[Federal Register Volume 62, Number 249 (Tuesday, December 30, 1997)]
[Rules and Regulations]
[Pages 67726-67728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33645]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8747]
RIN 1545-AU30


Empowerment Zone Employment Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
period employers may use in computing the empowerment zone employment 
credit under section 1396 of the Internal Revenue Code. The regulations 
reflect and implement certain changes made by the Omnibus Budget 
Reconciliation Act of 1993 (OBRA '93). They affect employers of 
employees who live and work in an empowerment zone designated under the 
statute. The regulations provide employers with the guidance necessary 
to claim the credit.

DATES: These regulations are effective December 30, 1997. For dates of 
applicability, see Sec. 1.1396-1(c) of these regulations.

FOR FURTHER INFORMATION CONTACT: Robert G. Wheeler, (202) 622-6060 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On December 16, 1996, a notice of proposed rulemaking [REG-209834-
96] containing proposed regulations relating to the period employers 
may use in computing the empowerment zone employment credit under 
section 1396 of the Internal Revenue Code was published in the Federal 
Register (61 FR 66000).
    No written comments responding to this notice were received. No one 
requested an opportunity to speak at a public hearing. Therefore, no 
public hearing was held. The regulations proposed by REG-209834-96 are 
adopted with minor clarifications by this Treasury decision.

Explanation of Provisions

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) relating to the empowerment zone employment credit under 
section 1396. Section 1396 was added to the Internal Revenue Code by 
the Omnibus Budget Reconciliation Act of 1993 (OBRA '93). Section 1397D 
of the Code authorizes the Secretary of the Treasury to prescribe 
regulations that may be

[[Page 67727]]

necessary or appropriate to carry out the purposes of section 1396.
    Section 1396 provides employers with a credit for certain wages 
(qualified zone wages) paid or incurred by an employer for services 
performed by a qualified zone employee. The amount of the empowerment 
zone employment credit under section 1396 is equal to a specified 
percentage of the qualified zone wages paid or incurred by the employer 
during the calendar year that ends with or within the taxable year of 
the employer. Questions have arisen about the definition of a 
``qualified zone employee'' in section 1396(d). In particular, 
questions have been raised about the appropriate period under section 
1396(d)(1)(A) during which substantially all of the services performed 
by an employee for his or her employer must be performed within an 
empowerment zone in a trade or business of the employer.
    Under the regulations, an employer may use either each pay period 
of the calendar year or the entire calendar year as the relevant period 
in determining whether a particular employee performed substantially 
all of his or her services within an empowerment zone (the ``location-
of-services'' requirement). For each taxable year the employer must use 
the same method for all its employees, but the employer may change 
methods from one taxable year to the next. The description of the pay 
period method has been revised slightly to clarify that the relevant 
pay periods are those for the calendar year with respect to which the 
credit is being claimed (i.e., the calendar year ending with or within 
the employer's taxable year).

Special Analyses

    It has been determined that this Treasury Decision 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 regulation does 
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 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 G. Wheeler, Office of Associate Chief Counsel, Employee Benefits 
and Exempt Organizations. However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes

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 1.1396-1 also issued under 26 U.S.C. 1397D.

    Par. 2. A new undesignated center heading and Sec. 1.1396-1 are 
added to read as follows:

Empowerment Zone Employment Credit


Sec. 1.1396-1  Qualified zone employees.

    (a) In general. A qualified zone employee of an employer is an 
employee who satisfies the location-of-services requirement and the 
abode requirement with respect to the same empowerment zone and is not 
otherwise excluded by section 1396(d).
    (1) Location-of-services requirement. The location-of-services 
requirement is satisfied if substantially all of the services performed 
by the employee for the employer are performed in the empowerment zone 
in a trade or business of the employer.
    (2) Abode requirement. The abode requirement is satisfied if the 
employee's principal place of abode while performing those services is 
in the empowerment zone.
    (b) Period for applying location-of-services requirement. In 
applying the location-of-services requirement, an employer may use 
either the pay period method described in paragraph (b)(1) of this 
section or the calendar year method described in paragraph (b)(2) of 
this section. For each taxable year of an employer, the employer must 
either use the pay period method with respect to all of its employees 
or use the calendar year method with respect to all of its employees. 
The employer may change the method applied to all of its employees from 
one taxable year to the next.
    (1) Pay period method--(i) Relevant period. Under the pay period 
method, the relevant period for applying the location-of-services 
requirement is each pay period in which an employee provides services 
to the employer during the calendar year with respect to which the 
credit is being claimed (i.e., the calendar year that ends with or 
within the relevant taxable year). If an employer has one pay period 
for certain employees and a different pay period for other employees 
(e.g., a weekly pay period for hourly wage employees and a bi-weekly 
pay period for salaried employees), the pay period actually applicable 
to a particular employee is the relevant pay period for that employee 
under this method.
    (ii) Application of method. Under this method, an employee does not 
satisfy the location-of-services requirement during a pay period unless 
substantially all of the services performed by the employee for the 
employer during that pay period are performed within the empowerment 
zone in a trade or business of the employer.
    (2) Calendar year method--(i) Relevant period. Under the calendar 
year method, the relevant period for an employee is the entire calendar 
year with respect to which the credit is being claimed. However, for 
any employee who is employed by the employer for less than the entire 
calendar year, the relevant period is the portion of that calendar year 
during which the employee is employed by the employer.
    (ii) Application of method. Under this method, an employee does not 
satisfy the location-of-services requirement during any part of a 
calendar year unless substantially all of the services performed by the 
employee for the employer during that calendar year (or, if the 
employee is employed by the employer for less than the entire calendar 
year, the portion of that calendar year during which the employee is 
employed by the employer) are performed within the empowerment zone in 
a trade or business of the employer.
    (3) Examples. This paragraph (b) may be illustrated by the 
following examples. In each example, the following assumptions apply. 
The employees satisfy the abode requirement at all relevant times and 
all services performed by the employees for their employer are 
performed in a trade or business of the employer. The employees are not 
precluded from being qualified zone employees by section 1396(d)(2) 
(certain employees ineligible). No portion of the employees' wages is 
precluded from being qualified zone wages by section 1396(c)(2) (only 
first $15,000 of wages taken into account) or section 1396(c)(3) 
(coordination with targeted jobs credit and work opportunity credit). 
The examples are as follows:


[[Page 67728]]


    Example 1. (i) Employer X has a weekly pay period for all its 
employees. Employee A works for X throughout 1997. During each of 
the first 20 weekly pay periods in 1997, substantially all of A's 
work for X is performed within the empowerment zone in which A 
resides. A also works in the zone at various times during the rest 
of the year, but there is no other pay period in which substantially 
all of A's work for X is performed within the empowerment zone. 
Employer X uses the pay period method.
    (ii) For each of the first 20 pay periods of 1997, A is a 
qualified zone employee, all of A's wages from X are qualified zone 
wages, and X may claim the empowerment zone employment credit with 
respect to those wages. X cannot claim the credit with respect to 
any of A's wages for the rest of 1997.
    Example 2. (i) Employer Y has a weekly pay period for its 
factory workers and a bi-weekly pay period for its office workers. 
Employee B works for Y in various factories and Employee C works for 
Y in various offices. Employer Y uses the pay period method.
    (ii) Y must use B's weekly pay periods to determine the periods 
(if any) in which B is a qualified zone employee. Y may claim the 
empowerment zone employment credit with respect to B's wages only 
for the weekly pay periods for which B is a qualified zone employee, 
because those are B's only wages that are qualified zone wages. Y 
must use C's bi-weekly pay periods to determine the periods (if any) 
in which C is a qualified zone employee. Y may claim the credit with 
respect to C's wages only for the bi-weekly pay periods for which C 
is a qualified zone employee, because those are C's only wages that 
are qualified zone wages.
    Example 3. (i) Employees D and E work for Employer Z throughout 
1997. Although some of D's work for Z in 1997 is performed outside 
the empowerment zone in which D resides, substantially all of it is 
performed within that empowerment zone. E's work for Z is performed 
within the empowerment zone in which E resides for several weeks of 
1997 but outside the zone for the rest of the year so that, viewed 
on an annual basis, E's work is not substantially all performed 
within the empowerment zone. Employer Z uses the calendar year 
method.
    (ii) D is a qualified zone employee for the entire year, all of 
D's 1997 wages from Z are qualified zone wages, and Z may claim the 
empowerment zone employment credit with respect to all of those 
wages, including the portion attributable to work outside the zone. 
Under the calendar year method, E is not a qualified zone employee 
for any part of 1997, none of E's 1997 wages are qualified zone 
wages, and Z cannot claim any empowerment zone employment credit 
with respect to E's wages for 1997. Z cannot use the calendar year 
method for D and the pay period method for E because Z must use the 
same method for all employees. For 1998, however, Z can switch to 
the pay period method for E if Z also switches to the pay period 
method for D and all of Z's other employees.

    (c) Effective date. This section applies with respect to wages paid 
or incurred on or after December 21, 1994.

    Dated: December 11, 1997.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.

    Approved:
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-33645 Filed 12-29-97; 8:45 am]
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