct of a

trade or business in the United States. A is directly

owned by H and J. J is a corporation organized in

Country Z which treats A as fiscally transparent and

J as an entity taxable at the entity level. Accordingly, Country Z requires J to include in income on a

current basis J’s share of A’s U.S. source royalty income. H, A’s other direct interest holder, is a corporation organized in Country Y. H, in turn is owned

by E and F, both of which are entities organized in

10

Country X. E and F are each wholly owned by C

which is a corporation organized in Country V. Y

treats both A and H as fiscally transparent entities.

X treats A, H, and E as fiscally transparent entities.

X treats F as an entity taxable at the entity level. Accordingly, X requires F to include in income on a

current basis F’s indirect share of A’s U.S. source

royalty income. H and J are treated as corporations

for U.S. federal income tax purposes while E, F, and

C are treated as partnerships for U.S. federal tax purposes. X, Y and Z each have in effect an income tax

treaty with the United States. Article 12 of the U.S.X and the U.S.–Z income tax treaty provides that

royalties paid to a resident of a treaty country from

sources within the other may be taxed in both countries but the tax is limited to 5 percent of the gross

amount of the royalties in the source country. Article 4.1 of the U.S.–X and the U.S.–Z treaty provides that for purposes of the treaty, a “‘resident’ of

a Contracting State means any person who, under

the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management,

place of incorporation, or any other criterion of a

similar nature...”. Article 4.2 of the U.S.–X and the

U.S.-Z treaty provides that in the case of income

“derived or paid by a partnership...”, the term resident applies only to the extent that the income derived by such partnership is subject to tax in that

State as the income of a resident, either in its hands

or in the hands of its partners. Article 12 of the

U.S.–Y treaty provides that “royalties derived and

beneficially owned by a resident of a Contracting

State shall be taxable only in that State.” Article 4.1

of the U.S.-Y treaty provides that, for purposes of

the treaty, a “‘resident’ of a Contracting State means

any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation,

or any other criterion of a similar nature...”. The

U.S.-Y treaty does not include a provision relating to

income paid or derived through a partnership.

(ii) Analysis. A may not claim, based on its own

status, the benefit of any income tax treaty since it is

not a resident of a country with which the United

States has such a treaty. This result occurs regardless of how A is treated for U.S. tax purposes or for

purposes of the tax laws of Country V. H may not

claim the benefits of any treaty, including the benefits of Article 12 of the U.S.–Y treaty, because H

does not qualify as a resident of Y or any other treaty

jurisdiction. Similarly, neither E nor C may claim

the benefits of any income tax treaty, since neither

entity qualifies as a resident of X or any other treaty

jurisdiction. F, however, may claim the benefit of

Article 12 of the U.S.–X treaty with respect to F’s

indirect share of the U.S. source royalty income received by A. Such income is treated as derived by F,

a resident of X, because X qualifies as a resident of

X and, under the tax laws of X, F is the first entity in

the A, H, F chain that is not itself treated as fiscally

transparent in X. J may claim the benefits of Article

12 of the U.S.–Z treaty with respect to J’s indirect

share of the U.S. source royalty income paid to A because, under the tax laws of Z, J rather than A, is required to account for income received by A. Accordingly, J’s share of the U.S. source royalty

income paid to A is treated as derived by a resident

of Z. As illustrated in this example, the U.S. federal

income tax treatment of A, J, H, E, F and C is irrelevant for purposes of determining the extent to

which U.S. source royalty income paid to A is eligible for treaty-reduced tax rates under the U.S. income tax treaty with X, Y or Z.

Example 12. (i) Facts. Entity A is a business

organization formed under the laws of Country X

that has an income tax treaty in effect with the

United States. A owns all of the stock of a U.S.

corporation B. Under the tax laws of X, A is sub-

1997-29␣ ␣ I.R.B.

ject to tax at the entity level. For U.S. tax purposes, A is treated as a branch of its single owner,

G. G is a corporation organized under the laws of

X. A receives dividends from B that are from U.S.

sources and are not effectively connected with the

conduct of a trade or business in the United States.

Article 10 of the U.S.–X tax treaty provides that

“dividends derived from sources within a Contracting State by a resident of the other Contracting

State shall not exceed 5 percent of the gross

amount thereof...”. Article 4.1 of the treaty provides that for purposes of the treaty, a “‘resident’ of

a Contracting State means any person who, under

the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion

of a similar nature...”. The U.S.–X treaty contains

1997-29␣ ␣ I.R.B.

no provision regarding income paid or derived

through a partnership.

(ii) Analysis. For U.S. tax purposes, A is

treated as a wholly-owned business entity that is

disregarded for federal income tax purposes. However, because, under the laws of X and under X’s

application of the treaty, A is treated as deriving the

dividend income as a resident of X, A qualifies for

benefits under the treaty with respect to the U.S.

source dividend. Thus, G, as the taxable person for

U.S. tax purposes, may claim the benefit of a reduced rate under Article 10 of the U.S.–X treaty

based on A’s eligibility for tax treaty benefits.

(7) Effective date. This paragraph (d)

applies to amounts paid on or after January

1, 1998.

11

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved June 26, 1997.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on June

30, 1997, 12:19 p.m., and published in the issue of

the Federal Register for July 2, 1997, 35673).

July 21, 1997

Part III. Administrative, Procedural, and Miscellaneous

Time for Reporting Transfers to

Foreign Entities Under Sections

1491 Through 1494

Notice 97–42

This notice modifies the guidance set

forth in Notice 97–18, 1997–10 I.R.B. 35,

regarding the time for reporting transfers

of property to foreign corporations, partnerships, trusts, or estates as described in

section 1491 (“section 1491 transfers”).

Background

Notice 97–18 provides guidance with respect to section 1491 transfers occurring after August 20, 1996, that are reportable under section 1494, including the time and

manner for reporting such transfers, the

manner for making elections pursuant to

section 1492, and the penalty imposed by

section 1494(c) for failure to report a section 1491 transfer. That notice provides

that a U.S. transferor who is required to report a section 1491 transfer may either file

Form 926 with the U.S. transferor’s annual

tax return or information return for the taxable year that includes the date of the transfer or may file Form 926 on the day the

transfer is made. Interest must be paid on

the amount of excise tax due with respect to

the period between the date on which the

transfer occurred and the date on which the

excise tax is actually paid.

A U.S. transferor can avoid the section

1491 excise tax by making certain elections under section 1492. One election allows a U.S. transferor to avoid the excise

tax by electing, before the transfer, to apply principles similar to the principles of

section 367. Section 1492(2)(B). Alternatively, a U.S. transferor can avoid the

section 1491 excise tax by electing to

treat the transfer as a taxable exchange

July 21, 1997

under section 1057. Section 1492(3).

Section III.B of Notice 97–18 provides

guidance on the time and manner for

making these elections.

Section VIII of Notice 97–18 contains a

transition provision with respect to the reporting requirements for the U.S.

transferor’s tax year that includes August

20, 1996. That section provides that no

penalties will be imposed under section

1494(c) if a Form 926 reporting a section

1491 transfer (or certain other adequate reporting described in the notice) is filed by

the later of the due date of the U.S.

transferor’s income tax return, including

extensions, for the taxable year in which the

transfer occurred, or May 9, 1997 (the date

that is 60 days after the date that notice was

published in the Internal Revenue Bulletin).

This notice extends the time during

which certain section 1491 transfers may

be reported under that transition provision

without the imposition of the section

1494(c) penalty. This notice does not affect the interest that accrues on any excise

tax due between the date of the transfer

and the date on which the excise tax is actually paid. Moreover, this notice does

not extend the time for filing under any

duplicative reporting provision described

in section II.B of Notice 97–18.

tion return for the tax year that includes

August 20, 1996, includes the items of

gross income required to be taken into account as a result of an election on the

1996 Form 926 (for example, any gain

recognized by the taxpayer as a result of a

section 1057 election). Alternatively, no

penalty will be imposed under section

1494(c) if the taxpayer files the 1996

Form 926 within the period set forth in

Section VIII of Notice 97–18.

The U.S. transferor will be deemed to

have made, as the case may be, a section

1492(2)(B) election before the transfer, or

a section 1057 election in accordance with

Treas. Reg. § 301.9100–12T, if the following requirements are satisfied:

(i) The U.S. transferor otherwise

complies with the requirements set

forth in Notice 97–18 for making an

election under section 1494(2)(B) to

apply principles similar to the principles of section 367, or under section

1492(3) for treating the transfer as a

taxable exchange under section 1057;

and

(ii) With respect to either election, the

U.S. transferor’s 1996 Form 926 is

filed within the time period set forth

in this notice.

Guidance

Sections III.B and VIII of Notice 97–18

are hereby modified.

With respect to Form 926 for the taxable year that includes August 20, 1996

(the “1996 Form 926”), no penalty will be

imposed under section 1494(c) if the taxpayer files the 1996 Form 926 with the

taxpayer’s timely–filed (including extensions) income tax return or information

return for the first taxable year beginning

on or after January 1, 1997, provided the

taxpayer’s income tax return or informa-

12

Effect on Other Guidance

Drafting Information

The principal author of this notice is

Michael Kirsch of the Office of Associate

Chief Counsel (International). For further information regarding this notice,

contact Mr. Kirsch on (202) 622–3880

(not a toll-free call).

1997-29␣ ␣ I.R.B.

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Guidance Regarding Claims for

Income Tax Convention Benefits

REG–104893–97

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rule-making

by cross-reference to temporary regulations

and notice of public hearing.

SUMMARY: In T.D. 8722, page 4, the IRS

is issuing temporary regulations regarding

rules for determining whether U.S. source

payments made to entities, including entities that are fiscally transparent in the

United States and/or the applicable treaty

jurisdiction, are eligible for treaty–reduced

tax rates. The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these

proposed regulations.

DATES: Comments and outlines of topics

to be discussed at the public hearing scheduled for September 24, 1997, at 10 a.m.

must be received by September 3, 1997.

ADDRESSES: Send submissions to: CC:

DOM:CORP:R (REG–104893–97), room

5228, Internal Revenue Service, POB 7604,

Ben Franklin Station, Washington, DC

20044. Submissions may also be hand delivered between the hours of 8 a.m. and 5

p.m. to: CC:DOM:CORP:R (REG–

104893–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue

NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the internet by selecting the “Tax

Regs” option on the IRS Home Page, or by

submitting comments directly to the IRS

internet site at http://www.irs.ustreas.gov/

prod/tax_regs/comments.html. The public

hearing will be held in the Commissioner’s

Conference Room, room 3313, Internal

Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Elizabeth Karzon, (202) 622-3860; concerning

submissions and the hearing, Evangelista

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

1997-29␣ ␣ I.R.B.

SUPPLEMENTARY INFORMATION:

Background

T.D. 8722 amends the Income Tax Regulations (26 CFR part 1) relating to section

894. The temporary regulations contain

rules relating to eligibility for benefits under income tax conventions for payments to

flow–through entities or arrangements.

The text of T.D. 8722 also serves as the

text of these proposed regulations. The preamble to the temporary regulations explains

the temporary regulations.

Special Analyses

It has been determined that this notice of

proposed rulemaking is not a significant

regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these

regulations do not impose on small entities

a collection of information requirement, the

Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration

will be given to any comments that are submitted timely to the IRS. All comments

will be available for public inspection and

copying.

A public hearing has been scheduled for

September 24, 1997, at 10 a.m. in the

Commissioner’s Conference Room, room

3313, Internal Revenue Building, 1111

Constitution Avenue NW., Washington DC.

Because of access restrictions, visitors will

not be admitted beyond the Internal Revenue Building lobby more than 15 minutes

before the hearing starts.

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

to the hearing.

Persons who wish to present oral comments at the hearing must submit comments and an outline of the topics to be dis-

13

cussed and the time to be devoted to each

topic by September 3, 1997.

A period of 10 minutes will be allotted to

each person for making comments.

An agenda showing the scheduling of the

speakers will be prepared after the deadline

for receiving outlines has passed. Copies

of the agenda will be available free of

charge at the hearing.

Proposed Effective Date

This amendment is proposed to apply to

payments received by an entity on or after

January 1, 1998.

*

*

*

*

*

Proposed Amendments to the Regulations

Accordingly, 26 part 1 is proposed to be

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

continues to read in part as follows:

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

Par. 2. In §1.894–1, paragraph (d) is

added to read as follows:

§1.894–1 Income affected by treaty.

*

*

*

*

*

[The text of proposed paragraph (d) is

the same as the text of §1.894–1T(d) published in T.D. 8722, page 4.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on June

30, 1997, 12:19 p.m., and published in the issue of the

Federal Register for July 2, 1997, 62 F.R. 35755).

Special Rule for U.S. Permanent

Residents Receiving Compensation

or Pensions From the Government

of France

Announcement 97–61

The Competent Authorities of the United

States and France have entered into an

agreement to alleviate the double taxation

of U.S. permanent residents with respect to

compensation and pensions for governmental services rendered to the French government. Generally, under the agreement, income of this type received in 1996 is

July 21, 1997

taxable only in France and income of this

type received in 1997 is taxable only in the

United States. For 1998 and subsequent

years, both the United States and France

will tax the income, but the United States

will allow a credit for taxes paid to France.

Taxpayers who are otherwise required to

file an Individual Income Tax Return on

Form 1040 for tax year 1996 should attach

the following statement to the return: “I/we

am/are not taxable in the United States under Article 19 of the Income Tax Convention between the United States and France

on compensation or pension income received in 1996 for services rendered to the

French Government that are of a governmental nature, pursuant to a 1997 Competent Authority agreement between the

United States and France.” A taxpayer who

has already filed a 1996 return in accordance with the Competent Authority agreement need not amend the return to include

such a statement. A taxpayer who has already filed a 1996 return and paid tax on income subject to the Competent Authority

agreement should include this statement if

filing a claim for refund.

Contacts

For further information or assistance regarding the U.S. income tax treatment of

compensation and pensions received from

the Government of France, please contact

Calvin Watson, Tax Treaty Division, Office

of the Assistant Commissioner (International), ((202) 874–1550 (not a toll-free

number)). For information or assistance regarding the French tax treatment of these

compensation and pension payments,

please contact Noel Claudon, Fiscal Attache, French Embassy, ((202) 944–6390 or

(202) 944–6391 (not toll-free numbers)).

In France, please contact Centre des Impots

des Non-Residents, 9, Rue d’Uzes, 75094

Paris Cedex 02.

Announcement 97–70

Transition Relief for Failures To

Make Plan Distributions to Certain

Employees or Offer Options To

Defer Distributions by April 1, 1997

Purpose

This announcement provides transition

relief for qualified plans that fail to make

distributions required under the terms of

July 21, 1997

the plan to an employee who attained age

70 1/2 in 1996 and who did not retire in

1996. This relief is conditioned upon the

employer meeting specified requirements

with respect to such an employee.

Background

Section 401(a)(9) of the Internal Revenue Code (“Code”) provides that, in order for a plan to be qualified under section

401(a), distributions from the plan must

commence no later than the “required beginning date.” Prior to 1997, section

401(a)(9)(C) generally provided that the

required beginning date is April 1 following the calendar year in which the employee attains age 70 1/2.

Section 1404(a) of the Small Business

Job Protection Act of 1996 (“SBJPA”)

amended section 401(a)(9) of the Code to

provide that, in the case of an employee

who is not a 5-percent owner, the required

beginning date for minimum distributions

from a qualified plan is April 1 of the calendar year following the later of the calendar year in which the employee attains

age 70 1/2 or the calendar year in which

the employee retires. The amendment to

section 401(a)(9) applies to years beginning after December 31, 1996.

Notice 96–67, 1996–53 I.R.B. 12, December 30, 1996, Q&A–2, provides that,

under section 401(a)(9) as amended by

the SBJPA, an employee (other than a 5percent owner) who attained age 70 1/2 in

1996, but who had not retired from employment with the employer maintaining

the plan by the end of 1996, is not required to receive a minimum distribution

by April 1, 1997. Such an employee’s required beginning date is determined under

amended section 401(a)(9), which requires distributions to commence by April

1 of the calendar year following the calendar year in which the employee retires

from employment with the employer

maintaining the plan.

Many qualified plans continue to

contain provisions (consistent with section 401(a)(9) prior to its amendment

by the SBJPA) requiring an employee

who attains age 70 1/2 in a calendar

year to begin receiving distributions by

April 1 of the following calendar year.

Announcement

97–24,

1997–11

I.R.B. 24, March 13, 1997, provides

that, prior to amending its plan, an employer maintaining a plan is permitted

14

to offer an employee (other than a 5percent owner) who attains age 70 1/2

in a calendar year after 1995, e.g. 1996,

and who does not retire by the end of

that calendar year, the option to delay

commencement of distributions until no

later than April 1 following the calendar year in which the employee retires

from employment with the employer.

Announcement 97–24 notes that future

guidance will provide that an employer

that offers this option under a plan must

amend the plan retroactively to provide

for the option. The retroactive plan

amendment must conform the plan to

its pre-amendment operation regarding

this option to defer distributions until

after retirement.

Announcement 97–24 states that it also

applies to an employer that has adopted a

master or prototype or a regional prototype

plan. Announcement 97–24 notes that if a

conforming amendment is not an available

option under the sponsor’s prototype plan

document, the required amendment may result in the loss of prototype status.

Transition Relief

Under this announcement, if the requirements described below are satisfied, a plan will not be treated as failing

to satisfy the requirements of section

401(a) of the Code merely because the

plan fails to make certain distributions

required under the terms of the plan to

an employee (other than a 5-percent

owner) who attained age 70 1/2 in 1996

and who did not retire from employment with the employer maintaining the

plan by the end of 1996. The relief in

this announcement applies to a plan

with respect to distributions required

under the terms of the plan to be made

to such an employee between August

20, 1996 (the date of enactment of the

SBJPA) and December 31, 1997.

This relief is available only if: (1) the

employee is offered an option to defer the

distribution and elects to defer, or a

make-up distribution is paid to such employee, and (2) the employee option or

the make-up distribution meets the qualification requirements under section

401(a) of the Code (other than the requirement that a plan operate in accordance with its terms). For example, the

employee option or the make-up distribution must satisfy the requirements of sec-

1997-29␣ ␣ I.R.B.

tions 401(a)(11) and 417 (relating to joint

and survivor annuities).

If the employer chooses to offer an

election to defer, the election to defer

must be made by the employee by December 31, 1997. If an employee chooses

not to defer, the plan must pay a make-up

distribution to the employee in a manner

that satisfies the rules set out below.

Whether a make-up distribution from the

plan is paid to all employees (other than 5percent owners) who attained age 70 1/2 in

1996 and who did not retire from employment with the employer maintaining the

plan by the end of 1996 or only to any such

employee who is offered an election to defer but chooses not to defer, the make-up

distribution must be made by December 31,

1997 and must include all of the

employee’s distributions required under the

plan terms up to that date. The make-up

distribution must restore to the employee

the benefits that the employee would have

had if the plan terms had been followed.

For example, in the case of a defined benefit plan, the make-up distribution for an

employee must be increased to take into account the delayed payment consistent with

the plan’s actuarial adjustments.

Further, future guidance will provide

that an employer who offers the option to

defer described above under a plan must

amend the plan retroactively, no later than

the date specified in that guidance, to provide for the option. The retroactive plan

amendment must conform the plan to its

preamendment operation regarding the

option to defer commencement of benefits. However, a plan will not fail to satisfy this operational requirement merely

because the amendment provides for an

employee to have the option to either

commence distribution by April 1, 1997

or to defer distribution beyond that date

but, in operation, the plan provided for an

election to defer or make-up distributions

in accordance with this announcement.

1997-29␣ ␣ I.R.B.

This announcement also applies to an

employer that has adopted a master or

prototype or a regional prototype plan.

Such an employer should note that if a

conforming amendment is not an available option under the sponsor’s prototype

plan document, the required amendment

may result in the loss of prototype status.

Availability of Publication 1542, Per

Diem Rates (Revised May 1997)

Announcement 97–71

Publication 1542, recently updated, is

now available from the Internal Revenue

Service.

The publication gives the maximum per

diem rate employers can use without treating part of the allowance as wages for tax

purposes. It also provides the listing of localities eligible for $166 per diem amount

under the high-low substantiation method.

You can get a copy of this publication

by calling 1–800–829–3676. You can also

write to the IRS Forms Distribution Center nearest you.

If you have access to a personal computer and modem, you also can get the

publication electronically. You can get the

publication at:

1) World Wide Web-http://

www.irs.ustreas.gov,

2) FTP-ftp.irs.ustreas.gov, and

3) IRIS at FEDWORLD–(703) 321-8020.

Deletions From Cumulative List

of Organizations Contributions to

Which Are Deductible Under

Section 170 of the Code

Announcement 97–72

The names of organizations that no

longer qualify as organizations described

in section 170(c)(2) of the Internal Revenue Code of 1986 are listed.

15

Generally, the Service will not disallow

deductions for contributions made to a

listed organization on or before the date

of announcement in the Internal Revenue

Bulletin that an organization no longer

qualifies. However, the Service is not

precluded from disallowing a deduction

for any contributions made after an organization ceases to qualify under section

170(c)(2) if the organization has not

timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter,

(2) was aware that such revocation was

imminent, or (3) was in part responsible

for or was aware of the activities or omissions of the organization that brought

about this revocation.

If on the other hand a suit for declaratory

judgment has been timely filed, contributions from individuals and organizations

described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c)

would begin on July 21, 1997, and would

end on the date the court first determines

that the organization is not described in section 170(c)(2) as more particularly set forth

in section 7428(c)(1). For individual contributors, the maximum deduction protected

is $1,000, with a husband and wife treated

as one contributor. This benefit is not extended to any individual who was responsible, in whole or in part, for the acts or

omissions of the organization that were the

basis for revocation.

Kinaman Animal Shelter

Erie, PA

Don Stewart Association

Phoenix, AZ

St. Matthews Publishing, Inc. f/k/a Church

and Bible Study in the Home by Mail, Inc.

Los Angeles, CA

Washington Institute for Policy Studies

Seattle, WA

July 21, 1997

Announcement of the Expedited Suspension of Attorneys, Certified Public

Accountants, Enrolled Agents and Enrolled Actuaries From Practice Before the

Internal Revenue Service

Under 31 Code of Federal Regulations,

section 10.76, the Director of Practice is authorized to immediately suspend from practice before the Internal Revenue Service

any practitioner who, within five years,

from the date the expedited proceeding is

instituted, (1) has had a license to practice

as an attorney, certified public accountant,

or actuary suspended or revoked for cause;

or (2) has been convicted of any crime under title 26 of the United States Code or, of

a felony under title 18 of the United States

Code involving dishonesty or breach of

trust.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Service

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

before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled actuaries to identify practitioners under expedited suspensions from practice before the

Internal Revenue Service, the Director of

Practice will announce in the Internal Revenue Bulletin the names and addresses of

practitioners who have been suspended

from such practice, their designation as attorney, certified public accountant, enrolled

agent, or enrolled actuary, and date or period of suspension. This announcement will

appear in the weekly Bulletin at the earliest

practicable date after such action and will

continue to appear in the weekly Bulletins

for five successive weeks or for as many

weeks as is practicable for each attorney,

certified public accountant, enrolled agent,

or enrolled actuary so suspended and will

be consolidated and published in the Cumulative Bulletin.

The following individuals have been

placed under suspension from practice before the Internal Revenue Service by virtue

of the expedited proceeding provisions of

the applicable regulations:

Name

Address

Designation

Date of Suspension

Newman, Harry J.

Sehnert, Fred

Gas

Gaskins, John D.

Turner, Charles L.

Thornton Jr., Kenneth W.

Kellogg, Richard

Stec, Albert J.

Huff Jr., James G.

Seall, William

Brunner, L. Keith

Bart, David R.

Shafer, David A.

Schouman, James

Jones, Milo A.

Dolan, Gary L.

Coorey, Edward T.

Sheehan, Thomas J.

Millonig, Arthur F.

McHaffie, Richard T.

Rigler, Michael

Hopkins, Diane E.

Adae, F. Brian

Covington, VA

Dallas, TX

Valdosta, GA

Goshen, KY

Murrells Inlet, SC

White Hall, AR

Schereville, IN

Raleigh, NC

Dayton, OH

Centerville, OH

Oakwood, OH

Franklin, OH

Milford, MI

Greensboro, NC

Lincoln, NE

Hampton, NH

Maggie Valley, NC

Dayton, OH

St. Paul, MN

Gainesville, TX

St. Paul, MN

Barrington, RI

CPA

CPA

CPA

Attorney

Attorney

CPA

CPA

CPA

Attorney

Attorney

Attorney

CPA

Attorney

CPA

Attorney

Enrolled Agent

CPA

Attorney

Attorney

CPA

Attorney

Attorney

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from May 16, 1997

Indefinite from June 4, 1997

Indefinite from June 4, 1997

Indefinite from June 4, 1997

Indefinite from June 4, 1997

July 21, 1997

16

1997-29␣ ␣ I.R.B.

Announcement of the Consent Suspension of Attorneys, Certified Public

Accountants, Enrolled Agents and Enrolled Actuaries From Practice Before the

Internal Revenue Service

Under 31 Code of Federal Regulations,

Part 10, an attorney, certified public accountant, enrolled agent or enrolled actuary, in order to avoid the institution or

conclusion of a proceeding for his disbarment or suspension from practice before

the Internal Revenue Service, may offer

his consent to suspension from such practice. The Director of Practice, in his discretion, may suspend an attorney, certified

public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Ser-

vice matter from directly or indirectly employing, accepting assistance from, being

employed by or sharing fees with, any

practitioner disbarred or suspended from

practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled

actuaries to identify practitioners under

consent suspension from practice before

the Internal Revenue Service, the Director

of Practice will announce in the Internal

Revenue Bulletin the names and addresses of practitioners who have been

suspended from such practice, their designation as attorney, certified public ac-

countant, enrolled agent, or enrolled actuary, and date or period of suspension. This

announcement will appear in the weekly

Bulletin at the earliest practicable date after such action and will continue to appear

in the weekly Bulletins for five successive

weeks or for as many weeks as is practicable for each attorney, certified public

accountant, enrolled agent, or enrolled actuary so suspended and will be consolidated and published in the Cumulative

Bulletin.

The following individuals have been

placed under consent suspension from

practice before the Internal Revenue

Service:

Name

Address

Designation

Date of Suspension

Padgett, John

Crisp, Jerry W.

Kessel, Donald K.

Klimchak, Joseph

Steele, Lewis M.

Castleberry, Gene A.

O’Connor, Paul J.

Olshan, Robert M.

Johnson, Kirk L.

Mattutat, Stephen

Trenary, Lloyd R.

Ritchey Jr., Ferris

Gold, Howard G.

Womack, Kathleen

Orleans, MA

Dallas, TX

Export, PA

Aliquippa, PA

Pittsburgh, PA

Oklahoma City, OK

Hanover, MA

Washington, DC

Ann Arbor, MI

Elicott City, MD

Oklahoma City, OK

Birmingham, AL

Hamden, CT

Hammond, LA

Attorney

CPA

CPA

CPA

CPA

Attorney

CPA

CPA

CPA

CPA

CPA

Attorney

CPA

CPA

May 22, 1997 to October 21, 1998

June 1, 1997 to May 31, 2000

June 1, 1997 to November 30, 1998

June 1, 1997 to February 28, 1998

June 1, 1997 to May 31, 1998

June 4, 1997 to August 3, 1997

June 6, 1997 to June 5, 2000

June 10, 1997 to December 9, 1998

July 1, 1997 to June 30, 1999

July 1, 1997 to March 31, 1998

August 1, 1997 to March 31, 1998

August 1, 1997 to July 31, 2000

August 1, 1997 to July 31, 1999

August 1, 1997 to July 31, 1999

1997-29␣ ␣ I.R.B.

17

July 21, 1997

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is being made clear because the language has

caused, or may cause, some confusion. It

is not used where a position in a prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is being changed. Thus, if a prior ruling held

that a principle applied to A but not to B,

and the new ruling holds that it applies to

both A and B, the prior ruling is modified

because it corrects a published position.

(Compare with amplified and clarified,

above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

may also be obsoleted because the substance has been included in regulations

subsequently adopted.

Revoked describes situations where the

position in the previously published ruling is not correct and the correct position

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

where the substance of a previously published ruling is being changed in part and

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and that

list is expanded by adding further names

in subsequent rulings. After the original

ruling has been supplemented several

times, a new ruling may be published that

includes the list in the original ruling and

the additions, and supersedes all prior

rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

The following abbreviations in current use and

formerly used will appear in material published in

the Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

July 21, 1997

18

1997-29␣ ␣ I.R.B.

Numerical Finding List1

Bulletins 1997–27 through 1997–28

Announcements:

97–67, 1997–27 I.R.B. 37

97–68, 1997–28 I.R.B. 13

97–69, 1997–28 I.R.B. 13

Delegation Orders:

172 (Rev. 5), 1997–28 I.R.B. 6

Notices:

97–37, 1997–27 I.R.B. 4

97–38, 1997–27 I.R.B. 8

97–39, 1997–27 I.R.B. 8

97–40, 1997–28 I.R.B. 6

97–41, 1997–28 I.R.B. 6

Railroad Retirement Quarterly Rate:

1997–28 I.R.B. 5

Revenue Procedures:

97–27, 1997–27 I.R.B. 9

Revenue Rulings:

97–27, 1997–27 I.R.B. 4

97–28, 1997–28 I.R.B. 4

97–29, 1997–28 I.R.B. 4

1

A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 1997–1 through 1997–26 will

be found in Internal Revenue Bulletin 1997–27, dated

July 7, 1997.

1997-29␣ ␣ I.R.B.

19

July 21, 1997

Finding List of Current Action on

Previously Published Items1

Bulletins 1997–27 through 1997–28

*Denotes entry since last publication

Revenue Procedures:

96–42

Superseded by

97–27, 1997–27 I.R.B. 9

1

A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins 1997–

1 through 1997–26 will be found in Internal Revenue

Bulletin 1997–27, dated July 7, 1997.

July 21, 1997

20

1997-29␣ ␣ I.R.B.

Notes

1997-29␣ ␣ I.R.B.

21

July 21, 1997

Notes

July 21, 1997

22

1997-29␣ ␣ I.R.B.

INTERNAL REVENUE BULLETIN

The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is

sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the

Superintendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These

are sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers

to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative

Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the

reverse, may purchase them from the Superintendent of Documents.

HOW TO ORDER

Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper

remittance, detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington,

DC 20402. Please allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving

it, we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home

Page (www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW,

Washington, DC 20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.

Internal Revenue Service

Washington, DC 20224

Official Business

Penalty for Private Use, $300

July 21, 1997

24

1997-29␣ ␣ I.R.B.

INTERNAL REVENUE BULLETIN

The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is

sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the

Superintendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These

are sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers

to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative

Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the

reverse, may purchase them from the Superintendent of Documents.

HOW TO ORDER

Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper

remittance, detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington,

DC 20402. Please allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving

it, we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home

Page (www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW,

Washington, DC 20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.

Superintendent of Documents

U.S. Government Printing Office

Washington, DC 20402

First Class Mail

Postage and Fees Paid

GPO

Permit No. G–26

Official Business

Penalty for Private Use, $300

1997-29␣ ␣ I.R.B.

25

July 21, 1997

1997-29 I.R.B.

23

July 21, 1997