Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 3817

is not affiliated with X Corp. and is not an

existing credit claimant. Y Corp. has been

manufacturing snack food in the United

States. In 1997, X Corp. purchased the assets

of Y Corp. and began to manufacture snack

food in Puerto Rico. House slipper

manufacturing is in the six-digit NAICS code

316212 (Four-digit SIC code 3142, House

Slippers). The manufacture of snack foods

falls under the six-digit NAICS code 311919,

Other Snack Food Manufacturing (four-digit

SIC code 2052, Cookies and Crackers

(pretzels)). Because these activities are not

within the same five or six digit NAICS code

(or the same three or four-digit SIC code), and

because snack food is not an integrated

product that contains house slippers, the safe

harbor of paragraph (b)(2)(ii) of this section

cannot apply. Considering all the facts and

circumstances, including the seven factors of

paragraph (b)(2)(i) of this section, the snack

food manufacturing activity is not closely

related to the manufacture of house slippers,

and is a new line of business, within the

meaning of paragraph (b) of this section.

Example 5. X Corp., a calendar year

taxpayer, is an existing credit claimant that

has elected the profit-split method for

computing taxable income. P Corp. was not

an existing credit claimant and manufactured

a product in a different five-digit NAICS code

than the product manufactured by X Corp. In

1997, X Corp. acquired the stock of P Corp.

and liquidated P Corp. in a tax-free

liquidation under section 332, but continued

the business activity of P Corp. as a new

business segment. Assume that this new

business segment is a new line of business

within the meaning of paragraph (c) of this

section. In 1997, X Corp. has gross income

from the active conduct of a trade or business

in a possession computed under section

936(a)(2) of $500 million and the adjusted tax

basis of its assets is $200 million. The new

business segment had gross income of $60

million, or 12 percent of the X Corp. gross

income, and the adjusted basis of the new

segment’s assets was $20 million, or 10

percent of the X Corp. total assets. In 1997,

X Corp. does not derive more than 15 percent

of its gross income, or directly use more that

15 percent of its total assets, from the new

business segment. Thus, the new line of

business acquired from P Corp. is not a

substantial new line of business within the

meaning of paragraph (c) of this section, and

the new activity will not cause X Corp. to

lose its status as an existing credit claimant

during 1997. In 1998, however, the gross

income of X Corp. grew to $750 million

while the gross income of the new line of

business grew to $150 million, or 20% of the

X Corp. 1998 gross income. Thus, in 1998,

the new line of business is substantial within

the meaning of paragraph (c) of this section,

and X Corp. loses its status as an existing

credit claimant for 1998 and all years

subsequent.

(e) Loss of status as existing credit

claimant. An existing credit claimant

that adds a substantial new line of

business in a taxable year, or that has a

new line of business that becomes

substantial in a taxable year, loses its

status as an existing credit claimant for

that year and all years subsequent.

(f) Effective date—(1) General rule.

This section applies to taxable years of

a possessions corporation beginning on

or after January 25, 2000.

(2) Election for retroactive

application. Taxpayers may elect to

apply retroactively all the provisions of

this section for any open taxable year

beginning after December 31, 1995.

Such election will be effective for the

year of the election and all subsequent

taxable years. This section will not

apply to activities of pre-existing

businesses for taxable years beginning

before January 1, 1996.

David Mader,

Acting Deputy Commissioner of Internal

Revenue.

Approved: January 12, 2000.

Jonathan Talisman,

Acting Assistant Secretary of the Treasury.

[FR Doc. 00–1528 Filed 1–21–00; 8:45 am]

BILLING CODE 4831–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8867]

RIN 1545–AW69

Passive Foreign Investment

Companies; Definition of Marketable

Stock

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations under section 1296 relating

to the new mark-to-market election for

stock of a passive foreign investment

company (PFIC). The final regulations

interpret changes made by the Taxpayer

Relief Act of 1997. The final regulations

affect persons holding PFIC stock that is

regularly traded on certain U.S. or

foreign exchanges or markets or holding

stock in certain PFICs comparable to

U.S. regulated investment companies

(RICs).

DATES: Effective Date: January 25, 2000.

Applicability Dates: For dates of

applicability see section 1.1296(e)–1(g)

of these regulations.

FOR FURTHER INFORMATION CONTACT:

Robert Laudeman, (202) 622–3840 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On February 2, 1999, the IRS

published in the FEDERAL REGISTER

proposed regulations (REG–113744–98,

64 FR 5014) regarding the taxation of

U.S. holders of PFIC stock. Three

written comments regarding the

proposed regulations were received.

Because no one requested to speak at a

public hearing, no hearing was held.

After consideration of all of the

comments received, the proposed

regulations under section 1296 are

adopted as final regulations with some

changes. The changes are discussed

below.

The preamble to the proposed

regulations (64 FR 5014) provides a

detailed discussion of the mark-tomarket election for shareholders of PFIC

stock and the proposed regulations.

Summary of Public Comments and

Changes

Exchange or Other Market

The proposed regulations require that

a foreign exchange or market be

regulated or supervised by a

governmental authority of the country

in which the market is located. The

proposed regulations also list additional

characteristics that the foreign exchange

or market must have for stock that is

regularly traded on the exchange or

market to be marketable stock for

purposes of section 1296. Specifically,

the proposed regulations require that

the exchange have trading volume,

listing, financial disclosure and other

requirements designed to prevent fraud,

perfect the mechanism of a free and

open market, and protect investors.

The final regulations add a

surveillance requirement and add the

concept of perfecting a fair and orderly

market to the requirements for

exchanges. These changes are intended

to clarify the characteristics that an

exchange or other market must have in

order to be a qualified exchange or

market for purposes of section 1296 and

to more closely represent common

characteristics of foreign markets. See

International Federation of Stock

Exchanges (FIBV), 1998 Market

Principles, available by request from

secretariat@fibv.com, and International

Organization of Securities Commissions

(IOSCO), Supervisory Framework for

Markets, Report by the Technical

Committee, May 1999 (visited Oct. 5,

1999) <http://www.iosco.org/

iosco.html>.

Stock in Certain PFICs

The proposed regulations provide that

stock in certain PFICs is marketable

stock if the PFIC both is a corporation

described in section 1296(e)(1)(B)

(foreign corporations comparable to

RICs) and offers for sale or has

outstanding stock of which it is the

3818 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

issuer and which is redeemable at its

net asset value. The proposed

regulations further provide that a PFIC

is a corporation described in section

1296(e)(1)(B) only if the PFIC satisfies

eight conditions listed in the proposed

regulations with respect to the class of

shares held by the electing taxpayer.

The conditions are intended to describe

PFICs that are comparable to RICs in

relevant respects and to implement the

intent of the statute by ensuring that the

net asset valuations of such companies

represent legitimate and sound fair

market values for the companies’ stock.

Two commentators asserted that the

statute and legislative history indicate

that Congress was only concerned that

PFICs redeem stock at net asset values

and that such values represent sound

and legitimate fair market values and,

therefore, it is not necessary that the

PFIC resemble a RIC. The commentators

suggest that the regulations be modified

to include PFICs that redeem their stock

at its net asset value but do not

otherwise resemble RICs. Because the

plain language of the statute clearly

requires that the stock in any foreign

corporation be comparable to a RIC, the

final regulations retain the approach of

requiring PFICs to be comparable to

RICs in order for their stock to be

marketable stock for purposes of section

1296(e)(1)(B).

The proposed regulations provide that

a foreign corporation must have one

hundred or more unrelated

shareholders. One commentator

recommended that the number be

reduced to ten unrelated shareholders,

arguing that a corporation with ten

unrelated shareholders as opposed to

one hundred unrelated shareholders has

the same susceptibility to legal

liabilities if valuations are inaccurate.

Requiring that a PFIC have one hundred

or more unrelated shareholders is

comparable to the requirement imposed

on RICs by section 851(a). In addition,

the IRS and the Treasury Department

believe that there will be less likelihood

of share price manipulation with

corporations that have one hundred or

more unrelated shareholders.

Consequently, the above described rule

in the proposed regulations is not

changed except that ‘‘one hundred or

more’’ is corrected to read ‘‘more than

one hundred’’ unrelated shareholders.

The proposed regulations require that

the class of shares of the foreign

corporation be readily available for

purchase by the general public at its net

asset value by new investors in initial

amounts not greater than $10,000 (U.S.).

One commentator recommended that

this condition not be included in the

final regulations because an investment

ceiling will not make the valuation

easier or less likely to be manipulated.

The condition in the proposed

regulations regarding initial investments

is not an investment ceiling. Rather, the

condition specifies that the foreign

corporation not require a minimum

initial investment of greater than

$10,000 (U.S.) and that shares of the

foreign corporation be readily available

for purchase by the general public at net

asset values. For example, a foreign

corporation that requires new investors

to purchase shares for a minimum

initial investment of $5,000 (U.S.)

satisfies the condition. However, a

foreign corporation that requires new

investors to purchase shares for a

minimum initial investment of $20,000

(U.S.) does not satisfy the condition.

There is not any limit, however, on the

total amount that a shareholder can

invest. The final regulations clarify that

this condition is not an investment

ceiling.

Two additional requirements in the

proposed regulations are that shares be

available for purchase by the general

public and that, no less frequently than

annually, financial statements prepared

by independent auditors be available to

the public. One commentator asserted

that availability to the general public of

the shares of the foreign corporation and

of the financial statements is not

necessary and should not be required

because it will not necessarily ensure a

legitimate and sound fair market value

for the foreign corporation’s stock.

Availability of shares for purchase by

the general public is comparable to the

requirement of availability of shares of

RICs for purchase by the general public.

In addition, availability of shares for

purchase by the the general public for

net asset value (in addition to current

investors being able to redeem shares for

the same net asset value), will ensure

that the net asset values are legitimate

and sound. However, shares will not be

considered available for purchase by the

general public if the shares are only

available to individuals with high

annual incomes or high net worth. For

example, limiting investors to

individuals with annual incomes in

excess of $200,000 or net worth in

excess of $1 million will not be

considered available for purchase by the

general public.

Similarly, availability to the general

public of audited financial statements is

comparable to conditions imposed on

RICs and will help to ensure that the

foreign corporation’s financial

information is readily available to

potential and current investors, which,

in turn, will help ensure that the net

asset values are legitimate and sound.

Availability of financial statements to

the general public requires no more than

that the statements be available upon

request to potential and current

investors.

The proposed regulations require that

quotations for the shares of the foreign

corporation be determined and

published on a daily basis in a widelyavailable medium, such as a newspaper

of general circulation. One commentator

asserted that the condition is not

necessary because the mark-to-market

election is made on an annual basis at

the close of the taxpayer’s taxable year.

The commentator recommended that

the condition be changed to require that

values be communicated to

shareholders, on at least an annual

basis, in written form that serves as

support for such valuation.

The final regulations do not adopt the

commentator’s recommendation. The

publication of quotations for the shares

is not intended to serve solely as a

means for a current shareholder of the

PFIC to determine the value of the PFIC

on the mark date. The publication of

quotations for the shares is comparable

to the practice of RICs and helps to

ensure that asset valuations are

legitimate and sound by allowing

potential investors as well as current

shareholders to have ready access to

price information.

Because quotations for the shares of

some PFICs may not be published on a

daily basis, the daily publication

requirement in the proposed regulations

is changed to require that quotations for

the shares of the foreign corporation be

determined and published no less

frequently than weekly. In addition, the

publication requirement is changed to

clarify that the quotations must be

published in a permanent medium not

controlled by the issuer of the shares,

such as an independent trade

publication. The requirement that the

medium be permanent does not require

the medium to be saved in a printed

form; archived electronic data not

susceptible to subsequent alteration are

permanent. This change is intended to

assist shareholders and the IRS in

verifying valuations.

The proposed regulations require that

the foreign corporation be supervised or

regulated as an investment company by

a foreign government or instrumentality

thereof. One commentator suggested

that the condition be clarified with

respect to the meaning of governmental

supervision. In particular, the

commentator asks whether a foreign

jurisdiction that requires a local

corporation to file information upon

incorporation with the local government

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 3819

or agency would qualify as supervision

or regulation.

The condition in the proposed

regulations is intended to require that

the PFIC be supervised or regulated as

an investment company in a manner

comparable, but not identical, to RICs.

Consequently, the final regulations

clarify the type of supervision or

regulation required. The final

regulations provide that sufficient

supervision or regulation requires that

the government or agency have broad

inspection and enforcement authority

and effective oversight over investment

companies to ensure that such

companies provide complete and

accurate disclosure of relevant financial

information to shareholders and

potential investors and to provide

adequate sanctions for false or

inadequate disclosure. The mere filing

of information upon incorporation does

not qualify as supervision or regulation.

Finally, the proposed regulations

require that the foreign corporation have

no senior securities authorized or

outstanding, including any debt other

than de minimis amounts. In addition,

the proposed regulations require that

the foreign corporation meet the PFIC

income and asset tests in sections

1297(a)(1) and (2) with the requisite

percentages increased from 75 percent

to 90 percent and from 50 percent to 90

percent respectively. One commentator

asserted that these conditions not be

included in the final regulations

because there is no basis for requiring a

PFIC to have the same borrowing

restrictions, asset composition, and

characteristics of RICs in order for the

PFIC’s stock to be marketable stock

under section 1296.

Conditions regarding debt and asset

composition are essential characteristics

of RICs. The IRS and the Treasury

Department believe that Congress

intended to provide mark-to-market

treatment to shares of PFICs that are, in

fact, comparable to RICs.

Special Rules for RICs

The proposed regulations provide that

if shares in a PFIC are owned directly

or indirectly by a RIC, that is offering for

sale, or has outstanding any stock of

which it is the issuer, and which is

redeemable at net asset value, the PFIC

shares shall be treated as marketable

stock for purposes of section 1296.

Section 1296(e)(2) further provides that

except as provided in regulations,

similar treatment as marketable stock

shall apply in the case of any other RIC

which publishes net asset valuations at

least annually. The IRS and Treasury

Department invited comments regarding

situations where PFIC stock held by

other RICs that publish asset valuations

at least annually should not be treated

as marketable stock for purposes of

section 1296.

One commentator explained why

PFIC stock held by any closed-end RIC

that publishes net asset values at least

annually should be treated as

marketable stock. In particular, that

commentator pointed out that closedend RICs are subject to many of the

same regulatory requirements as openend RICs. In addition, that commentator

explained that an industry practice has

developed under which closed-end RICs

typically determine and publish current

share prices, together with net asset

values, on a weekly basis in print and

other media.

At this time, the IRS and Treasury

Department know of no reason not to

treat PFIC stock held by closed-end

funds that publish net asset values at

least annually as marketable stock.

Consequently, as provided by section

1296(e)(2), PFIC stock held by any

closed-end RIC that publishes net asset

values at least annually shall be treated

as marketable stock. The final

regulations, however, continue to

reserve this issue in the event that it is

determined that situations exist where

PFIC stock held by closed-end RICs that

publish net asset valuations at least

annually should not be treated as

marketable stock for purposes of section

1296. If such a situation is found to

exist, the reservation will be replaced at

that time by a new regulatory exception.

Special Analyses

It has been determined that these

regulations are not significant regulatory

actions as defined in EO 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

requirement for the 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

preceeding 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 Robert Laudeman of the

Office of the Associate Chief Counsel

(International). 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

1.1296(e)–1 also issued under 26 U.S.C.

1296(e). * * *

Par. 2. Section 1.1296(e)–1 is added to

read as follows:

§ 1.1296(e)–1 Definition of marketable

stock.

(a) General rule. For purposes of

section 1296, the term marketable stock

means—

(1) Passive foreign investment

company (PFIC) stock that is regularly

traded, as defined in paragraph (b) of

this section, on a qualified exchange or

other market, as defined in paragraph (c)

of this section;

(2) Stock in certain PFICs, as

described in paragraph (d) of this

section; and

(3) Options on stock that is described

in paragraph (a)(1) or (2) of this section,

to the extent provided in paragraph (e)

of this section.

(b) Regularly traded—(1) General rule.

For purposes of paragraph (a)(1) of this

section, a class of stock that is traded on

one or more qualified exchanges or

other markets, as defined in paragraph

(c) of this section, is regularly traded on

such exchanges or markets for any

calendar year during which such class

of stock is traded, other than in de

minimis quantities, on at least 15 days

during each calendar quarter.

(2) Anti-abuse rule. Trades that have

as one of their principal purposes the

meeting of the trading requirement of

paragraph (b)(1) of this section shall be

disregarded. Further, a class of stock

shall not be treated as meeting the

trading requirement of paragraph (b)(1)

of this section if there is a pattern of

trades conducted to meet the

requirement of paragraph (b)(1) of this

section.

(c) Qualified exchange or other

market—(1) General rule. For purposes

of paragraph (a)(1) of this section, the

term qualified exchange or other market

means, for any calendar year—

(i) A national securities exchange that

is registered with the Securities and

3820 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

Exchange Commission or the national

market system established pursuant to

section 11A of the Securities Exchange

Act of 1934 (15 U.S.C. 78f); or

(ii) A foreign securities exchange that

is regulated or supervised by a

governmental authority of the country

in which the market is located and

which has the following

characteristics—

(A) The exchange has trading volume,

listing, financial disclosure,

surveillance, and other requirements

designed to prevent fraudulent and

manipulative acts and practices, to

remove impediments to and perfect the

mechanism of a free and open, fair and

orderly, market, and to protect

investors; and the laws of the country in

which the exchange is located and the

rules of the exchange ensure that such

requirements are actually enforced; and

(B) The rules of the exchange

effectively promote active trading of

listed stocks.

(2) Exchange with multiple tiers. If an

exchange in a foreign country has more

than one tier or market level on which

stock may be separately listed or traded,

each such tier shall be treated as a

separate exchange.

(d) Stock in certain PFICs—(1)

General rule. Except as provided in

paragraph (d)(2) of this section, a foreign

corporation is a corporation described

in section 1296(e)(1)(B), and paragraph

(a)(2) of this section, if the foreign

corporation offers for sale or has

outstanding stock of which it is the

issuer and which is redeemable at its

net asset value and if the foreign

corporation satisfies the following

conditions with respect to the class of

shares held by the electing taxpayer—

(i) At all times during the calendar

year, the foreign corporation has more

than one hundred shareholders with

respect to the class, other than

shareholders who are related under

section 267(b);

(ii) At all times during the calendar

year, the class of shares of the foreign

corporation is readily available for

purchase by the general public at its net

asset value and the foreign corporation

does not require a minimum initial

investment of greater than $10,000

(U.S.);

(iii) At all times during the calendar

year, quotations for the class of shares

of the foreign corporation are

determined and published no less

frequently than on a weekly basis in a

widely-available permanent medium

not controlled by the issuer of the

shares, such as a newspaper of general

circulation or a trade publication;

(iv) No less frequently than annually,

independent auditors prepare financial

statements of the foreign corporation

that include balance sheets (statements

of assets, liabilities, and net assets) and

statements of income and expenses, and

those statements are made available to

the public;

(v) The foreign corporation is

supervised or regulated as an

investment company by a foreign

government or an agency or

instrumentality thereof that has broad

inspection and enforcement authority

and effective oversight over investment

companies;

(vi) At all times during the calendar

year, the foreign corporation has no

senior securities authorized or

outstanding, including any debt other

than in de minimis amounts;

(vii) Ninety percent or more of the

gross income of the foreign corporation

for its taxable year is passive income, as

defined in section 1297(a)(1) and the

regulations thereunder; and

(viii) The average percentage of assets

held by the foreign corporation during

its taxable year which produce passive

income or which are held for the

production of passive income, as

defined in section 1297(a)(2) and the

regulations thereunder, is at least 90

percent.

(2) Anti-abuse rule. If a foreign

corporation undertakes any actions that

have as one of their principal purposes

the manipulation of the net asset value

of a class of its shares, for the calendar

year in which the manipulation occurs,

the shares are not marketable stock for

purposes of paragraph (d)(1) of this

section.

(e) [Reserved]

(f) Special rules for regulated

investment companies (RICs)—(1)

General rule. In the case of any RIC that

is offering for sale, or has outstanding,

any stock of which it is the issuer and

which is redeemable at net asset value,

if the RIC owns directly or indirectly, as

defined in sections 958(a)(1) and (2),

stock in any passive foreign investment

company, that stock will be treated as

marketable stock owned by that RIC for

purposes of section 1296. Except as

provided in paragraph (f)(2) of this

section, in the case of any other RIC that

publishes net asset valuations at least

annually, if the RIC owns directly or

indirectly, as defined in sections

958(a)(1) and (2), stock in any passive

foreign investment company, that stock

will be treated as marketable stock

owned by that RIC for purposes of

section 1296.

(2) [Reserved]

(g) Effective date. This section applies

to shareholders whose taxable year ends

on or after January 25, 2000 for stock in

a foreign corporation whose taxable year

ends with or within the shareholder’s

taxable year. In addition, shareholders

may elect to apply these regulations to

any taxable year beginning after

December 31, 1997, for stock in a

foreign corporation whose taxable year

ends with or within the shareholder’s

taxable year.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: January 12, 2000.

Jonathan Talisman,

Assistant Secretary of the Treasury.

[FR Doc. 00–1530 Filed 1–21–00; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8865]

RIN 1545–AS77

Amortization of Intangible Property

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the amortization

of certain intangible property. The final

regulations reflect changes to the law

made by the Omnibus Budget

Reconciliation Act of 1993 (OBRA ’93)

and affect taxpayers who acquired

intangible property after August 10,

1993, or made a retroactive election to

apply OBRA ’93 to intangibles acquired

after July 25, 1991.

DATES: Effective Date: January 25, 2000.

Applicability Dates: These regulations

apply to property acquired after January

25, 2000. Regulations to implement

section 197(e)(4)(D) are applicable

August 11, 1993, for property acquired

after August 10, 1993 (or July 26, 1991,

for property acquired after July 25, 1991,

if a valid retroactive election has been

made under § 1.197–1T).

FOR FURTHER INFORMATION CONTACT: John

Huffman at (202) 622–3110 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and, pending receipt and

evaluation of public comments,

approved by the Office of Management

and Budget (OMB) under 44 U.S.C. 3507

and assigned control number 1545–

1671.