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Treas.
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v.410
Department of the Treasury
PRESS R E L E A S E S
The following numbers were not used:
JS-1054, 1058 AND 1072
JS-1029: Secretary S n o w Meets with House Financial Services Committee Chairman Mic... Page 1 of 1
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 2, 2003
JS-1029
Secretary John W. Snow Meets with House Financial Services Committee
Chairman Michael G. Oxley
to Discuss Issues Related to Financial Services and the Economy
Media Contact
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://www.treas.gov/press/releases/js 1029.htm
5/20/2005
PRESS R O O M
F R O M THE OFFICE OF PUBLIC AFFAIRS
December 2, 2003
2003-12-2-16-55-25-9842
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $85,156 million as of the end of that week, compared to $84,993 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
November 28, 2003
November 21, 2003
TOTAL
85,156
84,993
1. Foreign Currency Reserves
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
7,949
14,448
22,397
7,988
14,361
22,349
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
12,989
2,902
15,891
13,083
2,885
15,968
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position
23,586
23,675
3. Special Drawing Rights (SDRs) 2
12,076
12,121
4. Gold Stock 3
11,043
11,043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
November 21, 2003
Euro
Yen
TOTAL
November 28, 2003
Euro
Yen
1. Foreign currency loans and securities
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
TOTAL
U
2. a. Short positions
2.b. Long positions
3. Other
III. Contingent Short-Term Net Drains on Foreign Currency Assets
November 21, 2003
Euro
Yen
TOTAL
0
1. Contingent liabilities in foreign currency
November 28, 2003
Euro
Yen
TOTAL
0
La. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a. 1. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items "2 IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-10:30: S h o w Statement on S E C Mutual Fund Reform Proposals
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 3, 2003
JS-1030
Statement by Secretary John Snow on the SEC's
Mutual Fund Reform Proposals
Mutual funds are vitally important savings tools for millions of American families.
They play an essential role in business growth and job creation and have helped
transform America into an ownership society. The thoughtful reform proposals put
forth by Chairman Donaldson today as part of his Mutual Fund Investors' Rights
Agenda represent important progress in strengthening the governance and
transparency of mutual funds, in preserving the critical role that these funds play in
our financial system, and in protecting investors.
I look forward to working with Chairman Donaldson as the SEC continues to pursue
reforms to ensure that our nation's financial markets remain strong, fair and
accessible for all Americans. This administration will not tolerate wrongdoing by
anyone who would abuse the trust of investors. I a m pleased by the action the S E C
took today, and I a m confident Chairman Donaldson will continue to seek out bad
actors and bring them to justice.
http://www.treas.gov/press/releases/jsl030.htm
5/20/2005
js-1031: Remarks of<BR>Michael A. D a w s o n < B R > D e p u t y Assistant Secretary<BR>for...
Page 1 of 3
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 3, 2003
js-1031
Remarks of
Michael A. D a w s o n
Deputy Assistant Secretary
for
Critical Infrastructure Protection and Compliance Policy
at the Fourth E-Gov Homeland Security Conference
Washington, D.C.
Thank you for this opportunity to address the economic risks associated with
terrorism.
This is an issue that is very important to the Department of the Treasury. At the
Treasury, w e are responsible for developing and promoting policies that create jobs
and improve the economy. W e are equally concerned with developing and
promoting policies that enhance the resiliency of the economy, policies that
minimize the economic d a m a g e and speed economic recovery from a terrorist
attack. In addition to these general responsibilities, the President has n a m e d
Treasury as the lead agency to enhance the resiliency of the critical financial
infrastructure.
These two responsibilities are closely related. As Secretary Snow has said, the
financial system is the engine of our economy. In a very real sense, the resilience
of the American economy depends on the resilience of the American financial
system.
Fortunately, we are starting from a very strong base. The American economy is
remarkably resilient. Over the past few years, w e have seen that resilience first
hand, as the American economy withstood a significant fall in equity prices, a
recession, the terrorist attacks of September 11, a rash of corporate governance
scandals, and power outage of August 14-15. There are m a n y reasons for the
resilience of the American economy. Good policies have played an important part.
So has the resilience of the American people. O n e of the reasons w e are so strong
is that our people are so tough, so determined to protect our w a y of life.
Like the economy as a whole, the American financial system is remarkably
resilient. During the power outage in August that affected cities from Cleveland to
N e w York City, for example, the financial system performed extraordinarily well.
With one exception, the bond and major equities and futures markets were open
the next day at their regular trading hours. Major market participants were well
prepared, having invested in contingency plans, procedures, and equipment such
as backup power generators. This resilience mitigates the economic risks of
terrorist attacks, both to the financial system itself and to the American economy as
a whole.
Although we are starting from a strong base, the fact remains that we are still
exposed to significant risks of economic disruption from terrorist attacks. Four
principles guide our efforts to m a n a g e these risks. These principles guided our
decisions as the financial system recovered from the attacks of September 11th.
They guide our actions still.
The first principle is to remember that the financial system is really about people.
People, not buildings or computers, produce financial services. A n d it is people
w h o benefit from financial services.
http://www.treas.gov/press/releases/js 1031 .htm
5/20/2005
js-1031: R e m a r W o f < B R > M i c h a e l A. Dawson<BR>Deputy Assistant Secretary<BR>for...
Page 2 of 3
We depend on people to run the financial system. We need these people - tellers,
technicians, loan officers, technicians, technologists - to see the system through
times of stress. Indeed, it w a s the commitment of these professionals to their
institutions, customers, and colleagues that helped the financial system recover
from the attacks of September 11th and weather the power outage of August 1415.
Just as we depend on people to run the financial system, people depend on the
financial system to run. Virtually every American depends on financial services to
get their paycheck, buy their groceries, purchase a house, finance their children's
education, or save for retirement. W e must ensure that people continue to have
confidence that the financial system will meet their needs.
The second principle is the importance of maintaining confidence. Confidence in
the ability of financial institutions to clear checks, execute transactions, and satisfy
insurance obligations helps the system weather significant disruption from evolving
threats. By relying on a sound financial system, Americans can m a k e business
decisions for the future and conduct necessary business in the present.
The third principle is to ensure that the financial system remains accessible and
open for business when the safety of the employees permits. During times of
disaster, investors depend on markets to price the impact of the disruption on
assets. The longer markets are closed, the longer investors must go without
knowing what the impact will be. This uncertainty can itself be harmful to the
economy, compounding the impact of any disruption. The sooner w e can eliminate
this uncertainty, the more w e can mitigate the impact and speed recovery.
Fourth, we want to promote responsible decision-making and problem-solving
within the private sector. Financial institutions should m a k e the appropriate
decisions without waiting for guidance from Washington. After all, it is the private
sector that owns and operates the majority of the financial systems. And it is the
private sector that best knows how to help these systems recover from a disruption.
W e will help when needed, but w e intend for the private sector to find the necessary
solutions.
These are the principles that guide our actions in managing the risks of terrorism to
our financial system. But what are our actions? Let m e highlight just three.
First, we have helped to develop a next generation Financial Services Information
Sharing and Analysis Center (FS/ISAC). Since 1999, the FS/ISAC has been a
leader in information sharing for the financial sector, allowing m e m b e r s to receive
and submit anonymous reports on security threats and solutions. The FS/ISAC,
however, has been limited in scope. It focused primarily on cyber threats. And it
served only 56 financial institutions, albeit 56 of the biggest ones. In addition,
Congress has expressed concern over the technological capabilities of the
FS/ISAC. Shortly, Treasury will help launch a n e w and improved FS/ISAC. This
next generation FS/ISAC will include both cyber and physical threat information;
serve the entire sector, not just 56 large institutions; and deploy a secure,
confidential technology platform where companies can exchange information in real
time as they identify vulnerabilities, address the vulnerabilities, and respond to
attempts to exploit the vulnerabilities.
Second, we have recently reached an agreement with Assistant Secretary Patrick
Hughes of the Department of Homeland Security to detail an expert in financial
services issues to the Information Analysis directorate of the Homeland Security
Department. Initially, this person will be a Department of the Treasury employee.
Over time, however, w e will rotate other employees from other financial regulators
through the Department. In so doing, w e will ensure that financial services issues
and perspectives are considered early in the process of evaluating information
about terrorist threats. The resulting product will help federal, state, and local
authorities better protect our financial infrastructure. A s important, w h e n w e are
able to share that information with the private sector, it will help the owners and
operators of that infrastructure better m a n a g e risks.
Third, we have developed proven procedures for secure communications between
federal and state financial regulators. During times of crisis, these communications
procedures help financial regulators share information about the impact of an event
on the financial institutions regulated by that regulator. By pooling information
about the impact of a disruption, w e can together form a quick, accurate
assessment of the overall impact of an event on the financial sector as a whole.
http://www.treas.gov/press/releases/js 1031 .htm
5/20/2005
j s-1031: Remarks of<BR>Michael A. Dawson<BR>Deputy Assistant Secretary<BR>for...
Page 3 of 3
This information helps guide our action as regulators. But, more importantly, we
can share the information with financial institutions and help them better weather
the disruption. This system worked in real time during the power outage of August
14-15 and its results were summarized in a report to Congress in October of 2003.
(The report is available at http://www.treas.gov/offices/domestic-finance/financialinstitution/cip/pdf/impact.pdf)
These are but three of our recent actions. They highlight the importance we place
on developing accurate and timely information about threats and sharing that
information with the private sector. A s more and better information about the
threats they face becomes available, the people in the private sector w h o o w n and
operate our financial infrastructure can better estimate the risks they bear.
Furthermore, they can better invest to reduce the probability of a threat against their
infrastructure, thereby lessening the consequences that a disruption might pose.
http://www.treas.gov/press/releases/js 1031 .htm
5/20/2005
js-1032: Rem3rlcs~ df<br>Michael A . Dawson<br>Deputy Assistant Secretary<br>For Cri... Page 1 of 3
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Rea_der®.
December 4, 2003
js-1032
Remarks of
Michael A. D a w s o n
Deputy Assistant Secretary
For Critical Infrastructure Protection and Compliance Policy
at the
Conference on Critical Financial Infrastructure Protection
Organized by the Federal Deposit Insurance Corporation
Charlotte, North Carolina
I am here in North Carolina today to talk about what we are doing in Washington to
help you protect the critical financial infrastructure. I don't have to tell anyone in
North Carolina that the critical financial infrastructure exists outside of Washington.
North Carolina is an important center of financial innovation. Institutions like the
Bank of America, Wachovia, B B & T , and the Latino Community Credit Union all
attest to North Carolina's strong tradition of financial innovation and leadership.
In partnership with the FDIC, the Department of the Treasury and our colleagues in
the public and private sectors are speaking to audiences in twenty-four cities across
the United States. After our eighteen month tour, w e will have spoken to 6,000
individuals; on average, 250 people per city. Through this outreach, w e hope to
encourage you - stewards of financial services in North Carolina - to take
advantage of policies and programs that will further strengthen the U.S. critical
financial infrastructure.
This is an issue that is very important to the Department of the Treasury. At the
Treasury, w e are responsible for developing and promoting policies that create jobs
and improve the economy. W e are equally concerned with developing and
promoting policies that enhance the resiliency of the economy, policies that
minimize the economic d a m a g e and speed economic recovery from a terrorist
attack. In addition to these general responsibilities, the President has n a m e d
Treasury as the lead agency to enhance the resiliency of the critical financial
infrastructure.
These two responsibilities are closely related. As Secretary Snow has said, the
financial system is the engine of our economy. In a very real sense, the resilience
of the American economy depends on the resilience of the American financial
system.
Fortunately, we are starting from a very strong base. The American economy is
remarkably resilient. Over the past few years, w e have seen that resilience first
hand, as the American economy withstood a significant fall in equity prices, a
recession, the terrorist attacks of September 11, a rash of corporate governance
scandals, and power outage of August 14-15. There are m a n y reasons for the
resilience of the American economy. Good policies have played an important part.
S o has the resilience of the American people. O n e of the reasons w e are so strong
is that our people are so tough, so determined to protect our w a y of life.
Like the economy as a whole, the American financial system is remarkably
resilient. During the power outage in August that affected cities from Cleveland to
N e w York City, for example, the financial system performed extraordinarily well.
With one exception, the bond and major equities and futures markets were open
the next day at their regular trading hours. Major market participants were well
prepared, having invested in contingency plans, procedures, and equipment such
as backup power generators. This resilience mitigates the economic risks of
http://www.treas.gov/press/releases/js 1032.htm
5/20/2005
js-1032: Remarks of^br>Michael A. Dawson<br>Deputy Assistant Secretary<br>For Cri... Page 2 of 3
terrorist attacks, both to the financial system itself and to the American economy as
a whole.
Although we are starting from a strong base, the fact remains that we are still
exposed to significant risks of economic disruption from terrorist attacks.
Four principles guide our efforts to manage these risks. These principles guided
our decisions as the financial system recovered from the attacks of September
11th. They guide our actions still.
The first principle is to remember that the financial system is really about people.
People, not buildings or computers, produce financial services. And it is people
w h o benefit from financial services.
We depend on people to run the financial system. We need these people - tellers,
technicians, loan officers, technicians, technologists -- to see the system through
times of stress. Indeed, it w a s the commitment of these professionals to their
institutions, customers, and colleagues that helped the financial system recover
from the attacks of September 11th and weather the power outage of August 1415.
Just as we depend on people to run the financial system, people depend on the
financial system to run. Virtually every American depends on financial services to
get their paycheck, buy their groceries, purchase a house, finance their children's
education, or save for retirement. W e must ensure that people continue to have
confidence that the financial system will meet their needs.
The second principle is the importance of maintaining confidence. Confidence in
the ability of financial institutions to clear checks, execute transactions, and satisfy
insurance obligations helps the system weather significant disruption from evolving
threats. By relying on a sound financial system, Americans can m a k e business
decisions for the future and conduct necessary business in the present.
The third principle is to ensure that the financial system remains accessible and
open for business when the safety of the employees permits. During times of
disaster, investors depend on markets to price the impact of the disruption on
assets. The longer markets are closed, the longer investors must go without
knowing what the impact will be. This uncertainty can itself be harmful to the
economy, compounding the impact of any disruption. The sooner w e can eliminate
this uncertainty, the more w e can mitigate the impact and speed recovery.
Fourth, we want to promote responsible decision-making and problem-solving
within the private sector. Financial institutions should m a k e the appropriate
decisions without waiting for guidance from Washington. After all, it is the private
sector that owns and operates the majority of the financial systems. And it is the
private sector that best knows how to help these systems recover from a disruption.
W e will help when needed, but w e intend for the private sector to find the necessary
solutions.
With these principles in mind, w e have organized ourselves into two main groups.
O n e is the Financial and Banking Information Infrastructure Committee (FBIIC).
The FBIIC is sponsored by the President's Working Group on Financial Markets
and consists of many state and federal regulators. The FDIC, which organized this
conference today, is a member. S o too are the Board of Governors of the Federal
Reserve System, the Securities and Exchange Commission, the Commodity
Futures Trading Commission, the National Association of Insurance
Commissioners, the Conference of State Banking Supervisors, and m a n y other
important regulators. Treasury chairs the FBIIC.
Another important group is the Financial Services Sector Coordinating Council
(FSSCC). The F S S C C consists of virtually every important financial services
association. The F S S C C is coordinated by Rhonda MacLean, an executive based
here in Charlotte with Bank of America. Treasury w a s pleased to appoint Rhonda
to this position. She has done an outstanding job.
Together, the FBIIC and the FSSCC work to systematically identify the critical
financial infrastructure, identify vulnerabilities in that infrastructure, address the
vulnerabilities, and evaluate our progress.
These are the principles and structures that guide our actions in managing the risks
of terrorism to our financial system. But what are our actions? What are w e doing
http://www.treas.gov/press/releases/js 1032.htm
5/20/2005
js-1032: Remarks of<br>Michael A. Dawson<br>Deputy Assistant Secretary<br>For Cri... Page 3 of 3
that will help you manage the risks you face? Let me highlight just three. You will
learn more about these - and other opportunities - during the course of the day
from other speakers.
First, we have helped to develop a next generation Financial Services Information
Sharing and Analysis Center (FS/ISAC). Since 1999, the FS/ISAC has been a
leader in information sharing for the financial sector, allowing m e m b e r s to receive
and submit anonymous reports on security threats and solutions. T h e FS/ISAC,
however, has been limited in scope. It focused primarily on cyber threats. A n d it
served only 56 financial institutions, albeit 56 of the biggest ones. In addition,
Congress has expressed concern over the technological capabilities of the
FS/ISAC. Shortly, Treasury will help launch a n e w and improved FS/ISAC. This
next generation FS/ISAC will include both cyber and physical threat information;
serve the entire sector, not just 56 large institutions; and deploy a secure,
confidential technology platform where companies can exchange information in real
time as they identify vulnerabilities, address the vulnerabilities, and respond to
attempts to exploit the vulnerabilities. Y o u can learn more about h o w your financial
institution can benefit from the FS/ISAC at www.fsisac.com.
Second, w e have recently reached an agreement with Assistant Secretary Patrick
Hughes of the Department of Homeland Security to detail an expert in financial
services issues to the Information Analysis directorate of the Homeland Security
Department. Initially, this person will be a Department of the Treasury employee.
Over time, however, w e will rotate other employees from other financial regulators
through the Department. In so doing, w e will ensure that financial services issues
and perspectives are considered early in the process of evaluating information
about terrorist threats. The resulting product will help federal, state, and local
authorities better protect our financial infrastructure. A s important, w h e n w e are
able to share that information with the private sector, it will help the owners and
operators of that infrastructure better manage risks.
Third, we have developed proven procedures for secure communications between
federal and state financial regulators. During times of crisis, these communications
procedures help financial regulators share information about the impact of an event
on the financial institutions regulated by that regulator. By pooling information
about the impact of a disruption, w e can together form a quick, accurate
assessment of the overall impact of an event on the financial sector as a whole.
This information helps guide our action as regulators. But, more importantly, w e
can share the information with financial institutions and help them better weather
the disruption. This system worked in real time during the power outage of August
14-15 and its results were summarized in a report to Congress in October of 2003.
(The report is available at http://www.treas.gov/offices/domestic-finance/financialinstitution/cip/pdf/impact.pdf)
These are but three of our recent actions. They highlight the importance we place
on developing accurate and timely information about threats and sharing that
information with the private sector. A s more and better information about the
threats they face becomes available, the people in the private sector w h o o w n and
operate our financial infrastructure can better estimate the risks they bear.
Furthermore, they can better invest to reduce the probability of a threat against their
infrastructure, thereby lessening the consequences that a disruption might pose.
Thank you for your time today. Thank you for attending this important conference.
http://www.treas.sav/press/releases/js 1032.htm
5/20/2005
JS-1033: M E D I A A D V I S O R Y Secretary John Snow to Discuss U.S. Economy in St. Lou... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 4, 2003
JS-1033
MEDIA ADVISORY
Secretary John S n o w to Discuss U.S. E c o n o m y
in St. Louis, Missouri on Friday
Treasury Secretary John W . Snow will visit St. Louis, Missouri on Friday, December
5th to discuss the state of the economy, as well as efforts by President Bush to
create jobs, strengthen the economic recovery and increase workers' standards of
living.
In St. Louis, Secretary Snow will tour a construction site, meet with local
construction industry leaders, and tour a vocational school that is teaching students
job skills. The construction industry, an important segment of the overall U.S.
economy, is showing signs of improvement. The Commerce Department this week
reported that construction spending increased 0.9 percent in October, to a record
$922 billion annual rate.
According to a leading trade group, the construction industry employs nearly 7
million people or about six percent of the nation's non-farm, private sector
employment, with an annual payroll of $250 billion. The construction industry also
contributes nearly eight percent of the Gross Domestic Product (GDP) as measured
by the value of construction put in place.
The following events are open to the media:
10:30 am CST Tour of Metroloft Apartment construction site
4555 Forest Park Blvd.
St. Louis, M O
** P H O T O O P O N L Y - N O R E M A R K S B Y T H E S E C R E T A R Y
1:00 p m C S T Tour of Construction Careers Center charter school
1224Gratton
St. Louis, M O
** A T T H E E N D O F T H E T O U R , T H E S E C R E T A R Y WILL C O N D U C T A S H O R T
P R E S S AVAILABILITY
JS-1033
Impact of the President's Jobs and Growth Package on Missouri
The package provides benefits to more than 1.7 million Missouri taxpayers.
REDUCING TAXES
• More than 1.7 million taxpayers in Missouri have lower income tax bills in 2003.
• Nearly 390,000 business taxpayers can use their tax savings to invest in new
equipment, hire additional workers, and increase pay.
ACCELERATE 10-PERCENT BRACKET EXPANSION
• More than 1.3 million married couples and single filers benefit from the
acceleration to 2003 of the expansion of the 10-percent bracket scheduled for 2008.
ACCELERATE REDUCTION IN INCOME TAX RATES
• Nearly 440,000 taxpayers in Missouri benefit from the acceleration to 2003 of the
reductions in income tax rates in excess of 15-percent scheduled for 2004 and
2006.
http://www.treas.gov/press/releases/jsl033.htm
5/20/2005
JS-1033: M E D I A A D V I S O R Y Secretary John Snow to Discuss U.S. Economy in St. Lou... Page 2 of 2
ACCELERATE REDUCTION IN MARRIAGE PENALTY
• 715,000 married couples in Missouri benefit from the acceleration to 2003 of
provisions that increase the standard deduction for joint filers to double the amount
for single filers and increase the width of the 15-percent bracket to twice the width
for single filers. These two provisions are scheduled to phase in between 2005 and
2009.
ACCELERATE INCREASE IN CHILD TAX CREDIT
• More than 510,000 married couples and single parents in Missouri benefit from
the acceleration to 2003 of the increase in the child tax credit from $600 to $1,000
that is scheduled to phase in between 2005 and 2010.
EXCLUSION FOR CORPORATE DIVIDENDS
• 470,000 taxpayers in Missouri benefit from the reduced tax rates on capital gains
and dividends.
http://www.treas.gov/press/releases/jsl033.htm
5/20/2005
JS-1034: Treasury and IRS Shut D o w n Abusive Tax Avoidance Transaction
Page 1 of 1
PRLSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 4, 2003
JS-1034
Treasury and IRS Shut Down Abusive Tax Avoidance Transaction
Involving Options on Foreign Currencies
Today the Treasury Department and the Internal Revenue Service issued guidance
to bar transactions in which taxpayers dispose of a pair of offsetting options,
claiming a loss on one of the options but contending that they never have to
recognize the corresponding gain on the other. These transactions are now "listed
transactions." Taxpayers who have entered into these transactions must disclose
them to the IRS, and advisors promoting their use will be required to maintain lists
of participating taxpayers.
"This is another step in our ongoing efforts to stop abusive tax avoidance
transactions," stated Treasury Assistant Secretary for Tax Policy P a m Olson. " W e
have given taxpayers notice that if they assign an option in one of these
transactions they must recognize the gain. If they fail to do so, they will have to
disclose their transaction to the IRS."
"We are seeing increasingly creative and complex deals involving foreign
currencies and charities that are designed to abuse the tax code," IRS
Commissioner Mark W . Everson said. "Today's guidance closes the door on this
transaction. W e are continuing to use all the tools at our disposal to combat
potentially abusive transactions."
These transactions involve two pairs of offsetting options on foreign currencies that,
collectively, are structured to have little real risk of economic gain or loss. The
taxpayer assigns two offsetting options to a charity, claiming an immediate loss on
one of the options and taking the position that it does not have to take into account
the offsetting gain in the other assigned option. The taxpayer disposes of the
remaining pair of offsetting options. The result is a large tax benefit (the claimed
tax loss on one assigned option) without recognition of the matching economic gain
on the other assigned option.
The Treasury Department and the Internal Revenue Service believe that the
promoters and taxpayers involved in these transactions are misapplying the rules
relating to the inclusion of gain on the assigned option in taxable income. The
Internal Revenue Service will challenge the tax benefits claimed by taxpayers w h o
have entered into these transactions.
Related Documents:
• The Text of Notice 2003-81
http://www.treas.gov/press/releases/jsl034.htm
5/20/2005
Part III - Administrative, Procedural and Miscellaneous
Tax Avoidance Using Offsetting Foreign Currency Option Contracts
Notice 2003-81
The Internal Revenue Service and the Treasury Department are aware of a type of
transaction, described below, in which a taxpayer claims a loss upon the assignment of a
section 1256 contract to a charity but fails to report the recognition of gain when the
taxpayer's obligation under an offsetting non-section 1256 contract terminates. This notice
alerts taxpayers and their representatives that these transactions are tax avoidance
transactions and identifies these transactions, and those that are substantially similar to
these transactions, as listed transactions for purposes of § 1.6011 -4(b)(2) of the Income
Tax Regulations and §§ 301.6111-2(b)(2) and 301.6112-1 (b)(2) of the Procedure and
Administration Regulations. This notice also alerts parties involved with these transactions
of certain responsibilities that m a y arise from their involvement with these transactions.
FACTS
A taxpayer pays premiums to purchase a call option and a put option (the
purchased options) on a foreign currency. The currency is one in which positions are
traded through regulated futures contracts, and the purchased options, therefore, are
foreign currency contracts within the meaning of section 1256(g)(2)(A) of the Internal
Revenue C o d e and section 1256 contracts within the meaning of section 1256(b). The
purchased options are reasonably expected to move inversely in value to one another over
a relevant range, thus ensuring that as the value of the underlying foreign currency
changes, the taxpayer will hold a loss position in one of the two section 1256 contracts.
The taxpayer also receives premiums for writing a call option and a put option (the written
options) on a different foreign currency in which positions are not traded through regulated
futures contracts. Thus, the written options are not foreign currency contracts within the
meaning of section 1256(g)(2)(A), nor are they section 1256 contracts within the meaning
of section 1256(b). The written options are reasonably expected to m o v e inversely in value
to one another over a relevant range, thus ensuring that, as the value of the underlying
foreign currency changes, the taxpayer will hold a gain position in one of the two nonsection 1256 contracts.
The values of the two currencies underlying the purchased and written options (i)
historically have demonstrated a very high positive correlation with one another, or (ii)
officially have been linked to one another, such as through the European Exchange Rate
Mechanism ( E R M II). Thus, as the currencies change in value, the taxpayer reasonably
expects to have the following potential gains and losses in substantially offsetting positions:
(1) a loss in a purchased option and a gain in a written option; and (2) a gain in a
purchased option and a loss in a written option. At any time, the taxpayer's loss in the
purchased option position that has declined in value m a y be more or less than the
taxpayer's gain in the offsetting written option position that has appreciated in value.
Similarly, the taxpayer's gain in the remaining purchased option position m a y be more or
2
less than the taxpayer's loss in the remaining written option position. A material pre-tax
profit or rate of return, or both, on the transaction is possible but unlikely.
The taxpayer assjgns to a charity the purchased option that has a loss. The charity
also assumes the taxpayer's obligation under the offsetting written option that has a gain.
A s with all written options, the amount of gain on the option is limited to the premium
received for the option. In the s a m e tax year, the taxpayer m a y dispose of the remaining
purchased option and offsetting written option.
Because the purchased option assigned to the charity is a section 1256 contract,
the taxpayer relies on section 1256(c) and Greene v. United States, 79 F.3d 1348 (2d Cir.
1996), to mark to market the purchased option when the option is assigned to the charity
and to recognize a loss at that time. In contrast, because the assumed written option is not
a section 1256 contract, the taxpayer claims not to recognize gain attributable to the option
premium. Specifically, the taxpayer claims that the charity's assumption of the option
obligation does not cause the taxpayer to recognize gain and that the taxpayer also does
not recognize gain either at the time the option expires or terminates or at any other time.
ANALYSIS
Rev. Rul. 58-234, 1958-1 C.B. 279, clarified by Rev. Rul. 68-151, 1968-1 C.B. 363,
holds that an option writer does not recognize income or gain with respect to a premium
received for writing an option until the option is terminated, without exercise, or otherwise.
Accord Rev. Rul. 78-182, 1978-1 C.B. 265; Koch v. Commissioner, 67 T.C. 71 (1976),
acq. 1980-2 C.B. 1. Rev. Rul. 58-234 explains that this is the treatment for the option writer
because the option writer assumes a burdensome and continuing obligation, and the
transaction therefore stays open without any ascertainable income or gain until the writer's
obligation is finally terminated. W h e n the option writer's obligation terminates, the
transaction closes, and the option writer must recognize any income or gain attributable to
the prior receipt of the option premium.
In s o m e cases, the option writer's obligation under the option contract m a y
terminate on the charity's assumption of the written option obligation. In other cases, the
writer will have a continuing obligation because the writer m a y be called upon to perform if
the charity fails to perform or to reimburse the charity for any losses or expenses it m a y
incur if called upon to perform. If an assumption terminates the option writer's obligation
under the option contract, the option writer must recognize gain w h e n the option obligation
is assumed. If the assumption does not terminate the option writer's obligation under the
option contract, the option writer must recognize the premium w h e n the option writer's
obligation under the option contract terminates (other than through an exercise of the option
against, and performance by, the option writer).
These general principles remain applicable even if the assumption of the option
writer's obligation is part of what the taxpayer claims is a donative transaction. Cf.
Diedrich v. Commissioner, 457 U.S. 191 (1982) (noting that if a donee pays a gift tax
obligation arising from a donative transfer, the donative nature of the transaction does not
preclude income recognition by the donor on the obligation assumed). Here, the taxpayer
has m a d e a transfer to the charity of the purchased option, and the charity has assumed
the burden of the written option. N o aspect of the taxpayer's transfer or the charity's
assumption (or their combination) relieves the taxpayer from its duty under the C o d e to
account for the gain attributable to the premium originally received by the taxpayer for
3
assuming the burden of writing the option. S e e Lucas v. Earl, 281 U.S. 111 (1930)
(holding that a taxpayer m a y not avoid inclusion of future earned income by making a
gratuitous transfer of therightto receive the income).
Finally, if the taxpayer has any unrecognized gain on the written option at the end of
the year in which the assumption occurs (e.g., the assumption did not terminate the option
writer's obligation under the option contract), the mark-to-market loss on the offsetting
contributed section 1256 contract will be deferred under section 1092.
Transactions that are the s a m e as, or substantially similar to, the transactions
described in this notice are identified as "listed transactions" for purposes of §§ 1.60114(b)(2), 301.6111 -2(b)(2) and 301.6112-1 (b)(2) effective D e c e m b e r 4, 2003, the date this
notice w a s released to the public. Variations on these transactions m a y include positions
in other section 1256 and non-section 1256 contracts. Independent of their classification
as "listed transactions" for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2), and
301.6112-1 (b)(2), transactions that are the s a m e as, or substantially similar to, the
transaction described in this notice m a y already be subject to the disclosure requirements
of section 6011 (§1.6011 -4), the tax shelter registration requirements of section 6111
(§§301.6111-1T, 301.6111-2), or the list maintenance requirements of section 6112 (§
301.6112-1). Persons w h o are required to register these tax shelters under section 6111
but have failed to do so m a y be subject to the penalty under section 6707(a). Persons w h o
are required to maintain lists of investors under section 6112 but have failed to do so (or
w h o fail to provide those lists w h e n requested by the Service) m a y be subject to the penalty
under section 6708(a). In addition, the Service m a y impose penalties on parties involved
in these transactions or substantially similar transactions, including the accuracy-related
penalty under § 6662.
The Service and the Treasury recognize that s o m e taxpayers m a y have filed tax
returns taking the position that they were entitled to the purported tax benefits of the type of
transaction described in this notice. These taxpayers should consult with a tax advisor to
ensure that their transactions are disclosed properly and to take appropriate corrective
action.
The principal author of this notice is Clay Littlefield of the Office of Associate Chief
Counsel (Financial Institutions and Products). For further information regarding this notice,
contact Mr. Littlefield at (202) 622-3920 (not a toll-free call).
Of I IC I- O F N HI.U" AN-A IKS • 1500 PI- VN S V l.\ A \ I .V A* I M]l . \'.W. • \\ \>\ 11 N (. I 0 % , D.C".• 202211 • ilVl)fi22-2UMI
EMBARGOED UNTIL 11:00 A.M.
December 4, 2003
CONTACT:
Office of Financing
202/691-3550
TREASURY OFFERS 13-WEEK AND 26-WEEK BILLS
The Treasury will auction 13-week and 26-week Treasury bills totaling $32,000
million to refund an estimated $32,748 million of publicly held 13-week and 26-week
Treasury bills maturing December 11, 2003, and to pay down approximately $748 million.
Also maturing is an estimated $14,000 million of publicly held 4-week Treasury bills,
the disposition of which will be announced December 8, 2003.
The Federal Reserve System holds $14,607 million of the Treasury bills maturing
on December 11, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders either in these
auctions or the 4-week Treasury bill auction to be held December 9, 2003. Amounts
awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New
York will be included within the offering amount of each auction. These
noncompetitive bids will have a limit of $100 million per account and will be accepted
in the order of smallest to largest, up to the aggregate award limit of $1,000
million.
TreasuryDirect customers have requested that we reinvest their maturing holdings
of approximately $999 million into the 13-week bill and $603 million into the 26-week
bill.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions set
forth in the Uniform Offering Circular for the Sale and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about each of the new securities are given in the attached offering
highlights.
oOo
Attachment
<f$-(0^
HIGHLIGHTS OF TREASURY OFFERINGS OF BILLS
TO BE ISSUED DECEMBER 11, 2003
December 4, 2003
Offering Amount
$16,000
Maximum Award (35% of Offering Amount)
$ 5,600
Maximum Recognized Bid at a Single Rate .... $ 5,600
NLP Reporting Threshold
$ 5,600
NLP Exclusion Amount
$ 5,200
Description of Offering:
Term and type of security
CUSIP number
Auction date
Issue date
Maturity date
Original issue date
Currently outstanding
Minimum bid amount and multiples
million
million
million
million
million
91-day bill
912795 PP 0
December 8, 2003
December 11, 2003
March 11, 2004
September 11, 2003
$20,463 million
$1,000
$16,000
$ 5,600
$ 5,600
$ 5,600
None
million
million
million
million
182-day bill
912795 QC 8
December 8, 2003
December 11, 2003
June 10, 2004
December 11, 2003
$1,000
The following rules apply to all securities mentioned above:
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve
Banks as agents for FIMA accounts. Accepted in order of size from smallest to largest with no more than $100
million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for FIMA
accounts will not exceed $1,000 million. A single bid that would cause the limit to be exceeded will
be partially accepted in the amount that brings the aggregate award total to the $1,000 million limit. However,
if there are two or more bids of equal amounts that would cause the limit to be exceeded, each will be prorated
to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in increments of .005%, e.g., 7.100%, 7.105%.
(2) Net long position (NLP) for each bidder must be reported when the sum of the total bid amount, at all
discount rates, and the net long position equals or exceeds the NLP reporting threshold stated above.
(3) Net long position must be determined as of one half-hour prior to the closing time for receipt of
competitive tenders.
Receipt of Tenders:
Noncompetitive tenders
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank on issue date, or payment of full par amount
with tender. TreaauryDirect customers can use the Pay Direct feature, which authorizes a charge to their account of
record at their financial institution on issue date.
OITIC I. O K I»IBI.U
U F M R S • 1500 I'FNNSVIA \ M A AVI'Mi:, \.W.« U A S H I \t; ION. I'M .» 202211 ••202: <i2 2-2<)hO
EMBARGOED UNTIL 11:00 A.M.
December 1, 2003
Contact:
Office of Financing
202/691-3550
TREASURY OFFERS 4-WEEK BILLS
The Treasury will auction 4-week Treasury bills totaling $20,000 million to
refund an estimated $17,000 million of publicly held 4-week Treasury bills maturing
December 4, 2003, and to raise new cash of approximately $3,000 million.
Tenders for 4-week Treasury bills to be held on the book-entry records of
TreasuryDlrect will not be accepted.
The Federal Reserve System holds $14,832 million of the Treasury bills maturing
on December 4, 2003, in the System Open Market Account (SOMA). This amount may be
refunded at the highest discount rate of accepted competitive tenders in this auction
up to the balance of the amount not awarded in today's 13-week and 26-week Treasury
bill auctions. Amounts awarded to SOMA will be in addition to the offering amount.
Up to $1,000 million in noncompetitive bids from Foreign and International
Monetary Authority (FIMA) accounts bidding through the Federal Reserve Bank of New York
will be included within the offering amount of the auction. These noncompetitive bids
will have a limit of $100 million per account and will be accepted in the order of
smallest to largest, up to the aggregate award limit of $1,000 million.
The allocation percentage applied to bids awarded at the highest discount rate
will be rounded up to the next hundredth of a whole percentage point, e.g., 17.13%.
This offering of Treasury securities is governed by the terms and conditions
set forth in the Uniform Offering Circular for the Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds (31 CFR Part 356, as amended).
Details about the new security are given in the attached offering highlights.
oOo
Attachment
J 6 10^
HIGHLIGHTS OF TREASURY OFFERING
OF 4-WEEK BILLS TO BE ISSUED DECEMBER 4, 2003
December 1, 2003
Offering Amount $20 , 000 million
Maximum Award (35% of Offering Amount).. . $ 7,000 million
Maximum Recognized Bid at a Single Rate.. $ 7,000 million
NLP Reporting Threshold
$ 7 ,000 million
NLP Exclusion Amount
$11, 800 million
Description of Offering:
Term and type of security
29-day bill
CUSIP number
912795 PD 7
Auction date
December 2 , 2003
Issue date
December 4 , 2003
Maturity date
January 2 , 2004
Original issue date
July 3, 2003
Currently outstanding
$46,307 million
Minimum bid amount and multiples....$1,000
Submission of Bids:
Noncompetitive bids: Accepted in full up to $1 million at the highest
discount rate of accepted competitive bids.
Foreign and International Monetary Authority (FIMA) bids: Noncompetitive bids submitted through the Federal Reserve Banks as agents for
FIMA accounts. Accepted in order of size from smallest to largest
with no more than $100 million awarded per account. The total noncompetitive amount awarded to Federal Reserve Banks as agents for
FIMA accounts will not exceed $1,000 million. A single bid that
would cause the limit to be exceeded will be partially accepted in
the amount that brings the aggregate award total to the $1,000
million limit. However, if there are two or more bids of equal
amounts that would cause the limit to be exceeded, each will be
prorated to avoid exceeding the limit.
Competitive bids:
(1) Must be expressed as a discount rate with three decimals in
increments of .005%, e.g., 4.215%.
(2) Net long position (NLP) for each bidder must be reported when
the sum of the total bid amount, at all discount rates, and the
net long position equals or exceeds the NLP reporting threshold
stated above.
(3) Net long position must be determined as of one half-hour prior
to the closing time for receipt of competitive tenders.
Receipt of Tenders:
Noncompetitive tenders:
Prior to 12:00 noon eastern standard time on auction day
Competitive tenders:
Prior to 1:00 p.m. eastern standard time on auction day
Payment Terms: By charge to a funds account at a Federal Reserve Bank
on issue date.
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
•TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
December 01, 2003
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Term: 91-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:
December 04, 2003
March 04, 2004
912795PN5
High Rate: 0.925% Investment Rate 1/: 0.943% Price: 99.766
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 71.08%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
$
37,664,022
1,297,388
215,000
$
14,487,864
1,297,388
215,000
SUBTOTAL 39,176,410 16,000,252 2/
Federal Reserve 5,825,710 5,825,710
TOTAL $ 45,002,120 $ 21,825,962
Median rate 0.920%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
0.900%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio - 39,176,410 / 16,000,252 = 2.45
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $1,093,271,000
/o3 7
http ://www.publicdebt.treas.gov
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
TREASURY SECURITY AUCTION RESULTS
BUREAU OF THE PUBLIC DEBT - WASHINGTON DC
FOR IMMEDIATE RELEASE CONTACT: Office of Financing
December 01, 2003
202-691-3550
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Term: 182-Day Bill
Issue Date:
Maturity Date:
CUSIP Number:
December 04, 2003
June 03, 2004
912795QB0
High Rate: 1.030% Investment Rate 1/: 1.053% Price: 99.479
All noncompetitive and successful competitive bidders were awarded
securities at the high rate. Tenders at the high discount rate were
allotted 14.45%. All tenders at lower rates were accepted in full.
AMOUNTS TENDERED AND ACCEPTED (in thousands)
Tender Type Tendered Accepted
Competitive
Noncompetitive
FIMA (noncompetitive)
$
31,803,855
979,402
50,000
$
14,970,655
979,402
50,000
SUBTOTAL 32,833,257 16,000,-057 2/
Federal Reserve 5,856,191 5,856,191
TOTAL $ 38,689,448 $ 21,856,248
Median rate 1.020%: 50% of the amount of accepted competitive tenders
was tendered at or below that rate. Low rate
1.000%:
5% of the amount
of accepted competitive tenders was tendered at or below that rate.
Bid-to-Cover Ratio = 32,833,257 / 16,000,057 = 2.05
1/ Equivalent coupon-issue yield.
2/ Awards to TREASURY DIRECT = $799,429,000
rf6 I0^f
http://www.publicdebt.treas.gov
Bureau of the Public Debt: Public Debt Announces Activity for Securities in the STRIPS Program For ... Page 1 of 1
B u r e a u of ihe
Public e«
Un:tezl bfares L'epo> r;nenr ot r,1;e Trecs•_• ,ry
Public Debt Announces Activity for Securities in the STRIPS Program fo
November 2003
FOR IMMEDIATE RELEASE
December 4, 2003
The Bureau of the Public Debt announced activity for the month of N o v e m b e r 2003, of securities within the Separate Trading of
Registered Interest and Principal of Securities program (STRIPS).
In Thousands
Principal Outstanding (Eligible Securities)
$2,517,442,841
Held in Unstripped Form
$2,342,839,206
Held in Stripped Form
$174,603,635
Reconstituted in N o v e m b e r
$11,538,231
The accompanying table, gives a breakdown of STRIPS activity by individual loan description. The balances in this table are subject to
audit and subsequent revision. These monthly figures are included in Table V of the Monthly Statement of the Public Debt, entitled
"Holdings of Treasury Securities in Stripped Form."
The STRIPS table, along with the n e w Monthly Statement of the Public Debt, is available on Public Debt's Internet site at:
www.publicdebt.treas.gov. A wide range of information about the public debt and Treasury securities is also available at the site.
Intellectual Property | Privacy & Security Notices | Terms & Conditions | Accessibility | Data Quality
U.S. Department of the Treasury, Bureau of the Public Debt
Last Updated September 27, 2004
fS lOlfO
http://www.publicdebt.treas.gov/com/coml203s.htm 5/25/2005
JS-10?1: Speech by John B. Taylor "Will Economic Recovery in Japan B e Sustained?"
Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
December 5, 2003
JS-1041
Will Economic Recovery in Japan Be Sustained?
John B. Taylor
Under Secretary of the Treasury for International Affairs
Japan Society
N e w York
December 5, 2003
Thank you for inviting me to speak here today. The Japan Society is a valuable
forum for promoting better understanding and good relations between Japan and
the United States. I have benefited from the insights and the activity that the Japan
Society has made possible.
America's alliance with Japan is a centerpiece of President Bush's foreign policy. I
a m happy to say that the alliance is as strong as it has ever been. Japan has been
a key player in the war against terrorist financing, one of the most successful
international cooperation efforts in the financial area in many years. Japan's
generous support for the reconstruction of Afghanistan and Iraq has been
invaluable.
We are also grateful for Japan's support in our efforts to raise economic growth
around the world. Recently, Japan, the United States, and the other G 7 countries
agreed on the innovative Agenda for Growth. It is a milestone agreement. Each of
the G 7 countries identified high priority supply-side reforms to create jobs and raise
productivity. Each committed to build on recent reforms by implementing these new
measures - and to review progress as part of the regular G 7 surveillance process.
In the United States, for example, w e want to build on the successful tax rate cuts
and to implement new policies such as tort reform and saving incentives.
Such reforms are important in all the G7 countries, including the United States. But
they are particularly welcome in Japan, because it has struggled economically for
more than a decade. Prime Minister Koizumi has embraced structural reforms as
the hallmark of his administration.
And things do seem to be changing. The economy has grown for 7 straight
quarters, with particularly strong growth this year. The stock market is up 25
percent since the end of March. Banks are reporting increased profits and
reductions in bad loans. And there is a rising sense of confidence and optimism
among business leaders, officials, and the public.
But many who watch Japan still seem to have a sense of wariness. Previous
recoveries—in 1996 and 2000-2001—proved to be short-lived. Is there reason to
think that this time is different? That Japan will at last be able to achieve sustained,
robust growth?
Fortunately, several factors suggest the current recovery will prove more durable.
Perhaps the most important reason for optimism is the new monetary policy the
Bank of Japan has put in place. This policy holds the promise of finally eliminating
deflation in Japan. For at least 7 years, deflation has been a tremendous drag on
the Japanese economy, raising the real value of debts, making the resolution of
banking sector problems more difficult, and discouraging consumption and
investment. Many factors lead to price changes in the short run, but deflation - a
sustained drop in the overall price level - is ultimately a monetary phenomenon.
Economic theory and experience indicates that strong growth in the money supply,
maintained over time, is what brings deflation to an end. The Bank of Japan's shift
in March 2001 to a policy of sharply raising base money growth—and maintaining
http://www.treas.gov/press/releases/j s 1041 .htm
JS-104T?Speech by John B. Taylor "Will Economic Recovery in Japan B e Sustained?"
Page 2 of 3
this policy until deflation is eliminated—was therefore a most welcome change. I
recall the announcement of this n e w policy well. It occurred just as I began m y
current job in the United States government and had to resign m y position as
foreign adviser to the Bank of Japan. Since that time, steady increases in financial
institutions' current account deposits at the Bank of Japan has resulted in 68
percent increase in the monetary base, an average annual growth rate of 22
percent. In addition, good communication with the market from Mr. Fukui has
increased market confidence in the Bank of Japan's commitment to end deflation.
There is evidence that the Bank of Japan's more aggressive approach may be
starting to pay off. Consumer prices excluding fresh food rose for the first time in
over 5 years in October. But it is still too early to declare victory in Japan's long
struggle against deflation. S o m e of the apparent easing of deflation is due to
special factors that have increased prices this year.
I agree with those that say the Bank of Japan should wait some time before raising
interest rates above zero and abandoning its current policy of strong monetary base
increases. Inflation is barely positive. It is still well below c o m m o n measures of price
stability. There is still excess capacity. Standard monetary policy guidelines suggest
that the interest rate should be held at zero until price stability is more firmly
established and output grows much closer to potential. Both will take time.
Fortunately, the Bank of Japan recognizes that the time has not yet come to
abandon its anti-deflation efforts. In October, the Monetary Policy Board judiciously
assured the markets that its current policy will continue until deflation is clearly in
the past.
Another key reason for optimism about the sustainability of the current recovery is
the recent progress in bank and corporate sector reforms. The resolution of
Ahikaga Bank and Resona Bank are genuine signs of progress. Those actions
showed that last year's measures to improve the valuation of bank assets and
capital are effective, and that Japan's regulators and auditors can and will resist
political pressures to "go easy" on the banks. They demonstrated the Japanese
authorities' ability to m o v e quickly and effectively to resolve weak banks, while
avoiding financial and economic disruption. Perhaps most important, replacing top
management and imposing costs on shareholders showed the government's
commitment to setting the right incentives—a key to achieving a longer-term
solution to the banking system's problems.
On the corporate side, firms have strengthened their balance sheets by paying
down debt. They have cut costs and increased operating margins, even in the midst
of deflation. They have begun to restructure to focus more on their core strengths.
Listed companies have begun to pay more attention to shareholders and rates of
return. A s a result of these efforts, corporate profits have increased sharply,
supporting future investment and growth.
Another good sign is that, unlike past recoveries that depended heavily on public
works spending, this time growth has been led by the private sector. From 1992 to
2000, the Japanese Government spent over $1 trillion in stimulus packages to
jump-start recovery. These did not bring about sustained growth, but they did leave
Japan with a huge deficit and the largest public debt of any G 7 country. This time is
different. Government spending, and public works spending in particular, has fallen
during the current recovery.
Not all indicators are positive, of course. Japanese economic prospects are still
highly dependent on exports. For a durable recovery, Japan needs more balanced
growth where domestic spending grows with income. This is w h y the structural
reform and deregulation agenda of the Koizumi administration is so important. It
has the potential to open up n e w opportunities for investment and growth. The
deregulation of the domestic mobile phone industry in the mid-1990's, which
spurred demand for base station and transmission facilities as well as for handsets,
is a clear example of deregulation's power to spur domestic activity. Similar
opportunities exist in health care and care for the elderly, housing, and a host of
domestic services.
Progress in retail deregulation has allowed far more competition, with benefits for
consumers and the economy as a whole. M a n y medical services businesses have
been deregulated. And there has been progress in IT deregulation.
http://www.treas.gov/press/releases/jsl041.htm
5/20/2005
JS-1041 f Speech by John B. Taylor "Will Economic Recovery in Japan B e Sustained?"
Page 3 of 3
I hope we can look forward to more progress, such as the reduction in regulatory
barriers that continue to limit competition in m a n y economic sectors, including
transportation and food processing.
Continued reforms will also be useful to increase new firm creation and
entrepreneurial activity in Japan. The "Global Entrepreneurship Monitor" listed
Japan last a m o n g 37 countries in its 2002 Total Entrepreneurial Activity Index.
Japan w a s also near the bottom of those indexes, which are based on the
percentage of the working age population involved in starting a n e w business, or an
owner/manager of a business that is less than 42 months old, in previous years.
Removing regulatory barriers to competition can help, as will the emergence of a
healthier financial system that is better able to support entrepreneurial activity.
The key to taking advantage of these opportunities is economic flexibility - the
ability to respond to price signals both in the domestic and world economy, and to
shift resources to most productive uses. The reforms Prime Minister Koizumi is
pursuing will help promote the economic flexibility needed to take advantage of
those opportunities.
Flexible exchange rate regimes among the world's major trading countries are a
key part of maintaining economic flexibility. That is w h y w e have entered
discussions with China—an increasingly important trading partner for Japan and the
United States—about the steps needed to pursue their announced goal of moving
toward a more flexible exchange rate regime.
And while Japan has made progress in dealing with its banking sector problems,
non-performing loans are still a problem. It is true that bank profits rose sharply in
the first half of this year, but s o m e of this w a s due to gains on stock holdings and to
tax rebates from the Tokyo municipal government. Solid profitability on core
business operations of banks still has to be established.
Japan now has much of the legal and institutional infrastructure needed for
corporate restructuring, and the workout process for distressed, over-indebted
borrowers is beginning. But incentives are still skewed towards rolling over debt and
postponing borrower problems. Unresolved loan claims have created an overhang
of land, capital, and labor locked in unproductive activities that blocks resource
mobility and discourages investment. I have argued in the past that ending the
deflation problem will help improve incentives because positive interest rates will
reduce incentives for debt rollover.
As I mentioned, policymakers in Japan now recognize that fiscal stimulus is not the
key to sustained growth. The Koizumi administration has changed the w a y in which
people view government spending. It has also framed the debate in realistic terms h o w to achieve a primary budget balance over time. There is n o w a very healthy
debate going on in Japan on h o w to meet public pension obligations and limit the
rise in the contribution ratio - a debate that w a s spurred on by the recent election
campaign.
A credible, transparent multi-year framework for restoring public finances would do
much to ease the pain of fiscal consolidation in Japan, and increase the public's
confidence in the future.
In sum, there are clear signs that things have changed in Japan. The building
blocks for sustained, robust economic growth are being established. Further reform
efforts will be needed across the spectrum of economic policy to ensure stronger
growth. A s the Koizumi Government continues to implement banking, regulatory,
and other reform measures, a brighter economic future is in store.
http://www.treas.gov/press/releases/js 1041 .htm
5/20/2005
JS-1042 statement of Secretary John S n o w on Employment Report
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 5, 2003
JS-1042
Statement of Secretary John Snow on Employment Report
Today's employment rate report is further evidence that the economy is on the right
path, but there is much more that needs to be done. For the fourth consecutive
month, more Americans are finding jobs and unemployment is lower. However,
despite signs that the economy is moving in the right direction, the effort must
remain ongoing. W e will not be satisfied until every American looking for work can
find a job. Enactment of the President's six point plan for job creation is critical for
continuing more new jobs and economic growth.
http://www.treas.gov/press/releases/js 1042.htm
5/20/2005
JS-1043TTT^. TJesignates Individual Tied to Attacks on European Tourists
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 5, 2003
JS-1043
U.S. Designates Individual Tied to Attacks on European Tourists
WASHINGTON - The U.S. Treasury Department today announced the designation
of an individual for involvement in terrorism. Today's action comes in response to
the designation of this individual as a terrorist by the United Nations.
The individual, Saifi Ammari was the leader of a region for the Salafist Group for
Preaching and Combat ("GSPC"), an organization previously designated by the
United States as a specially designated global terrorist, and designated by the
United Nations, because of its ties to al-Qaida. Earlier this year, Amman's group
orchestrated the kidnapping of thirty-two tourists while they were traveling in fourby-four vehicles, on motor bikes, and in camper vans in an area between lllizi,
Djanet, and Tanjanrasset, Algeria. The kidnappings occurred over a period of
several weeks. Sixteen Germans, ten Austrians, four Swiss, one Dutch, and one
Swede were held hostage by the group. In May 2003, the Algerian army managed
to free 17 tourists from the kidnappers. The kidnappers escaped. In June, one of
the remaining hostages died as a result of the extreme conditions. After
negotiations, the remaining hostages were released on August 18, 2003. The
hostages identified Ammari as the Emir of the group.
The German public prosecutor's office issued a warrant for the arrest of Ammari on
September 11, 2003. The charges are based on Amman's responsibility for
masterminding, as the operational leader, the kidnapping of the hostages and his
role as leader of a G S P C region. The G S P C has been on the list of the UN's alQaida/Taliban Sanctions Committee since October 6, 2001.
Today's action is taken under obligations to freeze the assets of individuals and
organizations listed by the UN. The name was originally submitted to the U N by
another country for listing. A U N listing requires all Member States to freeze the
assets of those listed and to bar cross-border travel. The U N listed this individual
on Thursday, December 4th.
With today's action, the U.S. and our international partners have designated 344
individuals and organizations as terrorists and terrorist supporters and have frozen
over $136.8 million in terrorist assets.
http://www.treas.gov/press/releases/js 1043 .htm
5/20/2005
JS-1044TSdministration Announces Principles for Postal Reform
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 8, 2003
JS-1044
Bush Administration Announces Principles for
Postal Reform
The Bush administration today called on Congress to enact comprehensive postal
reform to ensure that the United States Postal Service can continue to provide
affordable and reliable universal service, while limiting exposure of taxpayers and
operating appropriately in the competitive marketplace. United States Postal
Service reform should be guided by a set of clear principles outlined by the
administration:
Implement Best Practices: Ensure that the Postal Service's governing body is
equipped to meet the responsibilities and objectives of an enterprise of its size and
scope.
Transparency: Ensure that important factual information on the Postal Service's
product costs and performance is accurately measured and made available to the
public in a timely manner.
Flexibility: Ensure that the Postal Service's governing body and management
have the authority to reduce costs, set rates, and adjust key aspects of its business
in order to meet its obligations to customers in a dynamic marketplace.
Accountability: Ensure that a Postal Service operating with greater flexibility has
appropriate independent oversight to protect consumer welfare and universal mail
service.
Self Financing: Ensure that a Postal Service operating with greater flexibility is
financially self-sufficient, covering all of its obligations.
http://www.treas.gov/press/releases/js 1044.htm
5/20/2005
JS-104?: Treasury Secretary S n o w Statement O n Health Savings Accounts
Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 8, 2003
JS-1045
Treasury Secretary Snow Statement On Health Savings Accounts
Today, the President signed the Medicare Prescription Drug legislation into law.
This is an important victory for the health of America's senior citizens.
An important provision in the bill greatly expands the former Medical Savings
Accounts into new and innovative Health Savings Accounts ("HSA"s). H S A s
provide an important and welcome option for many Americans to fund their health
care expenses.
Treasury is committed to ensuring that taxpayers get the full benefit of HSAs as
quickly as possible. W e will be releasing basic information and guidance about
H S A s shortly, and will request suggestions about how the rules should be applied.
In addition, w e expect to issue more detailed guidance.
-30-
F A C T SHEETHEALTH SAVINGS A C C O U N T S
• The Medicare billed signed by the President today creates new Health Savings
Accounts (HSAs) to help individuals save for qualified medical and retiree health
expenses on a tax-free basis.
• Beginning on January 1, 2004, individuals under the age of 65 are eligible to
contribute to an H S A if they have a qualified health plan.
o For self-only policies, a qualified health plan must have a minimum deductible of
$1,000 with a $5,000 cap on out-of-pocket expenses (indexed annually).
o For family policies, a qualified health plan must have a minimum deductible of
$2,000 with a $10,000 cap on out-of-pocket expenses (indexed annually).
• Preventive care services, as well as coverage for accidents, disability, dental care,
vision care, and long-term care is not subject to the deductible.
• Individuals may contribute up to 100% of the health plan deductible. The
maximum annual contribution is $2,600 for self-only policies and $5,150 for family
policies (indexed annually).
• Individuals age 55 - 65 may make additional "catch-up" contributions of up to
$500 in 2004, increasing to $1,000 annually in 2009 and thereafter. A married
couple can make two catch-up contributions as long as both spouses are at least
55.
• Contributions may be made by individuals, family members and employers and
are tax deductible, even if the account beneficiary does not itemize. Employer
contributions are made on a pre-tax basis and are not taxable to the employee.
Employers will be allowed to offer H S A s through a cafeteria plan.
• Investment earnings accrue tax-free.
http://www.treas.gov/press/releases/jsl045.htm
5/20/2005
JS-1045:Treasury Secretary S n o w Statement O n Health Savings Accounts
Page 2 of 2
• HSA distributions are tax-free if they are used to pay for qualified medical
expenses. Qualified expenses include prescription drugs, qualified long-term care
services and long-term care insurance, C O B R A coverage, Medicare expenses (but
not Medigap), and retiree health expenses for individuals age 65 and older.
• Distributions made for any other purpose are subject to income tax and a 10%
penalty. The 1 0 % penalty is waived in the case of death or disability. The 1 0 %
penalty is also waived for distributions m a d e by individuals age 65 and older.
• Upon death, HSA ownership may transfer to the spouse on a tax-free basis.
http://www.treas.gov/press/releases/j s 1045 .htm
5/20/2005
JS-1046TMEDIA A D V I S O R Y Secretary Snow to Host Meeting of African Finance Mini... Page 1 of 1
•
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 9, 2003
JS-1046
MEDIA ADVISORY
Secretary S n o w to Host Meeting of African Finance Ministers to
discuss African Growth and Opportunity Act
On Wednesday, December 10, 2003 at 8:00 a.m.EST, Treasury Secretary John
Snow will host a meeting with finance ministers from African nations to discuss the
African Growth and Opportunity Act (AGOA). The meeting will be held in the
Treasury Department's Cash Room, 1500 Pennsylvania Avenue, N W .
Since the program began, AGOA has proven to be a vital tool for economic growth
and development in sub-Saharan Africa, stimulating trade opportunities for African
businesses, empowering local entrepreneurs, delivering much-needed investment
and creating jobs. Secretary Snow will discuss will discuss with finance ministers
the economic impact of A G O A and future prospects for expanding trade and
investment links with sub-Saharan Africa.
The TOP of the meeting will be OPEN PRESS.
The Cash Room will be available for pre-set at 7:00 a.m.
Media without Treasury or White House press credentials planning to attend should
contact Treasury's Office of Public Affairs at (202) 622-2960 with the following
information: name, social security number and date of birth. This information may
also be faxed to (202) 622-1999.
http://www.treas.gov/press/releases/js 1046.htm
JS-1047: Tlemarics of Brian Roseboro: The Next Generation Financial Services Informatio... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 9, 2003
JS-1047
Remarks of Acting Under Secretary of the Treasury for Domestic Finance,
Brian Roseboro
on the
Next Generation Financial Services Information Sharing and Analysis Center
Washington, D C
It is a great pleasure to be here today, to help launch the next generation Financial
Services Information Sharing and Analysis Center, better known to some of you as
the FSISAC.
The United States has a $12 trillion economy and about $4 trillion in funds flow daily
through the financial system.
In a very real sense, the financial system is the life blood of our economy. Any
significant disruption in this flow of funds would severely affect our economic growth
and our standard of living. Accordingly, the Department of the Treasury
wholeheartedly supports the mission of FSISAC, which will enhance the resiliency
of the thousands of financial institutions that comprise the financial sector.
FSISAC was created in 1999 in response to a Presidential Directive. At that time,
the United States recognized the growing threats to our infrastructure, particularly
from an increasing onslaught of computer viruses, worms, and hackers. FSISAC
did a commendable job of responding to those threats as w e understood them at
the time. I wish to acknowledge and thank Rhonda MacLean, who is with us today,
for her role in establishing the original FSISAC, as well as her continued leadership.
Since 1999, of course, much has changed. The terrorist attacks of September 11 th,
made clear that w e faced new physical threats to our infrastructure. At the same
time, the speed and maliciousness of cyber threats has increased exponentially.
The next generation FSISAC is designed to meet these new threats. It will service
the entire financial services sector. It will integrate physical and cyber threat
information. It will provide a state-of-the-art technology platform for the confidential
exchange of information as the financial sector works together to respond to
emerging physical and cyber threats. This will be a key component of the
extraordinary resiliency of the financial system of the United States.
President Bush has designated the Department of the Treasury as the lead agency
to coordinate the protection of our critical financial infrastructure. After receiving this
charge, the Department of the Treasury made the development of a nextgeneration FSISAC a top priority. W e worked with FSISAC, our sister financial
regulators in the "Financial and Banking Information Infrastructure Committee", and
private sector members of the "Financial Services Sector Coordinating Council", to
develop a business plan for the next generation. This business plan was based on
extensive market research documenting that a new, improved FSISAC could serve
the entire sector and support itself through private sector funding.
At the same time, however, our research convinced us that the FSISAC must make
significant investments to upgrade its technological infrastructure if it is to serve the
entire sector and deliver a product that would elicit ongoing, private sector support.
The Department of the Treasury stands ready to acquire approximately $2 million in
services from FSISAC, which should have the added benefit of making the Next
Generation FSISAC a reality.
http://www.treas.gov/press/releases/js 1047.htm
JS-1047T Remarks of Brian Roseboro: T h e Next Generation Financial Services Informatio... Page 2 of 2
In closing, I want to commend Suzanne Gorman for both her vision and her
dedication. Without her tireless leadership, w e would not be here today. Given her
significant time spent in Washington, I know that she has a "day job" in N e w York
with the Securities Industry Automation Corporation. S o the Securities Industry
Automation Corporation should also be congratulated for allowing her to spend so
much of her time on an effort that benefits all of us.
Thank you.
http://www.treas.gov/press/releases/js 1047.htm
5/20/2005
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
December 9, 2003
2003-12-9-17-0-22-2046
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $86,038 million as of the end of that week, compared to $85,309 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
November 28, 2003
December 5,2003
85,309
86,038
TOTAL
1. Foreign Currency Reserves
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
7,988
14,361
22,349
8,113
14,594
22,707
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
13,083
2,885
15,968
13,265
2,932
16,197
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position 2
23,769
23,863
3. Special Drawing Rights (SDRs)
12,179
12,227
4. Gold Stock3
11,043
11,043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
November 28, 2003
Euro
1. Foreign currency loans and securities
Yen
TOTAL
December 5, 2003
Euro
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
0
2. a. Short positions
2.b. Long positions
3. Other
III. Contingent Short-Term Net Drains on Foreign Currency Assets
November 28, 2003
Euro
Yen
TOTAL
0
1. Contingent liabilities in foreign currency
December 5, 2003
Euro
Yen
TOTAL
0
La. Collateral guarantees on debt due within 1
year
Lb. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b. 1. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market A
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
js-104?: Statement T r b m Treasury Secretary John S n o w
Page 1 of 1
PRCSS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 9, 2003
js-1048
Statement From Treasury Secretary John Snow On The Announcement Of
The Next Generation Financial Services Information Sharing A n d Analysis
Center
The American financial system is one of the most resilient in the world. While we
have worked very hard to strengthen the infrastructure that supports it and prepare
for events both expected and unthinkable, w e must continue to make strides to
increase our preparedness and anticipate new threats.
The Department of the Treasury announced today that we will acquire $2 million in
services from the Financial Services Information Sharing and Analysis Center (FSISAC), a critical component of the financial sector's system of infrastructure
protection. This significant investment will help the FS-ISAC enhance its mission
and capabilities.
This Next Generation FS-ISAC will help the financial sector better prepare to face
the new physical threats that w e have confronted since the attacks of September
11, 2001, as well as the increasing speed and maliciousness of cyber attacks.
At the heart of our ability to protect our financial system from attack or disruption is
the sharing of information between government and the private sector, as well as
information sharing among individual financial institutions. The Next Generation
FS-ISAC will provide real time, accurate information about emerging physical and
cyber threats to the entire financial community in a confidential and secure
manner.
By working together, the public and private sectors will continue to make great
progress in protecting the American financial sector, the millions of Americans that
is serves, and our economy as a whole in ways that neither could achieve on its
own.
-30Related Documents:
• Fact Sheet
http://www.treas.gov/press/releases/js 1048.htm
5/20/2005
•
Include over 16 quantitative measures of the FS-ISAC's effectiveness that will enable the
leadership of the FS-ISAC and the Department of the Treasury to assess both the FS-ISAC's
performance and the aggregate state of information sharing within the industry in response to
particular threats.
This $2 million contract is a one-time expenditure to upgrade the technology supporting the FSISAC. Based on extensive market research, the FS-ISAC and the Department of the Treasury
believe that the FS-ISAC can, by the end of F Y 2005, be funded entirely by membership fees
paid by the private sector.
The next-generation FS-ISAC has four membership levels depending upon the services that are
provided. The most basic membership level isfree.The three other membership levels are
priced at $750, $10,000, and $50,000. Financial institutions interested in learning more about
the FS-ISAC can do so at www.fsisac.com.
President George W. Bush designated the Department of the Treasury as the lead agency charged
with enhancing the resilience of the banking and finance sector. In addition, Congress recently
expressed interest in improving the technological infrastructure of the FS-ISAC. Today, the
Department of the Treasury took important strides toward fulfilling its role as the lead agency
charged with critical financial infrastructure protection.
-30-
DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE Contact: Anne Womack Kolton
December 9, 2003
(202) 622-2960
FACT SHEET:
ANNOUNCEMENT OF THE NEXT GENERATION FINANCIAL SERVICES
INFORMATION SHARING AND ANALYSIS CENTER
Today, Treasury announced that it would purchase $2 million in services from the Financial
Services Information Sharing and Analysis Center (FS-ISAC).
The FS-ISAC is a private organization run by leading firms in the financial services sector. The
mission of the F S - I S A C is to disseminate information about threats to the financial infrastructure
and to facilitate information sharing by financial institutions as they respond to particular threats.
Treasury's contract with the FS-ISAC will result in a new, next-generation FS-ISAC that will
benefit Treasury, other financial regulators, and the private sector. Specifically, the $2 million
will:
• Transform the FS-ISAC from a technology platform that serves approximately 80 financial
institutions to one that serves the entire 30,000 institution financial sector including banks,
credit unions, securities firms, insurance companies, commodity futures merchants,
exchanges, and others.
• Provide a secure, confidential forum for financial institutions to share information among
each other as they respond in real-time to particular threats.
• Add information about physical threats to the cyber threat information that the FS-ISAC
currently disseminates.
• Include an advance notification service that will notify member financial institutions of
threats. T h e primary means of notification will be by internet. If, however, internet traffic is
disrupted, the notification will be by other means including telephone calls and faxes.
JS-1 O^fTOtelneWoftreasury Secretary John S n o w on Azie Taylor Morton
Page 1 of 1
December 9, 2003
JS-1049
Statement of Treasury Secretary John Snow on Azie Taylor Morton
The Treasury Department is saddened to learn of the death of Azie Taylor Morton,
the nation's first African American U.S. Treasurer. Our thoughts and prayers are
with her family and friends.
http://www.treas.gov/press/releases/jsl049.htm
5/20/2005
JS-1050: U.S.TffMffy Secretary John W . Snow Remarks to A G O A Forum Breakfast
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 10,2003
JS-1050
U.S. Treasury Secretary John W. Snow
Remarks to A G O A Forum Breakfast
Let me thank you for your participation in the Africa Growth and Opportunity Act
(AGOA) Forum and for being with us here at Treasury this morning.
We are committed to this process and want to see a great success made of it. As
you know, Treasury has the lead in representing the U S government at the IMF, the
multi-lateral development banks and the Paris Club.
As one of AGOA's sponsoring agencies, along with the State Dept., Commerce
Dept. and the USTA, w e have a deep interest in the A G O A process and the
continuing dialogue with you on a broad range of topics.
It is important that we stimulate closer trade and investment relations with the
countries of sub-Saharan Africa, promoting market-led growth in the region.
Beyond promoting trade, we are also interested in promoting the essentials of a
vibrant economy, as reflected in the theme of this year's forum "Building Trade,
Expanding Investment."
AGOA seeks to promote stable and lasting growth through a strong macroeconomic framework, reliance on market economy principles, the rule of law and
active commitment to decrease poverty.
We see an important role for private sector in promoting growth and expanding
investments and developing capital markets. Treasury has been actively involved
in promoting the S M E financing initiative through IFC-IDA, through promotion of
grant lending and by helping countries achieve sovereign credit ratings.
Housing and housing finance is one of the principle drivers of US economic
development. It was enormously important in helping us through the recent
recession where despite the stock market fall-off housing industry remains strong.
Housing could serve an important development role for many African countries,
proving opportunities for small and medium enterprises, deepening the retail
banking sector and promoting the development of domestic capital markets. You
have an excellent topic for discussion and I regret that I won't be able to be here for
the entire meeting, but Assistant Secretary Quarles and his staff will be here to
engage in the dialogue with you.
I look forward to working with you in the future to attain these goals.
Thank you.
http://www.treas.gov/press/releases/jsl050.htm
5/20/2005
JS-1051: Treasury Secretary S n o w Praises Assistant Secretary P a m Olson for Leadership ... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
December 10, 2003
JS-1051
Treasury Secretary Snow Praises Assistant Secretary Pam Olson
for Leadership and Accomplishments While Serving in Bush Administration
Treasury Secretary John W. Snow today praised the leadership and
accomplishments of Assistant Secretary for Tax Policy Pamela F. Olson during her
service to the Bush Administration. Ms. Olson joined Treasury as Deputy Assistant
Secretary for Tax Policy in February 2001 and was sworn in as Assistant Secretary
for Tax Policy September 26, 2002. Today she submitted her resignation to the
President, effective after the budget is completed.
"Pam has shown outstanding leadership within Treasury and the Administration on
a wide variety of issues over the past several years," said Secretary Snow. "Her
expertise has been invaluable as w e have worked to promote policies that have
resulted in economic growth and job creation. Millions of families have benefited
from her efforts in ensuring that the President's Jobs and Growth Tax Relief was
enacted.
"Pam's effort to continually improve and streamline federal tax policies and
practices has greatly benefited the taxpayer and her significant contributions to the
government are to be commended. Her passion, experience and insight will be
missed, and I wish her the best in her future endeavors. She is a rare public servant
and she simply cannot be praised too highly for her dedication and service to the
President and the country."
Ms. Olson's major accomplishments during her tenure as Assistant Secretary
include her efforts to enact policies that reduce taxes, increase economic growth
and boost job creation; simplify the tax code so that it is fair, easy to understand,
easy for taxpayers to comply with and easy for the IRS to administer; cracking
down on abusive tax avoidance transactions; improving the guidance process; and
improving the revenue estimating process.
Related Documents:
• The Text of Olson's Resignation Letter to the President
http://www.treas.gov/press/releases/js 1051 .htm
5/20/2005
Page 1 of 1
PresidenTGebfge W
December 10, 2003
The President
The White House
Washington, D.C. 20500
Dear Mr. President:
It has been my privilege and honor to serve you and this great country for the past three years.
Unfortunately, I have found it extremely difficult to balance the requirements of the office with time for
m y family. Consequently, I have concluded that the time has c o m e for m e to return to the private sector
to allow m e to spend more time with them, and I a m writing to resign as Assistant Secretary of the
Treasury for Tax Policy. T o allow for a smooth transition, Secretary S n o w requested that m y
resignation be effective after the completion of the fiscal year 2005 budget.
Under your leadership, we have taken important steps toward a tax system consistent with our valu
and our best interests as a nation. Your principles, your values, and your commitment to doing what is
right have resulted in change far beyond the incremental change that too often marks our progress. I a m
proud of what w e have accomplished over the last three years and pleased to have had the opportunity to
play a role in promoting policies that have resulted in economic growth and job creation. W e have also
taken important steps over the last three years to restore the confidence of American taxpayers in the tax
system, which was shaken by the excesses of the 1990s. I appreciate the opportunity that I have had to
work with the talented staff of the Office of Tax Policy and the Internal Revenue Service to achieve
those goals.
May God bless you as you continue to lead our country.
Very truly yours,
Pamela F. Olson
http://www.treas.gov/Dress/releases/reports/resignation.letter.htm
5/20/2005
JS-1052rStatemefit"by^Secretary S n o w Following a Meeting with Secretary Baker
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 10, 2003
JS-1052
Statement by Secretary Snow
Following a Meeting Today at The Treasury Department with Secretary Baker
Today, Secretary Jim Baker and I had the opportunity to continue our discussions
on the effort to help Iraq restructure and reduce its official debt. I assured Secretary
Baker the Treasury will continue to provide necessary resources to support his vital
mission. I welcome Secretary Baker as the President's personal envoy to work with
heads of state. He will complement my efforts working with finance ministers and
the international financial institutions and Secretary Powell's efforts with his
counterparts. In our meeting w e also briefly discussed the nature of Iraq's debt and
strategies to resolve this issue. W e agreed that it is imperative to move quickly to
solve this problem if the Iraqi people are to have a chance to succeed as a free,
democratic and prosperous nation. As President Bush said, the issue of Iraq's debt
must be resolved in a manner that is fair and that does not unjustly burden a
struggling nation at its moment of hope and promise.
Related Documents:
• (1) Photo of Secretary Snow During a Meeting with Secretary Baker
• (2) Photo of Secretary Snow During a Meeting with Secretary Baker
http://www.treas.gov/press/releases/jsl052.htm
5/20/2005
JS-1052photo-l: Photo of Secretary S n o w During a Meeting with Secretary Baker
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 10, 2003
JS-1052photo-1
Photo of Secretary Snow During a Meeting Today at The Treasury Department
with Secretary Baker
Media Contact
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://www.treas.gov/press/releases/jsl052photol.htm
5/20/2005
JS-1052photo-2: Photo of Secretary S n o w During a Meeting with Secretary Baker
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 10, 2003
JS-1052photo-2
Photo of Secretary Snow During a Meeting Today at The Treasury Department.
with Secretary Baker
Media Contact
All media queries should be directed to
The Press Office at (202) 622-2960.
Only call this number if you are a member of the media.
High Resolution Image
http://www.treas.gov/press/releases/jsl052photo2.htm
5/20/2005
JS-10531: TreasurfTfsues Revised Regulations O n Inversion Transaction Reporting
Page
F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 12, 2003
JS-1053a
Treasury Issues Revised Regulations On Inversion Transaction Reporting
Today the Treasury Department issued revised temporary regulations requiring
corporations to notify the IRS and their shareholders when they move their
headquarters offshore or are acquired by a foreign company. Temporary
regulations were first released on November 12, 2002, and covered transactions
occurring after 2001. These revised regulations cover transactions occurring after
2002 and reflect clarifications that will ensure better information reporting by
brokers. These regulations are part of Treasury's proposals to address corporate
inversion transactions, which were unveiled by Treasury Assistant Secretary P a m
Olson in testimony before the House W a y s & Means Committee on June 6, 2002.
The texts of the revised temporary and proposed regulations are attached. They will
be published in the Federal Register in the next few days and are subject to minor
technical changes.
-30Related Documents:
• Text of Revised Temporary Regulations
• Text of Proposed Regulations
http://www.treas.gov/press/releases/js 1053a.htm
5/20/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD ]
RIN 1545-BC79
Information Reporting Relating to Taxable Stock Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains temporary regulations requiring information reporti
a corporation if control of the corporation is acquired or if the corporation has a
or other substantial change in capital structure. This document also contains tempo
regulations concerning information reporting requirements for brokers with respect
transactions described in section 6043(c). The text of these temporary regulations a
the text of proposed regulations set forth in the Proposed Rules section of this is
Federal Register.
DATES: Effective Date: These regulations are effective fINSERT DATE THIS DOCUMENT
IS PUBLISHED IN THE FEDERAL REGISTER1.
Applicability Dates: For dates of applicability, see §§1.6043-4T(i) and 1.6045-3T(g)
FOR FURTHER INFORMATION CONTACT: Nancy Rose at (202) 622-4910 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
2
Paperwork Reduction Act
The forms referenced in these regulations have been, or will be, reviewed and approved
by the Office of Management and Budget in accordance with the requirements of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)).
An agency may not conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection of information displays a valid OMB control
number.
Books and records relating to a collection of information must be retained as long as their
contents may become material in the administration of any internal revenue law. Generally, tax
returns and tax return information are confidential, as required by 26 U.S.C. 6103.
Background
Section 6043(c) provides that if any person acquires control of a corporation, or if there is
a recapitalization or other substantial change in capital structure of a corporation, the
corporation, when required by the Secretary, shall make a return setting forth the identity of th
parties to the transaction, the fees involved, the changes in the capital structure involved, and
such other information as the Secretary may require with respect to such transaction.
On November 18, 2002, the IRS published temporary regulations under section 6043(c)
(TD 9022). The transactions covered by the reporting requirement were certain acquisitions of
control and substantial changes in the capital structure of a corporation. These regulations
required a corporation to attach a form to its income tax return describing these transactions an
to file information returns with respect to certain shareholders in such transactions. On
November 18, 2002, the IRS also published temporary regulations under section 6045, which
3
provided for information reporting with respect to these transactions by brokers (together with
the section 6043(c) temporary regulations, the 2002 temporary regulations). The 2002 temporary
regulations were applicable to acquisitions of control and substantial changes in capital structure
occurring after December 31, 2001, if the reporting corporation or any shareholder was required
to recognize gain (if any) as a result of the application of section 367(a) as a result of the
transaction.
The text of the 2002 temporary regulations also served as the text of proposed regulations
set forth in a cross-referencing notice of proposed rulemaking published in the Proposed Rules
section of the same issue of the Federal Register (2002 proposed regulations) (REG-14332102). The provisions of the proposed regulations were proposed to apply with respect to any
acquisition of control or substantial change in capital structure occurring after the date on which
final regulations would be published in the Federal Register. The preamble to the notice of
proposed rulemaking invited public comments with respect to the potential for duplicate
reporting and with respect to the burden of compliance with the reporting requirements.
The IRS received a number of written public comments with respect to the information
reporting requirements set forth in the 2002 temporary and proposed regulations. In addition, the
IRS met with representatives of the Information Reporting Program Advisory Committee
(IRPAC) and other representatives of the securities industry to discuss their concerns and
suggestions for revisions to the regulations.
After considering the issues concerning affected taxpayers, the IRS has decided to revise
the 2002 temporary regulations. The revised temporary regulations set forth information
reporting rules that will help ensure that brokers and shareholders receive information regarding
4
these corporate transactions, without unduly burdening brokers and other members of the
securities industry.
The text of the revised temporary regulations also serves as the text of new proposed
regulations (reproposed regulations) set forth in the cross-referencing notice of proposed
rulemaking published in the proposed rules section of this issue of the Federal Register. The
preamble to that notice of proposed rulemaking invites public comments with respect to the
revised temporary and reproposed regulations, particularly with respect to the ability of brokers
to obtain the information necessary for reporting under revised §1.6045-3T and proposed
§1.6045-3.
Summary of Comments
The commentators noted certain gaps in the transmission of information under the 2002
temporary and proposed regulations between corporations subject to reporting and brokers.
Information reporting by brokers depends upon the effective dissemination of information from
the corporation to the reporting community, and broker reporting is difficult to effectuate if there
are gaps in the process of transmitting this information.
As provided in the 2002 temporary regulations, a reporting corporation would file Forms
1099-CAP, "Changes in Corporate Control and Capital Structure", with respect to its
shareholders of record, including brokers, under §1.6043-4T(b). Brokers who received Forms
1099-CAP would then file Forms 1099-CAP with respect to their customers pursuant to §1.60453T. The commentators pointed out that a large majority of U.S. publicly issued securities are
actually held on behalf of brokerage firms through clearing organizations. Pursuant to the 2002
temporary regulations, clearing organizations would receive Forms 1099-CAP from the
reporting corporation; however, because clearing organizations are not treated as brokers, they in
turn would not be required under §1.6045-3T to file Forms 1099-CAP with respect to their
5
broker-members. Consequently, brokers (who otherwise had the requirement to file a Form
1099-CAP upon receiving one) would not receive Form 1099-CAP if they held their shares
through a clearing organization. In addition, brokers may not be aware of the requirement to
report with respect to a particular corporate transaction, or may have difficulty obtaining the
information necessary for reporting. Thus, under the 2002 temporary regulations, the actual
shareholders of the reporting corporation, the broker's customers, may not receive information
returns to assist them in preparing their income tax returns.
To address this issue, commentators suggested an alternative procedure to ensure that
brokers receive the required information for reporting and to bridge any potential gaps in the
chain of reporting. Commentators recommended that the IRS act as a central repository of
information necessary for brokers and issue a publication containing information needed for
brokers to satisfy their reporting obligations. Brokers and commercial tax services that publish
current developments could access this information, and brokers could use this information in
preparing Forms 1099-CAP with respect to their customers. An alternative suggested by
commentators was to require the reporting corporation to post essential information for
reporting, from its Form 8806, "Information Return for Acquisition of Control or Substantial
Change in Capital Structure", to an IRS website.
Based on the comments, the revised temporary regulations provide in §1.60434T(a)(l)(vi) that reporting corporations may elect on Form 8806 to consent to the publication by
the IRS of information necessary for brokers to file information returns with respect to their
customers. To provide every corporation with the ability to make this election, the revised
temporary regulations require reporting corporations to file Form 8806 even though the
corporation may also report the transaction under sections 351, 355, or 368. In order to enable
6
the IRS to publish the information timely, the revised temporary regulations require reporting
corporations to file Form 8806 within 45 days after the transaction, and in no event later than
January 5 of the year following the calendar year in which the transaction occurs.
The role of clearing organizations was also the subject of comments. Commentators
suggested that the regulations use existing processes for distributing information to minimize the
cost of and the time required for implementing reporting by the industry. Those existing
processes include the dissemination of information by clearing organizations. Under current
practices, important information regarding corporate transactions (including tax information) is
disseminated by clearing organizations to their members. The new temporary regulations try to
take advantage of this existing information flow by continuing to require corporations to provide
a Form 1099-CAP to clearing organizations that are listed as shareholders of record at the time of
an acquisition of control or substantial change in capital structure. It is anticipated that clearing
organizations will disseminate information obtained from the Form 1099-CAP to their members
and that broker-members will use that information (and information obtained from other sources)
to satisfy their own reporting obligations under revised §1.6045-3T. Under the revised
temporary regulations, a broker is required to report information if the broker knows or has
reason to know, based on readily available information, that there was an acquisition of control
or substantial change in capital structure with respect to shares held by the broker on behalf of a
customer. If a clearing organization disseminates information identifying an acquisition of
control or a substantial change in capital structure to a broker-member, the broker-member has
readily available information about the transaction and must satisfy its §1.6045-3T reporting
obligations with respect to the transaction.
7
The revised temporary regulations provide that a reporting corporation is not required to
file Forms 1099-CAP with respect to its shareholders which are clearing organizations, or to
furnish Forms 1099-CAP to such clearing organizations, if the corporation makes the election to
permit the IRS to publish information regarding the transaction. The IRS' publication of such
information pursuant to the corporation's consent will provide readily available information for
brokers, who must satisfy their reporting obligations with respect to the transaction.
Commentators also requested that brokers be permitted to use Form 1099-B, "Proceeds
from Broker and Barter Exchange Transactions," for reporting under §1.6045-3T, rather than
overhaul their systems to report on Form 1099-CAP. The commentators point out that this
would also avoid any confusion stemming from the issuance of both types of forms to the same
taxpayer in the same transaction. The revised temporary regulations provide that Form 1099-B
should be used by brokers for reporting under §1.6045-3T. With respect to transactions
occurring in 2003, brokers may use either Form 1099-B or 1099-CAP.
Explanation of Provisions
The revised temporary regulations require a domestic corporation involved in certain
large taxable transactions to file Form 8806 reporting and describing such transactions. The
revised temporary regulations require the filing of Form 8806 within 45 days following an
acquisition of control or substantial change in capital structure, as defined in §§1.6043-4T(c) and
(d), or, if earlier, by January 5th of the year following the calendar year in which such event
occurred.
The revised temporary regulations do not change the definition of acquisition of control
or substantial change in capital structure as set forth in the 2002 temporary regulations. An
acquisition of control of a corporation is defined as a transaction or series of related transaction
in which stock representing control of that corporation is distributed by a second corporation or
8
in which stock representing control of that corporation is acquired (directly or indirectly) by a
second corporation and the shareholders of the first corporation receive cash, stock or other
property. For these purposes, control is determined in accordance with the first sentence of
section 304(c)(1). With certain limitations, the constructive ownership rules of section 318(a)
apply to determine ownership. Acquisitions of control within an affiliated group are excepted
from this definition, as are acquisitions in which the fair market value of the stock acquired in the
transaction or series of related transactions is less than $100,000,000.
A corporation has a substantial change in its capital structure if the corporation in a
transaction or series of related transactions (a) undergoes a recapitalization with respect to its
stock, (b) redeems its stock, (c) merges, consolidates or otherwise combines with another entity
or transfers substantially all of its assets to one or more entities, (d) transfers all or part of its
assets to another corporation in a title 11 or similar case and, in pursuance of the plan, distributes
stock or securities of that corporation, or (e) changes its identity, form or place of organization.
Transactions in which the amount of any cash plus the fair market value of any property
(including stock) provided to shareholders of the corporation is less than $100,000,000 are
excepted from this definition, as are transactions within an affiliated group.
The revised temporary regulations require a domestic corporation involved in the
specified transactions to issue, with respect to each of its shareholders of record, a Form 1099CAP reporting the amount of any cash plus the fair market value of any property (including
certain stock) exchanged in the transaction. Corporations are not required to report the fair
market value of any stock provided to a shareholder if the corporation reasonably determines that
the receipt of such stock would not cause the shareholder to recognize gain (if any).
9
Corporations also are not required to report amounts distributed to certain exempt recipients.
The list of exempt recipients has been expanded to include brokers.
Penalties under section 6652(1) may be imposed for failing to file required returns under
section 6043(c) (including failure to file on magnetic media, as required under section 6011(e)
and §1.6011-2). The penalty under section 6652(1) is $500 for each day the failure continues, but
the total amount imposed with respect to a return cannot exceed $100,000. The revised
temporary regulations provide that the information returns required under these regulations shall
be treated as one return for purposes of the section 6652(1) penalty, so that the penalty shall not
exceed $500 per day ($100,000 in total) with respect to any acquisition of control or change in
capital structure. Further, as provided in section 6652(1), such penalty does not apply if the
failure is due to reasonable cause. Until regulations are promulgated under section 6652(1) to set
forth specific standards for determining reasonable cause, the IRS will use the reasonable cause
standards set forth in §301.6724-1 as a guideline for determining reasonable cause.
The 2002 temporary regulations under section 6045 required a broker who, as the record
holder of stock, received a Form 1099-CAP from a corporation pursuant to the reporting
requirements of §1.6043-4T to file a Form 1099-CAP with respect to the actual owner and
furnish such Form 1099-CAP to the actual owner. Under the revised temporary regulations,
brokers should not receive Forms 1099-CAP from a corporation and are not required to issue
Forms 1099-CAP. Instead, revised §1.6045-3T requires a broker that knows or has reason to
know, based on readily available information, that a transaction described in §1.6043-4T(c) or
(d) has occurred to file an information return reporting the required information with respect to
its customers who are not exempt recipients. In order to allow brokers to use their existing
information reporting systems, the new temporary regulations require Form 1099-B, Proceeds
10
from Broker and Barter Exchange Transactions, to be used for such reporting. It is anticipated
that brokers will obtain the information regarding the corporate transactions from the IRS
website or an IRS publication, from information provided by clearing organizations, as well as
from other sources regularly consulted within the industry.
The revised temporary regulations are effective only for acquisitions of control and
substantial changes of capital structure that occur after December 31, 2002, and for which the
reporting corporation or any shareholder is required to recognize gain (if any) as a result of the
application of section 367(a). The cross-referencing proposed regulations published in Proposed
Rules section of this issue of the Federal Register will apply to all acquisitions of control and
substantial changes in capital structure occurring after the date that such regulations are
published as final regulations (regardless of whether section 367(a) applies).
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as
defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has
also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For the applicability of the Regulatory Flexibility Act (5
U.S.C. chapter 6), refer to the Special Analyses section of the preamble to the cross-referencing
notice of proposed rulemaking published in the Proposed Rules section of this issue of the
Federal Register. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary
regulations will be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small businesses.
Drafting Information
The principal author of these temporary regulations is Nancy L. Rose, Office of
Associate Chief Counsel (Procedure and Administration).
11
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. Section 1.6043-4T is revised to read as follows:
§1.6043-4T Information returns relating to certain acquisitions of control and changes in capital
structure (temporary).
(a) Information returns for an acquisition of control or a substantial change in capital
structure— (1) General rule. If there is an acquisition of control (as defined in paragraph (c) of
this section) or a substantial change in the capital structure (as defined in paragraph (d) of this
section) of a domestic corporation (reporting corporation), the reporting corporation must file a
completed Form 8806, "Information Return for Acquisition of Control or Substantial Change in
Capital Structure", in accordance with the instructions to that form. Form 8806 will request the
information required in paragraphs (a)(l)(i) through (vi) of this section and any other
information specified in the instructions.
(i) Reporting corporation Provide the name, address, and taxpayer identification number
(TIN) of the reporting corporation.
12
(ii) Common parent, if any, of the reporting corporation If the reporting corporation was
a subsidiary member of an affiliated group filing a consolidated return immediately prior to the
acquisition of control or the substantial change in capital structure, provide the name, address,
and TIN of the common parent of that affiliated group.
(iii) Acquiring corporation Provide the name, address and TIN of any corporation that
acquired control of the reporting corporation within the meaning of paragraph (c) of this section
or combined with or received assets from the reporting corporation pursuant to a substantial
change in capital structure within the meaning of paragraph (d) of this section (acquiring
corporation). State whether the acquiring corporation is foreign (as defined in section
7701(a)(5)) or is a dual resident corporation (as defined in §1.1503-2(c)(2)). In either case, state
whether the acquiring corporation was newly formed prior to its involvement in the transaction.
(iv) Common parent, if any, of acquiring corporation If the acquiring corporation named
in paragraph (a)(l)(iii) of this section was a subsidiary member of an affiliated group filing a
consolidated return immediately prior to the acquisition of control or the substantial change in
capital structure, provide the name, address, and TIN of the common parent of that affiliated
group.
(V) Information about acquisition of control or substantial change in capital structure.
Provide—
(A) A description of the transaction or transactions that gave rise to the acquisition of
control or the substantial change in capital structure of the corporation;
(B) The date or dates of the transaction or transactions that gave rise to the acquisition of
control or the substantial change in capital structure;
13
(C) A description of and a statement of the fair market value of any stock provided to the
reporting corporation's shareholders in exchange for their stock if the reporting corporation
reasonably determines that the shareholders are not required to recognize gain (if any) from the
receipt of such stock for U.S. federal income tax purposes; and
(D) A statement of the amount of cash plus the fair market value of any property
(including stock if the reporting corporation reasonably determines that its shareholders would be
required to recognize gain (if any) on the receipt of such stock, but excluding stock described in
paragraph (a)(l)(v)(C) of this section) provided to the reporting corporation's shareholders in
exchange for each share of their stock.
(2) Consent election Form 8806 will provide the reporting corporation with the ability to
elect to permit the IRS to publish information that will inform brokers of the transaction and
enable brokers to satisfy their reporting obligations under §1.6045-3T. The information to be
published, on the IRS website and/or in an IRS publication, would be limited to the name and
address of the corporation, the date of the transaction, a description of the shares affected by the
transaction, and the amount of cash and the fair market value of any property (excluding stock
described in paragraph (a)(l)(v)(C) of this section) provided to each class of shareholders in
exchange for a share.
(3) Time for making return— (i) In general. Form 8806 must be filed on or before the 45th
day following the acquisition of control or substantial change in capital structure of the
corporation, or, if earlier, on or before January 5 of the year following the calendar year in
which the acquisition of control or substantial change in capital structure occurs.
(ii) Transition rule. If an acquisition of control or a substantial change in capital structure
of a corporation occurs after December 31, 2002, and before ITNSERT DATE THIS
14
DOCUMENT IS FILED WITH THE OFFICE OF THE FEDERAL REGISTER!, Form
8806 must be filed on or before January 5, 2004.
(4) Exception where transaction is reported under section 6043(a). No reporting is
required under paragraph (a) of this section with respect to a transaction for which information is
required to be reported pursuant to section 6043(a), provided the transaction is properly reported
in accordance with that section.
(5) Exception where shareholders are exempt recipients. No reporting is required under
paragraph (a) of this section if the reporting corporation reasonably determines that all of its
shareholders who receive cash, stock or other property pursuant to the acquisition of control or
substantial change in capital structure are exempt recipients under paragraph (b)(5) of this
section.
(b) Information returns regarding shareholders—(1) General rule. A corporation that is
required to file Form 8806 pursuant to paragraph (a)(1) of this section shall file a return of
information on Forms 1096, "Annual Summary and Transmittal of U.S. Information Returns",
and 1099-CAP, "Changes in Corporate Control and Capital Structure", with respect to each
shareholder of record in the corporation (before or after the acquisition of control or the
substantial change in capital structure) who receives cash, stock, or other property pursuant to the
acquisition of control or the substantial change in capital structure and who is not an exempt
recipient as defined in paragraph (b)(5) of this section. A corporation is not required to file a
Form 1096 or 1099-CAP with respect to a clearing organization if the corporation makes the
election described in paragraph (a)(2) of this section.
15
(2) Time for making information returns. Forms 1096 and 1099-CAP must be filed on or
before February 28 (March 31 if filed electronically) of the year following the calendar year in
which the acquisition of control or the substantial change in capital structure occurs.
(3) Contents of return A separate Form 1099-CAP must be filed with respect to amounts
received by each shareholder (who is not an exempt recipient as defined in paragraph (b)(5) of
this section) showing—
(i) The name, address, telephone number and TIN of the reporting corporation;
(ii) The name, address and TIN of the shareholder;
(iii) The number and class of shares in the reporting corporation exchanged by the
shareholder;
(iv) The aggregate amount of cash and the fair market value of any stock (other than
stock described in paragraph (a)(l)(v)(C) of this section) or other property provided to the
shareholder in exchange for its stock; and
(v) Such other information as may be required by the instructions to Form 1099-CAP.
(4) Furnishing of forms to shareholders. The Form 1099-CAP filed with respect to each
shareholder must be furnished to such shareholder on or before January 31 of the year following
the calendar year in which the shareholder receives cash, stock, or other property as part of the
acquisition of control or the substantial change in capital structure. The Form 1099-CAP filed
with respect to a clearing organization must be furnished to the clearing organization on or
before January 5th of the year following the calendar year in which the acquisition of control or
substantial change in capital structure occurred. A Form 1099-CAP is not required to be
furnished to a clearing organization if the reporting corporation makes the election described in
paragraph (a)(2) of this section.
16
(5) Exempt recipients. A corporation is not required to file a Form 1099-CAP pursuant to
this paragraph (b) of this section with respect to any of the following shareholders that is not a
clearing organization:
(i) Any shareholder who receives solely stock described in paragraph (a)(l)(v)(C) of this
section in exchange for its stock in the corporation.
(ii) Any shareholder who is required to recognize gain (if any) as a result of the receipt of
cash, stock, or other property if the corporation reasonably determines that the amount of such
cash plus the fair market value of such stock and other property does not exceed $1,000. Stock
described in paragraph (a)(l)(v)(C) of this section is not taken into account for purposes of this
paragraph (b)(5)(h).
(iii) Any shareholder described in paragraphs (b)(5)(iii)(A) through (M) of this section if
the corporation has actual knowledge that the shareholder is described in one of paragraphs
(b)(5)(iii)(A) through (M) of this section or if the corporation has a properly completed
exemption certificate from the shareholder (as provided in §31.3406(h)-3 of this chapter). The
corporation also may treat a shareholder as described in paragraphs (b)(5)(iii)(A) through (M) of
this section based on the applicable indicators described in §1.6049-4(c)(l)(ii).
(A) A corporation, as described in section §1.6049-4(c)(l)(ii)(A)(except for corporations
for which an election under section 1362(a) is in effect).
(B) A tax-exempt organization, as described in §1.6049-4(c)(l)(ii)(B)(l).
(C) An individual retirement plan, as described in §1.6049-4(c)(l)(ii)(C).
(D) The United States, as described in §1.6049-4(c)(l)(ii)(D).
(E) A state, as described in §1.6049-4(c)(l)(ii)(E).
(F) A foreign government, as described in §1.6049-4(c)(l)(ii)(F).
17
(G) An international organization, as described in §1.6049-4(c)(l)(ii)(G).
(H) A foreign central bank of issue, as described in §1.6049-4(c)(l)(ii)(H).
(I) A securities or commodities dealer, as described in §1.6049-4(c)(l)(ii)(I).
(J) A real estate investment trust, as described in §1.6049-4(c)(l)(ii)(J).
(K) An entity registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1),
as described in §1.6049-4(c)(l)(ii)(K).
(L) A common trust fund, as described in §1.6049-4(c)(l)(ii)(L).
(M) A financial institution such as a bank, mutual savings bank, savings and loan
association, building and loan association, cooperative bank, homestead association, credit
union, industrial loan association or bank, or other similar organization.
(iv) Any shareholder that the corporation, prior to the transaction, associates with
documentation upon which the corporation may rely in order to treat payments to the shareholder
as made to a foreign beneficial owner in accordance with §1.1441-1 (e)(1)(h) or as made to a
foreign payee in accordance with §1.6049-5(d)(l) or presumed to be made to a foreign payee
under §1.6049-5(d)(2) or (3). For purposes of this paragraph (b)(5)(iv), the provisions in
§1.6049-5(c) (regarding rules applicable to documentation of foreign status and definition of
U.S. payor and non-U.S. payor) shall apply. The provisions of §1.1441-1 shall apply by using
the terms corporation and shareholder in place of the terms withholding agent and payee and
without regard to the fact that the provisions apply only to amounts subject to withholding under
chapter 3 of the Internal Revenue Code. The provisions of §1.6049-5(d) shall apply by using the
terms corporation and shareholder in place of the terms payor and payee. Nothing in this
paragraph (b)(5)(iv) shall be construed to relieve a corporation of its withholding obligations
under section 1441.
18
(v) Any shareholder if, on January 31 of the year following the calendar year in which the
shareholder receives cash, stock, or other property, the corporation did not know and did not
have reason to know that the shareholder received such cash, stock, or other property in a
transaction or series of related transactions that would result in an acquisition of control or a
substantial change in capital structure.
(6) Coordination with other sections. In general, no reporting is required under paragraph
(b) of this section with respect to amounts that are required to be reported under section 6042 or
section 6045, unless the corporation knows or has reason to know that such amounts are not
properly reported in accordance with those sections. A corporation must satisfy the requirements
under paragraph (b) of this section with respect to any shareholder of record that is a clearing
organization.
(c) Acquisition of control of a corporation-(l) In general For purposes of this section,
an acquisition of control of a corporation (first corporation) occurs if, in a transaction or series
related transactions, either—
(i) Stock representing control of the first corporation is distributed by a second
corporation to shareholders of the second corporation and the fair market value of such stock on
the date of distribution is $100,000,000 or more; or
(ii) (A) Before an acquisition of stock of the first corporation (directly or indirectly) by a
second corporation, the second corporation does not have control of the first corporation;
(B) After the acquisition, the second corporation has control of the first corporation;
(C) The fair market value of the stock acquired in the transaction and in any related
transactions as of the date or dates on which such stock was acquired is $100,000,000 or more;
and
19
(D) The shareholders of the first corporation (determined without applying the
constructive ownership rule of section 318(a)) receive cash, stock, or other property pursuant to
the acquisition.
(2) Control. For purposes of this section, control is determined in accordance with the
first sentence of section 304(c)(1).
(3) Constructive ownership, (i) Except as otherwise provided in this section, the
constructive ownership rules of section 318(a) (except for section 318(a)(4), providing for
constructive ownership through an option to acquire stock), modified as provided in section
304(c)(3)(B), shall apply for determining whether there has been an acquisition of control.
(ii) The determination of whether there has been an acquisition of control shall be made
without regard to whether the person or persons from whom control was acquired retain indirect
control of the first corporation under section 318(a).
(iii) For purposes of paragraph (c)(1)(h) of this section, section 318(a) shall not apply to
cause a second corporation to be treated as owning, before an acquisition of stock in a first
corporation (directly or indirectly) by the second corporation, any stock that is acquired in the
first corporation. For example, if the shareholders of a domestic corporation form a new holding
company and then transfer their shares in the domestic corporation to the new holding company,
the new holding company shall not be treated as having control of the domestic corporation
before the acquisition. The new holding company acquires control of the domestic corporation
as a result of the transfer. Similarly, if the shareholders of a domestic parent corporation transfer
their shares in the parent corporation to a subsidiary of the parent in exchange for shares in the
subsidiary, the subsidiary shall not be treated as having control of the parent before the
transaction. The subsidiary acquires control of the parent as a result of the transfer.
20
(4) Corporation includes group. For purposes of this paragraph (c), if two or more
corporations act pursuant to a plan or arrangement with respect to acquisitions of stock, such
corporations will be treated as one corporation for purposes of this section. Whether two or
more corporations act pursuant to a plan or arrangement depends on the facts and circumstances.
(5) Section 338 election For purposes of this paragraph (c), an acquisition of stock of a
corporation with respect to which an election under section 338 is made is treated as an
acquisition of stock (and not as an acquisition of the assets of such corporation).
(d) Substantial change in capital structure of a corporation—(1) In generaL A corporation
has a substantial change in capital structure if it has a change in capital structure (as defined in
paragraph (d)(2) of this section) and the amount of any cash and the fair market value of any
property (including stock) provided to the shareholders of such corporation pursuant to the
change in capital structure, as of the date or dates on which the cash or other property is
provided, is $100,000,000 or more.
(2) Change in capital structure. For purposes of this section, a corporation has a change
in capital structure if the corporation in a transaction or series of transactions—
(i) Undergoes a recapitalization with respect to its stock;
(ii) Redeems its stock (including deemed redemptions);
(iii) Merges, consolidates or otherwise combines with another corporation or transfers all
or substantially all of its assets to one or more corporations;
(iv) Transfers all or part of its assets to another corporation in a title 11 or similar case
and, in pursuance of the plan, distributes stock or securities of that corporation; or
(v) Changes its identity, form or place of organization.
21
(e) Reporting by successor entity. If a corporation (transferor) transfers all or
substantially all of its assets to another entity (transferee) in a transaction that constitutes a
substantial change in the capital structure of transferor, transferor must satisfy the reporting
obligations in paragraph (a) or (b) of this section. If transferor does not satisfy the reporting
obligations in paragraph (a) or (b) of this section, then transferee must satisfy those reporting
obligations. If neither transferor nor transferee satisfies the reporting obligations in paragraphs
(a) and (b) of this section, then transferor and transferee shall be jointly and severally liable for
any applicable penalties (see paragraph (g) of this section).
(f) Receipt of property. For purposes of this section, a shareholder is treated as receiving
property (or as having property provided to it) pursuant to an acquisition of control or a
substantial change in capital structure if a liability of the shareholder is assumed in the
transaction and, as a result of the transaction, an amount is realized by the shareholder from the
sale or exchange of stock.
(g) Penalties for failure to file. For penalties for failure to file as required under this
section, see section 6652(1). The information returns required to be filed under paragraphs (a)
and (b) of this section shall be treated as one return for purposes of section 6652(1) and,
accordingly, the penally shall not exceed $500 for each day the failure continues (up to a
maximum of $ 100,000) with respect to any acquisition of control or any substantial change in
capital structure. Failure to file as required under this section also includes the requirement to
file on magnetic media as required by section 6011(e) and §1.6011-2. In addition, criminal
penalties under sections 7203, 7206 and 7207 may apply in appropriate cases.
22
(h) Examples. The following examples illustrate the application of the rules of this
section. For purposes of these examples, assume the transaction is not reported under sections
6042, 6043(a) or 6045, unless otherwise specified, and assume that the fair market value of the
consideration provided to the shareholders exceeds $100,000,000. The examples are as follows:
Example 1. The shareholders of X, a domestic corporation and parent of an affiliated
group, exchange their X stock for stock in Y , a newly-formed foreign holding corporation. After
the transaction, Y owns all the outstanding X stock. The X shareholders must recognize gain (if
any) on the exchange of their stock as a result of the application of section 367(a). Because the
transaction results in an acquisition of control of X , X must comply with the rules in paragraphs
(a) and (b) of this section. X mustfileForm 8806 reporting the transaction. X must also file a
Form 1099-CAP with respect to each shareholder w h o is not an exempt recipient showing the
fair market value of the Y stock received by that shareholder, and X must furnish a copy of the
Form 1099-CAP to that shareholder. If X elects on the Form 8806 to permit the IRS to publish
information regarding the transaction, X is not required tofileor furnish Forms 1099-CAP with
respect to shareholders that are clearing organizations.
Example 2. C, a domestic corporation, and parent of an affiliated group merges into D,
an unrelated domestic corporation. Pursuant to the transaction, the C shareholders exchange
their C stock for D stock or for a combination of short term notes and D stock. The transaction
does not satisfy the requirements of section 368, and the C shareholders must recognize gain (if
any) on the exchange. Because the transaction results in a substantial change in the capital
structure of C, C (or D as the successor to C ) must comply with the rules in paragraphs (a) and
(b) of this section. C mustfileForm 8806. C (or D as the successor to C ) also mustfilea Form
1099-CAP with respect to each shareholder w h o is not an exempt recipient showing the fair
market value of the short term notes and the fair market value of the D stock provided to that
shareholder. In addition, C (or D ) must furnish a copy of the Form 1099-CAP to that
shareholder.
Example 3. (i) The facts are the same as in Example 2, except that C reasonably
determines that—
(A) The transaction satisfies the requirements of section 368;
(B) The C shareholders who exchange their C stock solely for D stock will not be
required to recognize gain (if any) on the exchange; and
(C) The C shareholders who exchange their C stock for a combination of short term notes
and D stock will be required to recognize gain (if any) on the exchange solely with respect to the
receipt of the short term notes.
23
(ii) C is required tofileForm 8806 under paragraph (a) of this section. C (or D as the
successor to C ) must also comply with the rules in paragraph (b) of this section. With respect to
each shareholder w h o receives a combination of short term notes and D stock, and w h o is not an
exempt recipient, C (or D ) mustfilea Form 1099-CAP showing the fair market value of the short
term notes provided to the shareholder, and C (or D ) must furnish a copy of the F o r m 1099-CAP
to that shareholder. The F o r m 1099-CAP should not show the fair market value of the D stock
provided to the shareholder. C and D are not required tofileand furnish Forms 1099-CAP with
respect to shareholders w h o receive only D stock in exchange for their C stock.
Example 4. The facts are the same as in Example 3, except C hires a transfer agent to
effectuate the exchange. The transfer agent is treated as a broker under section 6045 and is
required to report the fair market value of the short term notes provided to C's shareholders
under §1.6045-3T. Under paragraph (b)(6) of this section, C and D are not required to file
information returns under paragraph (b) of this section with respect to a shareholder of record,
unless C or D knows or has reason to k n o w that the transfer agent does not satisfy its information
reporting obligation under §1.6045-3T with respect to that shareholder. Thus, if the transfer
agent satisfies its information reporting requirements under §1.6045-3T with respect to
shareholder I, an individual w h o receives both D stock and short term notes, C and D are not
required tofilea Form 1099-CAP with respect to I. Conversely, if the transfer agent does not
have an information reporting obligation under §1.6045-3T with respect to one of C's
shareholder's of record (for example, a clearing organization that is an exempt recipient under
§1.6045-3T(b)(ii)), or if C or D knows or has reason to k n o w that the transfer agent has not
satisfied its information reporting requirement with respect to a shareholder, then C (or D ) must
provide a F o r m 1099-CAP to that shareholder.
(i) Effective date. This section applies to any acquisition of control and any substantial
change in capital structure occurring after December 31, 2001, if the reporting corporation or any
shareholder is required to recognize gain (if any) as a result of the application of section 367(a)
as a result of the transaction. However, paragraphs (a) through (h) of this section apply to
acquisitions of control and substantial changes in capital structure occurring after December 31,
2002, if the reporting corporation or any shareholder is required to recognize gain (if any) as a
result of the application of section 367(a) as a result of the transaction. For transactions prior
January 1, 2003, see §1.6043-4T as published in 26 CFR Part 1 (revised as of April 1, 2003).
This section expires on November 14, 2005.
24
Par. 3. Section 1.6045-3T is revised to read as follows:
§ 1.6045-3T Information reporting for an acquisition of control or a substantial change in capital
structure (temporary).
(a) In general Any broker (as defined in § 1.6045-1 (a)(1)) that holds shares on behalf of
a customer in a corporation that the broker knows or has reason to know based on readily
available information (including, for example, information from a clearing organization or from
information published by the Internal Revenue Service (see §601.601(d)(2) of this chapter)) has
engaged in a transaction described in §1.6043-4T(c) (acquisition of control) or §1.6043-4T(d)
(substantial change in capital structure), shall file a return of information with respect to the
customer, unless the customer is an exempt recipient as defined in paragraph (b) of this section.
(b) Exempt recipients. A broker is not required to file a return of information under this
section with respect to the following customers:
(i) Any customer who receives only cash in exchange for its stock in the corporation,
which must be reported by the broker pursuant to §1.6045-1(a).
(ii) Any customer who is an exempt recipient as defined in §1.6043-4T(b)(5) or §1.6045l(c)(3)(i).
(c) Form, manner and time for making information returns. The return required by
paragraph (a) of this section must be on Forms 1096, "Annual Summary and Transmittal of U.S.
Information Returns", and 1099-B, "Proceeds from Broker and Barter Exchange Transactions,"
25
or on an acceptable substitute statement. Such forms must befiledon or before February 28
(March 31 if filed electronically) of the year following the calendar year in which the acquisitio
of control or the substantial change in capital structure occurs.
(d) Contents of return A separate Form 1099-B must be prepared for each customer
showing—
(1) The name, address and taxpayer identification number (TIN) of the customer;
(2) The name and address of the corporation which engaged in the transaction described
in§1.6043-4T(c)or(d);
(3) The number and class of shares in the corporation exchanged by the customer;
(4) The aggregate amount of cash and the fair market value of any stock (other than stock
described in 1.6043-4T(a)(l)(v)(C)) or other property provided to the customer in exchange for
its stock; and
(5) Such other information as may be required by Form 1099-B.
(e) Furnishing of forms to actual owners. The Form 1099-B prepared for each customer
must be furnished to the customer on or before January 31 of the year following the calendar
year in which the customer receives stock, cash or other property.
(f) Single Form 1099. If a broker is required to file a Form 1099-B with respect to a
customer under both this §1.6045-3T and §1.6045-1(b) with respect to the same transaction, the
broker may satisfy the requirements of both sections by filing and furnishing one Form 1099-B
that contains all the relevant information, as provided in the instructions to Form 1099-B.
26
(g) Effective date, (i) This section applies with respect to any acquisition of control and
any substantial change in capital structure occurring after December 31, 2001, if the reporting
corporation or any shareholder is required to recognize gain (if any) as a result of the applicatio
of section 367(a) as a result of the transaction. However, paragraphs (a) through (f) of this
section apply to acquisitions of control and substantial changes in capital structure occurring
after December 31, 2002, if the reporting corporation or any shareholder is required to recognize
gain (if any) as a result of the application of section 367(a) as a result of the transaction. For
transactions prior to that date, see §1.6045-3T as published in 26 CFR Part 1 (revised as of April
1, 2003). This section expires on November 14, 2005.
(ii) For any acquisition of control or any substantial change in capital structure occurring
during the 2003 calendar year, a broker may elect to satisfy the requirements of this section by
using Form 1099-CAP in lieu of Form 1099-B.
PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part 602 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 5. In §602.101, paragraph (b) is amended by removing the following entries in the
table as follows:
§602.101 OMB Control numbers
fo\ * * *
27
C F R part or section where identified and
described
Current O M B
control N o .
1.6043-4T 1545-1812
1.6045-3T 1545-1812
Deputy Commissioner for Services and Enforcement.
Approved:
Assistant Secretary of the Treasury (Tax Policy).
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
2 6 CFR Part 1
[REG-143321-02; REG-156232-03]
RIN 1545-BB60; RIN 1545-BC80
Information Reporting Relating to Taxable Stock Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Withdrawal of previous proposed rules; notice of
proposed rulemaking by cross-reference to temporary regulations
and notice of public hearing.
SUMMARY: This document withdraws proposed regulations published
in the Federal Register on November 18, 2002 (REG-143321-02).
In the Rules and Regulations section of this issue of the
Federal Register, the IRS is issuing temporary regulations
relating to information reporting relating to taxable stock
transactions. This document contains proposed regulations under
section 6043(c) requiring information reporting by a corporation
if control of the corporation is acquired or if the corporation
has a recapitalization or other substantial change in capital
structure. This document also contains proposed regulations
under section 6045 concerning information reporting requirements
for brokers with respect to transactions described in section
6043 (c) . The text of the temporary regulations serves as the
text of these proposed regulations. This document also provides
notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by
2
[INSERT DATE 90 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE
FEDERAL REGISTER]. Outlines of topics to be discussed at the
public hearing scheduled for , at , must
be received by [INSERT DATE THAT IS 3 WEEKS BEFORE THE HEARING] .
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-156232-03),
room 5203, Internal Revenue Service, POB 7604, Ben Franklin
Station, Washington, DC 20044. Submissions may be hand
delivered Monday through Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG-156232-03), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington, DC. Alternatively, taxpayers may submit electronic
comments directly to the IRS Internet site at www.irs.gov/regs.
The public hearing will be held in room , Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Nancy L. Rose (202) 622-4910; concerning
submissions of comments, the hearing, and/or to be placed on the
building access list to attend the hearing, at (202)
622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The forms referenced in these regulations have been, or
will be, approved by the Office of Management and Budget in
accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)).
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
3
collection of information displays a valid OMB control number.
Books and records relating to a collection of information
must be retained as long as their contents may become material
in the administration of any internal revenue law. Generally,
tax returns and tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document withdraws the Notice of Proposed Rulemaking
(REG-143321-02) that was published in the Federal Register on
November 18, 2002 (67 FR 65496). Temporary regulations in the
Rules and Regulations section of this issue of the Federal
Register amend the Income Tax Regulations (2 6 CFR Part 1)
relating to sections 6043 and 6045. The temporary regulations
set forth information reporting requirements relating to
acquisitions of control and substantial changes in capital
structure. The text of those regulations also serves as the
text of these proposed regulations. The preamble to the
temporary regulations explains the amendments and these proposed
regulations.
On November 18, 2 0 02, the IRS published temporary
regulations under section 6043(c) (TD 9022). The transactions
covered by the reporting requirement were certain acquisitions
of control and substantial changes in the capital structure of a
corporation. These regulations required a corporation to attach
a form to its income tax return describing these transactions
and to file information returns with respect to certain
shareholders in such transactions. On November 18, 2002, the
4
IRS also published temporary regulations under section 6045,
which provided for information reporting with respect to these
transactions by brokers (together with the section 6043 (c)
temporary regulations, the "2 002 temporary regulations" . The
2002 temporary regulations were effective for acquisitions of
control and substantial changes in capital structure occurring
after December 31, 2001, if the reporting corporation or any
shareholder was required to recognize gain (if any) as a result
of the application of section 367(a) as a result of the
transaction.
The text of the 2002 temporary regulations also served as
the text of proposed regulations set forth in a crossreferencing notice of proposed rulemaking published in the
Proposed Rules section of the same issue of the Federal Register
(2002 proposed regulations) (REG-143321-02). The provisions of
the proposed regulations were proposed to be effective with
respect to any acquisition of control or substantial change in
capital structure occurring after the date on which final
regulations would be published in the Federal Register. The
preamble to the notice of proposed rulemaking invited public
comments with respect to the potential for duplicate reporting
and with respect to the burden of compliance with the reporting
requirements.
The IRS received a number of written public comments with
respect to the information reporting requirements set forth in
the 2002 temporary and proposed regulations. In addition, the
IRS met with representatives of the Information Reporting
5
Program Advisory Committee (IRPAC) and other representatives of
the securities industry to discuss their concerns and
suggestions for revisions to the regulations.
After considering the issues concerning affected taxpayers,
the IRS has decided to revise the 2002 temporary regulations.
The revised temporary regulations set forth information
reporting rules that will help ensure that brokers and
shareholders receive information regarding these corporate
transactions, without unduly burdening brokers and other members
of the securities industry. The text of the revised temporary
regulations also serves as the text of these proposed
regulations (reproposed regulations).
Summary of Comments and Explanation of Provisions
The commentators noted certain gaps in the transmission of
information under the 2 0 02 temporary and proposed regulations
between corporations subject to reporting and brokers.
Information reporting by brokers depends upon the effective
dissemination of information from the corporation to the
reporting community, and broker reporting is difficult to
effectuate if there are gaps in the process of transmitting this
information.
As provided in the 2002 temporary and proposed regulations,
a reporting corporation would file Forms 1099-CAP, "Changes in
Corporate Control and Capital Structure", with respect to its
shareholders of record, including brokers, under §1.6043-4T(b)
and proposed §1.6043-4(b). Brokers who received Forms 1099-CAP
would then file Forms 1099-CAP with respect to their customers
6
pursuant to §1.6045-3T and proposed §1.6045-3.
The commentators
pointed out that a large majority of U.S. publicly issued
securities are actually held on behalf of brokerage firms
through clearing organizations. Pursuant to the 2002 temporary
and proposed regulations, clearing organizations would receive
Forms 1099-CAP from the reporting corporation; however, because
clearing organizations are not treated as brokers, they in turn
would not be required under §1.6045-3T and reproposed §1.6045-3
to file Forms 1099-CAP with respect to their broker-members.
Consequently, brokers (who had the requirement to file a Form
1099-CAP upon receiving one) would not receive Form 1099-CAP if
they held their shares through a clearing organization. In
addition, brokers may not be aware of the requirement to report
with respect to a particular corporate transaction, or may have
difficulty obtaining the information necessary for reporting.
Thus, under the 2 002 temporary and proposed regulations, the
actual shareholders of the reporting corporation, the broker's
customers, may not receive information returns to assist them in
preparing their income tax returns.
To address this issue, commentators suggested an
alternative procedure to ensure that brokers receive the
required information for reporting and to bridge any potential
gaps in the chain of reporting. Commentators recommended that
the IRS act as a central repository of information necessary for
brokers and issue a publication containing information needed
for brokers to satisfy their reporting obligations. Brokers and
commercial tax services that publish current developments could
7
access this information, and brokers could use this information
in preparing Forms 1099-CAP with respect to their customers. An
alternative suggested by commentators was to require the
reporting corporation to post essential information for
reporting, from its Form 8806,"Information Return for
Acquisition of Control or Substantial Change in Capital
Structure," to an IRS website.
Based on the comments, revised §1.6043-4T(a)(1)(vi) and
reproposed §1.6043-4(a)(1)(vi) provide that reporting
corporations may elect on Form 8806 to consent to the
publication by the IRS of information necessary for brokers to
file information returns with respect to their customers. To
provide every corporation with the ability to make this
election, the revised temporary regulations require reporting
corporations to file Form 8806 even though the corporation may
also report the transaction under sections 351, 355, or 368. In
order to enable the IRS to publish the information timely, the
revised temporary regulations require reporting corporations to
file Form 8806 within 45 days after the transaction, and in no
event later than January 5 of the year following the calendar
year in which the transaction occurs.
The role of clearing organizations was also the subject of
comments. Commentators suggested that the regulations utilize
existing processes for distributing information to minimize the
cost of and the time required for implementing reporting by the
industry. Those existing processes include the dissemination of
information by clearing organizations. Under current practices,
8
important information regarding corporate transactions
(including tax information) is disseminated by clearing
organizations to their members. The revised temporary and
reproposed regulations try to take advantage of this existing
information flow by continuing to require corporations to
provide a Form 1099-CAP to clearing organizations that are
listed as shareholders of record at the time of an acquisition
of control or substantial change in capital structure. It is
anticipated that clearing organizations will disseminate
information obtained from the Form 10 9 9-CAP to their members and
that broker-members will use that information (and information
obtained from other sources) to satisfy their own reporting
obligations under section §1.6045-3T and reproposed §1.6045-3.
Under the revised regulations, a broker is required to report
information if the broker knows or has reason to know, based on
readily available information, that there was an acquisition of
control or substantial change in capital structure with respect
to shares held by the broker on behalf of a customer. If a
clearing organization disseminates information identifying an
acquisition of control or a substantial change in capital
structure to a broker-member, the broker-member has readily
available information about the transaction and must satisfy its
reporting obligations under §1.6045-3T and reproposed §1.6045-3
with respect to the transaction.
The revised temporary and reproposed regulations provide
that a reporting corporation is not required to file Forms 1099CAP with respect to its shareholders which are clearing
9
organizations, or to furnish Forms 1099-CAP to such clearing
organizations, if the corporation makes the election to permit
the IRS to publish information regarding the transaction. The
IRS' publication of such information pursuant to the
corporation's consent will provide readily available information
for brokers, who must satisfy their reporting obligations with
respect to the transaction.
Commentators also requested that brokers be permitted to
utilize Form 1099-B for reporting under §1.6045-3T and
reproposed §1.6045-3, rather than overhaul their systems to
report on Form 1099-CAP. The commentators point out that this
would also avoid any confusion stemming from the issuance of
both types of forms to the same taxpayer in the same
transaction. The revised temporary regulations and reproposed
regulations provide that Form 1099-B should be used by brokers
for reporting under §1.6045-3T and reproposed §1.6045-3. With
respect to transactions occurring in 2003, brokers may use
either Form 1099-B or 1099-CAP.
Proposed Effective Date
The provisions of these regulations are proposed to be
applicable for any acquisition of control and change in capital
structure occurring after the date on which these regulations
are published in the Federal Register as final regulations.
Special Analyses
It has been determined that this notice of proposed
rulemaking is not a significant regulatory action as defined in
Executive Order 12866. Therefore, a regulatory assessment is
10
not required.
It has also been determined that section 553(b)
of the Administrative Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because the regulations do
not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on its impact on small businesses.
Comments and Public Hearing
Before these proposed regulations are adopted as final
regulations, consideration will be given to any electronic or
written comments (a signed original and eight (8) copies) that
are submitted timely to the IRS. The IRS and Treasury
Department request comments on the clarity of the proposed rules
and how they can be made easier to understand. All comments
will be available for public inspection and copying. A public
hearing has been scheduled for , beginning at in
Room , Internal Revenue Building, 1111 Constitution Avenue,
NW., Washington, DC. Because of access restrictions, visitors
will not be admitted beyond the immediate entrance area more
than 3 0 minutes before the hearing starts. For information
about having your name placed on the building access list to
attend the hearing, see the FOR FURTHER INFORMATION CONTACT
portion of this preamble.
The rules of 2 6 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments must submit electronic
11
or written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (a signed original and
eight (8) copies) by . A period of 10 minutes will
be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after
the deadline for reviewing outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal author of this notice of proposed rulemaking
is Nancy L. Rose, Office of Associate Chief Counsel (Procedure
and Administration).
List of Subjects in 26 CFR part 1
Income taxes, Reporting and recordkeeping requirements.
Withdrawal of a Previous Notice of Proposed Rulemaking
Accordingly, under the authority of 26 U.S.C. 7805, the
notice of proposed rulemaking published in the Federal Register
on November 18, 2002 (REG-143321-02) is withdrawn.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as
follows:
PART 1-- INCOME TAXES
Paragraph 1. The authority citation for part 1 continues' to
read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. Section 1.6043-4 is added to read as follows:
§1.6043-4 Information returns relating to certain acquisitions
of control and changes in capital structure.
12
[The text of proposed §1.6043-4 is the same as the text of
§1.6043-4T published elsewhere in this issue of the Federal
Register]
13
Par. 3.
Section 1.6045-3 is added to read as follows:
§1.6045-3 Information reporting for acquisitions of control or
substantial changes in capital structure.
[The text of proposed §1.6045-3 is the same as the text of
§1.6045-3T published elsewhere in this issue of the Federal
Register]
Deputy Commissioner for Services and Enforcement.
JS-1054: U.S Treasury Secretary John W . S n o w Commencement Address to Virginia Co...
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
December 13, 2003
JS-1054
U.S Treasury Secretary John W. Snow
C o m m e n c e m e n t Address to Virginia Commonwealth University
December 13, 2003
Richmond, Virginia
Congratulations! Thank you for inviting me to speak to you today on this important
occasion. I've had a long and personal connection with Virginia Commonwealth
University, so it's a special pleasure to see so many successful graduates here at
VCU.
Thank you, President Trani, for bestowing this honorary degree upon me. Gene,
you've done so much for this University, as a visionary and a builder. You've done
a lot for this campus.
This is a great institution in so many ways. A strong business school, one of the
best art programs in the country, a leading biotechnology research center, a new
engineering school, and m y favorite, one of the top tennis teams around. And
there's so much more. V C U is a wonderful place - and I'm not just saying that
because m y own son goes here.
So first of all, my heartiest congratulations to you the graduates. I understand one
thing very clearly; a commencement speech is the last thing to stand between you
and your degree, so I know m y duty well. At some commencements, speakers go
on and on like wind blowing through a desert. S o m e of m y own graduations went
like that, bringing to mind the comment of a forlorn speaker w h o apparently went on
too long. H e said, "I don't mind people looking at their watches when I'm speaking,
but I do take exception when they start shaking their watches to make sure they still
work."
This is a great day for you the graduates, your friends, parents and loved ones. But
I'll bet there's at least one question on many of your minds today. No, not "who's
the old guy with the bushy eyebrows?" You're wondering about jobs, and what the
future holds for you - will I be able to find a good job? That's natural. It was the
question on m y mind when I graduated. It should be on your mind today, and it's
on m y mind as well.
The basic question is, where do jobs come from? One thing we know for sure is
that education plays a big role.
You know jobs and education are closely linked. Otherwise you wouldn't be here.
Many of you are continuing education graduates - you've been out in the workforce
before, maybe a few times. You know it takes education to understand your
opportunities, to create opportunities, and to exploit them.
Living in the United States, you live in the most dynamic, innovative, economy in
the world. We're at the forefront of every industry and every technology. Change is
always in the air. The workplace is ever changing, with some industries losing jobs,
and others creating jobs. Over time, there's always more of the latter than the
former, but to grab hold of the wave, you need education - you need to be prepared
for the opportunities. That's what a good education does for you.
And it isn't just the knowledge you take with you. That's perishable. Knowledge or
skills quickly become obsolete unless constantly upgraded. That's the real secret
of a good education. It's the gift that keeps on giving. Because a good education
provides you with the ability to keep on learning - and lifetime learning is the key to
http://www.treas.gov/press/releases/js 1054.htm 5/20/2005
Page 1 of 3
JS-1054: U.S Treasury Secretary John W . S n o w C o m m e n c e m e n t Address to Virginia Co...
Page 2 of 3
your success in the dynamic, ever-changing economy.
I'll share with you a figure that illuminates my point. Over the past decade in the
United States, around 30 million jobs have been lost every year, give or take a few
million. In fact, in the year 2000, when unemployment hit its lowest point in the
decade, 33 million jobs were lost. That sounds pretty bad, doesn't it? After ten
years of losing 30 million jobs a year, the whole country should be out of work, and
then some.
The key is that over the same period, about 30 million jobs were created every
year, give or take a few million. In s o m e years the gain is slighter greater than the
loss. In other years - the opposite is true.
It sounds chaotic, but that is the path of progress. Look at history. A hundred years
ago 4 0 % of the U.S. workforce was in agriculture, at a time when our population
totaled 90 million. Today, agriculture accounts for less than 2 % of our workforce
and we're a nation of nearly 300 million people, and we're better fed as a nation,
and we're doing more to feed the rest of the world as well.
Imagine the United States today with 40% of its workforce in farming. How many of
you studied agriculture? If 2 out of 5 workers were in farming today, w e wouldn't
have enough people for our growth industries such as information technology,
biotechnology and healthcare.
Agriculture is honorable work - farmers feed our nation, and our nation feeds much
of the world. But today, we're able to do that job with far fewer people. That's an
economic success story in the big picture, but it caused countless individual
dislocations, as folks moved from the country to the cities over the course of a
century, and took up n e w work. It's still happening today, and it's tough on a lot of
families.
The new jobs are often different from the old jobs because our economy keeps
changing and creating n e w opportunities. W e keep getting more productive. It
takes less time to do the s a m e amount of work, thanks to better education and
better technology. S o as w e keep getting more productive, workers get paid more
for what they do because they are getting more done.
That's good, but the market requires everybody to be on their toes. The dynamic of
the marketplace leads to the constant creation of n e w businesses and new jobs to
go where the growth is.
The truth is, in America, there will always be plenty of jobs created for everyone, as
long as Americans are free to create them.
So h o w do jobs get created? Where will w e find the jobs of the future?
Jobs c o m e from n e w ideas, from discovery, from innovations. And by their very
nature the innovations of the future are not known today. They require risk-taking
and overcoming uncertainty, and they require lifelong learning.
I don't know where new jobs will come from, in biotech or software, ball bearings or
space exploration. Or maybe something I've never heard of, but something one of
you has been researching every day for two years. I don't know exactly where
they'll c o m e - that's why w e have markets - but I know h o w they'll come: from
capital and labor finding the most productive opportunities in the market, from n e w
ideas, and from investors and innovators prepared to risk their time and capital to
create something new.
In the American economy, new ideas are always displacing old ideas; new
management processes are displacing old management processes; n e w
technologies are displacing older technologies. And all the while, productivity is
rising, the standard of living is rising, and wealth is rising. People have the
opportunity to lead more abundant lives.
Interwoven in all of this is education. To work or invest or invent on the frontiers of
our economy, to ride the wave, you need education. You need training. You need
flexibility. That's true whether you're looking for your first job out of college, or
you're a venture capitalist putting a million dollars into the biotech startup of a newly
minted V C U grad.
http://www.treas.sov/press/releases/js 1054.htm
5/20/2005
JS-1054: U.S Treasury Secretary John W . S n o w C o m m e n c e m e n t Address to Virginia Co...
Page 3 of 3
Let me give you an example of the need for lifelong learning. No one is too smart
to need further education. Alan Greenspan, the eminent chairman of the Federal
Reserve, is well known for his deep erudition and mastery of financial matters. I
w a s talking with Alan s o m e years back. H e told m e he had gone back to the books,
the mathematics books, to master the complex mathematical theory behind
derivatives.
Alan explained that derivatives were becoming a bigger and bigger part of what the
Federal Reserve System needed to be concerned about. And derivatives, which
are highly sophisticated investment tools, are based on a system of underlying
mathematical constructs.
Think of that: the Chairman of the Federal Reserve Board, who years ago got a
P h D in economics, one of the leading financial figures in the world, goes back to the
books. But that is the world w e are in; that is the world you are entering. You can
never be satisfied with what you know. Instead, draw strength from what you have
learned about h o w to learn. Learn through studying, and learn through doing.
People that pursue a new opportunity are taking a risk. They often fail. The key is
that they learn, and try again. The secret of American economic success is failure!
- or perhaps that w e allow people to fail and start over again. If it were easy to
exploit n e w opportunities, they wouldn't be opportunities for long.
Those who take the risks - with their time, money, and reputations, must be able to
claim their reward when they succeed, and learn their lessons when they fail. A lot
of people learned lessons in the dotcom boom and bust, for example. Maybe s o m e
of you. S o m e succeeded, but many did not. But there's no stigma for having
worked for a start-up that failed. In fact, in many quarters, it's a right of passage.
And that risk with your time - that includes education. Many of you stepped out of
the work force, you passed up jobs you could have had, because you felt that with a
better education, you could do better for yourself. You took a tougher road for a
greater reward. You had that confidence in your abilities, your ability to learn, and
your future. You m a d e the right choice.
I'll tell you another thing - since exchanging my job in Richmond for one in
Washington, I've been impressed. I've been impressed with our President's
understanding of exactly these issues. H e knows the importance of lifelong
learning, in education and training, and he knows the value of incentives for
investment and job creation.
President Bush's administration is striving to encourage entrepreneurship, capital
formation, and education. This year's tax program w a s the first in decades to focus
on reducing taxes on capital formation, such as taxes on dividends and capital
gains. At the s a m e time, the President's "No Child Left Behind" Act invests more in
education, and it introduces key concepts of innovation and competition into the
market for education. In education, as in business, there should be rewards for
success.
And we're seeing success. Our economy set a twenty year record for growth last
quarter, and job creation is up. V C U graduates, your prospects are good.
G o pursue your dreams. You are n o w armed to do so. And remember, never stop
learning.
Congratulations again to you, your families and your teachers. Thank you.
hrrr)://www.treas.gov/Dress/releases/jsl 054.htm
5/20/2005
JS-1055: treasury International Capital Data for October
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 15, 2003
JS-1055
Treasury International Capital Data for October
Treasury International Capital (TIC) data for October is released today and posted
on the U.S. Treasury web site (www.treas.gov/tic). The next release date, which will
report on data for November, is scheduled for January 16, 2004.
According to the TIC data released today:
• Gross purchases by foreigners of U.S. long-term domestic securities from
U.S. residents were $1,438 billion in October. Gross sales by foreigners of
U.S. long-term domestic securities to U.S. residents were $1,397 billion in
October.
• Thus, net foreign purchases of U.S. long-term domestic securities from U.S.
residents were $41 billion in October, which compares with $16 billion in
September.
• Net foreign purchases of U.S. Treasury notes and bonds from U.S.
residents were $12 billion in October, which compares with $6 billion in
September.
• Net foreign purchases of U.S. agency bonds from U.S. residents were $9
billion in October, which compares with -$3 billion in September.
• Net foreign purchases of U.S. corporate bonds from U.S. residents were
$21 billion in October, which compares with $20 billion in September.
• Net foreign purchases of U.S. equities from U.S. residents were -$1 billion in
October, which compares with -$6 billion in September.
• Net purchases by foreign official institutions of U.S. long-term domestic
securities in October were $23 billion, up from $12 billion in September. Net
purchases by foreign official institutions of U.S. Treasury notes and bonds
were $19 billion, which compares with $8 billion in September.
• Gross purchases by foreigners of long-term foreign securities from U.S
residents were $369 billion in October. Gross sales by foreigners of longterm foreign securities to U.S. residents were $382 billion in October.
• Thus, net foreign purchases of long-term foreign securities from U.S.
residents were -$13 billion in October, which compares with -$12 billion in
September.
For the full October data set, including adjustments for repayments of principal on
asset-backed securities, as well as the historical series go to www.treas.gov/tic
http://www.treas.gov/press/releases/jsl055.htm
5/20/2005
2003-12-15-17-0-23-7138: Cost of Participation Report ( F Y 2003 Quarters)
PRESSROOM
Page 1 of 1
"—
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 15, 2003
2003-12-15-17-0-23-7138
Cost of Participation Report (FY 2003 Quarters)
See the attached Cost of Participation Report (FY 2003 Quarters) below:
Report(s):
• Cost of Participation Report„(FY 2003 Quarters)
http://www.treas.gov/press/releases/20031215170237138.htm
5/20/2005
REPORT TO CONGRESS ON FINANCIAL IMPLICATIONS OF
U.S. PARTICIPATION IN
THE INTERNATIONAL MONETARY FUND
Fiscal Year 2003
This report has been prepared in compliance with Section 504(b) of Appendix E, Title V ofthe
Consolidated Appropriations Act for F Y 2000.' The report focuses exclusively on the financial
implications of U.S. participation in the I M F and does not attempt to quantify the broad and
substantial economic benefits to the United States and the global economy resulting from U.S.
participation in the I M F .
As required, the report provides financial information on the net interest income and valuation
changes associated with U.S. participation in the International Monetary Fund (IMF). T h e
broader context for the financial implications OfU.S. participation in the I M F and the
methodology used in deriving these figures have been laid out in previous reports. T h e
methodology is also summarized briefly in the footnotes attached to the tables. Reports under
this provision are prepared quarterly and made available to the public on the Treasury website:
http: //www. treas. gov/press/reports. html.
This report provides quarterly data for the fiscal year 2003. It provides information on U.S.
participation in the IMF's General Department as well as information related to U.S. holdings of
Special Drawing Rights (SDRs) as part of its international reserves and the financial implications
of U.S. participation in the S D R Department ofthe IMF. 2
Data on the net interest income and valuation changes related to U S. participation in the IMF's
General Department during the fiscal year 2003 is provided in Table 1. For comparison
purposes, previously-reported data for fiscal years 2000, 2001 and 2002 is also provided. (The
data for these fiscal years reflects corrections to the information previously provided.)
Similarly, data for net interest income and valuation changes related to U.S. participation in the
S D R Department ofthe I M F during the fiscal year 2003 is provided in Table 2. For comparison
purposes, previously reported data for fiscal year 2002 is also provided.
The attached footnotes explain the columns shown on each table and provide pertinent
information and assumptions used in the calculations.
1
Section 504(b) of Appendix E, Title V ofthe Consolidated Appropriations Act for F Y 2000, Public L a w 106-113,
113 Stat 1501A-317 requires that the Secretary ofthe Treasury prepare and transmit to the appropriate committees
ofthe Congress a quarterly report on the costs or benefits of United States participation in the International
Monetary Fund (IMF), detailing the costs or benefits to the United States, as well as valuation gains or losses on the
United States' reserve position in the I M F
2
The S D R is an international reserve asset created by tlie I M F The S D R is used as a unit of account by the I M F
and other international organizations Its value is determined as a weighted average of a basket of currencies - the
dollar, euro, pound sterling and yen The S D R carries a market-based interest rate determined on the basis of a
weighted average of interest rates on short-term instruments in tlie markets of the currencies included in the S D R
valuation basket
1
A s shown in Table 1, for fiscal year 2003, the financial implications of U S. participation in the
General Department reflected a net interest income effect of $65 million, relative to $34 million,
$7 million, and negative $43 million in fiscal years 2002, 2001 and 2000, respectively. The
valuation change on the U.S. Reserve Position for fiscal year 2003 was $ L 7 billion, which
compares to $446 million, negative $47 million, and negative $1.1 billion in tlie prior three
years.3
A s shown in Table 2, for the fiscal year 2003, the net interest income effect of U S . participation
in the S D R Department was $17 million, relative to $12 million in the prior period. The
valuation change for fiscal year 2003 on U S . S D R holdings was $396 million, compared to $134
million in 2002. 4
Attachments
3
For an explanation ofthe methodology used in deriving these figures, see the section on "Calculating the Financial
Implications of U.S. Participation in the General Department" in the report prepared for the fourth quarter of fiscal
year 2000, submitted in December 2000 and available at http://www.treas.gov/press/releases/report3073.htm
For an explanation of the methodology used in deriving these figures, see the section on "Calculating the Financial
Implications of U.S. Participation in the S D R Department" in the report prepared for the fourth quarter of fiscal year
2000, submitted in December 2000 and available at http://www.treas.gov/press/releases/report3073 htm
2
Net Interest Income and Valuation Changes Related to U.S. Participation in the I M F
— General Account —
Tabic 1
U.S. Fiscal Year, Quarterly
(SM U.S. Dollars)
Transactions with the I M F
Transactions Under U.S. U.S. Loans to I M F
Quota (Letter of Credit (Under SFF, G A B ,
&Transfcrs of Reserve
NAB)
Fiscal Year Ended 9/30
Assets) Cumulative
Cumulative
Valuation
Interest Calculations
Total U.S.
Transactions with
the I M F
Interest Expense
Associated with
Financing U.S.
Transactions with
the IMF
Remuneration
Received by U.S.
from IMF &
Refund of Burden
Sharing
Interest Received
from IMF Under
SFF, GAB, and
NAB
(Col l-t-21
Col. 1
Col. 2
2000
Ql: Oct-Dec 99
Q2: Jan -Mar 00
Q3: Apr - June 00
Q4: July-Sept 00
Total
-SI 4,263
-14,484
-12,161
-10,864
2001
Ql: Oct-Dec 00
02: Jan -Mar 01
Q3: Apr-June 01
Q4: July-Sept 01
Total
-SI 1,949
-11,378
-12^89
-15.632
Col. 3
SO
0
0
0
so
0
0
0
-S14.263
-14,484
-12,161
-10,864
-SI 1,949
-11,378
-12.389
-15,632
Valuation Changes
on U.S. Reserve
Position
Net Interest
Income
(Col. 4+5+6)
Col.5
Cot. 4
CoL6
Total
(Col 7+8)
Col. 7
Col.9
Col. 8
SO
0
0
0
-SIS
148
144
139
S578
so
-S43
-S227
•316
-115
-444
-SI.102
SI33
so
S51
0
0
0
so
-474
-172
543
-S47
-163
-167
S492
-S5
11
5
-4
S7
S56
139
115
105
SIS
i
i
15
$34
-S467
-125
1,157
-119
-S449
-124
S446
1,158
-104
S480
S18
19
15
13
S6S
S580
S598
234
439
469
253
454
482
SI,722
S1.787
-SI65
-171
-146
-139
-S62I
SI47
-SI38
-128
-109
-109
-S484
-S87
-24
-2
0
-$245
-340
-117
-444
-SI, 146
539
-S40
2002
Ql: Oct-Dec01
Q2: Jan - Mar 02
Q3: Apr-June 02
Q4: July - Sept 02
-515,547
-14,875
-16,500
-17,635
so
0
0
0
-SI 5.547
-14,875
-16,500
-17,635
Total
S105
so
-82
-80
-88
83
81
103
0
0
0
-S337
S372
so
-S79
S97
91
82
78
so
-72
-67
-65
-S283
S348
so
2003
Ql: Oct-Dec 02
Q2: Jan - Mar 03
Q3: Apr - June 03
Q4: July - Sept 03
Total
-S18,152
-18,826
-18,737
-19.136
Note: Detail may not add to total due to rounding.
so
0
0
0
-S18.I52
-18,826
-18,737
-19,136
0
0
0
TABLE 1
Footnotes to Columns
Column 1: Total cumulative transactions under the U.S. Quota, including drawings by the I M F under the Letter of Credit ( 7 5 % portion ofthe U.S.
quota) and the transfers of reserve assets to the I M F (generally 2 5 % ofthe U.S. quota).
Column 2: Total cumulative dollar funding through loans to the IMF made by the U.S. under the Supplementary Financing Facility (SFF, in
1980), the General Arrangements to Borrow ( G A B , in FY1998) and the N e w Arrangements to Borrow ( N A B , in FY1999). A H U.S. loans under
the three facilities/arrangements have been repaid.
Column 3: Total cumulative U.S. transactions with the Fund (horizontal summation of columns 1 and 2).
Column 4: Total interest associated with total cumulative transactions shown in column 3. This includes interest paid on additional public
borrowing to fund day-to-day transactions under the Letter of Credit and occasional transfers under loan arrangements (SFF, G A B , N A B ) , as well
as interest income forgone due to the transfer of reserve assets to the I M F at the time of a quota increase. In order to provide resources under the
Letter of Credit or under loan arrangements, the Treasury borrows from the public via additional issuance in the Treasury market; average cost of
funds is used as a proxy for calculating the associated interest cost This portion ofthe total interest paid enters the U.S. budget as interest on the
public debt. For purposes of calculating forgone interest on the transfer of reserve assets to the IMF, the S D R interest rate is used.
Column 5: The U.S. earns interest on the non-gold portion of its reserve position in the IMF, This interest is called remuneration and, in
combination with an adjustment by the I M F related to burden-sharing, is paid by the I M F every quarter. If remuneration is paid in S D R s , it is paid
to the Exchange Stabilization Fund (ESF) and the E S F transfers the dollar equivalent to the Treasury General Fund. It is recorded in the budget as
an offsetting receipt from the public. If the United States took payment in dollars (which it does not n o w do), the payment would be in the form of
a decrease in the U.S. Letter of Credit and a counterpart increase in the U.S. reserve position.
Column 6: These amounts constitute the interest payments the United States has received on its loans to the IMF under the SFF, GAB, and NAB.
Column 7: Total net interest paid, forgone or received as a result of U.S. participation in the General Department of die IMF.
Column 8: The U.S. reserve position in the IMF is denominated in SDRs. The valuation gain (if positive) or loss (if negative) refers to the
exchange rate gain or loss on the reserve position due to changes in the dollar value ofthe S D R . For example, if the S D R appreciates/dollar
depreciates, then the dollar value ofthe reserve position rises and a valuation gain is recorded. This column would also include valuation gains or
losses experienced as a result of U.S. loans under the SFF, G A B and N A B .
Column 9: The total of net interest and valuation changes, obtained by summing column 7 and column 8.
1
Table 2
Net Interest and Valuation Changes Related to U.S. Participation in the I M F
- SDR Department U.S. Fiscal Year, Quarterly
( $ M U.S. Dollars)
Fiscal Year Ended
9/30
Dollar Value of
S D R Holdings
Col. 1
2002
Ql: Oct-Dec 01
Q 2 : Jan - Mar 02
Q3: Apr-June 02
Q 4 : July - Sept 02
Total
$10,783
10,809
11,645
11,710
2003
Q l : Oct-Dec 02
Q 2 : Jan - M a r 03
Q 3 : Apr-June 03
Q 4 : July - Sept 03
Total
$12,166
11,392
11,720
12,062
Dollar Value of
Cumulative S D R Net S D R Holdings
Allocation
(Col . 1 - Col. 2)
Col. 3
Col. 2
NotetDetail may not add to total due to rounding.
$6,157
6,109
6,519
6,481
$6,661
6,731
6,864
7,005
Valuation
Interest Calculations
Net S D R Holdings
$4,626
4,700
5,127
5,229
$5,505
4,662
4.857
5,057
Interest Expense
Associated with
Net Interest
Financing
Interest Income
Income
Cumulative U.S.
on Net S D R
i
S D R Transactions (Col. 4 +Col1.5)
Holdings
Col. 6
Col. 5
Col. 4
Valuation
Changes
Total
(Col. 6 4- Col. 7)
Col. 8
Col. 7
-$100
$0
4
3
4
$12
-$115
-36
315
-30
$134
-$115
-32
318
-26
$145
-$21
$5
-16
-15
-16
3
$146
58
92
100
$396
$151
63
95
104
$412
$26
27
30
29
-$25
$112
$26
20
18
20
$84
-24
-26
-24
-$68
3
4
$17
TABLE 2
Footnotes to C o l u m n s
Column 1; Total stock of U.S. holdings of Special Drawing Rights (SDRs) measured at the end of period, converted into dollars at the end of
period exchange rate. Source: IMF.
Column 2: Total stock of U.S. SDR allocations measured at the end of period, converted into dollars at the end of period exchange rate. Changes
in dollar value of S D R allocations reflect only exchange rate changes. Source: IMF.
Column 3: Total stock of U.S. SDR holdings minus allocations measured from end of period (Column 1 minus Column 2), converted into dollars
at the end of period exchange rate.
Column 4: Net interest earned on SDR holdings. Derived by subtracting charges on SDR allocations (the SDR end-of-quarter interest rate times
S D R allocations) from interest earned on S D R holdings (the S D R end-of-quarter interest rate times S D R holdings). A H interest is calculated as
compounding quarterly.
Column 5: Net effect on U.S. borrowing costs due to cumulative net SDR purchases or sales, using the simplifying assumption that transactions
are carried out in dollars. Derived by multiplying the dollar equivalent of cumulative net S D R purchases by the average cost of funds rate.
Interest is calculated on the basis of end-quarter holdings and compounded quarterly.
Column 6: Net Interest (Column 4 plus 5).
Column 7: Derived by subtracting the change in total SDR holdings from the change in the dollar equivalent of total SDR holdings (end-period to
end-period) divided by the end-period SDR/dollar exchange rate. The valuation gain (if positive) or loss (if negative) refers to the exchange rate
gain or loss on the reserve position due to changes in the dollar value ofthe S D R . For example, if the S D R appreciates/dollar depreciates, then the
impact on the dollar value of U.S. holdings of S D R s is positive, and a valuation gain is recorded.
Column 8: The total net interest and valuation changes (sum of Columns 6 and 7),
1
£edoral
i i n a n c i n g ba_i ik
W A S H \ C-, r • j K H r. 20 220
NEWS
FEDERAL FINANCING BANK
2003 PRESS RELEASE
December 2003
Brian Jackson, Chief Financial Officer, Federal Financing Bank (FFB)
announced the following activity for the month of December 2003.
FFB holdings of obligations issued, sold or guaranteed by other Federal
agencies totaled $30.8 billion on December 31, 2003, posting a decrease of
$1,279.0 million from the level on November 30, 2003. This net change was
the result of decreases in holdings of agency debt (U.S. Postal Service) of
$1,137.6 million, in holdings of agency assets of $125.0 million, and in net
holdings of government-guaranteed loans of $16.4 million. The FFB made
53 disbursements and received 14 prepayments during the month of
December. The FFB also extended the maturities of 153 loans guaranteed
by the Rural Utilities Service ("RUS") during the month.
Below are tables presenting FFB December 2003 loan activity and FFB
holdings as of December 31, 2003.
FEDERAL FINANCING BANK
December 2003 ACTIVITY
<fs ~l°F/fi
Borrower
Date
Amount of
Advance
Final Interest SemiMaturity Rate
Annual
A G E N C Y DEBT
US POSTAL SERVICE
U.S. Postal Service
12/1/03
$115,600,000.00 12/02/2003
1.091%
U.S. Postal Service
12/5/03
$388,600,000.00 12/8/2003
1.061%
U.S. Postal Service
12/8/03
$400,000,000.00 12/9/2003
1.061%
U.S. Postal Service
12/8/03
$183,400,000.00 12/09/2003
1.061%
U.S. Postal Service
12/9/03
$337,000,000.00 12/10/2003
1.051%
U.S: Postal Service
12/10/03
$165,300,000.00 12/11/2003
1.041%
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
GOVERNMENT-GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
San Francisco O B
12/1/03
$142,051.38
8/1/2005
1.996%
Foley Square Office Bldg.
12/10/03
$549,153.00 7/31/2025
4.875%
San Francisco O B
12/11/03
$379,157.72
8/1/2005
1.857%
San Francisco Bldg Lease
12/12/03
$2,575,404.83
8/1/2005
1.755%
San Francisco Bldg Lease
12/16/03
$3,083,052.06
8/1/2005
1.799%
San Francisco O B
12/29/03
$127,897.58
8/1/2005
1.728%
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
DEPARTMENT OF EDUCATION
Tuskegee Univ.
12/10/03
$1,388,497.96
1/2/2032
4.966%
Livingstone College
12/24/03
$263,248.71
7/1/2031
4.876%
Livingstone College
12/24/03
$57,125.00
7/1/2031
4.876%
Livingstone College
12/24/03
$34,563.05
7/1/2031
4.876%
Livingstone College
12/29/03
$151,948.41
7/1/2031
4.781%
Livingstone College
12/29/03
$53,834.59
7/1/2031
4.781%
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
SemiAnnual
RURAL UTILITIES SERVICE
Grand Valley Rural #873
12/1/03
$1,038,000.00 12/31/2036
5.028%
Quarterly
S. Illinois Power #819
12/1/03
$7,299,000.00 12/31/2030
4.924%
Quarterly
Plateau Electric Coop. #881 12/2/03
$2,000,000.00 12/31/2036
5.074%
Quarterly
1/3/2033
5.024%
Quarterly
East Kentucky Power #2019 12/4/03
$27,000,000.00
Kenergy Corp. #2068
12/4/03
$6,000,000.00 3/31/2004
0.952%
Quarterly
N e w Horizon Elec. #791
12/4/03
$1,686,000.00 3/31/2004
0.953%
Quarterly
N e w Horizon Elec. #791
12/4/03
$1,034,000.00 3/31/2004
0.953%
Quarterly
Oglethorpe Power #2023
12/5/03
$3,296,000.00 12/31/2025
4.652%
Quarterly
Oglethorpe Power #2025
12/5/03
$13,190,000.00 12/31/2025
4.652%
Quarterly
Tri-County Elec. T N #2066
12/5/03
$5,032,000.00
5.003%
Quarterly
Citizens Elec. #878
12/8/03
$4,000,000.00 12/31/2031
4.846%
Quarterly
Sangre D e Cristo Elec. #732 12/8/03
$500,000.00 3/31/2011
3.739%
Quarterly
Belfalls Elec. #542
12/10/03
$640,000.00
1/3/2034
5.046%
Quarterly
West Florida Electric #2047
12/10/03
$2,103,000.00 12/31/2037
5.041%
Quarterly
Midstate Communications
#780
12/11/03
$482,529.00 12/31/2018
4.203%
Quarterly
W o o d County Electric #826
12/12/03
$1,500,000.00 12/31/2036
4.997%
Quarterly
Maquoketa Valley #2012
12/15/03
$1,200,000.00 12/31/2036
4.973%
Quarterly
Medina Electric #2050
12/15/03
$1,000,000.00
1.307%
Quarterly
Interstate Tele #661
12/18/03
$1,213,000.00 12/31/2019
4.083%
Quarterly
Swan's Island Electric #203
12/20/03
$53,000.00 12/31/2036
4.847%
Quarterly
Virgin Islands Tel. #2089
12/20/03
$64,655,000.00 3/31/2004
0.893%
Quarterly
A d a m s Rural Electric #706
12/22/03
$644,000.00 3/31/2004
0.879%
Quarterly
Central Florida Elec. #521
12/22/03
1/3/2033
4.775%
Quarterly
Fleming-Mason Energy #644 12/22/03
$3,000,000.00 3/31/2004
0.879%
Quarterly
Farmers Telephone #476
12/22/03
$5,404,520.00 3/31/2004
1.004%
Quarterly
Grayson Rural Elec. #619
12/22/03
$1,000,000.00 3/31/2004
0.879%
Quarterly
Butler County Rural Elec. #
832
12/23/03
$1,400,000.00 12/31/2036
4.873%
Quarterly
Darien Telephone Co. #719 12/23/03
$650,000.00 3/31/2004
0.911%
Quarterly
4.627%
Quarterly
$4,094,000.00
1/3/2033
1/3/2005
Coop. Power Assoc. #722
12/24/03
$6,100,000.00
R E A Energy Cooperative
#772
12/24/03
$2,500,000.00 12/31/2035
4.934%
Quarterly
S. Indiana Rural Elec. #205
12/24/03
$600,000.00 12/31/2037
4.966%
Quarterly
S. Illinois Power #2020
12/24/03
4.879%
Quarterly
United Power Assoc. #721
12/29/03
4.586%
Quarterly
Cornbelt Power #565
12/30/03
1/3/2028
4.692%
Quarterly
$500,000.00 3/31/2009
3.257%
Quarterly
Sangre D e Cristo Elec. #732 12/30/03
$12,203,000.00
1/2/2029
1/3/2033
$5,700,000.00 12/31/2030
$510,000.00
"Adams Rural Electric #706
12/31/03
$496,567.68 3/31/2004
0.937%
Quarterly
*Adams Rural Electric #706
12/31/03
$496,780.53 3/31/2004
0.937%
Quarterly
*Amicalola Electric #664
12/31/03
$4,842,712.13 3/31/2004
0.937%
Quarterly
*Amicalola Electric #664
12/31/03
$6,726,062.29 3/31/2004
0.937%
Quarterly
*Atlantic Telephone M e m .
#80
12/31/03
$5,774,653.26 3/31/2004
0.937%
Quarterly
"Bailey County Elec. #856
12/31/03
$1,896,000.00 3/31/2004
0.937%
Quarterly
*Bailey County Elec. #856
12/31/03
$615,000.00 3/31/2004
0.937%
Quarterly
"Basin Electric #425
12/31/03
$12,577,017.90 3/31/2004
1.062%
Quarterly
*Basin Electric #2005
12/31/03
$3,000,000.00 3/31/2004
0.937%
Quarterly
"Big Sand Elec. #540
12/31/03
$753,357.83 3/31/2004
0.937%
Quarterly
"Big Sand Elec. #540
12/31/03
$565,018.37 3/31/2004
0.937%
Quarterly
"Big Sand Elec. #540
12/31/03
$944,588.02 3/31/2004
0.937%
Quarterly
"Big Sand Elec. #540
12/31/03
$2,196,862.83 3/31/2004
0.937%
Quarterly
"Big Sand Elec. #540
12/31/03
$2,744,378.19 3/31/2004
0.937%
Quarterly
*Blue Grass Energy #674
12/31/03
$1,935,851.16 3/31/2004
0.937%
Quarterly
*Blue Grass Energy #674
12/31/03
$4,932,953.81
3/31/2004
0.937%
Quarterly
"Brazos Electric #844
12/31/03
$4,432,000.00 3/31/2004
0.937%
Quarterly
*Brazos Electric #844
12/31/03
$5,000;000.00 3/31/2004
0.937%
Quarterly
*Brazos Electric #844
12/31/03
$5,000,000.00 3/31/2004
0.937%
Quarterly
*Brazos Electric #844
12/31/03
$5,000,000.00 3/31/2004
0.937%
Quarterly
*Brown County Elec. #687
12/31/03
$240,555.00 3/31/2004
0.937%
Quarterly
"Brown County Elec. #687
12/31/03
$577,332.03 3/31/2004
0.937%
Quarterly
*Brown County Elec. #687
12/31/03
$288,712.55 3/31/2004
0.937%
Quarterly
"Coast Elec. Power #787
12/31/03
$5,866,019.31
1/3/2005
1.282%
Quarterly
*Clark Energy Coop. #611
12/31/03
$2,833,764.04 3/31/2004
0.937%
Quarterly
*Clark Energy Coop. #611
12/31/03
$1,883,107.60 3/31/2004
0.937%
Quarterly
"Clark Energy Coop. #611
12/31/03
$4,202,525.54 3/31/2004
0.937%
Quarterly
"Clark Energy Coop. #611
12/31/03
$3,514,554.33 3/31/2004
0.937%
Quarterly
"Cumberland Valley $668
12/31/03
$2,545,747.35 3/31/2004
0.937%
Quarterly
"Cumberland Valley #668
12/31/03
$4,041,324.17 3/31/2004
0.937%
Quarterly
"Cooper Valley Tel. #648
12/31/03
$954,146.66 3/31/2004
0.937%
Quarterly
"Cooper Valley Tel. #648
12/31/03
$217,115.29 3/31/2004
0.937%
Quarterly
"Cotton Electric Coop #2038 12/31/03
$3,505,000.00 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$1,758,016.53
3/31/2004
4.989%
Quarterly
$404,979.83 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
"Darien Telephone Co. #719 12/31/03
$195,192.99 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$230,765.53 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$167,829.47 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$249,007.87 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$205,045.87 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$1,393,408.85 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$259,956.68 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$512,961.82 3/31/2004
0.937%
Quarterly
"Darien Telephone Co. #719 12/31/03
$373,632.52 3/31/2004
0.937%
Quarterly
"Delaware County Elec.
#682
12/31/03
$635,152.90 3/31/2004
0.937%
Quarterly
"East River Power #453
12/31/03
$367,048.70 3/31/2004
1.062%
Quarterly
"East River Power #453
12/31/03
$181,017.24 3/31/2004
1.062%
Quarterly
"East River Power #601
12/31/03
3/31/2004
0.937%
Quarterly
"East River Power #793
12/31/03
$620,148.47 3/31/2004
0.937%
Quarterly
"Fairfield Elec. #684
12/31/03
3/31/2004
0.937%
Quarterly
$5,000,000.00 3/31/2004
0.937%
Quarterly
$20,706.73 3/31/2004
1.062%
Quarterly
"Farmer's Rural Elec. #2046 12/31/03
$3,177,979.36
$3,111,567.66
"Farmer's Telephone #459
12/31/03
"Farmer's Telephone #459
12/31/03
$197,238.01
3/31/2004
1.062%
Quarterly
"Federal Rural Elec. #728
12/31/03
$487,432.40
1/3/2005
1.282%
Quarterly
12/31/03
$2,455,928.83 3/31/2004
0.937%
Quarterly
12/31/03
$1,322,423.19 3/31/2004
0.937%
Quarterly
12/31/03
$1,416,882.02 3/31/2004
0.937%
Quarterly
12/31/03
$2,078,093.62 3/31/2004
0.937%
Quarterly
12/31/03
$1,322,423.19
3/31/2004
0.937%
Quarterly
12/31/03
$2,865,464.64 3/31/2004
0.937%
Quarterly
12/31/03
$2,839,700.05 3/31/2004
0.937%
Quarterly
"Fleming-Mason Energy
#644
"Fleming-Mason Energy
#644
"Fleming-Mason Energy
#644
"Fleming-Mason Energy
#644
"Fleming-Mason Energy
#644
"Fleming-Mason Energy
#644
"Fleming-Mason Energy
#644
"Freeborn-Mower Coop.
#736
"Freeborn-Mower Coop.
#736
12/31/03
$725,866.85
3/31/2004
0.937%
Quarterly
12/31/03
$483,925.46
3/31/2004
0.937%
Quarterly
"Farmers Telephone #476
12/31/03
$9,344,327.19
3/31/2004
1.062%
Quarterly
"Farmers Telephone #476
12/31/03
$6,960,856.76
3/31/2004
1.062%
Quarterly
"FTC Communications #709 12/31/03
$2,487,490.86
3/31/2004
0.937%
Quarterly
"FTC Communications #709 12/31/03
$3;181;271.34 3/31/2004
0.937%
Quarterly
"Grady Electric #690
12/31/03
$3,062,953.31
3/31/2004
0.937%
Quarterly
"Grady Electric #746
12/31/03
$3,167,086.30 3/31/2004
0.937%
Quarterly
"Grayson Rural Elec. #619
12/31/03
$1,133,505.62 3/31/2004
0.937%
Quarterly
"Grayson Rural Elec. #619
12/31/03
$566,752.82 3/31/2004
0.937%
Quarterly
"Grayson Rural Elec. #619
12/31/03
$944,588.02 3/31/2004
0.937%
Quarterly
"Grayson Rural Elec. #619
12/31/03
$1,223,742.84 3/31/2004
0.937%
Quarterly
"Grayson Rural Elec. #619
12/31/03
$966,630.70 3/31/2004
0.937%
Quarterly
"Grayson Rural Elec. #619
12/31/03
$2,448,013.70 12/31/2030
4.695%
Quarterly
"Great River Energy #738
12/31/03
$13,290,810.82 12/31/2030
4.695%
Quarterly
"Great River Energy #738
12/31/03
$4,518,486.48 3/31/2004
0.937%
Quarterly
"Greenbelt Elec. #743
12/31/03
$1,705,217.25 3/31/2004
0.937%
Quarterly
"Greenbelt Elec. #743
12/31/03
$492,247.87 3/31/2004
0.937%
Quarterly
"Grundy Elec.Coop. #744
12/31/03
$1,218,110.12 3/31/2004
0.937%
Quarterly
"Grundy Elec.Coop. #744
12/31/03
$974,619.30 3/31/2004
0.937%
Quarterly
"Grundy Elec.Coop. #744
12/31/03
$496,700.88 3/31/2004
0.937%
Quarterly
"Harrison County #532
12/31/03
$940,746.66 3/31/2004
0.937%
Quarterly
"Harrison County #532
12/31/03
$846,672.01
3/31/2004
0.937%
Quarterly
"Harrison County #532
12/31/03
$947,093.57 3/31/2004
0.937%
Quarterly
"Harrison County #532
12/31/03
$1,544,388.09 3/31/2004
0.937%
Quarterly
"Harrison County #532
12/31/03
$1,662,722.20 3/31/2004
0.937%
Quarterly
12/31/03
$5,000,000.00 3/31/2004
0.937%
Quarterly
12/31/03
$2,000,000.00 3/31/2004
0.937%
Quarterly
"Inter-County Energy #592
12/31/03
$1,411,119.98 3/31/2004
0.937%
Quarterly
"Inter-County Energy #592
12/31/03
$1,881,493.33 3/31/2004
0.937%
Quarterly
"Inter-County Energy #592
12/31/03
$2,452,526.55 3/31/2004
0.937%
Quarterly
"Inter-County Energy #592
12/31/03
$208,753.94 3/31/2004
0.937%
Quarterly
"Inter-County Energy #850
12/31/03
$4,000,000.00 3/31/2004
0.937%
Quarterly
"Inter-County Energy #850
12/31/03
$2,000,000.00 3/31/2004
0.937%
Quarterly
"Ironton Telephone Co. #888 12/31/03
$3,235,942.00 6/30/2004
1.020%
Quarterly
"Ironton Telephone Co.
#2051
12/31/03
$2,956,000.00 6/30/2004
1.020%
Quarterly
"Jackson Energy #794
12/31/03
$3,922,293.86
3/31/2004
0.937%
Quarterly
"Jackson Energy #794
12/31/03
$2,941,720.40 3/31/2004
0.937%
Quarterly
"Jackson Energy #794
12/31/03
$4,608,695.30 3/31/2004
0.937%
Quarterly
"Hudson Valley Datanet
#833
"Hudson Valley Datanet
#833
"Jackson Energy #794
12/31/03
$1,961,146.94 3/31/2004
0.937%
Quarterly
"Jackson Energy #794
12/31/03
$2,451,433.67 3/31/2004
0.937%
Quarterly
"Jackson Energy #794
12/31/03
$1,961,206.42 3/31/2004
0.937%
Quarterly
"Jackson Energy #794
12/31/03
$7,301,010.38 3/31/2004
0.937%
Quarterly
"Johnson County Elec. #482 12/31/03
$1,509,098.13 3/31/2004
1.062%
Quarterly
"Licking Valley Elec. #522
12/31/03
$2,586,112.57 3/31/2004
0.937%
Quarterly
"Licking Valley Elec. #854
12/31/03
$2,000,000.00 3/31/2004
0.937%
Quarterly
"Lynches River Elec. #634
12/31/03
1/2/2007
2.372%
Quarterly
"Magnolia Electric #560
12/31/03
$4,711,164.57 3/31/2004
1.062%
Quarterly
"Medina Electric #622
12/31/03
1/3/2005
1.282%
Quarterly
"North Carolina R S A 3 Tel
#2009
12/31/03
$9,600,000.00 3/31/2004
0.937%
Quarterly
"New Horizon Elec. #791
12/31/03
$2,035,236.97 3/31/2004
0.937%
Quarterly
"New Horizon Elec. #791
12/31/03
$1,376,333.80 3/31/2004
0.937%
Quarterly
"Nolin Rural Elec. #528
12/31/03
$1,780,833.41
3/31/2004
0.937%
Quarterly
"Nolin Rural Elec. #577
12/31/03
$2,429,948.65 3/31/2004
0.937%
Quarterly
"Nolin Rural Elec. #577
12/31/03
$2,429,948.65 3/31/2004
0.937%
Quarterly
"Nolin Rural Elec. #840
12/31/03
$4,000,000.00 3/31/2004
0.937%
Quarterly
"Nolin Rural Elec. #840
12/31/03
$2,948,000.00 3/31/2004
0.937%
Quarterly
"Northstar Technology #811 12/31/03
$1,781,983.55 3/31/2004
0.937%
Quarterly
"Northstar Technology #811 12/31/03
$971,906.92 3/31/2004
0.937%
Quarterly
"Owen Electric #525
12/31/03
$1,884,120.22 3/31/2004
0.937%
Quarterly
"Owen Electric #525
12/31/03
$1,880,315.20 3/31/2004
0.937%
Quarterly
"Owen Electric #525
12/31/03
$948,653.13 3/31/2004
0.937%
Quarterly
"Owen Electric #525
12/31/03
$1,913,066.30 3/31/2004
0.937%
Quarterly
"Owen Electric #525
12/31/03
$1,949,222.28 3/31/2004
0.937%
Quarterly
"Pataula Electric #585
12/31/03
$529,247.22 12/31/2008
3.203%
Quarterly
"Pennyrile Elec. #513
12/31/03
$5,760,426.43 3/31/2004
1.062%
Quarterly
"Pennyrile Elec. #513
12/31/03
$5,452,933.01
3/31/2004
1.062%
Quarterly
"Polar
Telecommunications#2056
12/31/03
$1,346,000.00
1/3/2011
3.661%
Quarterly
$484,356.55
$792,972.44
"PRTCommunications #798 12/31/03
$4,723,423.58 3/31/2004
0.937%
Quarterly
"PRTCommunications #798 12/31/03
$1,770,546.12 3/31/2004
0.937%
Quarterly
"Runestone Electric Ass.
#886
12/31/03
$1,500,000.00 3/31/2004
0.937%
Quarterly
"San Miguel Electric #919
12/31/03
$7,173,258.78 3/31/2004
0.937%
Quarterly
"San Miguel Electric #919
12/31/03
$7,532,005.66 3/31/2004
0.937%
Quarterly
"Scenic Rivers Energy #677 12/31/03
$1,342,526.62
"Socorro Elec. #869
12/31/03
"Surry-Yadkin Elec. #534
2.372%
Quarterly
$1,652,000.00 12/31/2036
4.973%
Quarterly
12/31/03
$925,842.38 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #534
12/31/03
$925,842.38 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #534
12/31/03
$462,921.19 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #534
12/31/03
$925,842.38 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #534
12/31/03
$925,842.38 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #534
12/31/03
$941,022.09 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #534
12/31/03
$947,148.15 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #534
12/31/03
$2,187,998.42 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #852
12/31/03
$1,000,000.00 3/31/2004
0.937%
Quarterly
"Surry-Yadkin Elec. #852
12/31/03
$2,000,000.00 3/31/2004
0.937%
Quarterly
"Thumb Electric #767
12/31/03
$496,694.33 3/31/2004
0.937%
Quarterly
"Thumb Electric #767
12/31/03
$620,860.83 3/31/2004
0.937%
Quarterly
"United Elec. Coop. #870
12/31/03
$12,000,000.00 3/31/2004
0.937%
Quarterly
"United Elec. Coop. #870
12/31/03
$3,000,000.00 3/31/2004
0.937%
Quarterly
"Webster Electric #705
12/31/03
$2,136,915.05 3/31/2004
0.937%
Quarterly
"West Plains Elec. #501
12/31/03
$2,215,586.78 3/31/2004
1.062%
Quarterly
1/2/2007
Return To top
FEDERAL FINANCING BANK HOLDINGS
December 2003
(in millions of dollars)
December 31,
2003
Program
Agency Debt:
U.S. Postal Service
$2,250.0
October 31,
2003
Monthly Net Fiscal Year Net
Change Change
12/1/03 10/1/0312/31/03
12/31/03
($l 137.6)
($5,023.40)
$2,250.00
$3,387.60
$3,387.60
($1,137.6)
($5,023.40)
FmHA-RDIF
$680.00
$805.00
($125.00)
($125.00)
FmHA-RHIF
$1,830.0
$1,830.00
$0.00
$0.00
$4,270.20
$4,270.20
$0.00
$0.0
$6,780.20
$6,905.20
($125.00)
($125.00)
$1,634.90
$1,673.1
($38.20)
($53.50)
$105.80
$103.90
$81.90
$26.50
Subtotal*
Agency Assets:
Rural Utilities Service-CBO
Subtotal*
Government-Guaranteed Lending:
DOD-Foreign Military Sales
DoEd-HBCU+
DHUD-Comm.Dev.Block Grant
DHUD-Public Housing Notes
General Svces Administration+
DOI-Virgin Islands
DON-Ship Lease Financing
Rural Utilities Service
SBA-State/Local Develop Cos.
DOT-Section 511
$1.1
$1.3
($0.20)
($1.0)
$1,054.8
$1,054.8
$0.00
($78.50)
$2,142.60
$2,143.10
($0.50)
($4.60)
$9.60
$9.60
$0.00
$0.00
$607.50
$607.50
$0.00
$0.00
$16,149.60
$16,127.20
$22.40
$531.30
$71.80
$73.60
($1.80)
($5.50)
$3.00
$0.00
$0.00
$414.70
Subtotal*
$21,780.70
$3.l
$21,797.1
Grand total*
$30,810.90
$32,089.90
($16.40)
($1,279.00)
*figures may not total due to rounding; +does not include capitalized interest
Return To top
Return to 2003 Press Releases
Return to PRESS RELEASES
Last Updated on 1/22/03
($4,733.70)
JS-1056: Statement of Secretary John S n o w on N o v e m b e r Housing Starts and C P I
Page
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 16,2003
JS-1056
Statement of Secretary John Snow on November Housing Starts and CPI
I am encouraged to see today's strong report on new residential construction. The
continuing good performance of this sector is adding to the underlying fundamental
strength of the economy. 2003 should be the best year for home building since
1978.
I am also encouraged by today's Consumer Price Index report, which underscores
the potential for a long and sustainable recovery. W e are continuing to see
increased growth and job creation as the President's economic initiatives begin to
take effect, but there is more yet to be done. W e will continue our efforts until every
American looking for work can find a job.
http://www.treas.gov/press/releases/j s 105 6.htm
5/20/2005
JS-1057: Statement of Acting Assistant Secretary M a r k W a r s h a w s k y Regarding Industria... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 16, 2003
JS-1057
Statement of
Acting Assistant Secretary for Economic Policy Mark Warshawsky
Regarding Industrial Production
Today's report on industrial production shows robust growth in our nation's
factories. Manufacturing output increased 0.9 percent in November, the fastest rate
of growth since 1999. The report confirms the improvement suggested by the ISM
Manufacturing Index earlier this month. The gains in factory output were
widespread, with increases in the production of both consumer goods and business
equipment. High-tech production increased 4.1 percent and is up 27.5 percent
versus last year. Although more remains to be done, today's data add to the
evidence supporting the wisdom ofthe President's economic policies. Thanks to
these policies, businesses have been upgrading their equipment at a rapid pace
and the American economy has started creating jobs again.
http://www.treas.jiov/press/releases/js 1057.htm
5/20/2005
;SS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 16, 2003
2003-12-16-16-45-54-23030
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $86,558 million as of the end of that week, compared to $86,038 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
December 5, 2003
December 12, 2003
86,038
86,558
TOTAL
1. Foreign Currency Reserves]
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
8,113
14,594
22,707
8,211
14,601
22,812
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
13,265
2,932
16,197
13,408
2,933
16,341
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position
23,863
24,043
3. Special Drawing Rights (SDRs) 2
12,227
12,319
4. Gold Stock 3
11,043
11,043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 5, 2003
Euro
1. Foreign currency loans and securities
Yen
December 12, 2003
TOTAL
Euro
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
0
2.a. Short positions
2.b. Long positions
3. Other
III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 5, 2003
Euro
Yen
December 12, 2003
TOTAL
0
1. Contingent liabilities in foreign currency
Euro
Yen
TOTAL
0
l.a. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings ofthe Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
JS-1059: S n o w Congratulates U.S. Mint for Customer Service Recognition
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 18, 2003
JS-1059
Secretary John Snow Congratulates the U.S. Mint
for Being Named the
Top Federal Agency for Customer Service
I congratulate the United States Mint and Director Henrietta Holsman Fore for
receiving the highest score of all Federal agencies in the University of Michigan
Business School's 2003 American Customer Satisfaction Index. For eight years in
a row, the U.S. Mint has been a leader among government agencies and the
private sector in customer satisfaction by consistently offering its customers exciting
new products and exemplary customers care. The dedicated public servants ofthe
U.S. Mint have made their agency an example for all others to follow and I
commend them for their hard work.
http://www.treas.gov/press/releases/jsl059.htm
5/20/2005
JS-1060: O E C D Reaches Agreement on Environmental Guidelines for Export Credit Age... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 18, 2003
JS-1060
OECD Reaches Agreement on Environmental Guidelines for
Export Credit Agencies
Today, the Organization for Economic Cooperation and Development (OECD) gave
its formal approval of an agreement that calls for member export credit agencies
(ECAs) to evaluate the environmental impact ofthe projects that they are
considering. The agreement lays out the procedures to be followed when
performing an evaluation, and sets minimum environmental standards to be used.
"This agreement helps to create a level playing field for U.S. exporters," said John
Taylor, Treasury Under Secretary for International Affairs. "It will help to ensure
that projects receiving financing by export credit agencies will meet clear and
transparent environmental standards."
The agreement marks the conclusion of several years of intensive negotiations
among the members of this Paris-based multilateral organization, which has been
at the center of this issue since the mid-1990s. The U.S. highlighted the need for
E C A environmental guidelines by bringing the issue to the G-7 in 1997. In 1999,
the G-7 and O E C D Ministers both issued mandates for such work to begin.
Negotiations were carried out in the O E C D Trade Committee's Working Party on
Export Credits and Credit Guarantees (ECG), which has competence for technical
export credit issues.
In 2001, the ECG sought approval of a draft agreement which reflected substantial
movement on the part of its members. However, the U.S. rejected it for failure to
provide adequate assurances that appropriate environmental standards would be
used, and for failing to provide basic transparency. The current agreement reflects
significant progress in both areas.
The agreement also achieves a measure of consistency with MDB-supported
projects, which have long been evaluated for their environmental impact and which
are supported by the same shareholders comprising the O E C D . In addition, the
agreement is a significant step in leveling the playing field for U.S. exporters, w h o
have had to comply with Ex-lm Bank's rigorous environmental guidelines since
1995.
The
and
and
and
and
Department of the Treasury is the head of the U.S. delegation to the OECD
chief negotiator on all export credit issues. Treasury received strong support
active participation throughout the negotiations from the Department of State
the Ex-lm Bank, as well as the White House Council on Environmental Quality
the Environmental Protection Agency.
The following countries are members ofthe agreement: Australia, Austria, Belgium,
Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, N e w Zealand,
Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey,
United States, United Kingdom.
http://www.treas.gOv/press/releases/j s 1060.htm
5/20/2005
JS-1061: Treasury Issues Guidance T o Encourage Use O f N e w Innovative Health Saving... Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 22, 2003
JS-1061
Treasury Issues Guidance To Encourage Use Of New Innovative Health
Savings Accounts (HSAs)
The Treasury Department and the Internal Revenue Service today issued guidance
regarding the new and innovative Health Savings Accounts (HSAs). H S A s were
created by the Medicare bill signed by President Bush on December 8 th and are
designed to help individuals save for qualified medical and retiree health expenses
on a tax-free basis.
"Starting January 1, 2004, new innovative Health Savings Accounts will change the
way millions can save to meet their health care needs," said Treasury Secretary
John Snow. "We want Americans to be able to take advantage of H S A s as soon as
possible," stated Treasury Secretary John Snow. "An H S A is a good deal, and all
Americans should consider it. H S A s will help consumers have more choice in
meeting their health care needs, and w e are acting today to clear the way."
Any individual who is covered by a high-deductible health plan may establish an
HSA. Amounts contributed to an H S A belong to individuals and are completely
portable. Every year the money not spent would stay in the account and gain
interest tax-free, just like an IRA. Unused amounts remain available for later years
(unlike amounts in Flexible Spending Arrangements that are forfeited if not used by
the end ofthe year). Tax-advantaged contributions can be made in three ways: the
individual and family members can make tax deductible contributions to the H S A
even if the individual does not itemize deductions, the individual's employer can
make contributions that are not taxed to either the employer or the employee, and
employers with cafeteria plans can allow employees to contribute untaxed salary
through a salary reduction plan. Funds distributed from the H S A are not taxed if
they are used to pay qualifying medical expenses. To encourage saving for health
expenses after retirement, H S A owners between age 55 and 65 are allowed to
make additional catch-up contributions ($500 in 2004) to their HSAs.
HSAs are more flexible and are available to many more individuals than Archer
MSAs. The minimum required deductible ofthe high-deductible plan is lower, both
employees and employers can contribute, and the maximum contribution is now the
full amount of the deductible. Employees of large companies are now eligible.
Individuals with existing M S A s can either retain them or roll the amounts over into a
new HSA.
Today's guidance (Notice 2004-2) provides, in a question and answer format,
information about what H S A s are, who can have HSAs, how to establish them and
the basic rules for contributions and withdrawals from HSAs. While many ofthe
rules follow previous guidance issued for Archer MSAs, they also address new
issues specific to HSAs. In addition to the basic information about HSAs, the
guidance provides the following clarifications:
• Employer contributions to employee HSAs are not subject to FICA taxes.
• An H S A is allowed for employees covered by an employer self-insured
medical reimbursement plan with a qualifying high-deductible.
• Like MSAs, trustees or custodians are not required to determine if
withdrawals are used for medical expenses.
• Special rules are provided for determining the deductible for high-deductible
family coverage.
• Like MSAs, in addition to banks and insurance companies, persons may be
approved as H S A custodians under the IRA nonbank trustee rules - and
existing IRA or Archer M S A trustees or custodians are automatically
approved.
http://www.treas.gov/rjress/releases/js 1061 .htm
5/20/2005
JS-1061: Treasury Issues Guidance T o Encourage Use O f N e w Innovative Health Saving... Page 2 of 2
• While an HSA trustee or custodian that does not sponsor the highdeductible health plan m a y request proof or certification that someone is
eligible to contribute to the HSA, it is not required.
• Otherwise eligible individuals without earnings m a y contribute to an H S A including self-employed and unemployed.
Treasury and the IRS intend to issue additional guidance in the summer of 2004. To
that end, today's Notice requests comments concerning HSAs, including • What kinds of preventive care can be offered without a deductible in a highdeductible health plan?
• What is the relationship of H S A s to Flexible Spending Arrangements and
Health Reimbursement Arrangements?
• Are high-deductible plans used in conjunction with an H S A allowed to
impose a lifetime limit on benefits?
Treasury Assistant Secretary for Tax Policy Pam Olson stated, "We look forward to
receiving comments from the public on the issues that need to be resolved in order
to make H S A s a success."
Separately, the Federal Office of Personnel Management has already begun a
review of H S A s and their role within the FEHB. O P M will identify opportunities to
extend this new benefit to the 3.1 million members of the Federal team as they
make decisions on how to spend their hard-earned dollars on healthcare.
-30-
LINKS
• HSAs Technical Guidance
• H S A s Frequently Asked Questions
• H S A s Press Release
http://www.treas.gov/press/releases/isl 061 .htm
5/20/2005
js-10627Treasury Issues Capitalization Guidance
Page 1 o f 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 22, 2003
js-1062
Treasury Issues Capitalization Guidance
Today, the Treasury Department issued final regulations on capitalizing costs
incurred in acquiring or creating intangible assets. The regulations generally follow
the rules that were proposed in December of 2002 and in an advance notice of
proposed rulemaking released in January of 2002.
The IRS also released today a notice informing taxpayers that the Treasury
Department and the IRS intend to propose regulations that clarify the treatment of
expenditures to repair, improve or rehabilitate tangible property. The notice
identifies issues that the Treasury Department and the IRS may address in the
proposed regulations and requests comments on the specific rules and principles
that should be provided.
"In recent years, controversy regarding the capitalization of costs associated with
tangible and intangible assets has consumed substantial IRS and taxpayer
resources," stated Treasury Assistant Secretary for Tax Policy P a m Olson. "The
final regulations issued today provide clear and administrable rules that will provide
certainty to taxpayers regarding the treatment of costs associated with intangible
assets and will enable the IRS to fairly and efficiently administer the law. The notice
begins the process of providing similar certainty regarding the treatment of costs
associated with tangible assets."
To clarify the application of section 263(a) of the Internal Revenue Code, the final
regulations describe specific categories of expenditures incurred in acquiring or
creating intangible assets that taxpayers are required to capitalize. The final
regulations also describe certain types of enhancements to intangible assets that
are required to be capitalized. Expenditures incurred in acquiring, creating, or
enhancing intangible assets that are not described in the final regulations are not
required to be capitalized under section 263(a); however, another provision ofthe
Code may require that the capitalization of these expenditures.
The final regulations provide safe harbors and simplifying assumptions that permit
the current deduction of certain costs and reduce taxpayers' record-keeping burden
including a "12 month" rule for costs of certain intangible assets with relatively short
useful lives, "de minimis" rules for costs less than a specified dollar amount, an
employee compensation rule, and an overhead rule. In addition, the final
regulations permit a 15-year safe harbor amortization period for certain created
intangible assets that do not have a readily ascertainable useful life.
The Treasury Department and IRS plan to address in future guidance the treatment
of costs related to the development and implementation of computer software and
costs required to be capitalized in certain transactions including tax-free acquisitive
transactions and stock issuance transactions.
The text ofthe Final Regulations and the Advance Notice of Proposed Rulemaking
are attached. They will be published in the Federal Register in the next few days
and are subject to minor technical changes.
-30Related Documents:
http://www.treas.gov/press/releases/js 1062.htm
5/20/2005
js-1062: Treasury Issues Capitalization Guidance
Page 2 of 2
• Final Regs
• Notice
http://www.treas.gov/press/releases/jsl062.htm
5/20/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD ]
RIN 1545-BA00
Guidance Regarding Deduction and Capitalization of Expenditures
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that explain how section 263(a) of
the Internal Revenue Code (Code) applies to amounts paid to acquire or create
intangibles. This document also contains final regulations under section 167 ofthe
Code that provide safe harbor amortization for certain intangibles, and final regula
under section 446 of the Code that explain the manner in which taxpayers may deduct
debt issuance costs.
DATES: Effective Date: These regulations are effective RNSERT DATE OF FILING
OF THIS DOCUMENT WITH THE FEDERAL REGISTER].
Applicability Dates: For dates of applicability of the final regulations, see
§§1.167(a)-3(b)(4), 1.263(a)-4(o), 1.263(a)-5(m), and 1.446-5(d).
FOR FURTHER INFORMATION CONTACT: Andrew J. Keyso, (202) 622-4800 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
Part III — Administrative, Miscellaneous, a n d Procedural
Weighted Average Interest Rate Modification
Notice 2004-34
This notice provides guidance as to the determination of the weighted average interest
rate and the resulting permissible range of interest rates used to calculate current liability for the
purpose ofthe additional funding requirements under § 412(1) ofthe Internal Revenue Code and
the minimum full funding limitation of § 412(c)(7)(E) ofthe Code, the corresponding
requirements and limitation under §§ 302(c)(7)(E) and 302(d) of the Employee Retirement
Income Security Act of 1974 (ERISA). In addition, this notice sets forth the interest rate under §
4006(a)(3)(E)(iii)(V) of ERISA, which is needed in the determination of unfunded vested benefits
for purposes of determining premiums payable to the Pension Benefit Guaranty Corporation
(PBGC). This notice implements changes to the rules regarding those interest rates that were
enacted in section 101 ofthe Pension Funding Equity Act of 2004, P.L. 108- .
BACKGROUND AND PRIOR LAW
Under § 412(b)(5)(A) ofthe Code, the funding standard account (and items therein)
must be charged or credited with interest at the appropriate rate consistent with the rate or rates
of interest used under the plan to determine costs.
Section 412(b)(5)(B) provides special rules for the interest rate that is used to determine
a plan's current liability for purposes of § 412(1) and for purposes of the minimum full funding
limitation under § 412(c)(7)(E). In general, that interest rate must fall within a specified corridor
based on the weighted average of the rates of interest on 30-year Treasury constant maturities
during the 4-year period ending on the last day before the beginning of the plan year, as
published monthly in the Internal Revenue Bulletin. See Notice 88-73 (1988-2 C.B. 383).
Under Notice 2002-26 (2002-1 C.B. 743), the interest rate used in determining the weighted
average interest rate currently is based on the yield on the 30-year Treasury bonds maturing in
February 2031.
In general, § 412(l)(7)(C)(i)(ll) specifies that, for years after 1998, the interest rate used
to determine the deficit reduction contribution must be not more than 1 0 5 % ofthe weighted
average interest rate. A special rule for 2002 and 2003 w a s enacted in the Job Creation and
Worker Assistance Act of 2002 (Pub. L. No. 107-147, 116 Stat. 21) to provide for the deficit
reduction contribution under § 412(1) to be calculated using a corridor capped at 1 2 0 % ofthe
weighted average interest rate rather than 1 0 5 % ofthe weighted average interest rate.
PENSION FUNDING EQUITY ACT OF 2004
The Pension Funding Equity Act was enacted on April 10, 2004. Section
412(b)(5)(B)(ii)(lll) ofthe Code, which w a s added by section 101 ofthe Pension Funding Equity
Act, provides that, for plan years beginning in 2004 and 2005, the interest rate used to
determine current liability must not be above and must not be more than 10 percent below the
weighted average of the rates of interest on amounts invested conservatively in long-term
investment-grade corporate bonds during the 4-year period ending on the last day before the
beginning of the plan year. Under § 412(b)(5)(B)(ii)(lll), the Treasury Department must
prescribe a method for periodically determining the rates. These rates must be based on the
use of two or more indices that are in the top three quality levels available. T h e Treasury
Department must m a k e the permissible range, and the indices and methodology used to
determine the average rate, publicly available.
Section 412(l)(7)(C)(i)(IV), which was also added by the Pension Funding Equity Act,
provides that, for plan years beginning in 2004 and 2005, the interest rate used to determine
current liability for purposes of determining the deficit reduction contribution must be the s a m e
as the rate used under § 412(b)(5).
INTERIM GUIDANCE
This notice provides interim guidance on the determination of the weighted average
interest rate under § 412(b)(5)(B)(ii)(lll) ofthe C o d e and § 302(b)(5)(B)(ii)(lll) of ERISA. In
addition, this notice provides interim guidance as to the interest rate under § 4006(a)(3)(E)(iii)(V)
of ERISA, which is needed in the determination of unfunded vested benefits for purposes of
determining premiums payable to the P B G C . Taxpayers can rely on this interim guidance until
the publication of further guidance. Any further guidance will not apply to plan years beginning
before the publication of further guidance. The determination ofthe weighted average involves:
a specification ofthe indices; the determination ofthe rate of interest on amounts invested
conservatively in investment-grade corporate bonds (the "composite corporate bond rate"); and
the determination of a 4-year weighted moving average ofthe composite corporate bond rate
(the "corporate weighted average interest rate").
Specification of Indices
The following indices are designated for use in determining composite corporate bond
rates beginning with January 1997 and ending August 2000.
1. Citigroup High Grade Corporate Index (AAA/AA, 10+ Years)
2. Merrill Lynch U S Corporates A A - A A A Rated 10+ Years
3. Merrill Lynch U S Corporates A Rated 15+ Years
The following indices are designated for use in determining the composite corporate
bond rates beginning with September 2000 and continuing until further guidance is issued:
1. Citigroup High Grade Credit Index1 (AAA/AA, 10+ Years)
2. Merrill Lynch U S Corporates A A - A A A Rated 10+ Years
3. L e h m a n Brothers U S A Long Credit
All of these indices reflect interest rates on long-term corporate bonds that are in the top three
quality levels.
Composite Corporate Bond Rate
The composite corporate bond rate for a month is determined using the indices
1
The n a m e of the Citigroup High Grade Corporate Index was changed to the Citigroup High Grade Credit
Index in April 2001, when a new Citigroup High Grade Corporate Index was created.
designated in this notice. For each index designated for inclusion in determining the composite
corporate bond rate for a month, a monthly rate is determined based on the average ofthe daily
values for the yield to maturity for the bonds that are included in the index, as determined by the
financial service firm maintaining the index. The composite corporate bond rate for the month is
determined by computing the average of these monthly rates. Table 1 lists the composite
corporate bond rates for the months January 2000 through March 2004.
Corporate Weighted Average Interest Rate and Section 412(b)(5)(B)(ii)(lll) Permissible Range
The corporate weighted average interest rate under § 412(b)(5)(B)(ii)(lll) for a month is
determined by applying the weighting methodology set forth in Notice 88-73 to the composite
corporate bond rates for the 48 months preceding that month. Thus, in determining the 48month weighted average ofthe composite corporate bond rate, the composite corporate bond
rate for each of the months within the immediately preceding 12 months receives a weight of 4,
those that are 13-24 months in the past receive a weight of 3, those that are 25-36 months in
the past receive a weight of 2 and those that are 37 or more months before the determination
receive a weight of 1. The § 412(b)(5)(B)(ii)(lll) permissible range is 9 0 % to 1 0 0 % ofthe
corporate weighted average interest rate. Table 2 lists the corporate weighted average interest
rates and the permissible range for plan years beginning in the months January 2001 through
April 2004.
Lookback Rules
Under section 101(d)(2) of the Pension Funding Equity Act of 2004, for purposes of
applying section 412(l)(9)(B)(ii) and section 412(m)(1) ofthe C o d e (and section 302(d)(9)(B)(ii)
and section 302(m)(1) of ERISA) to plan years beginning after December 31, 2003, the
amendments m a d e by section 101 ofthe Pension Funding Equity Act of 2004 m a y be applied
as if such amendments have been in effect for all prior years. Thus, for example, for the plan
year beginning January 1, 2004, in determining whether the plan's funded current liability
percentage w a s at least 90 percent for two consecutive years of the previous three years under
section 412(l)(9)(B)(ii), the funded current liability percentage m a y be recalculated using the
corporate weighted average interest rate applicable for plan years beginning in January 2001,
2002, and 2003. Similarly, in determining whether a plan is subject to quarterly contributions
under section 412(m)(1) for the plan year beginning January 1, 2004, the funded current liability
percentage for 2003 m a y be recalculated using the corporate weighted average interest rate.
However, for purposes of computing the required installment under section 412(m)(4) for
plan years beginning in 2004, the required amount for plan years beginning in 2003 m a y not be
recalculated using the corporate weighted average interest rate. Instead, the required amount
for 2003 will continue to be determined based upon an interest rate which is within the range of
90 to 120 percent ofthe weighted average ofthe rate of interest on 30-year Treasury securities.
Monthly Publication of Rates
The IRS will publish by notice each month the composite corporate bond rate, the
corporate weighted average interest rate, and the § 412(b)(5)(B)(ii)(lll) permissible range. The
s a m e notice will specify a change in the group of indices that are taken into account in
determining the component corporate bond rate, and the manner they are taken into account, if
any such change takes place.
Reouest for C o m m e n t s
C o m m e n t s are requested regarding the determination of the composite corporate bond
rate set forth in this notice. Specifically, comments are requested regarding the appropriateness
ofthe indices that are used in the determination of this rate, whether other indices would be
more appropriate for this purpose, and the appropriateness of the weight given to each index.
Comments should be submitted by August 2, 2004, to CC:PA:LPD:RU (Notice 2004-34),
R o o m 5203, Internal Revenue Service, P O B 7604 Ben Franklin Station, Washington, D.C.
20044. C o m m e n t s m a y be hand delivered between the hours of 8 a.m. and 5 p.m., Monday
through Friday to CC:PA:LPD:RU (Notice 2004-34), Courier's Desk, Internal Revenue Service,
1111 Constitution Ave. N W , Washington D.C. Alternatively, comments m a y be submitted
electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov, with
"Notice 2004-34" in the subject line. All comments will be available for public inspection.
Drafting Information
The principal author of this notice is Tony Montanaro of the Employee Plans, Tax
Exempt and Government Entities Division. For further information regarding this notice, please
contact the Employee Plans' taxpayer assistance telephone service at 1-877-829-5500 (a tollfree number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through
Friday. Mr. Montanaro m a y be reached at 1-202-283-9714 (not a toll-free number).
Table 1
Composite Corporate Bond Rates
Composite Rates for:
2000
2001
2002
2003
January
February
March
7.94
7.84
7.87
7.34
7.21
7.08
6.92
6.86
7.10
6.07
5.90
5.89
April
May
June
7.84
8.27
8.05
7.28
7.28
7.17
7.03
6.99
6.76
5.91
5.42
5.24
July
August
September
7.93
7.82
7.87
7.13
6.95
7.05
6.74
6.57
6.27
5.77
6.19
5.95
October
November
December
7.85
7.82
7.51
6.91
6.82
7.07
6.47
6.30
6.18
5.91
5.86
5.81
Month
Table 2
Corporate Bond Weighted Average Interest Rates
For Plan Years
Beginning in:
Year Month
Corporate
Bond
Weighted
Permissible Range
Average
90%
100%
2001
2001
2001
2001
2001
2001
January
February
March
April
May
June
7.44
7.44
7.44
7.43
7.42
7.42
6.69
6.69
6.69
6.68
6.68
6.68
7.44
7.44
7.44
7.43
7.42
7.42
2001
2001
2001
2001
2001
2001
July
August
September
October
November
December
7.41
7.40
7.39
7.37
7.36
7.34
6.67
6.66
6.65
6.64
6.62
6.61
7.41
7.40
7.39
7.37
7.36
7.34
2002
2002
2002
2002
2002
2002
January
February
March
April
May
June
7.34
7.33
7.32
7.32
7.31
7.30
6.60
6.60
6.59
6.58
6.58
6.57
7.34
7.33
7.32
7.32
7.31
7.30
2002
2002
2002
2002
2002
2002
July
August
September
October
November
December
7.28
7.26
7.23
7.20
7.17
7.14
6.55
6.53
6.51
6.48
6.46
6.43
7.28
7.26
7.23
7.20
7.17
7.14
2003
2003
2003
2003
2003
January
February
March
April
May
7.11
7.07
7.03
6.98
6.94
6.40
6.36
6.33
6.29
6.25
7.11
7.07
7.03
6.98
6.94
2003 June
6.87
6.19
6.87
2003
2003
2003
2003
2003
2003
July
August
September
October
November
December
6.80
6.75
6.72
6.68
6.63
6.59
6.12
6.08
6.05
6.01
5.97
5.93
6.80
6.75
6.72
6.68
6.63
6.59
2004
2004
2004
2004
January
February
March
April
6.55
6.50
6.45
6.40
5.89
5.85
5.81
5.76
6.55
6.50
6.45
6.40
js-1063: Treasury U r g e s ' U N to Designate Terrorist Organizations Avoiding International... Page 1 of 2
PRESS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
December 22, 2003
js-1063
Treasury Urges UN to Designate Terrorist Organizations Avoiding
International Sanctions
Today, the United States and Saudi Arabian governments are asking the
U N 1267 Sanctions Committee to list Vazir, a non-governmental
organization located in Travnik, Bosnia, as an aka for Al Haramain-Bosnia.
In addition, w e are asking the Committee to add Safet Durguti, the
representative of this organization, to their list of persons and entities tied
to al-Qaida, subject to international sanctions under U N S C R s 1256, 1333,
and 1390.
In addition, the United States is designating Hochburg AG as an aka for BA
Taqwa. B A Taqwa w a s designated by the U.S. and added to the U N 1267
Sanctions Committee in 2002 because Youssef Nada, a Specially
Designated Global Terrorist, had a controlling interest in B A Taqwa. Nada
maintains an ongoing interest in the liquidation of Hochburg.
"These designations signal that we continue to track terrorist targets and
designated persons w h o attempt to evade the international sanctions
regime," stated Deputy Assistant Secretary for Terrorist Financing Juan
Zarate. "It further indicates that international cooperation on all fronts is a
necessary and ongoing component ofthe long-term campaign against
terrorist financing."
BACKGROUND INFORMATION
Vazir/Durguti
On March 13, 2002, the UN 1267 Sanctions Committee listed the Bosnian
branch of Al Haramain, a Saudi-based charity, as an organization with ties
to al-Qaida, subject to sanctions under U N S C R s 1267, 1333, and 1390.
This branch office w a s submitted to the U N 1267 Sanctions Committee
jointly by the United States and the government of Saudi Arabia. (The U.S.
Government designated Al-Haramain-Sarajevo, Bosnia for asset-freeze
pursuant to U.S. Executive Order 13224 on March 11, 2002.)
The U.S. Government has information establishing that Al Haramain
resumed operation in Travnik, Bosnia under a new name, Vazir. After the
Bosnia branch of Al Haramain w a s designated in March 2002, Al Haramain
officials closed its Bosnian operations. Officials in Bosnia, persuaded
senior Al Haramain officials to reopen the organization under a different
n a m e in Travnik, Bosnia.
The new non-governmental organization, Vazir, was founded in May 2003,
and its leadership and mandates have been established since that time.
Vazir established its headquarters in a business space formerly used by Al
Haramain. The Ministry of Justice and Administration for the Central
Bosnian canton registered Vazir on June 11, 2003, as an association for
sport, culture, and education. The office opened under the n a m e Vazir in
early August 2003.
Safet Durguti was appointed as the representative of Vazir. The Al
http://www.treas.gov/press/releases/js 1063.htm 5/20/2005
Js-1063: Treasury Urges U N to Designate Terrorist Organizations Avoiding International... Page 2 of 2
Haramain and Vazir legal, banking and registration documentation all have
Durguti's involvement in common. Durguti re-opened the Vazir office in the
same location as the former office of Al Haramain.
Hochburg
Hochburg, AG ("Hochburg"), located in Vaduz, Liechtenstein, is the
successor organization to B A Taqwa for C o m m e r c e and Real Estate
Company Limited ("BA Taqwa"), an entity previously named a Specially
Designated Global Terrorist ("SDGT") on August 29, 2002 by the U.S.
Department ofthe Treasury. The U N 1267 Sanctions Committee added
B A Taqwa to its consolidated asset-freeze list on September 3, 2002.
The official corporate registry of Liechtenstein indicates that BA Taqwa
(registration number 245/15) was renamed Hochburg A G on January 28,
Youssef Nada, an S D G T whose controlling interest in B A Taqwa resulted
in its initial designation, maintains an ongoing interest in the liquidation of
Hochburg. Nada was one of two liquidators for the company as of June 2,
2002. Nada w a s designated an S D G T on November 6, 2001. [Note:
Liechtenstein has since removed Nada from his position as liquidator of
Hochburg.]
Hochburg and BA Taqwa share the same business registration number.
Publicly available commercial reporting substantiates Hochburg's status as
B A Taqwa's successor. This reporting lists Nada as one ofthe liquidators
of Hochburg and provides a business registration number identical to that
of B A Taqwa (245/15).
-30-
http://www.treas.gov/press/releases/js 1063 .htm
5/20/2005
Js-1064: Treasury Issues Final Research Credit Regulations
P a g e 1 of 2
PRLSS ROOM
F R O M THE OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 22, 2003
js-1064
Treasury Issues Final Research Credit Regulations
Today the Treasury Department and the IRS issued final regulations for the
research credit. These regulations provide rules for determining which
research activities are eligible for the credit. The Treasury Department and
the IRS also issued a notice requesting additional c o m m e n t s on the
proposed rules for internal-use software.
"These regulations are an important step towards resolving the uncertainty
that has surrounded the research credit. They provide clearer rules to
m a k e it less burdensome for taxpayers to claim the credit and easier for the
IRS to administer," stated Treasury Assistant Secretary for Tax Policy P a m
Olson. "At the s a m e time, the regulations are flexible enough to address
the wide range of research activities being conducted in the U.S. today.
They will help ensure that the credit continues to serve its purpose of
supporting research conducted in the U.S."
The regulations issued today replace regulations that were issued in
January 2001. Shortly after the January 2001 regulations were issued, the
Treasury Department and the IRS began a review of those regulations and
solicited additional public comments. Consistent with the regulations
proposed in December 2001, today's final regulations reflect significant
changes to the provisions relating to the statutory requirement that
qualifying research be "undertaken for the purpose of discovering
information which is technological in nature." In addition, the regulations
provide additional guidance regarding the statutory requirement that
qualifying research constitute a "process of experimentation."
Treasury and IRS did not finalize today the rules relating to software that is
developed by a taxpayer primarily for the taxpayer's internal use, often
referred to as internal-use software. T o qualify for the research credit,
internal-use software must satisfy additional requirements. Since 1997, the
Treasury Department and the IRS have issued a series of proposed and
final regulations addressing both the definition of internal-use software and
the additional qualification requirements for internal-use software. T h e
Treasury Department and the IRS have concluded that additional public
c o m m e n t s would be useful before the internal-use software rules are
finalized. Consequently, the Treasury Department and the IRS are
requesting additional public c o m m e n t s to ensure that final rules address
comprehensively all issues raised by internal-use software.
"The world has changed significantly since the statutory provision for
internal-use software w a s enacted in 1986," Assistant Secretary Olson
continued. "A number of important issues still must be resolved before w e
can issue final regulations that both carry out the statute's purpose and
provide clear and meaningful rules for software development today.
Although our goal w a s to finalize regulations for all aspects of the research
credit this year, it is more important for us to have the rules right.
Consequently, w e are requesting further input from the public on internaluse software before w e m o v e forward."
The public is invited to submit comments concerning a definition of internaluse software that appropriately reflects the statute and legislative history
can be readily applied by taxpayers and readily administered by the IRS
http://www.treas.gov/press/releases/jsl 064.htm
5/20/2005
js-1064: Treasury Issues Final Research Credit Regulations
Page 2 of 2
and is flexible enough to provide continuing application into the future. The
notice states that while the Treasury Department and the IRS are
considering these comments, taxpayers m a y rely on either the final
regulations issued in January 2001 or the proposed regulations issued in
December 2001 for rules for internal-use software. The Notice requests
commentators to address whether final regulations for internal-use
software should have any retroactive effect.
The Treasury Department and the IRS believe that today's guidance on the
research credit will facilitate the resolution of a number of contentious
issues that have consumed considerable taxpayer and IRS resources. The
Treasury and the IRS expect that the final regulations will provide
taxpayers and the IRS an opportunity to resolve disputes over the research
credit in a timely manner. This will allow the IRS to devote compliance
resources to more productive areas.
The texts ofthe final regulations and the advanced notice of proposed
rulemaking are attached. They will be published in the Federal Register in
the next few days and are subject to minor technical changes.
-30Related Documents:
• Final Regulations
• Advanced Notice of Proposed Rulemaking
http://www.treas.gov/press/releases/jsl 064.htm
5/20/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-112991-01]
RIN 1545-AY82
Credit for Increasing Research Activities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations relating to
the definition of qualified research under section 41(d) for
the credit for increasing research activities. These final
regulations reflect changes to section 41(d) made by the Tax
Reform Act of 1986.
DATES: Effective Dates: These regulations are effective
[INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE FEDERAL
REGISTER].
Applicability Dates: For dates of applicability of these
regulations, see Effective Dates under SUPPLEMENTARY
INFORMATION.
FOR FURTHER INFORMATION CONTACT: Nicole R. Cimino at (202)
622-3120 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
2
On December 2, 1998, the Treasury Department and the IRS
published in the Federal Register (63 FR 66503) a notice of
proposed rulemaking (REG-10570-97, 1998-2 C.B. 729) under
section 41 (1998 proposed regulations) relating to the credit
for increasing research activities (research credit). The
1998 proposed regulations addressed, in relevant part, (1) the
definition of qualified research under section 41(d), (2) the
application of the exclusions from the definition of qualified
research, and (3) the application of the shrinking-back rule.
Comments responding to the 1998 proposed regulations were
received and a public hearing was held on April 29, 1999.
On January 3, 2 001, the Treasury Department and the IRS
published in the Federal Register (66 FR 280) final
regulations relating, in relevant part, to the definition of
qualified research under section 41(d) (TD 8930). In response
to taxpayer concerns regarding TD 8 930, on January 31, 2001,
the Treasury Department and the IRS published Notice 2001-19
(2001-10 I.R.B. 784), announcing that the Treasury Department
and the IRS would review TD 8930 and reconsider comments
previously submitted in connection with the finalization of TD
8930. Notice 2001-19 also provided that, upon the completion
of the review, the Treasury Department and the IRS would
announce changes to the regulations, if any, in the form of
3
proposed regulations.
On December 26, 2001, the Treasury Department and the IRS
published in the Federal Register (66 FR 66362) a notice of
proposed rulemaking (REG-112991-01) reflecting the Treasury
Department and the IRS' review of TD 8930 (2001 proposed
regulations). Comments responding to the 2 001 proposed
regulations were received and a public hearing was held on
March 27, 2002. After considering the comments received and
the statements made at the public hearing, portions of the
2001 proposed regulations are adopted as revised by this
Treasury Decision.
Explanation of Provisions
This document amends 26 CFR part 1 to provide revised
rules for the research credit under section 41. These final
regulations generally retain the provisions of the 2001
proposed regulations but clarify the provisions relating to
the requirement in section 41(d)(1)(C) that qualified research
be research "substantially all of the activities of which
constitute elements of a process of experimentation." These
final regulations, however, do not contain final rules for
research with respect to computer software "which is developed
by (or for the benefit of) the taxpayer primarily for internal
use by the taxpayer" for purposes of section 41(d)(4)(E).
4
Process of Experimentation -- In General
The Tax Reform Act of 1986, Public Law 99-514 (100 Stat.
2085)(the 1986 Act), which narrowed the definition of the term
qualified research, amended the definition of qualified
research by adding a process of experimentation requirement.
Section 41(d)(1) provides that in order to constitute
qualified research, substantially all of the activities of the
research must constitute elements of a process of
experimentation related to a new or improved function,
performance, or reliability or quality. The legislative
history to the 1986 Act explained that "[t]he determination of
whether research is undertaken for the purpose of discovering
information that is technological in nature depends on whether
the process of experimentation utilized in the research
fundamentally relies on principles of the physical or
biological sciences, engineering, or computer science." H.R.
Conf. Rep. No. 99-841, at 11-71 (1986). The legislative
history further explained that the term process of
experimentation means, "a process involving the evaluation of
more than one alternative designed to achieve a result where
the means of achieving that result is uncertain at the
outset." Id., at 11-72. In addition, a process of
experimentation may involve developing one or more hypotheses,
5
testing and analyzing those hypotheses (through, for example,
modeling or simulation), and refining or discarding the
hypotheses as part of a sequential design process to develop
the
overall component. Id.
The 1998 proposed regulations defined a process of
experimentation as "a process to evaluate more than one
alternative designed to achieve a result where the means of
achieving that result are uncertain at the outset." Further,
the 1998 proposed regulations specified that a process of
experimentation is a four-step process requiring that the
taxpayer: (i) develop one or more hypotheses designed to
achieve the intended result; (ii) design a scientific
experiment (that, where appropriate to the particular field of
research, is intended to be replicable with an established
experimental control) to test and analyze those hypotheses
(through, for example, modeling, simulation, or a systematic
trial and error methodology); (iii) conduct the experiment and
record the results; and (iv) refine or discard the hypotheses
as part of a sequential design process to develop or improve
the business component. Commentators generally objected to
this prescribed four-step test arguing that it would not be
appropriate for evaluating the qualification of certain
6
commercial and industrial research activities.
In response to these comments, the Treasury Department
and the IRS in TD 8 93 0 provided that taxpayers conducting a
process of experimentation may, but were not required to.
engage in the four-step process described in the 1998 proposed
regulations, but eliminated, for this purpose, the specific
recordation requirement. (As an addition to the general
recordkeeping requirement under section 6001, TD 8930 instead
included a contemporaneous documentation requirement that was
intended to be less burdensome than the specific recordation
requirement. The contemporaneous documentation requirement in
TD 8930 was eliminated in the 2001 proposed regulations.)
Consistent with the legislative history, however, TD 8930
retained the underlying process of experimentation requirement
in the 1998 proposed regulations by providing that a process
of experimentation "is a process to evaluate more than one
alternative designed to achieve a result where the capability
or method of achieving that result is uncertain at the
outset."
The 2001 proposed regulations further clarified the
definition of a process of experimentation and provided, in
relevant part, that "a process of experimentation is a process
designed to evaluate one or more alternatives to achieve a
7
result where the capability or the method of achieving that
result, or the appropriate design of that result, is uncertain
as of the beginning of the taxpayer's research activities."
More specifically, however, the general requirement was
modified in the 2001 proposed regulations to provide, first,
that "a process of experimentation is a process designed to
evaluate one or more alternatives to achieve a result."
(Emphasis added). The 2001 proposed regulations also provided
that a process of experimentation may exist if a taxpayer
performs research to establish the appropriate design of a
business component even when the capability and method for
developing or improving the business component are not
uncertain. The 2001 proposed regulations further stated that
a taxpayer's activities do not constitute elements of a
process of experimentation where the capability and method of
achieving the desired new or improved business component, and
the appropriate design of the desired new or improved business
component, are readily discernible and applicable as of the
beginning of the taxpayer's research activities so that true
experimentation in the scientific or laboratory sense would
not have to be undertaken to test, analyze, and choose among
viable alternatives. Finally, the 2001 proposed regulations
emphasized that the determination of whether a taxpayer has
8
engaged in a process of experimentation was dependent on the
facts and circumstances of the taxpayer's research activities
and, for this purpose, contained three non-dispositive and
non-exclusive factors that tend to indicate that a taxpayer
has engaged in a process of experimentation.
In response to the 2001 proposed regulations, a number of
commentators expressed concern with the rules for the process
of experimentation requirement, and, in particular, stated
that the rules and terms used (including uncertainty,
appropriate design, and readily discernible and applicable)
did not provide clear guidance for the requirement. More
specifically, commentators stated that the term readily
discernible and applicable was highly subjective in nature,
and thus arguably could be construed as a variant of the
discovery test of TD 8930. In addition, one commentator
expressed concern regarding the meaning and scope of the term
uncertain and suggested adding examples illustrating the
factors that tend to indicate that a taxpayer has engaged in a
process of experimentation. Another commentator also noted
that the 2001 proposed regulations appeared to allow the
inclusion of all design costs as qualified research
expenditures to the extent that the appropriate design of the
desired result is never certain at the outset of the typical
9
design process.
The Treasury Department and the IRS continue to believe
that the process of experimentation test requires an
evaluation of the facts and circumstances of a taxpayer's
research activities. As reflected by the changes made in the
2001 proposed regulations, this requirement is not intended to
be inflexible or overly narrow. Nevertheless, the Treasury
Department and the IRS continue to believe that the
requirement in the 2001 proposed regulations that a process of
experimentation is "a process designed to evaluate one or more
alternatives to achieve a result" (emphasis added) implies
that research activities must contain certain core elements in
order to constitute a process of experimentation within the
meaning of section 41(d)(1)(C). These final regulations,
therefore, make the following clarifications relating to the
process of experimentation requirement in the 2001 proposed
regulations.
Process of experimentation -- requirements
The final regulations retain, but further clarify, the
requirement in the 2001 proposed regulations that "a process
of experimentation is a process designed to evaluate one or
more alternatives to achieve a result where the capability or
the method of achieving that result, or the appropriate design
10
of that result, is uncertain as of the beginning of the
taxpayer's research activities." Further, the final
regulations emphasize that the taxpayer's activities must be
directed at resolving uncertainty regarding the taxpayer's
development or improvement of a business component, and that
the process of experimentation must fundamentally rely on the
principles of the physical or biological sciences,
engineering, or computer science in attempting to resolve the
uncertainty. Although these concepts are stated explicitly in
the 1986 legislative history and are implicit in the statute,
they may not have been given appropriate or necessary weight
in prior proposed or final guidance on the process of
experimentation requirement.
The final regulations, therefore, set out what the
Treasury Department and the IRS have concluded to be the core
elements of a process of experimentation for purposes of the
research credit. As noted above and consistent with the
statute's wording which requires purposeful activity (i.e.,
"undertaken for the purpose of discovering information"), a
taxpayer is required to identify the uncertainty regarding the
development or improvement of a business component that is the
object of the taxpayer's research activities. A taxpayer is
also required to identify one or more alternatives intended to
11
eliminate that uncertainty. Additionally, a taxpayer is
required to identify and to conduct a process of evaluating
the alternatives. The final regulations provide that such a
process may involve, for example, modeling, simulation, or a
systematic trial and error methodology.
The final regulations further provide that a process of
experimentation "must be an evaluative process and generally
should be capable of evaluating more than one alternative."
(Emphasis added). Although the identification and evaluation
of more than a single alternative is not required to satisfy
the process of experimentation requirement, the Treasury
Department and the IRS believe that a taxpayer's activities,
in order to qualify for the research credit, generally should
be capable of evaluating more than one alternative and, in any
event, must be designed to evaluate the alternative, or
alternatives, being considered.
The final regulations state that the mere existence of
uncertainty regarding the development or improvement of a
business component does not indicate that all of a taxpayer's
activities undertaken to achieve that new or improved business
component constitute a process of experimentation, even if the
taxpayer, in fact, does achieve the new or improved business
component. The Treasury Department and the IRS believe that
12
the inclusion of a separate process of experimentation
requirement in the statute makes this proposition clear.
However, the Treasury Department and the IRS have included
this clarification in the final regulations out of concern
that taxpayers have not been giving sufficient weight to the
requirement that a taxpayer engage in a process designed to
evaluate one or more alternatives to achieve a result where
the capability or the method of achieving that result, or the
appropriate design of that result, is uncertain as of the
beginning of the taxpayer's research activities. In
particular, this clarification is intended to indicate that
merely demonstrating that uncertainty has been eliminated
(e.g., the achievement of the appropriate design of a business
component when such design was uncertain as of the beginning
of a taxpayer's activities) is insufficient to satisfy the
process of experimentation requirement. A taxpayer bears the
burden of demonstrating that its research activities
additionally satisfy the process of experimentation
requirement.
As noted above, all of the facts and circumstances of a
taxpayer's research activities are taken into account to
determine whether the taxpayer identified uncertainty
concerning the development or improvement of a business
13
component, identified one or more alternatives intended to
eliminate that uncertainty, and identified and conducted a
process of evaluating the alternatives. Although the final
regulations set out the core elements of a process of
experimentation, how a taxpayer's qualified research
activities will reflect these core elements will depend on the
facts and circumstances. These core elements will not
necessarily occur in a strict, sequential order. A process of
experimentation is an evaluative process, and as such, often
involves refining throughout much of the process the
taxpayer's understanding of the uncertainty the taxpayer is
trying to address, modifying the alternatives being evaluated
to eliminate that uncertainty, or modifying the process used
to evaluate those alternatives.
Accordingly, the final regulations do not provide
detailed guidance as to how the regulatory provisions are to
be applied to a given factual situation. Rather, the Treasury
Department and the IRS have concluded that the application of
these provisions will depend on the specific activities being
claimed by a taxpayer as qualified research, the nature of the
taxpayer's business and industry, and the uncertainties being
addressed by the taxpayer's research activities. The Treasury
Department and the IRS believe that additional, industry-
14
specific guidance may be appropriate and request comments on
the form of such guidance.
The final regulations do not include the rule contained
in the 2001 proposed regulations that a taxpayer's activities
do not constitute a process of experimentation where the
capability and method of achieving the desired new or improved
business component, and the appropriate design of the desired
new or improved business component, are readily discernible
and applicable as of the beginning of the taxpayer's research
activities. A number of commentators expressed concern that
this rule was too vague and susceptible to conflicting
interpretations. In light of the clarifications made in these
final regulations, the Treasury Department and the IRS have
concluded that this rule is no longer necessary because such
activities do not constitute a process of experimentation
under the final regulations.
As noted above, the 2001 proposed regulations do not
contain a specific recordkeeping requirement beyond the
requirements set out in section 6001 and the regulations
thereunder. No change regarding recordkeeping is being made
in these final regulations. The clarifications being made to
the process of experimentation requirement do not impose any
recordkeeping requirement on taxpayers beyond the requirements
15
set out in section 6001 and the regulations thereunder.
Process of experimentation -- substantially all requirement
The 2001 proposed regulations retained the rule in TD
8930 that the "substantially all" requirement of section
41(d)(1)(C) is satisfied only if 80 percent or more of the
research activities, measured on a cost or other consistently
applied reasonable basis (and without regard to §1.412(d) (2)), constitute elements of a process of experimentation
for a purpose described in section 41(d)(3). This requirement
is applied separately to each business component.
The Treasury Department and the IRS requested comments on
the application of the substantially all rule and, in
particular, whether research expenses incurred for nonqualified purposes (i.e., relating to style, taste, cosmetic,
or seasonal design factors) are includible in the credit
computation provided that substantially all of the research
activities constitute elements of a process of experimentation
for a qualified purpose. After consideration of the comments
received, the Treasury Department and the IRS have concluded
that the substantially all requirement can be satisfied even
if some portion of a taxpayer's activities are not for a
qualified purpose.
16
Accordingly, these final regulations clarify the
substantially all rule and provide that the substantially all
requirement is satisfied if 20 percent or less of a taxpayer's
research activities do not constitute elements of a process of
experimentation for a purpose described in section 41(d)(3),
so long as these remaining activities satisfy the requirements
of section 41(d)(1)(A) and are not otherwise excluded under
section 41(d)(4). Example (6) of §1.41-4 (a) (8) of the 2001
proposed regulations has been modified to illustrate the
application of this rule, and appears as example (4) in these
final regulations.
Other Issues
Patent safe harbor
Section 1.41-4(a) (3) (iii) of the 2001 proposed
regulations generally provided that the issuance of certain
patents is conclusive evidence that a taxpayer has discovered
information that is technological in nature that is intended
to eliminate uncertainty concerning the development or
improvement of a business component. Some commentators
requested that this patent safe harbor be expanded to cover
all requirements contained in sections 41(d)(1) and (3).
After consideration of these comments, and in light of the
17
clarifications being made in these final regulations to the
provisions relating to the process of experimentation
requirement, the Treasury Department and the IRS continue to
believe that the patent safe harbor is appropriately limited
and, therefore, have not changed the patent safe harbor
provision.
Shrinking-back rule
Some commentators expressed concern that the language of
the shrinking-back rule in §1.41-4(b)(2) of the 2001 proposed
regulations implied that not all of a taxpayer's qualified
research expenses would be eligible for the research credit as
a result of the application of the rule. This provision has
been revised in these final regulations to clarify that the
rule is not intended to exclude qualified research expenses
from the credit, but rather is intended to ensure that
expenses attributable to qualified research activities are
eligible for the research credit for purposes of section
41(d)(1).
Research after commercial production
Some commentators requested additional clarification
regarding the scope of the research after commercial
production, adaptation, and duplication exclusions set out in
section 41(d)(4)(A), (B) and (C), and §1.41-4(c)(2), (3) and
18
(4) of the 2001 proposed regulations. After consideration of
these comments, the Treasury Department and the IRS believe
that the multitude of factual situations to which these
exclusions might apply make it impractical to provide
additional clarification that is both meaningful and of broad
application. The Treasury Department and the IRS believe
these three specific exclusions do not cover research
activities that otherwise satisfy the requirements for
qualified research. Taxpayers, however, should carefully
review (including, as appropriate, the application of the
shrinking-back rule) research activities that might otherwise
fall within these exclusions to ensure that only eligible
activities are being included in their credit computations.
One commentator expressed concern that the language of
§1.41-4(c)(2)(iv), relating to the clinical testing of
pharmaceutical products, could exclude from credit eligibility
clinical trials performed under an arrangement where the Food
and Drug Administration has granted conditional approval for a
pharmaceutical product contingent upon the results of
additional clinical trials. Another commentator expressed
concern that the language would exclude otherwise qualifying
activities because the research was not required to be
approved by the Food and Drug Administration. Section 1.41-
19
4(c)(2)(iv) is not a rule of exclusion. As stated above, the
Treasury Department and the IRS believe that the research
after commercial production exclusion (as well as the
adaptation and duplication exclusions) do not cover research
activities, including these additional clinical trials, so
long as such trials satisfy the requirements for qualified
research.
Gross receipts
These final regulations retain the broad definition of
gross receipts contained in TD 8930. In response to Notice
2001-19, a number of commentators reiterated earlier comments
that this definition was overly broad. As stated in the
preamble to the 2001 proposed regulations, the Treasury
Department and the IRS continue to believe that the definition
of gross receipts should be construed broadly, and,
accordingly, no change has been made in these final
regulations to the definition contained in
TD 8930.
Examples
The examples in the regulations have been changed to
remove references to "readily discernible and applicable."
While the Treasury Department and the IRS continue to believe
that the activities in Examples 4 and 5_ of §1.41-4 (a) (8) of
20
the 2001 proposed regulations would not qualify under the
final regulations, these examples were removed as the only
purpose of these examples was to illustrate the "readily
discernable and applicable" standard. Minor changes to the
facts in Example 4 of §1.41-4(a)(8) in the final regulations
(Example 6 of §1.41-4(a)(8) of the 2001 proposed regulations)
were made to illustrate more clearly the application of the
substantially all requirement of §1.41-4 (a) (6) . These changes
do not indicate that the Treasury Department and the IRS
believe that the integration activities removed from the
example, as contained in the 2001 proposed regulations, are or
are not qualified activities standing alone. The
determination of whether activities are qualified research is
based on the specific facts and circumstances of those
activities.
Additionally, minor changes were made to the examples in
§1.41-4 (c) (10) to remove references to "readily discernable
and applicable" and to make some clarifications based on
comments received. Example 1 of §1.41-4 (c) (10) was modified
to remove the conclusion regarding qualification of expenses
under section 174. Although the Treasury Department and the
IRS continue to believe that the conclusion in the 2001
proposed regulations is correct, the Treasury Department and
21
the IRS believe that the point illustrated in the removed
portion of the example would be more appropriately addressed
in guidance issued under section 174, rather than in guidance
under section 41.
Effective Date
Notice 2001-19 stated, in relevant part, that the
provisions of TD 8930, including any changes to TD 8930, would
be effective no earlier than the date when the completion of
the Treasury Department and the IRS' review of TD 8930 was
announced. The 2 001 proposed regulations provided, in
relevant part, that final regulations would apply to taxable
years ending on or after December 26, 2001, the date the
proposed regulations were published in the Federal Register.
Because these final regulations only clarify the
provisions of the 2001 proposed regulations, these final
regulations apply to taxable years ending on or after [INSERT
DATE THIS DOCUMENT IS FILED WITH THE FEDERAL REGISTER]. For
taxable years ending before [INSERT DATE THIS DOCUMENT IS
FILED WITH THE FEDERAL REGISTER], the IRS will not challenge
return positions that are consistent with these final
regulations.
Special Analyses
22
It has been determined that these regulations are not a
significant regulatory action as defined in Executive Order
12866. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because these regulations do
not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Therefore, a Regulatory Flexibility Act Analysis is
not required. Pursuant to section 7805(f), the notice of
proposed rulemaking preceding these regulations was submitted
to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Nicole R.
Cimino of the Office of Associate Chief Counsel (Passthroughs
and Special Industries), IRS. However, personnel from other
offices of the IRS and the Treasury Department participated in
their development.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as
follows:
PART I--INCOME TAXES
23
Paragraph 1. The authority for part 1 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.41-0 is amended as follows:
1. Revising the entries for §1.41-4.
The revisions and additions read as follows:
§1.41-0 Table of contents.
*****
§1.41-4 Qualified research for expenditures paid or incurred
in taxable years ending on or after [INSERT DATE THIS DOCUMENT
IS FILED WITH THE FEDERAL REGISTER].
(a) Qualified research.
(1) General rule.
(2) Requirements of section 41(d) (1) .
(3) Undertaken for the purpose of discovering information.
(i) In general.
(ii) Application of the discovering information requirement.
(iii) Patent safe harbor.
(4) Technological in nature.
(5) Process of experimentation.
(i) In general.
(ii) Qualified purpose.
(6) Substantially all requirement.
(7) Use of computers and information technology.
(8) Illustrations.
(b) Application of requirements for qualified research.
(1) In general.
(2) Shrinking-back rule.
(3) Illustration.
(c) Excluded activities.
(1) In general.
(2) Research after commercial production.
(i) In general.
(ii) Certain additional activities related to the business
component.
(iii) Activities related to production process or technique.
24
(iv) Clinical testing.
(3) Adaptation of existing business components.
(4) Duplication of existing business component.
(5) Surveys, studies, research relating to management
functions, etc.
(6) Internal use software for taxable years beginning on or
after December 31, 1985. [Reserved].
(7) Activities outside the United States, Puerto Rico, and
other possessions.
(i) In general.
(ii) Apportionment of in-house research expenses.
(iii) Apportionment of contract research expenses.
(8) Research in the social sciences, etc.
(9) Research funded by any grant, contract, or otherwise.
(10) Illustrations.
(d) Recordkeeping for the research credit.
(e) Effective dates.
*****
Par. 3. Section 1.41-4 is amended as follows:
1. Paragraphs (a) (2) (iii), (a)(3), (a)(4), (a)(5),
(a)(6), (a)(8), (b)(2), (b)(3), (c)(2)(iv), and (c)(4) are
revised.
2. Paragraph (c)(6) is reserved.
3. Paragraphs (c)(7)(ii), (c)(10), (d), and (e) are
revised.
The revisions and additions read as follows:
§1.41-4 Qualified research for expenditures paid or incurred
in taxable years ending on or after [INSERT DATE THIS DOCUMENT
IS FILED WITH THE FEDERAL REGISTER].
(a)*
* *
25
(2 ) * * *
(iii) Substantially all of the activities of which
constitute elements of a process of experimentation that
relates to a qualified purpose.
(3) Undertaken for the purpose of discovering
information--(i) In general. For purposes of section 41(d)
and this section, research must be undertaken for the purpose
of discovering information that is technological in nature.
Research is undertaken for the purpose of discovering
information if it is intended to eliminate uncertainty
concerning the development or improvement of a business
component. Uncertainty exists if the information available to
the taxpayer does not establish the capability or method for
developing or improving the business component, or the
appropriate design of the business component.
(ii) Application of the discovering information
requirement. A determination that research is undertaken for
the purpose of discovering information that is technological
in nature does not require the taxpayer be seeking to obtain
information that exceeds, expands or refines the common
knowledge of skilled professionals in the particular field of
science or engineering in which the taxpayer is performing the
research. In addition, a determination that research is
26
undertaken for the purpose of discovering information that is
technological in nature does not require that the taxpayer
succeed in developing a new or improved business component.
(iii) Patent safe harbor. For purposes of section 41(d)
and paragraph (a)(3)(i) of this section, the issuance of a
patent by the Patent and Trademark Office under the provisions
of 35 U.S.C. 151 (other than a patent for design issued under
the provisions of 35 U.S.C. 171) is conclusive evidence that a
taxpayer has discovered information that is technological in
nature that is intended to eliminate uncertainty concerning
the development or improvement of a business component.
However, the issuance of such a patent is not a precondition
for credit availability.
(4) Technological in nature. For purposes of section
41(d) and this section, information is technological in nature
if the process of experimentation used to discover such
information fundamentally relies on principles of the physical
or biological sciences, engineering, or computer science. A
taxpayer may employ existing technologies and may rely on
existing principles of the physical or biological sciences,
engineering, or computer science to satisfy this requirement.
(5) Process of experimentation--(i) In general. For
purposes of section 41(d) and this section, a process of
27
experimentation is a process designed to evaluate one or more
alternatives to achieve a result where the capability or the
method of achieving that result, or the appropriate design of
that result, is uncertain as of the beginning of the
taxpayer's research activities. A process of experimentation
must fundamentally rely on the principles of the physical or
biological sciences, engineering, or computer science and
involves the identification of uncertainty concerning the
development or improvement of a business component, the
identification of one or more alternatives intended to
eliminate that uncertainty, and the identification and the
conduct of a process of evaluating the alternatives (through,
for example, modeling, simulation, or a systematic trial and
error methodology). A process of experimentation must be an
evaluative process and generally should be capable of
evaluating more than one alternative. A taxpayer may
undertake a process of experimentation if there is no
uncertainty concerning the taxpayer's capability or method of
achieving the desired result so long as the appropriate design
of the desired result is uncertain as of the beginning of the
taxpayer's research activities. Uncertainty concerning the
development or improvement of the business component (e.g.,
its appropriate design) does not establish that all activities
28
undertaken to achieve that new or improved business component
constitute a process of experimentation.
(ii) Qualified purpose. For purposes of section 41(d)
and this section, a process of experimentation is undertaken
for a qualified purpose if it relates to a new or improved
function, performance, reliability or quality of the business
component. Research will not be treated as conducted for a
qualified purpose if it relates to style, taste, cosmetic, or
seasonal design factors.
(6) Substantially all requirement. In order for
activities to constitute qualified research under section
41(d)(1), substantially all of the activities must constitute
elements of a process of experimentation that relates to a
qualified purpose. The substantially all requirement of
section 41(d)(1)(C) and paragraph (a)(2)(iii) of this section
is satisfied only if 80 percent or more of a taxpayer's
research activities, measured on a cost or other consistently
applied reasonable basis (and without regard to
§1.41-2(d)(2)), constitute elements of a process of
experimentation for a purpose described in section 41(d)(3).
Accordingly, if 80 percent (or more) of a taxpayer's research
activities with respect to a business component constitute
elements of a process of experimentation for a purpose
29
described in section 41(d)(3), the substantially all
requirement is satisfied even if the remaining 20 percent (or
less) of a taxpayer's research activities with respect to the
business component do not constitute elements of a process of
experimentation for a purpose described in section 41(d)(3),
so long as these remaining research activities satisfy the
requirements of section 41(d)(1)(A) and are not otherwise
excluded under section 41(d)(4). The substantially all
requirement is applied separately to each business component.
*****
(8) Illustrations. The following examples illustrate
the application of paragraph (a)(5) of this section:
Example 1. (i) Facts. X is engaged in the business of
developing and manufacturing widgets. X wants to change the
color of its blue widget to green. X obtains from various
suppliers several different shades of green paint. X paints
several sample widgets, and surveys X's customers to determine
which shade of green X's customers prefer.
(ii) Conclusion. X's activities to change the color of
its blue widget to green are not qualified research under
section 41(d)(1) and paragraph (a)(5) of this section because
substantially all of X's activities are not undertaken for a
qualified purpose. All of X's research activities are related
to style, taste, cosmetic, or seasonal design factors.
Example 2. (i) Facts. The facts are the same as in
Example 1, except that X chooses one of the green paints. X
obtains samples of the green paint from a supplier and
determines that X must modify its painting process to
accommodate the green paint because the green paint has
different characteristics from other paints X has used. X
obtains detailed data on the green paint from X's paint
30
supplier. X also consults with the manufacturer of X's paint
spraying machines. The manufacturer informs X that X must
acquire a new nozzle that operates with the green paint X
wants to use. X tests the nozzles to ensure that they work as
specified by the manufacturer of the paint spraying machines.
(ii) Conclusion. X's activities to modify its painting
process are a separate business component under section
41(d)(2)(A). X's activities to modify its painting process to
change the color of its blue widget to green are not qualified
research under section 41(d)(1) and paragraph (a)(5) of this
section. X did not conduct a process of evaluating
alternatives in order to eliminate uncertainty regarding the
modification of its painting process. Rather, the
manufacturer of the paint machines eliminated X's uncertainty
regarding the modification of its painting process. X's
activities to test the nozzles to determine if the nozzles
work as specified by the manufacturer of the paint spraying
machines are in the nature of routine or ordinary testing or
inspection for quality control.
Example 3. (i) Facts. X is engaged in the business of
manufacturing food products and currently manufactures a
large-shred version of a product. X seeks to modify its
current production line to permit it to manufacture both a
large-shred version and a fine-shred version of one of its
food products. A smaller, thinner shredding blade capable of
producing a fine-shred version of the food product, however,
is not commercially available. Thus, X must develop a new
shredding blade that can be fitted onto its current production
line. X is uncertain concerning the design of the new
shredding blade, because the material used in its existing
blade breaks when machined into smaller, thinner blades. X
engages in a systematic trial and error process of analyzing
various blade designs and materials to determine whether the
new shredding blade must be constructed of a different
material from that of its existing shredding blade and, if so,
what material will best meet X's functional requirements.
(ii) Conclusion. X's activities to modify its current
production line by developing the new shredding blade meet the
requirements of qualified research as set forth in paragraph
(a)(2) of this section. Substantially all of X's activities
constitute elements of a process of experimentation because X
evaluated alternatives to achieve a result where the method of
31
achieving that result, and the appropriate design of that
result, were uncertain as of the beginning of the taxpayer's
research activities. X identified uncertainties related to
the development of a business component, and identified
alternatives intended to eliminate these uncertainties.
Furthermore, X's process of evaluating identified alternatives
was technological in nature, and was undertaken to eliminate
the uncertainties.
Example 4. (i) Facts. X is in the business of
designing, developing and manufacturing automobiles. In
response to government-mandated fuel economy requirements, X
seeks to update its current model vehicle and undertakes to
improve aerodynamics by lowering the hood of its current model
vehicle. X determines, however, that lowering the hood
changes the air flow under the hood, which changes the rate at
which air enters the engine through the air intake system, and
which reduces the functionality of the cooling system. X's
engineers are uncertain how to design a lower hood to obtain
the increased fuel economy, while maintaining the necessary
air flow under the hood. X designs, models, simulates, tests,
refines, and re-tests several alternative designs for the hood
and associated proposed modifications to both the air intake
system and cooling system. This process enables X to
eliminate the uncertainties related to the integrated design
of the hood, air intake system, and cooling system, and such
activities constitute eighty-five percent of X's total
activities to update its current model vehicle. X then
engages in additional activities that do not involve a process
of evaluating alternatives in order to eliminate
uncertainties. The additional activities constitute only
fifteen percent of X's total activities to update its current
model vehicle.
(ii) Conclusion. In general, if eighty percent or more
of a taxpayer's research activities measured on a cost or
other consistently applied reasonable basis constitute
elements of a process of experimentation for a qualified
purpose under section 41(d)(3)(A) and paragraph (a)(5)(ii) of
this section, then the substantially all requirement of
section 41(d) (1) (C) and paragraph (a) (2) (iii) of this section
is satisfied. Substantially all of X's activities constitute
elements of a process of experimentation because X evaluated
alternatives to achieve a result where the method of achieving
that result, and the appropriate design of that result, were
32
uncertain as of the beginning of X's research activities. X
identified uncertainties related to the improvement of a
business component and identified alternatives intended to
eliminate these uncertainties. Furthermore, X's process of
evaluating the identified alternatives was technological in
nature and was undertaken to eliminate the uncertainties.
Because substantially all (in this example, eighty-five
percent) of X's activities to update its current model vehicle
constitute elements of a process of experimentation for a
qualified purpose described in section 41(d)(3)(A), all of X's
activities to update its current model vehicle meet the
requirements of qualified research as set forth in paragraph
(a) (2) of this section, provided that X's remaining activities
(in this example, fifteen percent of X's total activities)
satisfy the requirements of section 41(d)(1)(A) and are not
otherwise excluded under section 41(d)(4).
(b) * * *
(2) Shrinking-back rule. The requirements of section
41(d) and paragraph (a) of this section are to be applied
first at the level of the discrete business component, that
is, the product, process, computer software, technique,
formula, or invention to be held for sale, lease, or license,
or used by the taxpayer in a trade or business of the
taxpayer. If these requirements are not met at that level,
then they apply at the most significant subset of elements of
the product, process, computer software, technique, formula,
or invention to be held for sale, lease, or license. This
shrinking back of the product is to continue until either a
subset of elements of the product that satisfies the
requirements is reached, or the most basic element of the
33
product is reached and such element fails to satisfy the test.
This shrinking-back rule is applied only if a taxpayer does
not satisfy the requirements of section 41(d)(1) and paragraph
(a)(2) of this section with respect to the overall business
component. The shrinking-back rule is not itself applied as a
reason to exclude research activities from credit eligibility.
(3) Illustration. The following example illustrates the
application of this paragraph (b):
Example. X, a motorcycle engine builder, develops a new
carburetor for use in a motorcycle engine. X also modifies an
existing engine design for use with the new carburetor. Under
the shrinking-back rule, the requirements of section 41(d)(1)
and paragraph (a) of this section are applied first to the
engine. If the modifications to the engine when viewed as a
whole, including the development of the new carburetor, do not
satisfy the requirements of section 41(d)(1) and paragraph (a)
of this section, those requirements are applied to the next
most significant subset of elements of the business component.
Assuming that the next most significant subset of elements of
the engine is the carburetor, the research activities in
developing the new carburetor may constitute qualified
research within the meaning of section 41(d)(1) and paragraph
(a) of this section.
(c) * * *
/ 2 ) * * *
(iv) Clinical testing. Clinical testing of a
pharmaceutical product prior to its commercial production in
the United States is not treated as occurring after the
beginning of commercial production even if the product is
commercially available in other countries. Additional
34
clinical testing of a pharmaceutical product after a product
has been approved for a specific therapeutic use by the Food
and Drug Administration and is ready for commercial production
and sale is not treated as occurring after the beginning of
commercial production if such clinical testing is undertaken
to establish new functional uses, characteristics,
indications, combinations, dosages, or delivery forms for the
product. A functional use, characteristic, indication,
combination, dosage, or delivery form shall be considered new
only if such functional use, characteristic, indication,
combination, dosage, or delivery form must be approved by the
Food and Drug Administration.
*****
(4) Duplication of existing business component.
Activities relating to reproducing an existing business
component (in whole or in part) from a physical examination of
the business component itself or from plans, blueprints,
detailed specifications, or publicly available information
about the business component are not qualified research. This
exclusion does not apply merely because the taxpayer examines
an existing business component in the course of developing its
own business component.
* * * * *
35
(6) Internal use software for taxable years beginning on
or after December 31, 1985. [Reserved].
(7) * * *
(ii) Apportionment of in-house research expenses.
In-house research expenses paid or incurred for qualified
services performed both in the United States, the Commonwealth
of Puerto Rico and other possessions of the United States and
outside the United States, the Commonwealth of Puerto Rico and
other possessions of the United States must be apportioned
between the services performed in the United States, the
Commonwealth of Puerto Rico and other possessions of the
United States and the services performed outside the United
States, the Commonwealth of Puerto Rico and other possessions
of the United States. Only those in-house research expenses
apportioned to the services performed within the United
States, the Commonwealth of Puerto Rico and other possessions
of the United States are eligible to be treated as qualified
research expenses, unless the in-house research expenses are
wages and the 80 percent rule of §1.41-2(d)(2) applies.
*****
(10) Illustrations. The following examples illustrate
provisions contained in paragraphs (c)(1) through (9)
(excepting (c)(6)) of this section. No inference should be
36
drawn from these examples concerning the application of
section 41(d)(1) and paragraph (a) of this section to these
facts. The examples are as follows:
Example 1. (i) Facts. X, a tire manufacturer, develops
a new material to use in its tires. X conducts research to
determine the changes that will be necessary for X to modify
its existing manufacturing processes to manufacture the new
tire. X determines that the new tire material retains heat
for a longer period of time than the materials X currently
uses for tires, and, as a result, the new tire material
adheres to the manufacturing equipment during tread cooling.
X evaluates several alternatives for processing the treads at
cooler temperatures to address this problem, including a new
type of belt for its manufacturing equipment to be used in
tread cooling. Such a belt is not commercially available.
Because X is uncertain of the belt design, X develops and
conducts sophisticated engineering tests on several
alternative designs for a new type of belt to be used in tread
cooling until X successfully achieves a design that meets X's
requirements. X then manufactures a set of belts for its
production equipment, installs the belts, and tests the belts
to make sure they were manufactured correctly.
(ii) Conclusion. X's research with respect to the design
of the new belts to be used in its manufacturing of the new
tire may be qualified research under section 41(d)(1) and
paragraph (a) of this section. However, X's expenses to
implement the new belts, including the costs to manufacture,
install, and test the belts were incurred after the belts met
the taxpayer's functional and economic requirements and are
excluded as research after commercial production under section
41(d)(4)(A) and paragraph (c)(2) of this section.
Example 2. (i) Facts. For several years, X has
manufactured and sold a particular kind of widget. X
initiates a new research project to develop a new or improved
widget.
(ii) Conclusion. X's activities to develop a new or
improved widget are not excluded from the definition of
qualified research under section 41(d)(4)(A) and paragraph
(c)(2) of this section. X's activities relating to the
37
development of a new or improved widget constitute a new
research project to develop a new business component. X's
research activities relating to the development of the new or
improved widget, a new business component, are not considered
to be activities conducted after the beginning of commercial
production under section 41(d)(4)(A) and paragraph (c)(2) of
this section.
Example 3. (i) Facts. X, a computer software
development firm, owns all substantial rights in a general
ledger accounting software core program that X markets and
licenses to customers. X incurs expenditures in adapting the
core software program to the requirements of C, one of X's
customers.
(ii) Conclusion. Because X's activities represent
activities to adapt an existing software program to a
particular customer's requirement or need, X's activities are
excluded from the definition of qualified research under
section 41(d)(4)(B) and paragraph (c)(3) of this section.
Example 4. (i) Facts. The facts are the same as in
Example 3, except that C pays X to adapt the core software
program to C's requirements.
(ii) Conclusion. Because X's activities are excluded
from the definition of qualified research under section
41(d)(4)(B) and paragraph (c)(3) of this section, C's payments
to X are not for qualified research and are not considered to
be contract research expenses under section 41(b)(3)(A).
Example 5. (i) Facts. The facts are the same as in
Example 3, except that C's own employees adapt the core
software program to C's requirements.
(ii) Conclusion. Because C's employees' activities to
adapt the core software program to C's requirements are
excluded from the definition of qualified research under
section 41(d)(4)(B) and paragraph (c)(3) of this section, the
wages C paid to its employees do not constitute in-house
research expenses under section 41(b)(2)(A).
Example 6. (i) Facts. X manufacturers and sells rail
cars. Because rail cars have numerous specifications related
to performance, reliability and quality, rail car designs are
38
subject to extensive, complex testing in the scientific or
laboratory sense. B orders passenger rail cars from X. B's
rail car requirements differ from those of X's other existing
customers only in that B wants fewer seats in its passenger
cars and a higher quality seating material and carpet that are
commercially available. X manufactures rail cars meeting B's
requirements.
(ii) Conclusion. X's activities to manufacture rail cars
for B are excluded from the definition of qualified research.
The rail car sold to B was not a new business component, but
merely an adaptation of an existing business component that
did not require a process of experimentation. Thus, X's
activities to manufacture rail cars for B are excluded from
the definition of qualified research under section 41(d)(4)(B)
and paragraph (c)(3) of this section because X's activities
represent activities to adapt an existing business component
to a particular customer's requirement or need.
Example 7. (i) Facts. X, a manufacturer, undertakes to
create a manufacturing process for a new valve design. X
determines that it requires a specialized type of robotic
equipment to use in the manufacturing process for its new
valves. Such robotic equipment is not commercially available,
and X, therefore, purchases the existing robotic equipment for
the purpose of modifying it to meet its needs. X's engineers
identify uncertainty that is technological in nature
concerning how to modify the existing robotic equipment to
meet its needs. X's engineers develop several alternative
designs, and conduct experiments using modeling and simulation
in modifying the robotic equipment and conduct extensive
scientific and laboratory testing of design alternatives. As
a result of this process, X's engineers develop a design for
the robotic equipment that meets X's needs. X constructs and
installs the modified robotic equipment on its manufacturing
process.
(ii) Conclusion. X's research activities to determine
how to modify X's robotic equipment for its manufacturing
process are not excluded from the definition of qualified
research under section 41(d)(4)(B) and paragraph (c)(3) of
this section, provided that X's research activities satisfy the
requirements of section 41(d)(1).
39
Example 8. (i) Facts. An existing gasoline additive is
manufactured by Y using three ingredients, A, B, and C. X
seeks to develop and manufacture its own gasoline additive
that appears and functions in a manner similar to Y's additive.
To develop its own additive, X first inspects the composition
of Y's additive, and uses knowledge gained from the inspection
to reproduce A and B in the laboratory. Any differences
between ingredients A and B that are used in Y's additive and
those reproduced by X are insignificant and are not material
to the viability, effectiveness, or cost of A and B. X
desires to use with A and B an ingredient that has a
materially lower cost than ingredient C. Accordingly, X
engages in a process of experimentation to develop, analyze
and test potential alternative formulations of the additive.
(ii) Conclusion. X's activities in analyzing and
reproducing ingredients A and B involve duplication of
existing business components and are excluded from the
definition of qualified research under section 41(d)(4)(C) and
paragraph (c)(4) of this section. X's experimentation
activities to develop potential alternative formulations of
the additive do not involve duplication of an existing
business component and are not excluded from the definition of
qualified research under section 41(d)(4)(C) and paragraph
(c)(4) of this section.
Example 9. (i) Facts. X, a manufacturing corporation,
undertakes to restructure its manufacturing organization. X
organizes a team to design an organizational structure that
will improve X's business operations. The team includes X's
employees as well as outside management consultants. The team
studies current operations, interviews X's employees, and
studies the structure of other manufacturing facilities to
determine appropriate modifications to X's current business
operations. The team develops a recommendation of proposed
modifications which it presents to X's management. X's
management approves the team's recommendation and begins to
implement the proposed modifications.
(ii) Conclusion. X's activities in developing and
implementing the new management structure are excluded from
the definition of qualified research under section 41(d)(4)(D)
and paragraph (c)(5) of this section. Qualified research does
not include activities relating to management functions or
40
techniques including management organization plans and
management-based changes in production processes.
Example 10. (i) Facts. X, an insurance company,
develops a new life insurance product. In the course of
developing the product, X engages in research with respect to
the effect of pricing and tax consequences on demand for the
product, the expected volatility of interest rates, and the
expected mortality rates (based on published data and prior
insurance claims).
(ii) Conclusion. X's activities related to the new
product represent research in the social sciences (including
economics and business management) and are thus excluded from
the definition of qualified research under section 41(d)(4)(G)
and paragraph (c)(8) of this section.
(d) Recordkeeping for the research credit. A taxpayer
claiming a credit under section 41 must retain records in
sufficiently usable form and detail to substantiate that the
expenditures claimed are eligible for the credit. For the
rules governing record retention, see §1.6001-1. To
facilitate compliance and administration, the IRS and
taxpayers may agree to guidelines for the keeping of specific
records for purposes of substantiating research credits.
(e) Effective dates. This section is applicable for
taxable years ending on or after [INSERT DATE THIS DOCUMENT IS
FILED WITH THE FEDERAL REGISTER].
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION
ACT
41
Par. 4. The authority citation for part 602 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 5. In §602.101, paragraph (b) is amended by
removing the entry to the table for §1.41-4(d).
42
Deputy Commissioner for Services and Enforcement.
Assistant Secretary of the Treasury.
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
2 6 CFR Part 1
[REG-153656-03]
RIN 1545-BC70
Credit for Increasing Research Activities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Advance notice of proposed rulemaking.
SUMMARY: This document invites comments from the public
regarding certain rules and standards relating to internal-use
software under section 41(d)(4)(E) of the Internal Revenue
Code. All materials submitted will be available for public
inspection and copying. This document also addresses the
effective date for final rules relating to internal-use
software.
DATES: Comments are requested on or before [INSERT DATE].
ADDRESSES: Send written comments to: Internal Revenue
Service, Attn: CC:PA:LPD:PR [REG-153656-03], room 5203, POB
7604, Ben Franklin Station, Washington, DC 20044. In the
alternative, taxpayers may submit comments in writing, by hand
delivery to CC:PA:LPD:PR [REG-153656-03], Courier's Desk,
Internal Revenue Service, 1111 Constitution Ave., NW.,
Washington, DC, or electronically, via the IRS Internet site
at:
www.irs.gov/regs.
FOR FURTHER INFORMATION CONTACT: Nicole R. Cimino at (202)
622-3120 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Introduction
On [INSERT DATE FINAL REGULATIONS ARE FILED WITH THE
FEDERAL REGISTER], the Treasury Department and the IRS issued
final regulations (TD XXXX) for the credit for increasing
research activities under section 41 (research credit). TD
XXXX provides rules relating to the definition of qualified
research under section 41(d) but does not finalize rules
relating to internal-use software under section 41(d)(4)(E).
This advance notice of proposed rulemaking (ANPRM) invites
comments from the public regarding the proposed regulations
issued in 2001 relating to internal-use software under section
41(d)(4)(E). Although the Treasury Department and the IRS
welcome comments on all aspects of those proposed regulations,
the Treasury Department and the IRS specifically request
comments concerning the definition of internal-use software.
In addition, the Treasury Department and the IRS request
comments on whether final rules relating to internal-use
software should have retroactive effect.
Background
2
Section 41(d)(4)(E) provides that, except to the extent
provided by regulations, research with respect to computer
software which is developed by (or for the benefit of) the
taxpayer primarily for internal use by the taxpayer (internaluse software) is excluded from the definition of qualified
research under section 41(d). (Software that is developed for
use in an activity which constitutes qualified research and
software that is developed for use in a production process
with respect to which the general credit eligibility
requirements are satisfied are not excluded as internal-use
software under the provisions of section 41(d)(4)(E).) The
statutory exclusion for internal-use software and the
regulatory exceptions to this exclusion have been the subject
of a series of proposed and final regulations.
Legislative History
The legislative history to the Tax Reform Act of 1986,
Public Law 99-514 (100 Stat. 2085)(1986 Act), states that "the
costs of developing software are not eligible for the credit
where the software is used internally, for example, in general
and administrative functions (such as payroll, bookkeeping, or
personnel management) or in providing noncomputer services
(such as accounting, consulting, or banking services) except
to the extent permitted by Treasury regulations." See H.R.
3
Conf. Rep. No. 841, at 11-73 (1986 legislative history).
The
1986 legislative history further states that Congress intended
that regulations would make the costs of new or improved
internal-use software eligible for the credit only if the
research satisfies, in addition to the general requirements
for credit eligibility, an additional, three-part high
threshold of innovation test (i.e., that the software was
innovative, that the software development involved significant
economic risk, and that the software was not commercially
available for use by the taxpayer).
Congress has extended the research credit a number of
times since the 1986 Act but has not made any changes to the
statutory definition of qualified research or to the statutory
exclusion for internal-use software in section 41(d)(4)(E).
When Congress extended the research credit in the Tax Relief
Extension Act of 1999, Public Law 106-170 (113 Stat. 1860)
(1999 Act), however, the legislative history stated the
following with respect to internal-use software:
The conferees further note the rapid pace of
technological advance, especially in service-related
industries, and urge the Secretary to consider
carefully the comments he has and may receive in
promulgating regulations in connection with what
constitutes "internal use" with regard to software
expenditures. The conferees also wish to observe
that software research, that otherwise satisfies the
requirements of section 41, which is undertaken to
support the provision of a service, should not be
4
deemed "internal use" solely because the business
component involves the provision of a service.
H.R. Conf. Rep. No. 106-478, at 132 (1999).
1997 Proposed Regulations
On January 2, 1997, the Treasury Department and the IRS
published proposed regulations (REG-209494-90, 1997-1 C.B.
723) in the Federal Register (62 FR 81) under section 41
relating to internal-use software (1997 proposed regulations).
In relevant part, the 1997 proposed regulations stated:
Research with respect to computer software that is
developed by (or for the benefit of) the taxpayer
primarily for the taxpayer's internal use is eligible
for the research credit only if the software
satisfies the requirements of paragraph (e)(2) of
this section. Generally, research with respect to
computer software is not eligible for the research
credit where software is used internally, for
example, in general and administrative functions
(such as payroll, bookkeeping, or personnel
management) or in providing noncomputer services
(such as accounting, consulting, or banking
services).
Prop. §1.41-4(e)(1) (1997).
The 1997 proposed regulations contained an exception to
the internal-use software rules for certain software developed
by the taxpayer as a part of a new or improved package of
computer software and hardware developed together as a single
product. Such software would not be subject to the high
threshold of innovation requirements for internal-use software
5
under the 1997 proposed regulations.
The 1997 proposed
regulations, however, did not contain a specific definition of
internal-use software. Instead, the 1997 proposed regulations
provided that the determination of whether software was
internal-use software would depend on the facts and
circumstances of each case:
All relevant facts and circumstances are to be
considered in determining if computer software is
developed primarily for the taxpayer's internal use.
If computer software is developed primarily for the
taxpayer's internal use, the requirements of this
paragraph (e) apply even though the taxpayer intends
to, or subsequently does, sell, lease, or license
the computer software.
Prop. §1.41-4(e)(4) (1997).
2001 Final Regulations (TD 8930)
On January 3, 2 001, the Treasury Department and the IRS
published in the Federal Register (66 FR 280) final
regulations (TD 8930) relating, in relevant part, to the
definition of internal-use software for purposes of section
41(d)(4)(E). With respect to the general definition of
internal-use software, TD 8930 provided:
Software is developed primarily for the taxpayer's
internal use if the software is to be used
internally, for example, in general administrative
functions of the taxpayer (such as payroll,
bookkeeping, or personnel management) or in
providing noncomputer services (such as accounting,
consulting, or banking services). If computer
software is developed primarily for the taxpayer's
internal use, the requirements of this paragraph
6
(c)(6) apply even though the taxpayer intends to, or
subsequently does, sell, lease, or license the
computer software.
§1.41-4(c)(6)(iv). TD 8930, therefore, did not provide a
specific definition of internal-use software but instead
identified two general categories of software as examples of
internal-use software: software "used internally" and
software used "in providing noncomputer services." TD 8930
eliminated the general facts and circumstances standard
contained in the 1997 proposed regulations.
The preamble to TD 8930 addressed the requests made by
some commentators that the definition of internal-use software
exclude software used to deliver a service to customers and
software that includes an interface with customers or the
public. The preamble stated that after careful analysis of
the legislative history, the Treasury Department and the IRS
had concluded that such broad exclusions would be inconsistent
with the statutory mandate, because the exclusion would extend
to some software that Congress clearly intended to treat as
internal-use software. The preamble, however, continued by
highlighting changes that had been made in TD 8 93 0 to take
into account the commentators' concerns as well as the
legislative history to the 1999 Act.
First, TD 8930 provided that the high threshold of
7
innovation test applicable to internal-use software does not
apply to software used to provide computer services (defined
in TD 8930 generally as a service offered by a taxpayer to
customers who conduct business with the taxpayer primarily for
the use of the taxpayer's computer or software technology).
In contrast, software used to provide a noncomputer service
(defined in TD 8930 generally as a service other than a
computer service, even if such other service is enabled,
supported, or facilitated by computer or software technology)
would be subject to the high threshold of innovation test
under TD 8 93 0.
Second, TD 8930 contained a new exception to the high
threshold of innovation test for internal-use software for
software used to provide a noncomputer service if the
software, among other things, contained features or
improvements not yet offered by a taxpayer's competitors. In
describing this exception, the preamble to TD 8930 stated:
This exercise of regulatory authority [to create the
exception for certain software used to provide noncomputer services] is based on a determination that
the development of software containing features or
improvements that are not available from a
taxpayer's competitors and that provide a
demonstrable competitive advantage is more likely to
increase the innovative qualities and efficiency of
the U.S. economy (by generating knowledge that can
be used by other service providers) than is the
development of software used to provide noncomputer
services containing features or improvements that
8
are already offered by others. IRS and Treasury
believe that drawing such a line is an appropriate
way to administer the credit with a view to
identifying and facilitating the credit availability
for software with the greatest potential for
benefiting the U.S. economy, an important rationale
for the research credit.
In response to taxpayer concerns, on January 31, 2 001,
the Treasury Department and the IRS published Notice 2001-19
(2001-10 I.R.B. 784), announcing that the Treasury Department
and the IRS would review TD 893 0 and reconsider comments
previously submitted in connection with the finalization of TD
8930.
2001 Proposed Regulations
On December 26, 2001, the Treasury Department and the IRS
published in the Federal Register (66 FR 66362) a notice of
proposed rulemaking (REG-112991-01) reflecting their review of
TD 8930 (2001 proposed regulations). The 2001 proposed
regulations revised the definition of internal-use software as
compared to the definitions contained in the 1997 proposed
regulations and TD 8930. The definition in the 2001 proposed
regulations was based on a presumption that turns on whether
the software is developed to be commercially sold, leased,
licensed, or otherwise marketed for separately stated
consideration:
Unless computer software is developed to be
commercially sold, leased, licensed, or otherwise
9
marketed, for separately stated consideration to
unrelated third parties, computer software is
presumed developed by (or for the benefit of) the
taxpayer primarily for the taxpayer's internal use.
For example, the computer software may serve general
and administrative functions of the taxpayer, or may
be used in providing a noncomputer service. General
and administrative functions include, but are not
limited to, functions such as payroll, bookkeeping,
financial management, financial reporting, personnel
management, sales and marketing, fixed asset
accounting, inventory management and cost
accounting. Computer software that is developed to
be commercially sold, leased, licensed or otherwise
marketed, for separately stated consideration to
unrelated third parties is not developed primarily
for the taxpayer's internal use. The requirements of
this paragraph (c)(6) apply to computer software
that is developed primarily for the taxpayer's
internal use even though the taxpayer subsequently
sells, leases, licenses, or otherwise markets the
computer software for separately stated
consideration to unrelated third parties.
Prop. §1.41-4 (c) (6) (iv) (2001) (emphasis added).
As explained in the preamble to the 2001 proposed
regulations, this "separately stated consideration" standard
reflected the Treasury Department and the IRS' determination
that software that is sold, leased, licensed, or otherwise
marketed, for separately stated consideration to unrelated
third parties is software that is intended to be used
primarily by the customers of the taxpayer, whereas software
that does not satisfy this requirement is software that is
intended to be used primarily by the taxpayer for its internal
use or in connection with a noncomputer service provided by
10
the taxpayer.
The 2001 proposed regulations modified the
hardware-software exception and continued to provide that
software used to provide computer services was not required to
satisfy the additional qualification requirements imposed on
internal-use software. The new proposed regulations, however,
eliminated the special rule in TD 8930 for certain software
used to provide noncomputer services. The preamble to the
2001 proposed regulations explained that "[d] ue to other
revisions contained in these proposed regulations, Treasury
and the IRS believe that the computer software targeted by
this rule generally would be credit eligible without this
rule."
The preamble to the 2001 proposed regulations also
addressed the continued concerns expressed by some
commentators that the definition of internal-use software
should not include software used to deliver a service to
customers and software that includes an interface with
customers or the public. In addition to repeating the
Treasury Department and IRS' concern that such exclusions may
conflict with Congress' intent regarding software used in the
provision of noncomputer services, the preamble stated that an
exclusion for software that includes an interface with
customers or the public would entail substantial
11
administrative difficulties and "may inappropriately permit
certain categories of costs (e.g., certain web site
development costs) to constitute qualified research expenses
without having to satisfy the high threshold of innovation
test."
Discussion
Prior regulatory guidance generally reflects three
approaches to the definition of internal-use software. First,
the 1997 proposed regulations closely mirrored the language
contained in the legislative history but did not provide a
specific definition of internal-use. Instead, the 1997
proposed regulations used the "general and administrative
functions" and "noncomputer services" language from the
legislative history as examples of internal-use software and
provided that the determination of whether particular software
was internal-use software required an evaluation of "all
relevant facts and circumstances."
TD 8930 then attempted to provide greater specificity
regarding the definition of internal-use software. Although
TD 8930 eliminated the facts and circumstances test in the
1997 proposed regulations, TD 8930 continued to provide a
general definition of internal-use software that incorporated
the legislative history's examples of general and
12
administrative functions and non-computer services.
Additionally, TD 8930 provided that software used by the
taxpayer to provide "computer services" was not subject to the
high threshold of innovation test applicable to internal-use
software, and provided definitions of computer services and
noncomputer services. The exception for computer services
software, however, required a determination of the primary
reason why a taxpayer's customers conduct business with the
taxpayer. TD 8930 also applied this exception to certain
software used to provide "noncomputer services" provided that
the software satisfied additional requirements intended to
identify software containing new features or improvements that
provide a competitive advantage to the taxpayer.
Finally, the 2001 proposed regulations prescribed a
bright-line, separately-stated consideration rule for
determining which software is treated as internal-use software
for purposes of the research credit. (The 2001 proposed
regulations retained the exception for software used to
provide computer services, but removed the special rule for
noncomputer services. Additionally, the 2001 proposed
regulations expanded upon the list of general and
administrative functions contained in the legislative history
and expanded the exception for integrated software-hardware
13
products.)
The purpose of this rule was to provide a clear
definition of internal-use software that could be readily
applied by taxpayers and more readily administered by the IRS.
Numerous comments were received in response to the 1997
proposed regulations, TD 8930 and Notice 2001-19, and the 2001
proposed regulations regarding the provisions relating to
internal-use software. Although commentators addressed
virtually all aspects of the internal-use software provisions
in the various iterations of regulations, most of the comments
focused on the definition of internal-use software. As
previously stated, many commentators believed that the
definition of internal-use software should exclude any
software used to deliver a service to customers and any
software that includes an interface with customers or the
public. Some commentators suggested, as an alternative, that
the statutory production process exception be extended to
software used in connection with the provision of services.
With respect to the definition of internal-use software
in the 2001 proposed regulations, commentators stated that the
separately-stated consideration test was a poor indication of
when computer software was developed "primarily for internal
use by the taxpayer" and directly conflicted with the
legislative history to the 1999 Act. In support of a narrower
14
definition of internal-use software, these commentators
pointed to technological advancements and changes to the role
of computer software in business activities since the
exclusion for internal-use software was enacted in 1986,
including the increased development of computer software by
taxpayers, the increased use of computer software in all
aspects of business activity, and the role of computer
software (often integrated across a business) in providing
goods and services in addition to the internal operations of a
business. Commentators further argued that the definition
should be based on the underlying functionality of the
software (i.e., whether the software, in light of the facts
and circumstances, is used to deliver services or goods to a
taxpayer's customers). Commentators urged that a
functionality rule is preferable to a bright-line rule (such
as the separately-stated consideration rule in TD 8930) even
though a bright-line rule provided a clearer rule for
identifying internal-use software for purposes of the research
credit.
The Treasury Department and the IRS are continuing to
consider the concerns raised by commentators in response to
the definition of internal-use software contained in the 2001
proposed regulations, including the concern that the
15
separately-stated consideration test is over-inclusive.
Nevertheless, the Treasury Department and the IRS are
concerned that the alternatives, including expanded or
modified exceptions, proposed by commentators generally would
make the definition of internal-use software more complex
without providing additional clarity. Several commentators
suggested similar definitions that would exclude software
that, for example, is "integral and essential" to the
provision of services with integral defined as software that
directly "enables, supports, or facilitates" a service. Some
commentators suggested a definition that would exclude
software that is "primarily used" by customers, suppliers, or
other third parties. Other commentators suggested a
definition that would limit internal-use software to software
that is developed primarily for use in general and
administrative functions that enable, facilitate, or support
the taxpayer's conduct of the taxpayer's trade or business,
but would exclude certain customer interface software. These
suggestions would introduce many terms (including enable,
support, facilitate, primarily) that, due to their subjective
nature, the Treasury Department and the IRS believe would be
prone to controversy and could not be readily applied by
taxpayers or administered by the IRS. Another commentator
16
suggested limiting the definition of internal-use software to
software used to perform a specifically enumerated list of
general and administrative functions. Some commentators,
however, have noted that the often highly integrated nature of
software development today makes it difficult, if not
impossible, to divide software development projects into
separate components, and thus a list approach may not be
administrable. Finally, as part of their review of these
comments, the Treasury Department and the IRS also reviewed
the possibility of using definitions of internal-use software
contained in prior guidance.
In light of the statute, the legislative history, the
history of the regulations regarding internal-use software,
and the comments received, the Treasury Department and the IRS
have decided not to finalize in TD XXXX the provisions in the
2001 proposed regulations relating to internal-use software.
Instead, the Treasury Department and the IRS are issuing this
ANPRM to solicit further comments regarding the definition of
internal-use software as well as other provisions affecting
the qualification of internal-use software for the research
credit. The Treasury Department and the IRS are mindful that
Congress specifically intended that computer software
"developed by (or for the benefit of) the taxpayer primarily
17
for internal use by the taxpayer" be subject to additional
requirements before the software could qualify for the
research credit. At the same time, the Treasury Department
and the IRS recognize that there have been changes in computer
software, and its role in business activity, since the mid1980s. In light of these changes, the Treasury Department and
the IRS are concerned about the difficulty of effecting
Congressional intent behind the exclusion for internal-use
software with respect to computer software being developed
today. Despite Congress' broad grant of regulatory authority
in section 41(d)(4)(E), the Treasury Department and the IRS
believe that this authority may not be broad enough to resolve
those difficulties.
Accordingly, the Treasury Department and the IRS request
comments regarding a definition of internal-use software that
appropriately reflects the statute and legislative history,
can be readily applied by taxpayers and readily administered
by the IRS, and is flexible enough to provide continuing
application into the future. In submitting comments,
commentators are invited to address any of the definitions
included in prior guidance as well as other definitions that
have been proposed to the Treasury Department and the IRS by
commentators.
18
In addressing these alternatives, commentators also are
invited to discuss how software development efforts that
encompass both internal-use software and non-internal use
software should be addressed under any particular definition.
The Treasury Department and the IRS are concerned that the
tendency toward the integration of software across many
functions of a taxpayer's business activities may make it
difficult for both taxpayers and the IRS to separate internaluse software from non-internal use software (or software not
subject to additional qualification requirements) under any
particular definition of internal-use software. In addition,
the Treasury Department and the IRS are concerned that a
definition of internal-use software that relies upon the
"primary" or "principal" use of that software would be
difficult to apply and administer. The Treasury Department
and the IRS' continuing goal is that any final rule must
provide clear, objective guidance on what software is treated
as internal-use software for purposes of the research credit.
Effective Dates
On [INSERT DATE FINAL REGULATIONS ARE FILED WITH THE
FEDERAL REGISTER], the Treasury Department and the IRS
published in the Federal Register (XX FR XX) final regulations
(TD XXXX) relating to the definition of qualified research
19
under section 41(d).
The final regulations apply to taxable
years ending on or after [INSERT DATE FINAL REGULATIONS ARE
FILED WITH THE FEDERAL REGISTER]. The final regulations do
not contain final rules for research with respect to computer
software "which is developed by (or for the benefit of) the
taxpayer primarily for internal use by the taxpayer" for
purposes of section 41(d)(4)(E) (i.e., internal-use software).
The Treasury Department and the IRS have announced in
prior guidance, including Notice 87-12 (1987-1 C.B. 432) and
more recently in the 2001 proposed regulations, that final
regulations relating to internal-use software generally will
be effective for taxable years beginning after December 31,
1985. In light of the length of time that has passed since
1986, as well as the developments with respect to computer
software discussed in this ANPRM, the Treasury Department and
the IRS request comments on whether final regulations relating
to internal-use software should have any retroactive effect.
With respect to internal-use software for taxable years
beginning after December 31, 1985, and until further guidance
is published in the Federal Register, taxpayers may continue
to rely upon all of the provisions relating to internal-use
software in the 2001 proposed regulations (66 FR 66362).
Alternatively, taxpayers may continue to rely upon all of the
20
provisions relating to internal-use software in TD 8930 (66 FR
280). For example, taxpayers relying upon the internal-use
software rules of TD 8930 must also apply the "discovery test"
as set forth in TD 8930.
21
Request for Public Comment
The Treasury Department and the IRS invite interested
persons to submit comments (in the manner described in the
ADDRESSES caption) on issues arising under the provisions for
internal-use software. The Treasury Department and the IRS
invite comments that address any of the definitions included
in prior guidance as well as other definitions that have been
proposed to the Treasury Department and the IRS by
commentators. Specifically, the Treasury Department and the
IRS invite comments that provide a definition of internal-use
software that-1. Appropriately reflects the statute and legislative
history;
2. Can be readily applied by taxpayers and readily
administered by the IRS; and
3. Is flexible enough to provide continuing application
in the future.
Deputy Commissioner for Services and Enforcement.
22
JS-1065T Air Transportation Stabilization Board Statement on Frontier Airlines, Inc. L o a n ... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 23, 2003
js-1065
Air Transportation Stabilization Board Statement on Frontier Airlines, Inc.
Prepayment of Remaining Loan Balance
The Air Transportation Stabilization Board announced that yesterday, Frontier
Airlines, Inc. fully repaid the remaining balance of a $70.0 million loan issued on
February 14, 2003. The final payment had been due in 2007. The loan was backed
by $63.0 million federal guarantee issued under the Air Transportation Safety and
System Stabilization Act.
http://www.treas.gov/press/releases/j s 1065 .htm
5/20/2005
ZSS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 24, 2003
2003-12-24-12-26-57-26198
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $86,924 million as of the end of that week, compared to $86,559 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
December 12, 2003
December 19, 2003
86,559
86,924
TOTAL
1. Foreign Currency Reserves
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
8,211
14,601
22,812
8,281
14,573
22,853
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
13,408
2,933
16,341
13,518
2,927
16,445
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position 2
24,043
24,189
3. Special Drawing Rights (SDRs)
12,319
12,394
4. Gold Stock 3
11,043
11,043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 12, 2003
Euro
1. Foreign currency loans and securities
Yen
December 19, 2003
TOTAL
Euro
Yen
0
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
TOTAL
0
2. a. Short positions
2.b. Long positions
3. Other
III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 12, 2003
Euro
Yen
TOTAL
0
1. Contingent liabilities in foreign currency
December 19, 2003
Euro
Yen
TOTAL
0
La. Collateral guarantees on debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
3.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings ofthe Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
js-1066: Treasury Issues Rules T o Increase Transparency and Halt Abusive Tax Avoidan...
Page 1 of 3
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 29, 2003
js-1066
Treasury Issues Rules To Increase Transparency and Halt Abusive Tax
Avoidance Transactions
Reins Tightened on Lawyers, Accountants, and Other Tax Advisors
Today the Treasury Department and the IRS issued four items of administrative
guidance as part of their ongoing effort to halt abusive tax avoidance transactions
and maximize effective use of IRS audit resources. The first of the items released
today is aimed at strengthening the tax system through heightened standards for
tax advisors. The other three are aimed at increasing transparency and disclosure
of information to the IRS. Improved disclosure coupled with more effective use of
the information disclosed are central to the Treasury Department and IRS's strategy
for identifying abusive tax avoidance transactions early and addressing them
promptly. In addition, the transparency that disclosure brings serves as a deterrent
to abusive tax avoidance transactions.
"Taken together, the actions we are announcing today represent another significant
step to end the proliferation of abusive tax avoidance transactions that has
undermined confidence in our tax system," said Treasury Assistant Secretary for
Tax Policy P a m Olson. " W e are proposing a set of best practices that makes clear
that tax professionals should adhere to the highest ethical standards and ensure
that their clients are well-advised of the law and any risks they are taking."
> Proposed changes to Circular 230 that set high standards for the tax advisors
and firms that provide opinions supporting tax-motivated transactions.
o The proposed rules set out clear and specific requirements for tax opinions
provided by attorneys and accountants and expectations for those with
supervisory responsibility for a professional services firm's tax practice.
o In an effort to halt the rush to the bottom that pervaded the 1990s and
restore the confidence of the public in tax professionals, the proposed
changes also describe best practices for tax advisors and call on
professional services firms to put in place procedures for all of the firm's
personnel that are consistent with these best practices.
o To ensure clients are well-advised, the proposed changes would obligate
tax advisors to inform clients explicitly about what protections, if any, an
opinion provides to the client. For example, tax advisors would have to
advise clients about issues that the opinion does not address and warn the
client if the opinion will not protect the client against penalties.
o The Treasury Department and the IRS are working with professional
organizations to promote best practices among tax professionals through
setting aspirational standards and self-regulation. The proposed changes
would put in place a framework for that effort.
o The proposed changes replace changes proposed in January 2001. They
reflect a careful consideration of the comments received on the January
2001 proposals and information gathered by the IRS in its audit of
professional services firms' compliance with the tax shelter rules.
> Final regulations that will increase the cost of failing to disclose abusive tax
avoidance transactions. The regulations also apply to taxpayers w h o do not
disclose that they have reported items on their tax returns that are based on
the position that a Treasury regulation is invalid. Under the final regulations,
for purposes of the imposition of penalties, a taxpayer's failure to disclose an
abusive tax avoidance transaction is treated as a strong indication that the
taxpayer acted in bad faith with respect to any additional tax owed as a
consequence of the transaction. Similarly, taxpayers w h o do not disclose
items that are based on advice that a Treasury regulation is invalid will be
http://www.treas.gov/press/releases/jsl066.htm
5/20/2005
deemed to have acted in bad faith with respect to any additional tax that is
js-1066: Treasury Issues Rules T o Increase Transparency and Halt Abusive Tax Avoidan...
Page 2 of 3
owed as a consequence of those items.
"We are taking the administrative steps we can under current law to create
downsides for those w h o choose not to disclose by making it clear that failing to
disclose significantly increases the likelihood of penalties being imposed,"
• continued Assistant Secretary Olson. "Having the IRS hunt for an abusive
transaction hidden on a tax return is a waste of IRS resources. If a taxpayer is
willing to enter into a transaction, then the taxpayer should be willing to disclose
that transaction on its return."
> Revised final regulations clarifying that the. disclosure of confidential
transactions on a return is limited to transactions for which a promoter has
imposed confidentiality on a taxpayer to protect the promoter's tax strategies
from disclosure. The revisions are intended to reduce unnecessary paperwork
for taxpayers and advisors and to allow the IRS to focus its attention on
transactions with potential for abusive tax avoidance, not on transactions for
which confidentiality is required for non-tax reasons.
"We continue to believe that sunshine is the best disinfectant for abusive
transactions," noted Assistant Secretary Olson." "Ensuring that the rules are
focused appropriately on the transactions with potential for abusive tax avoidance
will further that goal. Burdening taxpayers and burying the IRS with useless paper
will not. As a consequence, w e have narrowed the disclosure of confidential
transactions to situations in which the promoter imposed confidentiality to keep the
promoter's tax strategy out of view."
>
Proposed new Form 8858 requjjingjnformatign reporting by U.S. persons that
own foreign entities that are disregarded for U.S. tax purposes. The need for
information is not limited to the area of abusive tax avoidance transactions.
Appropriately tailored disclosure and information reporting requirements
provide the means to better focus the audit resources aimed at protecting the
integrity of our tax system. Ready access to information allows the IRS to
identify potential compliance issues efficiently and is critical to achieving the
IRS's commitment to reducing the time needed to complete an audit. The
proposed Form 8858 will be required for annual accounting periods beginning
after December 31, 2003. Comments on the text of the proposed n e w Form
8858 are requested from the public by March 1, 2004.
"Lack of information increases the time it takes for the IRS to identify and address
potential compliance issues efficiently and effectively," Assistant Secretary Olson
stated. "The proposed new form will increase transparency for offshore entities,
allowing the IRS to better focus its resources and improve compliance. The
disclosure will also have a deterrent effect."
"The Treasury Department has adopted measures that do as much as possible to
stem abusive tax avoidance transactions without legislative change. W e urge
Congress to pass the legislation the Treasury Department and IRS proposed in
March 2002 to deter abusive tax avoidance and facilitate the upfront identification of
questionable transactions," concluded Assistant Secretary Olson.
ATTACHED
Circular 230: Regulations Governing Practice before the Internal Revenue Service
6011: Final Regulations Clarifying the Rules Relating to Confidential'Transactions
6662-6664: Final Regulations Intended to Promote Disclosure of Reportable
Transactions
Announcement 2004-4: Information Reporting With Respect to Foreign
Disregarded Entities
Form 8858 (Information Reporting With Respect to Foreign Disregarded Entities)
Schedule M to Form 8858
These will be published in the Federal Register in the next few days and are subject
to minor technical changes.
-30Related Documents:
• Circular 230: Regulations Governing Practice before the Internal Revenue
http://www.treas.gov/press/releases/js 1066.htm
5/20/2005
js-1066: Treasury Issues Rules T o Increase Transparency and Halt Abusive T a x Avoidan...
Page 3 of 3
Service
• 6011: Final Regulations Clarifying the Rules Relating to Confidential
Transactions
• 6662-6664: Final Regulations Intended to Promote Disclosure of Reportable
Transactions
• Form 8858 (Information Reporting With Respect to Foreign Disregarded
Entities)
• Schedule M to Form 8858
• Announcement 2004-4: Information Reporting With Respect to Foreign
Disregarded Entities
http://www.treas.£Ov/press/releases/js 1066.htm
5/20/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Office of the Secretary
31 CFRParMO
[REG-122379-02]
RIN1545-BA70
Regulations Governing Practice Before the Internal Revenue Service
AGENCY: Office of the Secretary, Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This notice proposes modifications of the regulations governing practice
before the Internal Revenue Service (Circular 230). These regulations affect individuals
who are eligible to practice before the IRS. The proposed modifications set forth best
practices for tax advisors providing advice to taxpayers relating to Federal tax issues or
submissions to the IRS and modify the standards for certain tax shelter opinions. This
document also provides notice of a public hearing regarding the proposed regulations.
DATES: Comments: Written or electronically generated comments must be received
by February 13, 2004.
Public hearing: Outlines of topics to be discussed at the public hearing
scheduled for February 18, 2004, in the Auditorium of the Internal Revenue Building at
1111 Constitution Avenue, NW., Washington, DC 20224, must be received by February
11, 2004. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-122379-02),
room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand delivered Monday through Friday between the
2
hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-122379-02), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the IRS Internet site
www.irs.gov/regs.
FOR FURTHER INFORMATION CONTACT: Concerning issues for comment, Heather
L. Dostaler or Bridget E. Tombul at (202) 622-4940; concerning submissions of
comments, Guy Traynor of the Publications and Regulations Branch at (202) 622-7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed rulemaking has
been submitted to the Office of Management and Budget for review in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. 3507). Comments on the collection of
information should be sent to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affair
Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments
on the collection of information should be received by March 1, 2004. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the proper
performance of the Office of Professional Responsibility, including whether the
information will have practical utility;
3
The accuracy of the estimated burden associated with the proper collection of
information (see below);
How the quality, utility, and clarity of the information to be collected may be
enhanced;
How the burden of complying with the proposed collection of information may be
minimized, including through the application of automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
The collections of information (disclosure requirements) in these proposed
regulations are in Sec. 10.35(d). Section 10.35(d) requires a practitioner providing a tax
shelter opinion to make certain disclosures in the beginning of marketed tax shelter
opinions, limited scope opinions and opinions that fail to conclude at a confidence level
of at least more likely than not. In addition, certain relationships between the
practitioner and a person promoting or marketing a tax shelter must be disclosed. A
practitioner may be required to make one or more disclosure at the beginning of an
opinion. The collection of this material helps to ensure that taxpayers who receive a tax
shelter opinion are informed of any facts or circumstances that might limit the taxpayer's
use of the opinion. The collection of information is mandatory.
Estimated total annual disclosure burden is 13,333 hours.
Estimated annual burden per disclosing practitioner varies from 5 to 10 minutes,
depending on individual circumstances, with an estimated average of 8 minutes.
4
Estimated number of disclosing practitioners is 100,000.
Estimated annual frequency of responses is on occasion.
An agency may not conduct or sponsor, and a person is not required to respond
to a collection of information unless it displays a valid control number assigned by the
Office of Management and Budget.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by section
6103 of the Internal Revenue Code.
Background
Section 330 of title 31 of the United States Code authorizes the Secretary of the
Treasury to regulate the practice of representatives before the Treasury Department.
The Secretary has published the regulations in Circular 230 (31 CFR part 10). On
February 23, 1984, the regulations were amended to provide standards for tax shelter
opinions (49 FR 6719). On May 5, 2000, an advance notice of proposed rulemaking
was published (65 FR 30375) which requested comments regarding amendments to the
standards of practice governing tax shelters and other general matters. On January 12,
2001, a notice of proposed rulemaking (66 FR 3276) was published that proposed
amendments to the regulations relating to practice before the Internal Revenue Service
in general and addressing tax shelter opinions in particular. On July 26, 2002, final
regulations (67 FR 48760) were issued incorporating only the non-tax shelter related
5
matters. The IRS and the Treasury Department announced that regulations governing
standards for tax shelter opinions would be proposed again at a later date.
This document proposes new proposed amendments to the standards governing
tax shelter opinions and withdraws proposed amendments to §§10.33, 10.35 and 10.36
of the regulations governing practice before the IRS that were published in 2001. See
66 F R 3276 (Jan. 12, 2001).
Explanation of Provisions
Tax advisors play an increasingly important role in the Federal tax system, which
is founded on principles of voluntary compliance. The tax system is best served when
the public has confidence in the honesty and integrity of the professionals providing tax
advice. To restore, promote, and maintain the public's confidence in those individuals
and firms, these proposed regulations set forth best practices applicable to all tax
advisors. These regulations also amend the mandatory requirements for practitioners
w h o provide certain tax shelter opinions. These regulations are limited to practice
before the IRS and do not alter or supplant other ethical standards applicable to
practitioners.
The standards set forth in these proposed regulations differ from the January 12,
2001 proposed regulations in several ways. First, §10.33 prescribes best practices for
all tax advisors. Second, §10.35 combines and modifies the standards applicable to
marketed and more likely than not tax shelter opinions in former §10.33 (tax shelter
opinions used to market tax shelters) and former §10.35 (more likely than not tax shelter
opinions) of the January 12, 2001 proposed regulations. Third, these regulations revise
6
proposed §10.36, which provides procedures for ensuring compliance with §§10.33 and
10.35. Finally, provisions relating to advisory committees to the Office of Professional
Responsibility are provided in new §10.37. The Treasury Department and the IRS will
publish conforming amendments to §§10.22 and 10.52 in a separate notice of proposed
rulemaking.
Best Practices
To ensure the integrity of the tax system, tax professionals should adhere to best
practices when providing advice or assisting their clients in the preparation of a
submission to the IRS. Section 10.33 describes the best practices to be observed by all
tax advisors in providing clients with the highest quality representation. These best
practices include: (1) communicating clearly with the client regarding the terms of the
engagement and the form and scope of the advice or assistance to be rendered; (2)
establishing the relevant facts, including evaluating the reasonableness of any
assumptions or representations; (3) relating applicable law, including potentially
applicable judicial doctrines, to the relevant facts; (4) arriving at a conclusion supported
by the law and the facts; (5) advising the client regarding the import of the conclusions
reached; and (6) acting fairly and with integrity in practice before the IRS.
Standards for Certain Tax Shelter Opinions
Section 10.35 prescribes requirements for practitioners providing more likely than
not and marketed tax shelter opinions. A more likely than not tax shelter opinion is a tax
shelter opinion that reaches a conclusion of at least more likely than not with respect to
one or more material Federal tax issue(s). A marketed tax shelter opinion is a tax
7
shelter opinion, including a more likely than not tax shelter opinion, that a practitioner
knows, or has reason to know, will be used or referred to by a person other than the
practitioner (or a person w h o is a m e m b e r of, associated with, or employed by the
practitioner's firm) in promoting, marketing or recommending a tax shelter to o n e or
more taxpayers.
Definition of Tax Shelter Opinion
These proposed regulations retain the definition of tax shelter proposed in
January 2001 by applying the definition found in section 6662 to all taxes under the
Internal Revenue Code. A number of commentators expressed concern that this
definition is overly broad, encompasses routine tax matters, and is difficult to administer
by practitioners and the IRS. After careful consideration of these issues, the Treasury
Department and the IRS have determined that the definition in the proposed regulations
best defines the scope of these regulations. Section 10.35 has been modified,
however, to address commentators' concerns by excluding from the definition of a tax
shelter opinion preliminary advice provided pursuant to an engagement in which the
practitioner is expected subsequently to provide an opinion that satisfies the
requirements of this section. In addition, under §10.35(a)(3)(ii), a practitioner m a y
provide an opinion that is limited to some, but not all, material Federal tax issues that
m a y be relevant to the treatment of a tax shelter item if the taxpayer and the practitioner
agree to limit the scope of the opinion. Such a limited scope opinion cannot be a
marketed tax shelter opinion, and all limited scope opinions must contain the
appropriate disclosures described below.
8
Reguirements for Tax Shelter Opinions
The requirements for all more likely than not and marketed tax shelter opinions
include: (1) identifying and considering all relevant facts and not relying on any
unreasonable factual assumptions or representations; (2) relating the applicable law
(including potentially applicable judicial doctrines) to the relevant facts and not relying
on any unreasonable legal assumptions, representations or conclusions; (3) considering
all material Federal tax issues and reaching a conclusion, supported by the facts and
the law, with respect to each material Federal tax issue; and (4) providing an overall
conclusion as to the Federal tax treatment of the tax shelter item or items and the
reasons for that conclusion.
In addition to the exception to the requirements for limited scope opinions
discussed above, in the case of a marketed tax shelter opinion, a practitioner is not
expected to identify and ascertain facts peculiar to a taxpayer to w h o m the transaction
is marketed, but the opinion must include the appropriate disclosure described below.
Moreover, if a practitioner is unable to reach a conclusion with respect to one or more
material Federal tax issue(s) or to reach an overall conclusion in a tax shelter opinion,
the opinion must state that the practitioner is unable to reach a conclusion with respect
to those issues or to reach an overall conclusion and describe the reasons that the
practitioner is unable to reach such a conclusion. If the practitioner fails to reach a
conclusion at a confidence level of at least more likely than not with respect to one or
more material Federal tax issue(s), the opinion must include the appropriate disclosures
described below.
9
Reguired Disclosures
Section 10.35(d) provides disclosures that are required to be m a d e in the
beginning of marketed tax shelter opinions, limited scope opinions, and opinions that fail
to reach a conclusion at a confidence level of at least more likely than not. In addition,
certain relationships between the practitioner and a person promoting or marketing a tax
shelter must be disclosed. A practitioner m a y be required to m a k e more than one of the
disclosures described below.
1.
Relationship Between Practitioner and Promoter
Under §10.35(d)(1), a practitioner must disclose if the practitioner has a
compensation arrangement with any person (other than the client for w h o m the opinion
is prepared) with respect to the promoting, marketing or recommending of a tax shelter
discussed in the opinion. A practitioner also must disclose if there is any referral
agreement between the practitioner and a ny person (other than the client for w h o m the
opinion is prepared) engaged in the promoting, marketing or recommending of the tax
shelter discussed in the opinion.
2.
Marketed Tax Shelter Opinion
Under §10.35(d)(2), a practitioner must disclose that a marketed opinion m a y not
be sufficient for a taxpayer to use for the purpose of avoiding penalties under section
6662(d) of the Code. The practitioner also must state that taxpayers should seek
advice from their o w n tax advisors.
10
3. Limited Scope Opinion
Under §10.35(d)(3), a practitioner must disclose in a limited scope opinion that
additional issue(s) may exist that could affect the Federal tax treatment of the tax
shelter addressed in the opinion, that the opinion does not consider or reach a
conclusion with respect to those additional issues and that the opinion was not written,
and cannot be used by the recipient, for the purpose of avoiding penalties under
section 6662(d) of the Code with respect to those issues outside the scope of the
opinion.
4. Opinions That Fail to Reach a Conclusion at a Confidence Level of at Least More
Likely Than Not
Under §10.35(d)(4), a practitioner must disclose that the opinion fails to reach a
conclusion at a confidence level of at least more likely than not with respect to one or
more material Federal tax issue(s) addressed by the opinion and that the opinion was
not written, and cannot be used by the recipient, for the purpose of avoiding penalties
under section 6662(d) of the Code with respect to such issue(s).
Procedures to Ensure Compliance
Section 10.36 provides that tax advisors with responsibility for overseeing a firm's
practice before the IRS should take reasonable steps to ensure that the firm's
procedures for all members, associates, and employees are consistent with the best
practices described in §10.33. In the case of tax shelter opinions, a practitioner with this
oversight responsibility must take reasonable steps to ensure that the firm has adequate
procedures in effect for purposes of complying with §10.35.
11
Advisory Committees on the Integrity of Tax Professionals
Section 10.37 authorizes the Director of the Office of Professional Responsibility
to establish one or more advisory committees composed of at least five individuals
authorized to practice before the IRS. Under procedures prescribed by the Director and
at the request of the Director, an advisory committee may review and make
recommendations regarding professional standards or best practices for tax advisors or
may advise the Director whether a practitioner may have violated §§10.35 or 10.36.
Proposed Effective Date
These regulations are proposed to apply on the date that final regulations are
published in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities. Persons
authorized to practice before the IRS have long been required to comply with certain
standards of conduct. The added disclosure requirements for tax shelter opinions
imposed by these regulations will not have a significant economic impact on a
substantial number of small entities because, as previously noted, the estimated burden
of disclosures is minimal. This is because practitioners have the information needed to
determine whether some of the disclosures are required before the opinion is prepared
and for the other disclosures the regulations provide practitioners with the language to
12
be included in the opinion. Therefore, a regulatory flexibility analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section
7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small businesses.
Comments and Public Hearing
Before the regulations are adopted as final regulations, consideration will be
given to any written comments and electronic comments that are submitted timely to the
IRS. The IRS and Treasury Department specifically request comments on the clarity of
the proposed regulations and how they can be made easier to understand. All
comments will be available for public inspection and copying.
The public hearing is scheduled for February 18, 2004, at 10 a.m., and will be
held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. All visitors must present photo identification to enter the
building. Visitors will not be admitted beyond the immediate entrance area more than
30 minutes before the hearing starts. For information about having your name placed
on the building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments at the hearing must submit written or electronic comments by
February 13, 2004, and submit an outline of the topics to be discussed and the time to
13
be devoted to each topic by February 11, 2004. A period of 10 minutes will be allocated
to each person for making comments.
An agenda showing the scheduling of the speakers will be prepared after the
deadline for receiving outlines has passed. Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal authors of the regulations are Heather L. Dostaler, Bridget E.
Tombul, and Brinton T. Warren of the Office of the Associate Chief Counsel (Procedure
and Administration), Administrative Provisions and Judicial Practice Division, but other
personnel from the IRS and Treasury Department participated in their development.
List of Subjects in 31 CFR Part 10
Administrative practice and procedure, Lawyers, Accountants, Enrolled agents,
Enrolled actuaries, Appraisers.
Proposed Amendments to the Regulations
Accordingly, 31 CFR part 10 is proposed to be amended as follows
Paragraph 1. The authority citation for subtitle A, part 10 continues to read as
follows:
[Authority: Sec. 3, 23 Stat. 258, sees. 2-12, 60 Stat. 237 et.seq.; 5 U.S.C. 301,
500, 551-559; 31 U.S.C. 330; Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3
CFR, 1949-1953 Comp., P. 1017.]
PART 10--PRACTICE BEFORE THE INTERNAL REVENUE SERVICE
14
Par. 2. Section 10.33 is revised to read as follows:
§10.33 Best practices for tax advisors.
(a) Best practices. Tax advisors should provide clients with the highest quality
representation concerning Federal tax issues by adhering to best practices in providing
advice and in preparing or assisting in the preparation of a submission to the Internal
Revenue Service. Best practices i nclude the following:
(1) Communicating clearly with the client regarding the terms of the
engagement. For example, the advisor should determine the client's expected purpose
for and use of the advice and should have a clear understanding with the client
regarding the form and scope of the advice or assistance to be rendered.
(2) Establishing the facts, determining which facts are relevant, and evaluating
the reasonableness of any assumptions or representations.
(3) Relating the applicable law (including potentially applicable judicial doctrines)
to the relevant facts.
(4) Arriving at a conclusion supported by the law and the facts.
(5) Advising the client regarding the import of the conclusions reached,
including, for example, whether a taxpayer may avoid penalties for a substantial
understatement of income tax under section 6662(d) of the Internal Revenue Code if a
taxpayer acts in reliance on the advice.
(6) Acting fairly and with integrity in practice before the Internal Revenue
Service.
15
(b) Effective date. This section is effective on the date that final regulations are
published in the Federal Register.
Par. 3. Section 10.35 is added to read as follows:
§10.35 Reguirements for certain tax shelter opinions.
(a) In general. A practitioner providing a more likely than not tax shelter opinion
or a marketed tax shelter opinion must comply with each of the following requirements.
(1) Factual matters, (i) The practitioner must use reasonable efforts to identify
and ascertain the facts, which may relate to future events if a transaction is prospective
or proposed, and determine which facts are relevant. The opinion must identify and
consider all relevant facts.
(ii) The practitioner must not base the opinion on any unreasonable factual
assumptions (including assumptions as to future events), such as a factual assumption
that the practitioner knows or should know is incorrect or incomplete. For example, it is
unreasonable to assume that a transaction has a business purpose or that a transaction
is potentially profitable apart from tax benefits, or to make an assumption with respect to
a material valuation issue. In the case of any marketed tax shelter opinion, the
practitioner is not expected to identify or ascertain facts peculiar to a taxpayer to whom
the transaction may be marketed, but the opinion must include the appropriate
disclosure(s) required under paragraph (d) of this section.
(iii) The practitioner must not base the opinion on any unreasonable factual
representations, statements or findings of the taxpayer or any other person, such as a
factual representation that the practitioner knows or should know is incorrect or
16
incomplete. For example, a practitioner may not rely on a taxpayer's factual
representation that a transaction has a business purpose if the representation fails to
include a specific description of the business purpose or the practitioner knows or
should know that the representation is incorrect or incomplete.
(2) Relate law to facts, (i) The practitioner must relate the applicable law
(including potentially applicable judicial doctrines) to the relevant facts.
(ii) The practitioner must not assume the favorable resolution of any material
Federal tax issue except as provided in paragraphs (a)(3)(H) and (b) of this section, or
otherwise base an opinion on any unreasonable legal assumptions, representations, or
conclusions.
(iii) The practitioner's opinion must not contain internally inconsistent legal
analyses or conclusions.
(3) Evaluation of material Federal tax issues, (i) The practitioner must consider
all material Federal tax issues except as provided in paragraphs (a)(3)(H) and (b) of this
section.
(ii) The practitioner may provide an opinion that considers less than all of the
material Federal tax issues if(A) The taxpayer and the practitioner agree to limit the scope of the opinion to
one or more Federal tax issue(s);
(B) The opinion is not a marketed tax shelter opinion; and
(C) The opinion includes the appropriate disclosure(s) required under paragraph
(d) of this section.
17
(iii) The practitioner must provide his or her conclusion as to the likelihood that
the taxpayer will prevail on the merits with respect to each material Federal tax issue. If
the practitioner is unable to reach a conclusion with respect to one or more material
Federal tax issue(s), the opinion must state that the practitioner is unable to reach a
conclusion with respect to those issues. The practitioner must describe the reasons fo r
the conclusions, including the facts and analysis supporting the conclusions, or describe
the reasons that the practitioner is unable to reach a conclusion as to one or more
material Federal tax issue (s). If the practitioner fails to reach a conclusion at a
confidence level of at least more likely than not with respect to one or more material
Federal tax issue(s), the opinion must include the appropriate disclosure(s) required
under paragraph (d) of this section.
(iv) The practitioner must not take into account the possibility that a tax return will
not be audited, that an issue will not be raised on audit, or that an issue will be settled.
(4) Overall conclusion. The practitioner must provide an overall conclusion as to
the likelihood that the Federal tax treatment of the tax shelter item or items is the proper
treatment and the reasons for that conclusion. If the practitioner is unable to reach an
overall conclusion, the opinion must state that the practitioner is unable to reach an
overall conclusion and describe the reasons for the practitioner's inability to reach a
conclusion.
(b) Competence to provide opinion; reliance on opinions of others. (1)The
practitioner must be knowledgeable in all of the aspects of Federal tax law relevant to
the opinion being rendered. If the practitioner is not sufficiently knowledgeable to
18
render an informed opinion with respect to particular material Federal tax issues, the
practitioner may rely on the opinion of another practitioner with respect to these issues
unless the practitioner knows or should know that such opinion should not be relied on.
If a practitioner relies on the opinion of another practitioner, the relying practitioner must
identify the other opinion and set forth the conclusions reached in the other opinion.
(2) The practitioner must be satisfied that the combined analysis of the opinions,
taken as a whole, satisfies the requirements of this section.
(c) Definitions. For purposes of this section(1) A practitioner includes any individual described in §10.2(e).
(2) The term tax shelter includes any partnership or other entity, any investment
plan or arrangement, or any other plan or arrangement, a significant purpose of which is
the avoidance or evasion of any tax imposed by the Internal Revenue Code. A tax
shelter may give rise to one or more tax shelter items.
(3) A tax shelter item is, with respect to a tax shelter, an item of income, gain,
loss, deduction, or credit, the existence or absence of a taxable transfer of property, or
the value of property.
(4) Tax shelter opinion--(i) In general. A tax shelter opinion is written advice by a
practitioner concerning the Federal tax aspects of any Federal tax issue relating to a tax
shelter item or items.
(ii) Excluded advice. A tax shelter opinion does not include written advice
provided to a client during the course of an engagement pursuant to which the
practitioner is expected subsequently to provide written advice to the client that satisfies
19
the requirements of this section, or written advice concerning the qualification of a
qualified plan.
(iii) Included advice. A tax shelter opinion includes the Federal tax aspects or
tax risks portion of offering materials prepared by or at the direction of a practitioner.
Similarly, a financial forecast or projection prepared by or at the direction of a
practitioner is a tax shelter opinion if it is predicated on assumptions regarding Federal
tax aspects of the investment.
(5) A more likely than not tax shelter opinion is a tax shelter opinion that reaches
a conclusion at a confidence level of at least more likely than not (that is, greater than
50 percent) that one or more material Federal tax issues would be resolved in the
taxpayer's favor.
(6) A marketed tax shelter opinion is a tax shelter opinion, including a more likely
than not tax shelter opinion, that a practitioner knows or has reason to know will be
used or referred to by a person other than the practitioner (or a person who is a member
of, associated with, or employed by the practitioner's firm) in promoting, marketing or
recommending the tax shelter to one or more taxpayers.
(7) A material Federal tax issue is any Federal tax issue for which the Internal
Revenue Service has a reasonable basis for a successful challenge and the resolution
of which could have a significant impact, whether beneficial or adverse and under any
reasonably foreseeable circumstance, on the Federal tax treatment of a taxpayer's tax
shelter item or items.
20
(d) Reguired disclosures. An opinion must contain all of the following disclosures
thatapply-(l) Relationship between promoter and practitioner. A practitioner must
disclose in the beginning of the opinion the existence of(i) Any compensation arrangement, such as a referral fee or a fee-sharing
arrangement, between the practitioner (or the practitioner's firm) and any person (other
than the client for whom the opinion is prepared) with respect to the promoting,
marketing or recommending of a tax shelter discussed in the opinion; or
(ii) Any referral agreement between the practitioner (or the practitioner's firm) and
a person (other than the client for whom the opinion is prepared) engaged in the
promoting, marketing or recommending of the tax shelter discussed in the opinion.
(2) Marketed tax shelter opinions. A practitioner must disclose in the beginning
of a marketed tax shelter opinion that with respect to any material Federal tax issue for
which the opinion reaches a conclusion at a confidence level of at least more likely than
not(i) The opinion may not be sufficient for a taxpayer to use for the purpose of
avoiding penalties relating to a substantial understatement of income tax under section
6662(d) of the Internal Revenue Code; and
(ii) Taxpayers should seek advice based on their individual circumstances with
respect to those material Federal tax issues from their own tax advisor(s).
(3) Limited scope opinions. If a practitioner provides an opinion that is limited to
one or more Federal tax issue(s) agreed to by the taxpayer and the practitioner, the
practitioner must disclose in the beginning of the opinion that-
21
(i) T h e opinion is limited to the one or more Federal tax issue(s) agreed to by the
taxpayer and the practitioner and addressed in the opinion;
(ii) Additional issue(s) m a y exist that could affect the Federal tax treatment of the
tax shelter addressed in the opinion and the opinion does not consider or provide a
conclusion with respect to any additional issue(s); and
(iii) With respect to any material Federal tax issue(s) outside the limited scope of
the opinion, the opinion w a s not written, and cannot be used by the recipient, for the
purpose of avoiding penalties relating to a substantial understatement of income tax
under section 6662(d) of the Internal Revenue Code.
(4) Opinions that fail to reach a more likely than not conclusion. If a practitioner
does not reach a conclusion at a confidence level of at least more likely than not with
respect to a material Federal tax issue addressed by the opinion, the practitioner must
disclose in the beginning of the opinion that-(i) T h e opinion does not reach a conclusion at a confidence level of at least more
likely than not that with respect to one or more material Federal tax issues addressed by
the opinion; and
(ii) With respect to those material Federal tax issues, the opinion w a s not written,
and cannot be used by the recipient, for the purpose of avoiding penalties relating to a
substantial understatement of income tax under section 6662(d) of the Internal Revenue
Code.
(e) Effect of opinion that meets these standards. A n opinion that meets these
requirements satisfies the practitioner's responsibilities under this section, but the
22
persuasiveness of the opinion with regard to the tax issues in question and the
taxpayer's good faith reliance on the opinion will be separately determined under
applicable provisions of the law and regulations.
(f) Effective date. This section applies to tax shelter opinions rendered after the
date that final regulations are published in the Federal Register.
Par. 4. Section 10.36 is added to read as follows:
§10.36 Procedures to ensure compliance.
(a) Best practices for tax advisors. Tax advisors with responsibility for
overseeing a firm's practice of providing advice concerning Federal tax issues or of
preparing or assisting in the preparation of submissions to the Internal Revenue Service
should take reasonable steps to ensure that the firm's procedures for all members,
associates, and employees are consistent with the best practices described in §10.33.
(b) Reguirements for certain tax shelter.opinions. Any practitioner who has (or
practitioners who have or share) principal authority and responsibility for overseeing a
firm's practice of providing advice concerning Federal tax issues must take reasonable
steps to ensure that the firm has adequate procedures in effect for all members,
associates, and employees for purposes of complying with §10.35. A practitioner will be
subject to discipline for failing to comply with the requirements of this paragraph if(1) The practitioner through willfulness, recklessness, or gross incompetence
does not take reasonable steps to ensure that the firm has adequate procedures to
comply with §10.35, and one or more individuals who are members of, associated with,
23
or employed by, the firm are, or have, engaged in a pattern or practice, in connection
with their practice with the firm, of failing to comply with §10.35; or
(2) The practitioner knows or has reason to know that one or more individuals
who are members of, associated with, or employed by, the firm are, or have, engaged in
a practice, in connection with their practice with the firm, that does not comply with
§10.35 and the practitioner, through willfulness, recklessness, or gross incompetence
fails to take prompt action to correct the noncompliance.
(c) Effective date. Paragraph (a) of this section is effective on the date that final
regulations are published in the Federal Register. Paragraph (b) of this section applies
to tax shelter opinions rendered after the date that final regulations are published in the
Federal Register.
Par. 5. Section 10.37 is added to read as follows:
§10.37 Establishment of Advisory Committees.
(a) Advisory committees. To promote and maintain the public's confidence in
tax advisors, the Director of the Office of Professional Responsibility is authorized to
establish one or more advisory committees composed of at least five individuals
authorized to practice before the Internal Revenue Service. Under procedures
prescribed by the Director, an advisory committee may review and make
recommendations regarding professional standards or best practices for tax advisors, or
more particularly, whether a practitioner may have violated §§10.35 or 10.36.
(b) Effective date. This section is effective on the date that final regulations are
published in the Federal Register.
24
Par. 6. Section 10.93 is revised to read as follows:
§10.93 Effective date.
Except as otherwise provided in each section and subject to §10.91, Part 10 is
applicable on July 26, 2002.
Mark E. Matthews
Deputy Commissioner for Services and Enforcement.
Approved: December 19, 2003
George B. Wolfe
Deputy General Counsel, Office of the Secretary.
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[TD 9108]
RIN 1545-BC76
Confidential Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: These final regulations modify and clarify the rules
relating to confidential transactions under the Income Tax
Regulations, and make minor conforming changes to the list
maintenance rules under the Procedure and Administration
Regulations. These regulations affect taxpayers participating
in reportable transactions and persons responsible for
maintaining and furnishing lists of investors in reportable
transactions.
DATES: Effective Date: These regulations are effective
December 29, 2003.
Applicability Dates: For dates of applicability, see
§1.6011-4(h) and §301.6112-1.
FOR FURTHER INFORMATION CONTACT: Tara P. Volungis or Charlotte
Chyr, 202-622-3070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these
regulations have been previously reviewed and approved by the
Office of Management and Budget in accordance with the
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under
control numbers 1545-1685 and 1545-1686.
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection of information displays a valid 0MB control number
assigned by the Office of Management and Budget.
Books or records relating to a collection of information
must be retained as long as their contents may become
material in the administration of any internal revenue
law. Generally, tax returns and tax return information are
confidential, as required by 26 U.S.C. 6103.
Background
This document amends 2 6 CFR parts 1 and 3 01 by modifying
and clarifying the rules relating to the disclosure of
reportable transactions by certain taxpayers on their Federal
income tax returns under section 6011 and by making conforming
changes to the rules under section 6112.
On October 17, 2002, the IRS issued temporary and
proposed regulations modifying the rules under sections 6011,
2
6111, and 6112
(TD 9017, REG-103735-00, REG-154117-02, REG-
154116-02, REG-154115-02, REG-154429-02, REG-154423 - 02, REG154426-02, REG-110311-98; TD 9018, REG-103736 - 00) (the October
2002 regulations). The October 2002 regulations were
published in the Federal Register (67 FR 64799, 67 FR 64840;
67 FR 64807, 67 FR 64842) on October 22, 2002. On December
11, 2002, and on January 7, 2003, the IRS and Treasury
Department held a public hearing on these regulations. On
February 28, 2003, the IRS issued final regulations under
sections 6011, 6111, and 6112 (TD 9046) (the February 2003
regulations). The February 2003 regulations were published in
the Federal Register (68 FR 10161) on March 4, 2003.
Since finalizing the disclosure regulations, the IRS and
Treasury Department have received numerous comments concerning
the confidentiality filter. The IRS and Treasury Department
received requests to exclude certain transactions from the
scope of the confidentiality filter, and requests to modify
the language of the regulation itself. After reviewing these
comments, the IRS and Treasury Department have decided to
narrow the confidentiality filter under §1.6011-4(b) (3).
Explanation of Provisions
Section 1.6011-4(b)(3) provides that certain transactions
are identified as confidential transactions. Confidential
3
transactions are reportable transactions that are subject to
the disclosure rules under §1.6011-4 and the list maintenance
rules under §301.6112-1. Currently, a confidential
transaction is a transaction that is offered under conditions
of confidentiality. The confidentiality filter generally
provides a presumption of non-confidentiality if the taxpayer
receives written authorization to disclose the tax treatment
and tax structure of the transaction.
The IRS and Treasury Department have concluded that the
confidentiality filter should be limited to situations in
which an advisor is paid a large fee and imposes a limitation
on disclosure that protects the confidentiality of the
advisor's tax strategies. The IRS and Treasury Department
believe that the confidentiality filter should not apply to
transactions in which confidentiality is imposed by a party to
the transaction acting in such capacity. Accordingly, the
confidentiality filter has been narrowed to reflect this
policy. Further, the exceptions and presumption language have
been removed because the IRS and Treasury Department have
concluded that they no longer are necessary under this
narrower rule. Conforming changes have been made to the rules
under §301.6112-1.
The IRS and Treasury Department also have made minor
4
clarifying changes under §1.6011-4.
The regulations clarify
that a return includes amended returns for purposes of
determining when a disclosure must be made. The IRS and
Treasury Department will continue to accept comments and will
make other changes as appropriate.
Special Analyses
It has been determined that this Treasury decision is not
a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required.
It has been determined pursuant to 5 U.S.C. 553(b) (B) that
notice and public procedure are unnecessary and contrary to
the public interest. These final regulations substantially
reduce taxpayer compliance burdens by limiting the scope of
transactions subject to the disclosure requirements of
§1.6011-4. For the same reason, pursuant to 5 U.S.C.
553(d)(1) and (3) a delayed effective date for these final
regulations is not required. Because no notice of proposed
rulemaking is required, the provisions of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not apply. However,
the IRS and Treasury Department welcome comments on whether
these final regulations impose additional costs and compliance
burdens on small businesses. Any such comments should provide
specific information concerning those costs and burdens. In
5
addition, the IRS and Treasury Department will consider
holding a public hearing concerning these regulations if there
is sufficient interest from affected parties. Pursuant to
section 7805(f) of the Internal Revenue Code, these
regulations were submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on their
impact on small business.
Drafting Information
The principal authors of these regulations are Tara P.
Volungis and Charlotte Chyr, Office of the Associate Chief
Counsel (Passthroughs and Special Industries). However, other
personnel from the IRS and Treasury Department participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Administrative practice and procedure, Employment taxes,
Estate taxes, Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are amended as
follows:
6
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues
to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6011-4 is amended as follows:
1. Paragraph (b)(3) is revised.
2. Paragraph (e)(1) is amended by removing the second
sentence and replacing it with two new sentences in its place.
3. Paragraphs (e)(2)(i) and (h) are revised.
The revisions and additions read as follows:
§1.6011-4 Requirement of statement disclosing participation in
certain transactions by taxpayers.
*****
(b) *****
(3) Confidential transactions--(i) In general. A
confidential transaction is a transaction that is offered to a
taxpayer under conditions of confidentiality and for which the
taxpayer has paid an advisor a minimum fee.
(ii) Conditions of confidentiality. A transaction is
considered to be offered to a taxpayer under conditions of
confidentiality if the advisor who is paid the minimum fee
places a limitation on disclosure by the taxpayer of the tax
treatment or tax structure of the transaction and the
7
limitation on disclosure protects the confidentiality of that
advisor's tax strategies. A transaction is treated as
confidential even if the conditions of confidentiality are not
legally binding on the taxpayer. A claim that a transaction
is proprietary or exclusive is not treated as a limitation on
disclosure if the advisor confirms to the taxpayer that there
is no limitation on disclosure of the tax treatment or tax
structure of the transaction.
(iii) Minimum fee. For purposes of this paragraph (b)(3),
the minimum fee is:
(A) $250,000 for a transaction if the taxpayer is a
corporation.
(B) $50,000 for all other transactions unless the
taxpayer is a partnership or trust, all of the owners or
beneficiaries of which are corporations (looking through any
partners or beneficiaries that are themselves partnerships or
trusts), in which case the minimum fee is $250,000.
(iv) Determination of minimum fee. For purposes of this
paragraph (b)(3), a minimum fee includes all fees for a tax
strategy or for services for advice (whether or not tax
advice) or for the implementation of a transaction. These
fees include consideration in whatever form paid, whether in
cash or in kind, for services to analyze the transaction
8
(whether or not related to the tax consequences of the
transaction), for services to implement the transaction, for
services to document the transaction, and for services to
prepare tax returns to the extent that the fees exceed the
fees customary for return preparation. For purposes of this
paragraph (b)(3), a taxpayer also is treated as paying fees to
an advisor if the taxpayer knows or should know that the
amount it pays will be paid indirectly to the advisor, such as
through a referral fee or fee-sharing arrangement. A fee does
not include amounts paid to a person, including an advisor, in
that person's capacity as a party to the transaction. For
example, a fee does not include reasonable charges for the use
of capital or the sale or use of property.
(v) Related parties. For purposes of this paragraph
(b)(3), persons who bear a relationship to each other as
described in section 267(b) or 707(b) will be treated as the
same person.
*****
(e) * * *
(1) * * * in addition, the disclosure statement for a
reportable transaction must be attached to each amended return
that reflects a taxpayer's participation in a reportable
transaction. A copy of the disclosure statement must be sent
9
to OTSA at the same time that any disclosure statement is
first filed by the taxpayer. * * *
(2) * * *
(i) Listed transactions. If a transaction becomes a
listed transaction after the filing of a taxpayer's tax return
(including an amended return) reflecting either tax
consequences or a tax strategy described in the published
guidance listing the transaction (or a tax benefit derived
from tax consequences or a tax strategy described in the
published guidance listing the transaction) and before the end
of the period of limitations for the final return (whether or
not already filed) reflecting the tax consequences, tax
strategy, or tax benefit, then a disclosure statement must be
filed as an attachment to the taxpayer's tax return next filed
after the date the transaction is listed regardless of whether
the taxpayer participated in the transaction in that year.
*****
(h) Effective dates. This section applies to Federal
income tax returns filed after February 28, 2000. However,
paragraphs (b)(3), (e)(1), and (e)(2)(i) of this section apply
to transactions entered into on or after December 29, 2003.
All the rules in this section may be relied upon for
transactions entered into on or after January 1, 2003, and
10
before December 29, 2003.
Otherwise, the rules that apply
with respect to transactions entered into before December 29,
2003 are contained in §1.6011-4 in effect prior to December
29, 2003, (see 26 CFR part 1 revised as of April 1, 2003).
PART 3 01--PROCEDURE AND ADMINISTRATION
Par. 3. The authority citation for part 301 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. In §301.6112-1, paragraph (c) (3) (iii) is amended
by revising the first sentence, removing the words "for advice
or implementation" from the third sentence, and adding two
sentences after the third sentence, to read as follows:
§301.6112-1 Requirement to prepare, maintain, and furnish
lists with respect to potentially abusive tax shelters.
*****
(c) * * *
(3) * * *
(iii) * * * in determining whether the minimum fee
threshold is satisfied, all fees for a tax strategy or for
services for advice (whether or not tax advice) or for the
implementation of a transaction that is a potentially abusive
tax shelter are taken
11
into account. * * * A fee does not include amounts paid to a
person, including an advisor, in that person's capacity as a
party to the transaction. For example, a fee does not include
reasonable charges for the use of capital or the sale or use
of property. * * *
*****
/s/ Mark E. Matthews
Deputy Commissioner for Services and
Enforcement.
Approved: December 18, 2 0 03
/s/ Pamela F. Olson
Assistant Secretary of the Treasury.
12
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD9109]
RIN1545-AY97
Establishing Defenses to the Imposition of the Accuracy-Related Penalty
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations that affect the defenses available
to the imposition of the accuracy-related penalty when taxpayers fail to disclose
reportable transactions or fail to disclose that they have taken a return position based
on the conclusion that a regulation is invalid. The final regulations are intended to
promote disclosure of reportable transactions and positions based on the conclusion
that a regulation is invalid by narrowing a taxpayer's ability to establish good faith and
reasonable cause as a defense. The final regulations also clarify the existing
regulations with respect to the facts and circumstances to be considered in determining
whether a taxpayer acted with reasonable cause and in good faith.
DATES: Effective Dates: These regulations are effective December 30, 2003.
Applicability Dates: These regulations apply to returns filed after December 31,
2002, with respect to transactions entered into on or after January 1, 2003.
FOR FURTHER INFORMATION CONTACT: Jamie G. Bernstein at (202) 622-4940
(not a toll-free number).
-2SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1. On December 31, 2002,
the IRS and the Treasury Department published in the Federal Register (67 FR 79894)
proposed amendments to the regulations (REG-126016-01) under sections 6662 and
6664 of the Internal Revenue Code (Code). No public hearing was requested or held.
Written and electronic comments responding to the notice of proposed rulemaking were
received. After consideration of all the comments, the proposed regulations under
section 6662 and 6664 are adopted as amended by this Treasury decision. The
revisions are discussed below.
Explanation of Revisions and Summary of Comments
These final regulations generally adopt the provisions of the proposed
regulations. The changes to the proposed regulations reflected in these final
regulations, as well as comments received, are discussed below.
1. Applicability of Disclosure Regulations Under Section 6011 and Effective Date
These final regulations were proposed to apply to returns filed after December
30, 2002, with respect to transactions entered into on or after January 1, 2003, to
coincide with temporary regulations relating to disclosure, promulgated under section
6011 and applicable for transactions entered into on or after January 1, 2003 (the
Temporary Disclosure Regulations). The Temporary Disclosure Regulations were
published in the Federal Register on October 22, 2002. See 67 FR 64799 and 67 FR
64840 (October 22, 2002). Final regulations under section 6011 were published on
March 4, 2003, and apply to transactions entered into on or after February 28, 2003.
-3See 68 FR 10161,10163 (March 4, 2003) (the Final Disclosure Regulations). The Final
Disclosure Regulations define reportable transactions more narrowly than the
Temporary Disclosure Regulations. For transactions entered into on or after January 1,
2003, and before February 28, 2003, the taxpayer may apply the Final Disclosure
Regulations instead of the Temporary Disclosure Regulations. Revisions throughout
these final regulations refer to the definition of reportable transaction in §1.6011-4(b) or
1.6011-4T(b), as applicable, to accommodate situations in which the Temporary
Disclosure Regulations apply to a transaction.
One commentator suggested that the final regulations under sections 6662 and
6664 apply to transactions entered into on or after February 28, 2003, because that
date is the effective date for the Final Disclosure Regulations. See 68 FR 10161, 10163
(March 4, 2003). The final regulations do not adopt this recommendation. The
proposed regulations under sections 6662 and 6664 provided adequate notice that
failure to comply with the Temporary or Final Disclosure Regulations could limit the
penalty defenses available under sections 6662 and 6664.
2. Applicability of the Reasonable Cause and Good Faith Defense
The proposed regulations prohibited reliance on tax advice to establish a
reasonable cause and good faith defense to the accuracy-related penalties if a taxpayer
failed to disclose a reportable transaction pursuant to the Final or Temporary Disclosure
Regulations, as applicable. Three commentators suggested that it is inappropriate to
preclude a taxpayer from relying on the advice of a tax advisor in circumstances in
which the taxpayer does not lack good faith in failing to disclose a reportable
transaction. The Treasury Department and the IRS believe that good faith requires
-4taxpayers to be forthcoming and that taxpayers should construe the Final and
Temporary Disclosure Regulations broadly in favor of disclosure. Nonetheless, there
may be circumstances in which a taxpayer does not lack good faith in failing to disclose
a reportable transaction. Accordingly, the final regulations revise the proposed
regulations to provide that a taxpayer's failure to disclose a reportable transaction is a
strong indication that the taxpayer failed to act in good faith, which would bar relief
under section 6664(c).
These final regulations also adopt the requirement in the proposed regulations
that a taxpayer may not rely on an opinion or advice that a regulation is invalid to
establish that the taxpayer acted with reasonable cause and in good faith unless the
taxpayer adequately disclosed its position that the regulation is invalid. One
commentator suggested that this provision is inappropriate because it would be difficult
for a taxpayer to discern whether its position is contrary to a regulation without
consulting with a tax advisor. This suggestion was rejected because the requirement of
revised §1.6664-4(c)(2)(iii) does not apply to situations in which a taxpayer has taken a
position that is merely contrary to a regulation, but instead applies to situations in which
a taxpayer has taken a return position based on advice or an opinion that a regulation is
invalid.
3. Definition of Advice
One commentator suggested that the proposed regulations more clearly define
what constitutes professional advice or opinion. Section 1.6664-4(c)(2) defines the term
-5advice. Neither the proposed nor the final regulations change the definition of the term
advice.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because
these regulations do not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section
7805(f) of the Code, the proposed regulations preceding these regulations were
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Jamie Bernstein, Office of the
Associate Chief Counsel (Procedure and Administration), Administrative Provisions and
Judicial Practice Division.
List of Subjects in 26 C F R Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of A m e n d m e n t s to the Regulations
Accordingly, 26 C F R part 1 is amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
-6Par. 2. Section 1.6662-0 is amended by adding an entry for §1.6662-2(d)(5) to
read as follows:
§1.6662-0 Table of Contents.
*****
§1.6662-2 Accuracy-related penalty.
*****
(d) * * *
(5) Returns filed after December 31, 2002.
*****
Par. 3. Section 1.6662-2 is amended by:
1. Revising the first sentence of paragraph (d)(2).
2. Adding new paragraph (d)(5).
The revision and addition read as follows:
§1.6662-2 Accuracy-related penalty.
*****
(d) ***(<|)***
(2) * * * Except as provided in paragraphs (d)(3), (4) and (5) of this section and
the last sentence of this paragraph (d)(2), the provisions of §§1.6662-1 through 1.66624 and §1.6662-7 (as revised to reflect the changes made to the accuracy-related
penalty by the Omnibus Budget Reconciliation Act of 1993) and of §1.6662-5 apply to
returns the due date of which (determined without regard to extensions of time for filing)
is after December 31,1993. * * *
* * * * *
(5) For returns filed after December 31, 2002. Sections 1.6662-3(a), 1.66623(b)(2) and 1.6662-3(c)(1) (relating to adequate disclosure) apply to returns filed after
December 31, 2002, with respect to transactions entered into on or after January 1,
-7003. Except as provided in paragraph (d)(1) of this section, §§1.6662-3(a), 1.6662(b)(2) and 1.6662-3(c)(1) (as contained in 26 CFR part 1 revised April 1, 2003) apply to
)tums filed with respect to transactions e ntered into prior to January 1, 2003.
Par. 4. Section 1.6662-3 is amended by revising paragraph (a), the last
jntence of paragraph (b)(2), and the first sentence of paragraph (c)(1) to read as
Hows:
1.6662-3 Negligence or disregard of rules or regulations.
(a) In general. If any portion of an underpayment, as defined in section 6664(a)
id §1.6664-2, of any income tax imposed under subtitle A of the Internal Revenue
)de that is required to be shown on a return is attributable to negligence or disregard
rules or regulations, there is added to the tax an amount equal to 20 percent of such
rtion. The penalty for disregarding rules or regulations does not apply, however, if the
^uirements of paragraph (c)(1) of this section are satisfied and the position in question
adequately disclosed as provided in paragraph (c)(2) of this section (and, if the
sition relates to a reportable transaction as defined in §1.6011-4(b) (or §1.6011-4T(b),
applicable), the transaction is disclosed in accordance with §1.6011-4 (or §1.6011, as applicable)), or to the extent that the reasonable cause and good faith exception
his penalty set forth in §1.6664-4 applies. In addition, if a position with respect to an
TI (other than with respect to a reportable transaction, as defined in §1.6011-4(b) or
6011-4T(b), as applicable) is contrary to a revenue ruling or notice (other than a
ice of proposed rulemaking) issued by the Internal Revenue Service and published in
Internal Revenue Bulletin (see §601.601 (d)(2) of this chapter), this penalty does not
)ly if.the position has a realistic possibility of being sustained on its merits. See
-8§1.6694-2(b) of the income tax return preparer penalty regulations for a description of
the realistic possibility standard.
/L.\*
* * *
*
(2)* * *Nevertheless, a taxpayer who takes a position (other than with respect to
a reportable transaction, as defined in §1.6011 -4(b) or §1.6011-4T(b), as applicable)
contrary to a revenue ruling or notice has not disregarded the ruling or notice if the
contrary position has a realistic possibility of being sustained on its merits.
*****
(c)* * *(1) * * * No penalty under section 6662(b)(1) may be imposed on any
portion of an underpayment that is attributable to a position contrary to a rule or
regulation if the position is disclosed in accordance with the rules of paragraph (c)(2) of
this section (and, if the position relates to a reportable transaction as defined in
§1.6011-4(b) (or §1.6011-4T(b), as applicable), the transaction is disclosed in
accordance with §1.6011-4 (or §1.6011-4T, as applicable)) and, in case of a position
contrary to a regulation, the position represents a good faith challenge to the validity of
the regulation. * * *
* ****
§1.6662-4 [ A m e n d e d ]
Par. 5. Section 1.6662-4(g)(1)(iv) is a m e n d e d by removing the reference to
"§1.6664-4(e)" and adding the reference "§1.6664-4(f)" in its place.
Par. 6. Section 1.6664-0 is a m e n d e d by:
1. Adding entries for §§1.6664-1 (b)(2)(i), (b)(2)(H) and 1.6664-4(c)(1)(iii).
-92. Redesignating the entries for §1.6664-4(d), (e), (f), and (g), as §1.6664-4(e),
(f), (g), and (h), respectively.
3. Adding a new entry for §1.6664-4(d).
The additions read as follows:
§1.6664-0 Table of contents.
*****
§1.6664-1 Accuracy-related and fraud penalties, definitions and special rules.
*****
(b) * * *
(2)* * *
(i) For returns due after September 1,1995.
(ii) For returns filed after December 31, 2002.
*****
§1.6664-4 Reasonable cause and good faith exception to section 6662 penalties.
*****
(c) * * *
IA \ * *
*
(iii) Reliance on the invalidity of a regulation.
(d) Underpayments attributable to reportable transactions.
*****
Par. 7. Section 1.6664-1 is amended by:
1. Redesignating the text of paragraph (b)(2) as (b)(2)(i)
2. Adding a new paragraph heading for newly designated paragraph (b)(2)(i).
3. Adding paragraph (b)(2)(ii).
The revisions and additions are as follows:
§1.6664-1 Accuracy-related and fraud penalties: definitions and special rules.
* * * * *
(b)***(1)***
(2)* * *(i) For returns due after September 1, 1995. * * *
(ii) For returns filed after December 31, 2002. Sections 1.6664-4(c) (relating to
relying on opinion or advice) and (d) (relating to underpayments attributable to
-10reportable transactions) apply to returns filed after December 31, 2002, with respect to
transactions entered into on or after January 1, 2003. Except as provided in paragraph
(b)(2)(i) of this section, §1.6664-4 (as contained in 26 CFR part 1 revised April 1, 2003)
applies to returns filed with respect to transactions entered into before January 1, 2003.
Par. 8. Section 1.6664-4 is amended by:
1. Removing the language "(g) of this section" from the last sentence of
paragraph (a) and adding the language "(h) of this section" in its place.
2. Revising paragraph (c)(1) introductory text and the last sentence of paragraph
(c)(1)(i).
3. Adding paragraph (c)(1)(iii).
4. Redesignating paragraphs (d), (e), (f) and (g) as paragraphs (e), (f), (g) and
(h), respectively.
5. Adding a new paragraph (d).
6. Removing the language "(e)" wherever it appears in newly designated
paragraphs (f)(1), (f)(2)(i), (f)(2)(H), (f)(3), and (f)(4) and adding the language "(f)" in its
place.
7. Removing the language "(g)" wherever it appears in newly designated
paragraphs (h)(1), (h)(1)(i), (h)(2), and (h)(3) and adding the language "(h)" in its place.
The revisions and additions read as follows:
-11 §1.6664-4 Reasonable cause and good faith exception to section 6662 penalties.
* ****
(c) Reliance on opinion or advice--(1) Facts and circumstances: minimum
reguirements. All facts and circumstances must be taken into account in determining
whether a taxpayer has reasonably relied in good faith on advice (including the opinion
of a professional tax advisor) as to the treatment of the taxpayer (or any entity, plan, or
arrangement) under Federal tax law. For example, the taxpayer's education,
sophistication and business experience will be relevant in determining whether the
taxpayer's reliance on tax advice w a s reasonable and m a d e in good faith. In no event
will a taxpayer be considered to have reasonably relied in good faith on advice
(including an opinion) unless the requirements of this paragraph (c)(1) are satisfied.
The fact that these requirements are satisfied, however, will not necessarily establish
that the taxpayer reasonably relied on the advice (including the opinion of a tax advisor)
in good faith. For example, reliance m a y not be reasonable or in good faith if the
taxpayer knew, or reasonably should have known, that the advisor lacked knowledge in
the relevant aspects of Federal tax law.
(i) * * * In addition, the requirements of this paragraph (c)(1) are not satisfied if
the taxpayer fails to disclose a fact that it knows, or reasonably should know, to be
relevant to the proper tax treatment of an item.
*****
(iii) Reliance on the invalidity of a regulation. A taxpayer may not rely on an
opinion or advice that a regulation is invalid to establish that the taxpayer acted with
-12reasonable cause and good faith unless the taxpayer adequately disclosed, in
accordance with §1.6662-3(c)(2), the position that the regulation in question is invalid.
(d) Underpayments attributable to reportable transactions. If any portion of a n
underpayment is attributable to a reportable transaction, as defined in §1.6011-4(b) (or
§1.6011-4T(b), as applicable), then failure by the taxpayer to disclose the transaction in
accordance with §1.6011-4 (or §1.6011-4T, as applicable) is a strong indication that the
taxpayer did not act in good faith with respect to the portion of the underpayment
attributable to the reportable transaction.
* ****
/s/ Mark E. Matthews
Deputy Commissioner for Services and Enforcement.
Approved: December 18, 2003
/s/ Pamela F. Olson
Assistant Secretary of the Treasury.
Form
8858
Information Return of U.S. Persons With
Respect To Foreign Disregarded Entities
O M B No. 1545-XXXX
(December 2004)
• See separate instructions.
Information furnished for the foreign disregarded entity's annual accounting period (see
Department of the Treasury
Internal Revenue Service
instructions) beginning
, 20
, and ending
, 20
Filer's identifying number
N a m e of person filing this return
Number, street, and room or suite no. (or P.O. box number if mail is not delivered to street address)
City or town, state, and ZIP code
Filer's tax year beginning
20
and ending
, 20
Important: Fill in all applicable lines and schedules. All information must be in English. All amounts must be stat
in U.S. dollars unless otherwise indicated.
b
1a N a m e and address of foreign disregarded entity
c Country(ies) under whose laws organized and entity type under local tax law
d
Date(s) of organization e
f If benefits under a U.S. tax treaty were claimed with respect to
g Country in which principal
income of the foreign disregarded entity, enter the treaty and article
business activity is conducted
number
h
Principal business
activity
2
i
U.S. identifying number, if any
Effective date as foreign
disregarded entity
Functional currency
Provide the following information for the foreign disregarded entity's accounting period stated above.
a Name, address, and identifying number of branch office or agent (if any) in
the United States
3
b
N a m e and address (including corporate department, if applicable) of
person(s) with custody of the books and records of the foreign disregarded
entity, and the location of such books and records, if different
For the tax owner of the foreign disregarded entity (if different from the filer) provide the following:
a N a m e and address
4
b Tax year
c
U.S. identifying number, if any
d
e
Functional currency
c
U.S. identifying number, if any
d
Functional currency
Country under whose laws organized
For the direct owner of the foreign disregarded entity (if different from the tax owner) provide the following:
a N a m e and address
5
b
Country under whose laws organized
Provide a list or an organizational chart identifying the name, placement, percentage of ownership, and tax classification of all entities in the chain between
the tax owner and the foreign disregarded entity, and all entities in which the foreign disregarded entity has a 1 0 % or more direct or indirect interest. See
instructions.
Schedule C
Income Statement (see page XX of the instructions)
Important: Report all information in functional currency in accordance with U.S. GAAP. Also, report each amount in
U.S. dollars translated from functional currency (using GAAP translation rules). However, if the function
currency is the U.S. dollar, complete only the U.S. Dollars column. See instructions for special rules for
foreign disregarded entities that use DASTM.
Functional Currency
1
2
3
Gross receipts or sales (net of returns and allowances)
Cost of goods sold
Gross profit (subtract line 2 from line 1)
8
Net income (loss) per books
For Paperwork Reduction Act Notice, see the separate instructions.
U.S. Dollars
1
2
3
4
5
6
7
8
Cat. No. 21457L
Form 8 8 5 8 (12-2004)
Page 2
Form 8858 (12-2004)
Schedule C-1
Section 987 Gain or Loss Information
A m o u n t stated in
functional currency
of foreign
disregarded entity
A m o u n t stated in
functional
currency of
recipient
Remittances from the foreign disregarded entity
Section 987 gain (loss) of recipient
Were all remittances from the foreign disregarded entity reflected on the books of the direct owner?
Did the tax owner change its method of accounting for section 987 gain or loss with respect to
remittances from the foreign disregarded entity during the tax year?
Schedule F
Balance Sheet
Important: Report all amounts in U.S. dollars computed in functional currency and translated into U.S. dollars in
accordance with U.S. GAAP. See page XX of the instructions for an exception for foreign disregarded entities that use
DASTM.
(a)
Beginning of annual
accounting period
Assets
1
2
3
Cash and other current assets
Other assets
Total assets
4
5
6
Liabilities
Owner's equity
Total liabilities and owner's equity
1
2
3
Liabilities a n d O w n e r ' s Equity
Schedule G
(b)
End of annual
accounting period
• • • •••
5
46
Other Information
Yes
No
1
2
During the tax year, did the foreign disregarded entity own an interest in any trust?
During the tax year, did the foreign disregarded entity own at least a 1 0 % interest, directly or indirectly,
in any foreign partnership?
3 Were substantially all of the assets of the foreign disregarded entity sold, exchanged, transferred, or
otherwise disposed of during the tax year?
4 Answer the following question only if the foreign disregarded entity made its election to be treated as
disregarded from its owner during the tax year: Did the tax owner claim a loss with respect to stock or
debt of the foreign disregarded entity as a result of the election?
5 Answer the following question only if the foreign disregarded entity is owned directly or indirectly by a
domestic corporation and the foreign disregarded entity incurred a net operating loss for the tax year: Is
the foreign disregarded entity a separate unit as defined in Regulation section §1.1503-2(c)(3) and (4)? (If
yes, see the instructions)
6 Answer the following question only if the tax owner of the foreign disregarded entity is a controlled foreign
corporation (CFC): Were there any intracompany transactions between the foreign disregarded entity and
the CFC or any other branch of the CFC during the tax year, in which the foreign disregarded entity acted
as a manufacturing, selling, or purchasing branch?
Current Earnings and Profits or Taxable Income (see page X X of the instructions!
Schedule H
Important: Enter the amounts on lines 1 through 6 in functional currency.
1 Current year net income or (loss) per foreign books of account
2 Total net additions
3 Total net subtractions
4 Current earnings and profits (or taxable income—see instructions) (line 1 plus line 2 minus line 3).
5 DASTM gain or loss (if applicable)
6 Combine lines 4 and 5
7 Current earnings and profits (or taxable income) in U.S. dollars (line 6 translated at the appropriate
exchange rate as defined in section 989(b) and the related regulations (see instructions))....
Enter exchange rate used for line 7 •
Form 8 8 5 8 (12-2004)
Printed on recycled paper
SCHEDULE M
(Form 8858)
Transactions Between Foreign Disregarded Entity of a
Foreign Tax Owner and the Filer or Other Related Entities
(December 2004)
Department of the Treasury
Internal Revenue Service
N a m e of person filing Form 8858
• Attach to Form 8858.
O M B No. 1545-XXXX
• See separate instructions.
Identifying number
N a m e of foreign disregarded entity
N a m e of tax owner
Important: Complete a separate Schedule M for each foreign disregarded entity for which the tax owner is a controlled foreign
corporation or controlled foreign partnership. Enter the totals for each type of transaction that occurred during the annual
accounting period between the foreign disregarded entity and the persons listed in the applicable columns (b) through (f). All
amounts must be stated in U.S. dollars translated from functional currency at the appropriate exchange rate for the foreign
disregarded entity's tax year (see page XX of the instructions).
Enter the relevant functional currency and the exchange rate used throughout this schedule •
C h e c k the b o x that identifies the status of the tax o w n e r and complete lines 1 through 1 9 with respect to the applicable
c o l u m n s (b) through (f):
(b) U.S. person filing
this return
(c) Any domestic
corporation or
partnership
controlling or
controlled by the filer
(d) Any foreign
corporation or
partnership
controlling or
controlled by the
filer (other than the
tax owner)
(b) U.S. person filing
this return
(c) Any domestic
corporation or
partnership controlled
by the filer
(d) Any foreign
corporation or
partnership controlled
by the filer (other
, than tax owner)
I I Controlled Foreign Partnership
(a) Transactions of
foreign disregarded
entity
I I Controlled Foreign Corporation
(a) Transactions of
foreign disregarded
entity
1
2
Sales of inventory
. . . .
Sales of property rights
3
Compensation received for
certain services
Commissions received ,
4
5
Rents, royalties, and license
fees received
. . . . .
6
Dividends/Distributions
received
Interest received
. . . .
Other
Add lines 1 through 8 . . .
7
8
9
10
Purchases of inventory .
11
Purchases of tangible property other than inventory
Purchases of property rights .
12
13
14
15
16
17
18
19
(e) Any U.S. person
with a 1 0 % or more
direct interest in the
controlled foreign
partnership (other
than the filer)
H^SP
(e) 1 0 % or more U.S. (f) 1 0 % or more U.S.
shareholder, or other
shareholder of any
owner, of any entity
corporation
controlling the tax
controlling the tax
owner
owner
Compensation paid for certain
services
Commissions paid . . . .
Rents, royalties, and license
fees paid
Interest paid
Add lines 10 through 16 . .
Amounts borrowed (see page
xx of the instructions) . . .
Amounts loaned (see page xx
of the instructions) . . . .
For Paperwork Reduction Act Notice, see the Instructions for Form 8858.
Cat. No. 37387C
Schedule M (Form 8858) (12-2004)
Part IV - Items of General Interest
Information Reporting With Respect to Foreign Disregarded Entities
Announcement 2004-4
The Internal Revenue Service (the "Service") and the Treasury Department (the
"Treasury") announce that they are requesting comments from the public on proposed n e w
Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded
Entities. The form will be required to be filed by U.S. persons that o w n a foreign
disregarded entity (FDE) directly or, in certain circumstances, indirectly or constructively
(for example, U.S. persons that o w n a 10 percent or greater interest in an F D E indirectly
through a controlled foreign corporation (CFC) or controlled foreign partnership (CFP)). A n
F D E is an entity that is created or organized in a foreign jurisdiction and that is
disregarded as separate from its owner for U.S. income tax purposes under section
301.7701-2 and -3 of the Income Tax Regulations. The reporting of information on Form
8858 will be required under the authority of sections 6011, 6012, 6031 and 6038 of the
Internal Revenue C o d e and the related regulations, for annual accounting periods of tax
owners of F D E s beginning on or after January 1, 2004. Attached to this announcement is
a copy of the proposed form, with respect to which the Service and the Treasury are
requesting comments from the public.
BACKGROUND
Proposed Form 8858 was developed to enable the Service to administer more
efficiently the provisions of the tax law with respect to U.S. persons that o w n FDEs. The
promulgation of the elective entity classification regulations in 1997 has facilitated the use
of F D E s by U.S. persons with cross-border investments or operations. The Service has
had significant difficulties administering the relevant provisions of the tax law because the
information reporting requirements still date from a time w h e n the substantive entity
classification rules did not contemplate disregarded entities. The current lack of relevant
information reporting with respect to F D E s has hindered the Service's ability to identify
potential compliance issues efficiently and effectively. The Service is committed to
reducing the length of the corporate examination process and improving the currency of
examinations. The information to be reported on Form 8858 will help the Service identify
issues more efficiently, ensuring that the Service can better focus resources and reduce
exam cycle time.
PROPOSED FORM 8858
Proposed Form 8858 is three pages long, and consists of one section and five
schedules, plus a separate Schedule M. The introductory section of proposed Form 8858
requests identifying information. The schedules to proposed Form 8858 include requests
for abbreviated income statement information (Schedule C), abbreviated balance sheet
information (Schedule F), and summary information regarding taxable income or earnings
and profits (Schedule H). Schedule C-1 requests information relating to the foreign
currency rules applicable to foreign disregarded entities, and Schedule G consists of six
specific yes/no questions. Schedule M requests information regarding related party
transactions between an F D E owned by a C F P or a C F C and a related person other than
the C F P or C F C . Information regarding transactions between an F D E and its tax owner or
between or among F D E s of the s a m e tax owner is not requested, except where such
information is required to administer provisions of the tax law that recognize inter-branch
transactions, such as the foreign currency rules.
To ensure that taxpayer burden is minimized, each item of information requested on
proposed Form 8858 has been evaluated to m a k e certain that it is necessary to the
administration of the tax law and that it is not duplicative of information already required to
be reported. Proposed Form 8858 requests only the minimum information needed to
identify the tax items that are attributable to an FDE. Almost all of the items of information
requested from U.S. persons on proposed Form 8858 with respect to an F D E are currently
required to be reported by such U.S. persons on an aggregate basis on, for example,
Form 5471 (in the case of F D E s of C F C s ) or Form 8865 (in the case of F D E s of CFPs).
Consistent with the objectives of proposed Form 8858 and consistent with section
6038 of the Code, with a view to minimizing taxpayer burden and aiding Service efforts to
reduce exam cycle time, the Service and the Treasury also intend to review Forms 5471
and 8865 to ensure that the information requested on these forms enables the Service to
administer effectively the tax law applicable to U.S. owners of C F C s and CFPs, is
necessary to the administration of the tax law, and is not duplicative of information required
to be reported on proposed Form 8858 or other forms.
GENERAL QUESTIONS ABOUT FORM 8858
Who will be required to file Form 8858?
Form 8858 will be required to be filed by U.S. persons that are tax owners (as
defined below) of FDEs, or that own certain interests in foreign tax owners of FDEs.
Specifically, U.S. persons that are tax owners of FDEs would complete the entire
Form 8858 except for Schedule M. In the case of U.S. persons that are required to file a
Form 5471 with respect to a C F C that is a tax owner of an FDE, such U.S. persons that
are Category 4 filers of Form 5471 would complete the entire Form 8858 and separate
Schedule M. U.S. persons that are Category 5 filers of Form 5471 (Le., noncontrolling
shareholders) would complete only the identifying information on page 1 of Form 8858, and
Schedules G and H. Schedule M would not be required from Category 5 filers of Form
5471.
In the case of U.S. persons that are required to file a Form 8865 with respect to a
C F P that is a tax owner of an FDE, such U.S. persons that are Category 1 filers of Form
8865 would complete the entire Form 8858 and separate Schedule M. U.S. persons that
are Category 2 filers of Form 8865 (Le., noncontrolling partners) would complete only the
identifying information on page 1 of Form 8858, and Schedules G and H. Schedule M
would not be required from Category 2 filers of Form 8865.
Who is the tax owner of an FDE?
For purposes of completing the Form 8858, the tax owner of the FDE is the person
that is treated as owning the assets and liabilities of the F D E for purposes of U.S. income
tax law.
Who is the direct owner of an FDE?
For purposes of completing the Form 8858, the direct owner of an FDE is the legal
owner of the disregarded entity.
For example, assume A, a U.S. individual, is a 60 percent partner of CFP, a
controlled foreign partnership. F D E 1 is a foreign disregarded entity owned by CFP, and
F D E 2 is a foreign disregarded entity owned by F D E 1. In this example, F D E 1 is the
direct owner of F D E 2, and C F P is the direct owner of F D E 1. C F P is the tax owner with
respect to both F D E 1 and F D E 2. A would be required to file the Forms 8858 relating to
F D E 1 and F D E 2.
When will Form 8858 be required to be filed?
Form 8858 will be due when the filer's U.S. income tax or information return is due,
including extensions.
H o w will Form 8858 be filed?
The filer will be required to file Form 8858 as an attachment to the filer's U.S.
income tax or information return. In the case of a filer that is not the tax owner of the FDE,
the filer will be required to attach Form 8858 to any form filed by the filer with respect to the
foreign entity that is the tax owner of the FDE.
For example, where a U.S. person indirectly owns an FDE through a CFC, the CFC
is the tax owner of the FDE. In this instance, the U.S. person will be required to file a Form
8858 because it indirectly owns the F D E through a CFC. The Form 8858 will be required
to be filed as an attachment to the Form 5471 filed with the U.S. person's U.S. income tax
return.
A separate Form 8858, including Schedule M if required to be filed, will be required
for each FDE.
Will there be any exceptions to filing Form 8858?
Instructions for the Form 8858 will provide filing exceptions similar to those set forth
in the instructions for Form 5471 and Form 8865. For example, exceptions from filing for
multiple filers of the same information, for members of consolidated groups, and for owners
of dormant FDEs will apply for purposes of Form 8858.
What is the effective date for Form 8858?
Form 8858 will be required to be filed for annual accounting periods of tax owners
of FDEs beginning on or after January 1, 2004.
Can Form 8858 be filed electronically?
The instructions for filing Form 8858 will include information on electronic filing.
REQUEST FOR COMMENTS ON THE FORM
The Service and the Treasury are requesting comments about proposed Form
8858. The Service and the Treasury are particularly interested in receiving comments on
matters that should be addressed in the instructions to Form 8858, such as whether
clarification is needed as to specific aspects of the filing requirements or the information
requested on the form. The Service and the Treasury also are requesting comments about
current Forms 5471 and 8865, in particular whether any modifications are necessary in
light of proposed Form 8858 to ensure that the information requested on Forms 5471 and
8865 is necessary to the administration of the tax law and is not duplicative of information
required to be reported on proposed Form 8858 or other forms. Written comments should
be sent to: Tax Products Coordinating Committee, Internal Revenue Service,
SE:W:CAR:MP:T, R o o m 6406,1111 Constitution Avenue, N.W., Washington, D.C. 20224.
Alternatively, comments m a y be e-mailed to tfpmail(a)publish.no.irs.gov. C o m m e n t s must
be received by March 1, 2004.
The principal author of this announcement is Alexandra Helou of the Office of
Associate Chief Counsel (International). However, other personnel from the Treasury and
the IRS participated in its development. For further information regarding this
announcement contact Alexandra Helou at (202) 622-3840 (not a toll-free call).
js-1067: Treasury Announces Administrative Changes to the Terrorism Risk Insurance Pr... Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 23, 2003
js-1067
Treasury Announces Administrative Changes to the Terrorism Risk Insurance
Program
The Treasury Department today reminded all participants and observers of the
Terrorism Risk Insurance Program that there will be two important changes in the
program's administration in 2004.
As mandated by Congress, beginning on January 1, 2004 and throughout the
remainder of 2004, an insurer's deductible will increase from 7 percent to 10
percent of the insurer's direct earned premium over the previous calendar year.
Second, the ''mandatory availability" provisions of the Act will require insurers to
continue to make available coverage for certified acts of terrorism for the full annual
policy periods of all commercial property and casualty insurance policies that are
issued or renewed in 2004. The "make available" requirement under the Act
applies to December 31, 2004 while coverage issued as a result of the requirement
will extend for the normal annual policy period beyond 2004. As required by the
Act, the Treasury Department will be evaluating whether the "mandatory availability"
provisions should be extended for policies that are issued or renewed in 2005.
The final and proposed regulation and other information related to the Terrorism
Risk Insurance Program can be found at http://www.treasury.gov/trip/.
-30-
http://www.treas.gov/press/releases/jsl067.htm
js-1068: Treasury a n d l R S Issue Final Regulations Defining Income Under Section 643
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 30, 2003
js-1068
Treasury and IRS Issue Final Regulations Defining Income Under Section 643
Today, the Treasury Department and the IRS issued final regulations amending the
definition of income under section 643 of the Internal Revenue Code. These
regulations also clarify the circumstances under which capital gains are included in
the distributable net income (DNI) of an estate or trust.
"This new definition of income clarifies the application of federal tax law in light of
recent state law changes," stated P a m Olson, the Treasury's Assistant Secretary
for Tax Policy. "The regulations are an example of the appropriate evolution of
federal tax law to reflect and facilitate non-tax changes in the law that apply to
taxpayers."
Section 643(b) of the Code defines income for purposes of numerous federal tax
provisions, including determining qualification for the estate and gift tax marital
deduction, and computing required distributions from pooled income funds and
certain charitable remainder trusts. With certain exceptions, this definition generally
relies on the definition of trust accounting income under state law and the trust
agreement or will. Many states have now changed their definitions of income to
permit trusts and estates to adopt a more profitable method of investing their funds,
and to promote more equitable and impartial treatment of those with interests in the
income or principal of those entities.
The text of the final regulations is attached.
-30Related Documents:
• The text of the final regulations
http://www.treas.gov/press/releases/js 1068.htm
5/20/2005
[4830-01-P]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, 25, and 26
[TD9102]
RIN 1545-AX96
Definition of Income for Trust Purposes
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations revising the definition of income
under section 643(b) of the Internal Revenue Code. The regulations are necessary to
reflect changes in the definition of trust accounting income under state laws. The final
regulations also clarify the situations in which capital gains are included in distributa
net income under section 643(a)(3). Conforming amendments are made to regulations
affecting ordinary trusts, pooled income funds, charitable remainder trusts, trusts that
qualify for the gift and estate tax marital deduction, and trusts that are exempt from
generation-skipping transfer taxes. The regulations affect the grantors, beneficiaries,
and fiduciaries of trusts.
DATES: Effective Date: These regulations are effective January 2, 2004.
Applicability date: Generally, the final regulations are applicable to trusts and
estates for taxable years ending after January 2, 2004. See revised §§1.642(c)-2,
1.642(c)-5, and 1.664-3 for special dates of applicability affecting those sections.
FOR FURTHER INFORMATION CONTACT: Bradford R. Poston at (202) 622-3060
2
(not a toll-free number).
Background
O n February 15, 2001, proposed regulations (REG-106513-00) were published
in the Federal Register [66 F R 10396] containing proposed amendments to the
Income Tax Regulations [26 C F R part 1], the Estate Tax Regulations [26 C F R part 20],
the Gift Tax Regulations [26 C F R part 25], and the Generation-Skipping Transfer Tax
Regulations [26 C F R part 26] relating to the definition of income for trust purposes. A
public hearing w a s held on the proposed regulations on June 8, 2001. Written
comments were received on the proposed regulations. The proposed regulations, with
certain changes in response to the comments, are adopted as final regulations.
S u m m a r y of C o m m e n t s and Explanation of Revisions
Definition of Income
The proposed regulations provide that, for purposes of determining what
constitutes trust accounting income under section 643(b), trust provisions that depart
fundamentally from the traditional concepts of income and principal generally will
continue to be disregarded as they have been under the existing regulations. O n e
commentator suggested that, instead of using traditional concepts of income and
principal, the benchmark should be whether there is a departure from the duty to
administer the trust or estate impartially based upon what is fair and reasonable to all
the parties. O n e commentator suggested eliminating the distinction between trust
accounting income and principal. Another suggested that the regulations clarify the
consequences of a fundamental departure from traditional concepts of income and
3
principal.
Income under section 643(b) is the amount of income determined under the
terms of the governing instrument and applicable local law. This concept of income is
used as the measure of the amount that must be distributed from a trust in order for the
trust to qualify for certain treatment under various provisions of the Internal Revenue
Code. Trusts classified as simple trusts, pooled income funds, net income charitable
remainder unitrusts, and qualified subchapter S trusts (QSSTs) are required to m a k e
distributions measured at least in part by the amount of trust accounting income. A
similar concept applies to trusts that qualify for the gift and estate tax marital
deductions. Because section 643(b) requires a determination of trust accounting
income, it is not possible to ignore any distinctions between trust accounting income
and principal as suggested by a commentator.
A trust instrument m a y provide for any amount to be distributed to beneficiaries
currently. Trust provisions that measure the amount of the distribution by reference to
income but define income differently from the state statutory definition of income
generally will be recognized for state law purposes. However, Internal Revenue C o d e
provisions that require the current distribution of income to qualify the trust for certain
federal tax treatment are based on the assumption that the income beneficiary will
receive what is traditionally considered to be income. In s o m e situations, such as with
Q S S T s and marital deduction trusts for spouses w h o are U.S. citizens, the income
beneficiary is permitted to also receive principal distributions as long as all the income
is currently distributed. In other situations, as with pooled income funds and net income
charitable remainder unitrusts, only the income m a y be distributed. In all these
4
situations, the determination of income is critical. Thus, the definition of income under
the terms of the governing instrument and applicable local law must not depart
fundamentally from traditional concepts of income and principal, if the desired federal
tax treatment is to be secured.
The IRS and the Treasury Department recognize that state statutes are in the
process of changing traditional concepts of income and principal in response to
investment strategies that seek total positive return on trust assets. These statutes are
designed to ensure that, w h e n a trust invests in assets that m a y generate little
traditional income (including dividends, interest, and rents), the income and remainder
beneficiaries are allocated reasonable amounts of the total return of the trust (including
both traditional income and capital appreciation of trust assets) so that both classes of
beneficiaries are treated impartially. S o m e statutes permit the trustee to pay to the
person entitled to the income a unitrust amount based on a fixed percentage of the fair
market value of the trust assets. Other statutes permit the trustee the discretion to
m a k e adjustments between income and principal to treat the beneficiaries impartially.
Under the proposed regulations, a trust's definition of income in conformance with
applicable state statutes will be respected for federal tax purposes w h e n the state
statutes provide for a reasonable apportionment of the total return of the trust.
S o m e commentators suggested that, even in those states that have not enacted
legislation specifically authorizing powers to adjust or a unitrust definition of income,
trust instruments containing such provisions should be respected as defining income for
purposes of section 643(b). Under a unitrust or power to adjust, items traditionally
allocable to principal (such as gains from the sale or exchange of trust assets) may,
5
under certain circumstances, be allocated to income, and items traditionally allocable to
income (such as dividends, interest, and rents) may, under certain circumstances, be
allocated to principal. T h e proposed regulations already recognize that gains from the
sale or exchange of trust assets may, under certain circumstances, be allocated to
income under the terms of the governing instrument. However, §1.643(b)-1 has always
provided that the allocation to principal, under the terms of the governing instrument, of
items that traditionally would be allocable to income will not be respected for purposes
of section 643(b), and this position is maintained in the final regulations. Accordingly,
the IRS and the Treasury Department believe that an allocation to principal of traditional
income items should be respected for Federal tax purposes only if applicable state law
has specifically authorized such an allocation in certain limited circumstances, such as
when necessary to ensure impartiality regarding a trust investing for total return. Under
the regulations, a state statute specifically authorizing certain unitrust payments in
satisfaction of an income interest or certain powers to adjust would satisfy that
requirement. Further, the IRS and the Treasury Department acknowledge that other
actions m a y constitute applicable state law, such as a decision by the highest court of
the state announcing a general principle or rule of law that would apply to all trusts
administered under the laws of that state. However, a court order applicable only to the
trust before the court would not constitute applicable state law for this purpose.
T w o commentators suggested that the permissible range of unitrust percentages
should include any percentage permitted by state statutes. The IRS and the Treasury
Department believe that w h e n establishing a unitrust percentage that attempts to yield
the equivalent of income over a long period of time that m a y encompass wide variations
6
in economic conditions, a range of 3 % to 5 % will be considered a reasonable
apportionment of a trust's total return. In response to one comment, the range of
unitrust percentages has been adjusted in the final regulations to include, rather than
exclude, unitrust percentages of 3 % and 5 % . Also in response to comments, the final
regulations state that the periodic redetermination of the fair market value of the trust
assets m a y be done as of a particular date each year or as an average determined on a
multiple year basis.
The proposed regulations state that traditionally ordinary income is allocated to
income and capital gains are allocated to principal. O n e commentator pointed out that
ordinary income and capital gains are tax concepts and not concepts that have any
meaning for purposes of trust accounting income. The final regulations have been
revised to state that traditionally items such as dividends, interest, and rents are
allocated to income and the proceeds from the sale or exchange of trust assets are
allocated to principal.
The proposed regulations refer to a power to m a k e equitable adjustments
between income and principal and describe the circumstances under which these
adjustments currently are permitted under state law and will be respected for Federal
tax purposes. Specifically, state statutes permit adjustments w h e n trust assets are
invested under the state's prudent investor standard, the trust instrument refers to
income in describing the amount that m a y or must be paid to a beneficiary, and the
trustee, after applying the state statutory rules regarding the allocation of receipts and
disbursements between income and principal, is unable to administer the trust
impartially. O n e commentator requested clarification of the requirements a trustee
7
must satisfy to m a k e an adjustment that will be respected for Federal tax purposes.
Those requirements are a matter of local law and m a y differ from state to state; the
trustee must meet whatever requirements are imposed by applicable local law on the
exercise of this power. O n e commentator pointed out that state statutes do not include
the term equitable in referring to this power and suggested deleting that term. O n e
commentator suggested adding "generally" to the statement concerning the
circumstances in which these adjustments are permitted because s o m e states m a y
permit these adjustments without enacting a prudent investor standard. These two
suggestions are adopted in the final regulations.
O n e commentator suggested clarifying that the definition of income in the
regulations also applies to spray and sprinkle trusts. The final regulations provide that
allocations apportioning the total return of the trust pursuant to the state statute will be
respected regardless of whether the trust has one or more income beneficiaries and
irrespective of whether income must or m a y be paid out each year. The commentator
also suggested that allocations pursuant to one apportionment method should be
respected even if a different apportionment method w a s used in prior years. The final
regulations provide that, as long as the trust complies with the requirements of state
statutes for switching between methods authorized by the statute, then, w h e n the trust
switches between permitted methods: (i) the method used in any year will be respected
for Federal tax purposes; (ii) the switch will not constitute a recognition event under
section 1001; and (iii) neither the grantor nor any beneficiary will have any gift tax
consequences. This provision does not apply to switches between methods not
specifically authorized by state statute.
8
It has been questioned whether the changes to §1.643(b)-1 affect the amount of
income required to be distributed by Q S S T s . Section 1.1361-1 (j) provides that Q S S T s
are required to distribute income as defined in §1.643(b)-1. Therefore, no amendment
to the Q S S T regulations is necessary for the n e w provisions of §1.643(b)-1 to be
applicable to Q S S T s .
The proposed regulations provide that an allocation of capital gains to income
will be respected if m a d e either (i) pursuant to the terms of the governing instrument
and applicable local law, or (ii) pursuant to a reasonable and consistent exercise of a
discretionary power granted to the fiduciary by local law, or by the governing instrument
if not inconsistent with local law. O n e commentator suggested that in the phrase
"pursuant to the terms of the governing instrument and applicable local law," the term
"and" be replaced with "or." The phrase with the term "and" is consistent with the
statutory language of section 643(b), and, therefore, no change has been made.
O n e commentator suggested that a discretionary power to allocate capital gains
to income should not have to be exercised consistently. The exercise of the power
generally affects the actual amount that m a y or must be distributed to the income
beneficiaries and affects whether the trust or the beneficiary will be taxed on the capital
gains. Thus, the IRS and the Treasury Department agree that the power does not have
to be exercised consistently, as long as it is exercised reasonably and impartially.
However, if the amount of income is determined by a unitrust amount, the exercise of
this discretionary power has no effect on the amount of the distribution, but does affect
whether the beneficiary or the trust is taxed on the capital gains. Under these
circumstances, a discretionary power must be exercised consistently. O n e
9
commentator suggested changing the phrase "if not inconsistent with local law"
because powers to allocate capital gains to income will almost always be inconsistent
with the default provisions of state law. Accordingly, the phrase has been changed to
"if not prohibited by local law."
Pooled Income Funds
Several commentators were concerned about the provision in the proposed
regulations that long-term capital gain does not qualify for the income tax charitable
deduction available to pooled income funds (PIFs), if the amount of income payable to
the noncharitable beneficiaries m a y be either a unitrust amount or an amount that could
include unrealized appreciation in the value of trust assets pursuant to the exercise of a
trustee's power to adjust. O n e commentator suggested that, if income is defined as a
unitrust amount or is subject to the trustee's power of adjustment, the provision in the
proposed regulation invalidly limits the amount that can be paid to the noncharitable
beneficiaries of the PIF.
This regulatory provision places no prohibition on paying to the noncharitable
beneficiaries an amount of income determined under the governing instrument and
applicable local law, even if that income is a unitrust amount or is determined pursuant
to a power of adjustment that takes into account unrealized appreciation. Rather, this
regulatory provision addresses whether long-term capital gains recognized during a
year but not distributed during that year are permanently set aside for a charitable
purpose as required by section 642(c)(3) to allow the PIF to claim a charitable
deduction for these amounts. If income is defined as a unitrust amount, a future
payment of income to the noncharitable beneficiaries m a y be attributable to long-term
10
capital gains realized, but not distributed, in the current year. If income is determined
pursuant to a power of adjustment that takes into account unrealized appreciation, a
portion of the capital gain recognized during a year m a y be attributable to appreciation
that w a s the basis for a distribution to the noncharitable beneficiaries in a prior year. In
both situations, the long-term capital gains are not permanently set aside for charitable
purposes and therefore do not qualify for the charitable deduction in computing the
PIF's income tax liability.
S o m e commentators were concerned that PIFs need to be able to distribute
more than the traditional amounts of income to remain useful vehicles for charitable
giving. They suggest that PIFs should be able to define trust accounting income as
traditional income plus any realized capital gains for the year but the total amount
defined as income cannot exceed a specified percentage. Thus, the annual payout
would be the lesser of a unitrust amount or trust accounting income defined to include
gains from the appreciation of assets sold by the trust during the year.
Distinct statutory provisions govern PIFs and charitable remainder unitrusts
(CRUTs). The provisions applicable to each type of trust are specifically designed to
achieve statutory objectives based on the nature of the charitable and noncharitable
interests in each type of trust. The commentators' suggestion is, in effect, to permit
PIFs to operate in the s a m e manner as a net income C R U T , but without applying any of
the other C R U T requirements to these funds. There is no authority for incorporating
certain provisions applicable to C R U T s into the provisions applicable to PIFs.
Nevertheless, the power to adjust authorized by m a n y state statutes currently
applies to PIFs administered in those states. If permitted under the terms of the
11
governing instrument and state statutes, a trustee m a y use the power to m a k e
adjustments by allocating to income a portion of the sales proceeds from trust assets in
order to treat the income and remainder beneficiaries impartially. The proper exercise
of a power to adjust m a y provide the income beneficiaries with amounts in excess of
the amount of traditional income. The final regulations provide that, for a PIF, the
amount of proceeds from the sale of assets that m a y be allocated to income pursuant
to a power to adjust is limited to the amount by which those proceeds exceed the fair
market value of those assets as of the date those assets were contributed to or
purchased by the PIF. This provision ensures that amounts attributable to the fair
market value of assets on the date contributed to the PIF cannot be reallocated to
income under a power to adjust. In addition, long-term capital gains from the sale or
exchange of trust assets do not qualify for the charitable deduction under section
642(c)(3) to the extent that any sales proceeds are distributed to the income
beneficiaries.
O n e commentator suggested that the "or" in the phrase "under the terms of the
governing instrument or applicable local law" should be changed to "and" to be
consistent with the statutory definition of income under section 643(b). This change
has been made.
Charitable Remainder Trusts
Several commentators were concerned about the requirement in the proposed
regulations that net income C R U T s under sections 664(d)(2) and 664(d)(3) contain their
own definition of income if applicable state law provides that income is a unitrust
amount. The purpose of this proposed requirement w a s to avert potential problems
12
with qualification of a net income C R U T in a state that defines income as a unitrust
amount. S o m e commentators pointed out that state statutes provide alternative
definitions of income and all that should be necessary is that the trust use a definition of
income, whether contained in the terms of the governing instrument or applicable local
law, that is not a unitrust amount. Therefore, the requirement that the trust contain its
o w n definition of income has been eliminated from the final regulations.
Several commentators were concerned about the provision in the proposed
regulations that the allocation of post-contribution capital gain to income, if permitted
under the terms of the governing instrument and applicable local law, m a y not be
discretionary with the trustee. S o m e suggested eliminating the prohibition on
discretionary powers held by the trustee. S o m e suggested that a discretionary power
should be permitted if held by an independent trustee. S o m e requested clarification
that this prohibition does not apply to a trustee's power to allocate receipts to income or
principal pursuant to state law.
The provision in the proposed regulations has no effect on the determination of
trust accounting income under applicable state law that grants the trustee a power to
reasonably apportion the total return of the trust. The provision is directed at discretion
given the trustee under the terms of the governing instrument to allocate capital gains to
income in s o m e years and not others. Allowing the trustee this type of discretion is
inconsistent with the requirements for net income C R U T s as explained in the legislative
history. T h e settlor has the option of providing in the trust that the trustee is to
distribute the lesser of the stated percentage payout or trust income. However, this
option must be adopted in the trust instrument and not left to the discretion of the
13
trustee. S e e H.R. Conf. Rep. No. 91-782, at 296 (1969), reprinted in 1969-3 C.B. 644,
655. A power to allocate capital gains to income in s o m e years and not others in the
trustee's sole discretion is similar to having the discretionary ability to pay out either the
trust income or the stated percentage payout each year, regardless of their relative
values. Thus, the final regulations continue to provide that, for C R U T s , postcontribution capital gains m a y be included in the definition of income under the terms of
the governing instrument or applicable local law, but not pursuant to a trustee's
discretionary power granted by the trust instrument, rather than by state statute, to
allocate capital gains to income.
Capital Gains and Distributable Net Income
Section 643(a)(3) provides that gains from the sale or exchange of capital assets
generally are excluded from distributable net income (DNI) to the extent that these
gains are allocated to corpus. However, capital gains allocated to corpus are included
in DNI if they are either paid, credited, or required to be distributed, to a beneficiary
during the year, or paid, permanently set aside, or to be used for a charitable purpose.
In certain situations it is easily ascertained whether capital gains are paid to a
beneficiary. For example, if the trust instrument provides that the proceeds from the
sale of a certain asset are to be paid to a beneficiary upon sale, then any capital gain
recognized upon the sale of that asset is paid to the beneficiary and is includible in DNI.
However, the circumstances in which recognized capital gain determines the amount to
be distributed to a beneficiary during the year are relatively rare.
More frequently, the trustee is authorized by the trust instrument to m a k e
discretionary distributions of principal or, by the recently-enacted state statutes, to pay
14
the income beneficiary a unitrust amount. In these circumstances, the amount of
realized capital gain during the year does not affect the amount distributed to a
beneficiary, and because m o n e y is fungible, it is difficult to ascertain whether capital
gains are actually paid to the beneficiary. With respect to these situations, the
proposed regulations attempt to clarify the circumstances in which capital gains are
treated as distributed to a beneficiary and therefore are includable in DNI. T h e
proposed regulations provide that capital gains will be treated as part of a distribution to
a beneficiary, if the trustee allocates capital gains to the distribution pursuant to a
discretionary power granted by local law or by the governing instrument (if not
inconsistent with local law) to treat capital gains in this manner, provided the allocation
power is exercised in a reasonable and consistent manner, and is evidenced on the
trust's books, records, and tax returns.
Commentators requested guidance on several issues concerning the treatment
of capital gains as part of a distribution to a beneficiary. These issues include
clarification that one trustee m a y exercise the discretion differently for different trusts
and that the treatment of capital gains from the sale of different types of assets m a y be
different. Examples have been added to the final regulations to address these
situations. In addition, s o m e commentators were concerned about h o w a trustee m a y
show consistency in the first year, whether the treatment in future years m a y be
changed based on something other than a change in the definition of income, and
whether existing trusts m a y establish a different treatment based on the rules in the
final regulations.
In s o m e respects, the proposed regulations merely clarify h o w a trustee m a y
15
demonstrate that capital gain has been paid to a beneficiary and therefore is includible
in DNI under section 643(a)(3). This determination is relevant w h e n distributions are
m a d e to beneficiaries that exceed the amount of DNI determined without regard to the
capital gains. In the past this situation arose w h e n mandatory or discretionary
payments of principal were made. Because of the changes to the definition of income
under state statutes, the number and variety of situations in which this determination is
relevant are increasing. In implementing a different method for determining income
under a state statute, the trustee m a y establish a pattern for including or not including
capital gains in DNI to the extent that the amount of income so determined is greater
than the amount of DNI determined without regard to the capital gains. This choice
m a y be m a d e irrespective of the trustee's practice under a prior legal definition of
income regarding the treatment of capital gains as part of DNI w h e n discretionary or
mandatory distributions of principal were m a d e from the trust.
T w o commentators requested examples of the inclusion of capital gains in DNI
when the trustee exercises a power to adjust between income and principal under
applicable local law. The circumstances in which a power to adjust is exercisable m a y
vary a m o n g states and m a y be determined by the powers of the trustee to m a k e
distributions of income and principal under the terms of the governing instrument. For
example, if a trust instrument does not permit the trustee to distribute any corpus and
the power to adjust under local law m a y be exercised only with respect to receipts from
the sale of trust assets, the amount allocated to income under the power to adjust m a y
have to be from the realized appreciation in the value of the assets that were sold. O n
the other hand, if the trust instrument permits discretionary distributions of principal and
16
the power to adjust under local law m a y be exercised only with respect to appreciation
in the value of trust assets, the power to adjust m a y be similar to a unitrust amount that
is payable irrespective of whether appreciated assets are sold during the year.
Because of the potential variations in the circumstances and ramifications of exercising
a power to adjust under applicable state statutes, additional examples would be unlikely
to provide meaningful or complete guidance; thus, the final regulations contain no
additional examples concerning inclusion of capital gains in DNI w h e n the trustee
exercises a power to adjust.
It has been pointed out that Examples 6 through 8 in §1.643(a)-3(e) of the
proposed regulations, which are essentially identical to examples in the existing
regulations, m a y no longer be consistent with the rules in the proposed regulations. In
the final regulations, the corresponding examples, n o w Examples 7 through 1JJ, have
been updated to take into account the n e w rules. O n e commentator requested
examples of the effect on DNI of capital gains from a passthrough entity and income
from a passthrough entity that is more or less than the trust accounting income from
that entity. These issues are beyond the scope of this project.
Trusts Qualifying for Gift and Estate Tax Marital Deductions
The proposed regulations provide that a spouse will be treated as entitled to
receive all net income from a trust, as required for the trust to qualify for the gift and
estate tax marital deductions under §20.2056(b)-5(a)(1) of the Estate Tax Regulations
and §25.2523(e)-1 (f)(1) of the Gift Tax Regulations, if the trust is administered under
applicable state law that provides for a reasonable apportionment between the income
and remainder beneficiaries of the total return of the trust and that meets the
17
requirements of §1.643(b)-1. Thus, a spouse who, as the income beneficiary, is entitled
in accordance with the state statute and the governing instrument to a unitrust amount
of no less than 3 % and no more than 5 % would be entitled to all the income from the
trust for purposes of qualifying the trust for the marital deduction.
Several commentators suggested that a trust that provides for a unitrust payment
to the spouse should satisfy the income standard even in states that have not enacted
legislation defining income as a unitrust amount or providing that a right to income m a y
be satisfied by such a payment. The income distribution requirement that must be
satisfied for a trust to qualify for the gift and estate tax marital deductions ensures that
the spouse receives what is traditionally considered to be income from the assets held
in trust. A s previously discussed, the IRS and the Treasury Department believe that
only if applicable state law has authorized a departure from traditional concepts of
income and principal should such a departure be respected for Federal tax purposes.
A state statute specifically authorizing certain unitrust amounts in satisfaction of an
income interest or certain powers to adjust in conformance with the provisions of
§1.643(b)-1 would meet this standard. However, in the absence of a state statute, or,
for example, a decision of the highest court of the state applicable to all trusts
administered under that state's law, the applicable state law requirement will not be
satisfied.
It has also been suggested that, in s o m e circumstances, the proposed
regulations would allow the spouse to receive less than all the traditional trust income,
and therefore would conflict with the section 2056 statutory requirement that the spouse
receive all trust income. For example, a spouse who, in accordance with the state
18
statute, receives a 4 % unitrust amount would receive less than all the traditional income
generated by the trust, if the trust's total dividends, interest, rents, etc. for the year
exceed 4 % . However, that spouse would receive more than the amount of traditional
income earned by the trust in any year that the trust's total dividends, interest, rents,
etc. do not exceed 4 % . The regulations are intended to strike a reasonable balance
between the marital deduction statutory requirements and the m a n y state statutes
intended to facilitate the investment of trust assets while ensuring equitable treatment
for the income and remainder beneficiaries. Indeed, Congress contemplated that, in
appropriate circumstances, an annuity could be treated as satisfying the statutory
income distribution requirement. The flush language following section 2056(b)(7)(B)(ii)
specifically authorizes regulations that treat an annuity "in a manner similar to an
income interest in property." The IRS and Treasury Department believe that these
regulations implement this statutory authorization in a reasonable manner by
recognizing allocations under state statutes that provide for a reasonable
apportionment of the total return of the trust.
Trusts Exempt From Generation-Skipping Transfer Tax
The proposed regulations expand the rules concerning changes that m a y be
m a d e to trusts that are exempt from the generation-skipping transfer tax because they
were irrevocable on September 25, 1985, without causing the loss of the trusts' exempt
status. If such an exempt trust is administered in conformance with applicable state law
that permits a unitrust amount to be paid to the income beneficiary or permits
adjustments between income and principal to ensure impartiality, and that meets the
requirements of §1.643(b)-1, its exempt status will not be affected.
19
O n e commentator requested that the final regulations also provide that
administration of an exempt trust as described in these regulations will not cause any
trust beneficiary to be treated as making a gift and will not result in any taxable
exchange by the trust or any of its beneficiaries. Another commentator requested that
the final regulations clarify that changing the situs of a trust from a state with only a
traditional definition of income to a state that permits unitrusts or powers to adjust will
not affect the exempt status of the trust. Examples 11 and 12 have been revised to
address these and similar concerns. The s a m e conclusions apply to a change of situs
in the opposite direction, from a state that permits unitrusts or the power to adjust to a
state that has only the traditional definition of income.
Effective Dates
T h e proposed regulations provide that the final regulations apply for taxable
years that begin on or after January 2, 2004. Commentators suggested that, as a
number of states have already enacted statutes permitting the trustee to pay to the
person entitled to the income a unitrust amount based on a fixed percentage of the fair
market value of the trust assets or providing the trustee the discretion to m a k e
adjustments between income and principal to treat the beneficiaries impartially, the
effective date provision should be changed to allow trustees to take advantage of these
statutes for periods beginning before the date of the publication of the final regulations.
A s an alternative, one commentator suggested that the IRS issue guidance allowing
trustees to rely on the proposed regulations prior to the publication of the final
regulations.
T h e final regulations, in general, will b e c o m e effective for taxable years of trusts
20
and estates ending after January 2, 2004. In addition, taxpayers m a y rely on the
provisions of the final regulations for any taxable years in which a trust or estate is
governed by a state statute authorizing a unitrust payment in satisfaction of the income
interest of the income beneficiaries or granting the trustee a power to adjust between
income and principal, in each case as described in the final regulations.
With respect to C R U T s , the prohibition of a trustee's discretionary power,
granted solely by the governing instrument and not by applicable state statute, to
allocate to income sales proceeds attributable to appreciation in the value of the asset
after the date it w a s contributed to the trust or purchased by the trust is applicable to
trusts created after January 2, 2004.
With respect to PIFs, the provision concerning the failure of net long-term capital
gain to qualify for the charitable deduction if the income beneficiaries, under the terms
of the governing instrument and the state statute, m a y receive a unitrust amount or an
amount based on unrealized appreciation in the value of the fund's assets is applicable
to taxable years of PIFs beginning after January 2, 2004. However, provided income
has not already been determined in such a manner, the fund's governing instrument
m a y be amended or reformed to eliminate this possibility. A judicial proceeding to
reform the fund's governing instrument must be commenced, or a nonjudicial
reformation that is valid under state law must be completed, by the date that is nine
months after the later of January 2, 2004 or the effective date of the state statute
authorizing determination of income in such a manner.
Special Analyses
21
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It has also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding
these regulations w a s submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Drafting Information
The principal authors of these regulations are Bradford R. Poston and Mary
Berman of the Office of Associate Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the IRS and the Treasury Department
participated in their development.
List of Subjects
26 C F R Part 1
Income taxes, Reporting and recordkeeping requirements.
26 C F R Part 20
Estate taxes, Reporting and recordkeeping requirements.
26 C F R Part 25
Gift taxes, Reporting and recordkeeping requirements.
26 C F R Part 26
22
Generation-skipping transfer taxes, Reporting and recordkeeping requirements.
Adoption of A m e n d m e n t s to the Regulations
Accordingly, 26 C F R parts 1, 20, 25, and 26 are amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.642(c)-2 is amended as follows:
1. Paragraph (c) is amended by adding two sentences after the first sentence.
2. Paragraph (e) is added immediately following paragraph (d).
The additions read as follows:
§1.642(c)-2 Unlimited deduction for amounts permanently set aside for a charitable
purpose.
*****
(c) * * * N o amount of net long-term capital gain shall be considered permanently
set aside for charitable purposes if, under the terms of the fund's governing instrument
and applicable local law, the trustee has the power, whether or not exercised, to satisfy
the income beneficiaries' right to income by the payment of either: an amount equal to a
fixed percentage of the fair market value of the fund's assets (whether determined
annually or averaged on a multiple year basis); or any amount that takes into account
unrealized appreciation in the value of the fund's assets. In addition, no amount of net
long-term capital gain shall be considered permanently set aside for charitable
23
purposes to the extent the trustee distributes proceeds from the sale or exchange of the
fund's assets as income within the meaning of §1.642(c)-5(a)(5)(i). * * *
*****
(e) Effective dates. Generally, the second sentence of paragraph (c) of this
section, concerning the loss of any charitable deduction for long-term capital gains if the
fund's income m a y be determined by a fixed percentage of the fair market value of the
fund's assets or by any amount that takes into account unrealized appreciation in the
value of the fund's assets, applies for taxable years beginning after January 2, 2004. In
a state whose statute permits income to be determined by reference to a fixed
percentage of, or the unrealized appreciation in, the value of the fund's assets, net
long-term capital gain of a pooled income fund m a y be considered to be permanently
set aside for charitable purposes if the fund's governing instrument is a m e n d e d or
reformed to eliminate the possibility of determining income in such a manner and if
income has not been determined in this manner. For this purpose, a judicial
proceeding to reform the fund's governing instrument must be commenced, or a
nonjudicial reformation that is valid under state law must be completed, by the date that
is nine months after the later of January 2, 2004 or the effective date of the state statute
authorizing determination of income in such a manner.
*****
Par. 3. In §1.642(c)-5, paragraph (a)(5)(i) is revised to read as follows:
§1.642(c)-5 Definition of pooled income fund.
(a) * * *
24
(5) * * *
(i) The term income has the s a m e meaning as it does under section 643(b) and
the regulations thereunder, except that income generally m a y not include any long-term
capital gains. However, in conformance with the applicable state statute, income m a y
be defined as or satisfied by a unitrust amount, or pursuant to a trustee's power to
adjust between income and principal to fulfill the trustee's duty of impartiality, if the state
statute both provides for a reasonable apportionment between the income and
remainder beneficiaries of the total return of the trust and meets the requirements of
§1.643(b)-1. In exercising a power to adjust, the trustee must allocate to principal, not
to income, the proceeds from the sale or exchange of any assets contributed to the
fund by any donor or purchased by the fund at least to the extent of the fair market
value of those assets on the date of their contribution to the fund or of the purchase
price of those assets purchased by the fund. This definition of income applies for
taxable years beginning after January 2, 2004.
*****
Par. 4. Section 1.643(a)-3 is revised to read as follows:
§1,643(a)-3 Capital gains and losses.
(a) In general. Except as provided in §1.643(a)-6 and paragraph (b) of this
section, gains from the sale or exchange of capital assets are ordinarily excluded from
distributable net income and are not ordinarily considered as paid, credited, or required
to be distributed to any beneficiary.
(b) Capital gains included in distributable net income. Gains from the sale or
exchange of capital assets are included in distributable net income to the extent they
25
are, pursuant to the terms of the governing instrument and applicable local law, or
pursuant to a reasonable and impartial exercise of discretion by the fiduciary (in
accordance with a power granted to the fiduciary by applicable local law or by the
governing instrument if not prohibited by applicable local law) (1) Allocated to income (but if income under the state statute is defined as, or
consists of, a unitrust amount, a discretionary power to allocate gains to income must
also be exercised consistently and the amount so allocated m a y not be greater than the
excess of the unitrust amount over the amount of distributable net income determined
without regard to this subparagraph §1.643(a)-3(b));
(2) Allocated to corpus but treated consistently by the fiduciary on the trust's
books, records, and tax returns as part of a distribution to a beneficiary; or
(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the
fiduciary in determining the amount that is distributed or required to be distributed to a
beneficiary.
(c) Charitable contributions included in distributable net income. If capital gains
are paid, permanently set aside, or to be used for the purposes specified in section
642(c), so that a charitable deduction is allowed under that section in respect of the
gains, they must be included in the computation of distributable net income.
(d) Capital losses. Losses from the sale or exchange of capital assets shall first
be netted at the trust level against any gains from the sale or exchange of capital
assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in
determining the amount that is distributed or required to be distributed to a particular
beneficiary. S e e §1.642(h)-1 with respect to capital loss carryovers in the year of final
26
termination of an estate or trust.
(e) Examples. The following examples illustrate the rules of this section:
Example 1. Under the terms of Trust's governing instrument, all income is to be
paid to A for life. Trustee is given discretionary powers to invade principal for A's benefit
and to d e e m discretionary distributions to be m a d e from capital gains realized during
the year. During Trust's first taxable year, Trust has $5,000 of dividend income and
$10,000 of capital gain from the sale of securities. Pursuant to the terms of the
governing instrument and applicable local law, Trustee allocates the $10,000 capital
gain to principal. During the year, Trustee distributes to A $5,000, representing A's right
to trust income. In addition, Trustee distributes to A $12,000, pursuant to the
discretionary power to distribute principal. Trustee does not exercise the discretionary
power to d e e m the discretionary distributions of principal as being paid from capital
gains realized during the year. Therefore, the capital gains realized during the year are
not included in distributable net income and the $10,000 of capital gain is taxed to the
trust. In future years, Trustee must treat all discretionary distributions as not being
m a d e from any realized capital gains.
Example 2. The facts are the same as in Example 1, except that Trustee intends
to follow a regular practice of treating discretionary distributions of principal as being
paid first from any net capital gains realized by Trust during the year. Trustee evidences
this treatment by including the $10,000 capital gain in distributable net income on
Trust's federal income tax return so that it is taxed to A. This treatment of the capital
gains is a reasonable exercise of Trustee's discretion. In future years Trustee must
treat all discretionary distributions as being m a d e first from any realized capital gains.
Example 3. The facts are the same as in Example 1, except that Trustee intends
to follow a regular practice of treating discretionary distributions of principal as being
paid from any net capital gains realized by Trust during the year from the sale of certain
specified assets or a particular class of investments. This treatment of capital gains is a
reasonable exercise of Trustee's discretion.
Example 4. The facts are the same as in Example 1, except that pursuant to the
terms of the governing instrument (in a provision not prohibited by applicable local law),
capital gains realized by Trust are allocated to income. Because the capital gains are
allocated to income pursuant to the terms of the governing instrument, the $10,000
capital gain is included in Trust's distributable net income for the taxable year.
Example 5. The facts are the same as in Example 1, except that Trustee decides
that discretionary distributions will be m a d e only to the extent Trust has realized capital
gains during the year and thus the discretionary distribution to A is $10,000, rather than
$12,000. Because Trustee will use the amount of any realized capital gain to determine
the amount of the discretionary distribution to the beneficiary, the $10,000 capital gain
is included in Trust's distributable net income for the taxable year.
27
Example 6. Trust's assets consist of Blackacre and other property. Under the
terms of Trust's governing instrument, Trustee is directed to hold Blackacre for ten
years and then sell it and distribute all the sales proceeds to A. Because Trustee uses
the amount of the sales proceeds that includes any realized capital gain to determine
the amount required to be distributed to A, any capital gain realized from the sale of
Blackacre is included in Trust's distributable net income for the taxable year.
Example 7. Under the terms of Trust's governing instrument, all income is to be
paid to A during the Trust's term. W h e n A reaches 35, Trust is to terminate and all the
principal is to be distributed to A. Because all the assets of the trust, including all capital
gains, will be actually distributed to the beneficiary at the termination of Trust, all capital
gains realized in the year of termination are included in distributable net income. S e e
§1.641(b)-3 for the determination of the year of final termination and the taxability of
capital gains realized after the terminating event and before final distribution.
Example 8. The facts are the same as Example 7, except Trustee is directed to
pay B $10,000 before distributing the remainder of Trust assets to A. Because the
distribution to B is a gift of a specific s u m of m o n e y within the meaning of section
663(a)(1), none of Trust's distributable net income that includes all of the capital gains
realized during the year of termination is allocated to B's distribution.
Example 9. The facts are the same as Example 7, except Trustee is directed to
distribute one-half of the principal to A w h e n A reaches 35 and the balance to A w h e n A
reaches 45. Trust assets consist entirely of stock in corporation M with a fair market
value of $1,000,000 and an adjusted basis of $300,000. W h e n A reaches 35, Trustee
sells one-half of the stock and distributes the sales proceeds to A. All the sales
proceeds, including all the capital gain attributable to that sale, are actually distributed
to A and therefore all the capital gain is included in distributable net income.
Example 10. The facts are the same as Example 9, except when A reaches 35,
Trustee sells all the stock and distributes one-half of the sales proceeds to A. If
authorized by the governing instrument and applicable state statute, Trustee m a y
determine to what extent the capital gain is distributed to A. The $500,000 distribution
to A m a y be treated as including a minimum of $200,000 of capital gain (and all of the
principal amount of $300,000) and a m a x i m u m of $500,000 of the capital gain (with no
principal). Trustee evidences the treatment by including the appropriate amount of
capital gain in distributable net income on Trust's federal income tax return. If Trustee
is not authorized by the governing instrument and applicable state statutes to determine
to what extent the capital gain is distributed to A, one-half of the capital gain attributable
to the sale is included in distributable net income.
Example 11. The applicable state statute provides that a trustee may make an
election to pay an income beneficiary an amount equal to four percent of the fair market
value of the trust assets, as determined at the beginning of each taxable year, in full
28
satisfaction of that beneficiary's right to income. State statute also provides that this
unitrust amount shall be considered paid first from ordinary and tax-exempt income,
then from net short-term capital gain, then from net long-term capital gain, and finally
from return of principal. Trust's governing instrument provides that A is to receive each
year income as defined under state statute. Trustee m a k e s the unitrust election under
state statute. At the beginning of the taxable year, Trust assets are valued at $500,000.
During the year, Trust receives $5,000 of dividend income and realizes $80,000 of net
long-term gain from the sale of capital assets. Trustee distributes to A $20,000 ( 4 % of
$500,000) in satisfaction of A's right to income. Net long-term capital gain in the amount
of $15,000 is allocated to income pursuant to the ordering rule of the state statute and
is included in distributable net income for the taxable year.
Example 12. The facts are the same as in Example 11, except that neither state
statute nor Trust's governing instrument has an ordering rule for the character of the
unitrust amount, but leaves such a decision to the discretion of Trustee. Trustee
intends to follow a regular practice of treating principal, other than capital gain, as
distributed to the beneficiary to the extent that the unitrust amount exceeds Trust's
ordinary and tax-exempt income. Trustee evidences this treatment by not including any
capital gains in distributable net income on Trust's Federal income tax return so that the
entire $80,000 capital gain is taxed to Trust. This treatment of the capital gains is a
reasonable exercise of Trustee's discretion. In future years Trustee must consistently
follow this treatment of not allocating realized capital gains to income.
Example 13. The facts are the same as in Example 11. except that neither state
statutes nor Trust's governing instrument has an ordering rule for the character of the
unitrust amount, but leaves such a decision to the discretion of Trustee. Trustee
intends to follow a regular practice of treating net capital gains as distributed to the
beneficiary to the extent the unitrust amount exceeds Trust's ordinary and tax-exempt
income. Trustee evidences this treatment by including $15,000 of the capital gain in
distributable net income on Trust's Federal income tax return. This treatment of the
capital gains is a reasonable exercise of Trustee's discretion. In future years Trustee
must consistently treat realized capital gain, if any, as distributed to the beneficiary to
the extent that the unitrust amount exceeds ordinary and tax-exempt income.
Example 14. Trustee is a corporate fiduciary that administers numerous trusts.
State statutes provide that a trustee m a y m a k e an election to distribute to an income
beneficiary an amount equal to four percent of the annual fair market value of the trust
assets in full satisfaction of that beneficiary's right to income. Neither state statutes nor
the governing instruments of any of the trusts administered by Trustee has an ordering
rule for the character of the unitrust amount, but leaves such a decision to the discretion
of Trustee. With respect to s o m e trusts, Trustee intends to follow a regular practice of
treating principal, other than capital gain, as distributed to the beneficiary to the extent
that the unitrust amount exceeds the trust's ordinary and tax-exempt income. Trustee
will evidence this treatment by not including any capital gains in distributable net income
on the Federal income tax returns for those trusts. With respect to other trusts, Trustee
29
intends to follow a regular practice of treating any net capital gains as distributed to the
beneficiary to the extent the unitrust amount exceeds the trust's ordinary and taxexempt income. Trustee will evidence this treatment by including net capital gains in
distributable net income on the Federal income tax returns filed for these trusts.
Trustee's decision with respect to each trust is a reasonable exercise of Trustee's
discretion and, in future years, Trustee must treat the capital gains realized by each
trust consistently with the treatment by that trust in prior years.
(f) Effective date. This section applies for taxable years of trusts and estates
ending after January 2, 2004.
Par. 5. Section 1.643(b)-1 is revised to read as follows:
§1.643(b)-1 Definition of income.
For purposes of subparts A through D, part I, subchapter J, chapter 1 of the
Internal Revenue Code, "income," when not preceded by the words "taxable,"
"distributable net," "undistributed net," or "gross," means the amount of income of an
estate or trust for the taxable year determined under the terms of the governing
instrument and applicable local law. Trust provisions that depart fundamentally from
traditional principles of income and principal will generally not be recognized. For
example, if a trust instrument directs that all the trust income shall be paid to the income
beneficiary but defines ordinary dividends and interest as principal, the trust will not be
considered one that under its governing instrument is required to distribute all its income
currently for purposes of section 642(b) (relating to the personal exemption) and section
651 (relating to simple trusts). Thus, items such as dividends, interest, and rents are
generally allocated to income and proceeds from the sale or exchange of trust assets
are generally allocated to principal. However, an allocation of amounts between income
and principal pursuant to applicable local law will be respected if local law provides for a
30
reasonable apportionment between the income and remainder beneficiaries of the total
return of the trust for the year, including ordinary and tax-exempt income, capital gains,
and appreciation. For example, a state statute providing that income is a unitrust
amount of no less than 3 % and no more than 5 % of the fair market value of the trust
assets, whether determined annually or averaged on a multiple year basis, is a
reasonable apportionment of the total return of the trust. Similarly, a state statute that
permits the trustee to m a k e adjustments between income and principal to fulfill the
trustee's duty of impartiality between the income and remainder beneficiaries is
generally a reasonable apportionment of the total return of the trust. Generally, these
adjustments are permitted by state statutes w h e n the trustee invests and m a n a g e s the
trust assets under the state's prudent investor standard, the trust describes the amount
that m a y or must be distributed to a beneficiary by referring to the trust's income, and the
trustee after applying the state statutory rules regarding the allocation of receipts and
disbursements to income and principal, is unable to administer the trust impartially.
Allocations pursuant to methods prescribed by such state statutes for apportioning the
total return of a trust between income and principal will be respected regardless of
whether the trust provides that the income must be distributed to one or more
beneficiaries or m a y be accumulated in whole or in part, and regardless of which
alternate permitted method is actually used, provided the trust complies with all
requirements of the state statute for switching methods. A switch between methods of
determining trust income authorized by state statute will not constitute a recognition
event for purposes of section 1001 and will not result in a taxable gift from the trust's
grantor or any of the trust's beneficiaries. A switch to a method not specifically
31
authorized by state statute, but valid under state law (including a switch via judicial
decision or a binding non-judicial settlement) m a y constitute a recognition event to the
trust or its beneficiaries for purposes of section 1001 and m a y result in taxable gifts from
the trust's grantor and beneficiaries, based on the relevant facts and circumstances. In
addition, an allocation to income of all or a part of the gains from the sale or exchange of
trust assets will generally be respected if the allocation is m a d e either pursuant to the
terms of the governing instrument and applicable local law, or pursuant to a reasonable
and impartial exercise of a discretionary power granted to the fiduciary by applicable
local law or by the governing instrument, if not prohibited by applicable local law. This
section is effective for taxable years of trusts and estates ending after January 2, 2004.
Par. 6. In §1.651(a)-2, paragraph (d) is added to read as follows:
§1.651(a)-2 Income reguired to be distributed currently.
***** *
(d) If a trust distributes property in kind as part of its requirement to distribute
currently all the income as defined under section 643(b) and the applicable regulations,
the trust shall be treated as having sold the property for its fair market value on the date
of distribution. If no amount in excess of the amount of income as defined under section
643(b) and the applicable regulations is distributed by the trust during the year, the trust
will qualify for treatment under section 651 even though property in kind w a s distributed
as part of a distribution of all such income. This paragraph (d) applies for taxable years
of trusts ending after January 2, 2004.
Par. 7. In §1.661(a)-2, paragraph (f) is revised to read as follows:
§1,661(a)-2 Deduction for distributions to beneficiaries.
32
*****
(f) Gain or loss is realized by the trust or estate (or the other beneficiaries) by
reason of a distribution of property in kind if the distribution is in satisfaction of a right to
receive a distribution of a specific dollar amount, of specific property other than that
distributed, or of income as defined under section 643(b) and the applicable regulations,
if income is required to be distributed currently. In addition, gain or loss is realized if the
trustee or executor m a k e s the election to recognize gain or loss under section 643(e).
This paragraph applies for taxable years of trusts and estates ending January 2, 2004.
Par. 8. Section 1.664-3 is a m e n d e d as follows:
1. Paragraphs (a)(1 )(i)(b)(3) and (4) are revised.
2. Paragraph (a)(1)(i)(b)(5) is removed.
T h e revisions read as follows:
§1.664-3 Charitable remainder unitrust.
(a) * * *
(A \ * * * / j \ * * *
(b) * * *
(3) For purposes of this paragraph (a)(1)(i)(b), trust income generally m e a n s
income as defined under section 643(b) and the applicable regulations. However, trust
income m a y not be determined by reference to a fixed percentage of the annual fair
market value of the trust property, notwithstanding any contrary provision in applicable
state law. Proceeds from the sale or exchange of any assets contributed to the trust by
the donor must be allocated to principal and not to trust income at least to the extent of
the fair market value of those assets on the date of their contribution to the trust.
33
Proceeds from the sale or exchange of any assets purchased by the trust must be
allocated to principal and not to trust income at least to the extent of the trust's purchase
price of those assets. Except as provided in the two preceding sentences, proceeds
from the sale or exchange of any assets contributed to the trust by the donor or
purchased by the trust may be allocated to income, pursuant to the terms of the
governing instrument, if not prohibited by applicable local law. A discretionary power to
make this allocation may be granted to the trustee under the terms of the governing
instrument but only to the extent that the state statute permits the trustee to make
adjustments between income and principal to treat beneficiaries impartially.
(4) The rules in paragraph (a)(1)(i)(b)(1_) and (2) of this section are applicable for
taxable years ending after April 18, 1997. The rule in the first sentence of paragraph
(a)(1 )(i)(b)(3) is applicable for taxable years ending after April 18, 1997. The rules in the
second, fourth, and fifth sentences of paragraph (a)(1 )(i)(b)(3) are applicable for taxable
years ending after January 2, 2004. The rule in the third sentence of paragraph
(a)(1 )(i)(b)(3) is applicable for sales or exchanges that occur after April 18,1997. The
rule in the sixth sentence of paragraph (a)(1)(i)(b)(3) is applicable for trusts created after
January 2, 2004.
* ****
PART 20-ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
Par. 9. The authority citation for part 20 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. Section 20.2056(b)-5 is amended by adding a new sentence to the end
34
of paragraph (f)(1) to read as follows:
§20.2056(b)-5 Marital deduction; life estate with power of appointment in surviving
spouse.
*****
(f) * * * (1) * * * In addition, the surviving spouse's interest shall meet the
condition set forth in paragraph (a)(1) of this section if the spouse is entitled to income
as determined by applicable local law that provides for a reasonable apportionment
between the income and remainder beneficiaries of the total return of the trust and that
meets the requirements of §1.643(b)-1 of this chapter.
*****
Par. 11. Section 20.2056(b)-7 is amended by adding a n e w sentence to the end
of paragraph (d)(1) to read as follows:
§20.2056(b)-7 Election with respect to life estate for surviving spouse.
*****
(d) * * * (1) * * * A power under applicable local law that permits the trustee to
adjust between income and principal to fulfill the trustee's duty of impartiality between
the income and remainder beneficiaries that meets the requirements of §1.643(b)-1 of
this chapter will not be considered a power to appoint trust property to a person other
than the surviving spouse.
** * **
Par. 12. Section 20.2056(b)-10 is a m e n d e d by adding a n e w sentence at the end
of the section to read as follows:
35
§20.20560)1-10 Effective dates.
* * * In addition, the rule in the last sentence of §20.2056(b)-5(f)(1) and the rule in
the last sentence of §20.2056(b)-7(d)(1) regarding the effect on the spouse's right to
income if applicable local law provides for the reasonable apportionment between the
income and remainder beneficiaries of the total return of the trust are applicable with
respect to trusts for taxable years ending after January 2, 2004.
Par. 13. Section 20.2056A-5 is a m e n d e d by adding a n e w sentence in paragraph
(c)(2) after the third sentence to read as follows:
S20.2056A-5 Imposition of section 2056A estate tax.
*****
(c) * * *
(2) * * * However, distributions m a d e to the surviving spouse as the income
beneficiary in conformance with applicable local law that defines the term income as a
unitrust amount (or permits a right to income to be satisfied by such an amount), or that
permits the trustee to adjust between principal and income to fulfill the trustee's duty of
impartiality between income and principal beneficiaries, will be considered distributions
of trust income if applicable local law provides for a reasonable apportionment between
the income and remainder beneficiaries of the total return of the trust and meets the
requirements of §1.643(b)-1 of this chapter. * * *
*****
Par. 14. Section 20.2056A-13 is revised to read as follows:
S20.2056A-13 Effective dates.
36
Except as provided in this section, the provisions of §§20.2056A-1 through
20.2056A-12 are applicable with respect to estates of decedents dying after August 22,
1995. The rule in the fourth sentence of §20.2056A-5(c)(2) regarding unitrusts and
distributions of income to the surviving spouse in conformance with applicable local law
is applicable to trusts for taxable years ending after January 2, 2004.
P A R T 25-GIFT TAX; GIFTS M A D E A F T E R D E C E M B E R 31, 1954
Par. 15. The authority citation for part 25 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 16. Section 25.2523(e)-1 is amended by adding a n e w sentence to the end
of paragraph (f)(1) to read as follows:
525.2523(e)-1 Marital deduction; life estate with power of appointment in donee spouse.
*****
(f) * * * (1) * * * In addition, the spouse's interest shall meet the condition set forth
in paragraph (a)(1) of this section if the spouse is entitled to income as defined or
determined by applicable local law that provides for a reasonable apportionment
between the income and remainder beneficiaries of the total return of the trust and that
meets the requirements of §1.643(b)-1 of this chapter.
*****
Par. 17. Section 25.2523(h)-2 is amended by adding a new sentence to the end
of the section to read as follows:
S25.2523(h)-2 Effective dates.
* * * In addition, the rule in the last sentence of §25.2523(e)-1 (f)(1) regarding the
determination of income under applicable local law applies to trusts for taxable years
37
ending after January 2, 2004.
P A R T 26-GENERATION-SKIPPING T R A N S F E R T A X R E G U L A T I O N S U N D E R T H E
T A X R E F O R M A C T O F 1986
Par. 18. The authority citation for part 26 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 19. Section 26.2601-1 is amended as follows:
1. The second and third sentences of paragraph (b)(4)(i) are revised to read as
follows.
2. Paragraph (b)(4)(i)(D)(2) is amended by adding a new sentence to the end of
the paragraph.
3. Paragraph (b)(4)(i)(E) is amended by adding Examples 11 and 12.
4. Paragraph (b)(4)(H) is revised to read as follows.
The additions and revisions read as follows:
§26.2601-1 Effective dates.
*****
(b) * * *
(4) * * *(i) * * * In general, unless specifically provided otherwise, the rules
contained in this paragraph are applicable only for purposes of determining whether an
exempt trust retains its exempt status for generation-skipping transfer tax purposes.
Thus (unless specifically noted), the rules do not apply in determining, for example,
whether the transaction results in a gift subject to gift tax, or m a y cause the trust to be
included in the gross estate of a beneficiary, or may result in the realization of gain for
purposes of section 1001.
38
* ****
(D) * * *
(2) * * * In addition, administration of a trust in conformance with applicable local
law that defines the term income as a unitrust amount (or permits a right to income to be
satisfied by such an amount) or that permits the trustee to adjust between principal and
income to fulfill the trustee's duty of impartiality between income and principal
beneficiaries will not be considered to shift a beneficial interest in the trust, if applicable
local law provides for a reasonable apportionment between the income and remainder
beneficiaries of the total return of the trust and meets the requirements of §1.643(b)-1 of
this chapter.
/p\ * * *
Example 11. Conversion of income interest to unitrust interest under state
statute. In 1980, Grantor, a resident of State X, established an irrevocable trust for the
benefit of Grantor's child, A, and A's issue. The trust provides that trust income is
payable to A for life and upon A's death the remainder is to pass to A's issue, per
stirpes. In 2002, State X a m e n d s its income and principal statute to define income as a
unitrust amount of 4 % of the fair market value of the trust assets valued annually. For a
trust established prior to 2002, the statute provides that the n e w definition of income will
apply only if all the beneficiaries w h o have an interest in the trust consent to the change
within two years after the effective date of the statute. The statute provides specific
procedures to establish the consent of the beneficiaries. A and A's issue consent to the
change in the definition of income within the time period, and in accordance with the
procedures, prescribed by the state statute. The administration of the trust, in
accordance with the state statute defining income to be a 4 % unitrust amount, will not be
considered to shift any beneficial interest in the trust. Therefore, the trust will not be
subject to the provisions of chapter 13 of the Internal Revenue Code. Further, under
these facts, no trust beneficiary will be treated as having m a d e a gift for federal gift tax
purposes, and neither the trust nor any trust beneficiary will be treated as having m a d e a
taxable exchange for federal income tax purposes. Similarly, the conclusions in this
example would be the s a m e if the beneficiaries' consent w a s not required, or, if the
change in administration of the trust occurred because the situs of the trust w a s
changed to State X from a state whose statute does not define income as a unitrust
amount or if the situs w a s changed to such a state from State X.
39
Example 12. Eguitable adjustments under state statute. T h e facts are the s a m e
as in Example 11. except that in 2002, State X a m e n d s its income and principal statute
to permit the trustee to m a k e adjustments between income and principal w h e n the
trustee invests and m a n a g e s the trust assets under the state's prudent investor
standard, the trust describes the amount that shall or must be distributed to a beneficiary
by referring to the trust's income, and the trustee after applying the state statutory rules
regarding allocation of receipts between income and principal is unable to administer the
trust impartially. The provision permitting the trustees to m a k e these adjustments is
effective in 2002 for trusts created at any time. The trustee invests and m a n a g e s the
trust assets under the state's prudent investor standard, and pursuant to authorization in
the state statute, the trustee allocates receipts between the income and principal
accounts in a manner to ensure the impartial administration of the trust. T h e
administration of the trust in accordance with the state statute will not be considered to
shift any beneficial interest in the trust. Therefore, the trust will not be subject to the
provisions of chapter 13 of the Internal Revenue Code. Further, under these facts, no
trust beneficiary will be treated as having m a d e a gift for federal gift tax purposes, and
neither the trust nor any trust beneficiary will be treated as having m a d e a taxable
exchange for federal income tax purposes. Similarly, the conclusions in this example
would be the s a m e if the change in administration of the trust occurred because the situs
of the trust w a s changed to State X from a state whose statute does not authorize the
trustee to m a k e adjustments between income and principal or if the situs w a s changed
to such a state from State X.
40
(ii) Effective dates. The rules in this paragraph (b)(4) are generally applicable on
and after December 20, 2000. However, the rule in the last sentence of paragraph
(b)(4)(i)(D)(2) of this section and Example 11 and Example 12 in paragraph (b)(4)(i)(E)
of this section regarding the administration of a trust and the determination of income in
conformance with applicable state law applies to trusts for taxable years ending after
January 2, 2004.
* ****
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: December 16, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
js-1069: Treasury Issues Depreciation Guidance
Page 1 of 1
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC A F F A I R S
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 30, 2003
js-1069
Treasury Issues Depreciation Guidance
Today, the Treasury Department issued proposed, temporary, and final
regulations to clarify which changes in depreciation are changes in method of
accounting. These regulations and a revenue procedure also issued today will
provide certainty for taxpayers and reduce controversy.
In recent years, uncertainty has existed regarding whether a change in the
period of recovery of depreciable property was a change in method of accounting.
The regulations provide that a change in the period of recovery specifically
assigned by the Code, the regulations, or other published guidance is a change in
method of accounting. The regulations also provide, however, that a change in the
useful life of depreciable property is not a change in method of accounting if the
useful life of the property is not specifically assigned by the Code, the regulations,
or other published guidance. In addition, the regulations provide that a change in
depreciation method or convention is a change in method of accounting.
Previously, the IRS issued guidance to permit a taxpayer who had claimed
less than the depreciation allowable for its property to change its method of
determining depreciation for the property. This guidance has enabled many
taxpayers who had claimed less than the depreciation allowable to claim the full
depreciation allowable. Today, the IRS and Treasury Department issued a revenue
procedure to permit a taxpayer to make this change after the disposition of the
depreciable property. As a result, a taxpayer who has claimed less than the
depreciation allowable for its property will no longer risk permanently losing an
allowable depreciation deduction.
The texts of the proposed, temporary, final regulations and the revenue
procedure are attached. They will be published in the Federal Register in the next
few days and are subject to minor technical changes.
-30Related Documents:
• notice of proposed rule making
• final and temporary regulations
• revenue procedure
http://www.treas.gov/press/releases/js 1069.htm
5/20/2005
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-126459-03]
RIN1545-BC18
Changes in Computing Depreciation
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking; Notice of proposed rulemaking by crossreference to temporary regulations and notice of public hearing.
SUMMARY: In the Rules and Regulations section of this issue of the Federal Register, the
IRS is issuing temporary regulations under sections 446(e) and 1016(a)(2) of the Internal
Revenue Code relating to a change in computing depreciation or amortization as well as a
change from a nondepreciable or nonamortizable asset to a depreciable or amortizable
asset (or vice versa). The text of those temporary regulations also serves as the text of
these proposed regulations. This document also provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments must be received by April 1, 2004. Outlines of
topics to be discussed at the public hearing scheduled for April 7, 2004, at 10 a.m. must
be received by March 17, 2004.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-126459-03), room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC, 20044.
Alternatively, submissions may be hand-delivered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-126459-03), Couriers Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC or sent electronically,
via the IRS Internet site at: http://www.irs.gov/regs.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Sara
Logan or Douglas Kim, (202) 622-3110; concerning submissions of comments, the
hearing, and/or to be placed on the building access list to attend the hearing, Sonya Crus
(202) 622-4693 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in the Rules and Regulations section of this issue of the
Federal Register amend 26 CFR part 1 relating to sections 167,446, and 1016 of the
Internal Revenue Code (Code). The temporary regulations provide guidance under section
446(e) on whether a change in computing depreciation or amortization as well as a change
from a nondepreciable or nonamortizable asset to a depreciable or amortizable asset (or
vice versa) is a change in method of accounting that requires the consent of the
Commissioner.
The text of those temporary regulations also serves as the text of these proposed
regulations. The preamble to the temporary regulations explains the temporary regulations
and these proposed regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
2
assessment is not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and,
because these regulations do not impose on small entities a collection of information
requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore,
a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations, consideration
will be given to any written comments (a signed original and eight (8) copies) or electronic
comments that are submitted timely to the IRS. The IRS and Treasury Department
specifically request comments on the clarity of the proposed rules and how they can be
made easier to understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for April 7, 2004, beginning at 10:00 a.m. in
the Auditorium, 7th Floor, Internal Revenue Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building security procedures, visitors must enter at the
Constitution Avenue entrance. In addition, all visitors must present photo identification to
enter the building. Because of access restrictions, visitors will not be admitted beyond the
immediate entrance area more than 30 minutes before the hearing starts. For information
about having your name placed on the building access list to attend the hearing, see the
3
F O R F U R T H E R I N F O R M A T I O N C O N T A C T section of this preamble.
The rules of 26 CFR 601.601 (a)(3) apply to the hearing. Persons who wish to
present oral comments at the hearing must submit an outline of the topics to be discussed
and the time to be devoted to each topic (signed original and eight (8) copies) by March
17, 2004. A period of 10 minutes will be allotted to each person for making comments. An
agenda showing the scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available free of charge at th
hearing.
Drafting Information
The principal author of these regulations is Sara Logan, Office of Associate Chief
Counsel (Passthroughs and Special Industries). However, other personnel from the IRS
and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1 -INCOME TAXES
Paragraph 1. The authority citation for part 1 reads as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.167(e)-1 is amended by revising paragraphs (a) and (e) to read
as follows:
§1.167(e)-1 Change in method.
4
(a) [The text of the proposed amendment to §1.167(e)-1(a) is the s a m e as the text
of ' 1.167(e)-1T(a) published elsewhere in this issue of the Federal Register].
*****
(e) Effective date. This section applies on or after December 30, 2003. For the
applicability of regulations before December 30, 2003, see §1.167(e)-1 in effect prior to
December 30, 2003 (§1.167(e)-1 as contained in 26 C F R part 1 edition revised as of April
1,2003).
Par. 3. Section 1.446-1 is amended by revising paragraphs (e)(2)(ii)(a),
(e)(2)(ii)(b), (e)(2)(ii)(d), (e)(2)(iii), and (e)(4) to read as follows:
1
1.446-1 General rule for methods of accounting.
*****
(e) * * *
/o\ * * *
(ii)(a) and (b) [The text of the proposed amendment to §1.446-1 (e)(2)(ii)(a) and (b)
is the s a m e as the text of • 1.446-1 T(e)(2)(ii)(a) and (b) published elsewhere in this issue of
the Federal Register].
*****
(d) [The text of this paragraph (e)(2)(ii)(d) is the s a m e as the text of §1.4461T(e)(2)(ii)(d) published elsewhere in this issue of the Federal Register].
(iii) [The text of the proposed amendment to §1.446-1 (e)(2)(iii) is the s a m e as the
text of §1.446-1 T(e)(2)(iii) published elsewhere in this issue of the Federal Register].
5
** * * *
(4) Effective date--(i) In general. Except as provided in paragraphs (e)(3)(iii) and
(e)(4)(H) of this section, paragraph (e) of this section applies on or after December 30,
2003. For the applicability of regulations before December 30, 2003, see §1.446-1 (e) in
effect prior to December 30, 2003 (§1.446-1 (e) as contained in 26 CFR part 1 edition
revised as of April 1, 2003).
(ii) Changes involving depreciable or amortizable assets. With respect to
paragraph (e)(2)(ii)(d) of this section, paragraph (e)(2)(iii) Examples 9 through 17 of this
section, the addition of the language "certain changes in computing depreciation or
amortization (see paragraph (e)(2)(ii)(d) of this section)" to the last sentence of paragraph
(e)(2)(ii)(a) of this section, and the removal of all language regarding useful life and the
sentence "On the other hand, a correction to require depreciation in lieu of a deduction for
the cost of a class of depreciable assets which had been consistently treated as an
expense in the year of purchase involves the question of the proper timing of an item, and
is to be treated as a change in method of accounting" from paragraph (e)(2)(ii)(b) of this
section(A) For any change in depreciation or amortization that is a change in method of
accounting, this section applies to such a change in method of accounting made for
taxable years ending on or after December 30, 2003; and
(B) For any change in depreciation or amortization that is not a change in method of
accounting, this section applies to such a change made for taxable years ending on or after
December 30, 2003.
6
Par. 4. Section 1.1016-3 is amended by revising paragraphs (h) and (j) to read as
follows:
1
1.1016-3 Exhaustion, wear and tear, obsolescence, amortization, and depletion for
periods since February 28,1913.
*****
(h) [The text of the proposed amendment to §1.1016-3(h) is the s a m e as the text of
§1.1016-3T(h) published elsewhere in this issue of the Federal Register].
*****
(j) Effective date--(1) In general. Except as provided in paragraph (j)(2) of this
section, this section applies on or after December 30, 2003. For the applicability of
regulations before December 30, 2003, see §1.1016-3 in effect prior to December 30,
2003 (§1.1016-3 as contained in 26 C F R part 1 edition revised as of April 1, 2003).
(2) Depreciation or amortization changes. Paragraph (h) of this section applies to a
change in depreciation or amortization for property subject to section 167,168,197,14001,
1400L(b), or 1400L(c), or former section 168 for taxable years ending on or
7
after December 30, 2003.
Deputy Commissioner for Services and Enforcement.
Mark E. Matthews
8
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9105]
RIN:1545-BC17
Changes in Computing Depreciation
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains regulations relating to a change in computing
depreciation or amortization as well as a change from a nondepreciable or nonamortizable
asset to a depreciable or amortizable asset (or vice versa). Specifically, these regulations
provide guidance to any taxpayer that makes a change in depreciation or amortization on
whether such change is a change in method of accounting under section 446(e) of the
Internal Revenue Code and on the application of section 1016(a)(2) in determining whether
the change is a change in method of accounting. The text of these temporary regulations
also serves as the text of the proposed regulations set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section in this issue of the Federal
Register.
DATES: Effective Dates: These regulations are effective January 2, 2004.
Applicability Dates: For dates of applicability, see §§1.167(e)-1T(e), 1.446(e)1T(e)(4),and1.1016-3TG).
F O R F U R T H E R INFORMATION C O N T A C T : Sara Logan or Douglas Kim, (202) 622-3110
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1 to provide regulations under
sections 167,446(e), and 1016(a)(2) of the Internal Revenue Code (Code). These
regulations provide the changes in depreciation or amortization that are, and are not, a
change in method of accounting under §1.446-1 (e). Additionally, these regulations amend
§1.167(e)-1 to provide that certain changes in depreciation method for property for which
depreciation is determined only under section 167 are made without the consent of the
Commissioner of Internal Revenue, and amend §1.1016-3 to provide that section
1016(a)(2) does not permanently affect a taxpayer's lifetime income for purposes of
determining whether a change in depreciation or amortization is a change in method of
accounting.
Explanation of Provisions
Background
Section 446 provides in general that taxable income shall be computed under the
method of accounting on the basis of which the taxpayer regularly computes the taxpayer's
income in keeping the taxpayer's books. Section 446(e) provides that, except as
otherwise expressly provided in chapter 1 of the Code, a taxpayer who changes the
method of accounting on the basis of which the taxpayer regularly computes the taxpayer's
income in keeping the taxpayer's books shall, before computing the taxpayer's taxable
2
income under the n e w method, secure the consent of the Secretary.
Section 1.446-1 (e)(2)(ii)(a) provides in pertinent part that a change in method of
accounting includes a change in the overall plan of accounting for gross income or
deductions or a change in the treatment of any material item used in such overall plan. A
material item is any item that involves the proper time for the inclusion of the item in income
or the taking of a deduction. However, ' 1.446-1 (e)(2)(ii)(b) provides in pertinent part that a
change in method of accounting does not include an adjustment in the useful life of a
depreciable asset. Although such adjustment may involve the question of the proper time
for the taking of a deduction, such item is traditionally corrected by adjustments in the
current and future years.
Section 1.167(e)-1(a) provides that in general, any change in the method of
computing the depreciation allowances with respect to a particular account (other than a
change in method permitted or required by reason of the operation of former section
167(j)(2) and §1.167(j)-3(c)) is a change in method of accounting, and such a change will
be permitted only with the consent of the Commissioner, except that certain changes to the
straight line method of depreciation will be permitted without consent as provided in former
section 167(e)(1), (2), and (3). Any request for a change in method of depreciation shall be
made in accordance with section 446 and the regulations under section 446.
In 1996, the IRS issued Rev. Proc. 96-31 (1996-1 C.B. 714), providing that a
change from not claiming the depreciation or amortization allowable to claiming the
depreciation or amortization allowable is a change in method of accounting for which the
consent of the Commissioner of Internal Revenue is required.
3
In Kurzet v. Commissioner. 222 F.2d 830, 842-845 (10th Cir. 2000), the taxpayer
sought to change the classification of property under section 168 from nonresidential real
property to 15-year property thereby resulting in a change in recovery period from 31.5
years to 15 years. The Tenth Circuit held that a change in recovery period under section
168 is a change in method of accounting under section 446(e). In reaching its holding, the
Tenth Circuit considered the taxpayer's argument that a change in recovery period is
analogous to a change in useful life, but concluded that the Commissioner's interpretation
of §1.446-1 (e)(2)(H) in Rev. Proc. 96-31 as requiring a taxpayer to obtain permission for a
change in recovery period is not plainly erroneous or inconsistent with ' 1.446-1 (e)(2)(H).
In Brookshire Brothers Holding, Inc. & Subsidiaries v. Commissioner, 320 F.3d 507
(5th Cir. 2003), afffl. T.C. Memo. 2001-150, reh'g en banc denied, 65 Fed. Appx. 511 (5th
Cir. 2003), the Fifth Circuit held that a change in classification of property under section
168 is not a change in method of accounting under section 446(e) because the change is
the functional equivalent of a change in useful life thereby resulting in the change falling
under the useful life exception in §1.446-1 (e)(2)(ii)(b). The Eighth Circuit in
O'Shaughnessv v. Commissioner, 332 F.3d 1125 (8th Cir. 2003), rev'g in part 2002-1
U.S.T.C. (CCH) U50.235 (D. Minn. 2001), adopted the analysis in Brookshire and held that
a change in classification of property under section 168 falls within the useful life exception
and, thus, does not constitute a change in method of accounting under section 446(e).
Further, in Green Forest Manufacturing Inc. v. Commissioner, T.C.Memo. 2003-75,
the Tax Court extended its reasoning in Brookshire. The court held that a change in
computing depreciation from the general depreciation system in section 168(a) to the
4
alternative depreciation system in section 168(g) is a change in classification that falls
within the useful life exception and, therefore, is not a change in method of accounting.
As a result of these decisions, there is inconsistent treatment of taxpayers with
respect to whether a change in computing depreciation under section 168 is a change in
method of accounting under section 446(e). These regulations clarify the changes in
depreciation or amortization (depreciation) that are (and are not) changes in method of
accounting under section 446(e).
Scope
The regulations provide the changes in depreciation for property for which
depreciation is determined under section 167,168,197,14001,1400L(b), or 1400L(c), or
former section 168, of the Code that are (and are not) changes in method of accounting
under section 446(e). The regulations also clarify that the rules in §1.167(e)-1 with respect
to a change in the depreciation method made without the consent of the Commissioner
apply only to property for which depreciation is determined under section 167 (other than
under section 168, section 14001, section 1400L, or former section 168).
Changes in Depreciation that are Changes in Method of Accounting
In general, the regulations provide that a change in the depreciation method, period
of recovery, or convention of a depreciable or amortizable asset is a change in method of
accounting. This change may be the result of, for example, a change in the classification of
property under section 168(e) or a change in computing depreciation from the general
depreciation system under section 168(a) to the alternative depreciation system of section
168(g). Further, a change to or from claiming the additional first year depreciation
5
deduction provided by section 168(k) or 1400L(b) is a change in method of accounting
under certain circumstances.
The regulations clarify that the useful life exception, which has been moved from
§1.446-1 (e)(2)(ii)(b) to §1.446-1 T(e)(2)(ii)(d), applies only to property for which the
depreciation is determined under section 167 (other than under section 168, section 14001,
section 1400L, or former section 168). However, a change to or from a useful life (or
recovery period or amortization period) that is specifically assigned by the Code, the
regulations under the Code, or other guidance published in the Internal Revenue Bulletin is
a change in method of accounting.
The regulations also provide that a change in salvage value to zero for a
depreciable or amortizable asset for which the salvage value is expressly treated as zero
by the Code, the regulations under the Code, or other guidance published in the Internal
Revenue Bulletin, is treated as a change in method of accounting. Any other change in
salvage value is not treated as a change in method of accounting.
Further, the regulations provide that a change in the accounting for depreciable or
amortizable assets from single asset accounting to multiple asset accounting (pooling), or
vice versa, or from one type of multiple asset accounting (pooling) to a different type of
multiple asset accounting (pooling) is a change in method of accounting. Also, for
depreciable or amortizable assets that are mass assets accounted for in multiple asset
accounts or pools, a change in the method of identifying which assets have been disposed
is a change in method of accounting (for example, from specific identification to a first-in,
first-out method).
6
Finally, the regulations provide that a change in the treatment of an asset from
nondepreciable or nonamortizable (nondepreciable) to depreciable or amortizable
(depreciable), or vice versa, is a change in method of accounting. For example, a change
in the treatment of an asset that was used entirely in the taxpayer's trade or business and
was never held for sale from being treated as inventory to being treated as depreciable
property is a change in method of accounting.
Exceptions
The regulations provide that a change in computing depreciation allowances in the
taxable year in which the use of property changes in the hands of the same taxpayer is not
a change in method of accounting.
The regulations also provide that the making of a late depreciation election or the
revocation of a timely valid depreciation election generally is not a change in method of
accounting. This rule also applies to the making of a late election or the revocation of a
timely valid election under section 13261(g)(2) or (3) of the Revenue Reconciliation Act of
1993 (107 Stat. 312, 540) (relating to amortizable section 197 intangibles). To make a
late depreciation election or to revoke a timely valid depreciation election, a taxpayer must
submit a request for a private letter ruling. Elections made under section 168(b)(2)(C),
168(b)(3)(D), or 168(g)(7) are irrevocable.
Finally, the regulations provide that any change in the placed-in-service date of a
depreciable or amortizable asset is not treated as a change in method of accounting.
Item Being Changed
The regulations clarify that for purposes of changes in depreciation, the item being
7
changed is the depreciation treatment of each individual depreciable or amortizable asset.
However, the item is the depreciation treatment of each vintage account with respect to
depreciable assets for which depreciation is determined under §1.167(a)-11 (CLADR
property). Further, a change in computing depreciation under section 167 (other than a
change under section 168, section 14001, section 1400L, or former section 168) is
permitted only with respect to all assets in a particular account (as defined in §1.167(a)-7)
or vintage account.
Special Rules
The regulations also provide rules for the following: (1) a change from a declining
balance method under section 168(b)(1) or (2) to the straight line method; (2) changes in
certain depreciation methods under section 167 (other than under section 168, section
14001, section 1400L, or former section 168); and (3) section 481 adjustments.
With respect to a change from the 200-percent or 150-percent declining balance
method under section 168(b)(1) or (2) to the straight line method, the regulations provide
that this change may be made without the consent of the Commissioner in the first taxable
year in which the depreciation allowance under the straight line method is greater than the
depreciation allowance under the declining balance method.
With respect to changes in depreciation methods under section 167 (other than
under section 168, section 14001, section 1400L, or former section 168), the regulations
provide cross-references to regulations under section 167 that allow certain depreciation
method changes to be made without the consent of the Commissioner.
With respect to section 481 adjustments, the regulations also clarify that except as
8
otherwise expressly provided by the Code, the regulations under the Code, or other
guidance published in the Internal Revenue Bulletin, a change from one permissible
method of computing depreciation to another permissible method of computing
depreciation for a depreciable or amortizable asset is implemented on either a cut-off
method (as described in section 2.06 of Rev. Proc. 97-27 (1997-1 C.B. 680) and in
section 2.06 of Rev. Proc. 2002-9 (2002-1 C.B. 327)) or a modified cut-off method (under
which the adjusted depreciable basis of the asset as of the beginning of the year of change
is recovered using the new permissible method of accounting). Because no items are
duplicated or omitted from income when the cut-off method or the modified cut-off method
is used to effect the change in method of accounting, no section 481 adjustment is required
or permitted. However, a change from an impermissible method of computing
depreciation to a permissible method of computing depreciation results in a negative or
positive section 481 adjustment because the adjusted depreciable basis of the asset as of
the beginning of the year of change is changed as a result of the change in computing
depreciation. Similarly, a change in the treatment of an asset from nondepreciable to
depreciable (or vice versa) or a change from expensing to depreciating an asset (or vice
versa) will also result in a negative or positive section 481 adjustment.
Application of the Allowed or Allowable Rule to Changes in Method of Accounting
Section 1016(a)(2) provides that the basis of property is adjusted in respect of any
period since February 28,1913, for exhaustion, wear and tear, obsolescence,
amortization, and depletion, to the extent of the amount allowed as deductions in
computing taxable income and resulting in a reduction for any taxable year of the
9
taxpayer's taxes, but not less than the amount allowable.
Concurrently with the issuance of these regulations, the IRS and Treasury
Department will issue a revenue procedure that will allow a taxpayer to change the
taxpayer's method of determining depreciation for a depreciable or amortizable asset after
its disposition if the taxpayer did not take into account any depreciation allowance, or did
take into account some depreciation but less than the depreciation allowable, for the asset
in computing taxable income in the year of disposition or in prior taxable years. Because
the taxpayer is permitted to claim the allowable depreciation not taken into account for this
asset, the taxpayer's lifetime income is not permanently affected by the "allowed or
allowable" rule under section 1016(a)(2). Accordingly, the regulations provide that section
1016(a)(2) does not permanently affect a taxpayer's lifetime income for purposes of
determining whether a change in depreciation is a change in method of accounting under
section 446(e) and the regulations under section 446(e).
The revenue procedure also will revise the depreciation changes included in Rev.
Proc. 2002-9 (2002-1 C.B. 327), the automatic change in method of accounting revenue
procedure, to conform with these regulations and will waive the application of Rev. Rul. 9038 (1990-1 C.B. 57) for changes in depreciation made under Rev. Proc. 97-27 (1997-1
C.B. 680) or Rev. Proc. 2002-9.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the Administrative Procedure
10
Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the
Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section of th
preamble to the cross-reference notice of proposed rulemaking published in the Federal
Register. Pursuant to section 7805(f) of the Code, these temporary regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Sara Logan, Office of Associate Chief
Counsel (Passthroughs and Special Industries). However, other personnel from the IRS
and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.167(e)-1 is amended by:
1. Revising paragraph (a).
2. Adding new paragraph (e).
The addition and revision read as follows:
11
$1.167(e)-1 Change in method.
(a) In general. [Reserved]. For further guidance, see §1.167(e)-1T(a).
*****
(e) Effective date. [Reserved]. For further guidance, see the first two sentences of
§1.167(e)-1T(e).
Par. 3. Section 1.167(e)-1T is added to read as follows:
§1.167(e)-1T Change in method (temporary).
(a) In general. (1) Any change in the method of computing the depreciation
allowances with respect to a particular account (other than a change in method permitted
or required by reason of the operation of former section 167(j)(2) and §1.167(j)-3(c)) is a
change in method of accounting, and such a change will be permitted only with the consent
of the Commissioner, except that certain changes to the straight line method of
depreciation will be permitted without consent as provided in former section 167(e)(1), (2),
and (3). Except as provided in paragraphs (c) and (d) of this section, a change in method
of computing depreciation will be permitted only with respect to all the assets contained in
a particular account as defined in §1.167(a)-7. Any change in the percentage of the current
straight line rate under the declining balance method, for example, from 200 percent of the
straight line rate to any other percent of the straight line rate, or any change in the interest
factor used in connection with a compound interest or sinking fund method, will constitute a
change in method of depreciation. Any request for a change in method of depreciation
shall be m a d e in accordance with section 446(e) and the regulations under section 446(e).
For rules covering the use of depreciation methods by acquiring corporations in the case
12
of certain corporate acquisitions, see section 381(c)(6) and the regulations under section
381(c)(6).
(2) Paragraphs (b), (c), and (d) of this section apply to property for which
depreciation is determined under section 167 (other than under section 168, section 14001,
section 1400L, or under section 168 prior to its amendment by the Tax Reform Act of 1986
(100 Stat. 2121)) of the Internal Revenue Code.
(b) through (d) [Reserved]. For further guidance, see §1.167(e)-1(b) through (d).
(e) Effective date. This section applies on or after December 30, 2003. For the
applicability of regulations before December 30, 2003, see §1.167(e)-1 in effect prior to
December 30, 2003 (§1.167(e)-1 as contained in 26 C F R part 1 edition revised as of April
1, 2003). The applicability of this section expires on or before January 2, 2007.
Par. 4. Section 1.446-1 is amended by:
1. Revising paragraphs (e)(2)(ii)(a), (e)(2)(ii)(b), and (e)(2)(iii).
2. Adding new paragraphs (e)(2)(ii)(d) and (e)(4).
The additions and revisions read as follows:
§ 1.446-1 General rule for methods of accounting.
*****
(e) * * *
/o\ * * *
(ii) (a) [Reserved]. For further guidance, see §1.446-1 T(e)(2)(ii)(a).
(b) [Reserved]. For further guidance, see §1.446-1 T(e)(2)(ii)(b).
ie ~k * *
13
*
(d) Changes involving depreciable or amortizable assets. [Reserved]. For further
guidance, see §1.446-1 T(e)(2)(ii)(d).
(iii) Examples. [Reserved]. For further guidance, see §1.446-1 T(e)(2)(iii).
*****
(4) Effective date. [Reserved]. For further guidance, see §1.446(e)-1 T(e)(4)(i) and
(ii).
Par. 5. Section 1.446-1T is added to read as follows:
§1.446-1T General rule for methods of accounting (temporary).
(a) through (e)(2)(i) [Reserved]. For further guidance, see §1.446-1 (a) through
(e)(2)(i).
(e)(2)(ii)(a) A change in the method of accounting includes a change in the overall
plan of accounting for gross income or deductions or a change in the treatment of any
material item used in such overall plan. Although a method of accounting m a y exist under
this definition without the necessity of a pattern of consistent treatment of an item, in most
instances a method of accounting is not established for an item without such consistent
treatment. A material item is any item that involves the proper time for the inclusion of the
item in income or the taking of a deduction. Changes in method of accounting include a
change from the cash receipts and disbursement method to an accrual method, or vice
versa, a change involving the method or basis used in the valuation of inventories (see
sections 471 and 472 and the regulations under sections 471 and 472), a change from the
cash or accrual method to a long-term contract method, or vice versa (see §1.460-4),
certain changes in computing depreciation or amortization (see paragraph (e)(2)(ii)(d) of
14
this section), a change involving the adoption, use or discontinuance of any other
specialized method of computing taxable income, such as the crop method, and a change
where the Internal Revenue Code and regulations under the Code specifically require that
the consent of the Commissioner must be obtained before adopting such a change.
(b) A change in method of accounting does not include correction of mathematical
or posting errors, or errors in the computation of tax liability (such as errors in computation
of the foreign tax credit, net operating loss, percentage depletion, or investment credit).
Also, a change in method of accounting does not include adjustment of any item of income
or deduction that does not involve the proper time for the inclusion of the item of income or
the taking of a deduction. For example, corrections of items that are deducted as interest
or salary, but that are in fact payments of dividends, and of items that are deducted as
business expenses, but which are in fact personal expenses, are not changes in method of
accounting. In addition, a change in the method of accounting does not include an
adjustment with respect to the addition to a reserve for bad debts. Although such
adjustment may involve the question of the proper time for the taking of a deduction, such
items are traditionally corrected by adjustment in the current and future years. For the
treatment of the adjustment of the addition to a bad debt reserve (for example, for banks
under section 585 of the Internal Revenue Code), see the regulations under section 166 of
the Internal Revenue Code. A change in the method of accounting also does not include a
change in treatment resulting from a change in underlying facts. For further guidance on
changes involving depreciable or amortizable assets, see paragraph (e)(2)(ii)(d) of this
section and §1.1016-3T(h).
15
(c) [Reserved]. For further guidance, see §1.446-1 (e)(2)(ii)(c).
(d) Changes involving depreciable or amortizable assets-(1) Scope. This
paragraph (e)(2)(ii)(d) applies to property subject to section 167,168,197,14001,
1400L(b), or 1400L(c), or to section 168 prior to its amendment by the Tax Reform Act of
1986 (100 Stat. 2121) (former section 168).
(2) Changes in depreciation or amortization that are a change in method of
accounting. Except as provided in paragraph (e)(2)(ii)(d)(3) of this section, a change in the
treatment of an asset from nondepreciable or nonamortizable to depreciable or
amortizable, or vice versa, is a change in method of accounting. Additionally, a correction
to require depreciation or amortization in lieu of a deduction for the cost of depreciable or
amortizable assets that had been consistently treated as an expense in the year of
purchase, or vice versa, is a change in method of accounting. Further, except as provided
in paragraph (e)(2)(ii)(d)(3) of this section, the following changes in computing depreciation
or amortization are a change in method of accounting:
(i) A change in the depreciation or amortization method, period of recovery, or
convention of a depreciable or amortizable asset.
(ii) A change from not claiming to claiming the additional first year depreciation
deduction provided by section 168(k) or 1400L(b) for, and the resulting change to the
amount otherwise allowable as a depreciation deduction for the remaining adjusted
depreciable basis (or similar basis) of, qualified property, 50-percent bonus depreciation
property, or qualified New York Liberty Zone property, provided the taxpayer did not make
the election out of the additional first year depreciation deduction (or did not make a
16
d e e m e d election out of the additional first year depreciation deduction; for further
guidance, see Rev. Proc. 2002-33 (2002-1 C.B. 963), Rev. Proc. 2003-50 (2003-29 I.R.B.
119), and §601.601 (d)(2)(ii)(b) of this chapter) for the class of property in which the
qualified property, the 50-percent bonus depreciation property, or the qualified New York
Liberty Zone property is included.
(iii) A change from claiming the 30-percent additional first year depreciation
deduction to claiming the 50-percent additional first year depreciation deduction for 50percent bonus depreciation property (provided the property is not included in any class of
property for which the taxpayer elected the 30-percent, instead of the 50-percent,
additional first year depreciation deduction) or a change from claiming the 50-percent
additional first year depreciation deduction to claiming the 30-percent additional first year
depreciation deduction for qualified property (including property that is included in a class
of property for which the taxpayer elected the 30-percent, instead of the 50-percent,
additional first year depreciation deduction) or qualified New York Liberty Zone property,
and the resulting change to the amount otherwise allowable as a depreciation deduction for
the property's remaining adjusted depreciable basis (or similar basis). This paragraph
(e)(2)(ii)(d)(2)(iii) does not apply if a taxpayer is making a late election or revoking a timely
valid election under section 168(k) or 1400L(b) (see paragraph (e)(2)(ii)(d)(3)(iii) of this
section).
(iy) A change from claiming to not claiming the additional first year depreciation
deduction for an asset that is not qualified property, 50-percent bonus depreciation
property, or qualified New York Liberty Zone property, and the resulting change to the
17
amount otherwise allowable as a depreciation deduction for the property's depreciable
basis.
(y) A change in salvage value to zero for a depreciable or amortizable asset for
which the salvage value is expressly treated as zero by the Internal Revenue Code (for
example, section 168(b)(4)), the regulations under the Code (for example, §1.1972(f)(1)(H)), or other guidance published in the Internal Revenue Bulletin.
(yj) A change in the accounting for depreciable or amortizable assets from a single
asset account to a multiple asset account (pooling), or vice versa, or from one type of
multiple asset account (pooling) to a different type of multiple asset account (pooling).
(yn) For depreciable or amortizable assets that are mass assets accounted for in
multiple asset accounts or pools, a change in the method of identifying which assets have
been disposed. For purposes of this paragraph (e)(2)(ii)(d)(2)(yii), the term mass assets
means a mass or group of individual items of depreciable or amortizable assets that are
not necessarily homogeneous, each of which is minor in value relative to the total value of
the mass or group, numerous in quantity, usually accounted for only on a total dollar or
quantity basis, with respect to which separate identification is impracticable, and placed in
service in the same taxable year.
(viii) Any other change in depreciation or amortization as the Secretary may
designate by publication in the Federal Register or in the Internal Revenue Bulletin (see
§601.601 (d)(2) of this chapter).
(3) Changes in depreciation or amortization that are not a change in method of
accounting-(i) Useful life. An adjustment in the useful life of a depreciable or amortizable
18
asset for which depreciation is determined under section 167 (other than under section
168, section 14001, section 1400L, or former section 168) is not a change in method of
accounting. This adjustment in useful life is corrected by adjustments in the taxable year in
which the conditions known to exist at the end of that taxable year changed thereby
resulting in a redetermination of the useful life under §1.167(a)-1(b) (or if the period of
limitation for assessment under section 6501(a) has expired for that taxable year, in the
first succeeding taxable year open under the period of limitation for assessment), and in
subsequent taxable years. In other situations, the adjustment in useful life may be
corrected by adjustments in the earliest taxable year open under the period of limitation for
assessment under section 6501 (a) or the earliest taxable year under examination by the
Internal Revenue Service (IRS) but in no event earlier than the placed-in-service year of the
asset, and in subsequent taxable years. However, if a taxpayer initiates the correction in
useful life, in lieu of filing amended federal tax returns (for example, because the conditions
known to exist at the end of a prior taxable year changed thereby resulting in a
redetermination of the useful life under §1.167(a)-1(b)), the taxpayer may correct the
adjustment in useful life by adjustments in the current and subsequent taxable years. This
paragraph (e)(2)(ii)(d)(3)(i) does not apply if a taxpayer is changing to or from a useful life
(or recovery period or amortization period) that is specifically assigned by the Internal
Revenue Code (for example, section 167(f)(1), section 168(c), section 197), the
regulations under the Code, or other guidance published in the Internal Revenue Bulletin
and, therefore, such change is a change in method of accounting (unless paragraph
(e)(2)(ii)(d)(3)(y) of this section applies).
19
(ii) C h a n g e in use. A change in computing depreciation or amortization allowances
in the taxable year in which the use of an asset changes in the hands of the same taxpayer
is not a change in method of accounting.
(Hi) Elections. Generally, the making of a late depreciation or amortization election
or the revocation of a timely valid depreciation or amortization election is not a change in
method of accounting, except as otherwise expressly provided by the Internal Revenue
Code, the regulations under the Code, or other guidance published in the Internal Revenue
Bulletin. This paragraph (e)(2)(ii)(d)(3)(iii) also applies to making a late election or
revoking a timely valid election made under section 13261(g)(2) or (3) of the Revenue
Reconciliation Act of 1993 (107 Stat. 312, 540) (relating to amortizable section 197
intangibles). A taxpayer may request consent to make a late election or revoke a timely
valid election by submitting a request for a private letter ruling.
(iy) Salvage value. Except as provided under paragraph (e)(2)(ii)(d)(2)(y) of this
section, a change in salvage value of a depreciable or amortizable asset is not treated as
a change in method of accounting.
(y) Placed-in-service date. Any change in the placed-in-service date of a
depreciable or amortizable asset is not treated as a change in method of accounting. The
change in placed-in-service date may be corrected by adjustments in the earliest taxable
year open under the period of limitation for assessment under section 6501 (a) or the
earliest taxable year under examination by the IRS but in no event earlier than the placedin-service year of the asset, and in subsequent taxable years. However, if a taxpayer
initiates the change in placed-in-service date, in lieu of filing amended federal tax returns,
20
the taxpayer m a y correct the placed-in-service date by adjustments in the current and
subsequent taxable years.
(yi) Any other change in depreciation or amortization as the Secretary may
designate by publication in the Federal Register or in the Internal Revenue Bulletin (see
§601.601 (d)(2) of this chapter).
(4) Item being changed. For purposes of a change in depreciation or amortization
to which this paragraph (e)(2)(ii)(d) applies, the item being changed generally is the
depreciation treatment of each individual depreciable or amortizable asset. However, the
item is the depreciation treatment of each vintage account with respect to a depreciable
asset for which depreciation is determined under §1.167(a)-11 (CLADR property).
Further, a change in computing depreciation or amortization under section 167 (other than
under section 168, section 14001, section 1400L, or former section 168) is permitted only
with respect to all assets in a particular account (as defined in §1.167(a)-7) or vintage
account.
(5) Special rules. For purposes of a change in depreciation or amortization to
which this paragraph (e)(2)(ii)(d) applies-(i) Declining balance method to the straight line method for MACRS property. For
tangible, depreciable property subject to section 168 (MACRS property) that is
depreciated using the 200-percent or 150-percent declining balance method of
depreciation under section 168(b)(1) or (2), a taxpayer may change without the consent of
the Commissioner from the declining balance method of depreciation to the straight line
method of depreciation in the first taxable year in which the use of the straight line method
21
with respect to the adjusted depreciable basis of the M A C R S property as of the beginning
of that year will yield a depreciation allowance that is greater than the depreciation
allowance yielded by the use of the declining balance method. When the change is made,
the adjusted depreciable basis of the MACRS property as of the beginning of the taxable
year is recovered through annual depreciation allowances over the remaining recovery
period (for further guidance, see section 6.06 of Rev. Proc. 87-57 (1987-2 C.B. 687) and
§601.601 (d)(2)(ii)(b) of this chapter).
(jl) Depreciation method changes for section 167 property. For a depreciable or
amortizable asset for which depreciation is determined under section 167 (other than
under section 168, section 14001, section 1400L, or former section 168), see §1.167(e)1T(b), (c), and (d) for the changes in depreciation method that are permitted to be made
without the consent of the Commissioner. For CLADR property, see §1.167(a)-11(c)(1)(iii)
for the changes in depreciation method for CLADR property that are permitted to be made
without the consent of the Commissioner. Further, see §1.167(a)-11(b)(4)(iii)(c) for how to
correct an incorrect classification or characterization of CLADR property.
(iii) Section 481 adjustment. Except as otherwise expressly provided by the Internal
Revenue Code, the regulations under the Code, or other guidance published in the Internal
Revenue Bulletin, no section 481 adjustment is required or permitted for a change from
one permissible method of computing depreciation or amortization to another permissible
method of computing depreciation or amortization for an asset because this change is
implemented by either a cut-off method (for further guidance, see section 2.06 of Rev.
Proc. 97-27 (1997-1 C.B. 680), section 2.06 of Rev. Proc. 2002-9 (2002-1 C.B. 327), and
22
§601.601 (d)(2)(ii)(b) of this chapter) or a modified cut-off method (under which the
adjusted depreciable basis of the asset as of the beginning of the year of change is
recovered using the new permissible method of accounting), as appropriate. However, a
change from an impermissible method of computing depreciation or amortization to a
permissible method of computing depreciation or amortization for an asset results in a
section 481 adjustment. Similarly, a change in the treatment of an asset from
nondepreciable or nonamortizable to depreciable or amortizable (or vice versa) or a
change in the treatment of an asset from expensing to depreciating (or vice versa) results
in a section 481 adjustment.
(iii) Examples. The rules of this paragraph (e) are illustrated by the following
examples:
Example 1. Although the sale of merchandise is an income producing factor, and
therefore inventories are required, a taxpayer in the retail jewelry business reports his
income on the cash receipts and disbursements method of accounting. A change from the
cash receipts and disbursements method of accounting to the accrual method of
accounting is a change in the overall plan of accounting and thus is a change in method of
accounting.
Example 2. A taxpayer in the wholesale dry goods business computes its income
and expenses on the accrual method of accounting and files its Federal income tax returns
on such basis except for real estate taxes which have been reported on the cash receipts
and disbursements method of accounting. A change in the treatment of real estate taxes
from the cash receipts and disbursements method to the accrual method is a change in
method of accounting because such change is a change in the treatment of a material item
within his overall accounting practice.
Example 3. A taxpayer in the wholesale dry goods business computes its income
and expenses on the accrual method of accounting and files its Federal income tax returns
on such basis. Vacation pay has been deducted in the year in which paid because the
taxpayer did not have a completely vested vacation pay plan, and, therefore, the liability for
payment did not accrue until that year. Subsequently, the taxpayer adopts a completely
vested vacation pay plan that changes its year for accruing the deduction from the year in
which payment is m a d e to the year in which the liability to m a k e the payment n o w arises.
23
The change for the year of deduction of the vacation pay plan is not a change in method of
accounting but results, instead, because the underlying facts (that is, the type of vacation
pay plan) have changed.
Example 4. From 1968 through 1970, a taxpayer has fairly allocated indirect
overhead costs to the value of inventories on a fixed percentage of direct costs. If the ratio
of indirect overhead costs to direct costs increases in 1971, a change in the underlying
facts has occurred. Accordingly, an increase in the percentage in 1971 to fairly reflect the
increase in the relative level of indirect overhead costs is not a change in method of
accounting but is a change in treatment resulting from a change in the underlying facts.
Example 5. A taxpayer values inventories at cost. A change in the basis for
valuation of inventories from cost to the lower of cost or market is a change in an overall
practice of valuing items in inventory. The change, therefore, is a change in method of
accounting for inventories.
Example 6. A taxpayer in the manufacturing business has for many taxable years
valued its inventories at cost. However, cost has been improperly computed since no
overhead costs have been included in valuing the inventories at cost. The failure to
allocate an appropriate portion of overhead to the value of inventories is contrary to the
requirement of the Internal Revenue Code and the regulations under the Code. A change
requiring appropriate allocation of overhead is a change in method of accounting because
it involves a change in the treatment of a material item used in the overall practice of
identifying or valuing items in inventory.
Example 7. A taxpayer has for many taxable years valued certain inventories by a
method which provides for deducting 20 percent of the cost of the inventory items in
determining the final inventory valuation. The 20 percent adjustment is taken as a "reserve
for price changes." Although this method is not a proper method of valuing inventories
under the Internal Revenue C o d e or the regulations under the Code, it involves the
treatment of a material item used in the overall practice of valuing inventory. A change in
such practice or procedure is a change of method of accounting for inventories.
Example 8. A taxpayer has always used a base stock system of accounting for
inventories. Under this system a constant price is applied to an assumed constant normal
quantity of goods in stock. The base stock system is an overall plan of accounting for
inventories which is not recognized as a proper method of accounting for inventories under
the regulations. A change in this practice is, nevertheless, a change of method of
accounting for inventories.
Example 9. In 2000, A1, a calendar year taxpayer engaged in the trade or business
of manufacturing knitted goods, purchased and placed in service a building and its
components at a total cost of $10,000,000 for use in its manufacturing operations. A1
classified the $10,000,000 as nonresidential real property under section 168(e). A1 did
24
not m a k e any elections under section 168 on its 2000 Federal tax return. A s a result, on its
2000, 2001, and 2002 federal tax returns, A1 depreciated the $10,000,000 under the
general depreciation system of section 168(a), using the straight line method of
depreciation, a 39-year recovery period, and the mid-month convention. In 2003, A1
completes a cost segregation study on the building and its components and identifies
items that cost a total of $1,500,000 as section 1245 property. A s a result, the $1,500,000
should have been classified in 2000 as 5-year property under section 168(e) and
depreciated on A1's 2000, 2001, and 2002 Federal tax returns under the general
depreciation system, using the 200-percent declining balance method of depreciation, a 5year recovery period, and the half-year convention. Pursuant to paragraph (e)(2)(ii)(d)(2)(i)
of this section, A1's change to this depreciation method, recovery period, and convention
is a change in method of accounting. This method change results in a section 481
adjustment. The useful life exception under paragraph (e)(2)(ii)(d)(3)(i) of this section does
not apply because the assets are depreciated under section 168.
Example 10. In 1996, B, a calendar year taxpayer, purchased and placed in service
new equipment at a total cost of $1,000,000 for use in its plant located outside the United
States. The equipment is 15-year property under section 168(e) with a class life of 20
years. The equipment is required to be depreciated under the alternative depreciation
system of section 168(g). However, B incorrectly depreciated the equipment under the
general depreciation system of section 168(a), using the 150-percent declining balance
method, a 15-year recovery period, and the half-year convention. In 2003, the IRS
examines B's 2000 Federal income tax return and changes the depreciation of the
equipment to the alternative depreciation system, using the straight line method of
depreciation, a 20-year recovery period, and the half-year convention. Pursuant to
paragraph (e)(2)(ii)(d)(2)([) of this section, this change in depreciation method and
recovery period m a d e by the IRS is a change in method of accounting. This method
change results in a section 481 adjustment. The useful life exception under paragraph
(e)(2)(ii)(d)(3)(i) of this section does not apply because the assets are depreciated under
section 168.
Example 11. In May 2001, C, a calendar year taxpayer, purchased and placed in
service equipment for use in its trade or business. C never held this equipment for sale.
However, C incorrectly treated the equipment as inventory on its 2001 and 2002 Federal
tax returns. In 2003, C realizes that the equipment should have been treated as a
depreciable asset. Pursuant to paragraph (e)(2)(ii)(d)(2) of this section, C's change in the
treatment of the equipment from inventory to a depreciable asset is a change in method of
accounting. This method change results in a section 481 adjustment.
Example 12. Since 2001, D, a calendar year taxpayer, has used the distribution fee
period method to amortize distributor commissions and, under that method, established
pools to account for the distributor commissions (for further guidance, see Rev. Proc.
2000-38 (2000-2 C.B. 310) and §601.601 (d)(2)(ii)(b) of this chapter). A change in the
accounting of distributor commissions under the distribution fee period method from
25
pooling to single asset accounting is a change in method of accounting pursuant to
paragraph (e)(2)(ii)(d)(2)(y[) of this section. This method change results in no section 481
adjustment because the change is from one permissible method to another permissible
method.
Example 13. Since 2000, E, a calendar year taxpayer, has accounted for items of
M A C R S property that are m a s s assets in pools. Each pool includes only the m a s s assets
that are placed in service by E in the s a m e taxable year. E is able to identify the cost basis
of each asset in each pool. None of the pools are general asset accounts under section
168(i)(4) and the regulations under section 168(i)(4). E identified any dispositions of these
m a s s assets by specific identification. Because of changes in E's recordkeeping in 2003,
it is impracticable for E to continue to identify disposed m a s s assets using specific
identification. A s a result, E wants to change to a first-in, first-out method under which the
m a s s assets disposed of in a taxable year are d e e m e d to be from the pool with the earliest
placed-in-service year in existence as of the beginning of the taxable year of each
disposition. Pursuant to paragraph (e)(2)(ii)(d)(2)(vji) of this section, this change is a
change in method of accounting. This method change results in no section 481 adjustment
because the change is from one permissible method to another permissible method.
Example 14. In August 2001, F, a calendar taxpayer, purchased and placed in
service a copier for use in its trade or business. F incorrectly classified the copier as 7year property under section 168(e). F m a d e no elections under section 168 on its 2001
Federal tax return. A s a result, on its 2001 and 2002 Federal tax returns, F depreciated
the copier under the general depreciation system of section 168(a), using the 200-percent
declining balance method of depreciation, a 7-year recovery period, and the half-year
convention. In 2003, F realizes that the copier is 5-year property and should have been
depreciated on its 2001 and 2002 Federal tax returns under the general depreciation
system using a 5-year recovery period rather than a 7-year recovery period. Pursuant to
paragraph (e)(2)(ii)(d)(2)([) of this section, F's change in recovery period from 7 to 5 years
is a change in method of accounting. This method change results in a section 481
adjustment. The useful life exception under paragraph (e)(2)(ii)(d)(3)(i) of this section does
not apply because the copier is depreciated under section 168.
Example 15. In 1998, G, a calendar year taxpayer, purchased and placed in service
an intangible asset that is not an amortizable section 197 intangible and that is not
described in section 167(f). G amortized the cost of the intangible asset under section
167(a) using the straight line method of depreciation and a useful life of 13 years. In 2003,
because of changing conditions, G changes the remaining useful life of the intangible asset
to 2 years. Pursuant to paragraph (e)(2)(ii)(d)(3)(i) of this section, G's change in useful life
is not a change in method of accounting because the intangible asset is depreciated under
section 167 and G is not changing to or from a useful life that is specifically assigned by the
Internal Revenue Code, the regulations under the Code, or other guidance published in the
Internal Revenue Bulletin.
26
Example 16. In July 2001, H, a calendar year taxpayer, purchased and placed in
service "off-the-shelf computer software and a n e w computer. The cost of the n e w
computer and computer software are separately stated. H incorrectly included the cost of
this software as part of the cost of the computer, which is 5-year property under section
168(e). O n its 2001 Federal tax return, H elected to depreciate its 5-year property placed
in service in 2001 under the alternative depreciation system of section 168(g). The class
life for a computer is 5 years. A s a result, because H included the cost of the computer
software as part of the cost of the computer hardware, H depreciated the cost of the
software under the alternative depreciation system, using the straight line method of
depreciation, a 5-year recovery period, and the half-year convention. In 2003, H realizes
that the cost of the software should have been amortized under section 167(f)(1), using the
straight line method of depreciation, a 36-month useful life, and a monthly convention. H's
change from 5-years to 36-months is a change in method of accounting because H is
changing to a useful life that is specifically assigned by section 167(f)(1). The change in
convention from the half-year to the monthly convention also is a change in method of
accounting. Both changes result in a section 481 adjustment.
Example 17. On September 15, 2001,12, a calendar year taxpayer, purchased and
placed in service n e w equipment at a total cost of $500,000 for use in its business. The
equipment is 5-year property under section 168(e) with a class life of 9 years and is
qualified property under section 168(k). 12 did not place in service any other depreciable
property in 2001. Section 168(g)(1 )(A) through (D) do not apply to the equipment. 12
intended to elect the alternative depreciation system under section 168(g) for 5-year
property placed in service in 2001. However, 12 did not m a k e the election. Instead, 12
deducted on its 2001 Federal tax return the 30-percent additional first year depreciation
attributable to the equipment and, on its 2001 and 2002 Federal tax returns, depreciated
the remaining adjusted depreciable basis of the equipment under the general depreciation
system under 168(a), using the 200-percent declining balance method, a 5-year recovery
period, and the half-year convention. In 2003,12 realizes its failure to m a k e the alternative
depreciation system election in 2001 and files a Form 3115 to change its method of
depreciating the remaining adjusted depreciable basis of the 2001 equipment to the
alternative depreciation system. Because this equipment is not required to be depreciated
under the alternative depreciation system, 12 is attempting to m a k e an election under
section 168(g)(7). However, this election must be m a d e in the taxable year in which the
equipment is placed in service (2001) and, consequently, 12 is attempting to m a k e a late
election under section 168(g)(7). Accordingly, I2's change to the alternative depreciation
system is not a change in accounting method pursuant to paragraph (e)(2)(ii)(d)(3)(iN) of
this section. Instead, 12 must submit a request for a private letter ruling under §301.9100-3
of this chapter, requesting an extension of time to m a k e the alternative depreciation system
election on its 2001 Federal tax return.
(3) [Reserved]. For further guidance, see §1.446-1 (e)(3).
27
(4) Effective date-(i) In general. Except as provided in paragraphs (e)(3)(iii) and
(e)(4)(H) of this section, paragraph (e) of this section applies on or after December 30,
2003. For the applicability of regulations before December 30, 2003, see §1.446-1 (e) in
effect prior to December 30, 2003 (§1.446-1 (e) as contained in 26 CFR part 1 edition
revised as of April 1, 2003).
(ii) Changes involving depreciable or amortizable assets. With respect to
paragraph (e)(2)(ii)(d) of this section, paragraph (e)(2)(iii) Examples 9 through 17 of this
section, the addition of the language "certain changes in computing depreciation or
amortization (see paragraph (e)(2)(ii)(d) of this section)" to the last sentence of paragraph
(e)(2)(ii)(a) of this section, and the removal of all language regarding useful life and the
sentence "On the other hand, a correction to require depreciation in lieu of a deduction for
the cost of a class of depreciable assets which had been consistently treated as an
expense in the year of purchase involves the question of the proper timing of an item, and
is to be treated as a change in method of accounting" from paragraph (e)(2)(ii)(b) of this
section(A) For any change in depreciation or amortization that is a change in method of
accounting, this section applies to such a change in method of accounting made for
taxable years ending on or after December 30, 2003; and
(B) For any change in depreciation or amortization that is not a change in method of
accounting, this section applies to such a change made for taxable years ending on or after
December 30, 2003.
(iii) The applicability of paragraph (e) of this section expires on or before January 2,
28
2007.
Par. 6. Section 1.1016-3 is amended by:
1. Redesignating paragraph (h) as paragraph (i).
2. Adding new paragraphs (h) and (j).
The additions read as follows:
§1.1016-3 Exhaustion, wear and tear, obsolescence, amortization, and depletion for
periods since February 28,1913.
*****
(h) Application to a change in method of accounting. [Reserved]. For further
guidance, see§1.1016-3T(h).
*****
(j) Effective date. [Reserved]. For further guidance, see §1.1016-3T(j)(1) and (2).
Par. 7. Section 1.1016-3T is added to read as follows:
§1.1016-3T Exhaustion, wear and tear, obsolescence, amortization, and depletion for
periods since February 28,1913 (temporary).
(a) through (g) [Reserved]. For further guidance, see §1.1016-3(a) through (g).
(h) Application to a change in method of accounting. For purposes of determining
whether a change in depreciation or amortization for property subject to section 167,168,
197,14001,1400L(b), or 1400L(c), or to section 168 prior to its amendment by the Tax
Reform Act of 1986 (100 Stat. 2121) (former section 168) is a change in method of
accounting under section 446(e) and the regulations under section 446(e), section
1016(a)(2) does not permanently affect a taxpayer's lifetime income.
29
(i) [Reserved]. For further guidance, see§1.1016-3(i).
(j) Effective date-(1) In general. Except as provided in paragraph (j)(2) of this
section, this section applies on or after December 30, 2003. For the applicability of
regulations before December 30, 2003, see §1.1016-3 in effect prior to December 30,
2003 (§1.1016-3 as contained in 26 CFR part 1 edition revised as of April 1, 2003).
(2) Depreciation or amortization changes. Paragraph (h) of this section applies to a
change in depreciation or amortization for property subject to section 167,168,197,14001,
1400L(b), or 1400L(c), or former section 168 for taxable years ending on or after
December 30, 2003.
30
(3) The applicability of this section expires on or before January 2,2007.
December 16, 2003
Deputy Commissioner for Services and Enforcement.
Mark E. Matthews
Approved: December 18, 2003
Assistant Secretary of the Treasury (Tax Policy).
Pamela F. Olson
31
Part III
Administrative, Procedural, and Miscellaneous
26 C F R 601.204: C h a n g e s in accounting periods and in methods of accounting.
(Also Part I, § § 4 4 6 , 1 0 1 6 ; 1.446-1T, 1.1016-3T.)
Rev. Proc. 2004-11
SECTION! PURPOSE
This revenue procedure provides an automatic consent procedure allowing a
taxpayer to make a change in method of accounting under § 446(e) of the Internal Revenue
Code for depreciable or amortizable property after its disposition. This revenue procedure
also waives the application of the two-year rule set forth in Rev. Rul. 90-38,1990-1 C.B. 57,
for certain changes in depreciation or amortization. Finally, this revenue procedure
modifies Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified by Rev. Proc. 2002-54, 2002-2
C.B. 432, Rev. Proc. 2002-19, 2002-1 C.B. 696, Rev. Proc. 2002-33, 2002-1 C.B. 963,
and as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561), and other
revenue procedures to conform with § 1.446-1 T(e)(2)(ii)(d) of the temporary Income Tax
Regulations.
-2SECTION 2. BACKGROUND
.01 Section 446(e) and § 1.446-1 T(e) provide that, except as otherwise provided, a
taxpayer must secure the consent of the Commissioner of Internal Revenue before
changing a method of accounting for federal income tax purposes. Section
1.446-1 T(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures
setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer
to obtain consent to change a method of accounting.
.02 Concurrently with the issuance of this revenue procedure,
§§ 1.446-1 T(e)(2)(ii)(d) and 1.1016-3T(h) have been promulgated. Section
1.446-1 T(e)(2)(ii)(d) provides the changes in depreciation or amortization (hereinafter,
both are referred to as "depreciation") that are (and are not) changes in method of
accounting under § 446(e). Section 1.1016-3T(h) provides that the "allowed or allowable"
rule under § 1016(a)(2) does not permanently affect a taxpayer's lifetime income for
purposes of determining whether a change in depreciation or amortization is a change in
method of accounting under § 446(e).
.03 If a taxpayer uses an impermissible method of determining depreciation for a
depreciable or amortizable property, the taxpayer adopts that method of accounting for the
property when the taxpayer treats the property in the same way in determining gross
income or deductions in two or more consecutively filed federal tax returns. See Rev. Rul.
90-38. The Internal Revenue Service and Treasury Department recognize that this twoyear rule increases administrative and compliance costs associated with changes in
T&N^
-3depreciation because many taxpayers changing from an impermissible to permissible
method of accounting for depreciation used the impermissible method for depreciable or
amortizable properties placed in service in two or more taxable years before the year of
change as well as for depreciable and amortizable properties placed in service in the
taxable year immediately preceding the year of change. Accordingly, in the interest of
sound tax administration, the Service and Treasury Department have decided to waive the
two-year rule in Rev. Rul. 90-38 for a change in depreciation to which § 1.4461T(e)(2)(ii)(d) applies.
.04 If a depreciable or amortizable property is transferred in a transaction in which
the transferee is treated as the transferor for purposes of computing the depreciation
allowance for the property with respect to so much of the basis in the hands of the
transferee as does not exceed the adjusted depreciable basis in the hands of the
transferor (for example, in transactions subject to § 168(i)(7) or § 381(c)(6)), the transferee
may file a Form 3115, Application for Change in Accounting Method, to change from an
impermissible method of accounting adopted by the transferor for that portion of the basis
of the property to a permissible method of accounting for depreciation for the same portion
of the basis of the property, provided the impermissible method of accounting for that
portion of the basis of the property has not been changed by the transferor (through filing,
for example, a Form 3115 or an amended return) or by the Internal Revenue Service upon
examination of the transferor's tax returns. In this case, the § 481 adjustment will include
any necessary adjustments since the property's placed-in-service date by the transferor.
-4SECTION 3. METHOD CHANGE PROCEDURE FOR DISPOSED DEPRECIABLE OR
AMORTIZABLE PROPERTY
.01 Scope.
(1) Applicability. Except as provided in section 3.01(2) of this revenue
procedure, section 3 of this revenue procedure applies to a taxpayer that is changing from
an impermissible method of accounting for depreciation to a permissible method of
accounting for depreciation for any item of depreciable or amortizable property subject to
1.446-1 T(e)(2)(ii)(d):
(a) that has been disposed of by the taxpayer during the year of
change (as defined in section 3.02(2)(b) of this revenue procedure); and
(b) for which the taxpayer did not take into account any depreciation
allowance, or did take into account some depreciation but less than the depreciation
allowable (hereinafter, both are referred to as "claimed less than the depreciation
allowable"), in the year of change (as defined in section 3.02(2)(b) of this revenue
procedure) or any prior taxable year.
(2) Inapplicability. Section 3 of this revenue procedure does not apply to:
(a) any property to which § 1016(a)(3) (regarding property held by a
tax-exempt organization) applies;
(b) any property for which a taxpayer is revoking a timely valid
depreciation election, or making a late depreciation election, under the Code or
regulations thereunder, or under other guidance published in the Internal Revenue Bulletin
-5(including under § 13261(g)(2) or (3) of the Revenue Reconciliation Act of 1993,1993-3
C.B. 1,128 (relating to amortizable § 197 intangibles));
(c) any property for which the taxpayer deducted the cost or other
basis of the property as an expense; or
(d) any property disposed of by the taxpayer in a transaction to which
a nonrecognition section of the C o d e applies (for example, § 1031, transactions subject to
§ 168(i)(7)(B)(i)). However, this section 3.01 (2)(d) does not apply to property disposed of
by the taxpayer in a § 1031 or § 1033 transaction if the taxpayer elects to treat the entire
basis (that is, both the carryover and excess basis) of the acquired M A C R S property as
property placed in service by the taxpayer at the time of replacement and treat the
adjusted depreciable basis of the exchanged or involuntarily converted M A C R S property
as being disposed of by the taxpayer at the time of disposition.
.02 Change in method of accounting.
(1) In general. A taxpayer within the scope of section 3 of this revenue
procedure m a y change from an impermissible method of accounting for depreciation to a
permissible method of accounting for depreciation for any item of depreciable or
amortizable property within the scope of section 3 of this revenue procedure, provided:
(a) the taxpayer files the original Form 3115 in accordance with
section 3.02(2)(c) of this revenue procedure, prior to the expiration of the period of
limitation for assessment under § 6501(a) for the taxable year in which the item of
depreciable or amortizable property w a s disposed of by the taxpayer; and
-6(b) the taxpayer files an amended federal tax return for the year of
change (as defined in section 3.02(2)(b) of this revenue procedure) that includes the
adjustments to taxable income and any collateral adjustments to taxable income or tax
liability (for example, adjustments to the amount or character of the gain or loss of the
disposed depreciable or amortizable property) resulting from the change in method of
accounting for depreciation made by the taxpayer under this section 3.
(2) Application Procedures. A taxpayer making a change in method of
accounting under section 3 of this revenue procedure must follow the automatic change in
method of accounting provisions in Rev. Proc. 2002-9 (or its successor), with the following
modifications:
(a) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not
apply. If the taxpayer is under examination, before an appeals office, or before a federal
court at the time that a copy of the Form 3115 is filed with the national office, the taxpayer
must provide a copy of the Form 3115 to the examining agent, appeals officer, or counsel
for the government, as appropriate, at the time the copy of the Form 3115 is filed with the
national office. The Form 3115 must contain the name(s) and telephone number(s) of the
examining agent, appeals officer, or counsel for the government, as appropriate.
(b) The year of change is the taxable year in which the item of
depreciable or amortizable property was disposed of by the taxpayer.
(c) Section 6.02(3)(a) of Rev. Proc. 2002-9 is modified to require the
original of the Form 3115 to be attached to the taxpayer's timely filed amended federal tax
-7return for the year of change and a copy (with signature) of the Form 3115 to be filed with
the national office no later than when the original Form 3115 is filed with the amended
federal tax return for the year of change.
(d) For purposes of section 6.02(4)(a) of Rev. Proc. 2002-9, the
taxpayer should include on line 1a of the Form 3115 (revised December 2003) the
designated automatic accounting method change number for the change in method of
accounting for depreciation made under this section 3. This number for this method
change is "9."
SECTION 4. WAIVER OF TWO-YEAR RULE IN REV. RUL. 90-38
.01 In general. Notwithstanding Rev. Rul. 90-38, a taxpayer may file a Form 3115
under Rev. Proc. 97-27, 1997-1 C.B. 680 (or its successor), or Rev. Proc. 2002-9, as
applicable, to change from an impermissible method of accounting for depreciation to a
permissible method of accounting for depreciation under § 1.446-1 T(e)(2)(ii)(d) for any
depreciable or amortizable property subject to § 1.446-1 T(e)(2)(ii)(d) and placed in service
by the taxpayer in the taxable year immediately preceding the year of change (as defined in
section 5.02(2) of Rev. Proc. 97-27 or section 5.02 of Rev. Proc. 2002-9, as applicable)
(hereinafter, this property is referred to as "1-year depreciable property"), provided the
additional term and condition in section 4.02 of this revenue procedure is satisfied.
Alternatively, the taxpayer may make the change from the impermissible depreciation
method to the permissible depreciation method for the 1-year depreciable property by
filing an amended federal tax return for the placed-in-service year prior to the date the
-8taxpayer files its federal tax return for the taxable year succeeding the placed-in-service
year.
.02 Additional term and condition for filing a Form 3115. In addition to the terms
and conditions provided in Rev. Proc. 97-27 or Rev. Proc. 2002-9, as applicable, the
§ 481 adjustment reported on a Form 3115 that is filed by a taxpayer in accordance with
section 4.01 of this revenue procedure to make a change in method of accounting for
depreciation under § 1.446-1 T(e)(2)(ii)(d) for any 1-year depreciable property, must
include the amount of any adjustment attributable to all property (including the 1 -year
depreciable property) subject to the Form 3115.
SECTION 5. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 2002-9 is modified and amplified to include the accounting method
change provided under section 3 of this revenue procedure in section 2.05 of the
APPENDIX. See section 4 of the APPENDIX of this revenue procedure for the text of
section 2.05 of the APPENDIX of Rev. Proc. 2002-9.
.02 The heading for section 2 of the APPENDIX of Rev. Proc. 2002-9 is modified to
read as follows: "SECTION 2. DEPRECIATION OR AMORTIZATION (§ 56(a)(1),
56(g)(4)(A), 167, 168, 197, 14001, OR 1400L, OR FORMER § 168)".
.03 Rev. Proc. 2002-9 (as modified by Rev. Proc. 2002-33) is modified by deleting
sections 2.01,2.02, and 2B of the APPENDIX and replacing them with the text in,
respectively, sections 1, 2, and 3 of the APPENDIX of this revenue procedure.
.04 Section 6.03 of Rev. Proc. 2000-38, 2000-2 C.B. 310, 313, is modified by
-9deleting "See § 1.446-1 (e)(2)(ii)(b)." and replacing it with "See
§1.446-1T(e)(2)(ii)(d)(3)a)-"
.05 Section 8.01 of Rev. Proc. 2000-50, 2000-2 C.B. 601, is modified to read as
follows: "A change in a taxpayer's treatment of costs paid or incurred to develop,
purchase, lease, or license computer software to a method described in section 5, 6, or 7
of this revenue procedure is a change in method of accounting to which §§ 446 and 481
apply. Further, a change in useful life under the method described in section 5.01(2) or
6.01(2) of this revenue procedure is a change in method of accounting. See § 1.4461T(e)(2)(ii)(d)(3)(i) and, for the effective date, see § 1.446-1 T(e)(4)(ii)(A)."
SECTION 6. EFFECTIVE DATE
.01 In general. Except as provided in section 6.02 of this revenue procedure, this
revenue procedure is effective for a Form 3115 filed for taxable years ending on or after
December 30, 2003.
.02 Transition rule for previously filed Forms 3115 for automatic consent.
(1) For a taxable year ending on or after December 30,2003, a taxpayer
may make a change in method of accounting previously authorized in section 2.01, 2.02, or
2B of the APPENDIX of Rev. Proc. 2002-9 before any amendments were made to those
sections by this revenue procedure if:
(a) before December 30,2003, the taxpayer filed a completed Form
3115 with the national office to make that change in method of accounting; and
(b) the taxpayer makes that change in method of accounting in
-10compliance with all the applicable provisions of Rev. Proc. 2002-9 for the requested year
of change (as defined in section 5.02 of Rev. Proc. 2002-9) on that Form 3115.
(2) If a taxpayer filed a Form 3115 with the national office to make a change
in method of accounting previously authorized in section 2.01, 2.02, or 2B of the
APPENDIX of Rev. Proc. 2002-9 before any amendments were made to those sections by
this revenue procedure for a year of change for which this revenue procedure is effective
(see section 6.01 of this revenue procedure) and the taxpayer's original federal tax return
for that year of change was not filed before December 30,2003, the taxpayer may make
the change in method of accounting authorized under section 2.01, 2.02, or 2B, as
applicable, of the APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure.
However, the Service will process the Form 3115 in accordance with the section of the
APPENDIX of Rev. Proc. 2002-9 in effect on the date on which the Form 3115 was filed
with the national office by the taxpayer unless on or before the due date (including
extensions) of the taxpayer's federal tax return for the requested year of change (as defined
in section 5.02 of Rev. Proc. 2002-9) on that Form 3115, the taxpayer completes a new
Form 3115 to make the change under section 2.01, 2.02, or 2B, as applicable, of the
APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure and files this newly
completed Form 3115 in duplicate in accordance with section 6.02(3)(a) of Rev. Proc.
2002-9. Additionally, the newly completed Form 3115 must include the statement:
"Section [insert, as appropriate: 2.01, 2.02, or 2B] of the APPENDIX of Rev. Proc. 2002-9
as revised by Rev. Proc. 2004-11." This statement must be legibly printed or typed on the
Z~rET-,
-11appropriate line on, or at the top of page 1 of, the Form 3115.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Sara Logan of the Office of
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this revenue procedure, contact Ms. Logan or Douglas Kim on
(202) 622-3110 (not a toll free call).
-12APPENDIX
SECTION 1. Section 2.01 of the APPENDIX of Rev. Proc 2002-9 is deleted and replaced
with the following:
".01 Impermissible to permissible method of accounting for depreciation or
amortization.
(1) Description of change and scope.
(a) Applicability. This change applies to a taxpayer that wants to
change from an impermissible to a permissible method of accounting for depreciation or
amortization (depreciation) for any item of depreciable or amortizable property:
(i) for which the taxpayer used the impermissible method of
accounting in at least the two taxable years immediately preceding the year of change (but
see section 2.01 (1)(b) of this APPENDIX for property placed in service in the taxable year
immediately preceding the year of change);
(ii) for which the taxpayer is making a change in method of
accounting under § 1.446-1 T(e)(2)(ii)(d);
(iii) for which depreciation is determined under § 56(a)(1),
§ 56(g)(4)(A), § 167, § 168, § 197, § 14001, § 1400L(b), or§ 1400L(c), or under § 168
prior to its amendment in 1986 (former § 168); and
(iv) that is owned by the taxpayer at the beginning of the year of
change (but see section 2.05 of this APPENDIX for property disposed of before the year of
change).
-13(b) Taxpayer has not adopted a method of accounting for the item of
property. If a taxpayer does not satisfy section 2.01(1)(a)(i) of this APPENDIX for an item
of depreciable or amortizable property because this item of property is placed in service
by the taxpayer in the taxable year immediately preceding the year of change ("1-year
depreciable property"), the taxpayer may change from the impermissible depreciation
method to the permissible depreciation method for the 1-year depreciable property by
filing a Form 3115 for this change, provided the § 481 adjustment reported on the Form
3115 includes the amount of any adjustment that is attributable to all property (including the
1 -year depreciable property) subject to the Form 3115. Alternatively, the taxpayer may
change from the impermissible depreciation method to the permissible depreciation
method for a 1 -year depreciable property by filing an amended federal tax return for the
property's placed-in-service year prior to the date the taxpayer files its federal tax return for
the taxable year succeeding the
placed-in-service year.
(c) Certain scope limitations inapplicable. The scope limitations in
sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable to this change.
(d) Inapplicability. This change does not apply to:
(i) any property to which § 1016(a)(3) (regarding property held
by a tax-exempt organization) applies;
(ii) any taxpayer that is subject to § 263A and that is required
to capitalize the costs with respect to which the taxpayer wants to change its method of
accounting under section 2.01 of this APPENDIX, if the taxpayer is not capitalizing the
-14costs as required;
(iii) any property for which a taxpayer is making a change in
depreciation under § 1.446-1 T(e)(2)(ii)(d)(2)(yi) or (yi[);
(iv) any property subject to § 167(g) (regarding property
depreciated under the income forecast method);
(v) any § 1250 property that a taxpayer is reclassifying to an
asset class of Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc. 83-35, 1983-1 C.B. 745,
as appropriate, that does not explicitly include § 1250 property (for example, asset class
57.0, Distributive Trades and Services);
(vi) any property for which a taxpayer is revoking a timely valid
election, or making a late election, under § 167, § 168, § 14001, § 1400L, former § 168, or
§ 13261 (g)(2) or (3) of the Revenue Reconciliation Act of 1993 (1993 Act), 1993-3 C.B. 1,
128 (relating to amortizable § 197 intangibles). A taxpayer may request consent to revoke
or make the election by submitting a request for a letter ruling under Rev. Proc. 2003-1,
2003-1 I.R.B. 1 (or any successor). See
§1.446-1T(e)(2)(ii)(d)(3)(lii);
(vii) any property for which depreciation is determined under §
56(g)(4)(A) or § 167 (other than under § 168, § 14001, § 1400L, or former § 168) and a
taxpayer is changing the useful life of the property. A change in the useful life of property is
corrected by adjustments in the applicable taxable year provided under
§ 1.446-1 T(e)(2)(ii)(d)(3)(i). However, this section 2.01(1)(d)(vii) of this APPENDIX does
not apply if the taxpayer is changing to or from a useful life, recovery period, or amortization
-15period that is specifically assigned by the Internal Revenue Code (for example, § 167(f)(1),
§ 168(c)), the regulations thereunder, or other guidance published in the Internal Revenue
Bulletin and, therefore, this change is a change in method of accounting (unless section
2.01(1)(d)(xv) of this APPENDIX applies). See
§1.446-1T(e)(2)(ii)(d)(3)(i);
(viii) any depreciable property for which the use changes in the
hands of the same taxpayer. See § 1.446-1 T(e)(2)(ii)(d)(3)(ii);
(ix) any property for which depreciation is determined in
accordance with § 1.167(a)-11 (regarding the Class Life Asset Depreciation Range
System (ADR));
(x) any change in method of accounting involving a change
from deducting the cost or other basis of any property as an expense to capitalizing and
depreciating the cost or other basis;
(xi) any change in method of accounting involving a change
from one permissible method of accounting for the property to another permissible method
of accounting for the property. For example:
(A) a change from the straight-line method of
depreciation to the income forecast method of depreciating for videocassettes. See Rev.
Rul. 89-62, 1989-1 C.B. 78; or
(B) a change from charging the depreciation reserve
with costs of removal and crediting the depreciation reserve with salvage proceeds to
deducting costs of removal as an expense (provided the costs of removal are not required
-16to be capitalized under any provision of the Code, such as, § 263(a)) and including salvage
proceeds in taxable income (see section 2.02 of this APPENDIX for making this change
for property for which depreciation is determined under § 167);
(xii) any change in method of accounting involving both a
change from treating the cost or other basis of the property as nondepreciable or
nonamortizable property to treating the cost or other basis of the property as depreciable
or amortizable property and the adoption of a method of accounting for depreciation
requiring an election under § 167, § 168, § 14001, § 1400L(b), former
§ 168, or § 13261(g)(2) or (3) of the 1993 Act (for example, a change in the treatment of
the space consumed in landfills placed in service in 1990 from nondepreciable to
depreciable property (assuming section 2.01(1)(d)(xiii) of the APPENDIX does not apply)
and the making of an election under § 168(f)(1) to depreciate this property under the unit of
production method of depreciation under § 167);
(xiii) any change in method of accounting for any item of
income or deduction other than depreciation, even if the change results in a change in
computing depreciation under § 1.446-1 T(e)(2)(ii)(d)(2)(i), (ii), (Hi), (iy), (y), (yi), (yii), or
(viii). For example, a change in method of accounting involving:
(A) a change in inventory costs (for example, when
property is reclassified from inventory property to depreciable property, or vice versa) (but
see section 3.02 of this APPENDIX for making a change from inventory property to
depreciable property for unrecoverable line pack gas or unrecoverable cushion gas); or
(B) a change in the character of a transaction from sale
-17to lease, or vice versa (but see section 2.03 of this APPENDIX for making this change);
(xiv) a change from determining depreciation under § 168 to
determining depreciation under former § 168 for any property subject to the transition rules
in § 203(b) or 204(a) of the Tax Reform Act of 1986, 1986-3 (Vol. 1)C.B. 1,60-80; or
(xv) any change in the placed-in-service date of a depreciable
or amortizable property. This change is corrected by adjustments in the applicable taxable
year provided under § 1.446-1 T(e)(2)(ii)(d)(3)(y).
(2) Additional reguirements. A taxpayer also must comply with the following:
(a) Permissible method of accounting for depreciation. A taxpayer
must change to a permissible method of accounting for depreciation for the item of
depreciable or amortizable property. The permissible method of accounting is the same
method that determines the depreciation allowable for the item of property (as provided in
section 2.01(5) of this APPENDIX).
(b) Statements reguired. A taxpayer must provide the following
statements, if applicable, and attach them to the completed application:
(i) a detailed description of the former and new methods of
accounting. A general description of these methods of accounting is unacceptable (for
example, MACRS to MACRS, erroneous method to proper method, claiming less than the
depreciation allowable to claiming the depreciation allowable);
(ii) to the extent not provided elsewhere on the application, a
statement describing the taxpayer's business or income-producing activities. Also, if the
taxpayer has more than one business or income-producing activity, a statement describing
-18the taxpayer's business or income-producing activity in which the item of property at issue
is primarily used by the taxpayer;
(iii) to the extent not provided elsewhere on the application, a
statement of the facts and law supporting the new method of accounting, new classification
of the item of property, and new asset class in, as appropriate, Rev. Proc. 87-56 or Rev.
Proc. 83-35: If the taxpayer is the owner and lessor of the item of property at issue, the
statement of the facts and law supporting the new asset class also must describe the
business or income-producing activity in which that item of property is primarily used by the
lessee;
(iv) to the extent not provided elsewhere on the application, a
statement identifying the year in which the item of property was placed in service;
(v) if the item of property is depreciated under former § 168, a
statement identifying the asset class in Rev. Proc. 83-35 that applies under the taxpayer's
former and new methods of accounting (if none, state and explain);
(vi) if any item of property is public utility property within the
meaning of § 168(i)(10) or former § 167(I)(3)(A), as applicable, a statement providing that
the taxpayer agrees to the following additional terms and conditions:
(A) a normalization method of accounting (within the
meaning of former § 167(I)(3)(G), former § 168(e)(3)(B), or § 168(i)(9), as applicable) will
be used for the public utility property subject to the application;
(B) as of the beginning of the year of change, the
taxpayer will adjust its deferred tax reserve account or similar reserve account in the
-19taxpayer's regulatory books of account by the amount of the deferral of federal income tax
liability associated with the § 481 (a) adjustment applicable to the public utility property
subject to the application; and
(C) within 30 calendar days of filing the federal income
tax return for the year of change, the taxpayer will provide a copy of the completed
application to any regulatory body having jurisdiction over the public utility property subject
to the application;
(vii) if the taxpayer is changing the classification of an item of §
1250 property placed in service after August 19,1996, to a retail motor fuels outlet under §
168(e)(3)(E)(iii), a statement containing the following representation: "For purposes of §
168(e)(3)(E)(iii) of the Internal Revenue Code, the taxpayer represents that (A) 50 percent
or more of the gross revenue generated from the item of § 1250 property is from the sale of
petroleum products (not including gross revenue from related services, such as the labor
cost of oil changes and gross revenue from the sale of nonpetroleum products such as tires
and oil filters), (B) 50 percent or more of the floor space in the item of property is devoted
to the sale of petroleum products (not including floor space devoted to related services,
such as oil changes and floor space devoted to nonpetroleum products such as tires and
oil filters), or (C) the time of § 1250 property is 1,400 square feet or less."; and
(viii) if the taxpayer is changing the classification of an item of
property from § 1250 property to § 1245 property under § 168 or former § 168, a statement
of the facts and law supporting the new § 1245 property classification, and a statement
containing the following representation: "Each item of depreciable property that is the
-20subject of the application filed under section 2.01 of the A P P E N D I X of Rev. Proc. 2002-9
for the year of change beginning [Insert the date], and that is reclassified from [Insert, as
appropriate: nonresidential real property, residential rental property,
19-vear real property, 18-vear real property, or 15-year real property] to an asset class of
[Insert, as appropriate, either: Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc.
83-35,1983-1 C.B. 7451 that does not explicitly include § 1250 property, is § 1245
property for depreciation purposes."
(3) Section 481(a) adjustment. Because the adjusted basis of the property is
changed as a result of a method change m a d e under section 2.01 of this A P P E N D I X (see
section 2.01(4) of this A P P E N D I X ) , items are duplicated or omitted. Accordingly, this
change is m a d e with a § 481(a) adjustment. This adjustment m a y result in either a
negative § 481(a) adjustment (a decrease in taxable income) or a positive § 481(a)
adjustment (an increase in taxable income) and m a y be a different amount for regular tax,
alternative minimum tax, and adjusted current earnings purposes. This § 481(a)
adjustment equals the difference between the total amount of depreciation taken into
account in computing taxable income for the property under the taxpayer's former method
of accounting (including the amount attributable to any property described in section
2.01 (1)(b) of this A P P E N D I X that is included in the taxpayer's Form 3115), and the total
amount of depreciation allowable for the property under the taxpayer's n e w method of
accounting (as determined under section 2.01(5) of this A P P E N D I X , and including the
amount attributable to any property described in section 2.01 (1)(b) of this A P P E N D I X that
is included in the taxpayer's Form 3115), for open and closed years prior to the year of
-21change. However, the amount of the § 481 (a) adjustment must be adjusted to account for
the proper amount of the depreciation allowable that is required to be capitalized under any
provision of the Code (for example, § 263A) at the beginning of the year of change.
(4) Basis adjustment. As of the beginning of the year of change, the basis of
depreciable property to which section 2.01 of this APPENDIX applies must reflect the
reductions required by § 1016(a)(2) for the depreciation allowable for the property (as
determined under section 2.01(5) of this APPENDIX).
(5) Meaning of depreciation allowable.
(a) In general. Section 2.01 (5) of this APPENDIX provides the
amount of the depreciation allowable determined under § 56(a)(1), § 56(g)(4)(A), § 167, §
168, § 197, § 14001, or § 1400L(c), or former § 168. This amount, however, may be limited
by other provisions of the Code (for example, § 280F).
(b) Section 56(a)(1) property. The depreciation allowable for any
taxable year for property for which depreciation is determined under § 56(a)(1) is
determined by using the depreciation method, recovery period, and convention provided
for under § 56(a)(1) that applies for the property's placed-in-service date.
(c) Section 56(g)(4)(A) property. The depreciation allowable for any
taxable year for property for which depreciation is determined under § 56(g)(4)(A) is
determined by using the depreciation method, recovery period or useful life, as applicable,
and convention provided for under § 56(g)(4)(A) that applies for the property's placed-inservice date.
(d) Section 167 property. Generally, for any taxable year, the
-22depreciation allowable for property for which depreciation is determined under § 167, is
determined either:
(i) under the depreciation method adopted by a taxpayer for
the property; or
(ii) if that depreciation method does not result in a reasonable
allowance for depreciation or a taxpayer has not adopted a depreciation method for the
property, under the straight-line depreciation method.
For determining the estimated useful life and salvage value of the property, see
§ 1.167(a)-1(b) and (c), respectively.
The depreciation allowable for any taxable year for property subject to § 167(f)
(regarding certain property excluded from § 197) is determined by using the depreciation
method and useful life prescribed in § 167(f). If computer software is depreciated under §
167(f)(1) and is qualified property (as defined in § 168(k)(2) and
§ 1.168(k)-1Tof the temporary Income Tax Regulations), 50-percent bonus depreciation
property (as defined in § 168(k)(4) and § 1.168(k)-1T), or qualified New York Liberty Zone
(Liberty Zone) property (as defined in § 1400L(b)(2) and § 1.1400L(b)-1T), the
depreciation allowable for that computer software under § 167(f)(1) is also determined by
taking into account the additional first year depreciation deduction provided by § 168(k) or
§ 1400L(b), as applicable, unless the taxpayer made a timely valid election not to deduct
any additional first year depreciation for the computer software.
(e) Section 168 property. The depreciation allowable for any taxable
year for property for which depreciation is determined under § 168, is determined as
-23follows:
(i) by using either:
(A) the general depreciation system in § 168(a); or
(B) the alternative depreciation system in § 168(g) if the
property is required to be depreciated under the alternative depreciation system pursuant
to § 168(g)(1) or other provisions of the Code (for example, property described in §
263A(e)(2)(A) or § 280F(b)(1)). Property required to be depreciated under the alternative
depreciation system pursuant to § 168(g)(1) includes property in a class (as set out in §
168(e)) for which the taxpayer made a timely valid election under § 168(g)(7); and
(ii) if the property is qualified property, 50-percent bonus
depreciation property, or Liberty Zone property, by taking into account the additional first
year depreciation deduction provided by § 168(k) or § 1400L(b), as applicable, unless the
taxpayer made a timely valid election not to deduct the additional first year depreciation (or
made a deemed election not to deduct the additional first year depreciation; for further
guidance, see Rev. Proc. 2002-33, 2002-1 C.B. 963, or Rev. Proc. 2003-50, 2003-29
I.R.B. 119) for the class of property (as defined in
§ 1.168(k)-1T(e)(2) or § 1.1400L(b)-1T(e)(2), as applicable) in which that property is
included.
(f) Section 197 property. The depreciation allowable for any taxable
year for an amortizable § 197 intangible (including any property for which a timely election
under § 13261(g)(2) of the 1993 Act was made) is determined in accordance with § 1.1972(f).
-24(g) Former § 168 property. The depreciation allowable for any
taxable year for property subject to former § 168 is determined by using either:
(i) the accelerated method of cost recovery applicable to the
property (for example, for 5-year property, the recovery method under former
§ 168(b)(1)); or
(ii) the straight-line method applicable to the property if the
property is required to be depreciated under the straight-line method (for example,
property described in former § 168(f)(12) or former § 280F(b)(2)) or if the taxpayer elected
to determine the depreciation allowance under the optional straight-line percentage (for
example, the straight-line method in former § 168(b)(3)).
(h) Qualified revitalization building. The depreciation allowable for any
taxable year for any qualified revitalization building (as defined in § 14001(b)(1)) for which
the taxpayer has made a timely valid election under § 14001(a) is determined as follows:
(i) if the taxpayer elected to deduct one-half of any qualified
revitalization expenditures (as defined in § 14001(b)(2)) chargeable to a capital account
with respect to the qualified revitalization building for the taxable year in which the building
is placed in service by the taxpayer, the depreciation allowable for the property's placed-inservice year is equal to one-half of the qualified revitalization expenditures for the property
and the depreciation allowable for the remaining recovery period of the property is
determined using the general depreciation system of § 168(a) or the alternative
depreciation system of § 168(g), as applicable; or
(ii) if the taxpayer elected to amortize all of the qualified
-25revitalization expenditures chargeable to a capital account with respect to the qualified
revitalization building ratably over the 120-month period beginning with the month in which
the building is placed in service, the depreciation allowable is determined in accordance
with this election.
(i) Qualified New York Liberty Zone leasehold improvement property.
The depreciation allowable for any taxable year for qualified New York Liberty Zone
leasehold improvement property (as defined in § 1400L(c)(2)) is determined by using the
depreciation method and recovery period prescribed in § 1400L(c)."
SECTION 2. Section 2.02 of the APPENDIX of Rev. Proc. 2002-9 is deleted and replaced
with the following:
".02 Permissible to permissible method of accounting for depreciation.
(1) Description of change. This change applies to a taxpayer that wants to
change from a permissible method of accounting for depreciation under § 56(g)(4)(A)(iv)
or § 167 to another permissible method of accounting for depreciation under
§ 56(g)(4)(A)(iv) or § 167. Pursuant to § 1.167(a)-7(a) and (c), a taxpayer may account for
depreciable property either by treating each individual asset as an account or by
combining two or more assets in a single account and, for each account, depreciation
allowances are computed separately.
(2) Scope.
(a) Applicability. This change applies to any taxpayer wanting to
make a change in method of accounting for depreciation specified in section 2.02(3) of
this APPENDIX for the property in an account:
-26(i) for which the present and proposed methods of accounting
for depreciation specified in section 2.02(3) of this APPENDIX are permissible methods
for the property under § 56(g)(4)(A)(iv) or § 167; and
(ii) that is owned by the taxpayer at the beginning of the year of
change.
(b) Certain scope limitations inapplicable. The scope limitations in
sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable to this change.
(c) Inapplicability. This change does not apply to:
(i) any taxpayer that is subject to § 263A and that is required to
capitalize the costs with respect to which the taxpayer wants to change its method of
accounting under section 2.02 of this APPENDIX, if the taxpayer is not capitalizing the
costs as required;
(ii) any property to which § 1016(a)(3) (regarding property held
by a tax-exempt organization) applies;
(iii) any property described in § 167(f) (regarding certain
property excluded from § 197);
(iv) any property subject to § 167(g) (regarding property
depreciated under the income forecast method);
(v) any property for which depreciation is determined under
§ 56(a)(1), § 56(g)(4)(A)(i), (ii), (iii), or (v), § 168, § 14001, §1400L(b), or § 1400L(c), or
§ 168 prior to its amendment in 1986 (former § 168);
(vi) any property that the taxpayer elected under § 168(f)(1) or
-27former § 168(e)(2) to exclude from the application of, respectively, § 168 or former
§168;
(vii) any property for which depreciation is determined in
accordance with § 1.167(a)-11 (regarding the Class Life Asset Depreciation Range
System (ADR));
(viii) any depreciable property for which the taxpayer is
changing the depreciation method pursuant to § 1.167(e)-1T(b) of the temporary Income
Tax Regulations (change from declining-balance method to straight-line method), §
1.167(e)-1T(c) (certain changes for § 1245 property), or § 1.167(e)-1T(d) (certain changes
for § 1250 property). These changes must be made prospectively and are not permitted
under the cited regulations for property for which the depreciation is determined under §
168, § 14001, § 1400L, orformer§ 168; or
(ix) any distributor commissions (as defined by section 2 of
Rev. Proc. 2000-38, 2000-2 C.B. 310) for which the taxpayer is changing the useful life
under the distribution fee period method or the useful life method (both described in Rev.
Proc. 2000-38). A change in this useful life is corrected by adjustments in the applicable
taxable year provided under § 1.446-1 T(e)(2)(ii)(d)(3)(i).
(3) Changes covered. Section 2.02 of this APPENDIX only applies to the
following changes in methods of accounting for depreciation:
(a) a change from the straight-line method to the
sum-of-the-years-digits method, the sinking fund method, the unit-of-production method, or
the declining-balance method using any proper percentage of the straight-line rate;
-28(b) a change from the declining-balance method using any
percentage of the straight-line rate to the sum-of-the-years-digits method, the sinking fund
method, or the declining-balance method using a different proper percentage of the
straight-line rate;
(c) a change from the sum-of-the-years-digits method to the sinking
fund method, the declining-balance method using any proper percentage of the
straight-line rate, or the straight-line method;
(d) a change from the unit-of-production method to the straight-line
method;
(e) a change from the sinking fund method to the straight-line method,
the unit-of-production method, the sum-of-the-years-digits method, or the declining-balance
method using any proper percentage of the straight-line rate;
(f) a change in the interest factor used in connection with a compound
interest method or sinking fund method;
(g) a change in averaging convention as set forth in
§ 1.167(a)-10(b). However, as specifically provided in § 1.167(a)-10(b), in any taxable
year in which an averaging convention substantially distorts the depreciation allowance for
the taxable year, it may not be used (see Rev. Rul. 73-202,1973-1 C.B. 81);
(h) a change from charging the depreciation reserve with costs of
removal and crediting the depreciation reserve with salvage proceeds to deducting costs
of removal as an expense and including salvage proceeds in taxable income as set forth in
§ 1.167(a)-8(e)(2). See Rev. Rul. 74-455, 1974-2 C.B. 63. This change, however, may be
-29made under this revenue procedure only if:
(i) the change is applied to all items in the account for which
the change is being made; and
(ii) the removal costs are not required to be capitalized under
any provision of the Code (for example, § 263(a), 263A, or 280B);
(i) a change from crediting the depreciation reserve with the salvage
proceeds realized on normal retirement sales to computing and recognizing gains and
losses on the sales (see Rev. Rul. 70-165,1970-1 C.B. 43);
(j) a change from crediting ordinary income (including the combination
method of crediting the lesser of estimated salvage value or actual salvage proceeds to
the depreciation reserve, with any excess of salvage proceeds over estimated salvage
value credited to ordinary income) with the salvage proceeds realized on normal retirement
sales, to computing and recognizing gains and losses on the sales (see Rev. Rul. 70-166,
1970-1 C.B. 44);
(k) a change from item accounting for specific assets to multiple asset
accounting for the same assets, or vice versa;
(I) a change from one type of multiple asset accounting (pooling) for
specific assets to a different type of multiple asset accounting (pooling) for the same
assets;
(m) a change from one method described in Rev. Proc. 2000-38 for
amortizing distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2
C.B. 310) to another method described in Rev. Proc. 2000-38 for amortizing distributor
-30commissions; or
(n) a change from pooling to a single asset, or vice versa, for
distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2 C.B. 310)
for which the taxpayer is using the distribution fee period method or the useful life method
(both described in Rev. Proc. 2000-38).
(4) Additional reguirements. A taxpayer also must comply with the following:
(a) Basis for depreciation. At the beginning of the year of change, the
basis for depreciation of property to which this change applies is the adjusted basis of the
property as provided in § 1011 at the end of the taxable year immediately preceding the
year of change (determined under the taxpayer's present method of accounting for
depreciation). If applicable under the taxpayer's proposed method of accounting for
depreciation, this adjusted basis is reduced by the estimated salvage value of the property
(for example, a change to the straight-line method).
(b) Rate of depreciation. The rate of depreciation for property
changed to:
(i) the straight-line or the sum-of-the-years-digits method of
depreciation must be based on the remaining useful life of the property as of the beginning
of the year of change; or
(ii) the declining-balance method of depreciation must be
based on the useful life of the property measured from the placed-in-service date, and not
the expected remaining life from the date the change becomes effective.
(c) Regulatory reguirements. For changes in method of depreciation
-31to the sum-of-the-years-digits or declining-balance method, the property must meet the
requirements of § 1.167(b)-0 or 1.167(c)-1, as appropriate.
(d) Public utility property. If any item of property is public utility
property within the meaning of former § 167(I)(3)(A), the taxpayer must attach to the
application a statement providing that the taxpayer agrees to the following additional terms
and conditions:
(i) a normalization method of accounting within the meaning of
former § 167(I)(3)(G) will be used for the public utility property subject to the application;
and
(ii) within 30 calendar days of filing the federal income tax
return for the year of change, the taxpayer will provide a copy of the completed application
to any regulatory body having jurisdiction over the public utility property subject to the
application.
(5) Section 481(a) adjustment. Because the adjusted basis of the property is
not changed as a result of a method change made under section 2.02 of this APPENDIX,
no items are being duplicated or omitted. Accordingly, no § 481(a) adjustment is required
or necessary."
SECTION 3. Section 2B of the APPENDIX of Rev. Proc. 2002-9 is deleted and replaced
with the following:
"SECTION 2B. COMPUTER SOFTWARE EXPENDITURES (§§ 162, 167, AND
197)
.01 Description of change. This change applies to a taxpayer that wants to change
-32its method of accounting for the costs of computer software to a method described in Rev.
Proc. 2000-50, 2000-2 C.B. 601. Section 5 of Rev. Proc. 2000-50 describes the methods
applicable to the costs of developing computer software. Section 6 of Rev. Proc. 2000-50
describes the method applicable to the costs of acquired computer software. Section 7 of
Rev. Proc. 2000-50 describes the method applicable to leased or licensed computer
software. If a taxpayer treats the costs of computer software in accordance with the
applicable method described in Rev. Proc. 2000-50, the Service will not disturb the
taxpayer's treatment of its costs of computer software.
.02 Scope. This change applies to all costs of computer software as defined in
section 2 of Rev. Proc. 2000-50. However, this change does not apply to any computer
software that is subject to amortization as an "amortizable section 197 intangible" as
defined in § 197(c) and the regulations thereunder, or to costs that a taxpayer has treated
as research and experimentation expenditures under § 174.
.03 Statement reguired. If a taxpayer is changing to the method described in
section 5.01(2) of Rev. Proc. 2000-50, the taxpayer must attach to the application a
statement providing the information required in section 8.02(2) of Rev. Proc. 2000-50."
SECTION 4. Section 2.05 of the APPENDIX of Rev. Proc. 2002-9 is added to read as
follows:
".05 Impermissible to permissible method of accounting for depreciation or
amortization for disposed depreciable or amortizable property.
(1) Description of change. This change applies to a taxpayer that wants to
make the change in method of accounting for depreciation or amortization (depreciation)
-33provided under section 3 of Rev. Proc. 2004-11, 2004-3 I.R.B. _, for an item of
depreciable or amortizable property that has been disposed of by the taxpayer. Section 3
of Rev. Proc. 2004-11 allows a taxpayer to make a change in method of accounting for
depreciation for the disposed property if the taxpayer used an impermissible method of
accounting for depreciation for the property under which the taxpayer did not take into
account any depreciation allowance, or did take into account some depreciation but less
than the depreciation allowable, in the year of change (as defined in section 2.05(3) of this
APPENDIX) or any prior taxable year.
(2) Scope. This change applies to a taxpayer and an item of depreciable or
amortizable property that are within the scope of section 3.01 of Rev. Proc. 2004-11,
provided:
(a) the taxpayer files the original Form 3115 with the taxpayer's
amended federal tax return for the year of change (as defined in section 2.05(3) of this
APPENDIX) prior to the expiration of the period of limitation for assessment under
§ 6501 (a) for the taxable year in which the item of depreciable or amortizable property was
disposed of by the taxpayer; and
(b) the taxpayer's amended federal tax return for the year of change
(as defined in section 2.05(3) of this APPENDIX) includes the adjustments to taxable
income and any collateral adjustments to taxable income or tax liability (for example,
adjustments to the amount or character of the gain or loss of the disposed depreciable or
amortizable property) resulting from the change in method of accounting for depreciation
made by the taxpayer under section 2.05 of this APPENDIX.
-34(3) Year of change. The year of change for this change is the taxable year in
which the item of depreciable or amortizable property was disposed of by the taxpayer.
(4) Scope limitations inapplicable. The scope limitations in section 4.02 of
this revenue procedure do not apply. If the taxpayer is under examination, before an
appeals office, or before a federal court at the time that a copy of the Form 3115 is filed
with the national office, the taxpayer must provide a copy of the Form 3115 to the
examining agent, appeals officer, or counsel for the government, as appropriate, at the
time the copy of the Form 3115 is filed with the national office. The Form 3115 must
contain the name(s) and telephone number(s) of the examining agent, appeals officer, or
counsel for the government, as appropriate.
(5) Filing reguirements. Notwithstanding section 6.02(3)(a) of this revenue
procedure, a taxpayer making this change must attach the original Form 3115 to the
taxpayer's timely filed amended federal tax return for the year of change and must file the
required copy (with signature) of the Form 3115 with the national office no later than when
the original Form 3115 is filed with the amended federal tax return for the year of change.
(6) Section 481(a) adjustment period. A taxpayer must take the § 481 (a)
adjustment into account in the year of change."
F R O M T H E OFFICE O F PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 30, 2003
js-1070
IRS Issues Notice for Regulations on Inversion Transaction Reporting
Today the IRS issued a notice providing additional guidance to taxpayers affected
by the revised temporary regulations requiring corporations to notify the IRS and
their shareholders when they move their headquarters offshore or are acquired by a
foreign company. These revised regulations were published today in the Federal
Register. The notice provides instructions for certain forms required under the
regulations. In addition, the notice extends the January 5, 2004, reporting
deadlines to January 12, 2004. The IRS also has issued Form 8806, which must
be filed with the IRS by corporations covered by the regulations.
-30Related Documents:
• Form:8806
• Notice: 6043
http://www.treas.gov/2ress/releases/js 1070.htm
5/20/2005
Information Return for Acquisition of Control
or Substantial C h a n g e in Capital Structure
8806
Form
(December 2003)
O M B No. 1545-1869
Department of the Treasury
Internal Revenue Service
IsST 9 1
Reporting Corporation (see instructions)
1a N a m e of reporting corporation
b
Address of reporting corporation
b
Address of reporting corporation's c o m m o n parent
b
Address of acquiring corporation
c EIN of reporting corporation
2a N a m e of reporting corporation's c o m m o n parent, if any
c EIN of reporting corporation's c o m m o n parent
Acquiring Corporation (see instructions)
3a
c
d
e
f
4a
c
N a m e of acquiring corporation
EIN of acquiring corporation
Is the acquiring corporation a foreign corporation (as defined in section 7701 (a)(5))?
D Yes •
Is the acquiring corporation a dual resident corporation (see Regulations section 1.1503-2(c)(2))?
• Yes •
W a s the acquiring corporation newly formed prior to its involvement in the transaction?
• Yes •
N a m e of acquiring corporation's c o m m o n parent, if any
b Address of acquiring corporation's c o m m o n parent
No
No
No
EIN of acquiring corporation's c o m m o n parent
Information About Acquisition of Control or Substantial C h a n g e in Capital Structure
5a
b
6a
Date of transaction(s) that resulted in the acquisition of control or substantial change in capital structure
Description of the transaction(s) •
Did the reporting corporation's shareholders receive any stock in exchange for their stock in the reporting
corporation, for which the reporting corporation has reasonably determined that the shareholders are not required to
recognize gain (if any) from the receipt of such stock? (If "No," g o to line 7a)
Fair market value of the stock received
Description of the stock received •
7a
b
A m o u n t of cash received by the reporting corporation's shareholders in exchange for their stock
7a
Fair market value of property, other than stock, received by the reporting corporation's shareholders
7b
Did the reporting corporation's shareholders receive any stock, other than stock described on line 6c above, in exchange
for their stock in the reporting corporation, for which the reporting corporation has reasonably determined that its
shareholders would be required to recognize gain (if any) from the receipt of such stock? (If "No," go to line 7e.).
Yes
d
No
•
Yes
•
No
7d
7e
Fair market value of the stock received
Total cash and property. A d d lines 7a, 7b, and 7d
Description of the stock •
Sign
Here
0
I °" I
Under penalties of perjury, I declare that I have examined this form, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true,
correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.
•
•
Signature of officer
Paid
Preparer's
Use Only
IJSfflltl
Preparer's
signature
Firm's name (or
yours if self-employed),
address, and ZIP code
Date
•
Consent Election
Date
Preparer's SSN or PTIN
Check if
self-employed I I
EIN
Phone no. (
•
Does the reporting corporation consent to the publication of its name and address, date of transaction(s), description of shares
affected by the transaction(s) and the amount of cash and fair market value of any property provided to each class of shareholders in
exchange for a share, on an IRS website and/or in an IRS publication, as described in Temporary Regulations section 1.6043-4T(a)(2), . .
to assist brokers to satisfy their reporting obligations under Temporary Regulations section 1.6045-3T?
I I Y e s I INo
Under penalties of perjury, I declare that I a m an officer of the above named corporation and that I a m authorized to give consent on behalf of the above named
corporation for the IRS to publish the information necessary to enable brokers to satisfy their reporting obligations under Temporary Regulations section 1.6045-3T.
Sign
Here
•
Signature of officer
For P a p e r w o r k Reduction Act Notice, s e e p a g e 3.
Date
Cat. No. 10085T
Title
Form 8 8 0 6 (12-2003)
Page 2
Form 8806 (12-2003)
Corporation includes group. If two or
more corporations act according to a
plan or arrangement with respect to the
Section references are to the Internal
acquisition
of stock, they will be treated
Revenue Code unless otherwise noted.
as one corporation.
Purpose of Form
Section 338 election. A n acquisition of
stock of a corporation with respect to
A reporting corporation must file F o r m
which an election under section 338 is
8806, Information Return for Acquisition
m a d e is treated as an acquisition of
of Control or Substantial Change in
stock (and not as an acquisition of the
Capital Structure, to report an
assets of the corporation).
acquisition of control or a substantial
Substantial Change in Capital
change in the capital structure of a
Structure of a Corporation
domestic corporation.
A
corporation has a substantial change
Definitions
in capital structure if it has a change in
Acquisition of Control of a
capital structure and the amount of any
Corporation
cash and the fair market value of any
Generally, an acquisition of control of a
other property (including the value of
corporation (first corporation) occurs if,
any stock) provided to the shareholders
in a transaction or series of related
of such corporation pursuant to the
transactions, either:
change in capital structure, as of the
• Stock representing control of the first
date or dates on which the cash or
corporation is distributed by a second
other property is provided, is $100
corporation to shareholders of the
million or more. Generally, a corporation
second corporation and the fair market
has a change in capital structure if the
value of such stock on the date of
corporation in a transaction or series of
distribution is $100 million or more or
transactions:
• Before an acquisition of stock of the
• Undergoes a recapitalization with
first corporation (directly or indirectly) by respect to its stock;
a second corporation, the second
• R e d e e m s its stock (including d e e m e d
corporation does not have control of the redemptions);
first corporation; after the acquisition,
• Merges, consolidates, or otherwise
the second corporation has control of
combines with another corporation or
the first corporation; the fair market
transfers all or substantially all of its
value of the stock acquired in the
assets to one or more corporations;
transaction and in any related
• Transfers all or part of its assets to
transactions as of the date or dates on
another corporation in a Title 11 or
which the stock w a s acquired is $100
similar case and, in pursuance of the
million or more; and the shareholders of
plan, distributes stock or securities of
the first corporation (determined without that corporation; or
applying the constructive ownership rule
• Changes its identity, form, or place of
of section 318(a)) receive cash, stock, or organization.
other property pursuant to the aquisition. Receipt of property. A shareholder is
Control. Control m e a n s the ownership
treated as receiving property (or as
of stock possessing at least 5 0 % of the
having property provided to it) related to
total combined voting power of all
an aquisition of control or a substantial
classes of stock entitled to vote or at
change in capital structure if a liability of
least 5 0 % of the total value of shares of
the shareholder is assumed in the
all classes of stock.
transaction and, as a result of the
Constructive ownership. Generally, the transaction, an amount is realized by the
constructive ownership rules of section
shareholder from the sale or exchange
318(a) (except for section 318(a)(4),
of stock.
providing for constructive ownership
Reporting Corporation
through an option to acquire stock),
A reporting corporation is a corporation
modified as provided in section
whose stock w a s acquired in an
304(c)(3)(B), apply for determining
acquisition of control or that had a
whether there has been an acquisition of substantial change in its capital
control. The determination of whether
structure.
there has been an acquisition of control
Acquiring Corporation
will be m a d e without regard to whether
The acquiring corporation is any
the person or persons from w h o m
corporation that acquired control of the
control w a s acquired retain indirect
reporting corporation or received assets
control of the first corporation under
from the reporting corporation pursuant
section 318(a). Section 318(a) will not
to a substantial change in capital
cause a second corporation to be
structure of the reporting corporation.
treated as owning, before an acquisition
of stock in a first corporation (directly or
indirectly) by the second corporation
any stock that is acquired in the first
corporation.
General Instructions
W h o Must File
A reporting corporation is required to file
Form 8806 if the reporting corporation or
any shareholder is required to recognize
gain (if any) as a result of the application
of section 367(a) to the transaction.
If the reporting corporation transfers
all or substantially all of its assets to an
acquiring corporation in a transaction
that constitutes a substantial change in
the capital structure of the reporting
corporation and the reporting
corporation does not file Form 8806,
then the acquiring corporation must file
Form 8806. If neither corporation files
Form 8806, both corporations are jointly
and severally liable for any applicable
penalties. See Penalties for Failure To
File below.
Corporations Not Required
To File
D o not file Form 8806:
• For transactions that were properly
reported under section 6043(a); or
• If the reporting corporation reasonably
determines that all of its shareholders
w h o receive cash, stock, or other
property related to the acquisition of
control or substantial change in capital
structure are exempt recipients under
Temporary Regulations section
1.6043-4T(b)(6).
When To File
File Form 8806, within 45 days after the
transaction, or if earlier by January 5th
of the calendar year following the year in
which the acquisition of control or
substantial change in capital structure
occured.
If an acquisition of control or a
substantial change in capital structure
of a corporation occurs after
December 31, 2002, and before
December 30, 2003, Form 8806 must be
filed on or before January 5, 2004.
Where To File
Mail Form 8806 to:
Internal Revenue Service
Large and Midsize Business Division
Attention: P F T S
1111 Constitution Ave., N W
Washington, D C 20224
Penalties for Failure To File
Caution: Form 8806 and all Forms
1099-CAP, Changes in Corporate
Control and Capital Structure, required
to be filed under Temporary Regulations
sections 1.6043-4T(a) and (b) will be
considered as one return for purposes of
the failure to file penalty under section
6652(1).
If a correct Form 8806 is not filed by
the due date of the corporation's income
tax return, including extensions, it m a y
be penalized $500 for each day the
Page 3
Form 8806 (12-2003)
return is late, up to a m a x i m u m of
$100,000. The penalty will not be
imposed if the corporation can show
that the failure to file on time w a s due to
reasonable cause. Corporations that file
late must attach a statement explaining
the reasonable cause. Additional
penalties m a y apply under sections
7203, 7206, and 7207.
Note: Failure to file also includes the
requirement to file on magnetic media as
required by section 6011(e) and
Regulations section 1.6011-2.
C o m m o n parent of the reporting
corporation. If the reporting corporation
w a s a subsidiary m e m b e r of a
consolidated group immediately prior to
the reportable transaction, complete
lines 2a and 2b.
Common parent of the acquiring
corporation. If the acquiring corporation
w a s a subsidiary m e m b e r of a
consolidated group at the time of the
change in control or substantial change
in capital structure, complete lines 4a
and 4b.
Information Returns
Regarding Shareholders
Part IV-Consent Election
A corporation required to file Form 8806
also must file Form 1099-CAP for certain
shareholders of record w h o receive cash
or other property (including stock) in
exchange for their stock in the reporting
corporation due to the acquisition of
control or the substantial change in
capital structure. See Form 1099-CAP
for more information.
Specific Instructions
Employer identification number (EIN).
An EIN must be included for each
corporation identified. A n EIN is not
required if the corporation does not
have, and is not otherwise required to
have, an EIN.
A reporting corporation may elect to
consent to the IRS publication (on the
IRS website and/or an IRS publication)
of information included on this form, to
be limited to the n a m e and address of
the corporation, the date of the
transaction, a description of the shares
affected by the transaction, and the
amount of cash and the fair market
value of any property (as reflected on
line 7e) provided to each class of
shareholders in exchange for a share.
See Temporary Regulations section
1.6043-4T(a)(2).
Corporations that elect to consent to
such publication are not required to file
Form 1099-CAP with respect to
shareholders that are clearing
organizations, or to furnish Form
1099-CAP to such organizations. See
Temporary Regulations section
1.6043-4T(b)(1)and (4).
©
Paperwork Reduction Act Notice. W e
ask for the information on this form to
carry out the Internal Revenue laws of
the United States. You are required to
give us the information. W e need it to
ensure that you are complying with
these laws and to allow us to figure and
collect the right amount of tax.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid O M B
control number. Books or records
relating to a form or its instructions must
be retained as long as their contents
m a y become material in the
administration of any Internal Revenue
law. Generally, tax returns and return
information are confidential, as required
by section 6103.
The time needed to complete and file
this tax form will vary depending on
individual circumstances. The estimated
average time is:
Recordkeeping . . .
6 hr., 42 min.
Learning about the
law or the form . . . 2 hr., 10 min.
Preparing and sending
the form to the IRS
2 hr., 23 min.
If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form
simpler, w e would be happy to hear from
you. You can write to the Tax Forms
Committee, Western Area Distribution
Center, Rancho Cordova, C A
95743-0001. D o not send this form to
this address. Instead see W h e r e To File
on page 2.
Part III - Administrative, Procedural, and Miscellaneous
Notice SECTION 1. Purpose
This Notice announces the extension of certain 2004 deadlines under revised §§
1.6043-4T and 1.6045-3T of the Income Tax Regulations for filing Form 8806 and'
furnishing Form 1099-CAP to clearing organizations. This Notice also provides
information to filers of Forms 1099-CAP and 1099-B to assist in complying with the
reporting requirements set forth in revised §§ 1.6043-4T and 1.6045-3T. The 2003
Forms 1099-CAP and 1099-B, and their instructions, do not reflect the provisions of the
revised temporary regulations.
SECTION 2. Background
On December 30, 2003, the Internal Revenue Service (Service) issued
temporary regulations under sections 6043(c) and 6045 of the Internal Revenue Code
(TD 9101, FR ). These regulations, which revise temporary regulations issued
on November 18, 2002 (TD 9022, 67 FR 69468), require information reporting if a
domestic corporation undergoes an acquisition of control or a substantial change in
capital structure after December 31, 2002, if the reporting corporation or any
shareholder is required to recognize gain (if any) as a result of the application of section
367(a) of the Internal Revenue Code (Code). Pursuant to the revised regulations, a
corporation must file Form 8806, "Information Return for Acquisition of Control or
Substantial Change in Capital Structure," reporting and describing the acquisition of
control or substantial change in capital structure. In addition, the revised regulations
require the corporation to file Form 1099-CAP, "Changes in Corporate Control and
Capital Structure," with the Service with respect to each of its shareholders that is not
an exempt recipient, and to furnish Form 1099-CAP to each such shareholder. The
regulations also require a broker that holds stock on behalf of a customer in the
corporation that the broker knows or has reason to know has engaged in a transaction
described in these regulations to file Form 1099-B, "Proceeds from Broker and Barter
Exchange Transactions," with the Service with respect to its customer, and to furnish a
copy of the Form 1099-B to the customer.
SECTION 3. Extension of Deadlines
Section 6081 of the Code provides that the Secretary may grant a reasonable extension
of time for filing any return, declaration, statement, or other document required by the
Code or by regulations thereunder. Under the authority of section 6081, the Service is
extending the deadlines set forth in revised §§ 1.6043-4T and 1.6045-3T for filing Forms
8806 with the Service and furnishing Forms 1099-CAP to clearing organizations for
transactions occurring in calendar year 2003. Forms 8806 otherwise required to be filed
with the Service by January 5, 2004, must be filed by January 12, 2004. Forms 1099CAP otherwise required to be furnished to clearing organizations by January 5, 2004,
must be furnished by January 12, 2004. This extension does not apply to any other
deadline.
SECTION 4. Information for Filers of Form 1099-CAP
Under revised § 1.6043-4T(b), a reporting corporation must file Form 1099-CAP
with respect to its shareholders who are not exempt recipients. The list of exempt
recipients is set forth in § 1.6043-4T(b)(5), and includes brokers. Clearing organizations
are not exempt recipients under the revised regulations. Therefore, corporations must
file Form 1099-CAP with respect to shares held by a clearing organization, and furnish a
copy of the form to the clearing organization. Pursuant to § 1.6043-4T(b)(4), Form
1099-CAP must be furnished to clearing organizations by January 5th of the year
following the calendar year in which the transaction took place. Pursuant to Section 3 of
this Notice, Forms 1099-CAP otherwise due on January 5, 2004, must be furnished to
clearing organizations no later than January 12, 2004. Taxpayers, however, are
encouraged to comply as soon as possible prior to January 12, 2004.
The Depository Trust Company (DTC) is a clearing organization which holds a
large percentage of publicly issued securities, and is likely to receive Forms 1099-CAP
pursuant to the provisions of § 1.6043-4T(b). In anticipation of receiving such forms,
DTC has established a specific mailing address. DTC requests that Forms 1099-CAP
be delivered via express mail or other overnight service to:
Tax Information Reporting Services
Depository Trust & Clearing Corporation
55 Water Street- 25 th Floor
N e w York, N Y 10041
(212)855-4703
The envelope should be marked with the words:
TIME CRITICAL TAX INFORMATION FORM 1099-CAP
DTC will also accept Form 1099-CAP electronically. Forms should be emailed
to:
1099CAP@dtcc.com in Adobe Acrobat PDF file format
Furnishing Forms 1099 to payees electronically is permitted pursuant to section
401 of the Job Creation and Worker Assistance Act of 2002, if the rules set forth in §
31.6051-1 TO are followed.
SECTION 5. Information for Filers of Form 1099-B
Pursuant to revised § 1.6045-3T(a), a broker that holds shares on behalf of a
customer in a corporation that the broker knows or has reason to know has engaged in
a transaction under §1.6043-4T(c) or (d) must file an information return with respect to
the customer, unless the customer is an exempt recipient, and furnish a copy of the
information return to the customer. Revised § 1.6045-3T(c) provides that the broker
must use Form 1099-B, along with transmittal Form 1096, for this information reporting
requirement. With respect to transactions in 2003, the broker may elect to use Form
1099-CAP in lieu of Form 1099-B.
In completing Form 1099-B, brokers should aggregate all proceeds (cash, stock,
and other property) provided to the customer in Box 2 (Stocks, bonds, etc.). Brokers
should use Box 5 (Description) to report the name and address of the corporation which
engaged in the transaction and the number and class of shares exchanged by the
customers (as required by § 1.6045-3T(d)(2) and (3)).
SECTION 6. DRAFTING INFORMATION
For further information regarding this Notice, contact Nancy Rose of the Office of
the Associate Chief Counsel (Procedure & Administration), Administrative Provisions
and Judicial Practice Division, at (202) 622-4910 (not a toll-free call).
js-1071: Air Transportation Stabilization Board Issues Federal Guarantee on Behalf of W...
Page 1 of 1
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 30, 2003
js-1071
Air Transportation Stabilization Board Issues Federal Guarantee on Behalf of
World Airways, Inc.
The Air Transportation Stabilization Board today announced that World Airways,
Inc. has closed on a $30 million loan. The loan is backed by a $27 million Federal
guarantee issued under the Air Transportation Safety and System Stabilization Act
and implementing regulations promulgated by the Office of Management and
Budget.
-30-
http://www.treas.gov/press/releases/js 1071 .htm
5/20/2005
BESS R O O M
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 31, 2003
2003-12-31-9-42-14-18557
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $87,246 million as of the end of that week, compared to $86,924 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
December 19, 2003
December 26, 2003
86,924
87,246
TOTAL
1. Foreign Currency Reserves
Euro
Yen
TOTAL
Euro
Yen
TOTAL
a. Securities
8,281
14,573
22,853
8,329
14,676
23,005
0
0
Of which, issuer headquartered in the U.S.
b. Total deposits with:
b.i. Other central banks and BIS
13,518
2,927
16,445
13,590
2,948
16,538
b.ii. Banks headquartered in the U.S.
0
0
b.ii. Of which, banks located abroad
0
0
b.iii. Banks headquartered outside the U.S.
0
0
b.iii. Of which, banks located in the U.S.
0
0
2. IMF Reserve Position
24,189
24,240
3. Special Drawing Rights (SDRs) 2
12,394
12,420
4. Gold Stock3
11,043
11,043
0
0
5. Other Reserve Assets
II. Predetermined Short-Term Drains on Foreign Currency Assets
December 19, 2003
Euro
Yen
TOTAL
December 26, 2003
Euro
1. Foreign currency loans and securities
0
2. Aqqreqate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
Yen
TOTAL
0
2. a. Short positions
2.b. Long positions
3. Other
III. Contingent Short-Term Net Drains on Foreign Currency Assets
December 19, 2003
Euro
Yen
TOTAL
0
1. Contingent liabilities in foreign currency
December 26, 2003
Euro
Yen
TOTAL
0
l.a. Collateral guarantees o n debt due within 1
year
l.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
3.a. With other central banks
S.b. With banks and other financial institutions
Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U.S.
4. Aggregate short and long positions of
options in foreign
Currencies vis-a-vis the U.S. dollar
4. a. Short positions
4.a.l. Bought puts
4.a.2. Written calls
4.b. Long positions
4.b.l. Bought calls
4.b.2. Written puts
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA) valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week m a y be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to the prior week's IMF data. IMF data for the latest week m a y be
subject to revision. IMF data for the prior week are final.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
js-1073: Treasury and I R S Issue Guidance O n Roth I R A A b u s e s
Page 1 of 1
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
To view or print the PDF content on this page, download the free Adobe® Acrobat® Reader®.
December 31, 2003
js-1073
Treasury and IRS Issue Guidance On Roth IRA Abuses
Today, the Treasury Department and the IRS issued guidance to shut
down abuses involving indirect contributions to Roth IRAs. The notice
includes that these abuses satisfy the list-keeping and registration
requirements for tax shelter arrangements that are "listed transactions."
The guidance addresses situations in which value is shifted into an
individual's Roth IRA through transactions involving entities owned by the
individual.
"The notice illustrates that a contribution to an IRA through a transaction
that disguises the value of the contribution m a y disqualify the IRA," stated
Treasury Assistant Secretary for Tax Policy P a m Olson. For example, a
business owned by the individual could sell its receivables for less than fair
value to a shell corporation owned by the individual's Roth IRA. This
scheme artificially shifts taxable income away from the individual's
business into the shelter of the Roth IRA structure. "In effect, this is a
disguised contribution to the Roth IRA and the notice makes clear that it
will be treated as such," Olson concluded.
"For many people, the Roth IRA is an important retirement savings tool,"
said IRS Commissioner Mark W . Everson. " W e are concerned that s o m e
would try to abuse this savings vehicle in an attempt to skirt their tax
responsibilities."
The notice applies to any arrangement that has the effect of transferring
value to the Roth IRA corporation comparable to a contribution to the Roth
IRA.
The notice states that, the IRS also may assert that these are "prohibited
transactions" under the Code rules that disqualify the IRA or impose an
excise tax on transactions between an IRA and the individual for w h o m the
IRA is maintained or other disqualified persons with respect to the IRA.
The notice states that this transaction, and any transaction that is
substantially similar, are identified as "listed transactions" that are subject
to disclosure and to list-keeping and registration requirements.
The text of the notice is attached.
-30-
Related Documents:
• Roth IRA Abuses Notice 2004-8
http://www.treas.gov/press/releases/jsl073.htm
5/20/2005
Part III - Administrative, Procedural and Miscellaneous
Abusive Roth IRA Transactions
Notice 2004-8
The Internal Revenue Service and the Treasury Department are aware of
a type of transaction, described below, that taxpayers are using to avoid the
limitations on contributions to Roth IRAs. This notice alerts taxpayers and their
representatives that these transactions are tax avoidance transactions and
identifies these transactions, as well as substantially similar transactions, as
listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax
Regulations and §§ 301.6111 -2(b)(2) and 301.6112-1 (b)(2) of the Procedure and
Administration Regulations. This notice also alerts parties involved with these
transactions of certain responsibilities that m a y arise from their involvement with
these transactions.
Background
Section 408A was added to the Internal Revenue Code by section 302 of
the Taxpayer Relief Act of 1997, Pub. L. 105-34, 105th Cong., 1 sf Sess. 40
(1997). This section created Roth IRAs as a new type of nondeductible
individual retirement arrangement (IRA). The m a x i m u m annual contribution to
Roth IRAs is the s a m e m a x i m u m amount that would be allowable as a deduction
under § 219 with respect to the individual for the taxable year over the aggregate
amount of contributions for that taxable year to all other IRAs. Neither the
contributions to a Roth IRA nor the earnings on those contributions are subject to
tax on distribution, if distributed as a qualified distribution described in
§408A(d)(2).
A contribution to a Roth IRA above the statutory limits generates a 6percent excise tax described in § 4973. The excise tax is imposed each year
until the excess contribution is eliminated.
Facts
In general, these transactions involve the following parties: (1) an
individual (the Taxpayer) w h o owns a pre-existing business such as a
corporation or a sole proprietorship (the Business), (2) a Roth IRA within the
meaning of § 408A that is maintained for the Taxpayer, and (3) a corporation (the
Roth IRA Corporation), substantially all the shares of which are owned or
acquired by the Roth IRA. The Business and the Roth IRA Corporation enter into
transactions as described below. The acquisition of shares, the transactions or
both are not fairly valued and thus have the effect of shifting value into the Roth
IRA.
Examples include transactions in which the Roth IRA Corporation acquires
property, such as accounts receivable, from the Business for less than fair
market value, contributions of property, including intangible property, by a person
other than the Roth IRA, without a commensurate receipt of stock ownership, or
any other arrangement between the Roth IRA Corporation and the Taxpayer, a
related party described in § 267(b) or 707(b), or the Business that has the effect
of transferring value to the Roth IRA Corporation comparable to a contribution to
the Roth IRA.
Analysis
The transactions described in this notice have been designed to avoid the
statutory limits on contributions to a Roth IRA contained in § 408A. Because the
Taxpayer controls the Business and is the beneficial owner of substantially all of
the Roth IRA Corporation, the Taxpayer is in the position to shift value from the
Business to the Roth IRA Corporation. The Service intends to challenge the
purported tax benefits claimed for these arrangements on a number of grounds.
In challenging the purported tax benefits, the Service will, in appropriate
cases, assert that the substance of the transaction is that the amount of the value
shifted from the Business to the Roth IRA Corporation is a payment to the
Taxpayer, followed by a contribution by the Taxpayer to the Roth IRA and a
contribution by the Roth IRA to the Roth IRA Corporation. In such cases, the
Service will deny or reduce the deduction to the Business; m a y require the
Business, if the Business is a corporation, to recognize gain on the transfer under
§ 311(b); and m a y require inclusion of the payment in the income of the
Taxpayer (for example, as a taxable dividend if the Business is a C corporation).
S e e S a m m o n s v. United States, 433 F.2d 728 (5th Cir. 1970); Worcester v.
Commissioner, 370 F.2d 713 (1st Cir. 1966).
Depending on the facts of the specific case, the Service may apply § 482
to allocate income from the Roth IRA Corporation to the Taxpayer, Business, or
other entities under the control of the Taxpayer. Section 482 provides the
Secretary with authority to allocate gross income, deductions, credits or
allowances a m o n g persons owned or controlled directly or indirectly by the s a m e
interests, if such allocation is necessary to prevent evasion of taxes or clearly to
reflect income. The § 482 regulations provide that the standard to be applied is
that of a person dealing at arm's length with an uncontrolled person. See
generally § 1.482-1 (b) of the Income Tax Regulations. To the extent that the
consideration paid or received in transactions between the Business and the
Roth IRA Corporation is not in accordance with the arm's length standard, the
Service m a y apply § 482 as necessary to prevent evasion of taxes or clearly to
reflect income. In the event of a § 482 allocation between the Roth IRA
2
Corporation and the Business or other parties, correlative allocations and other
conforming adjustments would be m a d e pursuant to § 1.482-1 (g). Also see, Rev.
Rul. 78-83, 1978-1 C.B. 79.
In addition to any other tax consequences that may be present, the
amount treated as a contribution as described above is subject to the excise tax
described in § 4973 to the extent that it is an excess contribution within the
meaning of § 4973(f). This is an annual tax that is imposed until the excess
amount is eliminated.
Moreover, under § 408(e)(2)(A), the Service may take the position in
appropriate cases that the transaction gives rise to one or more prohibited
transactions between a Roth IRA and a disqualified person described in
§ 4975(e)(2). For example, the Department of Labor1 has advised the Service
that, to the extent that the Roth IRA Corporation constitutes a plan asset under
the Department of Labor's plan asset regulation (29 C.F.R. § 2510.3-101), the
provision of services by the Roth IRA Corporation to the Taxpayer's Business
(which is a disqualified person with respect to the Roth IRA under § 4975(e)(2))
would constitute a prohibited transaction under § 4975(c)(1)(C).2 Further, the
Department of Labor has advised the Service that, if a transaction between a
disqualified person and the Roth IRA would be a prohibited transaction, then a
transaction between that disqualified person and the Roth IRA Corporation would
be a prohibited transaction if the Roth IRA may, by itself, require the Roth IRA
Corporation to enter into the transaction.3
Listed Transactions
The following transactions are identified as "listed transactions" for
purposes of §§ 1.6011 -4(b)(2), 301.6111 -2(b)(2) and 301.6112-1 (b)(2) effective
December 31, 2003, the date this document is released to the public:
arrangements in which an individual, related persons described in § 267(b)
or 707(b), or a business controlled by such individual or related persons, engage
in one or more transactions with a corporation, including contributions of property
to such corporation, substantially all the shares of which are owned by one or
more Roth IRAs maintained for the benefit of the individual, related persons
1
Under section 102 of Reorganization Plan No. 4 of 1978 (43 F R 47713), the Secretary of Labor
has interpretive jurisdiction over § 4975 of the Internal Revenue Code.
2
For the Roth IRA Corporation to be considered as holding plan assets under the Department of
Labor's plan asset regulation, the Roth IRA's investment in the Roth IRA Corporation must be an
equity interest, the Roth IRA Corporation's securities must not be publicly-offered securities, and
the Roth IRA's investment in the Roth IRA Corporation must be significant. 29 C.F.R. §§2510.3101(a)(2), 2510.3-101(b)(1), 2510.3-101(b)(2), and 2510.3-101(f). Although the Roth IRA
Corporation would not be treated as holding plan assets if the Roth IRA Corporation constituted
an operating company within the meaning of 29 C.F.R. §2510.3-101(c), given the context of the
examples described in this notice, it is unlikely that the Roth IRA Corporation would qualify as an
operating company.
3
See 29 C.F.R. § 2509.75-2(c).
3
described in § 267(b)(1), or both. The transactions are listed transactions with
respect to the individuals for w h o m the Roth IRAs are maintained, the business
(if not a sole proprietorship) that is a party to the transaction, and the corporation
substantially all the shares of which are owned by the Roth IRAs. Independent of
their classification as "listed transactions," these transactions m a y already be
subject to the disclosure requirements of § 6011 (§ 1.6011-4), the tax shelter
registration requirements of § 6111 (§§ 301.6111-1T and 301.6111-2), or the list
maintenance requirements of § 6 1 1 2 (§301.6112-1).
Substantially similar transactions include transactions that attempt to use
a single structure with the intent of achieving the s a m e or substantially s a m e tax
effect for multiple taxpayers. For example, if the Roth IRA Corporation is owned
by multiple taxpayers' Roth IRAs, a substantially similar transaction occurs
whenever that Roth IRA Corporation enters into a transaction with a business of
any of the taxpayers if distributions from the Roth IRA Corporation are m a d e to
that taxpayer's Roth IRA based on the purported business transactions done with
that taxpayer's business or otherwise based on the value shifted from that
taxpayer's business to the Roth IRA Corporation.
Persons required to register these tax shelters under § 6111 who have
failed to do so m a y be subject to the penalty under § 6707(a). Persons required
to maintain lists of investors under § 6112 w h o have fail to do so (or w h o fail to
provide such lists w h e n requested by the Service) m a y be subject to the penalty
under § 6708(a). In addition, the Service m a y impose penalties on participants in
this transaction or substantially similar transactions, including the accuracyrelated penalty under § 6662, and as applicable, persons w h o participate in the
reporting of this transaction or substantially similar transactions, including the
return preparer penalty under § 6694, the promoter penalty under § 6700, and
the aiding and abetting penalty under § 6701.
The Service and the Treasury recognize that some taxpayers may have
filed tax returns taking the position that they were entitled to the purported tax
benefits of the type of transaction described in this notice. These taxpayers
should consult with a tax advisor to ensure that their transactions are disclosed
properly and to take appropriate corrective action.
Drafting Information
The principal author of this notice is Michael Rubin of the Employee Plans,
Tax Exempt and Government Entities Division. However, other personnel from
the Service and Treasury participated in its development. Mr. Rubin m a y be
reached at (202) 283-9888 (not a toll-free call).
4
js-1074: Fact Sheet: Tax Accomplishments In 2003
Page 1 of 2
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 31, 2003
js-1074
Fact Sheet: Tax Accomplishments In 2003
This past May, the President signed the Jobs and Growth Tax: Relief^Reconciliation
Act of 2003. The Act provides a boost to the economy this year, and provides a
sound basis for promoting economic growth in the future. The Jobs and Growth Tax
Relief Act had an immediate impact on the economy, with 3rd Q G D P growth
reaching 8.2%. The Jobs and Growth Tax Relief Act will continue to buoy the
economy as taxpayers see increased tax refunds come April 15th from the
increased child credit, reduced marriage penalty, and reduced rates, and as
businesses invest to take advantage of the increased expensing and bonus
depreciation.
• Taxpayers with children received an immediate boost from rebate checks of
$400 per eligible child sent out in July and August.
• Because of lower tax rates and less income tax withholding, workers saw
higher take-home pay in their paychecks starting in July of this year.
• Married couples benefit from reduction in the marriage penalty from
expansion of the fifteen percent rate bracket and increase in the standard
deduction for joint filers.
• Families benefit from increased child tax credits.
• Investors benefit from the lower tax rates on dividends and capital gains.
These lower rates were a positive step toward the President's goal of
reducing the double tax on dividends, and will help promote capital
formation and an ownership society.
• Small businesses are benefiting from a four-fold increase in the amount of
new investment they can deduct in one year, from $25,000 to $100,000.
• All businesses are benefiting from the increase in bonus depreciation from
30 to 50 percent, as well as its extension through 2004 (2005 for longerlived property). This change addressed what had been a weak spot in the
economic recovery - low corporate investment.
W e see the benefits of these tax cuts in today's economy and in the outlook for next
year:
• Business investment grew at an even faster rate, up 13 percent on an
annual basis.
• The outlook for next year is excellent: The most recent survey of business
economists showed that they expect growth next year to be a very healthy 4
Vz percent.
http://www.treas.gov/press/releases/js 1074.htm
5/20/2005
js-1074: Fact Sheet: TaTAccomplishments In 2003
Page 2 of 2
The Medicare Prescription Drug. Improvement, and Modernization Act of 2003
created health savings accounts (HSAs) to give individuals more choices, maintain
the doctor-patient relationship, promote cost consciousness, and potentially reduce
the growth of health care costs.
• Taxpayers can m a k e tax-deductible contributions to an H S A if the individual
is covered by high-deductible health insurance. Earnings on, and
withdrawals from, the account are tax free if used to cover qualified medical
expenses.
• H S A s are an innovative approach to give more choice to individuals and
help give them more control over their medical care.
-30-
httr>7/www.treas.gov/press/releases/js 1074.htm
5/20/2005
js-1075: TaxThTormation Exchange Agreement Between The United States A n d The Bah... Page 1 of 1
PRETSS R O O M
FROM THE OFFICE OF PUBLIC AFFAIRS
December 31, 2003
js-1075
Tax Information Exchange Agreement Between The United States And The
Bahamas Enters Into Force
The Treasury Department announced today that the United States and The Bahamas have
exchanged diplomatic notes that bring into force the tax information exchange agreement
between the two countries that was signed in Washington, D C in 2002. The Agreement
enters into force on December 31, 2003.
The Agreement takes effect on January 1, 2004, with respect to requests for information
made in connection with criminal tax matters, and on January 1, 2006, with respect to
requests for infonnation made in connection with civil tax matters. Once the Agreement is
effective with respect to requests for infonnation made in connection with civil tax matters,
it will be consistent with the standards for an exchange of information agreement described
in the Internal Revenue Code. The Code generally allows U.S. taxpayers to claim a tax
deduction for expenses associated with a convention held in certain beneficiary countries
with tax information exchange agreements with the United States to the same extent as a
convention held in the United States.
Beginning on January 1, 2006, The Bahamas will be considered part of the "North
American area" for purposes of detemiining whether U.S. taxpayers m a y deduct expenses
incurred in attending conventions, business meetings and seminars in The Bahamas.
Convention expenses that are incurred by U.S. taxpayers for meetings in geographical areas
considered part of the North American area and that otherwise are deductible as ordinary
and necessary business expenses are allowed as deductions without regard to the additional
limitations applicable to deductions for expenses associated with foreign conventions. A list
of geographical areas that currently are included in the North American area for purposes of
these convention expense deduction rules is provided in Revenue Ruling 2003-109.
-30-
http://www.treas.gov/press/releases/jsl075.htm
5/20/2005
JS-1076: Treasury"EasesT Restrictions T o Assist Humanitarian Relief Activities For Earthq... Page 1 of
PRESS ROOM
F R O M T H E OFFICE O F PUBLIC AFFAIRS
December 31, 2003
JS-1076
Treasury Eases Restrictions To Assist Humanitarian Relief Activities For
Earthquake Victims In Iran
President Bush directed Treasury Secretary Snow and State Department Secretary
Powell to ease restrictions to assist humanitarian relief activities for earthquake
victims in Iran. Today the Treasury Department announced that the Office of
Foreign Assets Control ("OFAC") is taking extraordinary steps along with the
Department of State and USAID to expedite disaster relief and humanitarian aid
operations in response to the devastating earthquake in Bam, Iran.
"We understand the need to speed up the process allowing nongovernmental
organizations to help the people devastated by the earthquake in Iran. Getting aid
to those so greatly affected by this devastating earthquake is a top priority," stated
Treasury Secretary John Snow.
The following authorizations and expedited procedures are being instituted today:
• Issuance of a General License (not requiring any application to, or further
specific authorization from O F A C ) authorizing cash donations to
nongovernmental organizations to be used for disaster relief and
humanitarian aid operations in response to the earthquake;
• Authorization to carry out humanitarian relief activities in Iran of any
nongovernmental organization registered with, funded by, or under contract
with the State Department/USAID;
• In response to applications, immediate issuance of specific licenses to
nongovernmental organizations not covered above previously authorized to
engage in humanitarian activities in Afghanistan or countries currently
subject to economic sanctions to carry out humanitarian relief activities in
Iran;
• Expedited issuance of specific licenses to nongovernmental organizations
not previously authorized by O F A C to engage in humanitarian activities in
countries subject to economic sanctions.
The OFAC Licensing Division will remain open tomorrow, January 1, 2004, to
ensure that licenses are issued as quickly as possible under the above criteria and
that telephone inquiries are answered to address any questions or concerns that
may arise.
-30-
http://www.treas.gov/press/releases/jsl076.htm
5/20/2005
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