Bulletin No. 1996–36
Agency decision
Ask Donna
What actually matters in this document.
Text
Bulletin No. 1996–36
September 3, 1996
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. 96–43, page 4.
Federal rates; adjusted federal rates; adjusted federal
long-term rate; and the long-term exempt rate. For
purposes of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the rates for
September 1996.
income from the international operation of ships and/or
aircraft, are set forth.
ADMINISTRATIVE
Notice 96–44, page 7.
T.D. 8128, 1987–1 C.B. 325, relating to certain rules
for the tax treatment of partnership items, is corrected.
INTL–4–95, page 8.
Proposed regulations under sections 861, 865, and 904
of the Code relate to the allocation of loss realized on
the disposition of stock.
Announcement 96–81, page 13.
IA–26–94, 1996–30 I.R.B. 25, relating to the 50-percent
exclusion for gain from certain small business stock, is
corrected.
Notice 96–43, page 7.
Guidelines are set forth for determining for August
1996, the weighted average interest rate and the
resulting permissible range of interest rates used to
calculate current liability for purposes of the full funding
limitation of section 412(c)(7) of the Code as amended
by the Omnibus Budget Reconciliation Act of 1987 and
by the Uruguay Round Agreements Act (GATT).
Announcement 96–82, page 14.
T.D. 8663, 1996–23 I.R.B. 4, concerning the treatment
of certain transfers to a controlled corporation, is
corrected.
TAX CONVENTIONS
Page 6.
The bilateral agreements between the United States and
Russia, providing for the reciprocal tax exemption of
Finding Lists begin on page 17.
Monthly Index for August on page 19.
Announcement 96–83, page 14.
T.D. 8669, 1996–23 I.R.B. 6, relating to the computation of combined taxable income under the profit split
method, is corrected.
Announcement 96–84, page 14.
T.D. 8662, 1996–23 I.R.B. 5, relating to the diversification of common trust funds at the time of a combination
or division, is corrected.
Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining of ficers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.
The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great cour tesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we ascertain and apply the true meaning of the statute.
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.
court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforcement).
Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Service 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,
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual period,
respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.
3
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
on this page.
Section 280G.—Golden Parachute
Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of September
1996. See Rev. Rul. 96–43, on this page.
Section 382.—Limitation on Net
Operating Loss Carryforwards and
Certain Built-In Losses Following
Ownership Change
The adjusted federal long-term rate is set forth
for the month of September 1996. See Rev. Rul.
96–43, on this page.
Section 412.—Minimum Funding
Standards
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
on this page.
Section 483.—Interest on Certain
Deferred Payments
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
on this page.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
on this page.
Section 846.—Discounted Unpaid
Losses Defined
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
on this page.
Section 467.—Certain Payments
for the Use of Property or Services
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
on this page.
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
on this page.
Section 1274.—Determination of
Issue Price in the Case of Certain
Debt Instruments Issued for
Property
(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal
rates; adjusted federal long-term rate;
and the long-term exempt rate. For
purposes of sections 1274, 1288, 382,
and other sections of the Code, tables
set forth the rates for September 1996.
Rev. Rul. 96–43
This revenue ruling provides various
prescribed rates for federal income tax
purposes for September 1996 (the current month.) Table 1 contains the shortterm, mid-term, and long-term applicable federal rates (AFR) for the current
month for purposes of section 1274(d)
of the Internal Revenue Code. Table 2
contains the short-term, mid-term, and
long-term adjusted applicable federal
rates (adjusted AFR) for the current
month for purposes of section 1288(b).
Table 3 sets forth the adjusted federal
long- term rate and the long-term taxexempt rate described in section 382(f).
Table 4 contains the appropriate percentages for determining the low-income
housing credit described in section
42(b)(2) for buildings placed in service
during the current month. Finally, Table
5 contains the federal rate for determining the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest
for purposes of section 7520.
REV. RUL. 96–43 TABLE 1
Applicable Federal Rates (AFR) for September 1996
Annual
Period for Compounding
Semiannual
Quarterly
Monthly
Short-Term
AFR
110% AFR
120% AFR
130% AFR
6.02%
6.63%
7.25%
7.86%
5.93%
6.52%
7.12%
7.71%
5.89%
6.47%
7.06%
7.64%
5.86%
6.43%
7.02%
7.59%
Mid-Term
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
6.64%
7.31%
7.99%
8.67%
10.04%
11.76%
6.53%
7.18%
7.84%
8.49%
9.80%
11.43%
6.48%
7.12%
7.76%
8.40%
9.68%
11.27%
6.44%
7.07%
7.71%
8.34%
9.61%
11.17%
Long-Term
AFR
110% AFR
120% AFR
130% AFR
7.03%
7.74%
8.46%
9.18%
6.91%
7.60%
8.29%
8.98%
6.85%
7.53%
8.21%
8.88%
6.81%
7.48%
8.15%
8.82%
4
REV. RUL. 96–43 TABLE 2
Adjusted AFR for September 1996
Annual
Short-term
adjusted AFR
Mid-term
adjusted AFR
Long-term
adjusted AFR
Period for Compounding
Semiannual
Quarterly
Monthly
4.00%
3.96%
3.94%
3.93%
4.69%
4.64%
4.61%
4.60%
5.63%
5.55%
5.51%
5.49%
REV. RUL. 96–43 TABLE 3
Rates Under Section 382 for September 1996
Adjusted federal long-term rate for the current month
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)
5.63%
5.80%
REV. RUL. 96–43 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for September 1996
Appropriate percentage for the 70% present value low-income housing credit
8.61%
Appropriate percentage for the 30% present value low-income housing credit
3.69%
REV. RUL. 96–43 TABLE 5
Rate Under Section 7520 for September 1996
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest
Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
page 4.
8.0%
Section 7520.—Valuation Tables
Section 7872.—Treatment of Loans
with Below-Market Interest Rates
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
page 4.
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of September 1996. See Rev. Rul. 96–43,
page 4.
5
Part II. Treaties and Tax Legislation
Subpart A.—Tax Conventions
RUSSIA
EMBASSY OF
THE UNITED STATES OF AMERICA
MOSCOW
JULY 18, 1994
The Embassy of the United States of
America presents its compliments to the
Ministry of Foreign Affairs of the Russian Federation. The Government of the
United States of America, in accordance
with Sections 872(b) and 883(a) of the
Internal Revenue Code, agrees to exempt from tax gross income derived
from the international operations of
ships or aircraft by individual residents
of the Russian Federation (other than
U.S. citizens) and corporations which
are incorporated in the Russian Federation. This exemption is granted on the
basis of equivalent exemptions granted
by the Russian Federation to individual
residents of the United States and to
corporations organized in the United
States.
In the case of a Russian corporation,
the exemptions shall apply only if the
corporation meets the ownership or public trading requirements of U.S. law.
Gross income includes all income
derived from the international operation
of ships or aircraft, including:
I. Income from the rental on a full
(time or voyage) basis of ships or
aircraft used in international transport;
II. Income from the rental on a
bareboat basis of ships or aircraft
used in international transport if such
income is incidental to income from
the international operation of ships or
aircraft;
III. Income from the rental of containers and related equipment used in
international transport if such income
is incidental to income from the international operation of ships or aircraft;
IV. Gains from the sale or other
alienation of ships or aircraft used in
international transport by a person
primarily engaged in the international
operation of ships or aircraft.
When the Government of the Russian
Federation agrees to these terms, this
will constitute an agreement between the
two governments. This agreement shall
enter into force on the date of the
Government of the Russian Federation’s
reply note and shall have effect with
respect to taxable years beginning on or
after January 1, 1991, and terminate
from the date of entry into force of the
Agreement between the Russian Federation and the United States of America to
Avoid Double Taxation and Prevention
of Tax Evasion with Respect to Taxes
on Income and Capital dated June 17,
1992.
The Embassy of the United States of
America avails itself of the opportunity
to extend to the Ministry of Foreign
Affairs of the Russian Federation renewed assurances of its highest consideration.
RUSSIAN FEDERATION
MINISTRY OF
FOREIGN AFFAIRS
MOSCOW
JULY 21, 1994
The Ministry of Foreign Affairs of the
Russian Federation presents its compliments to the Embassy of the United
States of America and has the honor to
confirm receipt of the Embassy note no.
MFA/112/94 dated July 18, 1994, which
reads as follows:
The Russian translation of the abovementioned note agrees in all substantive
6
respects with the original English text,
with the following exceptions:
P. 1, para. 1
English: . . . presents its compliments to
the Ministry of Foreign Affairs of the
Russian Federation. The Government of
the United States of America. . .
Russian: . . . presents its compliments to
the Ministry of Foreign Affairs of the
Russian Federation and has the honor to
advise that the Government of the
United States of America . . .
Ibid
English: the Internal Revenue Code
Russian: the Tax Code
P. 2, para. IV
English: . . . by a person primarily engaged in the international transport . . .
Russian: . . . by a juridical person
engaged in the international
transport . . .
[Translator’s note: in the numeration of
paragraphs on pp. 1–2, the English text
uses Roman numerals, whereas the Russian text employs ordinary numbers]
We have the honor to inform you that
the foregoing is acceptable to the Government of the Russian Federation, and
it therefore agrees that the U.S. Embassy note and this reply thereto shall
constitute an Agreement between the
Government of the Russian Federation
and the Government of the United
States of America, which shall enter into
force on the date of this reply.
The Ministry of Foreign Affairs of the
Russian Federation avails itself of the
opportunity to extend to the Embassy of
the United States of America the assurances of its high consideration.
Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest Rate
Update
Notice 96–43
Notice 88–73 provides guidelines for
determining the weighted average interest rate and the resulting permissible
range of interest rates used to calculate
current liability for the purpose of the
full funding limitation of § 412(c)(7) of
the Internal Revenue Code as amended
by the Omnibus Budget Reconciliation
Act of 1987 and as further amended by
the Uruguay Round Agreements Act,
Month
Year
Weighted
Average
August
1996
6.92
Drafting Information
The principal author of this notice is
Donna Prestia of the Employee Plans
Division. For further information regarding this notice, call (202) 622–6076
between 2:30 and 4:00 p.m. Eastern
time (not a toll-free number). Ms.
Prestia’s number is (202) 622–7377
(also not a toll-free number).
Miscellaneous Provisions Relating
to the Tax Treatment of Partnership
Items; Procedure and
Administration; OMB Control
Numbers; Correction
Notice 96–44
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Correcting amendment.
SUMMARY: This document contains a
correction to temporary regulations
(T.D. 8128 [1987–1 C.B. 325]), which
were published in the Federal Register
Pub. L. 103–465 (GATT).
The average yield on the 30-year
Treasury Constant Maturities for July
1996 is 7.03 percent.
The following rates were determined
for the plan years beginning in the
month shown below.
90% to 108%
Permissible
Range
90% to 110%
Permissible
Range
6.22 to 7.47
6.22 to 7.61
on Thursday, March 5, 1987 (52 FR
6779) relating to certain rules for the tax
treatment of partnership items.
EFFECTIVE DATE: March 5, 1987.
FOR FURTHER INFORMATION CONTACT: D. Lindsay Russell (202) 622–
3050, (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The temporary regulations that are the
subject of this correction is under sections 6221 thru 6233 of the Internal
Revenue Code.
Need for Correction
cise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Accordingly, 26 CFR part 301 is
corrected by making the following correcting amendment:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation
for part 301 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
§ 301.6231(a)(7)–1T [Correctly
redesignated from § 301.6231(a)(7)–1]
Par. 2. Section 301.6231(a)(7)–1 is
redesignated as § 301.6231(a)(7)–1T.
As published, the temporary regulations (T.D. 8128) contains an error
which may prove to be misleading and
is in need of clarification.
Michael L. Slaughter,
Acting Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
List of Subjects in 26 CFR Part 301
(Filed by the Office of the Federal Register on
July 18, 1996, 8:45 a.m., and published in the
issue of the Federal Register for July 19, 1996, 61
F.R. 37683)
Employment taxes, Estate taxes, Ex-
7
Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Allocation of Loss on Disposition of
Stock
INTL–4–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains
proposed Income Tax Regulations relating to the allocation of loss realized on
the disposition of stock. These regulations will affect United States and foreign shareholders of stock in domestic
and foreign corporations. The regulations are necessary to modify existing
guidance with respect to stock losses.
This document also contains a notice of
public hearing on the regulations.
DATES: Written comments must be received by October 7, 1996. Outlines of
topics to be discussed at the public
hearing scheduled for November 6,
1996, at 10 a.m. must be received by
October 16, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (INTL–4–95), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington
DC 20044. In the alternative, submissions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (INTL–4–95), Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Washington DC. 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,
Seth B. Goldstein, (202) 622–3850; concerning submissions and the hearing,
Evangelista Lee, (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).
1996–36
I.R.B.
Comments on the collection of information should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of Treasury,
Office of Information and Regulatory
Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
T:FP, Washington, DC 20224. Comments on the collection of information
should be received by September 6,
1996.
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.
The collection of information under
section 865(j)(1) is in § 1.865–2(e)(2)(ii). The proposed regulations provide
that in order for taxpayers to elect
retroactive application of the regulations,
taxpayers must comply with the reporting requirements contained in § 1.865–
2(e)(2)(ii). This information is required
by the IRS as a condition for a taxpayer
to elect to apply the rules of § 1.865–2
retroactively. This information will be
used to determine whether a taxpayer
properly applied the regulations. The
respondents generally will be U.S. corporations or individuals that sell or
otherwise dispose of stock in a foreign
corporation of which the seller owns
more than 10% of the vote or value.
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.
Estimated total annual reporting burden: 4,000 hours. The estimated annual
burden per respondent varies from 1
hour to 5 hours, depending on individual
circumstances, with an estimated average of 2 hours.
Estimated number of respondents:
2,000.
Estimated annual frequency of responses: Once.
Background
This document contains proposed
regulations amending the Income Tax
Regulations (26 CFR Part 1) under
sections 861, 865, and 904 of the Internal Revenue Code. These regulations are
8
also issued under authority contained in
section 7805 of the Internal Revenue
Code.
Explanation of Provisions
This notice of proposed rulemaking
provides rules under section 865(j) relating to the treatment of losses from the
sale or other disposition of stock.
Section 1.865–1 provides that the allocation of loss on the disposition of
property not governed by § 1.865–2
continues to be governed by the generally applicable rules of § 1.861–8, except as provided in other administrative
pronouncements. For example, Notice
89–58 (1989–1 C.B. 699) remains in
effect with respect to losses described in
that Notice. The treatment of portfolio
stock, which is excluded from § 1.865–
2, will be reviewed in the context of a
broader project dealing with similar
portfolio investments, including debt instruments and derivative financial products. Allocation of loss on the disposition of stock of a regulated investment
company and stock of an S corporation
also will continue to be governed by
§§ 1.861–8(e)(7)(i) and (ii).
Section 1.865–2(a) provides the general rule that stock losses are allocated
in the same manner as stock gains
(determined without regard to sections
1248 and 865(f)). Thus, stock loss generally is allocated to the residence of the
seller. Loss recognized by a United
States resident on the disposition of
stock attributable to a foreign branch is
allocated to foreign source income if a
gain would have been taxable by the
foreign country and the highest marginal
rate of tax imposed in that foreign
country is at least 10 percent. Loss
recognized by a nonresident alien individual or foreign corporation with respect to stock constituting a United
States real property interest reduces
United States source income, in accordance with section 897.
Section 1.865–2(b) provides exceptions to the general rule. Section 1.865–
2(b)(1) provides a dividend recapture
rule that applies to losses realized on a
disposition of stock within 24 months
following the inclusion of a dividend or
similar amount. To the extent of the
dividend recapture amount, the loss shall
be allocated to the same class of income
as the dividend. Under a de minimis
rule, the recapture rule will not apply if
the sum of all dividend recapture
amounts is less than 10 percent of the
realized loss.
A dividend recapture amount includes
an actual dividend, a subpart F or
qualified electing fund inclusion attributable to a dividend received by a controlled foreign corporation in a separate
limitation category other than that for
passive income, and an inclusion attributable to section 956 or 956A. Dividends from foreign corporations, which
often are sheltered from United States
tax by foreign tax credits and do not
reduce the shareholder’s basis in the
stock, may reduce the selling price of
the stock, thereby creating or increasing
a loss on sale. Similarly, the identified
subpart F inclusions may increase the
shareholder’s stock basis without substantially affecting the value of the
stock, offering similar opportunities to
create a tax mismatch from an economic
‘‘wash’’ by pairing tax-sheltered foreign
source inclusions and United States
source loss.
Section 1.865–2(b)(2) provides a consistency rule requiring generally that
loss recognized on the disposition of an
80%-owned foreign affiliate reduces foreign source passive income if, within
the past five years, the seller or any
member of its consolidated group recognized gain on the disposition of a foreign affiliate that was sourced under
section 865(f). In order to provide relief
for taxpayers that could have taken steps
to avoid section 865(f) treatment on
gain sales occurring prior to the publication of these proposed regulations, the
five-year lookback period will be phased
in so that losses will be tainted only by
reason of gains recognized after September 6, 1996.
Section 1.865–2(b)(3) provides antiabuse rules designed to prevent taxpayers from changing the allocation of a
loss with respect to stock or other
property by entering into certain transactions.
Section 1.865–2(c) provides rules of
general application. Section 1.865–
2(c)(1) provides that a partner’s distributive share of loss resulting from a
disposition of stock by a partnership is
allocated as if the partner disposed of
the stock. In an appropriate case the loss
may be attributable to a fixed place of
business of the partnership rather than to
the partner’s residence.
Section 1.865–2(c)(2) provides that
worthlessness shall be treated as a disposition for purposes of the stock loss
allocation rules.
Section 1.865–2(d) provides definitions.
Under § 1.865–2(e), the regulations
are proposed to be effective for taxable
years beginning after 60 days after the
date final regulations are published in
the Federal Register. However, a taxpayer may elect to apply the regulations
retroactively to stock losses in all open
post-1986 taxable years. A taxpayer generally may make the election by attaching a statement to an original or
amended federal income tax return filed
after final regulations are published in
the Federal Register. However, the
election will not be effective unless
amended returns are filed within 120
days of the date final regulations are
published in the Federal Register.
Section 1.904–4(c) is proposed to be
amended to provide rules specifically
addressing the treatment of loss allocated to the section 904(d) separate
category for passive income. The proposed amendments provide that, for purposes of the grouping rules relating to
the high-tax kick-out described in section 904(d)(2)(F), a passive loss is initially allocated to a group based on the
foreign tax that was, or would have
been, imposed on the transaction had the
sale resulted in a gain under foreign law.
If, after allocation and apportionment of
all deductions, net income in a group is
less than zero, any taxes imposed with
respect to the group are considered
related to general limitation income. The
net loss is not considered related to
general limitation income, but proportionately reduces income in the other
passive income groups. The determination of whether income in the positive
income groups is high-taxed is made
after this allocation of loss groups. Any
net loss in the section 904(d) separate
category for passive income constitutes
a separate limitation loss governed by
section 904(f)(5).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
is hereby certified that these regulations
do not have a significant economic
impact on a substantial number of small
entities. This certification is based on
the fact that these regulations will primarily affect U.S. owners of significant
interests in foreign corporations, which
owners generally are large multinational
9
corporations. This certification is also
based upon the fact that, even in cases
in which the regulation applies to small
entities, the burden imposed by the
collection of information in the regulation, which is merely an election to
apply the regulation to prior taxable
years, is not substantial and, therefore,
the collection of information will not
impose a significant economic impact
on such entities. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will
be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration will be given to any written comments (signed original and eight (8)
copies) that are timely submitted to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for November 6, 1996, at 10 a.m., in
room 2615, Internal Revenue Building,
1111 Constitution Avenue NW., Washington DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons that wish
to present oral comments at the hearing
must submit written comments by October 7, 1996 and submit an outline of
topics to be discussed and time to be
devoted to each topic (signed original
and eight (8) copies) by October 16,
1996.
A period of 10 minutes will be allotted to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Seth B. Goldstein, of the Office
of the Associate Chief Counsel (International), IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
1996–36
I.R.B.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR Part 1 is proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.865–1 is also issued under
26 U.S.C. 865(j)(1).
Section 1.865–2 is also issued under
26 U.S.C. 865(j)(1).
Par. 2. Section 1.861–8 is amended by
adding paragraph (e)(7)(iii) to read as
follows: § 1.861–8 Computation of taxable income from sources within the
United States and from other sources
and activities.
*
*
*
*
*
(e) * * *
(7) * * *
(iii) Special rules for allocation of
loss from disposition of stock. See
§ 1.865–2 for special rules regarding
the allocation of loss recognized on
certain dispositions of stock in taxable
years beginning after December 31,
1986.
Par. 3. Sections 1.865–1 and 1.865–2
are added under the undesignated center heading, DETERMINATION OF
SOURCES OF INCOME, to read as
follows:
§ 1.865–1 Loss from the disposition of
personal property.
Allocation of loss on the sale or other
disposition of portfolio stock, stock of a
regulated investment company (as defined in section 851), stock of an S
corporation (as defined in section 1361),
and other personal property not governed by § 1.865–2 is governed by
§ 1.861–8 or other administrative pronouncements. Portfolio stock is, with
respect to a taxpayer, stock in a corporation in which the taxpayer owns, or is
considered to own under the rules of
section 267(c), less than 10 percent of
the total combined voting power of all
classes of stock entitled to vote of such
corporation and less than 10 percent of
the total value of the stock of such
corporation.
§ 1.865–2 Loss from the disposition of
certain stock.
(a) General rules for allocation of
loss on disposition of stock—(1) Allocation against gain. Except as otherwise
1996–36
I.R.B.
provided in § 1.865–1 and paragraph
(b) of this section, loss recognized on
the sale or other disposition of stock
shall be allocated to the class of gross
income and, if necessary, apportioned
between the statutory grouping of gross
income (or among the statutory groupings) and the residual grouping of gross
income, with respect to which gain
(other than gain treated as a dividend
under section 1248) from the sale of
such stock would give rise in the hands
of the seller (without regard to section
865(f)). For purposes of section 904,
any such loss shall be allocated to the
separate category to which such gain
would have been assigned (without regard to section 904(d)(2)(A)(iii)(III)).
For purposes of § 1.904–4(c)(2)(ii)(A),
any loss allocated to passive income
shall be allocated (prior to the application of § 1.904–4(c)(2)(ii)(B)) to the
group of passive income to which gain
on the sale would have been assigned if
the sale of the stock had resulted in the
recognition of a gain under the law of
the relevant foreign jurisdiction or jurisdictions. See section 904(f)(5) and the
regulations under that section for rules
regarding the treatment of separate limitation losses.
(2) Stock attributable to foreign office. Except as otherwise provided in
§ 1.865–1 and paragraph (b) of this
section, in the case of loss on the sale or
other disposition of stock (other than
stock constituting inventory) by a
United States resident that is attributable
to an office or other fixed place of
business in a foreign country within the
meaning of section 865(e)(3), the loss
shall be allocated to reduce foreign
source income if a gain would have
been taxable by the foreign country and
the highest marginal rate of tax imposed
in the foreign country is at least 10
percent.
(3) Stock constituting a United States
real property interest. Loss recognized
by a nonresident alien individual or a
foreign corporation on the sale or other
disposition of stock that constitutes a
United States real property interest shall
be allocated to reduce United States
source income. For additional rules governing the treatment of such loss, see
section 897 and the regulations thereunder.
(b) Exceptions—(1) Dividend recapture exception—(i) In general. Except as
otherwise provided in § 1.865–1, if a
taxpayer realizes a loss on a disposition
of stock, and the taxpayer included in
income a dividend recapture amount (or
10
amounts) with respect to such stock at
any time during the recapture period,
then, to the extent of the dividend
recapture amount (or amounts), the loss
shall be allocated and apportioned on a
proportionate basis to the class or
classes of gross income or the statutory
or residual grouping or groupings of
gross income to which the dividend
recapture amount was assigned.
(ii) Exception for de minimis
amounts. Paragraph (b)(1)(i) of this section shall not apply to a loss realized by
a taxpayer on the disposition of stock if
the sum of all dividend recapture
amounts included in income by the
taxpayer with respect to such stock
during the recapture period is less than
10 percent of the realized loss.
(2) Consistency exception—(i) In
general. Except to the extent provided
in paragraph (b)(1) of this section, loss
recognized by a taxpayer with respect to
the sale or other disposition of stock of
a foreign affiliate (or of a corporation
that was a foreign affiliate within the
five-year period preceding the date of
the sale) or a foreign affiliate holding
company shall be allocated to reduce
foreign source income if the taxpayer
(or, in the case of a taxpayer that is a
member of a consolidated group (within
the meaning of § 1.1502–1(h)) at the
time the loss is recognized, the consolidated group) recognized gain on the
disposition of any stock that was
sourced under section 865(f) within the
five-year period ending on the last day
of the taxable year in which the loss
was recognized. See paragraph (a)(1) of
this section for rules relating to the
allocation of the loss to separate categories described in section 904(d).
(ii) Phased-in lookback period. The
rule of paragraph (b)(2)(i) of this section
shall apply only if gain sourced under
section 865(f) was recognized after September 6, 1996.
(3) Anti-abuse rules. If one of the
principal purposes of a reorganization
within the meaning of section 368(a),
liquidation under section 332, transfer to
a corporation under section 351, transfer
to a partnership under section 721,
transfer to a trust, distribution by a
partnership, distribution by a trust, or
transfer to or from a qualified business
unit (within the meaning of section
989(a)) is to change the allocation of a
built-in loss on the disposition of stock
(or other personal property), the loss
shall be allocated as if it were recognized on the disposition of the stock (or
other personal property) immediately
prior to the reorganization, liquidation,
transfer, or distribution. In addition, if a
loss recognized by a taxpayer with respect to the sale or other disposition of
stock in a corporation is primarily attributable to loss with respect to one or
more financial instruments held by the
corporation, and one of the taxpayer’s
principal purposes for holding the financial instrument or instruments through
the corporation is to allocate loss under
§ 1.865–2, the stock loss shall be allocated under § 1.865–1 as if it were
recognized on the disposition of such
financial instrument or instruments.
Whether a taxpayer has a principal
purpose to allocate loss under § 1.865–
2 shall be determined by taking into
account all the facts and circumstances,
including whether the corporation engages in business activities (other than
trading financial instruments) and
whether the taxpayer or any related
person or persons (within the meaning
of section 267(b) or 954(d)(3)) hold
positions that offset loss positions held
by the corporation. For purposes of this
paragraph (b)(3), positions are offsetting
if the risk of loss of holding one or
more positions is substantially diminished by holding one or more other
positions. A person may have a principal
purpose of affecting loss allocation even
though this purpose is outweighed by
other purposes (taken together or separately).
(4) Example. The application of this
paragraph (b) may be illustrated by the
following example:
Example. (i) P, a domestic corporation, is a
United States shareholder of N, a controlled
foreign corporation. N has never had any subpart
F income and all of its earnings and profits are
described in section 959(c)(3). On August 5, 1997,
N distributes a dividend to P in the amount of
$100. The dividend gives rise to a $5 foreign
withholding tax, and P is deemed to have paid an
additional $45 of foreign income tax with respect
to the dividend under section 902. Under section
904(d)(3) the dividend is general limitation income
described in section 904(d)(1)(I).
(ii) On February 6, 1998, P sells its shares of N
and recognizes a $110 loss. In 1998, P has the
following taxable income, excluding the loss on
the sale of N:
(A) $1,000 of foreign source income that is
general limitation income described in section
904(d)(1)(I), which is subject to foreign taxes of
$400;
(B) $1,000 of foreign source capital gain that is
passive income described in section 904(d)(1)(A)
attributable to gain on the sale of stock in a
foreign affiliate that is sourced under section
865(f), which is subject to foreign taxes of $30.
(iii) The $100 dividend paid in 1997 is a
dividend recapture amount that was included in
P’s income within the recapture period preceding
the disposition of the N stock. The de minimis
exception of paragraph (b)(1)(ii) of this section
does not apply because the $100 dividend recapture amount exceeds 10 percent of the $110 loss.
Therefore, to the extent of the $100 dividend
recapture amount, the loss must be allocated under
paragraph (b)(1)(i) of this section to the separate
limitation category to which the dividend was
assigned (general limitation income).
(iv) Because P recognized gain on the sale of
stock in a foreign affiliate that was sourced under
section 865(f) within the period described in
paragraph (b)(2)(i) of this section, P’s remaining
$10 loss on the disposition of the N stock is
allocated to foreign source passive income under
paragraph (b)(2)(i) of this section.
(v) After allocation of the stock loss, P’s taxable income in 1998 consists of $900 of foreign
source general limitation income and $990 of
foreign source passive income.
(c) Rules of application—(1) Loss
recognized by partnership. A partner’s
distributive share of loss resulting from
the sale or other disposition of stock by
a partnership shall be allocated and
apportioned in accordance with this section as if the partner had disposed of the
stock. If a sale of stock is attributable to
an office or other fixed place of business of the partnership within the meaning of section 865(e)(3), such office or
fixed place of business shall be considered to be an office of the partner for
purposes of this section.
(2) Worthless stock. For purposes of
this section, worthlessness giving rise to
a deduction under section 165(g) (including section 165(g)(3)) with respect
to stock shall be treated as a disposition.
(d) Definitions—(1) Terms defined in
§ 1.861–8. See § 1.861–8 for the meaning of class of gross income, statutory
grouping of gross income, and residual
grouping of gross income.
(2) Dividend recapture amount. A
dividend recapture amount is a dividend
(except for an amount treated as a
dividend under section 78), an inclusion
described in section 951(a)(1)(A)(i) (but
only to the extent attributable to a
dividend included in the earnings of a
controlled foreign corporation that is
included in foreign personal holding
company income under section 954(c)(1)(A) and that, pursuant to section
904(d)(3)(B), is treated as income in a
separate category other than the separate
category for passive income described in
section 904(d)(2)(A)), an inclusion described in section 951(a)(1)(B) or (C),
and an inclusion described in section
1293(a)(1) (but only to the extent attributable to a dividend that is included in
the earnings of a qualified electing fund
and that, pursuant to section 904(d)(3)(I), is treated as income in a separate
category other than the separate cat-
11
egory for passive income described in
section 904(d)(2)(A)).
(3) Foreign affiliate. A foreign affiliate is a foreign corporation that is a
member of the affiliated group (within
the meaning of section 1504(a) without
regard to section 1504(b)) that includes
the taxpayer.
(4) Foreign affiliate holding company. A foreign affiliate holding company is any corporation, substantially all
the assets of which consist of stock of
one or more foreign affiliates, held
directly or indirectly. For purposes of
this paragraph, any assets acquired or
held by a corporation with a principal
purpose of avoiding foreign affiliate
holding company status shall be disregarded.
(5) Recapture period. A recapture period is the 24-month period preceding
the date on which a taxpayer realizes a
loss on a disposition of stock, increased
by any period of time in which the
taxpayer has diminished its risk of loss
in a manner described in section
246(c)(4) and the regulations thereunder.
(6) Taxpayer. A taxpayer shall include
all predecessors or successors of the
taxpayer.
(7) United States resident. See section 865(g) and the regulations thereunder for the definition of United States
resident.
(e) Effective date—(1) In general.
This section is effective for taxable
years beginning after the date that is 60
days after the date these regulations are
published as final regulations in the
Federal Register.
(2) Prior year election—(i) In general. A taxpayer may elect to apply the
rules of this section to all (but not less
than all) of its taxable years that begin
after December 31, 1986, and on or
before the date that is 60 days after the
date these regulations are published as
final regulations in the Federal Register, and with respect to which the
statute of limitations expires after the
date that is 120 days after the date these
regulations are published as final regulations in the Federal Register. The election shall be effective only if the taxpayer satisfies all the applicable
requirements specified in paragraph
(e)(2)(ii) of this section.
(ii) Requirements for election—(A)
Statement filed with original or
amended return. For each taxable year
subject to the election, a taxpayer shall
file an original or amended federal income tax return that reflects the rules of
this section and includes the statement
1996–36
I.R.B.
described in paragraph (e)(2)(ii)(C) of
this section. Amended returns filed pursuant to this section must be filed on or
before the date that is 120 days after the
date these regulations are published as
final regulations in the Federal Register.
(B) Presentation of statement upon
audit. A taxpayer that is under examination with respect to any taxable year
subject to the election on the date that is
120 days after the date these regulations
are published as final regulations in the
Federal Register must furnish a copy
of the statement described in paragraph
(e)(2)(ii)(C) of this section for all years
subject to the election to the revenue
agent responsible for examining its federal income tax returns on or before the
date that is 140 days after the date these
regulations are published as final regulations in the Federal Register. For purposes of this paragraph (e)(2)(ii)(B), a
taxpayer is under examination beginning
on the date the taxpayer (or any member
of the consolidated group of which the
taxpayer is a member) has been contacted in any manner by a representative
of the Internal Revenue Service for the
purpose of scheduling any type of examination of any of its federal income
tax returns and ending on the earliest of
the date: the taxpayer (or consolidated
group of which the taxpayer is a member) receives a ‘‘no change’’ letter; the
taxpayer (or consolidated group of
which the taxpayer is a member) pays
the deficiency (or proposed deficiency);
or on which a deficiency, jeopardy,
termination, bankruptcy, or receivership
assessment is made. An electing taxpayer that is not under examination with
respect to any taxable year subject to
the election on the date that is 120 days
after the date these regulations are published as final regulations in the Federal
Register and is contacted thereafter by a
representative of the Internal Revenue
Service for the purpose of scheduling
any type of examination of any of its
federal income tax returns for a year
subject to the election must furnish a
copy of the statement described in paragraph (e)(2)(ii)(C) of this section for all
years subject to the election to the
revenue agent responsible for examining
its federal income tax returns within 20
days of being contacted.
(C) Contents of statement. The statement shall be entitled ‘‘ELECTION UNDER § 1.865–2(e)(2) TO APPLY RETROACTIVELY § 1.865–2 STOCK
LOSS ALLOCATION RULES.’’ The
statement shall identify, for the taxable
1996–36
I.R.B.
year subject to the election, each loss
from the disposition of stock that is
subject to this section and that was
incurred by the taxpayer or by any
controlled foreign corporation (within
the meaning of section 953(c)(1)(B) or
957) with respect to which the taxpayer
is a United States shareholder (within
the meaning of section 951(b) or
953(c)(1)(A)). For each such loss, the
statement shall provide the name and
identifying number of the entity that
incurred the loss, the amount of the loss,
and the paragraph of this section under
which the loss is allocated. Each loss
subject to paragraph (b)(1) of this section shall be separately identified with a
notation stating ‘‘Subject to dividend
recapture under § 1.865–2(b)(1).’’ The
statement shall also include the following declaration: ‘‘No losses, other than
those so identified herein, are subject to
§ 1.865–2(b)(1).’’ The statement shall
indicate whether the taxpayer or any
controlled foreign corporation (within
the meaning of section 953(c)(1)(B) or
957) with respect to which the taxpayer
is a United States shareholder (within
the meaning of section 951(b) or
953(c)(1)(A)) acquired the stock after
July 8, 1996, as a result of a transaction
described in paragraph (b)(3) of this
section (regardless of the purpose or
purposes of the transaction). An election
shall not be effective unless each statement required by this paragraph
(e)(2)(ii) contains all the information
specified herein.
Par. 4. Section 1.904–0 is amended
by revising the entry for § 1.904–
4(c)(2)(ii) and adding entries for paragraphs (c)(2)(ii)(A) and (B) of that
section to read as follows:
§ 1.904–0 Outline of regulation provisions for section 904.
*
*
*
*
*
§ 1.904–4 Separate application of section 904 with respect to certain categories of income.
*
*
*
*
*
(c) * * *
(2) * * *
(ii) Grouping rules.
(A) Initial allocation and apportionment of deductions.
(B) Reallocation of loss groups.
Par. 5. Section 1.904–4 is amended
by revising paragraphs (c)(1) and (c)(2)
and adding paragraph (c)(8) Example 11
and Example 12 to read as follows:
(c) High-taxed income—(1) In general. Income received or accrued by a
12
United States person that would otherwise be passive income shall not be
treated as passive income if the income
is determined to be high-taxed income.
Income shall be considered to be hightaxed income if, after allocating expenses, losses and other deductions of
the United States person to that income
under paragraph (c)(2)(ii) of this section,
the sum of the foreign income taxes
paid or accrued by the United States
person with respect to such income and
the foreign taxes deemed paid or accrued by the United States person with
respect to such income under section
902 or section 960 exceeds the highest
rate of tax specified in section 1 or
section 11, whichever applies (and with
reference to section 15 if applicable),
multiplied by the amount of such income (including the amount treated as a
dividend under section 78). If, after
application of this paragraph (c), income
that would otherwise be passive income
is determined to be high-taxed income,
such income shall be treated as general
limitation income, and any taxes imposed on that income shall be considered related to general limitation income
under § 1.904–6. If, after application of
this paragraph (c), passive income is
less than zero, the loss shall constitute a
passive separate limitation loss (subject
to the rules of section 904(f)(5) and the
regulations under that section), but any
taxes imposed on passive income shall
be considered related to general limitation income under § 1.904–6. For additional rules regarding losses related to
passive income, see paragraph (c)(2) of
this section. Income and taxes shall be
translated at the appropriate rates, as
determined under sections 986, 987 and
989 and the regulations under those
sections, before application of this paragraph (c). For purposes of allocating
taxes to groups of income, United States
source passive income is treated as any
other passive income. In making the
determination whether income is hightaxed, however, only foreign source income, as determined under United States
tax principles, is relevant. See paragraph
(c)(8) Examples (10), (11) and (12) of
this section for examples illustrating the
application of this paragraph (c)(1) and
paragraph (c)(2) of this section.
(2) Grouping of items of income in
order to determine whether passive income is high-taxed income—(i) Effective
date. For purposes of determining
whether passive income is high-taxed
income, the grouping rules of paragraphs (c)(3), (c)(4), and (c)(5) of this
section apply to taxable years beginning
after December 31, 1987. See notice
87–6 for the grouping rules applicable
to taxable years beginning after December 31, 1986 and before January 1,
1988. Paragraph (2)(ii)(B) of this section
is effective for taxable years beginning
after the date that is 60 days after the
date these regulations are published as
final regulations in the Federal Register.
(ii) Grouping rules(A) Initial allocation and apportionment of deductions.
For purposes of determining whether
passive income is high-taxed, expenses,
losses and other deductions shall be
allocated and apportioned initially to
each of the groups of passive income
(described in paragraphs (c)(3), (4), and
(5) of this section) under the rules of
§§ 1.861–8 through 1.861–14T, 1.865–
1, and 1.865–2. Taxpayers that allocate
and apportion interest expense on an
asset basis may nevertheless apportion
passive interest expense among the
groups of passive income on a gross
income basis. If loss from the disposition of property gives rise to foreign tax
(e.g., the transaction giving rise to the
loss is treated under foreign law as
having given rise to a gain), the foreign
tax shall be allocated to the group of
passive income to which the loss is
allocated under this paragraph (c)(2)(ii)(A), without regard to paragraph
(c)(2)(ii)(B) of this section. A determination of whether passive income is hightaxed shall be made only after application of paragraph (c)(2)(ii)(B) of this
section (if applicable).
(B) Reallocation of loss groups. If,
after allocation and apportionment of
expenses, losses and other deductions
under paragraph (c)(2)(ii)(A) of this section, the sum of the allocable deductions
exceeds the gross income in one or
more groups, the excess deductions shall
proportionately reduce income in the
other groups (but not below zero), and
any taxes imposed with respect to such
loss group or groups shall be considered
related to general limitation income.
*
*
*
*
*
(8) * * *
Example 11. P, a domestic corporation, earns
the following items of gross income: $100 of
foreign source, passive limitation interest income
not subject to any foreign tax, $200 of foreign
source, passive limitation royalty income subject
to a 5 percent foreign withholding tax (foreign tax
paid is $10), $1300 of foreign source, passive
limitation rental income subject to a 25 percent
foreign withholding tax (foreign tax paid is $325),
$500 of foreign source, general limitation income
that gives rise to a $250 foreign tax, and $2000 of
U.S. source capital gain that is not subject to any
foreign tax. P has a $700 deduction allocable to its
passive rental income. P’s only other deduction is
a $500 capital loss on a sale of stock that is
allocated to foreign source passive limitation income under § 1.865–2(b)(2). If P had recognized
a gain on the stock sale under foreign law, the
gain would not have been subject to foreign tax.
The $500 capital loss is initially allocated to the
group of passive income not subject to any foreign
tax, and the $400 amount by which the capital
loss exceeds the income in the group must be
reapportioned to the other groups under paragraph
(c)(2)(ii)(B) of this section. The net royalty income is thus reduced by $100 to $100 ($200 2
($400 x (200/800))) and the net rental income is
reduced by $300 to $300 ($1300 2 $700 2 ($400
x (600/800))). The $100 net royalty income is not
high-taxed and remains passive income. The $300
net rental income is high-taxed because the foreign
taxes exceed the highest United States rate of tax
on that income. Under the high-tax kick-out, the
$300 of net rental income (the gross rental income
and expenses allocated and apportioned thereto)
and the $325 of associated foreign tax are assigned to the general limitation category.
Example 12. The facts are the same as in
Example 11 except the amount of the capital loss
that is allocated under § 1.865–2(b)(2) and paragraph (c)(2) of this section to the group of foreign
source passive income subject to no foreign tax is
$1100. Under paragraph (c)(2)(ii)(B) of this section, the excess deductions of $1000 must be
reapportioned to the $200 of net royalty income
subject to a 5% withholding tax and the $600 of
net rental income subject to a 25% withholding
tax. The income in each of these groups is reduced
to zero, and the foreign taxes imposed on the
rental and royalty income are considered related to
general limitation income. The remaining loss of
($200) constitutes a separate limitation loss with
respect to passive income.
*
*
*
*
*
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
July 5, 1996, 8:45 a.m., and published in the issue
of the Federal Register for July 8, 1996, 61 F.R.
35696)
Qualified Small Business Stock;
Correction
Announcement 96–81
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of proposed rulemaking and notice of public
hearing.
SUMMARY: This document contains
corrections to notice of proposed
rulemaking and notice of public hearing
(IA–26–94 [1996–30 I.R.B. 24]) which
was published in the Federal Register on Thursday, June 6, 1996 (61 FR
28821). The notice of proposed
rulemaking and notice of public hearing
relates to the 50-percent exclusion for
gain from certain small business stock.
13
FOR FURTHER INFORMATION CONTACT: Catherine A. Prohofsky (202)
622–4930 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking
that is subject to these corrections are
under section 1202 of the Internal Revenue Code.
Need for Correction
As published, the notice of proposed
rulemaking and notice of public hearing
(IA–26–94) contain errors which may
prove to be misleading and are in need
of clarification.
Correction of Publication
Accordingly, the publication of proposed rulemaking (IA–26–94) which is
the subject of FR Doc. 96–14231 is
corrected as follows:
1. On page 28821, column 3, in the
preamble, under the caption ‘‘DATES:’’,
lines 3 and 4, the language ‘‘public
hearing scheduled for October 3, 1996
must be’’ is corrected to read ‘‘public
hearing scheduled for October 3, 1996,
must be’’.
§ 1.1202–0 [Corrected]
2. On page 28822, column 3,
§ 1.1202–0, table of contents, the entries for paragraphs (b)(1) and (2) under
§ 1.1202–2, are corrected to read as
follows:
§ 1.1202–0 Table of contents.
*
*
*
*
*
§ 1.1202–2 Qualified Small Business
Stock; Effect of Redemptions.
*
*
*
*
*
(b) * * *
(1) In general.
(2) De minimis amount.
*
*
*
*
*
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
July 25, 1996, 8:45 a.m., and published in the
issue of the Federal Register for July 26, 1996, 61
F.R. 39104)
1996–36
I.R.B.
Transfers to Investment
Companies; Correction
Announcement 96–82
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains a
correction to final regulations (T.D.
8663 [1996–23 I.R.B. 4]) which were
published in the Federal Register on
Thursday, May 2, 1996 (61 FR 19544).
The final regulations concern the treatment of certain transfers to a controlled
corporation.
Computation of Combined Taxable
Income Under the Profit Split
Method When the Possession
Product Is a Component Product or
an End-Product Form for Purposes
of the Possessions Credit Under
Section 936; Correction
Announcement 96–83
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regulations.
FOR FURTHER INFORMATION CONTACT: Andrew M. Eisenberg, (202)
622–7790 (not a toll-free number).
SUMMARY: This document contains
corrections to final regulations (T.D.
8669 [1996–23 I.R.B. 6]) which were
published in the Federal Register on
Friday, May 10, 1996 (61 FR 21366).
The final regulations relate to the computation of combined taxable income
under the profit split method.
SUPPLEMENTARY INFORMATION:
EFFECTIVE DATE: May 10, 1996
Background
FOR FURTHER INFORMATION
CONTACT: Jacob Feldman (202) 622–
3870 (not a toll-free number).
EFFECTIVE DATE: May 2, 1996
The final regulations that are the
subject of this correction are under
section 351 of the Internal Revenue
Code.
Need for Correction
Correction of Publication
Need for Correction
Accordingly, the publication of the
final regulations which are the subject
of FR Doc. 96–10394 is corrected as
follows:
As published, the final regulations
[T.D. 8669] contain errors which may
prove to be misleading and are in need
of clarification.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
June 25, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 26, 1996, 61
F.R. 39072)
1996–36
I.R.B.
3. On page 21368, § 1.936–6, in
paragraph (b)(1), in A. 12 (iv) in the
table, under the heading ‘‘Production
costs (excluding costs of materials):’’,
item 3, the language ‘‘3. P’s costs for
the CPU’s (the possession product)’’ is
corrected to read ‘‘3. P’s costs for the
CPUs (the possession product)’’.
4. On page 21369, column 3,
§ 1.936–6, paragraph (b)(1), under A.
12 (vii), line 3, the language ‘‘ending 30
days after May 10, 1996. If’’ is corrected to read ‘‘ending after June 9,
1996. If’’.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
July 25, 1996, 8:45 a.m., and published in the
issue of the Federal Register for July 26, 1996, 61
F.R. 39071)
Diversification of Common Trust
Funds; Correction
Background
The final regulations that are subject
to these corrections are under section
936 of the Internal Revenue Code.
On page 19545, column 3, in amendatory instruction ‘‘Paragraph 1.’’, lines
1 and 2, the language ‘‘Paragraph 1. The
authority citation for part 1 continues to
read as follows:’’ is corrected to read
‘‘Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:’’.
§ 1.936–6 [Corrected]
SUPPLEMENTARY INFORMATION:
As published, T.D. 8663 contains an
error that is in need of correction.
Part 1 [Corrected]
10, 1996. If’’ is corrected to read ‘‘regulations apply to taxable years ending
after June 9, 1996. If’’.
Correction of Publication
Accordingly, the publication of the
final regulations (TD 8669) which is the
subject of FR Doc. 96–11639, is corrected as follows:
1. On page 21366, column 3, in the
preamble, following the paragraph heading ‘‘Discussion’’, the first full paragraph in the column, line 4, the language ‘‘forms under the profit-split
method’’ is corrected to read ‘‘forms
under the profit split method’’.
2. On page 21367, column 1, in the
preamble, following the paragraph heading ‘‘Discussion’’, the second full paragraph in the column, lines 12 and 13,
the language ‘‘regulation is effective for
taxable years ending 30 days after May
14
Announcement 96–84
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains a
correction to final regulations (T.D.
8662 [1996–23 I.R.B. 5]) which were
published in the Federal Register on
Thursday, May 2, 1996 (61 FR 19546).
The final regulations relate to the diversification of common trust funds at the
time of a combination or division.
EFFECTIVE DATE: May 2, 1996.
FOR FURTHER INFORMATION CONTACT: Steven Schneider, (202) 622–
3060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the
subject of this correction are under
section 584 of the Internal Revenue
Code.
Need for Correction
§ 1.584–4 [Corrected]
As published, T.D. 8662 contains an
error that is in need of correction.
On page 19547, column 1, § 1.584–
4(a), the fifteenth line from the bottom
of the paragraph, the language ‘‘participant in substantially the same as’’ is
corrected to read ‘‘participant is substantially the same as’’.
Correction of Publication
Accordingly, the publication of final
regulations which are the subject of FR
Doc 96–10393 is corrected as follows.
15
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
June 25, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 26, 1996, 61
F.R. 39072)
1996–36
I.R.B.
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as ‘‘rulings’’)
that have an effect on previous rulings
use the following defined terms to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior position
is being extended to apply to a variation
of the fact situation set forth therein.
Thus, if an earlier ruling held that a
principle applied to A, and the new
ruling holds that the same principle also
applies to B, the earlier ruling is amplified. (Compare with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confusion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a published position. (Compare with amplified
and clarified, above).
Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly
used in a ruling that lists previously
published rulings that are obsoleted because of changes in law or regulations.
A ruling may also be obsoleted because
the substance has been included in regulations subsequently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing more
than restate the substance and situation
of a previously published ruling (or
rulings). Thus, the term is used to
republish under the 1986 Code and
regulations the same position published
under the 1939 Code and regulations.
The term is also used when it is desired
to republish in a single ruling a series of
situations, names, etc., that were previously published over a period of time in
separate rulings. If the new ruling does
more than restate the substance of a
prior ruling, a combination of terms is
used. For example, modified and superseded describes a situation where the
substance of a previously published ruling is being changed in part and is
continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names
of countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be
published that includes the list in the
original ruling and the additions, and
supersedes all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
PHC—Personal Holding Company.
PO—Possession of the U.S.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
M—Minor.
U.S.C.—United States Code.
Nonacq.—Nonacquiescence.
X—Corporation.
O—Organization.
Y—Corporation.
P—Parent Corporation.
Z—Corporation.
The following abbreviations in current use and
formerly used will appear in material published in
the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
16
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Numerical Finding List1
Bulletins 1996–27 through 1996–35
Announcements:
96–61, 1996–27 I.R.B. 72
96–62, 1996–28 I.R.B. 55
96–63, 1996–29 I.R.B. 18
96–64, 1996–29 I.R.B. 18
96–65, 1996–29 I.R.B. 18
96–66, 1996–29 I.R.B. 19
96–67, 1996–30 I.R.B. 27
96–68, 1996–31 I.R.B. 45
96–69, 1996–32 I.R.B. 38
96–70, 1996–32 I.R.B. 40
96–71, 1996–33 I.R.B. 16
96–72, 1996–33 I.R.B. 16
96–73, 1996–33 I.R.B. 18
96–74, 1996–33 I.R.B. 19
96–75, 1996–34 I.R.B. 29
96–76, 1996–34 I.R.B. 29
96–77, 1996–35 I.R.B. 15
96–78, 1996–35 I.R.B. 15
96–79, 1996–35 I.R.B. 15
96–80, 1996–35 I.R.B. 16
Revenue Rulings:
96–33, 1996–27 I.R.B. 4
96–34, 1996–28 I.R.B. 4
96–35, 1996–31 I.R.B. 4
96–36, 1996–30 I.R.B. 6
96–37, 1996–32 I.R.B. 4
96–38, 1996–33 I.R.B. 4
96–39, 1996–34 I.R.B. 4
96–42, 1996–35 I.R.B. 4
Tax Conventions:
1996–28 I.R.B. 36
Treasury Decisions:
8673, 1996–27 I.R.B. 4
8674, 1996–28 I.R.B. 7
8675, 1996–29 I.R.B. 5
8676, 1996–30 I.R.B. 4
8677, 1996–30 I.R.B. 7
8678, 1996–31 I.R.B. 11
8679, 1996–31 I.R.B. 4
8680, 1996–33 I.R.B. 5
Court Decisions:
2058, 1996–34 I.R.B. 13
2059, 1996–34 I.R.B. 10
2060, 1996–34 I.R.B. 5
Notices:
96–36, 1996–27 I.R.B. 11
96–37, 1996–31 I.R.B. 29
96–38, 1996–31 I.R.B. 29
96–39, 1996–32 I.R.B. 8
96–40, 1996–33 I.R.B. 11
96–41, 1996–35 I.R.B. 6
96–42, 1996–35 I.R.B. 6
Proposed Regulations:
CO–9–96, 1996–34 I.R.B. 20
CO–24–96, 1996–30 I.R.B. 22
CO–25–96, 1996–31 I.R.B. 30
CO–26–96, 1996–31 I.R.B. 31
FI–28–96, 1996–31, I.R.B. 33
FI–32–95, 1996–34 I.R.B. 21
FI–48–95, 1996–31 I.R.B. 36
FI–59–94, 1996–30 I.R.B. 23
GL–7–96, 1996–33 I.R.B. 13
IA–26–94, 1996–30 I.R.B. 24
IA–29–96, 1996–33 I.R.B. 14
IA-292-84, 1996–28 I.R.B. 38
PS–22–96, 1996–33 I.R.B. 15
PS–39–93, 1996–34 I.R.B. 27
Public Laws:
104–117, 1996–34 I.R.B. 19
Railroad Retirement Quarterly Rate
1996–29 I.R.B. 14
Revenue Procedures:
96–36, 1996–27 I.R.B. 11
96–37, 1996–29 I.R.B. 16
96–39, 1996–33 I.R.B. 11
96–40, 1996–32 I.R.B. 8
96–41, 1996–32 I.R.B. 9
96–42, 1996–32 I.R.B. 14
96–43, 1996–35 I.R.B. 6
96–44, 1996–35 I.R.B. 7
96–45, 1996–35 I.R.B. 12
1
A cumulative list of all Revenue Rulings, Revenue Procedures, Treasury Decisions, etc., published in Internal Revenue Bulletins 1996–1
through 1996–26 will be found in Internal Revenue Bulletin 1996–27, dated July 1, 1996.
17
Finding List of Current Action on
Previously Published Items1
Bulletins 1996–27 through 1996–35
*Denotes entry since last publication
Revenue Procedures:
80–27
Modified by
96–40, 1996–32 I.R.B. 8
87–32
Modified by
TD 8680, 1996–33 I.R.B. 5
92–20
Modified by
TD 8680, 1996–33 I.R.B. 5
95–29
Superseded by
96–36, 1996–27 I.R.B. 11
95–29A
Superseded by
96–36, 1996–27 I.R.B. 11
95–30
Superseded by
96–42, 1996–32 I.R.B. 14
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–1 through 1996–26 will be found in Internal
Revenue Bulletin 1996–27, dated July 1, 1996.
18
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.