# SEQ 0001 JOB IRS24-001-006 PAGE-0003 COVER

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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.

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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-

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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

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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.

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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
Register (INTL–0372–88, 57 FR
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
Register (INTL–0372–88, 60 FR
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

7

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.
*

*

*

*

*

*

*

*

*

*

*

*

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

8

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.

9

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

10

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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

11

8%

§ 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

6%
9%
7%
6%
12%
20%
16%
11%
11%
11%
13%
11%
10%
9%

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 75, pg. 629
Table 31, pg. 585
Table 27, pg. 581
Table 25 pg. 579
Table 23, pg. 577

12

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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

13

OVERPAYMENTS

UNDERPAYMENTS

RATE TABLE PG
1995–1 C.B.

RATE TABLE PG
1995–1 C.B.

8%
8%
8%
9%
10%
9%
9%
10%
10%
11%
11%
10%
10%
10%
10%
10%
10%
9%
9%
9%
8%
7%
7%
6%
6%
6%
6%
6%
6%
6%
7%
8%
8%
9%
8%
8%
8%
7%
8%

9%
9%
9%
10%
11%
10%
10%
11%
11%
12%
12%
11%
11%
11%
11%
11%
11%
10%
10%
10%
9%
8%
8%
7%
7%
7%
7%
7%
7%
7%
8%
9%
9%
10%
9%
9%
9%
8%
9%

21
21
21
23
73
71
71
73
25
27
27
25
25
25
25
25
25
23
23
23
69
67
67
65
17
17
17
17
17
17
19
21
21
23
21
21
69
67
69

575
575
575
577
627
625
625
627
579
581
581
579
579
579
579
579
579
577
577
577
623
621
621
619
571
571
571
571
571
571
573
575
575
577
575
575
623
621
623

23
23
23
25
75
73
73
75
27
29
29
27
27
27
27
27
27
25
25
25
71
69
69
67
19
19
19
19
19
19
21
23
23
25
23
23
71
69
71

577
577
577
579
629
627
627
629
581
583
583
581
581
581
581
581
581
579
579
579
625
623
623
621
573
573
573
573
573
573
575
577
577
579
577
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%
12%
12%
11%
10%
10%
9%
9%
9%
9%
9%
9%
9%
10%
11%
11%
12%
11%
11%
11%
10%
11%

31
29
29
29
75
73
73
71
23
23
23
23
23
23
25
27
27
29
27
27
75
73
75

585
583
583
583
629
627
627
625
577
577
577
577
577
577
579
581
581
583
581
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%
6.5%
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.

14

18
20
18
18
66
64
66

572
574
572
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-

15

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.

16

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

17

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

18

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).

19

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,

20

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

21

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-

22

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.

23

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

24

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.

SEQ 0026 JOB IRS24-006-007 PAGE-0025 PT 4 PGS 20REVISED 29JUL96 AT 21:31 BY LR DEPTH: 66.01 PICAS WIDTH 46 PICAS
COMPOSITE COLOR
778/20052/29JUL96/IRS24-006

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 avai

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Adad5e4461bd9bb20. Public record. Not legal advice.