These synopses are intended only as aids to the reader in

Agency decision

Ask Donna

What actually matters in this document.

Text

Bulletin No. 1997–6

February 10, 1997

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. 8694, page 11.

Final regulations amend section 6103 of the Code,

which authorizes the disclosure of certain information to

the U.S. Customs Service.

T.D. 8696, page 4.

Final regulations for S corporations and their shareholders relate to the definitions and the special rule provided in section 1377 of the Code.

REG–209828–96, page 15.

Proposed regulations under section 468A of the Code

relate to requests for revised schedules of ruling

amounts for nuclear decommissioning reserve funds. A

public hearing will be held on May 13, 1997.

EXEMPT ORGANIZATIONS

Announcement 97–11, page 19.

A list is given of organizations now classified as private

foundations.

EMPLOYMENT TAX

T.D. 8699, page 4.

Temporary regulations under section 45B of the Code,

pertaining to the credit for employer FICA taxes paid with

respect to certain tips received by employees of food or

beverage establishments, are removed.

Finding Lists begin on page 23.

Announcement of Disbarments and Suspensions begins on page 21.

REG–209672–93, page 15.

Proposed regulations under section 45B of the Code,

relating to the credit for employer FICA taxes paid with

respect to certain tips received by employees of food or

beverage establishments, are withdrawn.

EXCISE TAX

T.D. 8693, page 9.

REG–247678–96, page 17.

Temporary and proposed regulations under section 4082

of the Code relate to the application of the diesel fuel

excise tax to fuel used in Alaska.

ADMINISTRATIVE

Rev. Proc. 97–11, page 13.

Photocopy fee increase. Effective May 1, 1997, the

fee for a copy of a tax return or other related document

will increase from $14 to $23. The next revision of Form

4506 will reflect the $23 charge. Rev. Procs. 66–3 and

87–21 modified. Rev. Proc. 94–52 revoked.

Notice 97–13, page 13.

Change in accounting method; alternative minimum

tax. Taxpayers are informed that the Service intends to

provide approval for farmers to change their method of

accounting for income from certain deferred payment

sales contracts for purposes of computing their alternative minimum tax.

Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining of ficers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

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

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of view.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great cour tesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,

court decisions, and other items of general interest. It is

published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin

contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a

single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are

cautioned against reaching the same conclusions in

other cases unless the facts and circumstances are

substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

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

substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published rulings

apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management

are not published; however, statements of internal

practices and procedures that affect the rights and

duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

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

Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on positions

taken in rulings to taxpayers or technical advice to

Service field offices, identifying details and information

of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory

requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in

this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

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

as precedents by Service personnel in the disposition of

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

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin

of the succeeding quarterly and semi-annual period,

respectively.

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

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

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

Section 45B.—Credit for Portion of

Employer Social Security Taxes

Paid With Respect To Employee

Cash Tips

being withdrawn in a separate document.

26 CFR 1.45B–1T: Credit for certain employer

social security taxes paid with respect to employee

tips (Temporary).

Section 45B of the Code describes a

business tax credit allowable under section 38 for food and beverage establishments. The credit is equal to the employer’s Federal Insurance Contributions

Act (FICA) obligation attributable to

certain employee tips. The credit is

reduced, however, if the nontip wages

paid to an employee during a month are

less than the amount that would have

been payable to the employee at the

federal minimum wage rate. The temporary regulations provide that this credit

is available only for employer FICA

taxes paid after December 31, 1993,

with respect to tips received for services

performed after December 31, 1993.

The temporary regulations also provide

that the credit applies only to taxes paid

on tips that are reported to the employer

by its employees.

Section 1112(a) of the Small Business

Job Protection Act of 1996 amended

Code section 45B to provide that the

credit is available for employer FICA

taxes paid after December 31, 1993,

regardless of when the services with

respect to which the tips are received

were performed. Section 1112(a) also

provides that the credit is available

whether or not the tips on which the

employer FICA taxes were paid were

reported to the employer by the employee. These provisions are effective as

if included in the legislation under

which section 45B was originally enacted, and thus render the temporary

regulations obsolete.

T.D. 8699

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Credit for Employer Social Security

Taxes Paid on Employee Tips

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Removal of temporary regulations.

SUMMARY: This document removes

the temporary regulations pertaining to

the credit for employer FICA taxes paid

with respect to certain tips received by

employees of food or beverage establishments. The temporary regulations

were published in the Federal Register

on December 23, 1993. Statutory

changes made by the Small Business

Job Protection Act of 1996 have made

these temporary regulations obsolete.

EFFECTIVE DATE: The removal of the

temporary regulations is effective January 1, 1994.

FOR FURTHER INFORMATION CONTACT: Jean M. Casey at (202) 622–

6060 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

On December 23, 1993, the IRS published temporary regulations (T.D. 8503

[1994–1 C.B. 17])(58 FR 68033) under

section 45B of the Internal Revenue

Code of 1986 (Code). Amendments

made by section 1112(a) of the Small

Business Job Protection Act of 1996

(Public Law 104–188) render the temporary regulations obsolete. Therefore,

temporary regulation § 1.45B–1T is being removed.

On December 23, 1993, the IRS also

issued a notice of proposed rulemaking

(EE–71–93 [1994–1 C.B. 784])(58 FR

68091) under section 45B of the Code.

This notice of proposed rulemaking is

Par. 2. Section 1.45B–1T is removed.

Explanation of Provisions

Drafting Information

Background

§ 1.45B–1T [Removed]

The principal author of these regulations is Jean M. Casey of the Office of

the Associate Chief Counsel (Employee

Benefits and Exempt Organizations),

IRS. However, other personnel from the

IRS and Treasury Department participated in their development.

Removal of Temporary Regulations

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 * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved December 11, 1996.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on

December 19, 1996, 8:45 a.m., and published in

the issue of the Federal Register for December 20,

1996, 61 F.R. 67212)

Section 56.—Adjustments in

Computing Alternative Minimum

Taxable Income

26 CFR 1.55–1: Alternative minimum taxable

income.

Will the Internal Revenue Service provide approval for taxpayers engaged in the business of

farming to change their method of accounting for

the income from certain deferred payment sales

contracts for purposes of computing their alternative minimum tax. See Notice 97–13, page 13.

Section 1377.—Definitions and

Special Rules

26 CFR 1.1377: Pro rata share.

T.D. 8696

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 18, and 602

Definitions under Subchapter S of

the Internal Revenue Code

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final regulations for S corporations and

their shareholders relating to the definitions and the special rule provided in

section 1377 of the Internal Revenue

Code. The final regulations reflect

changes to the law made by the

Subchapter S Revision Act of 1982 and

the Small Business Job Protection Act

of 1996. These final regulations are

necessary to provide guidance for taxpayers to comply with the law.

EFFECTIVE DATE: These regulations

are effective January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Laura Howell, (202) 622–3060

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations 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

1545–1462. Responses to this collection

of information are required to verify the

event giving rise to the making of an

election under section 1377(a)(2) by an

S corporation.

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 estimated annual burden per respondent varies from .2 hour to .5 hour,

depending on individual circumstances,

with an estimated average of .25 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 Officer, T:FP,

Washington, DC 20224, and to the Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

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.

Background

On July 12, 1995, the IRS published

in the Federal Register a notice of

proposed rulemaking (PS–268–82,

1995–2 C.B. 491) containing proposed

amendments to the Income Tax Regulations (26 CFR part 1) under section

1377 of the Internal Revenue Code

(Code). These amendments were proposed to conform the regulations to the

addition of section 1377 to the Code by

section 2 of the Subchapter S Revision

Act of 1982, Public Law 97–354

(1982–2 C.B. 702, 710). Written comments responding to this notice were

received. No public hearing was held

because no hearing was requested. On

August 20, 1996, the Small Business

Job Protection Act of 1996, Public Law

104–188, 110 Stat. 1755, was enacted.

Sections 1306 and 1307 of the Small

Business Job Protection Act of 1996

amended section 1377 of the Code.

After consideration of all comments received, and the changes to section 1377

by the Small Business Job Protection

Act of 1996, the proposed amendments

are adopted as revised by this Treasury

decision.

Explanation of Provisions

Days on which stock has not been

issued

Section 1366(a)(1) requires a shareholder of an S corporation to take into

account the shareholder’s pro rata share

of the corporation’s items of income,

loss, deduction, and credit. Section

1377(a) provides that, except in the case

of an election under section 1377(a)(2),

each shareholders’s pro rata share of any

item for any taxable year shall be the

sum of the amounts determined with

respect to the shareholder by assigning

an equal portion of such item to each

day of the taxable year, and then by

dividing that portion pro rata among the

shares outstanding on such day. The

proposed regulations provide that solely

for purposes of determining a shareholder’s pro rata share of an item, an S

corporation’s taxable year does not include any day on which the corporation

has no shareholders.

One commentator suggested that a

person who beneficially owns the corporation should be treated as a shareholder

of an S corporation for any day on

which the corporation has assets and

conducts business, but has not issued

any stock. The final regulations revise

the rule concerning no shareholder days

and provide that, solely for purposes of

determining a shareholder’s pro rata

share of an item for a taxable year

under section 1377(a), the beneficial

owners of the corporation are treated as

the shareholders of the corporation for

any day on which the corporation has

not issued any stock.

When a Post-Termination Transition Period Arises

The proposed regulations provide that

a post-termination transition period

(PTTP) arises following the termination

under section 1362(d) of a corporation’s

S election. By example, the proposed

regulations state that a PTTP arises

when a C corporation acquires the assets

of an S corporation in a transaction to

which section 381(a)(2) applies. Several

commentators requested clarification

concerning whether the example results

in a termination under section 1362(d)

of the corporation’s election to be an S

corporation or merely the cessation of

the S corporation’s taxable year. The

final regulations clarify that, pursuant to

the rule in section 1377(b)(1), a PTTP

arises the day after the last day that an

S corporation was in existence if a C

corporation acquires the assets of an S

corporation in a transaction to which

section 381(a)(2) applies. Changes to

section 1377 made by the Small Business Job Protection Act of 1996.

Agreement to Terminate Year

Section 1306 of the Small Business

Job Protection Act of 1996 amended

section 1377(a)(2) to provide that only

the affected shareholders and the corporation must consent to an election to

treat the corporation’s taxable year as

two taxable years in the event of a

complete termination of a shareholder’s

interest in the corporation. In addition,

the terminating election under section

1377(a)(2) applies only to the affected

shareholders. H.R. Conf. Rep. No. 104–

737, 104th Cong. 2d Sess. 222 (1986).

The term affected shareholders is defined as the shareholder whose interest

is terminated and all shareholders to

whom the shareholder has transferred

shares during the taxable year. If the

shareholder has transferred shares to the

corporation, affected shareholders include all persons who are shareholders

during the taxable year. The final regulations reflect these changes made to

section 1377(a)(2) by the Small Business Job Protection Act of 1996.

Expansion of Post-Termination Transition Period

Section 1307(a) of the Small Business

Job Protection Act of 1996 expands the

definition of PTTP under section

1377(b)(1) to include the 120-day period

beginning on the date of any determination pursuant to an audit of the taxpayer

that follows the termination of the S

corporation’s election and that adjusts a

subchapter S item of income, loss, or

deduction of the S corporation during

the S period. In addition, the definition

of determination is expanded to include

any determination under section 1313(a).

The effect of this change is to expand

the definition of determination to include a final disposition by the Secre-

tary of a claim for refund and certain

agreements between the Secretary and

any person relating to the tax liability of

the person. The final regulations reflect

these changes made to section 1377(b)

by section 1307 of the Small Business

Job Protection Act of 1996.

Coordination With Other Provisions and

Other Clarifying Changes

In response to comments, the final

regulations add cross-references and

make certain clarifying revisions. The

proposed regulations coordinate the application of the terminating election under section 1377(a)(2) with the election

that may be made under § 1.1368–

1(g)(2) when there is a qualifying disposition by: (i) removing the section 1377

reference in § 1.1368–1(g)(1) because

all of the rules for a section 1377(a)(2)

terminating election are now entirely

stated in these final regulations; and (ii)

amending § 1.1368–1(g)(2) to provide

that a qualifying disposition election

cannot be made if a transfer results in a

termination of the shareholder’s entire

interest as a shareholder.

The proposed regulations provide that

a section 1377(a)(2) terminating election

must contain the written consent of each

shareholder. The final regulations revise

the shareholder consent rules by removing the written consent requirement for

each shareholder. The final regulations

merely require an S corporation to include a statement by the corporation that

each affected shareholder and the corporation consent to the election.

In response to comments, the final

regulations clarify that a shareholder’s

entire interest in an S corporation is not

terminated if the shareholder retains

ownership of any stock, including an

interest treated as stock under § 1.1361–

1(l), that would result in the shareholder

continuing to be considered a shareholder of the corporation for purposes of

section 1362(a)(2). In addition, the final

regulations clarify that a shareholder

whose entire interest in an S corporation

is terminated in an event for which a

terminating election was made is not

required to consent to an election under

section 1377(a)(2) for a subsequent termination of another shareholder within

the taxable year unless the shareholder

is an affected shareholder with respect

to the subsequent termination.

Effective Date

These regulations apply to taxable

years of an S corporation beginning

after December 31, 1996.

Special Analysis

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

Therefore, a regulatory assessment is not

required. It 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 Internal Revenue Code, the notice of

proposed rulemaking preceding these

regulations was submitted to the Small

Business Administration for comment on

its impact on small business.

Drafting Information

The principal author of these regulations is Laura Howell, Office of Assistant Chief Counsel (Passthroughs and

Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 18, and

602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read as follows:

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

Section 1.1377–1 also issued under 26

U.S.C. 1377(a)(2) and (c). * * *

Par. 2. Section 1.1368–0 is amended

by:

1. Revising the entry for paragraphs

(g) and (g)(1) of § 1.1368–1.

2. Adding an entry for paragraph

(g)(2)(iv) of § 1.1368–1.

The revisions and addition read as

follows:

§ 1.1368–0 Table of contents.

§ 1.1368–1 Distributions by S corporations.

(g) Special rule.

(1) Election to terminate year under

§ 1.1368–1(g)(2).

(2) * * *

(iv) Coordination with election under

section 1377(a)(2).

Par. 3. Section 1.1368–1 is amended

by:

1. Revising the heading for paragraph

(g).

2. Revising paragraph (g)(1).

3. Adding paragraph (g)(2)(iv).

The revisions and addition read as

follows:

§ 1.1368–1 Distributions by S corporations.

(g) Special rule—(1) Election to terminate year under § 1.1368–1(g)(2). If

an election is made under paragraph

(g)(2) of this section to terminate the

year when there is a qualifying disposition, this section applies as if the taxable

year consisted of separate taxable years,

the first of which ends at the close of

the day on which there is a qualifying

disposition of stock.

(2) * * *

(iv) Coordination with election under

section 1377(a)(2). If the event resulting

in a qualifying disposition also results in

a termination of a shareholder’s entire

interest as described in § 1.1377–

1(b)(4), the election under this paragraph (g)(2) cannot be made. Rather, the

election under section 1377(a)(2) and

§ 1.1377–1(b) may be made. See

§ 1.1377–1(b) (concerning the election

under section 1377(a)(2)). Par. 4. Sections 1.1377–0, 1.1377–1, 1.1377–2, and

1.1377–3 are added under the

undesignated center heading ‘‘Small

Business Corporations and Their Shareholders’’ to read as follows:

§ 1.1377–0 Table of contents.

The following table of contents is

provided to facilitate the use of

§§ 1.1377–1 through 1.1377–3:

§ 1.1377–1 Pro rata share.

(a) Computation of pro rata shares.

(1) In general.

(2) Special rules.

(i) Days on which stock has not been

issued.

(ii) Determining shareholder for day

of stock disposition.

(b) Election to terminate year.

(1) In general.

(2) Affected shareholders.

(3) Effect of the terminating election.

(i) In general.

(ii) Due date of S corporation return.

(iii) Taxable year of inclusion by

shareholder.

(iv) S Corporation that is a partner in

a partnership.

(4) Determination of whether an S

shareholder’s entire interest has terminated.

(5) Time and manner of making a

terminating election.

(i) In general.

(ii) Affected shareholders required to

consent.

(iii) More than one terminating election.

§ 1.1377–2 Post-termination transition

period.

(a) In general.

(b) Special rules for post-termination

transition period.

(d) Date a determination becomes effective.

(1) Determination under section

1313(a).

(2) Written agreement.

(3) Implied agreement.

§ 1.1377–3 Effective date.

§ 1.1377–1 Pro rata share.

(a) Computation of pro rata shares—

(1) In general. For purposes of

subchapter S of chapter 1 of the Internal

Revenue Code and this section, each

shareholder’s pro rata share of any S

corporation item described in section

1366(a) for any taxable year is the sum

of the amounts determined with respect

to the shareholder by assigning an equal

portion of the item to each day of the S

corporation’s taxable year, and then dividing that portion pro rata among the

shares outstanding on that day. See

paragraph (b) of this section for rules

pertaining to the computation of each

shareholder’s pro rata share when an

election is made under section

1377(a)(2) to treat the taxable year of an

S corporation as if it consisted of two

taxable years in the case of a termination of a shareholder’s entire interest in

the corporation.

(2) Special rules—(i) Days on which

stock has not been issued. Solely for

purposes of determining a shareholder’s

pro rata share of an item for a taxable

year under section 1377(a) and this

section, the beneficial owners of the

corporation are treated as the shareholders of the corporation for any day on

which the corporation has not issued

any stock.

(ii) Determining shareholder for day

of stock disposition. A shareholder who

disposes of stock in an S corporation is

treated as the shareholder for the day of

the disposition. A shareholder who dies

is treated as the shareholder for the day

of the shareholder’s death.

(b) Election to terminate year—(1) In

general. If a shareholder’s entire interest

in an S corporation is terminated during

the S corporation’s taxable year and the

corporation and all affected shareholders

agree, the S corporation may elect under

section 1377(a)(2) and this paragraph

(b) (terminating election) to apply paragraph (a) of this section to the affected

shareholders as if the corporation’s taxable year consisted of two separate

taxable years, the first of which ends at

the close of the day on which the

shareholder’s entire interest in the S

corporation is terminated. If the event

resulting in the termination of the shareholder’s entire interest also constitutes a

qualifying disposition as described in

§ 1.1368–1(g)(2)(i), the election under

§ 1.1368–1(g)(2) cannot be made. An S

corporation may not make a terminating

election if the cessation of a shareholder’s interest occurs in a transaction that

results in a termination under section

1362(d)(2) of the corporation’s election

to be an S corporation. (See section

1362(e)(3) for an election to have items

assigned to each short taxable year

under normal tax accounting rules in the

case of a termination of a corporation’s

election to be an S corporation.) A

terminating election is irrevocable and is

effective only for the terminating event

for which it is made.

(2) Affected shareholders. For purposes of the terminating election under

section 1377(a)(2) and paragraph (b) of

this section, the term affected shareholders means the shareholder whose interest is terminated and all shareholders to

whom such shareholder has transferred

shares during the taxable year. If such

shareholder has transferred shares to the

corporation, the term affected shareholders includes all persons who are shareholders during the taxable year.

(3) Effect of the terminating election—(i) In general. An S corporation

that makes a terminating election for a

taxable year must treat the taxable year

as separate taxable years for all affected

shareholders for purposes of allocating

items of income (including tax-exempt

income), loss, deduction, and credit;

making adjustments to the accumulated

adjustments account, earnings and profits, and basis; and determining the tax

effect of a distribution. An S corporation

that makes a terminating election must

assign items of income (including taxexempt income), loss, deduction, and

credit to each deemed separate taxable

year using its normal method of accounting as determined under section

446(a).

(ii) Due date of S corporation return.

A terminating election does not affect

the due date of the S corporation’s

return required to be filed under section

6037(a) for a taxable year (determined

without regard to a terminating election).

(iii) Taxable year of inclusion by

shareholder. A terminating election does

not affect the taxable year in which an

affected shareholder must take into account the affected shareholder’s pro rata

share of the S corporation’s items of

income, loss, deduction, and credit.

(iv) S corporation that is a partner in

a partnership. A terminating election by

an S corporation that is a partner in a

partnership is treated as a sale or exchange of the corporation’s entire interest in the partnership for purposes of

section 706(c) (relating to closing the

partnership taxable year), if the taxable

year of the partnership ends after the

shareholder’s interest is terminated and

within the taxable year of the S corporation (determined without regard to any

terminating election) for which the terminating election is made.

(4) Determination of whether an S

shareholder’s entire interest has terminated. For purposes of the terminating

election under section 1377(a)(2) and

paragraph (b) of this section, a shareholder’s entire interest in an S corporation is terminated on the occurrence of

any event through which a shareholder’s

entire stock ownership in the S corporation ceases, including a sale, exchange,

or other disposition of all of the stock

held by the shareholder; a gift under

section 102(a) of all the shareholder’s

stock; a spousal transfer under section

1041(a) of all the shareholder’s stock; a

redemption, as defined in section

317(b), of all the shareholder’s stock,

regardless of the tax treatment of the

redemption under section 302; and the

death of the shareholder. A shareholder’s

entire interest in an S corporation is not

terminated if the shareholder retains

ownership of any stock (including an

interest treated as stock under § 1.1361–

1(l)) that would result in the shareholder

continuing to be considered a shareholder of the corporation for purposes of

section 1362(a)(2). Thus, in determining

whether a shareholder’s entire interest in

an S corporation has been terminated,

any interest held by the shareholder as a

creditor, employee, director, or in any

other non-shareholder capacity is disregarded.

(5) Time and manner of making a

terminating election—(i) In general. An

S corporation makes a terminating election by attaching a statement to its

timely filed original or amended return

required to be filed under section

6037(a) (that is, a Form 1120S) for the

taxable year during which a shareholder’s entire interest is terminated. A

single election statement may be filed

by the S corporation for all terminating

elections for the taxable year. The election statement must include—

(A) A declaration by the S corporation that it is electing under section

1377(a)(2) and this paragraph (b) to

treat the taxable year as if it consisted

of two separate taxable years;

(B) Information setting forth when

and how the shareholder’s entire interest

was terminated (for example, a sale or

gift);

corporation of an authorized officer of

the corporation under penalties of perjury; and

(D) A statement by the corporation

that the corporation and each affected

shareholder consent to the S corporation

making the terminating election.

(ii) Affected shareholders required to

consent. For purposes of paragraph

(b)(5)(i)(D) of this section, a shareholder

of the S corporation for the taxable year

is a shareholder as described in section

1362(a)(2). For example, the person

who under § 1.1362–6(b)(2) must consent to a corporation’s S election in

certain special cases is the person who

must consent to the terminating election.

In addition, an executor or administrator

of the estate of a deceased affected

shareholder may consent to the terminating election on behalf of the deceased

affected shareholder.

(iii) More than one terminating election. A shareholder whose entire interest

in an S corporation is terminated in an

event for which a terminating election

was made is not required to consent to a

terminating election made with respect

to a subsequent termination within the

same taxable year unless the shareholder

is an affected shareholder with respect

to the subsequent termination.

section:

Example 1. Shareholder’s pro rata share in the

case of a partial disposition of stock. (i) On

January 6, 1997, X incorporates as a calendar year

corporation, issues 100 shares of common stock to

each of A and B, and files an election to be an S

corporation for its 1997 taxable year. On July 24,

1997, B sells 50 shares of X stock to C. Thus, in

1997, A owned 50 percent of the outstanding

shares of X on each day of X’s 1997 taxable year,

B owned 50 percent on each day from January 6,

1997, to July 24, 1997 (200 days), and 25 percent

from July 25, 1997, to December 31, 1997 (160

days), and C owned 25 percent from July 25,

1997, to December 31, 1997 (160 days).

(ii) Because B’s entire interest in X is not

terminated when B sells 50 shares to C on July

24, 1997, X cannot make a terminating election

under section 1377(a)(2) and paragraph (b) of this

section for B’s sale of 50 shares to C. Although

B’s sale of 50 shares to C is a qualifying

disposition under § 1.1368–1(g)(2)(i), X does not

make an election to terminate its taxable year

under § 1.1368–1(g)(2). During its 1997 taxable

year, X has nonseparately computed income of

$720,000.

(iii) For each day in X’s 1997 taxable year, A’s

daily pro rata share of X’s nonseparately computed

income is $1,000 ($720,000/360 days x 50%).

Thus, A’s pro rata share of X’s nonseparately

computed income for 1997 is $360,000 ($1,000 x

360 days). B’s daily pro rata share of X’s

nonseparately computed income is $1,000

($720,000/360 x 50%) for the first 200 days of

X’s 1997 taxable year, and $500 ($720,000/360 x

25%) for the following 160 days in 1997. Thus,

B’s pro rata share of X’s nonseparately computed

income for 1997 is $280,000 (($1,000 x 200 days)

+ ($500 x 160 days)). C’s daily pro rata share of

X’s nonseparately computed income is $500

($720,000/360 x 25%) for 160 days in 1997. Thus,

C’s pro rata share of X’s nonseparately computed

income for 1997 is $80,000 ($500 x 160 days).

Example 2. Shareholder’s pro rata share when

an S corporation makes a terminating election

under section 1377(a)(2). (i) On January 6, 1997,

X incorporates as a calendar year corporation,

issues 100 shares of common stock to each of A

and B, and files an election to be an S corporation

for its 1997 taxable year. On July 24, 1997, B

sells B’s entire 100 shares of X stock to C. With

the consent of B and C, X makes an election

under section 1377(a)(2) and paragraph (b) of this

section for the termination of B’s entire interest

arising from B’s sale of 100 shares to C. As a

result of the election, the pro rata shares of B and

C are determined as if X’s taxable year consisted

of two separate taxable years, the first of which

ends on July 24, 1997, the date B’s entire interest

in X terminates. Because A is not an affected

shareholder as defined by section 1377(a)(2)(B)

and paragraph (b)(2) of this section, the treatment

as separate taxable years does not apply to A.

(ii) During its 1997 taxable year, X has

nonseparately computed income of $720,000. Under X’s normal method of accounting, $200,000 of

the $720,000 of nonseparately computed income is

allocable to the period of January 6, 1997, through

July 24, 1997 (the first deemed taxable year), and

the remaining $520,000 is allocable to the period

of July 25, 1997, through December 31, 1997 (the

second deemed taxable year).

(iii) B’s pro rata share of the $200,000 of

nonseparately computed income for the first

deemed taxable year is determined by assigning

the $200,000 of nonseparately computed income

to each day of the first deemed taxable year

($200,000/200 days = $1,000 per day). Because B

held 50% of X’s authorized and issued shares on

each day of the first deemed taxable year, B’s

daily pro rata share for each day of the first

deemed taxable year is $500 ($1,000 per day x

50%). Thus, B’s pro rata share of the $200,000 of

nonseparately computed income for the first

deemed taxable year is $100,000 ($500 per day x

200 days). B must report this amount for B’s

taxable year with or within which X’s full taxable

year ends (December 31, 1997).

(iv) C’s pro rata share of the $520,000 of

nonseparately computed income for the second

deemed taxable year is determined by assigning

the $520,000 of nonseparately computed income

to each day of the second deemed taxable year

($520,000/160 days = $3,250 per day). Because C

held 50% of X’s authorized and issued shares on

each day of the second deemed taxable year, C’s

daily pro rata shares for each day of the second

deemed taxable year is $1,625 ($3,250 per day x

50%). Therefore, C’s pro rata share of the

$520,000 of nonseparately computed income is

$260,000 ($1,625 per day x 160 days). C must

report this amount for C’s taxable year with or

within which X’s full taxable year ends (December

31, 1997).

§ 1.1377–2 Post-termination transition

period.

(a) In general. For purposes of

subchapter S of chapter 1 of the Internal

Revenue Code (Code) and this section,

the term post-termination transition period means—

(1) The period beginning on the day

after the last day of the corporation’s

last taxable year as an S corporation and

ending on the later of—

(i) The day which is 1 year after such

last day; or

(ii) The due date for filing the return

for the last taxable year as an S corporation (including extensions);

(2) The 120-day period beginning on

the date of any determination pursuant

to an audit of the taxpayer which follows the termination of the corporation’s

election and which adjusts a subchapter

S item of income, loss, or deduction of

the corporation arising during the S

period (as defined in section

1368(e)(2)); and

(3) The 120-day period beginning on

the date of a determination that the

corporation’s election under section

1362(a) had terminated for a previous

taxable year.

(b) Special rules for post-termination

transition period. Pursuant to section

1377(b)(1) and paragraph (a)(1) of this

section, a post-termination transition period arises the day after the last day that

an S corporation was in existence if a C

corporation acquires the assets of the S

corporation in a transaction to which

section 381(a)(2) applies. However, if an

S corporation acquires the assets of

another S corporation in a transaction to

which section 381(a)(2) applies, a post-

termination transition period does not

arise. (See § 1.1368–2(d)(2) for the

treatment of the acquisition of the assets

of an S corporation by another S corporation in a transaction to which section

381(a)(2) applies.) The special treatment

under section 1371(e)(1) of distributions

of money by a corporation with respect

to its stock during the post-termination

transition period is available only to

those shareholders who were shareholders in the S corporation at the time of

the termination.

(c) Determination defined. For purposes of section 1377(b)(1) and paragraph (a) of this section, the term determination means—

(1) A determination as defined in

section 1313(a);

(2) A written agreement between the

corporation and the Commissioner (including a statement acknowledging that

the corporation’s election to be an S

corporation terminated under section

1362(d)) that the corporation failed to

qualify as an S corporation;

(3) For a corporation subject to the

audit and assessment provisions of

subchapter C of chapter 63 of subtitle A

of the Code, the expiration of the period

specified in section 6226 for filing a

petition for readjustment of a final S

corporation administrative adjustment

finding that the corporation failed to

qualify as an S corporation, provided

that no petition was timely filed before

the expiration of the period; and

(4) For a corporation not subject to

the audit and assessment provisions of

subchapter C of chapter 63 of subtitle A

of the Code, the expiration of the period

for filing a petition under section 6213

for the shareholder’s taxable year for

which the Commissioner has made a

finding that the corporation failed to

qualify as an S corporation, provided

that no petition was timely filed before

the expiration of the period.

(d) Date a determination becomes effective—(1) Determination under section

1313(a). A determination under paragraph (c)(1) of this section becomes

effective on the date prescribed in section 1313 and the regulations thereunder.

(2) Written agreement. A determination under paragraph (c)(2) of this section becomes effective when it is signed

by the district director having jurisdiction over the corporation (or by another

Service official to whom authority to

sign the agreement is delegated) and by

an officer of the corporation authorized

to sign on its behalf. Neither the request

for a written agreement nor the terms of

the written agreement suspend the running of any statute of limitations.

(3) Implied agreement. A determination under paragraph (c)(3) or (4) of this

section becomes effective on the day

after the date of expiration of the period

specified under section 6226 or 6213,

respectively.

Approved November 1, 1996.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on

December 20, 1996, 8:45 a.m., and published in

the issue of the Federal Register for December 23,

1996, 61 F.R. 67454)

§ 1.1377–3 Effective date.

Sections 1.1377–1 and 1.1377–2 apply to taxable years of an S corporation

beginning after December 31, 1996.

PART 18—TEMPORARY INCOME

TAX REGULATIONS UNDER THE

SUBCHAPTER S REVISION ACT OF

1982

Par. 5. The authority citation for part

18 continues to read as follows:

Authority: 26 U.S.C. 7805.

Section 18.1377–1 [Removed]

Par. 6. Section 18.1377–1 is removed.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK

REDUCTION ACT

Par. 7. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 8. In § 602.101, paragraph (c) is

amended as follows:

1. Removing the following entry

from the table:

§ 602.101 OMB Control numbers.

CFR part or section

where identified and

described

Current

OMB

control No.

18.1377–1 . . . . . . . . . . .

1545–0130

2. Adding an entry in numerical order

to the table to read as follows:

Section 4082.—Exemptions for

Diesel Fuel

26 CFR 48.4082–5T: Diesel fuel; Alaska (temporary).

T.D. 8693

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 48

Diesel Fuel Excise Tax; Special

Rules for Alaska

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations relating to the

application of the diesel fuel excise tax

to fuel used in Alaska. The regulations

implement certain changes made by the

Small Business Job Protection Act of

1996. They affect certain enterers, refiners, retailers, terminal operators,

throughputters, wholesale distributors,

and users. The text of these regulations

also serves as the text of REG–247678–

96, page 17, this Bulletin.

DATES: These regulations are effective

December 17, 1996. For dates of applicability of these regulations, see

§§ 48.4082–5T(g) and 48.6715–2T(b).

FOR FURTHER INFORMATION

CONTACT: Frank Boland (202) 622–

3130 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

§ 602.101 OMB Control numbers.

CFR part or section

where identified and

described

Current

OMB control

No.

1.1377–1 . . . . . . . . . . . .

1545–1462

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Background

Section 4081 imposes a tax on certain

removals, entries, and sales of diesel

fuel. However, under section 4082, tax

is not imposed if, among other conditions, the diesel fuel is indelibly dyed in

accordance with Treasury regulations.

Dyed diesel fuel can be used legally in

nontaxable uses such as for heating oil,

as fuel in stationary engines, or as fuel

in nonhighway vehicles. A substantial

penalty under section 6715 applies if

dyed diesel fuel is used for a taxable

purpose such as in a registered highway

vehicle.

A similar dyeing regime for diesel

fuel is required by regulations issued

under the Clean Air Act. That Act

prohibits the use on highways of diesel

fuel with a sulfur content exceeding

prescribed levels. The Environmental

Protection Agency (EPA) requires this

‘‘high sulfur’’ diesel fuel to be dyed.

Section 1801 of the Small Business

Job Protection Act of 1996 amends

section 4082 to create an exception to

the IRS dyeing requirement. Under this

amendment, which is effective October

1, 1996, the IRS dyeing requirement

does not apply to diesel fuel that is

removed, entered, or sold in a state for

ultimate sale or use in an area of such

state during the period such area is

exempted from EPA’s sulfur content and

fuel dyeing requirements if the use of

the fuel is certified pursuant to Treasury

regulations.

Section 211(i)(4) of the Clean Air Act

allows EPA to exempt the states of

Alaska and Hawaii from the Clean Air

Act’s sulfur content requirements. In

response to a petition from Alaska, the

EPA granted a permanent exemption for

remote areas of Alaska (that is, areas

that are not served by the Federal Aid

Highway System). In addition, a temporary exemption was granted for urban

areas. This temporary exemption, which

was originally scheduled to expire after

September 30, 1996, has been extended

by the EPA (61 FR 42812 (August 19,

1996)) for 24 months, or until a decision

is made on Alaska’s petition for a

permanent exemption, whichever period

is shorter.

Thus, under current EPA rules, the

entire state of Alaska is exempt from the

Clean Air Act’s sulfur content requirements and, consequently, from the EPA’s

dyeing requirements. No part of Hawaii

or any other state is similarly exempt.

Explanation of Provisions

These temporary regulations generally

establish a system for collecting the

federal diesel fuel tax at the wholesale

level in Alaska. This system is similar to

the pre-1994 federal system under section 4091 and the present system used

by the state of Alaska for state fuel tax.

The person liable for tax under the

temporary regulations generally will be

a person who is licensed by Alaska as a

qualified dealer.

Under the temporary regulations, a

qualified dealer may buy undyed diesel

fuel tax free at a terminal rack and sell

the fuel tax free to another qualified

dealer or to a buyer for the buyer’s own

nontaxable use. However, a qualified

dealer is liable for tax when it sells to a

buyer for the buyer’s taxable use or to a

reseller that is not a qualified dealer.

A qualified dealer must keep adequate

records to document the exempt nature

of its nontaxable sales. Although the

temporary regulations do not prescribe

any specific documentation, taxpayers

may consider using a format similar to

the

notification

certificate

§ 48.4081–5 as proof of tax-free sales

between qualified dealers. As proof of

tax-free sales for nontaxable uses, taxpayers may consider using Alaska’s exemption certificate, when appropriate, or

an adaptation of the certificate presently

used to support tax-free sales of aviation

fuel that is found in Notice 88–132,

1988–2 C.B. 552, 555. The IRS will

consider whether the final regulations

should specify model certificates to be

used for documenting nontaxable transactions in the future.

Taxpayers are cautioned that the uses

that are exempt from Alaska’s state tax

are not identical to the uses that are

exempt from the federal tax. For example, Alaska exempts sales to all nonprofit organizations described in section

501(c)(3); the comparable federal rule

exempts only sales to nonprofit educational organizations.

Taxpayers should also note that diesel

fuel that is dyed in accordance with

existing IRS regulations will continue to

be exempt from the section 4081 tax in

Alaska.

Special Analyses

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

Therefore, a regulatory assessment is not

required. It also has been determined

that section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5) does

not apply to these regulations and, because these regulations do not impose

on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this temporary regulation will be

submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on

small business.

Drafting Information

The principal author of these regulations is Frank Boland, Office of Assistant Chief Counsel (Passthroughs and

Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 48 is

amended as follows:

PART 48—MANUFACTURERS AND

RETAILERS EXCISE TAXES

Paragraph 1. The authority citation

for part 48 is amended by adding an

entry in numerical order to read in part

as follows:

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

Section 48.4082–5T also issued under

26 U.S.C. 4082. * * *

Par. 2. Section 48.4082–5T is added

to read as follows:

§ 48.4082–5T Diesel fuel; Alaska (temporary).

(a) Application. This section applies

to diesel fuel removed, entered, or sold

in Alaska for ultimate sale or use in an

exempt area of Alaska.

(b) Definitions.

Exempt area of Alaska means the area

of Alaska in which the sulfur content

requirements for diesel fuel (see section

211(i) of the Clear Air Act (42 U.S.C.

7545(i))) do not apply because the Administrator of the Environmental Protection Agency has granted an exemption

under section 211(i)(4) of that Act.

Nontaxable use means a use described

in section 4082(b). Qualified dealer

means any person that holds a qualified

dealer license from the state of Alaska.

Notwithstanding § 48.4082–1, tax is not

imposed by section 4081 on the removal

or entry of any diesel fuel in an exempt

area of Alaska if—

(1) The person that would be liable

for tax under § 48.4081–2 or 48.4081–3

is a taxable fuel registrant and satisfies

the requirements of paragraph (e) of this

section;

(2) In the case of a removal from a

terminal, the terminal is an approved

terminal; and

(3) The owner of the diesel fuel

immediately after the removal or entry

holds the fuel for its own use in a

nontaxable use or is a qualified dealer.

(d) Sales after removals and entries—(1) In general. Paragraph (c) of

this section does not apply with respect

to diesel fuel that is subsequently sold

by a qualified dealer unless—

(i) The fuel is sold in an exempt area

of Alaska;

(ii) The buyer purchases the fuel for

its own use in a nontaxable use or is a

qualified dealer; and

(iii) The seller satisfies the requirements of paragraph (e) of this section.

(2) Tax imposed at time of sale;

liability for tax. Notwithstanding

§§ 48.4081–2 and 48.4081–3, in any

case in which paragraph (c) of this

section does not apply with respect to

diesel fuel because of a subsequent sale

by a qualified dealer, the tax with

respect to that fuel is imposed at the

time of the subsequent sale and the

qualified dealer is liable for the tax.

(3) Rate of tax. For the rate of tax,

see section 4081.

(e) Evidence of tax-free transactions.

The requirements of section 4082(c)(2)

(relating to certification) and this paragraph (e) are satisfied if the person

otherwise liable for tax is able to show

the district director satisfactory evidence

of the exempt nature of the transaction

and has no reason to believe that the

evidence is false. Satisfactory evidence

may include copies of qualified dealer

licenses or exemption certificates obtained for state tax purposes.

(f) Cross reference. For the tax on

previously untaxed diesel fuel that is

used for a taxable purpose, see

§ 48.4082–4.

(g) Effective date. This section is applicable with respect to diesel fuel removed or entered after December 31,

1996.

Par. 3. Section 48.6715–2T is added

to read as follows:

§ 48.6715–2T Application of section

6715(a)(3) to Alaska (temporary).

(a) In general. The penalty provided

by section 6715(a)(3) for willful alteration of dyed fuel will not be assessed if

the alteration occurs in an exempt area

of Alaska.

(b) Effective date. This section is applicable October 1, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved November 27, 1996.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on

December 16, 1996, 8:45 a.m., and published in

the issue of the Federal Register for December 17,

1996, 61 F.R. 66215)

Section 6103.—Confidentiality and

Disclosure of Returns and Return

Information

26 CFR 301.6103(l)(14)–1: Disclosure of return

information to United States Customs Service.

T.D. 8694

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

Disclosure of Return Information to

the U.S. Customs Service

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: These amendments to the

regulations under 26 CFR part 301

implement section 6103(l)(14) of the

Internal Revenue Code, which authorizes the disclosure of certain return

information to the U.S. Customs Service. The regulations specify the procedure by which return information may

be disclosed and describe the conditions

and restrictions on the use of the information by the U.S. Customs Service.

EFFECTIVE DATE: These regulations

are effective December 17, 1996.

FOR FURTHER INFORMATION CONTACT: Donald Squires, 202–622–4570

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The North American Free Trade

Agreement Implementation Act (Act),

Public Law 103–182, 107 Stat. 2057,

was signed into law on December 8,

1993. Section 522 of the Act added

section 6103(l)(14) to the Internal Revenue Code (Code), authorizing the IRS

to disclose certain tax data to the U.S.

Customs Service. The Act directed the

Treasury Department to adopt temporary

regulations to implement the new section.

On March 11, 1994, temporary regulations were published in the Federal

procedure by which return information

may be disclosed to officers and employees of the United States Customs

Service, and describing the conditions

and restrictions on the use and

redisclosure of that information. A notice of proposed rulemaking (DL–21–

94) cross-referencing the temporary

regulations was published in the Federal Register for the same day (59 FR

11566).

The IRS received two comments on

the proposed regulations but did not

hold a public hearing. After consideration of the comments, this Treasury

decision adopts the proposed regulations

without revision. The comments are discussed below.

Explanation of Provisions

The regulations authorize disclosure

of return information only to the extent

necessary to the purposes authorized by

the statute, i.e., ascertaining the correctness of entries in audits under the Tariff

Act of 1930 and other actions to recover

any loss of revenue or collect amounts

determined to be due and owing as a

result of these audits. The regulations

permit redisclosure to the Department of

Justice for civil enforcement actions

related to these collection efforts. Consistent with the statute’s legislative history, the regulations prohibit disclosure

of information (i) relating to Advance

Pricing Agreements (as described in

Rev. Proc. 91–22 (1991–1 C.B. 526)), or

(ii) covered by tax treaties and executive

agreements with respect to which the

United States is a party. The regulations

also specifically prohibit any use or

redisclosure of the information by the

Customs Service in a manner inconsistent with section 6103 and the regulations.

Notice to Taxpayers/Importers

One commentator suggested that the

regulations should provide taxpayers

with advance notice of a Customs Service request for tax data and an opportunity to comment upon or object to the

request. The legislation authorizing these

disclosures did not, however, make any

provision for such advance notice and

pre-disclosure challenges to Customs

Service requests for disclosure of tax

data. Such procedures would, moreover,

run counter to the existing statutory

scheme of section 6103. Disclosures

under section 6103 are governed by the

requirements of that statute and applicable regulations, none of which offers a

procedural opportunity for a taxpayer to

challenge, in advance, a proposed disclosure of tax information by the IRS.

The same commentator suggested

that, in the alternative, a taxpayer should

be notified in the event of a disclosure

so the taxpayer can prepare its response

to inquiries from the Customs Service

that might be based on such tax data.

Otherwise, the commentator argued, the

taxpayer would be forced to defend

itself against an ‘‘unexpressed suspicion’’ based on information the taxpayer

does not know the Customs Service has

obtained and possibly has misinterpreted.

Nothing in the statute’s legislative

history suggests that Congress intended

the Service to notify taxpayers upon

disclosure of their tax data to the Customs Service. As noted above, such a

requirement would be at odds with

general practice under section 6103.

Moreover, the IRS understands that the

usual practice of the Customs Service is

not to request information from the IRS

unless the data has been first directly

requested from, but not provided by,

importers. When importers receive such

a request, therefore, they will effectively

be on notice, whether or not they choose

to comply with the request, that the

Customs Service is likely to consider

tax information in the course of its

audit.

Misinterpretation of Tax Data by Customs

Both commentators expressed a concern that due to the different reporting

requirements of the IRS and the Customs Service, tax data is susceptible to

misinterpretation by Customs Service

auditors. For example, it was noted that

the cost of goods reported for tax pur-

poses includes certain amounts (e.g.,

duty, transportation, insurance, storage,

design costs) not relevant to, or included

in, the value of goods for customs

purposes.

Congress was aware when it enacted

the legislation, however, that IRS tax

information may not correlate exactly

with the information required to be

reported to the Customs Service. Congress nonetheless concluded that the

value of the tax information to the

Customs Service would outweigh the

possible difficulties caused by the necessity of adjusting the IRS data for use in

Customs Service audits. Moreover, the

Customs Service has informed the IRS

that the Customs Service is committed

to a policy of full disclosure and communication with importers during audits.

In light of that policy, any apparent

discrepancies between tax data and Customs Service reporting will be brought

to the attention of the importer when

discovered in order to allow the importer to explain or reconcile the data.

The Customs Service also notes that

importers have an additional opportunity

to review and comment upon the findings of an auditor before the preparation

of the auditor’s final report.

Special Analyses

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

Therefore, a regulatory assessment is not

required. It 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 Internal Revenue 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

their impact on small business.

Drafting Information

The principal author of these regulations is Donald Squires, Office of the

Assistant Chief Counsel (Disclosure

Litigation), IRS. However, other personnel from the IRS, Customs Service and

Treasury Department participated in

their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is

amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for

part 301 is amended by removing the

entry for Section 301.6103(l)(14)–1T’’

and adding an entry in numerical order

to read as follows:

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

Section 301.6103(l)(14)–1 also issued

under 26 U.S.C. 6103(l)(14). * * *

§ 301.6103(l)(14)–1T [Redesignated

as § 301.6103(l)(14)–1]

Par. 2. Section 301.6103(l)(14)–1T is

redesignated as § 301.6103(l)(14)–1 and

the section heading is amended by removing the language ‘‘(temporary)’’.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved November 13, 1996.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on

December 16, 1996, 8:45 a.m., and published in

the issue of the Federal Register for December 17,

1996, 61 F.R. 66218)

Part III. Administrative, Procedural, and Miscellaneous

Notice of Intent to Issue Guidance

Allowing Farmers to Expeditiously

Change Their Method of

Accounting for Deferred Payment

Sales Contracts in Computing

Alternative Minimum Tax

Notice 97–13

SUMMARY: The Internal Revenue Service intends to provide approval for

taxpayers engaged in the business of

farming to change their method of accounting for the income from certain

deferred payment sales contracts for

purposes of computing their alternative

minimum tax (AMT). Farmers will be

allowed to change to a permissible

method of accounting for this income,

effective for taxable years beginning

after December 31, 1996, by attaching

Form 3115 to their 1997 federal income

tax returns to be filed during 1998.

Farmers who change their method of

accounting in accordance with this procedure will then receive audit protection

with respect to the use of an impermissible method of accounting for all taxable years prior to the change, in accordance with generally applicable rules.

BACKGROUND: The Service has received numerous inquiries on the proper

treatment, for AMT purposes, of income

from the sale of products raised by

farmers or other inventory property sold

in the ordinary course of the farming

business under deferred payment sales

contracts. A deferred payment sales contract is one where at least one payment

is to be received after the close of the

taxable year in which the product is

sold.

Section 56(a)(6) of the Code provides

that, in computing alternative minimum

taxable income (AMTI), income from

the disposition of property such as farm

products is determined without regard to

the installment method under § 453.

Thus, a farmer using the cash method,

who sells farm products under a deferred payment sales contract and does

not elect out of the installment method

of reporting, must include in AMTI in

the year of the sale both the cash

received and the fair market value (or

the issue price) of the deferred payment

obligation. Otherwise, the farmer is using an impermissible method of accounting. If the farmer elects not to

apply the installment method to the sale,

and reports the income in the year of

the sale, there is no AMTI adjustment

with respect to the sale.

Section 446(e) generally provides that

a taxpayer that changes its method of

accounting must secure the Commissioner’s consent before computing income using the new method. In general,

taxpayers who wish to change their

method of accounting must file Form

3115, Application for Change in Accounting Method, with the Commissioner within the first 180 days of the

taxable year in which the taxpayer desires to make the change, and must pay

a user fee (ranging from $500 to $900).

Treas. Reg. § 1.446–1(e)(3)(i). In addition, § 1.446–1(e)(3)(ii) authorizes the

Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to

obtain consent to change a method of

accounting.

AUTOMATIC CHANGE IN METHOD

OF ACCOUNTING: The Service will

issue guidance that will allow farmers

currently using an impermissible method

of accounting for income from the sale

of farm products under deferred payment sales contracts for AMT purposes

to automatically change to a permissible

method of accounting. Under the forthcoming guidance, farmers will be allowed to request the method change by

attaching Form 3115 to their timely filed

1997 federal income tax return (due in

1998). No user fee will be required.

The method change will be effective

for taxable years beginning after December 31, 1996. In addition, the

method change will result in audit protection for all prior taxable years with

respect to the impermissible method of

accounting (i.e., the examining agent

will not propose that a farmer change

the impermissible method of accounting

for any prior taxable year) in accordance

with generally applicable rules. See Rev.

Proc. 92–20, Section 10.12, 1992–1

C.B. 685. Farmers currently using an

impermissible method of accounting for

such sales should continue to use that

method in computing AMT for taxable

years ending prior to January 1, 1997.

The automatic method change procedure will not be available to farmers

who have received written notification

from an examining agent (e.g., by examination plan, information document

request, notification of proposed adjustments or income tax examination

changes) prior to January 28, 1997,

specifically citing as an issue under

consideration the farmer’s method of

accounting for income from sales of

farm products under deferred payment

sales contracts for AMT purposes. In

addition, the guidance will not apply if

the farmer’s method of accounting for

such income for AMT purposes is an

issue under consideration by an appeals

office or a federal court.

DRAFTING INFORMATION: The principal author of this notice is William A.

Jackson of the Office of Assistant Chief

Counsel (Income Tax and Accounting).

For further information regarding this

notice, contact Jonathan Strum at (202)

622–4960 (not a toll-free call).

Rev. Proc. 97–11

Section 1. Purpose

The purpose of this revenue procedure is to increase the charge imposed

for each request for a copy of a tax

return or other related document (other

than Employee Plans and Exempt Organization returns and related documents).

In so doing, it further modifies Rev.

Proc. 66–3, 1966–1 C.B. 601.

Section 2. Background

.01 Pursuant to I.R.C. § 6103 (p) (2),

the Internal Revenue Service may prescribe a reasonable fee for furnishing

copies of returns and related documents

as authorized under the Internal Revenue Code.

.02 Rev. Proc. 66–3 sets forth procedures to be followed by District Directors of the Internal Revenue Service in

permitting inspection of federal tax returns and related documents under the

Internal Revenue Code, and in furnishing copies of such returns and documents. Section 15 of Rev. Proc. 66–3 is

entitled ‘‘Charges for Copies of Returns

and Related Documents.’’

.03 Rev. Proc. 87–21, 1987–1 C.B.

718, modified Rev. Proc. 66–3, as previously modified by Rev. Proc. 84–71,

1984–2 C.B. 735, and Rev. Proc. 85–56,

1985–2 C.B. 739, by substituting a new

section 15, effective January 1, 1987.

Section 15 as modified by Rev. Proc.

87–21 maintained a charge of $4.25,

payable in advance, for each request for

a copy of a return or other related

document (other than Employee Plans

and Exempt Organizations returns and