bulletin no. 1996–6 february 5, 1996 of this issue · meaning of various code provisions in light...

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Bulletin No. 1996–6February 5, 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. 96–14, page 20.Federal rates; adjusted federal rates; adjusted federallong-term rate, and the long-term exempt rate. Forpurposes of sections 1274, 1288, 382, and othersections of the Code, tables set forth the rates forFebruary 1996.

T.D. 8641, page 4.Final regulations under sections 597 and 7507 of theCode relating to the treatment of acquisition of certainfinancial institutions and certain tax consequences ofFederal financial assistance to financial institutions.

INTL–3–95, page 29.Proposed regulations under section 863 of the Coderelating to the source of income from sales of inventoryand natural resources produced in one jurisdiction andsold in another jurisdiction. A public hearing will beheld on April 16, 1996.

EMPLOYEE PLANS

Notice 96–8, page 23.Determining amount of single sum distributions from cashbalance plans. This notice provides guidance concerningthe requirements of section 411(a) and 417(e) withrespect to the determination of the amount of a singlesum distribution from a cash balance plan. The noticealso describes proposed guidance to be issued later inregulations that would provide a list of standard indicesand associated margins for use by cash balance plansin determining the amount of interest credits.

Notice 96–9, page 26.Guidelines are set forth for determining for January1996, the weighted average interest rate and theresulting permissible range of interest rates used tocalculate current liability for purposes of the fullfunding limitation of section 412(c)(7) of the Code asamended by the Omnibus Budget Reconciliation Act of1987 and by the Uruguay Round Agreements Act(GATT).

ADMINISTRATIVE

Notice 96–5, page 22.Estimated tax payments for individuals. The Service willwaive penalties for individuals who are residents of theDistrict of Columbia, Connecticut, Delaware, Kentucky,Maine, Maryland, Massachusetts, New Hampshire, NewJersey, New York, North Carolina, Pennsylvania, RhodeIsland, Vermont, Virginia, and West Virginia for the 4thinstallment payment of estimated tax if that paymentwas made on or before 1/22/96.

Notice 96–7, page 22.Capital expenditures. Public comment is invited onapproaches the Service should consider to addressissues raised under sections 162 and 263 of the Codeparticularly in light of INDOPCO vs Commissioner, 503U.S. 79 (1992).

DL–1–95, page 28.Proposed regulations under section 6103 of the Coderelate to the disclosure of returns and return informa-tion in connection with the procurement of property andservices for tax administration purposes.

Finding Lists begin on page 45.Announcement of Disbarments and Suspensions begin on page 42.Monthly Index for January begins on page 47.

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

Section 42.—Low-Income HousingCredit

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth forthe month of February 1996. See Rev. Rul. 96–14, page 20.

Section 280G.—Golden ParachutePayments

Federal short-term, mid-term, and long-termrates are set forth for the month of February1996. See Rev. Rul. 96–14, page 20.

Section 382.—Limitation on NetOperating Loss Carryforwards andCertain Built-In Losses FollowingOwnership Change

The adjusted federal long-term rate is set forthfor the month of February 1996. See Rev. Rul.96–14, page 20.

Section 412.—Minimum FundingStandards


Section 467.—Certain Payments forthe Use of Property or Services


Section 468.—Special Rules forMining and Solid Waste Reclamationand Closing Costs


Section 483.—Interest on CertainDeferred Payments


Section 597.—Treatment ofTransactions in Which FederalFinancial Assistance Provided

26 CFR 1.597–1: Definitions

T.D. 8641

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1, 301 and 602

Treatment of Acquisition of CertainFinancial Institutions; Certain TaxConsequences of Federal FinancialAssistance to Financial Institutions

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations relating to Federalfinancial assistance, as defined in sec-tion 597(c) of the Internal RevenueCode, that is received by a financiallytroubled bank or thrift institution, andto acquisitions of financially troubledbank or thrift institutions in whichFederal financial assistance is provided.This document also contains finalregulations under section 7507. Theseregulations provide guidance concern-ing the proper tax treatment of varioustransactions involving the receipt ofFederal financial assistance.

DATES: These regulations are effectiveDecember 21, 1995.

For dates of applicability, see the‘‘§1.597-7 Effective date’’ section un-der the ‘‘SUPPLEMENTARY INFOR-MATION’’ portion of the preamble andthe effective date provisions (§1.597–7)of this document.

FOR FURTHER INFORMATIONCONTACT: Steven M. Flanagan at202-622-7790, Vicki J. Hyche at202-622-7530, William D. Alexander at202-622-7710, or Steven R. Glicksteinat 202-622-4439 (not tol l - f reenumbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in these final regulations have

been reviewed and approved by theOffice of Management and Budget inaccordance with the Paperwork Reduc-tion Act (44 U.S.C. 3507) undercontrol number 1545–1300. Responsesto these collections of information arerequired to track deferred income andits subsequent recapture, elect to dis-affiliate earlier than would otherwise bepermitted, elect to apply the provisionsof the regulation retroactively, andreport uncollected income tax.

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 estimated annual burden perrespondent/recordkeeper varies from 1hour to 11 hours, depending on individ-ual circumstances, with an estimatedaverage of 4.4 hours.

Comments concerning the accuracyof this burden estimate and suggestionsfor reducing this burden should be sentto the Internal Revenue Service, Attn:IRS Reports Clearance Officer T:FP,Washington, DC 20224, and to theOffice of Management and Budget,Attn: Desk Officer for the Departmentof the Treasury, Office of Informationand Regulatory Affairs, Washington,DC 20503.

Books or records relating to thesecollections of information must beretained as long as their contents maybecome material in the administrationof any internal revenue law. Generally,tax returns and tax return informationare confidential, as required by 26U.S.C. 6103.

Background

This document contains final regula-tions under section 597, as amended bysection 1401 of the Financial Institu-tions Reform, Recovery, and Enforce-ment Act of 1989 (Public Law 101–73)(FIRREA). The regulations provideguidance for banks and domestic build-ing and loan associations (Institutions)and their affiliates in connection withreceipt of Federal financial assistance(FFA), as defined in section 597(c).

Section 597(a) delegates to the Sec-retary of the Treasury authority toprescribe regulations concerning ‘‘anytransaction in which Federal financialassistance is provided.’’ These regula-


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tions are issued under the authority ofsection 597(a).

This document also amends theregulations under section 7507 to re-flect the treatment of FFA underFIRREA.

The IRS published proposed regula-tions under sections 597 and 7507 onApril 22, 1992 (57 FR 14794, FI–46–89, 1992–1 C.B. 1037).

Public Comments and the FinalRegulations

The IRS received comments on theproposed regulations, and a publichearing was held on July 17, 1992.After consideration of the commentsand the statements made at the hearing,the proposed regulations are adopted asrevised by this Treasury decision. Theprincipal comments and revisions arediscussed below.

§1.597–2 Taxation of FFA

Section 1.597–2 contains rules con-cerning accounting for FFA as income.The final regulations retain the pro-posed rule that, generally, FFA isincome to the failed Institution when itis received or accrued in accordancewith the Institution’s method of ac-counting. Section 1.597–2(c) containsrules permitting certain Institutions todefer the inclusion of FFA.

Deferral formula without ContinuingEquity. Under the proposed regulations,unresolved Institutions without Contin-uing Equity were permitted to deferinclusion of FFA in excess of amountsdetermined under a formula. The pro-posed formula required current inclu-sion equal to the sum of liabilities lessaggregate adjusted basis at the begin-ning of the assistance year (represent-ing losses already recognized), plusloss in the current year (disregardingFFA). The proposed formula generallyallowed the Institution the benefit ofany prior losses of its owners’ equity,but offset any losses of creditors’capital by the inclusion of FFA. How-ever, with respect to losses during theyear FFA is received, the proposedformula did not distinguish betweenlosses of owners’ equity and losses ofcreditors’ capital and, therefore, offsetlosses of owners’ equity by inclusionof FFA. The formula (together withrelated recapture rules) in the finalregulations has been changed to reflectthat the owners’ equity is the first

capital lost and, in a transaction with-out Continuing Equity, is not offset byinclusion of FFA.

Deferral formula with ContinuingEquity. The proposed regulations al-lowed deferral under different condi-tions where Continuing Equity is pres-ent. In that case, the Institution mustinclude currently, in addition to thenormal formula amount, income equalto all net operating loss carryoversavailable to it. Also, an Institution withContinuing Equity must recapture de-ferred FFA at least as quickly as prorata over a maximum of six years,regardless of whether it recognizes allof its built-in losses during that time.

Commentators suggested that theproposed regulations unfairly limiteddeferral for Institutions with ContinuingEquity and recommended the same de-ferral formula apply in all cases. Theycriticized the Continuing Equity con-cept because it focused on the identityof the Institution’s shareholders afterthe assistance transaction.

Under the definition of ContinuingEquity in the proposed regulations, anInstitution generally would have Con-tinuing Equity if five percent or moreof its stock at the end of a taxable yearwas owned by shareholders who ownedstock before the Institution was placedin receivership by a supervisory agency(Agency) or first received FFA. Thefive percent reference was misleadingbecause, under §1.597–5, a 50 percentchange in ownership generally resultsin a deemed Taxable Transfer (nowdefined in §1.597–5(a)(1)) in which thefailed Institution is treated as a NewEntity. The deferral rules do not applyafter a deemed Taxable Transfer. Thefinal regulations thus clarify that Con-tinuing Equity exists only if the Institu-tion is not (i) a Bridge Bank, (ii) inAgency receivership, or (iii) treated asa New Entity. The modification to thedefinition of Continuing Equity is notintended as a substantive change. TheContinuing Equity deferral provisionsapply only to the limited number of‘‘open bank’’ resolutions not subject tothe deemed Taxable Transfer rules. (Asdiscussed below, the Taxable Transferdefinitions have also been modified toclarify that most ‘‘open bank’’ assistedtransactions are treated as TaxableTransfers.)

The final regulations do not elimi-nate the special treatment of Institu-tions with Continuing Equity. Theregulations provide deferral rules to

ameliorate a timing mismatch betweenFFA income and related losses. Defer-ral is not designed to allow built-inlosses to offset operating income in-stead of FFA or to permit the perma-nent elimination of any subsidyprovided by Agency. The requirementthat Institutions with Continuing Equityrecapture their deferred FFA within sixyears is a reasonable safeguard againstindefinite deferral of FFA income. Theresults under these rules are compar-able in effect to those applicable toacquirors in Taxable Transfers.

The final regulations do, however,modify the Continuing Equity formula,which, in the proposed regulations,counted some losses twice. Recognizedlosses represented in the first prong ofthe formula (liabilities minus assetbases) may comprise part of the thirdprong (net operating losses available tothe Institution or its consolidatedgroup). The final regulations correctthis double counting of losses.

Transfers of money and property toAgency. The proposed regulations con-tained rules for taxing FFA if money orproperty is also transferred to Agency.These rules, together with rules for thetreatment of FFA received pursuant toa Loss Guarantee, have been clarified,reorganized, and restated in §1.597–2(d).

The proposed regulations providedan offset or deduction for payments byan Institution to Agency to the extentof previously received FFA. The ruleas proposed provided limited relief forpayments made to Agency by a NewEntity or Acquiring, because they re-ceive little or no FFA. However, anassisted acquisition can result in in-come to a New Entity or Acquiring inthe form of built-in gain. Under section597(c) and §1.597–3(b), an instrumentissued to Agency by a New Entity orAcquiring is, in effect, disregarded. If aNew Entity or Acquiring issues itsinstrument to Agency in connectionwith the acquisition of an Institution,the value of the instrument is notincluded in the purchase price. Conse-quently, a New Entity or Acquiringmay have a basis shortfall in the assetsacquired (or deemed acquired) from thefailed Institution. The final regulationsprovide a New Entity or Acquiring apurchase price adjustment upon anytransfer to Agency (e.g., in satisfactionof the disregarded instrument).

In response to comments, the finalregulations also specifically provide for


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repayments to Agency by Institutionaffiliates. Moreover, the final regula-tions provide that if Agency sells anInstitution’s instrument to a third party,the sales price is treated as a repaymentto Agency by the issuer. Furthermore,the instrument is treated as having beennewly issued by the issuer to the holderat that time. The IRS and Treasurybelieve that this is an appropriate timefor the issuer to offset FFA or increaseits basis, because the sales pricereasonably fixes the value of theinstrument, and any subsequent costassociated with the instrument shouldbe accounted for in accordance withthe nature of the instrument.

§1.597–4(g) Elective disaffiliation

The proposed regulations would al-low a consolidated group to elect (afterthe regulations became final) to ex-clude an Institution in receivershipfrom its group. The election potentiallyrequires the inclusion of a ‘‘tollcharge’’ in the income of those mem-bers owning the common stock of theInstitution (the member shareholders).The amount of the toll charge is theexcess of the disaffiliated Institution’sliabilities over the adjusted basis of itsassets. The toll charge is intended toreflect the amount that would beincluded in income if Agency were toprovide the entire amount of FFAnecessary to restore the Institution’ssolvency at the time of the eventpermitting disaffiliation. Commentatorssuggested that the final regulationsshould include the toll charge in theincome of the disaffiliated Institution(rather than its member shareholders),provide the group with a ‘‘toll chargededuction,’’ and clarify the ability ofthe member shareholders to take aworthless stock deduction.

Toll charge. Commentators sug-gested that the final regulations includethe toll charge in the income of thefailed Institution rather than its membershareholders. According to the com-mentators, including the toll charge inthe income of the member shareholdersmay result in disadvantageous state taxconsequences in those states wherebanking corporations are not permittedto file consolidated returns with non-banking corporations. Under the pro-posed regulations, a bank holding cor-poration (the disaffiliated Institution’sshareholder) would have to include inincome the toll charge without thebenefit of the Institution’s offsettinglosses.

The IRS and Treasury agree that thetoll charge is more appropriately in-cluded in the income of the Institution(i.e., the entity that is reimbursed byAgency for its loss), because the tollcharge represents accelerated FFA in-come. Thus, the final regulationsprovide that the Institution, rather thanits member shareholders, takes the tollcharge into income.

Toll charge deduction. Under theproposed regulations, the Institutiondoes not recognize built-in losses ondisaffiliation. One commentator sug-gested the final regulations provide fora ‘‘toll charge deduction’’ for theexcess of the Institution’s adjustedbasis over its liabilities. According tothe commentator, such a deduction isappropriate because the Institution in-curred economic loss while it was amember of the consolidated group,before the Institution was placed inreceivership by Agency.

The commentator’s recommendationis not adopted in the final regulationsbecause a toll charge deduction wouldaccelerate recognition of losses inadvance of realization. Such a deduc-tion is particularly inappropriate be-cause federal banking laws now permitplacing solvent institutions in receiver-ship. In such cases, it is uncertainwhether the loss represented by such adeduction will ever be realized.

Worthless stock deduction. Under theproposed regulations, if an election todisaffiliate is made, the members of theconsolidated group are treated as hav-ing disposed of their stock in theInstitution. One commentator suggestedthat the final regulations clarify that,upon disaffiliation, the Institution’sstock is worthless.

The final regulations address thecommentator’s concerns by providingthat, as a consequence of the election,the members of the consolidated grouptreat their stock in the Institution asworthless if the Institution is factuallyinsolvent on the date the Institution isplaced in receivership (or on the datethe consolidated group is deemed tomake the election to disaffiliate). Thisrule preempts otherwise applicable testsfor worthlessness under section 165and §1.1502–19. Any worthless stockdeduction is subject to the limitationsof the loss disallowance regulations(§§1.337(d)–1 and 1.1502–20).

Consistency rule. Under the proposedregulations, a consolidated group couldelect to disaffiliate a subsidiary Institu-

tion only if the Institution was its firstsubsidiary placed in Agency receiver-ship after the enactment of FIRREA.The election made for the first subsidi-ary bound all future subsidiaries placedin Agency receivership. To address theconcern that the scope of the proposedconsistency rule was too broad, thefinal regulations modify the consistencyrule to require, generally, that a consol-idated group must elect consistentlyonly for subsidiary Institutions placedin Agency receivership within fiveyears of each other.

§1.597–5 Taxable Transfers

Section 597 applies to FFA andtransactions in connection with whichFFA is provided. The proposed regula-tions generally define a Taxable Trans-fer as a transfer of deposit liabilities orstock while an Institution is underAgency Control. However, IRS andTreasury now understand that it ispossible for Agency to resolve anInstitution under its control withoutproviding assistance, or to provideassistance without placing an Institutionunder its control. In light of thisinformation, the final regulations refinethe definition of a Taxable Transfer.

Under the final regulations, TaxableTransfers include the transfer of anydeposit liability in connection withwhich FFA is provided or the transferof any asset for which Agency has anobligation (e.g., assets covered by LossGuarantees). Certain transfers of stockcause a Taxable Transfer if FFA isprovided in connection with the trans-fer, if the Institution is a Bridge Bankor if the Institution has a balance in itsdeferred FFA account. The phrase ‘‘inconnection with’’ should be interpretedbroadly. If any party to a transactionreceives FFA, all parties and all relatedtransactions are within the scope ofthese regulations. To provide certaintyregarding tax treatment for purchasersof stock of subsidiaries of Institutionsunder Agency Control, the final regula-tions treat all transactions in whichsuch a subsidiary leaves its group asTaxable Transfers.

§1.597–6 Limitation on collection ofincome tax

Limitation where tax is borne byAgency. The proposed regulationsprovided that income tax attributable tothe receipt of FFA or gain on a


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Taxable Transfer would not be col-lected from an Institution without Con-tinuing Equity if Agency would bearthe burden of the tax. Commentatorssuggested that the limitation on non-collection in cases of ContinuingEquity is inappropriate because it re-quires Agency to gross-up any assist-ance paid to cover the tax thereon.

The final regulations retain the lim-itation on noncollection in cases ofContinuing Equity. The IRS and Treas-ury believe that the limitation isappropriate for transactions in whichAgency assists an Institution whileallowing old shareholders to retain theirownership. Noncollection should notinure to the benefit of the Institution’sold shareholders, who would have useof the Institution’s losses while escap-ing responsibility for the tax on relatedFFA income. The congressional pur-pose in FIRREA to eliminate any taxsubsidy for assisted transactions re-quires that the IRS not waive its rightsas a creditor in cases where all othercreditors and equity holders retain theirrights.

Transferee liability. The proposedregulations limited the collection of afailed Institution’s income taxes from atransferee in a Taxable Transfer (i.e., aNew Entity or Acquiring). This rulewould not apply if (similar to theContinuing Equity rule discussed aboveunder the heading ‘‘Deferral formulawith Continuing Equity’’) there is afive percent overlap in the ownershipof the transferor Institution and theNew Entity or Acquiring.

Commentators suggested that thefinal regulations should not include thefive percent overlap exception becausethe exception appears to punish formerowners of Institutions, Institutions havedifficulty tracking ownership, and theexception contains no limits on ag-gregation.

Because good faith purchasers ofassets for value generally do not havetransferee liability, the final regulationsclarify that Acquiring (the purchaser ofInstitution’s assets in an actual TaxableTransfer) is not subject to such liabilityin any case. This rule applies even ifshareholders of Acquiring were share-holders of the selling Institution.

The final regulations do not, how-ever, except a New Entity (the resultingcorporation in a deemed TaxableTransfer) from collection if the Institu-tion’s previous equity interests remainoutstanding in the New Entity, or are

reacquired or exchanged for considera-tion. As in those cases in which aTaxable Transfer does not occur, theIRS should remain a creditor if allother creditors retain their interests andthe Institution’s previous equity inter-ests had retained value. However, byfocusing on whether previous equityinterests retain value, the final regula-tions eliminate the need to track oraggregate ownership and do not penal-ize any particular potential acquirors.

§1.597–7 Effective Date

As proposed, these final regulationsgenerally apply to taxable years endingon or after April 22, 1992. However,the provisions of these regulations donot apply to FFA received or accruedfor taxable years ending after April 22,1992, in connection with an Agencyassisted acquisition that occurs beforeApril 22, 1992. Taxpayers not subjectto these regulations must comply withan interpretation of the statute that isreasonable in light of the legislativehistory and applicable administrativepronouncements. For this purpose, therules contained in Notice 89–102(1989–2 C.B. 436) apply to the extentprovided in the Notice.

An irrevocable election is availableto apply the regulations to taxableyears prior to the general effectivedate. However, the election cannot bemade if the Institution’s statute oflimitations has expired or a section 338election was available but not made forthe Institution. In addition, consistenttreatment is required in ‘‘open bank’’resolutions that would result under theregulations in deemed Taxable Trans-fers before April 22, 1992.

The proposed regulations required anelecting taxpayer to extend the statuteof limitations for all items for threeyears from the date of filing theelection. The final regulations adopt acommentator’s suggestion that the tax-payer extend the statute of limitationsonly for items affected by applicationof the regulations.

An Institution or consolidated groupmakes the election on its first annualincome tax return filed on or afterMarch 15, 1996. However, to make theaffirmative election to disaffiliate under§1.597–4(g)(5) for an Institution placedin Agency receivership in a taxableyear ending before April 22, 1992, aconsolidated group must send the af-fected Institution the required statement

advising it of the elective disaffiliationon or before May 31, 1996. In thatcase, the consolidated group is deemedto have elected retroactive applicationof these regulations but must neverthe-less attach the required statement to itsfirst annual income tax return filed onor after March 15, 1996.

The final regulations provide thattaxpayers may rely on the provisions ofthe proposed regulations to the extentthey acted in reliance on the proposedregulations prior to December 21,1995. Such reliance must be reasonableand transactions with respect to whichsuch taxpayers rely must be consistentwith the overriding policies of section597, as expressed in the legislativehistory, as well as the overridingpolicies of the proposed regulations.

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 is herebycertified that these regulations do nothave a significant economic impact ona substantial number of small entities.This certification is based on the factthat these regulations will generallyonly apply to certain financially trou-bled financial institutions and the con-solidated groups, if any, to which theybelong. Therefore, a Regulatory Flex-ibility Analysis under the RegulatoryFlexibility Act (5 U.S.C. chapter 6) isnot required. Pursuant to section7805(f) of the Internal Revenue Code,the notice of proposed rulemakingpreceding these regulations was submit-ted to the Chief Counsel for Advocacyof the Small Business Administrationfor comment on its impact on smallbusiness.

Drafting Information

The principal author of these regula-tions is Steven M. Flanagan, Office ofthe Assistant Chief Counsel (Corpo-rate), IRS. However, other personnelfrom the IRS and Treasury Departmentparticipated in their development.

* * * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1, 301and 602 are amended as follows:


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PART 1—INCOME TAXES

Paragraph 1. The authority for part 1is amended by adding the followingcitation:

Authority: 26 U.S.C. 7805 * * *Sections 1.597–1 through 1.597–7 alsoissued under 26 U.S.C. 597 and 1502.

Par. 2. Sections 1.597–1 through1.597–7 are added to read as follows:

§1.597–1 Definitions.

For purposes of the regulations undersection 597—

(a) Unless the context otherwise re-quires, the terms consolidated group,member and subsidiary have the mean-ings provided in §1.1502–1; and

(b) The following terms have themeanings provided below—

Acquiring. The term Acquiringmeans a corporation that is a transfereein a Taxable Transfer, other than adeemed transferee in a Taxable Trans-fer described in §1.597–5(b).

Agency. The term Agency means theResolution Trust Corporation, the Fed-eral Deposit Insurance Corporation, anysimilar instrumentality of the UnitedStates government, and any predecessoror successor of the foregoing (includingthe Federal Savings and Loan Insur-ance Corporation).

Agency Control. An Institution orentity is under Agency Control ifAgency is conservator or receiver ofthe Institution or entity, or if Agencyhas the right to appoint any of theInstitution’s or entity’s directors.

Agency Obligation. The term AgencyObligation means a debt instrumentthat Agency issues to an Institution orto a direct or indirect owner of anInstitution.

Bridge Bank. The term Bridge Bankmeans an Institution that is organizedby Agency to hold assets and liabilitiesof another Institution and that continuesthe operation of the other Institution’sbusiness pending its acquisition orliquidation, and that is any of thefollowing—

(1) A national bank chartered by theComptroller of the Currency under sec-tion 11(n) of the Federal Deposit In-surance Act (12 U.S.C. 1821(n)) or sec-tion 21A(b)(10)(A) of the Federal HomeLoan Bank Act (12 U.S.C. 1441a(b)-(10)(A)) or any successor sections;

(2) A Federal savings associationchartered by the Director of the Office

of Thrift Supervision under section21A(b)(10)(A) of the Federal HomeLoan Bank Act (12 U.S.C. 1441a(b)-(10)(A)) or any successor section; or

(3) A similar Institution charteredunder any other statutory provisions.

Consolidated Subsidiary. The termConsolidated Subsidiary means a mem-ber of the consolidated group of whichan Institution is a member that bearsthe same relationship to the Institutionthat the members of a consolidatedgroup bear to their common parentunder section 1504(a)(1).

Continuing Equity. An Institution hasContinuing Equity for any taxable yearif, on the last day of the taxable year,the Institution is not (1) a Bridge Bank,(2) in Agency receivership, or (3)treated as a New Entity.

Controlled Entity. The term Con-trolled Entity means an entity underAgency Control.

Federal Financial Assistance (FFA).The term Federal Financial Assistance(FFA), as defined by section 597(c),means any money or property providedby Agency to an Institution or to adirect or indirect owner of stock in anInstitution under section 406(f) of theNational Housing Act (12 U.S.C.1729(f)), section 21A(b)(4) of theFederal Home Loan Bank Act (12U.S.C. 1441a(b)(4)), section 11(f) or13(c) of the Federal Deposit InsuranceAct (12 U.S.C. 1821(f), 1823(c)), orunder any similar provision of law.Any such money or property is FFA,regardless of whether the Institution orany of its affiliates issues Agency anote or other obligation, stock, war-rants, or other rights to acquire stock inconnection with Agency’s provision ofthe money or property. FFA includesNet Worth Assistance, Loss Guaranteepayments, yield maintenance payments,cost to carry or cost of funds reim-bursement payments, expense reim-bursement or indemnity payments, andinterest (including original issue dis-count) on an Agency Obligation.

Institution. The term Institutionmeans an entity that is, or immediatelybefore being placed under AgencyControl was, a bank or domesticbuilding and loan association within themeaning of section 597 (including aBridge Bank). Except as otherwiseprovided in the regulations under sec-tion 597, the term Institution includes aNew Entity or Acquiring that is a bankor domestic building and loan associa-tion within the meaning of section 597.

Loss Guarantee. The term LossGuarantee means an agreement pur-suant to which Agency or a ControlledEntity guarantees or agrees to pay anInstitution a specified amount upon thedisposition or charge-off (in whole orin part) of specific assets, an agreementpursuant to which an Institution has aright to put assets to Agency or aControlled Entity at a specified price,or a similar arrangement.

Net Worth Assistance. The term NetWorth Assistance means money orproperty (including an Agency Obliga-tion to the extent it has a fixedprincipal amount) that Agency providesas an integral part of a TaxableTransfer, other than FFA that accruesafter the date of the Taxable Transfer.For example, Net Worth Assistancedoes not include Loss Guarantee pay-ments, yield maintenance payments,cost to carry or cost of funds reim-bursement payments, or expense reim-bursement or indemnity payments. AnAgency Obligation is considered tohave a fixed principal amount notwith-standing an agreement providing for itsadjustment after issuance to reflect amore accurate determination of thecondition of the Institution at the timeof the acquisition.

New Entity. The term New Entitymeans the new corporation that istreated as purchasing all of the assetsof an Old Entity in a Taxable Transferdescribed in §1.597–5(b).

Old Entity. The term Old Entitymeans the Institution or ConsolidatedSubsidiary that is treated as selling allof its assets in a Taxable Transferdescribed in §1.597–5(b).

Residual Entity. The term ResidualEntity means the entity that remainsafter an Institution transfers depositliabilities to a Bridge Bank.

Taxable Transfer. The term TaxableTransfer has the meaning provided in§1.597–5(a)(1).

§1.597–2 Taxation of FederalFinancial Assistance.

(a) Inclusion in income—(1) In gen-eral. Except as otherwise provided inthe regulations under section 597, allFFA is includible as ordinary incometo the recipient at the time the FFA isreceived or accrued in accordance withthe recipient’s method of accounting.The amount of FFA received or ac-crued is the amount of any money, thefair market value of any property (other


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than an Agency Obligation), and theissue price of any Agency Obligation(determined under §1.597–3(c)(2)). AnInstitution (and not the nominal recip-ient) is treated as receiving directly anyFFA that Agency provides in a taxableyear to a direct or indirect shareholderof the Institution, to the extent moneyor property is transferred to the Institu-tion pursuant to an agreement withAgency.

(2) Cross references. See paragraph(c) of this section for rules regardingthe timing of inclusion of certain FFA.See paragraph (d) of this section foradditional rules regarding the treatmentof FFA received in connection withtransfers of money or property toAgency or a Controlled Entity, or paidpursuant to a Loss Guarantee. See§1.597–5(c)(1) for additional rules re-garding the inclusion of Net WorthAssistance in the income of anInstitution.

(b) Basis of property that is FFA. IfFFA consists of property, the Institu-tion’s basis in the property equals thefair market value of the property (otherthan an Agency Obligation) or theissue price of the Agency Obligation,as determined under §1.597–3(c)(2).

(c) Timing of inclusion of certainFFA—(1) Scope. This paragraph (c)limits the amount of FFA an Institutionmust include in income currently undercertain circumstances and providesrules for the deferred inclusion inincome of amounts in excess of thoselimits. This paragraph (c) does notapply to a New Entity or Acquiring.

(2) Amount currently included inincome by an Institution without Con-tinuing Equity. The amount of FFA anInstitution without Continuing Equitymust include in income in a taxableyear under paragraph (a)(1) of thissection is limited to the sum of—

(i) The excess at the beginning ofthe taxable year of the Institution’sliabilities over the adjusted bases of theInstitution’s assets; and

(ii) The amount by which the excessfor the taxable year of the Institution’sdeductions allowed by chapter 1 of theInternal Revenue Code (other than netoperating and capital loss carryovers)over its gross income (determinedwithout regard to FFA) is greater thanthe excess at the beginning of thetaxable year of the adjusted bases ofthe Institution’s assets over the Institu-tion’s liabilities.

(3) Amount currently included inincome by an Institution with Continu-

ing Equity. The amount of FFA anInstitution with Continuing Equity mustinclude in income in a taxable yearunder paragraph (a)(1) of this section islimited to the sum of—

(i) The excess at the beginning ofthe taxable year of the Institution’sliabilities over the adjusted bases of theInstitution’s assets;

(ii) The greater of—(A) The excess for the taxable year

of the Institution’s deductions allowedby chapter 1 of the Internal RevenueCode (other than net operating andcapital loss carryovers) over its grossincome (determined without regard toFFA); or

(B) The excess for the taxable yearof the deductions allowed by chapter 1of the Internal Revenue Code (otherthan net operating and capital losscarryovers) of the consolidated groupof which the Institution is a member onthe last day of the Institution’s taxableyear over the group’s gross income(determined without regard to FFA);and

(iii) The excess of the amount ofany net operating loss carryover of theInstitution (or in the case of a car-ryover from a consolidated return yearof the Institution’s current consolidatedgroup, the net operating loss carryoverof the group) to the taxable year overthe amount described in paragraph(c)(3)(i) of this section.

(4) Deferred FFA—(i) Maintenanceof account. An Institution mustestablish a deferred FFA account com-mencing in the first taxable year inwhich it receives FFA that is notcurrently included in income underparagraph (c)(2) or (c)(3) of thissection, and must maintain that accountin accordance with the requirements ofthis paragraph (c)(4). The Institutionmust add the amount of any FFA thatis not currently included in incomeunder paragraph (c)(2) or (c)(3) of thissection to its deferred FFA account.The Institution must decrease the bal-ance of its deferred FFA account by theamount of deferred FFA included inincome under paragraphs (c)(4)(ii), (iv)and (v) of this section. (See alsoparagraph (d)(5)(i)(B) of this sectionfor other adjustments that decrease thedeferred FFA account.) If, under para-graph (c)(3) of this section, FFA is notcurrently included in income in ataxable year, the Institution thereaftermust maintain its deferred FFA accounton a FIFO (first in, first out) basis

(e.g., for purposes of the first sentenceof paragraph (c)(4)(iv) of this section).

(ii) Deferred FFA recapture. In anytaxable year in which an Institution hasa balance in its deferred FFA account,it must include in income an amountequal to the lesser of the amountdescribed in paragraph (c)(4)(iii) of thissection or the balance in its deferredFFA account.

(iii) Annual recapture amount—(A)Inst i tut ions without Cont inuingEquity—(1) In general. In the case ofan Institution without ContinuingEquity, the amount described in thisparagraph (c)(4)(iii) is the amount bywhich—

(i) The excess for the taxable year ofthe Institution’s deductions allowed bychapter 1 of the Internal Revenue Code(other than net operating and capitalloss carryovers) over its gross income(taking into account FFA included inincome under paragraph (c)(2) of thissection); is greater than

(ii) The Institution’s remainingequity as of the beginning of thetaxable year.

(2) Remaining equity. The Institu-tion’s remaining equity is—

(i) The amount at the beginning ofthe taxable year in which the deferredFFA account was established equal tothe adjusted bases of the Institution’sassets minus the Institution’s liabilities(which amount may be positive ornegative); plus

(ii) The Institution’s taxable income(computed without regard to any car-ryover from any other year) in anysubsequent taxable year or years; minus

(iii) The excess in any subsequenttaxable year or years of the Institu-tion’s deductions allowed by chapter 1of the Internal Revenue Code (otherthan net operating and capital losscarryovers) over its gross income.

(B) Institutions with ContinuingEquity. In the case of an Institutionwith Continuing Equity, the amountdescribed in this paragraph (c)(4)(iii) isthe amount by which the Institution’sdeductions allowed by chapter 1 of theInternal Revenue Code (other than netoperating and capital loss carryovers)exceed its gross income (taking intoaccount FFA included in income underparagraph (c)(3) of this section).

(iv) Additional deferred FFA recap-ture by an Institution with ContinuingEquity. To the extent that, as of the endof a taxable year, the cumulative


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amount of FFA deferred under para-graph (c)(3) of this section that anInstitution with Continuing Equity hasrecaptured under this paragraph (c)(4)is less than the cumulative amount ofFFA deferred under paragraph (c)(3) ofthis section that the Institution wouldhave recaptured if that FFA had beenincluded in income ratably over the sixtaxable years immediately followingthe taxable year of deferral, the Institu-tion must include that difference inincome for the taxable year. An Institu-tion with Continuing Equity must in-clude in income the balance of itsdeferred FFA account in the taxableyear in which it liquidates, ceases to dobusiness, transfers (other than to aBridge Bank) substantially all of itsassets and liabilities, or is deemed totransfer all of its assets under §1.597–5(b).

(v) Optional accelerated recaptureof deferred FFA. An Institution that hasa deferred FFA account may include inincome the balance of its deferred FFAaccount on its timely filed (includingextensions) original income tax returnfor any taxable year that it is not underAgency Control. The balance of itsdeferred FFA account is income on thelast day of that year.

(5) Exceptions to limitations on useof losses. In computing an Institution’staxable income or alternative minimumtaxable income for a taxable year,sections 56(d)(1), 382 and 383 and§§1.1502–15, 1.1502–21 and 1.1502–22 do not limit the use of the attributesof the Institution to the extent, if any,that the inclusion of FFA (includingrecaptured FFA) in income results intaxable income or alternative minimumtaxable income (determined withoutregard to this paragraph (c)(5)) for thetaxable year. This paragraph (c)(5)does not apply to any limitation undersection 382 or 383 or §1.1502–15,1.1502–21 or 1.1502–22 that arose inconnection with or prior to a corpora-tion becoming a Consolidated Subsidi-ary of the Institution.

(6) Operating rules—(i) Bad debtreserves. For purposes of paragraphs(c)(2), (c)(3) and (c)(4) of this section,the adjusted bases of an Institution’sassets are reduced by the amount of theInstitution’s reserves for bad debtsunder section 585 or 593, other thansupplemental reserves under section593.

(ii) Aggregation of ConsolidatedSubsidiaries. For purposes of this para-

graph (c), an Institution is treated as asingle entity that includes the income,expenses, assets, liabilities, and at-tributes of its Consolidated Subsidi-aries, with appropriate adjustments toprevent duplication.

(iii) Alternative minimum tax. Tocompute the alternative minimum tax-able income attributable to FFA of anInstitution for any taxable year undersection 55, the rules of this section, andrelated rules, are applied by usingalternative minimum tax basis, deduc-tions, and all other items required to betaken into account. All other alternativeminimum tax provisions continue toapply.

(7) Earnings and profits. FFA that isnot currently included in income underthis paragraph (c) is included in earn-ings and profits for all purposes of theInternal Revenue Code to the extentand at the time it is included in incomeunder this paragraph (c).

(d) Transfers of money or propertyto Agency, and property subject to aLoss Guarantee—(1) Transfers ofproperty to Agency. The transfer ofproperty to Agency or a ControlledEntity is a taxable sale or exchange inwhich the Institution is treated asrealizing an amount equal to—

(i) The property’s fair market value;or

(ii) For property subject to a LossGuarantee, the greater of the property’sfair market value or the guaranteedvalue or price at which the propertycan be put at the time of transfer.

(2) FFA with respect to propertycovered by a Loss Guarantee otherthan on transfer to Agency. (i) FFAprovided pursuant to a Loss Guaranteewith respect to covered property isincluded in the amount realized withrespect to the property to the extent thetotal amount realized does not exceedthe greater of—

(A) The property’s fair marketvalue; or

(B) The guaranteed value or price atwhich the property can be put at thetime of transfer.

(ii) For the purposes of this para-graph (d)(2), references to an amountrealized include amounts obtained inwhole or partial satisfaction of loans,amounts obtained by virtue of chargingoff or marking to market coveredproperty, and other amounts similarlyrelated to property, whether or notdisposed of.

(3) Treatment of FFA received inexchange for property. FFA included inthe amount realized for property underthis paragraph (d) is not includible inincome under paragraph (a)(1) of thissection. The amount realized is treatedin the same manner as if realized froma person other than Agency or a Con-trolled Entity. For example, gain at-tributable to FFA received with respectto a capital asset retains its character ascapital gain. Similarly, FFA receivedwith respect to property that has beencharged off for income tax purposes istreated as a recovery to the extent ofthe amount previously charged off. AnyFFA provided in excess of the amountrealized under this paragraph (d) isincludible in income under paragraph(a)(1) of this section.

(4) Adjustment to FFA—(i) In gen-eral. If an Institution pays or transfersmoney or property to Agency or a Con-trolled Entity, the amount of moneyand fair market value of the property isan adjustment to its FFA to the extentthe amount paid and transferred ex-ceeds the amount of money and fairmarket value of property Agency or aControlled Entity provides in exchange.

(ii) Deposit insurance. This para-graph (d)(4) does not apply to amountspaid to Agency with respect to depositinsurance.

(iii) Treatment of an interest held byAgency or a Controlled Entity—(A) Ingeneral. For purposes of this paragraph(d), an interest described in §1.597–3(b) is not treated as property whentransferred by the issuer to Agency or aControlled Entity nor when acquiredfrom Agency or a Controlled Entity bythe issuer.

(B) Dispositions to persons otherthan issuer. On the date Agency or aControlled Entity transfers an interestdescribed in §1.597–3(b) to a holderother than the issuer, Agency or aControlled Entity, the issuer is treatedfor purposes of this paragraph (d)(4) ashaving transferred to Agency anamount of money equal to the sum ofthe amount of money and the fairmarket value of property that was paidby the new holder as consideration forthe interest.

(iv) Consolidated groups. For pur-poses of this paragraph (d), an Institu-tion will be treated as having made anytransfer to Agency or a ControlledEntity that was made by any othermember of its consolidated group. Theconsolidated group must make appro-


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priate investment basis adjustments tothe extent the member transferringmoney or other property is not themember that received FFA.

(5) Manner of making adjustments toFFA—(i) Reduction of FFA and de-ferred FFA. An Institution adjusts itsFFA under paragraph (d)(4) of thissection by reducing in the followingorder and in an aggregate amount notgreater than the adjustment—

(A) The amount of any FFA that isotherwise includible in income for thetaxable year (before application ofparagraph (c) of this section); and

(B) The balance (but not belowzero) in the deferred FFA account, ifany, maintained under paragraph (c)(4)of this section.

(ii) Deduction of excess amounts. Ifthe amount of the adjustment exceedsthe sum of the amounts described inparagraph (d)(5)(i) of this section, theInstitution may deduct the excess to theextent the deduction does not exceedthe amount of FFA included in incomefor prior taxable years reduced by theamount of deductions allowable underthis paragraph (d)(5)(ii) in prior taxableyears.

(iii) Additional adjustments. Any ad-justment to FFA in excess of the sumof the amounts described in paragraphs(d)(5)(i) and (ii) of this section istreated—

(A) By an Institution other than aNew Entity or Acquiring, as a deduc-tion of the amount in excess of FFAreceived that is required to be trans-ferred to Agency under section 11(g) ofthe Federal Deposit Insurance Act (12U.S.C. 1821(g)); or

(B) By a New Entity or Acquiring,as an adjustment to the purchase pricepaid in the Taxable Transfer (see§1.338(b)–3T).

(e) Examples. The following exam-ples illustrate the provisions of thissection:

Example 1. Timing of inclusion of FFA inincome. (i) Institution M, a calendar yeartaxpayer without Continuing Equity because it isin Agency receivership, is not a member of aconsolidated group and has not been acquired ina Taxable Transfer. On January 1, 1997, M hasassets with a total adjusted basis of $100 millionand total liabilities of $120 million. M’sdeductions do not exceed its gross income(determined without regard to FFA) for 1997.Agency provides $30 million of FFA to M in1997. The amount of this FFA that M mustinclude in income in 1997 is limited by §1.597–2(c)(2) to $20 million, the amount by which M’sliabilities ($120 million) exceed the total ad-

justed basis of its assets ($100 million) at thebeginning of the taxable year. Pursuant to§1.597–2(c)(4)(i), M must establish a deferredFFA account for the remaining $10 million.

(ii) If Agency instead lends M the $30million, M’s indebtedness to Agency is dis-regarded and the results are the same as inparagraph (i) of this Example 1. Section 597(c);§§1.597–1(b) (defining FFA) and 1.597–3(b).

Example 2. Transfer of property to Agency. (i)Institution M, a calendar year taxpayer withoutContinuing Equity because it is in Agencyreceivership, is not a member of a consolidatedgroup and has not been acquired in a TaxableTransfer. At the beginning of 1998, M’sremaining equity is $0 and M has a deferredFFA account of $10 million. Agency does notprovide any FFA to M in 1998. During the year,M transfers property not covered by a LossGuarantee to Agency and does not receive anyconsideration. The property has an adjusted basisof $5 million and a fair market value of $1million at the time of the transfer. M has noother taxable income or loss in 1998.

(ii) Under §1.597–2(d)(1), M is treated asselling the property for $1 million, its fair marketvalue, thus recognizing a $4 million loss ($5million – $1 million). In addition, because M didnot receive any consideration from Agency,under §1.597–2(d)(4) M has an adjustment toFFA of $1 million, the amount by which the fairmarket value of the transferred property ($1million) exceeds the consideration M receivedfrom Agency ($0). Because no FFA is providedto M in 1998, this adjustment reduces thebalance of M’s deferred FFA account to $9million ($10 million – $1 million). Section1.597–2(d)(5)(i)(B). Because M’s $4 million losscauses M’s deductions to exceed its grossincome by $4 million in 1998 and M has noremaining equity, under §1.597–2(c)(4)(iii)(A) Mmust include $4 million of deferred FFA inincome, and must decrease the remaining $9million balance of its deferred FFA account bythe same amount, leaving a balance of $5million.

Example 3. Loss Guarantee. Institution Q, acalendar year taxpayer, sells an asset covered bya Loss Guarantee to an unrelated third party for$4,000. Q’s adjusted basis in the asset at thetime of sale and the asset’s guaranteed value areboth $10,000. Pursuant to the Loss Guarantee,Agency pays Q $6,000 ($10,000 – $4,000). Q’samount realized from the sale of the asset is$10,000 ($4,000 from the third party and $6,000from Agency). Section 1.597–2(d)(2). Q realizesno gain or loss on the sale ($10,000 – $10,000 =$0), and therefore includes none of the $6,000 ofFFA it receives pursuant to the Loss Guaranteein income. Section 1.597–2(d)(3).

§1.597–3 Other rules.

(a) Ownership of assets. For allincome tax purposes, an Institution istreated as the owner of all assetscovered by a Loss Guarantee, yieldmaintenance agreement, or cost to carryor cost of funds reimbursement agree-ment, regardless of whether Agency (ora Controlled Entity) otherwise wouldbe treated as the owner under generalprinciples of income taxation.

(b) Debt and equity interests re-ceived by Agency. Debt instruments,

stock, warrants, or other rights toacquire stock of an Institution (or anyof its affiliates) that Agency or aControlled Entity receives in connec-tion with a transaction in which FFA isprovided are not treated as debt, stockor other equity interests of or in theissuer for any purpose of the InternalRevenue Code while held by Agencyor a Controlled Entity. On the dateAgency or a Controlled Entity transfersan interest described in this paragraph(b) to a holder other than Agency or aControlled Entity, the interest is treatedas having been newly issued by theissuer to the holder with an issue priceequal to the sum of the amount ofmoney and the fair market value ofproperty paid by the new holder inexchange for the interest.

(c) Agency Obligations—(1) In gen-eral. Except as otherwise provided inthis paragraph (c), the original issuediscount rules of sections 1271 et seq.apply to Agency Obligations.

(2) Issue price of Agency Obliga-tions provided as Net Worth Assistance.The issue price of an Agency Obliga-tion that is provided as Net WorthAssistance and that bears interest ateither a single fixed rate or a qualifiedfloating rate (and provides for nocontingent payments) is the lesser ofthe sum of the present values of allpayments due under the obligation,discounted at a rate equal to theapplicable federal rate (within themeaning of section 1274(d)(1) and (3))in effect for the date of issuance, or thestated principal amount of the obliga-tion. The issue price of an AgencyObligation that bears a qualified float-ing rate of interest (within the meaningof §1.1275–5(b)) is determined bytreating the obligation as bearing afixed rate of interest equal to the ratein effect on the date of issuance underthe obligation.

(3) Adjustments to principal amount.Except as provided in §1.597–5(d)-(2)(iv), this paragraph (c)(3) applies ifAgency modifies or exchanges anAgency Obligation provided as NetWorth Assistance (or a successor obli-gation). The issue price of the modifiedor new Agency Obligation is deter-mined under paragraphs (c)(1) and (2)of this section. If the issue price isgreater than the adjusted issue price ofthe existing Agency Obligation, thedifference is treated as FFA. If theissue price is less than the adjustedissue price of the existing AgencyObligation, the difference is treated as


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an adjustment to FFA under §1.597–2(d)(4).

(d) Successors. To the extent neces-sary to effectuate the purposes of theregulations under section 597, an en-tity’s treatment under the regulationsapplies to its successor. A successorincludes a transferee in a transaction towhich section 381(a) applies or aBridge Bank to which another BridgeBank transfers deposit liabilities.

(e) Loss disallowance. For purposesof §1.1502–20, FFA and the amountdescribed in §1.597–4(g)(3) are treatedas an extraordinary gain dispositionwithin the meaning of §1.1502–20(c)-(2)(i) and a Taxable Transfer is treatedas an applicable asset acquisition undersection 1060(c) within the meaning of§1.1502–20(c)(2)(i)(A)(4).

(f) Losses and deductions with re-spect to covered assets. Prior to thedisposition of an asset covered by aLoss Guarantee, the asset cannot becharged off, marked to a market value,depreciated, amortized, or otherwisetreated in a manner that supposes anactual or possible diminution of valuebelow the greater of the asset’s highestguaranteed value or the highest price atwhich the asset can be put.

(g) Anti-abuse rule. The regulationsunder section 597 must be applied in amanner consistent with the purposes ofsection 597. Accordingly, if, in struc-turing or engaging in any transaction, aprincipal purpose is to achieve a taxresult that is inconsistent with thepurposes of section 597 and the regula-tions thereunder, the Commissioner canmake appropriate adjustments to in-come, deductions and other items thatwould be consistent with thosepurposes.

§1.597–4 Bridge Banks and AgencyControl.

(a) Scope. This section providesrules that apply to a Bridge Bank orother Institution under Agency Controland to transactions in which an Institu-tion transfers deposit liabilities(whether or not the Institution alsotransfers assets) to a Bridge Bank.

(b) Status as taxpayer. A BridgeBank or other Institution under AgencyControl is a corporation within themeaning of section 7701(a)(3) for allpurposes of the Internal Revenue Codeand is subject to all Internal RevenueCode provisions that generally apply tocorporations, including those relating to

methods of accounting and to require-ments for filing returns, even if Agencyowns stock of the Institution.

(c) No section 382 ownershipchange. The imposition of AgencyControl, the cancellation of Institutionstock by Agency, a transaction inwhich an Institution transfers depositliabilities to a Bridge Bank, and anelection under paragraph (g) of thissection are disregarded in determiningwhether an ownership change hasoccurred within the meaning of section382(g).

(d) Transfers to Bridge Banks—(1)In general. Except as otherwiseprovided in paragraph (g) of thissection, the rules of this paragraph (d)apply to transfers to Bridge Banks. Ingeneral, a Bridge Bank and its associ-ated Residual Entity are togethertreated as the successor entity to thetransferring Institution. If an Institutiontransfers deposit liabilities to a BridgeBank (whether or not it also transfersassets), the Institution recognizes nogain or loss on the transfer and theBridge Bank succeeds to the transfer-ring Institution’s basis in any trans-ferred assets. The associated ResidualEntity retains its basis in any assets itcontinues to hold. Immediately afterthe transfer, the Bridge Bank succeedsto and takes into account the transfer-ring Institution’s items described insection 381(c) (subject to the condi-tions and limitations specified in sec-tion 381(c)), taxpayer identificationnumber (‘‘TIN’’), deferred FFA ac-count, and account receivable for futureFFA as described in paragraph (g)(4)-(ii) of this section. The Bridge Bankalso succeeds to and continues thetransferring Institution’s taxable year.

(2) Transfers to a Bridge Bank frommultiple Institutions. If two or moreInstitutions transfer deposit liabilities tothe same Bridge Bank, the rules inparagraph (d)(1) of this section aremodified to the extent provided in thisparagraph (d)(2). The Bridge Banksucceeds to the TIN and continues thetaxable year of the Institution thattransfers the largest amount of deposits.The taxable years of the other transfer-ring Institutions close at the time of thetransfer. If all the transferor Institutionsare members of the same consolidatedgroup, the Bridge Bank’s carryback oflosses to the Institution that transfersthe largest amount of deposits is notlimited by section 381(b)(3). The lim-itations of section 381(b)(3) do applyto the Bridge Bank’s carrybacks of

losses to all other transferor Institu-tions. If the transferor Institutions arenot all members of the same consoli-dated group, the limitations of section381(b)(3) apply with respect to alltransferor Institutions. See paragraph(g)(6)(ii) of this section for additionalrules that apply if two or more In-stitutions that are not members of thesame consolidated group transfer de-posit liabilities to the same BridgeBank.

(e) Treatment of Bridge Bank andResidual Entity as a single entity. ABridge Bank and its associated Re-sidual Entity or Entities are treated as asingle entity for income tax purposesand must file a single combined incometax return. The Bridge Bank is respon-sible for filing all income tax returnsand statements for this single entity andis the agent of each associated ResidualEntity to the same extent as if theBridge Bank were the common parentof a consolidated group including theResidual Entity. The term Institutionincludes a Residual Entity that files acombined return with its associatedBridge Bank.

(f) Rules applicable to members ofconsolidated groups—(1) Status asmembers. Unless an election is madeunder paragraph (g) of this section,Agency Control of an Institution doesnot terminate the Institution’s member-ship in a consolidated group. Stock of asubsidiary that is canceled by Agencyis treated as held by the members ofthe consolidated group that held thestock prior to its cancellation. If anInstitution is a member of a consoli-dated group immediately before ittransfers deposit liabilities to a BridgeBank, the Bridge Bank succeeds to theInstitution’s status as the commonparent or, unless an election is madeunder paragraph (g) of this section, as asubsidiary of the group. If a BridgeBank succeeds to an Institution’s statusas a subsidiary, its stock is treated asheld by the shareholders of the trans-ferring Institution, and the stock basisor excess loss account of the Institutioncarries over to the Bridge Bank. ABridge Bank is treated as owning stockowned by its associated Residual En-tities, including for purposes of deter-mining membership in an affiliatedgroup.

(2) No 30-day election to be ex-cluded from consolidated group. Nei-ther an Institution nor any of itsConsolidated Subsidiaries may be ex-cluded from a consolidated group for a


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t a x a b l e y e a r u n d e r § 1 . 1 5 0 2 –76(b)(5)(ii), as contained in 26 CFRpart 1 edition revised April 1, 1994, ifthe Institution is under Agency Controlat any time during the year.

(3) Coordination with consolidatedreturn regulations. The provisions ofthe regulations under section 597 takeprecedence over conflicting provisionsin the regulations under section 1502.

(g) Elective disaffiliation—(1) Ingeneral. A consolidated group of whichan Institution is a subsidiary may electirrevocably not to include the Institu-tion in its affiliated group if theInstitution is placed in Agency re-ceivership (whether or not assets ordeposit liabilities of the Institution aretransferred to a Bridge Bank). Seeparagraph (g)(6) of this section forcircumstances under which a consoli-dated group is deemed to make thiselection.

(2) Consequences of election. If theelection under this paragraph (g) ismade with respect to an Institution, thefollowing consequences occur imme-diately before the subsidiary Institutionto which the election applies is placedin Agency receivership (or, in the caseof a deemed election under paragraph(g)(6) of this section, immediatelybefore the consolidated group isdeemed to make the election) and inthe following order—

(i) All adjustments of the Institutionand its Consolidated Subsidiaries undersection 481 are accelerated;

(ii) Deferred intercompany gains andlosses with respect to the Institutionand its Consolidated Subsidiaries aretaken into account and the Institutionand its Consolidated Subsidiaries takeinto account any other items requiredunder the regulations under section1502 for members that become non-members within the meaning of§1.1502–32(d)(4);

(iii) The taxable year of the Institu-tion and its Consolidated Subsidiariescloses and the Institution includes theamount described in paragraph (g)(3)of this section in income as ordinaryincome as its last item for that taxableyear;

(iv) The members of the consoli-dated group owning the common stockof the Institution include in income anyexcess loss account with respect to theInstitution’s stock under §1.1502-19and any other items required under theregulations under section 1502 formembers that own stock of corpora-

tions that become nonmembers withinthe meaning of §1.1502–32(d)(4); and

(v) If the Institution’s liabilities ex-ceed the aggregate fair market value ofits assets on the date the Institution isplaced in Agency receivership (or, inthe case of a deemed election underparagraph (g)(6) of this section, on thedate the consolidated group is deemedto make the election), the members ofthe consolidated group treat their stockin the Institution as worthless. (See§§1.337(d)–1 and 1.1502–20 for poten-tial limitations on the group’s worthlessstock deduction.) In all other cases, theconsolidated group will be treated asowning stock of a nonmember corpora-tion until such stock is disposed of orbecomes worthless under rules other-wise applicable.

(3) Toll charge. The amount de-scribed in this paragraph (g)(3) is theexcess of the Institution’s liabilitiesover the adjusted bases of its assetsimmediately before the Institution isplaced in Agency receivership (or, inthe case of a deemed election underparagraph (g)(6) of this section, imme-diately before the consolidated group isdeemed to make the election). Incomputing this amount, the adjustedbases of an Institution’s assets arereduced by the amount of the Institu-tion’s reserves for bad debts undersection 585 or 593, other than supple-mental reserves under section 593. Forpurposes of this paragraph (g)(3), anInstitution is treated as a single entitythat includes the assets and liabilities ofits Consolidated Subsidiaries, with ap-propriate adjustments to prevent du-plication. The amount described in thisparagraph (g)(3) for alternative mini-mum tax purposes is determined usingalternative minimum tax basis, deduc-tions, and all other items required to betaken into account. In computing theincrease in the group’s taxable incomeor alternative minimum taxable income,sections 56(d)(1), 382 and 383 and§§1.1502–15, 1.1502–21 and 1.1502–22 do not limit the use of the attributesof the Institution and its ConsolidatedSubsidiaries to the extent, if any, thatthe inclusion of the amount describedin this paragraph (g)(3) in incomewould result in the group havingtaxable income or alternative minimumtaxable income (determined withoutregard to this sentence) for the taxableyear. The preceding sentence does notapply to any limitation under section382 or 383 or §§1.1502–15, 1.1502–21,or 1.1502–22 that arose in connection

with or prior to a corporation becominga Consolidated Subsidiary of theInstitution.

(4) Treatment of Institutions afterdisaffiliation—(i) In general. If theelection under this paragraph (g) ismade with respect to an Institution,immediately after the Institution isplaced in Agency receivership (or, inthe case of a deemed election underparagraph (g)(6) of this section, imme-diately after the consolidated group isdeemed to make the election), theInstitution and each of its ConsolidatedSubsidiaries are treated for income taxpurposes as new corporations that arenot members of the electing group’saffiliated group. Each new corporationretains the TIN of the correspondingdisaffiliated corporation and is treatedas having received the assets andliabilities of the corresponding disaffili-ated corporation in a transaction towhich section 351 applies (and inwhich no gain was recognized undersection 357(c) or otherwise). Thus, thenew corporation has no net operatingor capital loss carryforwards. An elec-tion under this paragraph (g) does notterminate the single entity treatment ofa Bridge Bank and its Residual Entitiesprovided in paragraph (e) of thissection.

(ii) FFA. A new Institution is treatedas having a non-interest bearing, non-transferable account receivable for fu-ture FFA with a basis equal to theamount described in paragraph (g)(3)of this section. If a disaffiliated Institu-tion has a deferred FFA account at thetime of its disaffiliation, the corre-sponding new Institution succeeds toand takes into account that deferredFFA account.

(iii) Filing of consolidated returns.If a disaffiliated Institution has Consol-idated Subsidiaries at the time of itsdisaffiliation, the corresponding newInstitution is required to file a consoli-dated income tax return with the sub-sidiaries in accordance with the regula-tions under section 1502.

(iv) Status as Institution. If an Insti-tution is disaffiliated under this para-graph (g), the resulting new corporationis treated as an Institution for purposesof the regulations under section 597regardless of whether it is a bank ordomestic building and loan associationwithin the meaning of section 597.

(v) Loss carrybacks. To the extent acarryback of losses would result in arefund being paid to a fiduciary under


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section 6402(i), an Institution or Con-solidated Subsidiary with respect towhich an election under this paragraph(g) (other than under paragraph (g)(6)-(ii) of this section) applies is allowedto carry back losses as if the Institutionor Consolidated Subsidiary had con-tinued to be a member of the con-solidated group that made the election.

(5) Affirmative election—(i) OriginalInstitution—(A) Manner of makingelection. Except as otherwise providedin paragraph (g)(6) of this section, aconsolidated group makes the electionprovided by this paragraph (g) bysending a written statement by certifiedmail to the affected Institution on orbefore the later of 120 days after itsplacement in Agency receivership orMay 31, 1996. The statement must con-tain the following legend at the top ofthe page: ‘‘THIS IS AN ELECTIONUNDER §1.597–4(g) TO EXCLUDETHE BELOW-REFERENCED INSTI-TUTION AND CONSOLIDATEDSUBSIDIARIES FROM THE AFFILI-ATED GROUP,’’ and must include thenames and taxpayer identification num-bers of the common parent and of theInstitution and Consolidated Subsidi-aries to which the election applies, andthe date on which the Institution wasplaced in Agency receivership. Theconsolidated group must send a similarstatement to all subsidiary Institutionsplaced in Agency receivership duringthe consistency period described inparagraph (g)(5)(ii) of this section.(Failure to satisfy the requirement inthe preceding sentence, however, doesnot invalidate the election with respectto any subsidiary Institution placed inAgency receivership during the consis-tency period described in paragraph(g)(5)(ii) of this section.) The consoli-dated group must include a copy of anyelection statement and accompanyingcertified mail receipt as part of its firstincome tax return filed after the duedate under this paragraph (g)(5) forsuch statement. A statement must beattached to this return indicating thatthe individual who signed the electionwas authorized to do so on behalf ofthe consolidated group. Agency cannotmake this election under the authorityof section 6402(i) or otherwise.

(B) Consistency limitation on affirm-ative elections. A consolidated groupmay make an affirmative election underthis paragraph (g)(5) with respect to asubsidiary Institution placed in Agencyreceivership only if the group made, oris deemed to have made, the election

under this paragraph (g) with respect toevery subsidiary Institution of thegroup placed in Agency receivership onor after May 10, 1989 and within fiveyears preceding the date the subjectInstitution was placed in Agencyreceivership.

(ii) Effect on Institutions placed inreceivership simultaneously or subse-quently. An election under this para-graph (g), other than under paragraph(g)(6)(ii) of this section, applies to theInstitution with respect to which theelection is made or deemed made (theoriginal Institution) and each subsidiaryInstitution of the group placed inAgency receivership or deconsolidatedin contemplation of Agency Control orthe receipt of FFA simultaneously withthe original Institution or within fiveyears thereafter.

(6) Deemed Election—(i) Decon-solidations in contemplation. If one ormore members of a consolidated groupdeconsolidate (within the meaning of§1.1502-19(c)(1)(ii)(B)) a subsidiaryInstitution in contemplation of AgencyControl or the receipt of FFA, theconsolidated group is deemed to makethe election described in this paragraph(g) with respect to the Institution onthe date the deconsolidation occurs. Asubsidiary Institution is conclusivelypresumed to have been deconsolidatedin contemplation of Agency Control orthe receipt of FFA if either eventoccurs within six months after thedeconsolidation.

(ii) Transfers to a Bridge Bank frommultiple groups. On the day an Institu-tion’s transfer of deposit liabilities to aBridge Bank results in the Bridge Bankholding deposit liabilities from both asubsidiary Institution and an Institutionnot included in the subsidiary Institu-tion’s consolidated group, each consoli-dated group of which a transferringInstitution or the Bridge Bank is asubsidiary is deemed to make the elec-tion described in this paragraph (g)with respect to its subsidiary Institu-tion. If deposit liabilities of anotherInstitution that is a subsidiary memberof any consolidated group subsequentlyare transferred to the Bridge Bank, theconsolidated group of which the Insti-tution is a subsidiary is deemed tomake the election described in thisparagraph (g) with respect to thatInstitution at the time of the subsequenttransfer.

(h) Examples. The following exam-ples illustrate the provisions of thissection:

Facts. Corporation X, the common parent of aconsolidated group, owns all the stock (with abasis of $4 million) of Institution M, aninsolvent Institution with no Consolidated Sub-sidiaries. At the close of business on April 30,1996, M has $4 million of deposit liabilities, $1million of other liabilities, and assets with anadjusted basis of $4 million and a fair marketvalue of $3 million.

Example 1. Effect of receivership on consol-idation. On May 1, 1996, Agency places M inreceivership and begins liquidating M. X doesnot make an election under §1.597–4(g). Mremains a member of the X consolidated groupafter May 1, 1996. Section 1.597–4(f)(1).

Example 2. Effect of Bridge Bank onconsolidation—(i) Additional facts. On May 1,1996, Agency places M in receivership andcauses M to transfer all of its assets and depositliabilities to Bridge Bank MB.

(ii) Consequences without an election to dis-affiliate. M recognizes no gain or loss from thetransfer and MB succeeds to M’s basis in thetransferred assets, M’s items described in section381(c) (subject to the conditions and limitationsspecified in section 381(c)) and TIN. Section1.597–4(d)(1). (If M had a deferred FFAaccount, MB would also succeed to that account.Section 1.597–4(d)(1).) MB continues M’s tax-able year and succeeds to M’s status as amember of the X consolidated group after May1, 1996. Section 1.597–4(d)(1) and (f). MB andM are treated as a single entity for income taxpurposes. Section 1.597–4(e).

(iii) Consequences with an election to dis-affiliate. If, on July 1, 1996, X makes an electionunder §1.597–4(g) with respect to M, thefollowing consequences are treated as occurringimmediately before M was placed in Agencyreceivership. M must include $1 million ($5million of liabilities — $4 million of adjustedbasis) in income as of May 1, 1996. Section1.597–4(g)(2) and (3). M is then treated as a newcorporation that is not a member of the Xconsolidated group and that has assets (includinga $1 million account receivable for future FFA)with a basis of $5 million and $5 million ofliabilities received from disaffiliated corporationM in a section 351 transaction. New corporationM retains the TIN of disaffiliated corporation M.Section 1.597–4(g)(4). Immediately after thedisaffiliation, new corporation M is treated astransferring its assets and deposit liabilities toBridge Bank MB. New corporation M recognizesno gain or loss from the transfer and MBsucceeds to M’s TIN and taxable year. Section1.597–4(d)(1). Bridge Bank MB is treated as asingle entity that includes M and has $5 millionof liabilities, an account receivable for futureFFA with a basis of $1 million, and other assetswith a basis of $4 million. Section 1.597–4(d)(1).

§1.597–5 Taxable Transfers.

(a) Taxable Transfers—(1) Defined.The term Taxable Transfer means—

(i) A transaction in which an entitytransfers to a transferee other than aBridge Bank—

(A) Any deposit liability (whether ornot the Institution also transfers assets),if FFA is provided in connection withthe transaction; or

(B) Any asset for which Agency ora Controlled Entity has any financial


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obligation (e.g., pursuant to a LossGuarantee or Agency Obligation); or

(ii) A deemed transfer of assetsdescribed in paragraph (b) of thissection.

(2) Scope. This section providesrules governing Taxable Transfers.Rules applicable to both actual anddeemed asset acquisitions are providedin paragraphs (c) and (d) of thissection. Special rules applicable only todeemed asset acquisitions are providedin paragraph (e) of this section.

(b) Deemed asset acquisitions uponstock purchase—(1) In general. In adeemed transfer of assets under thisparagraph (b), an Institution (includinga Bridge Bank or a Residual Entity) ora Consolidated Subsidiary of the Insti-tution (the Old Entity) is treated asselling all of its assets in a singletransaction and is treated as a newcorporation (the New Entity) that pur-chases all of the Old Entity’s assets atthe close of the day immediatelypreceding the occurrence of an eventdescribed in paragraph (b)(2) of thissection. However, such an event resultsin a deemed transfer of assets underthis paragraph (b) only if it occurs—

(i) In connection with a transactionin which FFA is provided;

(ii) While the Old Entity is a BridgeBank;

(iii) While the Old Entity has apositive balance in a deferred FFAaccount (see §1.597–2(c)(4)(v) regard-ing the optional accelerated recaptureof deferred FFA); or

(iv) With respect to a ConsolidatedSubsidiary, while the Institution ofwhich it is a Consolidated Subsidiary isunder Agency Control.

(2) Events. A deemed transfer ofassets under this paragraph (b) resultsif the Old Entity—

(i) Becomes a non-member withinthe meaning of §1.1502–32(d)(4) of itsconsolidated group (other than pursuantto an election under §1.597–4(g));

(ii) Becomes a member of an affili-ated group of which it was notpreviously a member (other than pur-suant to an election under §1.597–4(g)); or

(iii) Issues stock such that the stockthat was outstanding before the imposi-tion of Agency Control or the occur-rence of any transaction in connectionwith the provision of FFA represents50 percent or less of the vote or valueof its outstanding stock (disregarding

stock described in section 1504(a)(4)and stock owned by Agency or aControlled Entity).

(3) Bridge Banks and Residual En-tities. If a Bridge Bank is treated asselling all of its assets to a New Entityunder this paragraph (b), each associ-ated Residual Entity is treated assimultaneously selling its assets to aNew Entity in a Taxable Transferdescribed in this paragraph (b).

(c) Treatment of transferor—(1)FFA in connection with a TaxableTransfer. A transferor in a TaxableTransfer is treated as having directlyreceived immediately before a TaxableTransfer any Net Worth Assistance thatAgency provides to the New Entity orAcquiring in connection with the trans-fer. (See §1.597–2(a) and (c) for rulesregarding the inclusion of FFA inincome and §1.597–2(a)(1) for relatedrules regarding FFA provided to share-holders.) The Net Worth Assistance istreated as an asset of the transferor thatis sold to the New Entity or Acquiringin the Taxable Transfer.

(2) Amount realized in a TaxableTransfer. In a Taxable Transfer de-scribed in paragraph (a)(1)(i) of thissection, the amount realized is deter-mined under section 1001(b) by refer-ence to the consideration paid for theassets. In a Taxable Transfer describedin paragraph (a)(1)(ii) of this section,the amount realized is the sum of thegrossed-up basis of the stock acquiredin connection with the Taxable Trans-fer (excluding stock acquired from theOld or New Entity), plus the amount ofliabilities assumed or taken subject toin the deemed transfer, plus otherrelevant items. The grossed-up basis ofthe acquired stock equals the acquirors’basis in the acquired stock divided bythe percentage of the Old Entity’s stock(by value) attributable to the acquiredstock.

(3) Allocation of amount realized—(i) In general. The amount realizedunder paragraph (c)(2) of this section isallocated among the assets transferredin the Taxable Transfer in the samemanner as amounts are allocated amongassets under §§1.338(b)–2T(b), (c)(1)and (2).

(ii) Modifications to general rule.This paragraph (c)(3)(ii) modifies cer-tain of the allocation rules of paragraph(c)(3)(i) of this section. Agency Obli-gations and assets covered by LossGuarantees in the hands of the NewEntity or Acquiring are treated as Class

II assets. Stock of a ConsolidatedSubsidiary is treated as a Class II assetto the extent the fair market value ofthe Consolidated Subsidiary’s Class Iand Class II assets exceeds the amountof its liabilities. The fair market valueof an Agency Obligation is deemed toequal its adjusted issue price imme-diately before the Taxable Transfer.The fair market value of an assetcovered by a Loss Guarantee imme-diately after the Taxable Transfer isdeemed to be not less than the greaterof the asset’s highest guaranteed valueor the highest price at which the assetcan be put.

(d) Treatment of a New Entity andAcquiring—(1) Purchase price. Thepurchase price for assets acquired in aTaxable Transfer described in para-graph (a)(1)(i) of this section is thecost of the assets acquired. See§1.1060–1T(c)(1). The purchase pricefor assets acquired in a Taxable Trans-fer described in paragraph (a)(1)(ii) ofthis section is the sum of the grossed-up basis of the stock acquired inconnection with the Taxable Transfer(excluding stock acquired from the Oldor New Entity), plus the amount ofliabilities assumed or taken subject toin the deemed transfer, plus otherrelevant items. The grossed-up basis ofthe acquired stock equals the acquirors’basis in the acquired stock divided bythe percentage of the Old Entity’s stock(by value) attributable to the acquiredstock. FFA provided in connection witha Taxable Transfer is not included inthe New Entity’s or Acquiring’s pur-chase price for the acquired assets. AnyNet Worth Assistance so provided istreated as an asset of the transferor soldto the New Entity or Acquiring in theTaxable Transfer.

(2) Allocation of basis—(i) In gen-eral. Except as otherwise provided inthis paragraph (d)(2), the purchaseprice determined under paragraph(d)(1) of this section is allocatedamong the assets transferred in theTaxable Transfer in the same manneras amounts are allocated among assetsunder §1.338(b)–2T(b), (c)(1) and (2).

(ii) Modifications to general rule.The allocation rules contained in para-graph (c)(3)(ii) of this section apply tothe allocation of basis among assetsacquired in a Taxable Transfer. Nobasis is allocable to Agency’s agree-ment to provide Loss Guarantees, yieldmaintenance payments, cost to carry orcost of funds reimbursement payments,or expense reimbursement or indemnity


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payments. A New Entity’s basis inassets it receives from its shareholdersis determined under general principlesof income taxation and is not governedby this paragraph (d).

(iii) Allowance and recapture ofadditional basis in certain cases. If thefair market value of the Class I andClass II assets acquired in a TaxableTransfer is greater than the NewEntity’s or Acquiring’s purchase pricefor the acquired assets, the basis of theClass I and Class II assets equals theirfair market value. The amount bywhich the fair market value of theClass I and Class II assets exceeds thepurchase price is included ratably asordinary income by the New Entity orAcquiring over a period of six taxableyears beginning in the year of theTaxable Transfer. The New Entity orAcquiring must include as ordinaryincome the entire amount remaining tobe recaptured under the precedingsentence in the taxable year in whichan event occurs that would accelerateinclusion of an adjustment under sec-tion 481.

(iv) Certain post-transfer adjust-ments—(A) Agency Obligations. If anadjustment to the principal amount ofan Agency Obligation or cash paymentto reflect a more accurate determinationof the condition of the Institution at thetime of the Taxable Transfer is madebefore the earlier of the date the NewEntity or Acquiring files its first post-transfer income tax return or the duedate of that return (including exten-sions), the New Entity or Acquiringmust adjust its basis in its acquiredassets to reflect the adjustment. Inmaking adjustments to the New En-tity’s or Acquiring’s basis in its ac-quired assets, paragraph (c)(3)(ii) ofthis section is applied by treating anadjustment to the principal amount ofan Agency Obligation pursuant to thefirst sentence of this paragraph(d)(2)(iv)(A) as occurring immediatelybefore the Taxable Transfer. (See§1.597–3(c)(3) for rules regarding otheradjustments to the principal amount ofan Agency Obligation.)

(B) Assets covered by a Loss Guar-antee. If, immediately after a TaxableTransfer, an asset is not covered by aLoss Guarantee but the New Entity orAcquiring has the right to designatespecific assets that will be covered by aLoss Guarantee, the New Entity orAcquiring must treat any asset sodesignated as having been subject tothe Loss Guarantee at the time of the

Taxable Transfer. The New Entity orAcquiring must adjust its basis in thecovered assets and in its other acquiredassets to reflect the designation in themanner provided by paragraph (d)(2) ofthis section. The New Entity or Acquir-ing must make appropriate adjustmentsin subsequent taxable years if thedesignation is made after the NewEntity or Acquiring files its first post-transfer income tax return or the duedate of that return (including exten-sions) has passed.

(e) Special rules applicable to Tax-able Transfers that are deemed assetacquisitions—(1) Taxpayer identifica-tion numbers. Except as provided inparagraph (e)(3) of this section, a NewEntity succeeds to the TIN of thetransferor in a deemed sale underparagraph (b) of this section.

(2) Consolidated Subsidiaries—(i) Ingeneral. A Consolidated Subsidiarythat is treated as selling its assets in aTaxable Transfer under paragraph (b)of this section is treated as engagingimmediately thereafter in a completeliquidation to which section 332 ap-plies. The consolidated group of whichthe Consolidated Subsidiary is a mem-ber does not take into account gain orloss on the sale, exchange, or cancella-tion of stock of the ConsolidatedSubsidiary in connection with the Tax-able Transfer.

(ii) Certain minority shareholders.Shareholders of the Consolidated Sub-sidiary that are not members of theconsolidated group that includes theInstitution do not recognize gain or losswith respect to shares of ConsolidatedSubsidiary stock retained by the share-holder. The shareholder’s basis for thatstock is not affected by the TaxableTransfer.

(3) Bridge Banks and Residual En-tities—(i) In general. A Bridge Bank orResidual Entity’s sale of assets to aNew Entity under paragraph (b) of thissection is treated as made by a singleentity under §1.597–4(e). The NewEntity deemed to acquire the assets ofa Residual Entity under paragraph (b)of this section is not treated as a singleentity with the Bridge Bank (or withthe New Entity acquiring the BridgeBank’s assets) and must obtain a newTIN.

(ii) Treatment of consolidatedgroups. At the time of a TaxableTransfer described in paragraph(a)(1)(ii) of this section, treatment of aBridge Bank as a subsidiary member of

a consolidated group under §1.597–4(f)(1) ceases. However, the NewEntity deemed to acquire the assets ofa Residual Entity is a member of theselling consolidated group after thedeemed sale. The group’s basis orexcess loss account in the stock of theNew Entity that is deemed to acquirethe assets of the Residual Entity is thegroup’s basis or excess loss account inthe stock of the Bridge Bank imme-diately before the deemed sale, asadjusted for the results of the sale.

(4) Certain returns. If an Old Entitywithout Continuing Equity is not asubsidiary of a consolidated group atthe time of the Taxable Transfer, thecontrolling Agency must file all incometax returns for the Old Entity forperiods ending on or prior to the dateof the deemed sale described in para-graph (b) of this section that are notfiled as of that date.

(5) Basis limited to fair marketvalue. If all of the stock of thecorporation is not acquired on the dateof the Taxable Transfer, the Commis-sioner may make appropriate adjust-ments under paragraphs (c) and (d) ofthis section to the extent using agrossed-up basis of the stock of acorporation results in an aggregateamount realized for, or basis in, theassets other than the aggregate fairmarket value of the assets.

(f) Examples. The following exam-ples illustrate the provisions of thissection:

Example 1. Branch sale resulting in TaxableTransfer. (i) Institution M is a calendar yeartaxpayer in Agency receivership. M is not amember of a consolidated group. On January 1,1997, M has $200 million of liabilities (includingdeposit liabilities) and assets with an adjustedbasis of $100 million. M has no income or lossfor 1997 and, except as described below,receives no FFA. On September 30, 1997,Agency causes M to transfer six branches (withassets having an adjusted basis of $1 million)together with $120 million of deposit liabilitiesto N. In connection with the transfer, Agencyprovides $121 million in cash to N.

(ii) The transaction is a Taxable Transfer inwhich M receives $121 million of Net WorthAssistance. Section 1.597–5(a)(1). (M is treatedas directly receiving the $121 million of NetWorth Assistance immediately before the Tax-able Transfer. Section 1.597–5(c)(1).) M trans-fers branches having a basis of $1 million and istreated as transferring $121 million in cash (theNet Worth Assistance) to N in exchange for N’sassumption of $120 million of liabilities. Thus,M realizes a loss of $2 million on the transfer.The amount of the FFA M must include in itsincome in 1997 is limited by §1.597–2(c) to$102 million, which is the sum of the $100million excess of M’s liabilities ($200 million)over the total adjusted basis of its assets ($100


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million) at the beginning of 1997, plus the $2million excess for the taxable year, which resultsfrom the Taxable Transfer, of M’s deductions(other than carryovers) over its gross incomeother than FFA. M must establish a deferredFFA account for the remaining $19 million ofFFA. Section 1.597–2(c)(4).

(iii) N, as Acquiring, must allocate its $120million purchase price for the assets acquiredfrom M among those assets. Cash is a Class Iasset. The branch assets are in Classes III andIV. N’s adjusted basis in the cash is its amount,i.e., $121 million. Section 1.597–5(d)(2). Be-cause this amount exceeds N’s purchase price forall of the acquired assets by $1 million, Nallocates no basis to the other acquired assetsand, under §1.597–5(d)(2), must recapture the $1million excess at an annual rate of $166,667 inthe six consecutive taxable years beginning with1997 (subject to acceleration for certain events).

Example 2. Stock issuance by Bridge Bankcausing Taxable Transfer. (i) On April 1, 1996,Institution P is placed in receivership and causedto transfer assets and liabilities to Bridge BankPB. On August 31, 1996, the assets of PB con-sist of $20 million in cash, loans outstandingwith an adjusted basis of $50 million and a fairmarket value of $40 million, and other non-financial assets (primarily branch assets andequipment) with an adjusted basis of $5 million.PB has deposit liabilities of $95 million andother liabilities of $5 million. P, the ResidualEntity, holds real estate with an adjusted basis of$10 million and claims in litigation having a zerobasis. P retains no deposit liabilities and has noother liabilities (except its liability to Agency forhaving caused its deposit liabilities to besatisfied).

(ii) On September 1, 1996, Agency causes PBto issue 100 percent of its common stock for $2million cash to X. On the same day, Agencyissues a $25 million note to PB. The note bears afixed rate of interest in excess of the applicablefederal rate in effect for September 1, 1996.Agency provides Loss Guarantees guaranteeingPB a value of $50 million for PB’s loans out-standing.

(iii) The stock issuance is a Taxable Transferin which PB is treated as selling all of its assetsto a new corporation, New PB. Section 1.597–5(b)(1). PB is treated as directly receiving $25million of Net Worth Assistance (the issue priceof the Agency Obligation) immediately beforethe Taxable Transfer. Section 1.597–3(c)(2);§1.597–5(c)(1). The amount of FFA PB must in-clude in income is determined under §1.597–2(a)and (c). PB in turn is deemed to transfer the noteto New PB in the Taxable Transfer, togetherwith $20 million of cash, all its loans outstand-ing (with a basis of $50 million) and its othernon-financial assets (with a basis of $5 million).The amount realized by PB from the sale is $100million, the amount of PB’s liabilities deemed tobe assumed by New PB. This amount realizedequals PB’s basis in its assets and thus, PBrealizes no gain or loss on the transfer to NewPB.

(iv) Residual Entity P also is treated as sellingall its assets (consisting of real estate and claimsin litigation) for $0 (the amount of considerationreceived by P) to a new corporation (New P) in aTaxable Transfer. Section 1.597–5(b)(3). (P’sonly liability is to Agency and a liability toAgency is not treated as a debt under §1.597–3(b).) Thus, P realizes a $10 million loss on thetransfer to New P. The combined return filed byPB and P for 1996 will reflect a total loss on the

Taxable Transfer of $10 million ($0 for PB and$10 million for P). Section 1.597–5(e)(3). Thatreturn also will reflect FFA income from the NetWorth Assistance, determined under §1.597–2(a)and (c).

(v) New PB is treated as having acquired theassets it acquired from PB for $100 million, theamount of liabilities assumed. In allocating basisamong these assets, New PB treats the Agencynote and the loans outstanding (which arecovered by Loss Guarantees) as Class II assets.For the purpose of allocating basis, the fairmarket value of the Agency note is deemed toequal its adjusted issue price immediately beforethe transfer, $25 million. The fair market valueof the loans is deemed not to be less than theguaranteed value of $50 million.

(vi) New P is treated as having acquired itsassets for no consideration. Thus its basis in itsassets immediately after the transfer is zero. NewPB and New P are not treated as a single entity.Section 1.597–5(e)(3).

Example 3. Taxable Transfer of previously dis-affiliated Institution. (i) Corporation X, thecommon parent of a consolidated group, owns allthe stock of Institution M, an insolvent Institu-tion with no Consolidated Subsidiaries. On April30, 1996, M has $4 million of deposit liabilities,$1 million of other liabilities, and assets with anadjusted basis of $4 million and a fair marketvalue of $3 million. On May 1, 1996, Agencyplaces M in receivership. X elects under §1.597–4(g) to disaffiliate M. Accordingly, as of May 1,1996, new corporation M is not a member of theX consolidated group. On May 1, 1996, Agencycauses M to transfer all of its assets andliabilities to Bridge Bank MB. Under §1.597–4(e), MB and M are thereafter treated as a singleentity which has $5 million of liabilities, anaccount receivable for future FFA with a basis of$1 million, and other assets with a basis of $4million. Section 1.597–4(g)(4).

(ii) During May 1996, MB earns $25,000 ofinterest income and accrues $20,000 of interestexpense on depositor accounts and there is nonet change in deposits other than the additional$20,000 of interest expense accrued on depositoraccounts. MB pays $5,000 of wage expenses andhas no other items of income or expense.

(iii) On June 1, 1996, Agency causes MB toissue 100 percent of its stock to corporation Y.In connection with the stock issuance, Agencyprovides an Agency Obligation for $2 millionand no other FFA.

(iv) The stock issuance results in a TaxableTransfer. Section 1.597–5(b). MB is treated asreceiving the Agency Obligation immediatelyprior to the Taxable Transfer. Section 1.597–5(c)(1). MB has $1 million of basis in itsaccount receivable for FFA. This receivable istreated as satisfied, offsetting $1 million of the$2 million of FFA provided by Agency in con-nection with the Taxable Transfer. The status ofthe remaining $1 million of FFA as includibleincome is determined as of the end of the taxableyear under §1.597–2(c). However, under §1.597–2(b), MB obtains a $2 million basis in theAgency Obligation received as FFA.

(v) Under §1.597–5(c)(2), in the TaxableTransfer, Old Entity MB is treated as selling, toNew Entity MB, all of Old Entity MB’s assets,having a basis of $6,020,000 (the original $4million of asset basis as of April 30, 1996, plus$20,000 net cash from May 1996 activities, plus$2 million in the Agency Obligation received asFFA), for $5,020,000, the amount of Old EntityMB’s liabilities assumed by New Entity MB

pursuant to the Taxable Transfer. Therefore, OldEntity MB recognizes, in the aggregate, a loss of$1 million from the Taxable Transfer.

(vi) Because this $1 million loss causes OldEntity MB’s deductions to exceed its grossincome (determined without regard to FFA) by$1 million, Old Entity MB must include in itsincome the $1 million of FFA not offset by theFFA receivable. Section 1.597–2(c). (As of May1, 1996, Old Entity MB’s liabilities ($5,000,000)did not exceed MB’s $5 million adjusted basis ofits assets. For the taxable year, MB’s deductionsof $1,025,000 ($1,000,000 loss from the TaxableTransfer, $20,000 interest expense and $5,000 ofwage expense) exceeded its gross income (dis-regarding FFA) of $25,000 (interest income) by$1,000,000. Thus, under §1.597–2(c), MB in-cludes in income the entire $1,000,000 of FFAnot offset by the FFA receivable.)

(vii) Therefore, Old Entity MB’s taxable in-come for the taxable year ending on the date ofthe Taxable Transfer is $0.

(viii) Residual Entity M is also deemed toengage in a deemed sale of its assets to NewEntity M under §1.597–5(b)(3), but there are notax consequences as M has no assets or liabilitiesat the time of the deemed sale.

(ix) Under §1.597–5(d)(1), New Entity MB istreated as purchasing Old Entity MB’s assets for$5,020,000, the amount of New Entity MB’sliabilities. Of this, $2,000,000 is allocated to the$2 million Agency Obligation, and $3,020,000 isallocated to the other assets New Entity MB istreated as purchasing in the Taxable Transfer.

Example 4. Loss Sharing. Institution N ac-quires assets and assumes liabilities of anotherInstitution in a Taxable Transfer. Among theassets transferred are three parcels of real estate.In the hands of the transferring Institution, theseassets had book values of $100,000 each. Inconnection with the Taxable Transfer, Agencyagrees to reimburse Institution N for 80 percentof any loss (based on the original book value)realized on the disposition or charge-off of thethree properties. This arrangement constitutes aLoss Guarantee. Thus, in allocating basis, Institu-tion N treats the three parcels as Class II assets.By virtue of the arrangement with the Agency,Institution N is assured that the parcels will notbe worth less to it than $80,000 each, becauseeven if the properties are worthless, Agency willreimburse 80 percent of the loss. AlthoughInstitution could obtain payments under the LossGuarantee if the properties are worth more, it isnot guaranteed that it will realize more than$80,000. Accordingly, $80,000 is the highestguaranteed value of the three parcels. InstitutionN will allocate basis to the Class II assets up totheir fair market value. For this purpose, the fairmarket value of the three parcels is not less than$80,000 each. Section 1.597–5(d)(2)(ii); §1.597–5(c)(3)(ii).

§1.597–6 Limitation on collection ofincome tax.

(a) Limitation on collection wheretax is borne by Agency. If an Institutionwithout Continuing Equity (or any ofits Consolidated Subsidiaries) is liablefor income tax that is attributable to theinclusion in income of FFA or gainfrom a Taxable Transfer, the tax willnot be collected if it would be borne by


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Agency. The final determination ofwhether the tax would be borne byAgency is within the sole discretion ofthe Commissioner. In determiningwhether tax would be borne byAgency, the Commissioner will dis-regard indemnity, tax-sharing, or simi-lar obligations of Agency, an Institu-tion, or its Consolidated Subsidiaries.Collection of the several income taxliability under §1.1502–6 from mem-bers of an Institution’s consolidatedgroup other than the Institution or itsConsolidated Subsidiaries is not af-fected by this section. Income tax willcontinue to be subject to collectionexcept as specifically limited in thissection. This section does not apply totaxes other than income taxes.

(b) Amount of tax attributable toFFA or gain on a Taxable Transfer.For purposes of paragraph (a) of thissection, the amount of income tax in ataxable year attributable to the inclu-sion of FFA or gain from a TaxableTransfer in the income of an Institution(or a Consolidated Subsidiary) is theexcess of the actual income tax liabilityof the Institution (or the consolidatedgroup in which the Institution is amember) over the income tax liabilityof the Institution (or the consolidatedgroup in which the Institution is amember) determined without regard toFFA or gain or loss on the TaxableTransfer.

(c) Reporting of uncollected tax. Ataxpayer must specify on the front pageof Form 1120 (U.S. Corporate IncomeTax Return), to the left of the spaceprovided for ‘‘Total Tax,’’ the amountof income tax for the taxable year thatis potentially not subject to collectionunder this section. If an Institution is asubsidiary member of a consolidatedgroup, the amount specified as notsubject to collection is zero.

(d) Assessments of tax to offsetrefunds. Income tax that is not col-lected under this section will be as-sessed and, thus, used to offset anyclaim for refund made by or on behalfof the Institution, the ConsolidatedSubsidiary or any other corporationwith several liability for the tax.

(e) Collection of taxes from Acquir-ing or a New Entity—(1) Acquiring.No income tax liability (including theseveral liability for taxes under§1.1502–6) of a transferor in a TaxableTransfer will be collected fromAcquiring.

(2) New Entity. Income tax liability(including the several liability for taxes

under §1.1502–6) of a transferor in aTaxable Transfer will be collected froma New Entity only if stock that wasoutstanding in the Old Entity remainsoutstanding as stock in the New Entityor is reacquired or exchanged forconsideration.

(f) Effect on section 7507. Thissection supersedes the application ofsection 7507, and the regulations there-under, for the assessment and collec-tion of income tax attributable to FFA.

§1.597–7 Effective date.

(a) FIRREA effective date. Section597, as amended by section 1401 of theFinancial Institutions Reform, Recov-ery, and Enforcement Act of 1989(FIRREA), Public Law 101–73, isgenerally effective for any FFA re-ceived or accrued by an Institution onor after May 10, 1989, and for anytransaction in connection with whichsuch FFA is provided, unless the FFAis provided in connection with anacquisition occurring prior to May 10,1989. See §1.597–8 for rules regardingFFA received or accrued on or afterMay 10, 1989, that relates to anacquisition that occurred before May10, 1989.

(b) Effective date of regulations.Except as otherwise provided in thissection, §§1.597–1 through 1.597–6apply to taxable years ending on orafter April 22, 1992. However, theprovisions of §§1.597–1 through1.597–6 do not apply to FFA receivedor accrued for taxable years ending onor after April 22, 1992, in connectionwith an Agency assisted acquisitionwithin the meaning of Notice 89–102(1989–2 C.B. 436; see §601.601(d)(2))(which does not include a transfer to aBridge Bank), that occurs before April22, 1992. Taxpayers not subject to§§1.597–1 through 1.597–6 must com-ply with an interpretation of the statutethat is reasonable in light of thelegislative history and applicable ad-ministrative pronouncements. For thispurpose, the rules contained in Notice89–102 apply to the extent provided inthe Notice.

(c) Elective application to prioryears and transactions—(1) In general.Except as limited in this paragraph (c),an election is available to apply§§1.597–1 through 1.597–6 to taxableyears prior to the general effective dateof these regulations. A consolidatedgroup may elect to apply §§1.597–1

through 1.597–6 for all members of thegroup in all taxable years to whichsection 597, as amended by FIRREA,applies. The common parent makes theelection for the group. An entity that isnot a member of a consolidated groupmay elect to apply §§1.597–1 through1.597–6 to all taxable years to whichsection 597, as amended by FIRREA,applies for which it is not a member ofa consolidated group. The election isirrevocable.

(2) Election unavailable in certaincases—(i) Statute of limitations closed.The election cannot be made if theperiod for assessment and collection oftax has expired under the rules ofsection 6501 for any taxable year inwhich §§1.597–1 through 1.597–6would affect the determination of theelecting entity’s or group’s income,deductions, gain, loss, basis, or otheritems.

(ii) No section 338 election underNotice 89–102. The election cannot bemade with respect to an Institution if,under Notice 89–102, it was a Targetwith respect to which a qualified stockpurchase was made, a timely electionunder section 338 was not made, andon April 22, 1992, a timely electionunder section 338 could not be made.

(iii) Inconsistent treatment of Institu-tion that would be New Entity. If,under §1.597–5(b), an Institution wouldbecome a New Entity before April 22,1992, the election cannot be made withrespect to that Institution unless elec-tions are made by all relevant personssuch that §§1.597–1 through §1.597–6apply both before and after the deemedsale under §1.597–5. However, thisrequirement does not apply if, under§§1.597–1 through §1.597–6, the Insti-tution would not have ContinuingEquity prior to the deemed sale.

(3) Expense reimbursements. Notice89–102, 1989–2 C.B. 436, providesthat reimbursements paid or accruedpursuant to an expense reimbursementor indemnity arrangement are not in-cluded in income but the taxpayer maynot deduct, or otherwise take intoaccount, the item of cost or expense towhich the reimbursement or indemnitypayment relates. With respect to anAgency assisted acquisition within themeaning of Notice 89–102 that occursbefore April 22, 1992, a taxpayer thatelects to apply these regulations retro-actively under this paragraph (c) maycontinue to account for these itemsunder the rules of Notice 89–102.


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(4) Procedural rules—(i) Manner ofmaking election. An Institution orconsolidated group makes the electionprovided by this paragraph (c) byattaching a written statement to, andincluding it as a part of, the taxpayer’sor consolidated group’s first annualincome tax return filed on or afterMarch 15, 1996. The statement mustcontain the following legend at the topof the page: ‘‘THIS IS AN ELECTIONUNDER §1.597–7(c),’’ and must con-tain the name, address and employeridentification number of the taxpayer orcommon parent making the election.The statement must include a declara-tion that ‘‘TAXPAYER AGREES TOEXTEND THE STATUTE OF LIMI-TATIONS ON ASSESSMENT FORTHREE YEARS FROM THE DATEOF THE FILING OF THIS ELEC-TION UNDER §1.597–7(c), IF THELIMITATIONS PERIOD WOULD EX-PIRE EARLIER WITHOUT SUCHEXTENSION, FOR ANY ITEMS AF-FECTED IN ANY TAXABLE YEARBY THE FILING OF THIS ELEC-TION,’’ and a declaration that either‘‘AMENDED RETURNS WILL BEFILED FOR ALL TAXABLE YEARSAFFECTED BY THE FILING OFTHIS ELECTION WITHIN 180 DAYSOF MAKING THIS STATEMENT,UNLESS SUCH REQUIREMENT ISWAIVED IN WRITING BY THEDISTRICT DIRECTOR OR HIS DEL-EGATE’’ or ‘‘ALL RETURNS PRE-VIOUSLY FILED ARE CONSISTENTWITH THE PROVISIONS OF§§1.597–1 THROUGH 1.597–6,’’ andbe signed by an individual who isauthorized to make the election underthis paragraph (c) on behalf of thetaxpayer. An election with respect to aconsolidated group must be made bythe common parent of the group, notAgency, and applies to all members ofthe group.

(ii) Effect of elective disaffiliation.To make the affirmative election de-scribed in §1.597–4(g)(5) for an Insti-tution placed in Agency receivership ina taxable year ending before April 22,1992, the consolidated group must sendthe affected Institution the statementdescribed in §1.597–4(g)(5) on orbefore May 31, 1996. Notwithstandingthe requirements of paragraph (c)(4)(i)of this section, a consolidated groupsending such a statement is deemed tomake the election described in, and toagree to the conditions contained in,this paragraph (c). The consolidatedgroup must nevertheless attach the

statement described in paragraph(c)(4)(i) of this section to its firstannual income tax return filed on orafter March 15, 1996.

(d) Reliance on prior guidance—(1)Notice 89–102. Taxpayers may rely onNotice 89–102, 1989–2 C.B. 436, tothe extent they acted in reliance on thatNotice prior to April 22, 1992. Suchreliance must be reasonable and trans-actions with respect to which taxpayersrely must be consistent with the over-riding policies of section 597, asexpressed in the legislative history.

(2) Notice FI–46–89—(i) In general.Notice FI–46–89 was published in theFederal Register on April 23, 1992 (57FR 14804). Taxpayers may rely on theprovisions of §§1.597–1 through1.597–6 of that notice to the extentthey acted in reliance on those provi-sions prior to December 21, 1995. Suchreliance must be reasonable and trans-actions with respect to which taxpayersrely must be consistent with the over-riding policies of section 597, asexpressed in the legislative history, aswell as the overriding policies of noticeFI–46–89.

(ii) Taxable Transfers. Any taxpayerdescribed in this paragraph (d) that,under notice FI–46–89, would be aNew Entity or Acquiring with respectto a Taxable Transfer on or after April22, 1992, and before December 21,1995, may apply the rules of that no-tice with respect to such transaction.

PART 301—PROCEDURE ANDADMINISTRATION

Par. 3. The authority citation for part301 is amended by adding entries innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.7507–1 also issued un-

der 26 U.S.C. 597.Section 301.7507–9 also issued un-

der 26 U.S.C. 597. * * *Par. 4. Section 301.7507–1 is

amended by adding paragraph (b)(4) toread as follows:

§301.7507–1 Banks and trustcompanies covered.

* * * * * *

(b) * * *(4) The term ceased to do business

means the bank no longer acceptsdeposits or makes loans and discounts,

and is winding up its affairs and is inthe process of liquidating its assets topay depositors. A bank will not beconsidered to have ceased to do busi-ness on account of a transaction inwhich the bank—

(i) Transfers assets and liabilities toa Bridge Bank in a transfer describedin §1.597–4 of this chapter;

(ii) Transfers assets and liabilities toany person in a transaction to whichsection 381(a) applies or in which thetransferee receives property with atransferred basis;

(iii) Transfers assets or liabilities toany person in a transaction in whichFederal Financial Assistance (as de-fined in section 597) is provided to anyparty to the transaction, unless all theFederal Financial Assistance is depositinsurance under §301.7507–9(d); or

(iv) Transfers assets or liabilities toany person in a transaction similar toany transaction described in paragraphs(b)(4)(i) through (iii) of this section.This paragraph (b)(4) applies to taxableyears ending on or after April 22,1992.

Par. 5. Section 301.7507–9 isamended by adding a sentence to theend of paragraph (d) to read as follows:

§301.7507–9 Termination ofimmunity.

* * * * * *

(d) * * * For taxable years endingon or after April 22, 1992, depositinsurance does not include FederalFinancial Assistance (as defined insection 597) and other payments de-scribed in section 597(a) prior to itsamendment by the Financial Institu-tions Reform, Recovery, and Enforce-ment Act of 1989 and, therefore, suchpayments must be taken into account todetermine whether a bank’s assets aresufficient to meet claims of depositors.

* * * * * *

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 entries in numeri-cal order to the table to read asfollows:


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§602.101 OMB Control numbers.

* * * * * *

(c) * * *

CFR part or section Current OMBwhere identified control numberand described

* * * * * *

1.597–2 . . . . . . . . . . . . . . . . 1545–13001.597–4 . . . . . . . . . . . . . . . . 1545–13001.597–6 . . . . . . . . . . . . . . . . 1545–13001.597–7 . . . . . . . . . . . . . . . . 1545–1300

* * * * * *

Margaret Milner Richardson,Commissioner of

Internal Revenue.

Approved December 4, 1995.

Cynthia G. Beerbower,Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register onDecember 20, 1995, 8:45 a.m., and publishedin the issue of the Federal Register forDecember 21, 1995, 60 F.R. 66091)

Section 807.—Rules for CertainReserves


Section 846.—Discounted UnpaidLosses Defined


Section 1274.—Determination ofIssue Price in the Case of CertainDebt Instruments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468,483, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federalrates; adjusted federal long-term rate,and the long-term exempt rate. Forpurposes of sections 1274, 1288, 382,

and other sections of the Code, tablesset forth the rates for February 1996.

Rev. Rul. 96–14

This revenue ruling provides variousprescribed rates for federal income taxpurposes for February 1996 (the currentmonth). Table 1 contains the short-term, mid-term, and long-term applica-ble federal rates (AFR) for the currentmonth for purposes of section 1274(d)of the Internal Revenue Code. Table 2contains the short-term, mid-term, andlong-term adjusted applicable federalrates (adjusted AFR) for the currentmonth for purposes of section 1288(b).Table 3 sets forth the adjusted federallong-term rate and the long-term tax-exempt rate described in section 382(f).Table 4 contains the appropriate per-centages for determining the low-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Fi-nally, Table 5 contains the federal ratefor determining the present value of anannuity, an interest for life or for aterm of years, or a remainder or areversionary interest for purposes ofsection 7520.

REV. RUL. 96–14 TABLE 1

Applicable Federal Rates (AFR) for February 1996

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 5.32% 5.25% 5.22% 5.19%110% AFR 5.86% 5.78% 5.74% 5.71%120% AFR 6.40% 6.30% 6.25% 6.22%

Mid-Term

AFR 5.61% 5.53% 5.49% 5.47%110% AFR 6.17% 6.08% 6.03% 6.00%120% AFR 6.75% 6.64% 6.59% 6.55%150% AFR 8.47% 8.30% 8.22% 8.16%175% AFR 9.91% 9.68% 9.57% 9.49%

Long-Term

AFR 6.09% 6.00% 5.96% 5.93%110% AFR 6.71% 6.60% 6.55% 6.51%120% AFR 7.33% 7.20% 7.14% 7.09%


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Adjusted AFR for February 1996

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-termadjusted AFR 3.66% 3.63% 3.61% 3.60%

Mid-termadjusted AFR 4.42% 4.37% 4.35% 4.33%

Long-termadjusted AFR 5.27% 5.20% 5.17% 5.14%


Rates Under Section 382 for February 1996

Adjusted federal long-term rate for the current month 5.27%

Long-term tax-exempt rate for ownership changes during the current month (the highest of theadjusted federal long-term rates for the current month and the prior two months). 5.46%


Appropriate Percentages Under Section 42(b)(2)for February 1996

Appropriate percentage for the 70% present value low-income housing credit 8.37%

Appropriate percentage for the 30% present value low-income housing credit 3.59%


Rate Under Section 7520 for February 1996

Applicable federal rate for determining the present value of an annuity, an interest for life ora term of years, or a remainder or reversionary interest 6.8%

Section 1288.—Treatment of OriginalIssue Discount on Tax-ExemptObligations


Section 7520.—Valuation Tables


Section 7872.—Treatment of Loanswith Below-Market Interest Rates



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Part III. Administrative, Procedural, and Miscellaneous

Estimated Tax Payments forIndividuals

Notice 96–5

This notice provides that the InternalRevenue Service will waive penaltiesfor certain individuals for the 4thinstallment payment of estimated tax ifthat payment is made on or beforeJanuary 22, 1996. Under § 6654(c) ofthe Internal Revenue Code, the duedate for the 4th installment payment ofestimated tax by individuals is January15 of the following taxable year. Be-cause January 15, 1996, is a Federalholiday, a payment of the 4th install-ment of estimated tax made on January16, 1996, is considered timely.

Due to the blizzard that occurred onJanuary 7 and 8, 1996, the 4thinstallment payment of estimated taxmade by individuals who are residentsof the District of Columbia, Connecti-cut, Delaware, Kentucky, Maine, Mary-land, Massachusetts, New Hampshire,New Jersey, New York, North Car-olina, Pennsylvania, Rhode Island, Ver-mont, Virginia, and West Virginia willbe considered timely if made on orbefore January 22, 1996. The waiver isautomatic for these individuals.

Alternatively, under § 6654(h), allindividuals who file their 1995 individ-ual income tax returns on or beforeJanuary 31, 1996, and pay the entirebalance due with the return, do nothave to make the 4th installment pay-ment of estimated tax.

DRAFTING INFORMATION

The principal author of this notice isMargaret A. Owens of the Office ofAssistant Chief Counsel (Income Taxand Accounting). For further informa-tion regarding this notice, contact Ms.Owens on (202) 622-6232 (not a toll-free call).

Request for Comments on FurtherCapitalization Guidance

Notice 96–7

This notice invites public commenton approaches the Service should con-sider to address issues raised under§§ 162 and 263 of the Internal Revenue

Code particularly in light of INDO-PCO, Inc. v. Commissioner, 503 U.S.79 (1992).

BACKGROUND

Section 162(a) allows a deduction forall the ordinary and necessary expensespaid or incurred during the taxable yearin carrying on any trade or business.

Section 263 generally prohibits de-ductions for capital expenditures. Sec-tion 263(a)(1) provides that no deduc-tion is allowed for any amount paid outfor new buildings or for permanentimprovements or betterments made toincrease the value of any property orestate. Under § 263(a)(2), no deductionis allowed for any amount expended inrestoring property or in making goodthe exhaustion thereof for which anallowance is or has been made in theform of a deduction for depreciation,amortization, or depletion.

In INDOPCO, the Supreme Court ofthe United States concluded that certainlegal and professional fees incurred bya corporation to facilitate a friendlyacquisition of the corporation createdsignificant long-term benefits for thetaxpayer and, therefore, were capitalexpenditures. In reaching this decision,the Court specifically rejected theargument that its decision in Commis-sioner v. Lincoln Savings & LoanAssociation, 403 U.S. 345 (1971),should be read as holding ‘‘that onlyexpenditures that create or enhanceseparate and distinct assets are to becapitalized under § 263.’’ INDOPCO at86–87 (emphasis in original). TheCourt further stated that ‘‘[a]lthoughthe mere presence of an incidentalfuture benefit—‘some future aspect’—may not warrant capitalization, a tax-payer’s realization of benefits beyondthe year in which the expenditure isincurred is undeniably important indetermining whether the appropriate taxtreatment is immediate deduction orcapitalization.’’ INDOPCO at 87(emphasis in original).

The Service believes that the INDO-PCO decision did not change thefundamental legal principles for deter-mining whether a particular expendituremay be deducted or must be cap-italized. Since the decision in INDO-PCO, the Service has issued a varietyof revenue rulings applying §§ 162(a)and 263(a) to specific expenditures. For

example, the Service ruled that theINDOPCO decision did not change thetreatment of advertising costs (Rev.Rul. 92–80, 1992–2 C.B. 57), inciden-tal repair costs (Rev. Rul. 94–12,1994–1 C.B. 36), or severance pay-ments (Rev. Rul. 94–77, 1994–2 C.B.19), all of which are generally deduct-ible under § 162.

REQUEST FOR PUBLIC COMMENT

The Service continues to receivenumerous informal inquiries regardingissues of capitalization. Taxpayersshould be aware that, in appropriatecircumstances, they can receive privateletter rulings on the deductibility orcapitalization of specific expenditures.The Service welcomes comments onpossible changes to the private letterruling process that would facilitateadvance resolution of these issues. Inaddition, the Service requests com-ments concerning: (1) whether generalguidance clarifying the fundamentalprinciples of capitalization would aid inresolving capitalization issues; (2) whatspecific approaches, principles, or is-sues such guidance should address; and(3) whether safe-harbor amortizationperiods should be provided for certaincapitalizable expenditures and whatdata would support any suggestedperiods.

Written comments should be submit-ted by May 6, 1996. Written commentsshould be sent to: Internal RevenueService, Attn: CC:DOM:CORP:R (IA-Branch 5), Room 5228, P.O. Box 7604,Ben Franklin Station, Washington, D.C.20044. All materials submitted will beavailable for public inspection andcopying. During its review of thecomments, the Service will continue toprocess private letter rulings and con-tinue to resolve issues under §§ 162and 263(a) raised in examinations.

DRAFTING INFORMATION

The principal author of this notice isJohn Moriarty of the Office of Assist-ant Chief Counsel (Income Tax andAccounting). For further informationregarding this notice, contact Mr. Mor-iarty on (202) 622-4950 (not a toll-freecall).


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Cash Balance Pension Plans

Notice 96–8

I. Purpose

This notice describes and requestscomments on proposed guidance con-cerning the application of sections 411and 417(e) to single sum distributionsunder defined benefit pension plansthat are cash balance plans. The pro-posed guidance is being described inthis notice in order to permit advancepublic comment in anticipation of thepublication of regulations that incorpo-rate the proposed guidance.

II. BackgroundA. General description of cash

balance plans

In general terms, a cash balance planis a defined benefit pension plan thatdefines benefits for each employee byreference to the amount of theemployee’s hypothetical account bal-ance. An employee’s hypothetical ac-count balance is credited with hypo-thetical allocations and hypotheticalearnings determined under a formulaselected by the employer and set forthin the plan. These hypothetical alloca-tions and hypothetical earnings aredesigned to mimic the allocations ofactual contributions and actual earningsto an employee’s account that wouldoccur under a defined contributionplan. Cash balance plans often specifythat hypothetical earnings (referred toin this notice as interest credits) aredetermined using an interest rate or rateof return under a variable outside index(e.g., the annual yield on one-yearTreasury securities). Most cash balanceplans also are designed to permit, aftertermination of employment, a distribu-tion of an employee’s entire accruedbenefit in the form of a single sumdistribution equal to the employee’shypothetical account balance as of thedate of the distribution. Many cashbalance plans also provide that ifdistribution is in the form of anannuity, the amount of the annuity isdetermined by dividing the hypotheticalaccount balance by an annuity conver-sion factor.

As explained below, in order tocomply with sections 411(a) and 417(e)in calculating the amount of a singlesum distribution under a cash balance

plan, the balance of the employee’shypothetical account must be projectedto normal retirement age and then theemployee must be paid at least thepresent value, determined in accord-ance with section 417(e), of thatprojected hypothetical account balance.If a cash balance plan provides interestcredits using an interest rate that ishigher than the section 417(e) applica-ble interest rate, payment of a singlesum distribution equal to the hypotheti-cal account balance as a completedistribution of the employee’s accruedbenefit may result either in a violationof section 417(e) or a forfeiture inviolation of section 411(a). This isbecause, in such a case, the presentvalue of the employee’s accrued bene-fit, determined using the section 417(e)applicable interest rate, will generallyexceed the hypothetical account bal-ance. The following example illustratesthis potential problem.

Example. A cash balance plan provides forinterest credits at a fixed rate of 8% per annumthat are not conditioned on continued employ-ment, and for annuity conversions using thesection 417(e) applicable interest rate and mor-tality table. A fully vested employee with ahypothetical account balance of $45,000 termi-nates employment at age 45 and elects animmediate single sum distribution. At the time ofthe employee’s termination, the section 417(e)applicable interest rate is 6.5%.

The projected balance of the employee’shypothetical account as of normal retirement ageis $209,743. If $209,743 is discounted to age 45at 6.5% (the section 417(e) applicable interestrate), the present value equals $59,524.

Accordingly, if the plan paid the hypotheticalaccount balance of $45,000, instead of $59,524,the employee would receive $14,524 less thanthe amount to which the employee is entitled.

Even if a cash balance plan providesinterest credits using an interest ratethat exceeds the section 417(e) applica-ble interest rate, the plan can satisfysections 417(e) and 411(a). Such a planwould provide that the amount of anysingle sum distribution is equal to thepresent value of the employee’s ac-crued benefit determined in a mannerthat satisfies sections 411(a) and 417(e)even if the amount of the single sumexceeds the employee’s hypotheticalaccount balance. Thus, in the exampleabove, the plan would satisfy sections411(a) and 417(e) if the employeereceived a single sum distribution of$59,524 (the present value of theemployee’s accrued benefit) rather than$45,000 (the employee’s hypotheticalaccount balance).

B. Existing regulatory safe harborfor cash balance plans

Section 1.401(a)(4)–8(c) of the In-come Tax Regulations, as issued inSeptember 1991, provides a safe harbortesting method for cash balance plans.Under this method, a cash balance plancould be tested for nondiscriminationas though it were a defined contribu-tion plan with actual allocations equalto the amount of the hypotheticalallocations credited for the plan year.In order to use the safe harbor, a cashbalance plan must satisfy certain designrequirements that relate to the accruedbenefit and valuation rules that areunique to defined benefit plans.

Comments on the September 1991regulations expressed concern that thesafe harbor plan design requirementsreflected an interpretation by the Serv-ice and Treasury of the qualificationrequirements that, in certain cases,would require cash balance plans topay a single sum distribution in excessof the hypothetical account balance.Guidance was requested on the circum-stances in which a cash balance plan(whether or not it qualifies for safeharbor nondiscrimination testing) ispermitted to distribute a single sumdistribution equal to the hypotheticalaccount balance without violating sec-tion 411(a) or 417(e).

When revised regulations under sec-tion 401(a)(4) were issued in Septem-ber 1993, the safe harbor testingmethod for cash balance plans was leftunchanged. The Preamble to thoseregulations indicated that the safe har-bor testing method for cash balanceplans had generated significant com-ment and that further guidance wouldbe issued at a later date.

III. Analysis

A. Nonforfeiture and accrual rules

A cash balance plan is a definedbenefit plan, not a defined contributionplan, because the benefits provided arenot based solely on actual contributionsand forfeitures allocated to anemployee’s account and the actualinvestment experience and expenses ofthe plan allocated to the account.Section 411(a)(7) defines an em-ployee’s accrued benefit differently fordefined benefit plans than for definedcontribution plans. Also, defined bene-fit plans are subject to a number of


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statutory provisions that do not applyto defined contribution plans. Theseinclude the rules of section 411(b)(1)that limit ‘‘backloading’’ of accruals;the valuation rules of section 417(e);and the definitely determinable benefitsrequirement of section 401(a)(25).These provisions limit the extent towhich a cash balance plan can mimicthe benefit and accrual structure of adefined contribution plan.

Under section 411(a)(2), an em-ployee’s accrued benefit must becomenonforfeitable in accordance with oneof the schedules specified in thatsection. Under §1.411(a)–7(a)(1)(ii),the term ‘‘accrued benefits’’ generallyrefers only to pension or retirementbenefits. Under section 411(b)(1), theaccrual of the retirement benefits pay-able at normal retirement age mustsatisfy one of the rules in section411(b)(1)(A), (B) or (C).

Under a cash balance plan, the re-tirement benefits payable at normalretirement age are determined by refer-ence to the hypothetical account bal-ance as of normal retirement age, in-cluding benefits attributable to interestcredits to that age. Thus, benefitsattributable to interest credits must betaken into account in determiningwhether the accrual of the retirementbenefits under a cash balance plansatisfies one of the rules in section411(b)(1)(A), (B) or (C). Moreover,benefits attributable to interest creditsare in the nature of accrued benefitswithin the meaning of §1.411(a)–7(a),rather than ancillary benefits, and thus,once accrued, must become nonforfeita-ble in accordance with a vestingschedule that satisfies section 411(a).

Cash balance plans can be cate-gorized based on when the benefitsattributable to interest credits accrue.Under one type of cash balance plan(referred to in this notice as a front-loaded interest credit plan), futureinterest credits to an employee’s hypo-thetical account balance are not condi-tioned upon future service. (Of course,benefits attributable to future interestcredits may be forfeited in accordancewith the plan’s vesting provisions, tothe extent permitted under section 411.)Thus, in the case of a frontloadedinterest credit plan, the benefits attribu-table to future interest credits withrespect to a hypothetical allocationaccrue at the same time that the bene-fits attributable to the hypotheticalallocation accrue. As a result, if anemployee terminates employment and

defers distribution to a later date,interest credits will continue to becredited to that employee’s hypotheticalaccount.

A second type of cash balance plan(referred to in this notice as a back-loaded interest credit plan) conditionsfuture interest credits upon furtherservice. In the case of a backloadedinterest credit plan, benefits attributableto interest credits do not accrue untilthe interest credits are credited to theemployee’s account. Because back-loaded interest credit plans typicallywill not satisfy any of the accrual rulesin section 411(b)(1)(A), (B) or (C), it isanticipated that the proposed guidancewill address only frontloaded interestcredit plans.

B. Single sum distributions fromfrontloaded interest credit plans

As indicated above, most cash bal-ance plans are designed to permit adistribution of an employee’s entireaccrued benefit, after termination ofemployment, in the form of a singlesum equal to the employee’s hypotheti-cal account balance as of the date ofthe distribution. In order for a definedbenefit plan to satisfy section 417(e),any single sum distribution payable toan employee from the plan must not beless than the nonforfeitable portion ofthe present value of the employee’saccrued benefit under section 411(a)(7)(determined using the applicable inter-est rate and mortality table undersection 417(e)).

1. Determination of the accruedbenefit

In the case of a frontloaded interestcredit plan, an employee’s accruedbenefit as of any date before attainmentof normal retirement age is based onthe employee’s hypothetical accountbalance as of normal retirement age,including future interest credits to thatage. If such a plan specifies a fixedinterest rate for use in determiningfuture interest credits, the employee’shypothetical account balance as ofnormal retirement age (including futureinterest credits) can be calculated pre-cisely before normal retirement age.However, if a frontloaded interestcredit plan specifies a variable outsideindex for use in determining theamount of interest credits, the precisedollar amount of an employee’s hypo-

thetical account balance as of normalretirement age (including future interestcredits to normal retirement age), andthus the precise dollar amount of theemployee’s accrued benefit as of anydate before normal retirement age,cannot be calculated prior to normalretirement age.

A frontloaded interest credit planthat specifies a variable outside indexfor use in determining the amount ofinterest credits must prescribe themethod for reflecting future interestcredits in the calculation of anemployee’s accrued benefit. In order tocomply with section 401(a)(25), themethod, including actuarial assump-tions, if applicable, must precludeemployer discretion. Further, in deter-mining the amount of an employee’saccrued benefit, a forfeiture, within themeaning of §1.411(a)–4T, will result ifthe value of future interest credits isprojected using a rate that understatesthe value of those credits or if the planby its terms reduces the interest rate orrate of return used for projecting futureinterest credits. A forfeiture in violationof section 411(a) also will occur if, indetermining the amount of anemployee’s accrued benefit, future in-terest credits are not taken into account(i.e., there is no projection of futureinterest credits) and this has the sameeffect as using a rate that understatesthe value of future interest credits.

2. Calculation of the present valueof the employee’s accruedbenefit

In the case of a frontloaded interestcredit plan, a single sum distributionoptional form of benefit equal to thehypothetical account balance will sat-isfy section 417(e) only if the singlesum distribution is not less than thepresent value of the employee’s ac-crued benefit calculated in accordancewith the applicable interest rate andmortality table under section 417(e)(3).As noted above, the amount of theemployee’s accrued benefit must bedetermined using a method of reflect-ing future interest credits that satisfiessection 401(a)(25) and that does notcreate a forfeiture in violation ofsection 411(a).

3. Situations in which the presentvalue will not exceed thehypothetical account balance

A frontloaded interest credit planmight provide that the amount of


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interest credits is determined using avariable interest rate or rate of returnthat, by its terms, is no greater than theapplicable interest rate under section417(e)(3). For example, a plan that hasbeen amended to comply with thechanges to section 417(e) made by theRetirement Protection Act of 1994(RPA ’94) might provide that interestcredits are determined using the lesserof the current rate of interest on 30-year Treasury securities or the currentyield on 1-year Treasury ConstantMaturities. Under such a plan, futureinterest credits can, without violatingsection 411(a), be projected to normalretirement age using a rate that is nogreater than the applicable interest rateunder section 417(e)(3). In that case,assuming that the annuity conversionfactor under the plan is not less thanthe annuity conversion factor deter-mined using the applicable interest rateand mortality table under section417(e)(3), the employee’s hypotheticalaccount balance will equal or exceedthe present value of the employee’saccrued benefit determined in accord-ance with section 417(e). Thus, a singlesum distribution equal to theemployee’s hypothetical account bal-ance under such a plan will satisfysections 411(a) and 417(e).

In other cases, a single sum distribu-tion equal to an employee’s hypotheti-cal account balance will satisfy sections417(e) and 411(a) if (a) the annuityconversion factor is not less than theannuity conversion factor determinedusing the applicable interest rate andmortality table under section 417(e)(3),(b) under the method for reflectingfuture interest credits in the calculationof an employee’s accrued benefit, thefuture interest credits are projectedusing a rate that is no greater that theapplicable interest rate under section417(e)(3), and (c) this projection doesnot result in a forfeiture in violation ofsection 411(a).

By contrast, if the interest rate orrate of return under the plan used indetermining the amount of interestcredits is high relative to the section417(e)(3) interest rate, the plan cannotdistribute a single sum equal to theemployee’s hypothetical account bal-ance and satisfy sections 411(a) and417(e). If such a plan provided that, in

determining an employee’s accruedbenefit, the rate used for projecting theamount of future interest credits was nogreater than the interest rate undersection 417(e)(3), the projection wouldresult in a forfeiture. Alternatively, ifthe plan provided for interest credits tobe projected using a rate that exceededthe section 417(e) interest rate but thenprovided for the benefit to be dis-counted using that same higher rate, theplan would violate section 417(e).

C. Effect of defining the accruedbenefit as the hypotheticalaccount balance

The requirements referred to in thisnotice apply even in the case of a cashbalance plan that defines an employee’saccrued benefit as an amount equal tothe employee’s hypothetical accountbalance. Section 411(a)(7) defines theaccrued benefit in terms of benefitspayable under the plan at normalretirement age. In a cash balance plan,for an employee who has not attainednormal retirement age, whether theemployee’s retirement benefit payableat normal retirement age under the planincludes benefits attributable to futureinterest credits depends on whetherthose benefits have accrued.

If benefits attributable to futureinterest credits have accrued, and thosebenefits are disregarded when benefitscommence before normal retirementage, the plan has effectively condi-tioned entitlement to the benefits at-tributable to those future interestcredits on the employee not taking adistribution prior to normal retirementage. Pursuant to §1.411(a)–4T, a rightthat is conditioned under the plan on asubsequent forbearance is a forfeitableright. Accordingly, conditioning entitle-ment to benefits on the employee nottaking a distribution violates the non-forfeitability requirements of section411(a).

Alternatively, if the benefits attribu-table to future interest credits have notaccrued and will accrue only as of thelater dates when the interest credits areincluded in the hypothetical accountbalance, the timing of those lateraccruals must be taken into account inapplying the accrual rules of section

411(b)(1). As a result, such a plantypically will not satisfy those accrualrules.

IV. Description of proposal

A. Variable interest rates that maybe assumed for these purposesto be no greater than the 30-year Treasury interest rate

It is anticipated that the regulationswill set forth a list of standard indicesand associated margins for use withfrontloaded interest credit plans thatprovide interest credits equal to theproduct of the balance of the hypotheti-cal account and the current value of avariable index. (It is anticipated thatthis proposal will apply without regardto how frequently the rate used todetermine interest credits is com-pounded.) Under a frontloaded interestcredit plan that, for this purpose,specifies a variable index equal to thePBGC immediate rate or the sum ofone of the standard indices and amargin not greater than the specifiedmargin associated with that standardindex, no impermissible forfeiturewould result from projecting that therate used to determine future interestcredits for an employee is no greaterthan the applicable interest rate undersection 417(e)(3), as amended by RPA’94. Thus, if such a plan has beenamended to comply with the changes tosection 417(e) made by RPA ’94, theemployee’s entire accrued benefit couldbe distributed in the form of a singlesum distribution equal to theemployee’s hypothetical account bal-ance without violating section 411(a) or417(e), provided that the plan providesthe appropriate annuity conversionfactors.

The table below provides the pro-posed list of standard indices andassociated margins. The discount rateson Treasury bills and the yields onTreasury Constant Maturities are therates reported in the Federal ReserveBulletin, and the Consumer Price Indexis CPI-U, as reported by the Depart-ment of Labor. Authority would bedelegated to the Commissioner to ap-prove other indices and associatedmargins.


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Standard Index AssociatedMargin

The discount rate on 3-month Treasury Bills 175 basispoints

The discount rate on 6-month Treasury Bills or 12-month Treasury Bills

150 basispoints

The yield on 1-year Treasury Constant Maturities 100 basispoints

The yield on 2-year Treasury Constant Maturities or3-year Treasury Constant Maturities

50 basispoints

The yield on 5-year Treasury Constant Maturities or7-year Treasury Constant Maturities

25 basispoints

The yield on 10-year Treasury Constant Maturities orany longer period Treasury Constant Maturities

0 basis points

Annual rate of change of the Consumer Price Index 3 percentagepoints

In developing these standard indicesand associated margins, the Service andTreasury took into account the histor-ical relationship between each of theseindices and the rate of interest on 30-year Treasury securities.

Under the proposal, if a frontloadedinterest credit plan specified a variableindex for use in determining theamount of interest credits that is equalto the sum of a standard index (listedin the table above) and a margin thatexceeds the specified margin associatedwith that standard index, distribution ofa single sum equal to the employee’shypothetical account balance would notsatisfy both section 411(a) and section417(e). If such a plan provided that therate used for projecting the amount offuture interest credits was no greaterthan the interest rate under section417(e)(3), the projection would resultin a forfeiture. Alternatively, if afrontloaded interest credit plan pro-vided for interest credits to be pro-jected using a rate that exceeded thesection 417(e) interest rate but thenprovided for the benefit to be dis-counted using that same higher rate, theplan would violate section 417(e).

B. Guidance will be prospective

The anticipated regulations will beeffective prospectively. In addition, forplan years beginning before the regula-tions are effective, a frontloaded inter-

est credit plan would not be disquali-fied for failing to satisfy section 411(a)or 417(e) if the amount of the distribu-tion satisfied those sections based on areasonable, good-faith interpretation ofthe applicable provisions of the Code,taking into account pre-existing guid-ance. For this purpose, plans thatcomply with the guidance in this noticeare deemed to be applying a reason-able, good faith interpretation.

V. Comments

The Service and Treasury invitecomments on the proposal described inthis notice. Comments are specificallyrequested on other indices for whichguidance may be appropriate and onguidance that would facilitate the tran-sition to use of an approved index(including possible guidance with re-spect to the application of section411(d)(6)). Any suggestion of an index(and associated margin, if any) shouldinclude an analysis of the historicalrelationship between the index and therate for 30-year Treasury securities.Comments should be submitted in writ-ing, referencing Notice 96–7, and ad-dressed to—

Associate Chief Counsel(Employee Benefits and Exempt

Organizations) CC:EBEOATTN: Cash Balance Guidance

Room 5214 Internal Revenue Service1111 Constitution Ave., N.W.Washington, D.C. 20224

VI. Drafting information

The principal author of this notice isMarjorie Hoffman of the Office of theAssociate Chief Counsel (EmployeeBenefits and Exempt Organizations).For further information, contact Ms.Hoffman at 202-622-6030 (not a toll-free number).

Weighted Average Interest RateUpdate

Notice 96–9

Notice 88–73 provides guidelines fordetermining the weighted average inter-est rate and the resulting permissiblerange of interest rates used to calculatecurrent liability for the purpose of thefull funding limitation of § 412(c)(7) ofthe Internal Revenue Code as amendedby the Omnibus Budget ReconciliationAct of 1987 and as further amended bythe Uruguay Round Agreements Act,Pub. L. 103–465 (GATT).

The average yield on the 30-yearTreasury Constant Maturities for De-cember 1995 is 6.06 percent.

The following rates were determinedfor the plan years beginning in themonth shown below.


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Month YearWeightedAverage

90% to 108%Permissible

Range

90% to 110%Permissible

Range

January 1996 7.05 6.35 to 7.62 6.35 to 7.76


The principal author of this notice isDonna Prestia of the Employee PlansDivision. For further information re-garding this notice, call (202) 622-6076between 2:30 and 4:00 p.m. Easterntime (not a toll-free number). Ms.Prestia’s number is (202) 622-7377(also not a toll-free number).


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Part IV. Items of General Interest

Notice of Proposed Rulemaking

Disclosure of Returns and ReturnInformation to Procure Property orServices for Tax AdministrationPurposes

DL–1–95


ACTION: Notice of proposed rule-making.

SUMMARY: These proposed regula-tions relate to the disclosure of returnsand return information in connectionwith the procurement of property andservices for tax administration pur-poses. The amendments would author-ize the Department of Justice, includingoffices of United States Attorneys, tomake such disclosures. Current dis-closure authority within the Departmentof Justice rests only with the TaxDivision. The amendments also reflecta change to the law made by theOmnibus Budget Reconciliation Act of1990 regarding the type of servicesabout which disclosures may be made.

DATES: Comments and requests for apublic hearing must be received byMarch 14, 1996.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (DL–01–95), 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 (DL–01–95),Courier’s Desk, Internal Revenue Serv-ice, 1111 Constitution Avenue NW.,Washington, DC.

FOR FURTHER INFORMATIONC O N T A C T : D o n a l d S q u i r e s ,202-622-4570 (not a toll-free number).


Background

Section 6103(n) of the Internal Reve-nue Code (Code) authorizes the dis-closure of returns and return informa-

tion, pursuant to regulations prescribedby the Secretary of the Treasury, ‘‘tothe extent necessary in connection withthe processing, storage, transmission,and reproduction of such returns andreturn information, the programming,maintenance, repair, testing, and pro-curement of equipment, and the provid-ing of other services, for purposes oftax administration.’’

Existing regulations promulgated un-der this section prescribe the personswho may make such disclosures, thesituations under which such disclosuresmay be made and the notification andsafeguarding procedures to be followedwhen such disclosures are made.Among the persons who may makesuch disclosures are officers andemployees of the Tax Division of theDepartment of Justice. The amend-ments would authorize such disclosuresby the Department of Justice (notsolely the Tax Division) to third partieswho provide services for tax admin-istration purposes under the conditionsand restrictions of the regulations. Theamendments would provide that, for thepurpose of this section, the ‘‘Depart-ment of Justice’’ includes offices ofUnited States Attorneys.

The amendments would also conformthe regulation to the language ofsection 6103(n), which was amendedby the Omnibus Budget ReconciliationAct of 1990 to clarify that the dis-closures authorized by this sectionincluded those in connection with ‘‘theproviding of other services’’ (i.e. serv-ices other than those related to themechanical processing of returns andreturn information).

Explanation of Provisions

As currently written, 26 CFR301.6103(n)–1 authorizes the Tax Divi-sion of the Department of Justice,among other entities and individuals, tomake disclosures of returns and returninformation pursuant to section 6103(n)of the Internal Revenue Code. Thisauthority allows the Tax Division todisclose tax information incident to itscontracts to private parties for, amongother purposes, automated litigationsupport services.

The Department of Justice has indi-cated its intention to establish anexpanded automated tracking system

for all monetary judgments in favor ofthe United States, which will beoperated by a private company undercontract with the Department. Althoughthe majority of tax cases are handledby the Tax Division, there are severalUnited States Attorneys’ offices thatalso have litigation responsibility in thecivil tax area. In addition, the TaxDivision refers some judgments in taxcases to the United States Attorneys forcollection. Existing regulations argua-bly would not permit these offices,which are technically not part of theTax Division, to disclose tax informa-tion incident to their inclusion of taxjudgments in the automated trackingsystem.

The proposed amendment would au-thorize the Department of Justice,including offices of United States At-torneys, to make disclosures to procureproperty and services for tax admin-istration purposes. Any such dis-closures will be made under the sameconditions and restrictions already setforth in the existing regulations. Bydefinition, any office within the De-partment of Justice without tax admin-istration duties will not have occasionor authority pursuant to these regula-tions to make such disclosures.

The proposed amendment would alsoauthorize disclosures in connectionwith ‘‘the providing of other services,’’i.e., services not related to the strictmechanical processing or manipulationof tax returns or return information.This would conform the regulations tothe language of the statute, as amendedby the Omnibus Budget ReconciliationAct of 1990 (Public Law 101–508, 104Stat. 1388–353).

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 has alsobeen 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, this notice of proposed rulemak-


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ing will be submitted to the ChiefCounsel for Advocacy of the SmallBusiness Administration for commenton its 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 that are submitted timely(preferably a signed original and eightcopies) to the IRS. All comments willbe available for public inspection andcopying. A public hearing may bescheduled if requested in writing byany person that timely submits writtencomments. If a public hearing isscheduled, notice of the date, time, andplace for the hearing will be publishedin the Federal Register.


The principal author of these pro-posed regulations is Donald Squires,Office of the Assistant Chief Counsel(Disclosure Litigation), IRS. However,other personnel from the IRS, Depart-ment of Justice and Treasury Depart-ment participated in their development.

* * * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 301 isproposed to be amended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citationfor part 301 continues to read in part asfollows:

Authority: 26 U.S.C. 7805 * * *Paragraph 2. Section 301.6103(n)–1

is amended as follows:1. The first sentence of paragraph

(a) introductory text is amended byremov ing the l anguage ‘ ‘TaxDivision,’’.

2. Paragraph (a)(2) is amended byremoving the language ‘‘or to’’.

3. Paragraph (a)(2) is furtheramended by adding the language ‘‘orthe providing of other services,’’ im-mediately following the text ‘‘otherproperty,’’.

4. The concluding text followingparagraph (a)(2) is amended by remov-ing the language ‘‘Tax Division,’’.

5. The second sentence of paragraph(d) introductory text is amended byremov ing the l anguage ‘ ‘TaxDivision,’’.

6. Paragraph (d)(2) is amended byremov ing the l anguage ‘ ‘TaxDivision,’’.

7. Paragraph (e)(1) is amended byremoving the language ‘‘, and’’ at theend of the paragraph and adding asemicolon in its place.

8. Paragraph (e)(2) is amended byremoving the period at the end of theparagraph and adding ‘‘; and’’ in itsplace.

9. Paragraph (e)(3) is added.10. The authority citation imme-

diately following §301.6103(n) isremoved.

The addition reads as follows:

§301.6103(n)–1 Disclosure of returnsand return information in connectionwith procurement of property andservices for tax administrationpurposes.

* * * * * *

(e) * * * (3) The term Department of Justice

includes offices of the United StatesAttorneys.


Internal Revenue.

(Filed by the Office of the Federal Register onDecember 14, 1995, 8:45 a.m., and publishedin the issue of the Federal Register forDecember 15, 1995, 60 F.R. 64402)

Notice of Proposed Rulemaking andNotice of Public Hearing

Source of Income from Sales ofInventory and Natural ResourcesProduced in One Jurisdiction andSold in Another Jurisdiction

INTL–3–95


ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations governing thesource of income from sales of naturalresources or other inventory producedin the United States and sold in aforeign country or produced in aforeign country and sold in the UnitedStates. This document affects personswho produce natural resources or otherinventory in the United States and sellin a foreign country, or produce naturalresources or other inventory in aforeign country and sell in the UnitedStates. This document also providesnotice of a public hearing on theseproposed regulations.

DATES: Written comments and out-lines of oral comments to be presentedat the public hearing scheduled forApril 10, 1996, at 10 a.m. must bereceived by March 11, 1996.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (INTL–0003–95),Room 5228, Internal Revenue Service,POB 7604, Ben Franklin Station,Washington, DC 20044. In the alterna-tive, submissions may be hand deliv-ered between the hours of 8 a.m. and 5p.m. to: CC:DOM:CORP:R (INTL–0003–95), Courier’s Desk, InternalRevenue Service, 1111 ConstitutionAvenue NW., Washington, DC. Thepublic hearing will be held in the IRSAuditorium, Internal Revenue Building,1111 Consitution Avenue, NW., Wash-ington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the regula-tions, Anne Shelburne, (202) 622-3880;concerning submissions and the hear-ing, Ms. Christina Vasquez, (202)622-7180 (not toll-free numbers).


Paperwork Reduction Act

The collection of information con-tained in this notice of proposedrulemaking has been submitted to theOffice of Management and Budget(OMB) for review in accordance withthe Paperwork Reduction Act of 1995(44 U.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 Regulatory


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301996–24 I.R.B.

Affairs, 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 9,1996.

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 re-quirements are in proposed §§1.863–1(b)(6) and 1.863–3(e)(2). This infor-mation is required by the IRS tomonitor compliance with the federaltax rules for determining the source ofincome from the sale of natural re-sources or other inventory produced inthe United States and sold in a foreigncountry or produced in a foreigncountry and sold in the United States.The likely respondents are taxpayerswho produce natural resources or otherinventory in the United States and sellin a foreign country, or who producenatural resources or other inventory ina foreign country and sell in the UnitedStates. Responses to this collection ofinformation are required to properlydetermine the source of a taxpayer’sincome from such sales.

Books or records relating to a col-lection of information must be retainedas long as their contents may becomematerial in the administration of anyinternal revenue law. Generally, taxreturns and tax return information areconfidential, as required by 26 U.S.C.6103.Estimated total annual reporting bur-den: 1125 hours. The estimated annualburden per respondent varies from 1hour to 5 hours, depending on individ-ual circumstances, with an estimatedaverage of 2.6 hours.Estimated number of respondents: 425.Estimated annual frequency of re-sponses: One time per year.

Background

These proposed regulations containrules relating to the source of incomefrom the sale of certain natural re-sources and other inventory. Theseregulations are proposed to be effectivefor taxable years beginning 30 daysafter publication of final regulations.However, taxpayers may elect to applythese regulations for taxable yearsbeginning after July 11, 1995.

Explanation of provisions

I. Natural resources

A. Current regulations

Section 863 authorizes the Secretaryto promulgate regulations allocating orapportioning to sources within or with-out the United States all items of grossincome, expenses, losses, and deduc-tions other than those items specified insections 861(a) and 862(a).

Section 1.863–1 of the existing reg-ulations contains rules for determiningthe source of income derived from thesale of certain natural resources. Gener-ally, under paragraph (b)(1) of thoseregulations, income derived from theownership or operation of any farm,mine, oil or gas well, other naturaldeposit, or timber located within theUnited States and from the sale by theproducer of the products within orwithout the United States ordinarilymust be included in gross income fromsources within the United States. How-ever, if a taxpayer can show to thesatisfaction of the District Director that,due to peculiar conditions of produc-tion and sale or for other reasons, notall of the gross income derived there-from should be allocated to sourceswithin the United States, the source ofthe income generally is determinedunder the 50/50 method described in§1.863–3(b)(2) Example 2. The regula-tions do not define ‘‘peculiar condi-tions of production and sale.’’ Inaddition, §1.863–1(b)(2) permits theCommissioner to make an allocation orapportionment that more clearly reflectsthe proper source of a taxpayer’sincome, if the Commissioner deter-mines that the application of paragraph(b)(1) does not result in the properallocation or apportionment of income.Similar rules apply in the case ofnatural resources produced without theUnited States and sold within theUnited States. See §1.863–6. Thus,income from the sale of such productsordinarily will be allocated entirely toforeign sources.

B. Issues under current regulations

The IRS and Treasury have reex-amined the existing regulations undersection 863 regarding natural resourcesand arrived at several conclusions.First, certain ambiguities in existing§1.863–1 should be clarified. For ex-

ample, the regulation does not definethe term ‘‘peculiar conditions of pro-duction and sale,’’ and there is vir-tually no authoritative guidance as tothe scope of that term. To the extentthat ‘‘peculiar conditions of productionand sale’’ is defined narrowly, theregulation may lead to inappropriateresults when determining the source ofincome from the sale of processednatural resources. For example, if aU.S. corporation harvests timber tomanufacture furniture for export, all ofits income may be from sources withinthe United States. However, if anotherU.S. corporation purchases cut timberto manufacture furniture for exportfrom the United States, one-half of thattaxpayer’s income may be from sourceswithout the United States under the50/50 method.

Second, the interaction of the exist-ing regulations and the recently-issuedconsolidated return regulations maycause inappropriate sourcing results.On July 11, 1995, the IRS and Treas-ury issued final regulations under§1.1502–13 [TD 8597 [1995–32 I.R.B.6] (60 FR 36671)], treating members ofa U.S. consolidated group as a singleentity for purposes of determining thesource of a taxpayer’s income. The IRSand Treasury understand that inap-propriate results may occur when thecurrent section 863 regulations areapplied to certain consolidated groupson a single entity basis. For example, aU.S. corporation that is a member of aconsolidated group may extract oilabroad. The oil is then transported tothe United States where it is refined byanother member of the consolidatedgroup. It is sold in the United Statesthrough other members of the consoli-dated group. Under §1.1502–13 of theconsolidated return rules, the consoli-dated group is treated as a singleentity, and the source of income fromthe sale of oil must be determinedunder section 863. Because the consoli-dated group refines the oil outside thecountry of extraction, it may be thatpeculiar conditions of production andsale exist, and the exclusive sourcingrules of paragraph (b)(1) do not apply.Thus, the taxpayer would generallydetermine the source of its incomeunder the 50/50 method described in§1.863–3(b)(2) Example 2. Under thismethod, 50 percent of the consolidatedgroup’s income would be U.S. sourceincome based on the place of sale.However, this calculation may unders-tate the appropriate amount of the


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taxpayer’s foreign source income be-cause the value of the oil as extractedmay represent more than 50 percent ofthe total value of the product that isfinally sold in the United States. Thepreamble to the regulations under§1.1502–13 indicated that the IRS andTreasury would consider amending theregulations under section 863 to ad-dress these concerns.

Accordingly, the IRS and Treasuryare issuing proposed regulations undersection 863 to clarify ambiguities in theexisting regulation and to address con-cerns created by the new §1.1502–13regulations.

C. Proposed regulations

Section 1.863–1(b) provides specialrules for determining the source ofincome from the sale of productsderived from the ownership or opera-tion of any farm, mine, oil or gas well,other natural deposit, or timber, withinthe United States and the sale of theseproducts without the United States. Theproposed regulations also provide spe-cial rules for determining the source ofincome from the sale of productsderived from the ownership or opera-tion of any farm, mine, oil or gas well,other natural deposit, or timber, withoutthe United States and the sale of theseproducts within the United States. Theexport terminal rule of paragraph (b)(1)provides that the source of grossreceipts from the sale of such productsequal to the fair market value of theproduct immediately prior to export(referred to in the proposed regulationsas the export terminal) is determinedaccording to where the farm, mine, oilor gas well, other natural deposit ortimber is located. Separate rules areprovided for determining the source ofany gross receipts in excess of the fairmarket value of the product at theexport terminal. Paragraph (b)(2)provides an exception to the approachof paragraph (b)(1) where, prior toexport, the taxpayer engages in sub-stantial production activities in additionto activities related to the ownership oroperation of a farm, mine, oil or gaswell, other natural deposit, or timber.

1. Export terminal rule

Under the export terminal rule ofparagraph (b)(1), gross receipts derivedfrom the ownership or operation of anyfarm, mine, oil or gas well, other

natural deposit, or timber, and sale ofthe products derived therefrom, areallocated between sources within andwithout the United States based on thefair market value of the product at theexport terminal. The export terminal isthe last point from which the product issent from the United States to a foreigncountry or the last point from whichgoods are sent from a foreign countryto the United States. For example, if aU.S. corporation extracts oil in oneforeign country, sends the crude oil toa port in a second foreign country viapipeline, and delivers the oil to a U.S.refinery by ship, the export terminalwould be the port in the second foreigncountry where the crude oil was loadedonto the ship.

Under the export terminal rule, thesource of gross receipts equal to thefair market value of the product at theexport terminal is determined by thelocation of the farm, mine, well,deposit, or uncut timber. The source ofgross receipts in excess of the fairmarket value of the product at theexport terminal (excess gross receipts)is determined according to whether thetaxpayer engages in any additionalproduction activity following export. Ataxpayer will be treated as performingproduction activities in addition to theactivities of owning or operating afarm, mine, oil or gas well, othernatural deposit, or timber based on theprinciples of §1.954–3(a)(4). However,activities that prepare the natural re-source itself for export, including thosethat are designed to facilitate thetransportation of the natural resource toor from the export terminal, will not beconsidered additional production ac-tivities. Thus, §1.863–1 Example 2illustrates that liquefaction of naturalgas would not constitute additionalproduction activities. In addition, ac-tivities such as delimbing and debark-ing trees, sorting grain, and treatingand stabilizing oil would ordinarily notconstitute additional production ac-tivities. In contrast, the transformationof timber into furniture is not done toprepare the natural resource itself forexport, and would constitute additionalproduction activity. Production ac-tivities are defined in §1.863–1(b)(3)(i).

If no additional production occursfollowing export, paragraph (b)(1)(i)requires that the source of the excessgross receipts be determined accordingto where the farm, mine, well, deposit,or uncut timber is located.

However, under paragraph (b)(1)(ii),if the taxpayer engages in additionalproduction activities after the exportterminal and outside the country ofsale, the source of excess gross receiptsis determined under the rules of§1.863–3. For example, if a U.S.corporation extracts oil in a foreigncountry, refines the oil in the UnitedStates, and sells the refined product inanother foreign country, the source ofgross receipts in excess of the fairmarket value of the product when it isexported from the first foreign countrymust be determined under one of thethree methods described in §1.863–3(i.e., the 50/50 method as described in§1.863–3(b)(1), the IFP method de-scribed in §1.863–3(b)(2), or, if permit-ted by the District Director, the booksand records method as described in§1.863–3(b)(3)).

In any case not described in eitherparagraph (b)(1)(i) or (ii) of the pro-posed regulations, the source of theexcess gross receipts is determinedaccording to the place of sale pursuantto paragraph (b)(1)(iii). This rule wouldapply, for example, in the case wherethe taxpayer engages in additional pro-duction activities in the country of sale.

Paragraph (b)(1) addresses the con-cerns of U.S. corporations involved inthe production of natural resourcesabroad and the application of the new§1.1502–13 consolidated return regula-tions, by allowing them to treat thevalue of the natural resources at thepoint of export as income from sourceswhere the farm, mine, well, deposit, oruncut timber is located. This rule hasno effect on the rules governing foreignoil and gas extraction income undersection 907(c)(1).

On November 28, 1995, the TenthCircuit affirmed the Tax Court decisionin Phillips Petroleum v. Comm’r, 97T.C. 30 (1991), which held existing§1.863–1(b)(1) invalid to the extent itallocates income from the sale of U.S.natural resources solely to sourceswithin the United States. Phillips Pe-troleum v. Comm’r, No. 94–9021 (10thCir. Nov. 28, 1995). The IRS andTreasury will consider the implicationsof this decision when finalizing theseproposed regulations.

2. Additional production prior toexport terminal

Paragraph (b)(2) provides a specialrule for determining the source of in-


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come where a taxpayer performs sub-stantial additional production activitiesbefore the product leaves the exportterminal. Under paragraph (b)(2), thesource of gross receipts equal to thefair market value of the product priorto the additional production activities isbased on the location of the farm,mine, well, deposit, or uncut timber.The source of gross receipts in excessof the fair market value of the productsat the beginning of the additionalproduction activities is determined un-der the rules of §1.863–3.

3. Other rules

The proposed regulation containsrules for determining the fair marketvalue of relevant products. For thispurpose, fair market value depends onall of the facts and circumstances asthey exist relative to a party in anyparticular case. Thus, these rules fordetermining fair market value are con-sistent with the foreign oil and gasrules contained in §1.907(c)–1(b)(6). Inaddition, fair market value determina-tions must be consistent with pricescharged in sales, if any, to relatedparties in a transaction that is subject tosection 482. For example, if a memberof a U.S. consolidated group extractsnatural resources in a foreign countryand sells the natural resources toanother member of the same group atthe export terminal, the value of thenatural resources determined at theexport terminal should be the pricecharged by the producing member tothe purchasing member for purposes ofsection 482.

Under paragraph (b)(5), a taxpayer’sgross income from sources within orwithout the United States is determinedby reducing its gross receipts fromsources within or without the UnitedStates by the cost of goods soldproperly attributable to such grossreceipts. Under paragraph (c), a tax-payer’s taxable income from U.S. orforeign sources must be determinedunder the rules of §§1.861–8 through1.861–14T.

Under paragraph (b)(6), taxpayersmust fully explain the methodologyused, the facts describing substantialadditional production activities (if any),and the determination of fair marketvalue in a statement attached to thetaxpayer’s return. In addition, taxpayersmust provide such other information asis required by §1.863–3(e)(2).

Taxpayers may elect to apply therules of these regulations for taxableyears beginning after July 11, 1995.Otherwise, these regulations are effec-tive for taxable years beginning 30days after the publication of thisregulation as a final regulation.

II. Inventory other than naturalresources

A. Current regulations

Section 863 authorizes the Secretaryto promulgate regulations allocating orapportioning to sources within or with-out the United States all items of grossincome, expenses, losses, and deduc-tions other than those specified insections 861(a) and 862(a).

Section 1.863–3 of the current reg-ulations governs the source of incomefrom the sale of inventory produced (inwhole or in part) in the United Statesand sold in a foreign country, orproduced (in whole or in part) in aforeign country and sold in the UnitedStates (Section 863 Sales). Section1.863–3 provides three methods, setforth in the form of three examples, todetermine the source of income fromSection 863 Sales.

§1.861–3(b)(2) Example 1 of thecurrent regulations illustrates how anindependent factory or production price(IFP) applies to determine the incomeattributable to production (IFP method).An IFP generally is established if ataxpayer regularly sells part of itsoutput to wholly independent distribu-tors in such a way as to reasonablyreflect the income attributable to pro-duction activity. If an IFP exists,taxpayers must use the IFP method todetermine the income attributable toproduction activities in both the saleestablishing the IFP and in sales ofsimilar products. See Phillips Pe-troleum v. Comm’r, 97 T.C. 30 (1991),aff’d, No. 94–9021 (10th Cir. Nov. 28,1995); Rev. Rul. 88–73 (1988–2 C.B.173). Gross receipts in excess of theIFP are attributable to sales activity.Taxpayers can otherwise establish anIFP by showing to the satisfaction ofthe District Director that an IFP exists.Notice 89–10 (1989–1 C.B. 631) con-tains additional rules regarding theapplication of the IFP method. Section1.863–3(b)(2) Example 1 of the currentregulations does not provide explicitguidance as to how to determine thesource of income attributable to pro-

duction activities under the IFPmethod. However, the source of incomeattributable to sales activities is basedgenerally on where title to the inven-tory passes to the purchaser as definedin §1.861–7(c).

Section 1.863–3(b)(2) Example 2 ofthe current regulations divides a tax-payer’s income from Section 863 Salesequally between production activity andsales activity (50/50 method). Thesource of income attributable to pro-duction activity is based on the locationof the taxpayer’s property. The portionof this production income attributableto sources within the United States isdetermined by a fraction, the numeratorof which is the taxpayer’s propertylocated within the United States used toproduce income from Section 863Sales, and the denominator of which isthe taxpayer’s property both within theUnited States and within a foreigncountry used to produce income fromSection 863 Sales. The source of thetaxpayer’s income attributable to salesactivity is based on where title to theinventory passes to the purchaser asdefined in §1.861–7(c).

Section 1.863–3(b)(2) Example 3 ofthe current regulations allows a tax-payer to request permission from theDistrict Director to use the taxpayer’sbooks and records to allocate income tosources within and without the UnitedStates if those books reflect moreclearly than the other methods thetaxable income derived from sourceswithin the United States (books andrecords method).

B. Issues under current regulations

On July 12, 1995, the IRS andTreasury issued regulations under§1.1502–13, treating members of aconsolidated group as a single entityfor purposes of determining the sourceof a taxpayer’s income. The IRS andTreasury understand that the currentsection 863 regulations may raise ques-tions when applied to certain consoli-dated groups on a single entity basis.The preamble to the regulations under§1.1502–13 indicated that the IRS andTreasury would reevaluate part of theregulations under section 863. As partof this process, the IRS and Treasuryalso have reexamined the remainder ofthe existing section 863 regulations andhave concluded that several additionalchanges are necessary.

First, the existing regulations weredrafted more than 70 years ago, and


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have not been amended to reflect theevolution of business practices. As aresult, the regulations have been thesource of controversies in recent years.See Intel Corporation v. Comm’r, 100T.C. 39 (1993), aff’d, No. 94–70105(9th Cir. Oct. 16, 1995); PhillipsPetroleum v. Comm’r, 97 T.C. 30(1991), 101 T.C. 78, 104 (1993)(‘‘there have been no cases interpreting[the 50/50 method] and no administra-tive pronouncements regarding its ap-plication since the regulation was pro-mulgated in 1922 except for necessaryinferences to be drawn from Intel . . .’’),aff’d, No. 94–9021 (10th Cir. Nov. 28,1995). In part, these controversies maybe due to the structure of the currentregulations, which do not contain oper-ative rules to describe the methods ofallocating and apportioning income, butinstead rely on examples.

Second, the existing regulations raiseimportant administrative concerns. Forexample, the IFP method requires ananalysis of each of the taxpayer’s salestransactions to identify an IFP. If oneor more IFPs are so identified, asecond analysis is required of each ofthe taxpayer’s sales transactions toidentify which transactions are similarto the IFP sale. In some cases, thisprocess may require a review of amultitude of transactions. The IFPmethod may, therefore, be difficult forboth taxpayers and the government toapply. The existing 50/50 method alsopresents administrative concerns. Forexample, the 50/50 method may requirethe taxpayer to determine the fairmarket value of each of its assets at theend of every tax year. Taxpayers haveoften commented to the IRS about thedifficulties of determining the fairmarket value of their assets.

Third, the existing regulations resultin disparate treatment of similarlysituated taxpayers. Although an IFPmust be used under current rules if oneexists, the mandate applies only totaxpayers selling inventory to certainindependent distributors. Taxpayersselling exclusively to related parties arenot required to use the IFP methodsince the IRS may not establish an IFPbased on such sales. Instead, thesetaxpayers use the 50/50 method tosource their income from export sales.Thus, taxpayers selling inventory ex-clusively to related parties may bedeemed to generate far more foreignsource income than taxpayers selling aportion of their inventory to independ-

ent distributors, even though the twotaxpayers may perform the same func-tions. The IRS and Treasury believethat this differing treatment of similarlysituated taxpayers is not justified.

Fourth, the existing 50/50 methodcan result in apportionment of incomethat is inconsistent with the commonunderstanding of that method. The50/50 method is generally characterizedas a method that would source exportsales income one-half in the UnitedStates and one-half in a foreign coun-try. For example, in 1984 the TreasuryDepartment stated: ‘‘Generally, [in-come derived from manufacture andsale of property] is allocated one-halfon the basis of the place of manufac-ture and half on the basis of the placeof sale . . . ’’ Treasury Department, TaxReform for Fairness, Simplicity, andEconomic Growth, Nov. 1984 at 364.In addition, Congress understands the50/50 method to operate in this fashion.In 1986, the House, Senate and Con-ference Committees each stated: ‘‘[Un-der the existing 50/50 method], half ofsuch income generally is sourced in thecountry of manufacture, and half of theincome is sourced on the basis of theplace of sale’’. House Rep. No. 426,99th Cong. 1st Sess. 359 (1985); S.Rep. No. 313, 99th Cong. 2d Sess. 329(1986); H.R. Conf. Rep. No. 841, 99thCong. 2d Sess. II–595 (1986). The staffof the Joint Committee on Taxation hasreferred to the 50/50 method as the‘‘production/marketing split’’ andstated that under this method ‘‘50percent of such income generally isattributed to the place of production. . .’’ Staff of the Joint Comm. onTaxation, Factors Affecting Interna-tional Competitiveness of the UnitedStates 148 (1991).

The existing regulations may, how-ever, allow taxpayers to use the 50/50method to obtain results that areinconsistent with this common under-standing. Under the existing regula-tions, 50 percent of the income istreated as sales income and sourced onthe basis of title passage. The remain-ing 50 percent is treated as productionincome and sourced based on thelocation of assets. This half of theformula is not necessarily, however,limited to production assets. For exam-ple, goodwill and accounts receivablesare counted as assets in allocatingproduction income. The inclusion ofsales assets in the formula allocatingproduction income results in additional

income being allocated to sales ac-tivities. The contribution of the salesassets to sales income should be re-flected only in the 50 percent of theincome that is allocated to sales andsourced under title passage. Thus, theproduction income formula should onlytake into account assets directly in-volved in the production of inventory.

B. Proposed Regulations

1. Overview

Section 1.863–3 provides rules forallocating and apportioning incomefrom Section 863 Sales. Generally,§1.863–3(b) provides three methods fordetermining the amount of gross in-come attributable to production activityand the amount of gross incomeattributable to sales activity. The sourceof gross income attributable to eachactivity is then determined under therules of paragraph (c). Paragraph (d)provides rules to determine the sourceof taxable income. Reporting and elec-tion rules are set forth under paragraph(e) of the proposed regulations. Theproposed regulations reserve on para-graph (f) (prior paragraph (c)), dealingwith income partly from sources withina possession of the United States. TheIRS and Treasury solicit commentsfrom taxpayers regarding changes thatshould be made to new paragraph (f)(if any) to conform to the otherchanges in §1.863–3.

The proposed regulations generallyapply an aggregate approach in takinginto account a taxpayer’s interest in apartnership. The IRS and Treasurysolicit comments on the appropriatetreatment of partnerships, includingwhether there should be special rulesfor limited partnerships, de minimisinterests in partnerships, and tieredpartnerships.

2. Methods to determine grossincome attributable to productionactivity and sales activity

Section 1.863–3 generally retains thethree methods of the current regulationsfor splitting income between productionand sales activity, with severalmodifications.

a. 50/50 method

The proposed regulations do notchange the allocation of half of the


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taxpayer’s income from Section 863Sales to production activity and half tosales activity. As described below, theproposed regulations modify and clarifythe determination of the location ofassets. In addition, paragraph (b)(1) ofthe proposed regulations makes the50/50 method the general rule todetermine the amount of income at-tributable to production and sales ac-tivities. The taxpayer, however, mayelect to apply the IFP method, de-scribed in paragraph (b)(2), or, with theconsent of the District Director, thebooks and records method, described inparagraph (b)(3).

b. IFP method

By making the IFP method elective,the proposed regulations significantlyreduce administrative burdens related toits application and eliminate any biasagainst taxpayers choosing to exportthrough independent distributors.

Under the proposed regulations, thetaxpayer may elect to apply the IFPmethod if it is able to establish an IFP.As in the current regulations, an IFP isfairly established by actual sales of thetaxpayer if the taxpayer regularly sellspart of its output to wholly independentdistributors or other selling concerns insuch a way as to reasonably reflect theincome attributable to production ac-tivity. Once the IFP is established, itcan be used to determine the amount ofincome attributable to production ac-tivity in other Section 863 Sales if theinventory sold in the other sales issubstantially similar in physical charac-teristics and function, and is sold at asimilar level of distribution as theinventory sold in a sale establishing anIFP. A sale will not be considered toestablish an IFP if sales activity for therelevant product is significant in rela-tion to all of the activities for thatproduct. The IRS and Treasury intendto supersede Notice 89–10 upon pub-lication of final regulations.

The proposed regulations would alsoeliminate the existing rule permittingtaxpayers to otherwise establish an IFPby showing to the satisfaction of theDistrict Director that a sale reasonablyreflecting the income attributable toproduction exists. This ‘‘otherwiseestablished’’ IFP is rarely, if ever,used. American Law Institute, Interna-tional Aspects of United States IncomeTaxation 31 (1987). The IRS andTreasury solicit comments from tax-

payers on the continued utility of theotherwise established IFP.

The proposed regulations omit thereference in the existing regulation to asales branch. A taxpayer may elect touse the IFP method even if it does notmaintain a sales branch in a foreigncountry.

c. Books and records method

The proposed regulations retain thebooks and records method of theexisting regulations, permitting tax-payers to request permission from theDistrict Director to use their books andrecords to determine the income at-tributable to production and sales ac-tivities. The District Director willconsider a taxpayer’s request if thetaxpayer maintains a detailed allocationof receipts and expenditures, clearlyreflecting the amount of income fromproduction and sales activities.

The books and records method israrely, if ever, used. American LawInstitute, International Aspects ofUnited States Income Taxation, 31(1987). The IRS and Treasury solicitcomments from taxpayers on the con-tinued utility of the books and recordsmethod, or whether the books andrecords method should be replaced byanother method of economic sourcing.

3. Determination of source of grossincome

Unlike the current regulations whichprovide specific rules for determiningthe source of income attributable toproduction activity and sales activityonly for purposes of the 50/50 method,the proposed regulations adopt rulesapplicable to each of the three methods.Under the proposed regulations, oncegross income attributable to productionactivity and sales activity has beendetermined under one of the methodsdescribed in paragraph (b), the sourceof the income is determined separatelyfor each type of income under para-graph (c). The source of gross incomeattributable to production activity isdetermined under paragraph (c)(1),based on the location of productionassets, and the source of gross incomeattributable to sales activity is deter-mined under paragraph (c)(2) based onthe location of the sale.

a. Source of gross income attributableto production activity

The proposed regulations generallyadopt the approach set forth in thecurrent regulations under the 50/50method, but with modifications andclarifications.

Under §1.863–3(c)(1), the source ofincome attributable to production ac-tivity is determined based on thelocation of the taxpayer’s productionassets. Thus, if a taxpayer manufacturesinventory exclusively in the UnitedStates, all of its income attributable toproduction activity will be consideredfrom sources within the United States.The rules described below are intendedto apply only to taxpayers that produceinventory both within and without theUnited States.

Under the proposed regulations, thesource of a taxpayer’s income fromproduction activities is determined byreference to the taxpayer’s productionassets, instead of all of its assets thatproduce income from Section 863Sales. The IRS and Treasury believethat this change is appropriate to ensurethat the source of production incomecorresponds to the location of produc-tion activity. Production assets aredefined to include tangible and intang-ible property owned by the taxpayerthat are used to produce inventory soldin Section 863 Sales. Any property notdirectly used to produce inventory isexcluded. Thus, accounts receivableand marketing intangibles are excludedbecause they are sales assets and notproduction assets. Other assets ex-cluded because they do not directlyproduce inventory are transportationassets, warehouses, inventory, work-in-process, raw materials, cash, invest-ment assets, and stock of a subsidiary.Working capital is excluded to avoiduncertainty arising from determinationsof the appropriate amount of workingcapital. In addition, working capitalwould generally be apportioned prorata in accordance with a taxpayer’sproduction assets. As under the currentregulations, leased assets are excluded;only assets owned by the taxpayer areincluded.

The proposed regulations also pro-vide specific rules for determiningwhere a production asset is located.Tangible assets are located where theassets are used by the taxpayer. Intang-ible assets are located where thetangible production assets to whichthey relate are located.

Where production takes place bothwithin the United States and within a


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foreign country, the regulations apply aproperty fraction to apportion produc-tion income between U.S. and foreignsources. The taxpayer’s foreign sourcegross production income is determinedby multiplying its gross productionincome by a fraction, the numerator ofwhich is the taxpayer’s productionassets located within a foreign country,and the denominator of which is thetaxpayer’s production assets locatedboth within the United States andwithin a foreign country.

The current regulations generallyinclude assets in the property formulaat fair market value. The proposedregulations modify this rule to providethat an asset must be included in theproperty formula at its average adjustedbasis (see section 1011). The IRS andTreasury believe that this change toadjusted basis will significantly sim-plify the application of this formula forboth taxpayers and the IRS.

The proposed regulations also con-tain more detailed guidance than thecurrent regulations for determining theamounts to be included in the propertyfraction. For example, the proposedregulations would require that if theasset is used to produce inventory soldin Section 863 Sales and is also used toproduce other property, the basis of theasset must be prorated to account forsuch other uses.

The purpose of the property formulais to attribute the source of thetaxpayer’s production income to thelocation of its production activity. TheIRS and Treasury are concerned thattaxpayers may be able to affect thelocation of assets without changing thesitus of economic activity. Accordingly,comments are solicited about whetherthere should be rules to prevent manip-ulation of this formula in a mannerinconsistent with the purpose of theregulation.

b. Source of gross incomeattributable to sales activity

The source of gross income that isattributable to sales activity is deter-mined under paragraph (c)(2). As underthe current regulations, the source ofthis income is generally based onwhere a sale takes place. See §1.861–7(c). Accordingly, if a U.S. producersells its goods in a foreign country, theincome attributable to sales activity isgenerally foreign source income.

The proposed regulation would retainthe language of the existing regulation,

which only applies to sales that occurwithin a foreign country. The IRS andTreasury solicit comments as towhether the regulations should beexpanded to apply to sales made ininternational waters or in space. TheIRS and Treasury are concerned, how-ever, that if such a change were made,a U.S. seller may try to use the 50/50method by selling inventory in interna-tional waters to U.S. purchasers, evenwhen the goods were destined for theUnited States. In view of these con-cerns, the IRS and Treasury also solicitcomments as to whether the regulationsshould provide an exception to the titlepassage rule in the case of sales ofgoods produced in the United Statesand destined for use in the UnitedStates.

4. Determination of source of taxableincome

Once the amount and source of grossincome are determined under paragraph(c), taxpayers then determine thesource of their taxable income. Underproposed paragraph (d), taxpayers mustallocate or apportion under §§1.861–8through 1.861–14T the amounts ofexpenses, losses and other deductionsto its gross income determined undereach method described in paragraph(b). In the case of amounts of ex-penses, losses and other deductionsallocated or apportioned to gross in-come determined under the IFP methodor the books and records method, thetaxpayer must apply the rules of§§1.861–8 through 1.861–14T to allo-cate or apportion these amounts be-tween gross income from sourceswithin and without the United States.For amounts of expenses, losses andother deductions allocated or appor-tioned to gross income determinedunder the 50/50 method, taxpayersmust apportion expenses and otherdeductions pro rata based on therelative amounts of U.S. and foreignsource gross income. These rules areconsistent with existing regulations.

5. Election and reporting rules

Under paragraph (e) of the proposedregulations, a taxpayer must use the50/50 method unless the taxpayer electsto use the IFP method, or elects theBooks and Records method. The tax-payer makes the election by using the

method on its tax return. Once the taxreturn is filed, the election is notrevokable for that year. In addition,that method must be used in latertaxable years unless the Commissioneror her delegate consents to a change.Permission to change methods in lateryears will not be withheld unless thechange would result in a substantialdistortion of the source of income.

A taxpayer must fully explain themethodology used in paragraph (b), andthe amount of income allocated orapportioned to U.S. and foreign sourcesin a statement attached to its tax return.

6. Conforming changes

The proposed regulations make con-forming changes to §1.863–2 of theregulations. Under §1.863–2, the tax-payer may elect to apply the 50/50method to its net taxable income,instead of its gross income as specifiedin §1.863–3. The proposed regulationsclarify that income derived from thepurchase of personal property within apossession of the United States and itssale within the United States is subjectto these regulations only to the extent itis not excluded by §1.936–6(a)(5),Q&A 7. Other changes to §1.863–2were intended to conform the languageof the regulation to the changes in§1.863–3.

Finally, the IRS and Treasury willreconsider the existing regulationsissued under section 863 regardingtransportation services and cable andtelegraph services in light of the TaxReform Act of 1986. Accordingly, thetransportation rules contained in§1.863–4 will only apply to servicesthat are not described in section 863(c)and the telegraph and cable rulescontained in §1.863–5 are deleted. Noinference is intended as to whetherportions of the existing regulationscontinued to apply after the TaxReform Act of 1986.

7. Proposed effective dates

These regulations are effective fortaxable years beginning 30 days afterpublication of final regulations. How-ever, taxpayers may apply these regula-tions for taxable years beginning afterJuly 11, 1995, and before 30 days afterpublication of these regulations as finalregulations.


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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 is herebycertified that these regulations will nothave a significant economic impact ona substantial number of small entities.Accordingly, a regulatory flexibilityanalysis is not required. Pursuant tosection 7805(f) of the Internal RevenueCode, this notice of proposed rulemak-ing will be submitted to the ChiefCounsel for Advocacy of the SmallBusiness Administration for commenton its impact on small business.

Comments and Public Hearing

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 has been scheduledfor April 10, 1996, at 10 a.m. in theIRS Auditorium. Because of accessrestrictions, visitors will not be admit-ted beyond the Internal Revenue Build-ing lobby more than 15 minutes beforethe hearing starts.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons that wish to present oralcomments at the hearing must submitwritten comments and an outline oftopics to be discussed and the time tobe devoted to each topic (signedoriginal and eight (8) copies) by March11, 1996.

A period of 10 minutes will beallotted to each person for makingcomments.

An agenda showing the schedulingof the speakers will be prepared afterthe deadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal author of these regula-tions is Anne Shelburne, Office ofAssociate Chief Counsel (Interna-tional). However, other personnel from

the IRS and Treasury Departmentparticipated in their development.

* * * * * *

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 is amended by adding entriesin numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.863–1 also issued under 26

U.S.C. 863.Section 1.863–2 also issued under 26




U.S.C. 863. * * *Par. 2. Sections 1.863–0 is added to

read as follows:

§1.863–0 Table of contents.

This section lists captions containedin §§1.863–1, 1.863–2, and 1.863–3.

§1.863–1 Allocation of gross income.

(a) In general.(b) Natural resources.(1) In general.(2) Additional production prior to

export terminal.(3) Definitions.(i) Production activity.(ii) A d d i t i o n a l p r o d u c t i o n

activities.(iii) Export terminal.(4) Determination of fair market

value.(5) Determination of gross income.(6) Tax return disclosure.(7) Examples.(c) Determination of taxable

income.(d) Effective dates.

§1.863–2 Allocation andapportionment of taxable income.

(a) Determination of taxableincome.

(b) Determination of source of tax-able income.

(c) Effective dates.

§1.863–3 Allocation andapportionment of income from certainsales of inventory.

(a) In general.(b) Methods to determine income

attributable to production ac-tivity and sales activity.

(1) 50/50 method.(i) Determination of gross income.(ii) Example.(2) IFP method.(i) Establishing an IFP.(ii) Applying the IFP method.(iii) Determination of gross income.(iv) Examples.(3) Books and records method. (c) Determination of the source of

gross income from productionactivity and sales activity.

(1) Income attributable to produc-tion activity.

(i) Production only within theUnited States or only withinforeign countries.

(A) Source of income.(B) Definition of production assets.(C) Location of production assets.(ii) Production both within the

United States and within for-eign countries.

(A) Source of income.(B) Adjusted basis of production

assets.(iii) Examples.(2) Income attributable to sales

activity.(d) Determination of source of tax-

able income.(e) Election and reporting rules.(1) Elections under paragraph (b)

of this section.(2) Disclosure on tax return.(f) Income partly from sources

within a possession of theUnited States. [Reserved]

(g) Effective dates.

Par. 3. Sections 1.863–1, 1.863–2,and 1.863–3 are revised to read asfollows:

§1.863–1 Allocation of gross income.

(a) In general. Items of gross in-come other than those specified insection 861(a) and section 862(a) willgenerally be separately allocated tosources within or without the United


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States. See §1.863–2 for alternatemethods to determine the income fromsources within or without the UnitedStates in the case of items specified in§1.863–2(a). See also sections 865(b)and 865(e)(2).

(b) Natural resources—(1) In gen-eral. Except to the extent provided inparagraph (b)(2) of this section, grossreceipts from the sale outside theUnited States of products derived fromthe ownership or operation of any farm,mine, oil or gas well, other naturaldeposit, or timber within the UnitedStates, are allocated between sourceswithin or without the United Statesbased on the fair market value of theproduct at the export terminal (asdefined in paragraph (b)(3)(iii) of thissection). Except to the extent providedin paragraph (b)(2) of this section,gross receipts from the sale within theUnited States of products derived fromthe ownership or operation of any farm,mine, oil or gas well, other naturaldeposit, or timber outside the UnitedStates are also allocated betweensources within or without the UnitedStates based on the fair market value ofthe product at the export terminal. Thesource of gross receipts equal to thefair market value of the product at theexport terminal will be from sourceswhere the farm, mine, well, deposit, oruncut timber is located. The source ofgross receipts from the sale of theproduct in excess of its fair marketvalue at the export terminal (excessgross receipts) will be determined asfollows—

(i) If the taxpayer does not engagein additional production activities (asdefined in paragraph (b)(3)(ii) of thissection), excess gross receipts will befrom sources where the farm, mine,well, deposit, or uncut timber islocated;

(ii) If the taxpayer engages in addi-tional production activities subsequentto shipment from the export terminaland outside the country of sale, thesource of excess gross receipts must bedetermined under §1.863–3. For pur-poses of applying §1.863–3, only pro-duction assets used in additional pro-duction activity subsequent to theexport terminal are taken into account;or

(iii) In all other cases, excess grossreceipts will be from sources within thecountry of sale, as described in §1.861–7(c). This paragraph (b)(1)(iii) applies,for example, to a taxpayer that engages

in additional production activities in thecountry of sale.

(2) Additional production prior toexport terminal. Notwithstanding anyother provision of this section, grossreceipts from the sale of productsderived by a taxpayer who performsadditional production activities as de-fined in paragraph (b)(3)(ii) of thissection before the relevant product isshipped from the export terminal areallocated between sources within andwithout the United States based on thefair market value of the product imme-diately prior to the additional produc-tion activities. The source of grossreceipts equal to the fair market valueof the product immediately prior to theadditional production activities will befrom sources where the farm, mine,well, deposit, or uncut timber is lo-cated. The source of gross receiptsfrom the sale of the product in excessof the fair market value immediatelyprior to the additional production ac-tivities must be determined under§1.863–3. For purposes of applying§1.863–3, only production assets usedin the additional production activitiesare taken into account.

(3) Definitions—(i) Production ac-tivity. For purposes of this section,production activity means an activitythat creates, fabricates, manufactures,extracts, processes, cures, or ages in-ventory. See §1.864–1.

(ii) Additional production activities.For purposes of this section, additionalproduction activities are substantialproduction activities performed by thetaxpayer in addition to activities fromthe ownership or operation of any farm,mine, oil or gas well, other naturaldeposit, or timber. Whether a taxpayerperforms such additional productionactivities will be determined under theprinciples of §1.954–3(a)(4). However,in no case will activities that preparethe natural resource itself for export,including those that are designed tofacilitate the transportation of the natu-ral resource to or from the exportterminal, be considered additional pro-duction activities for purposes of thissection.

(iii) Export terminal. Where thefarm, mine, well, deposit, or uncuttimber is located without the UnitedStates, the export terminal will be thefinal point in a foreign country fromwhich goods are shipped from a foreigncountry to the United States. Where thefarm, mine, well, deposit, or uncut

timber is located within the UnitedStates, the export terminal will be thefinal point in the United States fromwhich goods are shipped from theUnited States to a foreign country. Theexport terminal is determined withoutregard to any contractual terms agreedto by the taxpayer and without regardto whether there is an actual sale of theproducts at the export terminal.

(4) Determination of fair marketvalue. For purposes of this section, fairmarket value depends on all of thefacts and circumstances as they existrelative to a party in any particularcase. Where the products are sold to arelated party in a transaction subject tosection 482, the determination of fairmarket value under this section must beconsistent with the arm’s length pricedetermined under section 482.

(5) Determination of gross income.To determine the amount of a tax-payer’s gross income from sourceswithin or without the United States, thetaxpayer’s gross receipts from sourceswithin or without the United Statesdetermined under this paragraph (b)must be reduced by the cost of goodssold properly attributable to grossreceipts from sources within or withoutthe United States.

(6) Tax return disclosure. A tax-payer that determines the source of itsincome under this paragraph (b) shallattach a statement to its return explain-ing the methodology used to determinefair market value under paragraph(b)(4) of this section, and explainingany additional production activities (asdefined in paragraph (b)(3)(ii) of thissection) performed by the taxpayer. Inaddition, the taxpayer must providesuch other information as is requiredby §1.863–3.

(7) Examples. The following exam-ples illustrate the rules of this para-graph (b):

Example 1. No additional production. USMines, a U.S. corporation, extracts coal in theUnited States and, without substantial additionalproduction, sells the coal in a foreign country.Under §1.863–1(b) and (b)(1)(i), all of USMines’ income will be from sources within theUnited States.

Example 2. Scope of additional production. USGas, a U.S. corporation, extracts natural gaswithin the United States, and transports thenatural gas to a U.S. port where it is liquified inpreparation for shipment. The liquified naturalgas is then transported via freighter and soldwithout additional production activities in aforeign country. Liquefaction of natural gas isnot an additional production activity becauseliquefaction prepares the natural gas for transpor-


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tation from the export terminal. Therefore, under§1.863–1(b) and (b)(1)(i), all of US Gas’ incomewill be from sources within the United States.

Example 3. Sale in third country. US Gold, aU.S. corporation, mines gold in country X,produces gold jewelry in the United States, andsells the jewelry in country Y. Assume that thefair market value of the gold at the exportterminal in country X is $40, and that US Goldultimately sells the gold jewelry in country Y for$100. Under §1.863–1(b), $40 of US Gold’sgross receipts will be allocated to sourceswithout the United States. Under §1.863–1(b)(1)(ii), the source of the remaining $60 ofgross receipts will be determined under §1.863–3. If US Gold applies the 50/50 methoddescribed in §1.863–3, $20 of cost of goods soldis properly attributable to activities subsequent tothe export terminal, and all of US Gold’sproduction assets subsequent to the exportterminal are located in the United States, then$20 of gross income will be allocated to sourceswithin the United States and $20 of gross incomewill be allocated to sources without the UnitedStates.

Example 4. Production in country of sale. USOil, a U.S. corporation, extracts oil in country X,transports the oil via pipeline to the exportterminal in country Y, refines the oil in theUnited States, and sells the refined product in theUnited States to unrelated persons. Assume thatthe fair market value of the oil at the exportterminal in country Y is $80, and that US Oilultimately sells the refined product for $100.Under §1.863–1(b)(1), $80 of US Oil’s grossreceipts will be allocated to sources without theUnited States, and under §1.863–1(b)(1)(iii) theremaining $20 of gross receipts will be allocatedto sources within the United States.

Example 5. Additional production prior toexport. US Furniture, a U.S. corporation, cutstrees in the United States, converts the trees intolumber, uses the lumber to manufacture furniturein the United States, and sells the furniture inanother country. Assume that the fair marketvalue of the trees when the conversion intolumber begins is $40, and that US Furnitureultimately sells the furniture for $100. Becausethe conversion of the trees into lumber is anadditional production activity within the UnitedStates within the meaning of §1.863–1(b)(3)(ii),the source of US Furniture’s income will bedetermined under §1.863–1(b)(2). Thus, $40 ofUS Furniture’s gross receipts will be allocated tosources within the United States. The source ofthe remaining $60 of gross receipts will bedetermined under §1.863–3. If US Furnitureapplies the 50/50 method described in §1.863–3(b)(1), $20 of cost of goods sold is properlyattributable to the additional production activity,and all of US Furniture’s production assets usedin the additional production activity are locatedin the United States, then $20 of gross incomewill be allocated to sources within the UnitedStates and $20 of gross income will be allocatedto sources without the United States.

(c) Determination of taxable income.The taxpayer’s taxable income fromsources within or without the UnitedStates will be determined under therules of §§1.861–8 through 1.861–14Tfor determining taxable income fromsources within the United States.

(d) Effective dates. The rules of thissection will apply to taxable years

beginning 30 days after publication ofthese regulations as final regulations.However, taxpayers may apply therules of this section for taxable yearsbeginning after July 11, 1995, andbefore 30 days after publication ofthese regulations as final regulations.For years beginning before 30 daysafter publication of these regulations asfinal regulations, see §1.863–1 (ascontained in 26 CFR part 1 revised asof April 1, 1995).

§1.863–2 Allocation andapportionment of taxable income.

(a) Determination of taxable income.Section 863(b) provides an alternatemethod for determining taxable incomefrom sources within the United Statesin the case of gross income derivedfrom sources partly within and partlywithout the United States. Under thismethod, taxable income is determinedby deducting from such gross incomethe expenses, losses, or other deduc-tions properly apportioned or allocatedthereto and a ratable part of any otherexpenses, losses, or deductions thatcannot definitely be allocated to someitem or class of gross income. Theincome to which this section applies(and that is treated as derived partlyfrom sources within and partly fromsources without the United States) willconsist of gains, profits, and income—

(1) From certain transportation orother services rendered partly withinand partly without the United States tothe extent not within the scope ofsection 863(c) or other specific provi-sions of this title;

(2) From the sale of inventory prop-erty (within the meaning of section865(i)) produced (in whole or in part)by the taxpayer in the United Statesand sold in a foreign country orproduced (in whole or in part) by thetaxpayer in a foreign country and soldin the United States; or

(3) Derived from the purchase ofpersonal property within a possessionof the United States and its sale withinthe United States, to the extent notexcluded from the scope of these regu-lations under §1.936–6(a)(5), Q&A 7.

(b) Determination of source of tax-able income. Income treated as derivedfrom sources partly within and partlywithout the United States under para-graph (a) of this section may beallocated to sources within and withoutthe United States pursuant to §1.863–1

or apportioned to such sources inaccordance with the methods describedin other regulations under section 863.To determine the source of certaintypes of income described in paragraph(a)(1) of this section, see §1.863–4. Todetermine the source of gross incomedescribed in paragraph (a)(2) of thissection, see §1.863–3. However, theprinciples of §1.863–3(b)(1) and (c)may be applied to determine the sourceof taxable income from sales of inven-tory property. To determine the sourceof income described in paragraph (a)(3)of this section, see §1.863–3(f).

(c) Effective dates. This section willapply to taxable years beginning 30days after publication of these regula-tions as final regulations. However,taxpayers may apply the rules of thissection for taxable years beginningafter July 11, 1995, and before 30 daysafter publication of these regulations asfinal regulations. For years beginningbefore 30 days after publication ofthese regulations as final regulations,see §1.863–2 (as contained in 26 CFRpart 1 revised as of April 1, 1995).

§1.863–3 Allocation andapportionment of income from certainsales of inventory.

(a) In general. This section appliesto determine the source of incomederived from the sale of inventoryproperty (inventory) produced (inwhole or in part) by a taxpayer withinthe United States and sold within aforeign country, or produced (in wholeor in part) by a taxpayer in one ormore foreign countries and sold withinthe United States (Section 863 Sales).For purposes of this section, a tax-payer’s production activity includesproduction activities conducted bymembers of the same affiliated groupas defined under section 1504(a). Ataxpayer’s production activity also in-cludes production activities conductedthrough a partnership of which thetaxpayer is a partner either directly orthrough one or more partnerships. Ataxpayer subject to this section mustdivide gross income from Section 863Sales between production activity andsales activity using one of the methodsdescribed in paragraph (b) of thissection. The source of gross incomefrom production activity and from salesactivity must then be determined underparagraph (c) of this section. Taxableincome from Section 863 Sales is


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determined under paragraph (d) of thissection. Paragraph (e) of this sectiondescribes the rules for electing themethods described in paragraph (b) ofthis section and the information that ataxpayer must disclose on a tax return.Paragraph (f) of this section applies todetermine the source of certain incomederived from a possession of theUnited States. Paragraph (g) of thissection provides effective dates for therules in this section. Once a taxpayerhas elected a method described inparagraph (b) of this section, thetaxpayer must separately apply thatmethod to Section 863 Sales in theUnited States and to Section 863 Salesin foreign countries. In addition, thetaxpayer must apply the rules ofparagraphs (c) and (d) of this sectionby aggregating all Section 863 Sales towhich a method described in paragraph(b) of this section applies. See section865(i)(1) for the definition of inventoryproperty; §1.861–7(c) for the time andplace of sale. See also section865(e)(2).

(b) Methods to determine incomeattributable to production activity andsales activity—(1) 50/50 method—(i)Determination of gross income. Gener-ally, gross income from Section 863Sales will be apportioned betweenproduction activity and sales activityunder the 50/50 method as described inthis paragraph (b)(1). Under the 50/50method, one-half of the taxpayer’sgross income will be considered in-come attributable to production activityand the source of that income will bedetermined under the rules of para-graph (c)(1) of this section. The re-maining one-half of such gross incomewill be considered income attributableto sales activity and the source of thatincome will be determined under therules of paragraph (c)(2) of this sec-tion. In lieu of the 50/50 method, thetaxpayer may elect to determine thesource of income from Section 863Sales under the IFP method describedin paragraph (b)(2) of this section or,with the consent of the District Direc-tor, the books and records methoddescribed in paragraph (b)(3) of thissection.

(ii) Example. The following exampleillustrates the rules of this paragraph(b)(1):

Example. 50/50 method. (i) P, a U.S. corpora-tion, produces widgets in the United States. Psells the widgets for $100 to D, an unrelatedforeign distributor, in another country. P’s cost

of goods sold is $40. Thus, P’s gross income is$60.

(ii) Pursuant to the 50/50 method, one-half ofP’s gross income, or $30, is considered incomeattributable to production activity, and one-halfof P’s gross income, or $30, is consideredincome attributable to sales activity.

(2) IFP method—(i) Establishing anIFP. A taxpayer may elect to allocategross income earned from productionactivity and sales activity using theindependent factory price (IFP) methoddescribed in this paragraph (b)(2) if anIFP is fairly established. An IFP isfairly established based on a sale bythe taxpayer only if the taxpayerregularly sells part of its output towholly independent distributors orother selling concerns in such a way asto reasonably reflect the income earnedfrom production activity. A sale willnot be considered to fairly establish anIFP if sales activity by the taxpayerwith respect to that sale is significantin relation to all of the activities withrespect to that product.

(ii) Applying the IFP method. If thetaxpayer elects to use the IFP method,the amount of the gross sales priceequal to the IFP will be treated asattributable to production activity, andthe excess of the gross sales price overthe IFP will be treated as attributable tosales activity. If a taxpayer elects touse the IFP method, the IFP must beapplied to all Section 863 Sales ofinventory that are substantially similarin physical characteristics and function,and are sold at a similar level ofdistribution as the inventory sold in thesale fairly establishing an IFP. The IFPwill only be applied to sales that arereasonably contemporaneous with thesale fairly establishing the IFP. An IFPcannot be applied to sales in othergeographic markets if the markets aresubstantially different. The rules of thisparagraph will also apply to determinethe division of gross receipts betweenproduction activity and sales activity ina Section 863 Sale that itself fairlyestablishes an IFP. If the taxpayerelects to apply the IFP method, the IFPmethod must be applied to all sales forwhich an IFP may be fairly establishedfor that taxable year and each subse-quent taxable year. The taxpayer willapply either the 50/50 method de-scribed in paragraph (b)(1) of thissection or the books and recordsmethod described in paragraph (b)(3)of this section to any other Section 863Sale for which an IFP cannot be estab-lished or applied for each taxable year.

(iii) Determination of gross income.The amount of a taxpayer’s gross in-come from production activity is deter-mined by reducing the amount of grossreceipts from production activity by thecost of goods sold properly attributableto production activity. The amount of ataxpayer’s gross income from salesactivity is determined by reducing theamount of gross receipts from salesactivity by the cost of goods sold (ifany) properly attributable to sales ac-tivity. The source of gross income fromproduction activity is determined underthe rules of paragraph (c)(1) of thissection, and the source of gross incomefrom sales activity will be determinedunder the rules of paragraph (c)(2) ofthis section.

(iv) Examples. The following exam-ples illustrate the rules of this para-graph (b)(2):

Example 1. IFP method. (i) P, a U.S. producer,purchases cotton and produces cloth in theUnited States. P sells cloth in country X to D, aunrelated foreign clothing manufacturer, for$100. Cost of goods sold for cloth is $80,entirely attributable to production activity. P doesnot engage in significant sales activity in relationto its other activities in the sales to D. Underthese facts, the sale to D fairly establishes an IFPof $100. Assume that P elects to use the IFPmethod. Accordingly, $100 of the gross salesprice is treated as attributable to productionactivity, and no amount of income from this saleis attributable to sales activity. After reducing thegross sales price by cost of goods sold, $20 ofthe gross income is treated as attributable toproduction activity ($100-$80).

(ii) P also sells cloth in country X to A, aunrelated foreign retail outlet, for $110. BecauseP elected the IFP method and the cloth issubstantially similar to the cloth sold to D, theIFP fairly established in the sales to D must beused to determine the amount attributable toproduction activity in the sale to A. Accordingly,$100 of the gross sales price is treated asattributable to production activity and $10($110-$100) is attributable to sales activity. Afterreducing the gross sales price by cost of goodssold, $20 of the gross income is treated asattributable to production activity ($100-$80) and$10 is attributable to sales activity.

Example 2. Scope of IFP Method. (i) USComanufactures three dissimilar products. USCoelects to apply the IFP method. In year 1, an IFPcan be established for sales of product X, but notfor products Y and Z. In year 2, an IFP cannotbe established for any of USCo’s products. Inyear 3, an IFP can be established for products Xand Y, but not for product Z.

(ii) In year 1, USCo must apply the IFPmethod to sales of product X. In year 2, althoughUSCo’s IFP election remains in effect, USCo isnot required to apply the IFP election to anyproducts. In year 3, USCo is required to applythe IFP method to sales of products X and Y.

(3) Books and records method. Ataxpayer may elect to determine the


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amount of its gross income from Sec-tion 863 Sales that is attributable toproduction and sales activities for thetaxable year based upon its books ofaccount if it has received in advancethe permission of the District Directorhaving audit responsibility over its taxreturn. The taxpayer must establish tothe satisfaction of the District Directorthat the taxpayer, in good faith andunaffected by considerations of taxliability, will regularly employ in itsbooks of account a detailed allocationof receipts and expenditures whichclearly reflects the amount of thetaxpayer’s income from production andsales activities. If a taxpayer receivespermission to apply the books andrecords method, but does not complywith a material condition set forth bythe District Director, the District Direc-tor may, in its discretion, revokepermission to use the books andrecords method. The source of grossincome treated as attributable to pro-duction activity under this method maybe determined under the rules ofparagraph (c)(1) of this section, and thesource of gross income attributable tosales activity will be determined underthe rules of paragraph (c)(2) of thissection.

(c) Determination of the source ofgross income from production activityand sales activity—(1) Income attribu-table to production activity—(i) Pro-duction only within the United Statesor only within foreign countries—(A)Source of income. Where the taxpayer’sproduction assets are located only with-in the United States or only within aforeign country, the income attributableto production activity is sourced wherethe taxpayer’s production assets arelocated. For rules regarding the sourceof income when production assets arelocated both within the United Statesand within one or more foreign coun-tries, see paragraph (c)(1)(ii) of thissection. For purposes of this section,production activity means an activitythat creates, fabricates, manufactures,extracts, processes, cures, or ages in-ventory. See §1.864–1.

(B) Definition of production assets.For purposes of this section, productionassets include only tangible and intang-ible assets owned by the taxpayer thatare directly used by the taxpayer toproduce inventory described in para-graph (a) of this section. Productionassets do not include assets that are notdirectly used to produce inventory

described in paragraph (a) of thissection. Thus, production assets do notinclude such assets as accounts receiv-ables, intangibles not related to produc-tion of inventory (e.g., marketing intan-gibles, including trademarks andcustomer lists), transportation assets,warehouses, the inventory itself, rawmaterials, or work-in-process. In addi-tion, production assets do not includecash or other liquid assets (includingworking capital), investment assets,prepaid expenses, or stock of a subsidi-ary. A partner will be treated asowning its proportionate share of thepartnership’s production assets, deter-mined by reference to the partner’sdistributive share of partnership incomefor the year attributable to such produc-tion assets.

(C) Location of production assets.For purposes of this section, a tangibleproduction asset will be consideredlocated where the asset is physicallylocated. An intangible production assetwill be considered located where thetangible production assets owned bythe taxpayer to which it relates arelocated.

(ii) Production both within theUnited States and within foreigncountries—(A) Source of income.Where the taxpayer’s production assetsare located both within the UnitedStates and within one or more foreigncountries, income from sources withoutthe United States will be determined bymultiplying the income attributable toproduction activity by a fraction, thenumerator of which is the averageadjusted basis of production assets thatare located in one or more foreigncountries and the denominator of whichis the average adjusted basis of allproduction assets in foreign countriesand in the United States. The remainingincome is treated as from sourceswithin the United States.

(B) Adjusted basis of productionassets. For purposes of paragraph(c)(1)(ii)(A) of this section, the ad-justed basis of an asset is determinedunder section 1011. The average ad-justed basis is computed by averagingthe adjusted basis of the asset at thebeginning and end of the taxable year,unless by reason of material changesduring the taxable year such averagedoes not fairly represent the averagefor such year. In this event, the averageadjusted basis will be determined upona more appropriate basis. If productionassets are used to produce inventory

sold in Section 863 Sales and are alsoused to produce other property duringthe taxable year, the portion of itsadjusted basis that is included in thefraction described in paragraph(c)(1)(ii)(A) of this section will bedetermined under any method thatreasonably reflects the portion of theassets that produces inventory sold inSection 863 Sales. For example, theportion of such an asset that is includedin the formula may be determined bymultiplying the asset’s average adjustedbasis by a fraction, the numerator ofwhich is the gross receipts from salesof inventory from Section 863 Salesproduced by the asset, and the de-nominator of which is the gross re-ceipts from all property produced bythat asset. For purposes of this section,a taxpayer’s basis in production assetsheld through a partnership shall bedetermined by reference to the part-nership’s adjusted basis in its assets(including a partner’s special basisadjustment, if any, under section 743).

(iii) Examples. The following exam-ples illustrate the rules of this para-graph (c)(1):

Example 1. Source of production income. (i)A, a U.S. corporation, produces widgets that aresold both within the United States and within aforeign country. The initial manufacture of allwidgets occurs in the United States. The secondstage of production of widgets that are soldwithin a foreign country is completed within thecountry of sale. A’s U.S. plant and machinerywhich is involved in the initial manufacture ofthe widgets has an average adjusted basis of$200. A also owns warehouses used to storework-in-process. A owns foreign equipment withan average adjusted basis of $25. A’s grossreceipts from all sales of widgets is $100, and itsgross receipts from export sales of widgets is$25. Assume that apportioning average adjustedbasis using gross receipts is reasonable. AssumeA’s cost of goods sold from the sale of widgetsin the foreign countries is $13 and thus, its grossincome from widgets sold in foreign countries is$12. A uses the 50/50 method to divide its grossincome between production activity and salesactivity.

(ii) A determines its production gross incomefrom sources without the United States bymultiplying one-half of A’s $12 of gross incomefrom sales of widgets in foreign countries, or $6,by a fraction, the numerator of which is allrelevant foreign production assets, or $25, andthe denominator of which is all relevant produc-tion assets, or $75 ($25 foreign assets + ($200U.S. assets 3 $25 gross receipts from exportsales/$100 gross receipts from all sales)). There-fore, A’s gross production income from sourceswithout the United States is $2 ($6 3 ($25/$75)).

Example 2. Location of intangible property.Assume the same facts as Example 1, except thatA employs a patented process that applies onlyto the initial production of widgets. In computingthe formula used to determine the source of

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income from production activity, A’s patent, if ithas an average adjusted basis, would be locatedin the United States.

(2) Income attributable to sales ac-tivity. The source of the taxpayer’sincome that is attributable to salesactivity will be determined under theprovisions of §1.861–7(c).

(d) Determination of source of tax-able income. Once the source of grossincome has been determined underparagraph (c) of this section, thetaxpayer must properly allocate andapportion separately under §§1.861–8through 1.861–14T the amounts of itsexpenses, losses, and other deductionsto its respective amounts of grossincome from Section 863 Sales deter-mined separately under each methoddescribed in paragraph (b) of thissection. In addition, if the taxpayerdeducts expenses for research anddevelopment under section 174 thatmay be attributed to its Section 863Sales under §1.861–8(e)(3), the tax-payer must separately allocate or ap-portion expenses, losses, and otherdeductions to its respective amounts ofgross income from each relevant prod-uct category that the taxpayer uses inapplying the rules of §1.861–8(e)(3)-(i)(A). In the case of gross incomefrom Section 863 Sales determinedunder the IFP method or the books andrecords method, the rules of §§1.861–8through 1.861–14T must apply to prop-erly allocate or apportion amounts ofexpenses, losses and other deductionsallocated and apportioned to such grossincome between gross income fromsources within and without the UnitedStates. In the case of gross incomefrom Section 863 Sales determinedunder the 50/50 method, the amountsof expenses, losses, and other deduc-tions allocated and apportioned to suchgross income must be apportionedbetween sources within and without theUnited States pro rata based on therelative amounts of gross income from

sources within and without the UnitedStates determined under the 50/50method.

(e) Election and reporting rules—(1)Elections under paragraph (b) of thissection. If a taxpayer does not elect amethod specified in paragraph (b)(2) or(3) of this section, the taxpayer mustapply the method specified in para-graph (b)(1) of this section. Thetaxpayer may elect to apply the methodspecified in paragraph (b)(2) of thissection by using the method on atimely filed original return (includingextensions). A taxpayer may elect toapply the method specified in para-graph (b)(3) of this section by usingthe method on a timely filed originalreturn (including extensions), but onlyif the taxpayer has received permissionfrom the District Director to apply thatmethod. Once a method under para-graph (b) of this section has been used,that method must be used in latertaxable years unless the Commissionerconsents to a change. See e.g., para-graph (b)(2)(ii) Example 2 of thissection. However, if a taxpayer electsto change to or from the methodspecified in paragraph (b)(3) of thissection, the taxpayer must obtain per-mission from the District Directorinstead of the Commissioner. Permis-sion to change methods from one yearto another year will not be withheldunless the change would result in asubstantial distortion of the source ofthe taxpayer’s income.

(2) Disclosure on tax return. A tax-payer who uses one of the methodsdescribed in paragraph (b) of thissection must fully explain the meth-odology used, the circumstances justi-fying use of that method, the extentthat sales are aggregated, and theamount of income so allocated.

(f) Income partly from sourceswithin a possession of the UnitedStates. [Reserved]

(g) Effective dates. The rules ofparagraphs (a) through (e) of thissection will apply to taxable yearsbeginning 30 days after publication offinal regulations. However, taxpayersmay apply these regulations for taxableyears beginning after July 11, 1995,and before 30 days after publication ofthese regulations as final regulations.For years beginning before 30 daysafter the publication of these regula-tions as final regulations, see §1.863–3(as contained in 26 CFR part 1 revisedas of April 1, 1995).

Par. 4. Section 1.863–4 is amendedby revising the section heading andparagraph (a) to read as follows:

§1.863–4 Certain transportationservices.

(a) General. A taxpayer carrying onthe business of transportation service(other than an activity giving rise totransportation income described in sec-tion 863(c) or to income subject toother specific provisions of this title)between points in the United States andpoints outside the United States derivesincome partly from sources within andpartly from sources without the UnitedStates.

* * * * * *

§1.863–5 [Removed]

Par. 5. Section 1.863–5 is removed30 days after publication of this regula-tion as a final regulation.


Internal Revenue.

(Filed by the Office of the Federal Register onDecember 7, 1995, 2:00 p.m., and published inthe issue of the Federal Register for December11, 1995, 60 F.R. 63478)

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Announcement of the Disbarment, Suspension, or Consent to VoluntarySuspension of Attorneys, Certified Public Accountants, Enrolled Agents andEnrolled Actuaries From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regula-tions, Part 10, an attorney, certifiedpublic accountant, enrolled agent or en-rolled actuary, in order to avoid the in-stitution or conclusion of a proceedingfor his disbarment or suspension frompractice before the Internal RevenueService, may offer his consent tosuspension from such practice. TheDirector of Practice, in his discretion,may suspend an attorney, certifiedpublic accountant, enrolled agent orenrolled actuary in accordance with theconsent offered.

Attorneys, certified public account-ants, enrolled agents and enrolled actu-aries are prohibited in any Internal

Revenue Service matter from directlyor indirectly employing, acceptingassistance from, being employed by,or sharing fees with, any practi-tioner disbarred or suspended frompractice before the Internal RevenueService.

To enable attorneys, certified publicaccountants, enrolled agents and en-rolled actuaries to identify practitionersunder consent suspension from practicebefore the Internal Revenue Service,the Director of Practice will announcein the Internal Revenue Bulletin thenames and addresses of practitionerswho have been suspended from suchpractice, their designation as attor-

ney, certified public accountant, en-rolled agent or enrolled actuary anddate or period of suspension. This an-nouncement will appear in the weeklyBulletin at the earliest practicable dateafter such action and will continue toappear in the weekly Bulletins for fivesuccessive weeks or for as many weeksas is practicable for each attorney,certified public accountant, enrolledagent or enrolled actuary so suspendedand will be consolidated and publishedin the Cumulative Bulletin.

The following individuals have beenplaced under consent suspension frompractice before the Internal RevenueService:

Name Address Designation Date of Suspension

Isdaner, Thomas M. Crofton, MD CPA October 31, 1995 to October 30, 1996Cacciola, Marlene Pittsburg, CA Enrolled

AgentNovember 9, 1995 to May 8, 1996

Goldman, William D. Hot Springs, AR Attorney November 9, 1995 to November 8, 1996Armstrong, David L. Norman, OK CPA Indefinite from November 10, 1995Heckathorn, Ben Red Oak, TX CPA/

AttorneyIndefinite from November 28, 1995

Tisdel, Linda Seattle, WA EnrolledAgent

November 28, 1995 to May 27, 1997

Webb, Herbert M. Gainsville, FL Attorney December 21, 1995 to June 20, 1997Hipp, Robert J. Evanston, IL CPA December 28, 1995 to April 27, 1996Ruff, James M. Willmar, MN CPA January 1, 1996 to March 31, 1996Mulkerin, John J. Wheaton, IL CPA January 5, 1996 to April 4, 1996Redwitz, Robert Irvine, CA CPA February 15, 1996 to May 14, 1996Lind, Stanley L. Milwaukee, WI Attorney March 1, 1996 to February 28, 1997Dais, Robert E. Plano, TX CPA March 1, 1996 to February 28, 1997

Under Section 330, Title 31 of theUnited States Code, the Secretary ofthe Treasury, after due notice andopportunity for hearing, is authorizedto suspend or disbar from practicebefore the Internal Revenue Serviceany person who has violated the rulesand regulations governing the recogni-tion of attorneys, certified public ac-countants, enrolled agents or enrolledactuaries to practice before the InternalRevenue Service.

Attorneys, certified public account-ants, enrolled agents, and enrolledactuaries are prohibited in any InternalRevenue Service matter from directly

or indirectly employing, accepting as-sistance from, being employed by orsharing fees with, any practitionerdisbarred or under suspension frompractice before the Internal RevenueService.

To enable attorneys, certified publicaccountants, enrolled agents andenrolled actuaries to identify suchdisbarred or suspended practitioners,the Director of Practice will announcein the Internal Revenue Bulletin thenames and addresses of practitionerswho have been suspended from suchpractice, their designation as attorney,certified public accountant, enrolled

agent or enrolled actuary, and the dateof disbarment or period of suspension.This announcement will appear in theweekly Bulletin for five successiveweeks or as long as it is practicable foreach attorney, certified public account-ant, enrolled agent or enrolled actuaryso suspended or disbarred and will beconsolidated and published in theCumulative Bulletin.

After due notice and opportunityfor hearing before an administrativelaw judge, the following individualshave been disbarred from further prac-tice before the Internal RevenueService:

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Name Address Designation Effective Date

Muraskin, David New York, NY Attorney November 6, 1995Kelsey, Patrick Poolesville, MD CPA November 13, 1995

Announcement of the Expedited Suspension of Attorneys, Certified PublicAccountants, Enrolled Agents, and Enrolled Actuaries From Practice Before theInternal Revenue Service

Under title 31 of the Code of FederalRegulations, section 10.76, the Directorof Practice is authorized to immediatelysuspend from practice before the Inter-nal Revenue Service any practitionerwho, within five years, from the datethe expedited proceeding is instituted,(1) has had a license to practice as anattorney, certified public accountant, oractuary suspended or revoked forcause; or (2) has been convicted of anycrime under title 26 of the UnitedStates Code or, of a felony under title18 of the United States Code involvingdishonesty or breach of trust.

Attorneys, certified public account-ants, enrolled agents, and enrolled ac-tuaries are prohibited in any Internal

Revenue Service matter from directlyor indirectly employing, accepting as-sistance from, being employed by, orsharing fees with, any practitionerdisbarred or suspended from practicebefore the Internal Revenue Service.

To enable attorneys, certified publicaccountants, enrolled agents, and en-rolled actuaries to identify practitionersunder expedited suspension from prac-tice before the Internal Revenue Serv-ice, the Director of Practice will an-nounce in the Internal Revenue Bulletinthe names and addresses of practition-ers who have been suspended from suchpractice, their designation as attorney,certified public accountant, enrolled

agent, or enrolled actuary, and date orperiod of suspension. This announce-ment will appear in the weekly Bulletinat the earliest practicable date aftersuch action and will continue to appearin the weekly Bulletins for five succes-sive weeks or for as many weeks as ispracticable for each attorney, certifiedpublic accountant, enrolled agent, orenrolled actuary so suspended and willbe consolidated and published in theCumulative Bulletin.

The following individuals have beenplaced under suspension from practicebefore the Internal Revenue Service byvirtue of the expedited proceedingprovisions of the applicable regulations:

Name Address Designation Date of Suspension

Trebatch, Henry T. Great Neck, NY CPA Indefinite from November 6, 1995Roomberg, Alan Minersville, PA CPA Indefinite from November 10, 1995Elfenbein, Emanuel B. Miami, FL Enrolled

AgentIndefinite from November 27, 1995

Cerullo, Louis, J. Boca Raton, FL CPA Indefinite from November 27, 1995Fogel, Harold St. Paul, MN CPA Indefinite from December 13, 1995Glover, Paul L. Downers Grove, IL Attorney Indefinite from December 13, 1995Miller, John R. Akron, OH Attorney Indefinite from December 13, 1995Pofahl, Charles Dallas, TX Attorney Indefinite from December 18, 1995Walburg, Douglas Mahtomedi, MN CPA Indefinite from December 18, 1995Hibler, Thomas M. Plymouth, MI CPA/

AttorneyIndefinite from December 18, 1995

Oringer, Ronald Flanders, NJ CPA Indefinite from December 29, 1995Butcher, Frederick Stillwater, NJ CPA Indefinite from December 29, 1995Tokars, Frederic Atlanta, GA Attorney Indefinite from December 29, 1995Atkins, Sanford I. Moreland Hills, OH Attorney Indefinite from December 29, 1995

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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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Numerical Finding List1

Bulletins 1996–1 through 1996–5

Announcements:

96–1, 1996–2 I.R.B. 5796–2, 1996–2 I.R.B. 5796–3, 1996–2 I.R.B. 5796–4, 1996–3 I.R.B. 5096–5, 1996–4 I.R.B. 9996–6, 1996–5 I.R.B. 4396–7, 1996–5 I.R.B. 44

Notices:

96–2, 1996–2 I.R.B. 1596–1, 1996–3 I.R.B. 3096–4, 1996–4 I.R.B. 6996–6, 1996–5 I.R.B. 27

Proposed Regulations:

EE–20–95, 1996–5 I.R.B. 15EE–34–95, 1996–3 I.R.B. 49EE–35–95, 1996–5 I.R.B. 19EE–53–95, 1996–5 I.R.B. 23IA–33–95, 1996–4 I.R.B. 99INTL–9–95, 1996–5 I.R.B. 24

Revenue Procedures:

96–1, 1996–1 I.R.B. 896–2, 1996–1 I.R.B. 6096–3, 1996–1 I.R.B. 8296–4, 1996–1 I.R.B. 9496–5, 1996–1 I.R.B. 12996–6, 1996–1 I.R.B. 15196–7, 1996–1 I.R.B. 18596–8, 1996–1 I.R.B. 18796–9, 1996–2 I.R.B. 1596–10, 1996–2 I.R.B. 1796–11, 1996–2 I.R.B. 1896–12, 1996–3 I.R.B. 3096–13, 1996–3 I.R.B. 3196–14, 1996–3 I.R.B. 4196–15, 1996–3 I.R.B. 4196–16, 1996–3 I.R.B. 4596–17, 1996–4 I.R.B. 6996–18, 1996–4 I.R.B. 7396–19, 1996–4 I.R.B. 8096–20, 1996–4 I.R.B. 8896–21, 1996–4 I.R.B. 9696–22, 1996–5 I.R.B. 2796–23, 1996–5 I.R.B. 2796–24, 1996–5 I.R.B. 28

Revenue Rulings:

96–1, 1996–1 I.R.B. 796–2, 1996–2 I.R.B. 596–3, 1996–2 I.R.B. 14

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.

Revenue Rulings—Continued

96–6, 1996–2 I.R.B. 896–4, 1996–3 I.R.B. 1696–5, 1996–3 I.R.B. 2996–7, 1996–3 I.R.B. 1296–8, 1996–4 I.R.B. 6296–9, 1996–4 I.R.B. 596–10, 1996–4 I.R.B. 2796–11, 1996–4 I.R.B. 28

Treasury Decisions:

8630, 1996–3 I.R.B. 198631, 1996–3 I.R.B. 78632, 1996–4 I.R.B. 68633, 1996–4 I.R.B. 208634, 1996–3 I.R.B. 178635, 1996–3 I.R.B. 58636, 1996–4 I.R.B. 648637, 1996–4 I.R.B. 298638, 1996–5 I.R.B. 58639, 1996–5 I.R.B. 128640, 1996–2 I.R.B. 10

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Finding List of Current Action onPreviously Published Items1

Bulletins 1996–1 through 1996–5

*Denotes entry since last publication

Revenue Procedures:

65–17Modified by96–14, 1996–3 I.R.B. 41

66–49Modified by96–15, 1996–3 I.R.B. 41

88–32Obsoleted by96–15, 1996–3 I.R.B. 41

88–33Obsoleted by96–15, 1996–3 I.R.B. 41

89–19Superseded by96–17, 1996–4 I.R.B. 69

89–48Superseded in part by96–17, 1996–4 I.R.B. 69

91–22Modified by96–1, 1996–1 I.R.B. 8

91–22Amplified by96–13, 1996–3 I.R.B. 31




92–20Modified by96–1, 1996–1 I.R.B. 8

92–85Modified by96–1, 1996–1 I.R.B. 8



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 Procedures—Continued

Superseded by96–18, 1996–4 I.R.B. 73
















96–3Amplified by96–12, 1996–3 I.R.B. 30

Revenue Rulings:

66–307Obsoleted by96–3, 1996–2 I.R.B. 14

72–437Modified by96–13, 1996–3 I.R.B. 31

80–80Obsoleted by96–3, 1996–2 I.R.B. 14

82–80Modified by96–14, 1996–3 I.R.B. 41

92–19Supplemented in part96–2, 1996–2 I.R.B. 5

92–75Clarified by96–13, 1996–3 I.R.B. 31

95–10Supplemented and superseded by96–4, 1996–3 I.R.B. 16

95–11Supplemented and superseded by96–5, 1996–3 I.R.B. 29