3 Bulletin No. 1996–3 January 16, 1996 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 96–4, page 16. Section 1274A inflation-adjusted numbers for 1996. This ruling provides the dollar amounts, increased by the 1996 inflation-adjustment, for section 1274A of the Code. Rev. Rul. 95–10 supplemented and superseded. Rev. Rul. 96–5, page 29. CPI adjustment for below-market loans–1996. The amount that section 7872(g) of the Code permits a taxpayer to lend to a qualified continuing care facility without incurring imputed interest is published and adjusted for inflation for years 1987–1996. Rev. Rul. 95–11 supplemented and superseded. T.D. 8631, page 7. EE–34–95, page 49. Temporary and proposed regulations under section 411 of the Code relating to the requirements of section 204(h) of the Employee Retirement Income Security Act of 1974, as amended, relating to defined benefit plans and to individual account plans that are subject to the funding standards of section 302 of ERISA. T.D. 8635, page 5. Final and temporary regulations under sections 401 and 408 that provide guidance to nonbank trustees with respect to the adequacy of net worth requirements that must be satisfied in order to be or remain an approved nonbank trustee. EMPLOYEE PLANS Rev. Rul. 96–7, page 12. Disability mortality tables. This ruling provides mortality tables for use under section 412(1) for plan years after 1995 to calculate current liability for individuals entitled to benefits on account of disability. Announcement 96–4, page 50. An announcement discusses the publication of mortality tables for use under section 412(1) for individuals entitled to benefits on account of disability. The announcement requests comments on the tables pub- lished in Rev. Rul. 96–7. EMPLOYMENT TAX T.D. 8634, page 17. Final regulations relating to the income tax withholding requirement on distribution of profits from certain gaming activities made to members of Indian tribes under section 3402(r) of the Code. ADMINISTRATIVE Notice 96–1, page 30. Notice of intention to issue regulations under section 1396 of the Code. The Service will clarify the relevant period under section 1396(d)(1)(A) during which sub- stantially all of the services performed by an employee for his or her employer must be performed within an empowerment zone in a trade or business of the employer. Rev. Proc. 96–12, page 30. Life insurance partnerships. The Service will not rule on certain issues raised in connection with the transfer of a life insurance policy to an unincorporated organization. Rev. Proc. 96–3 amplified. Rev. Proc. 96–13, page 31. Updated competent authority procedure. This procedure sets forth the procedures concerning requests by taxpayers for assistance of the U.S. competent authority (Continued on page 4) Finding Lists begin on page 52.
Transcript
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Bulletin No. 1996–3January 16, 1996
HIGHLIGHTSOF THIS ISSUE
These synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 96–4, page 16.Section 1274A inflation-adjusted numbers for 1996. Thisruling provides the dollar amounts, increased by the1996 inflation-adjustment, for section 1274A of theCode. Rev. Rul. 95–10 supplemented and superseded.
Rev. Rul. 96–5, page 29.CPI adjustment for below-market loans–1996. Theamount that section 7872(g) of the Code permits ataxpayer to lend to a qualified continuing care facilitywithout incurring imputed interest is published andadjusted for inflation for years 1987–1996. Rev. Rul.95–11 supplemented and superseded.
T.D. 8631, page 7.EE–34–95, page 49.Temporary and proposed regulations under section 411of the Code relating to the requirements of section204(h) of the Employee Retirement Income SecurityAct of 1974, as amended, relating to defined benefitplans and to individual account plans that are subjectto the funding standards of section 302 of ERISA.
T.D. 8635, page 5.Final and temporary regulations under sections 401and 408 that provide guidance to nonbank trusteeswith respect to the adequacy of net worth requirementsthat must be satisfied in order to be or remain anapproved nonbank trustee.
EMPLOYEE PLANS
Rev. Rul. 96–7, page 12.Disability mortality tables. This ruling provides mortalitytables for use under section 412(1) for plan years after1995 to calculate current liability for individuals entitledto benefits on account of disability.
Announcement 96–4, page 50.An announcement discusses the publication of mortalitytables for use under section 412(1) for individualsentitled to benefits on account of disability. Theannouncement requests comments on the tables pub-lished in Rev. Rul. 96–7.
EMPLOYMENT TAX
T.D. 8634, page 17.Final regulations relating to the income tax withholdingrequirement on distribution of profits from certaingaming activities made to members of Indian tribesunder section 3402(r) of the Code.
ADMINISTRATIVE
Notice 96–1, page 30.Notice of intention to issue regulations under section1396 of the Code. The Service will clarify the relevantperiod under section 1396(d)(1)(A) during which sub-stantially all of the services performed by an employeefor his or her employer must be performed within anempowerment zone in a trade or business of theemployer.
Rev. Proc. 96–12, page 30.Life insurance partnerships. The Service will not rule oncertain issues raised in connection with the transfer of alife insurance policy to an unincorporated organization.Rev. Proc. 96–3 amplified.
Rev. Proc. 96–13, page 31.Updated competent authority procedure. This proceduresets forth the procedures concerning requests bytaxpayers for assistance of the U.S. competent authority
(Continued on page 4)
Finding Lists begin on page 52.
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Mission of the ServiceThe purpose of the Internal Revenue Service is tocollect the proper amount of tax revenue at the leastcost; serve the public by continually improving the
quality of our products and services; and perform in amanner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.
Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is toadminister the Internal Revenue Code. Tax policyfor raising revenue is determined by Congress.
With this in mind, it is the duty of the Service tocarry out that policy by correctly applying the lawsenacted by Congress; to determine the reasonablemeaning of various Code provisions in light of theCongressional purpose in enacting them; and toperform this work in a fair and impartial manner,with neither a government nor a taxpayer point ofview.
At the heart of administration is interpretation of theCode. It is the responsibility of each person in theService, charged with the duty of interpreting thelaw, to try to find the true meaning of the statutoryprovision and not to adopt a strained construction inthe belief that he or she is ‘‘protecting the revenue.’’The revenue is properly protected only when we as-certain and apply the true meaning of the statute.
The Service also has the responsibility of applyingand administering the law in a reasonable,practical manner. Issues should only be raised byexamining officers when they have merit, neverarbitrarily or for trading purposes. At the sametime, the examining officer should never hesitateto raise a meritorious issue. It is also importantthat care be exercised not to raise an issue or toask a court to adopt a position inconsistent withan established Service position.
Administration should be both reasonable andvigorous. It should be conducted with as littledelay as possible and with great courtesy andconsiderateness. It should never try to overreach,and should be reasonable within the bounds of lawand sound administration. It should, however, bevigorous in requiring compliance with law and itshould be relentless in its attack on unreal taxdevices and fraud.
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IntroductionThe Internal Revenue Bulletin is the authoritativeinstrument of the Commissioner of Internal Revenue forannouncing official rulings and procedures of theInternal Revenue Service and for publishing TreasuryDecisions, Executive Orders, Tax Conventions, legisla-tion, court decisions, and other items of generalinterest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscrip-tion basis. Bulletin contents of a permanent nature areconsolidated semiannually into Cumulative Bulletins,which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletinall substantive rulings necessary to promote a uniformapplication of the tax laws, including all rulings thatsupersede, revoke, modify, or amend any of thosepreviously published in the Bulletin. All publishedrulings apply retroactively unless otherwise indicated.Procedures relating solely to matters of internalmanagement are not published; however, statements ofinternal practices and procedures that affect the rightsand duties of taxpayers are published.
Revenue rulings represent the conclusions of theService on the application of the law to the pivotal factsstated in the revenue ruling. In those based onpositions taken in rulings to taxpayers or technicaladvice to Service field offices, identifying details andinformation of a confidential nature are deleted toprevent unwarranted invasions of privacy and to complywith statutory requirements.
Rulings and procedures reported in the Bulletin do nothave the force and effect of Treasury DepartmentRegulations, but they may be used as precedents.Unpublished rulings will not be relied on, used, or citedas precedents by Service personnel in the disposition ofother cases. In applying published rulings and proce-dures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must beconsidered, and Service personnel and others con-cerned are cautioned against reaching the sameconclusions in other cases unless the facts andcircumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.This part includes rulings and decisions based onprovisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows:Subpart A, Tax Conventions, and Subpart B, Legislationand Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellanous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts andSubparts. Also included in this part are Bank SecrecyAct Administrative Rulings. Bank Secrecy Act Admin-istrative Rulings are issued by the Department of theTreasury’s Office of the Assistant Secretary(Enforcement).
Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemak-ing and the disbarment and suspension list included inthis part, none of these announcements are consoli-dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index forthe matters published during the preceding month.These monthly indexes are cumulated on a quarterlyand semiannual basis, and are published in the firstBulletin of the succeeding quarterly and semi-annualperiod, respectively.
The Bulletin Index-Digest System, a research andreference service supplementing the Bulletin, may beobtained from the Superintendent of Documents on asubscription basis. It consists of four Services: ServiceNo. 1, Income Tax; Service No. 2, Estate and GiftTaxes; Service No. 3, Employment Taxes; Service No.4, Excise Taxes. Each Service consists of a basicvolume and a cumulative supplement that provides (1)finding lists of items published in the Bulletin, (2)digests of revenue rulings, revenue procedures, andother published items, and (3) indexes of Public Laws,Treasury Decisions, and Tax Conventions.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.
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HIGHLIGHTSOF THIS ISSUE—Continued
ADMINISTRATIVE—Continued
under the provisions of an income, estate or gift taxtreaty to which the United States is a party. Rev. Procs.91–23 and 91–26 superseded; Rev. Proc. 91–22amplified; Rev. Rul. 72–437 modified; Rev. Rul 92–75clarified.
Rev. Proc. 96–14, page 41.Obtaining relief. This procedure prescribes additionalconditions associated with obtaining relief otherwiseavailable under Rev. Proc. 65–17, 1965–1 C.B. 833.Rev. Rul. 82–80 and Rev. Proc. 65–17 modified; Rev.Proc. 91–24 superseded.
Rev. Proc. 96–15, page 41.Advance valuation of art. Donors of art appraised at$50,000 or more and executors or administrators ofestates including art appraised at $50,000 or moremay request that the Service issue a statement of valuefor the art. Rev. Proc. 66–49 modified.
Rev. Proc. 96–16, page 45.Letter rulings; tax-exempt obligations. Revised proceduresare provided for obtaining a letter ruling under sections103, 141–150, 1394, and 7871(c) of the Code. Rev.Procs. 88–32 and 88–33 obsoleted.
T.D. 8630, page 19.Final income, estate, and gift regulations relating toactuarial tables exceptions.
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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 101.—Certain Death Benefits
The Service will not rule on certain issuesraised in connection with the transfer of a lifeinsurance policy to an unincorporated organiza-tion. See Rev. Proc. 96–12, page 30.
Section 103.—Interest on State andLocal Bonds
A revenue procedure sets forth procedures forrequesting a ruling under §§ 103, 141–150, 1395,and 7871(c) of the Code. See Rev. Proc. 96–16,page 45.
Section 170.—Charitable, etc.,Contributions and Gifts
26 CFR 1.170A–13: Recordkeeping and returnrequirements for deductions for charitablecontributions.
The contributor of art appraised at $50,000 ormore may request that the Service issue aStatement of Value for the art. See Rev. Proc.96–15, page 41.
Section 401.—Qualified Pension,Profit-sharing, and Stock BonusPlans
26 CFR 1.401(f)–1: Certain custodial accountson annuity contracts.
T.D. 8635
DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 1
Nonbank Trustee Net WorthRequirements
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Final and temporaryregulations.
SUMMARY: This document containsregulations that provide guidance tononbank trustees with respect to theadequacy of net worth requirementsthat must be satisfied in order to be orremain an approved nonbank trustee.These regulations affect nonbanktrustees and custodians of individualretirement accounts, and nonbankcustodians of qualified plans and tax-sheltered annuities.
EFFECTIVE DATE: These regulationsare effective December 20, 1995.
FOR FURTHER INFORMATIONCONTACT: Marjorie Hoffman, (202)622-6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 6, 1994, temporaryregulations (TD 8570 [1994–2 C.B.49]) under section 401 were publishedin the Federal Register (59 FR 62570).A notice of proposed rulemaking (EE–38–94 [1994–2 C.B. 49]), cross-referencing the temporary regulations,was published in the Federal Register(59 FR 62644) on the same day. Thetemporary regulations provide guidanceon the adequacy of net worth require-ments for nonbank trustees and custo-dians of individual retirement plans,and for nonbank custodians of custodialaccounts of qualified plans and tax-sheltered annuities.
After consideration of all of thecomments, the temporary regulationsare replaced and the proposed regula-tions are adopted as revised by thisTreasury decision. Because section401(d)(1), under which § 1.401–12 wasoriginally issued, was repealed bysection 237(a) of the Tax Equity andFiscal Responsibility Act of 1982,Public Law 97–248 (1982), these finalregulations also move all the rules fornonbank trustees and custodians thatwere previously in § 1.401–12(n) to§ 1.408–2.
Explanation of Provisions
The fiduciary conduct rules for non-bank trustees and custodians underlongstanding Treasury regulations re-quire nonbank trustees and custodiansto maintain a minimum amount of networth in order to qualify as anapproved nonbank trustee or custodian.Under this requirement, the nonbanktrustee or custodian’s net worth mustexceed the greater of a specified dollaramount or a percentage of the value ofall assets held in fiduciary accounts ofretirement plans. A primary objectiveof this adequacy-of-net-worth require-ment has been to ensure that nonbanktrustees and custodians maintain a level
of solvency commensurate with theirfinancial and fiduciary responsibilities.
Under the general net worth require-ment, nonbank trustees and custodiansmay not accept new accounts unlesstheir net worth exceeds the greater of$100,000 or four percent of the valueof all assets held in fiduciary accounts.Additionally, nonbank trustees andcustodians must take whatever steps arenecessary (including the relinquishmentof fiduciary accounts) to ensure thattheir net worth exceeds the greater of$50,000 or two percent of the value ofall assets held by them in fiduciaryaccounts.
For passive nonbank trustees andcustodians (qualified nonbank entitiesthat have no discretion to direct theinvestment of assets), the percentagerequirements are lower. Specifically,passive nonbank trustees and custo-dians may not accept new accountsunless their net worth exceeds thegreater of $100,000 or two percent ofthe value of all assets held in fiduciaryaccounts. Additionally, they must takeappropriate action (including the relin-quishment of fiduciary accounts) toensure that their net worth exceeds thegreater of $50,000 or one percent ofthe value of assets held in theirfiduciary accounts.
The proposed and temporary regula-tions provide a special rule for passivenonbank trustees and custodians thatare broker-dealers and members of theSecurities Investor Protection Corpora-tion (SIPC). The proposed and tempo-rary regulations provide that, to theextent that assets held in any fiduciaryaccounts are insured by SIPC in theevent of the member’s liquidation($500,000 per account, $100,000 ofwhich may be cash), the assets will bedisregarded in determining the value ofassets held in fiduciary accounts by thetrustee or custodian for purposes of thepercentage part of the net worthrequirement.
The final regulations adopt the provi-sions of the proposed and temporaryregulations. In addition, in response tocomments, the final regulations extendthe SIPC-related relief to all nonbanktrustees and custodians that are broker-dealers and members of SIPC ratherthan limiting the relief to passivenonbank trustees and custodians. Thefinal regulations provide that the
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amount of the minimum net worthrequirement for nonbank trustees andcustodians that are SIPC members isreduced by either two percent of assetsinsured by SIPC (in the case of theminimum net worth requirement thatapplies to a trustee or custodian accept-ing additional accounts) or one percentof assets insured by SIPC (in the caseof the minimum net worth requirementthat must be satisfied to avoid amandatory relinquishment of accounts).An example in the regulations illus-trates this rule.
The final regulations also retain therule in the proposed and temporaryregulations that increased the initial networth requirement for all nonbanktrustees and custodians. The purpose ofthe rule is to better assure that theenterprises are sound and well-fundedduring their start-up period. This initialnet worth requirement requires all newentities applying for nonbank trustee orcustodian status to have a net worth ofnot less than $250,000 for the mostrecent taxable year preceding the appli-cant’s initial application.
This new initial net worth require-ment applies only to applications re-ceived after January 5, 1995. Pre-viously approved nonbank trustees andcustodians need only satisfy the ongo-ing net worth requirement.
Special Analyses
It has been determined that thisTreasury decision is not a significantregulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) and the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do notapply to these regulations, and, there-fore, a Regulatory Flexibility Analysisis not required. Pursuant to section7805(f) of the Internal Revenue Code,the notice of proposed rulemakingpreceding these regulations was submit-ted to the Small Business Administra-tion for comment on its impact onsmall business.
Drafting Information
The principal author of these regula-tions is Marjorie Hoffman, Office ofthe Assoc ia te Chief Counse l ,(Employee Benefits and Exempt Orga-nizations) IRS. However, other person-
nel from the IRS and Treasury Depart-ment participated in their development.
* * * * * *
Adoption of Amendments to theRegulations
Accordingly, 26 CFR part 1 isamended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citationfor part 1 is amended by adding anentry in numerical order to read asfollows:
Authority: 26 U.S.C. 7805. * * *§ 1.401–12 also issued under 26
U.S.C. 401(d)(1). * * *
§§ 1.401–12 and 1.408–2 [Amended]
Par. 2. Paragraph (n) of § 1.401–12is redesignated as paragraph (e) of§ 1.408–2 and the authority citationimmediately following § 1.401–12 isremoved.
§ 1.401–12T [Removed]
Par. 3. Section 1.401–12T isremoved.
§ 1.401(f)–1 [Amended]
Par. 4. Section 1.401(f)–1 isamended by:
1. Removing the language ‘‘section401(d)(1) and the regulations there-under’’ and adding ‘‘§ 1.408–2(e)’’ inits place in the last sentence ofparagraph (b)(1)(ii).
2. Removing the language ‘‘401(d)-(1) and adding ‘‘408(n)’’ in its place inparagraph (d)(1).
Par. 5. Section 1.408–2 is amendedby:
1. Removing the language ‘‘401(d)-(1)’’ and adding ‘‘408(n)’’ in its placein paragraph (b)(2)(i).
2. Removing the language ‘‘(b)(2)-(ii)’’ and adding ‘‘(e)’’ in its place inparagraph (b)(2)(i).
3. Removing paragraph (b)(2)(ii).4. Redesignating (b)(2)(iii) as (b)(2)-
(ii)5. Removing newly redesignated
paragraphs (e)(1) and (e)(9). 6. Further redesignating paragraphs
(e)(2) through (e)(8) as paragraphs(e)(1) through (e)(7), respectively.
7. Removing the language ‘‘For theplan years to which this paragraphapplies, the’’ and adding ‘‘The’’ in itsplace, and removing the language ‘‘(c)-(1)(i)’’ and adding ‘‘(b)’’ in its place,in the first sentence of newly desig-nated paragraph (e)(1).
8. Removing the language ‘‘401’’and adding ‘‘408’’ in its place, andremoving the language ‘‘(n)(3) to(n)(7)’’ and adding ‘‘(e)(2) to (e)(6)’’in its place, in the second sentence ofnewly designated paragraph (e)(1).
9. Removing the language ‘‘Com-missioner of Internal Revenue, Atten-tion: E:EP, Internal Revenue Service,Washington, D.C. 20224’’ and adding‘‘the address prescribed by the Com-missioner in revenue rulings, notices,and other guidance published in theInternal Revenue Bulletin (see§ 601.601(d)(2)(ii)(b) of this chapter)’’in its place in the third sentence ofnewly designated paragraph (e)(1), inthe last sentence of newly designated(e)(6)(9)(iv), and in the first sentenceof newly designated (e)(6)(v)(B).
10. Removing the language ‘‘(n)(8)’’and adding ‘‘(e)(7)’’ in its place in thelast sentence of newly designated para-graph (e)(1).
11. Removing the language ‘‘(n)(6)’’and adding ‘‘(e)(5)’’ in its place innewly designated paragraph (e)(2)(iv).
12. Redesignating newly designatedparagraph (e)(5)(ii)(A) as paragraph(e)(5)(ii)(E).
13. Removing the language ‘‘(n)(7)-(i)(A)’’ and adding ‘‘(e)(6)(i)(A)’’ inits place in newly designated paragraph(e)(5)(ii)(B)(2) and in newly designatedparagraph (e)(5)(ii)(C)(2).
14. Removing the language ‘‘(n)(6)-(iii)(A)’’ and adding ‘‘(e)(5)(iii)(A)’’ inits place in newly designated paragraph(e)(5)(iii)(B).
15. Removing the language ‘‘(n)(6)-(vi)’’ and adding ‘‘(e)(5)(vi)’’ in itsplace in newly designated paragraph(e)(5)(v)(A).
16. Removing the language ‘‘(n)(6)-(viii)(C)’’ and adding ‘‘(e)(5)(viii)(C)’’in its place in newly designated para-graph (e)(5)(vi).
17. Removing the language ‘‘(n)(3)-(v)’’ and adding ‘‘(e)(2)(v)’’ in itsplace, and removing the language‘‘(n)(8)’’ and adding ‘‘(e)(7)’’ in itsplace, in newly designated paragraph(e)(5)(viii).
18. Removing the language ‘‘(n)(6)-(i)(A)(3)’’ and adding ‘‘(e)(5)(i)(A)-
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(3)’’ in its place, and removing thelanguage ‘‘(n)(5)(ii)(E)’’ and adding‘‘(e)(4)(ii)(E)’’ in its place, in the thirdsentence of newly designated paragraph(e)(6)(i)(A).
19. Removing the language ‘‘(n)(7)-(iii)(A)(3)’’ and adding ‘‘(e)(6)(iii)(A)-(3)’’ in its place in newly designatedparagraph (e)(6)(iii)(C).
20. Revising newly redesignatedparagraphs (e)(5)(ii)(A) and adding(e)(5)(ii)(D).
21. The revisions and addition readas follows:
§ 1.408–2 Individual retirementaccounts
* * * * * *
(e) * * *
* * * * * *
(5) * * *(ii) Adequacy of net worth—(A) Ini-
tial net worth requirement. In the caseof applications received after January5, 1995, no initial application will beaccepted by the Commissioner unlessthe applicant has a net worth of notless than $250,000 (determined as ofthe end of the most recent taxableyear). Thereafter, the applicant mustsatisfy the adequacy of net worthrequirements of paragraph (e)(6)(ii)(B)and (C) of this section.
* * * * * *
(D) Assets held by members ofSIPC—1) For purposes of satisfyingthe adequacy-of-net worth requirementof this paragraph, a special rule isprovided for nonbank trustees that aremembers of the Securities InvestorProtection Corporation (SIPC) createdunder the Securities Investor ProtectionAct of 1970 (SIPA)(15 U.S.C. § 78aaaet seq, as amended). The amount thatthe net worth of a nonbank trustee thatis a member of SIPC must exceed isreduced by two percent for purposes ofparagraph (e)(5)(ii)(B)(2), and one per-cent for purposes of paragraph (e)(5)-(ii)(C)(2), of the value of assets (deter-mined on an account-by-account basis)held for the benefit of customers (asdefined in 15 U.S.C. § 78fff–2(e)(4)) infiduciary accounts by the nonbanktrustee to the extent of the portion ofeach account that does not exceed thedollar limit on advances described in15 U.S.C. § 78fff–3(a), as amended,that would apply to the assets in that
account in the event of a liquidationproceeding under the SIPA.
(2) The provisions of this specialrule for assets held in fiduciary ac-counts by members of SIPC are illus-trated in the following example.
Example—(a) Trustee X is a broker-dealer andis a member of the Securities InvestmentProtection Corporation. Trustee X also has beenapproved as a nonbank trustee for individualretirement accounts (IRAs) by the Commissionerbut not as a passive nonbank trustee. Trustee Xis the trustee for four IRAs. The total assets ofeach IRA (for which Trustee X is the trustee) asof the most recent valuation date before the lastday of Trustee X’s taxable year ending in 1995are as follows: the total assets for IRA–1 is$3,000,000 (all of which is invested in se-curities); the value of the total assets for IRA–2is $500,000 ($200,000 of which is cash and$300,000 of which is invested in securities), thevalue of the total assets for IRA–3 is $400,000(all of which is invested in securities); and thevalue of the total assets of IRA–4 is $200,000(all of which is cash). The value of all assetsheld in fiduciary accounts, as defined in § 1.408–2(e)(6)(viii)(A), is $4,100,000.
(b) The dollar limit on advances described in15 U.S.C. § 78fff–3(a) that would apply to theassets in each account in the event of aliquidation proceeding under the Securities In-vestor Protection Act of 1970 in effect as of thelast day of Trustee X’s taxable year ending in1995 is $500,000 per account (no more that$100,000 of which is permitted to be cash).Thus, the dollar limit that would apply to IRA–1is $500,000; the dollar limit for IRA–2 is$400,000 ($100,000 of the cash and the $300,000of the value of the securities); the dollar limit forIRA–3 is $400,000 (the full value of the accountbecause the value of the account is less than$500,000 and no portion of the account is cash);and the dollar limit for IRA–4 is $100,000 (theentire account is cash and the dollar limit peraccount for cash is $100,000). The aggregatedollar limits of the four IRAs is $1,400,000.
(c) For 1996, the amount determined under§ 1.408–2(e)(6)(ii)(B) is determined as followsfor Trustee X: (1) four percent of $4,100,000equals $164,000; (2) two percent of $1,400,000equals $28,000; and (3) $164,000 minus $28,000equals $136,000. Thus, because $136,000 ex-ceeds $100,000, the minimum net worth neces-sary for Trustee X to accept new accounts for1996 is $136,000.
(d) For 1996, the amount determined under§ 1.408–2(e)(6)(ii)(C) for Trustee X is deter-mined as follows: (1) two percent of $4,100,000equals $82,000; (2) one percent of $1,400,000equals $14,000; and (3) $82,000 minus $14,000equals $68,000. Thus, because $68,000 exceeds$50,000, the minimum net worth necessary forTrustee X to avoid a mandatory relinquishmentof accounts for 1996 is $68,000.
* * * * * *
Margaret Milner Richardson,Commissioner of
Internal Revenue.
Approved December 12, 1995.
Leslie Samuels,Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register onDecember 19, 1995, 8:45 a.m., and publishedin the issue of the Federal Register forDecember 20, 1995, 60 F.R. 65547)
Section 411.—Minimum VestingStandards
26 CFR 1.411(d)–6T: Section 204(h) notice.
T.D. 8631
DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1 and 602
Notice of Significant Reduction inthe Rate of Future Benefit Accrual
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document containstemporary regulations that provideguidance concerning the requirementsof section 204(h) of the EmployeeRetirement Income Security Act of1974, as amended (ERISA), relating todefined benefit plans and to individualaccount plans that are subject to thefunding standards of section 302 ofERISA. It requires the plan administra-tor to give notice of certain planamendments to participants in the planand certain other parties. The text ofthese temporary regulations also servesas the text of the proposed regulationsset forth in the notice of proposedrulemaking on this subject published in*** [EE–34–95, page 49, thisBulletin.]
EFFECTIVE DATE: December 15,1995.
FOR FURTHER INFORMATIONCONTACT: Betty J. Clary, (202)622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issuedwithout prior notice and public proce-
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dure pursuant to the AdministrativeProcedure Act (5 U.S.C. 553). For thisreason, the collection of informationcontained in these regulations has beenreviewed and, pending receipt andevaluation of public comments, ap-proved by the Office of Managementand Budget under control number1545–1477. Responses to this collec-tion of information are required undersection 204(h) of ERISA upon theadoption of certain amendments topension plans.
An agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless the collection of informationdisplays a valid control number.
For further information concerningthis collection of information, andwhere to submit comments on thecollection of information and the ac-curacy of the estimated burden andsuggestions for reducing this burden,please refer to the preamble to thecross-referencing notice of proposedrulemaking published in * * * [EE–34–95, page 00, this Bulletin].
The regulations do not involve anyissue of confidentiality.
Background
This document contains temporaryregulations that provide guidance onsection 204(h) of the Employee Retire-ment Income Security Act of 1974, asamended (ERISA), 29 U.S.C. 1054(h).Section 204(h) of ERISA was added bysection 11006(a) of the Single-Employer Pension Plan AmendmentsAct of 1986 (Title XI of Public Law99–272), and was amended by section1879(u)(1) of the Tax Reform Act of1986, Public Law 99–514. Pursuant tosection 101(a) of the ReorganizationPlan No. 4 of 1978, 29 U.S.C. 1001nt,the Secretary of the Treasury hasauthority to issue regulations underparts 2 and 3 of subtitle B of title I ofERISA (including section 204 ofERISA). Under section 104 of Re-organization Plan No. 4, the Secretaryof Labor retains enforcement authoritywith respect to parts 2 and 3 of subtitleB of title I of ERISA, but, inexercising such authority, is bound bythe regulations issued by the Secretaryof the Treasury.
Prior guidance relating to the re-quirements of section 204(h) has beenprovided in Rev. Proc. 89–65 (1989–2C.B. 786) and Rev. Proc. 94–13 (1994–
1 C.B. 566), and under Notice 87–21(1987–1 C.B. 458), Notice 88–131(1988–2 C.B. 546), Notice 89–92(1989–2 C.B. 410), and Notice 90–73(1990–2 C.B. 353). These temporaryregulations provide further guidance, inthe form of Questions and Answers.
The provisions in this TreasuryDecision are needed immediately toprovide guidance to the public withrespect to the notice requirements ofsection 204(h) of ERISA. Issues relatedto section 204(h) arise in connectionwith a broad range of plan amend-ments, including amendments promptedby recent changes in the law. There-fore, it is found impracticable andcontrary to the public interest to issuethis Treasury decision with prior noticeunder 5 U.S.C. 553(b).
Explanation of Provisions
Section 204(h) of ERISA applies if adefined benefit plan or an individualaccount plan that is subject to thefunding standards of section 302 ofERISA is amended to provide for asignificant reduction in the rate offuture benefit accrual. It requires theplan administrator to give writtennotice of the amendment to participantsin the plan, alternate payees, andemployee organizations representingparticipants in the plan (or to a persondesignated, in writing, to receive thenotice on behalf of a participant,alternate payee, or employee organiza-tion). The notice must set forth the planamendment and its effective date andmust be provided after adoption of theamendment and not less than 15 daysbefore the effective date of theamendment.
A plan amendment that is subject tothe notice requirements of section204(h) of ERISA may also be subjectto additional reporting and disclosurerequirements under title I of ERISA,such as the requirement to provide asummary of material modifications. Seesections 102(a) and 104(a) of ERISA,29 U.S.C. 1022 and 1024, and theregulations thereunder for guidance onwhen a summary of material modifica-tions must be provided. Section 204(h)notice must be provided at least 15days in advance of the effective date ofan amendment significantly reducingthe future rate of benefit accrual, eventhough a summary of material modi-fications describing the amendment isprovided at a later date.
Section 204(h) of ERISA does notapply to an amendment that does notaffect the rate of future benefit accrual.These regulations clarify that anamendment to a defined benefit planthat does not affect the annual benefitcommencing at normal retirement agedoes not affect the rate of futurebenefit accrual for purposes of section204(h). Accordingly, the regulationsprovide that the plan administrator of adefined benefit plan is not required toprovide section 204(h) notice withrespect to an amendment that does notaffect the future annual benefit payableat normal retirement age, even if theamendment affects other forms of pay-ment (such as a single sum distribu-tion) or benefits commencing at a dateother than normal retirement age (suchas an early retirement benefit).
The regulations also clarify that anamendment to an individual accountplan that does not change the amountof future allocations to participants’accounts does not affect the rate offuture benefit accrual for purposes ofsection 204(h) of ERISA. Accordingly,section 204(h) notice is not requiredwith respect to any such amendment.
Even if an amendment affects therate of future benefit accrual, section204(h) notice is required only if theamendment significantly reduces therate of future benefit accrual. Under theregulations, whether an amendmentsignificantly reduces the rate of futurebenefit accrual is to be determinedbased on reasonable expectations takinginto account all relevant facts andcircumstances.
The regulations delegate to the Com-missioner of Internal Revenue theauthority to provide that section 204(h)notice need not be provided withrespect to plan amendments that theCommissioner determines are necessaryor appropriate, as a result of a changein federal law, to maintain compliancewith the law. The Commissioner mayexercise this authority only through thepublication of revenue rulings, notices,and other guidance in the InternalRevenue Bulletin.
In situations in which section 204(h)notice is required with respect to anamendment, the regulations provideguidance on the participants, alternatepayees, and employee organizations towhom the notice must be provided.Specifically, the regulations providethat the plan administrator is notrequired to provide notice to a partici-
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pant or alternate payee whose rate offuture benefit accrual is reasonablyexpected not to be reduced by theamendment. For example, notice neednot be provided to participants (such asformer employees with a vested benefitunder the plan) who, prior to theamendment, were not entitled to accruefuture benefits under the plan. More-over, under the regulations, section204(h) notice is not required to beprovided to an employee organizationunless it represents one or more partici-pants to whom section 204(h) notice isrequired to be provided. Finally, theregulations clarify that employees whohave not yet become participants in theplan are not taken into account for anypurpose under section 204(h) ofERISA.1 Thus, the plan administrator isnot required to provide section 204(h)notice to such employees.
The regulations provide that a planthat is terminated in accordance withtitle IV of ERISA is deemed to satisfysection 204(h) not later than the date oftermination established under section4048 of ERISA. Accordingly, section204(h) does not require that any furtherbenefits accrue under the plan after thatdate. However, if that date of termina-tion is deferred, benefits continue toaccrue until the deferred date oftermination absent an effective cessa-tion of accruals as of an earlierspecified date.
If the plan is not amended tosignificantly reduce the rate of futurebenefit accrual prior to the termination,section 204(h) notice is not required.However, the regulations also affirmthat section 204(h) applies to anamendment that is effective prior to thetermination date and clarify that, ifsection 204(h) notice is required, it canbe provided either with or as part ofthe notice of intent to terminate orseparately.
The regulations also provide tworules applicable in situations in which aplan administrator was required toprovide section 204(h) notice withrespect to an amendment but failed toprovide timely notice to some of theparties to whom notice was required tobe provided. The first rule applieswhen the plan administrator fails toprovide timely notice with respect tomore than a de minimis percentage ofthe parties to whom section 204(h)
1This is not intended to affect the rights ofemployees under other provisions of ERISA.
notice was required. In such a situation,the amendment becomes effective inaccordance with its terms with respectto a participant to whom notice wasrequired if the participant was providedwith timely notice and any employeeorganization representing the partici-pant was also provided with timelynotice. The amendment also becomeseffective in accordance with its termswith respect to an alternate payee towhom notice was required if thealternate payee was provided withtimely notice.
The second rule applies in a situationin which the plan administrator made agood faith effort to comply withsection 204(h) of ERISA with respectto an amendment, failed to providetimely section 204(h) notice to no morethan a de minimis percentage of theparties to whom notice was required,and provided timely notice to allemployee organizations with respect towhom section 204(h) notice was re-quired. In such a situation, if the planadministrator, promptly upon discoveryof the omission, provides section204(h) notice to all parties who wererequired to be provided such notice butwere omitted, the plan amendmentbecomes effective in accordance withits terms with respect to all parties towhom section 204(h) notice was re-quired, including those who did notreceive notice prior to discovery of theomission.
Effective Dates
These temporary regulations areeffective for amendments adopted on orafter December 15, 1995, and amend-ments effective by their terms on orafter December 30, 1995.
Special Analyses
It has been determined that thisTreasury decision is not a significantregulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) and the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do notapply to these regulations, and, there-fore, a Regulatory Flexibility Analysisis not required. Pursuant to section7805(f) of the Internal Revenue Code,these temporary regulations will besubmitted to the Chief Counsel for
Advocacy of the Small Business Ad-ministration for comment on theirimpact on small business.
Drafting Information
The principal author of these regula-tions is Betty J. Clary, Office of theAssociate Chief Counsel (EmployeeBenefits and Exempt Organizations),IRS. However, other personnel fromthe IRS and Treasury Departmentparticipated in their development.
* * * * * *
Adoption of Amendments to theRegulations
Accordingly, 26 CFR parts 1 and602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citationfor part 1 is amended by adding anentry for section 1.411(d)–6T to read asfollows:
Authority: 26 U.S.C. 7805. * * *Section 1.411(d)–6T also issued underReorganization Plan No. 4 of 1978, 29U.S.C. 1001nt. * * *
Par. 2. 1.411(d)–6T is added to readas follows:
1.411(d)–6T Section 204(h) notice.
Q–1: What are the requirements ofsection 204(h) of the Employee Retire-ment Income Security Act of 1974, asamended (ERISA)?
A–1: (a) Requirements of section204(h). Section 204(h) of ERISA gen-erally requires written notice of anamendment to certain plans that prov-ides for a significant reduction in therate of future benefit accrual. Section204(h) generally requires the notice tobe provided to plan participants, alter-nate payees, and employee organiza-tions. The plan administrator mustprovide the notice after adoption of theplan amendment and not less than 15days before the effective date of theplan amendment.
(b) Other notice requirements. Otherprovisions of law may require that cer-tain parties be notified of a plan amend-ment. See, for example, sections 102and 104 of ERISA, and the regulationsthereunder, for the requirements relatingto summary plan descriptions and sum-maries of material modifications.
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Q–2: To which plans does section204(h) of ERISA apply?
A–2: Section 204(h) of ERISA ap-plies to defined benefit plans subject topart 2 of subtitle B of title I of ERISAand to individual account plans subjectto such part 2 and to the fundingstandards of section 302 of ERISA.Accordingly, individual account plansthat are not subject to the fundingstandards of section 302, such asprofit-sharing and stock bonus plans,are not subject to section 204(h).
Q–3: What is section 204(h) notice?A–3: Section 204(h) notice is notice
that complies with section 204(h) ofERISA and the rules in this section.
Q–4: For which amendments issection 204(h) notice required?
A–4: (a) In general. Section 204(h)notice is required for an amendment toa plan described in Q&A–2 of thissection that provides for a significantreduction in the rate of future benefitaccrual.
(b) Delegation of authority to Com-missioner. The Commissioner of Inter-nal Revenue may provide throughpublication in the Internal RevenueBulletin of revenue rulings, notices, orother documents (see 601.601(d)(2) ofthis chapter) that section 204(h) noticeneed not be provided for plan amend-ments otherwise described in paragraph(a) of this Q&A–4 that the Commis-sioner determines to be necessary orappropriate, as a result of changes inthe law, to maintain compliance withthe requirements of the Internal Reve-nue Code of 1986, as amended (Code)(including requirements for taxqualification), ERISA, or other applica-ble federal law.
Q–5: What is an amendment thataffects the rate of future benefit accrualfor purposes of section 204(h) ofERISA?
A–5: (a) In general—(1) Definedbenefit plans. For purposes of section204(h) of ERISA, an amendment to adefined benefit plan affects the rate offuture benefit accrual only if it isreasonably expected to change theamount of the future annual benefitcommencing at normal retirement age.
(2) Individual account plans. Forpurposes of section 204(h), an amend-ment to an individual account planaffects the rate of future benefit accrualonly if it is reasonably expected tochange the amounts allocated in thefuture to participants’ accounts.
Changes in the investments or invest-ment options under an individual ac-count plan are not taken into accountfor this purpose.
(b) Determination of rate of futurebenefit accrual. In accordance withparagraph (a) of this Q&A–5, the rateof future benefit accrual is determinedwithout regard to optional forms ofbenefit (other than the annual benefitdescribed in paragraph (a) of thisQ&A–5), early retirement benefits, orretirement-type subsidies, within themeaning of such terms as used insection 411(d)(6) of the Code (section204(g) of ERISA). The rate of futurebenefit accrual is also determined with-out regard to ancillary benefits andother rights or features as defined in1.401(a)(4)–4(e).
(c) Examples. These examples illus-trate the rules in this Q&A–5:
Example 1. A plan is amended with respect tofuture benefit accruals to eliminate a right tocommencement of a benefit prior to normalretirement age. Because the amendment does notaffect the annual benefit commencing at normalretirement age, it does not reduce the rate offuture benefit accrual for purposes of section204(h).
Example 2. A plan is amended to modify theassumptions used in converting an annuity formof distribution to a single sum form of distribu-tion. The use of these modified assumptionsresults in a lower single sum. Because theamendment does not affect the annual benefitcommencing at normal retirement age, it doesnot reduce the rate of future benefit accrual forpurposes of section 204(h).
Q–6: What plan provisions are takeninto account in determining whetherthere has been a reduction in the rateof future benefit accrual?
A–6: (a) Plan provisions taken intoaccount. All plan provisions that mayaffect the rate of future benefit accrualof participants or alternate payees mustbe taken into account in determiningwhether an amendment provides for asignificant reduction in the rate offuture benefit accrual. Such provisionsinclude, for example, the dollar amountor percentage of compensation onwhich benefit accruals are based; in thecase of a plan using the permitteddisparity under section 401(l) of theCode, the amount of disparity betweenthe excess benefit percentage or excesscontribution percentage and the basebenefit percentage or base contributionpercentage (all as defined in section401(l)); the definition of service orcompensation taken into account indetermining an employee’s benefit ac-
crual; the method of determining aver-age compensation for calculating bene-fit accruals; the definition of normalretirement age in a defined benefitplan; the exclusion of current partici-pants from future participation; benefitoffset provisions; minimum benefitprovisions; the formula for determiningthe amount of contributions and forfei-tures allocated to participants’ accountsin an individual account plan; and theactuarial assumptions used to determinecontributions under a target benefitplan (as defined in 1.401(a)(4)–8(b)(3)(i)).
(b) Plan provisions not taken intoaccount. Plan provisions that do notaffect the rate of future benefit accrualof participants or alternate payees arenot taken into account in determiningwhether there has been a reduction inthe rate of future benefit accrual. Forexample, provisions such as vestingschedules or optional forms of benefit(other than the annual benefit describedin Q&A–5(a) of this section) are nottaken into account.
(c) Examples. The following exam-ple illustrates the rules in this Q&A–6:
Example. A defined benefit plan provides anormal retirement benefit equal to 50% of finalaverage compensation times a fraction (not inexcess of one), the numerator of which equalsthe number of years of participation in the planand the denominator of which equals 20. A planamendment that changes the numerator ordenominator of that fraction must be taken intoaccount in determining whether there has been areduction in the rate of future benefit accrual.
Q–7: What is the basic principleused in determining whether an amend-ment provides for a significant reduc-tion in the rate of future benefit accrualfor purposes of section 204(h) ofERISA?
A–7: Whether an amendment pro-vides for a significant reduction in therate of future benefit accrual forpurposes of section 204(h) of ERISA isdetermined based on reasonable expec-tations taking into account the relevantfacts and circumstances at the time theamendment is adopted.
Q–8: Are employees who have notyet become participants in a plan at thetime an amendment to the plan isadopted taken into account for anypurpose in applying section 204(h) ofERISA with respect to the amendment?
A–8: No. Employees who have notyet become participants in a plan at thetime an amendment to the plan isadopted are not taken into account for
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adopted taken into account for anypurpose in applying section 204(h) ofERISA with respect to the amendment?
A–8: No. Employees who have notyet become participants in a plan at thetime an amendment to the plan isadopted are not taken into account forany purpose in applying section 204(h)of ERISA with respect to the amend-ment. Thus, if section 204(h) notice isrequired with respect to an amendment,the plan administrator need not providesection 204(h) notice to suchemployees.
Q–9: If section 204(h) notice isrequired with respect to an amendment,must such notice be provided to partici-pants or alternate payees whose rate offuture benefit accrual is not reduced bythe amendment?
A–9: (a) In general. A plan admin-istrator need not provide section 204(h)notice to any participant whose rate offuture benefit accrual is reasonablyexpected not to be reduced by theamendment, nor to any alternate payeeunder an applicable qualified domesticrelations order whose rate of futurebenefit accrual is reasonably expectednot to be reduced by the amendment. Aplan administrator need not providesection 204(h) notice to an employeeorganization unless the employee orga-nization represents a participant towhom section 204(h) notice is requiredto be provided.
(b) Facts and circumstances test.Whether a participant or alternatepayee is described in paragraph (a) ofthis Q&A–9 is determined based on allrelevant facts and circumstances at thetime the amendment is adopted.
(c) Examples. The following exam-ples illustrate the rules in this Q&A–9:
Example 1. Plan A is amended to reducesignificantly the rate of future benefit accrual ofall current employees who are participants in theplan. It is reasonable to expect based on the factsand circumstances that the amendment will notreduce the rate of future benefit accrual offormer employees who are currently receivingbenefits or that of former employees who areentitled to vested benefits. Accordingly, the planadministrator is not required to provide section204(h) notice to such former employees.
Example 2. Assume in Example 1 that Plan Aalso covers two groups of alternate payees. Thealternate payees in the first group are entitled toa certain percentage or portion of the formerspouse’s accrued benefit, and for this purpose theaccrued benefit is determined at the time theformer spouse begins receiving retirement bene-fits under the plan. The alternate payees in thesecond group are entitled to a certain percentageor portion of the former spouse’s accruedbenefit, and for this purpose the accrued benefit
was determined at the time the qualifieddomestic relations order was issued by the court.It is reasonable to expect that the benefits to bereceived by the second group of alternate payeeswill not be affected by any reduction in a formerspouse’s rate of future benefit accrual. Accord-ingly, the plan administrator is not required toprovide section 204(h) notice to the alternatepayees in the second group.
Example 3. Plan B covers hourly employeesand salaried employees. Plan B provides thesame rate of benefit accrual for both groups. Theemployer amends Plan B to reduce significantlythe rate of future benefit accrual of the salariedemployees only. At that time, it is reasonable toexpect that only a small percentage of hourlyemployees will become salaried in the future.Accordingly, the plan administrator is not re-quired to provide section 204(h) notice to theparticipants who are currently hourly employees.
Example 4. Plan C covers employees inDivision M and employees in Division N. Plan Cprovides the same rate of benefit accrual for bothgroups. The employer amends Plan C to reducesignificantly the rate of future benefit accrual ofemployees in Division M. At that time, it isreasonable to expect that in the future only asmall percentage of employees in Division Nwill be transferred to Division M. Accordingly,the plan administrator is not required to providesection 204(h) notice to the participants who areemployees in Division N.
Example 5. Assume the same facts as inExample 4, except that at the time the amend-ment is adopted, it is expected that soonthereafter Division N will be merged intoDivision M in connection with a corporatereorganization (and the employees in Division Nwill become subject to the plan’s amendedbenefit formula applicable to the employees inDivision M). In this instance, the plan admin-istrator must provide section 204(h) notice to theparticipants who are employees in Division Mand to the participants who are employees inDivision N.
Q–10: Does a notice fail to complywith section 204(h) of ERISA if itcontains a summary of the amendmentand the effective date, without the textof the amendment itself?
A–10: No, the notice does not fail tocomply with section 204(h) of ERISAmerely because the notice contains asummary of the amendment, rather thanthe text of the amendment, if thesummary is written in a manner calcu-lated to be understood by the averageplan participant and contains the effec-tive date. The summary need notexplain how the individual benefit ofeach participant or alternate payee willbe affected by the amendment.
Q–11: How may section 204(h)notice be provided?
A–11: A plan administrator may useany method reasonably calculated toensure actual receipt of the section204(h) notice. First class mail to thelast known address of the party is an
acceptable delivery method. Likewise,hand delivery is acceptable. Section204(h) notice may be enclosed alongwith other notice provided by theemployer or plan administrator.
Q–12: If a plan administrator fails toprovide section 204(h) notice to morethan a de minimis percentage of partici-pants and alternate payees to whomsection 204(h) notice is required to beprovided, will the plan administrator beconsidered to have complied withsection 204(h) of ERISA with respectto participants and alternate payeeswho were provided with timely section204(h) notice?
A–12: The plan administrator will beconsidered to have complied withsection 204(h) of ERISA with respectto a participant to whom section 204(h)notice is required to be provided if theparticipant and any employee organiza-tion representing the participant wereprovided with timely section 204(h)notice. The plan administrator will beconsidered to have complied withsection 204(h) with respect to analternate payee to whom section 204(h)notice is required to be provided if thealternate payee was provided withtimely section 204(h) notice. Accord-ingly, the amendment will becomeeffective in accordance with its termswith respect to those participants andalternate payees.
Q–13: Will a plan be considered tohave complied with section 204(h) ofERISA if the plan administratorprovides section 204(h) notice to allbut a de minimis percentage of partici-pants and alternate payees to whomsection 204(h) notice must beprovided?
A–13: The plan will be considered tohave complied with section 204(h) ofERISA and the amendment will be-come effective in accordance with itsterms with respect to all parties towhom section 204(h) notice was re-quired to be provided (including thosewho did not receive notice prior todiscovery of the omission), if the planadministrator—
(a) Has made a good faith effort tocomply with the requirements of sec-tion 204(h);
(b) Has provided section 204(h)notice to each employee organizationthat represents any participant to whomsection 204(h) notice is required to beprovided;
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(c) Has failed to provide section204(h) notice to no more than a deminimis percentage of participants andalternate payees to whom section204(h) notice is required to beprovided; and
(d) Provides section 204(h) notice tothose participants and alternate payeespromptly upon discovering theoversight.
Q–14: How does section 204(h) ofERISA apply to a plan that is termi-nated in accordance with title IV ofERISA?
A–14: (a) On and after terminationdate. Notwithstanding paragraph (b) ofthis Q&A–14 or any other provisionsof this section, a plan that is terminatedin accordance with title IV of ERISA isdeemed to have satisfied section 204(h)of ERISA not later than the terminationdate (or date of termination, as applica-ble) established under section 4048 ofERISA. Accordingly, section 204(h)would not require that any additionalbenefits accrue after such date.
(b) Amendment effective before ter-mination date. An amendment that iseffective before the termination date (ordate of termination, as applicable)established under section 4048 ofERISA is subject to section 204(h).Accordingly, if such amendment pro-vides for a significant reduction in therate of future benefit accrual, the planadministrator must provide section204(h) notice (either separately or withor as part of the notice of intent toterminate) with respect to the amend-ment. However, if a plan is notamended to reduce significantly therate of future benefit accrual before thetermination date (for example, the plancontinues existing benefit accruals untilthe termination date), section 204(h)notice is not required.
Q–15: When does section 204(h) ofERISA become effective?
A–15: (a) Statutory effective date.With respect to defined benefit plans,section 204(h) of ERISA generallyapplies to plan amendments adopted onor after January 1, 1986. With respectto individual account plans, section204(h) applies to plan amendmentsadopted on or after October 22, 1986.
(b) Regulatory effective date. Thissection applies to amendments adoptedon or after December 15, 1995, andamendments effective by their terms onor after December 30, 1995.
PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT
Par. 6. The authority citation for part602 continues to read as follows:
Authority: 26 U.S.C. 7805.Par. 7. In 602.101, paragraph (c) is
amended by adding to the table innumerical order the entry ‘‘1.411(d)–6T . . . 1545–1477’’.
Margaret Milner Richardson,Commissioner of
Internal Revenue.
Approved December 5, 1995.
Leslie Samuels,Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register onDecember 12, 1995, 1:23 p.m., and publishedin the issue of the Federal Register forDecember 15, 1995, 60 F.R. 64401)
Section 412.—Minimum FundingStandards
Disability mortality tables. This rul-ing provides mortality tables for useunder section 412(1) for plan yearsafter 1995 to calculate current liabilityfor individuals entitled to benefits onaccount of disability.
Rev. Rul. 96–7
ISSUE
What alternative mortality tablesmay be used to calculate a plan’scurrent liability under § 412(l) of theInternal Revenue Code for individualswho are entitled to benefits under theplan on account of disability?
LAW AND ANALYSIS
Section 412(l) provides additionalfunding requirements for certain under-funded defined benefit pension plansthat have more than 100 participantsand that are not multiemployer plans.In general, the additional funding re-quirements are determined based on aplan’s unfunded current liability.
Section 751(a) of the RetirementProtection Act of 1994 added § 412(l)-(7)(C)(ii) to the Code, effective forplan years beginning after December31, 1994. Section 412(l)(7)(C)(ii)
provides that, for purposes of determin-ing current liability, the mortality tableused shall be the table prescribed bythe Secretary, and sets forth the basisfor establishing a table. For plan yearsbeginning before the effective date ofthe first tables prescribed under§ 412(l)(7)(C)(ii)(II), the table must bebased on the prevailing commissioners’standard table (described in § 807(d)-(5)(A)) used to determine reserves forgroup annuity contracts issued on Janu-ary 1, 1993. Rev. Rul. 95–28, 1995–1C.B. 74, sets forth this mortality table.
Section 412(l)(7)(C)(iii)(I) providesthat, for plan years beginning afterDecember 31, 1995, the Secretary shallestablish mortality tables that may beused, in lieu of the tables under§ 412(l)(7)(C)(ii), to determine currentliability under § 412(l) for individualswho are entitled to benefits under theplan on account of disability. TheSecretary must establish separate tablesfor individuals whose disabilities oc-curred in plan years beginning beforeJanuary 1, 1995, and for individualswhose disabilities occur in plan yearsbeginning after December 31, 1994.Under § 412(l)(7)(C)(iii)(II), the mor-tality table for individuals whose dis-abilities occur in plan years beginningafter December 31, 1994, applies onlywith respect to individuals who aredisabled within the meaning of title IIof the Social Security Act and theregulations thereunder.
The alternative mortality tablesprovided for under § 412(l)(7)(C)(iii)are permitted to be used in thespecified circumstances, but are notrequired to be used. For any individualfor whom these alternative mortalitytables are not used, the mortality tableprescribed under § 412(l)(7)(C)(ii) mustbe used.
The alternative mortality tablesprovided under § 412(l)(7)(C)(iii) maybe used only for individuals who areentitled to benefits under the plan onaccount of disability. For this purpose,an individual is entitled to benefitsunder a plan on account of disability if,because of the occurrence of a dis-ability, the individual is entitled toreceive a benefit to which the individ-ual would not be entitled in theabsence of the disability. For example,an individual is entitled to benefitsunder a plan on account of disability if,upon the occurrence of a disability at atime before the individual would havebeen entitled to receive an unreducednormal retirement benefit upon retire-
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ment, the individual is entitled toreceive the same annuity that wouldhave been payable to the individualupon retirement at normal retirementage. As a further example, an individ-ual is entitled to benefits under a planon account of disability if the individ-ual, who would not otherwise beearning service credits, is credited withyears of service for the period ofdisability. On the other hand, anindividual is not entitled to benefits onaccount of disability if the individualseparates from the service of theemployer because of a disability, butmerely receives the same benefit thatwould have been payable if the individ-ual had separated from service withoutthe occurrence of the disability.
For purposes of § 412(l)(7)(C)(iii),any individual who has become entitledto benefits under a plan on account ofdisability continues to be consideredentitled to benefits under the plan onaccount of disability until the individ-ual recovers from disability and be-comes entitled to different benefitsunder the plan than the individualwould have been entitled to if theindividual had not recovered.
Under § 412(l), nothing prohibits theuse of an additional actuarial assump-tion that meets the requirements of§ 412(c) regarding the probability ofrecovery from disability.
HOLDING
The mortality tables provided below,as applicable, may be used for planyears beginning after December 31,1995, in lieu of the mortality tablerequired to be used under § 412(l)(7)-(C)(ii), for purposes of determiningcurrent liability. The first mortalitytable provided below may be used forplan years beginning after December31, 1995, in lieu of the mortality tablerequired to be used under § 412(l)(7)-(C)(ii), for purposes of determiningcurrent liability for individuals entitledto benefits under the plan on accountof disability, whose disabilities oc-curred in plan years beginning beforeJanuary 1, 1995. The second mortalitytable provided below may be used forplan years beginning after December31, 1995, in lieu of the mortality tablerequired to be used under § 412(l)(7)-(C)(ii), for purposes of determiningcurrent liability for individuals entitledto benefits under the plan on accountof disability, whose disabilities occur in
plan years beginning after December31, 1994. This second mortality tablemay be used only for individuals whoare disabled within the meaning of titleII of the Social Security Act and theregulations thereunder. The mortalitytable required to be used under§ 412(l)(7)(C)(ii) must be used forindividuals whose disabilities occur inplan years beginning after December31, 1994, but who are not disabledwithin the meaning of title II of theSocial Security Act and the regulationsthereunder.
MORTALITY TABLE FORDISABILITIES OCCURRING INPLAN YEARS BEGINNINGBEFORE JANUARY 1, 1995
The following mortality table is themortality table that is permitted to beused for individuals entitled to benefitsunder the plan on account of disability,whose disabilities occurred in planyears beginning before January 1,1995. The table sets forth the numberliving based upon a starting populationof one million lives at age 15 (lx), andthe annual rate of mortality (qx), to beused for each age and each gender.
MORTALITY TABLE FORDISABILITIES OCCURRING INPLAN YEARS BEGINNING AFTERDECEMBER 31, 1994
The following mortality table is themortality table that is permitted to beused for individuals entitled to benefitsunder the plan on account of disability,whose disabilities occur in plan yearsbeginning after December 31, 1994.This mortality table may be used onlyfor individuals who are disabled withinthe meaning of title II of the SocialSecurity Act and the regulations there-under. The table sets forth the numberliving based upon a starting populationof one million lives at age 15 (lx), andthe annual rate of mortality (qx), to beused for each age and each gender.
This revenue ruling is effective forplan years beginning after December31, 1995.
DRAFTING INFORMATION
The principal author of this revenueruling is Edward Sypher of theEmployee Plans Division. For furtherinformation regarding this revenue rul-ing, please contact the Employee PlansDivision’s taxpayer assistance tele-phone service at (202) 622-6076 be-tween 2:30 and 4:00 Eastern time (nota toll-free number) Monday throughThursday. Mr. Sypher’s number is(202) 622-6245 (also not a toll-freenumber).
Section 483. Interest on CertainDeferred Payments
26 CFR 1.483–1: Computation of interest oncertain deferred payments.
As defined by section 1274A, the definitionsfor both ‘‘qualified debt instruments’’ and ‘‘cashmethod debt instruments’’ have dollar ceilings onthe stated principal amount. The limits to thestated principal amount are adjusted for inflationfor sales or exchanges occurring in the 1996calendar year. See Rev. Rul. 96–4, page 16.
Section 761.—Definitions
The Service will not rule on certain issuesraised in connection with the transfer of a life
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insurance policy to an unincorporated organiza-tion. See Rev. Proc. 96–12, page 30.
Section 1274. Determination of IssuePrice in the Case of Certain DebtInstruments Issued for Property
26 CFR 1.1274A–1: Special rules for certaintransactions where stated principal amount doesnot exceed $2,800,000.
As defined by section 1274A, the definitionsfor both ‘‘qualified debt instruments’’ and ‘‘cashmethod debt instruments’’ have dollar ceilings onthe stated principal amount. The limits to thestated principal amount are adjusted for inflationfor sales or exchanges occurring in the 1996calendar year. See Rev. Rul. 96–4, this page.
Section 1274A.—Special Rules forCertain Transactions Where StatedPrincipal Amount Does Not Exceed$2,800,000
(Also §§ 1274, 483; 1.483–1, 1.1274A–1.)
Section 1274A inflation-adjusted num-bers for 1996. This ruling provides thedollar amounts, increased by the 1996inflation-adjustment, for section 1274Aof the Code. Rev. Rul. 95–10 supple-mented and superseded.
Rev. Rul. 96–4
This revenue ruling provides thedollar amounts, increased by the 1996inflation adjustment, for § 1274A ofthe Internal Revenue Code.
BACKGROUND
In general, §§ 483 and 1274 of theCode determine the principal amount of
a debt instrument given in considera-tion for the sale or exchange ofnonpublicly traded property. In addi-tion, any interest on a debt instrumentsubject to § 1274 is taken into accountunder the original issue discount provi-sions of the Code. Section 1274A,however, modifies the rules under§§ 483 and 1274 for certain types ofdebt instruments.
In the case of a ‘‘qualified debtinstrument,’’ the discount rate used forpurposes of §§ 483 and 1274 of theCode may not exceed 9 percent,compounded semiannually. Section1274A(b) defines a qualified debtinstrument as any debt instrumentgiven in consideration for the sale orexchange of property (other than new§ 38 property within the meaning of§ 48(b), as in effect on the day beforethe date of enactment of the RevenueReconciliation Act of 1990) if thestated principal amount of the instru-ment does not exceed the amountspecified in § 1274A(b). For debt in-struments arising out of sales orexchanges before January 1, 1990, thisamount is $2,800,000.
In the case of a ‘‘cash method debtinstrument,’’ as defined in § 1274A(c)of the Code, the borrower and lendermay elect to use the cash receipts anddisbursements method of accounting. Inparticular, for any cash method debtinstrument, § 1274 does not apply, andinterest on the instrument is accountedfor by both the borrower and the lenderunder the cash method of accounting.A cash method debt instrument is aqualified debt instrument that meets thefollowing additional requirements: (A)In the case of instruments arising outof sales or exchanges before January 1,
1990, the stated principal amount doesnot exceed $2,000,000, (B) The lenderdoes not use an accrual method ofaccounting and is not a dealer withrespect to the property sold or ex-changed, (C) Section 1274 would haveapplied to the debt instrument but foran election under § 1274A(c); and (D)An election under § 1274A(c) is jointlymade with respect to the debt instru-ment by the borrower and lender.Section 1.1274A–1(c)(1) of the IncomeTax Regulations provides rules con-cerning the time for, and manner of,making this election.
Section 1274A(d)(2) of the Codeprovides that, for any debt instrumentarising out of a sale or exchange duringany calendar year after 1989, the dollaramounts stated in § 1274A(b) and§ 1274A(c)(2)(A) are increased by theinflation adjustment for the calendaryear. Any increase due to the inflationadjustment is rounded to the nearestmultiple of $100 (or, if the increase isa multiple of $50 and not of $100, theincrease is increased to the nearestmultiple of $100). The inflation adjust-ment for any calendar year is thepercentage (if any) by which the CPIfor the preceding calendar year exceedsthe CPI for calendar year 1988. Section1274A(d)(2)(B) defines the CPI for anycalendar year as the average of theConsumer Price Index as of the closeof the 12-month period ending onSeptember 30 of that calendar year.
INFLATION-ADJUSTEDAMOUNTS
For debt instruments arising out ofsales or exchanges after December 31,1989, the inflation-adjusted amountsunder § 1274A are shown in Table 1.
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TABLE 1
REV. RUL. 96–4Inflation-Adjusted Amounts Under § 1274A
Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982-1984 base,published by the Bureau of Labor Statistics.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 95–10, 1995–1 C.B. 168,is supplemented and superseded.
DRAFTING INFORMATION
The principal author of this revenueruling is David B. Silber of the Officeof the Assistant Chief Counsel (Finan-cial Institutions and Products). Forfurther information regarding this reve-nue ruling contact Mr. Silber on (202)622-3930 (not a toll-free call).
Section 2031.—Definition of GrossEstate
26 CFR 20.2031–6: Valuation of householdand personal effects.
Executors and administrators of estates includ-ing art appraised at $50,000 or more may requestthat the Service issue a Statement of Value forthe art. See Rev. Proc. 96–15, page 41.
Section 2512.—Valuation of Gifts
26 CFR 25.2512–1: Valuation of property, ingeneral.
The donor of a gift of art appraised at $50,000or more may request that the Service issue aStatement of Value for the art. See Rev. Proc.96–15, page 41.
Section 3402.—Income Tax Collectedat Source
26 CFR 31.3402(r)–1: Withholding ondistributions of Indian gaming profits to tribalmembers.
T.D. 8634
DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 31
Withholding on Distributions of IndianGaming Profits to Tribal Members
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document containsfinal regulations relating to the incometax withholding requirement on dis-tributions of profits from certain gam-ing activities made to members ofIndian tribes under section 3402(r) ofthe Internal Revenue Code of 1986.Those affected by the regulations arepersons, including Indian tribes, mak-ing payments to members of Indiantribes from net revenues of certaingaming activities conducted or licensedby the tribes. Also affected are mem-bers of Indian tribes who receive thepayments.
DATES: These regulations are effectiveDecember 19, 1995. For the date ofapplicability, see § 31.3402(r)–1(b).
FOR FURTHER INFORMATIONCONTACT: Rebecca Wilson (202)622-6040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendmentsto the Employment Tax Regulations(26 CFR part 31) under section3402(r). Section 3402(r) was added bysection 701 of the Uruguay RoundAgreements Act, which approved thetrade agreements resulting from theUruguay Round of multilateral tradenegotiations under the auspices of theGeneral Agreement on Tariffs andTrade (GATT) and the Statement ofAdministrative Action to implement theAgreements.
On December 22, 1994, temporaryregulations (TD 8574 [1995–1 C.B.194]) relating to withholding on dis-tributions of Indian gaming profits totribal members under section 3402(r)were published in the Federal Register(59 FR 65939). A notice of proposedrulemaking (EE–60–94 [1995–1 C.B.857]) cross-referencing the temporaryregulations was published in the Fed-eral Register for the same day (59 FR65982). No public hearing was re-quested or held.
Also on December 22, 1994, the IRSmailed a copy of Notice 1026, provid-ing withholding tables for use in 1995,to Indian tribes and gaming establish-ments listed with the National IndianGaming Commission. For 1996 and
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subsequent years, tables will be printedin a supplement to Circular E.
The IRS received written commentsresponding to the notice of proposedrulemaking. After consideration of thecomments, the regulations proposed byEE–60–94 are adopted as revised bythis Treasury decision, and the corre-sponding temporary regulations arewithdrawn. The regulations contain nosubstantive changes.
Explanation of Provisions
1. Indian Gaming Regulatory Act.Net revenue from certain gaming ac-tivities conducted or licensed by anIndian tribe may be used to maketaxable distributions to members of theIndian tribe. The tribe must notify itsmembers of the tax liability at the timethe payments are made. 25 U.S.C.2710(b)(3) and (d)(1).
2. Prior law. Prior to the addition ofsection 3402(r) in 1994, a tribe was notrequired to withhold on these distribu-tions to tribal members except to theextent backup withholding rules appliedunder section 3406.
3. Code section 3402(r). Section3402(r) generally requires that, forpayments made after December 31,1994, persons, including Indian tribes,making payments to members of Indiantribes from the net revenues of certaingaming activities conducted or licensedby the tribes deduct and withholdincome taxes from those payments.Section 3402(r) provides that the with-holding amount be calculated assumingthat the taxpayer is single and has oneexemption.
4. Legislative history. The legislativehistory of section 3402(r) indicates thatthe goal of the new withholding re-quirement was to make it easier fortribal members who receive gamingdistributions to meet their taxresponsibilities:
Distributions of net revenues fromgaming activity by an Indian tribe mayresult in significant tax liability to thetribe’s members. Establishing withhold-ing on such payments will more closelymatch estimated tax payments to ulti-mate tax liability. For some tribalmembers, this change may eliminatethe need to make quarterly estimatedtax payments. For others, it will reducethe likelihood that they will facepenalties for underpayment of tax atthe time of tax filing.H.R. Rep. No. 826, 103d Cong., 2dSess., pt.1, at 170–171 (1994).
5. Proposed regulations. The pro-posed regulations implement the with-holding method prescribed by section3402(r). They also permit additionalwithholding by agreement between thetribal member and the tribe.
6. Comments and final regulations.The IRS received only two writtencomments on the proposed regulations.After consideration of both comments,the proposed regulations are adoptedwith no substantive changes.
No comments were received fromthe Chief Counsel for Advocacy of theSmall Business Administration.
Special Analyses
It has been determined that thisTreasury decision is not a significantregulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) and the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do notapply to these regulations, and, there-fore, a Regulatory Flexibility Analysisis not required. Pursuant to section7805(f) of the Internal Revenue Code,the notice of proposed rulemakingpreceding these regulations was submit-ted to the Small Business Administra-tion for comment on its impact onsmall business.
Drafting Information
The principal author of the regula-tions is Rebecca Wilson, Office of theAssociate Chief Counsel (EmployeeBenefits and Exempt Organizations),IRS. However, other personnel fromthe IRS and Treasury Departmentparticipated in their development.
* * * * * *
Adoption of Amendments to theRegulations
Accordingly, 26 CFR part 31 isamended as follows:
PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOMETAX AT SOURCE
Paragraph 1. The authority citationfor part 31 is amended by removing theentry for section 31.3402(r)–1T andadding an entry in numerical order toread as follows:
Authority: 26 U.S.C. 7805 ***Section 31.3402(r)–1 also issued under26 U.S.C. 3402(p) and (r),***
Par. 2. Section 31.3402(r)–1 is addedto read as follows:
§ 31.3402(r)–1 Withholding ondistributions of Indian gaming profitsto tribal members.
(a)(1) General rule . Sect ion3402(r)(1) requires every person, in-cluding an Indian tribe, making apayment to a member of an Indian tribefrom the net revenues of any class II orclass III gaming activity, as defined in25 U.S.C. 2703, conducted or licensedby such tribe to deduct and withholdfrom such payment a tax in an amountequal to such payment’s proportionateshare of the annualized tax, as thatterm is defined in section 3402(r)(3).
(2) Withholding tables. Except asprovided in paragraph (a)(4) of thissection, the amount of a payment’sproportionate share of the annualizedtax shall be determined under theapplicable table provided by theCommissioner.
(3) Annualized amount of payment.Section 3402(r)(5) provides that pay-ments shall be placed on an annualizedbasis under regulations prescribed bythe Secretary. A payment may beplaced on an annualized basis bymultiplying the amount of the paymentby the total number of payments to bemade in a calendar year. For example,a monthly payment may be annualizedby multiplying the amount of thepayment by 12. Similarly, a quarterlypayment may be annualized by multi-plying the amount of the payment by 4.
(4) Alternate withholding pro-cedures—(i) In general. Any procedurefor determining the amount to bededucted and withheld under section3402(r) may be used, provided that theamount of tax deducted and withheld issubstantially the same as it would beusing the tables provided by theCommissioner under paragraph (a)(2)of this section. At the election of anIndian tribe, the amount to be deductedand withheld under section 3402(r)shall be determined in accordance withthis alternate procedure.
(ii) Method of election. It is suffi-cient for purposes of making an elec-tion under this paragraph (a)(4) that anIndian tribe evidence the election inany reasonable way, including use of aparticular method. Thus, no writtenelection is required.
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5. Additional withholding permitted.Consistent with the provisions of sec-tion 3402(p), a tribal member and atribe may enter into an agreement toprovide for the deduction and withhold-ing of additional amounts from pay-ments in order to satisfy the anticipatedtax liability of the tribal member. Theagreement may be made in a manners imi l a r t o t ha t de sc r ibed in§ 31.3402(p)–1 (with respect to volun-tary withholding agreements betweenemployees and employers).
(b) Effective date. This section ap-plies to payments made after December31, 1994.
§ 31.3402(r)–1T [Removed]
Par. 3. Section 31.3402(r)–1T isremoved.
Margaret Milner Richardson,Commissioner of
Internal Revenue.
Approved November 28, 1995.
Leslie Samuels,Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register onDecember 18, 1995, 8:45 a.m., and publishedin the issue of the Federal Register forDecember 19, 1995, 60 F.R. 65237)
Section 7478.—DeclaratoryJudgements Relating to Status ofCertain Governmental Obligations
A revenue procedure sets forth procedures forrequesting a ruling under §§ 103, 141–150, 1395,and 7871(c) of the Code. See Rev. Proc. 96–16,page 45.
Section 7520.—Valuation Tables
26 CFR 1.7520–3: Limitation on theapplication of section 7520.
T.D. 8630
DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1, 20, and 25
Actuarial Tables Exceptions
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document containsfinal income, estate, and gift taxregulations relating to exceptions to theuse of the valuation tables in theregulations for valuing annuities, inter-ests for life or a term of years, andremainder or reversionary interests, thevaluation of which was the subject offinal regulations published on June 10,1994. These regulations are necessaryin order to provide guidance consistentwith court decisions concluding that thevaluation tables are not to be used incertain situations.
EFFECTIVE DATE: These regulationsare effective December 13, 1995.
FOR FURTHER INFORMATIONCONTACT: William L. Blodgett, tele-phone (202) 622-3090 (not a toll-freenumber).
SUPPLEMENTARY INFORMATION:
Background
On June 10, 1994, the IRS publishedin the Federal Register (59 FR 30100)final income tax regulations undersections 170, 642, 664 and 7520 of theInternal Revenue Code (Code), andfinal estate and gift tax regulationsunder sections 2031, 2512 and 7520 ofthe Code providing actuarial tables tobe used in valuing annuities, interestsfor life or a term of years, andremainder or reversionary interests un-der section 7520. On June 10, 1994,the IRS also published in the FederalRegister (59 FR 30180) proposedamendments to the income, estate, andgift tax regulations prescribing circum-stances when the published actuarialtables cannot be used to value interests.This regulation finalizes thoseamendments.
Written comments responding to thenotice of proposed rulemaking werereceived. Requests for a public hearingwere also received but were subse-quently withdrawn. After considerationof all the comments received, thoseamendments are revised and adopted bythis Treasury decision.
Explanation of Provisions
Section 7520(a), which is effectivefor transfers after April 30, 1989,
provides that the value of annuities,interests for life or a term of years, andremainder or reversionary interests is tobe determined under tables publishedby the IRS. Section 7520(e) providesthat, for purposes of section 7520, theterm tables includes formulas. Section7520(b) provides that section 7520shall not apply for purposes of anyprovision specified in regulations. TheConference Report accompanying theTechnical and Miscellaneous RevenueAct of 1988, H.R. Conf. Rep. No.1104, 100th Cong., 2d Sess. 113 (1988)(1988–3 C.B. 603), states that section7520 does not apply in ‘‘situationsspecified in Treasury regulations.’’ Asummary of the principal commentsreceived and revisions made in thefinal regulations in response to thosecomments is provided below.
1. Valuation of Annuities, IncomeInterests, etc.
Under the proposed regulations, thetables cannot be used if the instrumentof transfer does not provide the bene-ficiary of the annuity, income interest,or remainder interest with the degree ofbeneficial enjoyment that is consistentwith the traditional character of thatproperty interest under applicable locallaw. One comment letter suggestedthat, as a result of enactment of section2702, it may no longer be necessary toprescribe special rules in the case of atrust corpus consisting of nonproduc-tive property. It was decided to retainthese rules because this issue willcontinue to arise in certain situationswhere section 2702 does not apply;e.g., the valuation of a gift of anincome interest for purposes of deter-mining the section 2503(b) gift taxexclusion; the valuation of the bequestof an income interest for purposes ofthe section 2013 estate tax credit.
In response to comments, the finalregulations provide additional guidancefor determining under what circum-stances a life tenant or term certainbeneficiary of tangible property pos-sesses adequate beneficial use such thatthe tables would be used to value theinterest.
A number of comments were re-ceived on the valuation of an annuitythat is payable from a trust corpus thatwill exhaust prior to the annuitantreaching the presumed terminal ageprescribed by the tables (age 110).Under the proposed regulations, the
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interest would be valued, not as a rightto receive the annuity for the life of theannuitant, but rather as the right toreceive the annuity for the shorter ofthe life of the annuitant or the date onwhich the corpus will exhaust. Onecommentator agreed that the possibilityof exhaustion of corpus should betaken into account in cases of relativelysevere underfunding of the trust. How-ever, it was suggested that, if theunderfunding was relatively less severe,it should be disregarded. After furtherconsideration of this issue, the IRS hasconcluded that the method described inthe proposed regulations for determin-ing the value of the annuity is consis-tent with fundamental principles fordetermining present value and long-standing IRS position. See, Rev. Rul.77–454 (1977–2 C.B. 351); Rev. Rul.70–452 (1970–2 C.B. 199); Moffett v.Commissioner, 269 F.2d 738 (4th Cir.1959); United States v. Dean, 224 F.2d26 (1st Cir. 1955). However, in re-sponse to requests, the explanation ofthe methodology and computation hasbeen amplified.
2. Terminal Illness
Under the proposed regulations, thetables cannot be used if the individual,who is the measuring life with respectto the property interest, is terminallyill. Under the proposed regulations, theindividual is terminally ill if thatindividual was known to have anincurable illness or deteriorating physi-cal condition such that there is at leasta 50 percent probability that theindividual will die within one year.
One commentator suggested that thevalue of a property interest that isdependent upon a measuring life shouldbe determined in all events based onthe mortality component contained inTable 80CNSMT (which is based onthe life experience of the generalpopulation), rather than a mortalitycomponent that reflects the actualterminally ill condition of the individ-ual. The commentator also suggestedthat if departure from the actuarialtables is deemed appropriate in the caseof terminally ill individuals, then thestandard in Rev. Rul. 80–80 (1980–1C.B. 194), which is not explicitlyexpressed in the form of a percentageprobability of survival (as is thestandard in the proposed regulations),adequately differentiates between indi-viduals that should not be consideredterminally ill and those that should.
This commentator also questionedwhether a percentage probability stand-ard, such as the one used in theproposed regulations, would be feasibleto administer.
The IRS continues to believe thatmortality tables such as Table80CNSMT should not be used topredict the survival probabilities of anindividual whose time of death isreasonably predictable based on thefacts presented. To determine whetherthe proposed test for classifying anindividual as terminally ill would befeasible, the IRS consulted with anumber of medical specialists. Medicalexperts called upon to assess theprobability of survival of a terminallyill individual base their assessment onstatistical compilations of the percent-age of individuals who survive for aspecified period of time when sufferingwith a particular disease. Thus, the IRSbelieves that a test for classifying anindividual as terminally ill can reason-ably be based upon the probability ofsurvival for a specified period of time.
One commentator suggested that themortality test should take into accountthe actual period of survival after thetransfer. For example, if the individualactually survived for one year, thatindividual should not be deemed tohave been terminally ill. Althoughpost-transaction events are not or-dinarily determinative for valuationpurposes, such events may provideevidence of value as of the valuationdate. Accordingly, the final regulationsprovide a presumption that if theindividual who is the measuring lifesurvives for eighteen months or longerafter the transfer, that individual shallbe presumed to have not been termi-nally ill on the date of the transferunless the contrary is established byclear and convincing evidence.
The commentator also questionedwhether the proposed test for classify-ing an individual as terminally illwould result in the classification ofelderly people suffering from the gen-eral infirmities of old age as ‘‘termi-nally ill.’’ The IRS continues to believethat the test should be consistentlyapplied to people of all ages. Under theregulations, the individual must beinflicted with an incurable illness orother deteriorating physical conditionthat is life threatening. Thus, elderlypeople suffering from the general infir-mities of old age, but not from aspecific incurable life-threatening ill-ness, would not be considered termi-
nally ill under the test. Consequently, ifan elderly person has one or moreillnesses, none of which, standing aloneor considered together, is life-threatening, that person would not beconsidered to be terminally ill.
The same commentator suggestedthat ‘‘knowledge’’ of the terminalillness should be limited to actualknowledge by the taxpayer or thedecedent, rather than to ‘‘knowledge’’by any of the parties involved. How-ever, limitation of the requisite‘‘knowledge’’ to the taxpayer or dece-dent would present a significant burdento the IRS regarding proof and wouldpresent opportunities for easy circum-vention. Thus, the IRS believes that therequirement that the condition of theindividual be ‘‘known,’’ although notnecessarily by the taxpayer or dece-dent, is reasonable.
Commentators suggested that theregulations should make it clear that aspecial actuarial factor taking intoaccount a transferor’s terminal illnessmay be used in valuing a transfer to apooled income fund. The final regula-tions incorporate that suggestion.
Comments were received that thelanguage in § 20.7520–3(b)(3)(ii) ofthe proposed regulations regarding thevaluation of a property interest that isbased upon a terminally ill measuringlife, for purposes of determining theapplicable credit for tax on priortransfers under section 2013, was am-biguous. Generally, if the final deter-mination of the estate tax liability inthe transferor’s estate was dependenton the valuation of the life interestreceived by the transferee, then thevalue of the property transferred, forpurposes of determining the creditallowable for the transferee’s estate, isthe value determined previously for thetransferor’s estate. Section 20.7520–3(b)(3)(ii) of the final regulations clar-ifies this rule. The IRS invites com-ments on whether the value of areversionary interest under section 673should be determined without regard tothe physical condition of the decedentimmediately before death, a relatedissue that was raised by commentators.
3. Application of Actuarial Tables
One commentator suggested that thetables prescribed by the regulationsmust be used for valuing all intereststransferred between April 30, 1989 (theeffective date of section 7520) and
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December December 13, 1995 (the ef-fective date of the regulations). How-ever, these regulations generally adoptprinciples established in case law andpublished IRS positions. See, e.g.,O’Reilly v. Commissioner, 973 F.2d1403 (8th Cir. 1992), rem’d, T.C.M.1994–61 (underproductive income in-terest); Estate of McLendon v. Commis-sioner, T.C.M. 1993–459; Rev. Rul.80–80 (1980–1 C.B. 194) (terminalillness of measuring life); Moffett v.Commissioner, 269 F.2d 738 (4th Cir.1959); Rev. Rul. 77–454 (1977–2 C.B.351) (exhausting corpus). There is noindication that Congress intended tosupersede this well-established case lawand administrative ruling position whenit enacted section 7520. Consequently,in the case of transfers prior to theeffective date of these regulations, thequestion of whether a particular interestmust be valued based on the tables willbe resolved based on applicable caselaw and revenue rulings.
Special Analyses
It has been determined that thisTreasury decision is not a significantregulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) and the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do notapply to these regulations, and, there-fore, a Regulatory Flexibility Analysisis not required. Pursuant to section7805(f) of the Internal Revenue Code,the notice of proposed rulemakingpreceding these regulations was submit-ted to the Small Business Administra-tion for comment on its impact onsmall business.
Drafting Information
The principal author of these regula-tions is William L. Blodgett, Office ofAssistant Chief Counsel (Passthroughsand Special Industries), IRS. However,other personnel from the IRS andTreasury Department participated intheir development.
Adoption of Amendments to theRegulations
Accordingly, 26 CFR parts 1, 20 and25 are amended as follows:
Part 1—INCOME TAXES
Paragraph 1. The authority citationfor part 1 continues to read in part asfollows:
by revising paragraph (b) and adding asentence at the end of paragraph (c) toread as follows:
§ 1.7520–3 Limitation on theapplication of section 7520.
* * * * * *
(b) Other limitations on the applica-tion of section 7520—(1) In general—(i) Ordinary beneficial interests. Forpurposes of this section:
(A) An ordinary annuity interest isthe right to receive a fixed dollaramount at the end of each year duringone or more measuring lives or forsome other defined period. A standardsection 7520 annuity factor for anordinary annuity interest represents thepresent worth of the right to receive$1.00 per year for a defined period,using the interest rate prescribed undersection 7520 for the appropriate month.If an annuity interest is payable moreoften than annually or is payable at thebeginning of each period, a specialadjustment must be made in any com-putation with a standard section 7520annuity factor.
(B) An ordinary income interest isthe right to receive the income from, orthe use of, property during one or moremeasuring lives or for some otherdefined period. A standard section 7520income factor for an ordinary incomeinterest represents the present worth ofthe right to receive the use of $1.00 fora defined period, using the interest rateprescribed under section 7520 for theappropriate month.
(C) An ordinary remainder or rever-sionary interest is the right to receivean interest in property at the end of oneor more measuring lives or some otherdefined period. A standard section 7520remainder factor for an ordinary re-mainder or reversionary interest repre-sents the present worth of the right toreceive $1.00 at the end of a definedperiod, using the interest rate pre-scribed under section 7520 for theappropriate month.
(ii) Certain restricted beneficial in-terests. A restricted beneficial interestis an annuity, income, remainder, or
reversionary interest that is subject to acontingency, power, or other restric-tion, whether the restriction is providedfor by the terms of the trust, will, orother governing instrument or is causedby other circumstances. In general, astandard section 7520 annuity, income,or remainder factor may not be used tovalue a restricted beneficial interest.However, a special section 7520 an-nuity, income, or remainder factor maybe used to value a restricted beneficialinterest under some circumstances. Seeparagraph (b)(4) Example 2 of thissection, which illustrates a situationwhere a special section 7520 actuarialfactor is needed to take into accountthe shorter life expectancy of theterminally ill measuring life. See§ 1.7520–1(c) for requesting a specialfactor from the Internal RevenueService.
(iii) Other beneficial interests. If,under the provisions of this paragraph(b), the interest rate and mortalitycomponents prescribed under section7520 are not applicable in determiningthe value of any annuity, income,remainder, or reversionary interest, theactual fair market value of the interest(determined without regard to section7520) is based on all of the facts andcircumstances if and to the extentpermitted by the Internal RevenueCode provision applicable to the prop-erty interest.
(2) Provisions of governing instru-ment and other limitations on source ofpayment—(i) Annuities. A standardsection 7520 annuity factor may not beused to determine the present value ofan annuity for a specified term of yearsor the life of one or more individualsunless the effect of the trust, will, orother governing instrument is to ensurethat the annuity will be paid for theentire defined period. In the case of anannuity payable from a trust or otherlimited fund, the annuity is not consid-ered payable for the entire definedperiod if, considering the applicablesection 7520 interest rate at the valua-tion date of the transfer, the annuity isexpected to exhaust the fund before thelast possible annuity payment is madein full. For this purpose, it must beassumed that it is possible for eachmeasuring life to survive until age 110.For example, for a fixed annuitypayable annually at the end of eachyear, if the amount of the annuitypayment (expressed as a percentage ofthe initial corpus) is less than or equalto the applicable section 7520 interest
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rate at the date of the transfer, thecorpus is assumed to be sufficient tomake all payments. If the percentageexceeds the applicable section 7520interest rate and the annuity is for adefinite term of years, multiply theannual annuity amount by the Table Bterm certain annuity factor, as de-scribed in § 1.7520–1(c)(1), for thenumber of years of the defined period.If the percentage exceeds the applicablesection 7520 interest rate and theannuity is payable for the life of one ormore individuals, multiply the annualannuity amount by the Table B annuityfactor for 110 years minus the age ofthe youngest individual. If the resultexceeds the limited fund, the annuitymay exhaust the fund, and it will benecessary to calculate a special section7520 annuity factor that takes intoaccount the exhaustion of the trust orfund. This computation would be modi-fied, if appropriate, to take into accountannuities with different payment terms.See § 25.7520–3(b)(2)(v) Example 5 ofthis chapter, which provides an illustra-tion involving an annuity trust that issubject to exhaustion.
(ii) Income and similar interests—(A) Beneficial enjoyment. A standardsection 7520 income factor for anordinary income interest may not beused to determine the present value ofan income or similar interest in trustfor a term of years or for the life ofone or more individuals unless theeffect of the trust, will, or othergoverning instrument is to provide theincome beneficiary with that degree ofbeneficial enjoyment of the propertyduring the term of the income interestthat the principles of the law of trustsaccord to a person who is unqualifiedlydesignated as the income beneficiary ofa trust for a similar period of time.This degree of beneficial enjoyment isprovided only if it was the transferor’sintent, as manifested by the provisionsof the governing instrument and thesurrounding circumstances, that thetrust provide an income interest for theincome beneficiary during the specifiedperiod of time that is consistent withthe value of the trust corpus and withits preservation. In determining whethera trust arrangement evidences thatintention, the treatment required orpermitted with respect to individualitems must be considered in relation tothe entire system provided for in theadministration of the subject trust.Similarly, in determining the presentvalue of the right to use tangible
property (whether or not in trust) forone or more measuring lives or forsome other specified period of time, theinterest rate component prescribed un-der section 7520 and § 1.7520–1 maynot be used unless, during the specifiedperiod, the effect of the trust, will orother governing instrument is toprovide the beneficiary with that degreeof use, possession, and enjoyment ofthe property during the term of interestthat applicable state law accords to aperson who is unqualifiedly designatedas a life tenant or term holder for asimilar period of time.
(B) Diversions of income andcorpus. A standard section 7520 in-come factor for an ordinary incomeinterest may not be used to value anincome interest or similar interest inproperty for a term of years or for oneor more measuring lives if—
(1) The trust, will, or other govern-ing instrument requires or permits thebeneficiary’s income or other enjoy-ment to be withheld, diverted, oraccumulated for another person’s bene-fit without the consent of the incomebeneficiary; or
(2) The governing instrument re-quires or permits trust corpus to bewithdrawn from the trust for anotherperson’s benefit during the incomebeneficiary’s term of enjoyment with-out the consent of and accountability tothe income beneficiary for suchdiversion.
(iii) Remainder and reversionaryinterests. A standard section 7520remainder interest factor for an ordi-nary remainder or reversionary interestmay not be used to determine thepresent value of a remainder or rever-sionary interest (whether in trust orotherwise) unless, consistent with thepreservation and protection that the lawof trusts would provide for a personwho is unqualifiedly designated as theremainder beneficiary of a trust for asimilar duration, the effect of theadministrative and dispositive provi-sions for the interest or interests thatprecede the remainder or reversionaryinterest is to assure that the propertywill be adequately preserved and pro-tected (e.g., from erosion, invasion,depletion, or damage) until the re-mainder or reversionary interest takeseffect in possession and enjoyment.This degree of preservation and protec-tion is provided only if it was thetransferor’s intent, as manifested by theprovisions of the arrangement and the
surrounding circumstances, that theentire disposition provide the remainderor reversionary beneficiary with anundiminished interest in the propertytransferred at the time of the termina-tion of the prior interest.
(iv) Pooled income fund interests. Ingeneral, pooled income funds are cre-ated and administered to achieve aspecial rate of return. A beneficialinterest in a pooled income fund is notordinarily valued using a standardsection 7520 income or remainderinterest factor. The present value of abeneficial interest in a pooled incomefund is determined according to rulesand special remainder factors pre-scribed in § 1.642(c)–6 and, whenapplicable, the rules set forth in para-graph (b)(3) of this section, if theindividual who is the measuring life isterminally ill at the time of the transfer.
(3) Mortality component. The mor-tality component prescribed under sec-tion 7520 may not be used to determinethe present value of an annuity, incomeinterest, remainder interest, or rever-sionary interest if an individual who isa measuring life is terminally ill at thetime of the transaction. For purposes ofthis paragraph (b)(3), an individualwho is known to have an incurableillness or other deteriorating physicalcondition is considered terminally ill ifthere is at least a 50 percent probabilitythat the individual will die within 1year. However, if the individual sur-vives for eighteen months or longerafter the date of the transaction, thatindividual shall be presumed to havenot been terminally ill at the time ofthe transaction unless the contrary isestablished by clear and convincingevidence.
(4) Examples. The provisions of thisparagraph (b) are illustrated by thefollowing examples:
Example 1. Annuity funded with unproductiveproperty. The taxpayer transfers corporationstock worth $1,000,000 to a trust. The trustprovides for a 6 percent ($60,000 per year)annuity in cash or other property to be paid to acharitable organization for 25 years and for theremainder to be distributed to the donor’s child.The trust specifically authorizes, but does notrequire, the trustee to retain the shares of stock.The section 7520 interest rate for the month ofthe transfer is 8.2 percent. The corporation haspaid no dividends on this stock during the past 5years, and there is no indication that this policywill change in the near future. Under applicablestate law, the corporation is considered to be asound investment that satisfies fiduciary stand-ards. Therefore, the trust’s sole investment inthis corporation is not expected to adverselyaffect the interest of either the annuitant or the
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remainder beneficiary. Considering the 6 percentannuity payout rate and the 8.2 percent section7520 interest rate, the trust corpus is consideredsufficient to pay this annuity for the entire 25-year term of the trust, or even indefinitely.Although it appears that neither beneficiarywould be able to compel the trustee to make thetrust corpus produce investment income, theannuity interest in this case is considered to bean ordinary annuity interest, and the standardsection 7520 annuity factor may be used todetermine the present value of the annuity. Inthis case, the section 7520 annuity factor wouldrepresent the right to receive $1.00 per year for aterm of 25 years.
Example 2. Terminal illness. The taxpayertransfers property worth $1,000,000 to a chari-table remainder unitrust described in section664(d)(2) and § 1.664–3. The trust provides for afixed-percentage 7 percent unitrust benefit (eachannual payment is equal to 7 percent of the trustassets as valued at the beginning of each year) tobe paid quarterly to an individual beneficiary forlife and for the remainder to be distributed to acharitable organization. At the time the trust iscreated, the individual beneficiary is age 60 andhas been diagnosed with an incurable illness andthere is at least a 50 percent probability of theindividual dying within 1 year. Assuming thepresumption in paragraph (b)(3) of this sectiondoes not apply, because there is at least a 50percent probability that this beneficiary will diewithin 1 year, the standard section 7520 unitrustremainder factor for a person age 60 from thevaluation tables may not be used to determinethe present value of the charitable remainderinterest. Instead, a special unitrust remainderfactor must be computed that is based on thesection 7520 interest rate and that takes intoaccount the projection of the individual benefici-ary’s actual life expectancy.
(5) Additional limitations. Section7520 does not apply to the extent asmay otherwise be provided by theCommissioner.
(c) * * * The provisions of para-graph (b) of this section are effectivewith respect to transactions after De-cember 13, 1995.
PART 20—ESTATE TAX; ESTATESOF DECEDENTS DYING AFTERAUGUST 16, 1954
Par. 3. The authority citation for part20 continues to read in part as follows:
amended by revising paragraph (b) andadding a sentence at the end ofparagraph (c) to read as follows:
§ 20.7520–3 Limitation on theapplication of section 7520.
* * * * * *
(b) Other limitations on the applica-tion of section 7520—(1) In general—(i) Ordinary beneficial interests. Forpurposes of this section:
(A) An ordinary annuity interest isthe right to receive a fixed dollaramount at the end of each year duringone or more measuring lives or forsome other defined period. A standardsection 7520 annuity factor for anordinary annuity interest represents thepresent worth of the right to receive$1.00 per year for a defined period,using the interest rate prescribed undersection 7520 for the appropriate month.If an annuity interest is payable moreoften than annually or is payable at thebeginning of each period, a specialadjustment must be made in anycomputation with a standard section7520 annuity factor.
(B) An ordinary income interest isthe right to receive the income from orthe use of property during one or moremeasuring lives or for some otherdefined period. A standard section 7520income factor for an ordinary incomeinterest represents the present worth ofthe right to receive the use of $1.00 fora defined period, using the interest rateprescribed under section 7520 for theappropriate month.
(C) An ordinary remainder or rever-sionary interest is the right to receivean interest in property at the end of oneor more measuring lives or some otherdefined period. A standard section 7520remainder factor for an ordinary re-mainder or reversionary interest repre-sents the present worth of the right toreceive $1.00 at the end of a definedperiod, using the interest rate pre-scribed under section 7520 for theappropriate month.
(ii) Certain restricted beneficial in-terests. A restricted beneficial interestis an annuity, income, remainder, orreversionary interest that is subject toany contingency, power, or otherrestriction, whether the restriction isprovided for by the terms of the trust,will, or other governing instrument oris caused by other circumstances. Ingeneral, a standard section 7520 an-nuity, income, or remainder factor maynot be used to value a restrictedbeneficial interest. However, a specialsection 7520 annuity, income, or re-mainder factor may be used to value arestricted beneficial interest under somecircumstances. See paragraphs (b)(2)(v)Example 4 and (b)(4) Example 1 of thissection, which illustrate situationswhere special section 7520 actuarialfactors are needed to take into accountlimitations on beneficial interests. See§ 20.7520–1(c) for requesting a specialfactor from the Internal RevenueService.
(iii) Other beneficial interests. If,under the provisions of this paragraph(b), the interest rate and mortalitycomponents prescribed under section7520 are not applicable in determiningthe value of any annuity, income,remainder, or reversionary interest, theactual fair market value of the interest(determined without regard to section7520) is based on all of the facts andcircumstances if and to the extentpermitted by the Internal RevenueCode provision applicable to the prop-erty interest.
(2) Provisions of governing instru-ment and other limitations on source ofpayment—(i) Annuities. A standardsection 7520 annuity factor may not beused to determine the present value ofan annuity for a specified term of yearsor the life of one or more individualsunless the effect of the trust, will, orother governing instrument is to ensurethat the annuity will be paid for theentire defined period. In the case of anannuity payable from a trust or otherlimited fund, the annuity is not consid-ered payable for the entire definedperiod if, considering the applicablesection 7520 interest rate at the valua-tion date of the transfer, the annuity isexpected to exhaust the fund before thelast possible annuity payment is madein full. For this purpose, it must beassumed that it is possible for eachmeasuring life to survive until age 110.For example, for a fixed annuitypayable annually at the end of eachyear, if the amount of the annuitypayment (expressed as a percentage ofthe initial corpus) is less than or equalto the applicable section 7520 interestrate at the date of the transfer, thecorpus is assumed to be sufficient tomake all payments. If the percentageexceeds the applicable section 7520interest rate and the annuity is for adefinite term of years, multiply theannual annuity amount by the Table Bterm certain annuity factor, as de-scribed in § 20.7520–1(c)(1), for thenumber of years of the defined period.If the percentage exceeds the applicablesection 7520 interest rate and theannuity is payable for the life of one ormore individuals, multiply the annualannuity amount by the Table B annuityfactor for 110 years minus the age ofthe youngest individual. If the resultexceeds the limited fund, the annuitymay exhaust the fund, and it will benecessary to calculate a special section7520 annuity factor that takes intoaccount the exhaustion of the trust or
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fund. This computation would be modi-fied, if appropriate, to take into accountannuities with different payment terms.See § 25.7520–3(b)(2)(v) Example 5 ofthis chapter, which provides an illustra-tion involving an annuity trust that issubject to exhaustion.
(ii) Income and similar interests—(A) Beneficial enjoyment. A standardsection 7520 income factor for anordinary income interest may not beused to determine the present value ofan income or similar interest in trustfor a term of years, or for the life ofone or more individuals, unless theeffect of the trust, will, or othergoverning instrument is to provide theincome beneficiary with that degree ofbeneficial enjoyment of the propertyduring the term of the income interestthat the principles of the law of trustsaccord to a person who is unqualifiedlydesignated as the income beneficiary ofa trust for a similar period of time.This degree of beneficial enjoyment isprovided only if it was the transferor’sintent, as manifested by the provisionsof the governing instrument and thesurrounding circumstances, that thetrust provide an income interest for theincome beneficiary during the specifiedperiod of time that is consistent withthe value of the trust corpus and withits preservation. In determining whethera trust arrangement evidences thatintention, the treatment required orpermitted with respect to individualitems must be considered in relation tothe entire system provided for in theadministration of the subject trust.Similarly, in determining the presentvalue of the right to use tangibleproperty (whether or not in trust) forone or more measuring lives or forsome other specified period of time, theinterest rate component prescribed un-der section 7520 and § 1.7520–1 of thischapter may not be used unless, duringthe specified period, the effect of thetrust, will or other governing instru-ment is to provide the beneficiary withthat degree of use, possession, andenjoyment of the property during theterm of interest that applicable statelaw accords to a person who isunqualifiedly designated as a life tenantor term holder for a similar period oftime.
(B) Diversions of income andcorpus. A standard section 7520 in-come factor for an ordinary incomeinterest may not be used to value anincome interest or similar interest inproperty for a term of years, or for oneor more measuring lives, if—
(1) The trust, will, or other govern-ing instrument requires or permits thebeneficiary’s income or other enjoy-ment to be withheld, diverted, oraccumulated for another person’s bene-fit without the consent of the incomebeneficiary; or
(2) The governing instrument re-quires or permits trust corpus to bewithdrawn from the trust for anotherperson’s benefit without the consent ofthe income beneficiary during theincome beneficiary’s term of enjoymentand without accountability to the in-come beneficiary for such diversion.
(iii) Remainder and reversionaryinterests. A standard section 7520remainder interest factor for an ordi-nary remainder or reversionary interestmay not be used to determine thepresent value of a remainder or rever-sionary interest (whether in trust orotherwise) unless, consistent with thepreservation and protection that the lawof trusts would provide for a personwho is unqualifiedly designated as theremainder beneficiary of a trust for asimilar duration, the effect of theadministrative and dispositive provi-sions for the interest or interests thatprecede the remainder or reversionaryinterest is to assure that the propertywill be adequately preserved and pro-tected (e.g., from erosion, invasion,depletion, or damage) until the re-mainder or reversionary interest takeseffect in possession and enjoyment.This degree of preservation and protec-tion is provided only if it was thetransferor’s intent, as manifested by theprovisions of the arrangement and thesurrounding circumstances, that theentire disposition provide the remainderor reversionary beneficiary with anundiminished interest in the propertytransferred at the time of the termina-tion of the prior interest.
(iv) Pooled income fund interests. Ingeneral, pooled income funds are cre-ated and administered to achieve aspecial rate of return. A beneficialinterest in a pooled income fund is notordinarily valued using a standardsection 7520 income or remainderinterest factor. The present value of abeneficial interest in a pooled incomefund is determined according to rulesand special remainder factors pre-scribed in § 1.642(c)–6 of this chapterand, when applicable, the rules setforth under paragraph (b)(3) of thissection if the individual who is themeasuring life is terminally ill at thetime of the transfer.
(v) Examples. The provisions of thisparagraph (b)(2) are illustrated by thefollowing examples:
Example 1. Unproductive property. A died,survived by B and C. B died two years after A.A’s will provided for a bequest of corporationstock in trust under the terms of which all of thetrust income was paid to B for life. After thedeath of B, the trust terminated and the trustproperty was distributed to C. The trust specifi-cally authorized, but did not require, the trusteeto retain the shares of stock. The corporationpaid no dividends on this stock during the 5years before A’s death and the 2 years beforeB’s death. There was no indication that thispolicy would change after A’s death. Underapplicable state law, the corporation is consid-ered to be a sound investment that satisfiesfiduciary standards. The facts and circumstances,including applicable state law, indicate that B didnot have the legal right to compel the trustee tomake the trust corpus productive in conformitywith the requirements for a lifetime trust incomeinterest under applicable local law. Therefore,B’s life income interest in this case is considerednonproductive. Consequently, B’s income interestmay not be valued actuarially under this section.
Example 2. Beneficiary’s right to make trustproductive. The facts are the same as in Example1, except that the trustee is not specificallyauthorized to retain the shares of stock. Further,the terms of the trust specifically provide that B,the life income beneficiary, may require thetrustee to make the trust corpus productiveconsistent with income yield standards for trustsunder applicable state law. Under that law, theminimum rate of income that a productive trustmay produce is substantially below the section7520 interest rate for the month of A’s death. Inthis case, because B has the right to compel thetrustee to make the trust productive for purposesof applicable local law during the beneficiary’slifetime, the income interest is considered anordinary income interest for purposes of thisparagraph, and the standard section 7520 lifeincome interest factor may be used to determinethe present value of B’s income interest.
Example 3. Discretionary invasion of corpus.The decedent, A, transferred property to a trustunder the terms of which all of the trust incomeis to be paid to A’s child for life and theremainder of the trust is to be distributed to agrandchild. The trust authorizes the trusteewithout restriction to distribute corpus to A’ssurviving spouse for the spouse’s comfort andhappiness. In this case, because the trustee’spower to invade trust corpus is unrestricted, theexercise of the power could result in thetermination of the income interest at any time.Consequently, the income interest is not consid-ered an ordinary income interest for purposes ofthis paragraph, and may not be valued actuariallyunder this section.
Example 4. Limited invasion of corpus. Thedecedent, A, bequeathed property to a trust underthe terms of which all of the trust income is tobe paid to A’s child for life and the remainder isto be distributed to A’s grandchild. The trustauthorizes the child to withdraw up to $5,000 peryear from the trust corpus. In this case, thechild’s power to invade trust corpus is limited toan ascertainable amount each year. Annualinvasions of any amount would be expected toprogressively diminish the property from whichthe child’s income is paid. Consequently, the
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income interest is not considered an ordinaryincome interest for purposes of this paragraph,and the standard section 7520 income interestfactor may not be used to determine the presentvalue of the income interest. Nevertheless, thepresent value of the child’s income interest isascertainable by making a special actuarialcalculation that would take into account not onlythe initial value of the trust corpus, the section7520 interest rate for the month of the transfer,and the mortality component for the child’s age,but also the assumption that the trust corpus willdecline at the rate of $5,000 each year during thechild’s lifetime. The child’s right to receive anamount not in excess of $5,000 per year may beseparately valued in this instance and, assumingthe trust corpus would not exhaust before thechild would attain age 110, would be consideredan ordinary annuity interest.
Example 5. Power to consume. The decedent,A, devised a life estate in 3 parcels of real estateto A’s surviving spouse with the remainder to achild, or, if the child doesn’t survive, to thechild’s estate. A also conferred upon the spousean unrestricted power to consume the property,which includes the right to sell part or all of theproperty and to use the proceeds for the spouse’ssupport, comfort, happiness, and other purposes.Any portion of the property or its sale proceedsremaining at the death of the surviving spouse isto vest by operation of law in the child at thattime. The child predeceased the survivingspouse. In this case, the surviving spouse’spower to consume the corpus is unrestricted, andthe exercise of the power could entirely exhaustthe remainder interest during the life of thespouse. Consequently, the remainder interest thatis includible in the child’s estate is notconsidered an ordinary remainder interest forpurposes of this paragraph and may not bevalued actuarially under this section.
(3) Mortality component—(i) Termi-nal illness. Except as provided inparagraph (b)(3)(ii) of this section, themortality component prescribed undersection 7520 may not be used todetermine the present value of anannuity, income interest, remainderinterest, or reversionary interest if anindividual who is a measuring life isterminally ill at the time of thedecedent’s death. For purposes of thisparagraph (b)(3), an individual who isknown to have an incurable illness orother deteriorating physical condition isconsidered terminally ill if there is atleast a 50 percent probability that the
individual will die within 1 year.However, if the individual survives foreighteen months or longer after thedate of the decedent’s death, thatindividual shall be presumed to havenot been terminally ill at the date ofdeath unless the contrary is establishedby clear and convincing evidence.
(ii) Terminal illness exceptions. Inthe case of the allowance of the creditfor tax on a prior transfer under section2013, if a final determination of thefederal estate tax liability of the trans-feror’s estate has been made undercircumstances that required valuation ofthe life interest received by the trans-feree, the value of the property trans-ferred, for purposes of the creditallowable to the transferee’s estate,shall be the value determined pre-viously in the transferor’s estate. Other-wise, for purposes of section 2013, theprovisions of paragraph (b)(3)(i) of thissection shall govern in valuing theproperty transferred. The value of adecedent’s reversionary interest undersections 2037(b) and 2042(2) shall bedetermined without regard to the physi-cal condition, immediately before thedecedent’s death, of the individual whois the measuring life.
(iii) Death resulting from commonaccidents. The mortality componentprescribed under section 7520 may notbe used to determine the present valueof an annuity, income interest, re-mainder interest, or reversionary inter-est if the decedent, and the individualwho is the measuring life, die as aresult of a common accident or otheroccurrence.
(4) Examples. The provisions ofparagraph (b)(3) of this section areillustrated by the following examples:
Example 1. Terminal illness. The decedentbequeaths $1,000,000 to a trust under the termsof which the trustee is to pay $103,000 per yearto a charitable organization during the life of thedecedent’s child. Upon the death of the child, theremainder in the trust is to be distributed to thedecedent’s grandchild. The child, who is age 60,has been diagnosed with an incurable illness, and
there is at least a 50 percent probability of thechild dying within 1 year. Assuming thepresumption provided for in paragraph (b)(3)(i)of this section does not apply, the standard lifeannuity factor for a person age 60 may not beused to determine the present value of thecharitable organization’s annuity interest becausethere is at least a 50 percent probability that thechild, who is the measuring life, will die within1 year. Instead, a special section 7520 annuityfactor must be computed that takes into accountthe projection of the child’s actual lifeexpectancy.
Example 2. Deaths resulting from commonaccidents, etc. The decedent’s will establishes atrust to pay income to the decedent’s survivingspouse for life. The will provides that, upon thespouse’s death or, if the spouse fails to survivethe decedent, upon the decedent’s death the trustproperty is to pass to the decedent’s children.The decedent and the decedent’s spouse diesimultaneously in an accident under circum-stances in which it was impossible to determinewho survived the other. Even if the terms of thewill and applicable state law presume that thedecedent died first with the result that theproperty interest is considered to have passed intrust for the benefit of the spouse for life, afterwhich the remainder is to be distributed to thedecedent’s children, the spouse’s life incomeinterest may not be valued by use of themortality component described under section7520. The result would be the same even if itwas established that the spouse survived thedecedent.
(5) Additional limitations. Section7520 does not apply to the extent asmay otherwise be provided by theCommissioner.
(c) * * * The provisions of para-graph (b) of this section are effectivewith respect to estates of decedentsdying after December 13, 1995.
PART 25—GIFT TAX; GIFTSMADE AFTER DECEMBER 31,1954
Par. 5. The authority citation for part25 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *Par. 6. In the list below, for each
section indicated in the left column,remove the language in the middlecolumn and add the language in theright column:
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Section Remove Add
25.2522(c)–3(c)(2)(i)6th sentence
(e)(2)(ii), (iii), and (iv) (c)(2)(ii), (iii), and (iv)
Par. 7. Section 25.7520–3 isamended by revising paragraph (b) andadding a sentence at the end ofparagraph (c) to read as follows:
§ 25.7520–3 Limitation on theapplication of section 7520.
(b) Other limitations on the applica-tion of section 7520— (1) In general—(i) Ordinary beneficial interests. Forpurposes of this section:
(A) An ordinary annuity interest isthe right to receive a fixed dollaramount at the end of each year duringone or more measuring lives or forsome other defined period. A standardsection 7520 annuity factor for anordinary annuity interest represents thepresent worth of the right to receive$1.00 per year for a defined period,using the interest rate prescribed undersection 7520 for the appropriate month.If an annuity interest is payable moreoften than annually or is payable at thebeginning of each period, a specialadjustment must be made in anycomputation with a standard section7520 annuity factor.
(B) An ordinary income interest isthe right to receive the income from orthe use of property during one or moremeasuring lives or for some otherdefined period. A standard section 7520income factor for an ordinary income
interest represents the present worth ofthe right to receive the use of $1.00 fora defined period, using the interest rateprescribed under section 7520 for theappropriate month. However, in thecase of certain gifts made after October8, 1990, if the donor does not retain aqualified annuity, unitrust, or reversion-ary interest, the value of any interestretained by the donor is considered tobe zero if the remainder beneficiary isa member of the donor’s family. See§ 25.2702–2.
(C) An ordinary remainder or rever-sionary interest is the right to receivean interest in property at the end of oneor more measuring lives or some otherdefined period. A standard section 7520remainder factor for an ordinary re-mainder or reversionary interest repre-sents the present worth of the right toreceive $1.00 at the end of a definedperiod, using the interest rate pre-scribed under section 7520 for theappropriate month.
(ii) Certain restricted beneficial in-terests. A restricted beneficial interestis an annuity, income, remainder, orreversionary interest that is subject toany contingency, power, or otherrestriction, whether the restriction isprovided for by the terms of the trust,will, or other governing instrument oris caused by other circumstances. Ingeneral, a standard section 7520 an-nuity, income, or remainder factor may
not be used to value a restrictedbeneficial interest. However, a specialsection 7520 annuity, income, or re-mainder factor may be used to value arestricted beneficial interest under somecircumstances. See paragraphs (b)(2)(v)Example 5 and (b)(4) of this section,which illustrate situations in whichspecial section 7520 actuarial factorsare needed to take into account limita-tions on beneficial interests. See§ 25.7520–1(c) for requesting a specialfactor from the Internal RevenueService.
(iii) Other beneficial interests. If,under the provisions of this paragraph(b), the interest rate and mortalitycomponents prescribed under section7520 are not applicable in determiningthe value of any annuity, income,remainder, or reversionary interest, theactual fair market value of the interest(determined without regard to section7520) is based on all of the facts andcircumstances if and to the extentpermitted by the Internal RevenueCode provision applicable to the prop-erty interest.
(2) Provisions of governing instru-ment and other limitations on source ofpayment—(i) Annuities. A standardsection 7520 annuity factor may not beused to determine the present value ofan annuity for a specified term of yearsor the life of one or more individualsunless the effect of the trust, will, or
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other governing instrument is to ensurethat the annuity will be paid for theentire defined period. In the case of anannuity payable from a trust or otherlimited fund, the annuity is not consid-ered payable for the entire definedperiod if, considering the applicablesection 7520 interest rate on thevaluation date of the transfer, theannuity is expected to exhaust the fundbefore the last possible annuity pay-ment is made in full. For this purpose,it must be assumed that it is possiblefor each measuring life to survive untilage 110. For example, for a fixedannuity payable annually at the end ofeach year, if the amount of the annuitypayment (expressed as a percentage ofthe initial corpus) is less than or equalto the applicable section 7520 interestrate at the date of the transfer, thecorpus is assumed to be sufficient tomake all payments. If the percentageexceeds the applicable section 7520interest rate and the annuity is for adefinite term of years, multiply theannual annuity amount by the Table Bterm certain annuity factor, as de-scribed in § 25.7520–1(c)(1), for thenumber of years of the defined period.If the percentage exceeds the applicablesection 7520 interest rate and theannuity is payable for the life of one ormore individuals, multiply the annualannuity amount by the Table B annuityfactor for 110 years minus the age ofthe youngest individual. If the resultexceeds the limited fund, the annuitymay exhaust the fund, and it will benecessary to calculate a special section7520 annuity factor that takes intoaccount the exhaustion of the trust orfund. This computation would be modi-fied, if appropriate, to take into accountannuities with different payment terms.
(ii) Income and similar interests—(A) Beneficial enjoyment. A standardsection 7520 income factor for anordinary income interest is not to beused to determine the present value ofan income or similar interest in trustfor a term of years or for the life ofone or more individuals unless theeffect of the trust, will, or othergoverning instrument is to provide theincome beneficiary with that degree ofbeneficial enjoyment of the propertyduring the term of the income interestthat the principles of the law of trustsaccord to a person who is unqualifiedlydesignated as the income beneficiary ofa trust for a similar period of time.This degree of beneficial enjoyment isprovided only if it was the transferor’s
intent, as manifested by the provisionsof the governing instrument and thesurrounding circumstances, that thetrust provide an income interest for theincome beneficiary during the specifiedperiod of time that is consistent withthe value of the trust corpus and withits preservation. In determining whethera trust arrangement evidences thatintention, the treatment required orpermitted with respect to individualitems must be considered in relation tothe entire system provided for in theadministration of the subject trust.Similarly, in determining the presentvalue of the right to use tangibleproperty (whether or not in trust) forone or more measuring lives or forsome other specified period of time, theinterest rate component prescribed un-der section 7520 and § 1.7520–1 of thischapter may not be used unless, duringthe specified period, the effect of thetrust, will or other governing instru-ment is to provide the beneficiary withthat degree of use, possession, andenjoyment of the property during theterm of interest that applicable statelaw accords to a person who is un-qualifiedly designated as a life tenantor term holder for a similar period oftime.
(B) Diversions of income andcorpus. A standard section 7520 in-come factor for an ordinary incomeinterest may not be used to value anincome interest or similar interest inproperty for a term of years, or for oneor more measuring lives, if—
(1) The trust, will, or other govern-ing instrument requires or permits thebeneficiary’s income or other enjoy-ment to be withheld, diverted, oraccumulated for another person’s bene-fit without the consent of the incomebeneficiary; or
(2) The governing instrument re-quires or permits trust corpus to bewithdrawn from the trust for anotherperson’s benefit without the consent ofthe income beneficiary during theincome beneficiary’s term of enjoymentand without accountability to the in-come beneficiary for such diversion.
(iii) Remainder and reversionaryinterests. A standard section 7520remainder interest factor for an ordi-nary remainder or reversionary interestmay not be used to determine thepresent value of a remainder or rever-sionary interest (whether in trust orotherwise) unless, consistent with thepreservation and protection that the law
of trusts would provide for a personwho is unqualifiedly designated as theremainder beneficiary of a trust for asimilar duration, the effect of theadministrative and dispositive provi-sions for the interest or interests thatprecede the remainder or reversionaryinterest is to assure that the propertywill be adequately preserved and pro-tected (e.g., from erosion, invasion,depletion, or damage) until the re-mainder or reversionary interest takeseffect in possession and enjoyment.This degree of preservation and protec-tion is provided only if it was thetransferor’s intent, as manifested by theprovisions of the arrangement and thesurrounding circumstances, that theentire disposition provide the remainderor reversionary beneficiary with anundiminished interest in the propertytransferred at the time of the termina-tion of the prior interest.
(iv) Pooled income fund interests. Ingeneral, pooled income funds are cre-ated and administered to achieve aspecial rate of return. A beneficialinterest in a pooled income fund is notordinarily valued using a standardsection 7520 income or remainderinterest factor. The present value of abeneficial interest in a pooled incomefund is determined according to rulesand special remainder factors pre-scribed in § 1.642(c)–6 of this chapterand, when applicable, the rules setforth under paragraph (b)(3) of thissection if the individual who is themeasuring life is terminally ill at thetime of the transfer.
(v) Examples. The provisions of thisparagraph (b)(2) are illustrated by thefollowing examples:
Example 1. Unproductive property. The donortransfers corporation stock to a trust under theterms of which all of the trust income is payableto A for life. Considering the applicable federalrate under section 7520 and the appropriate lifeestate factor for a person A’s age, the value ofA’s income interest, if valued under this section,would be $10,000. After A’s death, the trust is toterminate and the trust property is to bedistributed to B. The trust specifically authorizes,but does not require, the trustee to retain theshares of stock. The corporation has paid nodividends on this stock during the past 5 years,and there is no indication that this policy willchange in the near future. Under applicable statelaw, the corporation is considered to be a soundinvestment that satisfies fiduciary standards. Thefacts and circumstances, including applicablestate law, indicate that the income beneficiarywould not have the legal right to compel thetrustee to make the trust corpus productive inconformity with the requirements for a lifetimetrust income interest under applicable local law.Therefore, the life income interest in this case is
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considered nonproductive. Consequently, A’sincome interest may not be valued actuariallyunder this section.
Example 2. Beneficiary’s right to make trustproductive. The facts are the same as in Example1, except that the trustee is not specificallyauthorized to retain the shares of corporationstock. Further, the terms of the trust specificallyprovide that the life income beneficiary mayrequire the trustee to make the trust corpusproductive consistent with income yield stand-ards for trusts under applicable state law. Underthat law, the minimum rate of income that aproductive trust may produce is substantiallybelow the section 7520 interest rate on thevaluation date. In this case, because A, theincome beneficiary, has the right to compel thetrustee to make the trust productive for purposesof applicable local law during A’s lifetime, theincome interest is considered an ordinary incomeinterest for purposes of this paragraph, and thestandard section 7520 life income factor may beused to determine the value of A’s incomeinterest. However, in the case of gifts made afterOctober 8, 1990, if the donor was the life incomebeneficiary, the value of the income interestwould be considered to be zero in this situation.See § 25.2702–2.
Example 3. Annuity trust funded with unpro-ductive property. The donor, who is age 60,transfers corporation stock worth $1,000,000 to atrust. The trust will pay a 6 percent ($60,000 peryear) annuity in cash or other property to thedonor for 10 years or until the donor’s priordeath. Upon the termination of the trust, the trustproperty is to be distributed to the donor’s child.The section 7520 rate for the month of thetransfer is 8.2 percent. The corporation has paidno dividends on the stock during the past 5years, and there is no indication that this policywill change in the near future. Under applicablestate law, the corporation is considered to be asound investment that satisfies fiduciary stand-ards. Therefore, the trust’s sole investment inthis corporation is not expected to adverselyaffect the interest of either the annuity benefici-ary or the remainder beneficiary. Considering the6 percent annuity payout rate and the 8.2 percentsection 7520 interest rate, the trust corpus isconsidered sufficient to pay this annuity for theentire 10-year term of the trust, or evenindefinitely. The trust specifically authorizes, butdoes not require, the trustee to retain the sharesof stock. Although it appears that neitherbeneficiary would be able to compel the trusteeto make the trust corpus produce investmentincome, the annuity interest in this case isconsidered to be an ordinary annuity interest, anda section 7520 annuity factor may be used todetermine the present value of the annuity. Inthis case, the section 7520 annuity factor wouldrepresent the right to receive $1.00 per year for aterm of 10 years or the prior death of a personage 60.
Example 4. Unitrust funded with unproductiveproperty. The facts are the same as in Example3, except that the donor has retained a unitrustinterest equal to 7 percent of the value of thetrust property, valued as of the beginning of eachyear. Although the trust corpus is nonincome-producing, the present value of the donor’sretained unitrust interest may be determined byusing the section 7520 unitrust factor for a termof years or a prior death.
Example 5. Eroding corpus in an annuity trust.(i) The donor, who is age 60 and in normalhealth, transfers property worth $1,000,000 to a
trust. The trust will pay a 10 percent ($100,000per year) annuity to a charitable organization forthe life of the donor, payable annually, and theremainder will be distributed to the donor’schild. The section 7520 rate for the month of thetransfer is 6.8 percent. First, it is necessary todetermine whether the annuity may exhaust thecorpus before all annuity payments are made.Because it is assumed that any measuring lifemay survive until age 110, any life annuity couldrequire payments until the measuring life reachesage 110. Based on a section 7520 interest rate of6.8 percent, the determination of whether theannuity may exhaust the corpus before theannuity payments are made is computed asfollows:
Age to which life annuity may continue 110less: Age of measuring life at date
of transfer . . . . . . . . . . . . . . . . . . . . . . . . .60Number o f yea r s annu i t y may
(ii) Since the present value of an annuity for aterm of 50 years exceeds the corpus, the annuitymay exhaust the trust before all payments aremade. Consequently, the annuity must be valuedas an annuity payable for a term of years or untilthe prior death of the annuitant, with the term ofyears determined by when the fund will beexhausted by the annuity payments.
(iii) Using factors based on Table 80CNSMTat 6.8 percent, it is determined that the fund willbe sufficient to make 17 annual payments, butnot to make the entire 18th payment. Specifi-cally, the initial corpus will be able to makepayments of $67,287.26 per year for 17 yearsplus payments of $32,712.74 per year for 18years. The annuity is valued by adding the valueof the two separate temporary annuities.
(iv) Based on Table H of Publication 1457 (acopy of this publication may be purchased fromthe Superintendent of Documents, United StatesGovernment Printing Office, Washington, DC20402), the present value of an annuity of$67,287.26 per year payable for 17 years or untilthe prior death of a person aged 60 is$579,484.61 ($67,287.26 3 8.6121). The presentvalue of an annuity of $32,712.74 per yearpayable for 18 years or until the prior death of aperson aged 60 is $287,731.45 ($32,712.74 38.7957). Thus, the present value of the charitableannuity interest is $867,216.06 ($579,484.61 +$287,731.45).
(3) Mortality component. The mor-tality component prescribed under sec-tion 7520 may not be used to determinethe present value of an annuity, incomeinterest, remainder interest, or rever-sionary interest if an individual who isa measuring life dies or is terminally illat the time the gift is completed. Forpurposes of this paragraph (b)(3), anindividual who is known to have anincurable illness or other deterioratingphysical condition is considered termi-nally ill if there is at least a 50 percent
probability that the individual will diewithin 1 year. However, if the individ-ual survives for eighteen months orlonger after the date the gift iscompleted, that individual shall bepresumed to have not been terminallyill at the date the gift was completedunless the contrary is established byclear and convincing evidence.
(4) Example. The provisions of para-graph (b)(3) of this section are illus-trated by the following example:
Example. Terminal illness. The donor transfersproperty worth $1,000,000 to a child in exchangefor the child’s promise to pay the donor$103,000 per year for the donor’s life. The donoris age 60 but has been diagnosed with anincurable illness and has at least a 50 percentprobability of dying within 1 year. The section7520 interest rate for the month of the transfer is10.6 percent, and the standard annuity factor atthat interest rate for a person age 60 in normalhealth is 7.4230. Thus, if the donor were notterminally ill, the present value of the annuitywould be $764,569 ($103,000 3 7.4230). As-suming the presumption provided in paragraph(b)(3) of this section does not apply, becausethere is at least a 50 percent probability that thedonor will die within 1 year, the standard section7520 annuity factor may not be used todetermine the present value of the donor’sannuity interest. Instead, a special section 7520annuity factor must be computed that takes intoaccount the projection of the donor’s actual lifeexpectancy.
(5) Additional limitations. Section7520 does not apply to the extent asmay otherwise be provided by theCommissioner.
(c) * * * The provisions of para-graph (b) of this section are effectivewith respect to gifts made after Decem-ber 13, 1995.
Michael P. Dolan,Acting Commissioner of
Internal Revenue.
Approved October 29, 1995.
Leslie Samuels,Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register onDecember 12, 1995, 8:45 a.m., and publishedin the issue of the Federal Register forDecember 13, 1995, 60 F.R. 63913)
Section 7701.—Definitions
The Service will not rule on certain issuesraised in connection with the transfer of a life
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insurance policy to an unincorporated organiza-tion. See Rev. Proc. 96–12, page 30.
Section 7872.—Treatment of Loanswith Below-Market Interest Rates
CPI adjustment for below-marketloans—1996. The amount that section7872(g) of the Code permits a taxpayerto lend to a qualified continuing carefacility without incurring imputed inter-est is published and adjusted forinflation for years 1987–1996. Rev.Rul . 95–11 supplemented andsuperseded.
Rev. Rul. 96–5
This revenue ruling publishes theamount that § 7872(g) of the InternalRevenue Code permits a taxpayer tolend to a qualifying continuing carefacility without incurring imputed inter-est. The amount is adjusted for infla-tion for the years after 1986.
Section 7872 of the Code generallytreats loans bearing a below-marketinterest rate as if they bore interest atthe market rate.
Section 7872(g)(1) of the Codeprovides that, in general, § 7872 doesnot apply for any calendar year to anybelow-market loan made by a lender toa qualified continuing care facilitypursuant to a continuing care contractif the lender (or the lender’s spouse)attains age 65 before the close of theyear.
Section 7872(g)(2) of the Codeprovides that, in the case of loans madeafter October 11, 1985, and before1987, § 7872(g)(1) applies only to theextent that the aggregate outstandingamount of any loan to which § 7872(g)applies (determined without regard to§ 7872(g)(2)), when added to the ag-gregate outstanding amount of all otherprevious loans between the lender (orthe lender’s spouse) and any qualifiedcontinuing care facility to which§ 7872(g)(1) applies, does not exceed$90,000.
Section 7872(g)(5) of the Codeprovides that, for loans made duringany calendar year after 1986 to which§ 7872(g)(1) applies, the $90,000 limitspecified in § 7872(g)(2) is increasedby an inflation adjustment. The infla-tion adjustment for any calendar year isthe percentage (if any) by which theConsumer Price Index (CPI) for thepreceding calendar year exceeds theCPI for calendar year 1985. Section7872(g)(5) states that the CPI for anycalendar year is the average of the CPIas of the close of the 12-month periodending on September 30 of that calen-dar year.
Rev. Rul. 95–11, 1995–1 C.B. 224,publishes the amount specified in§ 7872(g)(2) of the Code, increased bythe inflation adjustment, for the years1987–95.
Table 1 sets forth the amount spec-ified in § 7872(g)(2) of the Code. Theamount is increased by the inflationadjustment for the years 1987–96.
Note: These inflation adjustmentswere computed using the All-Urban, Consumer Price Index1982-1984 base, published by theBureau of Labor Statistics.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 95–11, 1995–1 C.B. 224,is supplemented and superseded.
DRAFTING INFORMATION
The author of this revenue ruling isDavid B. Silber of the Office ofAssistant Chief Counsel (Financial In-stitutions and Products). For furtherinformation regarding this revenue rul-ing, contact Mr. Silber on (202)622-3930 (not a toll-free call).
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Part III. Administrative, Procedural, and Miscellaneous
Empowerment Zone EmploymentCredit
Notice 96–1
The Omnibus Budget ReconciliationAct of 1993, Pub. L. No. 103–66(OBRA’93) added sections 1391through 1397D (relating to empower-ment zones and enterprise commu-nities) to the Internal Revenue Code.See sections 13301 through 13303 ofOBRA’93. Section 1397D of the Codeauthorizes the Secretary of the Treasuryto prescribe such regulations as may benecessary or appropriate to carry outthe purposes of sections 1394 through1397C.
The empowerment zone employmentcredit is set forth in section 1396 of theCode. The amount of the credit is equalto a specified percentage of qualifiedzone wages, which are certain wagespaid or incurred by an employer forservices performed by a qualified zoneemployee. Certain questions havearisen about the definition of a‘qualified zone employee‘ in section1396(d). In particular, questions havebeen raised about the appropriateperiod under section 1396(d)(1)(A) dur-ing which substantially all of theservices performed by an employee forhis or her employer must be performedwithin an empowerment zone in a tradeor business of the employer.
The Internal Revenue Service intendsto issue a notice of proposed rulemak-ing, pursuant to the authority providedby sections 1397D and 7805(a), clarify-ing the relevant period for this purpose.The proposed regulations will providethat an employer may elect either ofthe following two approaches withrespect to each calendar year. Theemployer must use the same approachwith respect to all of its employees incomputing the credit for the year.
Under the first alternative, the rele-vant period for an employee is eachpay period in which the employeeprovides services to the employer. If anemployer has one pay period forcertain employees and a different payperiod for other employees (e.g., aweekly pay period for hourly wageemployees and a bi-weekly pay periodfor salaried employees), the pay periodactually applicable to a particularemployee is the relevant pay period for
that employee under this alternative.The credit may be claimed with respectto qualified zone wages (within themeaning of section 1396(c)) for serv-ices provided during each pay period inwhich substantially all of the servicesperformed by the employee for theemployer are performed within anempowerment zone in a trade orbusiness of the employer.
Under the second alternative, therelevant period for an employee is theentire calendar year with respect towhich the credit is being claimed bythat employer (or, for any employeewho is employed by the employer forless than the entire calendar year, theportion of that calendar year duringwhich the employee is employed by theemployer). Under this alternative, anemployee is not a qualified zoneemployee within the meaning of sec-tion 1396(d)(1) unless substantially allof the services performed by theemployee for the employer during thecalendar year are performed within anempowerment zone in a trade orbusiness of the employer. If theemployee is a qualified zone employee,the credit may be claimed with respectto qualified zone wages (within themeaning of section 1396(c)) for allservices performed by the employee forthe employer during the calendar year.
While the Service does not anticipateimposing specific record-keeping re-quirements in the regulations, undereither alternative an employer would beexpected to have and maintain recordssufficient to establish, for eachemployee with respect to whom theempowerment zone employment creditis claimed, where the employee actu-ally worked during the relevant period.The nine empowerment zones are lo-cated in portions of Atlanta, Baltimore,Ch icago , De t ro i t , New York ,Philadelphia/Camden, and the KentuckyHighlands (Clinton, Jackson, andWayne Counties, Kentucky), Mid-Delta(Bolivar, Sunflower, Leflore, Wash-ington, Humphreys, and HolmesCounties, Mississippi), and Rio GrandeValley (Starr, Cameron, Hidalgo, andWillacy Counties, Texas) regions.
These regulations will be proposed tobe effective December 21, 1994, thedate on which the nine empowermentzones authorized by OBRA’93 weredesignated by the Secretaries of Hous-ing and Urban Development andAgriculture.
The Service requests comments re-garding these alternative approaches, aswell as comments on other issuesrelating to the empowerment zoneemployment credit with respect towhich guidance may be helpful toemployers. These comments should besubmitted in writing by March 29,1996, to Internal Revenue Service,Office of the Associate Chief Counsel(Employee Benefits and Exempt Orga-nizations), CC:EBEO:4, Room 5203,1111 Constitution Avenue, N.W.,Washington, DC 20224, Attn: RobertG. Wheeler.
The principal author of this notice isRobert Wheeler of the Office of theAssociate Chief Counsel (EmployeeBenefits and Exempt Organizations).For further information regarding thisnotice contact Mr. Wheeler on (202)622-6060 (not a toll-free call).
26 CFR 601.201: Rulings and determinationletters.(Also Part I, §§ 101, 761, 7701.)
Rev. Proc. 96–12
SECTION 1. BACKGROUND
Rev. Proc. 96–3, 1996–1 I.R.B. 82,sets forth areas of the Internal RevenueCode under the jurisdiction of theAssociate Chief Counsel (Domestic) inwhich the Internal Revenue Servicewill not issue advance rulings ordetermination letters.
SECTION 2. PROCEDURE
Rev. Proc. 96–3 is amplified byadding to section 5 the following:Sections 101, 761 and 7701.—Definitions.—Whether, in connectionwith the transfer of a life insurancepolicy to an unincorporated organiza-tion, (i) the organization will be treatedas a partnership under §§ 761 and 7701of the Internal Revenue Code, or (ii)the transfer of the life insurance policyto the organization will be exempt fromthe transfer for value rules of § 101,when substantially all of the organiza-tion’s assets consist or will consist oflife insurance policies on the lives ofthe members.
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SECTION 3. EFFECTIVE DATE
This revenue procedure applies to allruling requests pending in the NationalOffice as of January 16, 1996, andruling requests received after thatdate.
SECTION 4. EFFECT ON OTHERREVENUE PROCEDURES
Rev. Proc. 96–3 is amplified.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Brian M. Blum of the Officeof Assistant Chief Counsel (Pass-throughs and Special Industries). Forfurther information regarding this reve-nue ruling, contact Mr. Blum on (202)622-3050 (not a toll-free call).
26 CFR 601.201: Rulings and determination letters.
Rev. Proc. 96–13
OUTLINE
SECTION 1. PURPOSE OF MUTUAL AGREEMENT PROCESS
SEC. 2. SCOPE.01 GeneralSuspension .02 Requests for Assistance.03 U.S. Competent Authority.04 General Process.05 Failure to Request Assistance
SEC. 3. GENERAL CONDITIONS UNDER WHICH THIS PROCEDURE APPLIES.01 General.02 Requirements of a Treaty.03 Applicable Standards in Allocation Cases.04 Who Can File Requests for Assistance.05 Closed Cases.06 Foreign Initiated Competent Authority Request.07 Requests Relating to Residence Issues.08 Determinations Regarding Limitation on Benefits
SEC. 4. PROCEDURES FOR REQUESTING COMPETENT AUTHORITY ASSISTANCE.01 Time for Filing.02 Place of Filing.03 Additional Filing.04 Form of Request.05 Information Required.06 APAs.07 Other Documentation.08 Updates.09 Conferences
SEC. 5. SMALL CASE PROCEDURE FOR REQUESTING COMPETENT AUTHORITY ASSISTANCE.01 General.02 Small Case Standards.03 Small Case Filing Procedure
SEC. 6. RELIEF REQUESTED FOR FOREIGN INITIATED ADJUSTMENT WITHOUT COMPETENT AUTHORITYINVOLVEMENT
SEC. 7. COORDINATION WITH OTHER ADMINISTRATIVE OR JUDICIAL PROCEEDINGS.01 Suspension of Administrative Action with Respect to U.S. Adjustments
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.02 Coordination with Appeals
.03 Coordination with Litigation
.04 Coordination with the APA Procedure
.05 Effect of Agreements or Judicial Determinations on Competent Authority Proceedings
.06 Accelerated Competent Authority Procedure
SEC. 8. SIMULTANEOUS APPEALS PROCEDURE.01 General.02 Time for Requesting the Simultaneous Appeals Procedure
(a) When Filing For Competent Authority Assistance(b) After Filing For Competent Authority Assistance
.03 Cases Pending in Court
.04 Request for Simultaneous Appeals Procedure
.05 Role of Appeals in the Competent Authority Process(a) Appeals Process(b) Assistance to U.S. Competent Authority
.06 Denial or Termination of Simultaneous Appeals Procedure(a) Taxpayer’s Termination(b) Service’s Denial or Termination
.07 Returning to Appeals
.08 Appeals Consideration of Non-Competent Authority Issues
SEC. 9. PROTECTIVE MEASURES.01 General.02 Filing of Amended Tax Return in the United States.03 Filing a Protective Claim in the United States
(a) In General(b) Filing of Protective Claim(c) Notification Requirement(d) No Consultation between Competent Authorities until Formal Request is Filed
.04 Effect of an Amended Tax Return
.05 Treaty Provisions Waiving Procedural Barriers
SEC. 10. APPLICATION OF REV. PROC. 65–17
SEC. 11. DETERMINATION OF CREDITABLE FOREIGN TAXES
SEC. 12. ACTION BY U.S. COMPETENT AUTHORITY.01 Notification of Taxpayer.02 Denial of Assistance.03 Extending Period of Limitations for Assessment.04 No Review of Denial of Request for Assistance.05 Notification.06 Closing Agreement.07 Unilateral Withdrawal or Reduction of U.S. Initiated Adjustments
SEC. 13. REQUESTS FOR RULINGS.01 General.02 Foreign Tax Rulings
SEC. 14. FEES
SEC. 15. EFFECT ON OTHER DOCUMENTS
SEC. 16. EFFECTIVE DATE
DRAFTING INFORMATION
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SECTION 1. PURPOSE OF MUTUALAGREEMENT PROCESS
This revenue procedure sets forth theprocedures concerning requests by tax-payers for assistance of the U.S.competent authority under the provi-sions of an income, estate or gift taxtreaty to which the United States is aparty. Rev. Proc. 91–23, 1991–1 C.B.534, and Rev. Proc. 91–26, 1991–1C.B. 543, are superseded by thisrevenue procedure.
SEC. 2. SCOPE
.01 General. The U.S. competentauthority assists taxpayers with respectto matters covered in the mutualagreement procedure provisions of taxtreaties in the manner specified in thoseprovisions. A tax treaty generally per-mits taxpayers to request competentauthority assistance when they considerthat actions of the United States, thetreaty country, or both, result or willresult in taxation that is contrary to theprovisions of a treaty. For example, taxtreaties generally permit taxpayers torequest assistance in order to relieveeconomic double taxation arising froman allocation under § 482 of theInternal Revenue Code or an equivalentprovision under the laws of a treatycountry. Competent authority assistancemay also be available with respect toissues specifically dealt with in otherprovisions of a treaty. For example,Article XIII(8) of the U.S.-Canadaincome tax treaty permits taxpayers torequest the competent authority to deferthe recognition of profit, gain orincome with respect to property alien-ated in the course of a corporateorganization, reorganization or similartransaction. In addition, many taxtreaties contain provisions concerningfiscal residence or concerning whethera taxpayer is entitled to the benefits ofa treaty under specific limitation onbenefits provisions. See section 3.07and 3.08 of this revenue procedure.Taxpayers are urged to examine thespecific mutual agreement procedureprovisions or other specific provisionsof the treaty under which they seekrelief, in order to determine whetherrelief is available in their particularcase. This revenue procedure is notintended to limit or expand any specifictreaty provisions relating to competentauthority matters.
.02 Requests for Assistance. In gen-eral, all requests for competent au-
thority assistance must be submitted inaccordance with this revenue proce-dure. However, where a treaty providesspecific procedures for requests forcompetent authority assistance, thoseprocedures shall apply, and the provi-sions of this revenue procedure shallnot apply to the extent inconsistentwith such treaty procedures. See alsoRev. Proc. 91–22, 1991–1 C.B. 526,concerning requests for competent au-thority assistance with respect to anAdvance Pricing Agreement (‘‘APA’’).
.03 U.S. Competent Authority. TheAssistant Commissioner (International)acts as the U.S. competent authority inadministering the operating provisionsof tax treaties (including entering into acompetent authority settlement in aspecific case) and in interpreting andapplying these treaties. The Tax TreatyDivision assists the Assistant Commis-sioner (International) in these matters.In interpreting or applying tax treaties,the Assistant Commissioner (Interna-tional) acts only with the concurrenceof the Associate Chief Counsel (Inter-national). See Delegation Order No.114 (Rev. 10).
.04 General Process. If a taxpayer’srequest for competent authority assist-ance is accepted, the U.S. competentauthority generally will consult withthe appropriate foreign competent au-thority and attempt to reach a mutualagreement that is acceptable to allparties. The U.S. competent authorityalso may initiate competent authoritynegotiations in any situation deemednecessary to protect U.S. interests.Such a situation may arise, for exam-ple, when a taxpayer fails to requestcompetent authority assistance afteragreeing to a U.S. or foreign taxassessment that is contrary to theprovisions of an applicable tax treaty orfor which correlative relief may beavailable.
.05 Failure to Request Assistance.Failure to request competent authorityassistance or to take appropriate stepsto maintain availability of the remedymay cause a denial of part or all ofany foreign tax credits claimed. See§ 1.901–2(e)(5)(i) of the Income TaxRegulations. See also section 11 of thisrevenue procedure concerning the de-termination of creditable foreign taxes.
SEC. 3. GENERAL CONDITIONSUNDER WHICH THIS PROCEDUREAPPLIES
.01 General. The exclusions, exemp-tions, deductions, credits, reductions in
rate, and other benefits and safeguardsprovided by treaties are subject toconditions and restrictions that mayvary in different treaties. Taxpayersshould examine carefully the specifictreaty provisions applicable in theircases to determine the nature andextent of treaty benefits or safeguardsthey are entitled to and the conditionsunder which such benefits or safe-guards are available. In particular,taxpayers should be aware of statutesof limitations and other proceduralbarriers under U.S. or foreign law thatmay preclude or limit the extent of theassistance under this revenue proce-dure. See section 9 of this revenueprocedure which prescribes protectivemeasures to be taken by the taxpayerand any concerned related person withrespect to U.S. and foreign tax au-thorities. See also section 12.02 of thisrevenue procedure for circumstances inwhich competent authority assistancemay be denied.
.02 Requirements of a Treaty. Thereis no authority for the U.S. competentauthority to provide relief from U.S.tax or to provide other assistance dueto taxation arising under the tax lawsof the foreign country or the UnitedStates, unless such authority is grantedby a treaty. See Rev. Proc. 89–8, 1989–1 C.B. 778, for procedures for request-ing the assistance of the InternalRevenue Service (‘‘the Service’’) whena taxpayer is or may be subject toinconsistent tax treatment by the Serv-ice and a U.S. possession tax agency.
.03 Applicable Standards in Alloca-tion Cases. With respect to requests forcompetent authority assistance involv-ing the allocation of income anddeductions between a U.S. taxpayerand a related person, the U.S. compe-tent authority, in seeking to arrive at anagreement with a treaty country, willbe guided by the arm’s length standard,as reflected in the regulations under§ 482 of the Code. When negotiatingmutual agreements on the allocation ofincome and deductions, the U.S. com-petent authority will take into accountall of the facts and circumstances ofthe particular case and the purpose ofthe treaty to avoid double taxation.
.04 Who Can File Requests forAssistance. Unless otherwise permittedunder an applicable tax treaty, the U.S.competent authority will only considerrequests for assistance from U.S. per-sons, as defined in § 7701(a)(30) of theCode. For purposes of this revenueprocedure, a U.S. person is referred to
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as ‘‘the taxpayer.’’ Thus, non-U.S.persons generally must present theirinitial request for assistance to therelevant foreign competent authority.
.05 Closed Cases. A case previouslyclosed after examination shall not bereopened in order to make an adjust-ment unfavorable to the taxpayer unlessthe exceptional circumstances describedin Rev. Proc. 94–68, 1994–2 C.B. 803,are present. The U.S. competent au-thority may, but is not required to,accept a taxpayer’s request for compe-tent authority consideration that willrequire the reopening of a case closedafter examination.
.06 Foreign Initiated Competent Au-thority Request. When a foreign com-petent authority refers a request from aforeign taxpayer to the U.S. competentauthority for consultation under themutual agreement procedure, the U.S.competent authority generally will re-quire the U.S. related taxpayer (in thecase of an allocation of income ordeductions between related persons) ormay require the foreign taxpayer (inother cases) to file a request forcompetent authority assistance underthis revenue procedure.
.07 Requests Relating to ResidenceIssues. U.S. competent authority assist-ance may be available to taxpayersseeking to establish their residencystatus in the United States. Examplesinclude cases in which taxpayers be-lieve that they are erroneously treatedas non-U.S. residents by treaty coun-tries or cases where taxpayers aretreated as dual residents despite theobjective tie-breaker provisions con-tained in the applicable treaties. Gener-ally, competent authority assistance islimited to situations where resolution ofa residency issue is necessary in orderto avoid double taxation or to deter-mine the applicability of a benefitunder the treaty. Further, a request forassistance regarding a residency issuewill be accepted only if it is establishedthat the issue requires consultation withthe foreign competent authority inorder to ensure consistent treatment bythe United States and the applicabletreaty country. The U.S. competentauthority does not issue unilateraldeterminations with respect to whetheran individual is a resident of the UnitedStates or of a treaty country.
.08 Determinations Regarding Lim-itation on Benefits. Many treaties con-tain a limitation on benefits article thatenumerates prescribed requirements
that must be met to qualify as aresident eligible for benefits under thetreaty. The U.S. competent authoritywill not issue determinations regardinga taxpayer’s status under one of theprescribed requirements in a limitationon benefits provision. However, certaintreaties provide that the competentauthority may, as a matter of discre-tion, determine the availability of treatybenefits where the prescribed require-ments are not met. See, e.g., Article26(7) of the U.S.-Netherlands incometax treaty. Requests for assistance insuch cases should comply with thisrevenue procedure and any other spe-cific procedures that may be issuedfrom time to time.
SEC. 4. PROCEDURES FORREQUESTING COMPETENTAUTHORITY ASSISTANCE
.01 Time for Filing. A request forcompetent authority assistance gener-ally may be filed at any time after anaction occurs which would give rise toa claim for competent authority assist-ance. In a case involving a U.S.initiated adjustment of tax or incomeresulting from a tax examination, arequest for competent authority assist-ance may be submitted as soon aspracticable after the amount of theproposed adjustment is communicatedin writing to the taxpayer. Where aU.S. initiated adjustment has not yetbeen communicated in writing (e.g., anotice of proposed adjustment) to thetaxpayer, the U.S. competent authoritygenerally will deny the request aspremature. In the case of a foreignexamination, a request may be submit-ted as soon as the taxpayer believessuch filing is warranted based on theactions of the country proposing theadjustment. In a case involving the re-allocation of income or deductionsbetween related entities, the requestshould not be filed until such time thatthe taxpayer can establish that there isthe probability of double taxation. Incases not involving an examination, arequest can be made when the taxpayerbelieves that an action or potentialaction warrants the assistance of theU.S. competent authority. Examples ofsuch action include a ruling or pro-mulgation by a foreign tax authorityconcerning a taxation matter, or thewithholding of tax by a withholdingagent. Except where otherwise providedin an applicable treaty, taxpayers havediscretion over the time for filing a
request; however, delays in filing maypreclude effective relief. See section 9of this revenue procedure concerningprotective measures for taxpayers thatneed or wish to delay the filing of arequest for assistance. See also section7.06 of this revenue procedure for rulesrelating to accelerated issue resolutionand competent authority assistance.
.02 Place of Filing. The taxpayermust send all written requests for, orany inquiries regarding, competent au-thority assistance to the Assistant Com-missioner (International), Attn: TaxTreaty Division, Internal RevenueService, P.O. Box 23598, WashingtonD.C. 20026–3598.
.03 Additional Filing. In the case ofU.S. initiated adjustments, the taxpayeralso must file a copy of the requestwith the office of the Service where thetaxpayer’s case is pending. If therequest is filed after the matter hasbeen designated for litigation or whilea suit contesting the relevant taxliability of the taxpayer is pending in aU.S. court, a copy of the request alsomust be filed with the Chief Counsel,Attention: Associate Chief Counsel (In-ternational), Internal Revenue Service,Washington, D.C. 20224, with a sepa-rate statement attached identifying thecourt where the suit is pending and thedocket number of the action.
.04 Form of Request. A request forcompetent authority assistance must bein the form of a letter addressed to theAssistant Commissioner (International).It must be dated and signed by aperson having the authority to sign thetaxpayer’s federal tax returns. Therequest must contain a statement thatcompetent authority assistance is beingrequested and must include the infor-mation described in section 4.05 of thisrevenue procedure. See section 5 of thisrevenue procedure for requests involv-ing small cases.
.05 Information Required. The fol-lowing information shall be included inthe request for competent authorityassistance:
(a) a reference to the specific treatyand the provisions therein pursuant towhich the request is made;
(b) the names, addresses, U.S. tax-payer identification number and foreigntaxpayer identification number (if any)of the taxpayer and, if applicable, allrelated persons involved in the matter;
(c) if applicable, a description of thecontrol and business relationships be-tween the taxpayer and any relevant
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related person for the years in issue,including any changes in such relation-ship to the date of filing the request;
(d) a brief description of the issuesfor which competent authority assist-ance is requested, including a briefdescription of the relevant transactions,activities or other circumstances in-volved in the issues raised and thebasis for the adjustment, if any;
(e) the years and amounts involvedwith respect to the issues in both U.S.dollars and foreign currency;
(f) if applicable, the district officewhich has made or is proposing tomake the adjustment;
(g) an explanation of the nature ofthe relief sought or the action requestedin the United States or in the treatycountry with respect to the issuesraised, including a statement as towhether the taxpayer wishes to availitself of the relief provided under Rev.Proc. 65–17, 1965–1 C.B. 833, asamplified, amended, clarified and mod-ified by Rev. Proc. 65–31, 1965–2 C.B.1024, Rev. Proc. 65–17 Amendment I,1966–2 C.B. 1211, Rev. Proc. 65–17Amendment II, 1974–1 C.B. 411, Rev.Proc. 70–23, 1970–2 C.B. 505, Rev.Proc. 71–35, 1971–2 C.B. 573, Rev.Proc. 72–48, 1972–2 C.B. 829, Rev.Proc. 72–53, 1972–2 C.B. 833, andRev. Proc. 91–24, 1991–1 C.B. 542,(hereinafter referred to as ‘‘Rev. Proc.65–17’’), as indicated in section 10 ofthis revenue procedure;
(h) a statement whether the period oflimitations for the years for whichrelief is sought has expired in theUnited States or in the treaty country;
(i) a statement whether the requestfor competent authority assistance in-volves issues that are currently, or werepreviously, considered as part of anAPA proceeding in the United States orin a similar proceeding in the foreigncountry;
(j) if applicable, powers of attorneywith respect to the taxpayer;
(k) a statement whether the taxpayeris requesting the Simultaneous Appealsprocedure as provided in section 8 ofthis revenue procedure;
(l) an amended return, if requiredunder section 9.02 of this revenueprocedure;
(m) on a separate document, astatement that the taxpayer consents tothe disclosure to the competent au-thority of the treaty country (with thename of the treaty country specifically
stated) and the competent authority’sstaff of any or all of the items ofinformation set forth or enclosed in therequest for U.S. competent authorityassistance within the limits contained inthe tax treaty under which the taxpayeris seeking relief. This statement mustbe dated and signed by a person havingauthority to sign the taxpayer’s federaltax returns and is required to facilitatethe administrative handling of therequest by the U.S. competent authorityfor purposes of the record-keepingrequirements of § 6103(p) of the Code.Failure to provide such a statement willnot prevent the U.S. competent au-thority from disclosing information un-der the terms of a treaty. See§ 6103(k)(4) of the Code; and
(n) a penalties of perjury statementin the following form: ‘‘Under penal-ties of perjury, I declare that I haveexamined this request, including ac-companying documents, and, to thebest of my knowledge and belief, thefacts presented in support of therequest for competent authority assist-ance are true, correct and complete.’’The declaration must be signed by theperson or persons on whose behalf therequest is being made and not by thetaxpayer’s representative. The personsigning for a corporate taxpayer mustbe an authorized officer of the taxpayerwho has personal knowledge of thefacts. The person signing for a trust, anestate or a partnership must be respec-tively, a trustee, an executor or apartner who has personal knowledge ofthe facts.
.06 APAs. Requests for competentauthority assistance that involve anAPA request must include the informa-tion required under Rev. Proc. 91–22,1991–1 C.B. 526, as well as theapplicable information under section4.05 of this revenue procedure.
.07 Other Documentation. In addi-tion, the taxpayer shall, on request,submit any other information or docu-mentation deemed necessary by theU.S. or foreign competent authority forpurposes of reaching an agreement.This includes English translations ofany documentation required in connec-tion with the competent authorityrequest.
.08 Updates. The taxpayer must keepthe U.S. competent authority informedof all material changes in the informa-tion or documentation previously sub-mitted as part of, or in connection with,the request for competent authority
assistance. The taxpayer also mustprovide any updated information ornew documentation that becomesknown or is created after the request isfiled and which is relevant to theresolution of the issues underconsideration.
.09 Conferences. The taxpayer may,at any time, request a pre-filing con-ference with the U.S. competent au-thority to discuss the mutual agreementprocess with respect to matters coveredunder a treaty, including discussion ofthe proper time for filing, the practicalaspects of obtaining relief and actionsnecessary to facilitate the proceedings.Similarly, after a matter is resolved bythe competent authorities, a taxpayermay also request a conference with theU.S. competent authority to discuss theresolution.
SEC. 5. SMALL CASEPROCEDURE FOR REQUESTINGCOMPETENT AUTHORITYASSISTANCE
.01 General. To facilitate requests forassistance involving small cases, thissection provides a special proceduresimplifying the form of a request forassistance and, in particular, theamount of information that initiallymust be submitted. All other require-ments of this revenue procedure con-tinue to apply to requests for assistancemade pursuant to this section.
.02 Small Case Standards. Eligibletaxpayers may file an abbreviatedrequest for competent authority assist-ance in accordance with this section ifthe total proposed adjustment involvedin the matter is not greater than thefollowing:
.03 Small Case Filing Procedure.The abbreviated request for competentauthority assistance under the smallcase procedure must be dated andsigned by a person having the authorityto sign the taxpayer’s federal taxreturns. Although other information anddocumentation may be requested at alater date, the initial request for assist-ance should include the followinginformation and materials:
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(a) a statement indicating that this isa matter subject to the small caseprocedure;
(b) the name, address, U.S. taxpayeridentification number and foreign tax-payer identification number (if any) ofthe taxpayer and if applicable, allrelated persons involved;
(c) a description of the issue and thenature of the relief sought;
(d) the taxable years and amountsinvolved with respect to the issues inboth U.S. and foreign currency;
(e) the name of the treaty country;(f) an amended return, if required
under section 9.02 of this revenueprocedure; and
(g) the statements described in sec-tion 4.05(m) and (n) of this revenueprocedure.
SEC. 6. RELIEF REQUESTED FORFOREIGN INITIATEDADJUSTMENT WITHOUTCOMPETENT AUTHORITYINVOLVEMENT
Taxpayers seeking correlative reliefwith respect to a foreign initiatedadjustment involving a treaty mattershould present their request to the U.S.competent authority. However, whenthe adjustment involves years under thejurisdiction of the District Director orAppeals, taxpayers sometimes try toobtain relief from these offices. Thismay occur, for example, if the adjust-ment involves a re-allocation of incomeor deductions involving a related per-son in a country with which the UnitedStates has an income tax treaty. Inthese cases, taxpayers will be advisedto contact the U.S. competent authorityoffice. In appropriate cases, the U.S.competent authority will advise theDistrict or Appeals office on appropri-ate action. The U.S. competent au-thority may request the taxpayer toprovide the information described un-der sections 4.05 and 4.07 of thisrevenue procedure. Failure to requestcompetent authority assistance mayresult in denial of correlative reliefwith respect to the issue, includingapplicable foreign tax credits.
SEC. 7. COORDINATION WITHOTHER ADMINISTRATIVE ORJUDICIAL PROCEEDINGS
.01 Suspension of Administrative Ac-tion with Respect to U.S. Adjustments.
When a request for competent authorityassistance is accepted with respect to aU.S. initiated adjustment, the Servicewill postpone further administrativeaction with respect to the issues undercompetent authority consideration, ex-cept (a) in situations in which theService may be requested otherwise bythe U.S. competent authority, or (b) insituations involving cases pending incourt and in other instances in whichaction must be taken to avoid prejudic-ing the U.S. Government’s interest. Thenormal administrative procedures con-tinue to apply, however, to all otherissues not under U.S. competent au-thority consideration. For example, ifthere are other issues raised during theexamination and the taxpayer is not inagreement with these issues, the usualprocedures for completing the examina-tion with respect to these issues apply.If the taxpayer is issued a thirty dayletter with respect to these issues andprepares a protest of the unagreedissues, the taxpayer need not includeany unagreed issue under considerationby the competent authority. Followingthe receipt of a taxpayer’s protest,normal Appeals procedures shall beinitiated with respect to those issuesnot subject to competent authorityconsideration.
.02 Coordination with Appeals. Tax-payers that disagree with a proposedU.S. adjustment may either pursue theirright of administrative review withAppeals before requesting competentauthority assistance or may requestcompetent authority assistance imme-diately. See, however, section 8 of thisrevenue procedure for SimultaneousAppeals procedures. Appeals’ consid-eration of potential competent authoritymatters will be made without regard toother issues or considerations that donot involve potential competent au-thority matters.
.03 Coordination with Litigation.The U.S. competent authority will not,without the consent of the ChiefCounsel, accept (or continue to con-sider) a taxpayer’s request for assist-ance if the request involves a taxableperiod pending in a U.S. court orinvolves a matter pending in a U.S.court or designated for litigation forany taxable period. If the case ispending in the United States Tax Court,the taxpayer may, in appropriate cases,be asked to join the Service in amotion to sever issues or delay trialpending completion of the competentauthority proceedings. If the case is
pending in any other court, the ChiefCounsel will consult with the Depart-ment of Justice about appropriate ac-tion, and the taxpayer may, in appropri-ate cases, be asked to join the U.S.Government in a motion to sever issuesor delay trial pending completion of thecompetent authority proceedings. Finaldecision on severing issues or delayingtrial rests with the court. The filing ofa competent authority request does not,however, relieve the taxpayer fromtaking any action that may be neces-sary or required with respect to litiga-tion.
.04 Coordination with the APA Pro-cedure. Rev. Proc. 91–22, 1991–1 C.B.526, informs taxpayers how to requestan APA from the office of the Associ-ate Chief Counsel (International). If anAPA request involves a treaty country,taxpayers are encouraged to seek acompetent authority agreement withrespect to the matters that are thesubject of the APA. The purpose of acompetent authority agreement in thiscase is to avoid double taxation thatotherwise may occur. Further, wherethe taxpayer requests that, as part ofthe APA process, consideration begiven to resolving an issue raised bythe Service for earlier taxable periods,the taxpayer is encouraged to seekcompetent authority consideration ofthe issue for these periods.
.05 Effect of Agreements or JudicialDeterminations on Competent AuthorityProceedings. If a taxpayer either ex-ecutes a closing agreement with theDistrict (whether or not contingentupon competent authority relief) withrespect to a potential competent au-thority issue or reaches a settlement onthe issue with Appeals or Counselpursuant to a closing agreement orother written agreement, the U.S. com-petent authority will endeavor only toobtain a correlative adjustment fromthe treaty country and will not under-take any actions that would otherwisechange such agreements. However, theU.S. competent authority will, in appro-priate cases, consider actions necessaryfor the purpose of providing reliefpursuant to Rev. Proc. 65–17. Once ataxpayer’s tax liability for the taxableperiods in issue has been determinedby a U.S. court (including settlement ofthe proceedings before or during trial),the U.S. competent authority similarlywill endeavor only to obtain correlativerelief from the treaty country and willnot undertake any action that wouldotherwise reduce the taxpayer’s federal
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tax liability for the taxable periods inissue as determined by a U.S. court.Taxpayers therefore should be awarethat in these situations, as well as insituations where a treaty country takesa similar position with respect to issuesresolved under its domestic laws, relieffrom double taxation may be jeopard-ized.
.06 Accelerated Competent AuthorityProcedure. A taxpayer requesting com-petent authority assistance with respectto an issue raised by the Service alsomay request that the competent au-thorities attempt to resolve the issue forsubsequent taxable periods ending priorto the date of the request for assistanceif the same issue continues in thoseperiods. See also Rev. Proc. 94–67,1994–2 C.B. 800, concerning the Ac-celerated Issue Resolution (‘‘AIR’’)process. The U.S. competent authoritywill consider the request and willcontact the appropriate District to con-sult on whether the issue should beresolved for subsequent taxable peri-ods. If the District consents to thisprocedure, the U.S. competent authoritywill present to the foreign competentauthority the request to consider suchtaxable periods. For purposes of resolv-ing the issue, the taxpayer must furnishall relevant information and statementsthat may be requested by the U.S.competent authority pursuant to thisrevenue procedure. In addition, if thecase involves a Coordinated Examina-tion Program (‘‘CEP’’) taxpayer, thetaxpayer must furnish all relevant infor-mation and statements requested by theDistrict Director, as described in Rev.Proc. 94–67, 1994–2 C.B. 800. If thecase involves a non-CEP taxpayer, thetaxpayer must furnish all relevant infor-mation and statements that may berequested by the District Director. Arequest for the accelerated competentauthority procedure may be made at thetime of filing a request for competentauthority assistance or at any timethereafter, but generally before conclu-sion of the mutual agreement in thecase; however, taxpayers are en-couraged to request the procedure asearly as practicable. The application ofthe accelerated procedure may requirethe prior consent of the Chief Counsel.See section 7.03 of this revenue proce-dure. A request for the acceleratedcompetent authority procedure mustcontain a statement that the taxpayeragrees that: (1) the inspection of booksof account or records under the acceler-ated competent authority procedure will
not preclude or impede (under §7605(b) or any administrative provisionadopted by the Service) a later ex-amination of a return or inspection ofbooks of account or records for anytaxable period covered in the acceler-ated competent authority assistancerequest and (2) the Service need notcomply with any applicable proceduralrestrictions (for example, providingnotice under § 7605(b)) before begin-ning such examination or inspection.For competent authority assistance withrespect to prospective periods, see Rev.Proc. 91–22, 1991–1 C.B. 526. Theaccelerated competent authority proce-dure is not subject to the AIR processlimitations.
SEC. 8. SIMULTANEOUS APPEALSPROCEDURE
.01 General. A taxpayer filing arequest for competent authority assist-ance under this revenue procedure may,at the same time or at a later date,request Appeals’ consideration of thecompetent authority issue under theprocedures and conditions provided inthis section. The U.S. competent au-thority also may request Appeals’involvement if it is determined thatsuch involvement would facilitate thenegotiation of a mutual agreement inthe case or otherwise would serve theinterest of the Service. The taxpayermay, at any time, request a pre-filingconference with the offices of theNational Director of Appeals and theU.S. competent authority to discuss theSimultaneous Appeals procedure.
.02 Time for Requesting the Simul-taneous Appeals Procedure.
(a) When Filing For CompetentAuthority Assistance.The Simultaneous Appeals proceduremay be invoked at any of the followingtimes:
(1) When the taxpayer applies forcompetent authority assistance withrespect to an issue for which theDistrict has proposed an adjustmentand before the protest is filed;
(2) When the taxpayer files a protestwith Appeals and decides to sever thecompetent authority issue and seekcompetent authority assistance whileother issues are referred to Appeals;and
(3) When the case is in Appeals andthe taxpayer later decides to requestcompetent authority assistance withrespect to the competent authority
issue. The taxpayer may sever thecompetent authority issue for referral tothe U.S. competent authority and in-voke the Simultaneous Appeals proce-dure at any time when the case is inAppeals but before settlement of theissue. Taxpayers, however, are en-couraged to invoke the SimultaneousAppeals procedure as soon as possible,preferably as soon as practicable afterthe first Appeals conference.
(b) After Filing For Competent Au-thority Assistance. The taxpayer mayrequest the Simultaneous Appeals pro-cedure at any time after requestingcompetent authority assistance. How-ever, a taxpayer’s request for theSimultaneous Appeals procedure gener-ally will be denied if made after thedate the U.S. position paper is commu-nicated to the foreign competent au-thority, unless the U.S. competentauthority determines that the procedurewould facilitate an early resolution ofthe competent authority issue or other-wise is in the best interest of theService.
.03 Cases Pending in Court. If thematter is pending before a U.S. courtor has been designated for litigationand jurisdiction has been released tothe U.S. competent authority, a requestfor the Simultaneous Appeals proce-dure may be granted only with theconsent of the Chief Counsel.
.04 Request for Simultaneous Ap-peals Procedure. The taxpayer’s re-quest for the Simultaneous Appealsprocedure should be addressed to theU.S. competent authority either as partof the initial competent authority assist-ance request or, if made later, as aseparate letter to the U.S. competentauthority. The request should statewhether the issue was previously pro-tested to Appeals for the periods incompetent authority or for prior periods(in which case a copy of the relevantportions of the protest and an explana-tion of the outcome, if any, should beprovided). The U.S. competent au-thority will send a copy of the requestto the National Director of Appeals,who, in turn, will forward a copy to theappropriate Regional Director of Ap-peals. When the U.S. competent au-thority invokes the Simultaneous Ap-peals procedure, the taxpayer will benotified. The U.S. competent authorityhas jurisdiction of the issue when theSimultaneous Appeals procedure isinvoked.
.05 Role of Appeals in the CompetentAuthority Process.
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(a) Appeals Process. The Appealsrepresentative assigned to the case willconsult with the taxpayer and the U.S.competent authority for the purpose ofreaching a resolution of the unagreedissue under competent authority juris-diction before the issue is presented tothe foreign competent authority. Forthis purpose, established Appeals pro-cedures apply. The Appeals representa-tive will consult with the U.S. compe-tent authority during this process toensure appropriate coordination of theAppeals process with the competentauthority procedure, so that the termsof a tentative resolution and the princi-ples and facts upon which it is basedare compatible with the position thatthe U.S. competent authority intends topresent to the foreign competent au-thority with respect to the issue. Anyresolution reached with the Serviceunder this procedure is subject to thecompetent authority process and, there-fore, is tentative and not binding on theService or the taxpayer. The Servicewill not request the taxpayer to con-clude the Appeals process with awritten agreement. The conclusions ofthe tentative resolution, however, gen-erally will be reflected in the U.S.position paper used for negotiating amutual agreement with the foreigncompetent authority. The proceduresunder this section do not give taxpayersthe right to receive a fresh considera-tion of the issue by Appeals where thetaxpayer applied for competent au-thority assistance after having receivedsubstantial Appeals consideration.Rather, the Service shall rely upon suchprevious consideration by Appealswhen considering the case under theSimultaneous Appeals procedure.
(b) Assistance to U.S. CompetentAuthority. The U.S. competent au-thority is responsible for developing aU.S. position paper with respect to theissue and for conducting the mutualagreement procedure. Generally, re-questing Appeals’ consideration of anissue under competent authority juris-diction will not affect the manner inwhich taxpayers normally are involvedin the competent authority process.
.06 Denial or Termination of Simul-taneous Appeals Procedure. (a) Tax-payer’s Termination. The taxpayermay, at any time, withdraw its requestfor the Simultaneous Appeals proce-dure.
(b) Service’s Denial or Termination.The U.S. competent authority, theNational Director of Appeals, or the
appropriate Regional Director of Ap-peals may decide to deny or terminatethe Simultaneous Appeals procedure ifthe procedure is determined to beprejudicial to the mutual agreementprocedure or to the administrativeappeals process. For example, a tax-payer that received Appeals considera-tion before requesting competent au-thority assistance, but was unable toreach a settlement in Appeals, may bedenied the Simultaneous Appeals pro-cedure. A taxpayer may request aconference with the offices of the U.S.competent authority and the NationalDirector of Appeals to discuss thedenial or termination of the procedure.
.07 Returning to Appeals. If thecompetent authorities fail to agree or ifthe taxpayer does not accept the mutualagreement reached by the competentauthorities, the taxpayer will be permit-ted to refer the issue to Appeals forfurther consideration.
.08 Appeals Consideration of Non-Competent Authority Issues. The Simul-taneous Appeals procedure does notaffect the taxpayer’s rights to Appeals’consideration of other unresolved is-sues. The taxpayer may pursue settle-ment discussions with respect to theother issues without waiting for resolu-tion of the issues under competentauthority jurisdiction.
SEC. 9. PROTECTIVE MEASURES
.01 General. In any matter subject tothis revenue procedure, the taxpayermust take (or, if necessary, advise arelated person to take) such protectivemeasures as may be necessary with theU.S. and foreign tax authorities so thatthe implementation of any agreementreached by the competent authorities isnot barred by administrative, legal orprocedural barriers. Such barriers mayarise either before or after a competentauthority request is filed. Protectivemeasures include, but are not limitedto: (a) filing amended returns orprotective claims for refund or credit;(b) staying the expiration of any periodof limitations on the making of arefund or other tax adjustment; (c)avoiding the lapse or termination of thetaxpayer’s right to appeal any taxdetermination; (d) complying with allapplicable procedures for invokingcompetent authority consideration, in-cluding applicable treaty provisionsdealing with time limits within whichto invoke such remedy; and (e) contest-
ing an adjustment or seeking an appro-priate correlative adjustment with re-spect to the U.S. or treaty country tax.A taxpayer should take protectivemeasures in a timely manner, that is, ina manner that allows sufficient time forappropriate procedures to be completedand effective before barriers arise.Generally, a taxpayer should consider,at the time an adjustment is firstproposed, which protective measuresmay be necessary and when suchmeasures should be taken. However,earlier consideration of appropriate ac-tions may be desirable, for example, inthe case of a recurring adjustment orwhere the taxpayer otherwise is onnotice that an adjustment is likely to beproposed. See section 9.05 of thisrevenue procedure regarding treatyprovisions waiving procedural andother barriers. Taxpayers may consultwith the U.S. competent authority todetermine the need for and timing ofprotective measures in their particularcase.
.02 Filing of Amended Tax Return inthe United States. At the time therequest for competent authority assist-ance is filed, the taxpayer also mustfile, in cases involving an adjustmentproposed by a treaty country, anamended federal tax return (for exam-ple, a Form 1120X, Amended U.S.Corporation Income Tax Return, if aForm 1120 was originally filed) in themanner provided in the regulationsunder § 6402 of the Code. Theamended tax return shall be limited toa claim for credit or refund of the taxesattributable to the matters under com-petent authority consideration. Theamended tax return shall be filed byattaching it to the request for compe-tent authority assistance. An amendedreturn filed in accordance with thissection should not be filed with anyother office of the Service, notwith-standing any instructions concerningthe place for filing on such forms or insuch regulations. Final disposition ofthe amended return will be deferred bythe Service until the U.S. competentauthority disposes of the issues underconsideration.
.03 Filing a Protective Claim in theUnited States.
(a) In General. There may be situa-tions where a taxpayer is unable to filea formal competent authority assistancerequest before the statute of limitationsexpires with respect to the affectedU.S. return. In this situation, before thestatute of limitations expires, the tax-
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payer should file a protective claim forrefund or credit of the taxes attributableto the potential competent authorityissue to ensure that assistance will notbe barred. Situations for which aprotective filing may be appropriateinclude: (i) the treaty country is consid-ering but has not yet proposed anadjustment; (ii) the treaty country hasproposed an adjustment but the relatedtaxpayer in the treaty country decidesto pursue administrative or judicialremedies in the foreign country; or (iii)the terms of the applicable treatyrequire notification to be made to thecompetent authority within a certaintime period. In considering whether toaccept a taxpayer’s request for compe-tent authority assistance, the U.S. com-petent authority will consider whetherthe taxpayer has filed a protectiveclaim in accordance with thissubsection.
(b) Filing of Protective Claim. Aprotective claim is made by filing anappropriate amended federal tax return,as provided in section 9.02 of thisrevenue procedure. The amended taxreturn is filed with the U.S. competentauthority at the address indicated insection 4.02 of this revenue procedureand before the expiration of anyapplicable time limitations. Theamended return shall indicate that thetaxpayer is filing a protective claim andshall set forth, to the extent available,the information required under section4.05 (a) through (j) or under section5.03 (a) through (e) of this revenueprocedure. An amended tax return filedin this manner will be considered aproperly filed amended tax return,notwithstanding any other instructionon the form or in regulations concern-ing the place for filing.
(c) Notification Requirement. Afterfiling a protective claim, the taxpayerperiodically must notify the U.S. com-petent authority whether the taxpayerstill is considering filing for competentauthority assistance. The notificationmust be filed every six months untilthe formal request for competent au-thority assistance is filed. The U.S.competent authority may deny compe-tent authority assistance if the taxpayerfails to file this semi-annual notifica-tion.
(d) No Consultation between Compe-tent Authorities until Formal Request isFiled. The U.S. competent authoritygenerally will not undertake any con-sultation with the treaty country’scompetent authority with respect to a
protective claim. The U.S. competentauthority shall place the protectiveclaim in suspense until either a formalrequest for competent authority assist-ance is filed or the taxpayer notifies theU.S. competent authority that compe-tent authority consideration is no longerneeded.
.04 Effect of an Amended TaxReturn. An amended tax return filedunder either sections 9.02 and 9.03 ofthis revenue procedure only allows acredit or a refund to the extent agreedto by the U.S. and foreign competentauthorities or to the extent unilaterallyallowed by the U.S. competent au-thority. This revenue procedure doesnot grant a taxpayer the right to invoke§ 482 of the Code in its favor orcompel the Service to allocate incomeor deductions or grant a tax credit orrefund.
.05 Treaty Provisions Waiving Pro-cedural Barriers. In those cases wherethe mutual agreement procedure provi-sion of a tax treaty waives or removesprocedural barriers to the credit orrefund of tax, taxpayers may be al-lowed a credit or refund of U.S. orforeign tax even though the otherwiseapplicable period of limitations hasexpired, prior closing agreements havebeen entered into, or other actions havebeen taken or omitted that ordinarilywould foreclose relief in the form of acredit or refund of tax. However,because of differences in interpretingthese waiver provisions or other diffi-culties that may arise in their applica-tion, taxpayers nonetheless should takeappropriate protective measures as de-scribed under this revenue procedure orunder applicable foreign procedures. Inconsidering whether to accept a tax-payer’s request for competent authorityassistance, the U.S. competent authoritywill consider whether the taxpayer tookprotective measures in accordance withthis section.
SEC. 10. APPLICATION OF REV.PROC. 65–17
Rev. Proc. 65–17 generally providesfor the tax-free repatriation of certainamounts following an allocation ofincome between related U.S. and for-eign corporations under § 482 of theCode. If a taxpayer intends to requestcompetent authority assistance to re-solve the underlying double taxationmatter with the treaty country, thetaxpayer should file for Rev. Proc. 65–
17 relief in conjunction with its requestfor competent authority assistance. SeeRev. Proc. 96–14, page 00, this Bul-letin, which also sets forth the proce-dures for securing relief under Rev.Proc. 65–17 when a taxpayer does notintend to request competent authorityassistance.
SEC. 11. DETERMINATION OFCREDITABLE FOREIGN TAXES
For purposes of determining theamount of foreign tax creditable under§§ 901 and 902 of the Code, anyamounts paid to foreign tax authoritiesthat would not have been due if thetreaty country had made a correlativeadjustment may not constitute a credi-table foreign tax. See § 1.901–2(e)(5)(i)of the regulations and Rev. Rul. 92–75,1992–2 C.B. 197. Acts or omissions bythe taxpayer that preclude effectivecompetent authority assistance, includ-ing failure to take protective measuresas described in section 9 of thisrevenue procedure or failure to seekcompetent authority assistance, mayconstitute failure to exhaust all effec-tive and practical remedies for purposesof § 1.901–2(e)(5)(i). Further, the factthat the taxpayer has sought competentauthority assistance but obtained norelief, either because the competentauthorities failed to reach an agreementor because the taxpayer rejected anagreement reached by the competentauthorities, generally will not, in andof itself, demonstrate for purposes of§ 1.901–2(e)(5)(i) that the taxpayer hasexhausted all effective and practicalremedies to reduce the taxpayer’s lia-bility for foreign tax (including liabilitypursuant to a foreign tax audit adjust-ment). Any determination within theService of whether a taxpayer hasexhausted the competent authority rem-edy must be made in consultation withthe U.S. competent authority.
SEC. 12. ACTION BY U.S.COMPETENT AUTHORITY
.01 Notification of Taxpayer. Uponreceiving a request for assistance pur-suant to this revenue procedure, theU.S. competent authority will notify thetaxpayer whether the facts provide abasis for assistance.
.02 Denial of Assistance. The U.S.competent authority generally will notaccept a request for competent au-thority assistance or will cease provid-ing assistance to the taxpayer if:
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(a) the taxpayer is not entitled to thetreaty benefit or safeguard in questionor to the assistance requested;
(b) the taxpayer is willing only toaccept a competent authority agreementunder conditions that are unreasonableor prejudicial to the interests of theU.S. Government;
(c) the taxpayer rejected the compe-tent authority resolution of the same orsimilar issue in a prior case;
(d) the taxpayer does not agree thatcompetent authority negotiations are agovernment-to-government activity thatdoes not include the taxpayer’s par-ticipation in the negotiation pro-ceedings;
(e) the taxpayer does not furnishupon request sufficient information todetermine whether the treaty applies tothe taxpayer’s facts and circumstances;
(f) the taxpayer was found to haveacquiesced in a foreign initiated adjust-ment that involved significant legal orfactual issues that otherwise would beproperly handled through the competentauthority process and then unilaterallymade a corresponding correlative ad-justment or claimed an increased for-eign tax credit, without initially seekingU.S. competent authority assistance; or
(g) the taxpayer: (i) fails to complywith this revenue procedure; (ii) fails tocooperate with the U.S. competentauthority (including failing to providesufficient facts and documentation tosupport its claim of double taxation ortaxation contrary to the treaty); or (iii)failed to cooperate with the Serviceduring the examination of the periodsin issue and such failure significantlyimpedes the ability of the U.S compe-tent authority to negotiate and concludean agreement (e.g., the period oflimitations for assessment in the for-eign country has expired or significantfactual development is required thatcannot effectively be completed outsidethe examination process).
.03 Extending Period of Limitationsfor Assessment. If the U.S. competentauthority accepts a request for assist-ance, the taxpayer may be requested toexecute a consent extending the periodof limitations for assessment of tax forthe taxable periods in issue. Failure tocomply with the provisions of thissubsection can result in denial ofassistance by the U.S. competent au-thority with respect to the request.
.04 No Review of Denial of Requestfor Assistance. The U.S. competentauthority’s denial of a taxpayer’s re-
quest for assistance or dismissal of amatter previously accepted for consid-eration pursuant to this revenue proce-dure is final and not subject toadministrative review.
.05 Notification. The U.S. competentauthority will notify a taxpayer request-ing assistance under this revenue proce-dure of any agreement that the U.S.and the foreign competent authoritiesreach with respect to the request. If thetaxpayer accepts the resolution reachedby the competent authorities, the agree-ment shall provide that it is final and isnot subject to further administrative orjudicial review. If the competent au-thorities fail to agree, or if the agree-ment reached is not acceptable to thetaxpayer, the taxpayer may withdrawthe request for competent authorityassistance and may then pursue allrights to review otherwise availableunder the laws of the United States andthe treaty country. Where the compe-tent authorities fail to agree, no furthercompetent authority remedies generallyare available, except with respect totreaties that provide for arbitration ofthe dispute. See, e.g., Article 25(5) ofthe U.S.- German income tax treaty. Arequest for arbitration shall be made inaccordance with the procedures pre-scribed under the applicable treaty andrelated documents, including proce-dures which the Service may promul-gate from time to time.
.06 Closing Agreement. When appro-priate, the taxpayer will be requested toreflect the terms of the mutual agree-ment and of the competent authorityassistance provided in a closing agree-ment, in accordance with section 6.07and 6.17 of Rev. Proc. 68–16, 1968–1C.B. 770.
.07 Unilateral Withdrawal or Reduc-tion of U.S. Initiated Adjustments. Withrespect to U.S. initiated adjustmentsunder § 482 of the Code, the primarygoal of the mutual agreement procedureis to obtain a correlative adjustmentfrom the treaty country. For other typesof U.S. initiated adjustments, the pri-mary goal of the U.S. competentauthority is the avoidance of taxation incontravention of an applicable treaty.Unilateral withdrawal or reduction ofU.S. initiated adjustments, therefore,generally will not be considered. Forexample, the U.S. competent authoritywill not withdraw or reduce an adjust-ment to income, deductions, credits orother items solely because the period oflimitations has expired in the foreigncountry and the foreign competent
authority has declined to grant anyrelief. If the period provided by theforeign statute of limitations has ex-pired, the U.S. competent authoritymay take into account other relevantfacts to determine whether such with-drawal or reduction is appropriate andmay, in extraordinary circumstancesand as a matter of discretion, providesuch relief with respect to the adjust-ment to avoid actual or economicdouble taxation. In no event, however,will relief be granted where there isfraud or negligence with respect to therelevant transactions. In keeping withthe U.S. Government’s view that taxtreaties should be applied in a balancedand reciprocal manner, the UnitedStates normally will not withdraw orreduce an adjustment where the treatycountry does not grant similar relief inequivalent cases.
SEC. 13. REQUESTS FOR RULINGS
.01 General. Requests for advancerulings regarding the interpretation orapplication of a tax treaty, as dis-tinguished from requests for assistancefrom the U.S. competent authoritypursuant to this revenue procedure,must be submitted to the AssociateChief Counsel (International) in accord-ance with Rev. Proc. 96–1, 1996–1I.R.B. 8.
.02 Foreign Tax Rulings. The Serv-ice does not issue advance rulings onthe effect of a tax treaty on the taxlaws of a treaty country for purposes ofdetermining the tax of the treatycountry.
SEC. 14. FEES
Rev. Proc. 96–1, 1996–1 I.R.B. 8, sec.14, requires the payment of user feesfor requests to the Service for rulings,opinion letters, determination lettersand similar requests. No user fees arerequired for requests for competentauthority assistance pursuant to thisrevenue procedure.
SEC. 15. EFFECT ON OTHERDOCUMENTS
Rev. Proc. 91–23 and Rev. Proc. 91–26 are superseded by this revenueprocedure. Rev. Proc. 91–22 is ampli-fied. Rev. Rul. 72–437, 1972–2 C.B.660, is modified. Rev. Rul. 92–75 isclarified.
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SEC. 16. EFFECTIVE DATE
This revenue procedure is effectivefor requests for competent authorityassistance filed after January 16, 1996.
DRAFTING INFORMATION
The principal authors of this revenueprocedure are Edward G. Turco of theOffice of International Programs, TaxTreaty Division and Judith CavellCohen of the Office of the AssociateChief Counsel (International). For fur-ther information regarding this revenueprocedure, contact either Mr. Turco on(202) 874-1570 or Ms. Cohen on (202)622-3880 (not toll-free calls).
26 CFR 601.201: Rulings and determinationletters.
Rev. Proc. 96–14
SECTION 1. PURPOSE
This revenue procedure prescribesadditional conditions associated withobtaining relief otherwise available un-der Rev. Proc. 65–17, 1965–1 C.B.833.
SEC. 2. BACKGROUND
Rev. Rul. 82–80, 1982–1 C.B. 89,and Rev. Proc. 65–17, 1965–1 C.B.833, as amplified, amended, clarifiedand modified by Rev. Proc. 65–31,1965–2 C.B. 1024, Rev. Proc. 65–17Amendment I, 1966–2 C.B. 1211, Rev.Proc. 65–17 Amendment II, 1974–1C.B. 411, Rev. Proc. 70–23, 1970–2C.B. 505, Rev. Proc. 71–35, 1971–2C.B. 573, Rev. Proc. 72–48, 1972–2C.B. 829, Rev. Proc. 72–53, 1972–2C.B. 833, and Rev. Proc. 91–24, 1991–1 C.B. 542, (hereinafter referred to as‘‘Rev. Proc. 65–17’’) provide for thetax-free repatriation of certain amountsfollowing an allocation of incomebetween related U.S. and foreign cor-porations under section 482 of theCode. Generally, in order to obtain thetreatment provided by Rev. Proc. 65–17, the taxpayer must file a writtenstatement requesting such relief withthe appropriate District Director. How-ever, in situations involving a countrywith which the United States has anincome tax convention in force whichcontains a mutual agreement procedurearticle (‘‘treaty cases’’), Rev. Proc. 91–
24 provides that the relief providedunder Rev. Proc. 65–17 is availableonly in conjunction with a request forassistance from the U.S. competentauthority. This revenue procedure su-persedes Rev. Proc. 91–24.
SEC. 3. PROCEDURES FOROBTAINING REV. PROC. 65–17RELIEF IN TREATY CASES
If a taxpayer intends to requestcompetent authority assistance pursuantto Rev. Proc. 96–13, page 31, thisBulletin, to resolve a double taxationmatter in a treaty case, the taxpayershould request relief under Rev. Proc.65–17 in conjunction with its requestfor competent authority assistance un-der the provisions of Rev. Proc. 96–13,sec. 4 and sec. 10. In addition, where arequest for relief under Rev. Proc. 65–17 is already pending before theService at the time a request forcompetent authority assistance is made,the taxpayer must forward a copy ofthe pending Rev. Proc. 6–17 request tothe U.S. competent authority. The U.S.competent authority will consider reliefunder Rev. Proc. 65–17 in conjunctionwith consideration of the competentauthority matter. If a taxpayer does notintend to request competent authorityassistance in a treaty case, the taxpayermust follow the procedures under Rev.Proc. 65–17 to request relief providedthereunder; however, the closing agree-ment required in that revenue proce-dure cannot be entered into except withthe concurrence of the Assistant Com-missioner (International).
SEC. 4. EFFECT ON OTHERDOCUMENTS
Rev. Rul. 82–80, 1982–1 C.B. 89,and Rev. Proc. 65–17, 1965–1 C.B.833, as amplified, amended, clarifiedand modified by Rev. Proc. 65–31,1965–2 C.B. 1024, Rev. Proc. 65–17Amendment I, 1966–2 C.B. 1211, Rev.Proc. 65–17 Amendment II, 1974–1C.B. 411, Rev. Proc. 70–23, 1970–2C.B. 505, Rev. Proc. 71–35, 1971–2C.B. 573, Rev. Proc. 72–48, 1972–2C.B. 829, and Rev. Proc. 72–53, 1972–2 C.B. 833, are modified. Rev. Proc.91–24, 1991–1 C.B. 542, is superseded.
SEC. 5. EFFECTIVE DATE
This revenue procedure is effective
for requests for Rev. Proc. 65–17 relieffiled after January 16, 1996.
DRAFTING INFORMATION
The principal authors of this revenueprocedure are Edward G. Turco of theOffice of International Programs, TaxTreaty Division and Judith CavellCohen of the Office of the AssociateChief Counsel (International). For fur-ther information regarding this revenueprocedure, contact either Mr. Turco on(202) 874-1570 or Ms. Cohen on (202)622-3880 (not toll-free calls).
26 CFR 601.201: Rulings and determinationletters.(Also Part I, §§ 170, 2031, 2512; 1.170A–13;20.2031–6; 25.2512–1.)
Rev. Proc. 96–15
SECTION 1. PURPOSE
This revenue procedure informs tax-payers how to request from the InternalRevenue Service a Statement of Valuethat can be used to substantiate thevalue of art for income, estate, or gifttax purposes. A taxpayer that complieswith the provisions of this revenueprocedure may rely on the Statement ofValue in completing the taxpayer’sfederal income tax, estate tax, or gifttax return that reports the transfer ofart.
SECTION 2. BACKGROUND
.01 Income Tax Charitable De-duction.
(1) Section 170(a) of the InternalRevenue Code allows as a deductionany charitable contribution (as definedin § 170(c)) payment of which is madeduring the taxable year.
(2) Section 1.170A–1(c)(1) of theIncome Tax Regulations provides thatif a charitable contribution is made inproperty other than money, the amountof the contribution is generally the fairmarket value of the property at thetime of the contribution.
(3) Section 1.170A–1(c)(2) providesthat the fair market value is the price atwhich the property would change handsbetween a willing buyer and a willingseller, neither being under any compul-sion to buy or sell and both havingreasonable knowledge of the relevantfacts.
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(4) Section 1.170A–13 sets forth therecordkeeping and return requirementsfor deductions for charitable contribu-tions. For a deduction for a charitablecontribution of property in excess of$5,000, § 1.170A–13(c) requires aqualified appraisal and an appraisalsummary.
(5) Rev. Proc. 66–49, 1966–2 C.B.1257, provides guidelines for review ofappraisals of contributed property forpurposes of § 170. Section 4.01 of Rev.Proc. 66–49 states that the Service willnot approve valuations or appraisalsprior to the actual filing of the taxreturn to which the appraisal pertains,and will not issue advance rulingsapproving or disapproving appraisals.
.02 Estate Tax.(1) Section 2031 provides that the
value of the gross estate of a decedentis determined by including the value atthe time of death of all propertywherever situated.
(2) Section 20.2031–1(b) of theEstate Tax Regulations provides thatthe value of property includible in adecedent’s gross estate is its fairmarket value at the time of thedecedent’s death.
(3) Section 2032(a) provides that theexecutor may elect to determine thevalue of all the property included in thegross estate as of 6 months after thedecedent’s death. However, propertydistributed, sold, exchanged, or other-wise disposed of within 6 months afterdeath must be valued as of the date ofdistribution, sale, exchange, or otherdisposition.
(4) Section 20.2031–6(a) providesthat the fair market value of a dece-dent’s household and personal effects isthe price that a willing buyer wouldpay to a willing seller, neither beingunder any compulsion to buy or to selland both having reasonable knowledgeof the relevant facts.
(5) Section 20.2031–6(b) providesthat if there are included among thehousehold and personal effects articleshaving marked artistic or intrinsic valueof a total in excess of $3,000, theappraisal of an expert or experts, underoath, must be filed with the estate taxreturn.
(6) Section 20.2031–6(d) providesthat if, pursuant to § 20.2031–6 (a) and(b), expert appraisers are employed,care must be taken to see that they arereputable and of recognized compe-tency to appraise the particular class of
property involved. In listing paintingshaving artistic value, the size, subject,and artist’s name must be stated.
.03 Gift Tax.(1) Section 2512(a) provides that if a
gift is made in property, the valuethereof at the date of the gift is theamount of the gift.
(2) Section 25.2512–1 of the GiftTax Regulations provides that the valueof property is the price at which theproperty would change hands betweena willing buyer and a willing seller,neither being under any compulsion tobuy or to sell and both having reason-able knowledge of the relevant facts.
.04 Legislation Authorizing UserFees. Section 10511 of the RevenueAct of 1987, 1987–3 C.B. 1, 166, asamended by § 11319 of the OmnibusBudget Reconciliation Act of 1990,1991–2 C.B. 481, 511, and by § 743 ofthe Uruguay Round Agreements Act,1995–11 I.R.B. 5, 14, requires theSecretary of the Treasury or delegate toestablish a program requiring the pay-ment of user fees for requests to theService for letter rulings, opinion let-ters, determination letters, and similarrequests. The fees apply to requestsmade on or after February 1, 1988, andbefore October 1, 2000. The feescharged under the program (1) varyaccording to categories or subcategoriesestablished by the Secretary; (2) aredetermined after taking into account theaverage time for, and difficulty of,complying with requests in each cate-gory and subcategory; and (3) arepayable in advance.
SECTION 3. SCOPE
.01 Except as provided in section3.02, this revenue procedure applies toan item of art that has been appraisedat $50,000 or more, and has been trans-ferred (1) as a ‘‘charitable contribu-tion’’ within the meaning of § 170(c),(2) by reason of a decedent’s death, or(3) by intervivos gift.
.02 The Service may issue a State-ment of Value for items appraised atless than $50,000 if (1) the request forthe Statement of Value includes arequest for appraisal review for at leastone item appraised at $50,000 or more,and (2) the Service determines thatissuance of such a Statement would bein the best interest of efficient taxadministration.
.03 The Service may decline to issuea Statement of Value when appropriate
in the interest of efficient tax admin-istration. If the Service declines toissue a Statement of Value under thissection 3.03, the Service will refundthe user fee.
SECTION 4. DEFINITIONS
.01 The term ‘‘art’’ includes paint-ings, sculpture, watercolors, prints,drawings, ceramics, antique furniture,decorative arts, textiles, carpets, silver,rare manuscripts, historical memo-rabilia, and other similar objects.
.02 The term ‘‘taxpayer’’ includes anexecutor or administrator acting onbehalf of an estate, and a donor of agift.
.03 The term ‘‘valuation date’’ refersto the date of death, the alternatevaluation date (as established under§ 2032(a)), or the date of the gift.
SECTION 5. REQUESTING ASTATEMENT OF VALUE FORINCOME TAX CHARITABLEDEDUCTION PURPOSES
.01 To request a Statement of Valuefrom the Service for an item of arttransferred as a charitable contributionwithin the meaning of § 170(c), ataxpayer must submit to the Service arequest for a Statement of Value forthe item prior to filing the income taxreturn that first reports the charitablecontribution. The request must includethe following:
(1) a copy of an appraisal (asdescribed in section 6 of this revenueprocedure) of the item of art;
(2) a check or money order payableto the Internal Revenue Service (userfee) in the amount of $2,500 for arequest for a Statement of Value forone, two, or three items of art, plus$250 for each additional item of art forwhich a Statement of Value is re-quested;
(3) a completed appraisal summary(Section B of Form 8283, NoncashCharitable Contributions) that meets therequirements of § 1.170A–13(c)(4); and
(4) the location of the District Officethat has or will have examinationjurisdiction over the return (not theService Center where the return isfiled).
.02 A taxpayer may withdraw therequest for a Statement of Value at anytime before it is issued by the Service.The user fee will not be refunded for a
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request that is withdrawn. When arequest is withdrawn, the appropriateDistrict Director will be notified.
.03 If a request for a Statement ofValue lacks information essential to theissuance of a Statement of Value for anitem of art, the Service will notify thetaxpayer that the request will not beprocessed for that item unless theService receives the missing informa-tion within 30 calendar days after thedate of such notification.
.01 An appraisal submitted to theService by a taxpayer under section 5of this revenue procedure must meetthe requirements for a qualified ap-praisal under § 1.170A–13(c)(3)(i)–(iii), and must also include thefollowing:
(1) a complete description of theitem of art, including:
(a) the name of the artist or culture,(b) the title or subject matter,(c) the medium, such as oil on
canvas, or watercolor on paper,(d) the date created,(e) the size,(f) any marks, signatures, or labels
on the item of art, on the back of theitem of art, or affixed to the frame,
(g) the history (provenance) of theitem, including proof of authenticity, ifthat information is available,
(h) a record of any exhibitions atwhich the item was displayed,
(i) any reference source citing theitem, and
(j) the physical condition of the item;(2) a professional quality photograph
of a size and quality fully showing theitem, preferably an 8 3 10 inch colorphotograph or a color transparency notsmaller than 4 3 5 inches; and
(3) the specific basis for thevaluation.
.02 The appraisal must be made noearlier than 60 days prior to the date ofthe contribution of the item of art.
.03 Taxpayers are encouraged toinclude in the request any additionalinformation that may affect the deter-mination of the fair market value of theitem of art.
.04 The requirements of section 6 ofthis revenue procedure must be met bySubchapter C corporations, even though
they would otherwise be exempt under§ 1.170A–13(c)(2)(ii)(B)(3) from theappraisal requirements.
SECTION 7. REQUESTING ASTATEMENT OF VALUE FORESTATE TAX OR GIFT TAXPURPOSES
.01 To request a Statement of Valuefrom the Service for an item of arttransferred as part of an estate or as anintervivos gift, a taxpayer must submitto the Service a request for a Statementof Value for the item prior to filing thefederal estate tax return or the federalgift tax return that first reports thetransfer of the item. The request mustinclude the following:
(1) a copy of an appraisal (asdescribed in section 8 of this revenueprocedure) of the item of art;
(2) a check or money order payableto the Internal Revenue Service (userfee) in the amount of $2,500 for a re-quest for a Statement of Value for one,two, or three items of art, plus $250 foreach additional item of art for which aStatement of Value is requested;
(3) a description of the item of art; (4) the appraised fair market value;(5) the cost, date, and manner of
acquisition;(6) the date of death (or the alternate
valuation date, if applicable) or thedate of the gift; and
(7) the location of the District Officethat has or will have examination juris-diction over the return (not the ServiceCenter where the return is filed).
.02 A taxpayer may withdraw therequest for a Statement of Value at anytime before it is issued by the Service.The user fee will not be refunded for arequest that is withdrawn. When arequest is withdrawn, the appropriateDistrict Director will be notified.
.03 If a request for a Statement ofValue lacks information essential to theissuance of a Statement of Value for anitem of art, the Service will notify thetaxpayer that the request will not beprocessed for that item unless theService receives the missing informa-tion within 30 calendar days after thedate of such notification.
SECTION 8. APPRAISAL FORESTATE TAX OR GIFT TAXPURPOSES
.01 An appraisal submitted to theService by a taxpayer under section 7
of this revenue procedure must includethe following:
(1) a complete description of theitem of art, including:
(a) the name of the artist or culture,(b) the title or subject matter, (c) the medium, such as oil on
canvas, or watercolor on paper, (d) the date created,(e) the size,(f) any marks, signatures, or labels
on the item of art, on the back of theitem of art, or affixed to the frame,
(g) the history (provenance) of theitem, including proof of authenticity, ifsuch information is available,
(h) a record of any exhibitions atwhich the item was displayed,
(i) any reference source citing theitem, and
(j) the physical condition of the item;(2) a professional quality photograph
of a size and quality fully showing theitem, preferably an 8 x 10 inch colorphotograph or a color transparency notsmaller than 4 x 5 inches;
(3) a statement that the appraisal wasprepared for estate tax purposes or gifttax purposes;
(4) the date (or dates) on which theitem of art was appraised;
(5) the appraised fair market value(within the meaning of § 20.2031–6(a)or 25.2512–1); and
(6) the specific basis for the valua-tion.
.02 The appraisal must be made noearlier than 60 days prior to thevaluation date.
.03 Taxpayers are encouraged toinclude in the request any additionalinformation that may affect the deter-mination of the fair market value of theitem of art.
.04 An appraisal must:(1) be prepared, signed, and dated by
an appraiser, and contain a statementby the appraiser that:
(a) the appraiser either holds himselfor herself out to the public as anappraiser or performs appraisals on aregular basis;
(b) the appraiser is qualified to makeappraisals of the item of art;
(c) the appraiser is not the taxpayer; (d) the appraiser was not a party to
the transaction in which the decedentor donor of the gift acquired the itemof art being appraised, unless thevaluation date is within 2 months of
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the date of acquisition and the ap-praised value is not less than theacquisition price;
(e) the appraiser is not the benefici-ary or donee receiving the item of art;
(f) the appraiser is not a person whowas employed by the decedent or isemployed by the taxpayer;
(g) the appraiser is not related to anyof the foregoing persons under § 267-(b) or married to a person who is in arelationship described in § 267(b) withany of the foregoing persons;
(h) the appraiser is not an appraiserwho was regularly used by the dece-dent or who is regularly used by thetaxpayer or the beneficiary or donee;and
(i) the appraisal fee is not based onthe appraised value of the item of art;
(2) include the name, address, andtaxpayer identification number (if ataxpayer identification number is other-wise required by § 6109 and theregulations thereunder) of the appraiser.If the appraiser is acting in his or hercapacity as a partner in a partnership,an employee of any person (whether anindividual, corporation, or partnership),or an independent contractor engagedby a person other than the taxpayer, theappraiser must include the name, ad-dress, and taxpayer identification num-ber (if a taxpayer identification numberis otherwise required by § 6109 and theregulations thereunder) of the part-nership or the person who employs orengages the appraiser; and
(3) include the qualifications of theappraiser who signs the appraisal,including the appraiser’s background,experience, education, and membership,if any, in professional appraisal asso-ciations.
.05 The appraisal will not satisfy therequirements of this section if thetaxpayer has knowledge of facts thatwould cause a reasonable person toexpect the appraiser to overstate orunderstate the value of the item of art.
SECTION 9. TAXPAYER’SDECLARATION
.01 A request to obtain a Statementof Value, any factual representationsassociated with the request, and anyamendments to the request must beaccompanied by the following declara-tion: ‘‘Under penalties of perjury, Ideclare that I have examined thisrequest, including the accompanying
documents, and to the best of myknowledge and belief, the facts pre-sented in support of this request aretrue, correct, and complete.’’
.02 The declaration must be signedby the taxpayer, and not the taxpayer’srepresentative. The person signing foran estate must be the executor oradministrator of the estate. The personsigning for a trust or partnership mustbe a trustee or general partner who haspersonal knowledge of the facts. Theperson signing for a corporate taxpayermust be an officer of the corporatetaxpayer who has personal knowledgeof the facts. If a corporate taxpayer is amember of an affiliated group filingconsolidated returns, a penalties-of-perjury statement must also be signedand submitted by an officer of thecommon parent of the group.
.03 A taxpayer that submits addi-tional factual information on severaloccasions may provide one declarationthat refers to all submissions.
SECTION 10. WHERE TO SUBMITREQUESTS
Requests for a Statement of Valueshould be sent to the Internal RevenueService, POB 120, Ben Franklin Sta-tion, Washington, DC 20044, Attn:C:AP:AS:ART.
SECTION 11. NATIONAL OFFICECONSIDERATION OF REQUESTS
.01 For a completed request for aStatement of Value received after July15, but on or before January 15, theService will ordinarily issue a State-ment of Value by the following June30. For a completed request for aStatement of Value received after Janu-ary 15, but on or before July 15, theService will ordinarily issue a State-ment of Value by the following De-cember 31. It is the responsibility oftaxpayers to obtain extensions, as nec-essary, to file the appropriate taxreturns.
.02 If the Service agrees with thevalue reported on the taxpayer’s ap-praisal, the Service will issue a State-ment of Value approving the appraisal.
.03 If the Service disagrees with thevalue reported on the taxpayer’s ap-praisal, the Service will issue a State-ment of Value with the Service’sdetermination of value, and the basisfor its disagreement with the taxpayer’sappraisal.
SECTION 12. ATTACHMENT OFSTATEMENT OF VALUE TORETURN
.01 A copy of the Statement ofValue, regardless of whether the tax-payer agrees with it, must be attachedto and filed with the taxpayer’s income,estate, or gift tax return that reports thetransfer of the item of art valued in theStatement of Value. However, if, priorto receiving a Statement of Value, thetaxpayer files an income, estate, or gifttax return reporting the transfer of anitem of art for which a Statement ofValue was requested, the taxpayer mustindicate on the return that a Statementof Value has been requested and attacha copy of the request to the return.Upon receipt of the Statement ofValue, the taxpayer must file anamended income or gift tax return, or asupplemental estate tax return, with theStatement of Value attached.
.02 If a taxpayer disagrees with aStatement of Value issued by theService, the taxpayer may submit withthe tax return additional information insupport of a different value.
SECTION 13. EFFECT OFSTATEMENT OF VALUE
.01 A taxpayer may rely on aStatement of Value received from theService for an item of art, except asprovided in sections 13.02 and 13.03 ofthis revenue procedure.
.02 A taxpayer may not rely on aStatement of Value issued to anothertaxpayer.
.03 A taxpayer may not rely on aStatement of Value if the representa-tions upon which the Statement ofValue was based are not accuratestatements of the material facts.
SECTION 14. EFFECT ON OTHERDOCUMENTS
Rev. Proc. 66–49 is modified.
SECTION 15. EFFECTIVE DATE
This revenue procedure applies to arequest for a Statement of Value for anitem of art if the request is submittedafter January 15, 1996.
DRAFTING INFORMATION
The principal authors of this revenueprocedure are Jefferson K. Fox of the
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Office of Chief Counsel (Income Taxand Accounting) and Deborah Ryan ofthe Office of Chief Counsel (Pass-throughs and Special Industries). Forfurther information regarding this reve-nue procedure, contact Karen Carolanof the Office of Art Appraisal Servicesat (202) 401-4128 (not a toll-free call).
26 CFR 601.105: Rulings and determinationletters.(Also Part I, §§ 103, 7478.)
Rev. Proc. 96–16
SECTION 1. BACKGROUND ANDPURPOSE
A prospective issuer of bonds, theinterest on which is intended to beexcludable from gross income under§ 103(a) of the Internal Revenue Code,can request a ruling that is subject tothe declaratory judgment procedures of§ 7478. Section 7478 provides theUnited States Tax Court with jurisdic-tion to issue declaratory judgmentswith respect to certain governmentalobligations. A prospective issuer canfile a petition under § 7478 if theService determines that the interest onbonds will not be excludable fromgross income under § 103(a) or if theService fails to make a determinationwith respect to the excludability of theinterest within 180 days from the timethe request for a determination is made.In a declaratory judgment case, the TaxCourt determines whether the intereston the bonds will be excludable under§ 103 and thus must consider all of therequirements for the exclusion.
A prospective issuer or holder ofbonds may also request a ruling that isnot subject to the declaratory judgmentprovisions of § 7478. For example, therequest may ask for a ruling about oneor more of the various requirements forexcludability under § 103(a) rather thanexcludability in general under § 103(a).Alternatively, the request may relate tothe effect of a proposed transaction onan outstanding issue of bonds.
This revenue procedure updates ex-isting procedures with respect to bothreviewable and nonreviewable rulings.Thus, Rev. Proc. 88–32, 1988–1 C.B.833, relating to reviewable rulings, andRev. Proc. 88–33, 1988–1 C.B. 835,relating to nonreviewable rulings, areobsolete as provided in section 7 ofthis revenue procedure.
This revenue procedure provides def-initions of the two types of ruling
requests and procedures for each. Theprocedures are designed to make itclear to both the requesting party andthe Service whether a ruling request isreviewable under § 7478. For a requestthat is reviewable, the procedures aredesigned to ensure that the administra-tive record is fully developed withrespect to each requirement for exclu-sion of interest under § 103(a). Inaddition, for a request that is review-able, the procedures are designed toensure that all necessary informationwith respect to the proposed issue ofbonds is provided in a timely mannerthat will allow the Service to make itsdetermination within 180 days from thedate the request for a ruling is filed.
SECTION 2. SCOPE
This revenue procedure applies toany request for a letter ruling under §§103, 141 through 150, 1394, and7871(c) of the Code. This revenueprocedure does not apply to a requestfor a determination that an organizationmeets the requirements of § 501(c)(3)as a condition to the issuance ofqualified 501(c)(3) bonds under § 145.
SECTION 3. COORDINATIONWITH REV. PROC. 96–1
Unless otherwise specifically statedin this revenue procedure, the defini-tions and requirements set forth in Rev.Proc. 96–1, 1996–1 I.R.B. 8, apply.Any reference to Rev. Proc. 96–1 isalso a reference to any successor ofRev. Proc. 96–1.
SECTION 4. PROCEDURE FORREVIEWABLE RULINGS
.01 Issuer Must Submit Request. Arequest for a reviewable ruling must besubmitted by the prospective issuer.The term ‘‘issuer’’ includes any state,any political subdivision of a state, andany corporation described in § 150(d).It also includes any ‘‘on-behalf-of’’issuer described in Rev. Rul. 63–20,1963–1 C.B. 24, and any constitutedauthority described in Rev. Rul. 57–187, 1957–1 C.B. 65, if the on-behalf-of issuer or constituted authority hasbeen designated by a state or politicalsubdivision to issue the prospectiveobligations. It does not include aconduit borrower of the proceeds of theprospective obligations.
.02 Specific Prospective Issuance ofObligations. A request for a reviewable
ruling must address a specific, prospec-tive issuance of obligations. A resolu-tion must have been adopted before therequest is submitted, in accordancewith state or local law authorizing theissuance of a specific issue of obliga-tions. The resolution may state that theissuance of obligations is contingentupon a favorable ruling by the Serviceor a favorable decision by the TaxCourt.
.03 Statement of Facts. The state-ment of facts in a request for areviewable ruling must be complete,accurate, and detailed. Each requestmust contain all relevant facts. Thesefacts include but are not limited to thefollowing:
(1) the name, address, and taxpayeridentification number of the issuer,each underwriter, and each conduitborrower (except conduit borrowers ofthe proceeds of bonds such as qualifiedmortgage bonds, qualified veterans’mortgage bonds, and qualified studentloan bonds);
(2) a description of all uses and usersof proceeds of the obligations;
(3) a description of the accountingmethod or methods that will be used toaccount for investments and expendi-tures of gross proceeds of theobligations;
(4) an estimate of all fees that willbe paid in connection with the issuanceof the obligations;
(5) a description of any electionsmade pursuant to the regulations under§ 148 including elections on the ap-plication of the various versions of thethose regulations;
(6) the expected principal amount,expected yield, expected issue price,and expected issue date of the prospec-tive obligations and of the expectedinvestments to be acquired with bondproceeds;
(7) a statement whether proceeds areexpected to be invested at a yield thatexceeds the yield on the issue ofobligations by more than the amountpermitted in § 1.148–2(d)(2) of theIncome Tax Regulations (definition ofmaterially higher yield) and a statementindicating which definition the issuerexpects will apply;
(8) descriptions of any obligationsthat are to be refunded by the prospec-tive obligations and representationswhether the interest on each obligationthat is to be refunded has been treatedby the issuer as excludable from grossincome under § 103; and
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(9) a representation whether theissuer has received an appropriateallocation of volume cap under § 146for the prospective obligations.
.04 Supporting Documentation. Rul-ings are based on the documents thatare submitted. The initial request for areviewable ruling, and any additionalsubmission at a later date, must beaccompanied by copies of all documen-tation that is relevant to the determina-tion whether interest on the prospectiveobligations will be excludable fromgross income under § 103. If theprospective obligations are refundingobligations, the documentation mustalso include the relevant documentsunderlying the refunded obligations.The request must include a representa-tion that each document accompanyingthe request is a complete and accuratecopy of the original document. Thedocuments to be submitted include—
(1) the resolution for the issuance ofthe obligations;
(2) management and service con-tracts, leases, output contracts, andagreements that affect any facilityfinanced with the proceeds from theobligations;
(3) the official statement and trustindenture;
(4) the arbitrage certificate and otherdocuments containing covenants aboutarbitrage rebate and about subsequentintentional acts to earn arbitrage; and
(5) any relevant provision of state orlocal law.
.05 Cross-references. Relevant provi-sions in submitted documents must beappropriately described, analyzed, andcross-referenced in the request for areviewable ruling.
.06 Legal Analysis. A request for areviewable ruling must set forth acomplete and detailed analysis of therationale on which the requester reliesto support its request for a determina-tion that each condition for exclusionof interest on the prospective obliga-tions under § 103 will be satisfied. Theanalysis submitted must include cita-tions to the Code, regulations, revenuerulings, revenue procedures, judicialauthority, and any other authority rele-vant to the issues raised by the request.A simple statement that a provision ofthe Code is satisfied is insufficient. Therequest must also describe in detail anyrelevant provision of state or local law.The following is a recommended for-mat for the legal analysis:
(1) Whether the obligations will beissued by or on behalf of a state orpolitical subdivision of a state;
(2) Whether the obligations will beprivate activity bonds under § 141;
(3) Whether the obligations willsatisfy each of the provisions of §§ 142through 147;
(4) Whether the obligations will bearbitrage bonds under § 148;
(5) Whether the obligations willsatisfy the requirements of § 149;
(6) Whether the obligations willsatisfy the requirements of § 150;
(7) Whether the obligations satisfyany other requirements for the exclu-sion of interest under § 103.
.07 Acknowledgement. The requestfor a ruling must be accompanied by astatement, signed by the issuer, ac-knowledging that the issuer is awarethat it cannot exhaust its administrativeremedies unless it complies with sec-tion 4 of this revenue procedure.Appendix A sets forth a form for thisacknowledgement.
.08 Number of Copies. Three copiesmust be submitted of the initial submis-sion and of each additional submission,including the statement of facts, legalanalysis, supporting documents, cross-referenced documents, and acknowl-edgement.
.09 Time Periods. The 180-dayperiod specified in § 7478 begins as ofthe date the Service receives the initialrequest for a ruling. To ensure asufficient amount of time to properlyprocess a ruling request within this180-day period, all time periods spec-ified by Rev. Proc. 96–1 for processinga ruling request are 14 days forpurposes of processing a ruling requestunder this procedure. The Service maygrant extensions of these 14-day peri-ods in accordance with the proceduresset forth in Rev. Proc. 96–1 forextending the time period for additionalinformation.
.10 Substantial compliance of initialrequest. If the initial request for areviewable ruling substantially com-plies with section 4 of this revenueprocedure, the Service will send awritten notice of initial compliance. Ifa request for a reviewable ruling hasonly minor deficiencies, the deficien-cies may be corrected in the samemanner that additional information isprovided under section 4.11 of thisrevenue procedure. If the initial requestfor a reviewable ruling does not
substantially comply with section 4 ofthis revenue procedure, the Service willimmediately close the request. TheService will also send written notice tothe issuer, or its authorized representa-tive, stating that the request has beenclosed and stating the specific nature ofthe defects. If a request for a review-able ruling is closed because it is doesnot substantially comply with section 4of this revenue procedure, the issuerhas failed to have timely taken allreasonable steps to secure a rulingsubject to review by the Tax Court.
.11 Additional information. If addi-tional information is not receivedwithin 14 days of the date the Servicerequests it, the request will be closed,and the issuer will have failed to havetimely taken all reasonable steps tosecure a ruling subject to review by theTax Court. Once a request is closed,the issuer must submit a new request,and pay an additional fee, if it wishesto request a reviewable or nonreview-able ruling. If the new request issubmitted not later than 30 days afterthe request is closed, the new requestmay incorporate the information anddocuments already submitted. To do so,the issuer must clearly state in writingthat it is submitting a new request andincorporating by reference previouslysubmitted materials.
.12 Taxpayer conferences.(1) Taxpayer conference is a step in
securing a ruling. Taxpayer con-ferences ensure that the requester fullyparticipates in the processing of arequest for a ruling and that the Servicefully understands the requester’s posi-tion. Thus, if an issuer has beennotified of a tentative adverse positionby the Service and does not participatein the conference, the issuer has failedto have timely taken all reasonablesteps to secure a ruling subject toreview by the Tax Court. After the firstconference, the issuer need not partici-pate in any additional conference of-fered by the Service under Rev. Proc.96–1.
(2) Location of conference. Theconference generally will be held at theNational Office. The issuer, however,may request in writing that the con-ference be held by telephone.
(3) Conference report. If the Serviceprepares a conference report, a copywill be sent to the issuer. The issuerwill have 14 calendar days to correctany factual errors made in the report. Ifthe Service does not receive corrections
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within the 14-day period, it may baseits ruling on the facts stated in thereport. The Service may grant exten-sions of the 14-day period in accord-ance with the procedures set forth inRev. Proc. 96–1 for extending thescheduling of conferences. The con-ference report may be included in theadministrative record filed with the TaxCourt.
.13 Withdrawal of Requests. Anywithdrawal of a request for a review-able ruling must be made in a writtenstatement signed by the issuer. Thestatement must contain an acknowledg-ment that the issuer has not taken allreasonable steps to secure a reviewableruling. If a request is not withdrawn inthe manner described in this paragraph,the Service will continue to process therequest and may issue a ruling.
.14 Exhaustion of AdministrativeRemedies.
(1) Compliance With ProceduresRequired. The issuer must comply withthe procedures described in Rev. Proc.96–1 and in section 4 of this revenueprocedure in order to have reasonablytaken all steps necessary to obtain aruling that is subject to review by theTax Court.
(2) Each Issuer Must Exhaust ItsRemedies. An issuer that petitions theTax Court must itself have exhaustedadministrative remedies for each re-quest for a ruling. It may not base itspetition on the response to any otherrequest for a letter ruling that itsubmits or that is submitted by anotherissuer or other person.
SECTION 5. PROCEDURE FORNONREVIEWABLE RULINGS
.01 Issuer or Holder Must SubmitRequest. A request for a nonreviewableruling must be submitted by an issueror holder. The term ‘‘issuer’’ includesany state, any political subdivision of astate, and any corporation described in§ 150(d). It also includes any ‘‘on-behalf-of’’ issuer described in Rev.Rul. 63–20, 1963–1 C.B. 24, and anyconstituted authority described in Rev.Rul. 57–187, 1957–1 C.B. 65, if theon-behalf-of issuer or constituted au-thority has been designated by a stateor political subdivision to issue theprospective obligations. It does notinclude a conduit borrower of theproceeds of the prospective obligations.
Other parties may join an issuer orholder in requesting a ruling. Forexample, an underwriter that is not aholder may join an issuer in requestinga nonreviewable ruling but may not byitself request a ruling. However, theService may rule in accordance withthe methodology and procedure indi-cated in § 9(f) of the Pacific NorthwestElectric Power Planning and Conserva-tion Act (16 U.S.C. 839).
.02 Specific Transaction. The Servicegenerally rules only on specific transac-tions. Thus, a request for a nonreview-able ruling must address a specificproposal to issue obligations or aspecific proposed transaction that mayaffect the application of §§ 103, 141through 150, 1394, or 7871(c) toobligations already issued.
.03 Prospective Obligations. TheService may issue a nonreviewableruling on whether a proposed obliga-tion meets one or more conditions forthe exclusion of interest on the obliga-tion from gross income under § 103.Before the request is submitted, aresolution must have been adopted inaccordance with state or local lawauthorizing the issuance of the obliga-tion that is the subject of the rulingrequest. Among other things, the reso-lution may state that the issuance ofobligations is contingent upon a favor-able ruling by the Service.
.04 Outstanding Obligations.(1) Whether an outstanding obliga-
tion meets conditions under § 103. TheService will not issue a nonreviewableruling on whether an issued and out-standing obligation that is part of anissue of obligations meets one or moreconditions for the exclusion of intereston the obligation from gross incomeunder § 103 unless the request isreceived by the Service before intereston any obligation in that issue isrequired to be reported by a holder.
(2) Transactions affecting outstand-ing obligations. The Service may issuea nonreviewable ruling on the effect ofa proposed act or transaction on one ormore conditions for the exclusion fromgross income under § 103 of interest onan issued and outstanding obligation.The request, however, must contain astatement by the issuer that the out-standing obligation has met the condi-tions for the exclusion of interest under§ 103 from the issue date to the datethe request is submitted.
.05 Status Rulings. The Service willnot issue a nonreviewable ruling underthis procedure on the status or classi-fication of an issuer of obligationsunless the status or classification of theissuer affects the exclusion of interestunder § 103 on a specific, prospectiveissue of obligations.
.06 Statement of Facts. Although arequest for a nonreviewable ruling mayaddress only one or a few of theconditions for exclusion under § 103,the requester should describe the entiretransaction in the request. The reques-ter should consider submitting thefollowing information in complyingwith the procedures set forth in Rev.Proc. 96–1 for submitting requests:
(1) the name, address, and taxpayeridentification number of the issuer,each underwriter, each conduit bor-rower (except conduit borrowers of theproceeds of bonds such as qualifiedmortgage bonds, qualified veterans’mortgage bonds, and qualified studentloan bonds);
(2) a description of all uses and usersof proceeds of the obligations;
(3) a description of the accountingmethod or methods that have been orwill be used to account for investmentsand expenditures of gross proceeds ofthe obligations, including refundingobligations;
(4) an accounting of all fees that willbe paid in connection with the issuanceof the obligations;
(5) for outstanding obligations, in-cluding refunded obligations, the actualprincipal amount, actual issue price,actual issue date, and actual yield ofthe obligations and investments;
(6) for prospective obligations, theexpected principal amount, expectedyield, expected issue price, and ex-pected issue date of the prospectiveobligations and of the expected invest-ments to be acquired with bondproceeds;
(7) descriptions of any obligationsthat have been or will be refunded andrepresentations whether the interest oneach obligation that has been or will berefunded has been treated by the issueras excludable from gross income under§ 103;
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(8) a statement whether the issuerhas received an appropriate allocationof volume cap under § 146; and
(9) a description of any electionsmade pursuant to the regulations under§ 148, including elections on the ap-plication of the various versions ofthose regulations.
.07 Supporting Documentation. Therequester should consider submittingcopies of the following documents incomplying with the procedures set forthin Rev. Proc. 96–1 for submittingrequests:
(1) the resolution, official statement,and trust indenture;
(2) management and service con-tracts, leases, output contracts, andagreements that affect any facilityfinanced with the proceeds from theobligations;
(3) the arbitrage certificate and otherdocuments containing covenants aboutarbitrage rebate and about subsequentintentional acts to earn arbitrage; and
(4) copies of relevant provisions oflocal law.
.08 Acknowledgement. The requestfor a nonreviewable ruling must beaccompanied by a written statementacknowledging that the request doesnot comply with the requirements ofsection 4 of this procedure and thatcompliance with the provisions ofsection 4 of this procedure is manda-tory for a ruling subject to review by
the Tax Court under § 7478. Theacknowledgement must be in the formset forth in Appendix B.
SECTION 6. EFFECTIVE DATE
This revenue procedure applies torequests for rulings received on or afterFebruary 1, 1996. A requester of aletter ruling submitted prior to thiseffective date may also submit itsrequest under this revenue procedure.
SECTION 7. EFFECT ON OTHERDOCUMENTS
Rev. Procs. 88–32 and 88–33 areobsolete after January 31, 1996.
DRAFTING INFORMATION
The principal author of this revenueprocedure is Timothy L. Jones of theOffice of Assistant Chief Counsel(Financial Institutions & Products). Forfurther information regarding this reve-nue procedure contact Mr. Jones on(202) 622-3980 (not a toll-free call).
Appendix A
ACKNOWLEDGEMENT OF AREQUEST FOR A REVIEWABLE
RULING
The undersigned acknowledges thatthe request for a ruling submitted by
{insert name of issuer} to the InternalRevenue Service on {insert date of therequest for a ruling} is governed bysection 4 of Rev. Proc. 96–16 . Section4 of Rev. Proc. 96–16 sets forthprocedures that must be followed toobtain a ruling that may be reviewedby the United States Tax Court under§ 7478 of the Internal Revenue Code.
Name of the Issuer Date
Appendix B
ACKNOWLEDGEMENT OF AREQUEST FOR A
NONREVIEWABLE RULING
The undersigned acknowledges thatthe request for a ruling submitted by{insert name of holder or issuer} tothe Internal Revenue Service on{insert date of the request for aruling} is governed by section 5 ofRev. Proc. 96–16. Section 5 of Rev.Proc. 96–16 sets forth procedures thatmust be followed to obtain a non-reviewable ruling. Therefore, the re-quest for a ruling does not comply withthe requirements of section 4 of Rev.Proc. 96–16 which sets forth theprocedures that must be satisfied toobtain a ruling that is reviewable bythe United States Tax Court under§ 7478 of the Internal Revenue Code.
Name of issuer or holder Date
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Part IV. Items of General Interest
Notice of Proposed Rulemaking
Notice of Significant Reduction in theRate of Future Benefit Accrual
EE–34–95
AGENCY: Internal Revenue Service(IRS), Treasury.
ACTION: Notice of proposed rulemak-ing by cross-reference to temporaryregulations.
SUMMARY: In *** [T.D. 8631, page7, this Bulletin], the Federal Register,the IRS is issuing temporary regula-tions relating to the requirements ofsection 204(h) of the Employee Retire-ment Income Security Act of 1974, asamended (ERISA). Section 204(h) ofERISA applies to defined benefit plansand to individual account plans that aresubject to the funding standards ofsection 302 of ERISA. It requires theplan administrator to give notice ofcertain plan amendments to participantsin the plan and certain other parties.The text of those temporary regulationsalso serves as the text of theseproposed regulations.
DATES: Written comments must bereceived by March 14, 1996.
ADDRESSES: Send submissions toCC:DOM:CORP:R (EE–34–95), Room5228, Internal Revenue Service, POB7604, Ben Franklin Station, Wash-ington, DC 20044. In the alternative,submissions may be hand deliveredbetween the hours of 8 a.m. and 5 p.m.to CC:DOM:CORP:R (EE–34–95),Courier’s Desk, Internal Revenue Serv-ice, 1111 Constitution Avenue NW.,Washington DC.
FOR FURTHER INFORMATIONCONTACT: Betty J. Clary, (202)622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-tained in this notice of proposedrulemaking has been submitted to theOffice of Management and Budget for
review in accordance with the Paper-work Reduction Act of 1995 (44U.S.C. 3507).
Comments on the collection of infor-mation should be sent to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of Treasury,Office of Information and RegulatoryAffairs, Washington DC 20503, withcopies to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,T:FP, Washington, DC 20224. Com-ments on the collection of informationshould be received by February 13,1996.
An agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless the collection of informationdisplays a valid control number.
The collection of information is in§ 1.411(d)–6T which implements thestatutory requirement of section 204(h)of ERISA that a plan administratorprovide notice to participants and cer-tain other parties if certain pensionplans are amended to provide for asignificant reduction in the rate offuture benefit accrual. This collectionof information is required to assure thatthe rights of participants in planssubject to section 204(h) of ERISA areprotected. The likely respondents aresmall businesses. Responses to thiscollection of information are requiredunder section 204(h) of ERISA in orderfor certain amendments to qualifiedplans to become effective.
These regulations do not involve anyissues of confidentiality.Estimated total annual reporting bur-den: 15,000 hours.The estimated annual burden per re-spondent varies from 1 hour to 40hours, depending on individual circum-stances, with an estimated average of 5hours.Estimated number of respondents:3,000.Estimated annual frequency of re-sponses: Once.
Background
Temporary regulations in *** [T.D.8631, page 7, this Bulletin] amend theIncome Tax Regulations (26 CFR part1) (relating to section 411(d)). The textof those temporary regulations also
serves as the text of these proposedregulations. The preamble to the tem-porary regulations explains the tempo-rary regulations.
Special Analyses
It has been determined that thisnotice of proposed rulemaking is not asignificant regulatory action as definedin EO 12866. Therefore, a regulatoryassessment is not required. It also hasbeen determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) and the RegulatoryFlexibility Act (5 U.S.C. chapter 6) donot apply to these regulations, and,therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant tosection 7805(f) of the Internal RevenueCode, the notice of proposed rulemak-ing will be submitted to the ChiefCounsel for Advocacy of the SmallBusiness Administration for commenton their impact on small business.
Comments and Requests for a PublicHearing
Before these proposed regulationsare adopted as final regulations, consid-eration will be given to any writtencomments (a signed original and eight(8) copies) that are submitted timely tothe IRS. All comments will be avail-able for public inspection and copying.A public hearing may be scheduled ifrequested in writing by a person thattimely submits written comments. If apublic hearing is scheduled, notice ofthe date, time, and place for thehearing will be published in the FederalRegister.
Drafting Information
The principal author of these regula-tions is Betty J. Clary, Office of theAssociate Chief Counsel (EmployeeBenefits and Exempt Organizations),IRS. However, other personnel fromthe IRS and Treasury Departmentparticipated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-keeping requirements.
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Proposed Amendments to theRegulations
Accordingly, 26 CFR part 1 isproposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citationfor part 1 continues to read, in part, asfollows:
Authority: 26 U.S.C. 7805. * * *Section 1.411(d)–6 also issued underReorganization Plan No. 4 of 1978, 29U.S.C. 1001nt. * * *
Par. 2. Section 1.411(d)–6 is addedto read as follows:
§ 1.411(d)–6 Section 204(h) notice.
[The text of this proposed section is thesame as the text of § 1.411(d)–6Tpublished elsewhere in *** [T.D. 8631,page 7, this Bulletin].]
Margaret Milner Richardson,Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register onDecember 12, 1995, 1:23 p.m., and publishedin the issue of the Federal Register forDecember 15, 1995, 60 F.R. 64401)
Mortality Assumptions Used toCalculate an Underfunded DefinedBenefit Pension Plan’s CurrentLiability for Individuals Entitled toBenefits on Account of Disability
Announcement 96–4
The Internal Revenue Service hasissued Rev. Rul. 96–7, page 12, thisBulletin, to provide guidance regardingthe mortality assumptions used under§ 412(l)(7)(C)(iii) of the Internal Reve-nue Code for plans that are subject tothe additional funding requirements of§ 412(l), to calculate a plan’s currentliability for individuals who are entitled
to benefits under the plan on accountof disability. Section 412(l) providesadditional funding requirements forcertain underfunded defined benefitpension plans that have more than 100participants and that are not multi-employer plans. In general, the addi-tional funding requirements are deter-mined based on a plan’s unfundedcurrent liability. Rev. Rul. 95–28,1995–1 C.B. 74, sets forth the mortalitytable that generally must be used todetermine current liability under§ 412(l). Section 412(l)(7)(C)(iii)(I)provides that the Secretary shallestablish mortality tables that may beused, in lieu of the generally applicablemortality tables, to determine currentliability under § 412(l) for individualswho are entitled to benefits under theplan on account of disability.
Rev. Rul. 96–7 provides two mor-tality tables that may be used incalculating current liability for individ-uals who are entitled to benefits underthe plan on account of disability. Rev.Rul. 96–7 provides a mortality tablethat may be used for plan yearsbeginning after December 31, 1995, inlieu of the mortality table required tobe used under § 412(l)(7)(C)(ii), forpurposes of determining current lia-bility for individuals entitled to benefitsunder the plan on account of disability,whose disabilities occurred in planyears beginning before January 1,1995. The mortality table takes intoaccount the experience for individualswho are entitled to benefits on accountof disability under the Railroad Retire-ment System and the Civil ServiceRetirement System. This experiencecovers a large workforce over a broadrange of occupational categories and isthe best available information.
Rev. Rul. 96–7 also provides amortality table that may be used forplan years beginning after December31, 1995, in lieu of the mortality tablerequired to be used under § 412(l)(7)-(C)(ii), for purposes of determiningcurrent liability for individuals entitled
to benefits under the plan on accountof disability, whose disabilities occur inplan years beginning after December31, 1994. This mortality table may beused only for individuals who aredisabled within the meaning of title IIof the Social Security Act and theregulations thereunder. The mortalitytable takes into account the SocialSecurity Administration’s experiencefor individuals who are receiving dis-ability benefits under its program.
Rev. Rul. 96–7 is effective for planyears beginning after December 31,1995. The Service plans to review themortality tables set forth in Rev. Rul.96–7 and, if appropriate, to issue newguidance for plan years beginning afterDecember 31, 1996. Accordingly, theService is soliciting public commentregarding the mortality tables in Rev.Rul. 96–7, as well as other aspects ofRev. Rul. 96–7, including the desir-ability of any adjustment to theseaggregate mortality tables to reflect aselect and ultimate pattern of mortality.Public comments should be submittedin writing on or before July 1, 1996.Comments should be sent to thefollowing address:
Internal Revenue Service1111 Constitution Ave., NWWashington, DC 20224Attn: Edward Sypher
CP:E:EP:A:1, Room 2548
DRAFTING INFORMATION
The principal author of this an-nouncement is Edward Sypher of theEmployee Plans Division. For furtherinformation regarding this announce-ment, please contact the EmployeePlans Division’s taxpayer assistancetelephone service at (202) 622-6076between 2:30 and 4:00 Eastern time(not a toll-free number) Mondaythrough Thursday. Mr. Sypher’s num-ber is (202) 622-6245 (also not a toll-free number).
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Definition of TermsRevenue rulings and revenue proce-dures (hereinafter referred to as ‘‘rul-ings’’) that have an effect on previousrulings use the following defined termsto describe the effect:
Amplified describes a situation whereno change is being made in a priorpublished position, but the prior posi-tion is being extended to apply to avariation of the fact situation set forththerein. Thus, if an earlier ruling heldthat a principle applied to A, and thenew ruling holds that the same princi-ple also applies to B, the earlier rulingis amplified. (Compare with modified,below).
Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position ina prior ruling is being changed.
Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out anessential difference between them.
Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A butnot to B, and the new ruling holds thatit applies to both A and B, the prior
ruling is modified because it corrects apublished position. (Compare with am-plified and clarified, above).
Obsoleted describes a previouslypublished ruling that is not considereddeterminative with respect to futuretransactions. This term is most com-monly used in a ruling that listspreviously published rulings that areobsoleted because of changes in law orregulations. A ruling may also beobsoleted because the substance hasbeen included in regulations subse-quently adopted.
Revoked describes situations wherethe position in the previously publishedruling is not correct and the correctposition is being stated in the newruling.
Superseded describes a situationwhere the new ruling does nothingmore than restate the substance andsituation of a previously publishedruling (or rulings). Thus, the term isused to republish under the 1986 Codeand regulations the same position pub-lished under the 1939 Code and regula-tions. The term is also used when it isdesired to republish in a single ruling aseries of situations, names, etc., thatwere previously published over aperiod of time in separate rulings. If
If the new ruling does more thanrestate the substance of a prior ruling, acombination of terms is used. Forexample, modified and superseded de-scribes a situation where the substanceof a previously published ruling isbeing changed in part and is continuedwithout change in part and it is desiredto restate the valid portion of thepreviously published ruling in a newruling that is self contained. In thiscase the previously published ruling isfirst modified and then, as modified, issuperseded.
Supplemented is used in situations inwhich a list, such as a list of the namesof countries, is published in a rulingand that list is expanded by addingfurther names in subsequent rulings.After the original ruling has beensupplemented several times, a newruling may be published that includesthe list in the original ruling and theadditions, and supersedes all priorrulings in the series.
Suspended is used in rare situationsto show that the previous publishedrulings will not be applied pendingsome future action such as the issuanceof new or amended regulations, theoutcome of cases in litigation, or theoutcome of a Service study.
AbbreviationsThe following abbreviations in current use andformerly used will appear in material publishedin the Bulletin.
A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C.—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.
E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contribution Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—GrantorIC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.
PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.
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1A cumulative list of all Revenue Rulings,Revenue Procedures, Treasury Decisions, etc.,published in Internal Revenue Bulletins 1995–27through 1995–52 will be found in InternalRevenue Bulletin 1996–1, dated January 2, 1996.
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Finding List of Current Action onPreviously Published Items1
Bulletins 1996–1 through 1996–2
*Denotes entry since last publication
Revenue Procedures:
91–22Modified by96–1, 1996–1 I.R.B. 8
92–20Modified by96–1, 1996–1 I.R.B. 8
92–85Modified by96–1, 1996–1 I.R.B. 8
93–16Superseded by96–11, 1996–2 I.R.B. 18*
95–1Superseded by96–1, 1996–1 I.R.B. 8
95–2Superseded by96–2, 1996–1 I.R.B. 60
95–3Superseded by96–3, 1996–1 I.R.B. 82
95–4Superseded by96–4, 1996–1 I.R.B. 94
95–5Superseded by96–5, 1996–1 I.R.B. 129
95–6Superseded by96–6, 1996–1 I.R.B. 151
95–7Superseded by96–7, 1996–1 I.R.B. 185
95–8Superseded by96–8, 1996–1 I.R.B. 187
95–50Superseded by96–3, 1996–1 I.R.B. 82
1A cumulative finding list for previouslypublished items mentioned in Internal RevenueBulletins 1995–27 through 1995–52 will befound in Internal Revenue Bulletin 1996–1, datedJanuary 2, 1996.
Revenue Rulings:
66–307Obsoleted by96–3, 1996–2 I.R.B. 14*
80–80Obsoleted by96–3, 1996–2 I.R.B. 14*
92–19Supplemented in part96–2, 1996–2 I.R.B. 5*
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NOTES
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NOTES
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