Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations 68165

Discussion of Change

Heading 9817, HTSUS, provides for

classes of articles entitled to duty free

entry into the United States.

The classes of merchandise

encompass unwrought metal including

remelt scrap ingot (except copper, lead,

zinc, and tungsten) in the form of pigs,

ingots or billets (a) that are defective or

damaged, or have been produced from

melted down metal waste and scrap for

convenience in handling and

transportation without sweetening,

alloying, fluxing or deliberate purifying,

and (b) that cannot be commercially

used without remanufacture; relaying or

rerolling rails; and articles of metal

(except articles of lead, of zinc or of

tungsten, and not including metalbearing materials provided for in section

VI, chapter 26 or subheading 8548.10

and not including unwrought metal

provided for in chapters 72–81) to be

used in remanufacture by melting or to

be processed by shredding, shearing,

compacting or similar processing which

renders them fit only for the recovery of

the metal content.

Specifically, subheading 9817.00.80,

provides for articles of copper and

subheading 9817.00.90, provides for

articles of any other metal fitting into

one of the above referenced classes.

Part 54, Customs Regulations (19 CFR

Part 54), provides procedures for the

duty free entry of certain importations.

Section 54.5, Customs Regulations (19

CFR 54.5) sets forth the scope of several

exemptions from entitlement to duty

free entry of metal articles classified in

subheadings 9817.00.80 and 9817.00.90,

HTSUS. The provision presently does

not apply to:

1. Articles of lead, zinc, or tungsten:

2. Metal-bearing materials provided

for in Chapter 26, HTSUS; or

3. Unwrought metal provided for in

Section XV, HTSUS.

Inasmuch as subheadings 9817.00.80

and 9817.00.90, HTSUS, also exclude

metal-bearing materials provided for in

Section VI, HTSUS, as well as articles

provided for in subheading 8548.10,

HTSUS, § 54.5(a)(2), Customs

Regulations, must be amended to

include these exemptions. The

amendment rectifies the omission of

these exemptions.

Inapplicability of Public Notice and

Comment and Delayed Effective Date

Requirements, the Regulatory

Flexibility Act, and Executive Order

12866

Inasmuch as this amendment merely

conforms the Customs Regulations to

existing law as noted above, pursuant to

5 U.S.C. 553(b)(B), notice and public

procedure thereon are unnecessary and

pursuant to 5 U.S.C. 553(d)(3), a delayed

effective date is not required. Since this

document is not subject to the notice

and public procedure requirements of 5

U.S.C. 553, it is not subject to the

provisions of the Regulatory Flexibility

Act (5 U.S.C. 601 et seq.). This

amendment does not meet the criteria

for a ‘‘significant regulatory action’’ as

defined in E.O. 12866.

Drafting Information

The principal author of this document

was Janet L. Johnson, Regulations

Branch, Office of Regulations and

Rulings, U.S. Customs Service.

However, personnel from other offices

participated in its development.

List of Subjects in 19 CFR Part 54

Customs duties and inspection,

Metals, Reporting and recordkeeping

requirements.

Amendment to the Regulations

Part 54, Customs Regulations (19 CFR

Part 54), is amended as set forth below.

PART 54—CERTAIN IMPORTATIONS

TEMPORARILY FREE OF DUTY

1. The general authority citation for

part 54 is revised to read as follows:

Authority: 19 U.S.C. 66, 1202 (General

Note 20, Section XV, Note 5, Harmonized

Tariff Schedule of the United States), 1623,

1624.

2. Section 54.5 is amended by revising

paragraph (a)(2) to read as follows:

§ 54.5 Scope of exemptions; nondeposit of

estimated duty.

(a) * * *

(2) Metal-bearing materials provided

for in section VI, Chapter 26 or

subheading 8548.10, HTSUS; or

* * * * *

Douglas M. Browning,

Acting Commissioner of Customs.

Approved: December 5, 1997.

Dennis M. O’Connell,

Acting Deputy Assistant Secretary of the

Treasury.

[FR Doc. 97–33855 Filed 12–30–97; 8:45 am]

BILLING CODE 4820–02–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8749]

RIN 1545–AU34

Qualified Small Business Stock

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the 50-percent

exclusion for gain from certain small

business stock. The final regulations

reflect changes to the law made by the

Omnibus Budget Reconciliation Act of

1993 and provide guidance to the

issuers and owners of the stock of

certain small businesses.

DATES: This regulation is effective

December 31, 1997. For dates of

applicability of these regulations, see

§ 1.1202–2(e).

FOR FURTHER INFORMATION CONTACT:

Catherine A. Prohofsky of the Office of

the Assistant Chief Counsel (Income Tax

and Accounting) at 202–622–4930 (not

a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

Section 1202 of the Internal Revenue

Code allows a taxpayer (other than a

corporation) to exclude 50 percent of

certain gain from the sale or exchange

of qualified small business stock held

for more than 5 years. This document

contains amendments to the Income Tax

Regulations (26 CFR part 1) that provide

guidance relating to the effect of

redemptions on the availability of this

exclusion.

On June 6, 1996, the Federal Register

published a notice of proposed

rulemaking (IA–26–94), 61 FR 28821,

relating to the effect of certain

redemptions on the 50-percent

exclusion of gain from the sale or

exchange of qualified small business

stock under section 1202. The proposed

regulations provide that these

redemptions are disregarded in

determining whether the anti-churning

rules of section 1202(c) are violated.

Four comments responding to this

notice were received. A public hearing

was held on October 3, 1996. After

consideration of the comments, the

proposed regulations under section

1202 are adopted as modified by this

Treasury decision.
68166 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations

Summary of Comments and

Modifications

The notice of proposed rulemaking

requested comments on how to

determine when an independent

contractor has terminated services. One

commentator suggested that the

determination of whether services of an

independent contractor were terminated

should be based on all the facts and

circumstances, with termination

conclusively presumed if no further

services were provided for six months.

The IRS and Treasury Department have

not adopted this suggestion, but are

continuing to study this issue and

request additional comments.

Commentators suggested an

additional exception for all redemptions

occurring in the ordinary course of

business or for legitimate business

reasons. The final regulations do not

incorporate this suggestion. The

exceptions in the final regulations relate

to redemptions that are incident to

certain events affecting a shareholder.

Because of the extraordinary nature of

these events and the fact that they are

generally not within the control of the

issuing corporation, the exceptions are

unlikely to lead to avoidance of the

requirement that qualified small

business stock be purchased at original

issue. The IRS and Treasury are

concerned, however, that a much

broader exception for redemptions that

arise out of the ordinary business needs

and purposes of the issuing corporation,

and are not incident to extraordinary

events affecting its shareholders, would

be much more likely to undermine the

original issue requirement.

Two commentators requested that the

final regulations be effective for stock

purchases by an issuing corporation at

any time after August 10, 1993. The

effective date has been modified in

response to this suggestion. The final

regulations will apply to stock issued

after August 10, 1993. Thus, regardless

of the date on which a redemption

occurs (or on which the redeemed stock

was issued) the redemption is treated as

provided in the final regulations for

purposes of determining whether stock

issued after August 10, 1993, is

qualified small business stock.

The Chief Counsel for Advocacy of

the Small Business Administration

recommended the inclusion of an

exception for redemptions occurring in

connection with the divorce of a

shareholder. This suggestion has been

adopted. The final regulations provide

that redemptions of stock occurring

incident to the divorce of a shareholder

are disregarded in determining whether

redemptions exceed de minimis

amounts.

The Chief Counsel for Advocacy also

requested that the IRS and Treasury

Department analyze the current use of

section 1202. No exclusion under

section 1202 can be claimed until 1998

because stock must be issued after

August 10, 1993, to be qualified small

business stock, and must be held for

more than 5 years to qualify for the

exclusion. Thus, the available tax return

data do not provide the information

necessary to analyze the current use of

section 1202.

Minor clarifying changes in the

regulatory language have also been

made.

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 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 Internal Revenue

Code, the notice of proposed rulemaking

preceding these final 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 Catherine A. Prohofsky,

Office of the Assistant Chief Counsel

(Income Tax and Accounting). 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

1.1202–2 is also issued under 26 U.S.C.

1202(k). * * *

Par. 2. Sections 1.1202–0 and 1.1202–

2 are added to read as follows:

§ 1.1202–0 Table of contents.

This section lists the major captions

that appear in the regulations under

§ 1.1202–2.

§ 1.1202–2 Qualified small business stock;

effect of redemptions.

(a) Redemptions from taxpayer or related

person.

(1) In general.

(2) De minimis amount.

(b) Significant redemptions.

(1) In general.

(2) De minimis amount.

(c) Transfers by shareholders in connection

with the performance of services not

treated as purchases.

(d) Exceptions for termination of services,

death, disability or mental

incompetency, or divorce.

(1) Termination of services.

(2) Death.

(3) Disability or mental incompetency.

(4) Divorce.

(e) Effective date.

§ 1.1202–2 Qualified small business stock;

effect of redemptions.

(a) Redemptions from taxpayer or

related person—(1) In general. Stock

acquired by a taxpayer is not qualified

small business stock if, in one or more

purchases during the 4-year period

beginning on the date 2 years before the

issuance of the stock, the issuing

corporation purchases (directly or

indirectly) more than a de minimis

amount of its stock from the taxpayer or

from a person related (within the

meaning of section 267(b) or 707(b)) to

the taxpayer.

(2) De minimis amount. For purposes

of this paragraph (a), stock acquired

from the taxpayer or a related person

exceeds a de minimis amount only if the

aggregate amount paid for the stock

exceeds $10,000 and more than 2

percent of the stock held by the taxpayer

and related persons is acquired. The

following rules apply for purposes of

determining whether the 2-percent limit

is exceeded. The percentage of stock

acquired in any single purchase is

determined by dividing the stock’s

value (as of the time of purchase) by the

value (as of the time of purchase) of all

stock held (directly or indirectly) by the

taxpayer and related persons

immediately before the purchase. The

percentage of stock acquired in multiple

purchases is the sum of the percentages

determined for each separate purchase.

(b) Significant redemptions—(1) In

general. Stock is not qualified small

business stock if, in one or more

purchases during the 2-year period

beginning on the date 1 year before the

issuance of the stock, the issuing

corporation purchases more than a de

minimis amount of its stock and the

purchased stock has an aggregate value
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations 68167

(as of the time of the respective

purchases) exceeding 5 percent of the

aggregate value of all of the issuing

corporation’s stock as of the beginning

of such 2-year period.

(2) De minimis amount. For purposes

of this paragraph (b), stock exceeds a de

minimis amount only if the aggregate

amount paid for the stock exceeds

$10,000 and more than 2 percent of all

outstanding stock is purchased. The

following rules apply for purposes of

determining whether the 2-percent limit

is exceeded. The percentage of the stock

acquired in any single purchase is

determined by dividing the stock’s

value (as of the time of purchase) by the

value (as of the time of purchase) of all

stock outstanding immediately before

the purchase. The percentage of stock

acquired in multiple purchases is the

sum of the percentages determined for

each separate purchase.

(c) Transfers by shareholders in

connection with the performance of

services not treated as purchases. A

transfer of stock by a shareholder to an

employee or independent contractor (or

to a beneficiary of an employee or

independent contractor) is not treated as

a purchase of the stock by the issuing

corporation for purposes of this section

even if the stock is treated as having

first been transferred to the corporation

under § 1.83–6(d)(1) (relating to

transfers by shareholders to employees

or independent contractors).

(d) Exceptions for termination of

services, death, disability or mental

incompetency, or divorce. A stock

purchase is disregarded if the stock is

acquired in the following

circumstances:

(1) Termination of services—(i)

Employees and directors. The stock was

acquired by the seller in connection

with the performance of services as an

employee or director and the stock is

purchased from the seller incident to

the seller’s retirement or other bona fide

termination of such services;

(ii) Independent contractors.

[Reserved];

(2) Death. Prior to a decedent’s death,

the stock (or an option to acquire the

stock) was held by the decedent or the

decedent’s spouse (or by both), by the

decedent and joint tenant, or by a trust

revocable by the decedent or the

decedent’s spouse (or by both), and—

(i) The stock is purchased from the

decedent’s estate, beneficiary (whether

by bequest or lifetime gift), heir,

surviving joint tenant, or surviving

spouse, or from a trust established by

the decedent or decedent’s spouse; and

(ii) The stock is purchased within 3

years and 9 months from the date of the

decedent’s death;

(3) Disability or mental incompetency.

The stock is purchased incident to the

disability or mental incompetency of the

selling shareholder; or

(4) Divorce. The stock is purchased

incident to the divorce (within the

meaning of section 1041(c)) of the

selling shareholder.

(e) Effective date. This section applies

to stock issued after August 10, 1993.

Approved: December 22, 1997.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–33987 Filed 12–30–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, 601, and 602

[TD 8742]

RIN 1545–AU42 and 1545–AV20

Requirements Respecting the

Adoption or Change of Accounting

Method; Extensions of Time To Make

Elections

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations providing the procedures for

requesting an extension of time to make

certain elections under the Internal

Revenue Code. In addition, the

regulations provide the standards that

the Commissioner will use in

determining whether to grant taxpayers

extensions of time to make certain

elections including changes in

accounting method and accounting

period. The regulations also set forth the

time for filing a Form 3115, Application

for Change in Accounting Method, with

the Commissioner. The regulations

affect taxpayers requesting an extension

of time to make certain elections and

taxpayers requesting to change their

method of accounting for federal income

tax purposes.

DATES: These regulations are effective

December 31, 1997.

FOR FURTHER INFORMATION CONTACT:

Cheryl Lynn Oseekey, (202) 622–4970

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1488. Responses

to this collection of information are

required to obtain an extension of time

to make an election.

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 control number.

The estimated annual burden per

respondent is 10 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to this

collection of information must be

retained as long as their contents may be

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

On June 27, 1996, temporary

regulations relating to the standards the

Commissioner will use to grant

taxpayers extensions of time to make

certain elections were published in the

Federal Register (TD 8680, 61 FR

33365), and cross-referenced to a notice

of proposed rulemaking published in

the Federal Register on the same date

(61 FR 33408). The regulations,

§§ 301.9100–1T through 301.9100–3T,

provide an automatic 6-month extension

from the due date of the return

excluding extensions to make statutory

and regulatory elections whose due

dates are the due date of the return or

the due date of the return including

extensions. The regulations also provide

an automatic 12-month extension of

time to make certain regulatory

elections. For regulatory elections not

eligible for the automatic extensions of

time, the regulations provide the

standards the Commissioner will use to

determine whether to grant an extension

of time to make the election. A public

hearing on the regulations was held on

October 30, 1996.

On May 15, 1997, temporary

regulations setting forth the time for

requesting a change in accounting

method and the standards the

Commissioner will use to grant an

extension of time to request a change in