32164 Federal Register / Vol. 63, No. 113 / Friday, June 12, 1998 / Proposed Rules

416.1330 or § 416.1339 and they should

have remained suspended but a benefit

that exceeded the dollar limitation was

paid, no further payment shall be made

to him at this time and notice of the

planned action shall not contain any

provision regarding continuation of

payment pending appeal. * * *

* * * * *

7. New § 416.1339 is added to subpart

M to read as follows:

§ 416.1339 Suspension due to flight to

avoid criminal prosecution or custody or

confinement after conviction, or due to

violation of probation or parole.

(a) Basis for suspension. An

individual is ineligible for SSI benefits

for any month during which he or she

is—

(1) Fleeing to avoid prosecution for a

crime, or an attempt to commit a crime,

which is a felony under the laws of the

place from which the individual flees

(or which, in the case of the State of

New Jersey, is a high misdemeanor

under the laws of that State); or

(2) Fleeing to avoid custody or

confinement after conviction for a

crime, or an attempt to commit a crime,

which is a felony under the laws of the

place from which the individual flees

(or which, in the case of the State of

New Jersey, is a high misdemeanor

under the laws of that State); or

(3) Violating a condition of probation

or parole imposed under Federal or

State law.

(b) Suspension Effective date. (1)

Suspension of benefit payments because

an individual is a fugitive as described

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

section or a probation or parole violator

as described in paragraph (a)(3) of this

section is effective with the first day of

whichever of the following months is

earlier—

(i) The month in which a warrant or

order for the individual’s arrest or

apprehension, an order requiring the

individual’s appearance before a court

or other appropriate tribunal (e.g., a

parole board), or similar order is issued

by a court or other duly authorized

tribunal on the basis of an appropriate

finding that the individual—

(A) Is fleeing, or has fled, to avoid

prosecution as described in paragraph

(a)(1) of this section;

(B) Is fleeing, or has fled, to avoid

custody or confinement after conviction

as described in paragraph (a)(2) of this

section; or

(C) Is violating, or has violated, a

condition of his or her probation or

parole as described in paragraph (a)(3)

of this section; or

(ii) The first month during which the

individual fled to avoid such

prosecution, fled to avoid such custody

or confinement after conviction, or

violated a condition of his or her

probation or parole, if indicated in such

warrant or order, or in a decision by a

court or other appropriate tribunal.

(2) An individual will not be

considered to be ineligible for SSI

benefits and benefit payments will not

be suspended under this section for any

month prior to August 1996.

(c) Resumption of payments. If

benefits are otherwise payable, they will

be resumed effective with the first

month throughout which the individual

is determined to be no longer fleeing to

avoid such prosecution, fleeing to avoid

such custody or confinement after

conviction, or violating a condition of

his or her probation or parole.

[FR Doc. 98–15699 Filed 6–11–98; 8:45 am]

BILLING CODE 4190–29–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–106031–98]

RIN 1545–AW13

Trading Safe Harbors

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed rules for the treatment of

foreign taxpayers trading in derivative

financial instruments for their own

account. These proposed rules provide

that foreign taxpayers who effect

transactions in derivative financial

instruments for their own accounts are

not thereby engaged in a trade or

business in the United States if they are

not dealers in stocks, securities,

commodities or derivatives. These

proposed rules affect foreign persons

that conduct such trading for their own

account either directly through U.S.

offices or indirectly through

partnerships or other agents. This

document also provides notice of a

public hearing on these proposed

regulations.

DATES: Written comments must be

received by September 10, 1998.

Outlines of oral comments to be

discussed at the public hearing

scheduled for September 9, 1998, must

be received by August 19, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–106031–98),

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–106031–98),

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/

tax—regs/comments.html. The public

hearing will be held in room 2615,

Internal Revenue Building, 1111

Constitution Avenue NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Milton Cahn of the Office of Associate

Chief Counsel (International), (202)

622–3870; concerning submissions and

the hearing, LaNita Van Dyke, (202)

622–7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 864(b) of the Code provides

that the phrase ‘‘trade or business

within the United States’’ generally

includes the performance of personal

services within the United States at any

time during the taxable year but, under

certain circumstances, does not include

trading in stocks, securities, or

commodities through an independent

agent or for a taxpayer’s own account

(the ‘‘trading safe harbors’’).

Regulations regarding certain aspects

of the trading safe harbors were

promulgated in 1972. Since the

promulgation of these regulations, the

use of derivative financial instruments

has increased significantly. This is due

in large measure to the overall

expansion and growing sophistication of

global capital markets. Although

guidance concerning the tax treatment

of derivatives and notional principal

contracts has been issued under other

provisions of the Code (see, e.g.,

§§ 1.446–3, 1.863–7(b)), the section

864(b) regulations have not been

modernized to take into account the

manner in which taxpayers customarily

use derivative transactions.

Explanation of Provisions

1. In General

These proposed regulations provide

that foreign taxpayers who are not

dealers with respect to any derivative

transactions, who are not otherwise

dealers in stocks, securities, or

commodities, and who enter into

derivative transactions for their own
Federal Register / Vol. 63, No. 113 / Friday, June 12, 1998 / Proposed Rules 32165

accounts are not engaged in trade or

business within the United States solely

by reason of those transactions. The

term ‘‘derivative’’ is defined as an

interest rate, currency, equity or

commodity notional principal contract

or an evidence of an interest in, or

derivative financial instrument in, any

commodity, currency, or any of the

items described in Code section

475(c)(2)(A)–(D).

For purposes of these proposed

regulations, the term ‘‘currency’’ is

limited to those currencies that are of a

kind customarily dealt in on an

organized commodity exchange. No

inference is intended, however, as to

whether currencies that are not traded

on an organized commodity exchange

are ‘‘of a kind’’ customarily dealt in on

an organized commodity exchange.

Comments are solicited on this issue.

Under the statutory safe harbors,

taxpayers who are dealers in stocks and

securities but not commodities may

avail themselves of the commodities

trading safe harbor of section

864(b)(2)(B)(ii), and likewise, dealers in

commodities but not stocks and

securities may avail themselves of the

stocks and securities trading safe harbor

of section 864(b)(2)(A)(ii). The proposed

regulations, however, do not specify

into which statutory safe harbor any

particular derivative transaction falls.

Accordingly, dealers in stocks,

securities, commodities, or derivatives

may not avail themselves of the benefits

of these proposed regulations.

Treasury and the IRS are considering

the appropriate application of both the

stocks and securities safe harbor of

section 864(b)(2)(A)(ii) and the

commodities safe harbor of section

864(b)(2)(B)(ii) with respect to a dealer

in a derivative which arguably might be

classified as both a security and a

commodity. Treasury and the IRS are

also considering the appropriate

application of the section

864(b)(2)(A)(ii) and (B)(ii) safe harbors

to dealers in either stocks and securities

or commodities who enter into a

derivative transaction which arguably

might be classified within both sections.

Comments are solicited on these points

including the classification of specific

derivatives for purposes of the safe

harbors.

Comments are also solicited regarding

whether the final regulations should

include derivative transactions in either

the stocks and securities, or

commodities trading safe harbors under

sections 864(b)(2)(A)(i) and (B)(i). In

particular, the IRS solicits comments as

to whether certain dealers could

inappropriately avoid the limitations of

section 864(b)(2)(C) with respect to

derivative transactions effected through

independent agents in the United States.

2. Eligible Nondealer

Until Treasury and the IRS determine

whether particular derivative

transactions should be classified under

the stocks and securities or commodities

safe harbors, the proposed regulations

provide that derivative transactions

(including hedging transactions) do not

constitute a U.S. trade or business if the

taxpayer meets the newly proposed

definition of an ‘‘eligible nondealer.’’

An eligible nondealer is defined as a

foreign resident taxpayer who is not a

dealer in stocks, securities, commodities

or derivatives at any time during the

taxable year. Dealer status is determined

on a worldwide basis and disqualifies a

taxpayer from the safe harbor of the

proposed regulations even if no dealing

activities are conducted in the United

States. For example, if a taxpayer is a

dealer in commodities through its home

country office and conducts no dealing

activities through its U.S. office, but

enters into derivative transactions for its

own account through the U.S. office, the

taxpayer fails to be an eligible

nondealer.

Under the proposed regulations, the

definition of dealer in stocks or

securities refers to § 1.864–2(c)(2)(iv)

and the definition of dealer in

commodities refers to the use of that

term in § 1.864–2(d). The definition of

eligible nondealer contains language

based on the definition of dealer in

securities in 475(c)(1)(B), including

regularly holding oneself out, in the

ordinary course of one’s trade or

business, as being willing and able to

enter into either side of a derivative

transaction. See § 1.475(c)–1(a)(2).

Treasury and the IRS are considering

issuing additional guidance with respect

to the definition of a dealer for purposes

of applying the trading safe harbors

generally. Comments are solicited

regarding the definition of a dealer,

including the adequacy of the present

rules in § 1.864–2(c)(2)(iv) and § 1.864–

2(d), possible rules for identifying

derivative transactions entered into with

customers in the ‘‘ordinary course,’’ and

the appropriateness of adopting a

definition similar to that provided in

section 475(c)(1).

3. Swaps on U.S. Equities

Treasury and the IRS are aware that

in order to avoid the tax imposed on

U.S. source dividends under sections

871 and 881 and Chapter 3 of the Code,

some foreign investors use notional

principal contract transactions based on

U.S. equities (‘‘U.S. based equity

swaps’’). Accordingly, Treasury and the

IRS are considering whether rules

should be developed to preserve the

withholding tax with respect to such

transactions. Specifically, Treasury and

the IRS are evaluating whether conduit

(e.g., section 7701(l)) or other principles

should be invoked in regulations, to

characterize payments made with

respect to U.S. based equity swaps as

subject to U.S. withholding tax.

Treasury and the IRS are considering

whether or not finalization of the

proposed regulations as they relate to

U.S. based equity swaps should await

guidance concerning the application of

the withholding rules to such

transactions. Broadening the section

864(b)(2)(A)(ii) and (B)(ii) safe harbors

to include derivatives could impair the

ability of the United States to tax U.S.

source dividend payments.

Congress enacted the stocks and

securities trading safe harbor in 1936 to

provide certainty that foreign persons

who merely trade stocks and securities

would not be subject to the net income

tax regime. Section 211(b), Revenue Act

of 1936, Pub. L. 74–740, 49 Stat. 1648,

1714–15 (1936); S. Rep. No. 2156, 74th

Cong., 2d Sess. 21 (1936). Congress’

decision to include the safe harbor was

premised on the fundamental

assumption that ordinary income from

U.S. stocks and securities would be

appropriately subject to U.S. taxation

through the withholding tax on fixed

and determinable or annual and

periodic income (‘‘FDAP’’), and that

activities beyond the scope of the safe

harbor would remain subject to net tax

if the taxpayer was engaged in a trade

or business or had an office in the

United States. Id. The Foreign Investors

Tax Act of 1966, which expanded the

trading safe harbors to include trading

activities conducted by or on behalf of

a non-U.S. resident taxpayer through a

U.S. office for the foreign taxpayer’s

own account, built upon the same

principles reflected in the Revenue Act

of 1936. See Section 102(d), Foreign

Investors Tax Act of 1966, Pub. L. 89–

809, 80 Stat. 1539, 1544 (1966); S. Rep.

No. 1701, 99th Cong., 2d Sess. 16–17,

22–23, 32–33 (1966).

Treasury and the IRS request

comments regarding the U.S. taxation of

non-U.S. persons investing in

derivatives generally in addition to the

treatment of derivatives under the

trading safe harbors. Comments are also

solicited concerning the appropriate

source of payments made pursuant to

U.S. based equity swaps and whether

conduit or other principles should be

invoked for purposes of sections 871,

881 and Chapter 3 of the Code,

including the circumstances under

which such payments between non-U.S.
32166 Federal Register / Vol. 63, No. 113 / Friday, June 12, 1998 / Proposed Rules

resident counterparties (i.e., foreign-toforeign payments) may be included in

such regulations. In addition, comments

are also solicited concerning the

appropriate treatment of swaps or other

derivative transactions on property

(other than stocks and securities) that

produce FDAP income, e.g., rents and

royalties.

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

impact analysis 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. Therefore, a

Regulatory Flexibility Analysis under

the Regulatory Flexibility Act (5 U.S.C.

Chapter 6) is not required. Pursuant to

section 7805(f) of the Code, this notice

of proposed rulemaking will be

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on their

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 that are submitted

timely to the IRS (a signed original and

eight (8) copies). All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for September 9, 1998, at 10:00 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 written comments by

September 10, 1998, and submit an

outline of the topics to be discussed and

the time to be devoted to each topic by

August 19, 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.

Proposed Effective Date

These regulations are proposed to be

effective for taxable years beginning 30

days after the date final regulations are

published in the Federal Register.

Taxpayers may elect to apply the

provisions of the final regulations to

taxable years beginning before the date

which is 30 days after these regulations

are published as final in the Federal

Register. No inference is intended

regarding the treatment of derivative

transactions under sections

864(b)(2)(A)(ii) and (B)(ii) and the

current regulations. For periods prior to

the effective date, taxpayers engaged in

derivative transactions may take any

reasonable position with regard to the

section 864(b)(2)(A)(ii) and (B)(ii) safe

harbors. Positions consistent with these

proposed regulations will be considered

reasonable.

Drafting Information

The principal author of these

regulations is Milton Cahn of the Office

of 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.

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 1.864(b)–1 is added to

read as follows:

§ 1.864(b)–1 Trading in derivatives.

(a) Trading for taxpayer’s own

account. As used in part I (section 861

and following) and part II (section 871

and following), subchapter N, chapter 1

of the Internal Revenue Code (Code),

and chapter 3 (section 1441 and

following) of the Code, and the

regulations thereunder, if a taxpayer is

an eligible nondealer, the term engaged

in trade or business within the United

States does not include effecting

transactions in derivatives for the

taxpayer’s own account, including

hedging transactions within the

meaning of § 1.1221–2.

(b) Definitions—(1) Eligible nondealer.

For purposes of this section, an eligible

nondealer is a person that is not a

resident of the United States and is not,

at any place (domestic or foreign), nor

at any time during that person’s taxable

year, any of the following—

(i) A dealer in stocks or securities as

defined in § 1.864–2(c)(2)(iv)(a);

(ii) A dealer in commodities as that

term is used in § 1.864–2(d); or

(iii) A person that regularly offers to

enter into, assume, offset, assign or

otherwise terminate positions in

derivatives with customers in the

ordinary course of a trade or business,

including regularly holding oneself out,

in the ordinary course of one’s trade or

business, as being willing and able to

enter into either side of a derivative

transaction.

(2) Derivative. For purposes of this

section, the term derivative includes—

(i) An interest rate, currency (as

defined in paragraph (b)(3) of this

section), equity, or commodity (as the

term is used in section 864(b)(2)(B) and

§ 1.864–2(d)) notional principal contract

(as the term is used in section 475(c)(2));

or

(ii) An evidence of an interest, or a

derivative financial instrument

(including any option, forward contract,

short position and any similar financial

instrument), in any—

(A) Commodity (as the term is used in

section 864(b)(2)(B) and § 1.864–2(d));

(B) Currency (as defined in paragraph

(b)(3) of this section);

(C) Share of stock (as the term is used

in § 1.864–2(c)(2));

(D) Partnership or beneficial

ownership interest in a widely held or

publicly traded partnership or trust;

(E) Note, bond, debenture, or other

evidence of indebtedness; or

(F) Notional principal contract

described in paragraph (b)(2)(i) of this

section.

(3) Limitation. For purposes of this

section, the term currency is limited to

currencies of a kind customarily dealt in

on an organized commodity exchange.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98–15452 Filed 6–11–98; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Chapter II

Review of Existing Regulations

AGENCY: Minerals Management Service

(MMS), Interior.

ACTION: Review of regulations; request

for comment.