Internal Revenue bulletinnone of these announcements are consolidated in the Cumu-lative Bulletins. The first Bulletin for each month includes a cumulative index for the matters published

INCOME TAX

Rev. Rul. 99–12, page 6.Fringe benefits aircraft valuation formula. For purposesof section 1.61–21(g) of the Income Tax Regulations, relat-ing to the rule for valuing noncommercial flights on em-ployer-provided aircraft, the Standard Industry Fare Level(SIFL) cents-per-mile rates and terminal charges in effect forthe first half of 1999 are set forth.

REG–104072–97, page 12.Proposed regulations under section 7701 of the Coderecharacterize, for tax purposes, financing arrangements in-volving fast-pay stock. A public hearing is scheduled for April8, 1999.

REG–106388–98, page 27.Proposed regulations under section 25A of the Code relateto the Hope Scholarship Credit and the Lifetime LearningCredit.

REG–106905–98, page 39.Proposed regulations under section 861 of the Code relateto the allocation of loss recognized on the disposition ofstock and other personal property. A public hearing isscheduled for May 26, 1999.

REG–114841–98, page 41.Proposed regulations under section 663 of the Code providethat substantively separate and independent shares of differ-ent beneficiaries are to be treated as separate estates forpurposes of computing distributable net income. A publichearing is scheduled for April 22, 1999.

Notice 99–14, page 7.This notice withdraws guidance proposed in April 1992under the passive foreign investment company (PFIC) rulesof section 1291 of the Code relating to a mark-to-market

election for regulated investment companies (RICs) that areshareholders of PFICs.

EMPLOYEE PLANS

REG–209103–89, page 10.Proposed regulations under section 79 of the Code relate tothe uniform premium rates used to calculate the cost ofgroup-term life insurance provided to employees. A publichearing is scheduled for May 6, 1999.

EXEMPT ORGANIZATIONSAnnouncement 99–20, page 53.A list is given of organizations now classified as private foun-dations.

ADMINISTRATIVE

Rev. Proc. 99–18, page 7.Election to treat certain debt substitutions as realiza-tion events. This procedure provides for an election thatwill allow taxpayers to treat a debt substitution, in certain cir-cumstances, as a realization event even though it does notresult in a significant modification under section 1.1001–3of the Income Tax Regulations.

REG–114664–97, page 21.Proposed regulations under section 42 of the Code relate tothe low-income housing credit including the procedures forcompliance monitoring by state and local housing agencies(Agencies), the requirements for making carryover alloca-tions, and the rules for correction of administrative errors oromissions by Agencies. A public hearing is scheduled forMay 27, 1999.

Internal Revenue

bbuulllleettiinnBulletin No. 1999–11

March 15, 1999

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page 58.Announcement Relating to Court Decisions begins on page 5.Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 56.

Continued on page 4

Mission of the Service

Provide America’s taxpayers top quality service by help-ing them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness toall.

2

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents of a permanent nature are consoli-dated semiannually into Cumulative Bulletins, which are soldon a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof 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, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemakingand the disbarment and suspension list included in this part,none of these announcements are consolidated in the Cumu-lative Bulletins.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a quarterly andsemiannual basis, and are published in the first Bulletin of thesucceeding quarterly and semiannual period, respectively.

3

Introduction

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

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

HIGHLIGHTSOF THIS ISSUE—ContinuedADMINISTRATIVE—ContinuedREG–119192–98, page 45.Proposed regulations under sections 1201 and 1204 of theInternal Revenue Restructing and Reform Act of 1998 relateto the adoption by the IRS of a balanced system to measureorganizational performance within the IRS. A public hearingis scheduled for May 13, 1999.

Announcement 99–21, page 55.This document provides notice of a public hearing on pro-posed regulations, REG–246256–96, 1998–34 I.R.B. 9,under section 4958 of the Code relating to the excise tax onexcess benefit transactions. The hearing is scheduled forMarch 16, 1999, at 1 p.m. (EDT), and will continue on March17, 1999, at 1 p.m., if necessary.

March 15, 1999 4 1999–11 I.R.B.

1999–11 I.R.B. 5 March 15, 1999

It is the policy of the Internal RevenueService to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on un-appealed issues decided adverse to thegovernment. Generally, an Action on De-cision is issued where its guidance wouldbe helpful to Service personnel workingwith the same or similar issues. Unlike aTreasury Regulation or a Revenue Ruling,an Action on Decision is not an affirma-tive statement of Service position. It is notintended to serve as public guidance andmay not be cited as precedent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action onDecision was issued. Caution should beexercised in extending the recommenda-tion of the Action on Decision to similarcases where the facts are different. More-over, the recommendation in the Actionon Decision may be superseded by newlegislation, regulations, rulings, cases, orActions on Decisions.

Prior to 1991, the Service published ac-quiescence or nonacquiescence only incertain regular Tax Court opinions. TheService has expanded its acquiescenceprogram to include other civil tax caseswhere guidance is determined to be help-ful. Accordingly, the Service now may ac-quiesce or nonacquiesce in the holdingsof memorandum Tax Court opinions, aswell as those of the United States DistrictCourts, Claims Court, and Circuit Courtsof Appeal. Regardless of the court decid-ing the case, the recommendation of anyAction on Decision will be published inthe Internal Revenue Bulletin.

The recommendation in every Actionon Decision will be summarized as ac-quiescence, acquiescence in result only,or nonacquiescence. Both “acquies-cence” and “acquiescence in result only”mean that the Service accepts the holdingof the court in a case and that the Servicewill follow it in disposing of cases withthe same controlling facts. However, “ac-quiescence” indicates neither approvalnor disapproval of the reasons assignedby the court for its conclusions; whereas,“acquiescence in result only” indicatesdisagreement or concern with some or all

of those reasons. Nonacquiescence signi-fies that, although no further review wassought, the Service does not agree withthe holding of the court and, generally,will not follow the decision in disposingof cases involving other taxpayers. In ref-erence to an opinion of a circuit court ofappeals, a nonacquiescence indicates thatthe Service will not follow the holding ona nationwide basis. However, the Servicewill recognize the precedential impact ofthe opinion on cases arising within thevenue of the deciding circuit.

The announcements published in theweekly Internal Revenue Bulletins areconsolidated semiannually and annually.The semiannual consolidation appears inthe first Bulletin for July and in the Cu-mulative Bulletin for the first half of theyear, and the annual consolidation ap-pears in the first Bulletin for the follow-ing January and in the Cumulative Bul-letin for the last half of the year.

The Commissioner ACQUIESCES inthe following decision:

Oshkosh Truck Corporation v. UnitedStates,123 F.3d 1477 (Fed. Cir. 1997)1

Announcement Relating to Court Decisions

1 Acquiescence in result only relating to whether the 12-percent excise tax imposed under I.R.C. section 4052 on the first retail sale of specially designed trucks to

the United States Army is computed by adding to the vehicle sales price a “presumed markup percentage” as decribed in subsections (b)(3) and (4) of section 4052

and Treas. Reg. Section 145.4052–1(d)(7).

Section 61.—Gross IncomeDefined

26 CFR 1.61–21: Taxation of fringe benefits.

Fringe benefits aircraft valuationformula. For purposes of section1.61–21(g) of the Income Tax Regula-tions, relating to the rule of valuing non-commercial flights on employer-providedaircraft, the Standard Industry Fare Level(SIFL) cents-per-mile rates and terminalcharges in effect for the first half of 1999are set forth.

Rev. Rul. 99–12For purposes of the taxation of fringe

benefits under section 61 of the InternalRevenue Code, section 1.61-21(g) of theIncome Tax Regulations provides a rulefor valuing noncommercial flights on em-ployer-provided aircraft. Section 1.61-21(g)(5) provides an aircraft valuationformula to determine the value of suchflights. The value of a flight is deter-mined under the base aircraft valuationformula (also known as the Standard In-dustry Fare Level formula or SIFL) by

multiplying the SIFL cents-per-mile ratesapplicable for the period during which theflight was taken by the appropriate air-craft multiple provided in section 1.61-21(g)(7) and then adding the applicableterminal charge. The SIFL cents-per-milerates in the formula and the terminalcharge are calculated by the Departmentof Transportation and are reviewed semi-annually.

The following chart sets forth the ter-minal charges and SIFL mileage rates:

March 15, 1999 6 1999–11 I.R.B.

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

Period During Which Terminal SIFL Mileagethe Flight Was Taken Charge Rates

1/1/99 – 6/30/99 $32.69 Up to 500 miles = $.1788 per mile

501-1500 miles = $.1364 per mile

Over 1500 miles = $.1311 per mile

DRAFTING INFORMATION

The principle author of this revenueruling is Kathleen Edmondson of the Of-fice of the Associate Chief Counsel (Em-ployee Benefits and Exempt Organiza-tions). For further information regardingthis revenue ruling, contact Ms. Edmond-son on (202) 622-6080 (not a toll-freecall).

Section 1001.—Determinationof Amount of and Recognition ofGain or Loss26 CFR 1.1001–3: Modification of debtinstruments.

The revenue procedure provides for an electionthat will allow taxpayers to treat a debt substitution,in certain circumstances, as a realization event eventhough it does not result in a significant modifica-tion under section 1.1001–3 of the Income Tax Reg-ulations. See Rev. Proc. 99–18, page 7.

Section 1275.—OtherDefinitions and Special Rules

26 CFR 1.1275–2: Special rules relating to debtinstruments.

The revenue procedure provides for an electionthat will allow taxpayers to treat a debt substitution,in certain circumstances, as a realization event eventhough it does not result in a significant modifica-tion under section 1.1001–3 of the Income Tax Reg-ulations. See Rev. Proc. 99–18, page 7.

1999–11 I.R.B. 7 March 15, 1999

Withdrawal of Guidance UnderSection 1291 Relating to Mark-to-Market Elections for RICs

Notice 99–14

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Partial withdrawal of proposedregulations.

SUMMARY: This document withdraws§1.1291–8 of the notice of proposed rule-making (INTL–941–86, 1992–1 C.B.1124) that was published in the FederalRegister on April 1, 1992, providingguidance under the passive foreign invest-ment company (PFIC) rules relating to themark to market election for regulated in-vestment companies (RICs) that areshareholders of PFICs.

DATES: Section 1.1291–8 of the pro-posed regulations published at 57 FR11024 (April 1, 1992) is withdrawn Feb-ruary 2, 1999.

FOR FURTHER INFORMATION CON-TACT: Robert Laudeman of the Office ofAssociate Chief Counsel (International),Internal Revenue Service, 1111 Constitu-tion Ave., NW, Washington, DC 20224.Telephone (202) 622-3840, not a toll-freenumber.

SUPPLEMENTARY INFORMATION:

Background

On April 1, 1992 (57 F.R. 110224), theIRS issued proposed regulations provid-ing, in part, an election under which cer-tain RICs could mark to market their stockin certain PFICs. In the Taxpayer ReliefAct of 1997 Congress enacted section1296(e)(2) of the Internal Revenue Code,which allows certain RICs to elect to markto market their PFIC stock. Accordingly,the IRS is withdrawing proposed regula-tions §1.1291-8. Future guidance will beissued providing rules for all PFIC share-holders, including RICs, on how to markto market certain PFIC stock.

Drafting Information

The principal author of this withdrawalnotice is Robert Laudeman, Office of the

Associate Chief Counsel (International).However, other personnel from the IRSand Treasury Department participated indeveloping the withdrawal notice.

* * * * *

Partial Withdrawal of ProposedAmendments to the Regulations

Accordingly, under the authority of 26U.S.C. 7805, §1.1291–8 of the proposedamendments to 26 CFR part 1 publishedat 57 F.R. 11024 (April 1, 1992), is with-drawn.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on Feb-ruary 1, 1999, 8:45 a.m., and published in the issueof the Federal Register for February 2, 1999, 64 F.R.5015)

26 CFR 601.601: Rules and regulations.(Also Part I, sections 1001; 1.1001–3, 1.1275–2.)

Rev. Proc. 99–18

SECTION 1. PURPOSE

This revenue procedure provides for anelection that will facilitate the substitutionof some or all of the debt instruments fromtwo or more outstanding issues of debtwith debt instruments from a new issue.Under the election, taxpayers can treat asubstitution of debt instruments, in certaincircumstances, as a realization event forfederal income tax purposes even thoughit does not result in a significant modifica-tion under § 1.1001–3 of the Income TaxRegulations (and, therefore, is not an ex-change for purposes of § 1.1001–1(a)).Under section 4 of this revenue procedure,taxpayers do not recognize any realizedgain or loss on the date of the substitution.Instead, the gain or loss generally is takeninto account as income or deductions overthe term of the new debt instruments.

SECTION 2. BACKGROUND

.01 Under § 1.1001–1(a), gain or loss isrealized from the exchange of propertyfor other property differing materially ei-ther in kind or in extent.

.02 Section 1.1001–3 provides rules todetermine whether a modification of the

terms of a debt instrument results in anexchange of the original debt instrumentfor a modified instrument that differs ma-terially either in kind or in extent. Under§ 1.1001–3, a modification of a debt in-strument results in an exchange for pur-poses of § 1.1001–1(a) if the modifica-tion is significant. A modification that isnot significant does not result in an ex-change for purposes of § 1.1001–1(a).Section 1.1001–3 applies to any modifi-cation of a debt instrument, regardless ofthe form of the modification (includingan exchange of a new instrument for anexisting instrument).

.03 Under § 1.1001–3(c), a modifica-tion means any alteration, including anydeletion or addition, in whole or in part,of a legal right or obligation of the issueror a holder of a debt instrument, whetherthe alteration is evidenced by an expressagreement (oral or written), conduct ofthe parties, or otherwise.

.04 In general, a modification of a debtinstrument is a significant modificationunder § 1.1001–3 only if, based on all thefacts and circumstances, the legal rightsor obligations that are altered and the de-gree to which they are altered are eco-nomically significant. Section 1.1001–3(e) provides rules to determine whethercertain modifications, such as a change inyield or the timing of payments, consti-tute significant modifications.

.05 If the terms of a debt instrument aremodified to defer one or more paymentsand the modification does not result in anexchange under § 1.1001–3, § 1.1275–2(j) provides rules to account for the mod-ified debt instrument. Under § 1.1275–2(j), solely for purposes of §§ 1272 and1273 of the Internal Revenue Code, thedebt instrument is treated as retired andthen reissued on the date of the modifica-tion for an amount equal to the instru-ment’s adjusted issue price on that date.As a result, the debt instrument is retestedfor original issue discount based on theinstrument’s adjusted issue price and theremaining payments, as modified, to bemade on the instrument. If the debt in-strument has original issue discount as aresult of the modification, both the issuerand the holder account for the original

Part III. Administrative, Procedural, and Miscellaneous

March 15, 1999 8 1999–11 I.R.B.

issue discount over the remaining term ofthe instrument. See§§ 163(e) and 1272.

.06 An issuer may want to refinanceand consolidate debt instruments (“olddebt”) from two or more outstanding is-sues of debt into debt instruments (“newdebt”) from a single new issue. In gen-eral, if the terms of the new debt are notmaterially different from the terms of theold debt, substituting the new debt for theold debt does not result in a significantmodification of the old debt under § 1.1001–3. Therefore, the substitution ofthe new debt for the old debt in the con-solidation is not a realization event forfederal income tax purposes. However,under § 1.1275–2(j), some or all of thenew debt may have original issue dis-count in varying amounts, dependingupon the terms of the old debt for whichthe new debt was substituted. As a result,the new debt may not be fungible.

SECTION 3. SCOPE

This revenue procedure applies to thesubstitution of new debt for old debt if allof the following conditions are satisfied:

.01 Debt instruments from a single newissue are being substituted for debt instru-ments from two or more old issues ofdebt. (It is not necessary, however, forany single holder of the old debt to haveheld debt instruments from more than oneof the old issues.)

.02 The substitution does not result in asignificant modification of the old debtunder § 1.1001–3 and, therefore, is not arealization event under § 1.1001–1.

.03 The new debt and the old debt arepublicly traded (within the meaning of § 1.1273–2(f)).

.04 The old debt was issued at par orwith a de minimis amount of originalissue discount or premium. (For purposesof this condition, the de minimis amountfor premium is determined using the prin-ciples of § 1.1273–1(d).)

.05 The new debt is issued at par orwith a de minimis amount of originalissue discount or premium. (For purposesof this condition, the issue price of thenew debt is determined under § 1.1273–2rather than under § 1.1275–2(j), and thede minimis amount for premium is deter-mined using the principles of § 1.1273–1(d).)

.06 Neither the new debt nor the olddebt is—

(1) a contingent payment debt instru-ment (within the meaning of § 1.1275–4),

(2) a tax-exempt obligation (as de-fined in § 1275(a)(3)), or

(3) a convertible debt instrument(within the meaning of § 1.1272–1(e)).

.07 All payments on the old debt andthe new debt are denominated in, or deter-mined solely by reference to, U.S. dollars,and the functional currency of the busi-ness unit issuing the new debt is the U.S.dollar.

.08 The issuer and one or more holdersof the old debt make the election providedin section 4.01 of this revenue procedure.

SECTION 4. APPLICATION

.01 Election.(1) Manner of making the election.

The issuer and the holders make the elec-tion under this revenue procedure byagreeing in writing to treat the substitu-tion as a realization event for federal in-come tax purposes and to comply with theprovisions of this revenue procedure. Thewritten agreement must be entered into nolater than the last day of the month inwhich the substitution occurs.

For example, the written agreement tomake the election may be evidenced by astatement in the offering documents forthe substitution that—

(a) the issuer, by distributing thedocuments, elects under this revenue pro-cedure to treat the substitution as a real-ization event for federal income tax pur-poses,

(b) any holder of old debt thattenders its old debt for new debt as part ofthe substitution thereby makes the elec-tion under this revenue procedure, and

(c) the issuer and the holders whohave tendered their old debt for the newdebt (“electing holders”) will complywith the provisions of this revenue proce-dure.

(2) Statement attached to return.Ifan election is made under section 4.01(1)of this revenue procedure, the issuer mustattach a signed statement to its timelyfiled (including extensions) federal in-come tax return for the taxable year inwhich the substitution occurs. On thestatement, the issuer must—

(a) identify the old debt for whichnew debt was substituted,

(b) identify the new debt that wassubstituted for the old debt,

(c) indicate the issue price of thenew debt, and

(d) indicate that the election wasmade under this revenue procedure.

.02 Treatment of substitution.If anelection is made under this revenue proce-dure, the issuer and the electing holdersmust report the substitution for federal in-come tax purposes as a repurchase of theold debt in exchange for the new debt inthe taxable year in which the substitutionoccurs. However, the issuer must accountfor this deemed exchange under the rulesdescribed in section 4.03 of this revenueprocedure and each electing holder mustaccount for this deemed exchange underthe rules described in section 4.04 of thisrevenue procedure.

.03 Issuer’s treatment.The issuer musttake into account over the term of the newdebt any difference between the adjustedissue prices of the old debt and the issueprice of the new debt (as determinedunder § 1.1273–2). If the aggregate issueprice of the new debt that is transferred toelecting holders as a substitute for the olddebt is greater than the aggregate adjustedissue prices of the old debt for which it issubstituted, the issuer treats the differenceas a reduction in the aggregate issue priceof the new debt. As a result, the differ-ence is taken into account by the issuerover the term of the new debt as increasedoriginal issue discount or as reduced bondissuance premium (within the meaning of§ 1.163–13). If the aggregate issue priceof the new debt that is transferred to elect-ing holders as a substitute for the old debtis less than the aggregate adjusted issueprices of the old debt for which it is sub-stituted, the issuer treats the difference asan increase in the aggregate issue price ofthe new debt. As a result, the difference istaken into account by the issuer over theterm of the new debt as reduced originalissue discount or increased bond issuancepremium.

.04 Electing holder’s treatment.(1) In general. Notwithstanding any

provision of subtitle A of the InternalRevenue Code (including §§ 356(a) and1276(a)), an electing holder does not rec-

1999–11 I.R.B. 9 March 15, 1999

ognize any gain or loss as a result of thedeemed exchange. Instead, the holder’sbasis (immediately after the substitution)in the new debt is the same as the holder’sadjusted basis (determined as of the dateof the substitution) in the debt instrumentsfor which the new debt was substituted.In addition, the holder’s holding periodfor the new debt includes the holder’sholding period for the old debt.

(2) Market discount.(a) In general. If the stated re-

demption price at maturity of the newdebt (as determined under § 1.1273–1(b))is greater than the holder’s basis (immedi-ately after the substitution) in the newdebt, the holder treats the difference asmarket discount on the new debt and thenew debt as a market discount bond (un-less the amount of the discount is a deminimis amount within the meaning of § 1278(a)(2)(C)). See§§ 1276 and 1278for the treatment of market discount.(The issue date of the old debt rather thanthe issue date of the new debt is used todetermine whether the new debt is ashort-term obligation for purposes of § 1278(a)(1)(B)(i).) See section4.04(2)(b) below for the treatment of anyaccrued market discount on the old debt.

(b) Accrued market discount.Therules in this section 4.04(2)(b) apply if, asof the date of the substitution, there is anyaccrued market discount on the old debtthat has not been taken into account bythe holder as ordinary income. If, undersection 4.04(2)(a) above, there is no mar-ket discount on the new debt or theamount of any market discount on thenew debt is a de minimis amount, theamount of accrued market discount on thenew debt is zero, and the accrued marketdiscount on the old debt is ignored. If,under section 4.04(2)(a) above, theamount of market discount on the newdebt is more than a de minimis amount,the lesser of this market discount and theaccrued market discount on the old debt istreated by the holder, as of the date of the

substitution, as accrued market discounton the new debt. (Solely for purposes ofdetermining the accruals of any additionalmarket discount on the new debt, theholder’s basis is increased by the amountof the accrued market discount on the olddebt that is treated as accrued market dis-count on the new debt.)

(3) Bond premium. If the holder’sbasis in the new debt (immediately afterthe substitution) is greater than the statedredemption price at maturity of the newdebt (as determined under § 1.1273–1(b)),the holder treats the difference as bondpremium on the new debt. See§§ 1.171–1 through 1.171–5 for the treatment ofbond premium.

SECTION 5. EFFECTIVE PERIOD

This revenue procedure applies to sub-stitutions that occur between March 1,1999, and June 30, 2000.

SECTION 6. REQUEST FORCOMMENTS

The Internal Revenue Service requestscomments on this revenue procedure, in-cluding comments on whether this rev-enue procedure should be made perma-nent. Persons that wish to comment onthis revenue procedure may submit com-ments by May 31, 1999, to: CC:DOM:CORP:R (RP–102721–99), room 5226,Internal Revenue Service, POB 7604, BenFranklin Station, Washington, DC 20044.Submissions may be hand delivered be-tween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (RP–102721–99),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington DC. Alternatively, com-ments may be submitted via the Internetby selecting the “Tax Regs” option of theIRS Home Page or by submitting them di-rectly to the IRS Internet site athttp://www.irs.ustreas.gov/prod/tax_regs/comments.html. Comments will be avail-able for public inspection.

SECTION 7. PAPERWORKREDUCTION ACT

The collections of information con-tained in this revenue procedure havebeen reviewed and approved by the Of-fice of Management and Budget (OMB)in accordance with the Paperwork Reduc-tion Act (44 U.S.C. 3507) under controlnumber 1545-1647.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validOMB control number.

The collections of information in thisrevenue procedure are in section 4.01.This information is required to determinewhether a taxpayer has made the electionunder this revenue procedure. The collec-tions of information are required to obtaina benefit. The likely respondents arebusiness or other for-profit institutions.

The estimated total annual reportingand/or recordkeeping burden is 75 hours.

The estimated annual burden per re-spondent/recordkeeper varies from 1/2hour to 1 hour, depending on individualcircumstances, with an estimated averageof 3/4 hour. The estimated number of re-spondents is 100.

The estimated annual frequency of re-sponses is on occasion.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

CONTACT PERSON

For further information regarding thisrevenue procedure, contact William E.Blanchard of the Office of Assistant ChiefCounsel (Financial Institutions and Prod-ucts) on (202) 622-3950 (not a toll freecall).

March 15, 1999 10 1999–11 I.R.B.

Part IV. Items of General Interest Notice of Proposed Rulemakingand Notice of Public Hearing

Group Term Insurance; Uniform Premiums

REG–209103–89


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

SUMMARY: This document containsproposed regulations that revise the uni-form premium table used to calculate thecost of group-term life insurance cover-age provided to an employee by an em-ployer. These proposed regulations pro-vide guidance to employers who must usethe uniform premium table to calculatethe cost of group-term insurance includi-ble in the gross income of their employ-ees. This document also provides noticeof a public hearing on these proposed reg-ulations.

DATES: Comments must be received byApril 13, 1999. Requests to speak andoutlines of topics to be discussed at thepublic hearing scheduled for May 6,1999, must be received by April 15,1999. The IRS requests comments on theclarity of the proposed rule and how itmay be made easier to read.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–209103–89),room 5228, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered between the hours of 8a.m. and 5 p.m. to CC:DOM:CORP:R(REG–209103–89), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC. Alterna-tively, taxpayers may submit commentselectronically via the Internet by selectingthe “Tax Regs” option on the IRS HomePage, or by submitting comments directlyto the IRS Internet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html.The public hearing will be held in Room2615, Internal Revenue Building, 1111Constitution Avenue NW, Washington,DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, BettyJ. Clary, (202) 622-6070; concerning sub-missions and the hearing, MichaelSlaughter, (202) 622-7190 (not toll-freenumbers).


Background

This document contains proposedamendments to the Income Tax Regula-tions under section 79 of the Internal Rev-enue Code. These proposed regulationsrevise the uniform premium rates used tocalculate the cost of group-term life insur-ance provided to employees. Section 79generally permits an employee to excludefrom gross income the cost of $50,000 ofgroup-term life insurance coverage. Theremaining cost of the group-term life in-surance is included in the employee’sgross income to the extent it exceeds theamount, if any, paid by the employee forthe coverage. The cost of the group-terminsurance is determined on the basis offive-year age brackets prescribed by regu-lations.

The uniform premiums are set forth inthe regulations in Table I entitled “Uni-form Premiums for $1,000 of Group-termLife Insurance Protection.” Section 1.79–3(d)(2). A table was initially published onJuly 6, 1966 (31 F.R. 9199), and the tablewas revised on December 6, 1983 (48F.R. 54595). The December 6, 1983 revi-sion was made to reflect changes in mor-tality since 1966, using 1975-1979 mor-tality experience reported by the Societyof Actuaries. The December 6, 1983 revi-sion extrapolated the reported mortalityexperience to 1982, and reflected a re-vised gender mix and load factor. Foryears after 1988, new factors were addedto the table for ages above 64, pursuant tosection 5013 of the Technical and Miscel-laneous Revenue Act of 1988. See 57F.R. 33635 (July 30, 1992).

The IRS and Treasury have concludedthat the section 79 table should be revisedbecause there has been a significant im-provement in mortality since the 1975-1979 period (even after taking into ac-count the projection to 1982). Thisconclusion is based on information on the

group-term life mortality experience of 13issuers covering the 1985-1989 period, ascompiled by the Society of Actuaries, aswell as other data on mortality trends.The IRS and Treasury contemplate con-tinuing to monitor future changes in mor-tality experience and would expect to update the section 79 table when a signifi-cant change in the cost of group-term lifeinsurance is evidenced.

Summary of Regulations

These proposed regulations revise theuniform premium table used to calculatethe cost of group-term life insurance cov-erage provided to an employee by an em-ployer. The proposed new table has beendeveloped based on mortality experiencefor individuals covered by group-term lifeinsurance during the 1985-1989 period, asreflected in a Society of Actuaries report.The mortality rates were adjusted for im-provements in mortality from 1988 (theweighted midpoint for the data used inthe1985-89 study) through 2000, basedon the same rates of mortality improve-ment that were adopted by the Society ofActuaries Group Annuity Valuation TableTask Force for the period 1988-1994.Separate mortality rates were derived formales and females, and the section 79table reflects a 50/50 blend of the maleand female mortality rates. The resultingmortality projections have been adjustedto reflect a 10 percent load factor. Theuniform premium rates under the pro-posed revision would be lower in all agegroups than the rates under the currentsection 79 regulations.

Comments are requested regarding theproposed premium rates.

Proposed Effective Date

These regulations are proposed to beeffective July 1, 1999. A special effectivedate rule applies to any policy of life in-surance issued under a plan in existencebefore the proposed general July 1, 1999effective date if the policy would not betreated as carried directly or indirectly byan employer under section 1.79–0 of theIncome Tax Regulations using the currentsection 79 table. In this case, if the spe-cial rule applies, the policy would con-tinue to be treated as not carried directly

or indirectly by an employer until the firstplan year that begins after July 1, 1999.

Because income imputed under section79 is generally subject to FICA tax whichis withheld from the employee’s pay, andbecause the withholding often is appliedperiodically from payrolls during theyear, many employers will need to modifytheir payroll-based withholding systemsand related information collection proce-dures before the effective date. The pro-posed July 1, 1999 effective date is in-tended to provide the benefits of havingthe lower income inclusions take effect asearly as possible while avoiding the addi-tional costs that would arise if employersdid not have adequate time to implementthe changes before the effective date(which would necessitate special adjust-ments to correct overwithholding thatwould have occurred after the effectivedate and before implementation of thenew table).

Comments are requested regarding theproposed effective date.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions and, because these regulations donot impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comment and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to electronic and writ-ten comments (a signed original and eight(8) copies) that are timely submitted tothe IRS. The IRS and Treasury specifi-cally request comments on the clarity ofthe proposed regulations and how it maybe made easier to understand. All com-ments will be available for public inspec-tion and copying.

A public hearing has been scheduled forThursday, May 6, 1999, at 10:00 a.m. inRoom 2615, Internal Revenue Building,1111 Constitution Avenue NW, Wash-ington, DC. Due to building security pro-cedures, visitors must enter the 10th Streetentrance, located between Constitutionand Pennsylvania Avenues, NW. In addi-tion, all visitors must present photo identi-fication to enter the building. Because ofaccess restrictions, visitors will not be ad-mitted beyond the immediate entrancearea more than 15 minutes before thehearing starts. For information about hav-ing your name placed on the building ac-cess list to attend the hearing, see the“FOR FURTHER INFORMATION CON-TACT” section of this preamble.

The rules of 26 CFR 601(a)(3) apply tothe hearing. Persons who wish to presentoral comments at the hearing must submitwritten comments and an outline of thetopics to be discussed and the time de-voted to each topic (a signed original andeight (8) copies) by April 15, 1999.

A period of 10 minutes will be allottedto each person for making comments.

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal author of these regula-tions is Betty J. Clary, Office of the Asso-ciate Chief Counsel (Employee Benefitsand Exempt Organizations). However,other personnel from the IRS and theTreasury Department participated in theirdevelopment.

* * * * *

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:

PART 1–INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.79–3 is amended as

follows:1. Paragraph (d)(2) is revised.2. Paragraph (e) and (f) are redesig-

nated as paragraph (f) and (g) respec-tively.

3. New paragraph (e) is added.The revision and addition read as fol-

lows:

§1.79–3 Determination of amount equalto cost of group-term life insurance.

* * * * *

(d) * * *(2) For the cost of group-term life in-

surance provided after June 30, 1999, thefollowing table sets forth the cost of$1,000 of group-term life insurance pro-vided for one month, computed on thebasis of 5-year age brackets. See 26 CFR1.79–3(d)(2) in effect prior to [DATEFINAL REGULATIONS ARE EFFEC-TIVE] and contained in the 26 CFR,part1, edition revised as of April 1, 1998,for a table setting forth the cost of group-term life insurance provided before July1, 1999. For purposes of Table I, the ageof the employee is the employee’s at-tained age on the last day of the em-ployee’s taxable year.

TABLE I. – UNIFORM PREMIUMSFOR $1,000 OF GROUP-TERM LIFEINSURANCE PROTECTION

5-year age bracket Cost per $1,000of protection forone month

Under 25 . . . . . . . . . . . . . . . . . . . . $0.0525 to 29 . . . . . . . . . . . . . . . . . . . . .0630 to 34 . . . . . . . . . . . . . . . . . . . . .0835 to 39 . . . . . . . . . . . . . . . . . . . . .0940 to 44 . . . . . . . . . . . . . . . . . . . . .1045 to 49 . . . . . . . . . . . . . . . . . . . . .1550 to 54 . . . . . . . . . . . . . . . . . . . . .2355 to 59 . . . . . . . . . . . . . . . . . . . . .4360 to 64 . . . . . . . . . . . . . . . . . . . . .6665 to 69 . . . . . . . . . . . . . . . . . . . . 1.2770 and above . . . . . . . . . . . . . . . . 2.06

* * * * *

(e) Effective date—(1) General effec-tive date for table.Except as provided inparagraph (e)(2) of this section, the tablein paragraph (d)(2) of this section is effec-tive July 1, 1999.

(2) Effective date for table for pur-poses of section 1.79–0.A policy of lifeinsurance issued under a plan in existenceon June 30, 1999, which would not betreated as carried directly or indirectly byan employer under §1.79–0, taking into

1999–11 I.R.B. 11 March 15, 1999

account the Table I in effect on that date,shall continue to be treated as a policythat is not carried directly or indirectly bythe employer until the first plan year be-ginning after the general effective date inparagraph (e)(1) of this section.

* * * * *


Internal Revenue.

(Filed by the Office of the Federal Register on Janu-ary 12, 1999, 8:45 a.m., and published in the issue ofthe Federal Register for January 13, 1999, 64 F.R.2164)

Notice of Proposed Rulemakingand Notice of Public Hearing

Recharacterizing FinancingArrangements Involving Fast-Pay Stock

REG–104072–97



SUMMARY: This document containsproposed regulations that recharacterize,for tax purposes, financing arrangementsinvolving fast-pay stock. The regulationsare necessary to prevent taxpayers fromusing fast-pay stock to achieve inappro-priate tax avoidance. The regulations af-fect corporations that issue fast-pay stock,holders of fast-pay stock, and other share-holders that may claim tax benefits pur-ported to result from arrangements in-volving fast-pay stock. This documentalso provides notice of a public hearingon the proposed regulations.

DATES: Written comments must be re-ceived by April 6, 1999. Outlines of top-ics to be discussed at the public hearingscheduled for April 8, 1999, at 10 a.m.must be received by March 18, 1999.

ADDRESSES: Send submissions: toCC:DOM:CORP:R (REG–104072–97),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may be

hand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–104072–97),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments via the Internet byselecting the “Tax Regs” option of theIRS Home Page or by submitting them di-rectly to the IRS Internet site athttp://www.irs.ustreas.gov/prod/tax_regs/comments.html. The public hearing willbe held in room 2615, 1111 ConstitutionAvenue, NW, Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Jonathan Zelnik at (202) 622-3940;concerning submissions of comments, thehearing, and/or to be placed on the build-ing access list to attend the hearing,LaNita VanDyke at (202) 622-7190 (nottoll-free numbers).


Paperwork Reduction Act

The collection of information con-tained in this notice of proposed rulemak-ing has been submitted to the Office ofManagement and Budgetfor review inaccordance with the Paperwork Reduc-tion Act of 1995 (44 U.S.C. 3507(d)).Comments on the collection of informa-tion should be sent to the Office of Man-agement and Budget, Attn: Desk Officerfor the Department of the Treasury, Officeof Information and Regulatory Affairs,Washington, DC 20503, with copies tothe Internal Revenue Service,Attn: IRSReports Clearance Officer, OP:FS:FP,Washington, DC 20224. Comments onthe collection of information should be re-ceived by March 8, 1999. Comments arespecifically requested concerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the InternalRevenue Service, including whether thecollection will have a practical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation (see below);

How the quality, utility, and clarity ofthe information to be collected may be enhanced;

How the burden of complying with the

proposed collection of information maybe minimized, including through the ap-plication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costs andcosts of operation, maintenance, and pur-chase of services to provide information.

The collection of information is in§1.7701(l)–3(f) and §1.7701(l)–3(g). Thecollection of information is mandatory.The likely respondents are individuals,businesses, and other organizations.Estimated total annual burden: 50 hoursEstimated average annual burden per re-spondent: 1 hourEstimated number of respondents: 50Estimated annual frequency of responses:Annually

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax information are confidential, as re-quired by 26 U.S.C. 6103.

Background

On February 27, 1997, the IRS issuedNotice 97–21, 1997–1 C.B. 407, whichrelates to financing arrangements involv-ing fast-pay stock. Among other things,the notice informs the public that the IRSand Treasury Department expect to issueregulations recharacterizing thesearrangements to prevent tax avoidance.Notice 97–21 requested comments, butnone have been received.

Explanation of Provisions

A. TAX-AVOIDANCEARRANGEMENTS USING FAST-PAY STOCK

Notice 97–21 addresses two-party fi-nancing arrangements that are structuredas multi-party arrangements to let one ormore of the parties avoid tax. Instead ofone party directly providing financing tothe other, they both acquire stock (withdifferent characteristics) in a conduit en-

March 15, 1999 12 1999–11 I.R.B.

tity. The arrangement is structured so thatthe party providing the financing has a de-creasing claim on the conduit entity (andits assets) while the party receiving the fi-nancing has an increasing claim on theconduit entity (and its assets). Economi-cally, both parties benefit from the con-duit entity’s income. For tax purposes,however, the entity’s income is allocatedalmost entirely to the party providing thefinancing, allowing the other party toclaim unwarranted tax benefits.

Notice 97–21 describes in detail a typi-cal fast-pay stock financing arrangement.The parties to the arrangement include:(1) a person seeking financing (the spon-sor), (2) investors who are willing to pro-vide financing and typically are not sub-ject to federal income tax (the investors),and (3) a corporation that is generallysubject to tax only at the shareholder level(a conduit entity). The conduit entity is-sues a class of self-amortizing stock (thefast-pay stock) to the investors and a classof other stock (the benefited stock) to thesponsor. The fast-pay stock is structuredso that during an initial period, the divi-dends made with respect to the stock aresubstantial and relatively certain while thedividends made with respect to the bene-fited stock are insignificant. After the ini-tial period, the dividend rate of the fast-pay stock, the stock’s effectiveredemption value, or both, decline.

Economically, the fast-pay stock isself-amortizing because the distributionsmade with respect to the fast-pay stockare in part a return on the investors’ invest-ment and in part a return of their invest-ment. For tax purposes, however, the par-ties characterize the fast-pay stockdistributions entirely as dividends (that is,entirely as a return on the investment).Consequently, the investors’ reported tax-able income—overstated dividend incomefollowed by an overstated capital loss ondisposition of the fast-pay stock— fails toclearly reflect their economic income.(Investors that are tax-exempt suffer nodisadvantage from this arrangement.)

Characterizing the distributions madewith respect to the fast-pay stock solely asdividends has the corresponding effect ofunderstating the taxable income on thebenefited stock (the stock held by thesponsor) during the initial period. Insteadof receiving dividends attributable to itsshare of the conduit entity’s income, the

sponsor’s economic income takes the formof an increasing ownership interest in theconduit entity. Because the fast-pay stockis economically self-amortizing, each dis-tribution reduces the investors’ claim onthe conduit entity (and its assets) and in-creases the sponsor’s claim. By treating afast-pay arrangement according to itsform, the sponsor reports taxable incomethat fails to clearly reflect its economic in-come. An individual sponsor, for exam-ple, reports little or no dividend income.Instead, the individual reports gain on dis-posing of its benefited stock; thus, defer-ring tax on its economic income and con-verting that income from ordinary tocapital. A corporate sponsor not only re-ports little or no dividend income, but canavoid reporting gain on the disposition ofits benefited stock, thereby entirely elimi-nating tax on its economic income. (If acorporate sponsor has a sufficient interestin the conduit entity, the sponsor may suc-ceed to the conduit entity’s assets tax-freeby liquidating or reorganizing the conduitentity; thus, avoiding a taxable dispositionof the benefited stock).

In substance, the investors (the fast-payshareholders) are financing the sponsor’sinvestment in the conduit entity. Al-though nominally shareholders in the con-duit entity, the investors have a limited,diminishing claim to the entity (and its as-sets). The sponsor’s claim, by contrast, isresidual and long-term. Thus, a fast-payarrangement is effectively a leveragedarrangement in which the sponsor usesuntaxed income from the conduit entity torepay the investors.

B. THE PROPOSED REGULATIONS

1. In General

To prevent the avoidance of tax, theSecretary may issue regulations undersection 7701(l) recharacterizing any mul-tiple-party financing transaction as atransaction directly among any two ormore of the parties. The proposed regula-tions exercise this authority by recharac-terizing certain fast-pay arrangements. Afast-pay arrangement is any financingarrangement in which a corporation hasoutstanding two or more classes of stock,one of which is fast-pay stock. The regu-lations identify fast-pay arrangements andrecharacterize certain of them as arrange-ments directly between the holders of the

fast-pay stock and the other shareholders(the benefited shareholders) in the corpo-ration. The regulations also impose re-porting requirements on certain corpora-tions with outstanding fast-pay stock andon certain shareholders that participate infast-pay arrangements. These reportingrequirements apply to all fast-payarrangements, whether or not they aresubject to recharacterization.

Notice 97–21 describes specific modelsfor recharacterizing fast-pay arrange-ments. For purposes of determining theincome of the shareholders of a corpora-tion with outstanding fast-pay stock, thesemodels ignore the separate existence ofthe corporation and treat the fast-payshareholders and benefited shareholdersas owning the corporation’s underlyingassets. Although this approach preventstax avoidance, the IRS and Treasury De-partment have concluded that it may notbest reflect the financing relationship be-tween the fast-pay shareholders and thebenefited shareholders. In addition, theapproach of the notice may be difficult fortaxpayers to apply if the corporation has acomplex capital structure, multiple assets(including active businesses), or both.

To address these concerns, the proposedregulations treat the fast-pay shareholdersas acquiring instruments issued by the ben-efited shareholders instead of acquiring in-terests in the assets of the corporation.This approach better reflects the financingrelationship between the fast-pay share-holders and the benefited shareholders. Italso removes the burden of determiningeach party’s ownership interest in the as-sets of the corporation. Thus, the regula-tions provide an approach that is easier toapply and more narrowly tailored than themodels described in Notice 97–21.

2. Fast-Pay Stock and Benefited Stock

Under the proposed regulations, stockis fast-pay stock if it is structured to pro-vide for dividends that economically rep-resent a return (in whole or in part) of theholder’s investment rather than only a re-turn on the holder’s investment. Stock ispresumed to be fast-pay stock if it has, bydesign, a dividend rate that is reasonablyexpected to decline, or an issue price thatexceeds the amount at which the holdercan be compelled to dispose of the stock.A taxpayer may rebut these presumptions

1999–11 I.R.B. 13 March 15, 1999

only by clearly showing that no dividendrepresents an economic return (in wholeor in part) of the holder’s investment.

Generally, whether stock is fast-paystock must be determined based on all thefacts and circumstances, including any re-lated agreements such as options or for-ward contracts. A related agreement isany direct or indirect, oral or written,agreement between the holder of the stockand the issuing corporation, or betweenthe holder of the stock and one or moreother shareholders in the corporation.The determination that stock is fast-paystock is made when the stock is issued,and whenever there is a significant modi-fication in the terms of the stock or the re-lated agreements, or a significant changein the relevant facts and circumstances.

The proposed regulations define bene-fited stock by reference to fast-pay stock.With respect to a class of fast-pay stock,all other stock in the corporation (includ-ing any other class of fast-pay stock) isbenefited stock. For fast-pay arrange-ments in which there is more than oneclass of benefited stock, the parties mustapply the general recharacterization rulesamong the different classes as appropriateto match the arrangement’s economic sub-stance.

3. Fast-Pay Arrangements Subject toRecharacterization

Under the proposed regulations, if thecorporation with outstanding fast-paystock is either a regulated investmentcompany (RIC) or a real estate investmenttrust (REIT), the fast-pay arrangement isautomatically recharacterized. If the cor-poration is neither a RIC nor a REIT, theCommissioner may (at the Commis-sioner’s discretion) recharacterize thefast-pay arrangement in cases where theCommissioner determines that a principalpurpose for the structure of the fast-payarrangement is the avoidance of tax. Thisrule applies to all parties to a fast-payarrangement, without regard to whethersuch parties acquired their interests aspart of an initial offering or later (by pur-chase or other transfer).

By not automatically recharacterizingall fast-pay arrangements, the regulationsprevent taxpayers from using the rechar-acterization rules for other tax avoidancepurposes. For example, shareholders of a

controlled foreign corporation cannot cir-cumvent the purposes of United States taxlaw (including treaties) by using therecharacterization rules to exploit incon-sistencies between the treatment of a fast-pay arrangement by the United States andforeign jurisdictions. It is expected thatthe Commissioner will closely scrutinizefast-pay arrangements in which the corpo-ration with outstanding fast-pay stock is aforeign corporation.

4. Model for Recharacterizing Fast-PayArrangements

a. In General

The proposed regulations treat the fast-pay shareholders as holding financing in-struments issued by the benefited share-holders rather than as holding fast-paystock in the corporation. The corporationis the paying agent on the financing in-struments but has no other relationship tothe fast-pay shareholders.

Under the proposed regulations, the fi-nancing instruments have the same pay-ment terms as the fast-pay stock. Thetiming and amount of payments madewith respect to the financing instruments,therefore, match the timing and amount ofdistributions made with respect to thefast-pay stock. Nothing in the regulationscharacterizes the financing instruments.The character of the financing instru-ments (for example, stock or debt) mustbe determined under general tax princi-ples and depends on all the facts and cir-cumstances.

The benefited shareholders are treatedas first issuing the financing instrumentsin exchange for cash equal to the fair mar-ket value of the fast-pay stock (taking intoaccount any related agreements), and thenas contributing the cash to the corporation(thereby increasing their basis in the ben-efited stock). Distributions made with re-spect to the fast-pay stock are treated asfirst made with respect to the benefitedstock, and then as used by the benefitedshareholders to make payments on the fi-nancing instruments.

b. Rule for Multiple Classes of BenefitedStock

The proposed regulations do not de-scribe detailed rules for fast-pay arrange-ments in which there is more than one

class of benefited shareholders. Instead,as mentioned before, the regulations pro-vide a general rule that requires recharac-terization among the different classes asappropriate to match the economic sub-stance of the fast-pay arrangement.

c. Rules for Disposition of BenefitedStock

The proposed regulations provide spe-cial rules for dispositions of benefitedstock. On the sale of benefited stock, inaddition to any consideration actually re-ceived, the seller is treated as receivingthe amount necessary to terminate its po-sition with respect to the financing instru-ments at fair market value. Similarly, thebuyer is treated as paying that amount andas issuing new financing instruments tothe fast-pay shareholders.

d. Rule Preserving Pre-effective DateGain

The proposed regulations provide aspecial basis adjustment rule to ensurethat unrealized gain on benefited stock isnot inappropriately eliminated. Becausethe regulations do not apply to amountsaccrued or paid in taxable years endingbefore February 27, 1997 (pre-effectiveyears), a benefited shareholder will haveeconomic income, but not taxable in-come, attributable to pre-effective years ifthe form of a fast-pay arrangement is re-spected for those years. This economicincome is reflected as unrealized gain inthe benefited stock.

Absent a special basis adjustment rule,the general recharacterization rule wouldeliminate this unrealized gain. Althoughthe regulations do not apply to amountsaccrued or paid in pre-effective years, theregulations recharacterize fast-payarrangements from their inception. Thus,in cases in which the fast-pay arrange-ment was entered into in a pre-effectiveyear, the general recharacterization ruleincreases a benefited shareholder’s basisin its stock as of the inception of the trans-action, even though the regulations do notrequire the benefited shareholder to in-clude deemed dividend distributions at-tributable to the pre-effective years. Con-sequently, this increase in basis withoutcorresponding dividend income elimi-nates the unrealized gain from the pre-ef-fective years.

March 15, 1999 14 1999–11 I.R.B.

To preserve the unrealized gain result-ing from the economic income attribut-able to pre-effective years, the proposedregulations provide a special basis adjust-ment rule. After taking into account anybasis increase under the general rule, abenefited shareholder must decrease itsbasis in its benefited stock by the amount(if any) that (1) its taxable income attrib-utable to the fast-pay arrangement for pre-effective years, computed by recharacter-izing the fast-pay arrangement under theregulations, exceeds (2) its taxable in-come attributable to the fast-pay arrange-ment for pre-effective years, computedwithout applying the recharacterizationrules of the regulations. In this way, abenefited shareholder’s economic incomeattributable to taxable years before the ef-fective date of the regulations is not elim-inated by the basis provisions of the gen-eral recharacterization rules and may berealized when the benefited shareholderdisposes of its benefited stock.

e. Rule Prohibiting the Affirmative Useof These Regulations to Avoid TaxImposed by the Code

The proposed regulations prohibit ataxpayer from affirmatively using the au-tomatic recharacterization rules if a prin-cipal purpose for using such rules is theavoidance of any tax imposed by theCode. With respect to such a taxpayer,the Commissioner may depart from theautomatic recharacterization rules andtreat (for all purposes of the Code) thefast-pay arrangement in accordance withits form or its economic substance. Thisanti-abuse rule applies on a taxpayer-by-taxpayer basis. For example, if a foreignperson acquires fast-pay stock in a REITand a principal purpose for acquiring suchstock is to reduce United States withhold-ing taxes by applying the automaticrecharacterization rules, the Commis-sioner may, for purposes of determiningthe foreign person’s United States taxconsequences (namely, withholding tax),depart from the automatic recharacteriza-tion rules and treat the foreign person asholding fast-pay stock in the REIT.

5. Withholding

A corporation that issues fast-pay stockis a withholding agent for payments made

(or deemed made) under a fast-payarrangement. Generally, if a fast-payarrangement is recharacterized under theautomatic recharacterization rules, a with-holding agent must withhold in accor-dance with the transaction as recharacter-ized. A different rule applies, however, ifthe withholding agent knows or has rea-son to know that any taxpayer enteredinto the fast-pay arrangement with a prin-cipal purpose of using the recharacteriza-tion rules to avoid tax under section871(a) or section 881. In that case, foreach payment made (or deemed made) tosuch taxpayer under the arrangement, thewithholding agent must withhold undersection 1441 or section 1442 the higher of(1) the amount of withholding that appliesto such payment determined under theform of the arrangement, or (2) theamount of withholding that applies tosuch payment determined under the auto-matic recharacterization rules. Also,when the withholding agent knows or hasreason to know that the Commissionerhas exercised the discretion to departfrom the automatic recharacterizationrules for a taxpayer, the withholding agentmust withhold on payments made (ordeemed made) to that taxpayer in accor-dance with the characterization of thefast-pay arrangement imposed by theCommissioner.

The withholding agent’s liability towithhold on payments to foreign individ-uals is described in new proposed§1.1441–7(g). The same rules apply topayments (or deemed payments) to for-eign corporations under §1.1442–1.

6. Reporting Requirements

In general, a corporation that has fast-pay stock outstanding at any time duringthe taxable year must attach a statement toits federal income tax return. This ruledoes not apply to a corporation that is acontrolled foreign corporation (CFC) asdefined in section 957, a foreign personalholding company (FPHC) as defined insection 552, or a passive foreign invest-ment company (PFIC) as defined in sec-tion 1297. Instead, certain shareholders(and officers and directors of FPHCs) ofthose corporations must attach a state-ment to their returns.

The statement must identify the corpo-ration that has outstanding fast-pay stock

and must recite the terms of the fast-paystock and the date on which the fast-paystock was issued. In addition, to the ex-tent the filing person knows or has reasonto know such information, the statementmust contain the names and the taxpayeridentification numbers of the shareholdersof any class of stock that is not traded onan established securities market as de-scribed in §1.7704-1(b).

7. Election to Limit Taxable IncomeAttributable to a RecharacterizedFast-Pay Arrangement for TaxableYears Ending After February 26,1997, and Before the Date TheseRegulations Are Published as FinalRegulations in the Federal Register.

The regulations are proposed to be ef-fective February 27, 1997, and to coverall taxable years ending after February 26,1997. Thus, the regulations will apply toall amounts accrued or paid on or after thefirst day of the first taxable year endingafter February 26, 1997.

Because the proposed effective date re-lates to the date Notice 97–21 was issuedto the public, and because the regulationsadopt different recharacterization rulesfrom the ones described in the notice, theregulations permit a shareholder of arecharacterized fast-pay arrangement tolimit its taxable income attributable to thearrangement for certain taxable years.Specifically, for taxable years endingafter February 26, 1997, and before thedate these regulations are finalized, ashareholder may limit its taxable incomeattributable to a fast-pay arrangementrecharacterized under the regulations, tothe taxable income that would result if thefast-pay arrangement were recharacter-ized under Notice 97–21. Any amountexcluded under the limit must be includedas an adjustment to taxable income in theshareholder’s first taxable year that in-cludes the date the regulations are final-ized. Under the regulations, a shareholderthat has elected to apply the limit must in-clude a statement in its books and recordsidentifying each fast-pay arrangement forwhich the election was made, and theamount excluded from taxable incomeunder the election for each fast-payarrangement.

Shareholders who take advantage ofthe limit enjoy only a deferral of taxable

1999–11 I.R.B. 15 March 15, 1999

income: Any amount excluded under thelimit is later included as an adjustment.Thus, the sole benefit of making the elec-tion is a timing difference. This result isappropriate because over the life of a fast-pay arrangement a shareholder has thesame amount of taxable income whetherthe fast-pay arrangement is recharacter-ized under Notice 97–21 or under the reg-ulations. The IRS and Treasury Depart-ment invite comments concerning thelimit and whether there are fast-payarrangements in which any difference be-tween a shareholder’s taxable income de-termined under Notice 97–21 and theshareholder’s taxable income determinedunder the regulations is other than a tim-ing difference.

Notice 97–21 describes two types offast-pay arrangements. Hence, calculat-ing the limit requires appropriatelyrecharacterizing the fast-pay arrangementunder the notice. In the first type of fast-pay arrangement that the notice describes,the corporation with outstanding fast-paystock holds income-producing assets is-sued by a third party. Notice 97–21 treatsthe benefited shareholders (one of whichis called the “sponsor” in the notice) asacquiring the assets of the corporation di-rectly from the sellers of those assets.The notice treats the fast-pay shareholders(called “investors” in the notice) as ac-quiring the assets of the corporation eitherfrom the sellers of those assets or from thebenefited shareholders in an income“stripping” transaction. Thus, both thefast-pay shareholders and benefited share-holders are regarded as owning directlythe corporation’s assets.

In the second type of fast-pay arrange-ment that Notice 97–21 describes, thecorporation with outstanding fast-paystock holds a debt instrument issued bythe sponsor (a benefited shareholder). Inthis situation, the notice treats the sponsoras having issued one or more instrumentsdirectly to the holders of the fast-paystock. Thus, for purposes of determiningthe sponsor’s taxable income, the spon-sor’s obligation under any asset held bythe corporation is ignored.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-

cant regulatory action as defined in E.O.12866. Therefore, a regulatory assess-ment is not required. It is hereby certifiedthat these regulations will not have a sig-nificant economic impact on a substantialnumber of small entities. This certifica-tion is based on the understanding of theIRS and Treasury Department that thetotal number of fast-pay arrangements isfewer than 100, that the number of enti-ties engaging in transactions affected bythese regulations is not substantial and, ofthose entities, few or none are small enti-ties within the meaning of the RegulatoryFlexibility Act (5 U.S.C. chapter 6).Therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant to sec-tion 7805(f) of the Internal RevenueCode, this notice of proposed rulemakingwill be submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comments on its impact onsmall businesses.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) that are submitted timely to theIRS. All comments will be available forpublic inspection and copying. The IRSand Treasury Department specifically re-quest comments on the clarity of the pro-posed rule and how it may be made easierto understand.

A public hearing has been scheduledfor April 8, 1999, beginning at 10 a.m. inroom 2615 of the Internal RevenueBuilding, 1111 Constitution Avenue, NW,Washington, DC. Due to building secu-rity procedures, visitors must enter at the10th Street entrance, located betweenConstitution and Pennsylvania Avenues,NW. In addition, all visitors must presentphoto identification to enter the building.Because of access restrictions, visitorswill not be admitted beyond the immedi-ate entrance area more than 15 minutesbefore the hearing starts. For informa-tion about having your name placed onthe building access list to attend the hear-ing, see the “FOR FURTHER INFOR-MATION CONTACT” section of thispreamble.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing. Persons that wish topresent oral comments at the hearing mustsubmit written comments by April 6,1999, and submit an outline of the topicsto be discussed and the time to be devotedto each topic (a signed original and eight(8) copies) by March 18, 1999.




These regulations are proposed to beeffective February 27, 1997, and apply totaxable years ending after February 26,1997. Thus, all amounts accrued or paidon or after the first day of the first taxableyear ending after February 26, 1997, willbe subject to the regulations, regardless ofwhen a particular share of the stock or aparticular debt instrument was issued.

The statement required under§1.7701(l)–3(f) is proposed to apply totaxable years (of the taxpayer required tofile the statement) ending after the datethe regulations are published as final reg-ulations in the Federal Register.


The principal authors of these regula-tions are Jonathan Zelnik and MarshallFeiring of the Office of the AssistantChief Counsel (Financial Institutions &Products). However, other personnelfrom the IRS and Treasury Departmentparticipated in their development.

* * * * *



PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.7701(l)–3 also issued under

26 U.S.C. 7701(l). * * *Par. 2. Section 1.1441–7 is amended as

follows:

March 15, 1999 16 1999–11 I.R.B.

1. Paragraph (g) is redesignated asparagraph (h) and is revised.

2. New paragraph (g) is added.The addition and revision read as fol-

lows:

§1.1441–7 General provisions relatingto withholding agents.

* * * * *

(g) Fast-pay arrangements—(1) Ingeneral. A corporation that issues fast-pay stock in a fast-pay arrangement de-scribed in §1.7701(l)–3(b)(1) is a with-holding agent with respect to fast-paydividends paid under the arrangement andany deemed payments with respect to thearrangement under the recharacterizationrules of §1.7701(l)–3(c). Except as pro-vided in this paragraph (g)(1) or in para-graph (g)(2) of this section, the withhold-ing tax rules under section 1441 andsection 1442 apply with respect to a fast-pay arrangement described in §1.7701(l)–3(c)(1)(i) in accordance with the rechar-acterization rules provided in §1.7701(l)–3(c). In all cases, notwithstanding para-graph (g)(2) of this section, if at any timethe withholding agent knows or has rea-son to know that the Commissioner hasexercised the discretion under§1.7701(l)–3(d) to depart from the rechar-acterization rules of §1.7701(l)–3(c) for ataxpayer, the withholding agent mustwithhold on payments made (or deemedmade) to that taxpayer in accordance withthe characterization of the fast-payarrangement imposed by the Commis-sioner under §1.7701(l)–3(d).

(2) Exception. If at any time the with-holding agent knows or has reason toknow that any taxpayer entered into afast-pay arrangement with a principal pur-pose of applying the recharacterizationrules of §1.7701(l)–3(c) to avoid taxunder section 871(a) or section 881, thenfor each payment made or deemed madeto such taxpayer under the arrangement,the withholding agent must withhold,under section 1441 or section 1442, thehigher of—

(i) The amount of withholding thatwould apply to such payment determinedunder the form of the arrangement; or

(ii) The amount of withholding thatwould apply to deemed payments deter-mined under the recharacterization rulesof §1.7701(l)–3(c).

(3) Liability. Any person required todeduct and withhold tax under this para-graph (g) is made liable for that tax bysection 1461, and is also liable for applic-able penalties and interest for failing tocomply with section 1461.

(4) Examples.The following examplesillustrate the rules of this paragraph (g):

Example 1. REIT W issues shares of fast-paystock to foreign individual A, a resident of CountryC. United States source dividends paid to residentsof C are subject to a 30 percent withholding tax. Wissues all shares of benefited stock to foreign indi-viduals who are residents of Country D. D’s incometax convention with the United States reduces theUnited States withholding tax on dividends to 15percent. Under §1.7701(l)–3(c), the dividends paidby W to A are deemed to be paid by W to the bene-fited shareholders. W has reason to know that A en-tered into the fast-pay arrangement with a principalpurpose of using the recharacterization rules of§1.7701(l)–3(c) to reduce United States withholdingtax. W must withhold at the 30 percent rate on thedividends deemed paid to its benefited shareholdersbecause the amount of withholding that applies tosuch payments determined under the form of thearrangement is higher than the amount of withhold-ing that applies to such payments determined under§1.7701(l)–3(c).

Example 2.The facts are the same as in Example1 of this paragraph (g)(4) except that W does notknow, or have reason to know, that A entered thearrangement with a principal purpose of using therecharacterization rules of §1.7701(l)–3(c) to reduceUnited States withholding tax. Further, the Com-missioner has not exercised the discretion under§1.7701(l)–3(d) to depart from the recharacteriza-tion rules of §1.7701(l)–3(c). Accordingly, W mustwithhold tax at a 15 percent rate on the dividendsdeemed paid to the benefited shareholders.

(5) Effective date. This paragraph (g)applies to payments made (or deemedmade) on or after January 6, 1999.

(h) Effective date.Except as otherwiseprovided in paragraph (f)(3) or (g)(5) ofthis section, this section applies to pay-ments made after December 31, 1999.

Par. 3. Section 1.7701(l)–3 is added toread as follows:

§1.7701(l)–3 Recharacterizing financingarrangements involving fast-pay stock.

(a) Purpose and scope.This section isintended to prevent the avoidance of taxby persons participating in fast-pay ar-rangements (as defined in paragraph (b)(1)of this section) and should be interpretedin a manner consistent with this purpose.This section applies to all fast-payarrangements. Paragraph (c) of this sec-tion recharacterizes certain fast-pay

arrangements to ensure the participants aretaxed in a manner reflecting the economicsubstance of the arrangements. Paragraph(f) of this section imposes reporting re-quirements on certain participants.

(b) Definitions—(1) Fast-pay arrange-ment. A fast-pay arrangement is anyarrangement in which a corporation hasoutstanding for any part of its taxable yeartwo or more classes of stock, at least oneof which is fast-pay stock.

(2) Fast-pay stock—(i) Defined. Stockis fast-pay stock if it is structured so thatdividends (as defined in section 316) paidby the corporation with respect to thestock are economically (in whole or inpart) a return of the holder’s investment(as opposed to only a return on theholder’s investment). Unless clearlydemonstrated otherwise, stock is pre-sumed to be fast-pay stock if—

(A) It is structured to have a dividendrate that is reasonably expected to decline(as opposed to a dividend rate that is rea-sonably expected to fluctuate or remainconstant); or

(B) It is issued for an amount that ex-ceeds (by more than a de minimis amount,as determined under the principles of§1.1273–1(d)) the amount at which theholder can be compelled to dispose of thestock.

(ii) Determination. The determinationof whether stock is fast-pay stock is basedon all the facts and circumstances, includ-ing any related agreements such as op-tions or forward contracts. A relatedagreement is any direct or indirect agree-ment or understanding, oral or written,between the holder of the stock and the is-suing corporation, or between the holderof the stock and one or more other share-holders in the corporation. The determi-nation is made when the stock is issuedand whenever there is a significant modi-fication in the terms of the stock or the re-lated agreements, or a significant changein the relevant facts and circumstances.

(3) Benefited stock defined. With re-spect to a class of fast-pay stock, all otherstock in the corporation (including anyother class of fast-pay stock) is benefitedstock.

(c) Recharacterization of certain fast-pay arrangements—(1) Scope.This para-graph (c) applies to any fast-pay arrange-ment—

1999–11 I.R.B. 17 March 15, 1999

(i) In which the corporation that hasoutstanding fast-pay stock is a regulatedinvestment company (RIC) (as defined insection 851) or a real estate investmenttrust (REIT) (as defined in section 856);or

(ii) If the Commissioner determinesthat a principal purpose for the structureof the fast-pay arrangement is the avoid-ance of any tax imposed by the Code.Application of this paragraph (c)(1)(ii) isat the Commissioner’s discretion, and adetermination under this paragraph(c)(1)(ii) applies to all parties to the fast-pay arrangement, including transferees.

(2) Recharacterization. A fast-payarrangement described in paragraph (c)(1)of this section is recharacterized as anarrangement directly between the bene-fited shareholders and the fast-pay share-holders. The inception and resulting rela-tionships of the recharacterizedarrangement are deemed to be as follows:

(i) Relationship between benefitedshareholders and fast-pay shareholders.The benefited shareholders issue financialinstruments (the financing instruments)directly to the fast-pay shareholders in ex-change for cash equal to the fair marketvalue of the fast-pay stock at the time ofissuance (taking into account any relatedagreements). The financing instrumentshave the same payment terms as the fast-pay stock. Thus, the timing and amountof the payments made with respect to thefinancing instruments always match thetiming and amount of the distributionsmade with respect to the fast-pay stock.

(ii) Relationship between benefitedshareholders and corporation. The bene-fited shareholders contribute to the corpo-ration the cash they receive for issuing thefinancing instruments. Distributionsmade with respect to the fast-pay stockare distributions made by the corporationwith respect to the benefited sharehold-ers’ benefited stock.

(iii) Relationship between fast-payshareholders and corporation.For pur-poses of determining the relationship be-tween the fast-pay shareholders and thecorporation, the fast- pay stock is ignored.The corporation is the paying agent of thebenefited shareholders with respect to thefinancing instruments.

(3) Other rules—(i) Character of thefinancing instruments.The character of a

financing instrument (for example, stockor debt) is determined under general taxprinciples and depends on all the facts andcircumstances.

(ii) Multiple classes of benefited stock.If there is more than one class of bene-fited stock, the recharacterization rules ofthis paragraph (c) apply among the differ-ent classes as appropriate to match theeconomic substance of the fast-payarrangement.

(iii) Sale of benefited stock.If one per-son sells benefited stock to another—

(A) In addition to any consideration ac-tually paid and received for the benefitedstock, the buyer is deemed to pay and theseller is deemed to receive the amountnecessary to terminate the seller’s posi-tion in the financing instruments at fairmarket value; and

(B) The buyer is deemed to issue fi-nancing instruments to the fast-pay share-holders in exchange for the amount neces-sary to terminate the seller’s position inthe financing instruments.

(iv) Adjustment to basis for amountsaccrued or paid in taxable years endingbefore February 27, 1997. In the case ofa fast-pay arrangement involving amountsaccrued or paid in taxable years endingbefore February 27, 1997, and recharac-terized under this paragraph (c), a bene-fited shareholder must decrease its basisin any benefited stock (as determinedunder paragraph (c)(2)(ii) of this section)by the amount (if any) that—

(A) Its income attributable to the bene-fited stock (reduced by deductions attrib-utable to financing instruments) for tax-able years ending before February 27,1997, computed by recharacterizing thefast-pay arrangement under this para-graph (c); exceeds

(B) Its income attributable to suchstock for taxable years ending before Feb-ruary 27, 1997, computed without apply-ing the rules of this paragraph (c).

(d) Prohibition against affirmative useof recharacterization by taxpayers.A tax-payer may not use the rules of paragraph(c) of this section if a principal purposefor using such rules is the avoidance ofany tax imposed by the Code. Thus, withrespect to such taxpayer, the Commis-sioner may depart from the rules of thissection and recharacterize (for all pur-poses of the Code) the fast-pay arrange-

ment in accordance with its form or itseconomic substance. For example, if aforeign person acquires fast-pay stock in aREIT and a principal purpose for acquir-ing such stock is to reduce United Stateswithholding taxes by applying the rules ofparagraph (c) of this section, the Commis-sioner may, for purposes of determiningthe foreign person’s United States taxconsequences (namely, withholding tax),depart from the rules of paragraph (c) ofthis section and treat the foreign person asholding fast-pay stock in the REIT.

(e) Examples. The following examplesillustrate the rules of paragraph (c) of thissection:

Example 1. Decline in dividend rate.(i) Facts.Corporation X issues 100 shares of A Stock and 100shares of B Stock for $1,000 per share. By its terms,a share of B Stock is reasonably expected to pay a$110 dividend in years 1 through 10 and a $30 divi-dend each year thereafter. If X liquidates, the holderof a share of B Stock is entitled to a preference equalto the share’s issue price. Otherwise, the B Stockcannot be redeemed at either X’s or the share-holder’s option.

(ii) Analysis. When issued, the B Stock has adividend rate that is reasonably expected to declinefrom an annual rate of 11 percent of its issue price toan annual rate of 3 percent of its issue price. Sincethe B Stock is structured to have a declining divi-dend rate, the B Stock is fast-pay stock, and the AStock is benefited stock.

Example 2. Issued at a premium. (i) Facts. Thefacts are the same as in Example 1 of this paragraph(e) except that a share of B Stock is reasonably ex-pected to pay an annual $110 dividend as long as itis outstanding, and Corporation X has the right to re-deem the B Stock for $400 a share at the end of year10.

(ii) Analysis. The B Stock is structured so thatthe issue price of the B Stock ($1,000) exceeds (bymore than a de minimis amount) the price at whichthe holder can be compelled to dispose of the stock($400). Thus, the B Stock is fast-pay stock, and theA Stock is benefited stock.

Example 3. Recharacterization illustrated.(i)Facts. On formation, REIT Y issues 100 shares of CStock and 100 shares of D Stock for $1,000 pershare. By its terms, a share of D Stock is reasonablyexpected to pay a $110 dividend in years 1 through10 and a $30 dividend each year thereafter. In years1 through 10, persons holding a majority of the DStock must consent before Y may take any actionthat would result in Y liquidating or dissolving,merging or consolidating, losing its REIT status, orselling substantially all of its assets. Thereafter, Ymay take these actions without consent so long asthe D Stock shareholders receive $400 in exchangefor their D Stock.

(ii) Analysis. When issued, the D Stock has adividend rate that is reasonably expected to declinefrom an annual rate of 11 percent of its issue price toan annual rate of 3 percent of its issue price. In addi-tion, the $1,000 issue price of a share of D Stock ex-

March 15, 1999 18 1999–11 I.R.B.

ceeds the price at which the shareholder can be com-pelled to dispose of the stock ($400). Thus, the DStock is fast-pay stock, and the C Stock is benefitedstock. Because Y is a REIT, the fast-pay arrange-ment is recharacterized under paragraph (c) of thissection.

(iii) Recharacterization.The fast-pay arrange-ment is recharacterized as follows:

(A) Under paragraph (c)(2)(i) of this section, theC Stock shareholders are treated as issuing financinginstruments to the D Stock shareholders in exchangefor $100,000 ($1,000, the fair market value of eachshare of D Stock, multiplied by 100, the number ofshares).

(B) Under paragraph (c)(2)(ii) of this section, theC Stock shareholders are treated as contributing$200,000 to Y (the $100,000 received for the financ-ing instruments, plus the $100,000 actually paid forthe C Stock) in exchange for the C Stock.

(C) Under paragraph (c)(2)(ii) of this section,each distribution with respect to the D Stock istreated as a distribution with respect to the C Stock.

(D) Under paragraph (c)(2)(iii) of this section,the C Stock shareholders are treated as making pay-ments with respect to the financing instruments, andY is treated as the paying agent of the financing in-struments for the C Stock shareholders.

Example 4. Transfer of benefited stock illus-trated. (i) Facts. The facts are the same as in Exam-ple 3of this paragraph (e). Near the end of year 5, aperson holding one share of C Stock sells it for$1,300. The buyer is unrelated to REIT Y or to anyof the D Stock shareholders. At the time of the sale,the amount needed to terminate the seller’s positionin the financing instruments at fair market value is$747.

(ii) Benefited shareholder’s treatment on sale.Under paragraph (c)(3)(iii)(A) of this section, theseller’s amount realized is $2,047 ($1,300, theamount actually received, plus $747, the amountnecessary to terminate the seller’s position in the fi-nancing instruments at fair market value). Theseller’s gain on the sale of the common stock is $47($2,047, the amount realized, minus $2,000, theseller’s basis in the common stock). The seller hasno income or deduction with respect to terminatingits position in the financing instruments.

(iii) Buyer’s treatment on purchase.Under para-graph (c)(3)(iii)(A) of this section, the buyer’s basisin the share of D Stock is $2,047 ($1,300, theamount actually paid, plus $747, the amount neededto terminate the seller’s position in the financing in-struments at fair market value). Under paragraph(c)(3)(iii)(B) of this section, simultaneous with thesale, the buyer is treated as issuing financing instru-ments to the fast-pay shareholders in exchange for$747, the amount necessary to terminate the seller’sposition in the financing instruments at fair marketvalue.

Example 5. Fast-pay arrangement involvingamounts accrued or paid in a taxable year endingbefore February 27, 1997.(i) Facts. Y is a calendaryear taxpayer. In June 1996, Y acquires shares ofREIT T benefited stock for $15,000. In December1996, Y receives dividends of $100. Under therecharacterization rules of paragraph (c)(2) of thissection, Y’s 1996 income attributable to the bene-fited stock is $1,200, Y’s 1996 deduction attribut-

able to financing instruments is $500, and Y’s basisin the benefited stock is $25,000.

(ii) Analysis. Under paragraph (c)(3)(iv) of thissection, Y’s basis in the benefited stock is reducedby $600. This is the amount by which Y’s 1996 in-come from the fast-pay arrangement as recharacter-ized under this section ($1,200 of income attribut-able to the benefited stock less $500 of deductionsattributable to the financing instruments), exceedsY’s 1996 income from the fast-pay arrangement asnot recharacterized under this section ($100 of in-come attributable to the benefited stock). Thus, in1997 when the fast-pay arrangement is recharacter-ized, Y’s basis in the benefited stock is $24,400.

(f) Reporting requirement—(1) Filingrequirements—(i) In general. A corpora-tion that has fast-pay stock outstanding atany time during the taxable year must at-tach the statement described in paragraph(f)(2) of this section to its federal incometax return for such taxable year. Thisparagraph (f)(1)(i) does not apply to acorporation described in paragraphs(f)(1)(ii), (iii), or (iv) of this section.

(ii) Controlled foreign corporation.Inthe case of a controlled foreign corpora-tion (CFC), as defined in section 957, thathas fast-pay stock outstanding at any timeduring its taxable year (during which timeit was a CFC), each controlling UnitedStates shareholder (within the meaning of§1.964–1(c)(5)) must attach the statementdescribed in paragraph (f)(2) of this sec-tion to the shareholder’s Form 5471 forthe CFC’s taxable year. The provisions ofsection 6038 and the regulations undersection 6038 apply to any statement re-quired by this paragraph (f)(1)(ii).

(iii) Foreign personal holding com-pany. In the case of a foreign personalholding company (FPHC), as defined insection 552, that has fast-pay stock out-standing at any time during its taxableyear (during which time it was a FPHC),each United States citizen or resident whois an officer, director, or 10-percent share-holder (within the meaning of section6035(e)(1)) of such FPHC must attach thestatement described in paragraph (f)(2) ofthis section to his or her Form 5471 forthe FPHC’s taxable year. The provisionsof sections 6035 and 6679 and the regula-tions under sections 6035 and 6679 applyto any statement required by this para-graph (f)(1)(iii).

(iv) Passive foreign investment com-pany. In the case of a passive foreign in-vestment company (PFIC), as defined in

section 1297, that has fast-pay stock out-standing at any time during its taxableyear (during which time it was a PFIC),each shareholder that has elected (undersection 1295) to treat the PFIC as a quali-fied electing fund and knows or has rea-son to know that the PFIC has outstandingfast-pay stock must attach the statementdescribed in paragraph (f)(2) of this sec-tion to the shareholder’s Form 8621 forthe PFIC’s taxable year. Each share-holder owning 10 percent or more of theshares of the PFIC (by vote or value) ispresumed to know that the PFIC has is-sued fast-pay stock. The provisions ofsections 1295(a)(2) and 1298(f) and theregulations under those sections (includ-ing §1.1295–1T(f)(2)) apply to any state-ment required by this paragraph (f)(1)(iv).

(2) Statement.The statement requiredunder this paragraph (f) must say, “Thisfast-pay stock disclosure statement is re-quired by §1.7701(l)–3(f) of the incometax regulations.” The statement must alsoidentify the corporation that has outstand-ing fast-pay stock and must contain thedate on which the fast-pay stock was is-sued, the terms of the fast-pay stock, and(to the extent the filing person knows orhas reason to know such information) thenames and taxpayer identification num-bers of the shareholders of any class ofstock that is not traded on an establishedsecurities market (as described in§1.7704–1(b)).

(g) Effective date—(1) In general. Ex-cept as provided in paragraph (g)(4) ofthis section (relating to reporting require-ments), this section applies to taxableyears ending after February 26, 1997.Thus, all amounts accrued or paid duringthe first taxable year ending after Febru-ary 26, 1997, are subject to this section.

(2) Election to limit taxable income at-tributable to a recharacterized fast-payarrangement for taxable years endingafter February 26, 1997, and before thedate these regulations are published asfinal regulations in the FederalRegister—(i) Limit and adjustment.Fortaxable years ending after February 26,1997, and before the date these regula-tions are published as final regulations inthe Federal Register, a shareholder maylimit its taxable income attributable to afast-pay arrangement recharacterizedunder paragraph (c) of this section, to the

1999–11 I.R.B. 19 March 15, 1999

taxable income that would result if thefast-pay arrangement were recharacter-ized under Notice 97–21, 1997–1 C.B.407, see §601.601(d)(2) of this chapter.Any amount a shareholder excludes fromtaxable income under this paragraph(g)(2)(i) must be included as an adjust-ment to taxable income in the share-holder’s first taxable year that includesthe date these regulations are published asfinal regulations in the Federal Register.A shareholder that has elected to limit itstaxable income under this paragraph(g)(2)(i) must include a statement in itsbooks and records identifying each fast-pay arrangement to which the limit wasapplied and providing the amount ex-cluded from taxable income for each suchfast-pay arrangement.

(ii) The following examples illustratethe rules of this paragraph (g)(2). Forpurposes of these examples, assume thatthe last year a shareholder may limit itstaxable income under this paragraph(g)(2) is 1998.

Example 1. Fast-pay arrangement recharacter-ized under Notice 97-21; REIT holds third-partydebt. (i) Facts.

(A) REIT Y is formed on January 1, 1998, atwhich time it issues 1,000 shares of fast-pay stockand 1,000 shares of benefited stock for $100 pershare. Y and all of its shareholders have calendartaxable years. All shareholders of Y have elected toaccrue market discount based on a constant interestrate, to include the market discount in income as itaccrues, and to amortize bond premium.

(B) For years 1 through 5, the fast-pay stock hasan annual dividend rate of $17 per share ($17,000for the class); in later years, the fast-pay stock has anannual dividend rate of $1 per share ($1,000 for theclass). At the end of year 5, and thereafter, a shareof fast-pay stock can be acquired by Y in exchangefor $50 ($50,000 for the class).

(C) On the day Y is formed, it acquires a five-year mortgage note (the note) issued by an unrelatedthird party for $200,000. The note provides for an-nual interest payments on December 31 of $18,000(a coupon interest rate of 9.0 percent, compoundedannually), and one payment of principal at the end of5 years. The note can be prepaid, in whole or inpart, at any time.

(ii) Recharacterization under Notice 97–21.(A)In general. One way to recharacterize the fast-payarrangement under Notice 97–21 is to treat the fast-pay shareholders and the benefited shareholders as ifthey jointly purchased the note from the issuer withthe understanding that over the five-year term of thenote the benefited shareholders would use theirshare of the interest to buy (on a dollar-for-dollarbasis) the fast-pay shareholders’ portion of the note.The benefited shareholders’ and the fast-pay share-holders’ yearly taxable income under Notice 97–21

can then be calculated after determining their initialportions of the note and whether those initial por-tions are purchased at a discount or premium.

(B) Determining initial portions of the debt in-strument. The fast-pay shareholders’ and the bene-fited shareholders’ initial portions of the note can bedetermined by comparing the present values of theirexpected cash flows. As a class, the fast-pay share-holders expect to receive cash flows of $135,000 (fiveannual payments of $17,000, plus a final payment of$50,000). As a class, the benefited shareholders ex-pect to receive cash flows of $155,000 (five annualpayments of $1,000, plus a final payment of$150,000). Using a discount rate equal to the yield tomaturity (as determined under §1.1272–1(b)(1)(i)) ofthe mortgage note (9.0 percent, compounded annu-ally), the present value of the fast-pay shareholders’cash flows is $98,620, and the present value of thebenefited shareholders’ cash flows is $101,380. Thus,the fast-pay shareholders initially acquire 49 percentof the note at a $1,380 premium (that is, they paid$100,000 for $98,620 of principal in the note). Thebenefited shareholders initially acquire 51 percent ofthe note at a $1,380 discount (that is, they paid$100,000 for $101,380 of principal in the note).Under section 171, the fast-pay shareholders’ pre-mium is amortizable based on their yield in their ini-tial portion of the note (8.57 percent, compounded an-nually). The benefited shareholders’ discount accruesbased on the yield in their initial portion of the note(9.35 percent, compounded annually).

(C) Taxable income under Notice 97–21. UnderNotice 97-21, the fast-pay shareholders’ 1998 tax-able income attributable to the fast-pay arrangementis $8,574 ($8.57 per $100 invested), computed bysubtracting the amortizable premium ($302) fromthe interest income from their portion of the note($8,876). The benefited shareholders’ 1998 taxableincome attributable to the fast-pay arrangement is$9,353 ($9.35 per $100 invested), computed byadding the accrued discount ($229) to the interest in-come from their portion of the note ($9,124).

(iii) Taxable income under the recharacterizationof this section.Assume the financing instrumentsare debt instruments. Under the recharacterizationrules of paragraph (c) of this section, the fast-payshareholders’ 1998 taxable income attributable tothe fast-pay arrangement is $8,574 ($8.57 per $100invested), which is the interest income from the fi-nancing instruments. The benefited shareholders’1998 taxable income attributable to the fast-payarrangement is $9,426 ($9.43 per share of benefitedstock), computed by subtracting the interest incomeaccrued on the financing instruments ($8,574) fromthe dividend income actually and deemed paid onthe benefited stock ($18,000).

(iv) Limit on taxable income under this para-graph (g)(2). (A) Fast-pay shareholders. For 1998,the fast-pay shareholders have the same taxable in-come under the recharacterization of Notice 97–21($8,574) as they have under the recharacterization ofparagraph (c) of this section ($8,574). Thus, thelimit under paragraph (g)(2)(i) of this section is un-available to the fast-pay shareholders.

(B) Benefited shareholders.For 1998, the bene-fited shareholders have taxable income attributableto the fast-pay arrangement of $9,353 ($9.35 per$100 invested) under the recharacterization of No-

tice 97–21, and taxable income of $9,426 ($9.43 pershare of benefited stock) under the recharacteriza-tion of paragraph (c) of this section. Thus, underparagraph (g)(2)(i) of this section, a benefited share-holder may elect to limit its taxable income attribut-able to the fast-pay arrangement to $9.35 for eachshare of benefited stock. Any amount an electingshareholder excludes from taxable income($0.08 pershare of benefited stock) must later be included asan adjustment. (If all benefited shareholders electthe limit, then as a class the later adjustment to tax-able income is $73.)

Example 2. REIT holds debt issued by a benefitedshareholder.(i) Facts. The facts are the same as inExample 1of this paragraph (g)(2) except that cor-poration Z holds 800 shares (80 percent) of the ben-efited stock, and Z, instead of a third party, issuesthe mortgage note acquired by Y.

(ii) Recharacterization under Notice 97–21.Be-cause Y holds a debt instrument issued by Z, thefast-pay arrangement is recharacterized under No-tice 97–21 as an arrangement in which Z issued oneor more instruments directly to the fast-pay share-holders and the other benefited shareholders. Con-sistent with this recharacterization, Z is treated as is-suing a debt instrument to the fast-pay shareholdersfor $100,000. The debt instrument provides for fiveannual payments of $17,000 and an additional pay-ment of $50,000 in year five. Thus, the debt instru-ment’s yield to maturity is 8.57 percent per annum,compounded annually. Z is also treated as issuing adebt instrument to the other benefited shareholdersfor $20,000 (200 shares multiplied by $100, or 20percent of the $100,000 paid to Y by the benefitedshareholders as a class). This debt instrument pro-vides for five annual payments of $200 and an addi-tional payment of $30,000 in year five. The debt in-strument’s yield to maturity is 9.30 percent perannum, compounded annually. For 1998, Z’s inter-est expense is $10,435 ($8,574 attributable to thedebt instruments held by the fast-pay shareholders,and $1,861 attributable to the debt instruments heldby the other benefited shareholders).

(iii) Recharacterization under this section. As-sume the financing instruments are debt instruments.Under the recharacterization rules of paragraph (c)of this section, for 1998, Z has dividend income of$14,400 (800 shares multiplied by $18, or 80 per-cent of $18,000), and total interest expense of$24,859 ($18,000 of interest accrued on the noteheld by Y, and $6,859 of interest accrued on the fi-nancing instruments).

(iv) Limit on taxable income under this para-graph (g)(2). For 1998, Z has a taxable loss attribut-able to the fast-pay arrangement of $10,435 underthe recharacterization of Notice 97-21, and a taxableloss of $10,459 ($14,400 of dividends, minus$24,859 of total interest expense) under the recharac-terization of paragraph (c) of this section. Thus, for1998, Z’s taxable loss attributable to the fast-payarrangement is $10,459 (the amount determinedunder paragraph (c) of this section), and the limit ofparagraph (g)(2)(i) of this section is unavailable to Z.

(3) Rule to comply with this section.To comply with this section for each tax-able year in which it failed to do so, a tax-

March 15, 1999 20 1999–11 I.R.B.

payer should file an amended return. Fortaxable years ending before the date theseregulations are published as final regula-tions, a taxpayer that has complied withNotice 97–21, 1997–1 C.B. 407, (see§601.601(d)(2) of this chapter) is consid-ered to have complied with this section.

(4) Reporting requirements. The re-porting requirements of paragraph (f) ofthis section apply to taxable years (of theperson required to file the statement) end-ing after the date these regulations arepublished as final regulations in the Fed-eral Register.

John Dalrymple,Deputy Commissioner of

Internal Revenue.



Compliance Monitoring andMiscellaneous Issues Relating tothe Low-Income Housing Credit

REG–114664–97



SUMMARY: This document containsproposed amendments to various existingfinal regulations concerning the low-in-come housing tax credit including theprocedures for compliance monitoring bystate and local housing agencies (Agen-cies), the requirements for making carry-over allocations, and the rules for Agen-cies’ correction of administrative errors oromissions. In addition, regulations arebeing proposed involving the independentverification of information on sources anduses of funds submitted by taxpayers toAgencies. These amendments and pro-posed regulations affect owners of low-income housing projects who haveclaimed the credit and the Agencies whoadminister the credit. This document alsoprovides notice of a public hearing onthese proposed regulations.

DATES: Written and electronic com-ments must be received by May 6, 1999.Outlines of topics to be discussed at thepublic hearing scheduled for May 27,1999, must be received by April 8, 1999.ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–114664–97),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–114664–97),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe Internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS In-ternet site at http://www.irs.ustreas.gov/prod/tax_regs/comments. html. The pub-lic hearing will be held in room 2615, In-ternal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, PaulHandleman, (202) 622-3040; concerningsubmissions, the hearing, and/or to beplaced on the building access list to attendthe hearing, LaNita Van Dyke, (202) 622-7180 (not toll-free numbers).



The collections of information con-tained in §§1.42–5 and 1.42–13 previ-ously have been reviewed and approvedby the Office of Management and Budgetfor review under control numbers 1545-1291 and 1545-1357, respectively; all ofthese paperwork requirements will beconsolidated under control number 1545-1357. The new collections of informationcontained in this notice of proposed rule-making have been submitted to the Of-fice of Management and Budget for re-view in accordance with the PaperworkReduction Act of 1995 (44 U.S.C.3507(d)).

Comments on the collections of infor-mation should be sent to the Office ofManagement and Budget,Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-

tory Affairs, Washington, DC 20503, withcopies to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,OP:FS:FP, Washington, DC 20224. Com-ments on the collections of informationshould be received by March 9, 1999.Comments are specifically requested con-cerning:Whether the proposed collection of infor-mation is necessary for the proper perfor-mance of the functions of the IRS, includ-ing whether the information will havepractical utility;The accuracy of the estimated burden as-sociated with the proposed collection ofinformation (see below);How the quality, utility, and clarity of theinformation to be collected may be en-hanced;How the burden of complying with theproposed collection of information maybe minimized, including through the ap-plication of automated collection tech-niques or other forms of information tech-nology; andEstimates of capital or start-up costs andcosts of operation, maintenance, and pur-chase of services to provide information.

The requirement for the collections ofinformation in this notice of proposedrulemaking is in §§1.42–5, 1.42–13, and1.42–17. The information is required bythe IRS to verify compliance with the re-quirements of section 42. The collectionsof information are mandatory. The likelyrespondents/recordkeepers are individu-als, state and local governments, busi-nesses or other for-profit institutions, non-profit institutions, and small businesses ororganizations.Estimated total annual reporting andrecordkeeping burden for §1.42–5:102,500 hours.For §1.42–5, the estimated annual burdenper respondent varies from .5 hour to 3hours for taxpayers and 250 to 5,000hours for Agencies, with an estimated av-erage of 1 hour for taxpayers and 1,500hours for Agencies.Estimated number of respondents for§1.42–5 : 20,000 taxpayers and 55 Agen-cies.Estimated total annual reporting andrecordkeeping burden for §1.42–13: 289hours.For §1.42–13, the estimated annual bur-den per respondent varies from .5 hour to

1999–11 I.R.B. 21 March 15, 1999

10 hours for taxpayers and Agencies, withan estimated average of 3.5 hours for tax-payers and 3 hours for Agencies.Estimated number of respondents for§1.42–13: 43 taxpayers and 43 Agencies.Estimated total annual reporting andrecordkeeping burden for §1.42–17:2,110 hours.For §1.42–17, the estimated annual bur-den per respondent varies from .5 hour to2 hours for taxpayers and .5 hour to 5hours for Agencies, with an estimated av-erage of 1 hour for taxpayers and 2 hoursfor Agencies.Estimated number of respondents for§1.42–17: 2,000 taxpayers and 55 Agen-cies.Estimated annual frequency of responses:once a year.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information unless it displays avalid control number assigned by the Of-fice of Management and Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

On March 28, 1997, the General Ac-counting Office (GAO) submitted a reportto Congress, “Tax Credits: Opportunitiesto Improve Oversight of the Low-IncomeHousing Program,” (GAO/GGD/RCED-97–55), recommending certain revisionsto existing Agency procedures for compli-ance with the low-income housing creditand requirements under qualified alloca-tion plans for verifying taxpayers’ sourcesand uses of funds for low-income housingprojects. Consistent with these proposals,the proposed regulations amend existingregulation §1.42–5 to require Agencies: (i)to report annually their compliance moni-toring activities to the IRS; (ii) to conducton-site habitability inspections of low-in-come housing projects; and (iii) to reviewlocal government reports on building codeviolations. In addition, the proposed regu-lations provide that qualified allocationplans require taxpayers to submit indepen-

dent verification on sources and uses offunds for low-income projects.

The proposed regulations also containamendments to the Income Tax Regula-tions (26 CFR part 1) including §1.42–6(carryover allocations), §1.42–11 (provi-sion of services), §1.42–12 (effectivedates and transitional rules), and§1.42–13 (correction of administrative er-rors and omissions) that are issued underthe authority granted by section 42(n).


Compliance Monitoring

Section 42(m)(1)(B)(iii) provides thatan allocation plan is not qualified unless itcontains a procedure that the Agency (oran agent of, or private contractor hired by,the Agency) will follow in monitoringcompliance with the provisions of section42. The Agency is to notify the IRS ofany noncompliance of which the Agencybecomes aware.

Section 42(m)(1)(B)(iii) is effective onJanuary 1, 1992, and applies to all build-ings for which the low-income housingcredit determined under section 42 is, orhas been, allowable at any time. Alloca-tion plans must have complied with therequirements of §1.42–5 by June 30,1993. Section 42(m)(1)(B)(iii) and§1.42–5 do not require monitoring forwhether a low-income housing project isin compliance with the requirements ofsection 42 prior to January 1, 1992. How-ever, if an Agency becomes aware of non-compliance that occurred prior to January1, 1992, the Agency is required to notifythe IRS of that noncompliance.

The current compliance monitoringregulations require an Agency, at a mini-mum, to review tenant income certifica-tions and rent charges of projects usingone of the following three monitoring op-tions: (1) review the owners’ annual in-come certifications, including the docu-mentation supporting the certifications forat least 50 percent of the Agency’s low-in-come projects, and tenant rent records inat least 20 percent of the low-income unitsin these projects; (2) make annual on-siteinspections of at least 20 percent of theprojects, and review the low-income certi-fication, the documentation supporting thecertification, and rent record for each ten-

ant in at least 20 percent of the low-in-come units in those projects; or (3) obtainfrom all project owners tenant income andrent records for each low-income unit and,for at least 20 percent of the projects, re-view the annual tenant income certifica-tion, backup income documentation, andrent record for each low-income tenant inat least 20 percent of the low-income unitsin those projects.

The GAO report recommended that anAgency conduct regular on-site inspec-tions of projects and obtain building codeinspection reports performed by the localgovernment unit. The GAO found thatdesk audits (monitoring options 1 and 3above) failed to detect violations involv-ing the physical condition of buildings.In addition, site visits allow an Agency todirectly assess the compliance status ofprojects and the physical condition ofbuildings. Consistent with these propos-als, the proposed regulations remove thethree monitoring options and require, atleast once every three (3) years, that eachAgency conduct on-site inspections of allbuildings in each low-income housingproject and, for each tenant in at least 20percent of the project’s low-income unitsselected by the Agency, review the low-income certification, the documentationsupporting such certification, and the rentrecord. The proposed regulations also re-quire, at a minimum, by the end of thecalendar year following the year the lastbuilding in a project is placed in service,that the Agency conduct on-site inspec-tions of the projects and review the low-income certification, the documentationsupporting such certification, and the rentrecord for each tenant in the project. Aspart of the inspection requirements, theproposed regulations also require theAgency to determine whether the projectis suitable for occupancy, taking into ac-count local health, safety, and buildingcodes. Agencies may delegate this deter-mination only to a state or local govern-ment unit responsible for making buildingcode inspections. The three-year inspec-tion requirement is proposed to be effec-tive on the date the final regulations arepublished in the Federal Register. Theplaced-in-service year inspection require-ment is proposed to be effective for build-ings placed in service on or after the date

March 15, 1999 22 1999–11 I.R.B.

the final regulations are published in theFederal Register.

The current compliance monitoringregulations require the owner of a project,at a minimum, to certify annually that forthe preceding 12-month period eachbuilding in the project was suitable for oc-cupancy, taking into account local health,safety, and building codes. Based on theGAO recommendation, the proposed reg-ulations revise this certification by alsorequiring the owner of the project to cer-tify that for the preceding 12-month pe-riod the state or local government unit re-sponsible for making building codeinspections did not issue a report of a vio-lation for the project. If the governmentalunit issued a report of a violation, theowner will be required to attach a copy ofthe report of the violation to the annualcertification submitted to the Agency.

The proposed regulations also adoptthe GAO recommendation that Agenciesreport annually to the IRS on compliancemonitoring activities. It is anticipatedForm 8610, “Annual Low-Income Hous-ing Credit Agencies Report,” will be re-vised to require an Agency to confirm an-nually that it has satisfied the newcompliance monitoring requirements in-volving: (1) the once every three-year on-site inspections and review of the low-in-come certification, the documentationsupporting such certification, and the rentrecord for each tenant in at least 20 per-cent of the low-income units selected bythe Agency; and (2) the on-site inspec-tions relating to the placed-in-service yearand review of the low-income certifica-tion, the documentation supporting suchcertification, and the rent record for eachlow-income tenant in the project.

The current compliance monitoringregulations require Agencies to report acorrection of noncompliance or failure tocertify if the correction occurs within thecorrection period defined in §1.42–5(e)(4). The proposed regulations clarifythat the Agency is required to file Form8823, “Low-Income Housing CreditAgencies Report of Noncompliance,”with the IRS reporting the correction ofthe noncompliance or failure to certify re-gardless of when the correction occursduring the compliance period. This re-quirement is proposed to be effective onthe date the final regulations are pub-lished in the Federal Register.

Sources and Uses of Funds

The GAO report recommended thatIRS regulations be amended to establishclear requirements to ensure independentverification of taxpayer’s key informationon sources and uses of funds submitted toan Agency. Without assurance of reliableand complete cost and financing informa-tion, Agencies are vulnerable to providingmore (or fewer) tax credits to projectsthan are actually needed. Under section42(m)(2)(A), the housing credit dollaramount allocated to a project should notexceed the amount the Agency determinesis necessary for the financial feasibility ofthe project and its viability as a qualifiedlow-income housing project throughoutthe credit period. In making this determi-nation, section 42(m)(2)(B) requires thatthe Agency must consider: (i) the sourcesand uses of funds and the total financingplanned for the project, (ii) any proceedsor receipts expected to be generated byreason of tax benefits, (iii) the percentageof the housing credit dollar amount usedfor project costs other than the costs of in-termediaries, and (iv) the reasonablenessof the developmental and operationalcosts of the project. The requirement insection 42(m)(2)(B)(iii) is not to be ap-plied so as to impede the development ofprojects in hard-to-develop areas.

In its report, the GAO determined thatan Agency must make three critical judg-ments in awarding credits: (1) the reason-ableness of developer costs because theAgency is to award no more credits to aproject than a specified percentage of cer-tain Agency-approved project develop-ment costs; (2) the reasonableness of thefinancing arrangements for the project be-cause the Agency is required to base anaward of credit on the financial need of aproject subject to the limit computed onAgency-approved development costs; and(3) criteria for pricing the credit (for ex-ample, use of an appropriate rate to con-vert credits into an equity investmentamount).

So that an Agency may more accuratelydetermine the amount of credits to beawarded, the GAO proposed three alter-native recommendations: (1) an examina-tion or audit, which would provide a rea-sonable basis for an independent publicaccountant to issue an opinion on theoverall reliability of a project’s financial

information taken as a whole; (2) a re-view, which would consist of inquiriesand application of analytical proceduresthat might bring to the accountant’s atten-tion significant matters affecting a pro-ject’s financial information but would notprovide assurance that the accountantwould become aware of all significantmatters that would be disclosed in anaudit; or (3) agreed-upon procedures,which would provide an accountant witha basis to issue a report of findings basedon the specified procedures but not a basisto issue an opinion on the reliability of thefinancial information.

Because the first alternative providesthe most reliable independent verificationon sources and uses of funds, the pro-posed regulations require that a taxpayermust obtain an opinion by a certified pub-lic accountant, based upon the accoun-tant’s audit or examination, on the finan-cial determinations and certificationsprovided by the taxpayer to the Agency,including the costs that may qualify forinclusion in eligible basis under section42(d) and the amount of the credit undersection 42. This opinion must be submit-ted to the Agency before the Agency is-sues the Form 8609, “Low-Income Hous-ing Credit Allocation Certification.” Thisrequirement is proposed to be effective onthe date the final regulations are pub-lished in the Federal Register.

Buildings Qualifying for CarryoverAllocations

The proposed regulations amend thecarryover allocation regulations by re-quiring the Agency to file a form (to beprescribed by the IRS) that summarizesthe carryover allocation document de-scribed in §1.42–6(d)(2) with theAgency’s Form 8610 for the year the allo-cation is made. The new form will befiled with the Form 8610 in lieu of theoriginal carryover allocation document.Taxpayers must continue to file a copy ofthe carryover allocation document withthe Form 8609 for the building for thefirst year the credit is claimed.

Correction of Administrative Errors andOmissions

Housing credit agencies may correctadministrative errors and omissions withrespect to allocations and recordkeeping

1999–11 I.R.B. 23 March 15, 1999

if the correction occurs within a reason-able period of time after discovery of theerror or omission. The current adminis-trative error and omission regulations de-fine an administrative error or omission asa mistake that results in a document thatinaccurately reflects the intent of theAgency at the time the document is origi-nally completed or, if the mistake affectsa taxpayer, a document that inaccuratelyreflects the intent of the Agency and theaffected taxpayer at the time the docu-ment is originally completed. However,an administrative error or omission doesnot include a misinterpretation of the ap-plicable rules and regulations under sec-tion 42. Agencies must obtain prior ap-proval from the Secretary to correct anadministrative error or omission if thecorrection is not made before the close ofthe calendar year of the error or omissionand the correction: (1) is a numericalchange to the housing credit dollaramount allocated for the building or pro-ject; (2) affects the determination of anycomponent of the state’s housing creditceiling under section 42(h)(3)(C); or (3)affects the state’s unused housing creditcarryover that is assigned to the Secretaryunder section 42(h)(3)(D).

The proposed regulations would pro-vide automatic approval for correcting anadministrative error or omission in an al-location document (a Form 8609, or a car-ryover allocation document under the re-quirements of section 42(h)(1)(E) or (F)and §1.42–6(d)(2)) that either did not ac-curately reflect the number of buildingsconstructed by the affected taxpayer, ortransposed the information for one ormore buildings with other buildings in aproject.

If the automatic approval provision ap-plies to the administrative error or omis-sion, the proposed regulations require theAgency to amend the allocation docu-ment. If correcting the administrativeerror or omission requires adding a Build-ing Identification Number (B.I.N.) to theamended allocation document, the pro-posed regulations require that the Agencymust include any B.I.N.(s) already exist-ing for the buildings in the document and,if possible, number the additionalB.I.N.(s) sequentially from the existingB.I.N.(s). In addition, the Agency mustfile the amended allocation document

with an amended Form 8610. This provi-sion is proposed to be effective on thedate the final regulations are published inthe Federal Register.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. It is hereby certified that the collec-tions of information in these regulationswill not have a significant economic im-pact on a substantial number of small en-tities. This certification is based upon thefact that any burden on taxpayers is mini-mal. Furthermore, an Agency is not a“small entity” for purposes of the Regula-tory Flexibility Act (5 U.S.C. chapter 6).Accordingly, a Regulatory FlexibilityAnalysis under the Regulatory FlexibilityAct is not required. Pursuant to section7805(f) of the Internal Revenue Code,this notice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) that are submitted timely to theIRS. The IRS and Treasury specificallyrequest comments on the clarity of theproposed rule and how it may be madeeasier to understand. All comments willbe available for public inspection andcopying.

A public hearing has been scheduledfor Thursday, May 27, 1999, at 10 a.m. inroom 2615, Internal Revenue Building,1111 Constitution Avenue, NW, Washing-ton DC. Due to building security proce-dures, visitors must enter at the 10thStreet entrance, located between Consti-tution and Pennsylvania Avenues, NW. Inaddition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-

trance area more than 15 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the“FOR FURTHER INFORMATIONCONTACT” section of this preamble.

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

Persons that wish to present oral com-ments at the hearing must submit writtenand electronic comments and an outlineof the topics to be discussed and the timeto be devoted to each topic (signed origi-nal and eight (8) copies) by April 8, 1999.




The principal author of these regula-tions is Paul F. Handleman, Office of theAssistant Chief Counsel (Passthroughsand Special Industries), IRS. However,other personnel from the IRS and Trea-sury Department participated in their de-velopment.

* * * * *




Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.42–17 also issued under 26

U.S.C. 42(n); * * *Par. 2. Section 1.42-5 is amended by:1. Revising paragraphs (c)(1)(v),

(c)(1)(vi) and (c)(2)(ii).2. Removing the language “If a moni-

toring procedure includes the review pro-vision described in paragraph (c)(2)(ii)(B)of this section, the” from the second sen-tence in paragraph (c)(2)(iii) and adding“The” in its place.

3. Removing the language “paragraph(c)(2)(ii)(A), (B), and (C) of this section”from the first sentence in paragraph(c)(4)(i) and adding “paragraph (c)(2)(ii)of this section” in its place.

March 15, 1999 24 1999–11 I.R.B.

4. Removing the language “AnAgency chooses the review requirementof paragraph (c)(2)(ii)(A) of this sectionand some of the buildings selected for re-view are” from the first sentence in theexample in paragraph (c)(4)(iii) andadding “An Agency selects for review” inits place.

5. Adding paragraph (c)(5).6. Revising the last sentence in para-

graph (d).7. Removing the language “(c)(2)-

(ii)(A), (B), or (C) of this section (which-ever is applicable)” from paragraph (e)(2)and adding the language “(c)(2)(ii) of thissection” in its place.

8. Adding a sentence at the end ofparagraph (e)(3)(i).

9. Removing the language “paragraph(e)(3) of this section” in the third sentencein paragraph (f)(1)(i) and adding “para-graphs (c)(5) and (e)(3) of this section” inits place.

10. Adding two sentences at the end ofparagraph (h).

The revisions and additions read as fol-lows:

§1.42–5 Monitoring compliance withlow-income housing credit requirements.

* * * * *

(c) * * *(1) * * *(v) All units in the project were for use

by the general public (as defined in§1.42–9) and used on a nontransient basis(except for transitional housing for thehomeless provided under section 42(i)-(3)(B)(iii) or single-room-occupancyunits rented on a month-by-month basisunder section 42(i)(3)(B)(iv));

(vi) Each building in the project wassuitable for occupancy, taking into ac-count local health, safety, and buildingcodes, and the State or local governmentunit responsible for making building codeinspections did not issue a report of a vio-lation for any building in the project. If areport of a violation was issued by thegovernmental unit, the owner must attacha copy of the report of the violation to theannual certification submitted to theAgency under paragraph (c)(1) of thissection;

(2) * * *(ii) Require that with respect to each

low-income housing project—

(A) The Agency conduct on-site in-spections of all buildings in the project bythe end of the calendar year following theyear the last building in the project isplaced in service and review the low-in-come certification, the documentationsupporting such certification, and the rentrecord for each low-income tenant; and

(B) At least once every three (3) years,the Agency conduct on-site inspections ofall buildings in the project, and, for eachtenant in at least 20 percent of the pro-ject’s low-income units selected by theAgency, review the low-income certifica-tion, the documentation supporting suchcertification, and the rent record; and

* * * * *

(5) Agency reports of compliance mon-itoring activities. The Agency must re-port its compliance monitoring activitiesannually on Form 8610, “Annual Low-In-come Housing Credit Agencies Report.”

(d) * * * In addition, in connection withthe on-site inspections required by para-graph (c)(2)(ii) of this section, the Agencymust determine whether the project issuitable for occupancy, taking into ac-count local health, safety, and buildingcodes. Notwithstanding paragraph (f) ofthis section, this determination may bedelegated only to a State or local govern-ment unit responsible for making buildingcode inspections.

(e) * * *(3) * * *(i) * * * For noncompliance or failure

to certify that is corrected after the end ofthe correction period, the Agency is re-quired to file Form 8823 with the Servicereporting the correction of the noncompli-ance or failure to certify regardless ofwhen the correction occurs during the 15-year compliance period under section42(i)(1).

* * * * *

(h) * * * In addition, the requirement inparagraph (c)(2)(ii)(A) of this section (in-volving on-site inspections relating to theplaced-in-service year and review of thelow-income certifications, the documen-tation supporting such certifications, andthe rent records) is effective for buildingsplaced in service on or after the date thefinal regulations are published in the Fed-eral Register. The requirements in para-

graph (c)(1)(vi) of this section (involvingwhether a State or local government unitresponsible for making building code in-spections issued a report or a violation forthe project), paragraph (c)(2)(ii)(B) ofthis section (the low-income certifica-tions, the documentation supporting suchcertifications, and the rent records), para-graph (c)(5) of this section (involving therequirement to report the Agency’s com-pliance monitoring activities to the Ser-vice), paragraph (d) of this section (in-volving habitability requirements), andparagraph (e)(3) of this section (involvingthe requirement to report corrected non-compliance or failure to certify after theend of the correction period) are effectiveon the date the final regulations are pub-lished in the Federal Register.

Par. 3. Section 1.42-6 is amended byremoving the first sentence in paragraph(d)(4)(ii) and adding two sentences in itsplace to read as follows:

§1.42–6 Buildings qualifying forcarryover allocations.

* * * * *(d) * * *(4) * * *(ii) Agency. The Agency must retain

the original carryover allocation docu-ment made under paragraph (d)(2) of thissection and file the form (to be prescribedby the IRS) that summarizes the carryoverallocation document. This form is filedwith the Agency’s Form 8610 that ac-counts for the year the allocation is made.* * *

* * * * *

Par. 4. Section 1.42–11 is amended byrevising the last sentence in paragraph(b)(3)(ii)(A) to read as follows:

§1.42–11 Provision of services.

* * * * *

(b) * * *(3) * * *(ii) * * * (A) * * * For a building de-

scribed in section 42(i)(3)(B)(iii) (relatingto transitional housing for the homeless)or section 42(i)(3)(B)(iv) (relating to sin-gle room occupancy), a supportive ser-vice includes any service provided to as-sist tenants in locating and retainingpermanent housing.

1999–11 I.R.B. 25 March 15, 1999

* * * * *

Par. 5. Section 1.42–12 is amended byadding paragraph (c) to read as follows:

§1.42–12 Effective dates and transitionalrules.

* * * * *

(c) The rule set forth in §1.42–6(d)(4)(ii) relating to the requirement thatstate and local housing agencies file theform to be prescribed by the Internal Rev-enue Service that summarizes the carry-over allocation document is effective forforms the due date of which are on orafter March 8, 1999.

Par. 6. Section 1.42–13 is amended by:1. Revising the introductory text of

paragraph (b)(3)(iii).2. Adding paragraphs (b)(3)(vi),

(b)(3)(vii), and (b)(3)(viii).3. Adding a sentence at the end of

paragraph (d).The revisions and additions read as fol-

lows:

§1.42–13 Rules necessary andappropriate; housing credit agencies’correction of administrative errors andomissions.

* * * * *

(b) * * *(3) * * *(iii) Secretary’s prior approval re-

quired. Except as provided in paragraph(b)(3)(vi) of this section, an Agency mustobtain the Secretary’s prior approval tocorrect an administrative error or omis-sion, as described in paragraph (b)(2) ofthis section, if the correction is not madebefore the close of the calendar year ofthe error or omission and the correction—

* * * * *

(vi) Secretary’s automatic approval.The Secretary grants automatic approvalto correct an administrative error or omis-sion described in paragraph (b)(2) of thissection if—

(A) The correction is not made beforethe close of the calendar year of the erroror omission and the correction is a numer-ical change to the housing credit dollaramount allocated for the building or mul-tiple-building project;

(B) The administrative error or omis-

sion resulted in an allocation document(the Form 8609, “Low-Income HousingCredit Allocation Certification,” or the al-location document under the requirementsof section 42(h)(1)(E) or (F) and §1.42–6(d)(2)) that either did not accurately re-flect the number of buildings constructedby the affected taxpayer (for example, theaffected taxpayer built 10 buildings insteadof 8 buildings having the same total num-ber of units), or transposed the informationfor one or more buildings with other build-ings in the multiple-building project;

(C) The administrative error or omis-sion does not affect the Agency’s rankingof the building(s) or project and the totalamount of credit the Agency allocated tothe building(s) or project;

(D) The Agency corrects the adminis-trative error or omission no later than oneyear after the building(s) were placed inservice by the affected taxpayer; and

(E) The Agency corrects the adminis-trative error or omission by following theprocedures described in paragraph(b)(3)(vii) of this section.

(vii) How Agency corrects errors oromissions subject to automatic approval.An Agency corrects an administrativeerror or omission described in paragraph(b)(3)(vi) of this section by—

(A) Amending the allocation documentdescribed in paragraph (b)(3)(vi)(B) ofthis section to correct the administrativeerror or omission. The Agency will indi-cate on the amended allocation documentthat it is making the “correction under§1.42–13(b)(3)(vii)”. If correcting the al-location document requires including anyadditional B.I.N.(s) in the document, thedocument must include any B.I.N.(s) al-ready existing for the buildings. If possi-ble, the additional B.I.N.(s) should be se-quentially numbered from the existingB.I.N.(s);

(B) Amending, if applicable, the formto be prescribed by the Service that sum-marizes the allocation document (see§1.42–6 (d)(4)(ii)) and attaching a copyof this form to an amended Form 8610,“Annual Low-Income Housing CreditAgencies Report,” for the year the alloca-tion was made. The Agency will indicateon the forms that it is making the “correc-tion under §1.42–13(b)(3)(vii)”;

(C) Amending, if applicable, the Form8609 and attaching the original of thisamended form to an amended Form 8610

for either the year the allocation wasmade or the year the building was placedin service by the affected taxpayer. TheAgency will indicate on the forms that itis making the “correction under §1.42–13(b)(3)(vii)”;

(D) Filing the amended Form 8610with the Service. When completing theamended Form 8610, the Agency shouldfollow the specific instructions for theForm 8610 under the heading “AmendedReport”; and

(E) Mailing a copy of any amended al-location document and any amended Form8609 to the affected taxpayer.

(viii) Other approval procedures.TheSecretary may grant automatic approval tocorrect other administrative errors oromissions as designated in one or moredocuments published either in the FederalRegister or in the Internal Revenue Bul-letin (see § 601.601(d)(2) of this chapter).

* * * * *

(d) * * * Paragraphs (b)(3)(vi), (vii),and (viii) of this section are effective onthe date the final regulations are pub-lished in the Federal Register.

Par. 7. Section 1.42–17 is added toread as follows:

§1.42–17 Qualified Allocation Plan.

(a) Requirements—(1) In general.[Reserved]

(2) Selection criteria.[Reserved](3) Agency evaluation. Section

42(m)(2)(A) requires that the housingcredit dollar amount allocated to a projectshould not exceed the amount the Agencydetermines is necessary for the financialfeasibility of the project and its viabilityas a qualified low-income housing projectthroughout the credit period. In makingthis determination, the Agency must con-sider—

(i) The sources and uses of funds andthe total financing planned for the project.The taxpayer must certify to the Agencythe full extent of all federal, state, andlocal subsidies that apply (or which thetaxpayer expects to apply) to the project.The taxpayer must also certify to theAgency all other sources of funds and alldevelopment costs for the project. Thetaxpayer’s certification should be suffi-ciently detailed to enable the Agency toascertain the nature of the costs that will

March 15, 1999 26 1999–11 I.R.B.

comprise the total financing package, in-cluding subsidies and the anticipated syn-dication or placement proceeds to beraised. Development cost information,whether or not includible in eligible basisunder section 42(d), that should be pro-vided to the Agency includes, but is notlimited to, site acquisition costs, construc-tion contingency, general contractor’soverhead and profit, architect and engi-neer’s fees, permit and survey fees, insur-ance premiums, real estate taxes duringconstruction, title and recording fees, con-struction period interest, financing fees,organizational costs, rent-up and market-ing costs, accounting and auditing costs,working capital and operating deficit re-serves, syndication and legal fees, devel-oper fees, and other costs;

(ii) Any proceeds or receipts expectedto be generated by reason of tax benefits;

(iii) The percentage of the housingcredit dollar amount used for project costsother than the costs of intermediaries.This requirement should not be applied soas to impede the development of projectsin hard-to-develop areas under section42(d)(5)(C); and

(iv) The reasonableness of the develop-mental and operational costs of the pro-ject.

(4) Timing of Agency evaluation.Thefinancial determinations and certificationsrequired under paragraph (a)(3) of thissection must be made at each of the fol-lowing times:

(i) The time of the application for thehousing credit dollar amount.

(ii) The time of the allocation of thehousing credit dollar amount.

(iii) The date the building is placed inservice.

(iv) After the building is placed in ser-vice, and before the Agency issues theForm 8609, “Low-Income HousingCredit Allocation Certification.”

(5) Special rule for final determina-tions and certifications.For the Agency’sevaluation under paragraph (a)(4)(iv) ofthis section, the taxpayer must obtain anopinion by a certified public accountant,based upon the accountant’s audit or ex-amination, on the financial determina-tions and certifications in paragraphs(a)(3)(i) through (iii) of this section, in-cluding the costs that may qualify for in-clusion in eligible basis under section

42(d) and amount of the credit under sec-tion 42.

(6) Bond financed projects.A projectqualifying under section 42(h)(4) is notentitled to any credit unless the govern-mental unit that issued the bonds (or onbehalf of which the bonds were issued),or the Agency responsible for issuing theForm(s) 8609 to the project, makes deter-minations under rules similar to the rulesin paragraphs (a)(3), (4), and (5) of thissection.

(b) Effective date.This section is ef-fective on the date final regulations arepublished in the Federal Register.


Internal Revenue.



Education Tax Credits

REG–106388–98


ACTION: Notice of proposed rulemak-ing and requests to hold a videoconfer-ence public hearing.

SUMMARY: This document containsproposed regulations relating to the HopeScholarship Credit and the LifetimeLearning Credit in section 25A of the In-ternal Revenue Code. These proposedregulations provide guidance to individu-als who may claim the Hope ScholarshipCredit or the Lifetime Learning Credit forcertain postsecondary educational ex-penses. This document also announcesthat a public hearing will be held on theproposed regulations upon request andthat persons outside the Washington, DC,area who wish to testify at the hearingmay request that the IRS videoconferencethe hearing to their sites.

DATES: Written or electronically gener-ated comments must be received by April

6, 1999. Requests to videoconference thehearing to other sites must be received byMarch 8, 1999.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–106388–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–106388–98),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS in-ternet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The IRSwill publish the time and date of the pub-lic hearing and the locations of any video-conferencing sites in the Federal Regis-ter.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations,Donna Welch, (202) 622-4910; concern-ing submissions of comments, the hear-ing, and/or to be placed on the buildingaccess list to attend the hearing, contactMichael L. Slaughter, (202) 622-7190(not toll-free numbers).



The collection of information con-tained in this notice of proposed rulemak-ing has been submitted to the Office ofManagement and Budget for review in ac-cordance with the Paperwork ReductionAct of 1995 (44 U.S.C. 3507(d)). Com-ments on the collection of informationshould be sent to the Office of Manage-ment and Budget,Attn: Desk Officer forthe Department of the Treasury, Office ofInformation and Regulatory Affairs,Washington, DC 20503, with copies tothe Internal Revenue Service,Attn: IRSReports Clearance Officer, OP:FS:FP,Washington, DC 20224. Comments onthe collection of information should be re-ceived by March 8, 1999. Comments arespecifically requested concerning:

1999–11 I.R.B. 27 March 15, 1999

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the InternalRevenue Service, including whether theinformation will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation (see below);

How the quality, utility, and clarity ofthe information to be collected may be en-hanced;

How the burden of complying with theproposed collection of information maybe minimized, including through theapplication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costs andcosts of operation, maintenance, and pur-chase of services to provide information.

The collection of information in thisproposed regulation is in §1.25A–1(d)and (f). Taxpayers must elect to claim aneducation credit by attaching Form 8863,“Education Credits (Hope and LifetimeLearning Credits),” to a timely filed (in-cluding extensions) federal income tax re-turn for the taxable year in which a creditis claimed. This collection of informationis required in order for a taxpayer to electto claim an education credit. This infor-mation will be used to carry out the inter-nal revenue laws. The likely respondentsare individuals.

The reporting burden contained in§1.25A–1(d) and (f) is reflected in theburden of Form 8863, “Education Credits(Hope and Lifetime Learning Credits),”and Form 1040, “U.S. Individual IncomeTax Return.”

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless it dis-plays a valid control number assigned bythe Office of Management and Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may becomematerial in the administration of any in-ternal revenue law. Generally, tax returnsand tax return information are confiden-tial, as required by 26 U.S.C. 6103.

Background

The Taxpayer Relief Act of 1997 (Pub-lic Law 105-34 (111 Stat. 788) (TRA

’97)) added section 25A to the InternalRevenue Code to provide the Hope Schol-arship Credit and the Lifetime LearningCredit (education credits). In general, theHope Scholarship Credit and the LifetimeLearning Credit allow taxpayers to claima nonrefundable credit against their fed-eral income taxes for certain postsec-ondary educational expenses. On No-vember 17, 1997, the IRS publishedNotice 97–60 (1997–46 I.R.B. 8) to pro-vide general guidance on the higher edu-cation tax incentives enacted by TRA ’97,including the Hope Scholarship Creditand the Lifetime Learning Credit. Thisdocument contains proposed amendmentsto the Income Tax Regulations (26 CFRpart 1) to provide detailed guidance on theeducation credits in section 25A.

TRA ’97 also added section 6050S tothe Code, which requires eligible educa-tional institutions to file information re-turns to assist taxpayer and the IRS in de-termining the education credit thattaxpayers may claim under section 25A.The IRS has published several notices out-lining the limited information returns thatare required for 1998 and 1999. On De-cember 22, 1997, the IRS published No-tice 97–73 (1997–51 I.R.B. 16), which de-scribes the information that must bereported for 1998. On September 8, 1998,the IRS published Notice 98–46 (1998–36I.R.B. 21), which extends the applicationof Notice 97–73 to information returns re-quired under section 6050S for 1999. Fi-nally, on December 7, 1998, the IRS pub-lished Notice 98–59 (1998–49 I.R.B. 16),which modified the two prior Notices byproviding that an eligible educational in-stitution is not required to file informationreturns under section 6050S for 1998 or1999 with respect to either: (1) studentswho are enrolled during the year only incourses for which the student receives noacademic credit from the educational insti-tution; or (2) nonresident alien students,unless requested to do so by the student.The IRS and the Treasury Department in-tend to issue separate regulations on theinformation reporting required under sec-tion 6050S for years after 1999.


1. Calculation of Education Credit andGeneral Eligibility Requirements

Under the proposed regulations, a tax-

payer may claim a nonrefundable educa-tion credit equal to the total of the HopeScholarship Credit and the LifetimeLearning Credit allowed for the taxpayer,the taxpayer’s spouse, and any claimeddependents. An education credit in ex-cess of a taxpayer’s tax liability for thetaxable year can not be refunded. As withother personal credits, section 25A doesnot allow a carryforward of an unused ed-ucation credit or a carryforward of excessqualified expenses.

The proposed regulations provide rulesfor the coordination of the Hope Scholar-ship Credit and the Lifetime LearningCredit. The proposed regulations providethat, in the same taxable year, a taxpayermay claim a Hope Scholarship Credit foreach eligible student’s qualified tuitionand related expenses and a LifetimeLearning Credit for one or more other stu-dents’ qualified tuition and related ex-penses. The regulations provide that ataxpayer may claim either the HopeScholarship Credit or the Lifetime Learn-ing Credit, but not both, for the qualifiedtuition and related expenses of the samestudent in the same taxable year. A HopeScholarship Credit may be claimed for thequalified tuition and related expenses (upto a specified limit described below) ofeach eligible student. The LifetimeLearning Credit may be claimed for theaggregate amount of qualified tuition andrelated expenses (up to a specified limitdescribed below) of those students forwhom no Hope Scholarship Credit isclaimed.

Consistent with the income limitationsin section 25A(d), the proposed regula-tions provide that the education credit al-lowed is phased out for taxpayers withmodified adjusted gross income between$40,000 and $50,000 ($80,000 and$100,000 for taxpayers filing a joint re-turn) for the taxable year. For taxableyears beginning after 2001, these amountswill be adjusted for inflation. Based onthe definition in section 25A(d)(3), theregulations define modified adjustedgross incomeas the adjusted gross in-come (as defined in section 62) of the tax-payer for the taxable year increased byany amount excluded from gross incomeunder section 911, 931, or 933 (relating toincome earned abroad or from certainU.S. possessions or Puerto Rico). Theamount of an otherwise allowable educa-

March 15, 1999 28 1999–11 I.R.B.

tion credit for a taxable year that is re-duced solely by reason of the modifiedadjusted gross income limitation can notbe carried forward and claimed in a sub-sequent taxable year.

Consistent with the requirements insection 25A(e)(1), the proposed regula-tions provide that a taxpayer must elect toclaim the education credit. The electionmust be made by attaching Form 8863,“Education Credits (Hope and LifetimeLearning Credits),” to the taxpayer’s fed-eral income tax return for the taxable yearin which the credit is claimed. Consistentwith the identification requirements insection 25A(g)(1), the regulations providethat a taxpayer must include on the fed-eral income tax return the name and tax-payer identification number of each stu-dent for whom the credit is claimed.

Consistent with the requirements insection 25A(e)(2), the proposed regula-tions provide that no education credit isallowed for a taxable year for the quali-fied tuition and related expenses of a stu-dent if: (1) during the taxable year, a dis-tribution is made to, or on behalf of, thestudent from an education individual re-tirement account described in section530(b); and (2) any portion of the distrib-ution is excluded from gross incomeunder section 530(d)(2).

The proposed regulations provide guid-ance on the rules for claiming an educa-tion credit in the case of a dependent. Theregulations provide that, if the student is aclaimed dependent of another taxpayer,only that taxpayer may claim the educa-tion credit for the student’s qualified tu-ition and related expenses. The regula-tions explain that, if the taxpayer iseligible to, but does not, claim the studentas a dependent, only the student mayclaim the education credit for the student’squalified tuition and related expenses.

2. Definitions

The proposed regulations provide that aclaimed dependentis a dependent (as de-fined in section 152) for whom a deduc-tion under section 151 is allowed on thetaxpayer’s federal income tax return forthe taxable year in which the credit isclaimed.

Based on the requirements of section25A(f)(2), the proposed regulations pro-vide that an eligible educational institu-

tion means a college, university, voca-tional school, or other postsecondary edu-cational institution that: (1) is describedin section 481 of the Higher EducationAct of 1965 (HEA) (20 U.S.C. 1088) as ineffect on August 5, 1997 (generally all ac-credited public, nonprofit, and proprietarypostsecondary institutions); and (2) par-ticipates in a federal student financial aidprogram under title IV of the HEA (20U.S.C. 1070 et seq.) or is certified by theDepartment of Education as eligible toparticipate in such a program but choosesnot to participate.

The proposed regulations provide thatacademic periodmeans a quarter, semes-ter, trimester, or other period of study(such as a summer school session) as rea-sonably determined by the eligible educa-tional institution. Neither section 25A norits legislative history defines the termacademic period.Additionally, the De-partment of Education does not have arecognized definition of academic period.The definition in the regulation is in-tended to include institutions that use tra-ditional academic terms and institutionsthat do not use academic terms, but forexample use clock hours or credit hours.The IRS and Treasury invite comments onthis definition of academic periodas wellas suggestions on alternative definitions.

Based on the definition in section25A(f)(1), the proposed regulations de-fine qualified tuition and related expensesas the tuition and fees required for the en-rollment or attendance of a student forcourses of instruction at an eligible educa-tional institution. This definition is gen-erally consistent with the definition of tu-ition and fees contained in section 472(1)of the HEA (20 U.S.C. 1087ll(1)). SeeH.R. Conf. Rep. No. 599, 105th Cong., 2dSess., at p. 321 (1998). The regulationsprovide that, in general, the test for deter-mining whether a fee is treated as a quali-fied tuition and related expense is whetherthe fee is required to be paid to the eligi-ble educational institution by students as acondition of the students’ enrollment orattendance at the institution. The regula-tions specifically provide that qualifiedtuition and related expenses include feesfor books, supplies, and equipment usedin a course of study only if the fees mustbe paid to the eligible educational institu-tion for the enrollment or attendance ofthe student at the institution. Similarly,

the regulations provide that, in general,qualified tuition and related expenses in-clude nonacademic fees (fees charged byan eligible educational institution that arenot used directly for, or allocated to, anacademic course of study) only if the feesmust be paid to the eligible educationalinstitution for the enrollment or atten-dance of the student at the institution.

However, based on the legislative his-tory to section 25A, the proposed regula-tions provide that qualified tuition and re-lated expenses do not include the costs ofroom and board, insurance, medical ex-penses (such as student health fees), trans-portation, and similar personal, living, orfamily expenses, regardless of whether thefees must be paid to the eligible educa-tional institution for the enrollment or at-tendance of the student at the institution.See H.R. Conf. Rep. No. 220, 105thCong., 1st Sess., at p. 343, 346 (1997).Further, based on the limitations in section25A(f)(1)(B) and (c)(2)(B), the regula-tions provide that qualified tuition and re-lated expenses do not include expensesthat relate to any course of instruction orother education that involves sports,games, hobbies, or any noncredit course,unless the course is part of the student’sdegree program or, in the case of the Life-time Learning Credit, is taken by the stu-dent to acquire or improve job skills.

3. Hope Scholarship Credit

The Hope Scholarship Credit is a perstudent credit that may be claimed foreach eligible student. Consistent with theprovisions of section 25A(b)(1), the pro-posed regulations provide that for taxableyears beginning before 2002 the maxi-mum Hope Scholarship Credit amount is$1,500 (100 percent of the first $1,000 ofthe qualified tuition and related expensespaid during the taxable year for educationfurnished to an eligible student during anyacademic period beginning in the taxableyear or treated as beginning in the taxableyear, plus 50 percent of the next $1,000 ofsuch expenses paid with respect to thatstudent). For taxable years beginningafter 2001, the $1,000 amounts will be ad-justed for inflation. Consistent with theprovisions of section 25A(b)(2)(A), theregulations provide that the Hope Schol-arship Credit is allowed for only two tax-able years for each eligible student.

1999–11 I.R.B. 29 March 15, 1999

Based on the requirements in section25A(b)(2) and (3), the proposed regula-tions define an eligible studentfor pur-poses of the Hope Scholarship Credit as astudent who meets all of the following re-quirements: (1) for at least one academicperiod during the taxable year, the studentenrolls at an eligible educational institu-tion in a program leading toward a post-secondary degree, certificate, or other rec-ognized postsecondary educationalcredential (degree requirement); (2) for atleast one academic period during the tax-able year, the student enrolls for at leasthalf of the normal full-time work load forthe course of study the student is pursuing(work load requirement); (3) as of the be-ginning of the taxable year, the studenthas not completed the first two years ofpostsecondary education at an eligible ed-ucational institution (year of study re-quirement); and (4) the student has notbeen convicted of a federal or state felonyoffense for the possession or distributionof a controlled substance as of the end ofthe taxable for which the credit is claimed(felony drug conviction restriction).

The proposed regulations explain thatthe student meets the work load require-mentif the student is enrolled for at leasthalf of the normal full-time work load, asdetermined by the eligible educational in-stitution. The regulations provide that theeducational institution’s standards for ahalf-time work load must equal or exceedthe standards established by the Depart-ment of Education under the HEA and setforth in 34 CFR 674.2(b) for a half-timeundergraduate student.

The proposed regulations explain thatwhether a student has completed the firsttwo years of postsecondary education asof the beginning of the taxable year isbased on whether the eligible educationalinstitution the student is enrolled inawards the student two years of academiccredit for postsecondary course workcompleted by the student prior to the be-ginning of the taxable year. However, theregulations provide that any academiccredit awarded by the educational institu-tion solely on the basis of the student’sperformance on proficiency examinationsis not taken into account.

The proposed regulations provide thatthe Hope Scholarship Credit is effectivefor expenses paid after December 31,

1997, for education furnished in academicperiods beginning after that date.

4. Lifetime Learning Credit

The Lifetime Learning Credit is a pertaxpayer credit, rather than a per studentcredit. For taxable years beginning be-fore 2003, the maximum Lifetime Learn-ing Credit amount is $1,000 (20 percentof up to $5,000 of the aggregate qualifiedtuition and related expenses paid duringthe taxable year for education furnished tothe taxpayer, the taxpayer’s spouse, andany claimed dependent during any acade-mic period beginning in the taxable yearor treated as beginning in the taxableyear). For taxable years beginning on orafter 2003, the maximum credit amount is$2,000 (20 percent of up to $10,000 of theaggregate qualified tuition and related ex-penses paid during the taxable year foreducation furnished to the taxpayer, thetaxpayer’s spouse, and any claimed de-pendent during any academic period be-ginning in the taxable year or treated asbeginning in the taxable year).

In contrast to the Hope ScholarshipCredit, the Lifetime Learning Credit is al-lowed for an unlimited number of yearsfor each student and does not have a de-gree requirement, year of study require-ment, work load requirement, or a felonydrug conviction restriction. See H.R.Conf. Rep. No. 220, 105th Cong., 1stSess., at p. 346–347 (1997). Therefore, ataxpayer may claim a Lifetime LearningCredit for a student’s qualified tuition andrelated expenses even if the taxpayercould not claim a Hope ScholarshipCredit for those expenses.

Based on the provisions of section25A(c)(2)(B) and the legislative history tosection 25A, the proposed regulationsprovide that, for purposes of claiming aLifetime Learning Credit, amounts that ataxpayer is required to pay for a course atan eligible educational institution arequalified tuition and related expenses ifthe course is either part of a postsec-ondary degree program or is part of a non-degree program that is taken by the stu-dent to acquire or improve job skills. Thelegislative history explains that the Life-time Learning Credit is available with re-spect to any course of instruction at anyeligible educational institution (whetherthe student is enrolled on a full-time, half-

time, or less than half-time basis) to ac-quire or improve job skills of the student.See H.R. Conf. Rep. No. 220, 105thCong., 1st Sess., at p. 346–347 (1997).

The proposed regulations provide thatthe Lifetime Learning Credit is effectivefor expenses paid after June 30, 1998, foreducation furnished in academic periodsbeginning after that date.

5. Special Rules Relating toCharacterization and Timing ofPayments

The proposed regulations provide guid-ance on qualified tuition and related ex-penses paid by a third party. The regula-tions provide that, solely for purposes ofsection 25A, if a third party makes a pay-ment directly to an eligible educationalinstitution to pay for a student’s qualifiedtuition and related expenses, the student istreated as receiving the payment from thethird party, and, in turn, paying the quali-fied tuition and related expenses to the in-stitution.

Consistent with the provisions of sec-tion 25A(g)(3), the proposed regulationsprovide that qualified tuition and relatedexpenses paid by a student are treated aspaid by the taxpayer if the student is aclaimed dependent of the taxpayer.

The proposed regulations provide rulesfor adjustments to qualified tuition and re-lated expenses for certain excludable edu-cational assistance. Consistent with theprovisions of section 25A(g)(2) and thelegislative history, the regulations providethat the amount of otherwise allowablequalified tuition and related expenses paidduring a taxable year must be reduced bythe following amounts paid to, or on be-half of, a student during the taxable year:(1) a qualified scholarship that is exclud-able from gross income under section117; (2) a veterans’ or member of thearmed forces’ educational assistance al-lowance under chapter 30, 31, 32, 34, or35 of title 38, U.S.C., or chapter 1606 oftitle 10, U.S.C.; (3) employer-providededucational assistance that is excludablefrom gross income under section 127; and(4) any other educational assistance that isexcludable from gross income (other thanas a gift, bequest, devise, or inheritancewithin the meaning of section 102(a)).See H.R. Conf. Rep. No. 220, 105thCong., 1st Sess., at p. 343, 347 (1997).

March 15, 1999 30 1999–11 I.R.B.

The proposed regulations provide rulesfor allocating scholarships and fellowshipgrants among expenses. The regulationsprovide that a scholarship or fellowshipgrant is treated as a qualified scholarshipexcludable from income under section117 (and thereby reduces the amount ofqualified tuition and related expenses thata taxpayer may otherwise include inclaiming an education credit) unless ei-ther: (1) the student reports the grant asincome on the student’s federal incometax return; or (2) the grant must be ap-plied, by its terms, to expenses other thanqualified tuition and related expenseswithin the meaning of section 117(b)(2),such as room and board.

The proposed regulations provide guid-ance on the timing rules for claiming aneducation credit. Consistent with the gen-eral rule in section 25A(b)(1) and (c)(1),the regulations provide that an educationcredit generally is allowed only for pay-ments of qualified tuition and related ex-penses that cover an academic period be-ginning in the same taxable year as theyear the payment is made. However, con-sistent with the specific prepayment rulein section 25A(g)(4), the regulations pro-vide that, if qualified tuition and relatedexpenses are paid during a taxable year tocover an academic period that begins dur-ing the first three months of the tax-payer’s next taxable year, an educationcredit is allowed only in the taxable yearin which the expenses are paid. Note,however, that because the Hope Scholar-ship Credit does not apply to expensespaid before January 1, 1998, and the Life-time Learning Credit does not apply toexpenses paid before July 1, 1998, theprepayment rule does not apply for tuitionpaid in 1997 to cover an academic periodbeginning in 1998.

Consistent with the legislative historyto section 25A, the proposed regulationsprovide that an education credit may beclaimed for the qualified tuition and re-lated expenses paid with the proceeds of aloan only in the taxable year in which theexpenses are paid, and not in the taxableyear in which the loan is repaid. See H.R.Conf. Rep. No. 220, 105th Cong., 1stSess., at p. 342, 346 (1997). In order toprovide taxpayers with a date certain forpayment, the regulations provide that loan

proceeds disbursed directly to an educa-tional institution are treated as paid on thedate of the disbursement. However, if thetaxpayer does not know the date of thedisbursement, the taxpayer must treatqualified tuition and related expenses aspaid on the last date prescribed for pay-ment by the educational institution.

Consistent with the directive in section25A(i), the proposed regulations providerules for refunds of qualified tuition andrelated expenses. The regulations providethat, if a payment and a refund of quali-fied tuition and related expenses occur inthe same taxable year, the amount of qual-ified tuition and related expenses for thetaxable year is calculated by adding allqualified tuition and related expenses paidfor the taxable year, and subtracting anyrefund of the expenses received from theeligible educational institution during thesame taxable year.

The proposed regulations provide that,if, in a taxable year, a taxpayer (or the tax-payer’s spouse or a claimed dependent)receives a refund from an eligible educa-tional institution of qualified tuition andrelated expenses paid in a prior taxableyear and the refund is received before thetaxpayer files a federal income tax returnfor the prior taxable year, the amount ofthe qualified tuition and related expensesfor the prior taxable year must be reducedby the amount of the refund.

Similar to the tax benefit rule, the pro-posed regulations provide that, if, in a tax-able year, a taxpayer (or the taxpayer’sspouse or a claimed dependent) receives arefund of qualified tuition and related ex-penses for which the taxpayer claimed aneducation credit in a prior taxable year,the tax for the subsequent taxable year isincreased by the recapture amount. Therecapture amount is the difference be-tween the credit claimed in the prior tax-able year and the redetermined credit.The redetermined credit is computed byreducing the amount of the qualified tu-ition and related expenses for which acredit was claimed in the prior taxableyear by the amount of the refund of thequalified tuition and related expenses (re-determined qualified expenses), and com-puting the credit using the redeterminedqualified expenses and the relevant factsand circumstance of the prior taxable

year, such as modified adjusted gross income.

The proposed regulations provide that,if, in a taxable year, any excludable edu-cational assistance is received for thequalified tuition and related expenses paidduring a prior taxable year, the educa-tional assistance is treated as a refund ofqualified tuition and related expenses. Inthis situation, if a taxpayer (or the tax-payer’s spouse or a claimed dependent)receives any excludable educational assis-tance before the taxpayer files a federalincome tax return for the prior taxableyear, the amount of the qualified tuitionand related expenses for the prior taxableyear is reduced by the amount of the ex-cludable educational assistance. How-ever, if a taxpayer (or the taxpayer’sspouse or claimed dependent) receivesexcludable educational assistance afterthe taxpayer has filed a federal income taxreturn for the prior taxable year, any edu-cation credit claimed for the prior taxableyear is subject to recapture.

6. Proposed Effective Date

These regulations are proposed to beeffective on the date they are published intheFederal Registeras final regulations.Taxpayers may rely on these proposedregulations for guidance pending the is-suance of final regulations. If, and to theextent, future guidance is more restrictivethan the guidance in the proposed regula-tions, the future guidance will be appliedwithout retroactive effect.

Special Analyses

It has been determined that these pro-posed regulations are not a significantregulatory action as defined in EO 12866.Therefore, a regulatory assessment is notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations, and becausethe regulations do not impose a collectionof information on small entities, the Reg-ulatory Flexibility Act (5 U.S.C. chapter6) does not apply. Pursuant to section7805(f), this notice of proposed rulemak-ing will be submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on their impacton small business.

1999–11 I.R.B. 31 March 15, 1999


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written and elec-tronic comments that are submitted timelyto the IRS. The IRS and Treasury specifi-cally request comments on the clarity ofthe proposed regulations and how theycan be made easier to understand. Allcomments will be available for public in-spection and copying.

A public hearing will be scheduled inthe Internal Revenue Building, 1111 Con-stitution Avenue, NW, Washington, DC.The IRS recognizes that persons outsidethe Washington, DC, area may also wishto testify at the public hearing throughvideoconferencing. Requests to includevideoconferencing sites must be receivedby March 8, 1999. If the IRS receivessufficient indications of interest to war-rant videoconferencing to a particularcity, and if the IRS has videoconferencingfacilities available in that city on the datethe public hearing is to be scheduled, theIRS will try to accommodate the requests.

The IRS will publish the time and dateof the public hearing and the locations ofany videoconferencing sites in an an-nouncement in the Federal Register.


The principal author of the regulationsis Donna Welch, Office of Assistant ChiefCounsel (Income Tax and Accounting).However, other personnel from the IRSand the Treasury Department participatedin the development of the regulations.

* * * * *




Paragraph 1. The authority citation forpart 1 is amended by adding entries in nu-merical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.25A–0 also issued under sec-tion 26 U.S.C. 25A(i).Section 1.25A–1 also issued under sec-tion 26 U.S.C. 25A(i). Section 1.25A–2 also issued under sec-tion 26 U.S.C. 25A(i).

Section 1.25A–3 also issued under sec-tion 26 U.S.C. 25A(i).Section 1.25A–4 also issued under sec-tion 26 U.S.C. 25A(i).Section 1.25A–5 also issued under sec-tion 26 U.S.C. 25A(i). * * *

Par. 2. Sections 1.25A–0 through1.25A–5 are added to read as follows:

§1.25A–0 Table of contents.

This section lists captions contained in§§1.25A–1, 1.25A–2, 1.25A–3, 1.25A–4,and 1.25A–5.

§1.25A–1 Calculation of education creditand general eligibility requirements.

(a) Amount of education credit.(b) Coordination of Hope Scholarship

Credit and Lifetime Learning Credit.(1) In general.(2) Hope Scholarship Credit. (3) Lifetime Learning Credit. (4) Examples.(c) Limitation based on modified ad-

justed gross income. (1) In general. (2) Modified adjusted gross income de-

fined. (3) Inflation adjustment. (d) Election. (e) Coordination with Education IRA.(f) Identification requirement.(g) Claiming the credit in the case of a

dependent.(1) In general. (2) Examples. (h) Married taxpayers. (i) Nonresident alien taxpayers and de-

pendents.

§1.25A–2 Definitions.

(a) Claimed dependent.(b) Eligible educational institution. (1) In general.(2) Rules on federal financial aid pro-

grams. (c) Academic period.(d) Qualified tuition and related ex-

penses. (1) In general. (2) Required fees.(i) In general.(ii) Books, supplies, and equipment.(iii) Nonacademic fees.(3) Personal expenses.(4) Treatment of comprehensive fees.

(5) Hobby courses. (6) Examples.

§1.25A–3 Hope Scholarship Credit.

(a) Amount of the credit. (1) In general.(2) Maximum credit. (b) Per student credit.(1) In general.(2) Example. (c) Credit allowed for only two taxable

years. (d) Eligible student. (1) Eligible student defined.(i) Degree requirement.(ii) Work load requirement.(iii) Year of study requirement.(iv) No felony drug conviction. (2) Examples.(e) Academic period for prepayments.(1) In general.(2) Example.(f) Effective date.

§1.25A–4 Lifetime Learning Credit.

(a) Amount of the credit. (1) Taxable years beginning before Jan-

uary 1, 2003. (2) Taxable years beginning after De-

cember 31, 2002.(3) Coordination with the Hope Scholar-

ship Credit.(4) Examples. (b) Credit allowed for unlimited number

of taxable years.(c) Both degree and nondegree courses

are eligible for the credit. (1) In general.(2) Examples.(d) Effective date.

§1.25A–5 Special rules relating tocharacterization and timing of payments.

(a) Payments of educational expensesby a third party.

(1) In general.(2) Example.(b) Expenses paid by dependent. (1) In general. (2) Example. (c) Adjustment to qualified tuition and

related expenses for certain exclud-able educational assistance.

(1) In general.(2) No adjustment for excludable educa-

tional assistance attributable to ex-penses paid in a prior year.

March 15, 1999 32 1999–11 I.R.B.

(3) Allocation of scholarships and fel-lowship grants.

(4) Examples.(d) No double benefit.(e) Timing rules. (1) In general. (2) Prepayment rule.(i) In general.(ii) Example.(3) Expenses paid with loan proceeds.(f) Refund of qualified tuition and re-

lated expenses. (1) Payment and refund of qualified tu-

ition and related expenses in thesame taxable year.

(2) Payment of qualified tuition and re-lated expenses in one taxable yearand refund in subsequent taxableyear before return filed for prior tax-able year.

(3) Payment of qualified tuition and re-lated expenses in one taxable yearand refund in subsequent taxableyear.

(i) In general. (ii) Recapture amount. (4) Excludable educational assistance

received in a subsequent taxable yeartreated as refund.

(5) Examples.

§1.25A–1 Calculation of education creditand general eligibility requirements.

(a) Amount of education credit.An in-dividual taxpayer is allowed a nonrefund-able education credit against income taximposed by chapter 1 of the Internal Rev-enue Code for the taxable year. Theamount of the education credit is the totalof the Hope Scholarship Credit (as de-scribed in §1.25A–3) plus the LifetimeLearning Credit (as described in §1.25A–4). For limitations on the credits allowedby subpart A of part IV of subchapter A ofchapter 1, see section 26.

(b) Coordination of Hope ScholarshipCredit and Lifetime Learning Credit—(1)In general. In the same taxable year, ataxpayer may claim a Hope ScholarshipCredit for each eligible student’s qualifiedtuition and related expenses (as defined in§1.25A-2(d)) and a Lifetime LearningCredit for one or more other students’qualified tuition and related expenses.However, a taxpayer may not claim both aHope Scholarship Credit and a LifetimeLearning Credit with respect to the samestudent in the same taxable year.

(2) Hope Scholarship Credit.Subjectto certain limitations, a Hope ScholarshipCredit may be claimed for the qualifiedtuition and related expenses paid during ataxable year with respect to each eligiblestudent (as defined in §1.25A–3(d)).Qualified tuition and related expensespaid during a taxable year with respect toany student for whom a Hope ScholarshipCredit is claimed may not be taken intoaccount in computing the amount of theHope Scholarship Credit with respect toany other student or the Lifetime Learn-ing Credit.

(3) Lifetime Learning Credit.Subjectto certain limitations, a Lifetime LearningCredit may be claimed for the aggregateamount of qualified tuition and related ex-penses paid during a taxable year with re-spect to students for whom no HopeScholarship Credit is claimed.

(4) Examples.The following examplesillustrate the rules of this paragraph (b):

Example 1. In 1999, Taxpayer A pays qualifiedtuition and related expenses for his dependent, B, toattend College Y during 1999. Assuming all otherrelevant requirements are met, Taxpayer A mayclaim either a Hope Scholarship Credit or a LifetimeLearning Credit with respect to dependent B, but notboth. See §1.25A–3(a) and §1.25A–4(a).

Example 2. In 1999, Taxpayer C pays $2,000 inqualified tuition and related expenses for her depen-dent, D, to attend College Z during 1999. In 1999,Taxpayer C also pays $500 in qualified tuition andrelated expenses to attend a computer course during1999 to improve Taxpayer C’s job skills. Assumingall other relevant requirements are met, Taxpayer Cmay claim a Hope Scholarship Credit for the $2,000of qualified tuition and related expenses attributableto dependent D (see §1.25A–3(a)) and a LifetimeLearning Credit for the $500 of qualified tuition andrelated expenses incurred to improve her job skills.

Example 3.The facts are the same as in Example2, except that Taxpayer C pays $3,000 in qualifiedtuition and related expenses for her dependent, D, toattend College Z during 1999. Although a HopeScholarship Credit is available only with respect tothe first $2,000 of qualified tuition and related ex-penses paid with respect to D (see §1.25A–3(a)),Taxpayer C may not add the $1,000 of excess ex-penses to her $500 of qualified tuition and relatedexpenses in computing the amount of the LifetimeLearning Credit.

(c) Limitation based on modified ad-justed gross income—(1) In general. Theeducation credit that a taxpayer may oth-erwise claim is phased out ratably for tax-payers with modified adjusted gross in-come between $40,000 and $50,000($80,000 and $100,000 for married indi-viduals who file a joint return). Thus, tax-payers with modified adjusted gross in-

come above $50,000 (or $100,000 forjoint filers) may not claim an educationcredit.

(2) Modified adjusted gross income de-fined. The term modified adjusted grossincomemeans the adjusted gross income(as defined in section 62) of the taxpayerfor the taxable year increased by anyamount excluded from gross incomeunder section 911, 931, or 933 (relating toincome earned abroad or from certainU.S. possessions or Puerto Rico).

(3) Inflation adjustment.For taxableyears beginning after 2001, the amountsin paragraph (c)(1) of this section will beincreased for inflation occurring after2000 in accordance with section 1(f)(3).If any amount adjusted under this para-graph (c)(3) is not a multiple of $1,000,the amount will be rounded to the nextlowest multiple of $1,000.

(d) Election. No education credit is al-lowed unless a taxpayer elects to claimthe credit on the taxpayer’s timely filed(including extensions) federal income taxreturn for the taxable year in which thecredit is claimed. The election is made byattaching Form 8863, “Education Credits(Hope and Lifetime Learning Credits),”(or its successor) to that federal incometax return.

(e) Coordination with Education IRA.No education credit is allowed for a tax-able year for the qualified tuition and re-lated expenses of a student if—

(1) During the taxable year, a distribu-tion is made to, or on behalf of, the stu-dent from an education individual retire-ment account described in section 530(b)(Education IRA); and

(2) Any portion of the distribution isexcluded from gross income under sec-tion 530(d)(2).

(f) Identification requirement.No edu-cation credit is allowed unless a taxpayerincludes on the federal income tax returnclaiming the credit the name and the tax-payer identification number of the studentfor whom the credit is claimed. For rulesrelating to assessment for an omission ofa correct taxpayer identification number,see section 6213(b) and (g)(2)(J).

(g) Claiming the credit in the case of adependent—(1) In general. If a student isa claimed dependent of another taxpayer,only that taxpayer may claim the educa-tion credit for the student’s qualified tu-ition and related expenses. However, if

1999–11 I.R.B. 33 March 15, 1999

the taxpayer is eligible to, but does not,claim the student as a dependent, only thestudent may claim the education credit forthe student’s qualified tuition and relatedexpenses.

(2) Examples.The following examplesillustrate the rules of this paragraph (g):

Example 1. In 1999, Taxpayer A pays qualifiedtuition and related expenses for his dependent, B, toattend University Y during 1999. Taxpayer A claimsB as a dependent on his federal income tax return.Therefore, assuming all other relevant requirementsare met, Taxpayer A is allowed an education crediton his federal income tax return, and B is not al-lowed an education credit on B’s federal income taxreturn. The result would be the same if B paid thequalified tuition and related expenses. See §1.25A–5(b).

Example 2.In 1999, Taxpayer C has one depen-dent, D. In 1999, D pays qualified tuition and re-lated expenses to attend University Z during 1999.Although Taxpayer C is eligible to claim D as a de-pendent on her federal income tax return, she doesnot do so. Therefore, assuming all other relevant re-quirements are met, D is allowed an education crediton D’s federal income tax return, and Taxpayer C isnot allowed an education credit on her federal in-come tax return, with respect to D’s education ex-penses. The result would be the same if C paid thequalified tuition and related expenses on behalf ofD. See §1.25A–5(a).

(h) Married taxpayers.If a taxpayer ismarried (within the meaning of section7703), no education credit is allowed un-less the taxpayer and the taxpayer ’sspouse file a joint federal income tax re-turn for the taxable year.

(i) Nonresident alien taxpayers and de-pendents. If a taxpayer or the taxpayer’sspouse is a nonresident alien for any por-tion of the taxable year, no educationcredit is allowed unless the nonresidentalien is treated as a resident alien by rea-son of an election under section 6013(g)or (h). In addition, if a student is a nonres-ident alien, a taxpayer may not claim aneducation credit with respect to the quali-fied tuition and related expenses of thestudent unless the student is a dependentas defined in section 152. Among otherrequirements under section 152, the non-resident alien student must be a resident ofa country contiguous to the United Statesin order to be treated as a dependent.

§1.25A–2 Definitions.

(a) Claimed dependent.A claimed de-pendent means a dependent (as defined insection 152) for whom a deduction undersection 151 is allowed on a taxpayer’s

federal income tax return for the taxableyear.

(b) Eligible educational institution—(1) In general. In general, an eligible ed-ucational institutionmeans a college, uni-versity, vocational school, or otherpostsecondary educational institution thatis—

(i) Described in section 481 of theHigher Education Act of 1965 (20 U.S.C.1088) as in effect on August 5, 1997,(generally all accredited public, nonprofit,and proprietary postsecondary institu-tions); and

(ii) Participating in a federal financialaid program under title IV of the HigherEducation Act of 1965 (20 U.S.C. 1070 etseq.) or is certified by the Department ofEducation as eligible to participate in sucha program but chooses not to participate.

(2) Rules on federal financial aid pro-grams. For rules governing an educa-tional institution’s eligibility to participatein federal financial aid programs, see 20U.S.C. 1070 et seq.; 20 U.S.C. 1094; and34 CFR 600 and 668.

(c) Academic period. Academic periodmeans a quarter, semester, trimester, orother period of study (such as a summerschool session) as reasonably determinedby an eligible educational institution.

(d) Qualified tuition and related ex-penses—(1) In general. Qualified tuitionand related expensesmeans tuition andfees required for the enrollment or atten-dance of a student for courses of instruc-tion at an eligible educational institution.

(2) Required fees—(i) In general. Ex-cept as provided in paragraph (d)(3) ofthis section, the test for determiningwhether any fee is a qualified tuition andrelated expense is whether the fee is re-quired to be paid to the eligible educa-tional institution as a condition of the stu-dent’s enrollment or attendance at theinstitution.

(ii) Books, supplies, and equipment.Qualified tuition and related expenses in-clude fees for books, supplies, and equip-ment used in a course of study only if thefee must be paid to the eligible educa-tional institution for the enrollment or at-tendance of the student at the institution.

(iii) Nonacademic fees.Except as pro-vided in paragraph (d)(3) of this section,qualified tuition and related expenses in-clude fees charged by an eligible educa-

tional institution that are not used directlyfor, or allocated to, an academic course ofinstruction only if the fee must be paid tothe eligible educational institution for theenrollment or attendance of the student atthe institution.

(3) Personal expenses.Qualified tu-ition and related expenses do not includethe costs of room and board, insurance,medical expenses, transportation, andsimilar personal, living, or family ex-penses, regardless of whether the fee mustbe paid to the eligible educational institu-tion for the enrollment or attendance ofthe student at the institution.

(4) Treatment of comprehensive fees. Ifa student is required to pay a comprehen-sive fee to an eligible educational institu-tion that includes charges for tuition, fees,and personal expenses described in para-graph (d)(3) of this section, the portion ofthe comprehensive fee that is allocable topersonal expenses is not a qualified tu-ition and related expense. The allocationmust be made by the institution using areasonable method.

(5) Hobby courses. Qualified tuitionand related expenses do not include ex-penses that relate to any course of instruc-tion or other education that involvessports, games, or hobbies, or any non-credit course, unless the course or othereducation is part of the student’s degreeprogram or, in the case of the LifetimeLearning Credit, is taken by the student toacquire or improve job skills.

(6) Examples.The following examplesillustrate the rules of this paragraph (d).In each example, assume that all other rel-evant requirements to claim an educationcredit are met. The examples are as fol-lows:

Example 1. University V offers a degree pro-gram in dentistry. In addition to tuition, all studentsenrolled in the program are required to pay a fee toUniversity V for the rental of dental equipment. Be-cause the equipment rental fee must be paid to Uni-versity V for enrollment and attendance, the tuitionand the equipment rental fee are qualified tuitionand related expenses.

Example 2. First-year students at College W arerequired to obtain books and other reading materialsused in its mandatory first-year curriculum. Thebooks and other reading materials are not required tobe purchased from College W and may be borrowedfrom other students or purchased from off-campusbookstores, as well as from College W’s bookstore.College W bills students for any books and materialspurchased from College W’s bookstore. The fee thatCollege W charges for the first-year books and mate-

March 15, 1999 34 1999–11 I.R.B.

rials purchased at its bookstore is not a qualified tu-ition and related expense because the books and ma-terials are not required to be purchased from CollegeW for enrollment or attendance at the institution.

Example 3. All students who attend College Xare required to pay a separate student activity fee inaddition to their tuition. The student activity fee isused solely to fund on-campus organizations and ac-tivities run by students, such as the student newspa-per and the student government (no portion of thefee covers personal expenses). Although labeled asa student activity fee, the fee is required for enroll-ment or attendance at College X. Therefore, the feeis a qualified tuition and related expense.

Example 4. The facts are the same as in Example3, except that College X offers an optional athleticfee that students may pay to receive discounted tick-ets to sports events. The athletic fee is not requiredfor enrollment or attendance at College X. There-fore, the fee is not a qualified tuition and related ex-pense.

Example 5. College Y requires all students tolive on campus. It charges a single comprehensivefee to cover tuition, required fees not allocable topersonal expenses, and room and board. Based onCollege Y’s reasonable allocation, sixty percent ofthe comprehensive fee is allocable to tuition andother required fees not allocable to personal ex-penses, and the remaining forty percent of the com-prehensive fee is allocable to charges for room andboard. Therefore, only sixty percent of College Y’scomprehensive fee is a qualified tuition and relatedexpense.

Example 6. As a degree student at College Z,Student A is required to take a certain number ofcourses outside of her chosen major in Economics.To fulfill this requirement, Student A enrolls in asquare dancing class offered by the Physical Educa-tion Department. Because Student A receives credittoward her degree program for the square dancingclass, the tuition for the square dancing class is in-cluded in qualified tuition and related expenses.

§1.25A–3 Hope Scholarship Credit.

(a) Amount of the credit—(1) In gen-eral. Subject to the phase out of the edu-cation credit described in §1.25A–1(c),the Hope Scholarship Credit amount isthe total of—

(i) 100 percent of the first $1,000 ofqualified tuition and related expenses paidduring the taxable year for education fur-nished to an eligible student (as defined inparagraph (d) of this section) who is thetaxpayer, the taxpayer’s spouse, or anyclaimed dependent during any academicperiod beginning in the taxable year (ortreated as beginning in the taxable year,see §1.25A–5(e)(2)); plus

(ii) 50 percent of the next $1,000 ofsuch expenses paid with respect to thatstudent.

(2) Maximum credit.For taxable yearsbeginning before 2002, the maximum

Hope Scholarship Credit allowed for eacheligible student is $1,500. For taxableyears beginning after 2001, the amountsin paragraph (a)(1) of this section to de-termine the maximum credit will be in-creased for inflation occurring after 2000in accordance with section 1(f)(3). If anyamount adjusted under this paragraph(a)(2) is not a multiple of $100, theamount will be rounded to the next lowestmultiple of $100.

(b) Per student credit—(1) In general.A Hope Scholarship Credit may beclaimed for the qualified tuition and re-lated expenses of each eligible student (asdefined in paragraph (d) of this section).

(2) Example. The following exampleillustrates the rule of this paragraph (b).In the example, assume that all the re-quirements to claim an education creditare met. The example is as follows:

Example. In 1999, Taxpayer A has two depen-dents, B and C, both of whom are eligible students.Taxpayer A pays $1,600 in qualified tuition and re-lated expenses for dependent B to attend a commu-nity college. Taxpayer A pays $5,000 in qualifiedtuition and related expenses for dependent C to at-tend University X. Taxpayer A may claim a HopeScholarship Credit of $1,300 ($1,000 + (.50 3

$600)) for dependent B, and the maximum $1,500Hope Scholarship Credit for dependent C, for a totalHope Scholarship Credit of $2,800.

(c) Credit allowed for only two taxableyears. For each eligible student, the HopeScholarship Credit may be claimed for nomore than two taxable years.

(d) Eligible student—(1) Eligible stu-dent defined.For purposes of the HopeScholarship Credit, the term eligible stu-dentmeans a student who satisfies all ofthe following requirements—

(i) Degree requirement. For at leastone academic period that begins duringthe taxable year, the student enrolls at aneligible educational institution in a pro-gram leading toward a postsecondary de-gree, certificate, or other recognized post-secondary educational credential;

(ii) Work load requirement.For at leastone academic period that begins duringthe taxable year, the student enrolls for atleast half of the normal full-time workload for the course of study the student ispursuing. The standard for what is half ofthe normal full-time work load is deter-mined by each eligible educational insti-tution. However, the standard for half-

time may not be lower than standards forhalf-time established by the Departmentof Education under the Higher EducationAct of 1965 and set forth in 34 CFR674.2(b) for a half-time undergraduatestudent;

(iii) Year of study requirement.As ofthe beginning of the taxable year, the stu-dent has not completed the first two yearsof postsecondary education at an eligibleeducational institution. Whether a studenthas completed the first two years of post-secondary education at an eligible educa-tional institution as of the beginning of ataxable year is determined based onwhether the institution in which the stu-dent is enrolled in a degree program (asdescribed in paragraph (d)(1)(i) of thissection) awards the student two years ofacademic credit at that institution forpostsecondary course work completed bythe student prior to the beginning of thetaxable year. Any academic creditawarded by the eligible educational insti-tution solely on the basis of the student’sperformance on proficiency examinationsis disregarded in determining whether thestudent has completed two years of post-secondary education; and

(iv) No felony drug conviction.Thestudent has not been convicted of a fed-eral or state felony offense for possessionor distribution of a controlled substanceas of the end of the taxable year for whichthe credit is claimed.

(2) Examples.The following examplesillustrate the rules of this paragraph (d).In each example, assume that the studenthas not been convicted of a felony drugoffense, that the institution is an eligibleeducational institution unless otherwisestated, that the qualified tuition and re-lated expenses are paid during the sametaxable year that the academic period be-gins, and that a Hope Scholarship Credithas not previously been claimed for thestudent (see paragraph (c) of this section).The examples are as follows:

Example 1. Student A graduates from highschool in June 1998 and enrolls full-time in an un-dergraduate degree program at College U for the1998 Fall semester. For the 1999 Spring semester,Student A again enrolls at College U on a full-timebasis. For the 1999 Fall semester, Student A enrollsin less than half the normal full-time course work forher degree program. Because Student A is enrolledin an undergraduate degree program on at least ahalf-time basis for at least one academic period that

1999–11 I.R.B. 35 March 15, 1999

begins during 1998 and at least one academic periodthat begins during 1999, Student A is an eligible stu-dent for taxable years 1998 and 1999 (including the1999 Fall semester when Student A enrolls at Col-lege U on less than a half-time basis).

Example 2. Prior to 1998, Student B attendedcollege for several years on a full-time basis. Stu-dent B transfers to College V for the 1998 Spring se-mester. College V awards Student B credit for some(but not all) of the courses he previously completed,and College V classifies Student B as a first-semes-ter sophomore. During both the Spring and Fall se-mesters of 1998, Student B enrolls in half the normalfull-time work load for his degree program. Be-cause College V does not classify Student B as hav-ing completed the first two years of postsecondaryeducation as of the beginning of 1998, Student B isan eligible student for taxable year 1998.

Example 3. The facts are the same as in Example2. After taking classes on a half-time basis for the1998 Spring and Fall semesters, Student B enrolls ina full-time work load at College V for the 1999Spring semester. College V classifies Student B as asecond-semester sophomore for the 1999 Spring se-mester and as a first-semester junior for the 1999Fall semester. Because College V does not classifyStudent B as having completed the first two years ofpostsecondary education as of the beginning of1999, Student B is an eligible student for taxableyear 1999.

Example 4.At the time that Student C enrolls ina degree program at College W for the 1998 Fall se-mester, Student C takes examinations to demon-strate her proficiency in several subjects. On thebasis of Student C’s performance on these examina-tions, College W classifies Student C as a second-se-mester sophomore as of the beginning of the 1998Fall semester. Student C takes a full-time work loadduring the 1998 Fall semester and during the 1999Spring and Fall semesters. Because Student C wasnot enrolled in a college or other eligible educationalinstitution prior to 1998 (but rather was classified asa second-semester sophomore by College W as ofthe start of the 1998 Fall semester solely because ofproficiency examinations), Student C is not treatedas having completed the first two years of postsec-ondary education at an eligible educational institu-tion as of the beginning of 1998 or as of the begin-ning of 1999. Therefore, Student C is an eligiblestudent for both taxable years 1998 and 1999.

Example 5. During the 1998 Fall semester, Stu-dent D is a high school student who takes classes ona half-time basis at College X. Student D is not en-rolled as part of a degree program at College X be-cause College X does not admit students to a degreeprogram unless the student has a high schooldiploma or equivalent. Because Student D is not en-rolled in a degree program at College X during1998, Student D is not an eligible student for taxableyear 1998.

Example 6.The facts are the same as in Example5. During the 1999 Spring semester, Student Dagain attends College X but not as part of a degreeprogram. Student D graduates from high school inJune 1999. For the 1999 Fall semester, Student Denrolls in College X as part of a degree program, andCollege X awards Student D credit for her priorcourse work at College X. During the 1999 Fall se-

mester, Student D takes more than half the normalfull-time work load of courses for her degree pro-gram at College X. Because Student D is enrolled ina degree program at College X for the 1999 Fallterm on more than a half-time basis, Student D is aneligible student for all of taxable year 1999. There-fore, the qualified tuition and required fees paid forclasses taken at College X during both the 1999Spring semester (during which Student D was notenrolled in a degree program) and the 1999 Fall se-mester are taken into account in computing anyHope Scholarship Credit.

Example 7.Student E completed two years of un-dergraduate study at College S located in Country S.College S is not an eligible educational institution forpurposes of the education credits. At the end of1998, Student E moves to the United States and en-rolls in an undergraduate degree program at CollegeZ on a full-time basis for the 1999 Spring semester.College Z awards Student E two years of academiccredit for his previous course work at College S andclassifies Student E as a first-semester junior for the1999 Spring semester. Student E is treated as havingcompleted the first two years of postsecondary edu-cation at an eligible educational institution as of thebeginning of 1999. Therefore, Student E is not an el-igible student for taxable year 1999.

Example 8. Student F was born and raised inCountry R, and she received a degree in 1998 fromCollege R located in Country R. College R is not aneligible educational institution for purposes of theeducation credits. During 1999, Student F moves tothe United States and enrolls for the 1999 Fall se-mester on a full-time basis in a graduate-degree pro-gram at College Y. By admitting Student F to itsgraduate degree program, College Y treats Student Fas having completed the first two years of postsec-ondary education as of the beginning of 1999.Therefore, Student F is not an eligible student fortaxable year 1999.

(e) Academic period for prepay-ments—(1) In general.For purposes ofdetermining whether a student meets therequirements in paragraph (d) of this sec-tion for a taxable year, if qualified tuitionand related expenses are paid during onetaxable year for an academic period thatbegins during January, February or Marchof the next taxable year (for taxpayers ona fiscal taxable year, use the first threemonths of the next taxable year), the aca-demic period is treated as beginning dur-ing the taxable year in which the paymentis made.

(2) Example. The following exampleillustrates the rule of this paragraph (e).In the example, assume that all the re-quirements to claim a Hope ScholarshipCredit are met. The example is as fol-lows:

Example. Student G graduates from high schoolin June 1998. After graduation, Student G worksfull-time for several months to earn money for col-

lege. Student G enrolls full-time in an undergradu-ate degree program at University W, an eligible edu-cational institution, for the 1999 Spring semester,which begins in January 1999. Student G pays tu-ition to University W for the 1999 Spring semesterin December 1998. Because the tuition paid by Stu-dent G in 1998 relates to an academic period that be-gins during the first three months of 1999, StudentG’s eligibility to claim a Hope Scholarship Credit in1998 is determined as if the 1999 Spring semesterbegan in 1998. Thus, assuming Student G has notbeen convicted of a felony drug offense as of De-cember 31, 1998, Student G is an eligible student for1998.

(f) Effective date.The Hope Scholar-ship Credit is applicable for qualified tu-ition and related expenses paid after De-cember 31, 1997, for education furnishedin academic periods beginning after De-cember 31, 1997.

§1.25A–4 Lifetime Learning Credit.

(a) Amount of the credit—(1) Taxableyears beginning before January 1, 2003.Subject to the phase out of the educationcredit described in §1.25A–1(c), for tax-able years beginning before 2003, theLifetime Learning Credit amount is 20percent of up to $5,000 of qualified tu-ition and related expenses paid during thetaxable year for education furnished to thetaxpayer, the taxpayer’s spouse, and anyclaimed dependent during any academicperiod beginning in the taxable year (ortreated as beginning in the taxable year,see §1.25A–5(e)(2)).

(2) Taxable years beginning after De-cember 31, 2002.Subject to the phase outof the education credit described in§1.25A–1(c), for taxable years beginningafter 2002, the Lifetime Learning Creditamount is 20 percent of up to $10,000 ofqualified tuition and related expenses paidduring the taxable year for education fur-nished to the taxpayer, the taxpayer’sspouse, and any claimed dependent dur-ing any academic period beginning in thetaxable year (or treated as beginning inthe taxable year, see §1.25A–5(e)(2)).

(3) Coordination with the Hope Schol-arship Credit. Expenses paid with respectto a student for whom the Hope Scholar-ship Credit is claimed are not eligible forthe Lifetime Learning Credit.

(4) Examples. The following examplesillustrate the rules of this paragraph (a).In each example, assume that all the re-quirements to claim a Lifetime Learning

March 15, 1999 36 1999–11 I.R.B.

Credit or a Hope Scholarship Credit, asapplicable, are met. The examples are asfollows:

Example 1. In 1999, Taxpayer A pays qualifiedtuition and related expenses of $3,000 for dependentB to attend an eligible educational institution, and hepays qualified tuition and related expenses of $4,000for dependent C to attend an eligible educational in-stitution. Taxpayer A does not claim a Hope Schol-arship Credit with respect to either B or C. AlthoughTaxpayer A paid $7,000 of qualified tuition and re-lated expenses during the taxable year, Taxpayer Amay claim the Lifetime Learning Credit with respectto only $5,000 of such expenses. Therefore, themaximum Lifetime Learning Credit Taxpayer A mayclaim for 1999 is $1,000 (.20 x $5,000).

Example 2. In 1999, Taxpayer D pays $6,000 ofqualified tuition and related expenses for dependentE, and $2,000 of qualified tuition and related ex-penses for dependent F, to attend eligible educa-tional institutions. Dependent F has already com-pleted the first two years of postsecondaryeducation. For 1999, Taxpayer D claims the maxi-mum $1,500 Hope Scholarship Credit with respectto dependent E. In computing the amount of theLifetime Learning Credit, Taxpayer D may not in-clude any of the $6,000 of qualified tuition and re-lated expenses paid on behalf of dependent E butmay include the $2,000 of qualified tuition and re-lated expenses of dependent F.

(b) Credit allowed for unlimited num-ber of taxable years. There is no limit tothe number of taxable years that a tax-payer may claim a Lifetime LearningCredit with respect to any student.

(c) Both degree and nondegree coursesare eligible for the credit—(1) In general.For purposes of the Lifetime LearningCredit, amounts paid for a course at an el-igible educational institution are qualifiedtuition and related expenses if the courseis either part of a postsecondary degreeprogram or is not part of a postsecondarydegree program but is taken by the stu-dent to acquire or improve job skills.

(2) Examples.The following examplesillustrate the rule of this paragraph (c). Ineach example, assume that all the require-ments to claim a Lifetime Learning Creditare met. The examples are as follows:

Example 1.Taxpayer A, a professional photogra-pher, enrolls in an advanced photography course at alocal community college. Although the course is notpart of a degree program, Taxpayer A enrolls in thecourse to improve her job skills. The course fee paidby Taxpayer A is a qualified tuition and related ex-pense for purposes of the Lifetime Learning Credit.

Example 2.Taxpayer B, a stockbroker, plans totravel abroad on a “photo-safari” for his next vaca-tion. In preparation for the trip, Taxpayer B enrollsin a noncredit photography class at a local commu-

nity college. Because Taxpayer B is not taking thephotography course as part of a degree program orto acquire or improve his job skills, amounts paid byTaxpayer B for the course are not qualified tuitionand related expenses for purposes of the LifetimeLearning Credit.

(d) Effective date. The Lifetime Learn-ing Credit is applicable for qualified tu-ition and related expenses paid after June30, 1998, for education furnished in acad-emic periods beginning after June 30,1998.

§1.25A–5 Special rules relating tocharacterization and timing of payments.

(a) Payments of educational expensesby a third party—(1) In general. Solelyfor purposes of section 25A, if a thirdparty (someone other than the taxpayer,the taxpayer’s spouse, or a claimed de-pendent) makes a payment directly to aneligible educational institution to pay fora student’s qualified tuition and relatedexpenses, the student is treated as receiv-ing the payment from the third party, and,in turn, paying the qualified tuition andrelated expenses to the institution.

(2) Example. The following exampleillustrates the rule of this paragraph (a).In the example, assume that all the re-quirements to claim an education creditare met. The example is as follows:

Example. Grandparent D makes a direct pay-ment to an eligible educational institution for Stu-dent E’s qualified tuition and related expenses. Stu-dent E is not a claimed dependent in 1999. Forpurposes of claiming an education credit, Student Eis treated as receiving the money from her grandpar-ent and, in turn, paying her qualified tuition and re-lated expenses.

(b) Expenses paid by dependent—(1)In general. Qualified tuition and relatedexpenses paid by a student are treated aspaid by a taxpayer if the student is aclaimed dependent of the taxpayer for thetaxable year in which the expenses arepaid.

(2) Example. The following exampleillustrates the rule of this paragraph (b).In the example, assume that all the re-quirements to claim an education creditare met. The example is as follows:

Example. Under a court-approved divorce de-cree, Parent A is required to pay Student C’s collegetuition. Parent A makes a direct payment to an eligi-ble educational institution for Student C’s 1999 tu-ition. Under paragraph (a) of this section, Student Cis treated as receiving the money from Parent A and,

in turn, paying his qualified tuition and related ex-penses. Under the divorce decree, Parent B has cus-tody of Student C for 1999. Parent B properlyclaims Student C as a dependent on Parent B’s 1999federal income tax return. Parent B may claim aneducation credit for the qualified tuition and relatedexpenses paid directly to the institution by Parent A.

(c) Adjustment to qualified tuition andrelated expenses for certain excludableeducational assistance—(1) In general.In determining the amount of an educa-tion credit, qualified tuition and relatedexpenses paid during the taxable yearmust be reduced by any amount paid to,or on behalf of, a student during the tax-able year with respect to attendance at aneligible educational institution during anacademic period beginning in that taxableyear that is—

(i) A qualified scholarship that is ex-cludable from income under section 117;

(ii) A veterans’ or member of the armedforces’ educational assistance allowanceunder chapter 30, 31, 32, 34 or 35 of title38, United States Code, or under chapter1606 of title 10, United States Code;

(iii) Employer-provided educational as-sistance that is excludable from incomeunder section 127; or

(iv) Any other educational assistancethat is excludable from gross income(other than as a gift, bequest, devise, orinheritance within the meaning of section102(a)).

(2) No adjustment for excludable edu-cational assistance attributable to ex-penses paid in a prior year. A reduction isnot required under paragraph (c)(1) of thissection if the amount of excludable edu-cational assistance received during thetaxable year is treated as a refund of qual-ified tuition and related expenses paid in aprior taxable year. See paragraph (f)(4) ofthis section.

(3) Allocation of scholarships and fel-lowship grants. For purposes of para-graph (c)(1) of this section, a scholarshipor fellowship grant is treated as a quali-fied scholarship excludable from incomeunder section 117 unless—

(i) The student reports the grant as in-come on the student’s federal income taxreturn; or

(ii) The grant must be applied, by itsterms, to expenses other than qualified tu-ition and related expenses within themeaning of section 117(b)(2), such asroom and board.

1999–11 I.R.B. 37 March 15, 1999

(4) Examples.The following examplesillustrate the rules of this paragraph (c).In each example, assume that all the re-quirements to claim an education creditare met. The examples are as follows:

Example 1.University X charges Student A, wholives on X’s campus, $3,000 for tuition and $5,000 forroom and board. University X awards a $2,000scholarship to Student A, which University X appliesagainst Student A’s $8,000 total bill. The terms of thescholarship permit it to be used to pay any of a stu-dent’s costs of attendance at University X, includingtuition and room and board. Student A pays the$6,000 balance of her bill from University X with acombination of savings and amounts she earns from asummer job. University X does not require A to payany additional fees beyond the $3,000 in tuition inorder to enroll in classes. Student A does not reportany portion of the scholarship as income on StudentA’s federal income tax return. The scholarship is aqualified scholarship that is excludable from StudentA’s income under section 117 and is allocable first toStudent A’s qualified tuition and related expenses.Therefore, for purposes of calculating an educationcredit, Student A is treated as having paid only $1,000($3,000 tuition – $2,000 scholarship) in qualified tu-ition and related expenses to University X.

Example 2. The facts are the same as in Example1, except that in addition to the scholarship that Uni-versity X awards to Student A, University X alsoprovides Student A with a student loan and pays Stu-dent A for working in a work/study job in the cam-pus dining hall. The loan is not excludable educa-tional assistance. In addition, wages paid to astudent who is performing services for the payor areneither a qualified scholarship nor otherwise exclud-able from gross income. Therefore, Student A is notrequired to reduce her qualified tuition and relatedexpenses by the amounts she receives from the stu-dent loan or as wages from her work/study job.

Example 3. In 1999, Student B pays UniversityY $1,000 in tuition for the 1999 Spring semester.University Y does not require Student B to pay anyadditional fees beyond the $1,000 in tuition in orderto enroll in classes. Student B is an employee ofCompany Z. At the end of the academic period andduring the same taxable year that Student B paid tu-ition to University Y, Student B provides CompanyZ with proof that he has satisfactorily completed hiscourses at University Y. Pursuant to an educationalassistance program described in section 127(b),Company Z reimburses Student B for all of the tu-ition paid to University Y. Because the reimburse-ment from Company Z is employer-provided educa-tional assistance that is excludable from Student B’sgross income under section 127, the reimbursementreduces Student B’s qualified tuition and related ex-penses. Therefore, for purposes of calculating aneducation credit, Student B is treated as having paidno qualified tuition and related expenses to Univer-sity Y during 1999.

Example 4.The facts are the same as in Example3, except that the reimbursement from Company Z isnot pursuant to an educational assistance programdescribed in section 127(b), is not otherwise exclud-able from Student B’s gross income, and is taxed asadditional wages to Student B. Because the reim-

bursement is not excludable employer-provided edu-cational assistance, Student B is not required to re-duce his qualified tuition and related expenses bythe $1,000 reimbursement he received from his em-ployer. Therefore, for purposes of calculating an ed-ucation credit, Student B is treated as paying $1,000in qualified tuition and related expenses to Univer-sity Y during 1999.

(d) No double benefit.Qualified tuitionand related expenses do not include anyexpense for which a deduction is allowedunder section 162 or any other provisionof chapter 1 of the Internal RevenueCode.

(e) Timing rules—(1) In general. Ex-cept as provided in paragraph (e)(2) ofthis section, an education credit is al-lowed only for payments of qualified tu-ition and related expenses for an acade-mic period beginning in the same taxableyear as the year the payment is made. Ex-cept for certain individuals who do notuse the cash receipts and disbursementsmethod of accounting, qualified tuitionand related expenses are treated as paid inthe year in which the expenses are actu-ally paid. See §1.461–1(a)(1).

(2) Prepayment rule—(i) In general. Ifqualified tuition and related expenses arepaid during one taxable year for an acade-mic period that begins during the firstthree months of the taxpayer’s next tax-able year (i.e., in January, February, orMarch of the next taxable year for calen-dar year taxpayers), an education credit isallowed with respect to the qualified tu-ition and related expenses only in the tax-able year in which the expenses are paid.

(ii) Example. The following exampleillustrates the rule of this paragraph(e)(2). In the example, assume that all therequirements to claim an education creditare met. The example is as follows:

Example. In December 1998, Taxpayer A, a cal-endar year taxpayer, pays College Z $1,000 in quali-fied tuition and related expenses to attend the 1999Spring semester, which begins in January 1999.Taxpayer A may claim an education credit only in1998 for payments made in 1998 for the 1999Spring semester.

(3) Expenses paid with loan proceeds.An education credit may be claimed forthe qualified tuition and related expensespaid with the proceeds of a loan only inthe taxable year in which the expenses arepaid, and may not be claimed in the tax-able year in which the loan is repaid.Loan proceeds disbursed directly to an el-

igible educational institution will betreated as paid on the date of disburse-ment. If a taxpayer does not know thedate of disbursement, the taxpayer musttreat the qualified tuition and related ex-penses as paid on the last date for pay-ment prescribed by the institution.

(f) Refund of qualified tuition and re-lated expenses—(1) Payment and refundof qualified tuition and related expensesin the same taxable year.With respect toany student, the amount of qualified tu-ition and related expenses for a taxableyear is calculated by adding all qualifiedtuition and related expenses paid for thetaxable year, and subtracting any refundof such expenses received from the eligi-ble educational institution during thesame taxable year.

(2) Payment of qualified tuition and re-lated expenses in one taxable year and re-fund in subsequent taxable year before re-turn filed for prior taxable year. If, in ataxable year, a taxpayer, (or the taxpayer’sspouse or a claimed dependent) receives arefund from an eligible educational insti-tution of qualified tuition and related ex-penses paid in a prior taxable year and therefund is received before the taxpayerfiles a federal income tax return for theprior taxable year, the amount of the qual-ified tuition and related expenses for theprior taxable year is reduced by theamount of the refund.

(3) Payment of qualified tuition and re-lated expenses in one taxable year and re-fund in subsequent taxable year—(i) Ingeneral. If, in a taxable year (refundyear), a taxpayer (or the taxpayer’s spouseor a claimed dependent) receives a refundof qualified tuition and related expensesfor which the taxpayer claimed an educa-tion credit in a prior taxable year, the taximposed by chapter 1 of the Internal Rev-enue Code for the refund year is increasedby the recapture amount.

(ii) Recapture amount.The recaptureamount is the difference between thecredit claimed in the prior taxable yearand the redetermined credit. The redeter-mined credit is computed by reducing theamount of the qualified tuition and relatedexpenses for which a credit was claimedin the prior taxable year by the amount ofthe refund of the qualified tuition and re-lated expenses (redetermined qualifiedexpenses), and computing the credit using

March 15, 1999 38 1999–11 I.R.B.

the redetermined qualified expenses andthe relevant facts and circumstances ofthe prior taxable year, such as modifiedadjusted gross income (redeterminedcredit). Any redetermination of the tax li-ability for the prior taxable year (by auditor amended return) will be taken into ac-count in computing the redeterminedcredit.

(4) Excludable educational assistancereceived in a subsequent taxable yeartreated as a refund.If, in a taxable year,any excludable educational assistance(described in paragraph (c)(1) of this sec-tion) is received for the qualified tuitionand related expenses paid during a priortaxable year (or attributable to enrollmentat an eligible educational institution dur-ing a prior taxable year), the educationalassistance is treated as a refund of quali-fied tuition and related expenses for pur-poses of paragraphs (f)(2) and (3) of thissection. If a taxpayer (or the taxpayer’sspouse or a claimed dependent) receivesany excludable educational assistance be-fore the taxpayer files a federal incometax return for the prior taxable year, theamount of the qualified tuition and relatedexpenses for the prior taxable year is re-duced by the amount of the excludableeducational assistance as provided inparagraph (f)(2) of this section. If a tax-payer (or the taxpayer ’s spouse or aclaimed dependent) receives excludableeducational assistance after the taxpayerhas filed a federal income tax return forthe prior taxable year, any educationcredit claimed for the prior taxable year issubject to recapture as provided in para-graph (f)(3) of this section.

(5) Examples.The following examplesillustrate the rules of this paragraph (f).In each example, assume that all the re-quirements to claim an education creditare met. The examples are as follows:

Example 1. In January 1998, Student A, a full-time freshman at University X, pays $2,000 forqualified tuition and related expenses for a 16-hourwork load for the 1998 Spring semester. Prior to be-ginning classes, Student A withdraws from 6 coursehours. On February 15, 1998, Student A receives an$800 refund from University X. In September 1998,Student A pays University X $1,000 to enroll half-time for the 1998 Fall semester. Prior to beginningclasses, Student A withdraws from a 2-hour course,and she receives a $200 refund in October 1998.Student A computes the amount of qualified tuitionand related expenses she may claim for 1998 by:

(i) Adding all qualified expenses paid during thetaxable year ($2,000 + 1,000 = $3,000);

(ii) Adding all refunds of qualified tuition and re-lated expenses received during the taxable year($800 + $200 = $1,000); and, then

(iii) Subtracting (ii) from (i) ($3,000 – $1,000 =$2,000). Therefore, Student A’s qualified tuition andrelated expenses for 1998 are $2,000.

Example 2. (i) In December 1998, Student B, asenior at College Y, pays $2,000 for qualified tuitionand related expenses for a 16-hour work load for the1999 Spring semester. Prior to beginning classes,Student B withdraws from a 4-hour course. On Jan-uary 15, 1999, Student B files her 1998 income taxreturn and claims a $400 Lifetime Learning Creditfor the $2,000 qualified expenses paid in 1998.

(ii) She calculates the increase in tax for 1999 by: (A) Calculating the redetermined qualified ex-

penses ($2,000 – $500 = $1,500); (B) Calculating the redetermined credit for the

redetermined qualified expenses ($1,500 3 .20 =$300); and

(C) Subtracting the redetermined credit from thecredit claimed in 1998 ($400 – $300 = $100).

(iii) Therefore, Student B must increase the taxon her 1999 federal income tax return by $100.

Example 3. In September 1998, Student C paysCollege Z $1,200 in qualified tuition and related ex-penses to attend evening classes during the 1998Fall semester. Student C is an employee of Com-pany R. On January 15, 1999, Student C files a fed-eral income tax return for 1998 claiming a LifetimeLearning Credit of $240 (.20 3 $1,200). Pursuant toan educational assistance program described in sec-tion 127(b), Company R reimburses Student C inFebruary 1999 for the $1,200 of qualified tuition andrelated expenses paid by Student C in 1998. The$240 education credit claimed by Student C for1998 is subject to recapture. Because Student Cpaid no net qualified tuition and related expenses in1998, the redetermined credit for 1998 is zero. Stu-dent C must increase the amount of Student C’s1999 taxes by the recapture amount, which is $240(the education credit claimed for 1998 ($240) minusthe redetermined credit for 1998 ($0)). Because the$1,200 reimbursement is taken into account in cal-culating the $240 recapture amount for 1999, the re-imbursement does not reduce the amount of anyqualified tuition and related expenses that Student Cpaid in 1999.


Internal Revenue.



Allocation of Loss With Respectto the Distributions of Stock andOther Personal Property

REG–106905–98


ACTION: Partial withdrawal of notice ofproposed rulemaking; notice of proposedrulemaking by cross-reference to tempo-rary regulations; and notice of publichearing

SUMMARY: This document containsproposed Income Tax Regulations relat-ing to the allocation of loss recognized onthe disposition of stock and other personalproperty. The loss allocation regulationsprimarily will affect taxpayers that claimthe foreign tax credit and that incur losseswith respect to personal property and arenecessary to modify existing guidance.Prior proposed regulations are withdrawn.This document also provides notice of a public hearing on these proposed regulations.

DATES: Written comments must be re-ceived by May 5, 1999. Outlines of oralcomments to be discussed at the publichearing scheduled for May 26, 1999, mustbe received by May 5, 1999.

ADDRESSES: Send submissions toCC:DOM:CORP:R (REG–106905–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–106905–98),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe Internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS In-ternet site at http://www.irs.ustreas. gov/prod/tax_regs/comments.html. The pub-lic hearing will be held in room 2615, In-ternal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC. FORFURTHER INFORMATION CONTACT:Concerning the regulations in general,Seth B. Goldstein of the Office of Associ-ate Chief Counsel (International), (202)622-3810; concerning submissions ofcomments, the hearing, and/or to beplaced on the building access list to attendthe hearing, Michael Slaughter, (202)622-7190 (not toll-free numbers).

1999–11 I.R.B. 39 March 15, 1999


Background

Temporary regulations published inT.D. 8805, 1999–5 I.R.B. 14, provideguidance concerning the allocation of losswith respect to personal property. The textof those temporary regulations also servesas the text of these proposed regulations.The preamble to the temporary regulationsexplains the proposed regulations. Pro-posed §1.865–1, published on July 8, 1996(REG–209750–95 [formerly INTL–4– 95,1996–2 C.B. 484], 61 F.R. 35696), is with-drawn.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory impact analysis is not required.

An initial regulatory flexibility analysishas been prepared for this notice of pro-posed rulemaking under 5 U.S.C. § 603. A summary of the analysis is setforth below under the heading ‘Summaryof Initial Regulatory Flexibility Analysis.’Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small businesses.

Summary of Initial Regulatory FlexibilityAnalysis

These proposed regulations under sec-tions 861 and 865 of the Internal RevenueCode address the allocation of loss withrespect to personal property and are nec-essary for the proper computation of theforeign tax credit limitation under section904 of the Internal Revenue Code. Theseregulations are promulgated under sec-tions 861, 865(j)(1) and 7805 of the Inter-nal Revenue Code. If adopted, these pro-posed regulations will affect small entitiessuch as small businesses but not othersmall entities such as government or taxexempt organizations, which do not paytaxes. The IRS and Treasury Departmentare not aware of any federal rules that du-plicate, overlap or conflict with these reg-ulations. None of the significant alterna-tives considered in drafting theseregulations would have significantly al-

tered the economic impact of these regu-lations on small entities. There are no al-ternative rules that are less burdensome tosmall entities but that accomplish the pur-pose of the statute. The IRS and TreasuryDepartment request comments from smallentities concerning this analysis.


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments that are submitted timely to the IRS(a signed original and eight (8) copies).In particular, the IRS requests commentson the clarity of the proposed regulationsand how they may be made easier to un-derstand. All comments will be availablefor public inspection and copying.

A public hearing has been scheduled forMay 26, 1999, beginning at 10 a.m. inroom 2615 of the Internal Revenue Build-ing, 1111 Constitution Avenue, NW,Washington, DC. Due to building securityprocedures, visitors must enter at the 10thStreet entrance, located between Constitu-tion and Pennsylvania Avenues, NW. Inaddition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-trance area more than 15 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the“FOR FURTHER INFORMATION CON-TACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written comments and an outlineof the topics to be discussed and the timeto be devoted to each topic (signed origi-nal and eight (8) copies) by May 5, 1999.A period of 10 minutes will be allotted toeach person for making comments. Anagenda showing the scheduling of thespeakers will be prepared after the dead-line for receiving outlines has passed.Copies of the agenda will be availablefree of charge at the hearing.


The principal author of these regula-tions is Seth B. Goldstein, of the Office ofthe Associate Chief Counsel (Interna-tional), IRS. However, other personnel

from the IRS and Treasury Departmentparticipated in their development.

* * * * *




Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.865–1 also issued under 26U.S.C. 865. * * *

Par. 2. Section 1.861–8 is amended byrevising paragraph (e)(8) to read as fol-lows:

§1.861–8 Computation of taxableincome from sources within the UnitedStates and from other sources andactivities.

* * * * *

(e) * * *(8) [The text of this proposed para-

graph (e)(8) is the same as the text of§1.861–8T(e)(8) published in T.D. 8805.]

* * * * *

Par. 3. Section 1.865–1 is added imme-diately following §1.864–8T, to read asfollows:§1.865–1 Loss with respect to personalproperty other than stock.[The text ofthis proposed §1.865–1 is the same as thetext of §1.865–1T published in T.D.8805.]

Par. 4. Section 1.865–2 is amended byadding paragraphs (b)(4)(ii i) and(b)(4)(iv) Example 3through Example 6to read as follows:

§1.865–2 Loss with respect to stock.

* * * * *

(b) * * *(4) * * *(iii) [The text of this proposed para-

graph (b)(4)(iii) is the same as the text of§1.865–2T(b)(4)(iii) published in T.D.8805.]

(iv) * * *Example 3through Example 6[The text

of this proposed paragraph (b)(4)(iv) Ex-ample 3through Example 6is the same as

March 15, 1999 40 1999–11 I.R.B.

the text of §1.865–2T(b)(4)(iv) Example 3through Example 6 published in T.D.8805.]

* * * * *


Internal Revenue.



Separate Share RulesApplicable to Estates

REG–114841–98



SUMMARY: This document containsproposed regulations that provide thatsubstantively separate and independentshares of different beneficiaries are to betreated as separate estates for purposes ofcomputing the distributable net income.These proposed regulations also providethat a surviving spouse’s statutory elec-tive share of a decedent’s estate is a sepa-rate share. Further, a revocable trust thatelects to be treated as part of a decedent’sestate is a separate share. Section 1307 ofthe Taxpayer Relief Act of 1997 amendedsection 663 of the Internal Revenue Codeby extending the separate share rules toestates. These proposed regulations affectestates of decedents. This document alsoprovides notice of a public hearing onthese proposed regulations.

DATES: Written and electronic commentsmust be received by April 6, 1999. Out-lines of topics to be discussed at the publichearing scheduled for April 22, 1999, at 10a.m. must be received by April 1, 1999.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–114841–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-

ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–114841–98),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically viathe internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS in-ternet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The pub-lic hearing will be held in room 2615, In-ternal Revenue Building, 1111 Constitu-tion Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, LauraHowell, (202) 622-3060; concerning sub-missions of comments, the hearing,and/or to be placed on the building accesslist to attend the hearing, Michael L.Slaughter, Jr., (202) 622-7190 (not toll-free numbers).


Background

Prior to amendment by Section 1307 ofthe Taxpayer Relief Act of 1997, PublicLaw 105–34, August 5, 1997, (TRA1997), section 663(c) of the Internal Rev-enue Code (Code) provided that, for thepurpose of determining the amount of dis-tributable net income in the application ofsections 661 and 662, in the case of a sin-gle trust having more than one benefi-ciary, substantially separate and indepen-dent shares of different beneficiaries (orclasses of beneficiaries) of the trust shallbe treated as separate trusts. The applica-tion of the separate share rule is manda-tory where separate shares exist. Section1.663(c)–1(d) and H.R. Conf. Rep. No.2014, 105th Cong. 1st Sess. 712–13 andfn. 18.

Section 1307 of TRA 1997 amendedsection 663(c) of the Code by extendingthe separate share rule to estates. Prior tothis amendment, a distribution to an estatebeneficiary in the ordinary course of ad-ministration often resulted in the benefi-ciary being taxed on a disproportionateshare of the estate’s income. The exten-sion of the separate share rule to estatespromotes fairness by more rationally allo-

cating the income of the estate among theestate and its beneficiaries thereby reduc-ing the distortion that may occur when adisproportionate distribution of estate as-sets is made to one or more estate benefi-ciaries in a year when an estate has dis-tributable net income. Under the separateshare rule, a beneficiary is taxed only onthe amount of income that belongs to thatbeneficiary’s separate share.

In addition, section 1305 of TRA 1997added section 645 to the Code (originallyenacted as section 646 and redesignatedas section 645 by the Internal RevenueService Restructuring and Reform Act of1998). Under section 645, both the ex-ecutor (if any) of an estate and the trusteeof a qualified revocable trust may elect totreat the revocable trust as part of thedecedent’s probate estate for income taxpurposes. The legislative history for sec-tion 1305 provides that the separate sharerule applicable to estates will apply whena qualified revocable trust elects to betreated as part of the decedent’s estate.


The proposed regulations conform thecurrent regulations to the statutorychanges. In addition, the proposed regu-lations address two specific matters in-volving separate share treatment of inter-ests in estates: the treatment of thespousal elective share and the treatmentof an electing revocable trust under sec-tion 645 of the Code.

General Separate Share Rule

If an estate has multiple beneficiaries,substantially separate and independentshares of different beneficiaries (orclasses of beneficiaries) are to be treatedas separate estates only for purposes ofcomputing distributable net income.There are separate shares in an estatewhen the governing instrument of the es-tate and applicable local law create sepa-rate economic interests in one beneficiaryor class of beneficiaries such that the eco-nomic interests of those beneficiaries(e.g., rights to income or gains from spec-ified items of property) are not affectedby the economic interests accruing to an-other separate beneficiary or class of ben-eficiaries. Thus, there are separate sharesin an estate when a beneficiary or class of

1999–11 I.R.B. 41 March 15, 1999

beneficiaries has an interest in a dece-dent’s estate (whether corpus or income,or both) that no other beneficiary or classof beneficiaries has in the decedent’s es-tate. The application of the separate sharerule to estates is mandatory where sepa-rate shares exist. The separate share rulerequires that the estate’s income and de-ductions be allocated among the separateshares as if they were separate estates.The section 661 deduction to the estateand the section 662 inclusion in the grossincome of the beneficiary are limited bythe distributable net income allocable toeach separate share.

These proposed regulations do notchange the rules involving specific giftsand bequests described in section 663(a).

Surviving Spouse’s Elective Share

Most non-community property stateshave some form of elective share statutewhich replaces common law dower andcurtesy (the common law protection forsurviving spouses). Generally, an electiveshare statute gives the surviving spousethe right to claim a share of the deceasedspouse’s estate if the surviving spouse isdisinherited or dissatisfied with what thespouse would have received under thewill or otherwise. In most states the elec-tive share consists of a fraction, rangingfrom one-fourth to one-half of the dece-dent’s estate. Elective share statutes varyas to when the share vests and whether theshare includes a portion of the estate in-come, as well as whether the share partic-ipates in the appreciation or depreciationof the estate’s assets.

Rev. Rul. 64–101 (1964–1 C.B. 77) ad-dresses the Florida statutory dower inter-est which, at the time of the revenue rul-ing, entitled the widow to the dowerinterest and mesne profits thereon. Theruling holds that the value of assets trans-ferred to the widow as dower is not a dis-tribution to a beneficiary subject to sec-tions 661(a) and 662(a) of the Code.Instead, the transfer of assets is governedby section 102.

Rev. Rul. 71–167 (1971–1 C.B. 163)modifies Rev. Rul. 64–101 by holdingthat the amount distributed to the widowrepresenting mesne profits is subject tosections 661(a) and 662(a) of the Code.Therefore, an amount corresponding to

the allowable deduction to the estateunder section 661(a) is includible in thegross income of the widow under section662(a).

Recently, two cases, Deutsch v. Com-missioner,TCM 1997-470, and Brighamv. United States,983 F. Supp. 46, (D.Mass. 1997), have addressed how to treatpayments to the surviving spouse in satis-faction of the spouse’s elective shareamount. In Deutsch,the surviving spouseelected to take against the decedent’s willas provided by the Florida elective sharestatute. Under the statute, the survivingspouse was entitled to 30 percent of thenet estate based upon date of death val-ues, but was not entitled to any income ofthe estate, and did not participate in ap-preciation or depreciation of the estate as-sets. The Tax Court, noting Rev. Rul. 64–101, held that payments to the survivingspouse in satisfaction of her elective shareamount were not subject to sections661(a) and 662(a). Rather, the paymentswere governed by section 102.

In Brigham, the surviving spouseelected to take against the decedent’s willas provided by the New Hampshire elec-tive share statute. Under the statute, thesurviving spouse was entitled to one-thirdof the personalty and one-third of the realestate. The court held that the paymentsmade to the surviving spouse in satisfac-tion of her elective share amount weresubject to sections 661(a) and 662(a).Thus, the court held that all of the estate’sdistributable net income was taxable tothe surviving spouse because she was theonly beneficiary to receive a distributionfor the year in question and her distribu-tion exceeded the amount of the estate’sdistributable net income.

In light of the uncertainty concerningthe proper treatment of payments in satis-faction of a surviving spouse’s electiveshare, and also given that Rev. Ruls. 64–101 and 71–167 are outdated becausedower has been replaced by elective sharestatutes in most states, the Internal Rev-enue Service and Treasury have con-cluded that regulatory guidance is neededto provide uniform treatment.

These proposed regulations providethat the surviving spouse’s elective shareconstitutes a separate share of the estatefor the sole purpose of determining the

amount of distributable net income in ap-plication of sections 661(a) and 662(a).Therefore, only the income that is (1) al-locable to the surviving spouse’s separateshare for a taxable year, and (2) distrib-uted to the surviving spouse in satisfac-tion of the elective share will be treated asa distribution subject to sections 661(a)and 662(a). This approach results in thesurviving spouse being taxed on the es-tate’s income earned during administra-tion only to the extent of the survivingspouse’s right to share in the estate’s in-come under state law. Comments are re-quested on whether there are situations inwhich an elective share or dower interestwould not be a separate share under theseparate economic interest test set forth inthe proposed regulations.

Electing Revocable Trust To Be a Part Of Estate

These proposed regulations providethat a qualified revocable trust that electsto be treated as part of the decedent’s es-tate constitutes a separate share for thesole purpose of determining the amountof distributable net income in the applica-tion of sections 661 and 662. A separateproposed regulation project will providefurther guidance concerning qualified re-vocable trusts that are treated as part of anestate.


These regulations apply to estates ofdecedents dying after the date that theTreasury decision adopting these rules asfinal regulations is published in the Fed-eral Register.

Effect on Other Documents

When these regulations are finalized,Rev. Rul. 64–101 (1964–1 C.B. 77) andRev. Rul. 71–167 (1971–1 C.B. 163) willbe obsolete.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12886. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.

March 15, 1999 42 1999–11 I.R.B.

chapter 5) does not apply to these regula-tions, and because the regulations do notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,this notice of proposed rulemaking will besubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.


Before these proposed regulations areadopted as final regulations, considera-tion will be given to any electronic andwritten comments (a signed original andeight (8) copies) that are submitted timelyto the IRS. The IRS and Treasury specifi-cally request comments on the clarity ofthe proposed regulation and how it maybe made easier to understand. All com-ments will be available for public inspec-tion and copying. We especially requestcomments concerning the treatment of pe-cuniary bequests (including formula pe-cuniary bequests) as separate shares.

A public hearing has been scheduledfor April 22, 1999, beginning at 10 a.m.The hearing will be held in room 2615,Internal Revenue Building, 1111 Consti-tution Avenue, NW, Washington, DC.Due to building security procedures, visi-tors must enter at the 10th Street entrance,located between Constitution and Penn-sylvania Avenues, NW. In addition, allvisitors must present photo identificationto enter the building. Because of accessrestrictions, visitors will not be admittedbeyond the immediate entrance area morethan 15 minutes before the hearing starts.For information about having your nameplaced on the building access list to attendthe hearing, see the “FOR FURTHER IN-FORMATION CONTACT” section ofthis preamble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written or electronic comments byApril 6, 1999, and submit an outline oftopics to be discussed and the time to bedevoted to each topic (a signed originaland eight (8) copies) by April 1, 1999.


An agenda showing the scheduling of

the speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal author of these regula-tions is Laura Howell of the Office of As-sistant Chief Counsel (Passthroughs andSpecial Industries). However, other per-sonnel from the IRS and Treasury Depart-ment participated in their development.

* * * * *




Paragraph 1. The authority citation forpart 1 is amended by adding entries in nu-merical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.663(c)–1 also issued under 26U.S.C. 663(c).Section 1.663(c)–2 also issued under 26U.S.C. 663(c).Section 1.663(c)–3 also issued under 26U.S.C. 663(c).Section 1.663(c)–4 also issued under 26U.S.C. 663(c).Section 1.663(c)–5 also issued under 26U.S.C. 663(c).Section 1.663(c)–6 also issued under 26U.S.C. 663(c). * * *

Par. 2. Section 1.663(c)–1 is amendedas follows:

1. The section heading is revised.2. The first sentence of paragraph (a) is

amended by removing the language“trust” and adding the language “trust (orestate)” in its place and removing the lan-guage “trusts” and adding the language“trusts (or estates)” in its place. The sec-ond sentence of paragraph (a) is amendedby removing the language “trusts” andadding the language “trusts (or estates)”in its place.

3. Paragraph (b)(2) is removed.4. Paragraphs (b)(3) and (b)(4) are re-

designated as paragraphs (b)(2) and(b)(3).

5. Paragraph (b) introductory text, isamended by removing the language“trusts” and adding the language “trusts(or estates)” each place it appears.

6. Paragraph (c) and the last sentenceof paragraph (d) are amended by remov-ing the language “trust” and adding thelanguage “trust (or estate)” in its place.

The revision reads as follows:

§1.663(c)–1 Separate shares treated asseparate trusts or as separate estates; ingeneral.

* * * * *

Par. 3. Section 1.663(c)–2 is revised toread as follows:

§1.663(c)–2 Computation of distributablenet income.

The amount of distributable net incomefor any share under section 663(c) is com-puted for each share as if each share con-stituted a separate trust or estate. Accord-ingly, any deduction or any loss which isapplicable solely to one separate share ofthe trust or estate is not available to anyother share of the same trust or estate.

Par. 4. Section 1.663(c)–3 is amendedby revising the section heading and re-moving paragraph (f) to read as follows:

§1.663(c)–3 Applicability of separateshare rule to trusts.

* * * * *

§1.663(c)–4 [Redesignated as §1.663(c)–5]

Par. 5. Section 1.663(c)–4 is redesig-nated as §1.663(c)–5 and a new§1.663(c)–4 is added to read as follows:

§1.663(c)–4 Applicability of separateshare rule to estates.

(a) General rule. The applicability ofthe separate share rule to estates providedby section 663(c) will generally dependupon whether the governing instrumentand applicable local law create separateeconomic interests in one beneficiary orclass of beneficiaries of the decedent’s es-tate such that the economic interests ofthe beneficiary or class of beneficiariesare not affected by economic interests ac-cruing to another beneficiary or class ofbeneficiaries. A separate share should beallocated only the share of the estate’s in-come and deductions that the beneficiary(or beneficiaries) of such separate share is(or are) entitled to (if any) under the termsof the governing instrument or local law.

1999–11 I.R.B. 43 March 15, 1999

The separate share rule does not affectrules under section 663(a) concerningspecific gifts and bequests.

(b) Examples of separate shares.Sepa-rate shares include—

(1) A surviving spouse’s elective share;(2) A revocable trust that elects to be

part of the decedent’s estate under section645;

(3) The residuary estate, or some por-tion of the residuary estate, if the require-ments of paragraph (a) of this section aremet; and

(4) A gift or bequest of a specific sumof money or of specific property that ispaid or credited in more than three install-ments, if the requirements of paragraph(a) of this section are met.

(c) Shares with multiple beneficiariesand beneficiaries of multiple shares.Ashare may be considered as separate eventhough more than one beneficiary has aninterest in it. For example, two beneficia-ries may have equal, disproportionate, orindeterminate interests in one share whichis economically separate and independentfrom another share in which one or morebeneficiaries have an interest. Moreover,the same person may be a beneficiary ofmore than one separate share.

Par. 6. Newly designated §1.663(c)–5is amended by:

1. Revising the section heading and in-troductory text.

2. Redesignating the “Example.” as“ Example 1.” and redesignating para-graphs (a), (b), (c), (d), and (e) in newlydesignated Example 1as paragraphs (i),(ii), (iii), (iv), and (v).

3. Adding Example 2, Example 3,andExample 4.

The revisions and addition read as fol-lows:

§1.663(c)-–5 Examples.

Section 663(c) may be illustrated bythe following examples:

Example 1.* * *Example 2. (i) Facts. (A) Testator died domi-

ciled in State X on January 30, 1999, leaving an es-tate of $40,000,000 after debts, expenses, and estatetaxes, and survived by a spouse and three adult chil-dren from a previous marriage. Testator’s will di-rected the executrix to pay the surviving spouse$1,000,000 in cash and divide the residue, after pay-ment of debts, expenses, and estate taxes, equallyamong Testator’s three children.

(B) The surviving spouse filed an election underState X’s elective share statute. The court deter-mined that the surviving spouse’s election was validand ordered the executrix to pay the elective share.Under State X’s elective share statute, a survivingspouse is entitled to one-fourth of a decedent’s estateafter debts, expenses, and estate taxes if the dece-dent had children. Further, the surviving spouse isentitled to a proportional amount of the estate net in-come and participates proportionally in appreciationor depreciation of the estate’s assets.

(C) The executrix elected the calendar year forthe estate. On June 30, 1999, the executrix distrib-uted $5,000,000 to the surviving spouse in partialsatisfaction of the elective share. During the 1999taxable year, the estate received dividend income of$2,000,000 and paid expenses of $50,000. For the1999 taxable year, the value of the estate neither ap-preciated nor depreciated. The executrix made noother distributions during the 1999 taxable year.

(ii) Holding. Separate share treatment applies toeach of the three residuary bequests, and to the sur-viving spouse’s elective share.

(iii) Application. (A) After determining the in-come and expenses for the estate, the executrix allo-cated a portion of the income and expenses to eachseparate share based upon each share’s percentageof the estate. Thus, while the surviving spouse’selective share initially constituted 25% of the estate,after the partial distribution of $5,000,000 made onJune 30, 1999, the elective share constituted asmaller percentage of the estate. Accordingly, thepercentage of the estate’s income and expenses allo-cated to the elective share after June 30, 1999, wascorrespondingly reduced in accordance with the ex-ecutrix’s determination of the proper allocation ofincome and expenses to the elective share.

(B) For the 1999 taxable year, the estate istreated as having distributed to the surviving spousethe distributable net income that was allocated to theelective share. In accordance with section 662, thesurviving spouse must include in gross income forthe 1999 taxable year an amount equal to the distrib-utable net income allocated to the surviving spouse’sseparate share and distributed to the survivingspouse for the 1999 taxable year. The estate will,accordingly, be allowed a deduction under section661 for the amount of distributable net income allo-cated to the elective share and distributed to the sur-viving spouse.

Example 3. (i) Facts. (A) Assume the samefacts as in Example 2except that Testator died domi-ciled in State Y leaving an estate of $60,000,000after debts, expenses, and estate taxes. Under StateY’s elective share statute, the surviving spouse is en-titled to the date of death value of one-third of thedecedent’s estate after debts, expenses, and taxes.The statute also provides that the surviving spouse isnot entitled to any of the estate’s income and doesnot participate in appreciation or depreciation of theestate’s assets. Further, under the statute, the surviv-ing spouse is entitled to interest on the elective sharefrom the date of the court order directing the ex-ecutrix to make payments.

(B) The executrix elected the calendar year forthe estate. During the 1999 taxable year, the estatereceived dividend income of $3,000,000, and paidadministration expenses of $60,000 and paid the sur-

viving spouse $1,000,000 of interest payments onthe elective share. Also, during the 1999 taxableyear, the executrix distributed $5,000,000 to the sur-viving spouse in partial satisfaction of the electiveshare. The executrix made no other distributionsduring the 1999 taxable year.

(ii) Holding. Separate share treatment applies toeach of the three residuary bequests and to the sur-viving spouse’s elective share.

(iii) Application. The distributable net income ofeach child’s residuary bequest is $980,000 (a33.33% share of estate income less a 33.33% shareof estate expenses). Because the surviving spousewas not entitled to any estate income under statelaw, no income is allocated to the spouse’s separateshare. The distribution in satisfaction of thespouse’s elective share does not consist of any dis-tributable net income and is not included in thespouse’s gross income under section 662. The$1,000,000 of interest payment to the survivingspouse must be included in gross income of thespouse under section 61. Therefore, the estate istreated as having distributed to the surviving spouse$5,000,000 of amounts other than 1999 estate in-come. Accordingly, the estate is not allowed a de-duction under section 661 for the distribution madeto the surviving spouse. The taxable income of theestate for the 1999 taxable year is $2,939,400($3,000,000 (dividend income) minus $60,000 (ex-penses) and $600 (personal exemption)). The$1,000,000 interest payment is a nondeductible per-sonal interest expense described in section 163(h).

Example 4. (i) Facts. (A) Testator died domi-ciled in State Z on February 14, 1999, survived by aspouse and two children. Testator’s will contains anonproportional funding fractional formula maritalbequest for the surviving spouse with a residuarycredit shelter trust for the lifetime benefit of the sur-viving spouse, and remainder to the two children onthe surviving spouse’s death. The date of deathvalue of the estate is $1,650,000.

(B) The executrix elected the calendar year forthe estate. Under the fractional formula, the maritalbequest constitutes 60% of the estate and the creditshelter trust constitutes 40% of the estate. Accord-ingly, the executrix claims a marital deduction of$990,000 on the estate tax return for the amountpassing to the spouse under the fractional formula.On December 31, 1999, the executrix made a partialproportionate distribution of $1,000,0000, $600,000to the surviving spouse outright and $400,000 to thecredit shelter trust. As of December 31, 1999, priorto the distribution, the value of Testator’s estate hadappreciated to $2,000,000.

(C) During the 1999 taxable year, the estatemade no other distributions, received dividend in-come of $20,000, and paid expenses of $8,000.

(ii) Holding. Separate share treatment applies tothe fractional formula marital bequest and the creditshelter trust.

(iii) Application. (A) Because Testator providedfor a fractional formula marital bequest in the will,the income and any appreciation in the value of theestate assets is proportionately allocated between themarital bequest share and the credit shelter trustshare. Therefore, the distributable net income mustbe allocated 60% for the marital separate share and40% for the credit shelter separate share.

March 15, 1999 44 1999–11 I.R.B.

(B) The distributable net income allocable to themarital share is $7,200 (60% of estate income less60% of estate expenses). Correspondingly, the dis-tributable net income allocable to the credit sheltershare is $4,800 (40% of estate income less 40% ofestate expenses). Because the $600,000 amount dis-tributed in partial satisfaction of the marital bequestexceeds the distributable net income of $7,200 allo-cated to the marital share, the estate is treated ashaving distributed to the surviving spouse $7,200 of1999 distributable net income and $592,800 of otheramounts. Similarly, because the $400,000 distrib-uted in partial satisfaction of the amount payable tothe credit shelter trust exceeds the distributable netincome of $4,800 allocated to the credit shelter trustshare, the estate is treated as having distributed tothe credit shelter trust $4,800 of 1999 distributablenet income and $395,200 of other amounts. Accord-ingly, the estate is allowed a deduction of $12,000under section 661 for the 1999 taxable year. Thetaxable income of the estate is $0, computed as fol-lows:

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . $20,000Deductions:Distribution to surviving spouse share $7,200Distribution to credit shelter trust share 4,800Expenses . . . . . . . . . . . . . . . . . . . . . . . . 8,000Personal exemption . . . . . . . . . . . . . . . . 600

20,600(600)

(C) In accordance with section 662, the survivingspouse must include in gross income for the 1999taxable year an amount equal to the distributable netincome of the marital bequest share ($7,200) thatwas distributed to the surviving spouse. The creditshelter trust must include in gross income for the1999 taxable year an amount equal to the distrib-utable net income of the credit shelter trust share($4,800) that was distributed to the credit sheltertrust.

Par. 7. Section 1.663(c)–6 is added toread as follows:

§1.663(c)–6 Effective date.

Sections 1.663(c)–1 through 1.663(c)–5 concerning the application of the sepa-rate share rules to estates apply to estatesof decedents dying after the final regula-tions are published in the Federal Regis-ter.


Internal Revenue.



Establishment of a BalancedMeasurement System

REG–119192–98



SUMMARY: This document containsproposed regulations relating to the adop-tion by the IRS of a balanced system tomeasure organizational performancewithin the IRS. These proposed regula-tions further implement a requirement thatall employees be evaluated on whetherthey provided fair and equitable treatmentto taxpayers and bar use of records of taxenforcement results to evaluate or to im-pose or suggest goals for any employee ofthe IRS. These regulations implementsections 1201 and 1204 of the InternalRevenue Restructuring and Reform Act of1998. These regulations affect internaloperations of the IRS and the systems thatagency employs to evaluate the perfor-mance of organizations within IRS and in-dividuals employed by IRS. This docu-ment also provides notice of publichearing on these proposed regulations.

DATES: Written comments and elec-tronic comments must be received byMarch 5, 1999. Outlines of oral com-ments to be presented at the public hear-ing scheduled for Thursday, May 13,1999 at 10 a.m. must be received byThursday, April 22, 1999.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–119192–98),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. to:CC:DOM:CORP:R (REG–119192–98),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue NW,Washington, DC. Alternatively, taxpayersmay submit comments electronically via

the Internet by selecting the “Tax Regs”option on the IRS Home Page, or by sub-mitting comments directly to the IRS In-ternet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The pub-lic hearing will be held in room 2615, at10 a.m., Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Julie Barry (202) 401-4013; con-cerning submission of comments, thehearing, or to be placed on the buildingaccess list to attend the hearing, the Regu-lations Unit, (202) 622-7180 (not toll-freenumbers).


Background

This document contains proposed regu-lations to establish a Balanced System forMeasuring Organizational and IndividualPerformance Within the Internal RevenueService (26 CFR Part 801).

Section 1201 of the Internal RevenueService Restructuring and Reform Act of1998 (RRA), Public Law No. 105–206(112 Stat. 685, 713 et seq.(1998)), re-quires the Internal Revenue Service to es-tablish a performance management sys-tem for those employees covered by 5U.S.C § 4302 that, inter alia, establishes“goals or objectives for individual, group,or organizational performance (or anycombination thereof), consistent with theInternal Revenue Service’s performanceplanning procedures, including those es-tablished under the Government Perfor-mance and Results Act of 1993, divisionE of the Clinger-Cohen Act of 1966 . . . ,Revenue Procedure 64-22 . . . , and tax-payer service surveys.” It further requiresthe IRS to use “such goals and objectivesto make performance distinctions amongemployees or groups of employees,” andto use “performance assessments as abasis for granting employee awards, ad-justing an employee’s rate of basic pay,and other appropriate personnel ac-tions. . . .” Finally, section 1201 expresslyrequires that any performance manage-ment system adopted by the IRS conform

1999–11 I.R.B. 45 March 15, 1999

to the requirements of section 1204 ofRRA.

Section 1204 of RRA provides that theIRS shall not use “records of tax enforce-ment results” in the evaluation of IRS em-ployees or to suggest or impose produc-tion goals for such employees. It furtherprovides that the IRS shall use the “fairand equitable treatment of taxpayers byemployees as one of the standards forevaluating employee performance.” Fi-nally, section 1204 requires that “each ap-propriate supervisor” certify quarterly in aletter to the Commissioner “whether ornot tax enforcement results are being usedin a manner prohibited by” that section.

Antecedents to Sections 1201 and 1204

Until the recent change, the MissionStatement for the IRS had provided, inpart: “The purpose of the Internal Rev-enue Service is to collect the properamount of tax revenue at the leastcost. . . . ” Consistent with this MissionStatement, the IRS has long adhered tothe principle that all IRS officials withdiscretion to make decisions regardingenforcement matters in individual casesshould do so only on the basis of the cor-rect application of the law to the facts ofeach individual case. It has also sought togive the taxpayers maximum efficienciesin its day-to-day operations and has ap-plied many modern management tech-niques to measure and encourage such ef-ficiencies.

In order to achieve these dual goals, theIRS has adopted a number of systems bywhich it sets goals for and measures thesuccess of its various operating units, anddirects the activities of its employees.The ultimate objective of these measure-ment systems is to help the IRS achieveits overall mission.

Measuring Organizational Performance

In General. The Government Perfor-mance and Results Act of 1993, PublicLaw No. 103–62 (107 Stat. 285 (Aug. 3,1993)) (GPRA), requires the IRS andother federal agencies to establish a hier-archy of performance measures and goalsapplicable to various organizational unitswithin their agencies. These performancemeasures and goals should be expressedin objective, quantifiable and measurable

forms to define the level of performanceto be achieved by a program activity.

As indicated by the General Account-ing Office (“Executive Guide: Effec-tively Implementing the Government Performance and Results Act,”(GAO/GGD–96–118 at 24)):

[L]eading organizations . . . strive toalign their activities and resources toachieve mission-related goals[;] theyalso seek to establish clear hierarchiesof performance goals and measures.Under these hierarchies, the organiza-tions try to link the goals and perfor-mance measures for each organiza-tional level to successive levels andultimately to the organization’s strate-gic goals. They have recognized thatwithout clear, hierarchically linked per-formance measures, managers and staffthroughout the organization will lackstraightforward roadmaps showinghow their daily activities can contributeto attaining organizationwide strategicgoals and mission.The legislative history underlying pas-

sage of GPRA indicates that not onlymust performance goals be established onan hierarchal basis throughout an organi-zation, but those goals must reflect thefull range of the organization’s objectives.As the Senate Report accompanying theAct indicates (S. Rep. No. 103–58, 103dCong., 1st Sess. at 29 (1993)):

The Committee believes agenciesshould develop a range of related per-formance indicators, such as quantity,quality, timeliness, cost, and outcome.A range is important because most pro-gram activities require managers to bal-ance their priorities among several sub-goals. . . . . Reliance on any single oneof these measures could create a per-verse incentive for managers to achieveone subgoal at the expense of the others.As a government agency responsible

for collecting 95 percent of the nation’srevenues, the IRS adopted, pursuant toGPRA and other statutes1, a number ofperformance measures that focus on theamount of adjustments proposed by exam-ination units or the dollars collected bycollection offices. For example, the bud-gets submitted by the IRS since the mid-1990’s have contained performance mea-sures that were heavily focused upon

enforcement revenue collected or pro-tected. The two performance measures forfield examination units contained in theFY 1997 budget request were examinationdollars recommended and examinationdollars recommended per employee(FTE). A similarly enforcement-focusedset of measures applied to field collectionfunctions: dollars collected, dollars col-lected per FTE, and average cycles perTDA/TDI (tax delinquency account/taxdelinquency investigation) disposition.

Measures of Special CompliancePrograms.

The IRS, apart from requirements im-posed upon it by statutes and regulationsof general applicability, has periodicallybeen required by Congress to establishand to report on other performance mea-sures. For example, in connection withexpected additional funding promised forFY 1995 through FY 1999 pursuant to aCompliance Initiative, the IRS made acommitment to generate $9.179 billion inadditional enforcement revenues. It wasexpected both to track how those addi-tional funds were employed and to pro-vide “quarterly reports . . . identifying theprogress being made through these en-hanced activities to collect taxes due.” S.Rep. No. 103–286, 103d Cong., 2d Sess.at 40 (1994); see H. R. Rep. No. 103–534,103d Cong., 2d Sess. at 33 (1994); “IRSFY 1995 Compliance Initiatives Final Re-port,” Document 9383 (Rev. 1-96), Cata-log Number 21508R.

More recently, the appropriation for theIRS for FY 1998 provided additionalmonies for “funding essential earned in-come tax credit compliance and error re-duction initiatives.” The Conference Re-port accompanying that appropriation billstated (H. R. Conf. Rep. No. 105–284,105th Cong.,1st Sess. at 64 (1997)) that“the IRS should establish a method totrack the expenditure of funds and mea-sure the impact [of the additional funding]on compliance. The IRS shall submitquarterly reports to the Committee on Ap-propriations which identify the expendi-tures and the change in the rates of com-pliance.” In the absence of accurateinformation regarding compliance rates,the IRS has attempted to comply with thiscongressional requirement by reporting,inter alia, on amounts of revenue pro-

March 15, 1999 46 1999–11 I.R.B.

tected or collected by various EITC com-pliance programs. See, e.g.,“IRS Track-ing Earned Income Tax Credit Appropria-tion,” Document 9383 (Rev. 6–98),Catalog Number 21508R.

Measuring the Performance ofEmployees

The IRS also must comply with a vari-ety of government-wide mandates to mea-sure the performance of individual em-ployees. The civil service rules requirethat the IRS evaluate the performance ofemployees on an annual basis. Perfor-mance evaluations also figure in recom-mendations for awards, incentives, al-lowances or bonuses, an assessment of anemployee’s qualifications for promotion,reassignment or other change in duties, andthe ranking of other than full-time perma-nent personnel for purposes of release/re-call schedules. While these individual per-formance ratings are based upon theelements set forth in various workplansand job elements, a manager’s success inachieving organizational goals will in-evitably play an important role in any eval-uation of his or her performance. Otheremployees’ performance with respect toitems set forth in their job elements will beviewed in light of these goals.

Past Criticisms

Over the years, the IRS has been re-peatedly criticized for placing too muchreliance upon tax enforcement measures ithas adopted. The critics have chargedthat front-line personnel have felt pres-sured by performance measures that werefocused on tax enforcement outcomes,such as dollars assessed per FTE or dol-lars collected per FTE, to take inappropri-ate enforcement actions in order toachieve perceived enforcement goals.The bulk of this criticism has focused onthe impact such tax enforcement mea-sures have had upon field personnel in theexamination and collection functions.

For example, in 1955, a report by anadvisory group appointed by the Chair-man of the Joint Committee on InternalRevenue Taxation (The Internal RevenueService: Its Reorganization and Adminis-tration, July 25, 1955, at 6) describes a1954 initiative by the IRS to “establishspecific office standards of production[for examination personnel in regional

and district offices], so that both supervi-sors and employees know what is consid-ered normal.” This advisory group re-ported that imposition of these standards“appears to have caused a worsening ofthe enforcement picture.”

[U]nder the established productionquota system proper standards of indi-vidual performance and proper stan-dards of examination are ignored infavor of number of returns examined.The established production quota pro-cedure has too frequently reduced theagent’s investigation to a cursory ex-amination of readily available recordsand a quick look for a few obviousitems on which a change can be madeso as to close the case and meet thequota set.In 1957 and again in 1959, questions

were raised during hearings before theHouse Ways and Means Committee re-garding IRS production quotas. “Reorga-nization and Administration of the Inter-nal Revenue Service,” Hearings beforethe Subcommittee on Internal RevenueTaxation of the Committee of Ways andMeans, 85th Cong., 1st Sess., at 118–119(1957); “Income Tax Revision, Panel Dis-cussions before the Committee on Waysand Means, House of Representatives,”86th Cong., 1st Sess. at 805, 808 (1959);“Compendium of Papers on Broadeningthe Tax Base Submitted to the Committeeof Ways and Means,” 86th Cong., 1stSess. at 1527, 1533 (1959).

In November of 1959, the IRS issued arevised policy statement that provided, inpart:

If the duties of the position require theexercise of judgment based on detailedknowledge of laws and regulations orinvolve material factors of technical orprofessional judgment, performancemust be evaluated in the light of the ac-tual cases or other assignments han-dled, and no quantitative measurementmay be utilized which does not takesuch differences into account. Dollarproduction shall not be used as the

measurement of any individual’s per-formance.

Policy Statement P–1200–9, approvedNov. 24, 1959

Questions regarding “the rating of rev-enue agents on the basis of numbers ofexaminations made and amounts of addi-tional tax recommended” were againraised during the 1961 confirmation hear-ings held for Commissioner-designateCaplin. Hearings Before the Committeeon Finance, United States Senate, 87thCong., 1st Sess., at 14–15 (1961). Fol-lowing his confirmation, CommissionerCaplin announced in July of 1961 that theIRS was embarking on a “New Direc-tion,” which was designed to counterwhat he described as the “undue empha-sis” placed upon production statistics andthe “adverse effect” the perception thatproduction statistics formed the “mainbasis” for evaluation of offices and indi-viduals had upon examination quality.Under this “New Direction,” productiongoals and statistics would be de-empha-sized, statistical data would be givenmore limited circulation and qualitativemeasures of performance would beadopted. “New Audit Program Concepts:Views of Commissioner Caplin on Evalu-ation of Individuals, Programs and Of-fices in the Audit Activity.”

The following year, CommissionerCaplin issued a Special Message to AllAudit Personnel, discussing some misun-derstandings that had arisen regarding thenew audit program. The Commissionerindicated that while supervisors were notallowed to evaluate performance on thebasis of statistics or to pressure agents toproduce deficiencies at the cost of inade-quate audits or inequities to the taxpayer,nothing in the new audit program prohib-ited supervisors from keeping track of thequality and amount of work produced byagents. Indeed, “this is exactly what thesupervisor of a group of agents is ex-pected to do.” The Message went on tostate “Special Message from the Commis-sioner,” dated September 7, 1962, at 2:

More serious than these misunder-standings, is the fact that enforcementresults have fallen off very substan-tially. Despite having 1,022 moreagents and office auditors in FY 62than in FY 61, the number of returns

1999–11 I.R.B. 47 March 15, 1999

1 Both the Chief Financial Officers Act of 1990,Pub. L. No. 101-576, 104 Stat. 2838 (1990), and Di-vision E, National Defense Authorization Act forFiscal Year 1996 (the Clinger-Cohen Act of 1996),Pub. L. No. 104-106, 110 Stat. 186, 679 (1996), alsocontain requirements that federal agencies establishperformance measurement systems.

examined decreased by 13,000, whileadditional taxes and penalties recom-mended decreased by $66 million.

You can readily see how this drop-off endangers our Long Range Plan forgradually increasing our manpower anddoing our work more effectively.Under this plan, we have been allowedalmost 10,000 additional people overthe last three years, and it calls for theaddition of about 24,000 more by 1968.Yet, when a substantial increase in staffis followed by this kind of a drop in ourenforcement results, the appropriatingauthorities naturally begin to wonderabout the wisdom of financing the restof our proposed expansion.Issues regarding the IRS’ use of pro-

duction statistics also came up duringCommissioner Alexander’s 1973 confir-mation hearings before the Senate Fi-nance Committee. When questionedabout his opinion toward production quo-tas, Commissioner Alexander respondedthat he was completely opposed to theiruse. Hearings Before the Committee onFinance, United States Senate, 93d Cong.,1st Sess., at 4–5 (1973).

In November of 1973, the IRS adoptedthe current version of Policy StatementP–1–20, revising its policies regardingthe use of records of tax enforcement re-sults and prohibiting absolutely the use ofenforcement statistics to evaluate the per-formance of enforcement personnel; thisstatement permitted the accumulationand use of enforcement statistics only for“long-range planning, financial planning,allocation of resources, work planningand control, effective functional manage-ment, or other related staffing utilizationsystems and plans.” In an accompanyingSpecial Message to all Enforcement Per-sonnel, Commissioner Alexander statedthat this prohibition was applicable to allpersonnel who exercised judgment in de-termining tax liability or the ability topay. Commissioner Alexander furtherdeclared, “[i]ndividual case or dollargoals–formal, informal, or implied–arenot permitted and will not be tolerated.”

During 1974, Senate AppropriationsCommittee hearings again focused on al-legations that taxpayers were being mis-treated as a result of production quotas(both case closings and dollar amounts).

A number of witnesses and the Commit-tee chairman expressed concerns that in-dividual production statistics were beingused to evaluate field employees,notwithstanding the existing policy. Tes-timony during those hearings also indi-cated that pressure to increase the numberof cases closed in Collection directly ledto inappropriate seizures. Hearings Be-fore the Subcommittee on the Departmentof the Treasury, U.S. Postal Service, andGeneral Government Appropriations ofthe Committee on Appropriations, UnitedStates Senate, 93d Cong., 2d Sess., at 2–25, 520, 543–546, 574–584, 586–601,653–670 (1974); see also, “Taxpayer As-sistance and Compliance Programs,”Hearings before the Senate Committee onAppropriations, 93d Cong., 1st Sess. at41–46, 568–569, 642–643, 680–681(1974).

In 1988, the Senate AppropriationsCommittee held hearings focusing againon allegations that the IRS’ use of en-forcement statistics to evaluate programsand personnel had led to inappropriate en-forcement actions. Treasury, Postal Ser-vice and General Government Appropria-tions, Fiscal Year 1989, Before theCommittee on Appropriations, 100thCong., 2d Sess. at 588–590 (1988). OnNovember 10, 1988, the Technical andMiscellaneous Revenue Act of 1988, Pub-lic Law No. 100–647 (102 Stat. 3734(1988)) (TBOR 1) was enacted. Section6231 of that measure prohibits the use ofrecords of tax enforcement results:

1) to evaluate employees directly in-volved in collection activities and theirimmediate supervisors, or2) to impose or suggest productionquotas or goals [for such employeesand supervisors].During the appropriation hearings for

FY 1989, Commissioner Gibbs testifiedabout the TBOR 1 prohibition (Treasury,Postal Service and General GovernmentAppropriations, Fiscal Year 1989, Beforethe Senate Committee on Appropriations,100th Cong., 2d Sess. at 589 (1988)):

The problem that I have with ourpolicy statement—that policy state-ment, by the way, being in the taxpayerbill of rights—is that it tells our peoplewhat not to do. It says, “Don’t use en-forcement statistics.” ... I don’t think

that this helps someone on the front linevery much to tell them what not to do.

What we have started, within thelast 18 months that I have been theCommissioner, is to begin to develop atthe working level criteria as to whatconstitutes a quality collection action,what constitutes a quality examinationaction. It is an entirely different ap-proach to collection and examination,trying to train the people as to how toapproach what they are doing so that ifthey do it the right way, the numberswill flow. The idea is to get away fromsimply dollar amounts, comparing oneanother in terms of how they are doingwith respect to collections, or seizures,or anything like that.The General Accounting Office has ex-

pressed a somewhat different view of theappropriate use of enforcement results tomeasure IRS performance. Its December10, 1991, report on “IRS’ Implementationof the 1988 Taxpayer Bill of Rights”stated (GAO/GGD–92-23 at 14–15):

In an October 1987 letter to the Chair-men of the House Committee on Waysand Means and the Senate Committeeon Finance, we commented on variousproposals to prohibit the use of collec-tion statistics in performance evalua-tions. Our position then and now isthat collection statistics should not bethe only indicator of performance but,along with other factors, could verywell be a useful tool in evaluating em-ployees. We pointed out that relying ona single factor can place more emphasison that factor than on overall perfor-mance. We said that it is not totally in-appropriate to generally consider theamount of revenues collected as part ofan employee’s evaluation if that con-sideration is only one of several factorsunder review. We added that setting ar-bitrary quotas for amounts collected,property seized, or cases closed cannotbe justified in evaluating performance,particularly because of the negative im-pact that trying to achieve those quotascan have on taxpayers.

In its May 11, 1993, report on “Tax Ad-ministration: New Delinquent Tax Col-lection Methods for IRS” (GAO/GGD093–67 at 9), GAO reiterated thisview:

March 15, 1999 48 1999–11 I.R.B.

As we have stated in the past, IRSshould be able to use collection perfor-mance as a criterion in determiningcompensation and rewards for individ-ual collectors. We believe that infor-mation such as taxes collected is a rea-sonable basis on which to judge theperformance of employees whose job itis to collect taxes as long as other crite-ria, such as fair and courteous treat-ment of taxpayers, are also evaluated.In a similar vein, a December 23, 1993,

report by the GAO on the offer in com-promise program (“Tax Administration:Changes Needed to Cope with Growth inOffer in Compromise Program”(GAO/GGD-94–47 at 24) indicated:

The Commissioner of Internal Revenueshould develop the indicators necessaryto evaluate the Offer in CompromiseProgram as a collection and compli-ance tool. The indicators should bebased on accurate data and include (1)the yield of the program in terms ofcosts expended and amounts collected,(2) the amount of revenues collectedthat would not have been collectedthrough other collection means . . . .In September 1997, the Senate Finance

Committee held three days of widely-publicized oversight hearings on the In-ternal Revenue Service. During thesehearings, several IRS employees testifiedthat IRS’ performance measurement sys-tem was creating an environment inwhich they felt pressured to achieve cer-tain quantitative goals for tax enforce-ment results (such as dollars recom-mended or collected). In his testimony atthe conclusion of these hearings, the Act-ing Commissioner responded to the con-cerns that had been raised about the nega-tive impact of the IRS performancemeasurement system by announcing anumber of immediate changes in the sys-tem. In particular, he announced that IRSwould suspend the comparative rankingof its 33 district offices and suspend dis-tribution of any goals related to revenueproduction to field offices. “Practices andProcedures of the Internal Revenue Ser-vice,” Hearings before the Committee onFinance, United States Senate, 105thCong., 1st Sess., at 3, 105–106, 123–128,153, 155– 156, 162–163, 206–209,212–213, 303– 304, 310, 317–318,320–322, 325–326, 330, 333, 351–356.

Following these hearings, the IRS Of-fice of Chief Inspector undertook threemanagement audits to determine how en-forcement statistics were then being usedas part of the IRS performance measure-ment system. See, “Review of the Use ofStatistics and the Protection of TaxpayerRights in the Arkansas-Oklahoma DistrictCollection Field Function,” Internal AuditReference Number 380402 (December 5,1997); “Use of Enforcement Statistics inthe Collection Field Function,” InternalAudit Reference Number 081904 (Janu-ary 12, 1998); “Examination Division’sUse of Performance Measures and Statis-tics,” Internal Audit Reference Number084303 (July 7, 1998). These three in-quiries generally confirmed that IRS per-formance measures were focused largelyon enforcement goals and productivity asdefined by statistics relating to dollarsrecommended, assessed or collected, orother enforcement actions taken. Theyfound a lack of corresponding emphasison quality casework, adherence to law,and protection of taxpayer rights.

In order to deal with specific allega-tions of misconduct made during the Sep-tember hearings, or discovered in thecourse of the management audits de-scribed above, the IRS Office of Chief In-spector also undertook a number of indi-vidual investigations. The Commissionerthen established a Special Review Panelof career executives from outside the IRSto review the evidence and to recommendappropriate personnel actions. The Spe-cial Review Panel issued a Report to theCommissioner in August 1998. In its Re-port, the Special Review Panel agreedwith earlier conclusions that IRS had re-sponded to external pressures to close therevenue gap through improved productiv-ity by shifting management emphasis togoals and measures that placed a heavyemphasis on use of enforcement statistics.See also“IRS Personnel Administration:Use of Enforcement Statistics in Em-ployee Evaluations” (GAO/GGD-99-11,November 39, 1998).

Internal Revenue Service Restructuringand Reform Act of 1998

Sections 1201 and 1204 of the InternalRevenue Service Restructuring and Re-form Act of 1998 (RRA) represent themost recent legislative action regarding

performance measures used by the IRS.Section 1201 directs the IRS, consistentwith its current performance planning pro-cedures, including those established underthe GPRA, to establish a performancemanagement system that will establish“goals or objectives for individual, group,or organizational performance.” The IRSis directed to use this performance systemin the evaluation of employees or groupsof employees, in determining salary ad-justments and awards, and in other person-nel matters. The Conference Report ac-companying RRA (H. R. Conf. Rep. No.105–599, 105th Cong., 2d Sess., at 228(June 24, 1998) indicates that “in no eventwould performance measures be usedwhich rank employees or groups of em-ployees based solely on enforcement re-sults, establish dollar goals for assess-ments or collections, or otherwiseundermine fair treatment of taxpayers.”

Section 1204 of RRA repealed section6231 of TBOR 1 and replaced TBOR 1’sprohibition on the use of “records of taxenforcement results” to evaluate or to im-pose or suggest goals for personnel di-rectly involved in collection activity witha prohibition against using such recordsof tax enforcement results to evaluate, orto impose or suggest production quotas orgoals for, any IRS “employee.”



These regulations are proposed to beeffective thirty days after the date of pub-lication in the Federal Registerof thefinal regulations.

Balanced Measurement System

These proposed regulations provideguidance and direction for the establish-ment of a balanced performance measure-ment system for the Internal Revenue Ser-vice. They also provide guidance forimplementing the restrictions on the useof “records of tax enforcement results” inevaluating, or imposing or suggestinggoals for employees and for establishing“fair and equitable treatment of taxpay-ers” as one of the standards for evaluatingemployees.

These proposed regulations establish anew balanced system for measuring theperformance of and establishing perfor-

1999–11 I.R.B. 49 March 15, 1999

mance goals for various operational unitswithin the Internal Revenue Service. Thethree elements of this balanced measure-ment system are (1) Customer Satisfac-tion Measures, (2) Employee SatisfactionMeasures and (3) Business Results Mea-sures. These measures will, consistentwith GPRA, be based on “quantifiableand measurable” data, and will be numer-ically scored.

The proposed regulations do not pro-vide procedures for certifying whether ornot records of tax enforcement resultshave been used in a manner prohibited bysection 1204. Subsequent guidance willprovide that information.

a. Customer SatisfactionTo measure customer satisfaction, the

IRS will develop data from customer sat-isfaction surveys it receives from a statis-tically valid sample of taxpayers withwhom it has dealt. Among other things,taxpayers will be asked to provide infor-mation regarding whether they weretreated courteously and professionally,whether they were informed of theirrights and whether they were given an op-portunity to voice their concerns and ade-quate time to respond to IRS requests.Using data derived from these surveys,the IRS will derive quantitative indices ofcustomer satisfaction which will be usedto measure progress in achieving cus-tomer satisfaction goals.

b. Employee SatisfactionTo measure employee satisfaction, the

IRS will utilize an employee survey thatpermits employees to provide, on ananonymous basis, their assessment of thewide variety of factors that determinewhether employees believe that the workenvironment permits them to performtheir duties in a professional manner.Among other items included in the em-ployee survey, the questionnaires shouldelicit information regarding employees’assessment of the quality of supervisionand the adequacy of training and supportservices. As in the case of the CustomerSatisfaction measures, the goals and theaccomplishments of units subject to thebalanced measurement system will be ex-pressed in quantified form.

c. Business ResultsThe IRS will employ two parallel av-

enues to measure business results.

1. Quality MeasuresThe first of these approaches will focus

on the quality of the work done in a sam-ple of cases that were worked on by em-ployees. Such reviews will be conductedof a statistically valid sample of casesworked on by units designated by theCommissioner, such as a collection or ex-amination unit. A staff of personnel spe-cially dedicated to the task will reviewand numerically score the quality of workdone by IRS personnel. These reviewswill focus on such factors as whether IRSpersonnel provided proper and timely ser-vice to the taxpayer, properly analyzedthe facts, correctly applied the law, pro-tected taxpayer rights by following ap-plicable IRS policies and procedures, de-voted an appropriate amount of time tothe case, made appropriate judgments re-garding liability for tax and ability to payand provided accurate answers to tax lawor account questions posed by callers.

2. Quantity MeasuresThe quantity measures element of the

business results measure will focus exclu-sively on outcome-neutral productiondata. Accordingly, as described in the reg-ulation, data concerning the enforcementoutcome in cases, such as the dollaramount of audit adjustments, the numbersof liens filed or levies served, and thenumber of referrals for criminal investiga-tion, would be excluded from the produc-tion data used in the quantity measures.On the other hand, outcome-neutral pro-duction data, such as cases closed, timeper closing or cycle time, which do not re-flect the outcome produced by any IRS of-ficial’s exercise of judgment in determin-ing liability for tax or the collectionmechanism to be employed may be usedin determining the production element ofthe business results measures. The IRShas determined, however, that as a matterof policy such outcome-neutral productiondata may not be used to set goals for or forevaluating any non-supervisory employeewith tax enforcement responsibilities.

Further, an organization with enforce-ment responsibilities may not be given agoal or an evaluation based on enforce-ment-neutral production data regardingmatters calling for the exercise of judg-ment with respect to tax enforcement re-sults unless that goal or evaluation consti-

tutes only one element in a set of goals orone element in an evaluation based alsoupon the balanced measurement system.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions and, because these regulations donot impose on small entities a collectionof information requirement, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Therefore, a RegulatoryFlexibility Analysis is not required. Pur-suant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any electronic andwritten (a signed original and eight (8)copies) comments that are submittedtimely to the IRS. the IRS and Treasuryspecifically request comments on the clar-ity of the proposed regulations and howthey may be easier to understand. Allcomments will be available for public in-spection and copying.

A public hearing has been scheduled forThursday, May 13, 1999, beginning at 10a.m. in room 2615 of the Internal RevenueBuilding, 1111 Constitution Avenue NW,Washington, DC. Due to building securityprocedures, visitors must enter at the 10thStreet entrance, located between Constitu-tion and Pennsylvania Avenues, NW. Inaddition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-trance area more than 15 minutes beforethe hearing starts. For information abouthaving your name placed on the buildingaccess list to attend the hearing, see the

March 15, 1999 50 1999–11 I.R.B.

“FOR FURTHER INFORMATION CON-TACT” section of this preamble.

The rules of 26 CFR 601.601 (a) (3)apply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit comments and an outline of thetopics to be discussed and the time to bedevoted to each topic by Thursday, April22, 1999. A period of 10 minutes will beallotted to each person for making com-ments. An agenda showing the schedul-ing of 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 Julie A. Barry, Office of AssistantChief Counsel (General Legal Services).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *


Accordingly, 26 CFR Chapter I is pro-posed to be a mended by adding part 801to Subchapter H to read as follows:

PART 801—BALANCED SYSTEMFOR MEASURINGORGANIZATIONAL ANDINDIVIDUAL PERFORMANCEWITHIN THE INTERNAL REVENUESERVICE

Sec.801.0–1 Balanced performance measure-ment system; in general.801.0–2 Balanced performance measure-ment system801.0–3 Customer satisfaction measures801.0–4 Employee satisfaction measures801.0–5 Business results measures

Authority: §§ 1201 and 1204, PublicLaw No. 105–206 (112 Stat. 685, 715–716, 722 (July 22, 1998)).

§801.0–1 Balanced performancemeasurement system; in general.

(a) In general. The regulations in thispart 801 implement the provisions of sec-tions 1201 and 1204 of the Internal Rev-enue Service Restructuring and ReformAct of 1998 and provide rules relating tothe establishment by the Internal Revenue

Service of a balanced performance mea-surement system.

(b) Effective date.This part 801 is ef-fective thirty days after the date these reg-ulations are published as final regulationsin the Federal Register.

§801.0–2 Balanced performancemeasurement system.

(a) In general. Modern managementpractice and various statutory and regula-tory provisions require the IRS to set per-formance goals for organizational unitsand to measure the results achieved bythose organizations with respect to thosegoals. To fulfill these requirements, theIRS has established a balanced perfor-mance measurement system, composed ofthree elements: Customer SatisfactionMeasures; Employee Satisfaction Mea-sures; and Business Results Measures.The IRS is likewise required to establish aperformance evaluation system for indi-vidual employees.

(b) Measuring organizational perfor-mance—(1) In general. The performancemeasures that comprise the balanced mea-surement system will, to the maximumextent possible, be stated in objective,quantifiable and measurable terms and,subject to the limitation set forth in para-graph 2, will be used to measure the over-all performance of various operationalunits within the IRS. In addition to im-plementing the requirements of the Inter-nal Revenue Service Restructuring andReform Act of 1998, Pub. L. No. 105–206, 112 Stat. 685 (1998), the measuresdescribed here will, where appropriate, beused in performance goals and perfor-mance evaluations established, inter alia,under Division E, National Defense Au-thorization Act for Fiscal Year 1996 (theClinger-Cohen Act of 1996), Pub. L. No.104–106, 110 Stat. 186, 679 (1996); theGovernment Performance and Results Actof 1993, Pub. L. No. 103–62, 107 Stat.285 (1993); and the Chief Financial Offi-cers Act of 1990, Pub. L. No. 101–576,108 Stat. 2838 (1990).

(2) Limitation—Quantity Measures(asdescribed in § 801.0–5) will not be usedto evaluate the performance of or to im-pose or suggest production goals for anyorganizational unit with employees whoare responsible for exercising judgmentwith respect to tax enforcement results (as

defined in § 801.0–5) except in conjunc-tion with an evaluation or goals basedalso upon Customer Satisfaction Mea-sures, Employee Satisfaction Measures,and Quality Measures.

(c) Measuring individual performance.All employees of the IRS will be evalu-ated according to the critical elements andstandards or other performance criteria es-tablished for their positions. In accor-dance with the requirements of §§ 4312 and 9508 of 5 U.S.C. and §1201of the Internal Revenue Service Restruc-turing and Reform Act of 1998, Pub. L.No. 105–206, 112 Stat. 685 (1998), (as isappropriate to the employee’s position),the performance criteria for each positionwill be composed of elements that supportthe organizational measures of CustomerSatisfaction, Employee Satisfaction andBusiness Results; however, such organiza-tional measures will not directly determinethe evaluation of individual employees.

(1) Fair and equitable treatment oftaxpayers. In addition to all other criteriarequired to be used in the evaluation ofemployee performance, all employees ofthe IRS will be evaluated on whether theyprovided fair and equitable treatment totaxpayers.

(2) Senior Executive Service andspecial positions.Employees in the Se-nior Executive Service will be rated in ac-cordance with the requirements of 5U.S.C. § 4312 and employees selected tofill positions under 5 U.S.C. § 9503 willbe evaluated pursuant to workplans, em-ployment agreements, performanceagreements or similar documents enteredinto between the Internal Revenue Ser-vice and the employee.

(3) General Workforce.The perfor-mance evaluation system for all other em-ployees will:

(i) Establish one or more retention stan-dards for each employee related to thework of the employee and expressed interms of individual performance; and

(A) require periodic determinations ofwhether each employee meets or does notmeet the employee’s established retentionstandards; and

(B) require that action be taken, in ac-cordance with applicable laws and regula-tions, with respect to employees whoseperformance does not meet the estab-lished retention standards.

(ii) Establish goals or objectives for in-

1999–11 I.R.B. 51 March 15, 1999

dividual performance consistent with theIRS’s performance planning procedures;and

(A) use such goals and objectives tomake performance distinctions amongemployees or groups of employees; and

(B) use performance assessments as abasis for granting employee awards, ad-justing an employee’s rate of basic pay,and other appropriate personnel actions,in accordance with applicable laws andregulations.

(4) Limitations—(i) No employee ofthe IRS may use records of tax enforce-ment results (as defined in § 801.0-5) toevaluate any other employee or to imposeor suggest production quotas or goals forany employee.

(A) For purposes of the limitation con-tained in this paragraph (c)(4), employeehas the meaning as defined in 5 U.S.C. § 2105(a).

(B) For purposes of the limitation con-tained in this paragraph (c)(4), evaluateincludes any process used to appraise ormeasure an employee’s performance forpurposes of providing the following:

(1) Any required or requested perfor-mance rating.

(2) A recommendation for an awardcovered by Chapter 45 of Title 5; 5 U.S.C.§ 5384; or section 1201(a) of the InternalRevenue Service Restructuring and Re-form Act of 1998, Pub. L. No. 105–206,112 Stat. 685, 713–716 (1998).

(3) An assessment of an employee’squalifications for promotion, reassign-ment or other change in duties.

(4) An assessment of an employee’s eli-gibility for incentives, allowances orbonuses.

(5) Ranking of employees forrelease/recall and reductions in force.

(ii) Employees who are responsible forexercising judgment with respect to taxenforcement results (as defined in § 801.0–5) in cases concerning one ormore taxpayers may be evaluated with re-spect to work done on such cases only onthe basis of information derived from areview of the work done on the taxpayercases handled by such employee.

(iii) Performance measures based inwhole or in part on Quantity Measures(asdescribed in § 801.0–5) will not be usedto evaluate the performance of or to im-pose or suggest goals for any non-super-

visory employee who is responsible forexercising judgment with respect to taxenforcement results (as defined in § 801.0–5).

§ 801.0–3 Customer satisfactionmeasures.

The customer satisfaction goals and ac-complishments of operating units will bedetermined on the basis of data derivedfrom questionnaires, surveys and othertypes of information gathering mecha-nisms. Surveys designed to measure cus-tomer satisfaction for a particular workunit will be distributed to a statisticallyvalid sample of the taxpayers served bythat operating unit and will be used tomeasure whether those taxpayers believethat they received courteous, timely andprofessional treatment by the IRS person-nel with whom they dealt. Taxpayers willbe permitted to provide information re-quested for these purposes under condi-tions that guarantee them anonymity.

§ 801.0–4 Employee satisfactionmeasures.

The numerical ratings to be given oper-ating units within the IRS for employeesatisfaction will be determined on thebasis of information derived from a ques-tionnaire which will be distributed to allemployees of the operating unit; the em-ployees will be permitted to provide infor-mation on an anonymous basis. Data fromthese surveys will measure, among otherfactors bearing upon employee satisfac-tion, the quality of supervision and the ad-equacy of training and support services.

§ 801.0–5 Business results measures.

(a) In general. The business resultsmeasures will consist of numerical scoresdetermined under the Quality Measuresand the Quantity Measures describedbelow.

(b) Quality measures. The qualitymeasure will be determined on the basisof a review by a specially dedicated staffwithin the IRS of a statistically valid sam-ple of work items handled by certainfunctions or organizational units deter-mined by the Commissioner or his dele-gate such as the following:

(1) Examination and collection unitsand Automated Collection System units

(ACS). The quality review of the handlingof cases involving particular taxpayerswill focus on such factors as whether IRSpersonnel devoted an appropriate amountof time to a matter, properly analyzed theissues presented, developed the facts re-garding those issues, correctly applied thelaw to the facts, and complied with statu-tory, regulatory and IRS procedures, in-cluding timeliness, adequacy of notifica-tions and required contacts with taxpayers.

(2) Toll-free telephone sites.The qual-ity review of telephone services will focuson such factors as whether IRS personnelprovided accurate tax law and account in-formation.

(3) Other workunits. The quality re-view of other workunits will be deter-mined according to criteria prescribed bythe Commissioner or his delegate.

(c) Quantity measures. The quantitymeasures will consist of outcome-neutralproduction and resource data, such as thenumber of cases closed, work items com-pleted, hours expended and similar inven-tory, workload and staffing information,that does not contain information regard-ing the tax enforcement result reached inany case involving particular taxpayers.

(d) Definitions—(1) Tax enforcementresult. A tax enforcement result is the out-come produced by an IRS employee’s ex-ercise of judgment recommending or de-termining whether or how the IRS shouldpursue enforcement of the tax law with re-spect to any assessed or unassessed tax.

(i) Examples of data containing infor-mation regarding tax enforcement results.The following are examples of data con-taining information regarding tax enforce-ment results: number of liens filed; num-ber of levies served; number of seizuresexecuted; dollars assessed; dollars col-lected; full pay rate; no change rate; andnumber of fraud referrals.

(ii) Examples of data that do not con-tain information regarding tax enforce-ment results.The following are examplesof data that do not contain information re-garding tax enforcement results: numberof cases closed; time per case; direct ex-amination time/out of office time; cycletime; number or percentage of overagecases; inventory information; toll-freelevel of access; talk time; and data derivedfrom a quality review or from a review ofan employee’s or a workunit’s work on acase, such as the number or percentage of

March 15, 1999 52 1999–11 I.R.B.

cases in which correct examination adjust-ments were proposed or appropriate liendeterminations were made.

(iii) Records of tax enforcement results.Records of tax enforcement results aredata, statistics, compilations of informa-tion or other numerical or quantitativerecordations of the tax enforcement resultsreached in one or more cases, but does notinclude information, including the tax en-forcement result, regarding an individualcase to the extent the information is de-rived from a review of an employee’s or aworkunit’s work on individual cases.

(e) Permitted Uses of Records of TaxEnforcement Results. Records of tax en-forcement results may be used for pur-poses such as forecasting, financial plan-ning, resource management, and theformulation of case selection criteria.

(f) Examples.The following examplesillustrate the rules of this section:

Example 1. In conducting a performance evalua-tion, a supervisor may take into consideration infor-mation showing that the employee had failed to pro-pose an appropriate adjustment to tax liability in oneof the cases the employee examined, provided thatinformation is derived from a review of the workdone on the case. All information derived from sucha review of individual cases handled by an employee,including time expended, issues raised, and enforce-ment outcomes reached may be considered in settinggoals or evaluating the employee.

Example 2. A supervisor may not establish a goalfor proposed adjustments in a future examination,even though the goal was derived from analyses ofpreviously-handled cases, because such enforcementgoals are not based upon an analysis of the newly-assigned case.

Example 3. A headquarters unit may use recordsof tax enforcement results to develop methodologiesand algorithms for use in selecting tax returns toaudit.

Charles O. Rossotti,Commissioner of

Internal Revenue.


Foundations Status of CertainOrganizations

Announcement 99–20The following organizations have

failed to establish or have been unable tomaintain their status as public charities oras operating foundations. Accordingly,

grantors and contributors may not, afterthis date, rely on previous rulings or des-ignations in the Cumulative List of Orga-nizations (Publication 78), or on the pre-sumption arising from the filing of noticesunder section 508(b) of the Code. Thislisting does not indicate that the organiza-tions have lost their status as organiza-tions described in section 501(c)(3), eligi-ble to receive deductible contributions.

Former Public Charities.The followingorganizations (which have been treated asorganizations that are not private founda-tions described in section 509(a) of theCode) are now classified as private foun-dations:Abbas-E-Alamdar, Inc., Houston, TXThe Alliance of Black Churches Inc.,

Louisa, VAAlpha House, Inc., Chicago, ILAmerican to Fellow Miskito, Houston,

TXAmos Agency, Homewood, ILAnimal Shelter Fund Inc., Boca Raton,

FLAnimated Education, Inc., Chatsworth,

CABad Girls Inc., Bend, ORBeverly Hills – Acapulco Sister City

Committee Incorporated, BeverlyHills, CA

Bergum Group Homes Inc., Costa Mesa,CA

Big Brother – Big Sister of LapeerCounty Incorporated, Lapeer, MI

Birthright of La Grande, La Grande, ORBWICA Educational Fund, Inc.,

Brooklyn, NYBridges of America the Lauderhill

Bridge, Inc., Orlando, FLBrothers in Christ Foundation Ministries,

San Antonio, TXThe Campbell Institute, Portland, OR Camp Council Inc., Jenkintown, PACentral Commercial Teachers

Association, Inc., Madison, WICentral Erie County Paramedic

Association, McKean, PAChildren’s Education Fund, Inc.,

Lincolndale, NYChurch of God Evening Light Mission

Trust Inc., McFarland, CACircle C Ranch Inc., Stockton, CAClergy Care Inc., Joplin, MOCoachella Public School Transportation

Foundation, Coachella, CA1st Coast Learning Success Skills Center

Inc., Jax Beach, FL

Comites of San Francisco, San Francisco,CA

Daystar Ministries, Gladstone, ORDrs Vinod & Tarlika Thakkar

Foundation, Inc., Avon Park, FLEconomic Development & Information

Center for Africa, New York, NYEducation Foundation of Millburn –

Short Mills, Inc., Short Hills, NJEducation Through Art a Nonprofit

Corporation, Seattle, WAEducational Music Theatre Inc., Redondo

Beach, CAEl Capitain Aquatics Boosters Inc.,

Lakeside, CAESC Foundation of America,

Washington, DCThe Eye Tech Foundation, New York,

NYFairlee Senior Housing Group, Fairlee,

VTFeneta Tutoring Center, Kinston, NCFilipino American Association of USA

Inc., Panorama City, CAThe Fisherman, Inc., Kingston, MAFISST USA Inc., West Hartford, CTFocus Re-Direction, New York, NYFoster Grandparent Foundation, Salem,

ORFoundation for Interventional Cardiology

Inc., New York, NYGlen View Corporation, Shreveport, LAGod Rules Ministry, Baton Rouge, LAGrant Ministries, Inc., Moore, OKGutherie Community Bootstrap

Corporation, Gutherie, OKHarlem Development Corporation, New

York, NYHerbertsville First Aid Squad, Inc., Brick,

NJHeritage Place of Fayetteville, Inc.,

Fayetteville, NCHope Breeds Citizens Thru Counseling,

Arts, Recreation and Education,Oberlin, OH

Iglesia en Marcha, Lubbock, TXIndiana Civic and Cultural Association,

Incorporated, Indiana, PAInstitute for Men and Mens Studies Inc.,

Greensboro, NCInternational Foundation, Broken Arrow,

OKItalian Cultural Society of Northwest

Florida Inc., Pensacola, FLJ B C Development Corporation,

Duquesne, PAJ Cooper International Academy Tennis

Foundation, Houston, TX

1999–11 I.R.B. 53 March 15, 1999

J U T E Inc., Orlando, FLJ2M Productions, San Rafael, CAJackson County Economic Development

Corporation Inc., Black River Falls,WI

Jacksonville Florida Depressive andManic-Depressive Association Inc.,Atlantic Beach, FL

Jacksonville School of Ministry Inc.,Jacksonville, FL

Jacobs Blessing, Staten Island, NYJACPAT Ministries Inc., Cascade, IDJaggers Terrace Community Association

Inc., Columbia, SCJail Chaplaincy Ministry, Houston, TXJamaica Mission Inc., Grapevine, TXJambalaya Incorporated, Columbia, MDJames D McDonald Charitable Trust Inc.,

Boynton Beach, FLJames E Clyburn Scholarship and

Research Foundation, Columbia, SCJames F Patten Jr Memorial Foundation

Inc., Newburyport, MAJanai Cante Foundation, Tacoma, WAJason P Davis Memorial Scholarship

Fund Inc., Somerset, KYJay Stewart Ministries Inc., Concord, NCJaycee Valley Housing Inc., Uhrichsville,

OHJean Baptiste Pointe Dusable Memorial

Statue Committee, Chicago, ILJeanette Neill Dance Scholarship Fund,

Boston, MAJefferson County Tennis Association Inc.,

Pine Bluff, ARJefferson County Youth Football Inc.,

Charlestown, WVJefferson Legacy Foundation,

Middlebury, VTJefferson Park Youth Scholarship Fund,

New York, NYJeffrey Grossman 9-1-1 Award

Foundation Inc., Winchester, MAJenkins Creek Environmental Research

Center Inc., Crisfield, MDJennifer Ann Hines Memorial

Scholarship Foundation Charitable,Tampa, FL

Jennifer Turner Cancer ResearchFoundation, Tarrytown, NY

Jerry Lisker Scholarship Fund,Massapequa, NY

Jesse Jennette Ministries Inc., Franklin,TN

Jesus Christ Apostolic ChurchInternational, Chicago, IL

Jesus Christ King of Kings – GlobalMinistries Inc., Houston, TX

Jesus Ministries Inc., Oklahoma City, OKJesus Streetwise Ministries Incorporated,

Excelsior Springs, MOJewish Action International Corp.,

New York, NYJewish International Service Corps.,

Highland Park, ILJewish Theater Group of the Berkshires,

Lenox, MAJewish Womens Center of Pittsburgh,

Pittsburgh, PAJim Wilson Unity in Christ Crusade Inc.,

Elizabeth, INJimmy Johnson Foundation for Childrens

Charities, Dallas, TXJMR Funding Inc., Blue Springs, MOJobs and Environment Campaign, Inc.,

Cambridge, MAJobs for Teens, San Jose, CAJogging for Jesus Inc., Duncanville, TXJohn B and Mary Bell Pirtle Endowment

Fund, Louisville, KYJohn J McMahon Jr Memorial Roller

Hockey Club Inc., Deer Park, NYJohn W Nixon Cultural Arts Foundation

Inc., Birmingham, ALJohnson County Community Concert

Association, Buffalo, WYJohnsons Island Preservation Society Inc.,

Marblehead, OHJoint Education Housing Partnership

Program HEHPP Inc., Gulfport, MS Joplin Area Evangelical Association,

Joplin, MOJoseph Mission Corporation, Dryden, NYJourney Publications, Lincolnshire, ILJourney Toward Wholeness Ltd., Kildeer,

ILJoy of Athletics Foundation Inc., Miami

Lakes, FLJuan de Fuca Festival of the Arts, Port

Angeles, WAJuaneno Band of Mission Indians, San

Juan Capistrano, CAJubilee Agriculture Ministries Inc., Tempe,

AZJubilee Center Inc., Concord, MAJudah Broadcasting Network Inc.,

Pascagoula, MSJudah Youth Ministries, Tinton Falls, NJJudean Development Project, New York,

NYJulie A Rodick Memorial Foundation Inc.,

Weymouth, MAJuneau Pioneers Home Foundation,

Juneau, AKJunior Urban Mentor Programs,

Washington, DC

Jus Care, Houston, TXJustice Works, Newtown, PAJuvenile Foster Parents Association of

Dallas County, Murphy, TXJuvenile Justice Institute, Baton Rouge,

LAK-12 Educational Foundation, Greenwich,

CTK-12 Foundation, Lafayette, COK Edward Popleon Foundation, Baton

Rouge, LAK E E P Incorporation, Chicago, ILK Hop Institute of Business and Pedology

Inc., Kansas City, MOKaiserhof, Tomball, TXKaleidosart Inc., Hamden, CTKandu Corporation, West Chester, PAKanine Kandystripers Inc., Brentwood,

TNKansas Area Transit District 9

Coordinating Council Inc., Louisburg,KS

Kansas City Athletic Advisory Council,Kansas City, MO

Kansas City Jazz International, KansasCity, MO

Kansas City Legends Soccer Club,Leawood, KS

Kansas Intelligence Association, Topeka,KS

Kansas Partners in Progress Inc., Topeka,KS

Kappa Alpha PSI Bklyn-Li AlumniScholarship Foundation Inc., Elmont,NY

Karate Helping Kids, Canton, OHKare, Canton, ILKarnes County Mental Health Clinic

Advisory Board Inc., Karnes City, TXKauwahi Anaina Hawaii Hawaiian Civic

Club, Orem, UTKeep America Free Corp., Brooklyn, NYKeep Graham Beautiful Inc., Graham, TXKeith Mason Ministries Incorporated,

Terry, MSKelloway Foundation TR., Reading, MAKennedale Youth Association, Kennedale,

TXKent County Hispanic Resource Center

Inc., Grand Rapids, MIKern River Valley Health Connection,

Inc., Kernville, CAKesan, Incorporated, Summersville, WVKey Inc., Hays, KSKeys of Hope Inc., Washington, DCKezias House Inc., Columbus, OHKhal Brothers Inc., Lindsey, CAKid Mit Ment Foundation, Plymouth, MN

March 15, 1999 54 1999–11 I.R.B.

Kidney Research Fund USA, Bryn Mawr,PA

Kids Against Drugs, Shaker Heights, OHKids for Kids Theatre Inc., Ballwin, MOKids Hope USA, Spring Lake, MIKids Kampus Metropolitan Park Inc.,

Jacksonville, FLKids Korner-We Care Latch Key Program

of Sumner Iowa, Sumner, IAKids Playce Inc., Lexington, VAKids Space Inc., Huntsville, ALKidsercise Inc., Midvale, UTKidspace Child Care Association, Yellow

Springs, OHKidspeace National Centers for Kids in

Crisis of North America, Orefield, PAKidwise, Birmingham, ALKimberly International Inc., Schoolcraft,

MIKimbro Kidds, Portland, ORKingdom Business Ministries Inc.,

Paterson, NJKingdom of God Ministries Inc.,

Nashville, TNKings Kids Outreach Ministries, Abilene,

TXKinzua Bridge Foundation Inc., Mt.

Jewett, PAKirk Homes Inc., Inkster, MIKitsap Youth Services Association,

Bremerton, WAKiwanis Club of Northeast Wichita

Foundation Inc., Wichita, KSThe Kiwanis Club of Parkschester The

Bronx Foundation, Inc., Bronx, NYKiwanis Club of Tyler-Rose City

Foundation Inc., Tyler, TXKiwanis Law Enforcement Camp

Incorporated, McMinnville, ORKlaire Research Foundation, Carlsbad, CAKlingon Language Institute, Flourtown,

PAKnappa Svensen Brownsmead Burnside

Youth Program, Astoria, ORKnoxville Home Child Care Association,

Knoxville, TNKoala Inc., Brevard, NCKo-Am World Mission, Torrance, CAKorean American Liquor Market

Association, Huntington Beach, CAKorean Senior Association of Colorado,

Aurora, COKorean Senior Citizens Association Inc.,

Madison, TNKorean War Veterans Memorial

Committee Inc., Louisville, KYKroger Community Foundation Inc.,

Atlanta, GA

KS Nutritional-Neighborhood ServicesKNS, Houston, TX

Kweisi Mfume Community andScholarship Fund Inc., Baltimore, MD

Kyoin Educational Foundation,Washington, DCIf an organization listed above submits

information that warrants the renewal ofits classification as a public charity or as aprivate operating foundation, the InternalRevenue Service will issue a ruling or de-termination letter with the revised classi-fication as to foundation status. Grantorsand contributors may thereafter rely uponsuch ruling or determination letter as pro-vided in section 1.509(a)–7 of the IncomeTax Regulations. It is not the practice ofthe Service to announce such revised clas-sification of foundation status in the Inter-nal Revenue Bulletin.

Failure by Certain CharitableOrganizations to Meet CertainQualification Requirements;Taxes on Excess BenefitTransactions; Hearing

Announcement 99–21

ACTION: Notice of public hearing onpreviously published proposed regula-tions.

SUMMARY: This document providesnotice of a public hearing on proposedregulations relating to the excise taxes onexcess benefit transactions under section4958 of the Internal Revenue Code(Code). In addition, this document an-nounces that persons wishing to testify inthe Los Angeles, California, area will beable to make their presentations at an IRSremote videoconference site.

DATES: The public hearing will be heldon Tuesday, March 16, 1999, at 1 p.m.(EDT), and will continue Wednesday,March 17, 1999, at 1 p.m., if necessary.Requests to speak and outlines of oralcomments must be received by Wednes-day, February 24, 1999.

ADDRESSES: The public hearing willbe held in the auditorium of the New Car-rollton Federal Building (Building A),5000 Ellin Street, New Carrollton, Mary-land. The videoconference site for per-

sons testifying in Los Angeles is room5003 in the Federal Building, 300 N. LosAngeles Street, Los Angeles, California.

Mail requests to speak and outlines to:CC:DOM:CORP:R (REG–246256–96),room 5226, P.O. Box 7604, Ben FranklinStation, Washington, DC 20044. Handdeliver outlines Monday through Fridaybetween the hours of 8 a.m. and 5 p.m. toCC:DOM:CORP:R (REG–246256–96),Courier’s Desk, Internal Revenue Ser-vice, 1111 Constitution Avenue, NW,Washington, DC. Submit outlines elec-tronically via the Internet by selecting the“Tax Regs”option on the IRS Home Page,or by submitting them directly to the IRSInternet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CON-TACT: Concerning submissions of com-ments, the hearing, and/or to be placed onthe building access list to attend the hear-ing, LaNita Van Dyke, (202) 622-7180(not a toll-free number).


The subject of the public hearing isproposed regulations issued under section4958 of the Code. These regulations(REG–246256–96) appeared in the Fed-eral Register (63 F.R. 41486), August 4,1998, and in the Internal Revenue Bul-letin (1998–34 IRB 9), August 24, 1998.No hearing was scheduled at the time ofpublication of the proposed regulations.

The rules of § 601.601(a)(3) of the“Statement of Procedural Rules” (26 CFRpart 601) shall apply with respect to thepublic hearing, except that persons whodid not file written comments within thetime prescribed by the notice of proposedrulemaking (i.e., November 2, 1998) willbe permitted to make oral comments atthe public hearing by submitting their re-quests to speak and outlines in a timelymanner. Any persons who wish to presentoral comments at the hearing on the pro-posed regulations should submit an out-line of the oral comments/testimony to bepresented at the hearing, as well as thetime they wish to devote to each subject(signed original and eight (8) copies).Submissions must be received no laterthan February 24, 1999.

Each speaker (or group of speakers rep-

1999–11 I.R.B. 55 March 15, 1999

resenting a single entity) will be limited to10 minutes for an oral presentation, ex-clusive of the time consumed by the gov-ernment panel in asking questions of thespeaker and answers to those questions.

Because of controlled access restric-tions, attendees cannot be admitted be-yond the lobby of the Federal Buildingmore than 15 minutes before the hearingstarts. Hearing times at the Los Angeles,California, videoconference site will beconcurrent with the hearing in New Car-rollton, Maryland (i.e., 10 a.m. PDT).

Due to a limited seating capacity at theLos Angeles site, no more than 12 peoplemay be accommodated at any one time inthe videoconference room. Seating in thevideoconference room will be made avail-able based on the order of presentations.IRS personnel will be available at the LosAngeles videoconference site to assistspeakers in using the videoconferenceequipment.

The IRS will prepare and provide at thehearing, free of charge, an agenda show-ing the scheduling of speakers. Testi-mony will begin with the speakers at the

Los Angeles videoconference site andconclude with presentations by the speak-ers in New Carrollton.

Cynthia Grigsby,Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on Feb-ruary 4, 1999, 8:45 a.m., and published in the issueof the Federal Register for February 5, 1999, 64 F.R.5727)

Section 7428(c) Validation ofCertain Contributions MadeDuring Pendency of DeclaratoryJudgment Proceedings

This announcement serves notice to po-tential donors that the organization listedbelow has recently filed a timely declara-tory judgment suit under section 7428 ofthe Code, challenging revocation of itsstatus as an eligible donee under section170(c)(2).

Protection under section 7428(c) of theCode begins on the date that the notice of

revocation is published in the InternalRevenue Bulletin and ends on the date onwhich a court first determines that an or-ganization is not described in section170(c)(2), as more particularly set forth insection 7428(c)(1). In the case of individ-ual contributors, the maximum amount ofcontributions protected during this periodis limited to $1,000.00, with a husbandand wife being treated as one contributor.This protection is not extended to any in-dividual who was responsible, in whole orin part, for the acts or omissions of the or-ganization that were the basis for the re-vocation. This protection also applies(but without limitation as to amount) toorganizations described in section170(c)(2) which are exempt from taxunder section 501(a). If the organizationultimately prevails in its declaratory judg-ment suit, deductibility of contributionswould be subject to the normal limitationsset forth under section 170.

Lenox Institute of Water Technology, Inc.Lenox, MA

March 15, 1999 56 1999–11 I.R.B.

1999–11 I.R.B. 57 March 15, 1999

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith 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 in aprior ruling is being changed.

Distinguisheddescribes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial 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 but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

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—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

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 Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

March 15, 1999 58 1999–11 I.R.B.

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1998–1 through 1998–52will be found in Internal Revenue Bulletin 1999–1,dated January 4, 1999.

Numerical Finding List1

Bulletins 1999–1 through 1999–10

Announcements:

99–1, 1999–2 I.R.B. 4199–2, 1999–2 I.R.B. 4499–3, 1999–3 I.R.B. 1599–4, 1999–3 I.R.B. 1599–5, 1999–3 I.R.B. 1699–6, 1999–4 I.R.B.2499–7, 1999–2 I.R.B. 4599–8, 1999–4 I.R.B.2499–9, 1999–4 I.R.B. 2499–10, 1999–5 I.R.B. 6399–11, 1999–5 I.R.B. 6499–12, 1999–5 I.R.B. 6599–13, 1999–6 I.R.B. 1899–14, 1999–7 I.R.B.6099–15, 1999–8 I.R.B.7899–16, 1999–8 I.R.B. 8099–17, 1999–9 I.R.B. 5999–19, 1999–10 I.R.B. 63

Notices:

99–1, 1999–2 I.R.B. 899–2, 1999–2 I.R.B. 899–3, 1999–2 I.R.B. 1099–4, 1999–3 I.R.B. 999–5, 1999–3 I.R.B. 1099–6, 1999–3 I.R.B. 1299–7, 1999–4 I.R.B.2399–8, 1999–5 I.R.B. 2699–9, 1999–4 I.R.B. 2399–10, 1999–6 I.R.B. 1499–11, 1999–8 I.R.B.5699–12, 1999–9 I.R.B. 4499–13, 1999–10 I.R.B. 26

Proposed Regulations:

REG–209619–93, 1999–10 I.R.B. 28REG–245562–96, 1999–9 I.R.B. 45REG–114663–97, 1999–6 I.R.B. 15REG–116826–97, 1999–10 I.R.B. 40REG–118620–97, 1999–9 I.R.B. 46REG–121806–97, 1999–10 I.R.B. 46REG–104924–98, 1999–10 I.R.B.47REG–106219–98, 1999–9 I.R.B. 51REG–106564–98, 1999–10 I.R.B.53REG–106902–98, 1999–8 I.R.B. 57REG–110524–98, 1999–10 I.R.B. 55REG–111435–98, 1999–7 I.R.B. 55REG–113694–98, 1999–7 I.R.B. 56REG–113744–98, 1999–10 I.R.B. 59REG–115433–98, 1999–9 I.R.B. 54REG–116824–98, 1999–7 I.R.B.57REG–117620–98, 1999–7 I.R.B. 59REG–121865–98, 1999–8 I.R.B.63

Revenue Procedures:

99–1, 1999–1 I.R.B. 699–2, 1999–1 I.R.B. 7399–3, 1999–1 I.R.B. 10399–4, 1999–1 I.R.B. 11599–5, 1999–1 I.R.B. 15899–6, 1999–1 I.R.B. 18799–7, 1999–1 I.R.B. 22699–8, 1999–1 I.R.B. 22999–9, 1999–2 I.R.B. 1799–10, 1999–2 I.R.B. 11

99–11, 1999–2 I.R.B. 1499–12, 1999–3 I.R.B. 13

Revenue Procedures—Continued

99–13, 1999–5 I.R.B. 5299–14, 1999–5 I.R.B. 5699–15, 1999–7 I.R.B. 4299–16, 1999–7 I.R.B. 5099–17, 1999–7 I.R.B. 52

Revenue Rulings:

99–1, 1999–2 I.R.B. 499–2, 1999–2 I.R.B. 599–3, 1999–3 I.R.B. 499–4, 1999–4 I.R.B.1999–5, 1999–6 I.R.B.899–6, 1999–6 I.R.B. 699–7, 1999–5 I.R.B. 499–8, 1999–6 I.R.B.899–9, 1999–7 I.R.B.1499–10, 1999–10 I.R.B. 1099–11, 1999–10 I.R.B. 1899–13, 1999–10 I.R.B. 4

Treasury Decisions:

8789, 1999–3 I.R.B. 58791, 1999–5 I.R.B. 78792, 1999–7 I.R.B.368793, 1999–7 I.R.B.158794, 1999–7 I.R.B.48795, 1999–7 I.R.B.88796, 1999–4 I.R.B. 168797, 1999–5 I.R.B. 58799, 1999–6 I.R.B. 108800, 1999–4 I.R.B. 208801, 1999–4 I.R.B. 58802, 1999–4 I.R.B. 108805, 1999–5 I.R.B. 148806, 1999–6 I.R.B.48807, 1999–9 I.R.B. 338808, 1999–10 I.R.B. 218809, 1999–7 I.R.B.278810, 1999–7 I.R.B.198811, 1999–10 I.R.B. 198812, 1998–8 I.R.B. 198816, 1998–8 I.R.B. 48817, 1998–8 I.R.B. 51

1999–11 I.R.B. 59 March 15, 1999

Finding List of Current Action onPreviously Published Items1

Bulletins 1999–1 through 1999–10

Revenue Procedures:

78–10Obsoleted by99–12, 1999–3 I.R.B. 13

94–56Superseded by99–9, 1999–2 I.R.B. 17










98–22Modified and amplified by99–13, 1999–5 I.R.B. 52


98–63Modified by announcement99–7, 1999–2 I.R.B. 45

1 A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1998–1 through 1998–52 will be found in InternalRevenue Bulletin 1999–1, dated January 4, 1999.

March 15, 1999 60 1999–11 I.R.B.

Notes

1999–11 I.R.B. 61 March 15, 1999

Notes

March 15, 1999 62 1999–11 I.R.B.

Notes

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