Federal Register / Vol. 62, No. 244 / Friday, December 19, 1997 / Proposed Rules 66575

system, option positions would be markedto-market, and gains and losses would be

paid and collected daily, and an option

position would become profitable once the

variation margin collected exceeded the cost

of entering the contract position.

Also, an option customer should be aware

of the risk that the futures price prevailing at

the opening of the next trading day may be

substantially different from the futures price

which prevailed when the option was

exercised. Similarly, for options on physicals

that are cash settled, the physicals price

prevailing at the time the option is exercised

may differ substantially from the cash

settlement price that is determined at a later

time. Thus, if a customer does not cover the

position against the possibility of underlying

commodity price change, the realized price

upon option exercise may differ substantially

from that which existed at the time of

exercise.

* * * * *

Issued in Washington, D.C., on this 15th

day of December, 1997, by the Commodity

Futures Trading Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97–33125 Filed 12–18–97; 8:45 am]

BILLING CODE 6351–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–105163–97]

RIN 1545–AV15

Certain Investment Income

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to the

treatment of certain investment income

under the qualifying income provisions

of section 7704(d) and the application of

the passive activity loss rules to

publicly traded partnerships. The

regulations would affect the

classification of certain partnerships for

federal tax purposes and would also

affect the passive activity loss

limitations with respect to items

attributable to publicly traded

partnerships. This document also

contains a notice of public hearing on

these proposed regulations.

DATES: Written comments must be

received by March 19, 1998. Requests to

speak (with outlines of oral comments)

at a public hearing scheduled for April

28, 1998, at 10 a.m., must be received

by April 7, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–105163–97),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. In the

alternative, submissions may be hand

delivered between the hours of 8 a.m.

and 5 p.m. to: CC:DOM:CORP:R (REG–

105163–97), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Avenue NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option of

the IRS Home Page, or by submitting

comments directly to the IRS Internet

site at: http://www.irs.ustreas.gov/prod/

taxlregs/comments.html. The public

hearing will be held in Room 2615,

Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Christopher

Kelley, (202) 622–3080; concerning

submissions and the hearing,

Evangelista Lee, (202) 622–7190 (not

toll-free numbers).

SUPPLEMENTARY INFORMATION:

Introduction

This document proposes to add

§ 1.7704–3 to the Income Tax

Regulations (26 CFR part 1) relating to

the definition of qualifying income for

publicly traded partnerships under

section 7704(d) of the Internal Revenue

Code (Code). This document also

proposes to amend § 1.469–10 of the

Income Tax Regulations relating to the

application of section 469 of the Code

to publicly traded partnerships.

Explanation of Provisions

Qualifying Income

Section 7704 of the Code provides

that a publicly traded partnership is

generally treated as a corporation for

federal tax purposes unless 90 percent

or more of the gross income of the

partnership consists of qualifying

income. Section 7704(d) defines

qualifying income to include certain

types of passive investment income,

such as interest, dividends, real

property rents, and income that would

qualify under the regulated investment

company provisions in section 851(b)(2)

or the real estate investment trust

provisions in section 856(c)(2). Since

section 7704 was enacted, however,

several new types of financial

instruments have been developed that

generate passive-type investment

income similar to interest and

dividends. The preamble to the

regulations under § 1.7704–1, issued

December 4, 1995, (regarding the

definition of public trading) requested

comments from the public on the

definition of qualifying income for

investment partnerships and other

partnerships engaged in various types of

securities transactions.

In response to comments received, the

proposed regulations provide that

qualifying income for purposes of

section 7704(c) includes income from

holding annuities, income from notional

principal contracts (as defined in

§ 1.446–3), and other substantially

similar income from ordinary and

routine investments to the extent

determined by the Commissioner.

Qualifying income, however, includes

income from a notional principal

contract only if the property, income, or

cash flow that measures the amounts to

which the partnership is entitled under

the contract would give rise to

qualifying income if held or received

directly by the partnership. The

proposed regulations also confirm that

capital gain from the sale of stock is

qualifying income, regardless of

whether the stock pays dividends. The

proposed regulations also provide that

qualifying income (as defined in the

proposed regulations) does not include

income derived in the ordinary course

of a trade or business by a broker,

dealer, or market maker. Income derived

by traders and investors can be

qualifying income under the proposed

regulations. The proposed regulations,

including the trade or business

restriction, are consistent with the

legislative history of section 7704,

which indicates that the exception for

passive investment income was

intended to distinguish between

partnerships engaged in investment

activities and those partnerships

engaged in active business activities that

are more typically conducted in

corporate form. See H.R. Rep. No. 391

(Part 2), 100th Cong., 1st Sess. 1066–69

(House Report). The IRS also requests

comments on the appropriate way to

determine how gains should be

measured for purposes of determining

whether 90 percent or more of the

partnership’s gross income is qualifying

income when a partnership makes a

mixed straddle account election under

§ 1.1092(b)–4T. The IRS believes that

use of the daily mark-to-market method

provided for by § 1.1092(b)–4T would

be inconsistent with the congressional

purpose behind section 7704.

Passive Activity Loss Rules

Section 469(a) generally provides that

if for any taxable year the taxpayer is an

individual, estate, trust, closely held C

corporation, or personal service

corporation, neither the passive activity

loss nor the passive activity credit for

the taxable year is allowed. Section
66576 Federal Register / Vol. 62, No. 244 / Friday, December 19, 1997 / Proposed Rules

469(k) provides that section 469 applies

separately with respect to items

attributable to each publicly traded

partnership. Section 469(k)(2) defines a

publicly traded partnership in the same

manner as section 7704(b). The

legislative history of section 469(k)

indicates that the term publicly traded

partnership has the same meaning for

purposes of section 469(k) as it does for

purposes of section 7704. See H.R. Rep.

No. 495, 100th Cong., 1st Sess. 952–53

(1987) (Conference Report). In addition,

Notice 88–75 (1988–2 C.B. 386)

provided the same guidance on the

definition of a publicly traded

partnership for purposes of both

sections 469(k) and 7704.

The recently issued regulations under

§ 1.7704–1, however, define a publicly

traded partnership only for purposes of

section 7704. The proposed regulations

implement the legislative history of

section 469(k) by providing that the

definition of a publicly traded

partnership for purposes of section

469(k) is the same as the definition of

publicly traded partnership under

section 7704.

Proposed Effective Date

These regulations are proposed to

apply for taxable years of a partnership

beginning on or after the date the 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 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 collection of

information on small entities, 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 (preferably a signed

original and eight (8) copies) that are

submitted timely to the IRS. All

comments will be available for public

inspection and copying.

A public hearing has been scheduled

for Tuesday, April 28, 1998, at 10 a.m.,

in Room 2615, Internal Revenue

Building, 1111 Constitution Avenue

NW., Washington, DC. Because of access

restrictions, visitors will not be

admitted beyond the Internal Revenue

Building lobby more than 15 minutes

before the hearing starts.

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

apply to the hearing. Persons that wish

to present oral comments at the hearing

must submit timely written comments

(preferably a signed original and eight

(8) copies) by March 19, 1998 and

submit an outline of the topics to be

discussed and the time to be devoted to

each topic by April 7, 1998.

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 the hearing.

Drafting Information: The principal

author of these regulations is

Christopher Kelley, Office of 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 continues to read in part as

follows:

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

Par. 2. Section 1.469–10 is revised to

read as follows:

§ 1.469–10 Application of section 469 to

publicly traded partnerships.

(a) [Reserved].

(b) Publicly traded partnership—(1) In

general. For purposes of section 469(k),

a partnership is a publicly traded

partnership only if the partnership is a

publicly traded partnership as defined

in § 1.7704–1.

(2) Effective date. This section applies

for taxable years of a partnership

beginning on or after the date final

regulations are published in the Federal

Register.

Par. 3. Section 1.7704–3 is added to

read as follows:

§ 1.7704–3 Qualifying income.

(a) Certain investment income—(1) In

general. For purposes of section

7704(d)(1), qualifying income includes

capital gain from the sale of stock,

income from holding annuities, income

from notional principal contracts (as

defined in § 1.446–3), and other

substantially similar income from

ordinary and routine investments to the

extent determined by the Commissioner.

Income from a notional principal

contract is included in qualifying

income only if the property, income, or

cash flow that measures the amounts to

which the partnership is entitled under

the contract would give rise to

qualifying income if held or received

directly by the partnership.

(2) Limitations. Qualifying income as

defined in paragraph (a)(1) of this

section does not include income derived

in the ordinary course of a trade or

business. For purposes of the preceding

sentence, income derived from an asset

with respect to which the partnership is

a broker, market maker, or dealer is

treated as income derived in the

ordinary course of a trade or business;

income derived from an asset with

respect to which the taxpayer is a trader

or investor is not treated as income

derived in the ordinary course of a trade

or business.

(b) Effective date. This section applies

for taxable years of a partnership

beginning on or after the date final

regulations are published in the Federal

Register.

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

[FR Doc. 97–33105 Filed 12–18–97; 8:45 am]

BILLING CODE 4830–01–P

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[TX 61–1–7270: FRL–5937–4]

Approval and Promulgation of State

Implementation Plans (SIP) for Texas:

Accelerated Vehicle Retirement (AVR)

Program

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: The Environmental Protection

Agency (EPA) is proposing to

disapprove the SIP revision submitted

by the State of Texas for the Accelerated

Vehicle Retirement (AVR) program

which allows stationary sources to

purchase Emission Reduction Credits

(ERCs) through a vehicle scrappage

program. For areas which face relatively

high stationary source control costs,

Mobile Emission Reduction Credits