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Bulletin No. 1996–24

June 10, 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

corporation, reflected its substance, determined on the

basis of all of the relevant facts and circumstances,

and was respected for federal income tax purposes.

Rev. Rul. 96–27, page 9.

Federal rates; adjusted federal rates; adjusted federal

long-term rates, 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 June

1996.

T.D. 8670, page 6.

Final regulations under section 482 of the Code relate

to qualified cost sharing arrangements.

EXEMPT ORGANIZATIONS

Rev. Rul. 96–28, page 11.

Interest rates; underpayments and overpayments. The rate

of interest determined under section 6621 of the Code

for the calendar quarter beginning July 1, 1996, is 8

percent for overpayments, 9 percent for underpayments, and 11 percent for large corporate underpayments. The rate of interest paid on the portion of a

corporate overpayment exceeding $10,000 is 6.5

percent.

Announcement 96–56, page 29.

A list is given of organizations now classified as private

foundations.

ADMINISTRATIVE

Notice 96–34, page 15.

Tax relief for those affected by Operation Joint Endeavor.

This notice provides guidance in a question and answer

format on the tax relief provided under the Act of

March 20, 1996, Pub. L. No. 104–117, 110 Stat. 827

(1996), for U.S. military and support personnel

involved in the peacekeeping efforts in Bosnia and

Herzegovina, Croatia, and Macedonia.

Rev. Rul. 96–29, page 5.

Reorganizations under section 368(a)(1)(F); series of

steps in overall plan. The merger of a corporation with

one created in another state is a section 368(a)(1)(F)

reorganization even though it is a step in a larger

transaction that includes a series of steps.

Rev. Rul. 96–30, page 4.

Spin-off of subsidiary, followed by its merger with

unrelated corporation. The form of the transaction,

consisting of the distribution by a parent corporation of

the stock of a subsidiary to its shareholders followed by

a merger of the former subsidiary into an unrelated

PS–43–95, page 20.

Proposed regulations under section 7701 of the Code

simplify the existing classification rules for certain

business organizations with an elective regime. A public

hearing will be held on August 21, 1996.

Finding Lists begin on page 36.

Announcement of Disbarments and Suspensions begins on page 33.

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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 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.

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.

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining officers when they have merit, never

arbitrarily or for trading purposes. At the same

time, 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.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great courtesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

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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.

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

all substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published

rulings apply retroactively unless otherwise indicated.

Procedures relating solely to matters of internal

management are not published; however, statements of

internal practices and procedures that affect the rights

and duties of taxpayers are published.

Revenue rulings represent the conclusions of the

Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on

positions taken in rulings to taxpayers or technical

advice to Service field offices, identifying details and

information of a confidential nature are deleted to

prevent unwarranted invasions of privacy and to comply

with statutory requirements.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and 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.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary

(Enforcement).

Part IV.—Items of General Interest.

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.

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.

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

Section 42.—Low-Income Housing

Credit

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27,

page 9.

Section 280G.—Golden Parachute

Payments

Federal short-term, mid-term, and long-term

rates are set forth for the month of June 1996.

See Rev. Rul. 96–27, page 9.

Section 355.—Distribution of Stock

and Securities of a Controlled

Corporation

26 CFR 1.355–2: Limitations.

The revenue ruling holds that the form of the

transaction, consisting of the distribution by a

parent corporation of the stock of a subsidiary to

its shareholders followed by a merger of the

former subsidiary into an unrelated corporation,

reflects its substance, determined on the basis of

all of the relevant facts and circumstances, and is

respected for federal income tax purposes. See

Rev. Rul. 96–30, on this page.

Spin-off of subsidiary, followed by

its merger with unrelated corporation.

The form of the transaction, consisting

of the distribution by a parent corporation of the stock of a subsidiary to its

shareholders followed by a merger of

the former subsidiary into an unrelated

corporation, reflected its substance,

determined on the basis of all of the

relevant facts and circumstances, and

was respected for federal income tax

purposes.

Rev. Rul. 96–30

ISSUE

If, under the facts below, a corporation distributes the stock of its wholly

owned subsidiary to its shareholders

and soon thereafter, the assets of the

former subsidiary are acquired in a

merger, is the form of the transaction

respected for Federal income tax

purposes?

FACTS

D corporation, whose stock is widely

held and actively traded, is engaged in

the manufacture and sale of consumer

products. C corporation, engaged in the

production and distribution of prepared

food products, has been a wholly

owned subsidiary of D since D purchased the C stock eight years ago.

Both D and C have actively conducted

their respective businesses for more

than five years.

For a valid business purpose, D

adopted a plan whereby it distributed,

on a pro rata basis to its shareholders,

all of the C stock. No stock of D was

surrendered.

Soon after the distribution, Y, an

unrelated corporation, and C commenced negotiations leading to an

agreement and plan of reorganization

pursuant to which C was to be merged

with and into Y. Pursuant to the

agreement, the C stock would be converted into Y stock representing 25

percent of the outstanding stock of Y.

Under applicable state law, the merger

could not be consummated without the

approval of the shareholders of C, and

the agreement and plan of reorganization provided that such approval was a

condition precedent to the merger. At

the time of the distribution of the C

stock to the D shareholders, there had

been no negotiations or agreements

relating to the transaction involving C

and Y, although an acquisition of C

was a possibility recognized by the

management of D and C at such time.

The plan of reorganization was submitted to the C shareholders after it

was approved by the directors of C in

accordance with applicable state law.

As a legal and practical matter, the C

shareholders were free to vote their C

stock for or against the merger. The C

shareholders approved the merger at a

meeting of the shareholders that had

been specifically called for such purpose. C then merged with and into Y

and the C stock was converted into Y

stock in accordance with the plan. The

merger satisfies all of the requirements

of a reorganization under § 368(a)(1)(A).

LAW AND ANALYSIS

Section 355(a) of the Internal Revenue Code provides, in part, that where

(1) a corporation distributes to its

shareholders, with respect to its stock,

either (a) all of the stock of a

corporation which it controls imme-

diately before the distribution, or (b)

subject to compliance with certain

conditions not relevant to the facts of

this ruling, an amount of stock constituting control of such a corporation,

(2) the active-trade-or-business requirements of § 355(b) are met, and (3) the

transaction is not used principally as a

device to distribute earnings and profits, no gain or loss will be recognized

to (and no amount will be includible in

the income of) such shareholders on

the receipt of such stock.

Section 355(c) provides, in effect,

that no gain or loss shall be recognized

to a corporation on a distribution, to

which § 355 applies, of stock in the

controlled corporation and that § 311

shall not apply to any such distribution.

Commissioner v. Court Holding Co.,

324 U.S. 331 (1945), holds that a sale

of property by the shareholders of a

corporation after receipt of the property

as a liquidating distribution was taxable

to the corporation when the corporation

had in fact conducted all the negotiations and the terms of the sale had been

agreed upon prior to the distribution of

the property. However, United States v.

Cumberland Public Service Co., 338

U.S. 451 (1950), holds that a sale of

assets by the shareholders after a

distribution of the assets by the corporation pursuant to a liquidation was not

taxable to the corporation. This latter

decision was based on the finding of

fact by the trial court to the effect that

the corporation had rejected an offer to

sell the property and the negotiations

had been carried on by the shareholders

after receipt of the property in

liquidation.

In Court Holding, the Supreme Court

recognized that ‘‘[t]he incidence of

taxation depends upon the substance of

a transaction. . . . [T]he transaction must

be viewed as a whole, and each step,

from the commencement of negotiations to the consummation of the sale,

is relevant. A sale by one person

cannot be transformed for tax purposes

into a sale by another by using the

latter as a conduit through which to

pass title.’’ 324 U.S. 331, 334.

If the C stock had, in form, been

exchanged by the D shareholders for Y

stock under circumstances in which D

had, in substance, made the exchange

of the C stock, D would be treated as

having distributed an amount of stock

in Y that did not constitute control of Y.

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As a result, one of the requirements of

§ 355 would not have been met. The

determination of the substance of the

transaction, i.e., which party (D or the

shareholders of D) had, in substance,

disposed of the C stock for Federal

income tax purposes is based on all of

the relevant facts and circumstances.

In this case, the form of the transaction will be respected for Federal

income tax purposes. At the time of the

distribution of the C stock by D, there

had been no negotiations regarding the

acquisition of C by Y, and the only

action taken by D with respect to the

transaction was that the directors of D

had authorized the distribution of the C

stock to the shareholders of D. The C

shareholders voted on the merger with

Y after the distribution and were free to

vote their stock for or against the

merger. Based on all of the facts and

circumstances, the substance of the

transaction is a distribution of the C

stock by D with respect to its stock

followed by the exchange of the C

stock by its shareholders for Y stock

pursuant to the merger.

HOLDING

The form of the transaction, consisting of the distribution by D of the C

stock to the D shareholders followed

by the exchange of the C stock by the

D shareholders for Y stock pursuant to

the merger of C into Y, reflects its

substance and will be respected for

Federal income tax purposes.

EFFECT ON OTHER REVENUE

RULINGS

Rev. Rul. 75–406 is modified.

APPLICATION OF SECTION

7805(b)

The Service will consider the application of § 7805(b) on a case-bycase basis.

FURTHER INFORMATION

For further information regarding

this revenue ruling contact Filiz A.

Serbes of the Office of Assistant Chief

Counsel (Corporate) at (202) 622-7750

(not a toll-free call).

Section 368.—Definitions Relating to

Corporate Reorganizations

26 CFR 1.368–1: Purpose and scope of

exception of reorganization exchanges.

The revenue ruling provides that under the

facts below, the merger of a corporation with one

created in another state is a section 368(a)(1)(F)

reorganization even though it is a step in a larger

transaction that includes a series of steps. See

Rev. Rul. 96–29, on this page.

Reorganizations under section

368(a)(1)(F); series of steps in overall

plan. The merger of a corporation with

one created in another state is a section

368(a)(1)(F) reorganization even

though it is a step in a larger transaction that includes a series of steps.

Rev. Rul. 96–29

ISSUE

Do the transactions described below

qualify as reorganizations under

§ 368(a)(1)(F) of the Internal Revenue

Code?

FACTS

Situation 1. Q is a manufacturing

corporation all of the common stock of

which is owned by twelve individuals.

One class of nonvoting preferred stock,

representing 40 percent of the aggregate value of Q, is held by a variety of

corporate and noncorporate shareholders. Q is incorporated in state M.

Pursuant to a plan to raise immediate

additional capital and to enhance its

ability to raise capital in the future by

issuing additional stock, Q proposes to

make a public offering of newly issued

stock and to cause its stock to become

publicly traded. Q entered into an

underwriting agreement providing for

the public offering and a change in its

state of incorporation. The change in

the state of incorporation was undertaken, in part, to enable the corporation

to avail itself of the advantages that the

corporate laws of state N afford to

public companies and their officers and

directors. In the absence of the public

offering, Q would not have changed its

state of incorporation. Pursuant to the

underwriting agreement, Q changed its

place of incorporation by merging with

and into R, a newly organized corporation incorporated in state N. The shares

of Q stock were converted into the

right to receive an identical number of

shares of R stock. Immediately thereafter, R sold additional shares of its stock

to the public and redeemed all of the

outstanding shares of nonvoting preferred stock. The number of new shares

sold was equal to 60 percent of all the

outstanding R stock following the sale

and redemption.

Situation 2. W, a state M corporation,

is a manufacturing corporation all of

the stock of which is owned by two

individuals. W conducted its business

through several wholly owned subsidiaries. The management of W determined that it would be in the best

interest of W to acquire the business of

Z, an unrelated corporation, and combine it with the business of Y, one of

its subsidiaries, and to change the state

of incorporation of W. In order to

accomplish these objectives, and pursuant to an overall plan, W entered into

a plan and agreement of merger with Y

and Z. In accordance with the agreement, Z merged with and into Y

pursuant to the law of state M, with the

former Z shareholders receiving shares

of newly issued W preferred stock in

exchange for their shares of Z stock.

Immediately following the acquisition

of Z, W changed its place of organization by merging with and into N, a

newly organized corporation incorporated in state R. Upon W’s change of

place of organization, the holders of W

common and preferred stock surrendered their W stock in exchange for

identical N common and preferred

stock, respectively.

LAW AND ANALYSIS

Section 368(a)(1)(F) provides that a

reorganization includes a mere change

in identity, form, or place of organization of one corporation, however effected. This provision was amended by

the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97–

248, in order to limit its application to

one corporation. Certain limitations

contained in § 381(b), including those

precluding the corporation acquiring

property in a reorganization from carrying back a net operating loss or a net

capital loss for a taxable year ending

after the date of transfer to a taxable

year of the transferor, do not apply to

reorganizations described in § 368(a)(1)(F) ‘‘in recognition of the intended

scope of such reorganizations as em-

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bracing only formal changes in a single

operating corporation.’’ H.R. Rep. No.

760, 97th Cong., 2d Sess. 540, 541

(1982). Although a change in the place

of organization usually must be effected through the merger of one

corporation into another, such a transaction qualifies as a reorganization

under § 368(a)(1)(F) because it involves only one operating corporation.

The 1982 amendment of § 368(a)(1)(F)

thus overruled several cases in which a

merger of two or more operating

corporations could be treated as a

reorganization under § 368(a)(1)(F).

See, e.g., Estate of Stauffer v. Commissioner, 403 F.2d 611 (9th Cir. 1968);

Associated Machine, Inc. v. Commissioner, 403 F.2d 622 (9th Cir. 1968);

and Davant v. Commissioner, 366 F.2d

874 (5th Cir. 1966).

A transaction does not qualify as a

reorganization under § 368(a)(1)(F) unless there is no change in existing

shareholders or in the assets of the

corporation. However, a transaction

will not fail to qualify as a reorganization under § 368(a)(1)(F) if dissenters

owning fewer than 1 percent of the

outstanding shares of the corporation

fail to participate in the transaction.

Rev. Rul. 66–284, 1966–2 C.B. 115.

The rules applicable to corporate

reorganizations as well as other provisions recognize the unique characteristics of reorganizations qualifying under

§ 368(a)(1)(F). In contrast to other

types of reorganizations, which can

involve two or more operating corporations, a reorganization of a corporation

under § 368(a)(1)(F) is treated for most

purposes of the Code as if there had

been no change in the corporation and,

thus, as if the reorganized corporation

is the same entity as the corporation

that was in existence prior to the

reorganization. See § 381(b);

§ 1.381(b)–1(a)(2); see also Rev. Rul.

87–110, 1987–2 C.B. 159; Rev. Rul.

80–168, 1980–1 C.B. 178; Rev. Rul.

73–526, 1973–2 C.B. 404; Rev. Rul.

64–250, 1964–2 C.B. 333.

In Rev. Rul. 69–516, 1969–2 C.B.

56, the Internal Revenue Service

treated as two separate transactions a

reorganization under § 368(a)(1)(F) and

a reorganization under § 368(a)(1)(C)

undertaken as part of the same plan.

Specifically, a corporation changed its

place of organization by merging into a

corporation formed under the laws of

another state and, immediately thereafter, it transferred substantially all of its

assets in exchange for stock of an

unrelated corporation. The ruling holds

that the change in place of organization

qualified as a reorganization under

§ 368(a)(1)(F).

Accordingly, in Situation 1, the

reincorporation by Q in state N

qualifies as a reorganization under

§ 368(a)(1)(F) even though it was a

step in the transaction in which Q was

issuing common stock in a public offering and redeeming stock having a

value of 40 percent of the aggregate

value of its outstanding stock prior to

the offering.

In Situation 2, the reincorporation by

W in state N qualifies as a reorganization under § 368(a)(1)(F) even though

it was a step in the transaction in

which W acquired the business of Z.

transaction doctrine in other contexts,

Rev. Rul. 79–250 is modified.

FURTHER INFORMATION

For further information regarding

this revenue ruling contact Marnie

Rapaport of the Office of Assistant

Chief Counsel (Corporate) at (202)

622-7550 (not a toll-free call).

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 June 1996. See Rev. Rul. 96–

27, page 9.

HOLDING

On the facts set forth in this ruling,

in each of Situations 1 and 2, the

reincorporation transaction qualifies as

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

notwithstanding the other transactions

effected pursuant to the same plan.

Section 412.—Minimum Funding

Standards

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27,

page 9.

EFFECT ON OTHER REVENUE

RULINGS

Section 467.—Certain Payments for

the Use of Property or Services

Rev. Rul. 79–250, 1979–2 C.B. 156,

addressed a similar issue on facts that

are substantially similar, in all material

respects, to those of Situation 2. The

ruling holds that a merger of Z with

and into Y in exchange for the stock of

W qualifies as a reorganization under

§ 368(a)(1)(A) by reason of § 368(a)(2)(D), even though W is reincorporated in another state immediately after

the merger. The ruling also holds that

the reincorporation qualifies as a reorganization under § 368(a)(1)(F). Rev.

Rul. 79–250 did not apply the step

transaction doctrine in order to combine the two transactions, stating that

the merger and the subsequent reincorporation were separate transactions because ‘‘the economic motivation supporting each transaction is sufficiently

meaningful on its own account, and is

not dependent upon the other transaction for its substantiation.’’

Although the holding of Rev. Rul.

79–250 is correct on the facts presented

therein, in order to emphasize that

central to the holding in Rev. Rul. 79–

250 is the unique status of reorganizations under § 368(a)(1)(F), and that

Rev. Rul. 79–250 is not intended to

reflect the application of the step-

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27,

page 9.

Section 468.—Special Rules for

Mining and Solid Waste Reclamation

and Closing Costs

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27,

page 9.

Section 482.—Allocation of Income

and Deductions Among Taxpayers

26 CFR 1.482–7: Sharing of costs.

T.D. 8670

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Revision of Section 482 Cost

Sharing Regulations

AGENCY: Internal Revenue Service

(IRS), Treasury.

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ACTION: Final regulations.

SUMMARY: This document contains

final regulations relating to qualified

cost sharing arrangements under section

482 of the Internal Revenue Code.

These regulations reflect technical

changes to the requirements for

qualification as a controlled participant

under the final cost sharing regulations

published in the Federal Register on

December 20, 1995.

DATES: These regulations are effective

May 13, 1996.

These regulations are applicable for

taxable years beginning on or after

January 1, 1996.

FOR FURTHER INFORMATION

CONTACT: Lisa Sams of the Office of

Associate Chief Counsel (International), IRS (202) 622-3840 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

Section 482 was amended by the Tax

Reform Act of 1986, Public Law 99–

514, 100 Stat. 2085, 2561, et. seq.

(1986–3 C.B. (Vol. 1) 1, 478). On

January 30, 1992, a notice of proposed

rulemaking concerning the section 482

amendment in the context of cost

sharing was published in the Federal

3571).

Written comments were received

with respect to the notice of proposed

rulemaking, and a public hearing was

held on August 31, 1992.

On December 20, 1995, final regulations were published in the Federal

65553) as Treasury Decision 8632.

These final regulations amend the

regulations contained in Treasury Decision 8632 by making technical changes

to the requirements for qualification as

a controlled participant contained in

§1.482–7(c).

The agency has decided not to issue

a second notice of proposed rulemaking

with respect to the modifications to TD

8632 contained in these final regulations. The rules to which the modifications relate (concerning qualification as

a controlled participant) were the subject of the notice of proposed rulemaking published on January 30, 1992, and

comments on those rules were received

in connection with those proposed

regulations. Therefore, a further comment period on these rules is unnecessary. Taxpayers need prompt guidance

on how to conform their arrangements

to the rules set forth in TD 8632,

which is effective for taxable years

beginning on or after January 1, 1996,

and which provides a one year transition period for amending arrangements.

The modifications contained in these

final regulations will aid taxpayers in

that regard, and any delay caused by a

second notice of proposed rulemaking

would be impracticable and contrary to

the public interest. Unsolicited comment letters were received in connection with TD 8632 and are available for

public inspection in the FOIA reading

room.

Explanation of Provisions

The purpose of these regulations is

to rectify problems in qualifying as a

controlled participant caused by the

technical requirements of the active

conduct rule of §1.482–7(c). This rule

provided that a controlled taxpayer may

be a controlled participant only if it

uses or reasonably expects to use

covered intangibles in the active conduct of a trade or business.

Under the 1992 proposed cost sharing regulations, a member of a group

of controlled taxpayers could participate in a qualified cost sharing arrangement on behalf of, and could satisfy the

active conduct rule based on activities

performed by, one or more other members of the group (a cost sharing

subgroup). The participating subgroup

member would then transfer or license

the intangibles developed under the

arrangement to the nonparticipating

subgroup member(s). The proposed

regulations would have measured benefits in such case on the basis of the

benefits of the entire subgroup from

exploiting the intangibles. TD 8632, in

streamlining the participation rules,

omitted the subgroup rules. Taxpayers

commented that the change would force

them to amend existing arrangements

to include as a participant every

operating company that predictably

would be using covered intangibles.

These regulations further streamline

the participation rules. The principal

reason for the active conduct rule was

to ensure that a controlled participant

stands to benefit from the use of

covered intangibles in a manner that

can be reliably measured. The Treasury

and Service have concluded that this

purpose can be accomplished without

the active conduct rule. No distinction

need be made based on the nature of a

participant’s use of covered intangibles,

so long as its benefits from such use

(whether from directly exploiting the

intangibles or from transferring or

licensing them to others) can be

reliably measured.

Accordingly, these regulations eliminate the active conduct rule of §1.482–

7(c) as a requirement for qualification

as a controlled participant in a qualified

cost sharing arrangement. Section

1.482–7(c)(1) of these regulations substitutes a general rule that a controlled

taxpayer may be a controlled participant in a cost sharing arrangement only

if it reasonably anticipates that it will

derive benefits from the use of covered

intangibles. In addition, §1.482–7(f)(3)(ii) provides that if a controlled

participant transfers covered intangibles

to another controlled taxpayer, the

participant’s benefits will be measured

with reference to the transferee’s benefits rather than with reference to any

consideration paid by the transferee.

(This gives rise to results similar to

those under the subgroup rules of the

proposed regulations by different mechanics.) Finally, §1.482–7(f)(3)(ii)

continues to provide that the amount of

benefits that each of the controlled

participants is reasonably anticipated to

derive from covered intangibles must

be measured on a basis that is consistent for all such participants.

These changes ensure that a controlled participant must benefit from

the arrangement, that the basis for

measuring benefits must be consistent

for all controlled participants, and that,

in the event of intragroup transfers,

there will be ‘‘look through’’ treatment

for reliably measuring benefits. These

rules allow a participant to exploit

covered intangibles itself or through

transferring or licensing them to others,

so long as the benefits to be derived

can be consistently and reliably measured for all controlled participants.

These regulations also clarify that

the documentation requirements of

§1.482–7(j)(2) will satisfy the principal

document requirement of §1.6662–6(d)(iii)(B) with respect to a qualified cost

sharing arrangement.

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Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It also has been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not

apply to these regulations, and, therefore, a Regulatory Flexibility Analysis

is not required. Pursuant to section

7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking

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

small business.

Drafting Information

The principal author of these regulations is Lisa Sams, Office of Associate

Chief Counsel (International), IRS.

However, other personnel from the IRS

and Treasury Department participated

in their development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

(j)

(1)

(2)

(i)

(ii)

(3)

Administrative requirements.

In general.

Documentation.

Requirements.

Coordination with penalty

regulation.

Reporting requirements.

Par. 3. Section 1.482–7 is amended

as follows:

a. By revising paragraph (c)(1)(i).

b. By adding paragraph (c)(1)(iv).

c. By removing paragraphs (c)(2) and

(c)(3) and redesignating paragraphs

(c)(4) and (c)(5) as paragraphs (c)(2)

and (c)(3), respectively.

d. By revising newly designated paragraph (c)(2)(ii).

e. By adding a sentence after the

second sentence in paragraph (f)(3)(ii).

f. By revising Example 8 of paragraph

(f)(3)(iii)(E).

g. By redesignating the text of paragraph (j)(2) following the heading as

paragraph (j)(2)(i) and adding a heading for newly designated paragraph

(j)(2)(i).

h. By removing the language ‘‘(j)(2)’’

and adding ‘‘(j)(2)(i)’’ in its place in

the first sentence of newly designated

paragraph (j)(2)(i).

i. By adding a paragraph (j)(2)(ii).

The additions and revisions read as

follows:

§1.482–7 Sharing of costs.

Paragraph 1. The authority for part 1

continues to read in part as follows:

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

Par. 2. Section 1.482–0 is amended

by revising the entries for §1.482–7(c)

and (j) to read as follows:

§1.482–0 Outline of regulations under

482.

(i) Reasonably anticipates that it will

derive benefits from the use of covered

intangibles;

(iv) The following example illustrates paragraph (c)(1)(i) of this

section:

§1.482–7 Sharing of costs.

(c)

(1)

(2)

(i)

(ii)

(3)

Participant.

In general.

Treatment of a controlled taxpayer that is not a controlled

participant.

In general.

Example.

Treatment of consolidated group.

Example. Foreign Parent (FP) is a foreign

corporation engaged in the extraction of a natural

resource. FP has a U.S. subsidiary (USS) to

which FP sells supplies of this resource for sale

in the United States. FP enters into a cost sharing

arrangement with USS to develop a new machine

to extract the natural resource. The machine uses

a new extraction process that will be patented in

the United States and in other countries. The cost

sharing arrangement provides that USS will

receive the rights to use the machine in the

extraction of the natural resource in the United

States, and FP will receive the rights in the rest

of the world. This resource does not, however,

exist in the United States. Despite the fact that

USS has received the right to use this process in

the United States, USS is not a qualified participant because it will not derive a benefit from the

use of the intangible developed under the cost

sharing arrangement.

(2) * * *

(ii) Example. The following example

illustrates this paragraph (c)(2):

Example. (i) U.S. Parent (USP), one foreign

subsidiary (FS), and a second foreign subsidiary

constituting the group’s research arm (R+D)

enter into a cost sharing agreement to develop

manufacturing intangibles for a new product line

A. USP and FS are assigned the exclusive rights

to exploit the intangibles respectively in the

United States and the rest of the world, where

each presently manufactures and sells various

existing product lines. R+D is not assigned any

rights to exploit the intangibles. R+D’s activity

consists solely in carrying out research for the

group. It is reliably projected that the shares of

reasonably anticipated benefits of USP and FS

will be 66 2/3% and 33 1/3%, respectively, and

the parties’ agreement provides that USP and FS

will reimburse 66 2/3% and 33 1/3%, respectively, of the intangible development costs

incurred by R+D with respect to the new

intangible.

(ii) R+D does not qualify as a controlled participant within the meaning

of paragraph (c) of this section, because it will not derive any benefits

from the use of covered intangibles.

Therefore, R+D is treated as a service

provider for purposes of this section

and must receive arm’s length consideration for the assistance it is deemed

to provide to USP and FS, under the

rules of §1.482–4(f)(3)(iii). Such consideration must be treated as intangible

development costs incurred by USP and

FS in proportion to their shares of

reasonably anticipated benefits (i.e., 66

2/3% and 33 1/3%, respectively). R+D

will not be considered to bear any

share of the intangible development

costs under the arrangement.

(f) * * *

(3) * * *

(ii) * * * If a controlled participant

transfers covered intangibles to another

controlled taxpayer, such participant’s

benefits from the transferred intangibles

must be measured by reference to the

transferee’s benefits, disregarding any

consideration paid by the transferee to

the controlled participant (such as a

royalty pursuant to a license agreement). * * *

(iii) * * *

(E) * * *

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Example 8. U.S. Parent (USP), Foreign Subsidiary 1 (FS1) and Foreign

Subsidiary 2 (FS2) enter into a cost

sharing arrangement to develop computer software that each will market

and install on customers’ computer

systems. The participants divide costs

on the basis of projected sales by USP,

FS1, and FS2 of the software in their

respective geographic areas. However,

FS1 plans not only to sell but also to

license the software to unrelated

customers, and FS1’s licensing income

(which is a percentage of the licensees’

sales) is not counted in the projected

benefits. In this case, the basis used for

measuring the benefits of each participant is not the most reliable because all

of the benefits received by participants

are not taken into account. In order to

reliably determine benefit shares, FS1’s

projected benefits from licensing must

be included in the measurement on a

basis that is the same as that used to

measure its own and the other participants’ projected benefits from sales

(e.g., all participants might measure

their benefits on the basis of operating

profit).

(j) * * *

(2) Documentation—(i) Requirements. * * *

(ii) Coordination with penalty regulation. The documents described in

paragraph (j)(2)(i) of this section will

satisfy the principal documents requirement under §1.6662–6(d)(2)(iii)(B)

with respect to a qualified cost sharing

arrangement.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved May 2, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on

May 9, 1996, 8:45 a.m., and published in the

issue of the Federal Register for May 13,

1996, 61 F.R. 21955)

Section 483.—Interest on Certain

Deferred Payments

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27, on

this page.

Section 807.—Rules for Certain

Reserves

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27, on

this page.

Section 846.—Discounted Unpaid

Losses Defined

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27, 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 rates,

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 June 1996.

Rev. Rul. 96–27

This revenue ruling provides various

prescribed rates for federal income tax

purposes for June 1996 (the current

month.) Table 1 contains the short-term,

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 tax-exempt 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.

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REV. RUL. 96–27 TABLE 1

Applicable Federal Rates (AFR) for June 1996

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-Term

AFR

110 AFR

120 AFR

130 AFR

Mid-Term

AFR

110 AFR

120 AFR

130 AFR

150 AFR

175 AFR

5.88%

6.48%

7.08%

7.68%

5.80%

6.38%

6.96%

7.54%

5.76%

6.33%

6.90%

7.47%

5.73%

6.30%

6.86%

7.42%

6.58%

7.26%

7.93%

8.60%

9.96%

11.66%

6.48%

7.13%

7.78%

8.42%

9.72%

11.34%

6.43%

7.07%

7.71%

8.33%

9.60%

11.18%

6.39%

7.03%

7.66%

8.28%

9.53%

11.08%

Long-Term

AFR

110 AFR

120 AFR

130 AFR

7.04%

7.75%

8.47%

9.20%

6.92%

7.61%

8.30%

9.00%

6.86%

7.54%

8.22%

8.90%

6.82%

7.49%

8.16%

8.84%

Annual

Period for Compounding

Semiannual

Quarterly

Monthly

3.93%

3.89%

3.87%

3.86%

4.81%

4.75%

4.72%

4.70%

5.78%

5.70%

5.66%

5.63%

REV. RUL. 96–27 TABLE 2

Adjusted AFR for June 1996

Short-term

adjusted AFR

Mid-term

adjusted AFR

Long-term

adjusted AFR

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REV. RUL. 96–27 TABLE 3

Rates Under Section 382 for June 1996

Adjusted federal long-term rate for the current month

5.78%

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.)

5.78%

REV. RUL. 96–27 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for June 1996

Appropriate percentage for the 70% present value low-income housing credit

8.60%

Appropriate percentage for the 30% present value low-income housing credit

3.69%

REV. RUL. 96–27 TABLE 5

Rate Under Section 7520 for June 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

overpayment exceeding $10,000 is 6.5

percent.

Rev. Rul. 96–28

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27,

page 9.

Section 6621.— Determination of

Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and

overpayments. The rate of interest

determined under section 6621 of the

Code for the calendar quarter beginning

July 1, 1996, is 8 percent for overpayments, 9 percent for underpayments,

and 11 percent for large corporate

underpayments. The rate of interest

paid on the portion of a corporate

Section 6621 of the Internal Revenue

Code establishes different rates for

interest on tax overpayments and interest on tax underpayments. Under

§ 6621(a)(1), the overpayment rate is

the sum of the federal short-term rate

plus 2 percentage points, except the

rate for the portion of a corporate

overpayment of tax exceeding $10,000

for a taxable period is the sum of the

federal short-term rate plus 0.5 of a

percentage point for interest computations made after December 31, 1994.

Under § 6621(a)(2), the underpayment

rate is the sum of the federal short-term

rate plus 3 percentage points.

Section 6621(c) provides that for

purposes of interest payable under

§ 6601 on any large corporate underpayment, the underpayment rate under

§ 6621(a)(2) is determined by substituting ‘‘5 percentage points’’ for ‘‘3

percentage points.’’ See § 6621(c) and

§ 301.6621–3 of the Regulations on

Procedure and Administration for the

definition of a large corporate underpayment and for the rules for determining the applicable rate. Section 6621(c)

and § 301.6621–3 are generally effective for periods after December 31,

1990.

Section 6621(b)(1) provides that the

Secretary will determine the federal

short-term rate for the first month in

each calendar quarter.

Section 6621(b)(2)(A) provides that

the federal short-term rate determined

under § 6621(b)(1) for any month applies during the first calendar quarter

beginning after such month.

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Section 6621(b)(3) provides that the

federal short-term rate for any month is

the federal short-term rate determined

during such month by the Secretary in

accordance with § 1274(d), rounded to

the nearest full percent (or, if a

multiple of 1⁄2 of 1 percent, the rate is

increased to the next highest full

percent).

Notice 88–59, 1988–1 C.B. 546,

announced that in determining the

quarterly interest rates to be used for

overpayments and underpayments of

tax under § 6621, the Internal Revenue

Service will use the federal short-term

rate based on daily compounding because that rate is most consistent with

§ 6621 which, pursuant to § 6622, is

subject to daily compounding.

Rounded to the nearest full percent,

the federal short-term rate based on

daily compounding determined during

the month of April 1996 is 6 percent.

Accordingly, an overpayment rate of 8

percent and an underpayment rate of 9

percent are established for the calendar

quarter beginning July 1, 1996. The

overpayment rate for the portion of

corporate overpayments exceeding

$10,000 for the calendar quarter beginning July 1, 1996, is 6.5 percent. The

underpayment rate for large corporate

underpayments for the calendar quarter

beginning July 1, 1996, is 11 percent.

These rates apply to amounts bearing

interest during that calendar quarter.

Interest factors for daily compound

interest for annual rates of 6.5 percent,

8 percent, 9 percent, and 11 percent are

published in Tables 66, 69, 71, and 75

of Rev. Proc. 95–17, 1995–1 C.B. 556,

620, 623, 625, and 629.

Annual interest rates to be compounded daily pursuant to § 6622 that

apply for prior periods are set forth in

the accompanying tables.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Marcia Rachy of the Office of

Assistant Chief Counsel (Income Tax

and Accounting). For further information regarding this revenue ruling,

contact Ms. Rachy on (202) 622-4940

(not a toll-free call).

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

RATE

DAILY RATE TABLE

IN 1995–1 C.B.

Before Jul. 1, 1975

Jul. 1, 1975—Jan. 31, 1976

Feb. 1, 1976—Jan. 31, 1978

Feb. 1, 1978—Jan. 31, 1980

Feb. 1, 1980—Jan. 31, 1982

Feb. 1, 1982—Dec. 31, 1982

Jan. 1, 1983—Jun. 30, 1983

Jul. 1, 1983—Dec. 31, 1983

Jan. 1, 1984—Jun. 30, 1984

Jul. 1, 1984—Dec. 31, 1984

Jan. 1, 1985—Jun. 30, 1985

Jul. 1, 1985—Dec. 31, 1985

Jan. 1, 1986—Jun. 30, 1986

Jul. 1, 1986—Dec. 31, 1986

12%

20%

16%

11%

13%

11%

10%

Table 2, pg. 557

Table 4, pg. 559

Table 3, pg. 558

Table 2, pg. 557

Table 5, pg. 560

Table 6, pg. 560

Table 37, pg. 591

Table 27, pg. 581

Table 75, pg. 629

Table 31, pg. 585

Table 27, pg. 581

Table 25 pg. 579

Table 23, pg. 577

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TABLE OF INTEREST RATES

FROM JAN. 1, 1987 — PRESENT

Jan. 1, 1987—Mar. 31, 1987

Apr. 1, 1987—Jun. 30, 1987

Jul. 1, 1987—Sep. 30, 1987

Oct. 1, 1987—Dec. 31, 1987

Jan. 1, 1988—Mar. 31, 1988

Apr. 1, 1988—Jun. 30, 1988

Jul. 1, 1988—Sep. 30, 1988

Oct. 1, 1988—Dec. 31, 1988

Jan. 1, 1989—Mar. 31, 1989

Apr. 1, 1989—Jun. 30, 1989

Jul. 1, 1989—Sep. 30, 1989

Oct. 1, 1989—Dec. 31, 1989

Jan. 1, 1990—Mar. 31, 1990

Apr. 1, 1990—Jun. 30, 1990

Jul. 1, 1990—Sep. 30, 1990

Oct. 1, 1990—Dec. 31, 1990

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

OVERPAYMENTS

UNDERPAYMENTS

RATE TABLE PG

1995–1 C.B.

RATE TABLE PG

1995–1 C.B.

10%

11%

10%

11%

10%

11%

12%

11%

10%

575

577

627

625

627

579

581

579

577

623

621

619

571

573

575

577

575

623

621

623

577

579

629

627

629

581

583

581

579

625

623

621

573

575

577

579

577

625

623

625

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TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 — PRESENT

RATE TABLE PG

1995–1 C.B.

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

13%

12%

11%

10%

11%

12%

11%

10%

11%

585

583

629

627

625

577

579

581

583

581

629

627

629

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 — PRESENT

RATE TABLE PG

1995–1 C.B.

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Section 7520.—Valuation Tables

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27,

page 9.

6.5%

7.5%

6.5%

5.5%

6.5%

Section 7872.—Treatment of Loans

With Below-Market Interest Rates

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for

the month of June 1996. See Rev. Rul. 96–27,

page 9.

572

574

572

620

618

620

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Part III. Administrative, Procedural, and Miscellaneous

Tax Relief for Those Affected by

Operation Joint Endeavor

Notice 96–34

PURPOSE

This notice provides guidance in a

question and answer format on the tax

relief provided under the Act of March

20, 1996 (the ‘‘Act’’), Pub. L. No.

104–117, 110 Stat. 827 (1996), for U.S.

military and support personnel involved

in the peacekeeping efforts in Bosnia

and Herzegovina, Croatia, and

Macedonia.

BACKGROUND

The Act generally provides that

members of the U.S. Armed Forces

performing services for the peacekeeping efforts in a ‘‘qualified hazardous duty area’’ are treated for tax

purposes in the same manner as if the

area were a combat zone (as determined under § 112 of the Internal

Revenue Code). The Act defines the

term ‘‘qualified hazardous duty area’’

to mean Bosnia and Herzegovina,

Croatia, or Macedonia, if, as of the

date of enactment of the Act any

member of the U.S. Armed Forces is

entitled to special pay under section

310 of title 37, United States Code

(relating to special pay; duty subject to

hostile fire or imminent danger), for

services performed in any of these

countries, but only during the period

the entitlement is in effect. On the date

of the enactment of the Act, members

of the U.S. Armed Forces were entitled

to special pay for services performed in

all of these countries.

A qualified hazardous duty area is

treated in the same manner as a combat

zone under § 112 for the purposes of

the following eight Code provisions:

(1) Section 2(a)(3) (relating to the

special rule where a deceased spouse

was in missing status);

(2) Section 112 (relating to the

exclusion from gross income of certain

military pay received by members of

the U.S. Armed Forces);

(3) Section 692 (relating to income

taxes of members of the U.S. Armed

Forces on death);

(4) Section 2201 (relating to members of the U.S. Armed Forces dying in

a combat zone or by reason of combatzone-incurred wounds, etc.);

(5) Section 3401(a)(1) (defining

wages relating to certain military pay

for members of the U.S. Armed

Forces);

(6) Section 4253(d) (relating to taxation of phone service originating from

members of the U.S. Armed Forces in

a combat zone);

(7) Section 6013(f)(1) (relating to a

joint return where an individual is in

missing status); and

(8) Section 7508 (relating to the

time for performing certain tax actions

(including filing, paying, assessing,

collecting, claiming a refund, and litigating) postponed by reason of service

in a combat zone).

Under the Act, the deadline extension provisions under § 7508 apply to

members of the U.S. Armed Forces

(and those serving in support of the

U.S. Armed Forces) in the qualified

hazardous duty area. In addition, during

the period the special pay entitlement is

in effect in Bosnia and Herzegovina,

Croatia, or Macedonia, the deadline

extension provisions under § 7508 also

apply to an individual in other areas

who (1) is performing services as part

of Operation Joint Endeavor, (2) is

outside the United States, and (3) is

deployed away from that individual’s

permanent duty station.

The Act also amends § 112(b) to

raise the dollar amount of the exclusion

from gross income of military pay for

commissioned officers from $500 per

month to the ‘‘maximum enlisted

amount.’’ New § 112(c)(5) defines the

term ‘‘maximum enlisted amount’’ for

any month as the sum of (a) the highest

rate of basic pay for that month

payable to any enlisted member of the

U.S. Armed Forces in the highest enlisted pay grade, and (b) in the case of

an officer entitled to special pay under

37 U.S.C. § 310, the amount of the

special pay for that month payable to

that officer.

The Act amends § 3401(a)(1) by

limiting the exclusion from federal

income tax withholding on military pay

to the amount of military pay that is

excludable from gross income under

§ 112.

The Act is generally effective on

November 21, 1995, except for the

modifications to the income tax with-

holding rules of § 3401(a)(1), which

apply to amounts paid after the March

20, 1996, date of enactment.

QUESTIONS AND ANSWERS

The following questions and answers

generally apply to members of the U.S.

Armed Forces on active duty, and are

patterned after the questions and answers in Publication 945, Tax Information for Those Affected by Operation

Desert Storm. For additional information on reservists, decedents, or persons

missing in action, consult Publication

945 and Publication 3, Tax Information

for Military Personnel (Including Reservists Called to Active Duty).

PART 1—MILITARY PAY

EXCLUSION

Q-1: Which geographic areas does the

Act include in the qualified hazardous

duty area?

A-1: The geographic areas included in

the qualified hazardous duty area are

Bosnia and Herzegovina, Croatia, and

Macedonia.

Q-2: I am a member of the U.S. Armed

Forces assigned to perform peacekeeping services in Bosnia and

Herzegovina. Is any part of my 1996

military pay for serving in this

qualified hazardous duty area excluded

from gross income?

A-2: Yes. If you serve in a qualified

hazardous duty area as an enlisted

person for any part of a month, all your

military pay received for military service that month is excluded from gross

income. Commissioned officers have a

similar exclusion, but it is limited to

the maximum enlisted amount per

month (currently $4,254.90). Amounts

excluded from gross income are not

subject to federal income tax.

Q-3: Assuming the same facts as in

question 2 except that my military pay

was earned in 1995, is any part of my

1995 military pay for serving in this

qualified hazardous duty area excluded

from gross income?

A-3: Yes. Since the Act was generally

effective on November 21, 1995, the

same military pay exclusion rules set

forth in Q & A 2 apply to military pay

received by enlisted personnel or commissioned officers for services per-

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formed during any part of December

1995 in the qualified hazardous duty

area. The same is true for military pay

they received for service in November

1995, if they served in that area on or

after November 21, 1995 and before

December 1, 1995. The maximum

enlisted amount per month in 1995 was

$4,158.60.

Q-4: How do I exclude from gross

income the military pay received for

service in the qualified hazardous duty

area during November and December

1995?

A-4: The U.S. Army, U.S. Navy, U.S.

Air Force, and U.S. Coast Guard will

issue Form W–2c, Statement of Corrected Income and Tax Amounts, to all

members of the U.S. Armed Forces

who served in the qualified hazardous

duty area in 1995 (that is, for any

period on or after November 21, 1995).

Once you have received your Form W–

2c, you can use it to file your 1995

federal individual income tax return if

you have not yet filed. You will need

to file Form 1040X, Amended U.S.

Individual Income Tax Return, if you

have previously filed your 1995 federal

individual income tax return.

Q-5: My husband and I are both

enlisted personnel serving in the U.S.

Armed Forces in the qualified hazardous duty area. Are we both entitled

to the income tax exclusion for military

pay?

A-5: Yes. Each of you qualifies for the

income tax exclusion for your military

pay.

Q-6: I am a member of the U.S. Armed

Forces stationed in Italy. I fly patrols

over Bosnia and Herzegovina, in direct

support of the military operations there,

for which I receive hostile fire/

imminent danger pay. Is any part of my

military pay excluded from gross

income?

A-6: Yes. Under the Act and regulations in effect prior to the Act, you are

treated as serving in the qualified

hazardous duty area because you are a

member of the U.S. Armed Forces

serving in direct support of military

operations in the qualified hazardous

duty area for which you receive hostile

fire/imminent danger pay. See Q & A 2

for a discussion of the amount of your

military pay that is excluded.

Q-7: If I am injured and hospitalized

while serving in the U.S. Armed Forces

in the qualified hazardous duty area, is

any of my military pay excluded from

gross income?

A-7: Yes. Military pay received by

enlisted personnel who are hospitalized

as a result of injuries sustained while

serving in the qualified hazardous duty

area is excluded from gross income.

Commissioned officers have a similar

exclusion, but it is limited to the

maximum enlisted amount per month.

See Q & A 2. These exclusions from

gross income for hospitalized enlisted

personnel and commissioned officers

end 2 years after the date of termination of the qualified hazardous duty

area designation.

Q-8: My wife is currently serving in

the U.S. Armed Forces in the qualified

hazardous duty area and will be

eligible for discharge when she returns

home. If she is discharged upon her

return, will the payment for the annual

leave that she accrued during her

service in the qualified hazardous duty

area be excluded from gross income?

A-8: Yes. Annual leave payments made

to enlisted members of the U.S. Armed

Forces at the time of their discharge

from the service are excluded from

gross income to the extent the leave

was accrued during any month in any

part of which the member served in the

qualified hazardous duty area. If your

wife is a commissioned officer, a

portion of the annual leave payment

she receives for leave accrued during

any month in any part of which she

served in the qualified hazardous duty

area may be excluded. The leave

payment cannot be excluded to the

extent it exceeds the maximum enlisted

amount (see Q & A 2) for the month of

service to which it relates less the

amount of military pay already excluded for that month.

Q-9: My brother, who is a civilian in

the merchant marine, is on a ship that

transports military supplies between the

United States and the qualified hazardous duty area. Is he entitled to the

qualified hazardous duty area military

pay exclusion?

A-9: No. Those serving in the merchant

marine are not members of the U.S.

Armed Forces. The qualified hazardous

duty area military pay exclusion applies

only to members of the U.S. Armed

Forces. The U.S. Armed Forces include

all regular and reserve components of

the uniformed services that are under

the control of the Secretaries of Defense, Army, Navy, and Air Force, as

well as the Coast Guard.

Q-10: My husband is a member of the

U.S. Armed Forces performing services

as part of Operation Joint Endeavor in

Germany. He is not receiving hostile

fire/imminent danger pay. Is he entitled

to the military pay exclusion?

A-10: No. U.S. Armed Forces personnel serving outside the qualified hazardous duty are not entitled to the

military pay exclusion, unless they are

serving in direct support of military

operations in the qualified hazardous

duty area for which they receive hostile

fire/imminent danger pay (see Q & A

6). For a more detailed discussion of

the tax treatment of military personnel,

see Publication 3. For a discussion of

possible extension of deadlines, see Q

& A’s 29 and 30.

PART 2—EXTENSION OF

DEADLINES

Q-11: I have been serving in Croatia

since March 1, 1996. I understand that

the deadline for performing certain

actions required by the internal revenue

laws is extended as a result of my

service. On what date did these deadline extensions begin?

A-11: The deadline extension provisions apply to most tax actions required

to be performed on or after November

21, 1995, or the date you began serving

in the qualified hazardous duty area,

whichever is later. In your case, the

date that the deadline extensions began

is March 1, 1996.

Q-12: My son is a member of the U.S.

Armed Forces who is now serving in

the qualified hazardous duty area. Is he

entitled to an extension of time for

filing and paying his federal income

taxes? Are any assessment or collection

deadlines extended?

A-12: For both questions, the answer is

yes. In general, the deadlines for

performing certain actions applicable to

his federal taxes are extended for the

period of his service in the qualified

hazardous duty area on or after November 21, 1995, plus 180 days thereafter.

During this extension period, assessment and collection deadlines will be

extended, and interest and penalties

attributable to the extension period will

not be charged.

Q-13: Assuming the same facts as in

question 12, would my son still have

an extension for filing and paying his

federal individual income taxes if he

has unearned income from investments?

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A-13: Yes. The extension applies without regard to the source of your son’s

income.

Q-14: Assuming the same facts as in

question 12, will the deadline extension

provisions continue to apply if my son

is hospitalized as a result of an injury

sustained in the qualified hazardous

duty area?

A-14: Yes. The deadline extension

provisions will apply for the period that

your son is continuously hospitalized

outside of the United States as a result

of injuries sustained while serving in

the qualified hazardous duty area. For

hospitalization inside the United States,

the extension period cannot be more

than 5 years.

Q-15: Do the deadline extension provisions apply only to members of the

U.S. Armed Forces serving in the

qualified hazardous duty area?

A-15: No. The deadline extension

provisions also apply to individuals

serving in a qualified hazardous duty

area in support of the U.S. Armed

Forces, such as Red Cross personnel,

accredited correspondents, and civilian

personnel acting under the direction of

the U.S. Armed Forces in support of

those forces.

Q-16: My son is a civilian explosive

specialist who is in Macedonia training

U.S. Armed Forces personnel serving

in the qualified hazardous duty area.

Do the deadline extension provisions

apply to my son?

A-16: Yes. The deadline extension

provisions apply to your son because

he is serving in the qualified hazardous

duty area in support of the U.S. Armed

Forces.

Q-17: My husband is a private businessman working in Bosnia and

Herzegovina on nonmilitary projects.

Do the deadline extension provisions

apply to my husband?

A-17: No. Other than military personnel, the only individuals working in the

qualified hazardous duty area that are

entitled to the deadline extension provisions are those serving in support of

the U.S. Armed Forces.

Q-18: I am a member of the U.S.

Armed Forces serving in the qualified

hazardous duty area. Do the deadline

extension provisions apply to my husband who is in the United States?

A-18: Yes. The deadline extension

provisions apply not only to members

serving in the U.S. Armed Forces (or

individuals serving in support thereof)

in the qualified hazardous duty area,

but to their spouses as well, with two

exceptions. First, if you are hospitalized in the United States as a result

of injuries received while serving in the

qualified hazardous duty area, the

deadline extension provisions would

not apply to your husband. Second, the

deadline extension provisions for your

husband do not apply for any tax year

beginning more than 2 years after the

date of the termination of the qualified

hazardous duty area designation.

our children in our home. We are

required to file a Schedule H, Household Employment Taxes, as an attachment to our federal individual income

tax return to report the federal employment taxes on wages we paid to our

child care provider. Do the deadline

extension provisions apply to the filing

of Schedule H as an attachment to our

federal individual income tax return?

A-21: Yes. The deadline extension

provisions apply to all schedules and

forms that are filed as attachments to

the federal individual income tax

return.

Q-19: Assuming the same facts as in

question 18, will my husband have to

file a joint tax return in order to benefit

from the deadline extension provisions?

A-19: No. The deadline extension

provisions apply to both spouses

whether joint or separate returns are

filed. If your husband chooses to file a

separate return, he will have the same

extension of time to file and pay his

taxes that you have.

Q-22: I am a member of the U.S.

Armed Forces who served in the

qualified hazardous duty area from

December 10, 1995, through May 15,

1996. When will I be required to file

my federal individual income tax return

for 1995?

A-22: You must file your 1995 federal

individual income tax return on or

before February 25, 1997, 286 days

after you left the qualified hazardous

duty area. The deadline extension

period consists of the sum of the

following:

(1) 180 days from the date you

left the area . . . . . . . . . . . . . . . . . . . 180

(2) The number of days remaining (as of the date you entered the

area) to perform the required act

(in your case, filing your 1995

federal individual income tax return, 1/1/96 to 4/15/96) . . . . . . . . . 106

Total . . . . . . . . . . . . . . . . . . . . . 286

Q-23: My wife is a member of the U.S.

Armed Forces serving in the qualified

hazardous duty area. Can she make a

timely qualified retirement contribution

for 1995 to her individual retirement

account (IRA) after April 15, 1996, and

on or before the due date of her 1995

federal individual income tax return

after applying the extension of deadline

provisions?

A-23: Yes. Your wife can make a

timely qualified retirement contribution

for 1995 to her IRA on or before the

extended deadline for filing her 1995

income tax return under the deadline

extension provisions.

Q-20: My husband is serving in the

U.S. Armed Forces in the qualified

hazardous duty area. In 1995, our son,

who is 12 years old, received $700 of

interest income. Our daughter, who is

17 years old, received $2,000 of earned

income from part-time work and $900

of interest income. We claim both

children as dependents on our federal

individual income tax return. Are federal individual income tax returns

required to be filed for our children

while my husband is in the qualified

hazardous duty area?

A-20: No. Federal individual income

tax returns for your dependent children

are not required to be filed while your

husband is in the qualified hazardous

duty area. Instead, these returns will be

considered timely if filed on or before

the deadline for filing your federal

individual income tax return under the

deadline extension provisions. The U.S.

Armed Forces will provide your husband with instructions on how to notify

the IRS of your children’s eligibility to

receive this extension of time to file.

Since your older child may be entitled

to a refund of tax, she may want to file

her federal individual income tax return

and obtain her refund.

Q-21: I am a member of the U.S.

Armed Forces serving in Croatia. My

spouse and our three children live in

our home in the United States. During

1995, a child care provider took care of

Q-24: My brother, who served in the

U.S. Armed Forces in the qualified

hazardous duty area from December

1995 through February 1996, did not

make his fourth estimated tax payment

for 1995. Will my brother be liable for

estimated tax penalties?

A-24: No. Your brother is covered by

the deadline extension provisions and

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will not be liable for any penalties if he

files and pays any tax due by his

extended filing due date. The U.S.

Armed Forces will provide your

brother with instructions on how to

notify the IRS of his eligibility to

receive tax relief.

Q-25: My son, who is a member of the

U.S. Armed Forces, was on an installment payment plan with the IRS for

back taxes before he was assigned to

the qualified hazardous duty area. What

should be done now that he is in the

qualified hazardous duty area?

A-25: The IRS office where your son

was making payments should be contacted. Because your son is serving in

the qualified hazardous duty area, he

will not have to make payments on his

past due taxes for his period of service

in the qualified hazardous duty area

plus 180 days. No penalties or interest

will be charged during the deadline

extension period.

Q-26: My son, who is a member of the

U.S. Armed Forces serving in the

qualified hazardous duty area, will file

his federal individual income tax return

for 1995 after April 15, 1996, but on or

before the end of the deadline extension for filing that return. He expects

to receive a refund. Will the IRS pay

interest on the refund?

A-26: Yes. The IRS will pay interest

from April 15, 1996, on a refund issued

to your son if he files his 1995 federal

individual income tax return on or

before the due date of that return after

applying the deadline extension provisions. The U.S. Armed Forces will

provide your son with instructions on

how to notify the IRS of his eligibility

to receive tax relief. If his 1995 return

is not timely filed on or before the due

date after applying the deadline extension provisions, no interest will be paid

on the refund except as provided under

the normal refund rules.

Q-27: My husband and I sold our

principal residence on March 1, 1994,

and we have not bought a replacement

residence yet. He is in the U.S. Armed

Forces and reported to active duty in

the qualified hazardous duty area on

December 1, 1995. He is still in the

qualified hazardous duty area. Do the

deadline extension provisions apply to

the period we have to replace our old

residence to defer gain on that

residence?

A-27: Yes. The deadline extension

period that applies to you is the time

your husband is in the qualified hazardous duty area plus 180 days after he

leaves the qualified hazardous duty

area. In addition, because your husband

is overseas on extended active duty

(more than 90 days), you will have an

additional replacement period of at

least 1 year after the 180 days described above. However, that replacement period may not exceed 8 years

after the date you sold your old

residence plus the deadline extension

period.

Q-28: Do the deadline extension provisions apply to federal tax returns other

than the federal individual income tax

return?

A-28: Yes. The deadline extension

provisions also apply to federal estate

and gift tax returns. However, the

deadline extension provisions do not

apply to other federal tax and information returns, such as those for corporate

income tax or employment taxes.

Q-29: I am a member of the U.S. Army

that was deployed to Germany to

perform services as part of Operation

Joint Endeavor. My permanent duty

station is in the United States where

my spouse resides. Do the deadline

extension provisions for filing and

paying our federal individual income

taxes apply?

A-29: Yes. Any member of the U.S.

Armed Forces who is performing services as part of Operation Joint Endeavor outside of the United States

while deployed away from that individual’s permanent duty station qualifies

for the deadline extension for filing and

paying federal individual income taxes.

The deadline extension provisions also

apply to that member’s spouse.

Q-30: My husband, who is a member

of the U.S. Armed Forces, is at his

permanent duty station in Germany

performing services as part of Operation Joint Endeavor. Do the deadline

extension provisions apply?

A-30: No. U.S. Armed Forces personnel serving at their permanent duty

station outside the qualified hazardous

duty area are not entitled to the

deadline extension provisions. For a

more detailed discussion of the tax

treatment of military personnel, see

Publication 3.

Q-31: I am a Department of Defense

civilian employee stationed in Hungary

away from my permanent duty station

in the United States. I am performing

services as part of Operation Joint

Endeavor. Do the deadline extension

provisions apply to me?

A-31: Yes. The deadline extension

provisions apply to you. Although you

are not serving in the qualified hazardous duty area, you are a Department

of Defense civilian employee performing services away from your permanent

duty station as part of Operation Joint

Endeavor.

Q-32: My husband and I are civilian

employees of defense contractors. I

work in the United States and my

husband temporarily works in Germany. Our jobs involve the production

of equipment used by the U.S. Armed

Forces for Operation Joint Endeavor.

Do the deadline extension provisions

apply to either of us?

A-32: No. The deadline extension

provisions do not apply to civilian

employees of defense contractors unless they are serving in the qualified

hazardous duty area in support of the

U.S. Armed Forces.

PART 3—MISCELLANEOUS

PROVISIONS

Q-33: My daughter is a member of the

U.S. Armed Forces serving in the

qualified hazardous duty area. She

makes calls to me here in the United

States. Are these calls exempt from the

federal excise tax on toll telephone

service?

A-33: Yes. Telephone calls that originate within the qualified hazardous

duty area and that are made by

members of the U.S. Armed Forces

serving there are exempt from the

federal excise tax on toll telephone

service. If a calling card or collect call

is made, a certificate of exemption

must be furnished to the telephone

service provider receiving payment for

the call. The exemption certificate

(which may be obtained from the

telephone service provider) should be

signed and dated by the telephone

subscriber and contain the following

information: the amount, time, and date

of the call, the name of the person who

called from the qualified hazardous

duty area, a statement that the person

who called was a member of the U.S.

Armed Forces performing service in

the qualified hazardous duty area, and

the name and address of the telephone

subscriber.

Q-34: If the federal excise tax has

already been paid on the toll telephone

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service in Q & A 33, can a refund be

obtained?

A-34: Yes. If the federal excise tax has

already been paid on that toll telephone

service, a refund may be obtained

either from the telephone service

provider that collected the tax, or from

the IRS by filing Form 8849, Claim for

Refund of Excise Taxes.

Q-35: How will my military pay for

active service in the U.S. Armed

Forces in the qualified hazardous duty

area be reported on my 1996 Form

W-2, Wage and Tax Statement?

A-35: Military pay attributable to your

active service in the qualified hazardous duty area that is excluded from

gross income will not be reported on

your 1996 Form W–2 in the box

marked ‘‘Wages, tips, other compensation.’’ However, military pay for such

service is subject to social security and

medicare taxes and will be reported on

your 1996 Form W–2 in the boxes

marked ‘‘Social security wages’’ and

‘‘Medicare wages and tips.’’

Q-36: I’m an officer serving in the

qualified hazardous duty area. I have

made monthly contributions to an

individual retirement account (IRA) for

1996. In view of the military pay

exclusion for my service in the

qualified hazardous duty area, I may

have little or no taxable compensation

for 1996 and may not be eligible to

make an IRA contribution for 1996. If

my taxable compensation is less than

$2000, should I withdraw the portion

of my contributions that exceeds my

taxable compensation?

A-36: Yes. In general, any amount

contributed to your IRA that is more

than the smaller of (1) your taxable

compensation, or (2) $2000, is an

excess contribution and must be withdrawn to avoid a 6 percent excise tax.

Once you are sure that your taxable

compensation will be less than $2000,

you should withdraw the portion of

your contributions that exceeds your

taxable compensation. You will not be

taxed on the distributed amount if you

receive the distribution on or before the

deadline for filing your 1996 federal

individual income tax return after applying the deadline extension provisions. You may not take a deduction

with respect to these distributed contributions. You must also withdraw the

amount of net income attributable to

the distributed contributions while they

were assets of the IRA. Any of that net

income is includible in your gross

income for 1996. For further information, see Publication 590, Individual

Retirement Arrangements (IRA).

Q-37: Assuming the same facts as

question 36, how will the financial

institution that distributes my 1996 IRA

contributions to me report this

distribution?

A-37: The financial institution will

report the entire amount of the distribution (1996 distributed contributions and

attributable net income) on Form 1099–

R, Distribution From Pensions, Annuities, Retirement or Profit-Sharing

Plans, IRAs, Insurance Contracts, etc.

However, it should report only the

amount of any net income attributable

to the distributed contributions as the

‘‘Taxable amount’’ on Form 1099–R.

PART 4—INQUIRIES

Taxpayers within the United States

may seek assistance by calling the IRS

at 1-800-829-1040.

The IRS offices in Rome, Italy, and

Bonn, Germany, can also assist you

with your federal income tax questions.

You may contact the Rome office by

calling [39] (6) 4674-2560, or via fax

at [39] (6) 4674-2223, and the Bonn

office by calling [49] (228) 339-2119,

or via fax at [49] (228) 339-2810.

Taxpayers with access to E-mail may

direct questions relating to the tax

relief discussed in this notice to

oje@ccmail.irs.gov.

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Part IV. Items of General Interest

Notice of Proposed Rulemaking and

Notice of Public Hearing

Simplification of Entity Classification

Rules

PS–43–95

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains

proposed regulations that would replace

the existing regulations for classifying

certain business organizations with an

elective regime. These proposed regulations simplify the existing classification

rules.

DATES: Written comments and requests to speak (with outlines of oral

comments) at a public hearing scheduled for August 21, 1996, at 10 a.m.

must be submitted by August 12, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (PS–43–95), 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 (PS–43–95),

Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC.

FOR FURTHER INFORMATION

CONTACT: Concerning the regulations, Armando Gomez, (202)

622-3050; concerning foreign organizations, Ronald M. Gootzeit or William

H. Morris, (202) 622-3880; 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 Paper-

1996– 27 I.R.B.

work Reduction Act of 1995 (44

U.S.C. 3507).

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, T:FP, Washington,

DC 20224. Comments on the collection

of information should be received by

July 12, 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 collections of information are

required by §§301.6109–1(b)(2)(vi) and

301.7701–3(c). This information is required by the IRS to ensure the proper

classification of business organizations

and to ensure compliance with the

proposed regulations. The likely respondents are businesses and other forprofit organizations, including small

businesses.

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.

The burden of the collection of

information required by §301.6109–1

will be reflected in Forms SS–4 and

W–7. The burden of the collection of

information required by §301.7701–

3(c) will be reflected in such form as is

prescribed by the Commissioner for

purposes of making the election described in this regulation.

Introduction

This document proposes to revise

§§301.7701–1 through 301.7701–3 of

the Procedure and Administration Regulations (26 CFR part 301) to clarify

which organizations are classified as

corporations automatically under the

Internal Revenue Code (Code) and to

provide a simple elective regime for

classifying other business organizations. This document also proposes

conforming changes to §§1.581–1,

1.581–2, and 1.761–1 of the Income

Tax Regulations (26 CFR part 1), and

to §§301.6109–1, 301.7701–4,

301.7701–6, and 301.7701–7 of the

Procedure and Administration Regulations (26 CFR part 301).

Background

On April 3, 1995, Notice 95–14,

relating to classification of business

organizations under section 7701, was

published in the Internal Revenue

Bulletin (1995–1 C.B. 297). A notice

of public hearing was published in the

Federal Register on May 10, 1995 (60

FR 24813). Written comments were

received and a public hearing was held

on July 20, 1995. After consideration

of the comments, the Treasury Department and the IRS propose to replace

the existing classification regulations

with a simplified regime that is elective

for certain business organizations.

Explanation of Provisions

I. Introduction

Section 7701(a)(2) of the Code defines a partnership to include a syndicate, group, pool, joint venture, or

other unincorporated organization,

through or by means of which any

business, financial operation, or venture

is carried on, and that is not a trust or

estate or a corporation. Section

7701(a)(3) defines a corporation to

include associations, joint-stock companies, and insurance companies.

The existing regulations for classifying business organizations as associations (which are taxable as corporations

under section 7701(a)(3)) or as partnerships under section 7701(a)(2) are

based on the historical differences

under local law between partnerships

and corporations. However, many states

have revised their statutes to provide

that partnerships and other unincorporated organizations may possess characteristics that traditionally have been

associated with corporations, thereby

narrowing considerably the traditional

distinctions between corporations and

partnerships under local law. For example, some partnership statutes now

provide that no partner is unconditionally liable for all of the debts of the

partnership. Similarly, almost all states

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have enacted statutes allowing the

formation of limited liability companies. These entities provide protection from liability to all members but

may qualify as partnerships for federal

tax purposes under the existing regulations. See, e.g., Rev. Rul. 88–76

(1988–2 C.B. 360).

One consequence of the increased

flexibility under local law in forming a

partnership or other unincorporated

business organization is that taxpayers

generally can achieve partnership tax

classification for a nonpublicly traded

organization that, in all meaningful

respects, is virtually indistinguishable

from a corporation. To accomplish this,

however, taxpayers and the IRS must

expend considerable resources on classification issues. For example, since the

issuance of Rev. Rul. 88–76, the IRS

has issued seventeen revenue rulings

analyzing individual state limited liability company statutes, and has issued

several revenue procedures and numerous letter rulings relating to classification of various business organizations. Meanwhile, small business

organizations may lack the resources

and expertise to achieve the tax classification they want under the current

classification regulations.

Reacting to the fact that publicly

traded entities could easily qualify as

partnerships, in 1987 Congress enacted

section 7704 to require most publicly

traded partnerships to be taxable as

corporations. Thus, even if an organization could be classified as a partnership

under the current regulations, it will

nevertheless be classified as a corporation in most cases if its ownership

interests are publicly traded.

In light of these developments,

Treasury and the IRS believe that it is

appropriate to replace the increasingly

formalistic rules under the current

regulations with a much simpler approach that generally is elective. To

further simplify this area, the proposed

regulations provide similar rules for

organizations that have a single owner.

With respect to foreign organizations, Notice 95–14 (1995–1 C.B. 297)

observed that, while the distinctions are

similarly formalistic, the classification

process under the current regulations

involves even more complexities and

requires greater resources than does the

classification process for domestic organizations. For example, the classification of a foreign organization

involves not only a review of organiza-

tional documents, but also a thorough

understanding of the controlling foreign

law. Accordingly, the simplified system

provided under the proposed regulations extends to foreign organizations

as well, with certain modifications

explained below.

In light of the increased flexibility

under an elective regime for the

creation of organizations classified as

partnerships, the Treasury Department

and the IRS will continue to monitor

carefully the uses of partnerships in the

international context and will issue

appropriate substantive guidance when

partnerships are used to achieve results

that are inconsistent with the policies

and rules of particular Code provisions

or of U.S. tax treaties.

To accomplish the changes described

above, the proposed regulations would

replace §§301.7701–1, 301.7701–2, and

301.7701–3 with new regulations. In

addition, conforming amendments

would be made to §§1.581–1, 1.581–2,

1.761–1, 301.6109–1, 301.7701–4,

301.7701–6, and 301.7701–7.

II. General classification rules

A. Business entities

Proposed §301.7701–1 provides an

overview of the rules applicable in

determining an organization’s classification for federal tax purposes. The

first step in the classification process is

to determine whether there is a separate

entity for federal tax purposes (which

is a matter of federal tax law). The

proposed regulations explain that certain joint undertakings that are not

entities under local law may nonetheless constitute separate entities for

federal tax purposes; on the other hand,

not all entities formed under local law

are recognized as separate entities for

federal tax purposes. For example,

individuals who own property as tenants in common may create a separate

entity for federal tax purposes if the

individuals actively carry on a trade,

business, financial operation, or venture

and divide the profits therefrom. On the

other hand, an organization wholly

owned by a State is not recognized as a

separate entity for federal tax purposes

if it is an integral part of the State.

Similarly, tribes incorporated under

section 17 of the Indian Reorganization

Act of 1934, as amended, 25 U.S.C.

477, or under section 3 of the

Oklahoma Indian Welfare Act, as

amended, 25 U.S.C. 503, are not

recognized as separate entities for

federal tax purposes. See Rev. Rul. 94–

16 (1994–1 C.B. 19); Rev. Rul. 94–65

(1994–2 C.B. 14). Also, the proposed

regulations retain the rule under the

current regulations that a qualified cost

sharing arrangement described in

§1.482–7 is not a partnership for

federal tax purposes.

An organization that is recognized as

a separate entity for federal tax purposes is either a trust or a business

entity (unless a provision of the Code

expressly provides for special treatment, such as the Real Estate Mortgage

Investment Conduit (REMIC) rules, see

section 860A(a)). The proposed regulations provide that trusts generally do

not have associates or an objective to

carry on business for profit. While

these proposed regulations restate the

distinction between trusts and business

entities, the determination of whether

an organization is classified as a trust

for federal tax purposes is intended to

remain the same as under current law.

Proposed §301.7701–2 specifies

those business entities that automatically are classified as corporations for

federal tax purposes. Any other business entity that is recognized for

federal tax purposes may choose its

classification under the rules of proposed §301.7701–3. Those rules provide that a business entity with at least

two members can be classified as either

a partnership or an association, and that

a business entity with a single member

can be classified as an association or

can be disregarded as an entity separate

from its owner.

B. Corporations

The proposed regulations clarify that

business entities that are classified as

corporations for federal tax purposes

include corporations denominated as

such under applicable law, as well as

associations, joint-stock companies, insurance companies, organizations that

conduct certain banking activities, organizations wholly owned by a State,

organizations that are taxable as corporations under a provision of the Code

other than section 7701(a)(3), and

certain organizations formed under the

laws of a foreign jurisdiction or a U.S.

possession, territory, or commonwealth.

Each of these categories is described

briefly below.

The proposed regulations define corporation to include any business entity

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recognized for federal tax purposes that

is organized under a Federal or State

statute, or under a statute of a federally

recognized Indian tribe, that describes

or refers to the entity as incorporated

or as a corporation, body corporate, or

body politic. Such entities include

governmentally chartered corporations,

as well as business corporations. See,

e.g., 12 U.S.C. 21 et seq. (national

banking associations), 20 U.S.C. 1087–

2 (Student Loan Marketing Association), and 36 U.S.C. 1101 (private

corporations established under federal

law).

The proposed regulations define an

association by reference to §301.7701–

3. As discussed in detail below, that

section permits certain business entities

to choose whether to be classified as an

association or as a partnership (or, if

the entity has a single owner, as a nonentity).

The proposed regulations define a

joint-stock company as a business

entity organized under a State statute

that describes or refers to the entity as

a joint-stock company or joint-stock

association. These entities typically

have a fixed capital stock divided into

shares represented by certificates transferable only upon the books of the

company, manage their affairs by a

board of directors and executive officers, and conduct their business in the

general form and mode of procedure of

a corporation. See Burk-Waggoner Oil

Assoc. v. Hopkins, 269 U.S. 110, 113

(1925).

The proposed regulations define an

insurance company as a business entity

that is taxable as an insurance company

under subchapter L, chapter 1 of the

Code.

Under the proposed regulations, a

state-chartered bank is classified as a

corporation if any of the bank’s deposits are insured under the Federal

Deposit Insurance Act, as amended, 12

U.S.C. 1811 et seq., or a similar federal

statute. This rule reflects Congress

requirement that these organizations be

incorporated to be eligible for federal

deposit insurance, see 12 U.S.C.

1813(a)(2), and provides comparable

tax treatment to state-chartered banks

and national banks chartered under the

National Bank Act, 12 U.S.C. 21 et

seq. (which characterizes national

banks as corporations, see 12 U.S.C.

24). It also is consistent with Congress

historical treatment of banks as corporations, as reflected in section 581 of

1996– 27 I.R.B.

the Code, which requires a bank to be

incorporated for purposes of subchapter

H of chapter 1. Under this rule, however, an unincorporated organization

that conducts banking activities but that

does not have federal deposit insurance, may, under proposed §301.7701–

3, choose not to be an association for

federal tax purposes; in that case,

however, the organization is not a bank

within the meaning of section 581, and

thus is not eligible for treatment under

subchapter H.

The proposed regulations also classify as corporations organizations that

are recognized for federal tax purposes

if they are wholly owned by a State, or

any political subdivision thereof. Organizations wholly owned by a State that

are not an integral part of the State

must be recognized for federal tax

purposes and scrutinized under section

115 (which excludes from gross income

any income derived from the exercise

of any essential governmental function

and accruing to a State or any political

subdivision thereof, or the District of

Columbia). Accordingly, the proposed

regulations classify any such organization as a corporation. Nevertheless,

under section 115, the organization’s

income may not be subject to federal

income tax.

The proposed regulations define corporation to include any business entity

that is taxable as a corporation under

another provision of the Code. For

example, a business entity that is

publicly traded within the meaning of

section 7704 (and not within the

exception in section 7704(c)), is taxable as a corporation. Similarly, a

business entity that is a taxable mortgage pool under section 7701(i) is

taxable as a corporation.

Finally, the proposed regulations

classify as corporations certain foreign

business entities (including entities

organized in U.S. possessions, territories, and commonwealths) that are

listed in the regulations. Notice 95–14

observed that current law does not

automatically classify any foreign entity as a corporation by reference to the

juridical status or designation of that

entity under local law. That is, current

law does not identify the foreign

analogue to the incorporated state law

entity that is always classified as a

corporation for federal tax purposes,

even though section 7701(a)(3) makes

no distinction between domestic and

foreign entities. Rather, since the issu-

ance of Rev. Rul. 88–8 (1988–1 C.B.

403), all foreign entities have been

classified based on the characteristics

set forth in §§301.7701–2 and

301.7701–3 of the current regulations.

Nevertheless, under this approach,

those foreign entities that are

equivalent to state law corporations are

virtually always classified as

corporations.

To ensure the corporate classification

of these foreign entities, the proposed

regulations include a list of foreign

business entities that always will be

classified as corporations. Several commentators supported inclusion of a list

of foreign business entities that either

would be treated as corporations per se

or that would continue to be classified

under the current regulations. The

Treasury Department and the IRS

believe that classifying the business

entities on the list as corporations in all

cases is consistent with the goal of

simplifying the entity classification

area. The organizations listed are limited liability entities, such as the British

Public Limited Company, the French

Societe Anonyme, and the German

Aktiengesellschaft. The Treasury Department and the IRS invite comments

on the composition of the list.

Under a special grandfather rule,

however, an entity described in this list

will nevertheless be classified as a

partnership under the proposed regulations if: (1) the entity was in existence

and claimed to be a partnership on May

8, 1996, and for all prior periods, (2)

that classification was relevant to any

person for federal tax purposes at any

time during the period that includes

May 8, 1996, (3) the entity had a

reasonable basis (within the meaning of

section 6662) for claiming partnership

classification, and (4) neither the entity

nor any member has been notified in

writing on or before May 8, 1996, that

the classification of the entity is under

examination (in which case the entity’s

classification will be determined in the

examination).

When these regulations become final,

and current §301.7701–2 (on which

Rev. Rul. 88–8 is based) is superseded,

Rev. Rul. 88–8 will be obsolete.

C. Other business entities

The proposed regulations define the

term partnership to include any business entity that has at least two

members and that is not classified as a

corporation.

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Some commentators requested clarification of the effect of these elective

classification rules on an organization’s

ability to elect to be excluded from

subchapter K under section 761. The

proposed regulations do not change the

existing requirements for the election

provided in §1.761–2. Accordingly, an

organization that is classified as a

partnership under the proposed regulations may elect to be excluded from

subchapter K, if it qualifies under

§1.761–2.

Many commentators requested guidance concerning the classification of an

unincorporated business entity with a

singl/e owner. Some commentators suggested that these entities be treated as

sole proprietorships, while others suggested partnership classification. Because a fundamental characteristic of a

partnership is the presence of associates, an entity with a single owner

cannot conduct business as a partnership. However, the proposed regulations permit a business entity with a

single owner that is not required to be

classified as a corporation to elect to be

classified as an association or to have

the organization disregarded as an

entity separate from its owner (in

which case the business activity is

treated for federal tax purposes in the

same manner as if it were conducted as

a sole proprietorship, branch, or division of the organization’s owner).

III. Elective classification of certain

entities

A. In general

Proposed §301.7701–3 sets forth

rules permitting a business entity that is

not required to be classified as a

corporation (referred to in the regulation as an eligible entity) to elect its

classification for federal tax purposes.

An eligible entity that has at least two

members may elect to be classified as

an association or a partnership, and an

eligible entity with a single owner may

elect to be classified as an association

or to be disregarded as an entity

separate from its owner.

B. Default classification

The proposed regulations are designed to provide most eligible entities

with the classification they would

choose without requiring them to file

an election. Thus, the proposed regula-

tions provide default classification rules

that aim to match expectations. An

eligible entity that wants the default

classification need not file an election.

1. Domestic eligible entities

Notice 95–14 suggested partnership

default for domestic eligible entities.

The comments supported this rule, and

the proposed regulations adopt it. Thus,

a newly formed domestic eligible entity

will be classified as a partnership if it

has two or more members unless an

election is filed to classify the entity as

an association; no affirmative action

need be taken by the entity to ensure

partnership classification. Similarly, if

that entity has a single member, it will

not be treated as an entity separate

from its owner for federal tax purposes

unless an election is filed to classify

the organization as an association.

2. Foreign eligible entities

Notice 95–14 suggested association

default for foreign eligible entities. The

Notice indicated that while domestic

eligible entities typically are formed

with an intent to obtain partnership

classification, the preferred classification of foreign eligible entities is less

predictable. For example, the Notice

expressed concern that because partnership default could subject some

foreign entities to compliance requirements and excise tax liability under

section 1491, an entity should not be

classified as a partnership inadvertently. On the other hand, as some

commentators indicated, association default might not match the expectations

of a foreign eligible entity.

In response to these comments, the

proposed regulations provide a default

rule that should match expectations

more closely. The Treasury Department

and IRS believe that if any of an

organization’s members has personal

liability for the debts of the organization, the expectation is that the organization will be classified as a partnership. Accordingly, the proposed

regulations provide that if one or more

of an eligible entity’s members have

unlimited liability, the entity will be

classified as a partnership if it has two

or more members, or it will be disregarded as a separate entity if it has a

single owner. Only if all of the entity’s

members have limited liability will the

entity’s default classification be

association.

For purposes of this rule, a member

of a foreign entity has limited liability

only if, based solely on the controlling

statute or law pursuant to which the

entity is organized, the member’s personal liability for the debts of or claims

against the entity is specifically limited

(for example, to the amount of the

member’s unpaid capital contribution

or to the amount of a statutorily limited

guarantee). If protection from personal

liability is optional under the applicable

law, the entity’s organizational documents will determine which option

applies. The determination whether

there is limited liability for purposes of

the default rule is intended to be

simpler and more straightforward than

under current law, to ensure that the

default classification is readily apparent. Thus, the limited liability inquiry

generally will focus solely on controlling statutes as interpreted by judicial or

administrative review. As a result, a

member’s ability to satisfy creditors’

claims would not be relevant. If taxpayers remain uncertain whether there

is limited liability in a particular case,

they may file an election to secure the

desired classification.

3. Existing eligible entities

Commentators suggested that special

rules should be provided for eligible

entities formed prior to the effective

date of the regulations. These commentators were concerned that some existing eligible entities would be required

to file classification elections immediately to prevent their classification

from being changed under a default

rule. Under the proposed regulations,

eligible entities existing prior to the

effective date of the regulations that

choose to retain their current classification would not be required to file an

election. Rather, those entities would

retain the classification claimed under

the existing regulations (except that, if

an eligible entity with a single owner

claimed to be a partnership under the

current regulations, the entity would be

disregarded as an entity separate from

its owner under this default rule). A

foreign entity is considered such an

existing entity only if its classification

immediately prior to the effective date

of these regulations is relevant to any

person for federal tax purposes; other

foreign entities formed prior to the

effective date of these regulations

would be considered new entities at the

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time that their federal tax classification

became relevant and, therefore, would

be required to file a classification

election or be classified under the

general default rule described above.

Furthermore, under a transition rule

discussed below, the IRS generally will

not challenge an existing entity’s

claimed classification for periods to

which the existing regulations apply if

the entity had a reasonable basis for the

claimed classification.

C. Elections

1. In general

An eligible entity that does not want

the classification provided by the applicable default provision, or that wants to

change its classification, may file an

election to obtain the chosen classification. Some commentators suggested

that the election be made with Form

SS-4 (Application for Employer Identification Number); others suggested that

the election be made with the filing of

the entity’s first tax return.

An eligible entity may elect its

classification by filing an election with

the appropriate service center. The

proposed regulations would require that

the election specify the name, address,

and taxpayer identifying number of the

entity, the chosen classification,

whether the election results in a change

in classification, and whether the entity

is a domestic or foreign entity. It is

anticipated that the Commissioner will

prescribe a form for this purpose, in

which case elections must be made on

such form. The election will be effective on a date specified on the election

if that date is not more than 75 days

prior to the date on which the election

is filed, or on the date filed if no such

date is specified on the election. In

addition to the original election, a

business entity that makes an election

shall file a copy of its election with its

federal tax return for the year in which

the election is effective. If the entity is

not required to file a return, the

Commissioner will require direct or

indirect owners of the entity to include

copies of the election with their federal

tax returns.

Notice 95–14 suggested that all the

members of an electing eligible entity

would be required to consent unanimously to a classification election.

Most commentators stated that, although an indication of unanimity may

1996– 27 I.R.B.

be appropriate, a requirement that each

member sign the election could cause

significant administrative difficulties.

In response to these comments, the

proposed regulations require that an

election be signed by: (1) each member

of the entity, or (2) any officer,

manager, or owner who is authorized to

make the election and who represents

to having such authorization under

penalties of perjury.

An electing eligible entity also

would be required to provide its

Employer Identification Number (EIN)

on the election form. To reduce taxpayers’ paperwork burdens when an

existing entity elects to change its

classification, the proposed regulations

provide that if the entity already has an

EIN, it will retain it even though it

elects to change its tax classification.

Any organization without an EIN at the

time it files its election, including an

organization that had not previously

been treated as a separate entity for

federal tax purposes, must apply for an

EIN on Form SS–4 when it files its

election. If a new single-member entity

elects to be disregarded as an entity

separate from its owner, then the

taxpayer identifying number of its

owner must be displayed on the election. The proposed regulations amend

§301.6109–1 to reflect these

requirements.

2. Special rule for exempt

organizations

A special rule is provided for

eligible entities that have been determined to be, or claim to be, exempt

from taxation under section 501(a). A

substantial majority of exempt organizations (including those employee plans

that qualify under section 401(a)) will

not be eligible entities, either because

they are properly classified as trusts for

federal tax purposes or because they

are not-for-profit corporations. However, for those exempt organizations

that are eligible entities, the business

entity classification that is consistent

with the claim for exemption is association (taxable as a corporation). Accordingly, the proposed regulations

provide that a claim or determination

of exempt status by an eligible entity is

treated as an election to be classified as

an association. Such elections will take

effect on the first day for which

exemption is claimed or determined to

apply, regardless of when the claim or

determination is made, and will remain

in effect unless an election is made to

change that classification after the date

that either the claim is withdrawn or

rejected or the determination is

revoked.

3. Limits on changes in classification

by election

Notice 95–14 requested comments on

whether the regulations should restrict

elections to change an entity’s classification. To varying degrees, commentators supported such a restriction.

Under the proposed regulations, an

eligible entity that makes an election to

change its classification cannot change

its classification by election again

during the sixty months succeeding the

effective date of the election. However,

an existing entity that elects to change

its classification as of the effective date

of the proposed regulations may elect

to change again within the first sixty

months following the effective date.

The sixty month limitation only

applies to a change in classification by

election. Thus, if a new eligible entity

elects out of its default classification

effective from its inception, that election is not a change in the entity’s

classification. Furthermore, the limitation does not apply if the organization’s business actually is transferred to

another entity. For example, an organization could liquidate into its parent,

terminate and reform as another entity

(e.g., by merger), or contribute its

business to another organization without restriction.

Taxpayers are reminded that a

change in classification, no matter how

achieved, will have certain tax consequences that must be reported. For

example, if an organization classified

as an association elects to be classified

as a partnership, the organization and

its owners must recognize gain, if any,

under the rules applicable to liquidations of corporations.

D. Certain partnership terminations

Under section 708(b)(1)(B), a partnership is considered terminated if

within a twelve month period there is a

sale or exchange of fifty percent or

more of the total interests in partnership capital and profits. Under this

rule, a termination is treated as a

liquidation of the existing partnership

and the formation of a new partnership.

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Accordingly, if an existing partnership

terminates under section 708(b)(1)(B),

the newly created entity will be classified as a partnership (but could elect to

change its classification thereafter).

IV. Effective date and transition rules

The regulations are proposed to

apply generally for periods beginning

on or after the date the final regulations

are published in the Federal Register.

Sections 301.7701–1 through

301.7701–3 will continue to apply until

these regulations are effective.

In addition, the IRS will not challenge the classification of an existing

eligible entity, or an existing entity

described in the list of foreign entities

that are classified as corporations under

the proposed regulations, for periods to

which the current regulations apply if:

(1) the entity had a reasonable basis

(within the meaning of section 6662)

for its claimed classification, (2) the

entity claimed that same classification

in all prior years, and (3) neither the

entity nor any member has been

notified in writing on or before May 8,

1996, that the classification of the

entity is under examination (in which

case the entity’s classification will be

determined in the examination).

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations

are adopted as final regulations, consideration will be given to any 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.

A public hearing has been scheduled

for Wednesday, August 21, 1996, at 10

a.m. in the Auditorium of the Internal

Revenue Building, 1111 Constitution

Avenue, NW., Washington, DC. Because of access restrictions, visitors

will not be admitted beyond the Internal Revenue Building lobby more than

15 minutes before the hearing starts.

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

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by August 12, 1996,

and submit an outline of the topics to

be discussed and the time to be devoted

to each topic (signed original and eight

(8) copies) by August 12, 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 authors of these regulations are Armando Gomez of the

Office of Assistant Chief Counsel

(Passthroughs and Special Industries)

and Ronald M. Gootzeit and William

H. Morris of the Office of Associate

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

Treasury Department participated in

their development.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and

301 are proposed to be amended as

follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. Section 1.581–1 is revised to

read as follows:

§1.581–1 Tax on banks.

(a) For an institution to be a bank

for purposes of section 581, it must be

a corporation for federal tax purposes.

See §301.7701–2(b) of this chapter for

the definition of corporation.

(b) This section applies to taxable

years beginning on or after the date

that final regulations are published in

the Federal Register.

§1.581–2 [Amended]

Par. 3. In §1.581–2, paragraph (a) is

amended by removing the first

sentence.

Par. 4. In §1.761–1, paragraph (a) is

revised to read as follows:

§1.761–1 Terms defined.

(a) Partnership. The term partnership means a partnership as determined under §§301.7701–1, 301.7701–

2, and 301.7701–3.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 5. The authority citation for part

301 continues to read in part as

follows:

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

Par. 6. Section 301.6109–1, as proposed to be amended in project number

INTL–0024–94, published on June 8,

1995, at 60 FR 30214, and INTL–062–

90, INTL–0032–93, INTL–52–86, and

INTL–52–94, published on April 22,

1996, at 61 FR 17666, is amended as

follows:

1. Paragraph (b)(2)(v) is amended by

removing the language ‘‘.’’ at the end

of the paragraph, and replacing it with

the language ‘‘; and’’.

2. Paragraph (b)(2)(vi) is added.

3. The text of paragraph (d)(2) is

redesignated as paragraph (d)(2)(i).

4. A paragraph heading is added for

newly designated paragraph (d)(2)(i).

5. Paragraph (d)(2)(ii) is added.

The revisions and additions read as

follows:

§301.6109–1 Identifying numbers.

(b) * * *

(2) * * *

(vi) A foreign person that makes an

election under §301.7701–3(c).

1996– 27 I.R.B.

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(d) * * *

(2) Employer identification

number—(i) In general. * * *

(ii) Special rule for entities electing

to change their federal tax classification under §301.7701-3(c). Any entity

that has an employer identification

number and then elects under

§301.7701–3(c) to change its federal

tax classification will retain that

employer identification number.

Par. 7. Sections 301.7701–1,

301.7701–2, and 301.7701–3 are revised to read as follows:

§301.7701–1 Classification of

organizations for federal tax

purposes.

(a) Organizations for federal tax

purposes—(1) In general. The Internal

Revenue Code prescribes the classification of various organizations for federal

tax purposes. Whether an organization

is an entity separate from its owners

for federal tax purposes is a matter of

federal tax law and does not depend on

whether the organization is recognized

as an entity under local law.

(2) Certain joint undertakings give

rise to entities for federal tax purposes.

A joint venture or other contractual

arrangement may create a separate

entity for federal tax purposes if the

participants carry on a trade, business,

financial operation, or venture and

divide the profits therefrom. For example, a separate entity exists for federal

tax purposes if co-owners of an apartment building lease space and in addition provide services to the occupants

either directly or through an agent.

Nevertheless, a joint undertaking

merely to share expenses does not

create a separate entity for federal tax

purposes. For example, if two or more

persons jointly construct a ditch merely

to drain surface water from their

properties, they have not created a

separate entity for federal tax purposes.

Similarly, mere co-ownership of property that is maintained, kept in repair,

and rented or leased does not constitute

a separate entity for federal tax purposes. For example, if an individual

owner, or tenants in common, of farm

property lease it to a farmer for a cash

rental or a share of the crops, they do

not necessarily create a separate entity

for federal tax purposes.

1996– 27 I.R.B.

(3) Certain local law entities not

recognized. An entity formed under

local law is not always recognized as a

separate entity for federal tax purposes.

For example, an organization wholly

owned by a State is not recognized as a

separate entity for federal tax purposes

if it is an integral part of the State.

Similarly, tribes incorporated under

section 17 of the Indian Reorganization

Act of 1934, as amended, 25 U.S.C.

477, or under section 3 of the

Oklahoma Indian Welfare Act, as

amended, 25 U.S.C. 503, are not

recognized as separate entities for

federal tax purposes.

(4) Single owner organizations. Under §§301.7701–2 and 301.7701–3, certain organizations that have a single

owner can choose to be recognized or

disregarded as entities separate from

their owners.

(b) Classification of organizations.

The classification of organizations that

are recognized as separate entities is

determined under §§301.7701–2,

301.7701–3, and 301.7701–4 (unless a

provision of the Internal Revenue Code

provides for special treatment of that

organization). For the classification of

organizations as trusts, see §301.7701–

4. That section provides that trusts

generally do not have associates or an

objective to carry on business for

profit. Sections 301.7701–2 and

301.7701–3 provide rules for classifying organizations that are not classified

as trusts.

of April 1, 1996.

(d) Domestic and foreign entities.

For purposes of this section and

§§301.7701–2 and 301.7701–3, an entity is a domestic entity if it is created

or organized in the United States or

under the law of the United States or of

any State; an entity is foreign if it is

not domestic. See sections 7701(a)(4)

and (a)(5).

(e) State. For purposes of this section and §301.7701–2, the term State

includes the District of Columbia.

(f) Effective date. The rules of this

section apply to periods beginning on

or after the date that final regulations

are published in the Federal Register.

§301.7701–2 Business entities;

definitions.

(a) Business entities. For purposes of

this section and §301.7701–3, a busi-

ness entity is any entity recognized for

federal tax purposes (including an

entity with a single owner that may be

disregarded as an entity separate from

its owner under §301.7701–3) that is

not properly classified as a trust under

§301.7701–4 (or otherwise subject to

special treatment under the Internal

Revenue Code). A business entity with

two or more members is classified for

federal tax purposes as either a corporation or a partnership. A business

entity with only one owner is classified

as a corporation or is disregarded; if

the entity is disregarded, its activities

are treated in the same manner as a

sole proprietorship, branch, or division

of the owner.

(b) Corporations. For federal tax

purposes, the term corporation

means—

(1) A business entity organized under a Federal or State statute, or under

a statute of a federally recognized

Indian tribe, if the statute describes or

refers to the entity as incorporated or

as a corporation, body corporate, or

body politic;

(2) An association (as determined

under §301.7701–3);

(3) A business entity organized under a State statute, if the statute

describes or refers to the entity as a

joint-stock company or joint-stock

association;

(4) A business entity that is taxable

as an insurance company under subchapter L, chapter 1 of the Internal

Revenue Code;

(5) A State-chartered business entity

conducting banking activities, if any of

its deposits are insured under the

Federal Deposit Insurance Act, as

amended, 12 U.S.C. 1811 et seq., or a

similar federal statute;

(6) A business entity wholly owned

by a State or any political subdivision

thereof;

(7) A business entity that is taxable

as a corporation under a provision of

the Internal Revenue Code other than

section 7701(a)(3); and

(8) Except as provided in paragraph

(d) of this section, the following

business entities formed in the following jurisdictions:

American Samoa, Corporation

Argentina, Sociedad Anonima

Aruba, Naamloze Vennootschap

Australia, Public Limited

Company

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Austria, Aktiengesellschaft

Barbados, Limited Company

Belize, Public Limited Company

Belgium, Societe Anonyme or

Naamloze Vennootschap

Bolivia, Sociedad Anonima

Brazil, Sociedade Anonima

Canada, Corporation

Chile, Sociedad Anonima

People’s Republic of China, Company Limited by Shares

Republic of China (Taiwan), Company Limited by Shares

Colombia, Sociedad Anonima

Costa Rica, Sociedad Anonima

Cyprus, Public Limited Company

Czech Republic, Akciova

Spolecnost

Denmark, Aktieselskab

Ecuador, Sociedad Anonima or

Compania Anonima

El Salvador, Sociedad Anonima

Egypt, Sharikat Al-Mossahamah

Finland, Osakeyhtio/Aktiebolag

France, Societe Anonyme

Germany, Aktiengesellschaft

Greece, Anonymos Etairia

Guam, Corporation

Guatemala, Sociedad Anonima

Guyana, Public Limited Company

Honduras, Sociedad Anonima

Hong Kong, Public Limited

Company

Hungary, Reszvenytarsasag

Iceland, Hlutafelag

India, Public Limited Company

Indonesia, Perseroan Terbatas

Ireland, Public Limited Company

Israel, Public Limited Company

Italy, Societa per Azioni

Jamaica, Public Limited Company

Japan, Kabushiki Kaisha

Kazakstan, Ashyk Aktsionerlik

Kogham

Republic of Korea, Chusik Hoesa

Liberia, Corporation

Luxembourg, Societe Anonyme

Malaysia, Berhad

Malta, Partnership Anonyme

Mexico, Sociedad Anonima

Morocco, Societe Anonyme

Netherlands, Naamloze

Vennootschap

Netherlands Antilles, Naamloze

Vennootschap

New Zealand, Limited Company

Nicaragua, Compania Anonima

Nigeria, Public Limited Company

Northern Mariana Islands,

Corporation

Norway, Aksjeselskap

Pakistan, Public Limited Company

Panama, Sociedad Anonima

Paraguay, Sociedad Anonima

Peru, Sociedad Anonima

Philippines, Stock Corporation

Poland, Spolka Akcyjna

Portugal, Sociedade Anonima

Puerto Rico, Corporation

Romania, Societe pe Actiuni

Russia, Otkrytoye Aktsionernoy

Obshchestvo

Saudi Arabia, Sharikat AlMossahamah

Singapore, Public Limited

Company

Slovak Republic, Akciova

Spolocnost

South Africa, Public Limited

Company

Spain, Sociedad Anonima

Surinam, Naamloze Vennootschap

Sweden, Aktiebolag

Switzerland, Aktiengesellschaft or

Societe Anonyme

Thailand, Borisat Chamkad

(Machachon)

Trinidad & Tobago, Public Limited Company

Turkey, Anonim Sirket

Tunisia, Societe Anonyme

Ukraine, Aktsionerne Tovaristvo

Vidkritogo Tipu

United Kingdom, Public Limited

Company

United States Virgin Islands,

Corporation

Uruguay, Sociedad Anonima

Venezuela, Sociedad Anonima or

Compania Anonima

(1) The term partnership means a

business entity that is not a corporation

under paragraph (b) of this section and

that has at least two members; and

(2) A business entity that has a

single owner and is not a corporation

under paragraph (b) of this section is

disregarded as an entity separate from

its owner.

(d) Special rule for certain foreign

business entities. A foreign business

entity described in paragraph (b)(8) of

this section is classified as a partnership if—

(1) The entity was in existence and

claimed to be a partnership on May 8,

1996, and for all prior periods;

(2) That classification was relevant

to any person for federal tax purposes

at any time during the period that

includes May 8, 1996;

(3) The entity had a reasonable basis

(within the meaning of section 6662)

for claiming partnership classification;

and

(4) Neither the entity nor any member has been notified in writing on or

before May 8, 1996, that the classification of the entity is under examination

(in which case the entity’s classification will be determined in the

examination).

(e) Effective date. The rules of this

section apply to periods beginning on

or after the date that final regulations

are published in the Federal Register.

§301.7701–3 Classification of certain

business entities.

(a) In general. A business entity that

is not classified as a corporation under

§301.7701–2(b)(1), (3), (4), (5), (6),

(7), or (8) (an eligible entity) can elect

its classification for federal tax purposes as provided in this section. An

eligible entity with at least two members can elect to be classified as either

an association (and thus a corporation

under §301.7701–2(b)(2)) or a partnership, and an eligible entity with a

single member can elect to be classified as an association or to be disregarded as an entity separate from its

owner. Paragraph (b) of this section

provides a default classification for an

eligible entity that does not make an

election. Thus, elections are necessary

only when an eligible entity chooses to

be classified initially as other than the

default classification or when an

eligible entity chooses to change its

classification. Paragraph (c) of this

section provides rules for making express elections. Paragraph (d) of this

section provides a special rule for

classifying an entity created pursuant to

a termination of a partnership under

section 708(b)(1)(B). Paragraph (e) of

this section sets forth the effective date

of this section and a special rule

relating to prior periods.

(b) Classification of eligible entities

that do not file an election—(1) Do-

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mestic eligible entities. Except as

provided in paragraph (b)(3) of this

section, unless the entity elects otherwise, a domestic eligible entity is—

(i) A partnership if it has two or

more members; or

(ii) Disregarded as an entity separate

from its owner if it has a single owner.

(2) Foreign eligible entities—(i) In

general. Except as provided in paragraph (b)(3) of this section, unless the

entity elects otherwise, a foreign

eligible entity is—

(A) A partnership if it has two or

more members and any member has

unlimited liability;

(B) An association if no member has

unlimited liability; or

from its owner if it has a single owner

that has unlimited liability.

(ii) Definition of unlimited liability.

For purposes of paragraph (b)(2)(i) of

this section, a member of a foreign

eligible entity has unlimited liability if

the member has personal liability for

the debts of or claims against the

entity, by reason of being a member,

based solely on the statute or law

pursuant to which the entity is

organized. A member has personal

liability if creditors of the entity may

seek satisfaction of debts of or claims

against the entity from the member as

such. A member has personal liability

for purposes of this paragraph even if

the member makes an agreement under

which another person (whether or not a

member of the entity) assumes such

liability or agrees to indemnify such

member for any such liability.

(3) Existing eligible entities. Unless

the entity elects otherwise, an eligible

entity in existence prior to the effective

date of this section will have the same

classification that the entity claimed

under §§301.7701–1 through 301.7701–

3 as in effect on the date prior to the

effective date of this section; except

that if an eligible entity with a single

owner claimed to be a partnership

under those regulations, the entity will

be disregarded as an entity separate

from its owner under this paragraph.

For special rules regarding the classification of such entities for periods

prior to the effective date of this

section, see paragraph (e)(2) of this

section. For purposes of this paragraph,

a foreign eligible entity is treated as

being in existence prior to the effective

date of this section only if the entity’s

1996– 27 I.R.B.

classification is relevant to any person

for federal tax purposes at any time

during the period that includes the date

immediately prior to the effective date

of this section.

for filing—(i) In general. Except as

provided in paragraphs (c)(1)(ii) and

(iii) of this section, an eligible entity

may elect to be classified other than as

provided under paragraph (b) of this

section, or to change its classification,

by filing an election with the appropriate service center. Such an election

shall specify the name, address, and

taxpayer identifying number of the

entity, the chosen classification,

whether the election results in a change

in classification, and whether the entity

is a domestic or foreign entity. The

election will be effective on the date

specified on the election if that date is

not more than 75 days prior to the date

on which the election is filed, or on the

date filed if no such date is specified

on the election. If the Commissioner

prescribes a form for this purpose, the

election shall be made on such form.

See §301.6109–1 for rules on applying

for and displaying Employer Identification Numbers.

(ii) Limitation. If an eligible entity

makes an election under this paragraph

than an election made by an existing

entity to change its classification as of

the effective date of this section), it

cannot change its classification by

election again during the sixty months

succeeding the effective date of the

election.

(iii) Special rule for exempt organizations. An eligible entity that has been

determined to be, or claims to be,

exempt from taxation under section

501(a) is treated as having made an

election under this section to be classified as an association. Such election

will be effective as of the first date for

which exemption is claimed or determined to apply, regardless of when the

claim or determination is made, and

will remain in effect unless an election

is made under paragraph (c)(1)(i) of

this section after the date the claim for

exempt status is withdrawn or rejected

or the date the determination of exempt

status is revoked.

(iv) Examples. The following examples illustrate the rules of this paragraph (c)(1):

Example 1. On July 1, 1998, X, a domestic

corporation, purchases a 10% interest in Y, an

eligible entity formed under Country A law in

1990. The entity’s classification was not relevant

to any person for federal tax purposes prior to

X’s acquisition of an interest in Y. Thus, Y is

not considered to be in existence on the effective

date of this section for purposes of paragraph

(b)(3) of this section. Under the applicable

Country A statute, no member of Y has

unlimited liability as defined in paragraph

(b)(2)(ii) of this section. Accordingly, Y is

classified as an association under paragraph

(b)(2)(i)(B) of this section unless it elects under

paragraph (c) of this section to be classified as a

partnership. To be classified as a partnership as

of July 1, 1998, Y must file the election by

September 13, 1998. See paragraph (c)(1)(i) of

this section. Because an election cannot be

effective more than 75 days prior to the date on

which it is filed, if Y files its election after

September 13, 1998, it will be classified as an

association from July 1, 1998, until the effective

date of the election. In that case, it could not

change its classification by election under

paragraph (c) of this section during the sixty

months succeeding the effective date of the

election.

Example 2. (i) Z is an eligible entity formed

under Country B law and is in existence on the

effective date of this section within the meaning

of paragraph (b)(3) of this section. Prior to the

effective date of this section, Z claimed to be

classified as an association. Unless Z files an

election under paragraph (c) of this section, it

will continue to be classified as an association

under paragraph (b)(3) of this section.

(ii) Z files an election under paragraph (c) of

this section to be classified as a partnership,

effective as of the effective date of this section.

Z can file an election to be classified as an

association at any time thereafter, but then would

not be permitted to change its classification by

election during the sixty months succeeding the

effective date of that subsequent election.

(2) Authorized signatures. An election made under paragraph (c)(1)(i) of

this section must be signed by—

(i) Each member of the electing

entity; or

(ii) Any officer, manager, or member of the electing entity who is

authorized to make the election and

who represents to having such authorization under penalties of perjury.

(3) Further notification of elections.

An eligible entity required to file a

federal tax return for the taxable year

for which an election is made under

paragraph (c)(1)(i) of this section shall

attach a copy of the form filed in

accordance with paragraph (c)(1)(i) of

this section to its federal tax return for

that year. If the entity is not required to

file a return for that year, the Commissioner will require that a copy of such

form be attached to the federal income

tax return of any direct or indirect

owner of the entity for the taxable year

of the owner that includes the date on

which the election was effective.

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(d) Special rule for certain partnership terminations. When a partnership terminates by operation of

section 708(b)(1)(B) (on the sale or

exchange of fifty percent or more of

the total interests in partnership capital

or profits within a twelve month

period), the resulting entity created by

such termination is a partnership.

(e) Effective date—(1) In general.

The rules of this section apply to

periods beginning on or after the date

that final regulations are published in

the Federal Register.

(2) Prior treatment of existing entities. In the case of a business entity

that is not described in §301.7701–

2(b)(1), (3), (4), (5), (6), or (7), and

that is in existence prior to the

effective date of this section, the

entity’s claimed classification will be

respected for all periods prior to the

effective date of this section if—

(i) The entity had a reasonable basis

(within the meaning of section 6662)

for its claimed classification;

(ii) The entity claimed that same

classification for all prior periods; and

(iii) Neither the entity nor any member has been notified in writing on or

before may 8, 1996, that the classification of the entity is under examination

(in which case the entity’s classification will be determined in the

examination).

Par. 8. Section 301.7701–4 is

amended as follows:

1. The last sentence of paragraphs

(b), (c)(1), (c)(2) Example 1, and (c)(2)

Example 3 are revised.

2. Paragraph (f) is added.

The revisions and additions read as

follows:

§301.7701–4 Trusts.

(b) Business trusts. * * * The fact

that any organization is technically cast

in the trust form, by conveying title to

property to trustees for the benefit of

persons designated as beneficiaries,

will not change the real character of

the organization if the organization is

more properly classified as a business

entity under §301.7701–2.

trust with multiple classes of ownership

interests ordinarily will be classified as

a business entity under §301.7701–2;

however, an investment trust with

multiple classes of ownership interests,

in which there is no power under the

trust agreement to vary the investment

of the certificate holders, will be

classified as a trust if the trust is

formed to facilitate direct investment in

the assets of the trust and the existence

of multiple classes of ownership interests is incidental to that purpose.

(2) * * *

Example 1. * * * As a consequence, the

existence of multiple classes of trust ownership

is not incidental to any purpose of the trust to

facilitate direct investment, and, accordingly, the

trust is classified as a business entity under

§301.7701–2.

Example 3. * * * Accordingly, the trust is

classified as a business entity under §301.7701–

(f) Effective date. The rules of this

section generally apply to taxable years

beginning after December 31, 1960.

Paragraph (e)(5) of this section contains rules of applicability for paragraph (e) of this section. In addition,

the last sentences of paragraphs (b),

(c)(1), and (c)(2) Example 1 and

Example 3 of this section apply to

taxable years beginning on or after the

date that final regulations are published

in the Federal Register.

Par. 9. Section 301.7701–6 is revised

to read as follows:

§301.7701–6 Definitions; person,

fiduciary.

(a) Person. The term person includes an individual, a corporation, a

partnership, a trust or estate, a jointstock company, an association, or a

syndicate, group, pool, joint venture, or

other unincorporated organization or

group. The term also includes a guardian, committee, trustee, executor, administrator, trustee in bankruptcy, receiver, assignee for the benefit of

creditors, conservator, or any person

acting in a fiduciary capacity.

(b) Fiduciary—(1) In general.

Fiduciary is a term that applies to

persons who occupy positions of peculiar confidence toward others, such as

trustees, executors, and administrators.

A fiduciary is a person who holds in

trust an estate to which another has a

beneficial interest, or receives and

controls income of another, as in the

case of receivers. A committee or

guardian of the property of an incompetent person is a fiduciary.

(2) Fiduciary distinguished from

agent. There may be a fiduciary

relationship between an agent and a

principal, but the word agent does not

denote a fiduciary. An agent having

entire charge of property, with authority to effect and execute leases with

tenants entirely on his own responsibility and without consulting his

principal, merely turning over the net

profits from the property periodically to

his principal by virtue of authority

conferred upon him by a power of

attorney, is not a fiduciary within the

meaning of the Internal Revenue Code.

In cases when no legal trust has been

created in the estate controlled by the

agent and attorney, the liability to

make a return rests with the principal.

section are effective on the date that

final regulations are published in the

Federal Register.

§301.7701–7 [Removed]

Par. 10.

removed.

Section

301.7701–7

Margaret Milner Richardson,

Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on

May 9, 1996, 8:45 a.m., and published in the

issue of the Federal Register for May 13,

1996, 61 F.R. 21989)

Foundations Status of Certain

Organizations

Announcement 96–56

The following organizations have

failed to establish or have been unable

to maintain their status as public

charities or as operating foundations.

Accordingly, grantors and contributors

may not, after this date, rely on

previous rulings or designations in the

Cumulative List of Organizations (Publication 78), or on the presumption

arising from the filing of notices under

section 508(b) of the Code. This listing

does not indicate that the organizations

have lost their status as organizations

described in section 501(c)(3), eligible

to receive deductible contributions.

Former Public Charities. The following organizations (which have been

treated as organizations that are not

1996– 27 I.R.B.

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private foundations described in section

509(a) of the Code) are now classified

as private foundations:

A Family Friend Inc., Hackensack,

Affordable Housing Ventures for

South Arkansas Inc., Hampton, AR

Alpha Omega Social Action and

Scholarship Foundation,

Washington, DC

Alternative AG Inc., Sandpoint, ID

American Coaltion for the Assistance

and Mentor Programs Inc.,

Rockville, MD

American Danz Theatre, Chicago, IL

American Mutiple Sclerosis

Association, Wilmington, DE

Angola Booster Club Inc., Angola,

Apostolic Social Services, Inc.,

Indianapolis, IN

Apple Developmental Daycare II Inc.,

Van Buren, AR

A Quiet Place, Inc., Altamonte

Springs, FL

Archbishop Fulton J. Sheen

Foundation, Troy, MI

Arts Council of Northern Beaufort

County, Beaufort, SC

Augusta Christian Maternity Home

Inc., Augusta, GA

Baltimore Substance Abuse Systems

Inc., Baltimore, MD

Barbara Schmitz Grasser Memorial

Scholarship Fdn Inc., Wisconsin

Rapids, WI

Beaver Lake Animal Shelter, Inc.,

Avoca, AR

Believers Bible Chapel of Tampa

Florida, Inc., Odessa, FL

Beloit Positive Youth Development

Inc., Beloit, WI

Best Wisconsin Foundation Inc.,

Mequon, WI

Big Horn Mountain Foundation,

Alexandria, VA

Bioreview Foundation Inc., Rockville,

BJ Camrah Industries, Inc., Norcross,

Bucks County Heroes Scholarship

Fund, Newtown, PA

Cape Fear Inner City Outings Inc.,

Wilmington, NC

Cap Ryan Trust, Manhattan, KS

Caseville Community Arts Council,

Caseville, MI

Central Missionary Fellowship Inc.,

Vienna, VA

1996– 27 I.R.B.

Charlotte Philharmonic Society,

Charlotte, NC

Cherry Tree Players Inc., Lynchburg,

Chesapeake Ballet Ensemble Inc.,

North Beach, MD

Children First of Cleveland,

Cleveland Heights, OH

Childrens Center of Dalton Whitefield

Inc., Dalton, GA

Christ Life Ministries, Inc., Tequesta,

Citizens for Appropriate River

Environs, Minneapolis, MN

Childrens Guild of Georgia, Aragon,

Citywide Public Housing Residents

Council, Milwaukee, WI

CLC, Inc., Clarkston, MI

Coalition for Academic Excellence,

Birmingham, AL

Consortium of Doctors Ltd,

Savannah, GA

Coventry Neighbors, Inc., Cleveland

Heights, OH

Cross Road Prison Ministries Inc.,

Greensboro, NC

Cuso International Development

Foundation, Memphis, TN

Daybreak, Inc., Owensboro, KY

Disability Law Foundation Inc.,

Birmingham, AL

Divine Law Society Inc., East Point,

Dixie Gray Band, Mexico, MO

Dunwoody High School Band Booster

Club Inc., Dunwoody, GA

Earth Day Chicago, Chicago, IL

Elm Lifelines Inc., Medford, NJ

Elrose Health Services, Inc., Detroit,

Environment Unlimited Inc.,

Minneapolis, MN

Essence/Foundation Inc., Deerfield,

Exchange Club Center for the

Prevention of Child Abuse of

Mobile County Alabama Inc.,

Mobile, AL

Eye Center Foundation, Inc., Jupiter,

Fair Housing Center of Washtenaw

County, Inc., Ann Arbor, MI

Faith Child Care & Development

Center, Statesville, NC

Flights for Life St. Louis, St. Louis,

Families Helping Families of Greater

New Orleans, Matairie, LA

Fancy Farm Elderly Housing Corp.

II, Mayfield, KY

Fire Escape Ministries Inc., Crosby,

Frances Grant Triebel Memorial

Sholarship Trust, Rockford, IL

Friends for Al Lopez Inc., Tampa,

Friends of Guy Mason Recreation

Center Inc., Washington, DC

Friends of Little River Inc., Fort

Payne, AL

Friends of the Birmingham Museum

of Art, Birmingham, AL

Friends of the Parks, Coshocton, OH

Furthering Independence for the

Disabled, Ann Arbor, MI

Gordon Lee Memorial High School

Alumni Association Inc.,

Chickamauga, GA

Haitian American Resource Center,

Inc., Newark, NJ

Headwaters Landtrust, Hiram, OH

Healthshare Peru, St. Paul, MN

Heartland Equine Therapeutics Riding

Academy Inc., Omaha, NE

Heritage Academy Hispanic

Association Inc., Metarine, LA

Historic South Park, Inc., Dayton,

Hogares Y Vecinos en Accion

Cooperativa de Terren O,

Philadelphia, PA

Homeless Helpers, Arlington, VA

Hometies, Lancaster, PA

Huang Hsing Foundation, Inc., Silver

Spring, MD

Hunger Organization Supported by

Tenns of Tennessee Inc., Nashville,

Ida Culver House of the Seattle

Education Auxiliary, Seattle, WA

Institute for Economics as a Second

Language, Richmond Hts., OH

Institute for Non-Formal Education in

Southern Africa, Potomac, MD

Inter-American Music Festival of

Florida, Inc., Miami, FL

Inter City Coalition, Chicago, IL

International Association of Christians

in Business, Palatine, IL

International Society of Global Health

Policy, Washington, DC

J. Jireh Ministries, Columbus, OH

James E Holmes Middle School

Parent Teacher Student Org. of

Eden NC, Eden, NC

Jesus Workshop, Springfield, MO

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Johnson Memorial Day Care Center,

Asheville, NC

Knox County Task Force Against

Dometic Violence, Knoxville, TN

Kids Involved Decide to Save the

Earth, Stonington, IL

Kings Men Inc., Atlantic City, NJ

Labor Safe Harbor for Workers

Corp., San Juan, PR

Lafayette Cadets Drum and Bugle

Corps., LaGrange, GA

Lao Veterans Assoc., Richfield, MN

LBF Management Research Inc.,

Huntingdon Valley, PA

Lehigh Valley Eduational

Cooperative, Bethlehem, PA

Long Island Aclo Realty Property

Holding Corp., Bethpage, NY

Mahomet Helping Hands, Champaign,

McComb City-Wide Housing

Authority Resident Council, Inc.,

McComb, MS

Mercy Douglass Housing Phase III,

Philadelphia, PA

Metro East Church Based Citizens

Organization, East St. Louis, MO

Michael Embrey McGuire Memorial

Scholarship Fund, Kingsport, TN

Michael Wilcher Foundation for

Youth Achievement, Mitchellville,

Mountain Classic Dance Company

Inc., Young Harris, GA

Maryland Entomological Society,

Columbia, MD

McDuffie Care Inc., Thomson, GA

Medication Manager, The, Winston

Salem, NC

Millvale Resident & Community

Council, Cincinnati, OH

Mobile Museum of Polk County,

Inc., The, Lakeland, FL

Mothers — And Men — of

Bellbrook, Billbrook, OH

Mount Rest Home Foundation,

Knoxville, TN

Nash County Foundation to Reduce

the Use of Drugs, Nashville, TN

National African American Childrens

Theatre League, The, Philadelphia,

National Alliance for the Mentally Ill

Shelby Ala Chapter Inc., The,

Calera, AL

National Association of Professional

Baseball Leagues Sports

Administration Grant Program, St.

Petersburg, FL

Neighbors Network, Atlanta, GA

New Horizons Horse Center,

Evensville, TN

New Horizons of Eau Claire County

Inc., Eau Claire, WI

New Life World Ministry, Kentwood,

Newspaper in Education Inc.,

Manitowoc, WI

New World Soccer Inc., Germantown,

Nigerians Who Care, Washington, DC

Nobles-Rock Way-Wo-Men Against

Violence-Inc., Luverne, MN

Northeast Bradford Area Little

League Wyalusing, PA

Northeast Piedmont Chorale, Inc.,

Louisburg, NC

Off the Streets, Franklin, TN

Open Hearth Inc., Limerick, PA

Operation Heroes Welcome, Inc.,

Metairie, LA

ORSO, Inc., Columbus, OH

Our Lords Work, Inc., Roswell, GA

Parents Professional Advocating for

Children With Exceptionalities,

Lake Worth, FL

Pawtucket Lions Club Memorial

Foundation Inc., Pawtucket, RI

Pennsylvania Public Interest Research

Group Education Fund, Inc.,

Philadelphia, PA

People-Plant Earth on Protecting a

Lasting Environment, Forked River,

Peoples Community Outreach Services

Corp., Detroit, MI

Peoria Area Literacy Coalition,

Peoria, IL

Perry School Community Services

Center Inc., Washington, DC

Piedmont Regional Genealogy

Society, Winder, GA

Playscape for the Park, Groose Point

Park, MI

Post 15 Legion Baseball Parents,

Sioux Falls, SD

Power to the Struggle Outreach

Ministry, Norfolk, VA

Programs for Achieving Total Health,

Inc., Princeton, NJ

Radomaine, Livonia, MI

Ragalo Medical and Educational

Foundation, Gramercy, LA

Raleight Bicentennial Foundation,

Raleigh, NC

Reaching Out With Love Ministeries,

Inc., Marietta, GA

Recovery Support Services Inc.,

Nashville, TN

Red Balloon Just A S K, Edinboro,

Redeeming Grace Ministries, Inc.,

Wakinsonville, GA

Red Feather Family Services Inc.,

Winnebago, NE

Rhymtyme, Inc., N Ft. Myers, FL

Rhyne Park Girls Softball Association

Inc., Smyrna, GA

Rick Harvey Ministries Inc.,

Greenbrior, AR

Salamander Company Inc.,

Minneapolis, MN

Senior Citizens Association of Bonita

Springs, Bonita Springs, FL

Servants Hands Inc., Sherwood, AR

Shalem Home Inc., Smithville, MO

Shelter the World Inc., Silver Spring,

Siouxland Housing Development

Corporation Inc., Sioux City, MO

Smith Mountain Arts Council, Wirtz,

Sonseekers Puppet Ministry, Inc.,

Salem, WV

South Dakota and Upper Midwest

Black History Museum, Yankton,

Southeastern Wake Adult Day Center,

Raleigh, NC

Southern Africa Refugee Fund Inc.,

Atlanta, GA

Southern Kentucky Youth Basketball

Leagues, Inc., Bowling Green, KY

Southwest Community Health Center,

Chicago, IL

Spiritual Vision, Inc., Tallahassee, FL

Stage Players, Cary, NC

St. Alphonsus Alumni Association,

Dearborn, MI

St Francis Veterans Memorial

Committee Inc., St Francis, WI

Stone Castle Restoration Committee,

Bristol, TN

Sunshine Child Care Center, Inc.,

Lafayette, IN

Support for Adult Survivors, Lake

Leelanau, MI

Teen Scenes Inc., Lithonia, GA

Tennessee Center for Justice and

Education Inc., Knoxville, TN

Tennessee Coalition for the Homeless

Inc., Nashville, TN

Tennessee Foreign Language Institute

Endowment Fund, Nashville, TN

Toombs County Project Hope Inc.,

Vidalia, GA

1996– 27 I.R.B.

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Tourism Institute Ltd., Roswell, GA

Tuesdays Music Live Inc., Augusta,

Tuscarora Tribe of the Red Hill

Community of Robison County

Inc., Maxton, NC

21st Century Commission on African

American Males, Washington, DC

U M O J A Care Inc., Chicago, IL

United African Arts & Education

Fund, Inglewood, CA

Unity Baptist Adult Day Care Center,

Lowndesboro, AL

University and John Hope Homes

Tenants Association, Atlanta, GA

Urban Forest Council of Washington

DC, Washington, DC

Virginia Blood Services Foundation,

Richmond, VA

1996– 27 I.R.B.

Virginia Lawyers Study Group, Inc.,

McLean, VA

Vito Battista Atelier Foundation Inc.,

Brooklyn, NY

Warren County Fine Arts Council,

Clayton, MO

White Earth Bay Development Corp.,

Tioga, ND

William C Skaggs Senior Citizens

Facilities, Chatham, IL

Willing Women Workers, St Paul,

Wisconsin Council of the American

Academy of Clinical Applied

Spinal Biomechanical Engineering,

Waukesha, WI

Wisconsin Agri-Business Foundation

Inc., Madison, WI

Word Only Ministries, Inc., The,

Raleigh, NC

Youth Reach Inc., Minneapolis, MN

If an organization listed above submits information that warrants the

renewal of its classification as a public

charity or as a private operating foundation, the Internal Revenue Service

will issue a ruling or determination

letter with the revised classification as

to foundation status. Grantors and

contributors may thereafter rely upon

such ruling or determination le

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