# Bulletin No. 1997–43

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Bulletin No. 1997–43
October 27, 1997

Internal Revenue

bulletin
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.

2

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.

3

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

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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
in
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

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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.
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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.
*

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*

*

(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.
*

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§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:

*

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*

(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

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(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.
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(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.
*

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(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.
*

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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).
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(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).
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(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.

(c) Substitute interest and dividend
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
or
determinable
annual
or
pe
(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.

7

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

8

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

9

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
(c) is redesignated as the introductory text
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.
(c) R e p o rting re q u i rement waived.
(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-

10

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.
*

*

*

*

*

(c) * * *
(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

11

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.
*

*

*

*

*

(c) * * * (1) In general—(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 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.
*

*

*

*

*

(c) * * *
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

12

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.

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

13

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.”.
(c) NO DAMAGES FOR INSPECTION REQUESTED BY TA X PAY E R.—Subsection (b)
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,

14

the Secretary shall notify such taxpayer as
soon as practicable of such inspection or
disclosure.”.
(c) NO DAMAGES FOR INSPECTION REQUESTED BY TA X PAY E R.—Subsection (b)
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
1

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
2

U.S. v. Czubinski, DTR 2/25/97, p. K–2.
3
P.L. 104–294, sec. 201 (October 11, 1996).
4
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.

15

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

16

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.
(c) DEFINITIONS.—For purposes of this
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

17

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.
(c) DAMAGES.—In any action brought
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

18

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

19

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;
(c) The corporation and all of its
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.

20

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
(c) “Under penalties of perjury, to
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

21

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-

22

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.
(c) Tax credits (for example, foreign
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

23

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Adbe28b89e89b4e94. Public record. Not legal advice.