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Bulletin No. 2000–5

January 31, 2000

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

Rev. Rul. 2000–5, page 436.

Application of section 368(a)(1)(A) to divisive mergers. This ruling holds that a state law merger will not qualify as a reorganization under section 368(a)(1)(A) of the

Code if the merger does not result in one corporation acquiring the assets of a target corporation and the target

corporation ceasing to exist.

T.D. 8859, page 429.

T.D. 8861, page 441.

Final regulations under section 6104(d) of the Code relate

to the disclosure requirements of private foundations.

ADMINISTRATIVE

Final regulations under section 42 of the Code amend various low-income housing tax credit regulations including

the procedures for compliance monitoring by the state

and local housing agencies, the requirements for making

carryover allocations, and the rules for the agencies’ correction of administrative errors or omissions. In addition,

the regulations require the independent verification of information on sources and uses of funds submitted by taxpayers to the agencies.

REG–103831–99, page 452.

T.D. 8860, page 437.

REG–116567–99, page 463.

Final regulations under section 988 of the Code relate to the

treatment of income and expenses from certain hyperinflationary, nonfunctional currency transactions and certain notional principal contracts.

Proposed regulations address when a currency will be

considered hyperinflationary under section 988 of the

Code. These regulations are intended to prevent distortions associated with the computation of income and ex-

Proposed regulations under section 752 of the Code relate

to the allocation of nonrecourse liabilities by a partnership. A

public hearing is scheduled for May 3, 2000.

REG–111119–99, page 455.

Proposed regulations under section 708 of the Code clarify

the tax consequences of partnership mergers and divisions.

A public hearing is scheduled for May 4, 2000.

(Continued on the next page )

Actions Relating to Court Decisions is on the page following the Introduction.

Finding Lists begin on page ii.

Department of the Treasury

Internal Revenue Service

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ADMINISTRATIVE—continued

penses arising from section 988 transactions denominated in hyperinflationary currencies. A public hearing is

scheduled for May 17, 2000.

Rev. Proc. 2000–15, page 447.

Innocent spouse; equitable relief. Guidance is provided

for taxpayers seeking relief from federal tax liability under

section 6015(f) or 66(c) of the Code. Notice 98–61 modified and superseded.

Notice 2000–9, page 449.

Insurance companies; treatment of variable contracts, closing agreements. This notice reminds issuers

of variable contracts that diversification rules for investments in U.S. Treasury securities by separate accounts

January 31, 2000

are different for variable annuity contracts than for variable life insurance contracts. For a limited time, the notice

permits issuers of variable annuity contracts that did not

satisfy the diversification requirements under section

817(h) of the Code, but which would have satisfied the

more lenient diversification requirements for variable life

insurance contracts, to obtain a closing agreement

through a reduced payment amount.

Notice 2000–10, page 451.

Guidance Priority List. Public comments are requested

about items that should be included in the Guidance Priority List for 2000. All comments should be submitted by

February 14, 2000.

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The IRS Mission

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

and by applying the tax law with integrity and fairness to

all.

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 are consolidated semiannually into

Cumulative Bulletins, which are sold on a single-copy basis.

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.

Revenue rulings represent the conclusions of the Service on

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

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

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

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

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

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

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).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a semiannual basis,

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

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

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

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Actions Relating to Court Decisions

It is the policy of the Internal Revenue

Service to announce at an early date

whether it will follow the holdings in certain cases. An Action on Decision is the

document making such an announcement.

An Action on Decision will be issued at

the discretion of the Service only on unappealed issues decided adverse to the

government. Generally, an Action on Decision is issued where its guidance would

be helpful to Service personnel working

with the same or similar issues. Unlike a

Treasury Regulation or a Revenue Ruling,

an Action on Decision is not an affirmative statement of Service position. It is not

intended to serve as public guidance and

may not be cited as precedent.

Actions on Decisions shall be relied

upon within the Service only as conclusions applying the law to the facts in the

particular case at the time the Action on

Decision was issued. Caution should be

exercised in extending the recommendation of the Action on Decision to similar

cases where the facts are different. Moreover, the recommendation in the Action

on Decision may be superseded by new

legislation, regulations, rulings, cases, or

Actions on Decisions.

Prior to 1991, the Service published ac-

quiescence or nonacquiescence only in

certain regular Tax Court opinions. The

Service has expanded its acquiescence

program to include other civil tax cases

where guidance is determined to be helpful. Accordingly, the Service now may acquiesce or nonacquiesce in the holdings

of memorandum Tax Court opinions, as

well as those of the United States District

Courts, Claims Court, and Circuit Courts

of Appeal. Regardless of the court deciding the case, the recommendation of any

Action on Decision will be published in

the Internal Revenue Bulletin.

The recommendation in every Action

on Decision will be summarized as acquiescence, acquiescence in result only,

or nonacquiescence. Both “acquiescence” and “acquiescence in result only”

mean that the Service accepts the holding

of the court in a case and that the Service

will follow it in disposing of cases with

the same controlling facts. However, “acquiescence” indicates neither approval

nor disapproval of the reasons assigned

by the court for its conclusions; whereas,

“acquiescence in result only” indicates

disagreement or concern with some or all

of those reasons. “Nonacquiescence” signifies that, although no further review

was sought, the Service does not agree

with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit

court of appeals, a “nonacquiescence” indicates that the Service will not follow

the holding on a nationwide basis. However, the Service will recognize the

precedential impact of the opinion on

cases arising within the venue of the deciding circuit.

The Actions on Decisions published in

the weekly Internal Revenue Bulletin are

consolidated semiannually and appear in

the first Bulletin for July and the Cumulative Bulletin for the first half of the

year. A semiannual consolidation also appears in the first Bulletin for the following January and in the Cumulative Bulletin for the last half of the year.

The Commissioner ACQUIESCES in

result only in the following decision:

McLeod v. United States,1

276 F. Supp. 213 (S.D. Ala. 1967)

1 Acquiescence in result only relating to whether minor children, listed as exemptions on taxpayer’s income tax return for 1964, were taxpayer’s dependents within

the meaning of I.R.C. section 152.

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

Section.—42 Low-Income

Housing Credit

26 CFR 1.42–5: Monitoring compliance with lowincome housing credit requirements.

T.D. 8859

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Compliance Monitoring and

Miscellaneous Issues Relating to

the Low-Income Housing Credit

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations regarding the procedures

for compliance monitoring by state and

local housing agencies (Agencies) with

the requirements of the low-income housing credit; the requirements for making

carryover allocations; the rules for Agencies’ correction of administrative errors or

omissions; and the independent verification of information on sources and uses of

funds submitted by taxpayers to Agencies. These final regulations affect owners of low-income housing projects who

claim the credit and the Agencies who administer the credit.

DATES: Effective Dates: These regulations are effective January 1, 2001, except

that the amendments made to

§§1.42–5(c)(5) and (e)(3)(i), and 1.42–13

are effective January 14, 2000, and the

amendment made to §1.42–6(d)(4)(ii) is

effective January 1, 2000.

Applicability Dates: For dates of applicability of the amendments to §1.42–5,

see §1.42–5(h). For date of applicability

of the amendment made to §1.42–6, see

§1.42–12(c). For date of applicability of

the amendments made to §1.42–13, see

§1.42–13(d). For date of applicability of

§1.42–17, see §1.42–17(b).

FOR FURTHER INFORMATION CONTACT: Paul Handleman, (202) 622-3040

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

2000–5 I.R.B.

Paperwork Reduction Act

The collections of information contained in these final regulations have been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act of

1995 (44 U.S.C. 3507) under control

number 1545-1357. Responses to these

collections of information are mandatory.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

control number.

For §1.42–5, the estimated annual burden per respondent varies from .5 hour to

3 hours for taxpayers and 250 to 5,000

hours for Agencies, with an estimated average of 1 hour for taxpayers and 1,500

hours for Agencies. For §1.42–13, the

estimated annual burden per respondent

varies from .5 hour to 10 hours for taxpayers and Agencies, with an estimated

average of 3.5 hours for taxpayers and 3

hours for Agencies. For §1.42–17, the

estimated annual burden per respondent

varies from .5 hour to 2 hours for taxpayers and .5 hour to 5 hours for Agencies,

with an estimated average of 1 hour for

taxpayers and 2 hours for Agencies.

Comments concerning the accuracy of

these burden estimates and suggestions

for reducing these burdens should be sent

to the Internal Revenue Service, Attn:

IRS Reports Clearance Officer,

OP:FS:FP, Washington, DC 20224, and to

the Office of Management and Budget,

Attn: Desk Officer for the Department of

the Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

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

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

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

On January 8, 1999, the IRS published

proposed regulations (REG–114664–97,

1999–11 I.R.B. 21) in the Federal Register (64 FR 1143) inviting comments

under section 42. A public hearing was

429

held May 27, 1999. Numerous comments

have been received. After consideration

of all the comments, the proposed regulations are adopted as revised by this Treasury Decision.

Public Comments

A. Compliance Monitoring

1. Inspection Requirement for New Buildings.

The proposed regulations require that,

by the end of the calendar year following

the year the last building in a project is

placed in service, the Agency conduct onsite inspections of the projects and review

the low-income certification, the documentation supporting such certification,

and the rent record for each tenant in the

project. Most commentators view the requirement for reviewing all tenant records

for all buildings in a project as unnecessary and burdensome. Most commentators suggest limiting inspections for new

buildings to 20 percent of the project’s

low-income units. Commentators also

suggest extending the time limit for inspecting new buildings to the end of the

calendar year following the first year of

the credit period or at least until a reasonable time after the Agency issues Form

8609, “Low-Income Housing Credit Allocation Certification.” This added flexibility would allow the Agency to combine a

physical inspection with a file review of

the first year of the credit period.

In response to the comments, the final

regulations reduce the inspection burden

for new buildings by requiring the

Agency to conduct on-site inspections of

all new buildings in the project and, for at

least 20 percent of the project’s low-income units, to inspect the units and review the low-income certifications, the

documentation supporting the certifications, and the rent records for the tenants

in those units. To allow the Agency sufficient time to review the tenant files for the

first year of the credit period, the final

regulations extend the time limit for inspecting new buildings to the end of the

second calendar year following the year

the last building in the project is placed in

service.

2. Three-year Inspection Requirement.

The proposed regulations require that,

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at least once every 3 years, each Agency

conduct on-site inspections of all buildings in each low-income housing project

and, for each tenant in at least 20 percent

of the project’s low-income units selected

by the Agency, review the low-income

certification, the documentation supporting such certification, and the rent record.

Most commentators agree with requiring physical inspections of the buildings

at least once every 3 years. However,

commentators recommend reviewing tenant income and rent records once every 5

years, which is one of the options under

the current compliance monitoring regulations (see §1.42–5(c)(2)(ii)(B) requiring

an Agency to review tenant files for 20

percent of the low-income housing projects each year). Commentators also recommend reviewing tenant files either onsite or at other locations, including desk

audits.

Although the physical inspection and

file review requirements for new buildings are relaxed in the final regulations,

the final regulations retain the 3-year inspection cycle for existing buildings. The

final regulations do not separate the physical inspection and file review cycles

(every 3 years for physical inspections

and every 5 years for file reviews) as suggested by commentators because it is administratively complete to do both during

the same year. The tenant income and

rent restrictions in section 42(g) are

equally important as the habitability standards for a low-income unit in section

42(i)(3)(B)(ii). The final regulations

adopt the suggestion that the file review

may be done wherever the tenant files are

maintained.

3. Health, Safety, and Building Code Inspections.

The proposed regulations require the

Agency to determine whether the project

is suitable for occupancy, taking into account local health, safety, and building

codes. Many commentators object to this

requirement as too costly and unadministerable because building codes vary considerably within states. Commentators

also asked for guidelines as to what constitutes an “inspection.” Some commentators propose defining an inspection as

looking at selected units in the building

and common areas for visible problems or

defects without applying the local health,

safety, and building codes standards. One

January 31, 2000

commentator suggests inspections based

on a complaint from the local jurisdiction

or from a tenant. Some commentators

suggest using a uniform physical standard

such as the uniform physical condition

standards for public housing established

by the Department of Housing and Urban

Development (HUD) in 24 CFR 5.703.

Section 42(i)(3)(B)(i) excludes from

the definition of a “low-income unit” a

unit that is not suitable for occupancy.

Under section 42(i)(3)(B)(ii), suitability

of a unit for occupancy shall be determined under regulations prescribed by the

Secretary taking into account local health,

safety, and building codes. Recognizing

that these codes vary considerably within

states, the final regulations require an

Agency to determine whether a low-income housing project satisfies these

codes, or satisfies the HUD uniform physical condition standards. The HUD standards are intended to ensure that housing

is decent, safe, sanitary, and in good repair. Though it would be appropriate that

an Agency use HUD’s inspection protocol

under 24 CFR 5.705, the final regulations

do not mandate use of HUD’s inspection

protocol because to do so could increase

costs to the Agencies as well as limit their

latitude in applying standards consistent

with their own operating procedures and

practices. The final regulations except a

building from the inspection requirement

if the building is financed by the Rural

Housing Service (RHS) under the section

515 program, the RHS inspects the building (under 7 CFR part 1930(c)), and the

RHS and Agency enter into a memorandum of understanding, or other similar

arrangement, under which the RHS

agrees to notify the Agency of the inspection results. Irrespective of the physical

inspection standard selected by the

Agency, a low-income housing project

under section 42 must continue to satisfy

local health, safety, and building codes.

The proposed regulations limit an

Agency’s delegation of the physical inspection of a project to only a state or

local government unit responsible for

making building code inspections. Commentators suggest expanding the delegation of inspections to professional firms.

The final regulations remove the delegation limitation and Agencies may delegate

the physical inspection requirement to

state or local governmental agencies,

430

HUD, or private contractors.

4. Local Reports of Building Code Violations.

The proposed regulations require the

owner of a low-income housing project to

certify that for the preceding 12-month

period the state or local government unit

responsible for making building code inspections didnot issue a report of a violation for the project. If the governmental

unit issued a report of a violation, the

owner is required to attach a copy of the

report of the violation to the annual certification submitted to the Agency.

A commentator noted that the number

of violations attached to the annual owner

certification would be considerable because even the highest quality rental

housing operations do not have an inspection without a report or notice of some violation. Two commentators suggest attaching reports only for violations that

have not been corrected prior to filing the

annual owner certification or requiring

that owners only attach reports for

“major” violations. The commentators

suggest defining major violations as violations not corrected within 90 days of the

notice of violation or violations where the

cost to comply exceeds $2,500. A commentator suggests that Agencies be allowed to distinguish between minor technical violations and serious violations

(i.e., lack of heat or hot water, hazardous

conditions, and security) in reporting noncompliance.

Though a minor violation will not lead

to the disallowance or recapture of section

42 credits, a series of minor violations

may be the equivalent of a major violation

resulting in disallowance or recapture of

credits. Determining the difference between a major and minor violation is subjective. The final regulations do not exclude minor violations from the reporting

and recordkeeping requirement. However, to reduce the inspection violation

paperwork, the final regulations require

that the owner must either attach a statement summarizing the violations or a

copy of each violation report to the annual

owner certification submitted to the

Agency. The owner must state on the certification whether the violation has been

corrected. In addition, the final regulations require that the owner retain the

original violation report for the Agency’s

physical inspection. Retention of the

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original violation report is not required

once the Agency reviews the violation

and completes its inspection, unless the

violation remains uncorrected.

5. Correction of Noncompliance or Failure to Certify.

The final regulations adopt commentators’ suggestion to limit to a 3-year period

after the end of the correction period in

§1.42–5(e)(4) the requirement that Agencies file Form 8823, “Low-Income Housing Credit Agencies Report of Noncompliance,” with the IRS reporting the

correction of the noncompliance or failure

to certify.

6. Compliance Monitoring Effective

Dates.

Commentators suggest an effective

date of at least one year after the final regulations are published in the Federal Register. Commentators also recommend onsite inspections apply only to new

buildings allocated section 42 credits after

the effective date of the final regulations.

Because the amendments to the compliance monitoring regulations will require amendments to qualified allocation

plans, the final regulations relating to

compliance generally contain a January 1,

2001, effective date. Thus, the requirements to attach local health, safety, or

building code violations to the annual

owner certification and to inspect buildings and review tenant files for existing

projects are effective January 1, 2001.

The inspection requirement and tenant

file review for new buildings is effective

for buildings placed in service on or after

January 1, 2001.

7. Section 8 and Federal Civil Rights

Laws.

Two commentators state that insufficient controls are in place to ensure that

low-income housing projects adhere to

the requirement in section 42(h)(6)(B)(iv)

of nondiscrimination against Section 8

voucher or certificate holders. The commentators suggest that the IRS could help

compensate for lack of controls by working with HUD to ensure that Section 8

voucher or certificate holders are aware

of, and have access to, low-income housing projects. The commentators also suggest that Agencies provide regional HUD

offices a list of low-income housing projects in that state, with information that

would be helpful for prospective tenants.

One commentator suggests that the prohi-

2000–5 I.R.B.

bition on discrimination based on Section

8 status be clarified to exclude policies

that bar Section 8 tenants but have no substantial business justification. For example, low-income housing projects should

not be permitted to exclude Section 8

voucher or certificate holders through a

rule that requires every applicant to have

income equal to at least three times the

total rent.

The commentators also suggest that the

Agencies should be required to develop a

plan for educating applicants and owners

of projects of the prohibition against discrimination on the basis of Section 8

voucher or certificate status. They recommend that the Agencies should be required to have a procedure for accepting

and processing complaints about discrimination against Section 8 voucher or certificate holders. They also recommend

that IRS and HUD should work together

to study the circumstances under which

Section 8 voucher or certificate holders

are, or are not, accessing projects.

Section 42(h)(6)(A) provides that no

credit shall be allowed by reason of section 42 with respect to any building for

the taxable year unless an extended lowincome housing commitment is in effect

as of the end of such taxable year. Section 42(h)(6)(B)(iv) defines the term “extended low-income housing commitment”

to include any agreement between the

taxpayer and the housing credit agency

that prohibits the refusal to lease to a

holder of a voucher or certificate of eligibility under section 8 of the United States

Housing Act of 1937 because of the status

of the prospective tenant as such a holder.

To help monitor compliance with section

42(h)(6)(B)(iv), the final regulations

amend the annual owner certification relating to the extended low-income housing commitment under §1.42–5(c)(1)(xi)

to require owners to certify that the owner

has not refused to lease a unit in the project to a Section 8 applicant because the

applicant holds a Section 8 voucher or

certificate.

The IRS has informed HUD of the

comments received about preventing discrimination based on Section 8 status.

Agencies should provide HUD with publicly available information on section 42

low-income housing projects if HUD requests it.

A commentator also suggests that the

431

compliance monitoring regulations be

amended to acknowledge the authority of

Title VIII of the 1968 Civil Rights Act, as

well as HUD’s Title VIII regulations;

specify the civil rights obligations of the

Agencies; and specify what developers

and owners of projects must do to satisfy

their civil rights obligations.

To monitor for compliance with the

Fair Housing Act, the final regulations

amend the annual owner certification relating to the general public use requirement in §1.42–5(c)(1)(v) to require owners to certify that no finding of

discrimination under the Fair Housing Act

has occurred for the project (a finding of

discrimination includes an adverse final

decision by HUD, an adverse final decision by a substantially equivalent state or

local fair housing agency, or an adverse

judgment from a Federal court).

B. Sources and Uses of Funds

Section 42(m)(2)(A) requires Agencies

to limit the housing credit dollar amount

allocated to a project to only the amount

necessary for the financial feasibility of a

project and its viability as a qualified lowincome project through the credit period.

The proposed regulations require an

Agency to evaluate the housing credit

dollar amount at four times: (1) at application for the housing credit dollar

amount, (2) the allocation of the housing

credit dollar amount, (3) the date the

building is placed in service, and (4) after

the building is placed in service, but before the Agency issues the Form 8609.

Commentators recommend elimination of

the evaluation at the placed-in-service

date. In practice, Agencies currently evaluate the credit amount at the three other

times. The final regulations adopt the recommendation by deleting the fourth time

requirement and clarifying that the

placed-in-service evaluation may occur

not later than the date the Agency issues

the Form 8609.

Commentators are concerned that the

opinion by a certified public accountant,

based upon the accountant’s audit or examination, on the financial determinations

and certifications required in the proposed

regulations, could have significant cost implications, particularly for smaller developers. Commentators suggest limiting the

requirement to projects with 25 or more

units, or projects with total development

costs of $5 million or more.

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The third-party validation on financial

information was recommended in the report by the General Accounting Office

(GAO), “Tax Credits: Opportunities to

Improve Oversight of the Low-Income

Housing Program,” (GAO/GGD/RCED97–55), dated March 28, 1997. The GAO

report states on page 93 that an accounting firm with a tax credit speciality would

charge in the $5,000 to $7,500 range per

engagement for tax credit certifications

(opinion on total costs, eligible basis, and

tax credit amount) prepared on the basis

of an audit done in accordance with

AICPA audit standards even for projects

costing upwards of $5 million to $10 million. As a percentage of development

costs, the CPA tax credit certifications

represent a minimal cost for validating financial information. However, in recognition that the cost may be burdensome

for smaller developers, the final regulations limit the requirement for an audited

schedule of costs for projects with more

than 10 units.

Two commentators were concerned

that the meaning of the term “financial

determinations and certifications” is unclear. A CPA would not be able to evaluate what needs to be audited and whether

there are relevant and reliable criteria

against which the information can be

evaluated. To conduct an audit or attestation engagement, CPAs require that the

subject matter be defined and that such

subject matter be capable of evaluation

against reasonable criteria. Reasonable

criteria are essential so that CPAs using

the same criteria will be able to arrive at

similar conclusions.

Another concern expressed by commentators involved uncertainty as to

whether the CPA is being asked to report

on financial information that is only historical or whether the CPA is also being

asked to examine prospective financial information. CPAs can compile or examine

and report on certain types of prospective

financial information. However, such engagements generally are more costly than

audits of historical information because of

minimum presentation guidelines required by professional standards as well

as increased risk associated with futureoriented information. The commentators

believe that if an Agency were to require

CPAs to be associated with prospective financial information, the related costs to

January 31, 2000

the taxpayer may far exceed any perceived benefits to the Agency. Accordingly, the final regulations have been revised to specify that the CPA’s opinion

only relates to historical project costs.

C. Correction of Administrative Errors

and Omissions

Commentators recommend filing the

corrected allocation document with the

current year’s Form 8610, “Annual LowIncome Housing Credit Agencies Report,” instead of amending the Form 8610

for the year the allocation was made. Because the administrative errors covered by

the automatic approval provision will not

have an effect on the total amount of

credit the Agency allocated to the building(s) or project, commentators view an

amended Form 8610 as unnecessary.

Agency recordkeeping would be simplified if all corrected allocation documents

could be submitted with the current year’s

Form 8610. The final regulations adopt

this recommendation.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order

12866. Therefore, a regulatory assessment is not required. It 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. It is hereby certified that the collections of information in these regulations

will not have a significant economic impact on a substantial number of small entities. This certification is based upon the

fact that the burden on taxpayers is minimal and the burden on small entity Agencies is not significant. Accordingly, a

Regulatory Flexibility Analysis under the

Regulatory Flexibility Act is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, the notice of proposed

rulemaking preceding these regulations

was submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on its impact on

small business.

Drafting Information

The principal author of these regulations is Paul F. Handleman, Office of the

Assistant Chief Counsel (Passthroughs

and Special Industries), IRS. However,

432

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

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read in part as follows:

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

Section 1.42–17 also issued under 26

U.S.C. 42(n); * * *

Par. 2. Section 1.42–5 is amended by:

1. Removing the word “Revenue” in

paragraph (b)(1)(iv) and adding “Omnibus Budget” in its place.

2. Adding paragraph (b)(3).

3. Revising paragraphs (c)(1)(v),

(c)(1)(vi), (c)(1)(xi), (c)(2)(ii), and

(c)(2)(iii).

4. Removing the word “project” in

paragraph (c)(1)(x) and adding “building”

in its place.

5. Removing the word “and” at the end

of paragraph (c)(1)(x).

6. Adding paragraph (c)(1)(xii).

7. Removing the language “paragraph

(c)(2)(ii)(A), (B), and (C) of this section”

from the first sentence in paragraph

(c)(4)(i) and adding “paragraph (c)(2)(ii)

of this section” in its place.

8. Removing the language “Farmers

Home Administration (FmHA)” in the

first sentence in paragraph (c)(4)(i) and

adding “Rural Housing Service (RHS),

formerly known as Farmers Home Administration,” in its place.

9. Removing the language “FmHA” in

paragraph (c)(4)(ii) and adding “RHS” in

its place in each place it appears.

10. Removing the language “An Agency

chooses the review requirement of paragraph (c)(2)(ii)(A) of this section and some

of the buildings selected for review are”

from the first sentence in the example in

paragraph (c)(4)(iii) and adding “An

Agency selects for review” in its place.

11. Removing the language “FmHA”

in paragraph (c)(4)(iii) Example and

adding “RHS” in its place in each place it

appears.

12. Adding paragraph (c)(5).

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Page 433

13. Revising paragraph (d).

14.

Removing the language

“(c)(2)(ii)(A), (B), or (C) of this section

(whichever is applicable)” from paragraph (e)(2) and adding the language

“(c)(2)(ii) of this section” in its place.

15. Adding a sentence at the end of

paragraph (e)(3)(i).

16. Removing the language “paragraph (e)(3) of this section” in the third

sentence in paragraph (f)(1)(i) and adding

“paragraphs (c)(5) and (e)(3) of this section” in its place.

17. Adding three sentences at the end

of paragraph (h).

The revisions and additions read as follows:

§1.42–5 Monitoring compliance with

low-income housing credit requirements.

* * * * *

(b) * * *

(3) Inspection record retention provision. Under the inspection record retention provision, the owner of a low-income

housing project must be required to retain

the original local health, safety, or building code violation reports or notices that

were issued by the State or local government unit (as described in paragraph

(c)(1)(vi) of this section) for the Agency’s

inspection under paragraph (d) of this section. Retention of the original violation

reports or notices is not required once the

Agency reviews the violation reports or

notices and completes its inspection, unless the violation remains uncorrected.

(c) * * * (1) * * *

(v) All units in the project were for use

by the general public (as defined in

§1.42–9), including the requirement that

no finding of discrimination under the

Fair Housing Act, 42 U.S.C. 3601 – 3619,

occurred for the project. A finding of discrimination includes an adverse final decision by the Secretary of the Department

of Housing and Urban Development

(HUD), 24 CFR 180.680, an adverse final

decision by a substantially equivalent

state or local fair housing agency, 42

U.S.C. 3616a(a)(1), or an adverse judgment from a federal court;

(vi) The buildings and low-income

units in the project were suitable for occupancy, taking into account local health,

safety, and building codes (or other habitability standards), and the State or local

government unit responsible for making

local health, safety, or building code in-

2000–5 I.R.B.

spections did not issue a violation report

for any building or low-income unit in the

project. If a violation report or notice was

issued by the governmental unit, the

owner must attach a statement summarizing the violation report or notice or a copy

of the violation report or notice to the annual certification submitted to the Agency

under paragraph (c)(1) of this section. In

addition, the owner must state whether

the violation has been corrected;

* * * * *

(xi) An extended low-income housing

commitment as described in section

42(h)(6) was in effect (for buildings subject to section 7108(c)(1) of the Omnibus

Budget Reconciliation Act of 1989, 103

Stat. 2106, 2308 - 2311 (1989)), including

the requirement under section

42(h)(6)(B)(iv) that an owner cannot

refuse to lease a unit in the project to an

applicant because the applicant holds a

voucher or certificate of eligibility under

section 8 of the United States Housing

Act of 1937, 42 U.S.C. 1437f (for buildings subject to section 13142(b)(4) of the

Omnibus Budget Reconciliation Act of

1993, 107 Stat. 312, 438 – 439 (1993));

and

(xii) All low-income units in the project were used on a nontransient basis (except for transitional housing for the homeless

provided

under

section

42(i)(3)(B)(iii) or single-room-occupancy

units rented on a month-by-month basis

under section 42(i)(3)(B)(iv)).

(2) * * *

(ii) Require that with respect to each

low-income housing project—

(A) The Agency must conduct on-site

inspections of all buildings in the project

by the end of the second calendar year

following the year the last building in the

project is placed in service and, for at

least 20 percent of the project’s low-income units, inspect the units and review

the low-income certifications, the documentation supporting the certifications,

and the rent records for the tenants in

those units; and

(B) At least once every 3 years, the

Agency must conduct on-site inspections

of all buildings in the project and, for at

least 20 percent of the project’s low-income units, inspect the units and review

the low-income certifications, the documentation supporting the certifications,

and the rent records for the tenants in

433

those units; and

(iii) Require that the Agency randomly

select which low-income units and tenant

records are to be inspected and reviewed

by the Agency. The review of tenant

records may be undertaken wherever the

owner maintains or stores the records (either on-site or off-site). The units and

tenant records to be inspected and reviewed must be chosen in a manner that

will not give owners of low-income housing projects advance notice that a unit and

tenant records for a particular year will or

will not be inspected and reviewed. However, an Agency may give an owner reasonable notice that an inspection of the

building and low-income units or tenant

record review will occur so that the owner

may notify tenants of the inspection or assemble tenant records for review (for example, 30 days notice of inspection or review).

* * * * *

(5) Agency reports of compliance monitoring activities. The Agency must report its compliance monitoring activities

annually on Form 8610, “Annual Low-Income Housing Credit Agencies Report.”

(d) Inspection provision—(1) In general. Under the inspection provision, the

Agency must have the right to perform an

on-site inspection of any low-income

housing project at least through the end of

the compliance period of the buildings in

the project. The inspection provision of

this paragraph (d) is a separate requirement from any tenant file review under

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

(2) Inspection standard. For the onsite inspections of buildings and low- income units required by paragraph

(c)(2)(ii) of this section, the Agency must

review any local health, safety, or building code violations reports or notices retained by the owner under paragraph

(b)(3) of this section and must determine—

(i) Whether the buildings and units are

suitable for occupancy, taking into account local health, safety, and building

codes (or other habitability standards); or

(ii) Whether the buildings and units

satisfy, as determined by the Agency, the

uniform physical condition standards for

public housing established by HUD (24

CFR 5.703). The HUD physical condition

standards do not supersede or preempt

local health, safety, and building codes. A

January 31, 2000

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Page 434

low-income housing project under section

42 must continue to satisfy these codes

and, if the Agency becomes aware of any

violation of these codes, the Agency must

report the violation to the Service. However, provided the Agency determines by

inspection that the HUD standards are

met, the Agency is not required under this

paragraph (d)(2)(ii) to determine by inspection whether the project meets local

health, safety, and building codes.

(3) Exception from inspection provision. An Agency is not required to inspect a building under this paragraph (d)

if the building is financed by the RHS

under the section 515 program, the RHS

inspects the building (under 7 CFR part

1930), and the RHS and Agency enter

into a memorandum of understanding, or

other similar arrangement, under which

the RHS agrees to notify the Agency of

the inspection results.

(4) Delegation. An Agency may delegate inspection under this paragraph (d) to

an Authorized Delegate retained under

paragraph (f) of this section. Such Authorized Delegate, which may include HUD

or a HUD-approved inspector, must notify the Agency of the inspection results.

(e) * * *

(3) * * *

(i) * * * If the noncompliance or failure

to certify is corrected within 3 years after

the end of the correction period, the

Agency is required to file Form 8823 with

the Service reporting the correction of the

noncompliance or failure to certify.

* * * * *

(h) * * * In addition, the requirements

in paragraphs (b)(3) and (c)(1)(v), (vi),

and (xi) of this section (involving recordkeeping and annual owner certifications)

and paragraphs (c)(2)(ii)(B), (c)(2)(iii),

and (d) of this section (involving tenant

file reviews and physical inspections of

existing projects, and the physical inspection standard) are applicable January 1,

2001. The requirement in paragraph

(c)(2)(ii)(A) of this section (involving

tenant file reviews and physical inspections of new projects) is applicable for

buildings placed in service on or after

January 1, 2001. The requirements in

paragraph (c)(5) of this section (involving

Agency reporting of compliance monitoring activities to the Service) and paragraph (e)(3)(i) of this section (involving

Agency reporting of corrected noncom-

January 31, 2000

pliance or failure to certify within 3 years

after the end of the correction period) are

applicable January 14, 2000.

Par. 3. Section 1.42–6 is amended by:

1. In paragraph (c)(3), second sentence, remove the language “Annual

Low-Income Housing Credit Agencies

Report,” and add the language “ ‘Annual

Low-Income Housing Credit Agencies

Report,’ “ in its place.

2. In paragraph (d)(1), first sentence,

remove the language “Low-Income Housing Credit Allocation Certification,” and

add the language “ ‘Low-Income Housing

Credit Allocation Certification,’ “ in its

place.

3. Revising the first sentence in paragraph (d)(4)(ii).

§1.42–6 Buildings qualifying for carryover allocations.

* * * * *

(d) * * *

(4) * * *

(ii) Agency. The Agency must retain

the original carryover allocation document made under paragraph (d)(2) of this

section and file Schedule A (Form 8610),

“Carryover Allocation of the Low-Income

Housing Credit,” with the Agency’s Form

8610 for the year the allocation is made. *

**

* * * * *

Par. 4. Section 1.42–11 is amended by

revising the last sentence in paragraph

(b)(3)(ii)(A) to read as follows:

§1.42–11 Provision of services.

* * * * *

(b) * * *

(3) * * *

(ii) * * * (A) * * * For a building described in section 42(i)(3)(B)(iii) (relating

to transitional housing for the homeless)

or section 42(i)(3)(B)(iv) (relating to single-room occupancy), a supportive service includes any service provided to assist tenants in locating and retaining

permanent housing.

* * * * *

Par. 5. Section 1.42–12 is amended by

adding paragraph (c) to read as follows:

§1.42–12 Effective dates and transitional

rules.

* * * * *

(c) Carryover allocations. The rule set

forth in §1.42–6(d)(4)(ii) relating to the

requirement that state and local housing

agencies file Schedule A (Form 8610),

“Carryover Allocation of the Low-Income

434

Housing Credit,” is applicable for carryover allocations made after December 31,

1999.

Par. 6. Section 1.42–13 is amended by:

1. Revising the introductory text of

paragraph (b)(3)(iii).

2. Adding paragraphs (b)(3)(vi),

(b)(3)(vii), and (b)(3)(viii).

3. Adding a sentence at the end of

paragraph (d).

The revisions and additions read as follows:

§1.42–13 Rules necessary and appropriate; housing credit agencies’ correction

of administrative errors and omissions.

* * * * *

(b) * * *

(3) * * *

(iii) Secretary’s prior approval required. Except as provided in paragraph

(b)(3)(vi) of this section, an Agency must

obtain the Secretary’s prior approval to

correct an administrative error or omission, as described in paragraph (b)(2) of

this section, if the correction is not made

before the close of the calendar year of

the error or omission and the correction—

* * * * *

(vi) Secretary’s automatic approval.

The Secretary grants automatic approval

to correct an administrative error or omission described in paragraph (b)(2) of this

section if—

(A) The correction is not made before

the close of the calendar year of the error

or omission and the correction is a numerical change to the housing credit dollar

amount allocated for the building or multiple-building project;

(B) The administrative error or omission resulted in an allocation document

(the Form 8609, “Low-Income Housing

Credit Allocation Certification,” or the allocation document under the requirements

of section 42(h)(1)(E) or (F), and

§1.42–6(d)(2)) that either did not accurately reflect the number of buildings in a

project (for example, an allocation document for a 10-building project only references 8 buildings instead of 10 buildings),

or the correct information (other than the

amount of credit allocated on the allocation document);

(C) The administrative error or omission does not affect the Agency’s ranking

of the building(s) or project and the total

amount of credit the Agency allocated to

the building(s) or project; and

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(D) The Agency corrects the administrative error or omission by following the

procedures described in paragraph

(b)(3)(vii) of this section.

(vii) How Agency corrects errors or

omissions subject to automatic approval.

An Agency corrects an administrative

error or omission described in paragraph

(b)(3)(vi) of this section by—

(A) Amending the allocation document

described in paragraph (b)(3)(vi)(B) of

this section to correct the administrative

error or omission. The Agency will indicate on the amended allocation document

that it is making the “correction under

§1.42–13(b)(3)(vii).” If correcting the allocation document requires including any

additional B.I.N.(s) in the document, the

document must include any B.I.N.(s) already existing for buildings in the project.

If possible, the additional B.I.N.(s) should

be sequentially numbered from the existing B.I.N.(s);

(B) Amending, if applicable, the

Schedule A (Form 8610), “Carryover Allocation of the Low-Income Housing

Credit,” and attaching a copy of this

schedule to Form 8610, “Annual Low-Income Housing Credit Agencies Report,”

for the year the correction is made. The

Agency will indicate on the schedule that

it is making the “correction under

§1.42–13(b)(3)(vii).” For a carryover allocation made before January 1, 2000, the

Agency must complete Schedule A (Form

8610), and indicate on the schedule that it

is making the “correction under

§1.42–13(b)(3)(vii)”;

(C) Amending, if applicable, the Form

8609 and attaching the original of this

amended form to Form 8610 for the year

the correction is made. The Agency will

indicate on the Form 8609 that it is making

the

“correction

under

§1.42–13(b)(3)(vii)”; and

(D) Mailing or otherwise delivering a

copy of any amended allocation document and any amended Form 8609 to the

affected taxpayer.

(viii) Other approval procedures. The

Secretary may grant automatic approval to

correct other administrative errors or omissions as designated in one or more documents published either in the Federal Register or in the Internal Revenue Bulletin

(see §601.601(d)(2) of this chapter).

* * * * *

(d) * * * Paragraphs (b)(3)(vi), (vii),

2000–5 I.R.B.

and (viii) of this section are effective January 14, 2000.

Par. 7. Section 1.42–17 is added to

read as follows:

§1.42–17 Qualified allocation plan.

(a) Requirements—(1) In general.

[Reserved]

(2) Selection criteria. [Reserved]

(3) Agency evaluation. Section

42(m)(2)(A) requires that the housing

credit dollar amount allocated to a project

is not to exceed the amount the Agency

determines is necessary for the financial

feasibility of the project and its viability

as a qualified low-income housing project

throughout the credit period. In making

this determination, the Agency must consider—

(i) The sources and uses of funds and

the total financing planned for the project.

The taxpayer must certify to the Agency

the full extent of all federal, state, and

local subsidies that apply (or which the

taxpayer expects to apply) to the project.

The taxpayer must also certify to the

Agency all other sources of funds and all

development costs for the project. The

taxpayer’s certification should be sufficiently detailed to enable the Agency to

ascertain the nature of the costs that will

make up the total financing package, including subsidies and the anticipated syndication or placement proceeds to be

raised. Development cost information,

whether or not includible in eligible basis

under section 42(d), that should be provided to the Agency includes, but is not

limited to, site acquisition costs, construction contingency, general contractor’s

overhead and profit, architect’s and engineer’s fees, permit and survey fees, insurance premiums, real estate taxes during

construction, title and recording fees, construction period interest, financing fees,

organizational costs, rent-up and marketing costs, accounting and auditing costs,

working capital and operating deficit reserves, syndication and legal fees, and developer fees;

(ii) Any proceeds or receipts expected

to be generated by reason of tax benefits;

(iii) The percentage of the housing

credit dollar amount used for project costs

other than the costs of intermediaries.

This requirement should not be applied so

as to impede the development of projects

in hard-to-develop areas under section

42(d)(5)(C); and

435

(iv) The reasonableness of the developmental and operational costs of the project.

(4) Timing of Agency evaluation—(i)

In general. The financial determinations

and certifications required under paragraph (a)(3) of this section must be made

as of the following times—

(A) The time of the application for the

housing credit dollar amount;

(B) The time of the allocation of the

housing credit dollar amount; and

(C) The date the building is placed in

service.

(ii) Time limit for placed-in-service

evaluation. For purposes of paragraph

(a)(4)(i)(C) of this section, the evaluation

for when a building is placed in service

must be made not later than the date the

Agency issues the Form 8609, “Low-Income Housing Credit Allocation Certification.” The Agency must evaluate all

sources and uses of funds under paragraph (a)(3)(i) of this section paid, incurred, or committed by the taxpayer for

the project up until date the Agency issues

the Form 8609.

(5) Special rule for final determinations and certifications.

For the

Agency’s evaluation under paragraph

(a)(4)(i)(C) of this section, the taxpayer

must submit a schedule of project costs.

Such schedule is to be prepared on the

method of accounting used by the taxpayer for federal income tax purposes,

and must detail the project’s total costs as

well as those costs that may qualify for inclusion in eligible basis under section

42(d). For projects with more than 10

units, the schedule of project costs must

be accompanied by a Certified Public Accountant’s audit report on the schedule

(an Agency may require an audited schedule of project costs for projects with fewer

than 11 units). The CPA’s audit must be

conducted in accordance with generally

accepted auditing standards. The auditor’s report must be unqualified.

(6) Bond-financed projects. A project

qualifying under section 42(h)(4) is not entitled to any credit unless the governmental

unit that issued the bonds (or on behalf of

which the bonds were issued), or the

Agency responsible for issuing the Form(s)

8609 to the project, makes determinations

under rules similar to the rules in paragraphs (a)(3), (4), and (5) of this section.

(b) Effective date. This section is ef-

January 31, 2000

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Page 436

fective January 1, 2001.

Part 602–OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 8. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 9. In §602.101, paragraph (b) is

amended by revising the entry for 1.42–5

and adding an entry for 1.42–17 to the

table in numerical order to read as follows:

§602.101 OMB Control numbers.

* * * * *

(b) * * *

Robert E. Wenzel,

Acting Commissioner

of Internal Revenue.

CFR part or section where

identified and described

Approved December 28, 1999.

Jonathan Talisman,

Acting Assistant Secretary of the

Treasury.

(Filed by the Office of the Federal Register on January 13, 2000, 8:45 a.m., and published in the issue

of the Federal Register for January 14, 2000, 65

F.R. 2323)

Current OMB

control No.

*****

1.42–5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1357

1.42–17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1357

*****

Section 368(a)(1)(A).—

Definitions Relating to

Corporate Reorganizations

26 CFR 1.368–1: Purpose and scope of exception

of reorganization exchanges.

Application of section 368(a)(1)(A) to

divisive mergers. The ruling holds that a

state law merger will not qualify as a reorganization under section 368(a)(1)(A) of

the Code if the merger does not result in

one corporation acquiring the assets of a

target corporation and the target corporation ceasing to exist.

Rev. Rul. 2000–5

ISSUES:

Whether a transaction in which (1) a

target corporation “merges” under state

law with and into an acquiring corporation and the target corporation does not go

out of existence, or (2) a target corporation “merges” under state law with and

into two or more acquiring corporations

and the target corporation goes out of existence, qualifies as a reorganization

under § 368(a)(1)(A) of the Internal Revenue Code?

FACTS:

Situation (1). A target corporation

transfers some of its assets and liabilities

January 31, 2000

to an acquiring corporation, retains the remainder of its assets and liabilities, and

remains in existence following the transaction. The target corporation’s shareholders receive stock in the acquiring corporation in exchange for part of their

target corporation stock and they retain

their remaining target corporation stock.

The transaction qualifies as a merger

under state X corporate law.

Situation (2). A target corporation

transfers some of its assets and liabilities

to each of two acquiring corporations.

The target corporation liquidates and the

target corporation’s shareholders receive

stock in each of the two acquiring corporations in exchange for their target corporation stock. The transaction qualifies as

a merger under state X corporate law.

DISCUSSION:

The purpose of the reorganization provisions of the Code is to provide tax-free

treatment to certain exchanges incident to

readjustments of corporate structures

made in one of the specified ways described in the Code. Section 1.368–1(b)

of the Income Tax Regulations. In 1921,

Congress defined a reorganization as including “. . . a merger or consolidation

(including the acquisition by one corporation . . . of substantially all the properties

of another corporation).” In 1934, Congress separated this rule into two distinct

provisions. In the predecessor of current

436

§ 368(a)(1)(C), an “acquisition by one

corporation . . . of substantially all the

properties of another corporation” continued to be a reorganization where payment

was effectuated with the acquiror’s voting

stock. In the predecessor of current §

368(a)(1)(A), the terms “merger or consolidation” were qualified by requiring

that they be “statutory” mergers and consolidations. The word “statutory” was

added to the definition of a reorganization

so that the definition “will conform more

closely to the general requirements of

[state] corporation law.” See H. R. Rep.

No. 704, 73d Cong., 2 d Sess. 14 (1934).

Historically, corporate law merger

statutes have operated to ensure that “[a]

merger ordinarily is an absorption by one

corporation of the properties and franchises of another whose stock it has acquired. The merged corporation ceases to

exist, and the merging corporation alone

survives.” Cortland Specialty Co. v. Commissioner, 60 F.2d 937, 939 (2d Cir.

1932), cert. denied, 288 U.S. 599 (1933);

for other cases that describe mergers as requiring that the target corporation transfer

its assets and cease to exist, see, e.g., Vulcan Materials Company v. U.S., 446 F.2d

690, 694 (5th Cir. 1971), cert. denied, 404

U.S. 942 (1971); Fisher v. Commissioner,

108 F.2d 707, 709 (6th Cir. 1939), cert.

denied, 310 U.S. 627 (1939). Thus, unlike

§ 368(a)(1)(C), in which Congress included a “substantially all the properties”

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requirement, it was not necessary for Congress to explicitly include a similar requirement in § 368(a)(1)(A) because corporate law merger statutes contemplated

an acquisition of the target corporation’s

assets by the surviving corporation by operation of law.

Compliance with a corporate law

merger statute does not by itself qualify a

transaction as a reorganization. See, e.g.,

Southwest Natural Gas Co. v. Commissioner, 189 F.2d 332 (5th Cir. 1951), cert.

denied, 342 U.S. 860 (1951) (holding that

a state law merger was not a reorganization under § 368(a)(1)(A)); Roebling v.

Commissioner, 143 F.2d 810 (3d Cir.

1944), cert. denied, 323 U.S. 773 (1944)

(same holding). In addition to satisfying

the requirements of business purpose,

continuity of business enterprise and continuity of interest, in order to qualify as a

reorganization under § 368(a)(1)(A), a

transaction effectuated under a corporate

law merger statute must have the result

that one corporation acquires the assets of

the target corporation by operation of the

corporate law merger statute and the target corporation ceases to exist. The transactions described in Situations (1) and (2)

do not have the result that one corporation

acquires the assets of the target corporation by operation of the corporate law

merger statute and the target corporation

ceases to exist. Therefore, these transactions do not qualify as reorganizations

under § 368(a)(1)(A).

In contrast with the operation of corporate law merger statutes, a divisive transaction is one in which a corporation’s assets are divided among two or more

corporations. Section 355 provides taxfree treatment for certain divisive transactions, but only if a number of specific requirements are satisfied. Congress

intended that § 355 be the sole means

under which divisive transactions will be

afforded tax-free status and, thus, specifically required the liquidation of the acquired corporation in reorganizations

under both §§ 368(a)(1)(C) and

368(a)(1)(D) in order to prevent these reorganizations from being used in divisive

transactions that did not satisfy § 355.

See S. Rep. No. 1622, 83d Cong., 2d Sess.

274 (1954); S. Rep. No. 169, 98th Cong.,

2d Sess. 204 (1984). No specific liquidation requirement was necessary for statutory mergers because corporate law

2000–5 I.R.B.

merger statutes contemplated that only

one corporation survived a merger. The

transaction described in Situation (1) is

divisive because, after the transaction, the

target corporation’s assets and liabilities

are held by both the target corporation

and acquiring corporation and the target

corporation’s shareholders hold stock in

both the target corporation and acquiring

corporation. The transaction described in

Situation (2) is divisive because, after the

transaction, the target corporation’s assets

and liabilities are held by each of the two

acquiring corporations and the target corporation’s shareholders hold stock in each

of the two acquiring corporations.

HOLDING:

The transactions described in Situations (1) and (2) do not qualify as reorganizations under § 368(a)(1)(A). However,

the transactions described in Situations

(1) and (2) possibly may qualify for taxfree treatment under other provisions of

the Code.

DRAFTING INFORMATION:

The principal author of this revenue

ruling is Reginald Mombrun of the Office

of the Assistant Chief Counsel (Corporate). For further information regarding

this revenue ruling, contact Reginald

Mombrun on (202) 622-7750 (not a tollfree call).

Section 988.—Treatment of

Certain Foreign Currency

Transactions

26 CFR 1.988–2: Recognition and computation of

exchange gain or loss.

T.D. 8860

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Treatment of Income and

Expense From Certain

Hyperinflationary,

Nonfunctional Currency

Transactions and Certain

Notional Principal Contracts

437

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations regarding the treatment

of income and deductions arising from

certain foreign currency transactions denominated in hyperinflationary currencies

and coordinates section 988 with the section 446 regulations pertaining to significant nonperiodic payments. These regulations are intended to prevent distortions

in computing income and deductions of

taxpayers who enter into certain transactions in hyperinflationary currencies, and

nonfunctional currency, notional principal

contracts with significant nonperiodic

payments.

DATES: These regulations are effective

February 14, 2000.

FOR FURTHER INFORMATION CONTACT: Roger M. Brown at (202) 6223830 (not a toll-free number) of the Office of the Associate Chief Counsel

(International) within the Office of the

Chief Counsel, Room 4554, 1111 Constitution Avenue, NW., Washington, DC.

20224.

SUPPLEMENTARY INFORMATION:

Background

On March 17, 1992, proposed regulations were published in the Federal Register at (57 F.R. 9217 [INTL–15–91,

1992–1 C.B. 1202]). The IRS received

two written comments on the proposed

regulations, which are discussed below.

No public hearing was held and no requests to speak were received. Having

considered the comments, the IRS and

Treasury Department adopt the proposed

regulations, as modified by this Treasury

decision.

Explanation of Provisions

I. Hyperinflationary Instruments

A. Proposed Regulations

The proposed regulations under

§1.988–2(b)(15) generally provided that

currency gain or loss on debt instruments

and demand deposits entered into or acquired when the currency in which the

item was denominated was hyperinflationary must be realized annually under a

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Page 438

mark-to-market methodology. For purposes of determining the character and

source (or allocation) of such currency

gain or loss, the gain or loss was generally

treated as an increase in, or a reduction of,

interest income or expense.

The proposed §1.988–2(b)(15) regulations excluded instruments described in

section 988(a)(3)(C) (relating to non-dollar, related-party loans where the rate of

interest is at least 10 percentage points

higher than the Federal mid-term rate)

from these rules. Proposed regulations

§1.988–2(d)(5) and (e)(7) generally provided that currency gain or loss realized

with respect to section 988 forward contracts, futures contracts, option contracts

and similar items (such as currency swap

contracts) entered into or acquired when

the currency in which such an item is denominated was hyperinflationary was recognized annually under a mark-to-market

methodology.

B. Discussion of Comments and Final

Regulations

1. Comments and the Treasury and IRS’s

responses

One of the comments responding to the

proposed regulations criticized the exclusion of loans described in section

988(a)(3)(C) from the rules of proposed

regulation §1.988–2(b)(15). The comment noted that it was inappropriate to

treat related-party loans differently from

loans between unrelated parties in this

context.

Proposed regulation §1.988–2(b)(15)

excluded loans subject to section

988(a)(3)(C) from the mark-to-market

rule of the proposed regulations because

the loans were already subject to mark-tomarket treatment under section

988(a)(3)(C), which was enacted to prevent manipulation of the section 904(a)

foreign tax credit limitation through related party loans with artificially high interest rates. See H. Conf. Rep. No. 841,

99th Cong., 2d Sess. 668 (1986). However, due to interest income’s U.S. source

treatment under section 988(a)(3)(C)(ii),

mark-to-market treatment under section

988(a)(3)(C),

rather

than

§1.988–2(b)(15), would be, in most cases,

more unfavorable to taxpayers.

Since the rules of proposed regulation

§1.988–2(b)(15) were consistent with the

approach of section 988(a)(3)(C) and prevented manipulation of the type Congress

January 31, 2000

addressed in that section, the IRS and

Treasury agree that transactions described

in section 988(a)(3)(C) should not be excluded from the mark-to-market rule of

the final regulations. The IRS and Treasury also have concluded that to the extent a debt instrument is subject to the

rules of §1.988–2(b)(15), the application

of section 988(a)(3)(C)’s resourcing rule

is not necessary. The final regulations reflect these changes.

The other comment identified the need

for coordinating the mark-to-market

regime for hyperinflationary instruments

under

proposed

regulation

§1.988–2(b)(15), and the mark-to-market

election under proposed regulation

§1.988–5(f) for all section 988 transactions. The final regulations do not include a rule coordinating these two markto-market regimes because the

mark-to-market election for all section

988 transactions is still in proposed form.

Accordingly, the IRS and Treasury have

decided that consideration of the proper

coordination is most appropriate when the

regulations relating to the general markto-market election for all section 988

transactions are finalized.

2. Other changes to the final regulations

(a) Source and Character of Gain or Loss

The proposed regulations provided that

any exchange gain or loss realized upon

marking to market a debt instrument or a

demand deposit under proposed regulation §1.988–2(b)(15)(i) was to be directly

allocable to the interest income or interest

expense from the debt instrument or deposit. Accordingly, the gain or loss reduced or increased the amount of interest

income or interest expense paid or accrued during that year with respect to that

instrument or deposit. Additionally, if realized exchange gain exceeded interest

expense of an issuer, or realized exchange

loss exceeded interest income of a holder

or depositor, the character and source of

such excess amount were to be determined under the general rules of

§§1.988–3 and 1.988–4.

The assumption underlying this proposed treatment was that in hyperinflationary conditions, high nominal interest

rates perform two functions: compensate

lenders for currency loss attributable to

the repayment of the principal with a devalued currency, and account for borrowers’ currency gain on the repayment of the

438

principal with a devalued currency. In instances, however, where hyperinflationary conditions are subsiding and a lender

would actually have currency gain on

principal repayment (and the borrower

would have currency loss on principal repayment), these assumptions are no

longer appropriate. For example, if a

lender has currency gain on the marking

to market (for currency fluctuations only)

of the principal of a debt instrument, high

nominal interest rates would not be compensating the lender for the decline in the

value of the principal as there would be a

gain on the principal.

Accordingly, the final regulations retain the source and character rule of the

proposed regulations (direct allocation of

the exchange gain or loss against interest

expense or income, respectively) when

hyperinflationary conditions result in exchange loss to lenders or exchange gain to

borrowers on the principal amount of a

debt instrument or deposit. However,

where a lender has exchange gain or a

borrower has exchange loss on the debt

instrument — which may occur as hyperinflationary conditions subside — the

final regulations clarify that the exchange

gain or loss is not allocated against interest expense or income. Rather, the exchange gain or loss is treated under the

normal currency character and source

rules of §§1.988–3 and 1.988–4. Thus,

for example, if an issuer has both interest

expense and currency loss, the currency

loss is sourced and characterized under

section 988 and does not affect the determination of interest expense.

(b) Synthetic, Non-hyperinflationary Currency Debt Instruments

The final regulations also make clear

that when a debt instrument has interest

and principal payments that are to be

made by reference to a non-hyperinflationary currency or item (commonly

known as interest and principal protection

features), the instrument is not marked to

market under the final section 988 regulations. This is because the instrument is, in

substance, a synthetic non-hyperinflationary instrument and does not experience

the distortions associated with a hyperinflationary instrument.

(c) Treatment of Hyperinflationary Contracts

Proposed regulation §1.988–2(d)(5)

generally provided that currency gain or

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Page 439

loss on derivative contracts described in

§1.988–1(a)(2)(iii) and denominated in a

currency that was hyperinflationary at the

time the contract was entered into was to

be realized annually under a mark-to-market methodology. This proposed regulation was issued prior to promulgation of

the §1.446–4 regulations (published in the

Federal Register on July 18, 1994)

which requires that, to clearly reflect income, the timing of income, deduction,

gain or loss on a hedge must match the

timing of income, deduction, gain or loss

on the item being hedged. The final regulations modify proposed regulation

§1.988–2(d)(5) by providing that

§1.446–4, to the extent applicable, will

take precedence over proposed regulation

§1.988–2(d)(5). This is because the IRS

and Treasury believe that a clearer reflection of income is present where the income and deductions arising from an item

hedged under §1.446–4 is matched with

the income and deductions arising from

the hedge. See §1.446–4(b).

(d) Demand and Time Deposits

The proposed regulations applied the

mark-to-market rules to demand deposits

denominated in a currency that was hyperinflationary at the time the deposit was

entered into. Under the final regulations,

the mark-to-market rules apply to demand

and time deposits that provide for payments denominated in or by reference to a

currency which is hyperinflationary at the

time the taxpayer enters into or otherwise

acquires the deposit, or whose interest

rate reflects hyperinflationary conditions

in a country. Similar clarifications have

been made with respect to the definitions

of hyperinflationary debt instruments and

currency swap contracts.

3. Abusive transactions

The Treasury and the IRS are concerned about the use of hyperinflationary

currencies in transactions motivated by

tax considerations. Because the direction

of exchange rates is relatively predictable

in hyperinflation economies, some taxpayers have attempted to use such currencies in transactions lacking economic substance. See, e.g., Agro Science Co. v.

Commissioner, T.C. Memo. 1989–687,

aff’d, 927 F.2d 213 (5th Cir.), cert. denied,

502 U.S. 907 (1991). However, section

988 may be applied by the IRS in a manner that reflects the proper timing,

source, and character of income, gain,

2000–5 I.R.B.

loss, or expense arising from a transaction

whose form is not in accordance with its

economic substance. §§1.988–1(a)(11)

and 1.988–2(f); Agro Science Co. v.

Commissioner, supra. Accordingly, the

rules contained in this Treasury decision

will be applied within the framework of

these general economic substance principles.

II. Significant Non-periodic Payments

and Currency Swaps

The proposed regulations coordinated

section 988 with the section 446 regulations pertaining to significant nonperiodic

payments. The final regulations maintain

this coordination and clarify that exchange gain or loss may be realized on the

principal and interest components of a

significant nonperiodic payment.

III. Proposed Change to Base Period in

Notice of Proposed Rulemaking

In REG–116567–99 on page 463, the

IRS and Treasury are publishing a notice

of proposed rulemaking that proposes to

change the period during which inflation

rates are measured in the determination of

whether a currency is hyperinflationary

for purposes of section 988 (base period).

The effect of this change to §1.988–1(f)

(defining hyperinflationary currency for

purposes of section 988) is to take into account current year, hyperinflationary conditions, rather than determining whether a

currency is hyperinflationary based on the

three years prior to the current year. The

proposed change relates only to section

988 and not to the dollar approximate separate transactions method of §1.985–3

(DASTM). However, other sections, such

as §1.267(f)–1(e) (relating to application

of the loss disallowance rule of section

267(a)(1) as applied to related party, nonfunctional currency loans), which make

reference to the section 988 definition of

hyperinflation will be affected.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order

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

chapter 5) and the Regulatory Flexibility

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

these regulations, and, therefore, a Regulatory Flexibility Analysis is not required.

439

Pursuant to section 7805(f) of the Internal

Revenue Code, the notice of proposed

rulemaking preceding these regulations

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

small businesses.

Drafting Information

The principal author of these regulations is Roger M. Brown of the Office of

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

the IRS and Treasury Department also

participated in their development.

* * * * *

Adoption of the Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read, in part, as follows:

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

Par. 2. Section 1.988–0 in the Table of

Contents is amended by:

1. The entry for §1.988–2(b)(14)–(15) is

removed.

2. An entry for §1.988–2(b)(14) is added.

3. An entry for §1.988–2(b)(15) is added.

4. The entry for §1.988–2(d)(5) is revised.

5. The entry for §1.988–2(e)(7) is revised.

The revisions and additions read as follows:

§1.988–0 Taxation of gain or loss from a

section 988 transaction; Table of Contents.

* * * * *

§1.988–2 Recognition and computation of

exchange gain or loss.

* * * * *

(b) ***

(14) [Reserved]

(15) Debt instruments and deposits denominated in hyperinflationary currencies.

* * * * *

(d) ***

(5) Hyperinflationary contracts.

(e) ***

(7) Special rules for currency swap contracts in hyperinflationary currencies.

* * * * *

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Par. 3. Section 1.988–2 is amended

by:

1. Adding paragraphs (b)(14) and

(b)(15).

2. Adding paragraph (d)(5).

3. Adding paragraph (e)(3)(iv).

4. Adding paragraph (e)(7).

The additions read as follows:

§1.988–2 Recognition and computation

of exchange gain or loss.

* * * * *

(b) ***

(14) [Reserved]

(15) Debt instruments and deposits denominated in hyperinflationary currencies— (i) In general. If a taxpayer issues,

acquires, or otherwise enters into or holds

a hyperinflationary debt instrument (as

defined in paragraph (b)(15)(vi)(A) of

this section) or a hyperinflationary deposit (as defined in paragraph

(b)(15)(vi)(B) of this section) on which

interest is paid or accrued that is denominated in (or determined by reference to) a

nonfunctional currency of the taxpayer,

then the taxpayer shall realize exchange

gain or loss with respect to such instrument or deposit for its taxable year determined by reference to the change in exchange rates between—

(A) The later of the first day of the taxable year, or the date the instrument was

entered into (or an amount deposited);

and

(B) The earlier of the last day of the

taxable year, or the date the instrument (or

deposit) is disposed of or otherwise terminated.

(ii) Only exchange gain or loss is realized. No gain or loss is realized under

paragraph (b)(15)(i) by reason of factors

other than movement in exchange rates,

such as the creditworthiness of the debtor.

(iii) Special rule for synthetic, non-hyperinflationary

currency

debt

instruments—(A) General rule. Paragraph (b)(15)(i) does not apply to a debt

instrument that has interest and principal

payments that are to be made by reference

to a currency or item that does not reflect

hyperinflationary conditions in a country

(within the meaning of §1.988–1(f)).

(B) Example. Paragraph (b)(15)(iii)(A)

is illustrated by the following example:

Example. When the Turkish lira (TL) is a hyperinflationary currency, A, a U.S. corporation with the

U.S. dollar as its functional currency, makes a 5

year, 100,000 TL-denominated loan to B, an unrelated corporation, at a 10% interest rate when 1,000

January 31, 2000

TL equals $1. Under the terms of the debt instrument, B must pay interest annually to A in amount of

Turkish lira that is equal to $100. Also under the

terms of the debt instrument, B must pay A upon maturity of the debt instrument an amount of Turkish

lira that is equal to $1,000. Although the principal

and interest are payable in a hyperinflationary currency, the debt instrument is a synthetic dollar debt

instrument and is not subject to paragraph (b)(15)(i)

of this section.

(iv) Source and character of gain or

loss—(A) General rule for hyperinflationary conditions. The rules of this paragraph (b)(15)(iv)(A) shall apply to any

taxpayer that is either an issuer of (or

obligor under) a hyperinflationary debt

instrument or deposit and has currency

gain on such debt instrument or deposit,

or a holder of a hyperinflationary debt instrument or deposit and has currency loss

on such debt instrument or deposit. For

purposes of subtitle A of the Internal Revenue Code, any exchange gain or loss realized under paragraph (b)(15)(i) of this

section is directly allocable to the interest

expense or interest income, respectively,

from the debt instrument or deposit (computed under this paragraph (b)), and

therefore reduces or increases the amount

of interest income or interest expense paid

or accrued during that year with respect to

that instrument or deposit. With respect

to a debt instrument or deposit during a

taxable year, to the extent exchange gain

realized under paragraph (b)(15)(i) of this

section exceeds interest expense of an issuer, or exchange loss realized under

paragraph (b)(15)(i) of this section exceeds interest income of a holder or depositor, the character and source of such

excess amount shall be determined under

§§1.988–3 and 1.988–4.

(B) Special rule for subsiding hyperinflationary conditions. If the taxpayer is

an issuer of (or obligor under) a hyperinflationary debt instrument or deposit and

has currency loss, or if the taxpayer is a

holder of a hyperinflationary debt instrument or deposit and has currency gain,

then for purposes of subtitle A of the Internal Revenue Code, the character and

source of the currency gain or loss is determined under §§1.988–3 and 1.988–4.

Thus, if an issuer has both interest expense and currency loss, the currency loss

is sourced and characterized under section

988, and does not affect the determination

of interest expense.

(v) Adjustment to principal or basis.

Any exchange gain or loss realized under

440

paragraph (b)(15)(i) of this section is an

adjustment to the functional currency

principal amount of the issuer, functional

currency basis of the holder, or the functional currency amount of the deposit.

This adjusted amount or basis is used in

making subsequent computations of exchange gain or loss, computing the basis

of assets for purposes of allocating interest under §§1.861–9T through 1.861–12T,

and 1.882–5, or making other determinations that may be relevant for computing

taxable income or loss.

(vi) Definitions—(A) Hyperinflationary debt instrument. A hyperinflationary

debt instrument is a debt instrument that

provides for—

(1) Payments denominated in or determined by reference to a currency that is

hyperinflationary (as defined in

§1.988–1(f)) at the time the taxpayer enters into or otherwise acquires the debt instrument; or

(2) Payments denominated in or determined by reference to a currency that is

hyperinflationary (as defined in

§1.988–1(f)) during the taxable year, and

the terms of the instrument provide for the

adjustment of principal or interest payments in a manner that reflects hyperinflation. For example, a debt instrument

providing for a variable interest rate based

on local conditions and generally responding to changes in the local consumer price index will reflect hyperinflation.

(B) Hyperinflationary deposit. A hyperinflationary deposit is a demand or

time deposit or similar instrument issued

by a bank or other financial institution

that provides for—

(1) Payments denominated in or determined by reference to a currency that is

hyperinflationary (as defined in

§1.988–1(f)) at the time the taxpayer enters into or otherwise acquires the deposit;

or

(2) Payments denominated in or determined by reference to a currency that is

hyperinflationary (as defined in

§1.988–1(f)) during the taxable year, and

the terms of the deposit provide for the

adjustment of the deposit amount or interest payments in a manner that reflects hyperinflation.

(vii) Interaction with other provisions—

(A) Interest allocation rules. In determining the amount of interest expense, this

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Page 441

paragraph (b)(15) applies before

§§1.861–9T through 1.861–12T, and

1.882–5.

(B) DASTM. With respect to a qualified

business unit that uses the United States

dollar approximate separate transactions

method of accounting described in

§1.985–3, paragraph (b)(15)(i) of this section does not apply.

(C) Interaction with section

988(a)(3)(C). Section 988(a)(3)(C) does

not apply to a debt instrument subject to

the rules of paragraph (b)(15)(i) of this section.

(D) Hedging rules. To the extent

§1.446–4 or 1.988–5 apply, the rules of

paragraph (b)(15)(i) of this section will not

apply. This paragraph (b)(15)(vii)(D) does

not apply if the application of §1.988–5 results in hyperinflationary debt instrument

or deposit described in paragraph

(b)(15)(vi)(A) or (B) of this section.

(viii) Effective date. This paragraph

(b)(15) applies to transactions entered

into after February 14, 2000.

* * * * *

(d) * * *

(5) Hyperinflationary contracts—(i)

In general. If a taxpayer acquires or otherwise enters into a hyperinflationary

contract (as defined in paragraph

(d)(5)(ii) of this section) that has payments to be made or received that are denominated in (or determined by reference

to) a nonfunctional currency of the taxpayer, then the taxpayer shall realize exchange gain or loss with respect to such

contract for its taxable year determined by

reference to the change in exchange rates

between—

(A) The later of the first day of the taxable year, or the date the contract was acquired or entered into; and

(B) The earlier of the last day of the

taxable year, or the date the contract is

disposed of or otherwise terminated.

(ii) Definition of hyperinflationary

contract. A hyperinflationary contract is

a contract described in paragraph (d)(1) of

this section that provides for payments

denominated in or determined by reference to a currency that is hyperinflationary (as defined in §1.988–1(f)) at the time

the taxpayer acquires or otherwise enters

into the contract.

(iii) Interaction with other provisions—

(A) DASTM. With respect to a qualified

business unit that uses the United States

2000–5 I.R.B.

dollar approximate separate transactions

method of accounting described in

§1.985–3, this paragraph (d)(5) does not

apply.

(B) Hedging rules. To the extent

§1.446–4 or 1.988–5 apply, this paragraph (d)(5) does not apply.

(C) Adjustment for subsequent transactions. Proper adjustments must be

made in the amount of any gain or loss

subsequently realized for gain or loss

taken into account by reason of this paragraph (d)(5).

(iv) Effective date. This paragraph (d)

(5) is applicable to transactions acquired

or otherwise entered into after February

14, 2000.

(e) ***

(3) ***

(iv) Coordination with §1.446–3(g)(4)

regarding swaps with significant nonperiodic payments.

The rules of

§1.446–3(g)(4) apply to any currency

swap with a significant nonperiodic payment. Section 1.446–3(g)(4) applies before this paragraph (e)(3). Thus, if

§1.446–3(g)(4) applies, currency gain or

loss may be realized on the loan. This

paragraph (e)(3)(iv) applies to transactions entered into after February 14, 2000.

* * * * *

(7) Special rules for currency swap

contracts

in

hyperinflationary

currencies—(i) In general. If a taxpayer

enters into a hyperinflationary currency

swap (as defined in paragraph (e)(7)(iv)

of this section), then the taxpayer realizes

exchange gain or loss for its taxable year

with respect to such instrument determined by reference to the change in exchange rates between —

(A) The later of the first day of the taxable year, or the date the instrument was

entered into (by the taxpayer); and

(B) The earlier of the last day of the

taxable year, or the date the instrument is

disposed of or otherwise terminated.

(ii) Adjustment to principal or basis.

Proper adjustments are made in the

amount of any gain or loss subsequently

realized for gain or loss taken into account by reason of this paragraph (e)(7).

(iii) Interaction with DASTM. With respect to a qualified business unit that uses

the United States dollar approximate separate transactions method of accounting

described in §1.985–3, this paragraph

(e)(7) does not apply.

441

(iv) Definition of hyperinflationary

currency swap contract. A hyperinflationary currency swap contract is a currency swap contract that provides for—

(A) Payments denominated in or determined by reference to a currency that is

hyperinflationary (as defined in

§1.988–1(f)) at the time the taxpayer enters into or otherwise acquires the currency swap; or

(B) Payments that are adjusted to take

into account the fact that the currency is

hyperinflationary (as defined in

§1.988–1(f)) during the current taxable

year. A currency swap contract that provides for periodic payments determined

by reference to a variable interest rate

based on local conditions and generally

responding to changes in the local consumer price index is an example of this

latter type of currency swap contract.

(v) Special effective date for nonfunctional hyperinflationary currency swap

contracts. Paragraph (e)(7) applies to

transactions entered into after February

14, 2000.

Robert E. Wenzel,

Deputy Commissioner

of Internal Revenue.

Approved December 13, 1999.

Jonathan Talisman,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on January 12, 2000, 8:45 a.m., and published in the issue of

the Federal Register for January 13, 2000, 65 F.R.

2026)

Section 6104.—Publicity of

Information Required From

Certain Exempt Organizations

and Certain Trusts

26 CFR 1.6104(d)–1: Public inspection and

distribution of applications for tax exemption and

annual information returns of tax-exempt

organizations.

T.D. 8861

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 301 and 602

January 31, 2000

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Page 442

Private Foundation Disclosure

Rules

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations that amend the regulations relating to the public disclosure requirements

described in section 6104(d) of the Internal

Revenue Code. These final regulations implement changes made by the Tax and

Trade Relief Extension Act of 1998, which

extended to private foundations the same

rules regarding public disclosure of annual

information returns that apply to other taxexempt organizations. These final regulations provide guidance for private foundations required to make copies of

applications for recognition of exemption

and annual information returns available

for public inspection and to comply with

requests for copies of those documents.

DATES: Effective Date: These regulations are effective March 13, 2000.

Applicability date. Except as provided

below, these regulations are applicable to

private foundations on or after March 13,

2000. These regulations are not applicable

to any private foundation annual information return the due date for which (determined with regard to any extension of time

for filing) is before March 13, 2000.

FOR FURTHER INFORMATION CONTACT: Michael B. Blumenfeld, (202)

622-6070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act of

1995 (44 U.S.C. 3507) under control

number 1545-1655. Responses to these

collections of information are mandatory.

An agency may not conduct or sponsor,

and a person is not required to respond to,

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

the Office of Management and Budget.

The estimated average annual burden

per respondent/recordkeeper is 30 minutes.

Comments on the accuracy of this bur-

January 31, 2000

den estimate and suggestions for reducing

the burden should be sent to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, OP:FS:FP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer

for the Department of the Treasury, Office

of Information and Regulatory Affairs,

Washington, DC 20503.

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

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

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This document amends §§301.6104(d)–1

through 301.6104(d)–5 of the Procedure

and Administration Regulations (26 CFR

Part 301) relating to the section 6104(d)

public disclosure rules applicable to tax-exempt organizations (organizations described

in section 501(c) or (d) and exempt from

taxation under section 501(a)) and certain

nonexempt charitable trusts and nonexempt

private foundations referenced in section

6033(d). The amendments remove existing

§301.6104(d)–1 (relating to public inspection of private foundation annual information returns). The amendments also revise

§§301.6104(d)–2 through 301.6104(d)–5 to

apply the provisions to all tax-exempt organizations, nonexempt charitable trusts described in section 4947(a)(1) and nonexempt private foundations. In addition, the

amendments redesignate existing

§§301.6104(d)–2 through 301.6104(d)–5 as

§§301.6104(d)–0 through 301.6104(d)–3,

respectively.

Description of Current Law Disclosure

Requirements Applicable to Private

Foundations

Section 6104(d), as in effect prior to the

effective date of the Tax and Trade Relief

Extension Act of 1998 (Division J of H.R.

4328, the Omnibus Consolidated and

Emergency Supplemental Appropriations

Act, 1999)(Public Law 105-277, 112 Stat

2681) (with respect to private foundations),

requires a private foundation to make its

annual information returns available for

public inspection at its principal office during regular business hours for a period of

180 days after the foundation publishes notice of the availability of its return. A pri-

442

vate foundation must publish the notice not

later than the due date of the return (determined with regard to any extension of time

for filing) in a newspaper having general

circulation in the county in which the principal office of the foundation is located.

Section 6104(e), as in effect prior to the effective date of the Tax and Trade Relief Extension Act of 1998 (with respect to private

foundations), requires a private foundation

to allow public inspection of the foundation’s application for recognition of exemption at the foundation’s principal office

(and certain regional or district offices).

Section 6104(e) also requires a private

foundation to provide copies of its exemption application upon request. The requirement to provide copies of an exemption application upon request becomes effective,

however, only after the Secretary of the

Treasury issues final regulations applicable

to private foundations that describe how the

requirement is inapplicable if the private

foundation makes its exemption application

widely available or obtains an IRS determination that a particular request is part of a

harassment campaign.

Amendments Made by the Tax and Trade

Relief Extension Act of 1998

The Tax and Trade Relief Extension

Act of 1998 was enacted on October 21,

1998. Among its provisions, it amended

section 6104(e) of the Code to apply to

private foundations the same rules regarding public disclosure of annual information returns that apply to other tax-exempt

organizations. In addition, the Tax and

Trade Relief Extension Act of 1998 repealed existing section 6104(d), and redesignated section 6104(e), as amended,

as new section 6104(d). Section 6104(d),

as amended by the Tax and Trade Relief

Extension Act of 1998, requires each taxexempt organization, including one that is

a private foundation, to allow public inspection at its principal office (and at certain regional or district offices) and to

comply with requests, made either in person or in writing, for copies of the organization’s application for recognition of exemption and the organization’s three most

recent annual information returns. Congress also intended that nonexempt charitable trusts described in section

4947(a)(1) and nonexempt private foundations comply with the expanded public

disclosure requirements, just as the infor-

2000–5 I.R.B.

IRB 2000-5

2/1/00 3:37 PM

Page 443

mation reporting requirements of section

6033, pursuant to section 6033(d), apply

to these entities. See Joint Committee on

Taxation, General Explanation of Tax

Legislation Enacted in 1998 (JCS–6–98),

November 24, 1998, at 242, fn. 102.

The Tax and Trade Relief Extension

Act of 1998 amendments apply to requests made after the later of December

31, 1998, or the 60th day after the Secretary of the Treasury issues final regulations referred to in section 6104(d)(4) (relating to when documents are made

widely available and when a particular request is considered part of a harassment

campaign). On April 9, 1999, the IRS

published T.D. 8818, 1999–17 I.R.B. 3, in

the Federal Register (64 FR 17279) final

regulations under section 6104(d) applicable to tax- exempt organizations other

than private foundations. Accordingly,

section 6104(d), as amended by the Tax

and Trade Relief Extension Act of 1998,

became effective with respect to tax-exempt organizations other than private

foundations on June 8, 1999.

On August 10, 1999, the IRS published

a notice of proposed rulemaking,

REG–121946–98, 1999–36 I.R.B. 403,

under section 6104(d) in the Federal

Register (64 FR 43324) that extends the

recently-published final regulations under

section 6104(d) to apply to private foundations and modifies those final regulations in several respects. The IRS received a few comments on the proposed

regulations. No public hearing on the

regulations was requested or held. After

consideration of all the comments, the

proposed regulations are adopted with

minor clarifying modifications by this

Treasury Decision. The provisions and

significant comments are discussed

below.

Explanation of the Provisions

These final regulations amend the final

regulations (T.D. 8818) under section

6104(d) that were published in the Federal

Register (64 FR 17279) on April 9, 1999

(the April 9, 1999 final regulations). The

amendments clarify that the term annual

information return includes any return that

is required to be filed under section 6033.

For a private foundation, these returns include Form 990-PF and Form 4720. The

amendments clarify that, unlike other taxexempt organizations, a private foundation

2000–5 I.R.B.

must disclose to the general public the

names and addresses of its contributors,

consistent with section 6104(d)(3). The

amendments also clarify that, for purposes

of section 6104(d), the terms tax-exempt

organization and private foundation include nonexempt private foundations and

nonexempt charitable trusts described in

section 4947(a)(1) that are subject to the information reporting requirements of section

6033. Finally, the amendments remove existing §301.6104(d)–1 and redesignate existing

§§301.6104–2

through

301.6104(d)–5, as §§301.6104(d)–0

through 301.6104(d)–3, respectively.

Until March 13, 2000, private foundations remain subject to section 6104(d)

and section 6104(e), as in effect prior to

the Tax and Trade Relief Extension Act of

1998, and existing §301.6104(d)–1.

Thereafter, private foundations are subject to the public inspection requirements

of section 6104(d), as in effect prior to the

Tax and Trade Relief Extension Act of

1998, and existing §301.6104(d)–1 with

respect to any annual information return

the due date (determined with regard to

any extension of time for filing) for which

is prior to March 13, 2000.

Summary of Comments

One commenter suggested another

method to satisfy the widely available exception to the requirement that a private

foundation provide a copy of its applicable

documents upon request. The commenter

would permit a private foundation to satisfy

the widely available exception by (1) filing

copies of its documents with a state agency

that, in turn, makes the documents available for public inspection, and (2) publishing a notice in a newspaper of general circulation stating where the documents are

available. The Tax and Trade Relief Extension Act of 1998 repealed the requirement

(in former section 6104(d)) that private

foundations publish notice of the availability of their annual information returns with

respect to annual information returns due

after the effective date of these final regulations. The Act extended the same public

disclosure requirements that apply to all

other tax-exempt organizations to private

foundations, including the widely available

exception. The proposed regulations specify that a private foundation satisfies the

widely available exception by posting its

documents on the World Wide Web as de-

443

scribed in the April 9, 1999 final regulations. After carefully considering this comment, the IRS and the Treasury Department

have concluded that providing copies of the

applicable documents to a state agency and

publishing notice would not make those

documents widely available. We reached

our conclusion because the method suggested by the commenter could impose a

substantial inconvenience to members of

the public. Therefore, the IRS and the

Treasury Department did not adopt this

suggestion.

A few commenters asked that these final

regulations not require private foundations

to disclose to the general public the identities of their contributors. Section 6104(d)

requires public disclosure of all the information contained on an exemption application and an annual information return filed

with the IRS, unless the information is

specifically excepted from disclosure.

Section 6104(d)(3) specifically excepts

from disclosure the names and addresses of

any contributor to an organization which is

not a private foundation. By its terms, this

exception does not apply to private foundations. The IRS and the Treasury Department believe the rule of the proposed regulation is consistent with the statute and

Congressional intent and, therefore, did not

change this provision.

One commenter asked that these final

regulations clarify how the disclosure requirements apply to a supporting organization described in section 509(a)(3).

Section 509(a) provides that an organization described in section 501(c)(3) is a

private foundation if it does not meet the

requirements of section 509(a)(1), (2),

(3), or (4). Therefore, an organization

that is described in section 501(c)(3) and

classified as a supporting organization

under section 509(a)(3) is not a private

foundation. The disclosure requirements

under section 6104(d) apply to supporting

organizations described in section

509(a)(3) in the same manner as they

apply to all other tax-exempt organizations that are not private foundations.

The proposed regulations define the terms

tax-exempt organization and private foundation consistent with the applicable

statutory provisions, and the IRS and the

Treasury Department have determined

that further regulatory clarification is not

necessary in this regard.

Another commenter expressed concern

January 31, 2000

IRB 2000-5

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Page 444

that some private foundations may not have

copies of their exemption applications.

This commenter suggested that these final

regulations only require private foundations formed after 1990 to disclose their

exemption applications. Since July 15,

1987, a tax-exempt organization, including

one that is a private foundation, has been

required under section 6104 to make its exemption application available for public inspection. See section 10702(b) of the Omnibus Budget Reconciliation Act of 1987

(Public Law 100–203) and Notice 88–120

(1988–2 C.B. 454). Under the proposed

regulations, a private foundation that filed

its exemption application before July 15,

1987 is required to make available for public inspection a copy of its application only

if it had a copy of its application on July 15,

1987. Thus, these final regulations do not

change this provision of the proposed regulations.

One commenter stated that the applicable date in the proposed regulations, which

would eliminate the requirement that private foundations publish notice of the availability of their annual information returns,

is inconsistent with the effective date specified in the House Committee Report to the

Tax and Trade Relief Extension Act of

1998 (H.R. Rep. No. 105–817). This commenter requested that the final regulations

add a rule that prevents the IRS from asserting a late filing penalty against a private

foundation whose return is rejected by the

IRS because the foundation filed the return

on or after June 8, 1999 (the effective date

of the April 9, 1999 final regulations) without proof that it satisfied the publication of

notice requirement. Section 6104(d), as in

effect prior to the effective date of the Tax

and Trade Relief Extension Act of 1998,

provides that a private foundation must

publish a notice of the availability of its return not later than the due date of the return

(determined with regard to any extension of

time for filing). Section 1.6033–3(b) of the

regulations requires a private foundation to

attach a copy of the notice to its return.

The Tax and Trade Relief Extension Act

of 1998 repealed the publication of notice

requirement of section 6104(d) effective for

private foundation annual information returns due after the later of December 31,

1998 or 60 days after the Treasury Department issues final regulations that explain

how requested documents may be made

widely available or when requests for docu-

January 31, 2000

ments are part of a harassment campaign.

The April 9, 1999 final regulations do not

apply to private foundations and, therefore,

the issuance of those regulations did not

trigger the repeal of the publication of notice requirement. Indeed, the April 9, 1999

final regulations stated explicitly that, until

the IRS issues final regulations under section 6104(d) applicable to private foundations, private foundations continue to be

governed by the existing § 301.6104(d)–1

requirements relating to public disclosure

of private foundation annual information

returns

The IRS and the Treasury Department

believe the effective date of the repeal of

the publication of notice requirement stated

in the proposed regulations is consistent

with both the statute and the legislative history. Further, the IRS and the Treasury Department believe it is important to retain

one public disclosure standard for private

foundations until another is finally adopted.

Accordingly, the IRS and the Treasury Department did not modify these final regulations as suggested.

Finally, one commenter expressed concern that disclosure in some instances could

adversely affect the charitable operations of

some small operating private foundations

that advance unpopular causes or desire to

maintain a low profile. This commenter

suggested that the final regulations should

authorize the Secretary to grant a waiver

from some or all of the disclosure requirements if a small operating foundation establishes that, without the waiver, its charitable operations could be adversely affected

and it provides alternative methods of disclosure that enhance oversight and public

accountability. Section 6104(d), however,

does not authorize the Secretary to grant

waivers except in the case of a harassment

campaign determination. Moreover, all

tax-exempt organizations have the option

under the regulations of avoiding having to

comply with requests for copies of documents by making such documents widely

available on the Internet. Therefore, the

IRS and the Treasury Department did not

adopt this suggestion.

Effective Date

of information in these regulations will

not have a significant economic impact on

a substantial number of small entities.

This certification is based on the fact that

the average time required to maintain and

disclose the information required under

these regulations is estimated to be 30

minutes for each private foundation. This

estimate is based on the assumption that,

on average, a private foundation will receive one request per year to inspect or

provide copies of its application for tax

exemption and its annual information returns. Approximately 0.1 percent of the

private foundations affected by these regulations will be subject to the reporting

requirements contained in the regulations.

It is estimated that annually, approximately 65 private foundations will make

their documents widely available by posting them on the Internet. In addition, it is

estimated that annually, approximately 3

private foundations will file an application for a determination that they are the

subject of a harassment campaign such

that a waiver of the obligation to provide

copies of their applications for tax exemption and their annual information returns

is in the public interest. The average time

required to complete, assemble and file an

application describing a harassment campaign is expected to be 5 hours. Because

applications for a harassment campaign

determination will be filed so infrequently, they will have no effect on the

average time needed to comply with the

requirements in these regulations. In addition, a private foundation is allowed in

these regulations to charge a reasonable

fee for providing copies to requesters.

Therefore, it is estimated that it will cost a

private foundation less than $10 per year

to comply with these regulations, which is

not a significant economic impact.

Therefore, a Regulatory Flexibility

Analysis under the Regulatory Flexibility

Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, the notice of proposed

rulemaking was submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its

impact on small business.

These final regulations are applicable

to private foundations on March 13, 2000.

Drafting Information

Special Analyses

The principal author of these regulations is Michael B. Blumenfeld, Office of

Associate Chief Counsel (Employee Ben-

It is hereby certified that the collections

444

2000–5 I.R.B.

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Page 445

efits and Exempt Organizations), IRS.

Other personnel from the IRS and Treasury Department also participated in their

development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 301 and

602 are amended as follows:

PART 301–PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 is amended by adding entries in

numerical order to read in part as follows:

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

Section 301.6104(d)–2 also issued

under 26 U.S.C. 6104(d)(3);

Section 301.6104(d)–3 also issued

under 26 U.S.C. 6104(d)(3); * * *

§301.6104(d)–1 [Removed]

Par. 2. Section 301.6104(d)–1 is removed.

§301.6104(d)–2 [Redesignated as

§301.6104(d)–0]

Par. 3. Section 301.6104(d)–2 is redesignated as §301.6104(d)–0.

Par. 4. Newly designated §301.6104(d)–0

is revised to read as follows:

§301.6104(d)–0 Table of contents.

This section lists the major captions

contained in §§301.6104(d)–1 through

301.6104(d)–3 as follows:

§301.6104(d)–1 Public inspection and

distribution of applications for tax

exemption and annual information

returns of tax-exempt organizations.

(a) In general.

(b) Definitions.

(1) Tax-exempt organization.

(2) Private foundation.

(3) Application for tax exemption.

(i) In general.

(ii) No prescribed application form.

(iii) Exceptions.

(iv) Local or subordinate organizations.

(4) Annual information return.

(i) In general.

(ii) Exceptions.

(iii) Returns more than 3 years old.

(iv) Local or subordinate organizations.

(5) Regional or district offices.

(i) In general.

(ii) Site not considered a regional or district office.

2000–5 I.R.B.

(c) Special rules relating to public inspection.

(1) Permissible conditions on public inspection.

(2) Organizations that do not maintain

permanent offices.

(d) Special rules relating to copies.

(1) Time and place for providing copies in

response to requests made in person.

(i) In general.

(ii) Unusual circumstances.

(iii) Agents for providing copies.

(2) Request for copies in writing.

(i) In general.

(ii) Time and manner of fulfilling written

requests.

(A) In general.

(B) Request for a copy of parts of document.

(C) Agents for providing copies.

(3) Fees for copies.

(i) In general.

(ii) Form of payment.

(A) Request made in person.

(B) Request made in writing.

(iii) Avoidance of unexpected fees.

(iv) Responding to inquiries of fees

charged.

(e) Documents to be provided by regional

and district offices.

(f) Documents to be provided by local and

subordinate organizations.

(1) Applications for tax exemption.

(2) Annual information returns.

(3) Failure to comply.

(g) Failure to comply with public inspection or copying requirements.

(h) Effective date.

(1) In general.

(2) Private foundation annual information

returns.

§301.6104(d)–2 Making applications

and returns widely available.

(a) In general.

(b) Widely available.

(1) In general.

(2) Internet posting.

(i) In general.

(ii) Transition rule.

(iii) Reliability and accuracy.

(c) Discretion to prescribe other methods

for making documents widely available.

(d) Notice requirement.

(e) Effective date.

§301.6104(d)–3 Tax-exempt

organization subject to harassment

445

campaign.

(a) In general.

(b) Harassment.

(c) Special rule for multiple requests from

a single individual or address.

(d) Harassment determination procedure.

(e) Effect of a harassment determination.

(f) Examples.

(g) Effective date.

§301.6104(d)–3 [Redesignated as

§301.6104(d)–1]

Par. 5. Section 301.6104(d)–3 is redesignated as §301.6104(d)–1.

Par. 6. Newly designated §301.6104(d)–1

is amended as follows:

1. Revise the section heading.

1a. Paragraph (a) is amended as follows:

a. Remove the language “, other than a

private foundation (as defined in paragraph (b)(2) of this section),” from the

first sentence.

b. Remove the language “, other than a

private foundation,” from the second sentence.

c.

Remove

the

language

“§§301.6104(d)–4 and 301.6104(d)–5”

from the fourth sentence and add

“§§301.6104(d)–2 and 301.6104(d)–3” in

its place.

2. In paragraph (b) introductory text, remove the language “§§301.6104(d)–4 and

301.6104(d)–5” and add “§§301.6104(d)–2

and 301.6104(d)–3” in its place.

3. In paragraph (b)(1), add a sentence

at the end of the paragraph.

4. In paragraph (b)(2), add the language “or a nonexempt charitable trust

described in section 4947(a)(1) or a

nonexempt private foundation subject to

the information reporting requirements of

section 6033 pursuant to section 6033(d)”

at the end of the sentence.

5. In paragraph (b)(3)(iii)(B), remove

the word “or” at the end of the paragraph.

6. Redesignate paragraph (b)(3)(iii)(C)

as paragraph (b)(3)(iii)(D) and add a new

paragraph (b)(3)(iii)(C).

7. In paragraph (b)(4)(i), remove the

last two sentences and add three sentences

in their place.

8. Paragraph (b)(4)(ii) is amended as

follows:

a. Remove the language “, and the return of a private foundation” from the first

sentence.

b. Revise the last sentence.

9. Revise paragraph (h).

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Page 446

The revisions and additions read as follows:

§301.6104(d)–1 Public inspection and

distribution of applications for tax exemption and annual information returns of

tax-exempt organizations.

* * * * *

(b) * * *

(1) * * * The term tax-exempt organization also includes any nonexempt charitable trust described in section 4947(a)(1)

or nonexempt private foundation that is

subject to the reporting requirements of

section 6033 pursuant to section 6033(d).

* * * * *

(3)* * *

(iii) * * *

(C) In the case of a tax-exempt organization other than a private foundation, the

name and address of any contributor to

the organization; or

* * * * *

(4) * * * (i) * * * Returns filed pursuant to

section 6033 include Form 990, Return of

Organization Exempt From Income Tax,

Form 990-PF, Return of Private Foundation,

or any other version of Form 990 (such as

Forms 990-EZ or 990-BL, except Form 990T) and Form 1065. Each copy of a return

must include all information furnished to

the Internal Revenue Service on the return,

as well as all schedules, attachments and

supporting documents. For example, in the

case of a Form 990, the copy must include

Schedule A of Form 990 (containing supplementary information on section 501(c)(3)

organizations), and those parts of the return

that show compensation paid to specific persons (currently, Part V of Form 990 and

Parts I and II of Schedule A of Form 990).

(ii) * * * In the case of a tax-exempt organization other than a private foundation, the term annual information return

does not include the name and address of

any contributor to the organization.

* * * * *

(h) Effective date–(1) In general. For a

tax-exempt organization, other than a private foundation, this section is applicable

June 8, 1999. For a private foundation,

this section is applicable (except as provided in paragraph (h)(2) of this section)

beginning March 13, 2000.

(2) Private foundation annual information returns. This section does not apply

to any private foundation return the due

date for which (determined with regard to

any extension of time for filing) is before

the applicable date for private foundations

specified in paragraph (h)(1) of this section.

§301.6104(d)–4 [Redesignated as

§301.6104(d)–2]

Par. 7. Section 301.6104(d)–4 is redesignated as §301.6104(d)–2.

Par. 8. Newly designated §301.6104(d)–2

is amended as follows:

1. In paragraph (a), remove the language

“§301.6104(d)–3(a)” from each place it appears and add “§301.6104(d)–1(a)” in each

place, respectively.

2. Revise paragraph (e).

The revision reads as follows:

§301.6104(d)–2 Making applications and

returns widely available.

* * * * *

(e) Effective date. For a tax-exempt organization, other than a private foundation,

this section is applicable June 8, 1999. For

a private foundation, this section is applicable beginning March 13, 2000.

§301.6104(d)–5 [Redesignated as

§301.6104(d)–3]

Par. 9. Section 301.6104(d)–5 is redesignated as §301.6104(d)–3.

Par. 10. Newly designated §301.6104(d)–3

is amended as follows:

1. In paragraph (a), remove the language “§301.6104(d)–3(a)” and add

“§301.6104(d)–1(a)” in its place.

2. Revise paragraph (g).

The revision reads as follows:

CFR part or section where

identified and described

§301.6104(d)–3 Tax-exempt organization

subject to harassment campaign.

* * * * *

(g) Effective date. For a tax-exempt organization, other than a private foundation,

this section is applicable June 8, 1999. For

a private foundation, this section is applicable beginning March 13, 2000.

PART 602–OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 11. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 12. In §602.101, paragraph (b) is

amended by removing the entries for

301.6104(d)–4 and 301.6104(d)–5, by revising the entries for 301.6104(d)–1 and

301.6104(d)–3, and adding a new entry

for 301.6104(d)–2 in numerical order to

the table to read as follows:

§602.101 OMB Control numbers.

* * * * *

(b) * * *

Robert E. Wenzel,

Deputy Commissioner

of Internal Revenue.

Approved December 23, 1999.

Jonathan Talisman,

Acting Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on January 12, 2000, 8:45 a.m., and published in the issue

of the Federal Register for January 13, 2000, 65

F.R. 2030)

Current OMB

control No.

*****

301.6104(d)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655

301.6104(d)–2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655

301.6104(d)–3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545-1655

*****

January 31, 2000

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Part III. Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and

claims for refund, credit, or abatement;

determination of correct tax liability.

(Also Part I, sections 66, 6015.)

Rev. Proc. 2000–15

SECTION 1. PURPOSE

This revenue procedure provides guidance for taxpayers seeking equitable relief

from federal tax liability under § 6015(f)

or 66(c) of the Internal Revenue Code (a

“requesting spouse”). Section 4.01 of this

revenue procedure provides the threshold

conditions that must be satisfied for any

request for equitable relief to be considered. Section 4.02 of this revenue procedure sets forth the conditions under which

relief under § 6015(f) will ordinarily be

granted. Section 4.03 of this revenue procedure provides a partial list of factors to

be considered in determining whether it

would be inequitable to hold a requesting

spouse jointly and severally liable for a liability that was properly reported but not

paid where the conditions of section 4.02

are not met, or for a deficiency. The factors in section 4.03 will also be used to

determine whether equitable relief should

be granted under § 66(c).

SECTION 2. BACKGROUND

.01 Section 6013(d)(3) provides that

married taxpayers who file a joint return

under § 6013 will be jointly and severally

liable for the tax arising from that return.

For purposes of § 6013(d)(3), and this

revenue procedure, the term “tax” includes additions to tax, interest, and

penalties. See §§ 6601(e)(1) and

6665(a)(2).

.02 Section 3201(a) of the Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105–206,

112 Stat.742 (RRA), enacted § 6015 of

the Code, which provides relief in certain

circumstances from the joint and several

liability imposed by § 6013(d)(3). Sections 6015(b) and 6015(c) specify two

sets of circumstances under which relief

from joint and several liability is available. Where relief is not available under

§ 6015(b) or 6015(c), § 6015(f) authorizes the Secretary to grant equitable relief if, taking into account all the facts and

2000–5 I.R.B.

circumstances, the Secretary determines

that it is inequitable to hold a requesting

spouse liable for any unpaid tax or any

deficiency (or any portion of either). Section 3201(b) of RRA amended § 66(c) to

add an equitable relief provision similar

to § 6015(f). Section 66(c) applies to

married individuals with community

property income, and provides certain

conditions under which an individual may

be relieved of separate return liability for

items of community income attributable

to the individual’s spouse. The enactment

of § 6015 and the amendment of § 66(c)

are effective with respect to any liability

for tax arising after July 22, 1998, and any

liability for tax arising on or before July

22, 1998, that is unpaid on that date.

.03 Under § 6015(b), a requesting

spouse may elect relief from joint and

several liability if the following five conditions are met: (1) a joint return was

filed; (2) on the return there was an understatement of tax attributable to erroneous

items of the spouse with whom the requesting spouse filed the return (“nonrequesting spouse”); (3) the requesting

spouse establishes that in signing the return, the requesting spouse had no knowledge or reason to know that there was an

understatement of tax; (4) taking into account all the facts and circumstances, it is

inequitable to hold the requesting spouse

liable for the understatement; and (5) the

requesting spouse elects the application of

§ 6015(b) no later than two years after the

date of the first collection activity after

July 22, 1998, with respect to the requesting spouse. If all five conditions would

be met except for the fact that the requesting spouse had no knowledge or reason to

know of only a portion of the understatement, then the requesting spouse may be

granted relief to the extent of that portion

of the understatement.

.04 Under § 6015(c), a requesting

spouse may elect to allocate a deficiency

if the following four conditions are met:

(1) a joint return was filed; (2) at the time

of the election, the requesting spouse is

no longer married to, is legally separated

from, or has not been a member of the

same household as the nonrequesting

spouse at any time during the 12-month

period ending on the date the election was

filed; (3) the requesting spouse elects the

447

application of § 6015(c) no later than two

years after the date of the first collection

activity after July 22, 1998, with respect

to the requesting spouse; and (4) the deficiency remains unpaid. Relief under §

6015(c) is subject to several limitations.

First, an election under § 6015(c) is invalid if the Service establishes that assets

were transferred between the requesting

spouse and the nonrequesting spouse as

part of a fraudulent scheme (and §

6013(d)(3) shall apply to the joint return).

Second, relief is not available to the extent that the Secretary demonstrates that

the requesting spouse had actual knowledge of an item giving rise to a deficiency

at the time the return was signed. Third,

relief will only be available to the extent

that the liability exceeds the value of any

disqualified assets (as defined in §

6015(c)(4)(B)) transferred to the requesting spouse by the nonrequesting spouse.

.05 Section 6015 provides for relief

only from joint and several liability arising from a joint return. If an individual

signs a joint return under duress, the signature is not valid and a joint return is not

made. The individual is not jointly and

severally liable for liabilities arising from

such a return. Therefore, § 6015 does not

apply.

.06 Under both §§ 6015(b) and

6015(c), relief is available only from proposed or assessed deficiencies. Neither §

6015(b) nor § 6015(c) authorizes relief

from liabilities that were properly reported on the return but not paid. However, equitable relief under § 6015(f) or

66(c) may be available for such liabilities.

The legislative history of the RRA indicates that Congress intended for the Secretary to exercise discretion in granting

equitable relief when a requesting spouse

“does not know, and had no reason to

know, that funds intended for the payment

of tax were instead taken by the other

spouse for such other spouse’s benefit.”

H.R. Conf. Rep. No. 599, 105th Cong., 2d

Sess. 254 (1998). Congress also intended

for the Secretary to exercise the equitable

relief authority under § 6015(f) in other

situations where, “taking into account all

the facts and circumstances, it is inequitable to hold an individual liable for

all or part of any unpaid tax or deficiency

arising from a joint return.” Id.

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.07 Notice 98–61, 1998–51 I.R.B. 13

(Dec. 21, 1998), provided interim guidance to taxpayers seeking equitable relief

under § 6015(f) or 66(c). In Notice

98–61, the Service and Treasury Department requested comments from the public

by April 30, 1999, regarding the interim

guidelines. Notice 99–29, 1999–21

I.R.B. 8 (May 24, 1999), extended the

deadline for submitting comments on Notice 98–61 to June 30, 1999.

SECTION 3. SCOPE

This revenue procedure applies to a

spouse who requests either equitable relief from joint and several liability under

§ 6015(f), or relief from separate liability

under § 66(c) that arises due to the operation of community property law, with respect to any liability for tax arising after

July 22, 1998, or any liability for tax arising on or before July 22, 1998, that was

unpaid on that date.

SECTION 4. GENERAL CONDITIONS

FOR RELIEF

.01 Eligibility to be considered for equitable relief. All the following threshold

conditions must be satisfied before the

Service will consider a request for equitable relief under § 6015(f). In addition,

with the exception of conditions (1) and

(2), all of the following threshold conditions must be satisfied before the Service

will consider a claim for equitable relief

under § 66(c). The threshold conditions

are as follows:

(1) The requesting spouse filed a

joint return for the taxable year for which

relief is sought;

(2) Relief is not available to the requesting spouse under § 6015(b) or

6015(c);

(3) The requesting spouse applies for

relief no later than two years after the date

of the Service’s first collection activity

after July 22, 1998, with respect to the requesting spouse;

(4) Except as provided in the next

sentence, the liability remains unpaid. A

requesting spouse is eligible to be considered for relief in the form of a refund of liabilities for: (a) amounts paid on or after

July 22, 1998, and on or before April 15,

1999; and (b) installment payments, made

after July 22, 1998, pursuant to an installment agreement entered into with the Service and with respect to which an individ-

January 31, 2000

ual is not in default, that are made after

the claim for relief is requested;

(5) No assets were transferred between the spouses filing the joint return as

part of a fraudulent scheme by such

spouses;

(6) There were no disqualified assets

transferred to the requesting spouse by the

nonrequesting spouse. If there were disqualified assets transferred to the requesting spouse by the nonrequesting spouse,

relief will be available only to the extent

that the liability exceeds the value of such

disqualified assets. For this purpose, the

term “disqualified asset” has the meaning

given such term by § 6015(c)(4)(B); and

(7) The requesting spouse did not

file the return with fraudulent intent.

A requesting spouse satisfying all the applicable threshold conditions set forth

above may be relieved of all or part of the

liability under § 6015(f) or 66(c), if, taking into account all the facts and circumstances, the Service determines that it

would be inequitable to hold the requesting spouse liable for such liability.

.02 Circumstances under which equitable relief under § 6015(f) will ordinarily

be granted.

(1) In cases where a liability reported

on a joint return is unpaid, equitable relief

under § 6015(f) will ordinarily be granted

(subject to the limitations of paragraph (2)

below) in cases where all of the following

elements are satisfied:

(a) At the time relief is requested,

the requesting spouse is no longer married

to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the

12-month period ending on the date relief

was requested;

(b) At the time the return was

signed, the requesting spouse had no

knowledge or reason to know that the tax

would not be paid. The requesting spouse

must establish that it was reasonable for

the requesting spouse to believe that the

nonrequesting spouse would pay the reported liability. If a requesting spouse

would otherwise qualify for relief under

this section, except for the fact that the requesting spouse had no knowledge or reason to know of only a portion of the unpaid liability, then the requesting spouse

may be granted relief only to the extent

that the liability is attributable to such

448

portion; and

(c) The requesting spouse will

suffer economic hardship if relief is not

granted. For purposes of this section, the

determination of whether a requesting

spouse will suffer economic hardship will

be made by the Commissioner or the

Commissioner’s delegate, and will be

based on rules similar to those provided in

§ 301.6343–1(b)(4) of the Regulations on

Procedure and Administration.

(2) Relief under this section 4.02 is

subject to the following limitations:

(a) If the return is or has been adjusted to reflect an understatement of tax,

relief will be available only to the extent

of the liability shown on the return prior

to any such adjustment; and

(b) Relief will only be available to

the extent that the unpaid liability is allocable to the nonrequesting spouse.

.03 Factors for determining whether to

grant equitable relief. This section 4.03

applies to requesting spouses who filed

separate returns in community property

states, request relief under § 66(c), and

satisfy the applicable threshold conditions

of section 4.01. This section 4.03 also applies to requesting spouses who filed joint

returns and satisfy the threshold conditions of section 4.01, but do not qualify

for relief under section 4.02. The Secretary may grant equitable relief under §

6015(f) or 66(c) if, taking into account all

the facts and circumstances, it is inequitable to hold the requesting spouse liable for all or part of the unpaid liability

or deficiency. The following is a partial

list of the positive and negative factors

that will be taken into account in determining whether to grant full or partial equitable relief under § 6015(f) or 66(c).

No single factor will be determinative of

whether equitable relief will or will not be

granted in any particular case. Rather, all

factors will be considered and weighed

appropriately. The list is not intended to

be exhaustive.

(1) Factors weighing in favor of relief. The factors weighing in favor of relief include, but are not limited to, the following:

(a) Marital status. The requesting

spouse is separated (whether legally separated or living apart) or divorced from the

nonrequesting spouse.

(b) Economic hardship. The requesting spouse would suffer economic

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hardship (within the meaning of section

4.02(1)(c) of this revenue procedure) if

relief from the liability is not granted.

(c) Abuse. The requesting spouse

was abused by the nonrequesting spouse,

but such abuse did not amount to duress.

(d) No knowledge or reason to

know. In the case of a liability that was

properly reported but not paid, the requesting spouse did not know and had no

reason to know that the liability would not

be paid. In the case of a liability that

arose from a deficiency, the requesting

spouse did not know and had no reason to

know of the items giving rise to the deficiency.

(e) Nonrequesting spouse’s legal

obligation. The nonrequesting spouse

has a legal obligation pursuant to a divorce decree or agreement to pay the

outstanding liability. This will not be a

factor weighing in favor of relief if the

requesting spouse knew or had reason to

know, at the time the divorce decree or

agreement was entered into, that the nonrequesting spouse would not pay the liability.

(f) Attributable to nonrequesting

spouse. The liability for which relief is

sought is solely attributable to the nonrequesting spouse.

(2) Factors weighing against relief.

The factors weighing against relief include, but are not limited to, the following:

(a) Attributable to the requesting

spouse. The unpaid liability or item giving rise to the deficiency is attributable to

the requesting spouse.

(b) Knowledge, or reason to

know. A requesting spouse knew or had

reason to know of the item giving rise to

a deficiency or that the reported liability

would be unpaid at the time the return

was signed. This is an extremely strong

factor weighing against relief. Nonetheless, when the factors in favor of equitable relief are unusually strong, it may

be appropriate to grant relief under §

6015(f) in limited situations where a requesting spouse knew or had reason to

know that the liability would not be paid,

and in very limited situations where the

requesting spouse knew or had reason to

know of an item giving rise to a deficiency.

(c) Significant benefit. The requesting spouse has significantly benefit-

2000–5 I.R.B.

ted (beyond normal support) from the unpaid liability or items giving rise to the

deficiency. See § 1.6013–5(b).

(d) Lack of economic hardship.

The requesting spouse will not experience

economic hardship (within the meaning

of section 4.02(1)(c) of this revenue procedure) if relief from the liability is not

granted.

(e) Noncompliance with federal

income tax laws. The requesting spouse

has not made a good faith effort to comply with federal income tax laws in the

tax years following the tax year or years

to which the request for relief relates.

(f) Requesting spouse’s legal

obligation. The requesting spouse has a

legal obligation pursuant to a divorce decree or agreement to pay the liability.

SECTION 5. PROCEDURE

A requesting spouse seeking equitable

relief under § 6015(f) or 66(c) must file

Form 8857, Request for Innocent Spouse

Relief (and Separation of Liability, and

Equitable Relief), or other similar statement signed under penalties of perjury,

within 2 years of the first collection activity against the requesting spouse. If a requesting spouse has already filed an application for relief under § 6015(b) or

6015(c), the Service will consider

whether equitable relief under § 6015(f) is

appropriate for the portion of the liability

for which relief under § 6015(b) or §

6015(c) is not available. A subsequent filing of a request for equitable relief under

§ 6015(f) is not necessary.

SECTION 6. EFFECT ON OTHER

DOCUMENTS

Notice 98–61 is modified and, as modified, is superseded.

SECTION 7. EFFECTIVE DATE

This revenue procedure is effective on

January 18, 2000.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Bridget E. Finkenaur of the

Office of Assistant Chief Counsel (Income Tax and Accounting). For further

information regarding this revenue procedure, contact Ms. Finkenaur on (202)

622-4940 (not a toll-free call).

449

Closing Agreements Concerning

Variable Annuity Contracts

Notice 2000–9

PURPOSE

This notice reminds issuers of variable

annuity contracts that the special rules of §

817(h)(3) of the Internal Revenue Code and

§ 1.817–5(h)(3) of the Income Tax Regulations do not apply in determining whether

the investments of a segregated asset account with respect to those contracts are adequately diversified for purposes of §

817(h). For a limited period of time, this

notice also permits issuers of failed variable

annuity contracts based on one or more accounts that would have satisfied the special

rules for accounts with respect to variable

life insurance contracts to obtain the relief

described in § 1.817–5(a)(2) through a reduced payment amount.

BACKGROUND

Section 817(h) of the Code provides

that a variable contract (other than a pension plan contract) based on a segregated

asset account shall not be treated as an

annuity, endowment, or life insurance

contract if the investments made by the

account are not adequately diversified in

accordance with regulations prescribed

by the Secretary. Section 1.817–5(a)(1)

of the regulations provides generally that

a variable contract is not treated as an

annuity, endowment, or life insurance

contract for any calendar quarter period

in which the investments of an account

on which the contract is based are not

adequately diversified. Thus, any income on the contract within the meaning

of § 7702(g) is treated as ordinary income received or accrued by the contract

holder during that period and any subsequent period.

Under § 1.817–5(b)(1), the investments

of a segregated asset account are considered adequately diversified for purposes

of § 817(h) only if–

(1) No more than 55%

of the value of the total assets of

the account is represented by

any one investment;

(2) No more than 70%

of the value of the total assets of

the account is represented by

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Page 450

any two investments;

(3) No more than 80%

of the value of the total assets of

the account is represented by

any three investments; and

(4) No more than 90%

of the value of the total assets of

the account is represented by

any four investments.

In addition, § 817(h)(2) and §

1.817–5(b)(2) provide a safe harbor under

which the investments of a segregated

asset account are considered adequately

diversified if the account meets the requirements of § 851(b)(3), and no more

than 55% of the value of the total assets of

the account is attributable to cash, cash

items, government securities, and securities of other regulated investment companies. For purposes of testing diversification, all securities of the same issuer are

treated as a single investment, and each

government agency or instrumentality is

treated as a separate issuer. See §

1.817–5(b)(1)(ii).

Under § 817(h)(3), the investments

made by a segregated asset account with

respect to a variable life insurance contract are treated as adequately diversified

to the extent the account is invested in securities issued by the United States Treasury. Section 1.817–5(b)(3) provides alternative diversification requirements for

a segregated asset account invested in

United States Treasury securities. Both §

817(h)(3) and § 1.817–5(b)(3) apply only

to segregated asset accounts with respect

to variable life insurance contracts; neither applies to such accounts with respect

to variable annuity contracts.

Under § 1.817–5(a)(2), the investments

of an inadequately diversified segregated

asset account are nevertheless treated as

diversified if three requirements are satisfied. First, the issuer or holder of a variable contract based on the account must

show that the failure to satisfy the diversification requirements was inadvertent.

Section 1.817–5(a)(2)(i). Second, the account must satisfy the diversification requirements within a reasonable time after

discovery of such failure. Section

1.817–5(a)(2)(ii). Third, the issuer or

holder of the variable contract must agree

to make such adjustments or pay such

amounts as may be required by the Commissioner with respect to the period or periods during which the investments of the

January 31, 2000

account were not diversified. The amount

required to be paid by the Commissioner

shall be based upon the tax that would

have been owed by the contract holders if

they were treated as receiving the income

on the contract for the periods during

which one or more accounts were not adequately

diversified.

Section

1.817–5(a)(2)(iii).

Rev. Rul. 91–17, 1991–1 C.B. 190,

provides that if a variable contract does

not satisfy the diversification requirements set forth in regulations under §

817(h), then the income on such contract

is a nonperiodic distribution under what is

now § 3405(e)(3). Thus, the insurance

company is subject to certain recordkeeping, reporting, withholding and deposit

obligations under §§ 3402, 3403, 3405,

6047, 6302 and 7501. In addition, if the

company’s failure to meet those obligations is not due to reasonable cause, the

company could be subject to the penalties

described in §§ 6651, 6652(e), 6652(h),

6656(a) and 6704.

Section 7121 authorizes the Secretary

to enter into closing agreements relating

to the internal revenue tax liability of a

person. Rev. Proc. 92–25, 1992–1 C.B.

741, provides the procedure by which the

issuer of a variable contract that fails to

satisfy the requirements of § 817(h) may

request the relief described in §

1.817–5(a)(2) of the regulations. That relief is in the form of a closing agreement

pursuant to which the Internal Revenue

Service and the issuer agree to treat the

assets of the nondiversified account as adequately diversified for purposes of §

817(h) for the period or periods of nondiversification. For periods in which the

highest rate specified in § 1 of the Code is

no greater than 31 percent, the amount

due from the issuer of a variable annuity

contract under the closing agreement is

the sum of–

(1) 20% of income on

annuity contracts from which

payments have not been made

as of the end of the period; plus

(2) 15% of income on

annuity contracts from which

payments have been made as of

the end of the period; plus

(3) any interest computed under § 6621(a)(2) of the

Code as if the amounts computed under (1) and (2) were under-

450

payments by the contract holders for their tax year(s) containing the period(s) of nondiversification.

The amount due from the issuer of a variable life insurance or endowment contract

is the sum of–

(1) 28% of the income

on the contracts; plus

(2) any interest computed under § 6621(a)(2) of the

Code as if the amounts computed under (1) were underpayments by the contract holders

for their tax year(s) containing

the period(s) of nondiversification.

The Service has continued to exercise

its authority under § 7121 and §

1.817–5(a)(2) to enter into closing agreements using these rates, even though the

highest rate specified in § 1 now is greater

than 31 percent. Except as provided

below, it will do so until further notice.

The Service has become aware of situations in which segregated asset accounts

with respect to variable annuity contracts

satisfied the special rules of § 817(h)(3)

and § 1.817–5(b)(3) that apply to accounts underlying variable life insurance

contracts, but did not satisfy the general

diversification requirements of §

1.817–5(b)(1) or (2).

SCOPE

This notice applies to any issuer of a

variable annuity contract seeking relief

under § 1.817–5(a)(2) of the regulations,

if that contract failed to satisfy the diversification requirements of § 817(h) solely

by reason of one or more inadequately diversified segregated asset accounts that

would have satisfied the requirements of

§ 817(h)(3) and § 1.817–5(b)(3) if the

contract been a variable life insurance

contract.

PROCEDURE

An issuer requesting relief under this

notice shall request a closing agreement

under the terms and conditions of Rev.

Proc. 92–25. In computing the amount

due under the closing agreement, however, the following rates shall be substituted for the 20% and 15% rates provided

in § 4.02(1)(A) and (B) of that procedure:

(1) 3.5%, if not more

than 75% of the value of the

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Page 451

total assets of the account is represented by Treasury securities

for the period or periods of nondiversification;

(2) 2.5%, if more than

75% but not more than 90% of

the value of the total assets of

the account is represented by

Treasury securities for the period or periods of nondiversification; and

(3) 1.5%, if more than

90% of the value of the total

assets of the account is represented by Treasury securities for

the period or periods of nondiversification.

If a contract is based on more than one

nondiversified segregated asset account,

the rate shall be determined based on the

account with the lowest percentage investment in Treasury securities. Likewise, if the segregated asset account(s)

failed the requirements of § 1.817–5(b)(1)

or (2) for more than one calendar quarter,

the rate for all quarters shall be determined based on the quarter in which the

account had the lowest percentage investment in Treasury securities.

EFFECTIVE DATE

This notice is effective January 13,

2000, the date this notice was made available to the public.

EXPIRATION DATE

This notice applies only to requests for

closing agreement relief that are received

2000–5 I.R.B.

on or before August 1, 2000. Requests received after that date must meet all of the

requirements, including the payment

amounts, set forth in Rev. Proc. 92–25.

DRAFTING INFORMATION

The principal author of this notice is

Gary Geisler of the Office of the Assistant

Chief Counsel (Financial Institutions and

Products). For further information regarding this notice, contact Mr. Geisler

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

Comments on Items for Year

2000 Published Guidance

Priority List

Notice 2000–10

The Department of Treasury and Internal Revenue Service request public comment about items that should be included

in the Guidance Priority List for 2000.

IRS and Treasury’s Office of Tax Policy use the Guidance Priority List (GPL)

each year to identify and prioritize the tax

issues that should be addressed through

regulations, rulings, and other published

administrative guidance. Public input is

invited as part of the process of formulating the GPL to ensure that the agency’s

resources focus on the guidance items that

are most important to taxpayers and tax

administration.

No particular format is required for

comments submitted in response to this

Notice. However, it will be helpful for

451

comments both to briefly describe the

item that is recommended for inclusion on

the GPL and to explain why there is a

need for guidance. In addition, comments

may present an analysis of how the issue

should be resolved.

Please submit all comments by February 14, 2000. Written comments should

be sent to:

Internal Revenue Service

Attn: CC:DOM:CORP:R

(Notice 2000–10)

Room 5228

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044

or hand delivered between the hours of 8

a.m. and 5 p.m. to:

Courier’s Desk

Internal Revenue Service

Attn: CC:DOM:CORP:R

(Notice 2000–10)

Room 5228

1111 Constitution Avenue, N.W.

Washington, D.C.

Alternatively, comments may be submitted electronically via e-mail to the following address:

Sharon.Y.Horn@M1.IRSCOUNSEL.TR

EAS.GOV

All comments will be available for public

inspection and copying in their entirety.

For further information regarding this

notice, contact David Schneider of the

Office of Assistant Chief Counsel (Income Tax and Accounting) at (202) 6224890 (not a toll-free call).

January 31, 2000

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Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Allocation of Partnership Debt

hearing, and/or to be placed on the building access list to attend the hearing, Guy

Traynor, (202) 622-7190 (not toll-free

numbers).

REG–103831–99

SUPPLEMENTARY INFORMATION:

AGENCY: Internal Revenue Service

(IRS), Treasury.

Introduction

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

SUMMARY: This document contains

proposed regulations relating to the allocation of nonrecourse liabilities by a partnership. The proposed regulations revise

tier three of the three-tiered allocation

structure contained in the current nonrecourse liability regulations, and also provide guidance regarding the allocation of

a single nonrecourse liability secured by

multiple properties. This document also

contains a notice of public hearing on

these proposed regulations.

DATES: Written comments must be received by April 12, 2000. Requests to

speak (with outlines of oral comments) at

a public hearing scheduled for May 3,

2000, at 10 a.m., must be received by

April 12, 2000.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–103831–99),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between

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

CC:DOM:CORP:R (REG–103831–99),

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

Washington, DC. Alternatively, taxpayers

may submit comments electronically via

the Internet by selecting the “Tax Regs”

option of the IRS Home Page, or by submitting comments directly to the IRS Internet

site

at:

http://www.irs.ustreas.gov/tax_regs/regsli

st.html. The public hearing will be held

in room 2615, Internal Revenue Building,

1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,

Christopher Kelley, (202) 622-3070; concerning submissions of comments, the

January 31, 2000

This document proposes to revise

§§1.752–3 and 1.752–5 of the Income

Tax Regulations (26 CFR part 1) relating

to the allocation by a partnership of nonrecourse liabilities.

Background

Treasury regulation §1.752–3 currently

provides a three-tiered system for allocating nonrecourse liabilities. The threetiered system applies sequentially. Thus,

as a portion of a liability is allocated to a

partner under the first tier, that portion is

not available to be allocated under the

second tier. Similarly, as a portion of a liability is allocated to a partner under the

second tier, that portion is not available to

be allocated in the third tier.

Under the first tier, a partner is allocated an amount of the liability equal to

that partner’s share of partnership minimum gain under section 704(b). See

§1.704–2(g)(1). Under the second tier, to

the extent the entire liability has not been

allocated under the first tier, a partner will

be allocated an amount of liability equal

to the gain that partner would be allocated

under section 704(c) if the partnership

disposed of all partnership property subject to one or more nonrecourse liabilities

in full satisfaction of the liabilities (section 704(c) minimum gain). Under the

third tier, a partner is allocated any excess

nonrecourse liabilities under one of several methods that the partnership may

choose. One allocation method is based

on the partner’s share of partnership profits. The partnership may specify in its

partnership agreement the partners’ interests in partnership profits for purposes of

allocating excess nonrecourse liabilities

provided the specified interests are reasonably consistent with allocations of

some other significant item of partnership

income or gain. The partnership also may

allocate excess nonrecourse liabilities in

accordance with the manner in which it is

reasonably expected that the deductions

452

attributable to those nonrecourse liabilities will be allocated. The partnership

may change its allocation method under

the third tier from year to year.

In Rev. Rul. 95–41, 1995–1 C.B. 132,

the IRS and Treasury addressed the effect

of the three section 704(c) allocation

methods under §1.704–3 upon the three

tiers of §1.752–3(a). Rev. Rul. 95–41

also stated that in determining the partners’ interests in partnership profits,

solely for purposes of the third tier, section 704(c) built-in gain (i.e., the excess

of a property’s book value over the contributing partner’s adjusted tax basis in

the property upon contribution) that was

not taken into account under

§1.752–3(a)(2) (the second tier) is one

factor, but not the only factor, to be considered. This gain (excess section 704(c)

gain) is equal to the excess of the amount

of section 704(c) built-in gain attributable

to an item of property over the amount of

section 704(c) minimum gain on that

property.

Explanation of Provisions

Modifications to Third Tier

The three tiers of §1.752–3(a) are

structured to allocate liabilities to those

partners who generally would be allocated income or gain upon the relief of

those liabilities. Under section 752(b),

any decrease in a partner’s share of the liabilities of a partnership will be considered a distribution of money to the partner

by the partnership. Under section 731(a),

a partner will recognize gain on the distribution of money by the partnership to the

extent that the distribution exceeds the

partner’s adjusted basis in its partnership

interest. Section 704(c) generally ensures

that any built-in gain on contributed property will be recognized by the contributing partner upon the disposition of the

property by the partnership. The partnership liability allocation rules arguably

should not accelerate the contributing

partner’s recognition of that gain when

the amount of the partnership’s liability

attributable to such property is sufficient,

if allocated to the contributing partner, to

prevent such partner from recognizing

gain.

2000–5 I.R.B.

IRB 2000-5

2/1/00 3:38 PM

Page 453

In response to comments received, the

proposed regulations modify the third tier

to allow a partnership to allocate the portion of a nonrecourse liabilities in excess

of the portions allocated in tiers one and

two (excess nonrecourse liabilities) based

on the excess section 704(c) gain attributable to the property securing the liability.

Thus, to the extent a portion of a partnership nonrecourse liability is available to

be allocated in the third tier, the partnership may allocate that portion to the contributing partner based on the excess section 704(c) gain inherent in the property.

Under §1.704–3(a)(2), section 704(c)

generally applies on a property-by-property basis. Therefore, in determining the

amount of excess section 704(c) gain, the

built-in gains and losses on items of contributed property cannot be aggregated.

Section 1.704–3(a)(3)(i) provides that

the book value of contributed property is

equal to its fair market value at the time of

contribution and is subsequently adjusted

for cost recovery and other events that affect the basis of the property. Section

1.704–3(a)(3)(ii) provides that the section

704(c) built-in gain with respect to a

property is the excess of the property’s

book value over the contributing partner’s

adjusted tax basis in the property upon

contribution. The built-in gain is thereafter reduced by decreases in the difference between the property’s book value

and adjusted tax basis. Similarly, the excess section 704(c) gain will decline as

the difference between the property’s fair

market value and tax basis declines.

If a partnership holds section 704(c)

property subject to the ceiling rule of

§1.704–3(b)(1), in certain situations, the

first tier of §1.752–3(a) can gradually

shift the allocation of liabilities away

from the partner that contributed the property (the contributing partner) to a noncontributing partner who does not necessarily need, for tax purposes, the entire

amount of the liability allocated to the

non-contributing partner in the first tier.

This can give rise to deemed distributions

to the contributing partner, resulting in

gain recognition under section 731(a)(1)

at a time that arguably is earlier than appropriate. The IRS and Treasury considered other alternatives for amending

§1.752–3 that would address these liability shifts caused by the ceiling rule, but

rejected them because of their complex-

2000–5 I.R.B.

ity. The proposed alternative was adopted

because it is simple and seems to address

the predominant concerns raised by practitioners regarding the contribution of section 704(c) property. The IRS and Treasury request comments on whether further

modifications to the three-ti

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