# Bulletin No. 1999–11

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Internal Revenue

bulletin

Bulletin No. 1999–11
March 15, 1999

HIGHLIGHTS
OF THIS ISSUE

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

INCOME TAX
Rev. Rul. 99–12, page 6.
Fringe benefits aircraft valuation formula. For purposes
of section 1.61–21(g) of the Income Tax Regulations, relating to the rule for valuing noncommercial flights on employer-provided aircraft, the Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal charges in effect for
the first half of 1999 are set forth.

election for regulated investment companies (RICs) that are
shareholders of PFICs.

EMPLOYEE PLANS
REG–209103–89, page 10.
Proposed regulations under section 79 of the Code relate to
the uniform premium rates used to calculate the cost of
group-term life insurance provided to employees. A public
hearing is scheduled for May 6, 1999.

REG–104072–97, page 12.
Proposed regulations under section 7701 of the Code
recharacterize, for tax purposes, financing arrangements involving fast-pay stock. A public hearing is scheduled for April
8, 1999.

REG–106388–98, page 27.
Proposed regulations under section 25A of the Code relate
to the Hope Scholarship Credit and the Lifetime Learning
Credit.

REG–106905–98, page 39.
Proposed regulations under section 861 of the Code relate
to the allocation of loss recognized on the disposition of
stock and other personal property. A public hearing is
scheduled for May 26, 1999.

REG–114841–98, page 41.
Proposed regulations under section 663 of the Code provide
that substantively separate and independent shares of different beneficiaries are to be treated as separate estates for
purposes of computing distributable net income. A public
hearing is scheduled for April 22, 1999.

Notice 99–14, page 7.
This notice withdraws guidance proposed in April 1992
under the passive foreign investment company (PFIC) rules
of section 1291 of the Code relating to a mark-to-market

EXEMPT ORGANIZATIONS
Announcement 99–20, page 53.
A list is given of organizations now classified as private foundations.

ADMINISTRATIVE
Rev. Proc. 99–18, page 7.
Election to treat certain debt substitutions as realization events. This procedure provides for an election that
will allow taxpayers to treat a debt substitution, in certain circumstances, as a realization event even though it does not
result in a significant modification under section 1.1001–3
of the Income Tax Regulations.

REG–114664–97, page 21.
Proposed regulations under section 42 of the Code relate to
the low-income housing credit including the procedures for
compliance monitoring by state and local housing agencies
(Agencies), the requirements for making carryover allocations, and the rules for correction of administrative errors or
omissions by Agencies. A public hearing is scheduled for
May 27, 1999.

Finding Lists begin on page 58.
Announcement Relating to Court Decisions begins on page 5.
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 56.

Department of the Treasury
Internal Revenue Service

Continued on page 4

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

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

HIGHLIGHTS
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued

Announcement 99–21, page 55.

REG–119192–98, page 45.

This document provides notice of a public hearing on proposed regulations, REG–246256–96, 1998–34 I.R.B. 9,
under section 4958 of the Code relating to the excise tax on
excess benefit transactions. The hearing is scheduled for
March 16, 1999, at 1 p.m. (EDT), and will continue on March
17, 1999, at 1 p.m., if necessary.

Proposed regulations under sections 1201 and 1204 of the
Internal Revenue Restructing and Reform Act of 1998 relate
to the adoption by the IRS of a balanced system to measure
organizational performance within the IRS. A public hearing
is scheduled for May 13, 1999.

March 15, 1999

4

1999–11 I.R.B.

Announcement Relating to Court Decisions
It is the policy of the Internal Revenue
Service to announce at an early date
whether it will follow the holdings in certain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on unappealed issues decided adverse to the
government. Generally, an Action on Decision is issued where its guidance would
be helpful to Service personnel working
with the same or similar issues. Unlike a
Treasury Regulation or a Revenue Ruling,
an Action on Decision is not an affirmative statement of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclusions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommendation of the Action on Decision to similar
cases where the facts are different. Moreover, the recommendation in the Action
on Decision may be superseded by new
legislation, regulations, rulings, cases, or
Actions on Decisions.

Prior to 1991, the Service published acquiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be helpful. Accordingly, the Service now may acquiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court deciding the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as acquiescence, acquiescence in result only,
or nonacquiescence. Both “acquiescence” and “acquiescence in result only”
mean that the Service accepts the holding
of the court in a case and that the Service
will follow it in disposing of cases with
the same controlling facts. However, “acquiescence” indicates neither approval
nor disapproval of the reasons assigned
by the court for its conclusions; whereas,
“acquiescence in result only” indicates
disagreement or concern with some or all

of those reasons. Nonacquiescence signifies that, although no further review was
sought, the Service does not agree with
the holding of the court and, generally,
will not follow the decision in disposing
of cases involving other taxpayers. In reference to an opinion of a circuit court of
appeals, a nonacquiescence indicates that
the Service will not follow the holding on
a nationwide basis. However, the Service
will recognize the precedential impact of
the opinion on cases arising within the
venue of the deciding circuit.
The announcements published in the
weekly Internal Revenue Bulletins are
consolidated semiannually and annually.
The semiannual consolidation appears in
the first Bulletin for July and in the Cumulative Bulletin for the first half of the
year, and the annual consolidation appears in the first Bulletin for the following January and in the Cumulative Bulletin for the last half of the year.
The Commissioner ACQUIESCES in
the following decision:
Oshkosh Truck Corporation v. United
States,
123 F.3d 1477 (Fed. Cir. 1997)1

1 Acquiescence in result only relating to whether the 12-percent excise tax imposed under I.R.C. section 4052 on the first retail sale of specially designed trucks to

the United States Army is computed by adding to the vehicle sales price a “presumed markup percentage” as decribed in subsections (b)(3) and (4) of section 4052
and Treas. Reg. Section 145.4052–1(d)(7).

1999–11 I.R.B.

5

March 15, 1999

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 61.—Gross Income
Defined

Rev. Rul. 99–12

multiplying the SIFL cents-per-mile rates
applicable for the period during which the
flight was taken by the appropriate aircraft multiple provided in section 1.6121(g)(7) and then adding the applicable
terminal charge. The SIFL cents-per-mile
rates in the formula and the terminal
charge are calculated by the Department
of Transportation and are reviewed semiannually.
The following chart sets forth the terminal charges and SIFL mileage rates:

Fringe benefits aircraft valuation
formula. For purposes of section
1.61–21(g) of the Income Tax Regulations, relating to the rule of valuing noncommercial flights on employer-provided
aircraft, the Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal
charges in effect for the first half of 1999
are set forth.

For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61-21(g) of the
Income Tax Regulations provides a rule
for valuing noncommercial flights on employer-provided aircraft. Section 1.6121(g)(5) provides an aircraft valuation
formula to determine the value of such
flights. The value of a flight is determined under the base aircraft valuation
formula (also known as the Standard Industry Fare Level formula or SIFL) by

Period During Which
the Flight Was Taken

Terminal
Charge

SIFL Mileage
Rates

1/1/99 – 6/30/99

$32.69

Up to 500 miles = $.1788 per mile

26 CFR 1.61–21: Taxation of fringe benefits.

501-1500 miles = $.1364 per mile
Over 1500 miles = $.1311 per mile

DRAFTING INFORMATION
The principle author of this revenue
ruling is Kathleen Edmondson of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding
this revenue ruling, contact Ms. Edmondson on (202) 622-6080 (not a toll-free
call).

March 15, 1999

Section 1001.—Determination
of Amount of and Recognition of
Gain or Loss
26 CFR 1.1001–3: Modification of debt
instruments.
The revenue procedure provides for an election
that will allow taxpayers to treat a debt substitution,
in certain circumstances, as a realization event even
though it does not result in a significant modification under section 1.1001–3 of the Income Tax Regulations. See Rev. Proc. 99–18, page 7.

6

Section 1275.—Other
Definitions and Special Rules
26 CFR 1.1275–2: Special rules relating to debt
instruments.
The revenue procedure provides for an election
that will allow taxpayers to treat a debt substitution,
in certain circumstances, as a realization event even
though it does not result in a significant modification under section 1.1001–3 of the Income Tax Regulations. See Rev. Proc. 99–18, page 7.

1999–11 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Withdrawal of Guidance Under
Section 1291 Relating to Markto-Market Elections for RICs
Notice 99–14

Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
developing the withdrawal notice.
* * * * *

AGENCY: Internal Revenue Service
(IRS), Treasury.

Partial Withdrawal of Proposed
Amendments to the Regulations

ACTION: Partial withdrawal of proposed
regulations.

Accordingly, under the authority of 26
U.S.C. 7805, §1.1291–8 of the proposed
amendments to 26 CFR part 1 published
at 57 F.R. 11024 (April 1, 1992), is withdrawn.

SUMMARY: This document withdraws
§1.1291–8 of the notice of proposed rulemaking (INTL–941–86, 1992–1 C.B.
1124) that was published in the Federal
Register on April 1, 1992, providing
guidance under the passive foreign investment company (PFIC) rules relating to the
mark to market election for regulated investment companies (RICs) that are
shareholders of PFICs.
DATES: Section 1.1291–8 of the proposed regulations published at 57 FR
11024 (April 1, 1992) is withdrawn February 2, 1999.
FOR FURTHER INFORMATION CONTACT: Robert Laudeman of the Office of
Associate Chief Counsel (International),
Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC 20224.
Telephone (202) 622-3840, not a toll-free
number.
SUPPLEMENTARY INFORMATION:
Background
On April 1, 1992 (57 F.R. 110224), the
IRS issued proposed regulations providing, in part, an election under which certain RICs could mark to market their stock
in certain PFICs. In the Taxpayer Relief
Act of 1997 Congress enacted section
1296(e)(2) of the Internal Revenue Code,
which allows certain RICs to elect to mark
to market their PFIC stock. Accordingly,
the IRS is withdrawing proposed regulations §1.1291-8. Future guidance will be
issued providing rules for all PFIC shareholders, including RICs, on how to mark
to market certain PFIC stock.
Drafting Information
The principal author of this withdrawal
notice is Robert Laudeman, Office of the

1999–11 I.R.B.

Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on February 1, 1999, 8:45 a.m., and published in the issue
of the Federal Register for February 2, 1999, 64 F.R.
5015)

26 CFR 601.601: Rules and regulations.
(Also Part I, sections 1001; 1.1001–3, 1.1275–2.)

Rev. Proc. 99–18
SECTION 1. PURPOSE
This revenue procedure provides for an
election that will facilitate the substitution
of some or all of the debt instruments from
two or more outstanding issues of debt
with debt instruments from a new issue.
Under the election, taxpayers can treat a
substitution of debt instruments, in certain
circumstances, as a realization event for
federal income tax purposes even though
it does not result in a significant modification under § 1.1001–3 of the Income Tax
Regulations (and, therefore, is not an exchange for purposes of § 1.1001–1(a)).
Under section 4 of this revenue procedure,
taxpayers do not recognize any realized
gain or loss on the date of the substitution.
Instead, the gain or loss generally is taken
into account as income or deductions over
the term of the new debt instruments.
SECTION 2. BACKGROUND
.01 Under § 1.1001–1(a), gain or loss is
realized from the exchange of property
for other property differing materially either in kind or in extent.
.02 Section 1.1001–3 provides rules to
determine whether a modification of the

7

terms of a debt instrument results in an
exchange of the original debt instrument
for a modified instrument that differs materially either in kind or in extent. Under
§ 1.1001–3, a modification of a debt instrument results in an exchange for purposes of § 1.1001–1(a) if the modification is significant. A modification that is
not significant does not result in an exchange for purposes of § 1.1001–1(a).
Section 1.1001–3 applies to any modification of a debt instrument, regardless of
the form of the modification (including
an exchange of a new instrument for an
existing instrument).
.03 Under § 1.1001–3(c), a modification means any alteration, including any
deletion or addition, in whole or in part,
of a legal right or obligation of the issuer
or a holder of a debt instrument, whether
the alteration is evidenced by an express
agreement (oral or written), conduct of
the parties, or otherwise.
.04 In general, a modification of a debt
instrument is a significant modification
under § 1.1001–3 only if, based on all the
facts and circumstances, the legal rights
or obligations that are altered and the degree to which they are altered are economically significant. Section 1.1001–
3(e) provides rules to determine whether
certain modifications, such as a change in
yield or the timing of payments, constitute significant modifications.
.05 If the terms of a debt instrument are
modified to defer one or more payments
and the modification does not result in an
exchange under § 1.1001–3, § 1.1275–
2(j) provides rules to account for the modified debt instrument. Under § 1.1275–
2(j), solely for purposes of §§ 1272 and
1273 of the Internal Revenue Code, the
debt instrument is treated as retired and
then reissued on the date of the modification for an amount equal to the instrument’s adjusted issue price on that date.
As a result, the debt instrument is retested
for original issue discount based on the
instrument’s adjusted issue price and the
remaining payments, as modified, to be
made on the instrument. If the debt instrument has original issue discount as a
result of the modification, both the issuer
and the holder account for the original

March 15, 1999

issue discount over the remaining term of
the instrument. See §§ 163(e) and 1272.
.06 An issuer may want to refinance
and consolidate debt instruments (“old
debt”) from two or more outstanding issues of debt into debt instruments (“new
debt”) from a single new issue. In general, if the terms of the new debt are not
materially different from the terms of the
old debt, substituting the new debt for the
old debt does not result in a significant
modification of the old debt under
§ 1.1001–3. Therefore, the substitution of
the new debt for the old debt in the consolidation is not a realization event for
federal income tax purposes. However,
under § 1.1275–2(j), some or all of the
new debt may have original issue discount in varying amounts, depending
upon the terms of the old debt for which
the new debt was substituted. As a result,
the new debt may not be fungible.
SECTION 3. SCOPE
This revenue procedure applies to the
substitution of new debt for old debt if all
of the following conditions are satisfied:
.01 Debt instruments from a single new
issue are being substituted for debt instruments from two or more old issues of
debt. (It is not necessary, however, for
any single holder of the old debt to have
held debt instruments from more than one
of the old issues.)
.02 The substitution does not result in a
significant modification of the old debt
under § 1.1001–3 and, therefore, is not a
realization event under § 1.1001–1.
.03 The new debt and the old debt are
publicly traded (within the meaning of
§ 1.1273–2(f)).
.04 The old debt was issued at par or
with a de minimis amount of original
issue discount or premium. (For purposes
of this condition, the de minimis amount
for premium is determined using the principles of § 1.1273–1(d).)
.05 The new debt is issued at par or
with a de minimis amount of original
issue discount or premium. (For purposes
of this condition, the issue price of the
new debt is determined under § 1.1273–2
rather than under § 1.1275–2(j), and the
de minimis amount for premium is determined using the principles of § 1.1273–
1(d).)

March 15, 1999

.06 Neither the new debt nor the old
debt is—
(1) a contingent payment debt instrument (within the meaning of § 1.1275–4),
(2) a tax-exempt obligation (as defined in § 1275(a)(3)), or
(3) a convertible debt instrument
(within the meaning of § 1.1272–1(e)).
.07 All payments on the old debt and
the new debt are denominated in, or determined solely by reference to, U.S. dollars,
and the functional currency of the business unit issuing the new debt is the U.S.
dollar.
.08 The issuer and one or more holders
of the old debt make the election provided
in section 4.01 of this revenue procedure.
SECTION 4. APPLICATION
.01 Election.
(1) Manner of making the election.
The issuer and the holders make the election under this revenue procedure by
agreeing in writing to treat the substitution as a realization event for federal income tax purposes and to comply with the
provisions of this revenue procedure. The
written agreement must be entered into no
later than the last day of the month in
which the substitution occurs.
For example, the written agreement to
make the election may be evidenced by a
statement in the offering documents for
the substitution that—
(a) the issuer, by distributing the
documents, elects under this revenue procedure to treat the substitution as a realization event for federal income tax purposes,
(b) any holder of old debt that
tenders its old debt for new debt as part of
the substitution thereby makes the election under this revenue procedure, and
(c) the issuer and the holders who
have tendered their old debt for the new
debt (“electing holders”) will comply
with the provisions of this revenue procedure.
(2) Statement attached to return. If
an election is made under section 4.01(1)
of this revenue procedure, the issuer must
attach a signed statement to its timely
filed (including extensions) federal income tax return for the taxable year in
which the substitution occurs. On the
statement, the issuer must—

8

(a) identify the old debt for which
new debt was substituted,
(b) identify the new debt that was
substituted for the old debt,
(c) indicate the issue price of the
new debt, and
(d) indicate that the election was
made under this revenue procedure.
.02 Treatment of substitution. If an
election is made under this revenue procedure, the issuer and the electing holders
must report the substitution for federal income tax purposes as a repurchase of the
old debt in exchange for the new debt in
the taxable year in which the substitution
occurs. However, the issuer must account
for this deemed exchange under the rules
described in section 4.03 of this revenue
procedure and each electing holder must
account for this deemed exchange under
the rules described in section 4.04 of this
revenue procedure.
.03 Issuer’s treatment. The issuer must
take into account over the term of the new
debt any difference between the adjusted
issue prices of the old debt and the issue
price of the new debt (as determined
under § 1.1273–2). If the aggregate issue
price of the new debt that is transferred to
electing holders as a substitute for the old
debt is greater than the aggregate adjusted
issue prices of the old debt for which it is
substituted, the issuer treats the difference
as a reduction in the aggregate issue price
of the new debt. As a result, the difference is taken into account by the issuer
over the term of the new debt as increased
original issue discount or as reduced bond
issuance premium (within the meaning of
§ 1.163–13). If the aggregate issue price
of the new debt that is transferred to electing holders as a substitute for the old debt
is less than the aggregate adjusted issue
prices of the old debt for which it is substituted, the issuer treats the difference as
an increase in the aggregate issue price of
the new debt. As a result, the difference is
taken into account by the issuer over the
term of the new debt as reduced original
issue discount or increased bond issuance
premium.
.04 Electing holder’s treatment.
(1) In general. Notwithstanding any
provision of subtitle A of the Internal
Revenue Code (including §§ 356(a) and
1276(a)), an electing holder does not rec-

1999–11 I.R.B.

ognize any gain or loss as a result of the
deemed exchange. Instead, the holder’s
basis (immediately after the substitution)
in the new debt is the same as the holder’s
adjusted basis (determined as of the date
of the substitution) in the debt instruments
for which the new debt was substituted.
In addition, the holder’s holding period
for the new debt includes the holder’s
holding period for the old debt.
(2) Market discount.
(a) In general. If the stated redemption price at maturity of the new
debt (as determined under § 1.1273–1(b))
is greater than the holder’s basis (immediately after the substitution) in the new
debt, the holder treats the difference as
market discount on the new debt and the
new debt as a market discount bond (unless the amount of the discount is a de
minimis amount within the meaning of
§ 1278(a)(2)(C)). See §§ 1276 and 1278
for the treatment of market discount.
(The issue date of the old debt rather than
the issue date of the new debt is used to
determine whether the new debt is a
short-term obligation for purposes of
§ 1278(a)(1)(B)(i).) See section
4.04(2)(b) below for the treatment of any
accrued market discount on the old debt.
(b) Accrued market discount. The
rules in this section 4.04(2)(b) apply if, as
of the date of the substitution, there is any
accrued market discount on the old debt
that has not been taken into account by
the holder as ordinary income. If, under
section 4.04(2)(a) above, there is no market discount on the new debt or the
amount of any market discount on the
new debt is a de minimis amount, the
amount of accrued market discount on the
new debt is zero, and the accrued market
discount on the old debt is ignored. If,
under section 4.04(2)(a) above, the
amount of market discount on the new
debt is more than a de minimis amount,
the lesser of this market discount and the
accrued market discount on the old debt is
treated by the holder, as of the date of the

1999–11 I.R.B.

substitution, as accrued market discount
on the new debt. (Solely for purposes of
determining the accruals of any additional
market discount on the new debt, the
holder’s basis is increased by the amount
of the accrued market discount on the old
debt that is treated as accrued market discount on the new debt.)
(3) Bond premium. If the holder’s
basis in the new debt (immediately after
the substitution) is greater than the stated
redemption price at maturity of the new
debt (as determined under § 1.1273–1(b)),
the holder treats the difference as bond
premium on the new debt. See §§ 1.171–
1 through 1.171–5 for the treatment of
bond premium.
SECTION 5. EFFECTIVE PERIOD
This revenue procedure applies to substitutions that occur between March 1,
1999, and June 30, 2000.
SECTION 6. REQUEST FOR
COMMENTS
The Internal Revenue Service requests
comments on this revenue procedure, including comments on whether this revenue procedure should be made permanent. Persons that wish to comment on
this revenue procedure may submit comments by May 31, 1999, to: CC:DOM:
CORP:R (RP–102721–99), room 5226,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (RP–102721–99),
Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington DC. Alternatively, comments may be submitted via the Internet
by selecting the “Tax Regs” option of the
IRS Home Page or by submitting them directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html. Comments will be available for public inspection.

9

SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the Office of Management and Budget (OMB)
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545-1647.
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
OMB control number.
The collections of information in this
revenue procedure are in section 4.01.
This information is required to determine
whether a taxpayer has made the election
under this revenue procedure. The collections of information are required to obtain
a benefit. The likely respondents are
business or other for-profit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 75 hours.
The estimated annual burden per respondent/recordkeeper varies from 1/2
hour to 1 hour, depending on individual
circumstances, with an estimated average
of 3/4 hour. The estimated number of respondents is 100.
The estimated annual frequency of responses is on occasion.
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 return information are confidential, as
required by 26 U.S.C. 6103.
CONTACT PERSON
For further information regarding this
revenue procedure, contact William E.
Blanchard of the Office of Assistant Chief
Counsel (Financial Institutions and Products) on (202) 622-3950 (not a toll free
call).

March 15, 1999

Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Group Term Insurance;
Uniform Premiums
REG–209103–89
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains
proposed regulations that revise the uniform premium table used to calculate the
cost of group-term life insurance coverage provided to an employee by an employer. These proposed regulations provide guidance to employers who must use
the uniform premium table to calculate
the cost of group-term insurance includible in the gross income of their employees. This document also provides notice
of a public hearing on these proposed regulations.
DATES: Comments must be received by
April 13, 1999. Requests to speak and
outlines of topics to be discussed at the
public hearing scheduled for May 6,
1999, must be received by April 15,
1999. The IRS requests comments on the
clarity of the proposed rule and how it
may be made easier to read.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209103–89),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to CC:DOM:CORP:R
(REG–209103–89), 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, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC.

March 15, 1999

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Betty
J. Clary, (202) 622-6070; concerning submissions and the hearing, Michael
Slaughter, (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regulations under section 79 of the Internal Revenue Code. These proposed regulations
revise the uniform premium rates used to
calculate the cost of group-term life insurance provided to employees. Section 79
generally permits an employee to exclude
from gross income the cost of $50,000 of
group-term life insurance coverage. The
remaining cost of the group-term life insurance is included in the employee’s
gross income to the extent it exceeds the
amount, if any, paid by the employee for
the coverage. The cost of the group-term
insurance is determined on the basis of
five-year age brackets prescribed by regulations.
The uniform premiums are set forth in
the regulations in Table I entitled “Uniform Premiums for $1,000 of Group-term
Life Insurance Protection.” Section 1.79–
3(d)(2). A table was initially published on
July 6, 1966 (31 F.R. 9199), and the table
was revised on December 6, 1983 (48
F.R. 54595). The December 6, 1983 revision was made to reflect changes in mortality since 1966, using 1975-1979 mortality experience reported by the Society
of Actuaries. The December 6, 1983 revision extrapolated the reported mortality
experience to 1982, and reflected a revised gender mix and load factor. For
years after 1988, new factors were added
to the table for ages above 64, pursuant to
section 5013 of the Technical and Miscellaneous Revenue Act of 1988. See 57
F.R. 33635 (July 30, 1992).
The IRS and Treasury have concluded
that the section 79 table should be revised
because there has been a significant improvement in mortality since the 19751979 period (even after taking into account the projection to 1982). This
conclusion is based on information on the

10

group-term life mortality experience of 13
issuers covering the 1985-1989 period, as
compiled by the Society of Actuaries, as
well as other data on mortality trends.
The IRS and Treasury contemplate continuing to monitor future changes in mortality experience and would expect to
update the section 79 table when a significant change in the cost of group-term life
insurance is evidenced.
Summary of Regulations
These proposed regulations revise the
uniform premium table used to calculate
the cost of group-term life insurance coverage provided to an employee by an employer. The proposed new table has been
developed based on mortality experience
for individuals covered by group-term life
insurance during the 1985-1989 period, as
reflected in a Society of Actuaries report.
The mortality rates were adjusted for improvements in mortality from 1988 (the
weighted midpoint for the data used in
the1985-89 study) through 2000, based
on the same rates of mortality improvement that were adopted by the Society of
Actuaries Group Annuity Valuation Table
Task Force for the period 1988-1994.
Separate mortality rates were derived for
males and females, and the section 79
table reflects a 50/50 blend of the male
and female mortality rates. The resulting
mortality projections have been adjusted
to reflect a 10 percent load factor. The
uniform premium rates under the proposed revision would be lower in all age
groups than the rates under the current
section 79 regulations.
Comments are requested regarding the
proposed premium rates.
Proposed Effective Date
These regulations are proposed to be
effective July 1, 1999. A special effective
date rule applies to any policy of life insurance issued under a plan in existence
before the proposed general July 1, 1999
effective date if the policy would not be
treated as carried directly or indirectly by
an employer under section 1.79–0 of the
Income Tax Regulations using the current
section 79 table. In this case, if the special rule applies, the policy would continue to be treated as not carried directly

1999–11 I.R.B.

or indirectly by an employer until the first
plan year that begins after July 1, 1999.
Because income imputed under section
79 is generally subject to FICA tax which
is withheld from the employee’s pay, and
because the withholding often is applied
periodically from payrolls during the
year, many employers will need to modify
their payroll-based withholding systems
and related information collection procedures before the effective date. The proposed July 1, 1999 effective date is intended to provide the benefits of having
the lower income inclusions take effect as
early as possible while avoiding the additional costs that would arise if employers
did not have adequate time to implement
the changes before the effective date
(which would necessitate special adjustments to correct overwithholding that
would have occurred after the effective
date and before implementation of the
new table).
Comments are requested regarding the
proposed effective date.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in EO
12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations and, because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comment and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration will be given to electronic and written comments (a signed original and eight
(8) copies) that are timely submitted to
the IRS. The IRS and Treasury specifically request comments on the clarity of
the proposed regulations and how it may
be made easier to understand. All comments will be available for public inspection and copying.

1999–11 I.R.B.

A public hearing has been scheduled for
Thursday, May 6, 1999, at 10:00 a.m. in
Room 2615, Internal Revenue Building,
1111 Constitution Avenue NW, Washington, DC. Due to building security procedures, visitors must enter 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(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 devoted to each topic (a signed original and
eight (8) copies) by April 15, 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

3. New paragraph (e) is added.
The revision and addition read as follows:
§1.79–3 Determination of amount equal
to cost of group-term life insurance.
* * * * *
(d) * * *
(2) For the cost of group-term life insurance provided after June 30, 1999, the
following table sets forth the cost of
$1,000 of group-term life insurance provided for one month, computed on the
basis of 5-year age brackets. See 26 CFR
1.79–3(d)(2) in effect prior to [DATE
FINAL REGULATIONS ARE EFFECTIVE] and contained in the 26 CFR,
part1, edition revised as of April 1, 1998,
for a table setting forth the cost of groupterm life insurance provided before July
1, 1999. For purposes of Table I, the age
of the employee is the employee’s attained age on the last day of the employee’s taxable year.
TABLE I. – UNIFORM PREMIUMS
FOR $1,000 OF GROUP-TERM LIFE
INSURANCE PROTECTION
5-year age bracket

Cost per $1,000
of protection for
one month

Proposed Amendments to the Regulations

Under 25 . . . . . . . . . . . . . . . . . . . . $0.05
25 to 29 . . . . . . . . . . . . . . . . . . . .
.06
30 to 34 . . . . . . . . . . . . . . . . . . . .
.08
35 to 39 . . . . . . . . . . . . . . . . . . . .
.09
40 to 44 . . . . . . . . . . . . . . . . . . . .
.10
45 to 49 . . . . . . . . . . . . . . . . . . . .
.15
50 to 54 . . . . . . . . . . . . . . . . . . . .
.23
55 to 59 . . . . . . . . . . . . . . . . . . . .
.43
60 to 64 . . . . . . . . . . . . . . . . . . . .
.66
65 to 69 . . . . . . . . . . . . . . . . . . . . 1.27
70 and above . . . . . . . . . . . . . . . . 2.06

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

* * * * *

The principal author of these regulations is Betty J. Clary, Office of the Associate Chief Counsel (Employee Benefits
and Exempt Organizations). However,
other personnel from the IRS and the
Treasury Department participated in their
development.
* * * * *

PART 1–INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.79–3 is amended as
follows:
1. Paragraph (d)(2) is revised.
2. Paragraph (e) and (f) are redesignated as paragraph (f) and (g) respectively.

11

(e) Effective date—(1) General effective date for table. Except as provided in
paragraph (e)(2) of this section, the table
in paragraph (d)(2) of this section is effective July 1, 1999.
(2) Effective date for table for purposes of section 1.79–0. A policy of life
insurance issued under a plan in existence
on June 30, 1999, which would not be
treated as carried directly or indirectly by
an employer under §1.79–0, taking into

March 15, 1999

account the Table I in effect on that date,
shall continue to be treated as a policy
that is not carried directly or indirectly by
the employer until the first plan year beginning after the general effective date in
paragraph (e)(1) of this section.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on January 12, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 13, 1999, 64 F.R.
2164)

Notice of Proposed Rulemaking
and Notice of Public Hearing
Recharacterizing Financing
Arrangements Involving
Fast-Pay Stock
REG–104072–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains
proposed regulations that recharacterize,
for tax purposes, financing arrangements
involving fast-pay stock. The regulations
are necessary to prevent taxpayers from
using fast-pay stock to achieve inappropriate tax avoidance. The regulations affect corporations that issue fast-pay stock,
holders of fast-pay stock, and other shareholders that may claim tax benefits purported to result from arrangements involving fast-pay stock. This document
also provides notice of a public hearing
on the proposed regulations.
DATES: Written comments must be received by April 6, 1999. Outlines of topics to be discussed at the public hearing
scheduled for April 8, 1999, at 10 a.m.
must be received by March 18, 1999.
ADDRESSES: Send submissions: to
CC:DOM:CORP:R (REG–104072–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be

March 15, 1999

hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–104072–97),
Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments via the Internet by
selecting the “Tax Regs” option of the
IRS Home Page or by submitting them 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, 1111 Constitution
Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Jonathan Zelnik at (202) 622-3940;
concerning submissions of comments, the
hearing, and/or to be placed on the building access list to attend the hearing,
LaNita VanDyke at (202) 622-7190 (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 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 March 8, 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
collection will have a 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

12

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 services to provide information.
The collection of information is in
§1.7701(l)–3(f) and §1.7701(l)–3(g). The
collection of information is mandatory.
The likely respondents are individuals,
businesses, and other organizations.
Estimated total annual burden: 50 hours
Estimated average annual burden per respondent: 1 hour
Estimated number of respondents: 50
Estimated annual frequency of responses:
Annually
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 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
On February 27, 1997, the IRS issued
Notice 97–21, 1997–1 C.B. 407, which
relates to financing arrangements involving fast-pay stock. Among other things,
the notice informs the public that the IRS
and Treasury Department expect to issue
regulations recharacterizing these
arrangements to prevent tax avoidance.
Notice 97–21 requested comments, but
none have been received.
Explanation of Provisions
A. TAX-AVOIDANCE
ARRANGEMENTS USING
FAST-PAY STOCK
Notice 97–21 addresses two-party financing arrangements that are structured
as multi-party arrangements to let one or
more of the parties avoid tax. Instead of
one party directly providing financing to
the other, they both acquire stock (with
different characteristics) in a conduit en-

1999–11 I.R.B.

tity. The arrangement is structured so that
the party providing the financing has a decreasing claim on the conduit entity (and
its assets) while the party receiving the financing has an increasing claim on the
conduit entity (and its assets). Economically, both parties benefit from the conduit entity’s income. For tax purposes,
however, the entity’s income is allocated
almost entirely to the party providing the
financing, allowing the other party to
claim unwarranted tax benefits.
Notice 97–21 describes in detail a typical fast-pay stock financing arrangement.
The parties to the arrangement include:
(1) a person seeking financing (the sponsor), (2) investors who are willing to provide financing and typically are not subject to federal income tax (the investors),
and (3) a corporation that is generally
subject to tax only at the shareholder level
(a conduit entity). The conduit entity issues a class of self-amortizing stock (the
fast-pay stock) to the investors and a class
of other stock (the benefited stock) to the
sponsor. The fast-pay stock is structured
so that during an initial period, the dividends made with respect to the stock are
substantial and relatively certain while the
dividends made with respect to the benefited stock are insignificant. After the initial period, the dividend rate of the fastpay stock, the stock’s effective
redemption value, or both, decline.
Economically, the fast-pay stock is
self-amortizing because the distributions
made with respect to the fast-pay stock
are in part a return on the investors’ investment and in part a return of their investment. For tax purposes, however, the parties characterize the fast-pay stock
distributions entirely as dividends (that is,
entirely as a return on the investment).
Consequently, the investors’ reported taxable income—overstated dividend income
followed by an overstated capital loss on
disposition of the fast-pay stock— fails to
clearly reflect their economic income.
(Investors that are tax-exempt suffer no
disadvantage from this arrangement.)
Characterizing the distributions made
with respect to the fast-pay stock solely as
dividends has the corresponding effect of
understating the taxable income on the
benefited stock (the stock held by the
sponsor) during the initial period. Instead
of receiving dividends attributable to its
share of the conduit entity’s income, the

1999–11 I.R.B.

sponsor’s economic income takes the form
of an increasing ownership interest in the
conduit entity. Because the fast-pay stock
is economically self-amortizing, each distribution reduces the investors’ claim on
the conduit entity (and its assets) and increases the sponsor’s claim. By treating a
fast-pay arrangement according to its
form, the sponsor reports taxable income
that fails to clearly reflect its economic income. An individual sponsor, for example, reports little or no dividend income.
Instead, the individual reports gain on disposing of its benefited stock; thus, deferring tax on its economic income and converting that income from ordinary to
capital. A corporate sponsor not only reports little or no dividend income, but can
avoid reporting gain on the disposition of
its benefited stock, thereby entirely eliminating tax on its economic income. (If a
corporate sponsor has a sufficient interest
in the conduit entity, the sponsor may succeed to the conduit entity’s assets tax-free
by liquidating or reorganizing the conduit
entity; thus, avoiding a taxable disposition
of the benefited stock).
In substance, the investors (the fast-pay
shareholders) are financing the sponsor’s
investment in the conduit entity. Although nominally shareholders in the conduit entity, the investors have a limited,
diminishing claim to the entity (and its assets). The sponsor’s claim, by contrast, is
residual and long-term. Thus, a fast-pay
arrangement is effectively a leveraged
arrangement in which the sponsor uses
untaxed income from the conduit entity to
repay the investors.
B. THE PROPOSED REGULATIONS
1. In General
To prevent the avoidance of tax, the
Secretary may issue regulations under
section 7701(l) recharacterizing any multiple-party financing transaction as a
transaction directly among any two or
more of the parties. The proposed regulations exercise this authority by recharacterizing certain fast-pay arrangements. A
fast-pay arrangement is any financing
arrangement in which a corporation has
outstanding two or more classes of stock,
one of which is fast-pay stock. The regulations identify fast-pay arrangements and
recharacterize certain of them as arrangements directly between the holders of the

13

fast-pay stock and the other shareholders
(the benefited shareholders) in the corporation. The regulations also impose reporting requirements on certain corporations with outstanding fast-pay stock and
on certain shareholders that participate in
fast-pay arrangements. These reporting
requirements apply to all fast-pay
arrangements, whether or not they are
subject to recharacterization.
Notice 97–21 describes specific models
for recharacterizing fast-pay arrangements. For purposes of determining the
income of the shareholders of a corporation with outstanding fast-pay stock, these
models ignore the separate existence of
the corporation and treat the fast-pay
shareholders and benefited shareholders
as owning the corporation’s underlying
assets. Although this approach prevents
tax avoidance, the IRS and Treasury Department have concluded that it may not
best reflect the financing relationship between the fast-pay shareholders and the
benefited shareholders. In addition, the
approach of the notice may be difficult for
taxpayers to apply if the corporation has a
complex capital structure, multiple assets
(including active businesses), or both.
To address these concerns, the proposed
regulations treat the fast-pay shareholders
as acquiring instruments issued by the benefited shareholders instead of acquiring interests in the assets of the corporation.
This approach better reflects the financing
relationship between the fast-pay shareholders and the benefited shareholders. It
also removes the burden of determining
each party’s ownership interest in the assets of the corporation. Thus, the regulations provide an approach that is easier to
apply and more narrowly tailored than the
models described in Notice 97–21.
2. Fast-Pay Stock and Benefited Stock
Under the proposed regulations, stock
is fast-pay stock if it is structured to provide for dividends that economically represent a return (in whole or in part) of the
holder’s investment rather than only a return on the holder’s investment. Stock is
presumed to be fast-pay stock if it has, by
design, a dividend rate that is reasonably
expected to decline, or an issue price that
exceeds the amount at which the holder
can be compelled to dispose of the stock.
A taxpayer may rebut these presumptions

March 15, 1999

only by clearly showing that no dividend
represents an economic return (in whole
or in part) of the holder’s investment.
Generally, whether stock is fast-pay
stock must be determined based on all the
facts and circumstances, including any related agreements such as options or forward contracts. A related agreement is
any direct or indirect, oral or written,
agreement between the holder of the stock
and the issuing corporation, or between
the holder of the stock and one or more
other shareholders in the corporation.
The determination that stock is fast-pay
stock is made when the stock is issued,
and whenever there is a significant modification in the terms of the stock or the related agreements, or a significant change
in the relevant facts and circumstances.
The proposed regulations define benefited stock by reference to fast-pay stock.
With respect to a class of fast-pay stock,
all other stock in the corporation (including any other class of fast-pay stock) is
benefited stock. For fast-pay arrangements in which there is more than one
class of benefited stock, the parties must
apply the general recharacterization rules
among the different classes as appropriate
to match the arrangement’s economic substance.
3. Fast-Pay Arrangements Subject to
Recharacterization
Under the proposed regulations, if the
corporation with outstanding fast-pay
stock is either a regulated investment
company (RIC) or a real estate investment
trust (REIT), the fast-pay arrangement is
automatically recharacterized. If the corporation is neither a RIC nor a REIT, the
Commissioner may (at the Commissioner’s discretion) recharacterize the
fast-pay arrangement in cases where the
Commissioner determines that a principal
purpose for the structure of the fast-pay
arrangement is the avoidance of tax. This
rule applies to all parties to a fast-pay
arrangement, without regard to whether
such parties acquired their interests as
part of an initial offering or later (by purchase or other transfer).
By not automatically recharacterizing
all fast-pay arrangements, the regulations
prevent taxpayers from using the recharacterization rules for other tax avoidance
purposes. For example, shareholders of a

March 15, 1999

controlled foreign corporation cannot circumvent the purposes of United States tax
law (including treaties) by using the
recharacterization rules to exploit inconsistencies between the treatment of a fastpay arrangement by the United States and
foreign jurisdictions. It is expected that
the Commissioner will closely scrutinize
fast-pay arrangements in which the corporation with outstanding fast-pay stock is a
foreign corporation.
4. Model for Recharacterizing Fast-Pay
Arrangements
a. In General
The proposed regulations treat the fastpay shareholders as holding financing instruments issued by the benefited shareholders rather than as holding fast-pay
stock in the corporation. The corporation
is the paying agent on the financing instruments but has no other relationship to
the fast-pay shareholders.
Under the proposed regulations, the financing instruments have the same payment terms as the fast-pay stock. The
timing and amount of payments made
with respect to the financing instruments,
therefore, match the timing and amount of
distributions made with respect to the
fast-pay stock. Nothing in the regulations
characterizes the financing instruments.
The character of the financing instruments (for example, stock or debt) must
be determined under general tax principles and depends on all the facts and circumstances.
The benefited shareholders are treated
as first issuing the financing instruments
in exchange for cash equal to the fair market value of the fast-pay stock (taking into
account any related agreements), and then
as contributing the cash to the corporation
(thereby increasing their basis in the benefited stock). Distributions made with respect to the fast-pay stock are treated as
first made with respect to the benefited
stock, and then as used by the benefited
shareholders to make payments on the financing instruments.
b. Rule for Multiple Classes of Benefited
Stock
The proposed regulations do not describe detailed rules for fast-pay arrangements in which there is more than one

14

class of benefited shareholders. Instead,
as mentioned before, the regulations provide a general rule that requires recharacterization among the different classes as
appropriate to match the economic substance of the fast-pay arrangement.
c. Rules for Disposition of Benefited
Stock
The proposed regulations provide special rules for dispositions of benefited
stock. On the sale of benefited stock, in
addition to any consideration actually received, the seller is treated as receiving
the amount necessary to terminate its position with respect to the financing instruments at fair market value. Similarly, the
buyer is treated as paying that amount and
as issuing new financing instruments to
the fast-pay shareholders.
d. Rule Preserving Pre-effective Date
Gain
The proposed regulations provide a
special basis adjustment rule to ensure
that unrealized gain on benefited stock is
not inappropriately eliminated. Because
the regulations do not apply to amounts
accrued or paid in taxable years ending
before February 27, 1997 (pre-effective
years), a benefited shareholder will have
economic income, but not taxable income, attributable to pre-effective years if
the form of a fast-pay arrangement is respected for those years. This economic
income is reflected as unrealized gain in
the benefited stock.
Absent a special basis adjustment rule,
the general recharacterization rule would
eliminate this unrealized gain. Although
the regulations do not apply to amounts
accrued or paid in pre-effective years, the
regulations recharacterize fast-pay
arrangements from their inception. Thus,
in cases in which the fast-pay arrangement was entered into in a pre-effective
year, the general recharacterization rule
increases a benefited shareholder’s basis
in its stock as of the inception of the transaction, even though the regulations do not
require the benefited shareholder to include deemed dividend distributions attributable to the pre-effective years. Consequently, this increase in basis without
corresponding dividend income eliminates the unrealized gain from the pre-effective years.

1999–11 I.R.B.

To preserve the unrealized gain resulting from the economic income attributable to pre-effective years, the proposed
regulations provide a special basis adjustment rule. After taking into account any
basis increase under the general rule, a
benefited shareholder must decrease its
basis in its benefited stock by the amount
(if any) that (1) its taxable income attributable to the fast-pay arrangement for preeffective years, computed by recharacterizing the fast-pay arrangement under the
regulations, exceeds (2) its taxable income attributable to the fast-pay arrangement for pre-effective years, computed
without applying the recharacterization
rules of the regulations. In this way, a
benefited shareholder’s economic income
attributable to taxable years before the effective date of the regulations is not eliminated by the basis provisions of the general recharacterization rules and may be
realized when the benefited shareholder
disposes of its benefited stock.
e. Rule Prohibiting the Affirmative Use
of These Regulations to Avoid Tax
Imposed by the Code
The proposed regulations prohibit a
taxpayer from affirmatively using the automatic recharacterization rules if a principal purpose for using such rules is the
avoidance of any tax imposed by the
Code. With respect to such a taxpayer,
the Commissioner may depart from the
automatic recharacterization rules and
treat (for all purposes of the Code) the
fast-pay arrangement in accordance with
its form or its economic substance. This
anti-abuse rule applies on a taxpayer-bytaxpayer basis. For example, if a foreign
person acquires fast-pay stock in a REIT
and a principal purpose for acquiring such
stock is to reduce United States withholding taxes by applying the automatic
recharacterization rules, the Commissioner may, for purposes of determining
the foreign person’s United States tax
consequences (namely, withholding tax),
depart from the automatic recharacterization rules and treat the foreign person as
holding fast-pay stock in the REIT.
5. Withholding
A corporation that issues fast-pay stock
is a withholding agent for payments made

1999–11 I.R.B.

(or deemed made) under a fast-pay
arrangement. Generally, if a fast-pay
arrangement is recharacterized under the
automatic recharacterization rules, a withholding agent must withhold in accordance with the transaction as recharacterized. A different rule applies, however, if
the withholding agent knows or has reason to know that any taxpayer entered
into the fast-pay arrangement with a principal purpose of using the recharacterization rules to avoid tax under section
871(a) or section 881. In that case, for
each payment made (or deemed made) to
such taxpayer under the arrangement, the
withholding agent must withhold under
section 1441 or section 1442 the higher of
(1) the amount of withholding that applies
to such payment determined under the
form of the arrangement, or (2) the
amount of withholding that applies to
such payment determined under the automatic recharacterization rules. Also,
when the withholding agent knows or has
reason to know that the Commissioner
has exercised the discretion to depart
from the automatic recharacterization
rules for a taxpayer, the withholding agent
must withhold on payments made (or
deemed made) to that taxpayer in accordance with the characterization of the
fast-pay arrangement imposed by the
Commissioner.
The withholding agent’s liability to
withhold on payments to foreign individuals is described in new proposed
§1.1441–7(g). The same rules apply to
payments (or deemed payments) to foreign corporations under §1.1442–1.
6. Reporting Requirements
In general, a corporation that has fastpay stock outstanding at any time during
the taxable year must attach a statement to
its federal income tax return. This rule
does not apply to a corporation that is a
controlled foreign corporation (CFC) as
defined in section 957, a foreign personal
holding company (FPHC) as defined in
section 552, or a passive foreign investment company (PFIC) as defined in section 1297. Instead, certain shareholders
(and officers and directors of FPHCs) of
those corporations must attach a statement to their returns.
The statement must identify the corporation that has outstanding fast-pay stock

15

and must recite the terms of the fast-pay
stock and the date on which the fast-pay
stock was issued. In addition, to the extent the filing person knows or has reason
to know such information, the statement
must contain the names and the taxpayer
identification numbers of the shareholders
of any class of stock that is not traded on
an established securities market as described in §1.7704-1(b).
7. Election to Limit Taxable Income
Attributable to a Recharacterized
Fast-Pay Arrangement for Taxable
Years Ending After February 26,
1997, and Before the Date These
Regulations Are Published as Final
Regulations in the Federal Register.
The regulations are proposed to be effective February 27, 1997, and to cover
all taxable years ending after February 26,
1997. Thus, the regulations will apply to
all amounts accrued or paid on or after the
first day of the first taxable year ending
after February 26, 1997.
Because the proposed effective date relates to the date Notice 97–21 was issued
to the public, and because the regulations
adopt different recharacterization rules
from the ones described in the notice, the
regulations permit a shareholder of a
recharacterized fast-pay arrangement to
limit its taxable income attributable to the
arrangement for certain taxable years.
Specifically, for taxable years ending
after February 26, 1997, and before the
date these regulations are finalized, a
shareholder may limit its taxable income
attributable to a fast-pay arrangement
recharacterized under the regulations, to
the taxable income that would result if the
fast-pay arrangement were recharacterized under Notice 97–21. Any amount
excluded under the limit must be included
as an adjustment to taxable income in the
shareholder’s first taxable year that includes the date the regulations are finalized. Under the regulations, a shareholder
that has elected to apply the limit must include a statement in its books and records
identifying each fast-pay arrangement for
which the election was made, and the
amount excluded from taxable income
under the election for each fast-pay
arrangement.
Shareholders who take advantage of
the limit enjoy only a deferral of taxable

March 15, 1999

income: Any amount excluded under the
limit is later included as an adjustment.
Thus, the sole benefit of making the election is a timing difference. This result is
appropriate because over the life of a fastpay arrangement a shareholder has the
same amount of taxable income whether
the fast-pay arrangement is recharacterized under Notice 97–21 or under the regulations. The IRS and Treasury Department invite comments concerning the
limit and whether there are fast-pay
arrangements in which any difference between a shareholder’s taxable income determined under Notice 97–21 and the
shareholder’s taxable income determined
under the regulations is other than a timing difference.
Notice 97–21 describes two types of
fast-pay arrangements. Hence, calculating the limit requires appropriately
recharacterizing the fast-pay arrangement
under the notice. In the first type of fastpay arrangement that the notice describes,
the corporation with outstanding fast-pay
stock holds income-producing assets issued by a third party. Notice 97–21 treats
the benefited shareholders (one of which
is called the “sponsor” in the notice) as
acquiring the assets of the corporation directly from the sellers of those assets.
The notice treats the fast-pay shareholders
(called “investors” in the notice) as acquiring the assets of the corporation either
from the sellers of those assets or from the
benefited shareholders in an income
“stripping” transaction. Thus, both the
fast-pay shareholders and benefited shareholders are regarded as owning directly
the corporation’s assets.
In the second type of fast-pay arrangement that Notice 97–21 describes, the
corporation with outstanding fast-pay
stock holds a debt instrument issued by
the sponsor (a benefited shareholder). In
this situation, the notice treats the sponsor
as having issued one or more instruments
directly to the holders of the fast-pay
stock. Thus, for purposes of determining
the sponsor’s taxable income, the sponsor’s obligation under any asset held by
the corporation is ignored.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-

March 15, 1999

cant regulatory action as defined in E.O.
12866. Therefore, a regulatory assessment is not required. It is hereby certified
that these regulations will not have a significant economic impact on a substantial
number of small entities. This certification is based on the understanding of the
IRS and Treasury Department that the
total number of fast-pay arrangements is
fewer than 100, that the number of entities engaging in transactions affected by
these regulations is not substantial and, of
those entities, few or none are small entities within the meaning of the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comments on its impact on
small businesses.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying. The IRS
and Treasury Department specifically request comments on the clarity of the proposed rule and how it may be made easier
to understand.
A public hearing has been scheduled
for April 8, 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)

16

apply to the hearing. Persons that wish to
present oral comments at the hearing must
submit written comments by April 6,
1999, and submit an outline of the topics
to be discussed and the time to be devoted
to each topic (a signed original and eight
(8) copies) by March 18, 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.
Proposed Effective Date
These regulations are proposed to be
effective February 27, 1997, and apply to
taxable years ending after February 26,
1997. Thus, all amounts accrued or paid
on or after the first day of the first taxable
year ending after February 26, 1997, will
be subject to the regulations, regardless of
when a particular share of the stock or a
particular debt instrument was issued.
The statement required under
§1.7701(l)–3(f) is proposed to apply to
taxable years (of the taxpayer required to
file the statement) ending after the date
the regulations are published as final regulations in the Federal Register.
Drafting Information
The principal authors of these regulations are Jonathan Zelnik and Marshall
Feiring of the Office of the Assistant
Chief Counsel (Financial Institutions &
Products). 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 * * *
Section 1.7701(l)–3 also issued under
26 U.S.C. 7701(l). * * *
Par. 2. Section 1.1441–7 is amended as
follows:

1999–11 I.R.B.

1. Paragraph (g) is redesignated as
paragraph (h) and is revised.
2. New paragraph (g) is added.
The addition and revision read as follows:
§1.1441–7 General provisions relating
to withholding agents.
* * * * *
(g) Fast-pay arrangements—(1) In
general. A corporation that issues fastpay stock in a fast-pay arrangement described in §1.7701(l)–3(b)(1) is a withholding agent with respect to fast-pay
dividends paid under the arrangement and
any deemed payments with respect to the
arrangement under the recharacterization
rules of §1.7701(l)–3(c). Except as provided in this paragraph (g)(1) or in paragraph (g)(2) of this section, the withholding tax rules under section 1441 and
section 1442 apply with respect to a fastpay arrangement described in §1.7701(l)–
3(c)(1)(i) in accordance with the recharacterization rules provided in §1.7701(l)–
3(c). In all cases, notwithstanding paragraph (g)(2) of this section, if at any time
the withholding agent knows or has reason to know that the Commissioner has
exercised the discretion under
§1.7701(l)–3(d) to depart from the recharacterization rules of §1.7701(l)–3(c) for a
taxpayer, the withholding agent must
withhold on payments made (or deemed
made) to that taxpayer in accordance with
the characterization of the fast-pay
arrangement imposed by the Commissioner under §1.7701(l)–3(d).
(2) Exception. If at any time the withholding agent knows or has reason to
know that any taxpayer entered into a
fast-pay arrangement with a principal purpose of applying the recharacterization
rules of §1.7701(l)–3(c) to avoid tax
under section 871(a) or section 881, then
for each payment made or deemed made
to such taxpayer under the arrangement,
the withholding agent must withhold,
under section 1441 or section 1442, the
higher of—
(i) The amount of withholding that
would apply to such payment determined
under the form of the arrangement; or
(ii) The amount of withholding that
would apply to deemed payments determined under the recharacterization rules
of §1.7701(l)–3(c).

1999–11 I.R.B.

(3) Liability. Any person required to
deduct and withhold tax under this paragraph (g) is made liable for that tax by
section 1461, and is also liable for applicable penalties and interest for failing to
comply with section 1461.
(4) Examples. The following examples
illustrate the rules of this paragraph (g):
Example 1. REIT W issues shares of fast-pay
stock to foreign individual A, a resident of Country
C. United States source dividends paid to residents
of C are subject to a 30 percent withholding tax. W
issues all shares of benefited stock to foreign individuals who are residents of Country D. D’s income
tax convention with the United States reduces the
United States withholding tax on dividends to 15
percent. Under §1.7701(l)–3(c), the dividends paid
by W to A are deemed to be paid by W to the benefited shareholders. W has reason to know that A entered into the fast-pay arrangement with a principal
purpose of using the recharacterization rules of
§1.7701(l)–3(c) to reduce United States withholding
tax. W must withhold at the 30 percent rate on the
dividends deemed paid to its benefited shareholders
because the amount of withholding that applies to
such payments determined under the form of the
arrangement is higher than the amount of withholding that applies to such payments determined under
§1.7701(l)–3(c).
Example 2. The facts are the same as in Example
1 of this paragraph (g)(4) except that W does not
know, or have reason to know, that A entered the
arrangement with a principal purpose of using the
recharacterization rules of §1.7701(l)–3(c) to reduce
United States withholding tax. Further, the Commissioner has not exercised the discretion under
§1.7701(l)–3(d) to depart from the recharacterization rules of §1.7701(l)–3(c). Accordingly, W must
withhold tax at a 15 percent rate on the dividends
deemed paid to the benefited shareholders.

(5) Effective date. This paragraph (g)
applies to payments made (or deemed
made) on or after January 6, 1999.
(h) Effective date. Except as otherwise
provided in paragraph (f)(3) or (g)(5) of
this section, this section applies to payments made after December 31, 1999.
Par. 3. Section 1.7701(l)–3 is added to
read as follows:
§1.7701(l)–3 Recharacterizing financing
arrangements involving fast-pay stock.
(a) Purpose and scope. This section is
intended to prevent the avoidance of tax
by persons participating in fast-pay arrangements (as defined in paragraph (b)(1)
of this section) and should be interpreted
in a manner consistent with this purpose.
This section applies to all fast-pay
arrangements. Paragraph (c) of this section recharacterizes certain fast-pay

17

arrangements to ensure the participants are
taxed in a manner reflecting the economic
substance of the arrangements. Paragraph
(f) of this section imposes reporting requirements on certain participants.
(b) Definitions—(1) Fast-pay arrangement. A fast-pay arrangement is any
arrangement in which a corporation has
outstanding for any part of its taxable year
two or more classes of stock, at least one
of which is fast-pay stock.
(2) Fast-pay stock—(i) Defined. Stock
is fast-pay stock if it is structured so that
dividends (as defined in section 316) paid
by the corporation with respect to the
stock are economically (in whole or in
part) a return of the holder’s investment
(as opposed to only a return on the
holder’s investment). Unless clearly
demonstrated otherwise, stock is presumed to be fast-pay stock if—
(A) It is structured to have a dividend
rate that is reasonably expected to decline
(as opposed to a dividend rate that is reasonably expected to fluctuate or remain
constant); or
(B) It is issued for an amount that exceeds (by more than a de minimis amount,
as determined under the principles of
§1.1273–1(d)) the amount at which the
holder can be compelled to dispose of the
stock.
(ii) Determination. The determination
of whether stock is fast-pay stock is based
on all the facts and circumstances, including any related agreements such as options or forward contracts. A related
agreement is any direct or indirect agreement or understanding, oral or written,
between the holder of the stock and the issuing corporation, or between the holder
of the stock and one or more other shareholders in the corporation. The determination is made when the stock is issued
and whenever there is a significant modification in the terms of the stock or the related agreements, or a significant change
in the relevant facts and circumstances.
(3) Benefited stock defined. With respect to a class of fast-pay stock, all other
stock in the corporation (including any
other class of fast-pay stock) is benefited
stock.
(c) Recharacterization of certain fastpay arrangements—(1) Scope. This paragraph (c) applies to any fast-pay arrangement—

March 15, 1999

(i) In which the corporation that has
outstanding fast-pay stock is a regulated
investment company (RIC) (as defined in
section 851) or a real estate investment
trust (REIT) (as defined in section 856);
or
(ii) If the Commissioner determines
that a principal purpose for the structure
of the fast-pay arrangement is the avoidance of any tax imposed by the Code.
Application of this paragraph (c)(1)(ii) is
at the Commissioner’s discretion, and a
determination under this paragraph
(c)(1)(ii) applies to all parties to the fastpay arrangement, including transferees.
(2) Recharacterization. A fast-pay
arrangement described in paragraph (c)(1)
of this section is recharacterized as an
arrangement directly between the benefited shareholders and the fast-pay shareholders. The inception and resulting relationships of the recharacterized
arrangement are deemed to be as follows:
(i) Relationship between benefited
shareholders and fast-pay shareholders.
The benefited shareholders issue financial
instruments (the financing instruments)
directly to the fast-pay shareholders in exchange for cash equal to the fair market
value of the fast-pay stock at the time of
issuance (taking into account any related
agreements). The financing instruments
have the same payment terms as the fastpay stock. Thus, the timing and amount
of the payments made with respect to the
financing instruments always match the
timing and amount of the distributions
made with respect to the fast-pay stock.
(ii) Relationship between benefited
shareholders and corporation. The benefited shareholders contribute to the corporation the cash they receive for issuing the
financing instruments. Distributions
made with respect to the fast-pay stock
are distributions made by the corporation
with respect to the benefited shareholders’ benefited stock.
(iii) Relationship between fast-pay
shareholders and corporation. For purposes of determining the relationship between the fast-pay shareholders and the
corporation, the fast- pay stock is ignored.
The corporation is the paying agent of the
benefited shareholders with respect to the
financing instruments.
(3) Other rules—(i) Character of the
financing instruments. The character of a

March 15, 1999

financing instrument (for example, stock
or debt) is determined under general tax
principles and depends on all the facts and
circumstances.
(ii) Multiple classes of benefited stock.
If there is more than one class of benefited stock, the recharacterization rules of
this paragraph (c) apply among the different classes as appropriate to match the
economic substance of the fast-pay
arrangement.
(iii) Sale of benefited stock. If one person sells benefited stock to another—
(A) In addition to any consideration actually paid and received for the benefited
stock, the buyer is deemed to pay and the
seller is deemed to receive the amount
necessary to terminate the seller’s position in the financing instruments at fair
market value; and
(B) The buyer is deemed to issue financing instruments to the fast-pay shareholders in exchange for the amount necessary to terminate the seller’s position in
the financing instruments.
(iv) Adjustment to basis for amounts
accrued or paid in taxable years ending
before February 27, 1997. In the case of
a fast-pay arrangement involving amounts
accrued or paid in taxable years ending
before February 27, 1997, and recharacterized under this paragraph (c), a benefited shareholder must decrease its basis
in any benefited stock (as determined
under paragraph (c)(2)(ii) of this section)
by the amount (if any) that—
(A) Its income attributable to the benefited stock (reduced by deductions attributable to financing instruments) for taxable years ending before February 27,
1997, computed by recharacterizing the
fast-pay arrangement under this paragraph (c); exceeds
(B) Its income attributable to such
stock for taxable years ending before February 27, 1997, computed without applying the rules of this paragraph (c).
(d) Prohibition against affirmative use
of recharacterization by taxpayers. A taxpayer may not use the rules of paragraph
(c) of this section if a principal purpose
for using such rules is the avoidance of
any tax imposed by the Code. Thus, with
respect to such taxpayer, the Commissioner may depart from the rules of this
section and recharacterize (for all purposes of the Code) the fast-pay arrange-

18

ment in accordance with its form or its
economic substance. For example, if a
foreign person acquires fast-pay stock in a
REIT and a principal purpose for acquiring such stock is to reduce United States
withholding taxes by applying the rules of
paragraph (c) of this section, the Commissioner may, for purposes of determining
the foreign person’s United States tax
consequences (namely, withholding tax),
depart from the rules of paragraph (c) of
this section and treat the foreign person as
holding fast-pay stock in the REIT.
(e) Examples. The following examples
illustrate the rules of paragraph (c) of this
section:
Example 1. Decline in dividend rate. (i) Facts.
Corporation X issues 100 shares of A Stock and 100
shares of B Stock for $1,000 per share. By its terms,
a share of B Stock is reasonably expected to pay a
$110 dividend in years 1 through 10 and a $30 dividend each year thereafter. If X liquidates, the holder
of a share of B Stock is entitled to a preference equal
to the share’s issue price. Otherwise, the B Stock
cannot be redeemed at either X’s or the shareholder’s option.
(ii) Analysis. When issued, the B Stock has a
dividend rate that is reasonably expected to decline
from an annual rate of 11 percent of its issue price to
an annual rate of 3 percent of its issue price. Since
the B Stock is structured to have a declining dividend rate, the B Stock is fast-pay stock, and the A
Stock is benefited stock.
Example 2. Issued at a premium. (i) Facts. The
facts are the same as in Example 1 of this paragraph
(e) except that a share of B Stock is reasonably expected to pay an annual $110 dividend as long as it
is outstanding, and Corporation X has the right to redeem the B Stock for $400 a share at the end of year
10.
(ii) Analysis. The B Stock is structured so that
the issue price of the B Stock ($1,000) exceeds (by
more than a de minimis amount) the price at which
the holder can be compelled to dispose of the stock
($400). Thus, the B Stock is fast-pay stock, and the
A Stock is benefited stock.
Example 3. Recharacterization illustrated. (i)
Facts. On formation, REIT Y issues 100 shares of C
Stock and 100 shares of D Stock for $1,000 per
share. By its terms, a share of D Stock is reasonably
expected to pay a $110 dividend in years 1 through
10 and a $30 dividend each year thereafter. In years
1 through 10, persons holding a majority of the D
Stock must consent before Y may take any action
that would result in Y liquidating or dissolving,
merging or consolidating, losing its REIT status, or
selling substantially all of its assets. Thereafter, Y
may take these actions without consent so long as
the D Stock shareholders receive $400 in exchange
for their D Stock.
(ii) Analysis. When issued, the D Stock has a
dividend rate that is reasonably expected to decline
from an annual rate of 11 percent of its issue price to
an annual rate of 3 percent of its issue price. In addition, the $1,000 issue price of a share of D Stock ex-

1999–11 I.R.B.

ceeds the price at which the shareholder can be compelled to dispose of the stock ($400). Thus, the D
Stock is fast-pay stock, and the C Stock is benefited
stock. Because Y is a REIT, the fast-pay arrangement is recharacterized under paragraph (c) of this
section.
(iii) Recharacterization. The fast-pay arrangement is recharacterized as follows:
(A) Under paragraph (c)(2)(i) of this section, the
C Stock shareholders are treated as issuing financing
instruments to the D Stock shareholders in exchange
for $100,000 ($1,000, the fair market value of each
share of D Stock, multiplied by 100, the number of
shares).
(B) Under paragraph (c)(2)(ii) of this section, the
C Stock shareholders are treated as contributing
$200,000 to Y (the $100,000 received for the financing instruments, plus the $100,000 actually paid for
the C Stock) in exchange for the C Stock.
(C) Under paragraph (c)(2)(ii) of this section,
each distribution with respect to the D Stock is
treated as a distribution with respect to the C Stock.
(D) Under paragraph (c)(2)(iii) of this section,
the C Stock shareholders are treated as making payments with respect to the financing instruments, and
Y is treated as the paying agent of the financing instruments for the C Stock shareholders.
Example 4. Transfer of benefited stock illustrated. (i) Facts. The facts are the same as in Example 3 of this paragraph (e). Near the end of year 5, a
person holding one share of C Stock sells it for
$1,300. The buyer is unrelated to REIT Y or to any
of the D Stock shareholders. At the time of the sale,
the amount needed to terminate the seller’s position
in the financing instruments at fair market value is
$747.
(ii) Benefited shareholder’s treatment on sale.
Under paragraph (c)(3)(iii)(A) of this section, the
seller’s amount realized is $2,047 ($1,300, the
amount actually received, plus $747, the amount
necessary to terminate the seller’s position in the financing instruments at fair market value). The
seller’s gain on the sale of the common stock is $47
($2,047, the amount realized, minus $2,000, the
seller’s basis in the common stock). The seller has
no income or deduction with respect to terminating
its position in the financing instruments.
(iii) Buyer’s treatment on purchase. Under paragraph (c)(3)(iii)(A) of this section, the buyer’s basis
in the share of D Stock is $2,047 ($1,300, the
amount actually paid, plus $747, the amount needed
to terminate the seller’s position in the financing instruments at fair market value). Under paragraph
(c)(3)(iii)(B) of this section, simultaneous with the
sale, the buyer is treated as issuing financing instruments to the fast-pay shareholders in exchange for
$747, the amount necessary to terminate the seller’s
position in the financing instruments at fair market
value.
Example 5. Fast-pay arrangement involving
amounts accrued or paid in a taxable year ending
before February 27, 1997. (i) Facts. Y is a calendar
year taxpayer. In June 1996, Y acquires shares of
REIT T benefited stock for $15,000. In December
1996, Y receives dividends of $100. Under the
recharacterization rules of paragraph (c)(2) of this
section, Y’s 1996 income attributable to the benefited stock is $1,200, Y’s 1996 deduction attribut-

1999–11 I.R.B.

able to financing instruments is $500, and Y’s basis
in the benefited stock is $25,000.
(ii) Analysis. Under paragraph (c)(3)(iv) of this
section, Y’s basis in the benefited stock is reduced
by $600. This is the amount by which Y’s 1996 income from the fast-pay arrangement as recharacterized under this section ($1,200 of income attributable to the benefited stock less $500 of deductions
attributable to the financing instruments), exceeds
Y’s 1996 income from the fast-pay arrangement as
not recharacterized under this section ($100 of income attributable to the benefited stock). Thus, in
1997 when the fast-pay arrangement is recharacterized, Y’s basis in the benefited stock is $24,400.

(f) Reporting requirement—(1) Filing
requirements—(i) In general. A corporation that has fast-pay stock outstanding at
any time during the taxable year must attach the statement described in paragraph
(f)(2) of this section to its federal income
tax return for such taxable year. This
paragraph (f)(1)(i) does not apply to a
corporation described in paragraphs
(f)(1)(ii), (iii), or (iv) of this section.
(ii) Controlled foreign corporation. In
the case of a controlled foreign corporation (CFC), as defined in section 957, that
has fast-pay stock outstanding at any time
during its taxable year (during which time
it was a CFC), each controlling United
States shareholder (within the meaning of
§1.964–1(c)(5)) must attach the statement
described in paragraph (f)(2) of this section to the shareholder’s Form 5471 for
the CFC’s taxable year. The provisions of
section 6038 and the regulations under
section 6038 apply to any statement required by this paragraph (f)(1)(ii).
(iii) Foreign personal holding company. In the case of a foreign personal
holding company (FPHC), as defined in
section 552, that has fast-pay stock outstanding at any time during its taxable
year (during which time it was a FPHC),
each United States citizen or resident who
is an officer, director, or 10-percent shareholder (within the meaning of section
6035(e)(1)) of such FPHC must attach the
statement described in paragraph (f)(2) of
this section to his or her Form 5471 for
the FPHC’s taxable year. The provisions
of sections 6035 and 6679 and the regulations under sections 6035 and 6679 apply
to any statement required by this paragraph (f)(1)(iii).
(iv) Passive foreign investment company. In the case of a passive foreign investment company (PFIC), as defined in

19

section 1297, that has fast-pay stock outstanding at any time during its taxable
year (during which time it was a PFIC),
each shareholder that has elected (under
section 1295) to treat the PFIC as a qualified electing fund and knows or has reason to know that the PFIC has outstanding
fast-pay stock must attach the statement
described in paragraph (f)(2) of this section to the shareholder’s Form 8621 for
the PFIC’s taxable year. Each shareholder owning 10 percent or more of the
shares of the PFIC (by vote or value) is
presumed to know that the PFIC has issued fast-pay stock. The provisions of
sections 1295(a)(2) and 1298(f) and the
regulations under those sections (including §1.1295–1T(f)(2)) apply to any statement required by this paragraph (f)(1)(iv).
(2) Statement. The statement required
under this paragraph (f) must say, “This
fast-pay stock disclosure statement is required by §1.7701(l)–3(f) of the income
tax regulations.” The statement must also
identify the corporation that has outstanding fast-pay stock and must contain the
date on which the fast-pay stock was issued, the terms of the fast-pay stock, and
(to the extent the filing person knows or
has reason to know such information) the
names and taxpayer identification numbers of the shareholders of any class of
stock that is not traded on an established
securities market (as described in
§1.7704–1(b)).
(g) Effective date—(1) In general. Except as provided in paragraph (g)(4) of
this section (relating to reporting requirements), this section applies to taxable
years ending after February 26, 1997.
Thus, all amounts accrued or paid during
the first taxable year ending after February 26, 1997, are subject to this section.
(2) Election to limit taxable income attributable to a recharacterized fast-pay
arrangement for taxable years ending
after February 26, 1997, and before the
date these regulations are published as
final regulations in the Federal
Register—(i) Limit and adjustment. For
taxable years ending after February 26,
1997, and before the date these regulations are published as final regulations in
the Federal Register, a shareholder may
limit its taxable income attributable to a
fast-pay arrangement recharacterized
under paragraph (c) of this section, to the

March 15, 1999

taxable income that would result if the
fast-pay arrangement were recharacterized under Notice 97–21, 1997–1 C.B.
407, see §601.601(d)(2) of this chapter.
Any amount a shareholder excludes from
taxable income under this paragraph
(g)(2)(i) must be included as an adjustment to taxable income in the shareholder’s first taxable year that includes
the date these regulations are published as
final regulations in the Federal Register.
A shareholder that has elected to limit its
taxable income under this paragraph
(g)(2)(i) must include a statement in its
books and records identifying each fastpay arrangement to which the limit was
applied and providing the amount excluded from taxable income for each such
fast-pay arrangement.
(ii) The following examples illustrate
the rules of this paragraph (g)(2). For
purposes of these examples, assume that
the last year a shareholder may limit its
taxable income under this paragraph
(g)(2) is 1998.
Example 1. Fast-pay arrangement recharacterized under Notice 97-21; REIT holds third-party
debt. (i) Facts.
(A) REIT Y is formed on January 1, 1998, at
which time it issues 1,000 shares of fast-pay stock
and 1,000 shares of benefited stock for $100 per
share. Y and all of its shareholders have calendar
taxable years. All shareholders of Y have elected to
accrue market discount based on a constant interest
rate, to include the market discount in income as it
accrues, and to amortize bond premium.
(B) For years 1 through 5, the fast-pay stock has
an annual dividend rate of $17 per share ($17,000
for the class); in later years, the fast-pay stock has an
annual dividend rate of $1 per share ($1,000 for the
class). At the end of year 5, and thereafter, a share
of fast-pay stock can be acquired by Y in exchange
for $50 ($50,000 for the class).
(C) On the day Y is formed, it acquires a fiveyear mortgage note (the note) issued by an unrelated
third party for $200,000. The note provides for annual interest payments on December 31 of $18,000
(a coupon interest rate of 9.0 percent, compounded
annually), and one payment of principal at the end of
5 years. The note can be prepaid, in whole or in
part, at any time.
(ii) Recharacterization under Notice 97–21. (A)
In general. One way to recharacterize the fast-pay
arrangement under Notice 97–21 is to treat the fastpay shareholders and the benefited shareholders as if
they jointly purchased the note from the issuer with
the understanding that over the five-year term of the
note the benefited shareholders would use their
share of the interest to buy (on a dollar-for-dollar
basis) the fast-pay shareholders’ portion of the note.
The benefited shareholders’ and the fast-pay shareholders’ yearly taxable income under Notice 97–21

March 15, 1999

can then be calculated after determining their initial
portions of the note and whether those initial portions are purchased at a discount or premium.
(B) Determining initial portions of the debt instrument. The fast-pay shareholders’ and the benefited shareholders’ initial portions of the note can be
determined by comparing the present values of their
expected cash flows. As a class, the fast-pay shareholders expect to receive cash flows of $135,000 (five
annual payments of $17,000, plus a final payment of
$50,000). As a class, the benefited shareholders expect to receive cash flows of $155,000 (five annual
payments of $1,000, plus a final payment of
$150,000). Using a discount rate equal to the yield to
maturity (as determined under §1.1272–1(b)(1)(i)) of
the mortgage note (9.0 percent, compounded annually), the present value of the fast-pay shareholders’
cash flows is $98,620, and the present value of the
benefited shareholders’ cash flows is $101,380. Thus,
the fast-pay shareholders initially acquire 49 percent
of the note at a $1,380 premium (that is, they paid
$100,000 for $98,620 of principal in the note). The
benefited shareholders initially acquire 51 percent of
the note at a $1,380 discount (that is, they paid
$100,000 for $101,380 of principal in the note).
Under section 171, the fast-pay shareholders’ premium is amortizable based on their yield in their initial portion of the note (8.57 percent, compounded annually). The benefited shareholders’ discount accrues
based on the yield in their initial portion of the note
(9.35 percent, compounded annually).
(C) Taxable income under Notice 97–21. Under
Notice 97-21, the fast-pay shareholders’ 1998 taxable income attributable to the fast-pay arrangement
is $8,574 ($8.57 per $100 invested), computed by
subtracting the amortizable premium ($302) from
the interest income from their portion of the note
($8,876). The benefited shareholders’ 1998 taxable
income attributable to the fast-pay arrangement is
$9,353 ($9.35 per $100 invested), computed by
adding the accrued discount ($229) to the interest income from their portion of the note ($9,124).
(iii) Taxable income under the recharacterization
of this section. Assume the financing instruments
are debt instruments. Under the recharacterization
rules of paragraph (c) of this section, the fast-pay
shareholders’ 1998 taxable income attributable to
the fast-pay arrangement is $8,574 ($8.57 per $100
invested), which is the interest income from the financing instruments. The benefited shareholders’
1998 taxable income attributable to the fast-pay
arrangement is $9,426 ($9.43 per share of benefited
stock), computed by subtracting the interest income
accrued on the financing instruments ($8,574) from
the dividend income actually and deemed paid on
the benefited stock ($18,000).
(iv) Limit on taxable income under this paragraph (g)(2). (A) Fast-pay shareholders. For 1998,
the fast-pay shareholders have the same taxable income under the recharacterization of Notice 97–21
($8,574) as they have under the recharacterization of
paragraph (c) of this section ($8,574). Thus, the
limit under paragraph (g)(2)(i) of this section is unavailable to the fast-pay shareholders.
(B) Benefited shareholders. For 1998, the benefited shareholders have taxable income attributable
to the fast-pay arrangement of $9,353 ($9.35 per
$100 invested) under the recharacterization of No-

20

tice 97–21, and taxable income of $9,426 ($9.43 per
share of benefited stock) under the recharacterization of paragraph (c) of this section. Thus, under
paragraph (g)(2)(i) of this section, a benefited shareholder may elect to limit its taxable income attributable to the fast-pay arrangement to $9.35 for each
share of benefited stock. Any amount an electing
shareholder excludes from taxable income($0.08 per
share of benefited stock) must later be included as
an adjustment. (If all benefited shareholders elect
the limit, then as a class the later adjustment to taxable income is $73.)
Example 2. REIT holds debt issued by a benefited
shareholder. (i) Facts. The facts are the same as in
Example 1 of this paragraph (g)(2) except that corporation Z holds 800 shares (80 percent) of the benefited stock, and Z, instead of a third party, issues
the mortgage note acquired by Y.
(ii) Recharacterization under Notice 97–21. Because Y holds a debt instrument issued by Z, the
fast-pay arrangement is recharacterized under Notice 97–21 as an arrangement in which Z issued one
or more instruments directly to the fast-pay shareholders and the other benefited shareholders. Consistent with this recharacterization, Z is treated as issuing a debt instrument to the fast-pay shareholders
for $100,000. The debt instrument provides for five
annual payments of $17,000 and an additional payment of $50,000 in year five. Thus, the debt instrument’s yield to maturity is 8.57 percent per annum,
compounded annually. Z is also treated as issuing a
debt instrument to the other benefited shareholders
for $20,000 (200 shares multiplied by $100, or 20
percent of the $100,000 paid to Y by the benefited
shareholders as a class). This debt instrument provides for five annual payments of $200 and an additional payment of $30,000 in year five. The debt instrument’s yield to maturity is 9.30 percent per
annum, compounded annually. For 1998, Z’s interest expense is $10,435 ($8,574 attributable to the
debt instruments held by the fast-pay shareholders,
and $1,861 attributable to the debt instruments held
by the other benefited shareholders).
(iii) Recharacterization under this section. Assume the financing instruments are debt instruments.
Under the recharacterization rules of paragraph (c)
of this section, for 1998, Z has dividend income of
$14,400 (800 shares multiplied by $18, or 80 percent of $18,000), and total interest expense of
$24,859 ($18,000 of interest accrued on the note
held by Y, and $6,859 of interest accrued on the financing instruments).
(iv) Limit on taxable income under this paragraph (g)(2). For 1998, Z has a taxable loss attributable to the fast-pay arrangement of $10,435 under
the recharacterization of Notice 97-21, and a taxable
loss of $10,459 ($14,400 of dividends, minus
$24,859 of total interest expense) under the recharacterization of paragraph (c) of this section. Thus, for
1998, Z’s taxable loss attributable to the fast-pay
arrangement is $10,459 (the amount determined
under paragraph (c) of this section), and the limit of
paragraph (g)(2)(i) of this section is unavailable to Z.

(3) Rule to comply with this section.
To comply with this section for each taxable year in which it failed to do so, a tax-

1999–11 I.R.B.

payer should file an amended return. For
taxable years ending before the date these
regulations are published as final regulations, a taxpayer that has complied with
Notice 97–21, 1997–1 C.B. 407, (see
§601.601(d)(2) of this chapter) is considered to have complied with this section.
(4) Reporting requirements. The reporting requirements of paragraph (f) of
this section apply to taxable years (of the
person required to file the statement) ending after the date these regulations are
published as final regulations in the Federal Register.
John Dalrymple,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on January 5, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 6, 1999, 64 F.R.
805)

Notice of Proposed Rulemaking
and Notice of Public Hearing
Compliance Monitoring and
Miscellaneous Issues Relating to
the Low-Income Housing Credit
REG–114664–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains
proposed amendments to various existing
final regulations concerning the low-income housing tax credit including the
procedures for compliance monitoring by
state and local housing agencies (Agencies), the requirements for making carryover allocations, and the rules for Agencies’ correction of administrative errors or
omissions. In addition, regulations are
being proposed involving the independent
verification of information on sources and
uses of funds submitted by taxpayers to
Agencies. These amendments and proposed regulations affect owners of lowincome housing projects who have
claimed the credit and the Agencies who
administer the credit. This document also
provides notice of a public hearing on
these proposed regulations.

1999–11 I.R.B.

DATES: Written and electronic comments must be received by May 6, 1999.
Outlines of topics to be discussed at the
public hearing scheduled for May 27,
1999, must be received by April 8, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–114664–97),
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–114664–97),
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, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Paul
Handleman, (202) 622-3040; concerning
submissions, the hearing, and/or to be
placed on the building access list to attend
the hearing, LaNita Van Dyke, (202) 6227180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in §§1.42–5 and 1.42–13 previously have been reviewed and approved
by the Office of Management and Budget
for review under control numbers 15451291 and 1545-1357, respectively; all of
these paperwork requirements will be
consolidated under control number 15451357. The new collections of information
contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)).
Comments on the collections of information should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regula-

21

tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224. Comments on the collections of information
should be received by March 9, 1999.
Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, 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 services to provide information.
The requirement for the collections of
information in this notice of proposed
rulemaking is in §§1.42–5, 1.42–13, and
1.42–17. The information is required by
the IRS to verify compliance with the requirements of section 42. The collections
of information are mandatory. The likely
respondents/recordkeepers are individuals, state and local governments, businesses or other for-profit institutions, nonprofit institutions, and small businesses or
organizations.
Estimated total annual reporting and
recordkeeping burden for §1.42–5:
102,500 hours.
For §1.42–5, the estimated annual burden
per respondent varies from .5 hour to 3
hours for taxpayers and 250 to 5,000
hours for Agencies, with an estimated average of 1 hour for taxpayers and 1,500
hours for Agencies.
Estimated number of respondents for
§1.42–5 : 20,000 taxpayers and 55 Agencies.
Estimated total annual reporting and
recordkeeping burden for §1.42–13: 289
hours.
For §1.42–13, the estimated annual burden per respondent varies from .5 hour to

March 15, 1999

10 hours for taxpayers and Agencies, with
an estimated average of 3.5 hours for taxpayers and 3 hours for Agencies.
Estimated number of respondents for
§1.42–13: 43 taxpayers and 43 Agencies.
Estimated total annual reporting and
recordkeeping burden for §1.42–17:
2,110 hours.
For §1.42–17, the estimated annual burden per respondent varies from .5 hour to
2 hours for taxpayers and .5 hour to 5
hours for Agencies, with an estimated average of 1 hour for taxpayers and 2 hours
for Agencies.
Estimated number of respondents for
§1.42–17: 2,000 taxpayers and 55 Agencies.
Estimated annual frequency of responses:
once a year.
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 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 return information are confidential, as
required by 26 U.S.C. 6103.
Background
On March 28, 1997, the General Accounting Office (GAO) submitted a report
to Congress, “Tax Credits: Opportunities
to Improve Oversight of the Low-Income
Housing Program,” (GAO/GGD/RCED97–55), recommending certain revisions
to existing Agency procedures for compliance with the low-income housing credit
and requirements under qualified allocation plans for verifying taxpayers’ sources
and uses of funds for low-income housing
projects. Consistent with these proposals,
the proposed regulations amend existing
regulation §1.42–5 to require Agencies: (i)
to report annually their compliance monitoring activities to the IRS; (ii) to conduct
on-site habitability inspections of low-income housing projects; and (iii) to review
local government reports on building code
violations. In addition, the proposed regulations provide that qualified allocation
plans require taxpayers to submit indepen-

March 15, 1999

dent verification on sources and uses of
funds for low-income projects.
The proposed regulations also contain
amendments to the Income Tax Regulations (26 CFR part 1) including §1.42–6
(carryover allocations), §1.42–11 (provision of services), §1.42–12 (effective
dates and transitional rules), and
§1.42–13 (correction of administrative errors and omissions) that are issued under
the authority granted by section 42(n).
Explanation of Provisions
Compliance Monitoring
Section 42(m)(1)(B)(iii) provides that
an allocation plan is not qualified unless it
contains a procedure that the Agency (or
an agent of, or private contractor hired by,
the Agency) will follow in monitoring
compliance with the provisions of section
42. The Agency is to notify the IRS of
any noncompliance of which the Agency
becomes aware.
Section 42(m)(1)(B)(iii) is effective on
January 1, 1992, and applies to all buildings for which the low-income housing
credit determined under section 42 is, or
has been, allowable at any time. Allocation plans must have complied with the
requirements of §1.42–5 by June 30,
1993. Section 42(m)(1)(B)(iii) and
§1.42–5 do not require monitoring for
whether a low-income housing project is
in compliance with the requirements of
section 42 prior to January 1, 1992. However, if an Agency becomes aware of noncompliance that occurred prior to January
1, 1992, the Agency is required to notify
the IRS of that noncompliance.
The current compliance monitoring
regulations require an Agency, at a minimum, to review tenant income certifications and rent charges of projects using
one of the following three monitoring options: (1) review the owners’ annual income certifications, including the documentation supporting the certifications for
at least 50 percent of the Agency’s low-income projects, and tenant rent records in
at least 20 percent of the low-income units
in these projects; (2) make annual on-site
inspections of at least 20 percent of the
projects, and review the low-income certification, the documentation supporting the
certification, and rent record for each ten-

22

ant in at least 20 percent of the low-income units in those projects; or (3) obtain
from all project owners tenant income and
rent records for each low-income unit and,
for at least 20 percent of the projects, review the annual tenant income certification, backup income documentation, and
rent record for each low-income tenant in
at least 20 percent of the low-income units
in those projects.
The GAO report recommended that an
Agency conduct regular on-site inspections of projects and obtain building code
inspection reports performed by the local
government unit. The GAO found that
desk audits (monitoring options 1 and 3
above) failed to detect violations involving the physical condition of buildings.
In addition, site visits allow an Agency to
directly assess the compliance status of
projects and the physical condition of
buildings. Consistent with these proposals, the proposed regulations remove the
three monitoring options and require, at
least once every three (3) years, that each
Agency conduct on-site inspections of all
buildings in each low-income housing
project and, for each tenant in at least 20
percent of the project’s low-income units
selected by the Agency, review the lowincome certification, the documentation
supporting such certification, and the rent
record. The proposed regulations also require, at a minimum, by the end of the
calendar year following the year the last
building in a project is placed in service,
that the Agency conduct on-site inspections of the projects and review the lowincome certification, the documentation
supporting such certification, and the rent
record for each tenant in the project. As
part of the inspection requirements, the
proposed regulations also require the
Agency to determine whether the project
is suitable for occupancy, taking into account local health, safety, and building
codes. Agencies may delegate this determination only to a state or local government unit responsible for making building
code inspections. The three-year inspection requirement is proposed to be effective on the date the final regulations are
published in the Federal Register. The
placed-in-service year inspection requirement is proposed to be effective for buildings placed in service on or after the date

1999–11 I.R.B.

the final regulations are published in the
Federal Register.
The current compliance monitoring
regulations require the owner of a project,
at a minimum, to certify annually that for
the preceding 12-month period each
building in the project was suitable for occupancy, taking into account local health,
safety, and building codes. Based on the
GAO recommendation, the proposed regulations revise this certification by also
requiring the owner of the project to certify that for the preceding 12-month period the state or local government unit responsible for making building code
inspections did not issue a report of a violation for the project. If the governmental
unit issued a report of a violation, the
owner will be required to attach a copy of
the report of the violation to the annual
certification submitted to the Agency.
The proposed regulations also adopt
the GAO recommendation that Agencies
report annually to the IRS on compliance
monitoring activities. It is anticipated
Form 8610, “Annual Low-Income Housing Credit Agencies Report,” will be revised to require an Agency to confirm annually that it has satisfied the new
compliance monitoring requirements involving: (1) the once every three-year onsite inspections and review of the low-income certification, the documentation
supporting such certification, and the rent
rec

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Aafc5ed126a872f2a. Public record. Not legal advice.