3812 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

(G)(3). The final penalty disposition will be

in an amount ranging from a minimum of 50

percent of the loss of revenue to a maximum

of 100 percent of the loss of revenue.

(e) Fraudulent Violations. The final penalty

disposition will be determined in the same

manner as in the case of fraudulent violations

committed by persons who are not

participants in the drawback compliance

program (see paragraph (F)(2)(c)).

(5) Final Penalty Disposition When There

Has Been A Prior Disclosure. The final

penalty disposition will be determined in the

same manner as in the case of persons who

are not participants in the drawback

compliance program (see paragraph (F)(3)).

(H) Violations by Small Entities

In compliance with the mandate of the

Small Business Regulatory Enforcement

Fairness Act of 1996, under appropriate

circumstances, the issuance of a penalty

under section 593A may be waived for

businesses qualifying as small business

entities. Procedures that were established for

small business entities regarding violations of

19 U.S.C. 1592 in Treasury Decision 97–46

published in the Federal Register (62 FR

30378) are also applicable for small entities

regarding violations of section 593A.

PART 191—DRAWBACK

1. The authority citation for part 191

continues to read in part as follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202

(General Note 20, Harmonized Tariff

Schedule of the United States), 1313, 1624.

* * * * *

§§ 191.191–191.195 also issued under 19

U.S.C. 1593a.

2. In § 191.194, paragraphs (e) and (f)

are revised to read as follows:

§ 191.194 Action on application to

participate in compliance program.

* * * * *

(e) Certification removal—(1) Grounds

for removal. The certification for

participation in the drawback

compliance program by a party may be

removed when any of the following

conditions are discovered:

(i) The certification privilege was

obtained through fraud or mistake of

fact;

(ii) The program participant is no

longer in compliance with the Customs

laws and regulations, including the

requirements set forth in § 191.192;

(iii) The program participant

repeatedly files false drawback claims or

false or misleading documentation or

other information relating to such

claims; or

(iv) The program participant is

convicted of any felony or has

committed acts which would constitute

a misdemeanor or felony involving

theft, smuggling, or any theft-connected

crime.

(2) Removal procedure. If Customs

determines that the certification of a

program participant should be removed,

the applicable drawback office will

serve the program participant with

written notice of the removal. Such

notice will inform the program

participant of the grounds for the

removal and will advise the program

participant of its right to file an appeal

of the removal in accordance with

paragraph (f) of this section.

(3) Effect of removal. The removal of

certification will be effective

immediately in cases of willfulness on

the part of the program participant or

when required by public health,

interest, or safety. In all other cases, the

removal of certification will be effective

when the program participant has

received notice under paragraph (e)(2)

of this section and either no appeal has

been filed within the time limit

prescribed in paragraph (f)(2) of this

section or all appeal procedures have

been concluded by a decision that

upholds the removal action. Removal of

certification may subject the affected

person to penalties.

(f) Appeal of certification denial or

removal—(1) Appeal of certification

denial. A party may challenge a denial

of an application for certification as a

participant in the drawback compliance

program by filing a written appeal,

within 30 days of issuance of the notice

of denial, with the applicable drawback

office. A denial of an appeal may itself

be appealed to Customs Headquarters,

Office of Field Operations, Office of

Trade Programs, within 30 days after

issuance of the applicable drawback

office’s appeal decision. Customs

Headquarters will review the appeal and

will respond with a written decision

within 30 days after receipt of the

appeal unless circumstances require a

delay in issuance of the decision. If the

decision cannot be issued within the 30-

day period, Customs Headquarters will

advise the appellant of the reasons for

the delay and of any further actions

which will be carried out to complete

the appeal review and of the anticipated

date for issuance of the appeal decision.

(2) Appeal of certification removal. A

party who has received a Customs

notice of removal of certification for

participation in the drawback

compliance program may challenge the

removal by filing a written appeal,

within 30 days after issuance of the

notice of removal, with the applicable

drawback office. A denial of an appeal

may itself be appealed to Customs

Headquarters, Office of Field

Operations, Office of Trade Programs,

within 30 days after issuance of the

applicable drawback office’s appeal

decision. Customs Headquarters will

consider the allegations upon which the

removal was based and the responses

made to those allegations by the

appellant and will render a written

decision on the appeal within 30 days

after receipt of the appeal.

Approved: January 19, 2000.

Raymond W. Kelly,

Commissioner of Customs.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 00–1681 Filed 1–24–00; 8:45 am]

BILLING CODE 4820–02–P

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8866]

RIN 1545–AV48

Equity Options With Flexible Terms;

Special Rules and Definitions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations providing guidance on the

application of the rules governing

qualified covered calls. The new rules

address concerns that were created by

the introduction of new financial

instruments after the enactment of the

qualified covered call rules. The final

regulations will provide guidance to

taxpayers writing qualified covered

calls.

EFFECTIVE DATE: These regulations are

effective January 25, 2000.

FOR FURTHER INFORMATION CONTACT:

Pamela Lew of the Office of Assistant

Chief Counsel (Financial Institutions

and Products), (202) 622–3950 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On June 25, 1998, the IRS published

in the Federal Register proposed

regulations (REG–104641–97, 63 FR

34616) addressing whether strike prices

available for equity options with flexible

terms affect the definition of a qualified

covered call (QCC) under section

1092(c)(4) for equity options with

standardized terms. No requests to

speak at a public hearing were received,

and no public hearing was held.

Two written comments were received.

These comments focused on whether

equity options with flexible terms

should be eligible for QCC treatment.

After considering these comments, the

IRS and Treasury have decided to

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 3813

address the eligibility of equity options

with flexible terms and certain other

equity options for QCC treatment in

other forthcoming guidance.

One of the comments also suggested

a clarifying change to the text of the

proposed regulations. After revising the

regulation to take into account this

comment, the proposed regulations are

adopted by this Treasury decision.

Explanation of Provisions

Section 1092(c) defines a straddle as

offsetting positions with respect to

personal property. Under section

1092(d)(3), stock is personal property if

the stock is part of a straddle that

involves an option on that stock or

substantially identical stock or

securities. Under section 1092(c)(4),

however, writing a QCC option and

owning the optioned stock is not treated

as a straddle for purposes of section

1092.

In order to be a QCC, a call option

must, among other things, be exchangetraded and not be deep in the money.

An option is deep in the money if the

strike price of the option is lower than

the lowest qualified bench mark for the

stock. This bench mark is generally the

highest available strike price for an

option on the stock that is less than the

applicable stock price.

At the time the QCC provisions were

enacted, exchange-traded options were

available only at standardized maturity

dates and strike price intervals. This

fixed-interval system was a basic

assumption of the Congressional plan

for QCCs and, more specifically, was the

foundation for the definition of a deepin-the-money option.

Certain options exchanges have begun

to trade equity options with flexible

terms. Unlike standardized exchangetraded options, these options could have

strike prices at other than fixed

intervals. For this reason, there is

concern that the strike prices

established for equity options with

flexible terms could impact the benchmark system for standardized exchangetraded options.

The proposed regulations provide that

strike prices established by equity

options with flexible terms are not taken

into account in determining whether

options that are not equity options with

flexible terms are deep in the money.

Thus, the existence of strike prices

established by equity options with

flexible terms does not affect the lowest

qualified bench mark, as determined

under section 1092(c)(4)(D), for an

equity option with standardized terms.

One commentator was concerned that

usage of the phrase ‘‘existence of strike

prices established by equity options

without standardized terms’’ might be

interpreted as requiring actual trading at

a particular strike price. The

commentator suggested that the

regulation be modified to discuss the

availability of a strike price for equity

options with flexible terms rather than

the existence of a strike price

established by equity options with

flexible terms. This suggestion has been

incorporated into the final regulation.

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 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

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 Pamela Lew, Office of

Assistant Chief Counsel (Financial

Institutions and Products). 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.

Adoption of 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 is amended by adding an entry

in numerical order to read as follows:

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

1.1092(c)–1 also issued under 26 U.S.C.

1092(c)(4)(H). * * *

Par. 2. Section 1.1092(c)–1 is added to

read as follows:

§ 1.1092(c)–1 Equity options with flexible

terms.

(a) In general. Section 1092(c)(4)

provides an exception to the general

rule that a straddle exists if a taxpayer

holds stock and writes a call option on

that stock. Under section 1092(c)(4), the

ownership of stock and the issuance of

a call option meeting certain

requirements result in a qualified

covered call, which is exempted from

the general straddle rules of section

1092. This section addresses the

consequences of the availability of

equity options with flexible terms under

the qualified covered call rules.

(b) No effect on lowest qualified bench

mark for standardized options. The

availability of strike prices for equity

options with flexible terms does not

affect the determination of the lowest

qualified bench mark, as defined in

section 1092(c)(4)(D), for an option that

is not an equity option with flexible

terms.

(c) [Reserved].

(d) Definitions. For purposes of this

section

(1) Equity option with flexible terms

means an equity option—

(i) That is described in any of the

following Securities

Exchange Act Releases—

(A) Self-Regulatory Organizations;

Order Approving Proposed Rule

Changes and Notice of Filing and Order

Granting Accelerated Approval of

Amendments by the Chicago Board

Options Exchange, Inc. and the Pacific

Stock Exchange, Inc., Relating to the

Listing of Flexible Equity Options on

Specified Equity Securities, Securities

Exchange Act Release No. 34–36841

(Feb. 21, 1996); or

(B) Self-Regulatory Organizations;

Order Approving Proposed Rule

Changes and Notice of Filing and Order

Granting Accelerated Approval of

Amendment Nos. 2 and 3 to the

Proposed Rule Change by the American

Stock Exchange, Inc., Relating to the

Listing of Flexible Equity Options on

Specified Equity Securities, Securities

Exchange Act Release No. 34–37336

(June 27, 1996); or

(C) Self-Regulatory Organizations;

Order Approving Proposed Rule Change

and Notice of Filing and Order Granting

Accelerated Approval of Amendment

Nos. 2, 4 and 5 to the Proposed Rule

Change by the Philadelphia Stock

Exchange, Inc., Relating to the Listing of

Flexible Exchange Traded Equity and

Index Options, Securities Exchange Act

Release No. 34–39549 (Jan. 23, 1998); or

(D) Any changes to the SEC releases

described in paragraphs (d)(1)(i)(A)

through (C) of this section that are

approved by the Securities and

Exchange Commission; or

(ii) That is traded on any national

securities exchange which is registered

with the Securities and Exchange

Commission (other than those described

in the SEC Releases set forth in

paragraph (d)(1)(i) of this section) or

3814 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

other market which the Secretary

determines has rules adequate to carry

out the purposes of section 1092 and

is—

(A) Substantially identical to the

equity options described in paragraph

(d)(1)(i) of this section; and

(B) Approved by the Securities and

Exchange Commission in a Securities

Exchange Act Release.

(2) Securities Exchange Act Release

means a release issued by the Securities

and Exchange Commission. To

determine identifying information for

releases referenced in paragraph (d)(1)

of this section, including release titles,

identification numbers, and issue dates,

contact the Office of the Secretary,

Securities and Exchange Commission,

450 5th Street, NW., Washington, DC

20549. To obtain a copy of a Securities

Exchange Act Release, submit a written

request, including the specific release

identification number, title, and issue

date, to Securities and Exchange

Commission, Attention Public

Reference, 450 5th Street, NW.,

Washington, DC 20549.

(e) Effective date. These regulations

apply to equity options with flexible

terms entered into on or after January

25, 2000.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: January 17, 2000.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 00–1527 Filed 1–21–00; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8868]

RIN 1545–AV68

Termination of Puerto Rico and

Possession Tax Credit; New Lines of

Business Prohibited

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and Temporary

regulations.

SUMMARY: This document amends the

Income Tax Regulations by removing

temporary regulations that provide

guidance regarding the addition of a

substantial new line of business by a

possessions corporation that is an

existing credit claimant and adding final

regulations. These regulations are

necessary to implement changes made

by the Small Business Job Protection

Act of 1996.

DATES: Effective Date. These regulations

are effective January 25, 2000.

FOR FURTHER INFORMATION CONTACT:

Daniel S. Karen, (202) 874–1490, or

Jacob Feldman, (202) 622–3830 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 1601(a) of the Small Business

Job Protection Act of 1996, Public Law

104–188, 110 Stat. 1755 (1996),

amended the Internal Revenue Code by

adding section 936(j). Section 936(j)

generally repeals the Puerto Rico and

possession tax credit for taxable years

beginning after December 31, 1995.

However, the section provides

grandfather rules under which a

corporation that is an existing credit

claimant would be eligible to claim

credits for a transition period. The

Puerto Rico and possession tax credit

and the Puerto Rico economic activity

credit phase out for these existing credit

claimants ending with the last taxable

year beginning before January 1, 2006.

For taxable years beginning after

December 31, 1995 and before January

1, 2006, the Puerto Rico and possession

tax credit and the Puerto Rico economic

activity credit apply only to a

corporation that qualifies as an existing

credit claimant (as defined in section

936(j)(9)(A)). The determination of

whether a corporation is an existing

credit claimant is made separately for

each possession. A possessions

corporation that adds a substantial new

line of business (other than in a

qualifying acquisition of all the assets of

a trade or business of an existing credit

claimant) after October 13, 1995, ceases

to be an existing credit claimant as of

the beginning of the taxable year during

which such new line of business is

added. Therefore, a possessions

corporation that ceases to be an existing

credit claimant either because it has

added a substantial new line of

business, or because a new line of

business becomes substantial, during a

taxable year may not claim the Puerto

Rico and possession tax credit or the

Puerto Rico economic activity credit for

that taxable year or any subsequent

taxable year.

On August 19, 1998, temporary

regulations were published in the

Federal Register (63 FR 44387). A cross

referenced Notice of Proposed

Rulemaking was also published in the

Federal Register (63 FR 44416) on the

same date. Three comments were

received with respect to the Notice. No

hearing was requested and none was

held. The temporary regulations are,

therefore, adopted as proposed with the

following changes, as explained, below.

Explanation of Revisions and Summary

of Comments

Minor and conforming changes were

made in these final regulations. Several

changes were also made in the final

regulations with regard to the three

comments that were received on the

Notice of Proposed Rulemaking.

The first comment received addressed

the issue as to whether the leasing of

some of the assets of an existing credit

claimant would result in a new line of

business under section 936(j)(9)(B) with

respect to the leasing activity. In

response to the comment, the final

regulations provide that the leasing out

of assets by an existing credit claimant

(and the employees necessary to operate

the leased assets) will not be treated as

a new line of business provided that: (1)

The existing credit claimant used the

leased assets in an active trade or

business for at least five years; (2) the

existing credit claimant does not

through its own officers or staff of

employees perform management or

operational functions (but not including

operational functions performed

through leased employees) with respect

to the leased assets; and (3) the existing

credit claimant does not perform

marketing functions with respect to the

leasing of the assets. The income from

the leasing of assets will not be income

from the active conduct of a trade or

business, and therefore, the existing

credit claimant may not receive a

possession tax credit with respect to

such income.

A second comment asked for

clarification as to whether a taxpayer

seeking to be treated as an existing

credit claimant through the acquisition

of the assets of an existing credit

claimant pursuant to section

936(j)(9)(A)(ii) must acquire all the

assets of the acquired corporation even

in cases in which the existing credit

claimant has more than one trade or

business. The final regulations have

been clarified to conform to the

language of section 936(j)(9)(A)(ii) and

provide that an acquiring corporation

need only acquire all the assets of a

single trade or business to be treated as

an existing credit claimant.

The third comment asked for

clarification as to when the assets of a

trade or business are measured for

purposes of satisfying the requirement

that all the assets of a trade or business

must be acquired from an existing credit

claimant in order to satisfy section

936(j)(9)(A)(ii). Specifically, the

comment expressed concern that assets