# Bulletin No. 1999–12 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Aa594a1514c06c8c1 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text IRB 1999-12 3/17/99 12:40 PM Page 1 Bulletin No. 1999–12 March 22, 1999 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 Rev. Rul. 99–15, page 4. LIFO; price indexes; department stores. The January 1999 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, January 31, 1999. T.D. 8798, page 16. REG–120168–97, page 21. Temporary and proposed regulations under section 6695 of the Code relate to the due diligence requirements for paid preparers of federal income tax returns or claims for refund involving the earned income credit. A public hearing is scheduled for May 20, 1999. T.D. 8803, page 15. REG–106386–98, page 31. Final and temporary regulations under section 6695 of the Code provide income tax return preparers with two alternative means of meeting the requirements that a preparer retain the manually signed (by the preparer) copy of the return or claim. turing and Reform Act of 1998 regarding the valuation of prior gifts in determining estate and gift tax liability, and the period of limitations for assessing and collecting gift tax. A public hearing is scheduled for April 28, 1999. GIFT TAX REG–106177–98, page 25. Proposed regulations under sections 2001, 2504, and 6501 of the Code relate to changes made by the Taxpayer Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform Act of 1998 regarding the valuation of prior gifts in determining estate and gift tax liability, and the period of limitations for assessing and collecting gift tax. A public hearing is scheduled for April 28, 1999. EMPLOYEE PLANS Notice 99–15, page 20. Weighted average interest rate update. Guidelines are set forth for determining the weighted average interest rate for March 1999 and the resulting permissible range of interest rates used to calculate current liability for purposes of the full funding limitation of section 412(c)(7) of the Code. EXEMPT ORGANIZATIONS T.D. 8804, page 5. Announcement 99–22, page 32. Final regulations relate to delaying the effective date and making technical amendments to final regulations under section 1441 of the Code. A list is given of organizations now classified as private foundations. REG–105964–98, page 22. ADMINISTRATIVE Proposed regulations under section 1502 of the Code clarify the treatment of the transfer or extinguishment of rights under an intercompany obligation. REG–116099–98, page 34. ESTATE TAX Announcement 99–25, page 35. REG–106177–98, page 25. Proposed regulations under sections 2001, 2504, and 6501 of the Code relate to changes made by the Taxpayer Relief Act of 1997 and the Internal Revenue Service Restruc- This notice withdraws certain proposed regulations under section 162 of the Code. The Joint Board for the Enrollment of Actuaries is proposing a restructuring of the examination program. Clarification is also provided on the Continuing Professional Education (CPE) requirements and the use of the four-digit enrollment number. Finding Lists begin on page 43. Announcement of Disbarments and Suspensions begins on page 38. Department of the Treasury Internal Revenue Service IRB 1999-12 3/17/99 12:40 PM Page 2 Mission of the Service and by applying the tax law with integrity and fairness to all. Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities 2 IRB 1999-12 3/17/99 12:40 PM Page 3 Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a single-copy basis. dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986. It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions, and Subpart B, Legislation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement). Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Part IV.—Items of General Interest. With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in this part, none of these announcements are consolidated in the Cumulative Bulletins. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce- The first Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a quarterly and semiannual basis, and are published in the first Bulletin of the succeeding quarterly and semiannual period, respectively. The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. 3 IRB 1999-12 3/17/99 12:40 PM Page 4 Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 472.—Last-in, First-out Inventories 26 CFR 1.472-1: Last-in, first-out inventories. LIFO; price indexes; department stores. The January 1999 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, January 31, 1999. Rev. Rul. 99–15 The following Department Store Inventory Price Indexes for January 1999 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, January 31, 1999. The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups – soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments. BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS (January 1941 = 100, unless otherwise noted) Jan. 1998 Jan. 1999 Percent Change from Jan. 1998 to Jan. 19991 1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . . 10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 536.7 627.9 656.3 890.5 619.0 558.3 304.6 544.1 395.6 614.6 584.2 504.4 981.2 803.3 929.7 662.8 583.9 811.8 241.8 73.5 108.3 134.0 107.8 507.3 643.1 640.4 894.0 628.6 560.7 316.2 535.4 376.9 603.8 585.2 482.1 965.3 729.7 946.8 678.4 602.4 813.6 237.7 69.6 100.7 130.3 107.8 –5.5 2.4 –2.4 0.4 1.6 0.4 3.8 –1.6 –4.7 –1.8 0.2 –4.4 –1.6 –9.2 1.8 2.4 3.2 0.2 –1.7 –5.3 –7.0 –2.8 0.0 Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593.1 586.4 –1.1 Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461.9 459.0 –0.6 Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.5 106.0 –4.9 Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547.5 539.4 –1.5 Groups 1 Absence of a minus sign before percentage change in this column signifies price increase. 2 Indexes on a January 1986=100 base. 3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments. March 22, 1999 4 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 5 DRAFTING INFORMATION The principal author of this revenue ruling is Richard C. Farley, Jr. of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Farley on (202) 622-4970 (not a toll-free call). Section 1441.—Withholding of Tax on Nonresident Aliens 26 CFR 1.1441–1: Requirement for the deduction and withholding of tax on payments to foreign persons. T.D. 8804 DEPARTMENT OF THE TREASURY Internal Revenue Services 26 CFR Parts 1, 31, 35a and 301 General Revision of Regulations Relating to Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Related Collection, Refunds, and Credits; Revision of Information Reporting and Backup Withholding Regulations; and Removal of Regulations Under Parts 1 and 35a and of Certain Regulations Under Income Tax Treaties AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final rule; delay of effective date, technical amendments, and partial withdrawal. SUMMARY: This document contains changes delaying the effective date and making technical amendments to final regulations (T.D. 8734, 1997–2 C.B. 109), relating to the withholding of income tax on certain U.S. source income payments to foreign persons. The Department of the Treasury and the IRS believe it is in the best interest of tax administration to extend the effective date of the final withholding regulations to ensure that both taxpayers and the government can complete changes necessary to implement the new withholding regime. As ex- 1999–12 I.R.B. tended by this document, the final withholding regulations will apply to payments made after December 31, 1999. This document also withdraws two amendments which have already been dealt with in T.D. 8772, (1998–31 I.R.B. 8), which was published in the Federal Register for June 30, 1998. DATES: Effective Dates: The amendments in this final rule are effective January 1, 2000. As of December 31, 1998, the effective date of the final regulations published at 62 F.R. 53387, October 14, 1997, is delayed from January 1, 1999, until January 1, 2000; however, the effective date of the addition of §31.9999–0 and §35a.9999–0 and the removal of §35a.9999–0T remains October 14, 1997. Withdrawal: Effective December 31, 1998, the amendments removing §§1.6045–1T and 1.6045–2T published at 62 F.R. 53387, October 14, 1997, are withdrawn. FOR FURTHER INFORMATION CONTACT: Lilo Hester, (202) 622-3840 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background The final regulations that are the subject of this amendment provide guidance under sections 1441, 1442, and 1443 of the Internal Revenue Code (Code) on certain U.S. source income paid to foreign persons, the related tax deposit and reporting requirements under section 1461 of the Code, and the related changes under sections 163(f), 165(j), 871, 881, 1462, 1463, 3401, 3406, 6041, 6041A, 6042, 6045, 6049, 6050A, 6050N, 6109, 6114, 6402, 6413, and 6724 of the Code. ble to payments made after December 31, 1998, and generally granted withholding agents until after December 31, 1999, to obtain the new withholding certificates and statements required under those regulations. This amendment serves to make the final regulations applicable to payments made after December 31, 1999, and to require mandatory use of the new withholding certificates and statements after December 31, 2000. In addition, this amendment serves to address typographical errors, and to withdraw the removal of §§1.6045–1T and 1.6045–2T since those sections were already removed on June 30, 1998, in T.D. 8772 (63 F.R. 35517). Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Finally, it has been determined that the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to these regulations because the regulations do not impose a collection of information on small entities. Pursuant to 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations (61 F.R. 17614) was submitted to the Small Business Administration for comment on its impact on small business. * * * * * Amendments to the Regulations Accordingly, under the authority of 26 U.S.C. 7805, 26 CFR parts 1, 31, 35a, and 301 are amended by making the following correcting amendments: Need for Changes On April 13, 1998, in Notice 98–16 (1998–15 I.R.B. 12), the IRS and Treasury announced their decision to extend the effective date of the final regulations, and to make correlative changes to the transition rules for obtaining new withholding certificates and statements containing the necessary information and representations required by the final regulations. As published in the Federal Register on October 14, 1997 (62 F.R. 53387 [T.D. 8734, 1997–2 C.B. 109]), the final regulations were generally applica- 5 PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. In §1.871–14, paragraph (h) is revised to read as follows: §1.871–14 Rules relating to repeal of tax on interest of nonresident alien individuals and foreign corporations received from certain portfolio debt investments. * * * * * March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 6 (h) Effective date—(1) In general. This section shall apply to payments of interest made after December 31, 1999. (2) Transition rule. For purposes of this section, the validity of a Form W-8 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form W-8 that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (h)(2), however, does not apply to extend the validity period of a Form W-8 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (h)(2), a withholding agent or payor may choose to not take advantage of the transition rule in this paragraph (h)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, may choose to obtain withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441– 1(e)(4)(ii), regardless of when the certificate is obtained. Par. 3. In §1.1441–1 as revised at 62 F.R. 53424, paragraph (f) is revised to read as follows: §1.1441–1 Requirement for the deduction and withholding of tax on payments to foreign persons. * * * * * (f) Effective date—(1) In general. This section applies to payments made after December 31, 1999. March 22, 1999 (2) Transition rules—(i) Special rules for existing documentation. For purposes of paragraphs (d)(3) and (e)(2)(i) of this section, the validity of a withholding certificate (namely, Form W-8, 8233, 1001, 4224, or 1078 , or a statement described in §1.1441–5 in effect prior to January 1, 2000 (see §1.1441–5 as contained in 26 CFR part 1, revised April 1, 1998)) that was valid on January 1, 1998 under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (f)(2)(i), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (f)(2)(i), a withholding agent may choose to not take advantage of the transition rule in this paragraph (f)(2)(i) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in paragraph (e)(4)(ii) of this section, regardless of when the certificate is obtained. (ii) Lack of documentation for past years. A taxpayer may elect to apply the provisions of paragraphs (b)(7)(i)(B), (ii), and (iii) of this section, dealing with liability for failure to obtain documentation timely, to all of its open tax years, including tax years that are currently under examination by the IRS. The election is made by simply taking action under those 6 provisions in the same manner as the taxpayer would take action for payments made after December 31, 1999. Par. 4. In §1.1441–4 as amended at 62 F.R. 53450, paragraph (g) is revised to read as follows: §1.1441–4 Exemptions from withholding for certain effectively connected income and other amounts. * * * * * (g) Effective date—(1) General rule. This section applies to payments made after December 31, 1999. (2) Transition rules. The validity of a Form 4224 or 8233 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form 4224 or 8233 that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a Form 4224 or 8223 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. Par. 5. In §1.1441–5 as revised at 62 F.R, 53452, paragraph (g) is revised to read as follows: 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 7 §1.1441–5 Withholding on payments to partnerships, trusts, and estates. ***** (g) Effective date—(1) General rule. This section applies to payments made after December 31, 1999. (2) Transition rules. The validity of a withholding certificate that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(2) , a withholding agent may choose to not take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. Par. 6. In §1.1441–6 as revised at 62 F.R. 53458, paragraph (g) is revised to read as follows: (g) Effective date—(1) General rule. This section applies to payments made after December 31, 1999. (2) Transition rules. For purposes of this section, the validity of a Form 1001 or 8233 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form 1001 or 8233 is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a Form 1001 or 8233 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate or in interpretation of the law under the regulations under §1.894–1T(d). Notwithstanding the first three sentences of this paragraph (g)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. Par. 7. In §1.1441–8 as redesignated and amended at 62 F.R. 53464, paragraph (f) is revised to read as follows: §1.1441–6 Claim of reduced withholding under an income tax treaty. §1.1441–8 Exemption from withholding for payments to foreign governments, international organizations, foreign central banks of issue, and the Bank for International Settlements. * * * * * * * * * * 1999–12 I.R.B. 7 (f) Effective date—(1) In general. This section applies to payments made after December 31, 1999. (2) Transition rules. For purposes of this section, the validity of a Form 8709 that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form 8709 that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (f)(2), however, does not apply to extend the validity period of a Form 8709 that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (f)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (f)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. Par. 8. In §1.1441–9, paragraph (d) is revised to read as follows: §1.1441–9 Exemption from withholding on exempt income of a foreign tax-exempt organization, including foreign private foundations. * * * * * (d) Effective date—(1) In general. This section applies to payments made after December 31, 1999. March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 8 (2) Transition rules. For purposes of this section, the validity of a Form W-8, 1001, or 4224 or a statement that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a Form W-8, 1001, or 4224 or a statement that is valid on or after January 1, 1999 remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (d)(2), however, does not apply to extend the validity period of a Form W-8, 1001, or 4224 or a statement that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (d)(2), a withholding agent may choose to not take advantage of the transition rule in this paragraph (d)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. Par. 9. In §1.1443–1 as revised at 62 F.R. 53466, paragraph (c) is revised to read as follows: §1.1443–1 Foreign tax-exempt organizations. * * * * * (c) Effective date—(1) In general. This section applies to payments made after December 31, 1999. (2) Transition rules. For purposes of this section, the validity of an affidavit or opinion of counsel described in §1.1443– 1(b)(4)(i) in effect prior to January 1, March 22, 1999 2000 (see §1.1443–1(b)(4)(i) as contained in 26 CFR part 1, revised April 1, 1998) that is valid on December 31, 1998 is extended until December 31, 2000. However, a withholding agent may choose to not take advantage of the transition rule in this paragraph (c)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR part 1, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. §1.6041–3 [Amended] Par. 10. Section 1.6041–3 as amended at 62 F.R. 53472 is further amended by removing the last sentence of the introductory text. Par. 11. In §1.6042–3 as amended at 62 F.R. 53475, paragraph (b)(5) is revised to read as follows: §1.6042–3 Dividends subject to reporting. * * * * * (b) * * * (5) Effective date—(i) General rule. The provisions of this paragraph (b) apply to payments made after December 31, 1999. (ii) Transition rules. The validity of a withholding certificate (namely, Form W8 or other form upon which the payor is permitted to rely to hold the payee as a foreign person) that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, 8 if earlier, until December 31, 2000. The rule in this paragraph (b)(5)(ii), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (b)(5)(ii), a payor may choose not to take advantage of the transition rule in this paragraph (b)(5)(ii) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. Par. 12. In §1.6045–1 as amended at 62 F.R. 53476, paragraph (g)(5) is revised to read as follows: §1.6045–1 Returns of information of brokers and barter exchanges. * * * * * (g) * * * (5) Effective date—(i) General rule. The provisions of this paragraph (g) apply to payments made after December 31, 1999. (ii) Transition rules. The validity of a withholding certificate (namely, Form W8 or other form upon which the payor is permitted to rely to hold the payee as a foreign person) that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(5)(ii), however, 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 9 does not apply to extend the validity period of a form that expires in 1998 solely by reason of changes in the circumstances of the person whose name is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(5)(ii), a payor may choose not to take advantage of the transition rule in this paragraph (g)(5)(ii) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, to require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. Par 13. Effective December 31, 1998, the amendments removing §§1.6045–1T and 1.6045–2T, published at 62 F.R. 53480, are withdrawn. Par. 14. In §1.6049–5 as amended at 62 F.R. 53483, paragraph (g) is revised to read as follows: §1.6049–5 Interest and original issue discount subject to reporting after December 31, 1982. Section Remove Add 1.871–14(c)(2)(iii) 1.871–14(c)(3)(ii), Example, first and sixth sentences 1.1441–1(c)(3)(ii) October 12, 1999 1.1441–1(e)(3)(ii) October 12, 2000 1.871–14(c)(3)(ii), Example, sixth sentence December 31, 1999 December 31, 2000 1.871–14(c)(3)(ii), Example, sixth and seventh sentences June 15, 2003 June 15, 2004 1.1441–1(b)(2)(iii)(B), fifth sentence savings clause saving clause 1.1441–1(b)(2)(iv)(E), second sentence actually maintain actually maintains 1.1441–1(b)(3)(iii)(B), first sentence that cannot reliably cannot reliably 1.1441–1(b)(3)(iii)(C), last sentence 1.1441–4(e) 1.1441–4(d) 1.1441–1(b)(3)(x), Example 1, seventh and ninth sentences Ws W’s 1999–12 I.R.B. * * * * * (g) Effective date—(1) General rule. The provisions of paragraphs (b)(6) through (15), (c), (d), and (e) of this section apply to payments made after December 31, 1999. (2) Transition rules. The validity of a withholding certificate (namely, Form W8 or other form upon which the payor is permitted to rely to hold the payee as a foreign person) that was valid on January 1, 1998, under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and expired, or will expire, at any time during 1998, is extended until December 31, 1998. The validity of a withholding certificate that is valid on or after January 1, 1999, remains valid until its validity expires under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) or, if earlier, until December 31, 2000. The rule in this paragraph (g)(2), however, does not apply to extend the validity period of a withholding certificate that expires solely by reason of changes in the circumstances of the person whose name 9 is on the certificate. Notwithstanding the first three sentences of this paragraph (g)(2), a payor may choose not to take advantage of the transition rule in this paragraph (g)(2) with respect to one or more withholding certificates valid under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998) and, therefore, may require withholding certificates conforming to the requirements described in this section (new withholding certificates). For purposes of this section, a new withholding certificate is deemed to satisfy the documentation requirement under the regulations in effect prior to January 1, 2000 (see 26 CFR parts 1 and 35a, revised April 1, 1998). Further, a new withholding certificate remains valid for the period specified in §1.1441–1(e)(4)(ii), regardless of when the certificate is obtained. PARTS 1, 31, 35a, and 301 [AMENDED] Par. 15. In the list below, for each section indicated in the left column (which was added, revised, or amended at 62 F.R. 53387), remove the language in the middle column and add the language in the right column: March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 10 1.1441–1(b)(3)(x), Example 2, sixth and seventh sentences Ws W’s 1.1441–1(b)(3)(x), Example 3, third sentence X, nc. X, Inc. 1.1441–1(b)(4)(i), first sentence 1.871–7(b)(2)(i) 1.871–7(b)(2) 1.1441–1(b)(4)(xix) January 1, 1999 January 1, 2000 1.1441–1(b)(4)(xix) April 1, 1997 April 1, 1998 1.1441–1(b)(5)(viii) I.R.B. 1996–49 1996–2 C.B. 227 1.1441–1(b)(7)(v), Example 1, first, fourth, and eighth sentences June 15, 1999 June 15, 2000 1.1441–1(b)(7)(v), Example 1, third and ninth sentences September 30, 2001 September 30, 2002 1.1441–1(b)(7)(v), Example 1, ninth sentence March 15, 2000 March 15, 2001 1.1441-1(b)(7)(v), Example 2, first, fourth, and seventh sentences June 15, 1999 June 15, 2000 1.1441–1(b)(7)(v), Example 2, third and seventh sentences September 30, 2001 September 30, 2002 1.1441–1(b)(7)(v), Example 2, seventh and ninth sentences March 15, 2000 March 15, 2001 1.1441–1(c)(6)(ii)(B) January 1, 1999 January 1, 2000 1.1441–1(c)(6)(ii)(B) April 1, 1997 April 1, 1998 1.1441–1(e)(4)(ii)(A) September 30, 1999 September 30, 2000 1.1441–1(e)(4)(ii)(A) December 31, 2002 December 31, 2003 1.1441–1(e)(4)(vi), sixth sentence provided the acceptable provided on the acceptable 1.1441–1(e)(4)(ix)(A)(2), second sentence §31.3406(c)1(c)(3)(ii) §31.3406(c)–(c)(3)(ii) 1.1441–1(e)(5)(i), penultimate sentence reportable payments reportable amounts 1.1441–1(e)(5)(v)(A), third sentence the intermediary the qualified intermediary 1.1441–1(e)(5)(v)(A), fourth sentence the intermediary to the qualified intermediary to March 22, 1999 10 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 11 1.1441–1(e)(5)(v)(B), introductory text, third sentence paragraph (b)(3)(vi) paragraph (e)(3)(vi) 1.1441–1(e)(5)(v)(B)(1), second sentence withholding agent qualified intermediary 1.1441–1(e)(5)(v)(C), first sentence The intermediary The qualified intermediary 1.1441–2(a), last sentence 871(h)(5)(B) 871(h)(5)(B) or a member of a clearing organization which member is the beneficial owner of the obligation 1.1441–2(b)(1)(ii), fifth sentence someone s someone’s 1.1441–2(b)(3)(iv) December 31, 1998 December 31, 1999 1.1441–2(f) December 31, 1998 December 31, 1999 1.1441–3(h) December 31, 1998 December 31, 1999 1.1441–4(a)(2)(i), second sentence United States United States and is includable in the beneficial owner’s gross income for the taxable year 1.1441–5(a)(6), second sentence withholding partnership withholding foreign partnership 1.1441–5(c)(2)(ii)(B), sixth sentence qualified intermediary withholding foreign partnership 1.1441–5(c)(2)(ii)(B), sixth sentence customers partners 1.1441–5(c)(3)(iii)(D) that the partners that the amounts allocable to the partners 1.1441–5(d)(4), Example 2, second sentence depending of depending on 1.1441–6(b)(1), first sentence §1.1441–1(e)(1)(ii)(B) §1.1441–1(e)(1)(ii)(A)(2) 1.1441–6(c)(2)(ii), first sentence upon a certificate upon receipt of a certificate 1.1441–6(d), second sentence rate of tax rate of withholding 1.1441–7(g) December 31, 1998 December 31, 1999 1.1461–1(b)(2)(v) foreign partnership shall foreign partnership (whether or not a withholding foreign partnership) shall 1.1461–1(b)(2)(vi), paragraph heading banks, securities dealers, or insurance companies. banks, or insurance companies. 1999–12 I.R.B. 11 March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 12 1.1461–1(c)(4)(iv), first sentence certificate attached to the intermediary’s or partnership withholding certificate that is from a qualified intermediary or a withholding foreign partnership certificate or documentary evidence atattached to the intermediary’s or partnership withholding certificate 1.1461–1(i) December 31, 1998 December 31, 1999 1.1461–2(a)(1), third sentence an adjustment to a refund of 1.1461–2(a)(3), first sentence beneficial owner beneficial owner or payee 1.1461–2(a)(4), Example 1(i), second sentence December 1999 December 2000 1.1461–2(a)(4), Example 1(i), third sentence February 10, 2000 February 10, 2001 1.1461–2(a)(4), Example 1(ii), first, second, and last sentences 1999 2000 1.1461–2(a)(4), Example 1(ii), first sentence March 15, 2000 March 15, 2001 1.1461–2(a)(4), Example 1(ii), third sentence 2000 2001 1.1461–2(a)(4), Example 2, second and last sentences 2000 2001 1.1461–2(a)(4), Example 2, second sentence June 2000 June 2001 1.1461–2(a)(4), Example 2, third sentence July 15, 2000 July 15, 2001 1.1461–2(a)(4), Example 2, third sentence 1999 2000 1.1461–2(a)(4), Example 2, last sentence March 15, 2001 March 15, 2002 1.1461–2(a)(4), Example 3, last sentence February 15, 2000 February 15, 2001 1.1461–2(a)(4), Example 3, last sentence March 15, 2000 March 15, 2001 1.1461–2(d) December 31, 1998 December 31, 1999 1.1462–1(c) December 31, 1998 December 31, 1999 1.1463–1(a), last sentence §1.1441–7(b)(7) §1.1441–7(b) 1.1463–1(b) December 31, 1989 December 31, 1999 March 22, 1999 12 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 13 1.1464–1(b) §1.1461–4 §1.1461–2 1.6041–4(d) December 31, 1998 December 31, 1999 1.6041A–1(d)(3)(i)(B), first sentence if payments made if payments are made 1.6041A–1(d)(3)(iv), paragraph heading amount paid amounts paid 1.6041A–1(d)(3)(v) December 31, 1998 December 31, 1999 1.6043–2(a), first, second, and last sentences 966 1099 1.6045–1(d)(6)(ii)(B) December 31, 1998 December 31, 1999 1.6045–1(g)(3)(iv), second sentence Example 7 Example 6 1.6045–1(g)(4), Example 7(ii), last sentence Ys Y’s 1.6049–4(c)(1)(ii)(A), second sentence certificate meeting the certification requirements of paragraphs (c)(2)(ii)(A) (1) through (5) of this section. certificate stating that each member of the partnership meets the requirements of paragraphs (c)(1)(ii)(A)(1) through (4) of this section. 1.6049–4(d)(3)(ii)(B) December 31, 1998 December 31, 1999 1.6049–5(b)(12), first sentence Returns of information are not required for payments that Payments that 1.6049–5(c)(4)(i), first sentence the payor may the bank or other financial institution may 1.6049–5(c)(4)(ii), second sentence then the financial institution then the bank or other financial institution 1.6049–5(c)(4)(v) January 1, 1999 January 1, 2000 1.6049–5(d)(2)(ii), second and last sentences publicly traded actively traded 1.6049–5(d)(2)(ii), eighth sentence is less than 31 is equal to or less than 31 1.6049–5(e)(1)(i), introductory text The amount An amount is described in this paragraph (e)(1)(i) if it 1.6049–5(e)(1)(ii) The amount An amount is described in this paragraph (e)(1)(ii) if it 1.6049–5(e)(4), second sentence specifically identifies specifically identify 1.6049–5(e)(5), Example 5, last sentence of is section of this section 1999–12 I.R.B. 13 March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 14 1.6049–5(e)(5), Example 9, second sentence a holds A holds 1.6049–5(e)(5), Example 9, third sentence paid to a paid to A 1.6049–5(e)(5), Example 9, third sentence a’s A’s 1.6049–5(e)(5), Example 9, last sentence to a by DB to A by DB 1.6050N–1(e), first sentence is applies to applies to 1.6050N–1(e), last sentence December 31, 1998 December 31, 1999 31.3401(a)(6)–1(e), paragraph heading January 1, 1999 January 1, 2000 31.3401(a)(6)–1(e), first sentence January 1, 1999 January 1, 2000 31.3401(a)(6)–1(f), paragraph heading December 31, 1998 December 31, 1999 31.3401(a)(6)–1(f), first sentence December 31, 1998 December 31, 1999 31.3406(g)–1(e), first sentence December 31, 1998 December 31, 1999 31.3406(h)–2(d), penultimate sentence December 31, 1998 December 31, 1999 31.9999–0 January 1, 1999 January 1, 2000 301.6114–1(b)(4)(ii)(C), introductory text December 31, 1998 December 31, 1999 301.6114–1(b)(4)(ii)(D) December 31, 1998 December 31, 1999 301.6724–1(g)(2) Q-11 January 1, 1999 January 1, 2000 301.6724–1(g)(2) Q-11 April 1, 1997 April 1, 1998 301.6724–1(g)(2) A-11 January 1, 1999 January 1, 2000 301.6724–1(g)(2) A-11 April 1, 1997 April 1, 1998 301.6724–1(g)(3), first sentence December 31, 1998 December 31, 1999 301.6724–1(g)(3), last sentence in both places January 1, 1999 January 1, 2000 301.6724–1(g)(3), last sentence April 1, 1997 April 1, 1998 March 22, 1999 14 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 15 Robert E. Wenzel, Deputy Commissioner of Internal Revenue. Approved January 7, 1998. Donald C. Lubick, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on December 30, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 31, 1998, 63 F.R. 72183) Section 6695.—Other Assessable Penalties With Respect to the Preparation of Income Tax Returns for Other Persons 26 CFR 1.6695–1: Other assessable penalties with respect to the preparation of income tax returns for other persons. T.D. 8803 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Retention of Income Tax Return Preparers’ Signatures AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. SUMMARY: This document contains final and temporary regulations that provide income tax return preparers with two alternative means of meeting the requirement that a preparer retain the manually signed (by the preparer) copy of the return or claim. The regulations are necessary to inform preparers of the two alternatives and provide preparers with the guidance needed to comply with the alternatives. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in REG– 106386–98, page 31. DATES: Effective date. These regulations are effective December 31, 1998. Applicability date: For dates of applicability, see §1.6695–1T(g) of these regulations. 1999–12 I.R.B. FOR FURTHER INFORMATION CONTACT: Marc C. Porter (202) 622-4940 (not a toll-free number). of a partnership which is a preparer), must retain the manually signed copy of the return or claim. SUPPLEMENTARY INFORMATION: Explanation of Provisions Background The regulations provide that, if an income tax return preparer presents for a taxpayer’s signature a return or claim for refund that has a copy of the preparer’s manual signature, the preparer may either retain a photocopy of the manually signed copy of the return or claim for refund or use an electronic storage system meeting the requirements of section 4 of Rev. Proc. 97–22, (1997–1 C.B. 652) or procedures subsequently prescribed by the Commissioner, to store and produce a copy of the return of claim manually signed by the preparer. This document contains amendments to the Income Tax Regulations (26 CFR part 1) relating to the penalty for failure to sign an income tax return under section 6695(b) of the Internal Revenue Code. Section 6695(b) provides that any person who is an income tax return preparer with respect to a return or claim for refund, who is required by regulations prescribed by the Secretary to sign the return or claim, and who fails to comply with those regulations, must pay a penalty of $50 for such failure, unless it is shown that the failure is due to reasonable cause and not willful neglect. The maximum penalty imposed with respect to documents filed during a calendar year will not exceed $25,000. Section 7701(a)(36)(A) provides that, in general, the term “income tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax or claim for refund imposed by subtitle A. For purposes of the preceding sentence, the preparation of a substantial portion of a return or claim is treated as if it were the preparation of such return or claim. Section 1.6695–1(b)(1) and (c) generally provides that an income tax return preparer, with respect to a return or claim for refund, must manually sign the return or claim (which may be a photocopy) in the appropriate space provided on the return or claim after it is completed and before it is presented to the taxpayer (or nontaxable entity) for signature. Section 1.6695–1(b)(4)(i) provides that the manual signature requirement may be satisfied by a photocopy of a copy of the return or claim for refund if the copy is manually signed by the income tax return preparer after completion of its preparation. The taxpayer may file a photocopy of this manually signed return with the IRS, see Rev. Proc. 78–370, (1978–2 C.B. 335). The employer of the preparer or the partnership in which the preparer is a partner, or the preparer (if not employed or engaged by a preparer and not a partner 15 Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Drafting Information The principal author of these regulations is Marc C. Porter, Office of Assistant Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development. * * * * * Adoption of 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 is amended by adding an entity in March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 16 numerical order to read as follows: Authority: 26 U.S.C. 7805 *** Section 1.6695–1T also issued under U.S.C. 6695(b) *** Par 2. Section 1.6695–1 is amended by revising paragraph (b)(4)(i) to read as follows: §1.6695–1 Other assessable penalties with respect to the preparation of income tax returns for other persons. * * * * * (b) *** (4) (i) [Reserved]. For further guidance on acceptable methods of meeting the manual signature requirement of paragraph (b)(1) and (2), see §1.6695–1T(b)(4)(i). * * * * * Par. 3. Section 1.6695–1T is added to read as follows: §1.6695–1T Other assessable penalties with respect to the preparation of income tax returns for other persons (temporary). (a) through (b)(3) [Reserved]. For further guidance, see §1.6695–1(a) through (b)(3). (4) (i) The manual signature requirement of paragraph 1.6695–1(b)(1) and (2) of this section may be satisfied by a photocopy of a copy of the return or claim for refund which copy is manually signed by the preparer after completion of its preparation. After a copy of the return or claim for refund is signed by the preparer and before it is photocopied, no person other than the preparer may alter any entries on the copy other than to correct arithmetical errors discernible on the return or claim for refund. The employer of the preparer or the partnership in which the preparer is a partner, or the preparer (if not employed or engaged by a preparer and not a partner of a partnership which is a preparer), must retain the manually signed copy of the return or claim for refund. In the alternative, for a return or claim for refund presented to a taxpayer for signature after December 31, 1998 and for returns or claims for refund retained on or before that date, the person required to retain the manually signed copy of the return or claim for refund may choose to retain a photocopy of the manually signed copy of the return or March 22, 1999 claim for refund, or use an electronic storage system to store and produce a copy of the manually signed return or claim for refund. For purposes of paragraph (b)(4)(i) of this section, an electronic storage system must meet the electronic storage system requirements prescribed in section 4 of Rev. Proc. 97–22 (1997–1 C.B. 652) or procedures subsequently prescribed by the Commissioner. A record of any arithmetical errors corrected must be retained and made available upon request by the person required to retain the manually signed copy of the return or claim for refund. (b)(4)(ii) through (f) [Reserved]. For further guidance, see §1.6695–1(b)(4)(ii) through (f). (g) Effective date. This section applies to income tax returns and claims for refund presented to a taxpayer for signature after December 31, 1998 and for returns or claims for refund retained on or before that date. This section expires on December 31, 2001. Robert E. Wenzel, Deputy Commissioner of Internal Revenue. Approved December 17, 1998. Donald C. Lubick, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on December 30, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 31, 1998, 63 F.R. 72182) 26 CFR 1.6695–2T: Preparer due diligence requirements for determining earned income credit eligibility (temporary). T.D. 8798 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602 Preparer Due Diligence Requirements for Determining Earned Income Credit Eligibility AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulations. 16 SUMMARY: This document contains temporary regulations relating to the due diligence requirements for paid preparers of federal income tax returns or claims for refund involving the earned income credit. The temporary regulations reflect changes to the law made by the Taxpayer Relief Act of 1997. The temporary regulations provide guidance to paid preparers who prepare federal income tax returns or claims for refund claiming the earned income credit. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in REG–120168–97, page 21. DATES: These regulations are effective December 21, 1998. FOR FURTHER INFORMATION CONTACT: Marc C. Porter (202) 622-4940 (not a toll free call). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545–1570. Responses to this collection 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 further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in REG–120168–97. Books and records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 17 tax return information are confidential, as required by 26 U.S.C. 6103. Background This document contains amendments to the Income Tax Regulations (26 CFR parts 1 and 602) under section 6695(g) relating to the penalty for failure of a preparer to be diligent in determining a taxpayer’s eligibility for the earned income credit (EIC). Section 6695(g) was added by section 1085(a)(2) of the Taxpayer Relief Act of 1997, Public Law 105-34 (11 Stat. 788, 955 (1997)) (the Act), effective for taxable years beginning after December 31, 1996. Section 6695(g) imposes a $100 penalty for each failure by an income tax return preparer to meet the due diligence requirements set forth in this regulation. The IRS may impose the section 6695(g) penalty in addition to any other applicable penalty provided by law. In Notice 97–65 (1997–51 I.R.B. 14 (December 22, 1997)), the IRS set forth the preparer due diligence requirements for 1997 returns and claims for refund involving the EIC. To avoid the imposition of the section 6695(g) penalty for 1997 returns and claims for refund, Notice 9765 requires preparers to meet four requirements: (1) complete the Earned Income Credit Eligibility Checklist attached to Notice 97-65 (Eligibility Checklist), or otherwise record the information necessary to complete the Eligibility Checklist; (2) complete the Earned Income Credit Worksheet (Computation Worksheet), as contained in the 1997 Form 1040 instructions, or otherwise record the computation and information necessary to complete the Computation Worksheet; (3) have no knowledge that any information used by the preparer in determining eligibility for, and amount of, the EIC is incorrect; and (4) retain for three years the Eligibility Checklist and Computation Worksheet (or alternative records), and a record of how and when the information used to determine eligibility for, and amount of, the EIC was obtained by the preparer. This information may be retained either as a paper record or in magnetic media format consistent with Rev. Proc. 81–46 (1981–2 C.B. 621). Notice 97–65 also requested comments on preparer due diligence requirements 1999–12 I.R.B. for tax years after 1997. Two comments were received. The commentators did not suggest alternative due diligence requirements. One commentator suggested, however, increased education for the public. The IRS and Treasury Department adhere to the principle that education is an integral part of good tax administration. Therefore, as part of its overall EIC strategy, the IRS has established various educational tools and outreach programs for taxpayers and preparers. These efforts are intended to provide the public with the tools necessary to receive the full amount of the EIC allowed by law. The second commentator suggested that preparers should be able to meet the due diligence requirements by using software reviewed and approved by the IRS. The IRS does not approve commercial software. The IRS is currently exploring, however, new opportunities for partnership with outside stakeholders to reduce burden, enhance customer service, and increase compliance. As part of this effort, the IRS will continue to review this comment and evaluate options. Explanation of Provisions The temporary and proposed regulations impose due diligence standards on persons who are income tax return preparers with respect to determining eligibility for, or the amount of, the EIC. Consistent with existing regulations under section 6695, these temporary regulations apply a modified definition of income tax return preparer. Section 7701(a)(36) provides that, in general, the term income tax return preparer means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return or claim for refund of tax imposed by subtitle A. The preparation of a substantial portion of a return or claim for refund is treated as if it were the preparation of such return or claim for refund. Persons are considered preparers if they give legal advice concerning a return or claim for refund or if they prepare another return which affects the return or claim for refund (§301.7701–15(a)(2) and (b) and §301.7701–15(b)(3), respectively). The regulations retain this definition of an income tax return preparer, except that preparers who merely give advice or prepare another return that af- 17 fects the EIC return or claim for refund are not preparers for purposes of the section 6695(g) penalty. Rather, the due diligence standards are imposed only on paid preparers who prepare the return claiming the EIC. The temporary regulations essentially adopt the four due diligence requirements in Notice 97-65. Thus, to avoid the penalty under section 6695(g), a preparer must: (1) complete the Eligibility Checklist (Form 8867, Paid Preparer’s Earned Income Credit Checklist, or such other form as may be prescribed by the IRS), or otherwise record in the preparer’s files the information necessary to complete the Eligibility Checklist; (2) complete the Computation Worksheet (Earned Income Credit Worksheet contained in the Form 1040 instructions), or otherwise record in the preparer’s files the computation and information necessary to complete the Computation Worksheet; (3) have no knowledge, and have no reason to know, that any information used by the preparer in determining eligibility for, and amount of, the EIC is incorrect; and (4) retain for three years the Eligibility Checklist and the Computation Worksheet (or alternative records), and a record of how and when the information used to determine eligibility for, and the amount of, the EIC was obtained by the preparer. The temporary regulations also provide that the income tax return preparer may avoid the section 6695(g) penalty with respect to a particular income tax return or claim for refund if the preparer can demonstrate to the satisfaction of the IRS that, considering all the facts and circumstances, the preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of the regulations, and that the particular failure was isolated and inadvertent. The temporary regulations will be effective for taxable years beginning after December 31, 1996. However, the Eligibility Checklist contained in Notice 97-65 has been expanded in Form 8867. Therefore, for taxable year 1997, the applicable Eligibility Checklist is the Eligibility Checklist contained in Notice 97-65. For taxable year 1998, a preparer may choose as the applicable Eligibility Checklist either the Eligibility Checklist published in Notice 97-65 modified however, by re- March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 18 placing, $9,770, $25,760, $29,290, and $2,250 each time these figures appear on the 1997 Eligibility Checklist with $10,030, $26,473, $30,095, and $2,300, respectively, or Form 8867. For taxable years beginning after December 31, 1998, the applicable Eligibility Checklist will be the Form 8867. Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Further, it is hereby certified, pursuant to sections 603(a) and 605(b) of the Regulatory Flexibility Act, that the collection 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 amount of time necessary to record and retain the required information will be nominal for those income tax return preparers that choose to use the Alternative Eligibility Record and Alternative Computation Record. 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, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact. Drafting Information The principal author of these regulations is Marc C. Porter, Office of Assistant Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development. * * * * * Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as follows: PART 1 — INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows: March 22, 1999 Authority: 26 U.S.C. 7805 * * * Section 1.6695–2T also issued under 26 U.S.C. 6695(g). * * * Par. 2. Section 1.6695–2T is added to read as follows: §1.6695–2T Preparer due diligence requirements for determining earned income credit eligibility (temporary). (a) Penalty for failure to meet due diligence requirements. A person who is an income tax return preparer (preparer) of an income tax return or claim for refund under subtitle A of the Internal Revenue Code (Code) with respect to determining the eligibility for, or the amount of, the earned income credit (EIC) under section 32 and who fails to satisfy the due diligence requirements of paragraph (b) of this section will be subject to a penalty of $100 for each such failure. However, no penalty will be imposed under section 6695(g) on a person who is an income tax return preparer solely by reason of — (1) Section 301.7701–15(a)(2) and (b) of this chapter, on account of having given advice on specific issues of law; or (2) Section 301.7701–15(b)(3) of this chapter, on account of having prepared the return solely because of having prepared another return that affects amounts reported on the return. (b) Due diligence requirements. A preparer must satisfy the following due diligence requirements: (1) Completion of eligibility checklist. (i) The preparer must either — (A) Complete Form 8867, Paid Preparer’s Earned Income Credit Checklist, or such other form as may be prescribed by the IRS (Eligibility Checklist); or (B) Otherwise record in the preparer’s paper or electronic files the information necessary to complete the Eligibility Checklist (Alternative Eligibility Record). The Alternative Eligibility Record may consist of one or more documents containing the required information. (ii) The preparer’s completion of the Eligibility Checklist or Alternative Eligibility Record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer. (2) Computation of credit. (i) The preparer must either — (A) Complete the Earned Income Credit Worksheet in the Form 1040 in- 18 structions or such other form as may be prescribed by the IRS (Computation Worksheet); or (B) Otherwise record in the preparer’s paper or electronic files the preparer’s EIC computation, including the method and information used to make the computation (Alternative Computation Record). The Alternative Computation Record may consist of one or more documents containing the required information. (ii) The preparer’s completion of the Computation Worksheet or Alternative Computation Record must be based on information provided by the taxpayer to the preparer or otherwise reasonably obtained by the preparer. (3) Knowledge. The preparer must not know, or have reason to know, that any information used by the preparer in determining the taxpayer’s eligibility for, or the amount of, the EIC is incorrect. The preparer may not ignore the implications of information furnished to, or known by, the preparer, and must make reasonable inquiries if the information furnished to, or known by, the preparer appears to be incorrect, inconsistent, or incomplete. (4) Retention of records. (i) The preparer must retain — (A) A copy of the completed Eligibility Checklist or Alternative Eligibility Record; (B) A copy of the Computation Worksheet or Alternative Computation Record; and (C) A record of how and when the information used to complete the Eligibility Checklist or Alternative Eligibility Record and the Computation Worksheet or Alternative Computation Record was obtained by the preparer, including the identity of any person furnishing the information. (ii) These items must be retained for three years after the June 30th following the date the return or claim for refund was presented to the taxpayer for signature, and may be retained on paper or electronically in the manner prescribed in applicable regulations, revenue rulings, revenue procedures, or other appropriate guidance. (c) Exception to penalty. The section 6695(g) penalty will not be applied with respect to a particular income tax return or claim for refund if the preparer can demonstrate to the satisfaction of the IRS that, considering all the facts and circum- 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 19 stances, the preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements of paragraph (b) of this section, and the failure to meet the due diligence requirements of paragraph (b) of this section with respect to the particular return or claim for refund was isolated and inadvertent. (d) Effective date. (1) In general. This section applies to income tax returns and claims for refund for taxable years beginning after December 31, 1996. This section expires on, December 21, 2001. For the applicable Eligibility Checklist see paragraph (d)(2) of this section. (2) Eligibility Checklist—(i) For the 1997 taxable year. For taxable year 1997, the applicable Eligibility Checklist is the Eligibility Checklist published in Notice 97-65 (1997–51 I.R.B.14) December 22, 1997. (See §601.601(d)(2)(ii)(b) of this chapter.) (ii) For the 1998 taxable year. For taxable year 1998 the applicable Checklist is either— (A) The Checklist published in Notice 97-65 (1997-51 I.R.B.14) December 22, 1999–12 I.R.B. 1997, modified however, by applying the figures $10,030, $26,473, $30,095, and $2,300 in place of $9,770, $25,760, $29,290, and $2,250, respectively, each time these figures appear on the 1997 Checklist; or (B) Form 8867, Paid Preparer ’s Earned Income Credit Checklist. (iii) For taxable years after 1998. For taxable years beginning after December 31, 1998, the applicable Eligibility Checklist is the Eligibility Checklist contained in Form 8867, Paid Preparer’s Earned Income Credit Checklist, or such other form as may be prescribed by the IRS. PART 602 — OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 3. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 4. In §602.101, paragraph (c) is amended by adding the following entry in numerical order to the table to read as follows: 19 §602.101 OMB Control numbers. * * * * * (c) * * * CFR part or section where identified and described Current OMB control No. * * * * * 1.6695–2T . . . . . . . . . . . . . . . 1545–1570 * * * * * David S. Mader, Acting Deputy Commissioner of Internal Revenue. Approved December 9, 1998. Donald C. Lubick, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on December 18, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 21, 1998, 63 F.R. 70339) March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 20 Part III. Administrative, Procedural, and Miscellaneous Weighted Average Interest Rate Update Notice 99–15 Notice 88–73 provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Internal Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987 and as further amended by the Uruguay Round Agreements Act, Pub. L. 103–465 (GATT). Month Year Weighted Average March 1999 6.15 Drafting Information The principal author of this notice is Todd Newman of the Employee Plans Di- March 22, 1999 90% to 105% Permissible Range 90% to 110% Permissible Range 5.54 to 6.46 5.54 to 6.77 vision. For further information regarding this notice, call (202) 622-6076 between 2:30 and 3:30 p.m. Eastern time (not a toll-free number). Mr. Newman’s number 20 The average yield on the 30-year Treasury Constant Maturities for February 1999 is 5.37 percent. The following rates were determined for the plan years beginning in the month shown below. is (202) 622-8458 (also not a toll-free number). 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 21 Part IV. Items of General Interest Notice of Proposed Rulemaking Notice of Public Hearing Preparer Due Diligence Requirements for Determining Earned Income Credit Eligibility REG–120168–97 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing. SUMMARY: In T.D. 8798, page 16, the IRS is issuing temporary regulations relating to the due diligence requirements in determining eligibility for the earned income credit for paid preparers of federal income tax returns or claims for refund. The text of those regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations. DATES: Written comments must be received by, March 22, 1999. Outlines of topics to be discussed at the public hearing scheduled for Thursday, May 20, 1999, at 10 a.m. must be received by Thursday, April 29, 1999. ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–120168–97), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–120168–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.gov/ prod/tax_regs/comments.html. The public hearing will be held in room 2615 of the Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC. 1999–12 I.R.B. FOR FURTHER INFORMATION CONTACT: Concerning submissions, LaNita Van Dyke, (202) 622-7190; concerning the regulations, Marc C. Porter, (202) 622-4940 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. Comments on the collection of information should be received by, February 19, 1998. Comments are specifically requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility; The accuracy of the estimated burden associated with the proposed collection of information (see below); How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information. The collection of information in this proposed regulation is in §1.6695–2T. This information is required by the IRS to determine preparer due diligence compliance. This information will be used to avoid the imposition of the penalty imposed by section 6695(g) of the Internal 21 Revenue Code. The collection of information is mandatory. The likely recordkeepers are individuals, business or other for profit institutions, and small businesses or organizations. The collection of information in §1.6695–2T is generally satisfied by completing: 1) the required information on the Checklist published in Notice 97–65 or the Form 8867, Paid Preparer ’s Earned Income Credit Checklist; and 2) the required Worksheet information on the Earned Income Credit Worksheet contained in the instructions to the Form 1040. The burden for the Checklist requirement is reflected in the burden estimate for Form 8867. The burden for the Worksheet requirement is reflected in the burden estimate for the Earned Income Credit Worksheet contained in the instructions to the Form 1040. Preparers may also choose to record the information necessary to complete the Checklist and Worksheet in their paper or electronic files (alternative method). The information collections in this regulation were originally included in Notice 97–65 and have been approved by the Office of Management and Budget under control number 1545–1570. The collection of information for preparers who choose to record the information required by the regulations in alternative paper or electronic form is as follows: Estimated total annual recordkeeping burden: 507,136 hours. Estimated average annual burden hours per recordkeeper: 5 hours 4 minutes (40 minutes per return or claim for refund, 7.6 returns per preparer). Estimated number of recordkeepers: 100,000. 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. Books and records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 22 Background and Explanation of Provisions Temporary regulations in T.D. 8798 amend the Income Tax Regulations (26 CFR part 1) relating to section 6695. The temporary regulations set forth due diligence requirements that paid preparers of federal income tax returns or claims for refund involving the Earned Income Credit (EIC) must meet to avoid imposition of the penalty under section 6695(g) for taxable years beginning after December 31, 1996. The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Further, it is hereby certified, pursuant to sections 603(a) and 605(b) of the Regulatory Flexibility Act, that the collection 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 amount of time necessary to record and retain the required information will be minimal for those income tax return preparers that choose to use the Alternative Eligibility Record and Alternative Computation Record. 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, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments (a signed original and eight (8) copies) that are submitted timely to the IRS. The IRS March 22, 1999 and Treasury specifically request comments on the clarity of the proposed rule and how it may be made easier to understand. All comments will be available for public inspection and copying. A public hearing has been scheduled for May 20, 1999, beginning at 10 a.m. in room 2615 of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the 10th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by (April 29, 1999). A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal author of these regulations is Marc C. Porter, Office of Assistant Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development. * * * * * Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1 — INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * 22 Section 1.6695–2 also issued under 26 U.S.C. 6695(g). * * * Par. 2. Section 1.6695–2 is added to read as follows: §1.6695–2 Preparer due diligence requirements for determining earned income tax credit eligibility. [The text of proposed §1.6695–2 is the same as the text of §1.6695–2T published in T.D. 8798.] David S. Mader, Acting Deputy Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on December 18, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 21, 1998, 63 F.R. 70357) Notice of Proposed Rulemaking Intercompany Obligations REG–105964–98 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains a proposed regulation that clarifies the treatment of the transfer or extinguishment of rights under an intercompany obligation. The existing regulation has caused uncertainty concerning the tax treatment of such transactions. The proposed regulation affects corporations that are members of consolidated groups, their subsidiaries, and their shareholders. DATES: Comments and requests for a public hearing must be received by March 22, 1999. ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–105964–98), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–105964–98), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 23 may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.gov/ prod/tax_regs/comments.html. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulation, Theresa A. Abell, (202) 622-7790; concerning submissions of comments, LaNita Van Dyke, (202) 622-7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to §1.1502–13(g) of the Income Tax Regulations. Section 1.1502– 13(g) prescribes rules relating to the treatment of the transfer or extinguishment of rights an intercompany obligation. An intercompany obligation is generally defined as an obligation between members of a consolidated group, but only for the period during which both parties are members of the group. The current regulation provides that if a member of a consolidated group realizes an amount (other than zero) of income, gain, deduction, or loss upon the transfer or extinguishment of all or part of its remaining rights or obligations under an intercompany obligation, the obligation is treated as satisfied (and the transferor’s basis in the property received is adjusted to reflect the satisfaction amount) and , if the obligation remains outstanding, it is treated as reissued as a new obligation. The current regulation is, however, ambiguous regarding the form of the recast transaction, i.e., the deemed transaction that encompasses the satisfaction,reissuance, and actual transaction. Under one interpretation of the regulation, there is a potential that the form of the recast jeopardizes the tax-free treatment of common corporates restructuring transactions. While it is not clear the regulation produces such consequences, the IRS and Treasury believe that any such consequences would be inappropriate and unnecessary to achieve the objectives of the regulation. Accordingly, the IRS and Treasury propose to amend the regulation as described below. 1999–12 I.R.B. Explanation of Provisions The existing regulation does not apply to transactions in which the amount of income, gain, deduction, or loss realized is zero. This rule was intended to avoid application of the regulation to transactions in which preservation of gain or loss location, an objective of §1.1502–13(g), would not be at issue. However, the determination of whether the amount of income, gain, deduction, or loss realized is zero might depend on the fair market value of property received in an exchange. The difficulty and manipulability of that valuation is a reason for the enactment of certain provisions of the original issue discount (OID) rules, particularly section 1274. To the extent that taxpayers were able to avoid the deemed satisfaction and reissuance rule by inaccurately maintaining that the amount of income, gain, deduction, or loss realized is zero, taxpayers could avoid those OID rules and could inappropriately shift gain or loss among members. The IRS and Treasury have concluded that the better and more administrable approach is not to condition the application of the regulation on a realization of some amount of income, gain, deduction, or loss other than zero. Accordingly, the regulation as proposed will apply to all transactions in which any amount is realized due to the transfer or extinguishment of rights in an intercompany obligation. The IRS and Treasury believe the exception from the operation of this provision for transactions that will not have significant effect on any person’s Federal income tax liability for any year is unclear in its application and scope. Further, the exception offers little, if any, relief from the requirements of the provision. Accordingly, the exception is eliminated from the regulation. The proposed regulation clarifies the form and timing of the recast applied to transactions subject to the regulation. In particular, it clarifies that the deemed satisfaction proceeds (rather than the obligation) are treated as transferred by the initial creditor in the actual transaction and then advanced by the transferee to the debtor in the deemed reissuance of the obligation. The proposed regulation includes an example to illustrate clearly the mechanics of the proposed regulation. It 23 also includes certain conforming adjustments. The proposed regulation retains the rule that the deemed satisfaction and reissuance amounts are determined under the principles of the OID provisions if the debt is transferred for property. The IRS and Treasury recognize that an alternate rule providing for a fair market value determination of the deemed satisfaction and reissuance amounts might (in theory) more accurately preserve location of economic gain or loss. In such an alternate regime, however, the inherent difficulty of valuing intercompany obligations would prove burdensome to both taxpayers and the IRS and may provide significant potential for abuse when member obligations are transferred. Certain provisions of the OID rules are intended to address the difficulty and manipulability o this valuation. Other developments in the tax law have recognized that issue price, as determined under the OID rules, is the surrogate for fair market value in the case of a debt obligation. For example, §1.100–1(g) provides that issue price is used in determining the amount realized from the receipt of a debt instrument. For these reasons, and consistent with the objective of promoting single entity treatment of the group, the IRS and Treasury continue to believe that the use of the OID provisions is appropriate and desirable in determining the deemed satisfaction amount and the amount for which the obligation is deemed reissued. Accordingly, the regulation as proposed continues to use the OID provisions to determine both the amount repaid in the deemed satisfaction and the issue price of the reissued obligation in cases involving the exchange of an intercompany obligation for cash or property. In addition, the proposed regulation clarifies that the term “conversion” includes only conversions pursuant to the terms of the instrument. Proposed Effective Date The regulation is proposed to be effective on the date that the final regulation is published in the Federal Register. For purposes of determining the tax treatment of transactions undertaking prior to such effective date, taxpayers may rely on the form and timing of the recast transaction, March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 24 as clarified by these proposed regulations. No inference is intended, however, as to the correct interpretation of the existing regulation. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant impact on a substantial number of small entities. This certification is based on the fact that these regulations principally affect corporations filing consolidated Federal income tax returns. Available data indicates that many consolidated return filers are larger companies (not small businesses). Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility ct (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for a Public hearing Before this proposed regulation is adopted as a final regulation, consideration will be given to any written comments (preferably a signed original and eight copies) that are timely submitted to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the hearing will be published in the Federal Register. Drafting Information The principal author of this regulation is Theresa A. Abell of the Office of Assistant Chief Counsel (Corporate), IRS. However, other personnel from the IRS and Treasury Department participated in its development. * * * * * Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: March 22, 1999 PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 *** Section 1.1502–13 also issued under 26 U.S.C. 1502. Par. 2. Section 1.1502–13 is amended by: 1. Revising paragraphs (g)(3)(i)(A), (g)(3)(i)(B)(3), (g)(3)(ii)(A), and (g)(3)(ii), and removing paragraph (g)(3)(i)(B)(4). 2. Revising paragraph (g)(4)(i)(B). 3. Amending paragraph (g)(5) by: a. Removing the language “Example 2” in each place it appears in paragraphs (d), (e) and (f) of Example 2 and adding “Example 3” in its place. b. Removing the language “Example 3” in each place it appears in paragraph (c) and (d) of Example 3 and adding “Example 4” in its place. c. Removing the language “Example 5” in each place it appears in paragraph (c) of Example 5 and adding “Example 6” in its place. d. Redesignating Examples 2, 3, 4 and 5 as Examples 3, 4, 5 and 6 and adding a new Example 2. The revisions and additions read as follows: §1.1502–13 Intercompany transactions. * * * * * (g) *** (3) Deemed satisfaction and reissuance of intercompany obligations—(i) Application—(a) In general. If a member realizes an amount from the assignment or extinguishment of all or part of its remaining rights or obligations under an intercompany obligation, the intercompany obligation is treated for all Federal income tax purposes as satisfied under paragraph (g)(3)(ii) of this section and, if it remains outstanding (either as an intercompany obligation or a nonintercompany obligations), reissued under paragraph (g)(3)(iii) of this section. Similar principles apply under this paragraph (g)(3) if a member realizes an amount, directly or indirectly, from a comparable transaction (for example, a marking-tomarket of an obligation or a bad debt deduction), or if an intercompany obligation becomes an obligation that is not an intercompany obligation. 24 (B) *** (3) The amount realized is from the conversion of an obligation (under the terms of the instrument) into stock of the obligor. (ii) Satisfaction—(A) General rule. If a creditor member sells an intercompany debt for cash, the debt is treated as satisfied by the debtor immediately before the sale for an amount equal to the amount of the cash. If the debt is transferred for property, the debt is treated as satisfied immediately before the transaction for an amount equal to the issue price (determined under section 1273 or section 1274) of a new debt issued on the date of the transaction, with identical terms, for such property. If this paragraph (g)(3) applies because the debtor or creditor becomes a nonmember, the debt is treated as satisfied for cash in an amount equal to its fair market value immediately before the debtor or creditor becomes a nonmember. If the debt is transferred for cash or property, the proceeds of the deemed satisfaction are treated as transferred by the creditor tot he transferee of the debt in exchange for the cash or property. Similar principles apply to other transactions and to transactions involving intercompany obligations other than debt. For example, if a corporation assumes the debtor’s liability in exchange for property of the debtor, the debt is treated as satisfied for an amount equal to the issue price (determined under section 1273 or section 1274) of a new debt issued on the date of the transaction, with identical terms, for such property. If, in a transaction to which this paragraph (g)(3) applies, the obligation is extinguished, including in a transaction in which the creditor and debtor become the same entity, the obligation is treated as satisfied for an amount equal to the issue price (determined under section 1273 or section 1274) of a new debt issued on the date of the transaction, with identical terms, to a third party, for property that is not publicly traded. * * * * * (iii) Reissuance. If an intercompany debt is transferred for cash or property, it is treated as a new debt (with a new holding period but otherwise identical terms) issued to the transferee in exchange for the proceeds of the deemed satisfaction as determined under paragraph (g)(3)(ii) of 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 25 this section. If this paragraph (g)(3) applies because the debtor or creditor becomes a nonmember, the debt is treated as a new debt (with a new holding period but otherwise identical terms) issued to the creditor for the deemed satisfaction proceeds. Similar principles apply to other transactions and to transactions involving intercompany obligations other than debt. * * * * * (4) *** (i) *** (B) Exception. This paragraph (g)(4) does not apply to an obligation if the obligation becomes an intercompany obligation by reason of an event described in §1.108–2(e) (exceptions to the application of section 108(e)(4)). * * * * * of this section, B is treated as reissuing the note to P for $100. P’s basis in the note is $100. * * * * * Robert E. Wenzel, Deputy Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on December 18, 1998, 8:45 a.m., and published in the issue of the Federal Register for December 21, 1998, 63 F.R. 70354) Notice of Proposed Rulemaking and Notice of Public Hearing Adequate Disclosure of Gifts Example 2. Nonrecognition transactions. (a) Facts. On January 1 of Year 1, B borrows $100 from S in return for B’s not providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of Year 5. B fully performs its obligations with the same tax consequences as described in paragraph (a) of Example 1. At the end of Year 3, S transfers the note to a newly formed subsidiary, Newco, in exchange for Newco stock. Section 351 applies to the exchange. The interest is adequate stated interest within the meaning of section 1274(c)(2) (determined on the date of the transfer). Neither B’s not nor Newco’s stock is publicly traded. (b) Deemed satisfaction and reissuance of note. Under paragraph (g)(3)(ii) of this section, B’s note is treated as satisfied for $100 (the issue price of the reissued note, determined under section 1273(b)(4)) immediately before S’s transfer of the note to Newco. Zero gain or loss is recognized by S and B on the deemed satisfaction of B’s note. S is then treated as transferring the deemed proceeds of the satisfaction of the note ($100) to Newco in exchange for the Newco stock. S’s basis in the Newco stock is $100. Under paragraph (g)(3)(iii) of this section, B is treated as reissuing the note to Newco for $100. Newco’s basis in B’s note is $100. (c) Intercompany obligation transferred in section 332 transaction. The facts are the same as in paragraph (a) of this Example 2, except that S transfers the note to P in a complete liquidation under section 332. Under paragraph (g)(3)(ii) of this section, B’s note is treated as satisfied for $100 (the issue price of the reissued note, determined under section 1273(b)(4)) immediately before S’s transfer of the note to P. Zero gain or loss is recognized by S and B on the deemed satisfaction of the note. S is then treated as transferring the deemed proceeds of the satisfaction of the note, with its other assets, to P in complete liquidation. Under paragraph (g)(3)(iii) 1999–12 I.R.B. FOR FURTHER INFORMATION CONTACT: Concerning the regulations, William L. Blodgett, (202) 622-3090; concerning submissions and the hearing, and/or to be placed on the building access list to attend the hearing, LaNita Van Dyke, (202) 622-7180 (not toll- free numbers). REG–106177–98 AGENCY: Internal Revenue Service (IRS), Treasury. (5) Examples. * * * * * the internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS internet site at http://www.irs.ustreas.gov/ prod/tax_regs/comments.html. The public hearing will be held in room 2615, at 10 a.m., Internal Revenue Building, 1111 Constitution Avenue, NW, Washington DC. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed regulations relating to changes made by the Taxpayer Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform Act of 1998 regarding the valuation of prior gifts in determining estate and gift tax liability, and the period of limitations for assessing and collecting gift tax. The proposed regulations affect individual donors and the estates of those donors. This document also provides notice of a public hearing on these proposed regulations. DATES: Written and electronic comments must be received by March 22, 1999. Outlines of topics to be discussed at the public hearing scheduled for Wednesday, April 28, 1999, must be received by Wednesday, April 7, 1999. ADDRESSES: Send submissions to CC:DOM:CORP:R [REG–106177–98] room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington DC 20044. Submissions may also be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R [REG–106177–98], Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via 25 SUPPLEMENTARY INFORMATION: Introduction This document proposes to amend the Estate and Gift Tax Regulations (26 CFR parts 20 and 25) under sections 2001 and 2504 relating to the value of prior gifts for purposes of computing the estate and gift tax. This document also proposes to amend the Procedure and Administration Regulations relating to the period for assessment and collection of gift tax under section 6501. Paperwork Reduction Act The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. Comments on the collection of information should be received by February 22, 1999. Comments are specifically requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility; March 22, 1999 IRB 1999-12 3/17/99 12:40 PM Page 26 The accuracy of the estimated burden associated with the proposed collection of information (see below); How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information. The collection of information in this proposed regulation is proposed §301.6501(c)–1(f) of the Procedure and Administration Regulations. This information is required by statute in order to commence the period of limitations on assessment. This information will be used to identify gift tax issues relating to the reported transfers. The collection of information is mandatory. The likely respondents are individuals. The reporting burden contained in §301.6501–1(f) is reflected in the burden of Form 709, U.S. Gift (and GenerationSkipping Transfer) Tax Return. 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. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax information are confidential, as required by 26 U.S.C. 6103. Background Under the unified estate and gift tax system, a single rate schedule is applied to an individual’s cumulative gifts and bequests. Gift tax is computed by determining a tax on the total of the gifts made by the donor in the current calendar year plus the gifts made in prior years (prior taxable gifts). The tax computed is then reduced by the tax that would have been payable on the prior taxable gifts. The result (after taking into account the applicable credit amount under section 2505) is the gift tax on the current gifts. Similarly, the March 22, 1999 estate tax is computed by determining a tax on the value of the decedent’s taxable estate plus the value of lifetime gifts (adjusted taxable gifts) made by the decedent. The tax computed is then reduced by the gift tax that would have been payable on the adjusted taxable gifts. The result (after allowing for various credits) is the estate tax on the taxable estate. The Statute of Limitations for Assessment of Gift Tax Under Section 6501(c)(9) of the Internal Revenue Code Prior to the Taxpayer Relief Act of 1997 (the 1997 Act) and the Internal Revenue Service Restructuring and Reform Act of 1998 (the 1998 Act), the period for assessment of gift tax for a calendar period generally expired three years from the date a gift tax return for that period was deemed to be filed. The statute of limitation protection extended to all gifts made in a calendar period for which a return was filed, including gifts not reported on the gift tax return for the period. An exception to this general rule applied for gifts subject to the special valuation rules of sections 2701 and 2702. For gifts subject to these rules, section 6501(c)(9) extends the period of assessment indefinitely unless the gifts were disclosed on the gift tax return in a manner adequate to apprise the IRS of the nature of the transfer. Under the 1997 and 1998 Acts, this adequate disclosure requirement was extended to all gifts, whether or not subject to section 2701 or 2702. Consequently, the period of assessment will not close for any gift made in a calendar year ending after August 5, 1997, or with respect to any increase in gift tax required under section 2701(d), that is not adequately disclosed on a gift tax return. The proposed regulations provide a list of information that, if applicable to a transaction, must be reported on a gift tax return, or a statement attached thereto, in order for the transaction to be considered adequately disclosed to cause the period for assessment to commence. The required information must completely and accurately describe the transaction and include: the nature of the transferred property; the parties involved; the value of the transferred property; and how the value was determined, including any discounts or adjustments used in valuing the transferred property. 26 Specific rules are provided in the case of transfers of entities that are not actively traded that own interests in other non-actively traded entities. Comments are requested on how these rules should be applied when the required information is not available to the donor. In addition, the return must disclose the facts affecting the gift tax treatment of the transaction in a manner that reasonably may be expected to apprise the IRS of the nature of any potential controversy regarding the gift tax treatment of the transfer. In lieu of this statement, the taxpayer may provide a statement of any legal issue presented by the facts. Finally, the taxpayer must also provide a statement of any position taken by the taxpayer that is contrary to any temporary or final Treasury regulation or any revenue ruling. These standards are based on those currently employed under §6662 in determining whether an item is adequately disclosed under that section, such that accuracy-related penalties will not be imposed. The proposed regulations contain examples that illustrate adequate disclosure under these standards. Under the proposed regulations, adequate disclosure of a transfer that is reported as a completed gift on the gift tax return will commence the running of the statute of limitations under section 6501(c)(9) even if the transfer is ultimately determined to be an incomplete gift. Thus, if the donor reports a transfer on the gift tax return as a completed gift for gift tax purposes, the period for assessing a gift tax with respect to the transfer will commence. If the IRS does not examine the transaction reported on the gift tax return prior to the expiration of the running of the statute of limitations, the transaction will be treated as a completed gift as reported on the gift tax return. If the IRS, upon examination, disagrees with the donor’s characterization of the transaction, and the issue remains unresolved through the administrative process, the donor will be sent a final notice of determination and the donor will be able to seek a declaratory judgment on the matter pursuant to section 7477. On the other hand, if a donor initially reports a transfer as an incomplete gift, even if adequately disclosed, the statute of limitations does not commence to run 1999–12 I.R.B. IRB 1999-12 3/17/99 12:40 PM Page 27 until the donor reports the transfer as a completed gift. The IRS would have three years from the date of filing of the subsequent gift tax return disclosing the completed gift to make any assessment with respect to the gift. As discussed below, the 1997 and 1998 Act amendments to sections 2001 and 2504 curtail the IRS’ ability to redetermine the value of a gift in computing the estate or gift tax, after the statute of limitations expires. However, the adequate disclosure requirement contained in section 6501(c)(9) is intended to afford the IRS the reasonable opportunity to identify in a timely manner and with a minimum expenditure of resources returns that present issues that merit further examination. Accordingly, the information required is intended to enable the IRS to identify issues, if any, without imposing an undue burden on taxpayers. The proposed regulations conform the regulations to the new statutory rules for gifts made in calendar years ending after August 5, 1997, if such gift tax return is filed after the regulations are published as final regulations. In the interim period, the statutory provisions apply. Valuation of Prior Gifts for Gift Tax Purposes Prior to the 1997 and 1998 Acts, section 2504(c) provided that if a gift tax had been paid or assessed with respect to the calendar period in which the gift occurred and the statute of limitations on assessment for the prior gift had expired, then the value of any gift made in such calendar period could not be adjusted for purposes of determining the total amount of prior taxable gifts that the individual had made. This prohibition on adjustments applied even if a particular gift was not disclosed on the gift tax return. This rule continues to apply for gifts made prior to August 6, 1997. Under section 2504(c) as amended by the 1997 and 1998 Acts, if a gift was adequately disclosed such that the time has expired for assessing gift tax for a preceding calendar period under section 6501, then the value of such gift made in the prior calendar period cannot be adjusted (regardless of whether or not a gift tax has been assessed or paid for a prior calendar period). Rather, the value of the gift is the value as finally determined for gift tax 1999–12 I.R.B. purposes, as defined in section 2001(f). A similar rule applies with respect to any increase in taxable gifts required under section 2701(d) (pertaining to the transfer of applicable retained interests under section 2701). Section 2504(c) applies only to adjustments involving issues of valuation. Thus, even after the 1997 and 1998 amendments to section 2504(c), adjustments to prior taxable gifts may be made if the adjustment is not related to the valuation of the gift; e.g., the erroneous inclusion or exclusion of property for gift tax purposes. See Rev. Rul. 76–451 (1976–2 C.B. 304). This result is consistent with the legislative history to the 1997 Act which emphasizes that the statutory change imposes a prohibition on revaluing certain gifts. The House Committee report states that a gift for which the limitations period has passed cannot be revalued for purposes of determining the applicable estate tax bracket and available unified credit. H.R. Rep. No. 148, 105th Cong., 1st Sess. 359 (1997). The proposed regulations conform the regulations to the new statutory rules for gift tax returns filed after the regulations are published as final regulations. In the interim period, the statutory provisions apply. Valuation of Prior Gifts for Estate Tax Purposes Prior to the enactment of the 1997 and 1998 Acts, there was no estate tax provision corresponding to section 2504(c). Therefore, even where the period of assessment expired for a calendar period, and gift tax was paid or assessed for that period, the value of any gifts made in that period could be adjusted for purposes of determining the estate tax liability. The statutory change and these proposed regulations preserve that treatment for gifts made prior to August 6, 1997. Section 2001(f) was added by the 1997 Act and amended by the 1998 Act. Under section 2001(f) as amended, if the time has expired for assessing gift tax for a preceding calendar period under section 6501, then the value of the gift, for purposes of computing the estate tax liability, is the value of the gift as finally determined for gift tax purposes. A similar rule applies for any increase in taxable gifts required under section 2701(d). 27 Under the statute, the value of a gift is finally determined if: the value is shown on a gift tax return and the IRS does not contest the value before the period for assessing gift tax expires; or, before the period for assessing gift tax expires, the value is specified by the IRS and the taxpayer does not contest the specified value; or, the value is determined by a court or pursuant to a settlement agreement between the taxpayer and the IRS. As discussed above, the provision only limits the IRS’ ability to make adjustments related to the value of a gift. Thus, [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Aa594a1514c06c8c1. Public record. Not legal advice.