Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules 39

(ii) Under paragraph (b)(4)(i)(A) of this

section, a change in the terms of a contract

that alters the amount or timing of an item

payable by the policyholder or the insurance

company is a material change in the contract.

Thus, B’s coverage is treated as coverage

under a contract issued on June 15, 2000,

and, accordingly, the contract must meet the

requirements of section 7702B(b) and any

regulations issued thereunder in order to be

a qualified long-term care insurance contract.

Example 4. (i) C, an individual, is the

policyholder under a long-term care

insurance contract purchased in 1994. At that

time and through December 31, 1996, the

contract met the long-term care insurance

requirements of the State in which the

contract was sitused. In 1996, the policy was

amended to add a provision requiring the

policyholder to be offered the right to

increase dollar limits for inflation every three

years (without the policyholder being

required to pass a physical or satisfy any

other underwriting requirements). During

2002, C elects to increase the amount of

insurance coverage (with a resulting

premium increase) pursuant to the inflation

protection provision.

(ii) Under paragraph (b)(4)(ii)(A) of this

section, an increase in the amount of

insurance coverage at the election of the

policyholder (without the insurance

company’s consent and without underwriting

or other limitations on the policyholder’s

rights) pursuant to a pre-1997 inflation

protection provision does not constitute a

material change in the contract. Thus, C’s

contract continues to be a pre-1997 long-term

care insurance contract that is treated as a

qualified long-term care insurance contract.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 97–33986 Filed 12–31–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–115795–97]

RIN 1545–AV39

General Rules for Making and

Maintaining Qualified Electing Fund

Elections

AGENCY: Internal Revenue Service (IRS),

Treasury

ACTION: Notice of proposed rulemaking

by cross-reference to temporary

regulations and notice of public hearing.

SUMMARY: In the Rules and Regulations

section of this issue of the Federal

Register, the IRS is issuing temporary

regulations that provide guidance to a

passive foreign investment company

(PFIC) shareholder that makes the

election under section 1295 (section

1295 election) to treat the PFIC as a

qualified electing fund (QEF). The

temporary regulations also provide

guidance for shareholders that wish to

make a section 1295 election that will

apply on a retroactive basis (retroactive

election). The temporary regulations

also include a rule concerning the

taxation under section 1291 of an

exempt organization that is a

shareholder of a PFIC that is not a

pedigreed QEF. This rule was originally

proposed in 1992. The text of the

temporary regulations also serves as the

text of these proposed regulations. In

addition, this document proposes

amendments to proposed regulation

§ 1.1296–4(e), concerning the treatment

of interbank deposits as loans for

purposes of the exception to passive

income characterization of income

derived in the active conduct of a

banking business. This document also

provides notice of a public hearing on

these proposed regulations.

DATES: Written comments must be

received by April 2, 1998. Requests to

speak and outlines of oral comments to

be discussed at the public hearing

scheduled for April 16, 1998, must be

received by March 26, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–115795–97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–115795–97),

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 on the

IRS Home Page, or by submitting

comments directly to the IRS Internet

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

taxlllregs/comments.html. The

public hearing will be held in Room

3313, Internal Revenue Service, 1111

Constitution Avenue, NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Gayle

Novig, (202) 622–3840; concerning

submissions and the hearing,

Evangelista Lee, (202) 622–7190 (not

toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)).

Comments on the collection of

information should be sent 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, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received by

March 3, 1998. Comments are

specifically requested concerning:

Whether the proposed collection of

information is necessary for the proper

performance of the functions of the

Internal Revenue Service, including

whether the information will have

practical utility;

The accuracy of the estimated burden

associated with the proposed collection

of information (see below);

How the quality, utility, and clarity of

the information to be collected may be

enhanced;

How the burden of complying with

the proposed collection of information

may be minimized, including through

the application of automated collection

techniques or other forms of information

technology; and

Estimates of capital or start-up costs

and costs of operation, maintenance,

and purchase of services to provide

information.

The collection of information in this

proposed regulation is in proposed

regulation §§ 1.1295–1(f), 1.1295–1(g),

1.1295–3(c), and 1.1295–3(g). The

information required in § 1.1295–1 (f)

and (g) will notify the Internal Revenue

Service that certain shareholders have

made the section 1295 election, and will

enable the Internal Revenue Service to

determine if a shareholder is satisfying

the election and annual reporting

requirements and is reporting income as

required under section 1293.

The information required in proposed

regulation § 1.1295–3(c) will notify the

IRS that certain shareholders of foreign

corporations have filed a Protective

Statement to preserve their ability to

make a retroactive section 1295 election,

and that those shareholders have

extended the periods of limitations for

their taxable years to which the

Protective Statement will apply. The

information will enable the IRS to verify

that the shareholders filing the

Protective Statement had the requisite

reasonable belief at the time they filed

the statement. The information required

in proposed regulation § 1.1295–3(g)

will notify the IRS that a shareholder

has made the retroactive election and, in

the case of a shareholder that filed a

Protective Statement, that the

shareholder’s waiver of the periods of
40 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules

limitations will terminate within three

years of making the election. The

information will enable the Service to

verify that the requirements for making

a retroactive election have been

satisfied.

The collection of information and

responses to these collections of

information are mandatory. The likely

respondents are individuals, businesses,

and other for-profit organizations.

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

assigned by the Office of Management

and Budget.

Books or records relating to a

collection of information must be

retained as long as their contents may

become 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.

Estimated total annual reporting/

recordkeeping burden: 623 hours.

The estimated annual burden per

respondent varies from 15 minutes to

three hours, depending on individual

circumstances, with an estimated

average of 29 minutes.

Estimated number of respondents:

1,290.

Estimated annual frequency of

responses: Annually or one time only.

Background

Sections 1291, 1293, 1295, and 1297

Temporary regulations in the Rules

and Regulations section of this issue of

the Federal Register amend the Income

Tax Regulations (26 CFR part 1) relating

to sections 1291, 1293, 1295, and 1297.

The temporary regulations contain rules

concerning the taxation of exempt

organizations under section 1291,

elections under section 1295 to treat

passive foreign investment companies

as qualified electing funds (QEFs), the

calculation of net capital gain for

purposes of section 1293, and the

inclusion of the pro rata shares of the

earnings and profits of QEFs held

through pass through entities. The

temporary regulations amend § 1.1297–

3T, permitting in certain cases the

application of the rules of section

1291(d)(2)(B) to an election made under

section 1297(b)(1).

The text of those temporary

regulations also serves as the text of

these proposed regulations. The

preamble to the temporary regulations

explains the temporary regulations.

Section 1296

On April 28, 1995, proposed

regulations were published providing

guidance for the exceptions to passive

income characterization of certain

income derived by active foreign banks

and foreign security dealers provided in

section 1296 (b)(2)(A) and (b)(3),

respectively. The proposed section 1296

regulations reflect comments received

with respect to Notice 89–81, 1989–2

C.B. 399. That notice established tests

for determining whether a foreign

corporation qualified for the active

foreign bank exception. The notice

specifically stated that interbank

deposits would not be treated as loans

made in the ordinary course of a

banking business.

After consideration of the comments

received with respect to the Notice, the

IRS and Treasury determined that

interbank deposits were made and

accepted in the ordinary course of a

banking business, and therefore should

be treated as such for purposes of

section 1296(b)(2)(A). Accordingly,

proposed regulation § 1.1296–4(d)(3)

specifically includes interbank deposits

with other deposits for purposes of

determining whether the foreign

corporation satisfies the deposit-taking

requirements of § 1.1296–4(d). Also in

response to comments, proposed

regulation § 1.1296–4(e) is clarified to

specifically provide that interbank

deposits made with banks in the

ordinary course of business constitute

loans for purposes of § 1.1296–4. This

clarification is favorable to taxpayers,

and is proposed to be effective for

taxable years beginning after December

31, 1994. It is also proposed that

taxpayers may apply it to a taxable year

beginning after December 31, 1986,

provided it is consistently applied to

that taxable year and all subsequent

taxable years. The dates for applying

proposed regulation § 1.1296–4(e)

coincide with the dates for which

§ 1.1296–4 is proposed to be effective.

See proposed regulation § 1.1296–4(k).

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment 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. It has been determined that an

initial regulatory flexibility analysis is

required for the collection of

information in this notice of proposed

rulemaking under 5 U.S.C. § 603. This

analysis is set forth below under the

heading ‘‘Initial Regulatory Flexibility

Analysis.’’

Initial Regulatory Flexibility Analysis

This initial analysis is provided

pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6). The major

objective of the proposed regulations is

to provide guidance to PFIC

shareholders that wish to elect under

section 1295 to treat their PFICs as

QEFs, and provide guidance to those

PFICs about the requirements imposed

on them. The legal basis for these

requirements is contained in sections

1293, 1294, and 1295. The IRS and

Treasury are not aware of any federal

rules that duplicate, overlap, or conflict

with the proposed regulations.

The recordkeeping and reporting

requirements of the proposed

regulations enable the Internal Revenue

Service to identify those taxpayers that

are treating their PFICs as QEFs; to

verify that those U.S. taxpayers are

currently including their shares of QEF

earnings in income, as required in

section 1293 of the Internal Revenue

Code; to be informed of those QEF

shareholders that are not paying their

section 1293 tax liability because they

made the section 1294 election to defer

the time for payment; to identify those

shareholders of foreign corporations that

are preserving their right to make a

retroactive section 1295 election; to

identify those shareholders making

retroactive elections and verify that they

are satisfying the requirements of a

retroactive election; and, in the case of

shareholders that have filed Protective

Statements, the dates by which the

shareholders’ extensions of periods of

limitations will terminate.

These proposed regulations will affect

those small entities that are PFICs, at

least one shareholder of which makes

the section 1295 election. The proposed

regulations also will affect those small

entities that are PFIC shareholders that

make the section 1295 election. The IRS

and Treasury believe that affected small

entities generally will be small

businesses, as local governments are not

likely to invest in PFICs. Also, few, if

any, affected small entities likely will be

tax exempt organizations, because only

a tax exempt entity that is taxable under

subchapter F on dividends received

from the PFIC generally would need to

consider making the section 1295

election.

The collections of information in

these proposed regulations would

impact a small entity that is treated as

a QEF principally by requiring the
Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules 41

entity to calculate annually its ordinary

earnings and net capital gain according

to federal income tax accounting

principles, as required by section 1293,

and report that information to its

shareholders that are U.S. persons. With

the enactment of section 1(h), the QEF

also must calculate each type of long

term capital gain that it derived and the

applicable rates of tax for proper

inclusion of the QEF’s net capital gain

by the QEF shareholders. Alternatively,

the regulations permit the QEF to

provide its shareholders with its books,

records and other documents necessary

for the shareholders to calculate the

ordinary earnings and net capital gain

amounts. This alternative will enable a

small entity that is a QEF to avoid the

burden of calculating its net capital gain

by providing its shareholders with

information with which the

shareholders can make the calculations.

The economic impact of other

collections of information contained in

these proposed regulations would fall

on a small entity that is a shareholder

of a PFIC for which it has made the

section 1295 election or that is a pass

through entity to which an interest

holder transferred stock subject to a

section 1295 election. The economic

impact would result primarily from the

reporting and recordkeeping

requirements pertaining to (1) the

manner for making the section 1295

election and the annual election

requirements; (2) the calculation by the

shareholder (rather than the QEF) of the

QEF’s ordinary earnings and net capital

gain according to federal income tax

principles, and its pro rata shares

thereof; (3) a request for consent to

revoke a section 1295 election; (4) the

preservation of the right to make a

retroactive election under section 1295;

(5) a request for consent to make a

retroactive election; (6) making a

retroactive election, including filing

amended returns for the affected taxable

years; and (7) providing interest holders

with PFIC statements and other

information received by an intermediary

shareholder.

The proposed regulations reduce the

burden under existing rules for making

the section 1295 election for all

taxpayers, including small businesses

and other small entities. Unlike the

current requirements provided in Notice

88–125, the proposed regulations only

require electing shareholders to file

Form 8621 to make the section 1295

election, thereby eliminating the

shareholder election statement as well

as the requirement to file a copy of the

PFIC Annual Information Statement.

The proposed regulations only require

shareholders to retain the PFIC Annual

Information Statement or the Annual

Intermediary Statement received as well

as a copy of their filings for each year

to which the section 1295 election

applies. In addition, the proposed

regulations impose a lesser burden on

small shareholders, typically

individuals and small entities, to

preserve their right to make a retroactive

election and a lesser burden of making

a retroactive election. A small entity

that owns less than five percent of each

class of stock of a foreign corporation

and satisfies other requirements is not

required to file a Protective Statement to

preserve its right to make a retroactive

election with respect to the foreign

corporation. Similarly, a small entity

potentially has fewer amended returns

to file to make a retroactive election

than a shareholder that filed a Protective

Statement. These changes in election

requirements are illustrative of IRS

efforts to minimize burden, particularly

with respect to small entities.

An estimate of the number of small

entities that would be affected by these

regulations is unavailable. In any event,

the enactment in 1997 of the mark-tomarket election for PFIC shareholders

and the elimination of the overlap in

certain cases of subpart F and the PFIC

provisions, will reduce the number of

small entities that would be affected by

these regulations.

None of the significant alternatives

considered in drafting these regulations

would have significantly altered the

economic impact of the collections of

information on small entities. In

considering the significant alternatives

that would be permissible under the

Code and would enable the IRS to

ensure compliance with the Code, the

IRS and Treasury concluded that the

alternatives generally would impose

equal or greater burdens.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (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 April 16, 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 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

written comments by April 2, 1998, and

submit an outline of the topics to be

discussed and the time to be devoted to

each topic (signed original and eight (8)

copies) by March 26, 1998.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the schedule of

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 authors of the proposed

regulations are Gayle Novig and Judith

Cavell Cohen, of the Office of the

Associate Chief Counsel (International).

Other personnel from the IRS and

Treasury Department also participated

in the development of these regulations.

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 1.1291–1 is added to

read as follows:

[The text of this proposed section is

the same as the text of § 1.1291–1T

published elsewhere in this issue of the

Federal Register.]

Par. 3. Section 1.1293–1 is added to

read as follows:

§ 1.1293–1 Current taxation of income

from qualified electing funds.

[The text of this proposed section is

the same as the text of § 1.1293–1T

published elsewhere in this issue of the

Federal Register.]

Par. 4. Section 1.1295–1 is added to

read as follows:

§ 1.1295–1 Qualified electing funds.

[The text of this proposed section is

the same as the text of § 1.1295–1T

published elsewhere in this issue of the

Federal Register.]

Par. 5. Section 1.1295–3 is added to

read as follows:

§ 1.1295–3 Retroactive elections.

[The text of this proposed section is

the same as the text of § 1.1295–3T

published elsewhere in this issue of the

Federal Register.]
42 Federal Register / Vol. 63, No. 1 / Friday, January 2, 1998 / Proposed Rules

1Proposed § 1.72(p)–1 (EE–106–82) was

published in the Federal Register (60 FR 66233) on

December 21, 1995.

2This treatment applies for purposes of

determining the amount taxable under section 72

(including application of return of tax basis).

However, as discussed below, the loan is still

considered outstanding for purposes of determining

the maximum amount of any subsequent loan to the

participant under section 72(p)(2)(A). Even though

interest continues to accrue on the outstanding loan

and is taken into account for purposes of

determining the maximum amount of any

subsequent loan, this additional interest is not

treated as an additional loan that results in a further

deemed distribution for purposes of section 72(p).

3With respect to coverage under Title I of the

Employee Retirement Income Security Act of 1974,

the Department of Labor has advised the Service

that an employer’s tax-sheltered annuity program

would not necessarily fail to satisfy the

Department’s regulation at 29 CFR 2510.3–2(f)

merely because the employer permits employees to

make repayments of loans made in connection with

the tax-sheltered annuity program through payroll

deductions as part of the employer’s payroll

deduction system, if the program operates within

the limitations set by that regulation.

Par. 6. In § 1.1297–3, paragraph (c) is

added to read as follows:

§ 1.1297–3 Deemed sale election by a

United States person that is a shareholder

of a passive foreign investment company.

[The text of this proposed paragraph

(c) is the same as the text of § 1.1297–

3T(c) published elsewhere in this issue

of the Federal Register.]

Par. 7 Section 1.1296–4(e) as

proposed at 60 FR 20922 (April 28,

1995) is amended by adding a sentence

at the end of the paragraph to read as

follows:

§ 1.1296–4 Characterization of certain

banking income of foreign banks as

passive.

* * * * *

(e) Lending activities test. * * * An

interbank deposit made in the ordinary

course of a corporation’s banking

business will be treated as a loan for

purposes of this section. For the

effective date of this paragraph (e), see

paragraph (k) of this section.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 97–33984 Filed 12–31–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–209476–82]

RIN 1545–AE41

Loans to Plan Participants

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document amends

proposed Income Tax Regulations under

section 72(p) of the Internal Revenue

Code relating to loans made from a

qualified employer plan to plan

participants or beneficiaries. Section

72(p) was added by section 236 of the

Tax Equity and Fiscal Responsibility

Act of 1982, and amended by the

Technical Corrections Act of 1982, the

Deficit Reduction Act of 1984, the Tax

Reform Act of 1986 and the Technical

and Miscellaneous Revenue Act of 1988.

These regulations provide guidance to

the public with respect to section 72(p),

and affect administrators of, participants

in, and beneficiaries of qualified

employer plans that permit participants

or beneficiaries to receive loans from the

plan (including loans from section

403(b) contracts and other contracts

issued under qualified employer plans).

DATES: Written comments and requests

for a public hearing must be received by

April 2, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–209476–82),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–209476–82),

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 on the

IRS Home Page, or by submitting

comments directly to the IRS Internet

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

taxlregs/comments.html.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations Vernon S.

Carter, (202) 622–6070; concerning

submissions or requests to speak at the

hearing, La Nita VanDyke, (202) 622–

7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Proposed Income

Tax Regulations (26 CFR Part 1) under

section 72 of the Internal Revenue Code

of 1986 (Code). These amendments

provide additional guidance concerning

the tax treatment of loans that are

deemed to be distributed under section

72(p).

Explanation of Provisions

Section 72(p)(1)(A) provides that a

loan from a qualified employer plan

(including a contract purchased under a

qualified employer plan) to a participant

or beneficiary is treated as received as

a distribution from the plan for

purposes of section 72 (a deemed

distribution). Section 72(p)(1)(B)

provides that an assignment or pledge of

(or an agreement to assign or pledge)

any portion of a participant’s or

beneficiary’s interest in a qualified

employer plan is treated as a loan from

the plan.

Section 72(p)(2) provides that section

72(p)(1) does not apply to the extent

certain conditions are satisfied.

Specifically, under section 72(p)(2), a

loan from a qualified employer plan to

a participant or beneficiary is not

treated as a distribution from the plan

if the loan satisfies requirements

relating to the term of the loan and the

repayment schedule, and to the extent

the loan satisfies certain limitations on

the amount loaned.

Regulations were proposed in 1995 1

with respect to many of the issues

arising under section 72(p)(2). The

preamble to the 1995 proposed

regulations requested comments on

whether further guidance should be

provided on certain issues that were not

addressed. Following publication of the

1995 proposed regulations, comments

were received and a public hearing was

held on June 28, 1996. One of the issues

on which comments were requested and

received was the effect of a deemed

distribution on the tax treatment of

subsequent distributions from a plan

(such as whether a participant has tax

basis as a result of a deemed

distribution). After reviewing the

written comments and comments made

at the public hearing, these new

proposed regulations address this issue.

These new proposed regulations

provide that once a loan is deemed

distributed under section 72(p), the

interest that accrues thereafter on that

loan is not included in income.2

Further, because the loan amount is

treated as distributed for purposes of

section 72, neither the income that

resulted from the deemed distribution

nor the interest that accrues thereafter

increases the participant’s investment in

the contract (tax basis) for purposes of

section 72.

For example, assume that, after a loan

has been made from a defined

contribution plan to a participant, a

deemed distribution occurs as a result of

failure to make timely loan repayments

(e.g., the repayments were not to be

made by payroll withholding 3). The

participant’s total account then consists

of non-loan assets and a receivable for

the loan balance. At separation from

employment, the participant’s vested