Bulletin No. 1997–43

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October 27, 1997

Internal Revenue

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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

T.D. 8733, page 8.

Final regulations under section 6114 of the Code provide

that reporting is specifically required if the residency of an

individual is determined under a treaty and apart from the Internal Revenue Code.

T.D. 8735, page 4.

Final regulations under section 861 of the Code relate to the

taxation of certain payments made pursuant to a cross-border securities lending transaction.

EXCISE TAX

Announcement 97–107, page 25.

This announcement corrects Rev. Proc. 97–46, 1997–42

I.R.B. 10, which contains a list of “rural airports,” as defined

in section 4261(e)(1)(B), for purposes of computing the tax

on air transportation.

ADMINISTRATIVE

P.L. 105–35, page 13.

EMPLOYEE PLANS

An Act to amend the Internal Revenue Code of 1986 to prevent the unauthorized inspection of tax returns or tax return

information.

Notice 97–56, page 19.

Rev. Proc. 97–48, page 19.

Weighted average interest rate update. Guidelines are

set forth for determining for October 1997, the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for purposes of

the full funding limitation of section 412(c)(7) of the Code as

amended by the Omnibus Budget Reconciliation Act of 1987

and by the Uruguay Round Agreements Act (GATT).

Automatic relief for S elections. Special procedures permit taxpayers in certain situations to obtain automatic late S

corporation election relief instead of applying for a private

letter ruling.

Notice 97–57, page 19.

Education individual retirement accounts. This notice

informs certain entities that they are approved to serve as

nonbank trustees and custodians of Education individual

retirement accounts. It also provides guidance on the procedures for being approved to be a nonbank trustee or custodian of an Education IRA.

Rev. Proc. 97–49, page 22.

Requests to report intercompany transactions on a

separate entity basis. Guidance is provided for requesting

consent under section 1.1502–13(e)(3) of the Code to treat

c e rtain intercompany transactions on a separate entity

basis, to revoke such consent, or to change from the unauthorized use of separate entity reporting to single entity reporting. This procedure cross-references Rev. Proc. 97–27.

Rev. Proc. 82–36 modified and superseded.

EXEMPT ORGANIZATIONS

Announcement 97–108, page 25.

A list is provided of organizations now classified as private

foundations.

Finding Lists begin on page 31.

Announcement of Disbarments and Suspensions begins on page 27.

Department of the Treasury

Internal Revenue Service

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

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 prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining 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.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great 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.

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 p rovision 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.

Introduction

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The 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.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S . Government Printing Office, Washington, DC 20402.

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

Section 861.—Income From

Sources Within the United

States

26 CFR 1.861–2: Interest.

T.D. 8735

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Certain Payments Made

Pursuant to a Securities

Lending Transaction

A G E N C Y: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

S U M M A RY: This document contains

final Income Tax Regulations relating to

the taxation of certain payments made

pursuant to a cross-border securities lending transaction. These regulations provide guidance concerning the source,

character, and income tax treaty treatment

of such payments and affect United States

payors and recipients and foreign payors

and recipients.

D ATES: These regulations are eff e c t i v e

October 14, 1997.

Applicability: These regulations are applicable to payments made after November 13, 1997.

FOR FURTHER INFORMATION CONTACT: Ramon Camacho or Paul Epstein

at (202) 622-3870 (not a toll-free number)

of the Office of Associate Chief Counsel

(International), within the Office of Chief

Counsel, Internal Revenue Service, 1111

Constitution Avenue, NW., Wa s h i n g t o n ,

DC 20224.

FR 860). A public hearing was scheduled

but was subsequently cancelled because

no one requested to testify. However,

several written comments were received.

After consideration of all of the comments, the regulations proposed by

INTL–106–89 are adopted by this Tr e asury decision, as modified.

Explanation of Provisions

I. The 1992 Proposed Regulations

On January 9, 1992, the Internal Revenue Service (IRS) issued proposed regulations that provided guidance on the

source and character of substitute payments made in cross-border securities

lending transactions. In general, the regulations proposed to source substitute payments by reference to the source of the

payments (dividend or interest) for which

they substitute. In addition, the regulations proposed to characterize substitute

payments under a transparency rule.

Under the transparency rule, substitute

payments are treated as having the same

character as the dividend or interest income for which they substitute.

Under the proposed regulations, the

source rule applies for all purposes of the

Code in cross-border securities lending

transactions. In contrast, the transparency

rule addressing the character of substitute

payments applies only for purposes of determining the tax liability under sections

871 and 881 and nonresident alien withholding under chapter 3 of the Code and

for treaty purposes. Generally, public

comments welcomed the transparency

rule because it eliminated unjustifiable tax

biases between similar economic investments. After considering all the public

comments, the proposed regulations are

adopted as final regulations by this Tr e asury decision, substantially as proposed.

II. The Final Regulations

SUPPLEMENTARYINFORMATION:

Background

On January 9, 1992, the IRS published

proposed amendments (INTL–106–89) to

the Income Tax Regulations (26 CFR part

1) under sections 861, 871, 881, 894, and

1441 of the Internal Revenue Code of

1986 (Code) in the Federal Register (57

October 27, 1997

1. General rule

The final regulations, like the proposed

regulations, provide that a substitute payment made with respect to a securities

lending or sale-repurchase transaction is

sourced using the general rules governing

the source of interest or dividend income

contained in sections 861 and 862. T h e

definitions of securities lending transactions and sale-repurchase transactions are

provided in §§1.861–2(a)(7) and

1.861–3(a)(6) of the regulations. T h e s e

provisions define a substitute payment as

a payment made to the transferor of a security of an amount equal to any distributions of dividends or interest which the

owner of the transferred security would

normally receive. The regulations also

provide that substitute interest or dividend

payments have the same character as interest or dividend income, respectively,

for purposes of applying sections

864(c)(4)(B), 871, 881, 894, 4948(a) and

the withholding provisions under chapter

3 of the Internal Revenue Code.

2. Scope of regulation

Some commentators questioned

whether a sale-repurchase transaction is

considered a transaction that is substantially similar to a securities lending

transaction for purposes of the proposed

regulations. They noted that most sale-repurchase transactions contractually permit

the purchaser to deal freely with the underlying securities, specifying only that substantially identical securities be returned

on the repurchase date. In such cases the

purchaser must also make substitute payments to the seller. The final regulations

clarify that substitute payments made in a

sale-repurchase transaction are sourced

and characterized in the same manner that

substitute payments are sourced and characterized in securities lending transactions.

The final regulations only address the

tax treatment of substitute payments received by the transferor in securities lending or sale-repurchase transactions. T h e

regulations do not address the treatment

of fees or interest paid to the transferee in

such transactions. For example, the transparency rule does not extend to characterize the interest component of the repurchase price of a sale-repurchase

agreement, which is treated as interest

and sourced under the general source

rules for interest contained in sections 861

and 862. See Rev. Rul. 74-27 (1974–1

C.B. 24); Rev. Rul. 77–59 (1977–1 C.B.

196); Nebraska Department of Revenue

v. Loewenstein, 115 S. Ct. 557 (1994).

In response to comments, the final regulations apply for purposes of determin-

1997–43 I.R.B.

ing the source of substitute payments, regardless of whether the recipient of the income is U.S. or foreign. When source is

determined under these regulations, it applies for all purposes of the Code (e.g.,

foreign tax credit limitations under sections 904 and 906). However, with respect to the characterization of substitute

payments, the IRS and Treasury believe

that it is appropriate, and more consistent

with existing guidance regarding the

treatment of substitute payments, to apply

the transparency rule only with respect to

foreign taxpayers and only for limited

purposes. A c c o r d i n g l y, the transparency

rule applies to determine character only

for certain purposes of sections 864, 871,

881, 894, 4948(a) and chapter 3 of the

Code. For example, under this rule, substitute payments to a foreign person with

respect to stocks and securities that, absent the securities lending transaction,

would give rise to foreign source eff e ctively connected income in the hands of

such person, will retain their character as

dividend or interest income for purposes

of determining whether the income is effectively connected to the U.S. trade or

business of such person.

The transparency rule does not apply,

h o w e v e r, to characterize the U.S. source

income of U.S. trades or businesses of

foreign taxpayers. A c c o r d i n g l y, U.S.

source effectively connected income of

foreign taxpayers and U.S. source income

of U.S. taxpayers will be treated the same.

In this regard, the final regulations do not

a ffect existing guidance applicable to

both U.S. and foreign taxpayers concerning the characterization of substitute payments for purposes of other sections not

specifically identified in these final regulations. See, e.g., Rev. Rul. 60–177

(1960–1 C.B. 9), (substitute payments are

ineligible for the dividends received deduction under section 243); Rev. Rul.

80–135 (1980–1 C.B. 18), (substitute

payments are ineligible for the tax-exemption on state and local bonds under

section 103).

Because the transparency rule does not

apply for purposes of sections 901 and 903,

nothing in the final regulations affects the

determination required under §1.901–2(f)

concerning the identity of the person by

whom a foreign tax is considered paid for

purposes of sections 901 and 903.

1997–43 I.R.B.

3. Substitute payments on portfolio debt

instruments

Under the final regulations, substitute

interest payments made with respect to a

debt instrument, the interest on which

qualifies as portfolio interest under section 871(h) or section 881(c) in the hands

of the lender, is characterized as portfolio

interest if, in the case of an obligation in

registered form, the lender provides the

withholding agent with a beneficial owner

withholding certificate or documentary

evidence

accordance

with

§1.871–14(c) and no exception from the

portfolio interest exemption applies. For

example, if a bank lends securities in a

transaction that the facts and circumstances indicate in substance is an extension of credit pursuant to a loan agreement in the ordinary course of the bank’s

trade or business, the substitute payment

may be characterized as interest which

would not qualify as portfolio interest

under section 881(c)(3)(A).

4. Tax treaties

Some commentators noted that the

transparency rule adversely affects foreign taxpayers that might otherwise rely

on a different characterization of substitute payments in order to claim benefits

under certain income tax treaties. T h e

transparency rule would eliminate these

benefits in a number of cases. T h o s e

commentators questioned the government’s authority to issue regulations that

would characterize substitute payments as

dividend or interest income in light of

U.S. income tax treaty provisions.

The IRS and Treasury believe that the

transparency rule in general is properly issued pursuant to the general grant of authority under section 7805 because it

eliminates opportunities for abuse that

arise from a rule that would characterize

substitute payments in a manner different

from the treatment of the underlying payment. A transparency approach provides

uniform results for economically similar

investments.

M o r e o v e r, the IRS and Treasury believe that, in the absence of a transparency rule, many taxpayers would use

securities lending transactions in order to

avoid tax under tax treaties or under the

Code. For this reason, authority to characterize substitute payments for Code and

treaty purposes in the manner proposed in

1992 also is amply provided in section

7701(l), which was enacted after these

comments were received. Section 7701(l)

provides a broad grant of authority to

issue regulations recharacterizing multiple party financing arrangements to prevent the avoidance of any tax.

In this regard, the legislative history

provides that “the committee seeks to bolster the Tr e a s u r y ’s ability to prevent unwarranted avoidance of tax through multiple-party financial engineering as well as

to provide a mechanism for issuing additional guidance to taxpayers entering into

financial transactions.” See H.R. Rep.

No. 103–111, 103rd Cong., 1st Sess. 729

(1993). The committee also made clear

that this authority was not limited to the

types of back-to-back loan transactions

addressed in prior rulings. See Rev. Rul.

84–152 (1984–2 C.B. 381); Rev. Rul.

84–153 (1984–2 C.B. 383); Rev. Rul.

87–89 (1987–2 C.B. 195). Section

7701(l) in fact has been applied to a broad

range of financial transactions. See, e.g.,

Prop. Regs. §1.7701(l)–2 (treatment of

obligation-shifting transactions); and Notice 97–21 (IRB 1997–11, March 17,

1997), (tax avoidance using self-amortizing

investments in conduit financing entities).

The 1992 proposed regulation under

section 894 provided that where an income tax convention refers to United

States law, the relevant law is the section

or sections of the Internal Revenue Code

and regulations thereunder governing the

tax which is the subject of the provision.

Some commentators have suggested that

the proposed securities lending regulations would be invalid for purposes of

characterizing dividends that are specifically defined by treaties. However, under

conduit principles and additional authority to characterize payments pursuant to

section 7701(l), the regulations adopted

under §1.894–1(c) address the identity of

the owner of dividend and interest income

for treaty purposes as opposed to the character of the payments received under

varying treaty definitions. These regulations therefore are consistent with the

g o v e r n m e n t ’s authority under treaties to

determine the identity of the beneficial

owner of income.

Special Analyses

It has been determined that this Tr e a-

October 27, 1997

sury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It is hereby certified that these

regulations will not have a significant

economic impact on a substantial number

of small entities. A c c o r d i n g l y, a regulatory flexibility analysis is not required.

This certification is based on the information that follows. These regulations affect

entities engaged in cross-border multipleparty financing arrangements. These regulations affect the tax treatment of substitute payments made with respect to stocks

and debt securities. The primary participants who engage in cross-border multiple party financing arrangements of this

type are large regulated commercial

banks and brokerage firms. In addition,

comments received in response to the notice of proposed rulemaking were from

law associations, other associations that

represent large regulated financial companies or from individuals. A c c o r d i n g l y,

Treasury and IRS do not believe that a

substantial number of small entities engages in cross-border multiple party financing arrangements of the type covered

by these regulations. Pursuant to section

7805(f) of the 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 Ramon Camacho of the Office of

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

the IRS and Treasury Department participated in their development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding entries in numerical order to read as follows:

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

Section 1.861–2 also issued under 26

U.S.C. 863(a).

Section 1.861–3 also issued under 26

October 27, 1997

U.S.C. 863(a). * * *

Section 1.864–5 also issued under 26

U.S.C. 7701(l). * * *

Section 1.871–7 also issued under 26

U.S.C. 7701(l). * * *

Section 1.881–2 also issued under 26

U.S.C. 7701(l). * * *

Section 1.894–1 also issued under 26

U.S.C. 7701(l). * * *

Par. 2. Section 1.861–2 is amended by

adding a sentence at the end of paragraph

(a)(1); adding paragraph (a)(7); and revising paragraph (e) to read as follows:

(a) * * * (1) * * * See paragraph (a)(7)

of this section for special rules concerning

substitute interest paid or accrued pursuant to a securities lending transaction.

(7) A substitute interest payment is a

payment, made to the transferor of a security in a securities lending transaction or a

sale-repurchase transaction, of an amount

equivalent to an interest payment which

the owner of the transferred security is entitled to receive during the term of the

transaction. A securities lending transaction is a transfer of one or more securities

that is described in section 1058(a) or a

substantially similar transaction. A salerepurchase transaction is an agreement

under which a person transfers a security

in exchange for cash and simultaneously

agrees to receive substantially identical securities from the transferee in the future in

exchange for cash. A substitute interest

payment shall be sourced in the same

manner as the interest accruing on the

transferred security for purposes of this

section and §1.862–1.

See also

§§1.864–5(b)(2)(iii), 1.871–7(b)(2),

1.881–2(b)(2) and for the character of

such payments and §1.894–1(c) for the application tax treaties to these transactions.

§1.861–3 Dividends.

(a) * * * (1) * * * See also paragraph

(a)(6) of this section for special rules concerning substitute dividend payments received pursuant to a securities lending

transaction.

§1.861–2 Interest.

adding a sentence at the end of paragraph

(a)(1); adding paragraph (a)(6); and removing the first sentence of paragraph (d)

and adding three sentences in its place to

read as follows:

(e) Effective dates. Except as otherwise provided, this section applies with

respect to taxable years beginning after

December 31, 1966. For corresponding

rules applicable to taxable years beginning before January 1, 1967, (see 26 CFR

part 1 revised April 1, 1971). Paragraph

(a)(7) of this section is applicable to payments made after November 13, 1997.

Par. 3. Section 1.861–3 is amended by

(6) Substitute dividend payments. A

substitute dividend payment is a payment, made to the transferor of a security

in a securities lending transaction or a

sale-repurchase transaction, of an amount

equivalent to a dividend distribution

which the owner of the transferred security is entitled to receive during the term

of the transaction. A securities lending

transaction is a transfer of one or more

securities that is described in section

1058(a) or a substantially similar transaction. A sale-repurchase transaction is an

agreement under which a person transfers

a security in exchange for cash and simultaneously agrees to receive substantially identical securities from the transferee in the future in exchange for cash.

A substitute dividend payment shall be

sourced in the same manner as the distributions with respect to the transferred security for purposes of this section and

§1.862–1. See also §§1.864–5(b)(2)(iii),

1.871–7(b)(2) and 1.881–2(b)(2) for the

character of such payments and

§1.894–1(c) for the application of tax

treaties to these transactions.

(d) * * * Except as otherwise provided

in this paragraph this section applies with

respect to dividends received or accrued

after December 31, 1966. Paragraph

(a)(5) of this section applies to certain

dividends from a DISC or former DISC in

taxable years ending after December 31,

1971. Paragraph (a)(6) of this section is

applicable to payments made after November 13, 1997. * * *

Par. 4. Section 1.864–5 is amended by

redesignating paragraph (b)(2)(ii) as paragraph (b)(2)(iii) and adding new paragraph (b)(2)(ii) to read as follows:

1997–43 I.R.B.

§1.864–5 Foreign source income

effectively connected with U.S. business.

(b) * * *

(2) * * *

(ii) Substitute payments. For purposes

of this paragraph (b)(2), a substitute

interest payment (as defined in

§1.861–2(a)(7)) received by a foreign

person subject to tax under this paragraph

(b) pursuant to a securities lending transaction or a sale-repurchase transaction

(as defined in §1.861–2(a)(7)) with

respect to a security (as defined in

§1.864–6(b)(2)(ii)(c)) shall have the same

character as interest income paid or accrued with respect to the terms of the

transferred security. Similarly, for purposes of this paragraph (b)(2), a substitute

dividend payment (as defined in

§1.861–3(a)(6)) received by a foreign

person pursuant to a securities lending

transaction or a sale-repurchase transaction (as defined in §1.861–3(a)(6)) with

respect to a stock shall have the same

character as a distribution received with

respect to the transferred security. T h i s

paragraph (b)(2)(ii) is applicable to payments made after November 13, 1997.

Par. 5. Section 1.871–7 is amended by

redesignating the text of paragraph (b) as

paragraph (b)(1); adding a paragraph

heading for newly designated paragraph

(b)(1); adding paragraph (b)(2); and removing the first sentence of paragraph (f)

and adding two sentences in its place to

read as follows:

§1.871–7 Taxation of nonresident alien

individuals not engaged in U.S. business.

section, a substitute dividend payment (as

defined in §1.861–3(a)(6)) received by a

foreign person pursuant to a securities

lending transaction or a sale-repurchase

transaction (as defined in §1.861–3(a)(6))

shall have the same character as a distribution received with respect to the transferred security. Where, pursuant to a securities lending transaction or a

sale-repurchase transaction, a foreign person transfers to another person a security

the interest on which would qualify as

portfolio interest under section 871(h) in

the hands of the lender, substitute interest

payments made with respect to the transferred security will be treated as portfolio

interest, provided that in the case of interest on an obligation in registered form (as

defined in §1.871–14(c)(1)(i)), the transferor complies with the documentation requirement described in §1.871–14(c)

(1)(ii)(C) with respect to the payment of

the substitute interest and none of the exceptions to the portfolio interest exemption in sections 871(h)(3) and (4) apply.

See also §§1.861–2(b)(2) and 1.894–1(c).

(f) * * * Except as otherwise provided

in this paragraph, this section shall apply

for taxable years beginning after December 31, 1966. Paragraph (b)(2) of this

section is applicable to payments made

after November 13, 1997. * * *

Par. 6. Section 1.881–2 is amended by

redesignating the text of paragraph (b) as

paragraph (b)(1); adding a paragraph

heading for newly designated paragraph

(b)(1); adding a paragraph (b)(2); and removing the first sentence of paragraph (e)

and adding two sentences in its place to

read as follows:

to the terms of the transferred security.

S i m i l a r l y, for purposes of this section, a

substitute dividend payment (as defined

in §1.861–3(a)(6)) received by a foreign

person pursuant to a securities lending

transaction or a sale-repurchase transaction (as defined in §1.861–2(a)(7)) shall

have the same character as a distribution

received with respect to the transferred

security. Where, pursuant to a securities

lending transaction or a sale-repurchase

transaction, a foreign person transfers to

another person a security the interest on

which would qualify as portfolio interest

under section 881(c) in the hands of the

lender, substitute interest payments made

with respect to the transferred security

will be treated as portfolio interest, provided that in the case of interest on an

obligation in registered form (as defined

in §1.871–14(c)(1)(i)), the transferor

complies with the documentation requirement described in §1.871–14(c)(1)(ii)(C)

with respect to the payment of substitute

interest and none of the exceptions to the

portfolio interest exemption in sections

881(c)(3) and (4) apply. See also

§§1.871–7(b)(2) and 1.894–1(c).

(e) * * * Except as otherwise provide

in this paragraph, this section applies for

taxable years beginning after December

31, 1966. Paragraph (b)(2) of this section

is applicable to payments made after November 13, 1997. * * *

Par. 7. Section 1.894–1 is amended by

revising paragraph (c) and adding paragraph (d) to read as follows:

§1.894–1 Income affected by treaty.

§1.881–2 Taxation of foreign

corporations not engaged in U.S.

business.

payments. The provisions of an income

* * * * *

tax convention dealing with interest or

dividends paid to or derived by a foreign

(b) Fixed or determinable annual or pe * * * * *

person include substitute interest or diviriodical income—(1) General rule. * * *

dend payments that have the same charac(b)

Fixed

determinable

annual

(2) Substitute payments. For purposes

ter as interest or dividends under

of this section, a substitute interest pay- riodical income—(1) General ru l e . * * *

(2) Substitute payments. For purposes §1.864–5(b)(2)(ii), 1.871–7(b)(2) or

ment (as defined in §1.861–2(a)(7)) received by a foreign person pursuant to a of this section, a substitute interest pay- 1.881–2(b)(2). The provisions of this

securities lending transaction or a sale-re- ment (as defined in §1.861–2(a)(7)) re- paragraph (c) shall apply for purposes of

purchase transaction (as defined in ceived by a foreign person pursuant to a securities lending transactions or sale-re§1.861–2(a)(7)) shall have the same char- securities lending transaction or a sale-re- purchase transactions as defined in

acter as interest income paid or accrued purchase transaction (as defined in §1.861–2(a)(7) and §1.861–3(a)(6).

(d) Effective dates. Paragraphs (a) and

with respect to the terms of the transferred §1.861–2(a)(7)) shall have the same chars e c u r i t y. Similarly, for purposes of this acter as interest income received pursuant (b) of this section apply for taxable years

1997–43 I.R.B.

October 27, 1997

beginning after December 31, 1966. For

corresponding rules applicable to taxable

years beginning before January 1, 1967,

(see 26 CFR part 1 revised April 1, 1971).

Paragraph (c) of this section is applicable

to payments made after November 13,

1997.

is defined in § 4261(e)(1)(B) of the Internal Revenue Code, for purposes of computing the tax on air

transportation. See Announcement 97–107, page 25.

§1.7701(l)–1 [Amended]

T.D. 8733

P a r. 10. Section 1.7701(l)–1 is

amended as follows:

1. Paragraph (a) is amended by removing the paragraph designation (a) and the

heading.

2. Paragraph (b) is removed.

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301 and 602

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on October 6, 1997, 8:45 a.m., and published in the issue of

the Federal Register for October 14, 1997, 62 F.R.

53498)

Section 1362.—Election;

Revocation; Termination.

26 CFR 1.1362–6: Elections and consents.

If a taxpayer applies for late S corporation election relief under §1362(b)(5) of the Internal Revenue Code under Rev. Proc. 97–48, who must file

the consent to apply for late S corporation election

relief? See Rev. Proc. 97–48, page 19.

Section 6114.—Treaty-Based

Return Positions

26 CFR 301.6114–1: Treaty-based return positions.

Treaty-Based Return Positions

A G E N C Y: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

S U M M A RY: This document contains

final regulations under section 6114 of the

Internal Revenue Code of 1986 providing

that reporting is specifically required if

the residency of an individual is determined under a treaty and apart from the

Code. The IRS concluded, in the process

of completing the regulations under section 7701(b), that the rules of section

6 114 should apply to individuals determining their residency under a treaty.

These final regulations are necessary to

implement the section 6114 rules to individuals determining their residency under

a treaty. Also contained in this document

are final regulations relating to section

7701(b) and conforming changes to regulations under sections 6038 and 6046.

This revenue procedure provides guidance for requesting consent under §1.1502–13(e)(3) to treat

certain intercompany transactions on a separate entity basis, to revoke such consent, or to change from

the unauthorized use of separate entity reporting to

single entity reporting. This revenue procedure

cross-references Rev. Proc. 97–27 and modifies and

supersedes Rev. Proc. 82–36. See Rev. Proc. 97–49,

page 22.

Section 4261.—Imposition of

Tax

Background

SUPPLEMENTARYINFORMATION:

On April 27, 1992, a notice of proposed

rulemaking was published in the Federal

R e g i s t e r (57 F.R. 15272) proposing

amendments to the final Regulations on

Procedure and Administration (26 CFR

3 0 1 . 6 114–1), published in the Federal

R e g i s t e r on March 14, 1990 (55 F. R .

9438) and on July 12, 1990 (55 F. R .

28608). The proposed amendments related to §301.6114–1(b) and (c) and

§301.7701(b)–7(c)(2). No written comments responding to the notice were received. No public hearing was requested

or held. The proposed amendments are

adopted without change by this Treasury

decision. This Treasury decision also includes modifications to §§1.6038–2(j),

1.6046–1(g), 301.6114–1(d), 301.7701

(b)–3(b)(3) and (4), 301.7701(b)–7(c)(1)

and 301.7701(b)–8(b)(1) and (2).

Paperwork Reduction Act

Explanation of Provisions

The collections of information contained in these final regulations have been

Section 301.6114–1(b) is amended by

adding paragraph (b)(8) to provide that

EFFECTIVE DATE: These regulations

are effective December 15, 1997.

Section 1502.—Regulations

26 CFR 1.1502–13: Intercompany transactions.

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under control number

1 5 4 5 – 1126. Responses to these collections of information are mandatory.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

OMB control number.

The estimated annual burden per respondent varies from 1/2 hour to 3 hours,

depending on individual circumstances,

with an estimated average of 1 hour.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to the

Internal Revenue Service, Attn: IRS

Reports Clearance Off i c e r, T: F P, Wa s hington, DC 20224, and to the Office of

Management and Budget, Attn: Desk

O fficer for the Department of the Tr e as u r y, Office of Information and Regulatory Affairs, Washington, DC 20503.

Books or records relating to this 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.

FOR FURTHER INFORMATION CONTACT: David A. Juster, telephone (202622-3850) (not a toll-free number), regarding sections 6114 and 7701(b) and

Carl M. Cooper, telephone (202-6223840) (not a toll-free number) regarding

sections 6038 and 6046, both of the Office of Associate Chief Counsel (International), within the Office of Chief Counsel, IRS.

26 CFR 49.4261–1: Imposition of tax; in general.

This announcement corrects Rev. Proc. 97–46,

which provides a list of “rural airports” as that term

October 27, 1997

1997–43 I.R.B.

reporting is required under section 611 4

where residency of an individual is determined under a treaty and apart from the

Internal Revenue Code (Code). The regulations provide, however, that reporting is

waived for an individual if payments or

income items reportable by reason of

paragraph (b)(8) do not exceed $100,000

in the aggregate. Section 301.6114–1(d)

currently provides that when reporting is

required under section 6114, a taxpayer

must furnish as an attachment to his or her

return a written statement with the information as set forth in paragraph (d). Section 301.7701(b)–7(b) currently provides

that a dual resident taxpayer who claims a

treaty benefit as a nonresident of the

United States must file a statement in the

form required by paragraph (c) of that

section. Section 301.6114–1(d) is now

amended to provide that, when reporting

is required under section 6114, a taxpayer

must furnish, as an attachment to his or

her return, a fully completed Form 8833

(Treaty-Based Return Position Disclosure

Under Section 6114 or 7701(b)) or appropriate successor form.

Section

301.7701(b)–7(c)(1) is amended to provide that the written statement required to

be furnished under paragraph (b) of that

section, as an attachment to a dual resident taxpayer’s return, must be in the

form of a fully completed Form 8833

(Treaty-Based Return Position Disclosure

Under Section 6114 or 7701(b)) or appropriate successor form. Form 8833 was

developed to provide standardized reporting of the information currently

required by §§301.6114–1(d) and

301.7701(b)–7(c).

In an effort to provide standardized reporting of the information currently

required to be reported, under §301.7701(b)–8(b), by taxpayers claiming the closer

connection exception and exempt individuals and individuals with a medical condition, the Service has developed Form

8840 (Closer Connection Exception

Statement) and Form 8843 (Statement for

Exempt Individuals and Individuals with

a Medical Condition). A c c o r d i n g l y,

§301.7701(b)–8(b)(1) is amended to provide that the statement filed by alien individuals claiming the closer connection exception, described in §301.7701(b)–2,

must be in the form of a fully completed

Form 8840 or appropriate successor

form. Section 301.7701(b)–8(b)(2) is

1997–43 I.R.B.

amended to provide that the statement

filed by exempt individuals and individuals with a medical condition, described in

§301.7701(b)–3, must be in the form of a

fully completed Form 8843 or appropriate

successor form.

Sections 3121(b)(19), 3306(c)(19) and

3231(e)(1) of the Code provide that “J”

class visa holders (teachers and trainees)

are exempt from FICA, FUTA and Railroad Retirement Act taxes, respectively.

Section 320 of the Social Security Independence and Program Improvements Act

of 1994, Public Law 103–296 (108 Stat.

1464), extends the FICA, FUTAand Railroad Retirement Act tax exemptions and

certain other tax rules to “Q” class visa

holders (participants in international cultural exchange programs). A c c o r d i n g l y,

conforming changes have been made to

§301.7701(b)–3(b)(3) and (4) to reflect

the revisions in the Code to the definitions

of a teacher or trainee and student c o ntained in section 7701(b)(5).

Section 301.7701(b)–7(c)(2), adopted

as proposed, provides that, for purposes

of stating the approximate amount of

subpart F income to be included in the

statement required to be furnished under

paragraph (b) of that section by a dual

resident taxpayer who is a shareholder in

a c o n t rolled foreign corporation (as defined in section 957 or section 953(c)),

the approximate amount of income may

be based on the audited foreign financial

statements of the CFC if there are no

other United States shareholders in that

CFC. Parallel rules with respect to information reporting under sections 6038 and

6046 are added in §§1.6038–2(j)(2)(ii)

and 1.6046–1(g). Under these rules, a

taxpayer who claims a treaty benefit as a

nonresident of the United States, but who

is a United States person for purposes of

the information reporting requirements of

sections 6038 or 6046, may satisfy certain information reporting requirements

by filing the audited foreign financial

statements of the foreign corporation

with respect to which the information reporting is required. However, these rules

apply only if the taxpayer is the sole

United States person for purposes of the

information reporting requirements with

respect to the foreign corporation. If

there are other United States persons for

those purposes, then the taxpayer must

report the information required by the

regulations in the form and manner generally prescribed.

Special Analyses

It has been determined that this Tr e asury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations, and because

the notice of proposed rulemaking preceding the regulations was issued prior to

March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the

Code, the notice of proposed rulemaking

preceding these regulations was submitted to the Chief Counsel for Advocacy of

the Small Business Administration for

comment on its impact on small business.

Drafting Information

Various personnel from the Office of

Associate Chief Counsel (International),

within the Office of Chief Counsel, IRS

and the Treasury Department participated

in developing the regulations.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 301 and

602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.6038-2 is amended by:

1. Redesignating paragraph (j)(2)(ii) as

paragraph (j)(2)(iii).

2. Adding new paragraph (j)(2)(ii) to

read as follows:

§1.6038–2 Information returns required

of United States persons with respect to

annual accounting periods of certain

foreign corporations beginning after

December 31, 1962.

(j) * * *

(2) * * *

October 27, 1997

(ii) If an individual who is a United

States person required to furnish information with respect to a foreign corporation

under section 6038 is entitled under a

treaty to be treated as a nonresident of the

United States, and if the individual claims

this treaty benefit, and if there are no

other United States persons that are required to furnish information under section 6038 with respect to the foreign corporation, then the individual may satisfy

the requirements of paragraphs (f)(10),

( f ) ( 11), (g), and (h) of this section by filing

the audited foreign financial statements of

the foreign corporation with the individu a l ’s return required under section 6038.

P a r. 3. In §1.6046–1, paragraph (g) is

amended by adding a sentence at the end

to read as follows:

§1.6046–1 Returns as to organization

or reorganization of foreign corporations

and as to acquisitions of their stock, on or

after January 1, 1963.

(g) * * * If an individual who is a

United States person required to make a

return with respect to a foreign corporation under section 6046 is entitled under a

treaty to be treated as a nonresident of the

United States, and if the individual claims

this treaty benefit, and if there are no

other United States persons that are required to furnish information under section 6046 with respect to the foreign corporation, then the individual may satisfy

the requirements of paragraphs (b)(10),

(11) and (12), (c)(3)(ii)(d), and (g) of this

section by filing the audited foreign financial statements of the foreign corporation

with the individual’s return required

under section 6046.

PART 301—PROCEDURE AND

ADMINISTRATION

P a r. 4. The authority citation for part

301 continues to read in part as follows:

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

Section 301.6114–1 also issued under 26

U.S.C. 6114; * * *

Par. 5. Section 301.6114–1 is amended

by:

1. Removing the language “(c)(1)” in

paragraph (b)(4) introductory text and

October 27, 1997

adding “(c)(1)(i)” in its place.

2. Removing the language “(c)(1)” in

paragraph (b)(5) introductory text and

adding “(c)(1)(i)” in its place.

3. Removing the language”(c)(4)” in

paragraph (b)(6) and adding “(c)(1)(iv)”

in its place.

4. Removing the language “or” at the

end of paragraph (b)(6).

5. Removing the period at the end of

paragraph (b)(7) and adding “; or” in its

place.

6. Adding a paragraph (b)(8).

7. Paragraphs (c)(1) through (c)(6) are

redesignated as paragraphs (c)(1)(i)

through (c)(1)(vi), respectively.

8. Paragraphs (c)(7) introductory text,

(c)(7)(i), (c)(7)(ii), and (c)(7)(iii) are redesignated as paragraphs (c)(1)(vii) introductory text, (c)(1)(vii)(A), (c)(1)(vii)(B)

and (c)(1)(vii)(C), respectively.

9. The introductory text of paragraph

of paragraph (c)(1).

10. Revising newly designated paragraph (c)(1)(ii).

11. Removing the concluding text immediately following newly designated

paragraph (c)(1)(vii)(C).

12. Adding paragraphs (c)(2), (c)(3),

(c)(4) and (c)(5).

13. Revising paragraph (d).

The additions and revisions read as follows:

§301.6114–1 Treaty-based return

positions.

(b) * * *

(8) For returns relating to taxable years

for which the due date for filing returns

(without extensions) is after December

15, 1997, that residency of an individual

is determined under a treaty and apart

from the Internal Revenue Code.

(1) * * *

(ii) For returns relating to taxable years

for which the due date for filing returns

(without extensions) is on or before December 15, 1997, that residency of an individual is determined under a treaty and

apart from the Internal Revenue Code.

(2) Reporting is waived for an individ-

ual if payments or income items otherwise reportable under this section (other

than by reason of paragraph (b)(8) of this

section), received by the individual during the course of the taxable year do not

exceed $10,000 in the aggregate or, in the

case of payments or income items reportable only by reason of paragraph

(b)(8) of this section, do not exceed

$100,000 in the aggregate.

(3) Reporting with respect to payments

or income items the treatment of which is

mandated by the terms of a closing agreement with the Internal Revenue Service,

and that would otherwise be subject to the

reporting requirements of this section, is

also waived.

(4) If a partnership, trust, or estate that

has the taxpayer as a partner or beneficiary discloses on its information return a

position for which reporting is otherwise

required by the taxpayer, the taxpayer

(partner or beneficiary) is then excused

from disclosing that position on a return.

(5) This section does not apply to a

withholding agent with respect to the performance of its withholding functions.

(d) Information to be re p o rt e d—(1)

Returns due after December 15, 1997.

When reporting is required under this section for a return relating to a taxable year

for which the due date (without extensions) is after December 15 1997, the taxpayer must furnish, in accordance with

paragraph (a) of this section, as an attachment to the return, a fully completed

Form 8833 (Treaty-Based Return Position

Disclosure Under Section 6114 or

7701(b)) or appropriate successor form.

(2) Earlier returns. For returns relating to taxable years for which the due date

for filing returns (without extensions) is

on or before December 15, 1997, the taxpayer must furnish information in accordance with paragraph (d) of this section in

e ffect prior to December 15, 1997 (see

§ 3 0 1 . 6 114–1(d) as contained in 26 CFR

part 301, revised April 1, 1997).

(3) In general—(i) Permanent estab lishment. For purposes of determining

the nature and amount (or reasonable estimate thereof) of gross receipts, if a taxpayer takes a position that it does not have

a permanent establishment or a fixed base

in the United States and properly discloses that position, it need not separately

report its payment of actual or deemed

dividends or interest exempt from tax by

1997–43 I.R.B.

reason of a treaty (or any liability for tax

imposed by reason of section 884).

(ii) Single income item. For purposes

of the statement of facts relied upon to

support each separate Treaty-Based Return Position taken, a taxpayer may treat

payments or income items of the same

type (e.g., interest items) received from

the same ultimate payor (e.g., the obligor

on a note) as a single separate payment or

income item.

(iii) F o reign source effectively con nected income. If a taxpayer takes the return position that, under the treaty, income that would be income eff e c t i v e l y

connected with a U.S. trade or business is

not subject to U.S. taxation because it is

income treated as derived from sources

outside the United States, the taxpayer

may treat payments or income items of

the same type (e.g., interest items) as a

single separate payment or income item.

(iv) Sales or services income. Income

from separate sales or services, whether

or not made or preformed by an agent (independent or dependent), to different U.S.

customers on behalf of a foreign corporation not having a permanent establishment in the United States may be treated

as a single payment or income item.

(v) Foreign insurers or reinsurers. For

purposes of reporting by foreign insurers

or reinsurers, as described in paragraph

(c)(1)(vii)(B) of this section, such reporting must separately set forth premiums

paid with respect to casualty insurance

and indemnity bonds (subject to section

4371(1)); life insurance, sickness and accident policies, and annuity contracts

(subject to section 4371(2)); and reinsurance (subject to section 4371(3)). All premiums paid with respect to each of these

three categories may be treated as a single

payment or income item within that category. For reports first due before May 1,

1991, the report may disclose, for each of

the three categories, the total amount of

premiums derived by the foreign insurer

or reinsurer in U.S. dollars (even if a portion of these premiums relate to risks that

are not U.S. situs). Reasonable estimates

of the amounts required to be disclosed

will satisfy these reporting requirements.

P a r. 6. Section 301.7701(b)–0 is

amended in the contents listing by:

1. Adding entries for §301.7701(b)–7,

1997–43 I.R.B.

paragraphs (c)(1)(i) and (c)(1)(ii).

2. Removing the language “[Reserved]” in the entry for §301.7701(b)–7,

paragraph (c)(2).

3. Adding entries for §301.7701(b)–8,

paragraphs (b)(1)(i), (b)(1)(ii), (b)(2)(i)

and (b)(2)(ii).

The additions read as follows:

§301.7701(b)–0 Outline of regulation

provision for section 7701(b)–1 through

(b)–9.

§301.7701(b)–7 Coordination with

income tax treaties.

(1) * * *

(i) Returns due after December 15,

1997.

(ii) Earlier returns.

§301.7701(b)–8 Procedural rules.

(b) * * *

(1) * * *

(i) Returns due after December 15,

1997.

(ii) Earlier returns.

(2) * * *

(i) Returns due after December 15,

1997.

(ii) Earlier returns.

P a r. 7. Section 301.7701(b)3 is

amended by revising paragraphs (b)(3)

and (b)(4) to read as follows:

§301.7701(b)–3 Days of presence in the

United States that are excluded for

purposes of section 7701(b).

(b) * * *

(3) Teacher or trainee. A teacher or

trainee includes any individual (and that

i n d i v i d u a l ’s immediate family), other

than a student, who is admitted temporarily to the United States as a nonimmigrant

under section 101(a)(15)(J) (relating to

the admission of teachers and trainees

into the United States) or section

101(a)(15)(Q) (relating to the admission

of participants in international cultural exchange programs) of the Immigration and

Nationality Act (8 U.S.C. 1101(a)(15)(J),

(Q)) and who substantially complies with

the requirements of being admitted.

(4) Student. A student is any individual (and that individual’s immediate family) who is admitted temporarily to the

United States as a nonimmigrant under

section 101(a)(15)(F) or (M) (relating to

the admission of students into the United

States) or as a student under section

101(a)(15)(J) (relating to the admission of

teachers and trainees into the United

States) or section 101(a)(15)(Q) (relating

to the admission of participants in international cultural exchange programs) of the

Immigration and Nationality Act (8

U.S.C. 1101(a)(15)(F), (J), (M), (Q)) who

substantially complies with the requirements of being admitted. For rules concerning taxation of certain nonresident

students or trainees, see section 871 (c)

and §1.871–9(a) of this chapter.

P a r. 8. Section 301.7701(b)–7 is

amended by:

1. Revising paragraph (c)(1).

2. Adding text for paragraph (c)(2).

The revision and addition read as follows:

§301.7701(b)–7 Coordination with

income tax treaties.

due after December 15, 1997. The statement filed by an individual described in

paragraph (a)(1) of this section, for a return relating to a taxable year for which

the due date (without extensions) is after

December 15, 1997, must be in the form

of a fully completed Form 8833 (TreatyBased Return Position Disclosure Under

Section 6114 or 7701(b)) or appropriate

successor form. See section 6114 and

§ 3 0 1 . 6 114–1 for rules relating to other

treaty-based return positions taken by the

same taxpayer.

(ii) Earlier returns. For returns relating to taxable years for which the due date

for filing returns (without extensions) is

on or before December 15, 1997, the

October 27, 1997

statement filed by the individual described in paragraph (a)(1) of this section

must contain the information in accordance with paragraph (c)(1) of this section in effect prior to December 15, 1997

(see §301.7701(b)–7(c)(1) as contained in

26 CFR part 301, revised April 1, 1997).

(2) C o n t rolled foreign corporation

shareholders. If the taxpayer who claims

a treaty benefit as a nonresident of the

United States is a United States shareholder in a controlled foreign corporation

(CFC), as defined in section 957 or section 953(c), and there are no other United

States shareholders in that CFC, then for

purposes of paragraph (c)(1) of this section, the approximate amount of subpart F

income (as defined in section 952) that

would have been included in the taxpayer’s income may be determined based

on the audited foreign financial statements of the CFC.

P a r. 9. Section 301.7701(b)–8 is

amended by revising paragraphs (b)(1)

and (b)(2) to read as follows:

§301.7701(b)–8 Procedural rules.

(b) * * *

(1) Closer connection exception—(i)

Returns due after December 15, 1997.

The statement filed by an individual described in paragraph (a)(1) of this section,

for a return relating to a taxable year for

which the due date (without extensions) is

after December 15, 1997, must be in the

form of a fully completed Form 8840

(Closer Connection Exception Statement)

or appropriate successor form.

October 27, 1997

(ii) Earlier returns. For returns relating to taxable years for which the due date

for filing returns (without extensions) is

on or before December 15, 1997, the

statement filed by the individual described in paragraph (a)(1) of this section

must contain the information in accordance with paragraph (b)(1) of this section in effect prior to December 15, 1997

(see §301.7701(b)–8(b)(1) as contained in

26 CFR Part 301, revised April 1, 1997).

(2) Exempt individuals and individuals

with a medical condition—(i) Returns

due after December 15, 1997. The statement filed by an individual described in

paragraph (a)(2) of this section, for a return relating to a taxable year for which

the due date (without extensions) is after

December 15, 1997, must be in the form

of a fully completed Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition) or appropriate successor form.

(ii) Earlier returns. For returns relating to taxable years for which the due date

for filing returns (without extensions) is

on or before December 15, 1997, the

statement filed by the individual described in paragraph (a)(2) of this section

must contain the information in accordance with paragraph (b)(2) of this section in effect prior to December 15, 1997

(see §301.7701(b)–8(b)(2) as contained in

26 CFR Part 301, revised April 1, 1997).

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

amended by adding an entry in numerical

order to the table and revising the entry

for 301.7701(b)–7 to read as follows:

§602.101 OMB Control numbers.

CFR part or section

where identified and

described

Current OMB

control No.

301.6114–1

1545–1126

301.7701(b)–7

1545–0089

1545–1126

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved August 28, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on October 6, 1997, 8:45 a.m., and published in the issue of

the Federal Register for October 14, 1997, 62 F.R.

53384)

Par. 10. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 11. In §602.101, paragraph (c) is

1997–43 I.R.B.

Part II. Treaties and Tax Legislation

Subpart B.—Legislation and

Related Committee Reports

Public Law 105–35

105th Congress, H.R. 1226

August 5, 1997

An Act to amend the Internal Revenue

Code of 1986 to prevent the unauthorized

inspection of tax returns or tax returns information.

Be it enacted by the Senate and House

of Representatives of the United States of

America in Congress assembled,

SECTION 1. SHORTTITLE.

This Act may be cited as the “Ta x p a y e r

Browsing Protection A c t . ”

SEC. 2. PENALTYFOR

UNAUTHORIZED INSPECTION OF

TAX RETURNS OR TAX RETURN

INFORMATION.

(a) IN GENERAL.—Part I of subchapter

A of chapter 75 of the Internal Revenue

Code of 1986 (relating to crimes, other

o ffenses, and forfeitures) is amended by

adding after section 7213 the following

new section:

“(b) PENALTY.—

“(1) IN GENERAL.—Any violation of subsection (a) shall be

punishable upon conviction by a

fine in any amount not exceeding

$1,000, or imprisonment of not

more than 1 year, or both, together

with the costs of prosecution.

“(2) FEDERAL OFFICERS OR

E M P L O Y E E S .—An officer or employee of the United States who is

convicted of any violation of subsection (a) shall, in addition to any

other punishment, be dismissed

from office or discharged from

employment.

“(c) DEFINITIONS.—For purposes of this

section, the terms ‘inspect’, ‘return’, and

‘return information’ have the respective

meanings given such terms by section

6103(b).”.

(b) TECHNICAL AMENDMENTS.—

(1) Paragraph (2) of section

7213(a) of such Code is amended by

inserting “(5),” after “(m)(2), (4),”.

(2) The table of sections for part

I of subchapter A of chapter 75 of such

Code 1986 is amended by inserting

after the item relating to section 7213

the following new item:

“Sec. 7213A. Unauthorized inspection of returns or

return information.”.

“SEC. 7213A. UNAUTHORIZED

INSPECTION OFRETURNS OR RETURN INFORMATION.

“(a) PROHIBITIONS.—

“(1) F E D E R A L E M P L O Y E E S A N D

OTHER PERSONS.—It shall be unlawful

for—

“(A) any officer or employee

of the United States, or

“(B) any person described in

section 6103(n) or an officer or

employee of any such person,

willfully to inspect, except as authorized

in this title, any return or return information.

“(2)

S TAT E

AND

OTHER

EMPLOYEES.—It shall be unlawful for

any person (not described in paragraph

(1)) willfully to inspect, except as authorized in this title, any return or return information acquired by such person or another person under a provision

of section 6103 referred to in section

7213(a)(2).

1997–43 I.R.B.

violations occurring on and after the date

of the enactment of this Act.

SEC. 3. CIVILDAMAGES FOR

UNAUTHORIZED INSPECTION OF

RETURNS AND RETURN

INFORMATION; NOTIFICATION

OFUNLAWFULINSPECTION OR

DISCLOSURE.

(a) CIVIL DAMAGES FOR UNAUTHORIZED

INSPECTION.—Subsection (a) of section

7431 of the Internal Revenue Code of

1986 is amended—

(1) by striking “D ISCLOSURE” in

the headings for paragraphs (1) and (2)

and inserting “INSPECTION OR DISCLOSURE”, and

(2) by striking “discloses” in

paragraphs (1) and (2) and inserting

“inspects or discloses”.

(b) NOTIFICATION OF UNLAWFUL INSPECTION OR D ISCLOSURE.—Section 7431 of

such Code is amended by redesignating

subsections (e) and (f) as subsections (f)

and (g), respectively, and by inserting

after subsection (d) the following new

subsection:

“(e) NO T I F I C AT I O N O F UN L AW F U L I NSPECTION AND DISCLOSURE .—If any person is criminally charged by indictment or

information with inspection or disclosure

of a taxpayer’s return or return information in violation of—

“(1) paragraph (1) or (2) of section

7213(a),

“(2) section 7213A(a), or

“(3) subparagraph (B) of section

1030(a)(2) of title 18, United States

Code,

the Secretary shall notify such taxpayer as

soon as practicable of such inspection or

disclosure.”.

of section 7431 of such Code is amended

to read as follows:

“(b) EXCEPTIONS.—No liability shall

arise under this section with respect to

any inspection or disclosure—

“(1) which results from a good

faith, but erroneous, interpretation of

section 6103, or

“(2) which is requested by the taxpayer.”.

(d) CONFORMING AMENDMENTS.—

(1) Subsections (c)(1)(A),

(c)(1)(B)(i), and (d) of section 7431 of

such Code are each amended by inserting “inspection or” before “disclosure”.

(2) Clause (ii) of section 7431(c)(1)(B) of such Code is amended by

striking “willful disclosure or a disclosure” and inserting “willful inspection

or disclosure or an inspection or disclosure”.

(3) Subsection (f) of section 7431

of such Code, as redesignated by subsection (b), is amended to read as follows:

“(f) DEFINITIONS.—For purposes of this

section, the terms ‘inspect’, ‘inspection’,

‘return’, and ‘return information’have the

respective meanings given such terms by

section 6103(b).”.

(4) The section heading for section 7431 of such Code is amended by

inserting “INSPECTION OR” before “DISCLOSURE ”.

October 27, 1997

(5) The table of sections for subchapter B of chapter 76 of such Code is

amended by inserting “inspection or”

before “disclosure” in the item relating

to section 7431.

(6) Paragraph (2) of section

7431(g) of such Code, as redesignated

by subsection (b), is amended by striking “any use” and inserting “any inspection or use”.

(e) EF F E C T I V E D AT E .—The amendments made by this section shall apply to

inspections and disclosures occurring on

and after the date of the enactment of this

Act.

Approved August 5, 1997.

105th

Congress

1st Session

HOUSE

OF REPRESENTATIVES

Report

105–51

TAXPAYER BROWSING

PROTECTION ACT

APRIL 14, 1997.—Committed to the Committee of the Whole House on the State of

the Union and ordered to be printed

M r. AR C H E R , from the Committee on

Ways and Means, submitted the following

REPORT

[To accompany H.R. 1226]

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to

whom was referred the bill (H.R. 1226) to

amend the Internal Revenue Code of 1986

to prevent the unauthorized inspection of

tax returns or tax return information, having considered the same, report favorably

thereon with an amendment and recommend that the bill as amended do pass.

CONTENTS

Page

I. Summary and Background . . . . . . . . . . .14

A. Summary . . . . . . . . . . . . . . . . . . . . . .14

B. Background and Reasons for

Legislation . . . . . . . . . . . . . . . . . . . . .15

C. Legislative History . . . . . . . . . . . . . . .15

II. Explanation of the Bill . . . . . . . . . . . . . .15

III. Vote of the Committee . . . . . . . . . . . . .15

IV. Budget Effects of the Bill . . . . . . . . . . .15

A. Committee Estimates of

October 27, 1997

Budgetary Effects . . . . . . . . . . . . . .15

B. Budget Authority and Tax

Expenditures . . . . . . . . . . . . . . . . . .15

C. Cost Estimate Prepared by the

Congressional Budget Office . . . . . .16

V. Other Matters To Be Discussed Under

the Rules of the House . . . . . . . . . . . . . .16

A. Committee Oversight Findings and

Recommendations . . . . . . . . . . . . . . .16

B. Summary of Findings and Recommendations of the Committee on

Government Reform and Oversight .16

C. Constitutional Authority Statement . .16

D. Information Relating to Unfunded

Mandates . . . . . . . . . . . . . . . . . . . . . .16

E. Applicability of House Rule XXI

clause 5(c) . . . . . . . . . . . . . . . . . . . . .16

VI. Changes in Existing Law Made by the

Bill, as Reported . . . . . . . . . . . . . . . . . .16

The amendment is as follows:

At the end of the bill insert the following new section:

SEC. 3. CIVILDAMAGES FOR

UNAUTHORIZED INSPECTION OF

RETURNS AND RETURN

INFORMATION; NOTIFICATION

OF UNLAWFULINSPECTION OR

DISCLOSURE.

(a) CIVIL DAMAGES FOR UNAUTHORIZED

INSPECTION.—Subsection (a) of section

7431 of the Internal Revenue Code of

1986 is amended—

(1) by striking “D ISCLOSURE” in

the headings for paragraphs (1) and (2)

and inserting “INSPECTION OR DISCLOSURE”, and

(2) by striking “discloses” in

paragraphs (1) and (2) and inserting

“inspects or discloses”.

(b) NOTIFICATION OF UNLAWFUL INSPECTION OR D ISCLOSURE.—Section 7431 of

such Code is amended by redesignating

subsections (e) and (f) as subsections (f)

and (g), respectively, and by inserting

after subsection (d) the following new

subsection:

“(e) N O T I F I C AT I O N O F U N L AW F U L I NSPECTION AND DISCLOSURE .—If any person is criminally charged by indictment or

information with inspection or disclosure

of a taxpayer’s return or return information in violation of—

“(1) paragraph (1) or (2) of section

7213(a),

“(2) section 7213A(a), or

“(3) subparagraph (B) of section

1030(a)(2) of title 18, United States

Code,

the Secretary shall notify such taxpayer as

soon as practicable of such inspection or

disclosure.”.

of section 7431 of such Code is amended

to read as follows:

“(b) EXCEPTIONS.—No liability shall

arise under this section with respect to

any inspection or disclosure—

“(1) which results from a good

faith, but erroneous, interpretation of

section 6103, or

“(2) which is requested by the taxpayer.”.

(d) CONFORMING AMENDMENTS.—

(1) Subsections (c)(1)(A), (c)(1)(B)(i), and (d) of section 7431 of such

Code are each amended by inserting

“inspection or” before “disclosure”.

(2) Clause (ii) of section 7431(c)(1)(B) of such Code is amended by

striking “willful disclosure or a disclosure” and inserting “willful inspection

or disclosure or an inspection or disclosure”.

(3) Subsection (f) of section 7431

of such Code, as redesignated by subsection (b), is amended to read as follows:

“(f) DEFINITIONS.—For purposes of this

section, the terms ‘inspect’, ‘inspection’,

‘return’, and ‘return information’have the

respective meanings given such terms by

section 6103(b).”.

(4) The section heading for section 7431 of such Code is amended by

inserting “INSPECTION OR” before

“DISCLOSURE”.

(5) The table of sections for subchapter B of chapter 76 of such Code is

amended by inserting “inspection or”

before “disclosure” in the item relating

to section 7431.

(6) Paragraph (2) of section

7431(g) of such Code, as redesignated

by subsection (b), is amended by striking “any use” and inserting “any inspection or use”.

(e) EFFECTIVE DATE.—The amendments

made by this section shall apply to inspections and disclosures occurring on and after

the date of the enactment of this A c t .

I. SUMMARY AND BACKGROUND

A. SUMMARY

H.R. 1226, as reported by the Commit-

1997–43 I.R.B.

tee on Ways and Means, provides for a

criminal penalty for unauthorized willful

inspection (“browsing”) of tax returns and

return information. The bill provides for

civil damages for unauthorized inspection, and also contains a notification requirement.

B. BACKGROUND AND REASONS FOR

LEGISLATION

Widespread indications of browsing

have made it imperative that Congress

create a criminal penalty in the Internal

Revenue Code to penalize this behavior.

C. LEGISLATIVE HISTORY

Committee bill

H.R. 1226 was introduced by Chairman

Archer (for himself, Ms. Dunn, Mr.

Rangel, Mrs. Johnson of Connecticut, Mr.

Coyne, Mr. Thomas, Mr. Herg e r, Mr.

Camp, Mr. Ensign, Mr. Hayworth, Mr.

We l l e r, Mrs. Kennelly of Connecticut,

M r. Levin, Mr. Kleczka, Mr. Lewis of

Georgia, Mr. Neal of Massachusetts, Mr.

Jefferson, Mr. Tanner, Mrs. Thurman, and

M r. Portman) on April 8, 1997. The bill

was considered in a Committee on Ways

and Means markup on April 9, 1997, and

was ordered favorably reported, with an

amendment, by voice vote.

II. EXPLANATION OFTHE BILL

PRESENT LAW

The Internal Revenue Code prohibits

disclosure of tax returns and return information, except to the extent specifically

authorized by the Internal Revenue Code

(sec. 6103). Unauthorized willful disclosure is a felony punishable by a fine not

exceeding $5,000 or imprisonment of not

more than five years, or both (sec. 7213).

An action for civil damages also may be

brought for unauthorized disclosure (sec.

7431).

There is no explicit criminal penalty in

the Internal Revenue Code for unauthorized inspection (absent subsequent disclosure) of tax returns and return information. Such inspection is, however,

explicitly prohibited by the Internal Revenue Service (“IRS”).1 In a recent case, an

individual was convicted of violating the

IRS Declaration of Privacy Principles, May 9, 1994.

1997–43 I.R.B.

Federal wire fraud statute (18 U.S.C.

1343 and 1346) and a Federal computer

fraud statute (18 U.S.C. 1030) for unauthorized inspection. However, the U.S.

First Circuit Court of Appeals overturned

this conviction.2 Unauthorized inspection

of information of any department or

agency of the United States (including the

IRS) via computer was made a crime

under 18 U.S.C. 1030 by the Economic

Espionage Act of 1996.3 This provision

does not apply to unauthorized inspection

of paper documents.

REASONS FOR CHANGE

The Committee believes that it is important to have a criminal penalty in the

Internal Revenue Code to punish this type

of behavior. The Committee also believes

that it is appropriate to provide for civil

damages for unauthorized inspection parallel to civil damages for unauthorized

disclosure.

EXPLANATION OF PROVISIONS

Criminal penalties (sec. 2 of the bill and

new sec. 7213A of the Code)

The bill creates a new criminal penalty

in the Internal Revenue Code. The penalty

is imposed for willful inspection (except

as authorized by the Code) of any tax return or return information by any Federal

employee or IRS contractor. The penalty

also applies to willful inspection (except

as authorized) by any State employee or

other person who acquired the tax return

or return information under specific provisions of section 6103. Upon conviction,

the penalty is a fine in any amount not exceeding $1,000,4 or imprisonment of not

more than 1 year, or both, together with

the costs of prosecution. In addition, upon

conviction, an officer or employee of the

United States would be dismissed from

office or discharged from employment.

The Congress views any unauthorized

inspection of tax return information as a

very serious offense; this new criminal

penalty reflects that view. The Congress

also believes that unauthorized inspection

warrants very serious personnel sanctions

against IRS employees who engage in

U.S. v. Czubinski, DTR 2/25/97, p. K–2.

P.L. 104–294, sec. 201 (October 11, 1996).

Pursuant to 18 U.S.C. sec. 3571 (added by the

Sentencing Reform Act of 1984), the amount of the

fine is not more than the greater of the amount specified in this new Code section or $100,000.

unauthorized inspection, and that it is appropriate to fire employees who do this.

Civil damages (sec. 3 of the bill and sec.

7431 of the Code)

The bill amends the provision providing

for civil damages for unauthorized disclosure by also providing for civil damages

for unauthorized inspection. Damages are

available for unauthorized inspection that

occurs either knowingly or by reason of

negligence. Accidental or inadvertent inspection that may occur (such as, for example, by making an error in typing in a

TIN) would not be subject to damages because it would not meet this standard. T h e

bill also provides that no damages are

available to a taxpayer if that taxpayer requested the inspection or disclosure.

The bill also requires that, if any person

is criminally charged by indictment or information with inspection or disclosure of

a taxpayer’s return or return information

in violation of section 7213(a) or (b), section 7213A (as added by the bill), or 18

U.S.C. section 1030 (a)(2)(B), the Secretary notify that taxpayer as soon as practicable of the inspection or disclosure.

EFFECTIVE DATE

The bill is effective for violations occurring on or after the date of enactment.

III. VOTE OFTHE COMMITTEE

In compliance with clause 2(l)(2)(B) of

rule XI of the Rules of the House of Representatives, the following statement is

made concerning the vote on the motion

to report the bill. The bill (H.R. 1226) was

ordered favorably reported, as amended

by voice vote on April 9, 1997, with a

quorum present.

I V. BUDGETEFFECTS OFTHE BILL

A. COMMITTEE ESTIMATES

In compliance with clause 7(a) of rule

XIII of the Rules of the House of Representatives, the following statement is

made concerning the estimated budget effects of the bill as reported.

The bill, as reported, is estimated to

have an indeterminate revenue effect.

B. BUDGET AUTHORITYAND TAX

EXPENDITURES

Budget authority

In compliance with subdivision (B) of

clause 2(l)(3) of rule XI of the Rules of

October 27, 1997

the House of Representatives, the Committee states that the provisions of the bill

as reported involve no new or increased

budget authority.

Tax expenditures

In compliance with subdivision (B) of

clause 2(l)(3) of rule XI of the Rules of

the House of Representatives, the Committee states that the provisions of the bill

as reported involve no new or increased

tax expenditures.

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET OFFICE

In compliance with subdivision (C) of

clause 2(l)(3) of rule XI of the Rules of

the House of Representatives, requiring

cost estimate prepared by the Congressional Budget Office, the Committee advises that the Congressional Budget Office has submitted the following

Statement on this bill.

U.S. CONGRESS,

CONGRESSIONAL BUDGET OFFICE,

Washington, DC, April 11, 1997.

Hon. BILL ARCHER,

Chairman, Committee on Ways and

Means, House of Representatives,

Washington, DC.

DEAR MR. C HAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 1226, the

Taxpayer Browsing Protection Act.

If you wish further details on this estimate, we will be pleased to provide them.

The CBO staff contact is Mark Grabowicz.

Sincerely,

JUNE E. O’NEILL, Director.

Enclosure.

H.R. 1226—Taxpayer Browsing

Protection Act

H.R. 1226 would ban the authorized inspection of federal tax returns or tax return information. Violators of the bill’s

provisions would be subject to a criminal

fine and imprisonment. In addition, H.R.

1226 would permit taxpayers whose returns are unlawfully inspected to bring a

civil action against the United States.

CBO estimates that enacting this legislation would have no significant impact

on the federal budget. While the bill could

lead to increases in both direct spending

and receipts, the amounts involved would

October 27, 1997

be less than $500,000 a year. Because

H.R. 1226 could affect direct spending

and receipts, pay-as-you-go procedures

would apply.

Enacting H.R. 1226 could increase

government receipts from criminal fines.

Such fines would be deposited in the

Crime Victims Fund and would be spent

in the following year. Thus, direct spending from the fund would match the increase in revenues with a one-year lag. In

any case, CBO estimates that the criminal

fines would likely total less than

$500,000 a year.

Enacting this legislation also could increase civil actions by taxpayers against

the Internal Revenue Service. Successful

litigants would be paid from a permanent,

indefinite appropriation for Claims, Judgments, and Relief Acts. CBO estimates

that any increase in direct spending from

such payments also would total less than

$500,000 annually.

H.R. 1226 contains no intergovernmental or private-sector mandates as defined

in the Unfunded Mandates Reform Act of

1995 and would not impose costs on state,

local, or tribal governments.

The CBO staff contact for this estimate

is Mark Grabowicz. This estimate was approved by Robert A. Sunshine, Deputy

Assistant Director for Budget Analysis.

V. OTHER MATTERS TO BE

DISCUSSED UNDER THE

RULES OFTHE HOUSE

A. COMMITTEE OVERSIGHT FINDINGS

AND RECOMMENDATIONS

mittee advises that no oversight findings

or recommendations have been submitted

to this Committee by the Committee on

Government Reform and Oversight with

respect to the provisions contained in the

bill.

C. CONSTITUTIONAL AUTHORITY

STATEMENT

With respect to clause 2(l)(4) of Rule XI

of the Rules of the House of Representatives (relating to Constitutional A u t h o r i t y ) ,

the Committee states that the Committee’s

action in reporting this bill is derived from

Article I of the Constitution, Section 7

(“All bills for raising revenue shall originate in the House of Representatives”) and

Section 8 (“The Congress shall have power

to lay and collect taxes, duties, imposts and

excises, to pay the debts * * * of the United

States”).

D. INFORMATION RELATING TO

UNFUNDED MANDATES

This information is provided in accordance with section 423 of the Unfunded

Mandates Act of 1995 (P.L. 104–4).

The Committee has determined that the

provisions of the bill do not impose a Federal mandate on the private sector nor a

Federal intergovernmental mandate.

Thus, the provisions of the bill do not affect the competitive balance between the

private sector and State, local, and tribal

government.

E. APPLICABILITYOF HOUSE RULE

XXI5(C)

With respect to subdivision (A) of

clause 2(l)(3) of rule XI of the Rules of

the House of Representatives (relating to

oversight findings), the Committee advises that it was the result of the Committ e e ’s oversight activities concerning reports of unauthorized “browsing” of

taxpayer’s returns and return information

by Internal Revenue Service personnel

that the Committee concluded that it is

appropriate to enact the provisions contained in the bill as reported.

Rule XXI5(c) of the Rules of the House

of Representatives provides, in part, that

“No bill or joint resolution, amendment,

or conference report carrying a Federal

income tax rate increase shall be considered as passed or agreed to unless so determined by a vote of not less than threefifths of the Members.” The Committee

has carefully reviewed the provisions of

the bill, and states that the provisions of

the bill do not involve any Federal income

tax rate increase within the meaning of

the rule.

B. SUMMARY OF FINDINGS AND

RECOMMENDATIONS OF THE COMMITTEE

ON GOVERNMENT REFORM

AND OVERSIGHT

VI. CHANGES IN EXISTING

LAW MADE BYTHE BILL,

AS REPORTED

With respect to subdivision (D) of

clause 2(l)(3) of rule XI of the Rules of

the House of Representatives, the Com-

In compliance with clause 3 of Rule

XIII of the Rules of the House of Representatives, changes in existing law made

1997–43 I.R.B.

by the bill, as reported, are shown as follows (existing law proposed to be omitted

is enclosed in black brackets, new matter

is printed in italic, existing law in which

no change is proposed is shown in roman).

INTERNALREVENUE

CODE OF 1986

Subtitle F–Procedure

and Administration

CHAPTER 75—CRIMES,

OTHER OFFENSES, AND

FORFEITURES

SubchapterA—Crimes

PA RT I—GENERALPROVISIONS

Sec. 7201. Attempt to evade or defeat tax.

Sec. 7213A. Unauthorized inspection of

returns or return information.

SEC. 7213. UNAUTHORIZED

DISCLOSURE OF INFORMATION.

(a) RETURNSAND RETURN INFORMATION.—

(1) * * *

(2) STATEAND OTHER EMPLOYEES.—It

shall be unlawful for any person (not described in paragraph (1)) willfully to disclose to any person, except as authorized

in this title, any return or return information (as defined in section 6103(b)) acquired by him or another person under

subsection (d), (i)(3)(B)(i), (l)(6), (7), (8),

(9), (10), (12), or (15) or (m)(2), (4), (5),

(6), or (7) of section 6103. Any violation

of this paragraph shall be a felony punishable by a fine in any amount not exceeding $5,000, or imprisonment of not more

than 5 years, or both, together with the

costs of prosecution.

SEC. 7213A. UNAUTHORIZED

INSPECTION OF RETURNS OR

RETURN INFORMATION.

(a) PROHIBITIONS.—

(1) FEDERAL EMPLOYEES AND OTHER

PERSONS.—It shall be unlawful for—

1997–43 I.R.B.

(A) any officer or employee

of the United States, or

(B) any person described in

section 6103(n) or an officer or em ployee of any such person,

willfully to inspect, except as authorized

in this title, any return or return informa tion.

(2) S TATE AND OTHER EMPLOYEES.—

It shall be unlawful for any person (not

described in paragraph (1)) willfully to

inspect, except as authorized in this

title, any return or return information

a c q u i red by such person or another

person under a provision of section

6103 referred to in section 7213(a)(2).

(b) PENALTY.—

(1) IN GENERAL.—Any violation of

subsection (a) shall be punishable upon

conviction by a fine in any amount not

exceeding $1,000, or imprisonment of

not more than 1 year, or both, together

with the costs of prosecution.

(2) FEDERAL OFFICERS OR EMPLOY E E S . — An officer or employee of the

United States who is convicted of any

violation of subsection (a) shall, in ad dition to any other punishment, be dis missed from office or discharged from

employment.

section, the terms “inspect”, “re t u r n ” ,

and “return information” have the re spective meanings given such terms by

section 6103(b).

CHAPTER 76—JUDICIALPROCEEDINGS

Subchapter B—Proceedings by Taxpayers and Third Parties

Sec. 7421. Prohibition of suits to restrain assessment

or collection.

Sec. 7431. Civil damages for unauthorized inspection

or disclosure of returns and return information.

SEC. 7431. CIVILDAMAGES FOR

UNAUTHORIZED

INSPECTION OR DISCLOSURE

O FRETURNS AND RETURN

INFORMATION.

(a) IN GENERAL.—

(1) [DISCLOSURE] INSPECTION OR

D I S C L O S U R E B Y E M P L O Y E E O F UN I T E D

STATES.— If any officer or employee of

the United States knowingly, or by reason of negligence, inspects or discloses

any return or return information with

respect to a taxpayer in violation of any

provision of section 6103, such taxpayer may bring a civil action for damages against the United States in a district court of the United States.

(2) [DISCLOSURE] INSPECTION OR

DISCLOSURE BY A PERSON WHO IS NOT AN

EMPLOYEE OF UNITED STAT E S.— If any

person who is not an officer or employee of the United States knowingly,

or by reason of negligence, inspects or

discloses any return or return information with respect to a taxpayer in violation of any provision of section 6103,

such taxpayer may bring a civil action

for damages against such person in a

district court of the United States.

[(b) N O LIABILITY FOR GOOD FAITH BUT

ERRONEOUS INTERPRETATION.—No liability

shall arise under this section with respect

to any disclosure which results from a

good faith, but erroneous, interpretation

of section 6103.]

(b) E X C E P T I O N S . —No liability shall

arise under this section with respect to

any inspection or disclosure—

(1) which results from a good

faith, but erroneous, interpretation of

section 6103, or

(2) which is requested by the tax payer.

under subsection (a), upon a finding of liability on the part of the defendant, the

defendant shall be liable to the plaintiff in

an amount equal to the sum of—

(1) the greater of—

(A) $1,000 for each act of unauthorized inspection or disclosure of a

return or return information with respect to which such defendant is

found liable, or

(B) the sum of—

(i) the actual damages sustained by the plaintiff as a result of

such unauthorized inspection or

disclosure, plus

(ii) in the case of a [willful disclosure or a disclosure] willful in spection or disclosure or an in spection or disclosure which is the

result of gross negligence, punitive damages, plus

(2) the costs of the action.

(d) P E R I O D F O R B R I N G I N G A C T I O N . —

October 27, 1997

Notwithstanding any other provision of

law, an action to enforce any liability created under this section may be brought,

without regard to the amount in controversy, at any time within 2 years after the

date of discovery by the plaintiff of the

unauthorized inspection or disclosure.

[(e) RETURN; RETURN INFORMATION.—

For purposes of this section, the terms

“return” and “return information” have

the respective meanings given such terms

in section 6103(b).]

(e) N OTIFICATION OF UNLAWFUL INSPEC TION AND DISCLOSURE.— If any person is

criminally charged by indictment or in formation with inspection or disclosure of

a taxpayer’s return or return information

in violation of—

October 27, 1997

(1) paragraph (1) or (2) of section

section 3406 (including information

7213(a),

with respect to any payee certification

(2) section 7213A(a), or

failure under subsection (d) thereof)

(3) subparagraph (B) of section

shall be treated as return information,

1030(a)(2) of title 18, United States

and

Code,

(2) any inspection or use of such inthe Secre t a ry shall notify such taxpayer

formation other than for purposes of

as soon as practicable of such inspection

meeting any requirement under section

or disclosure.

3406 or (subject to the safeguards set

(f) DEFINITIONS. — For purposes of this

forth in section 6103) for purposes permitted under section 6103 shall be

section, the terms “inspect”, “inspec treated as a violation of section 6103.

tion”, “return”, and “return informa tion” have the respective meanings given For purposes of subsection (b), the reference to section 6103 shall be treated as insuch terms by section 6103(b).

[( f )] (g) E X T E N S I O N TO I N F O R M AT I O N cluding a reference to section 3406.

OBTAINED UNDER SECTION 3406.—For pur*

poses of this section—

(1) any information obtained under

1997–43 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rate

Update

Notice 97–56

Notice 88–73 provides guidelines for determining the weighted average interest

rate and the resulting permissible range of

interest rates used to calculate current liability for the purpose of the full funding

limitation of § 412(c)(7) of the Internal

Revenue Code as amended by the Omnibus

Budget Reconciliation Act of 1987 and as

further amended by the Uruguay Round

Month

Year

Weighted

Average

October

1997

6.83

Drafting Information

The principal author of this notice is

Donna Prestia of the Employee Plans Division. For further information regarding

this notice, call (202) 622-6076 between

2:30 and 3:30 p.m. Eastern time (not a

toll-free number). Ms. Prestia’s number

is (202) 622-7377 (also not a toll-free

number).

Nonbank Trustees and

Custodians for Education

Individual Retirement Accounts

Notice 97–57

(1) Purpose

This notice informs entities already approved to serve as nonbank trustees and

custodians of individual retirement accounts (IRAs) that they are also approved

to serve as nonbank trustees and custodians of Education IRAs and provides guidance on the procedures for being approved to be a nonbank trustee or

custodian of an Education IRA.

(2) Education IRAs

Section 530 of the Internal Revenue

Code, added by section 213 of the Ta xpayer Relief Act of 1997, Pub. L. 105–34,

provides a new type of tax-free savings

vehicle for higher education expenses,

called an Education Individual Retirement Account (Education IRA). A total

amount of $500 per year may be contributed to Education IRAs for any beneficiary under the age of 18 years. To contribute the maximum of $500 for a

b e n e f i c i a r y, a contributor must have adjusted gross income for the year not ex-

1997–43 I.R.B.

Agreements Act, Pub. L. 103–465 (GAT T ) .

The average yield on the 30-year Tr e asury Constant Maturities for September

1997 is 6.50 percent.

The following rates were determined for

the plan years beginning in the month

shown below.

90% to 107%

Permissible

Range

90% to 110%

Permissible

Range

6.14 to 7.30

6.14 to 7.51

ceeding $95,000 ($150,000 for joint returns). The $500 maximum permitted

contribution is phased out for contributors

with adjusted gross income between

$95,000 and $110,000 ($150,000 and

$160,000 for joint returns). Education

IRAs may be established in taxable years

beginning after 1997.

(3) Approval of nonbank trustees and

custodians

nonbank trustee for Education IRAs, contact Mr. Gibbs at (202) 622-6030 (not a

toll-free call).

26 CFR 601.105: Examination of returns and

claims for refund, credit or abatement;

determination of correct tax liability.

(Also Part I, § 1362; 1.1362–6.)

Rev. Proc. 97–48

SECTION 1. PURPOSE

Under section 530 of the Code, the

trustee or custodian of an Education IRA

must be a bank (as defined in section

408(n) of the Code) or another person approved by the Internal Revenue Service.

Section 1.408–2(e) of the Income Ta x

Regulations sets forth the rules which an

entity must meet to be approved by the

Service as a nonbank trustee or custodian

of an individual retirement account

(IRA). Pursuant to this notice, any entity

already approved by the Service to be a

nonbank trustee or custodian of an IRAi s

automatically approved by the Service to

be a nonbank trustee or custodian of an

Education IRA. In addition, entities other

than banks or previously approved nonbank IRA trustees or custodians may request approval to be a trustee or custodian of an Education IRA in accordance

with the procedures set forth in section

1.408–2(e) and section 3.10 of Rev. Proc.

97-4, 1997–1 I.R.B. 97, dated January 6,

1 9 9 7.

(4) Drafting information

The principal author of this notice is

William Gibbs of the Office of the Associate Chief Counsel (Employee Benefits

and Exempt Organizations). For further

information concerning who may be a

This revenue procedure grants automatic relief under § 1362(b)(5) of the Internal Revenue Code for certain late S

corporation elections.

SECTION 2. BACKGROUND

Section 1361(a)(1) defines an “S corporation,” with respect to any taxable year,

as a small business corporation for which

an S election is in effect for that year.

Section 1362(a)(1) provides that, except in a situation described in § 1362(g),

a small business corporation may elect to

be treated as an S corporation.

Section 1362(b)(1) provides that the

corporation may make an election to be

treated as an S corporation (A) at any time

during the preceding taxable year, or (B)

at any time during the taxable year and on

or before the 15th day of the 3rd month of

the taxable year. Under § 1362(b)(3), if

an S corporation election is made for a

taxable year after the 15th day of the 3rd

month of that taxable year and on or before the 15th day of the 3rd month of the

following taxable year, then the S corporation election is treated as made for the

following taxable year.

Section 1362(b)(5) provides that if (A)

an election under § 1362(a) is made for

October 27, 1997

any taxable year (determined without regard to § 1362(b)(3)) after the date prescribed by § 1362(b) for making the election for the taxable year or no election is

made for any taxable year, and (B) the

Secretary determines that there was reasonable cause for the failure to timely

make the election, the Secretary may treat

the election as timely made for the taxable

year (and § 1362(b)(3) shall not apply).

SECTION 3. SCOPE

This revenue procedure provides special procedures to obtain relief for certain

late S corporation elections. The revenue

procedure only applies to the following

two situations:

(1) A corporation intends to be an S

corporation, the corporation and its shareholders reported their income consistent

with S corporation status for the taxable

year the S corporation election should

have been made and for every subsequent

year, and the corporation did not receive

notification from the Service regarding

any problem with the S corporation status

within 6 months of the date on which the

Form 1120S for the first year was timely

filed; and

(2) For periods prior to January 1,

1997, a corporation intends to be an S

corporation; however, due to a late S corporation election the corporation was not

permitted to be an S corporation for the

first taxable year specified in the election

(because late S corporation election relief

was not available during this period), the

corporation and the shareholders treated

the corporation as an S corporation for all

succeeding years, and all relevant taxable

years for both the corporation and all of

its shareholders are open.

This revenue procedure does not provide relief for late shareholder elections

including a qualified subchapter S trust

(QSST) election or electing small business trust (ESBT) election.

The procedures in this revenue procedure are in lieu of the letter ruling procedure that is used to obtain relief for

a late S corporation election under

§ 1362(b)(5). A c c o r d i n g l y, user fees do

not apply to corrective action under this

revenue procedure.

Acorporation that is not eligible for relief under this revenue procedure may request relief by applying for a private letter

ruling. The Service will not ordinarily

October 27, 1997

PROC. 97–48.” Attached to the Form

2553 must be a dated declaration signed

by an officer of the corporation authorized to sign and all persons who were

shareholders at any time during the period

that the corporation intended to be an S

corporation, attesting (but, in the case of a

s h a r e h o l d e r, only with respect to that

shareholder) that:

(a) the corporation and the shareholder reported their income (on all affected returns) consistent with S corporation status for the year the S corporation

election should have been made, and for

every subsequent taxable year; and

(b) “Under penalties of perjury, to

the best of my knowledge and belief, the

SECTION 4. AUTOMATIC RELIEF

facts presented in support of this election

FOR LATE S CORPORATION

are true, correct, and complete.”

ELECTIONS UNDER THIS

.02 Situation 2: Automatic Relief

REVENUE PROCEDURE

Where First Intended S Corporation Year

.01 Situation 1: Automatic Relief Filed as a C Corporation.

(1) Eligibility for Automatic Relief.

Where Return Filed as an S Corporation.

Automatic

relief is available in situation 2

(1) Eligibility for Automatic Relief.

Automatic relief is available in situation 1 if all of the following conditions are met:

(a) The corporation fails to qualify as

if all of the following conditions are met:

(a) The corporation fails to qualify an S corporation solely because the Form

as an S corporation solely because the 2553 (Election by a Small Business CorForm 2553 (Election by a Small Business poration) was not filed timely for a taxable year that began prior to January 1,

Corporation) was not filed timely;

1997;

(b) The corporation and all of its

(b) The corporation received notifishareholders reported their income consistent with S corporation status for the cation from the Service that the Form

year the S corporation election should 2553 was not filed timely, that the corpohave been made, and for every subse- ration must file as a C corporation for the

first taxable year the corporation intended

quent taxable year (if any);

(c) At least 6 months have elapsed to be an S corporation, and that the elecsince the date on which the corporation tion would be treated as an S corporation

filed its tax return for the first year the election for the following taxable year;

corporation intended to be an S corporashareholders reported their income (if any)

tion; and

(d) Neither the corporation nor any properly treating the corporation as a C corof its shareholders was notified by the In- poration for the first taxable year the corpoternal Revenue Service of any problem ration intended to be an S corporation;

(d) The corporation and all of its

regarding the S corporation status within

6 months of the date on which the Form shareholders reported their income consistent with S corporation status for all

1120S for the first year was timely filed.

subsequent

years;

(2) Procedural Requirements for Auto (e)

The

period of limitations on asmatic Relief. The corporation must file

with the applicable service center (or dis- sessment under § 6501(a) has not lapsed

trict director if under examination) a com- for any of the taxable years of the corpopleted Form 2553, signed by an officer of ration beginning on or after the date the

the corporation authorized to sign and all corporation intended to be taxable as an S

persons who were shareholders at any corporation; and

(f) The period of limitations on astime during the period that the corporation intended to be an S corporation. The sessment under § 6501(a) has not lapsed

Form 2553 must state at the top of the for any taxable year of any of the corporadocument “FILED PURSUANTTO REV. t i o n ’s shareholders in which any taxable

issue a private letter ruling under

§ 1362(b)(5) if the period of limitations

on assessment under § 6501(a) has lapsed

for any taxable year in which an election

should have been made or any taxable

year that would have been affected by the

election had it been timely made. T h e

procedural requirements for requesting a

private letter ruling are described in Rev.

Proc. 97–1, 1997–1 I.R.B. 11 (or its successor). See, also, Rev. Proc. 97–40,

1997–33 I.R.B. 50, for the special procedure to request relief for late S corporation elections that are filed within 6

months of the original due date of the

election.

1997–43 I.R.B.

year described in paragraph (e) above

ends.

(2) Procedural Requirements for Auto matic Relief. The corporation must file

with the applicable service center (or district director if under examination) a completed Form 2553, signed by an officer of

the corporation authorized to sign and all

persons who were shareholders at any

time during the period that the corporation intended to be an S corporation. The

Form 2553 must state at the top of the

document “FILED PURSUANTTO REV.

PROC. 97–48.” Attached to the Form

2553 must be a dated declaration signed

by an officer of the corporation authorized to sign and all persons who were

shareholders at any time during the period

that the corporation intended to be an S

corporation, attesting (but, in the case of a

s h a r e h o l d e r, only with respect to that

shareholder) that:

(a) the corporation and the shareholder reported their income (on all affected returns) consistent with the requirements for automatic relief under

section 4.02 of this revenue procedure;

(b) the corporation and the shareholder agree to amend their tax returns for

the first year and any other affected returns to reflect S corporation status; and

the best of my knowledge and belief, the

facts presented in support of this election

are true, correct, and complete.”

.03 Relief for Late S Corporation Elec tions. A corporation that satisfies the requirements of either section 4.01 or 4.02

of this revenue procedure will be deemed

to have reasonable cause for the failure to

file a timely S corporation election and

will automatically be granted relief to file

the election for S corporation status to

commence on the date that it intended to

have the S corporation election become

effective. The Service will notify the corporation of the acceptance of its untimely

filed S corporation election under this

revenue procedure, or the denial of a request that fails to satisfy the requirements

of this revenue procedure.

.04 Deemed Shareholders. Any reference in this revenue procedure to a shareholder of an S corporation shall be treated

as including a reference to those persons

whose consent is required under

§ 1.1362–6(b) of the Income Tax Regulations.

1997–43 I.R.B.

SECTION 5. EXAMPLES

.01 S corporation return filed and no

notification from the Service. A, B, and C

formed X corporation on January 1, 1996.

X intended to file an S corporation election; however, X did not file a timely

Form 2553 (Election by a Small Business

Corporation). On March 13, 1997, X files

a Form 1120S (S corporation income tax

return) for the 1996 taxable year, and A,

B, and C file their individual tax returns

as if X were an S corporation. In November 1997, X realizes that an S corporation

election was not timely filed. Neither X

nor its shareholders received any notification from the Service of any problem regarding the S corporation status of X. In

this case, the shareholders and X meet the

requirements of section 4.01 of this revenue procedure. Consequently, X will be

granted automatic late S corporation election relief if A, B, C, and X file a request

for relief in accordance with the procedures described in this revenue procedure.

.02 C corporation return for first year.

A formed X corporation on January 1,

1990. X intended to file an S corporation

election effective as of January 1, 1995;

h o w e v e r, X did not file a Form 2553

(Election by a Small Business Corporation) until May 5, 1995. On June 15,

1995, X received a letter from the Service

notifying X that its S corporation election

was denied for the 1995 taxable year because the S corporation election was not

timely filed, and that the election would

be treated as effective for the 1996 taxable year. X filed a Form 1120 (C corporation income tax return) for the 1995 taxable year and A filed the individual tax

return for 1995 as if X were a C corporation. For the 1996 taxable year, X filed a

Form 1120S (S corporation income tax

return) and A filed the individual tax return as if X were an S corporation. The

period of limitations on assessment under

§ 6501(a) has not lapsed for either the

1995 or the 1996 taxable years for either

X or for A. In this case, A and X meet the

requirements of section 4.02 of this revenue procedure. Consequently, X will be

granted automatic late S corporation election relief if X and A file a request for relief in accordance with the procedures described in this revenue procedure.

SECTION 7. EFFECTIVE DATE

This revenue procedure is effective for

all applications for relief satisfying the requirements of section 4 of this revenue

procedure, including those applications

now being considered by the Service.

SECTION 8. PAPERWORK

REDUCTION ACT

The collection of information contained in this revenue procedure has been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under control number

1545–1562.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

control number.

The collection of information in this

revenue procedure is in Sections 4.01(2)

and 4.02(2). This information is required

to be submitted to the applicable service

center in order to obtain relief for late S

corporation elections. This information

will be used to satisfy the reasonable

cause requirement in § 1362(b)(5). T h e

collection of information is required to obtain a benefit. The likely respondents are

business or other for-profit institutions.

The estimated total annual reporting

burden is 100 hours.

The estimated annual burden per respondent varies from .5 hours to 1.5

hours, depending on individual circumstances, with an estimated average of 1

h o u r. The estimated number of respondents is 100.

The estimated annual frequency of responses is once.

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.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Mark D. Harris of the Office

of Assistant Chief Counsel (Passthroughs

and Special Industries). For further information regarding this revenue procedure

contact Mr. Harris at (202) 622-3050 (not

a toll-free call).

October 27, 1997

26 CFR 601.201: Rulings and determination letters.

(Also §§ 1502; 1.1502–13.)

Rev. Proc. 97–49

SECTION 1. PURPOSE

This revenue procedure provides the

procedures by which a taxpayer may (1)

obtain the consent of the Internal Revenue

Service (the “Service”) to treat some or

all intercompany transactions on a separate entity basis under § 1.1502–13(e)(3)

of the Income Tax Regulations, (2) revoke

such consent, or have such consent revoked by the Service, and (3) obtain the

Service’s consent to change from separate

entity reporting to single entity reporting

where a valid consent from the Service to

report intercompany transactions on a

separate entity basis was not previously

obtained.

This revenue procedure modifies and

supersedes Rev. Proc. 82–36, 1982–1

C.B. 490.

SECTION 2. BACKGROUND

.01 The consolidated return regulations

generally require that intercompany transactions be treated in a manner that produces the effect of transactions between

divisions of a single corporation (that is,

the regulations treat intercompany transactions on a “single entity basis”). T h e

single entity approach for intercompany

transactions is an integral part of the overall tax treatment of affiliated groups filing

consolidated returns (“consolidated

groups”) under § 1502 of the Internal

Revenue Code. Treating intercompany

transactions on a single entity basis is required to clearly reflect consolidated taxable income (“CTI”). However, in certain

circumstances, the Service may exercise

discretion and grant consent, under

§ 1.1502–13(e)(3), to a consolidated

group to treat some or all intercompany

transactions (other than intercompany

transactions with respect to stock or

obligations of members of a consolidated

group) on a separate entity basis (that is,

without the application of § 1.1502–13).

Consent under § 1.1502–13(e)(3) may require changes in the methods of accounting for intercompany transactions of

members of a consolidated group.

.02 Section 4 sets forth the time and

manner in which requests for consent

under § 1.1502–13(e)(3) must be filed.

October 27, 1997

.03 Section 5 provides a checklist

which is similar to the checklist set forth

in Rev. Proc. 82–36 to facilitate the filing

and handling of requests under

§ 1.1502–13(e)(3) by specifying the information that should be included so that

applications will be as complete as possible when originally filed. However, because the information necessary to rule on

a particular case depends upon all the

facts and circumstances, information in

addition to that listed in this revenue procedure may be requested by the Service

prior to determining whether consent will

be granted.

.04 Section 6 sets forth certain factors

and guidelines used by the Service in considering requests for consent under

§ 1.1502–13(e)(3).

.05 Section 7 sets forth the effect of receiving the Service’s consent under

§ 1.1502–13(e)(3).

.06 Section 8 describes the procedures

applicable to the revocation of consent

under § 1.1502–13(e)(3). Section 8 provides that consent will generally not be

revoked simply because the effect of the

consent causes a substantial increase or

decrease in CTI in any one taxable year.

When consent was granted under Rev.

Proc. 82–36, the Service typically stated

in the ruling letter that the consent would

be revoked whenever the effect of the

consent would cause a substantial increase or decrease in CTI.

.07 Section 9 sets forth the manner in

which requests for consent to change from

separate entity reporting to single entity

reporting must be filed in cases where a

valid consent from the Service to report

intercompany transactions on a separate

entity basis was not previously obtained.

.08 The authority and general procedures with respect to the issuance of advance rulings are set forth in Rev. Proc.

97–1, 1997–1 I.R.B. 11, or its successor,

and are applicable to requests under

§ 1.1502–13(e)(3).

SECTION 3. APPLICABILITY

This revenue procedure applies to (1)

all requests to obtain the Service’s consent to treat some or all intercompany

transactions on a separate entity basis

under § 1.1502–13(e)(3), (2) all revocations of such consent, whether the revocation is made by the consolidated group or

by the Service, and (3) all requests to ob-

tain the Service’s consent to change from

separate entity reporting to single entity

reporting in cases where a valid consent

from the Service to report intercompany

transactions on a separate entity basis was

not previously obtained.

SECTION 4. TIME AND MANNER IN

WHICH REQUESTS FOR CONSENT

UNDER § 1.1502–13(e)(3)

MUST BE FILED

.01 Requests for consent under

§ 1.1502–13(e)(3) must be filed with the

Service on or before the due date of the

consolidated return (not including extensions of time) for the first taxable year for

which the consent would apply (the “consent year”). These requests for consent

must be submitted as a private letter ruling request pursuant to Rev. Proc. 97–1,

or its successor. All applicable items of

information listed in Section 5 must be included in the request.

.02 The filing requirement of

§ 1.1502–13(e)(3) will be deemed satisfied where the request for consent is

timely filed with the Service and contains

all available information. The request

must provide an explanation of any omitted information, and state that the omitted

information will be submitted not later

than the earlier of the following two dates:

(1) 90 days after the original due date of

the return, or (2) the date the consolidated

return is filed with the Service Center.

SECTION 5. INFORMATION TO BE

INCLUDED IN REQUESTS FOR

CONSENT UNDER § 1.1502–13(e)(3)

.01 Each of the items of information requested in this Section 5 must be addressed in the request for consent under

§ 1.1502–13(e)(3). If an item is not applicable, the letters “N.A.” should be inserted after that item. The presentation of

the information should follow the format

of this revenue procedure as closely as

possible.

.02 Information needed in order to make

a determination regarding a request for

consent to treat some or all intercompany

transactions on a separate entity basis:

1. The date the consolidated group

elected to file consolidated returns.

2. The taxable year used by the consolidated group.

3. A calculation of the difference, for

the consent year and for each of the two

1997–43 I.R.B.

taxable years preceding the consent year,

between (a) CTI computed by treating all

intercompany transactions on a single entity basis and (b) CTI computed by treating those intercompany transactions for

which consent is requested, and those intercompany transactions for which consent has previously been obtained, on a

separate entity basis. For any taxable year,

the percentage difference between (a) and

(b) in the preceding sentence is hereinafter

referred to as the “Effect on CTI.”

4. An analysis of all intercompany

transactions for the consent year and for

each of the two taxable years preceding

the consent year. This analysis must include the number and a description of all

intercompany transactions and the dollar

amounts thereof.

5. An analysis of the effect of treating

those intercompany transactions for

which consent is requested on a separate

entity basis on the following items for the

consent year:

(a) Net operating loss carryovers.

(b) Capital loss carryovers.

tax credits) in the consent year as well as

carryovers to the consent year.

With respect to any carryovers referred

to in items (a) through (c) above, the

analysis should include amounts for each

of the carryover years and the date the

losses or credits expire.

6. An analysis of whether any sales of

property for which consent is requested

between members of the consolidated

group that would be depreciable or depletable property in the hands of the buying member would result in long-term

capital gain to the selling member, taking

into account the provisions of §§ 1239,

1245, and 1250, relating to gain from dispositions of certain depreciable property

or certain depreciable realty.

7. An analysis of whether any of the

members involved in those intercompany

transactions for which consent is requested are subject to the separate return

limitation year rules or the change of

ownership rules under §§ 382 or 383, and

a calculation of any amounts subject to

limitation under those rules.

8. A description of the type or types of

property to which the consent would apply.

9. An analysis of the frequency of

those intercompany transactions for

which consent is requested, whether they

1997–43 I.R.B.

occur in the ordinary course of the consolidated group’s business, and whether the

amounts or prices charged in connection

with these intercompany transactions are

for fair market value based on arm’s length bargaining, providing examples

thereof. Also include a discussion of

whether gains from these intercompany

transactions have resulted from arm’s

length charges or prices.

10. An explanation as to why the consent is being requested, why the consolidated group believes it should not be required to treat these intercompany

transactions on a single entity basis, and

how treating such transactions on a separate entity basis will clearly reflect CTI

under § 446.

SECTION 6. FACTORS AND

GUIDELINES USED BYTHE

SERVICE IN CONSIDERING

REQUESTS FOR CONSENT

UNDER § 1.1502–13(e)(3)

.01 Whether it is difficult for the consolidated group to account for those intercompany transactions for which consent

is requested when they are treated on a

single entity basis and, if so, why it is difficult to do so.

.02 Whether the Effect on CTI for the

consent year or the average of the Effect

on CTI for the consent year and each of

the preceding two taxable years is greater

than 10 percent. Consent under

§ 1.1502–13(e)(3) will not be granted in

cases where either (a) the Effect on CTI is

greater than 10 percent for the consent

year or (b) the average of the Effect on

CTI for the consent year and each of the

two preceding taxable years is greater

than 10 percent. However, consent will

generally be granted in cases where (a)

the Effect on CTI is less than 10 percent

for the consent year and (b) the average of

the Effect on CTI for the consent year and

each of the two preceding taxable years is

less than 10 percent.

.03 Whether the consolidated group

will secure the benefit of any deduction,

credit, or other allowance that it would

not otherwise secure if consent to treat

those intercompany transactions for

which consent is requested on a separate

entity basis were not granted.

.04 Whether the gains that are the subject of the consent to treat intercompany

transactions on a separate entity basis

have resulted from arm’s-length charg e s

or prices.

SECTION 7. EFFECT OF THE

CONSENT UNDER § 1.1502–13(e)(3)

.01 A consent under § 1.1502–13(e)(3)

shall, unless revoked pursuant to Section

8, apply to all members of the consolidated group for the consent year and all

subsequent taxable years ending prior to

the first taxable year for which the group

does not file a consolidated return.

.02 Section 446(e) consent is granted

under § 1.1502–13(e)(3)(iii) for any

changes in methods of accounting for intercompany transactions that are necessary solely to conform a member’s methods to a consent obtained pursuant to this

revenue procedure, provided the changes

are made in the consent year. Any such

changes in methods are effected on a cutoff basis (that is, no § 481(a) adjustment

will be made). For any subsequent taxable year, § 446(e) consent must be separately requested under applicable administrative procedures if a member has

failed to conform its accounting practices

to the treatment of intercompany transactions required as a result of obtaining a

consent pursuant to this revenue procedure. S e e R e v. Proc. 97–27, 1997–21

I.R.B. 10, or its successor. Any such

changes in methods are effected on a cutoff basis (that is, no § 481(a) adjustment

will be made).

.03 A consent shall not preclude the application of § 482 to members of a consolidated group.

.04 A consent granted under

§ 1.1502–13(e)(3) to treat intercompany

transactions on a separate entity basis

does not apply for purposes of taking into

account losses and deductions deferred

under § 267(f).

SECTION 8. REVOCATION OF

CONSENT UNDER § 1.1502–13(e)(3)

.01 Consent to treat intercompany

transactions on a separate entity basis

under § 1.1502–13(e)(3) is revoked automatically for any taxable year in which

the Effect on CTI, when averaged with

the Effect on CTI for each of the two preceding taxable years, is greater than 10

percent. The consolidated group must attach a statement to its original return for

the taxable year in which the consent is

revoked, indicating that the consent under

October 27, 1997

§ 1.1502–13(e)(3) has been revoked pursuant to this Section 8.01.

.02 The Service’s consent under

§ 1.1502–13(e)(3) is granted for any consolidated group to revoke a valid consent

received from the Service under

§ 1.1502–13(e)(3) to treat intercompany

transactions on a separate entity basis,

and thus treat intercompany transactions

on a single entity basis, provided a statement is attached to the consolidated

g r o u p ’s original return for the taxable

year in which the revocation is to be effective indicating its revocation of the

consent pursuant to this Section 8.02. In

cases where a valid consent from the Service to report intercompany transactions

on a separate entity basis was not previously obtained and the consolidated group

wants to change from separate entity reporting to single entity reporting, see

Section 9.

.03 Notwithstanding that the Service

has granted consent under § 1.1502–

13(e)(3) and that such consent has not

been revoked pursuant to Section 8.01 or

8.02, the district director may, upon examination of tax returns for years subsequent to the consent year, recommend that

the ruling granting such consent be modified or revoked if the conditions and circumstances under which the ruling was

granted have changed substantially and it

is determined that single entity reporting

is necessary in order to clearly reflect CTI

under § 446. If the district director recommends that the ruling granting such consent be modified or revoked, the district director will forward the matter to the

national office for consideration before any

further action is taken. Such a referral to

the national office will be treated as a request for technical advice, and the provisions of Rev. Proc. 97–2, 1997–1 I.R.B.

64, or its successor, will be followed.

.04 When consent under § 1.1502–13

October 27, 1997

(e)(3) is revoked pursuant to Section 8.01,

8.02 or 8.03, each member of the consolidated group must report those intercompany transactions for which consent has

been revoked on a single entity basis for

the taxable year of the revocation and all

subsequent taxable years (ending prior to

the first taxable year for which the group

does not file a consolidated return) unless

consent is received pursuant to a new request submitted under Section 4.

.05 Section 446(e) consent is granted

under § 1.1502–13(e)(3)(iii) for any

changes in methods of accounting for intercompany transactions that are necessary solely to conform a member’s methods to a revocation of consent made

pursuant to this revenue procedure, provided the changes are made in the taxable

year for which the revocation is made.

Any such changes in methods are effected

on a cut-off basis (that is, no § 481(a) adjustment will be made). For any subsequent taxable year, § 446(e) consent must

be separately requested under applicable

administrative procedures if a member

has failed to conform its accounting practices to the treatment of intercompany

transactions required as a result of a revocation made pursuant to this revenue procedure. See Rev. Proc. 97–27, or its successor. Any such changes in methods are

e ffected on a cut-off basis (that is, no

§ 481(a) adjustment will be made).

single entity reporting must be separately

requested under applicable administrative

procedures in cases where a valid consent

from the Service to report intercompany

transactions on a separate entity basis was

not previously obtained. See R e v. Proc.

97–27, or its successor. Any such

changes in methods of accounting are effected on a cut-off basis (that is, no

§ 481(a) adjustment will be made).

SECTION 10. EFFECT ON OTHER

DOCUMENTS

R e v. Proc. 82–36 is modified and superseded.

SECTION 11. EFFECTIVE DATE

This revenue procedure is eff e c t i v e

October 27, 1997, the date it is published

in the Internal Revenue Bulletin.

DRAFTING INFORMATION

The principal authors of this revenue

procedure are Jeffrey L. Vogel and

Michael J. Wilder of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue

procedure, contact Jeffrey L. Vogel or

Michael J. Wilder at (202) 622-7770 (not

a toll-free call).

SECTION 9. REQUESTS FOR

CONSENTTO CHANGE FROM

SEPARATE ENTITYREPORTING TO

SINGLE ENTITY REPORTING IN

CASES WHERE AVALID CONSENT

FROM THE SERVICE TO REPORT

INTERCOMPANY TRANSACTIONS

ON ASEPARATE ENTITY BASIS WAS

NOT PREVIOUSLY OBTAINED

The Service’s consent under § 446(e) to

change from separate entity reporting to

1997–43 I.R.B.

Part IV. Items of General Interest

Rev. Proc. 97–46, Correction

Announcement 97–107

On September 30, 1997, the Internal

Revenue Service released Rev. Proc.

97–46, which sets forth a list of “rural airports” as that term is defined in

§ 4261(e)(1)(B) of the Internal Revenue

Code. This list was based on information

provided by the Office of Airline Information at the Department of Tr a n s p o r t a t i o n

(DOT). Subsequent to that time, DOT d etermined that Mitchell Municipal A i r p o r t

(MHE), located in Mitchell, South

Dakota, does not qualify as a rural airport.

Rev. Proc. 97–46 will be published on

October 20, 1997, in Internal Revenue

Bulletin 1997–42. The list of rural airports contained in the Bulletin will not include Mitchell Municipal Airport (MHE).

For amounts paid for transportation

segments beginning or ending at Mitchell

Municipal Airport (MHE), taxpayers may

rely on Rev. Proc. 97–46 as released to

the tax services by the Service on

September 30, 1997. Thus, amounts paid

between October 1, 1997, and October

20, 1997, for transportation segments beginning or ending at Mitchell Municipal

Airport (MHE) are subject to tax at the

7.5 percent rate and are not subject to the

segment tax.

The principal author of this announcement is Patrick S. Kirwan of the Office of

Assistant Chief Counsel (Passthroughs

and Special Industries). For further information regarding this announcement contact Mr. Kirwan at 202-622-3130 (not a

toll-free call).

Foundations Status of Certain

Organizations

Announcement 97–108

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. A c c o r d i n g l y,

grantors and contributors may not, after

this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices

under section 508(b) of the Code. T h i s

listing does not indicate that the organiza-

1997–43 I.R.B.

tions have lost their status as org a n i z ations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following

o rganizations (which have been treated as

o rganizations that are not private foundations described in section 509(a) of the

Code) are now classified as private foundations:

Aleut Foundation, Anchorage, AK

American Friends of Beth Asher,

Brooklyn, NY

American Friends of Children, Inc., New

York, NY

American Friends of Mesorot Yisroel of

Haifa, Inc., Brooklyn, NY

American Graphic Arts Museum, Inc.,

Pittsfield, MA

Andover Foundation Inc., Andover, OH

Arthur M. Handy Scholarship Fund,

Catumet, MA

Blessings, Schenectady, NY

Camp Phoenix Partnership, Inc.,

Providence, RI

Caroling Angels, Inc., Charlestown, RI

Changing Our Minds, Inc.,

New York, NY

Chester Housing, Inc., Chester, CT

Children Afflicted by Toxic Substances

Foundation, Inc., Hauppauge, NY

Christian Computer Community

Corporation, Glen Burnie, MD

Cranford Housing II Inc., Cranford, NJ

Crime Victims Assistance Center of New

York, Inc., New York, NY

David Prouty H.S. Permanent

Scholarship Fund, Spenser, MA

Delta Epsilon Kappa, Inc. Accounting

Honor Society, Montgomery, AL

Dreamers, Inc., Cambridge, MA

Echo Lake Wild Life Rehab, Inc.,

Presque Isle, ME

Enchanted Rain Forest Inc., Lavernia, TX

Fond du Lac Area Congregations United

and Strong, Fond du Lac, WI

Friends of Chosen Mishpat, Inc.,

Brooklyn, NY

Friends of Cranberry Lake Preserve, Inc.,

Rye, NY

Friends of Douai, Haverford, PA

Hamptons International Film Festival,

Inc., East Hampton, NY

Impact 90s, Inc., Memphis, TN

Institution of Torah & Charity of Haifa,

Inc., Brooklyn, NY

Margalit Chana Rappaport Childrens

Library, New Hempstead, NY

Marthas Vineyards Pop Warner Football,

Edgartown, MA

Martin House Restoration Corporation,

Buffalo, NY

Mascom Express, Lebanon, NH

Massachusetts Toxics Campaign Fund,

Inc., Cambridge, MA

Matt Talbot Retreat Movement Group 20,

Inc., Forest Hills, NY

Maynard Food Pantry, Inc.,

Maynard, MA

Mechtech of New Hampshire, Inc.,

Nashua, NH

Metropolitan Black Bar Association

Scholarship Fund, Inc., Brooklyn, NY

Mianus River Historical Society, Inc.,

Stamford, CT

Minority Parents Organization,

Bayshore, NY

Mitch Nathanson Classic Memorial

Scholarship Fund Charitable Trust,

Manchester, NH

Monrovia Resources Development

Corporation, Pasadena, CA

Mount Alverno Residence Corporation,

Warwick, NY

Mt. Greylock Babe Ruth League, Inc.,

Williamstown, MA

Mt. Tom School, Woodstock, VT

Musical Explorations Society, Inc.,

New York, NY

Musical Reflections of America, Inc.,

Syracuse, NY

Narragansett Housing Development

Fund, Corp., New York, NY

National Coalition for Child Protection

Reform, Cambridge, MA

National Progressive Institute for

Community Development Inc.,

Chicago, IL

New Hampshire Peer Helpers

Association, Goffstown, NH

New World Media Alliance, Inc.,

New York, NY

Nihon Ki-In America, Inc., New York, NY

Nokomis Rainbow Services Inc.,

Ukiah, CA

Pathfinders for Positive Parenting and

Nurturing of the Black Family,

Birmingham, AL

Police Athletic League of Newark and

Licking County Ohio Inc., Newark, OH

Prison Life Foundation, Inc.,

New York, NY

Ronald O. Rogers, Jamaica, NY

October 27, 1997

Shrewsbury Boosters Association, Inc.,

Shrewsbury, MA

The Stewardship Community Fund Inc.,

Boston, MA

Stillhouse Trestle Corporation,

Danville, VA

Tov Lakol, Inc., Brooklyn, NY

Training Connecticut, Inc., Needham, MA

21st Century Networking,

Greensburg, PA

October 27, 1997

Vermont Entological Society, South

Burlington, VT

Women and Family Counseling Services

Inc., E. Lansing, MI

If an organization listed above submits

information that warrants the renewal of its

classification as a public charity or as a private operating foundation, the Internal

Revenue Service will issue a ruling or determination letter with the revised classifi-

cation as to foundation status. Grantors and

contributors may thereafter rely upon such

ruling or determination letter as provided

in section 1.509(a)–7 of the Income Ta x

Regulations. It is not the practice of the

Service to announce such revised classification of foundation status in the Internal

Revenue Bulletin.

1997–43 I.R.B.

Announcement of the Expedited Suspension of Attorneys, Certified Public

Accountants, Enrolled Agents, and Enrolled Actuaries From Practice

Before the Internal Revenue Service

Under title 31 of the Code of Federal

Regulations, section 10.76, the Director

of Practice is authorized to immediately

suspend from practice before the Internal

Revenue Service any practitioner who,

within five years, from the date the expedited proceeding is instituted, (1) has had

a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause; or (2) has

been convicted of any crime under title 26

of the United States Code or, of a felony

under title 18 of the United States Code

involving dishonesty or breach of trust.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Service

matter from directly or indirectly employing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred or suspended from practice

before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled actuaries to identify practitioners under expedited suspension from practice before the

Internal Revenue Service, the Director of

Practice will announce in the Internal Revenue Bulletin the names and addresses of

practitioners who have been suspended

from such practice, their designation as att o r n e y, certified public accountant, en-

rolled agent, or enrolled actuary, and date

or period of suspension. This announcement will appear in the weekly Bulletin at

the earliest practicable date after such action and will continue to appear in the

weekly Bulletins for five successive weeks

or for as many weeks as is practicable for

each attorney, certified public accountant,

enrolled agent, or enrolled actuary so suspended and will be consolidated and published in the Cumulative Bulletin.

The following individuals have been

placed under suspension from practice before the Internal Revenue Service by virtue

of the expedited proceeding provisions of

the applicable regulations:

Name

Address

Designation

Date of Suspension

Booker, William G.

Acevado, Gustavo

Piotti, Wayne H.

Burley, Franklin R.

Kent, William F.

Levine, Jack

Kapral, Stephen M.

Bell, Abraham E.

Jackson, Paul

Clay, Henry

Cooley, Donald

Duke, Charla R.

Devins, George

Winston-Salem, NC

Laredo, TX

Homer, NY

Monroe, LA

Winston-Salem, NC

Phoenix, AZ

Richmond, VA

St. Louis, MO

Burley, ID

New York, NY

Springfield, MO

Oakland, CA

Munsey Park, NY

CPA

Attorney

CPA

Attorney

CPA

Attorney

CPA

Indefinite from June 12, 1997

Indefinite from July 23, 1997

Indefinite from July 30, 1997

Indefinite from September 11, 1997

Williams, Ronald A.

Doylestown, PA

Enrolled Agent

Indefinite from September 11, 1997

Announcement of the Consent Voluntary Suspension of Attorneys,

Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries

From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations,

Part 10, an attorney, certified public accountant, enrolled agent, or enrolled act u a r y, in order to avoid the institution or

conclusion of a proceeding for his disbarment or suspension from practice before

the Internal Revenue Service, may off e r

his consent to suspension from such practice. The Director of Practice, in his discretion, may suspend an attorney, certi-

1997–43 I.R.B.

fied public accountant, enrolled agent, or

enrolled actuary in accordance with the

consent off e r e d .

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Service matter from directly or indirectly employing, accepting assistance from, being

employed by, or sharing fees with, any

practitioner disbarred or suspended from

practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled

actuaries to identify practitioners under

consent suspension from practice before the

Internal Revenue Service, the Director

of Practice will announce in the Internal

Revenue Bulletin the names and addresses of practitioners who have been

October 27, 1997

suspended from such practice, their designation as attorney, certified public accountant, enrolled agent, or enrolled actuary, and date or period of suspension. This

announcement will appear in the weekly

Bulletin at the earliest practicable date

after such action and will continue to appear in the weekly Bulletins for five successive weeks or for as many weeks as is

practicable for each attorney, certified

public accountant, enrolled agent, or enrolled actuary so suspended and will be

consolidated and published in the Cumulative Bulletin.

The following individuals have been

placed under consent suspension from

practice before the Internal Revenue Service:

Name

Address

Designation

Date of Suspension

Weksler, Mark R.

Womble, Bill R.

Robinson II, Vaughn

Kim, Kwang W.

Tymas, George M.

Rattet, Robert L.

Noles, R. Leon

Harbin, Glenn E.

Harms, John G.

Lewis, Craig S.

Terranova, Michael P.

Frantz, Barbara A.

Smith, Glen L.

Bayus Sr., Gerald A.

Winton, D. Michael

McNabb, Gerald

Ness, Stanley L.

Culmer, Thomas A.

Ziskind, Sherman

Huston, James L.

Fulthorpe, Douglas R.

Suszko, Richard J.

Bromagen, Kent E.

Shawhan, David W.

Kennedy Jr., Joseph

Brummet, Richard E.

Pollard, E. Dwain

Tamminga, Roland R.

Ayala, Simon

Balmer, Alan J.

Fox, Eugene

Sanford, Paul L.

Glemann, Richard P.

Rubey, Patrick J.

Arlington Heights, IL

Dallas, TX

Midland, TX

Schaumburg, IL

Russellton, PA

New Rochelle, NY

N. Little Rock, AR

Bakersfield, CA

Lemont, PA

Savannah, GA

Lake Charles, LA

Pontiac, IL

Edina, MN

Hubbard, OH

Clovis, NM

White Bear, MN

Minneapolis, MN

Devils Lake, ND

Dunlevy, PA

Kingman, AZ

St. Petersburg, FL

La Mesa, CA

Dayton, OH

Xenia, OH

Santa Barbara, CA

Hinsdale, IL

Idabell, OK

Belmont, NH

Oxnard, CA

Fairfield, IA

Rockville Centre, NY

Avon, CT

Jacksonville Beach, FL

Chicago, IL

CPA

Attorney

CPA

Attorney

CPA

Attorney

CPA

Enrolled Agent

Attorney

CPA

Enrolled Agent

CPA

Enrolled Agent

CPA

Attorney

Enrolled Agent

CPA

June 16, 1997 to June 15, 2000

Indefinite from June 19, 1997

June 30, 1997 to December 29, 1997

July 1, 1997 to February 28, 1999

July 26, 1997 to June 25, 1998

July 30, 1997 to October 29, 1997

July 31, 1997 to December 30, 1998

August 1, 1997 to November 30, 1997

August 1, 1997 to July 31, 1998

August 7, 1997 to May 6, 1998

August 8, 1997 to July 31, 1999

August 9, 1997 to November 8, 1997

August 11, 1997 to July 10, 1998

August 15, 1997 to November 14, 1997

August 22, 1997 to January 21, 2000

August 25, 1997 to February 24, 1998

September 1, 1997 to November 30, 1997

September 1, 1997 to February 28, 1999

September 1, 1997 to December 31, 1997

September 1, 1997 to August 30, 1998

September 1, 1997 to August 31, 1999

September 1, 1997 to February 28, 2000

September 1, 1997 to August 31, 1999

September 1, 1997 to May 31, 1998

September 3, 1997 to January 2, 1998

September 4, 1997 to August 3, 1999

September 5, 1997 to December 4, 1997

Indefinite from September 19, 1997

September 30, 1997 to August 29, 1999

October 1, 1997 to March 31, 1998

November 1, 1997 to July 31, 1997

November 1, 1997 to October 31, 1999

November 1, 1997 to January 31, 1999

Coverdale Jr., Alphonso

Philadelphia, PA

Enrolled Agent

December 1, 1997 to November 30, 2000

October 27, 1997

1997–43 I.R.B.

Announcement of the Suspension of Attorneys, Certified Public

Accountants, Enrolled Agents, and Enrolled Actuaries From Practice

Before the Internal Revenue Service

Under Section 330, Title 31 of the United

States Code, the Secretary of the Tr e a s u r y,

after due notice and opportunity for hearing,

is authorized to suspend or disbar from practice before the Internal Revenue Service any

person who has violated the rules and regulations governing the recognition of attorneys, certified public accountants, enrolled

agents, or enrolled actuaries to practice before the Internal Revenue Service.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Service

matter from directly or indirectly employ-

ing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred or under suspension from

practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled actuaries to identify such disbarred or suspended practitioners, the Director of

Practice will announce in the Internal Revenue Bulletin the names and addresses of

practitioners who have been disbarred or

suspended from such practice, their designation as attorney, certified public accoun-

tant, enrolled agent, or enrolled actuary, and

date of disbarment or period of suspension.

This announcement will appear in the

weekly Bulletin for five successive weeks

or for as many weeks as is practicable for

each attorney, certified public accountant,

enrolled agent, or enrolled actuary so suspended and will be consolidated and published in the Cumulative Bulletin.

After due notice and opportunity for

hearing before an administrative law judge,

the following individuals have been suspended from further practice before the Internal Revenue Service:

Name

Address

Designation

Date of Suspension

Makos, Deborah

Friberg, John P.

Green Bay, WI

Milwaukee, WI

Enrolled Agent

CPA

June 20, 1997 to May 19, 2000

July 20, 1997 to June 19, 2001

Announcement of the Disbarment of Attorneys, Certified Public

Accountants, Enrolled Agents, and Enrolled Actuaries From Practice

Before the Internal Revenue Service

Under Section 330, Title 31 of the United

States Code, the Secretary of the Tr e a s u r y,

after due notice and opportunity for hearing,

is authorized to suspend or disbar from practice before the Internal Revenue Service any

person who has violated the rules and regulations governing the recognition of attorneys, certified public accountants, enrolled

agents, or enrolled actuaries to practice before the Internal Revenue Service.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Service

matter from directly or indirectly employ-

ing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred or under suspension from

practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled actuaries to identify such disbarred or suspended practitioners, the Director of

Practice will announce in the Internal Revenue Bulletin the names and addresses of

practitioners who have been disbarred or

suspended from such practice, their designation as attorney, certified public accoun-

tant, enrolled agent, or enrolled actuary, and

the date of disbarment or period of suspension. This announcement will appear in the

weekly Bulletin for five successive weeks

or for as many weeks as is practicable for

each attorney, certified public accountant,

enrolled agent, or enrolled actuary so suspended and will be consolidated and published in the Cumulative Bulletin.

After due notice and opportunity for

hearing before an administrative law judge,

the following individuals have been disbarred from further practice before the Internal Revenue Service:

Name

Address

Designation

Effective Date

Hoyt III, Walter J.

Lu, John S.

McCue, William T.

Burns, OR

New York, NY

Glen Rock, NJ

Enrolled Agent

Attorney

July 13, 1997

July 21, 1997

Foster, Dennis S.

Pittsburgh, PA

CPA

September 8, 1997

1997–43 I.R.B.

October 27, 1997

Definition of Terms

Revenue rulings and revenue pro c e d u re s

( h e reinafter re f e rred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. T h u s ,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in a

prior ruling is being changed.

D i s t i n g u i s h e d describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

to B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

may also be obsoleted because the substance has been included in regulations

subsequently adopted.

Revoked describes situations where the

position in the previously published ruling is not correct and the correct position

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

where the substance of a previously published ruling is being changed in part and

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

several times, a new ruling may be published that includes the list in the original

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

The following abbreviations in current use and for merly used will appear in material published in the

Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

October 27, 1997

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

1997–43 I.R.B.

Numerical Finding List

Bulletins 1997–27 through 1997–42

Announcements:

97–61, 1997–29 I.R.B. 13

97–67, 1997–27 I.R.B. 37

97–68, 1997–28 I.R.B. 13

97–69, 1997–28 I.R.B. 13

97–70, 1997–29 I.R.B. 14

97–71, 1997–29 I.R.B. 15

97–72, 1997–29 I.R.B. 15

97–73, 1997–30 I.R.B. 86

97–74, 1997–31 I.R.B. 16

97–75, 1997–32 I.R.B. 28

97–76, 1997–32 I.R.B. 28

97–77, 1997–33 I.R.B. 58

97–78, 1997–34 I.R.B. 11

97–79, 1997–35 I.R.B. 8

97–80, 1997–34 I.R.B. 12

97–81, 1997–34 I.R.B. 12

97–82, 1997–34 I.R.B. 12

97–83, 1997–34 I.R.B. 13

97–84, 1997–34 I.R.B. 13

97–85, 1997–35 I.R.B. 8

97–86, 1997–35 I.R.B. 9

97–87, 1997–35 I.R.B. 9

97–88, 1997–35 I.R.B. 9

97–89, 1997–36 I.R.B. 10

97–90, 1997–36 I.R.B. 10

97–91, 1997–37 I.R.B. 25

97–92, 1997–37 I.R.B. 26

97–93, 1997–36 I.R.B. 11

97–94, 1997–36 I.R.B. 12

97–95, 1997–36 I.R.B. 12

97–96, 1997–39 I.R.B. 15

97–97, 1997–38 I.R.B. 22

97–98, 1997–39 I.R.B. 15

97–99, 1997–40 I.R.B. 7

97–100, 1997–40 I.R.B. 8

97–101, 1997–41 I.R.B. 13

97–102, 1997–41 I.R.B. 15

97–103, 1997–41 I.R.B. 16

97–104, 1997–42 I.R.B. 39

97–105, 1997–42 I.R.B. 40

Court Decisions:

2061, 1997–31 I.R.B. 5

2062, 1997–32 I.R.B. 8

Delegation Orders:

97 (Rev. 34), 1997–41 I.R.B. 14

172 (Rev. 5), 1997–28 I.R.B. 6

Notices:

97–37, 1997–27 I.R.B. 4

97–38, 1997–27 I.R.B. 8

97–39, 1997–27 I.R.B. 8

97–40, 1997–28 I.R.B. 6

97–41, 1997–28 I.R.B. 6

97–42, 1997–29 I.R.B. 12

97–43, 1997–30 I.R.B. 9

97–44, 1997–31 I.R.B. 15

97–45, 1997–33 I.R.B. 7

97–46, 1997–34 I.R.B. 10

97–47, 1997–35 I.R.B. 5

97–48, 1997–35 I.R.B. 5

97–49, 1997–36 I.R.B. 8

97–50, 1997–37 I.R.B. 21

97–51, 1997–38 I.R.B. 20

Notices–Continued

97–52, 1997–38 I.R.B. 20

97–53, 1997–40 I.R.B. 6

97–54, 1997–41 I.R.B. 7

97–55, 1997–40 I.R.B. 6

Railroad Retirement Quarterly Rate:

1997–28 I.R.B. 5

Proposed Regulations:

REG–104893–97, 1997–29 I.R.B. 13

REG–105160–97, 1997–37 I.R.B. 22

REG–106043–97, 1997–37 I.R.B. 24

REG–107644–97, 1997–32 I.R.B. 24

REG–208151–91, 1997–38 I.R.B. 21

REG–246250–96, 1997–42 I.R.B. 30

Revenue Procedures:

97–32, 1997–27 I.R.B. 9

97–32A, 1997–34 I.R.B. 10

97–33, 1997–30 I.R.B. 10

97–34, 1997–30 I.R.B. 14

97–35, 1997–33 I.R.B. 11

97–36, 1997–33 I.R.B. 14

97–37, 1997–33 I.R.B. 18

97–38, 1997–33 I.R.B. 43

97–39, 1997–33 I.R.B. 48

97–40, 1997–33 I.R.B. 50

97–41, 1997–33 I.R.B. 5

97–42, 1997–33 I.R.B. 57

97–43, 1997–39 I.R.B. 12

97–44, 1997–41 I.R.B. 8

97–45, 1997–41 I.R.B. 10

97–46, 1997–42 I.R.B. 10

97–47, 1997–42 I.R.B. 19

Revenue Rulings:

97–27, 1997–27 I.R.B. 4

97–28, 1997–28 I.R.B. 4

97–29, 1997–28 I.R.B. 4

97–30, 1997–31 I.R.B. 12

97–31, 1997–32 I.R.B. 4

97–32, 1997–33 I.R.B. 4

97–33, 1997–34 I.R.B. 4

97–34, 1997–34 I.R.B. 14

97–35, 1997–35 I.R.B. 4

97–36, 1997–36 I.R.B. 5

97–37, 1997–37 I.R.B. 15

97–38, 1997–38 I.R.B. 14

97–39, 1997–39 I.R.B. 4

97–40, 1997–39 I.R.B. 8

97–41, 1997–40 I.R.B. 4

97–42, 1997–41 I.R.B. 4

97–43, 1997–42 I.R.B. 8

Treasury Decisions:

8722, 1997–29 I.R.B. 4

8723, 1997–30 I.R.B. 4

8724, 1997–36 I.R.B. 4

8725, 1997–37 I.R.B. 16

8726, 1997–34 I.R.B. 7

8727, 1997–34 I.R.B. 5

8728, 1997–37 I.R.B. 4

8729, 1997–38 I.R.B. 4

8730, 1997–38 I.R.B. 16

8731, 1997–42 I.R.B. 6

8732, 1997–42 I.R.B. 4

A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 1997–1 through 1997–26

will be found in Internal Revenue Bulletin 1997–27,

dated July 7, 1997.

1997–43 I.R.B.

October 27, 1997

Finding List of Current Action on

Previously Published Items

Bulletins 1997–27 through 1997–42

*Denotes entry since last publication

Revenue Procedures:

96–36

Superseded by

97–34, 1997–30 I.R.B. 14

96–42

Superseded by

97–27, 1997–27 I.R.B. 9

97–32

Modified and amplified by

97–32A, 1997–34 I.R.B. 10

Revenue Rulings:

89–42

Supplemented by

97–31, 1997–32 I.R.B. 4

93–76

Clarified, modified, partially

obsoleted, and superceded by

97–39, 1997–39 I.R.B 4

94–7

Clarified, modified, partially

obsoleted, and superceded by

97–39, 1997–39 I.R.B 4

A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1997–1 through 1997–26 will be found in Internal

Revenue Bulletin 1997–27, dated July 7, 1997.

October 27, 1997

1997–43 I.R.B.

Notes

1997–43 I.R.B.

October 27, 1997

Notes

October 27, 1997

1997–43 I.R.B.

INTERNAL REVENUE BULLETIN

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INTERNAL REVENUE BULLETIN

The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold

on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of

Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the

Superintendent of Documents.

HOW TO ORDER

Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please

allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page

(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC

20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.

Internal Revenue Service

Washington, DC 20224

Official Business

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First Class Mail

Postage and Fees Paid

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