20922 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules

including the Department of Energy for

NRC review of DOE sites under

UMTRCA. However, as stated in

response to similar comments (See FY

1992 Final Rule, 57 FR 32695) NRC is

currently precluded under the

Independent Offices Appropriation Act

(IOAA) from assessing Part 170 fees to

Federal agencies for specific services

rendered. The NRC currently assesses

annual fees under 10 CFR Part 171 to

Federal agencies if those agencies have

a license or approval/certificate from the

NRC; however, OBRA–90 limits annual

fee assessments to NRC licensees. In

September 1993, DOE became a general

licensee of the NRC because postreclamation closure of the Spook,

Wyoming, site had been achieved.

Therefore, effective with the FY 1994

final rule published July 20, 1994, DOE

is being assessed for costs associated

with DOE facilities under the Uranium

Mill Tailings Radiation Control Act of

1978 (UMTRCA). These costs were

previously recovered from operating

reactors because DOE was not an NRC

licensee prior to September 1993 and

therefore could not be billed under 10

CFR Part 171.

The Commission has recommended in

its report submitted to Congress on

February 23, 1994, that either OBRA–90

be modified to remove costs from the fee

base for services to other Federal

agencies or the Atomic Energy Act be

modified to permit the NRC to assess

application and other fees for specific

services rendered to all Federal

agencies.

For the reasons stated above, the NRC

has denied this petition.

Dated at Rockville, Maryland, this 24th day

of April, 1995.

For the Nuclear Regulatory Commission.

John C. Hoyle,

Secretary of the Commission.

[FR Doc. 95–10477 Filed 4–27–95; 8:45 am]

BILLING CODE 7590–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[INTL–0065–93]

RIN 1545–AS46

Exceptions to Passive Income

Characterization for Certain Foreign

Banks and Securities Dealers

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document provides

guidance concerning the application of

the exceptions to passive income

contained in section 1296(b) for foreign

banks, securities dealers and brokers.

This document affects persons who own

direct or indirect interests in certain

foreign corporations. This document

also provides notice of a public hearing

on these proposed regulations.

DATES: Written comments must be

received by August 10, 1995. Outlines of

oral comments to be presented at the

public hearing scheduled for August 31,

1995 at 10 a.m. must be received by

August 10, 1995.

ADDRESSES: Send submissions to:

CC:DOM:CORP:T:R (INTL–0065–93),

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:T:R

(INTL–0065–93), Courier’s Desk,

Internal Revenue Building, 1111

Constitution Avenue NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Ramon

Camacho at (202) 622–3870; concerning

submissions and the hearing, Ms.

Christina Vasquez, (202) 622–7180 (not

toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

A passive foreign investment

company (PFIC) is any foreign

corporation that satisfies either the

income test or asset test in section

1296(a) of the Internal Revenue Code

(Code). Under the income test, a foreign

corporation is a PFIC if 75 percent or

more of its gross income for the year is

passive income. Sec. 1296(a)(1).

Alternatively, a foreign corporation is a

PFIC if 50 percent or more of the

average value of its assets for the taxable

year produce passive income or are held

for the production of passive income.

Sec. 1296(a)(2). Under section

1296(b)(1), passive income is foreign

personal holding company income as

defined in section 954(c) of the Code,

and includes dividends, interest, certain

rents and royalties, and gain from

certain property transactions, including

gain from the sale of assets that produce

passive income.

Under section 1296(b)(2)(A), income

earned in the active conduct of a

banking business by a foreign

corporation licensed to do business as a

bank in the United States and, to the

extent provided in regulations, by other

corporations engaged in the banking

business is not passive. Notice 89–81,

1989–2 CB 399, (Notice) described rules

to be incorporated into subsequent

regulations that would expand this

exception to certain foreign banks not

licensed to do a banking business in the

United States. The rules contained in

§ 1.1296–4 of the proposed regulations

would implement section 1296(b)(2)(A)

for banking activities conducted by

foreign corporations.

In 1993, Congress added section

1296(b)(3)(A) to the Code, effective for

taxable years beginning after September

30, 1993. See Omnibus Budget

Reconciliation Act of 1993 (1993 Act),

Pub. L. 103–66, section 13231(d), 107

Stat. 312, 499. The provision treats as

nonpassive any income derived in the

active conduct of a securities business

by a controlled foreign corporation

(CFC) if the CFC is a U.S. registered

dealer or broker and, to the extent

provided in regulations, a CFC not so

registered. The rules contained in

§ 1.1296–6 would implement section

1296(b)(3)(A).

Section 956A, added by the 1993 Act,

requires each U.S. shareholder of a CFC

to include in income its pro rata share

of the CFC’s excess passive assets.

Under section 956A(c)(2), a passive

asset is any asset that produces passive

income as defined in section 1296(b).

An asset that generates nonpassive

income under § 1.1296–4 or § 1.1296–6

of the proposed regulations will be

nonpassive for purposes of section

956A.

Explanation of Provisions

I. Description of Proposed Rules for

Foreign Banks

A. General Rule

Section 1.1296–4(a) of the proposed

regulations provides generally that, for

purposes of section 1296(a)(1), passive

income does not include banking

income earned by an active bank or by

a qualified affiliate of such a bank. For

this purpose, an active bank is either a

corporation that possesses a license

issued under federal or state law to do

business as a bank in the United States,

or a foreign corporation that meets the

licensing, deposit-taking, and lending

requirements of paragraphs (c), (d), and

(e), respectively, of § 1.1296–4.

The proposed rules generally adopt

the deposit, lending, and licensing

standards contained in the Notice.

These standards are consistent with the

provisions of the Code that define a

bank as an institution that accepts

deposits from and makes loans to the

public and is licensed under state or

federal law to conduct banking

activities. See e.g., sec. 581. The IRS and

Treasury believe that Congress intended
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules 20923

to grant the banking exception only to

corporations that conform to a

traditional U.S. banking model.

However, the proposed rules

liberalize the approach taken in the

Notice in several ways. Most

significantly, the proposed rules adopt

subjective tests to measure whether the

corporation meets the deposit-taking

and lending requirements. The IRS and

Treasury rejected reliance on objective

tests such as those in the Notice after

learning, through several ruling requests

pursuant to the Notice, that objective

standards may cause legitimate banks to

be treated as nonbanks.

Because of the rigidity of the objective

tests, the Notice permitted the IRS to

rule in rare and unusual circumstances

that a foreign corporation was an active

bank even though it failed to satisfy the

requirements of the Notice. The

proposed regulations do not adopt this

procedure because the IRS and Treasury

believe that the enhanced flexibility of

the proposed rules should permit all

foreign corporations actively conducting

a licensed banking business (whether

directly or through affiliates) to qualify

for the bank exception.

B. Licensing Requirement

A foreign corporation that is not

licensed in the United States satisfies

the licensing requirements of § 1.1296–

4(c) if it is licensed or authorized to

accept deposits from residents of the

country in which it is chartered or

incorporated, and to conduct, in such

country, any of the banking activities

described in the proposed regulations.

However, a corporation fails this

licensing test if one of the principal

purposes for its obtaining a license was

compliance with the requirements of

this section.

The IRS and Treasury believe that

being licensed as a bank by a bank

regulatory authority is strong evidence

that a corporation is a bank. The

proposed regulations therefore adopt a

licensing test to distinguish banks from

investment funds.

C. Deposit-Taking Test

A foreign corporation satisfies the

deposit-taking test of § 1.1296–4(d) if it

regularly accepts deposits in the

ordinary course of its trade or business

from customers who are residents of the

country in which it is licensed or

authorized. In addition, the amount of

deposits shown on the corporation’s

balance sheet must be substantial.

Section 1.1296–4(d)(3) provides that

whether the amount of deposits on a

corporation’s balance sheet is

substantial depends on all the facts and

circumstances, including whether the

capital structure and funding of the

bank as a whole are similar to that of

comparable banking institutions

engaged in the same types of activities

and subject to regulation by the same

banking authorities.

The proposed regulations adopt this

deposit-taking test in part to distinguish

banks from finance companies, which

do not accept deposits. This distinction

between finance companies and banks

is required by Congress. H.R. Conf. Rep.

No. 213, 103d Cong., 1st Sess. 641

(1993) (noting that the banking,

insurance, and securities exemptions

‘‘do not apply to income derived in the

conduct of financing and credit services

businesses’’). Although the IRS and

Treasury believe that deposit-taking is a

key attribute of all active banks, they

also recognize that subjective tests will

better accommodate the various types of

banks that have developed as a result of

different banking systems and

regulatory frameworks.

The proposed regulations introduce

flexibility to the deposit-taking

requirements in several ways. First, the

requirement that the amount of deposits

be substantial is more flexible than the

Notice requirement that deposits

constitute at least 50 percent of the total

liabilities of the bank. The IRS and

Treasury recognize that a bank’s funding

preferences may be affected by market

conditions and regulatory requirements

and believes that an institution may be

properly treated as an active bank even

if deposits do not constitute the

institution’s primary source of funding.

Second, unlike the Notice, the

proposed regulations do not include any

special rules for interbank deposits but

treat them like any other deposit,

regardless of whether they are received

from persons who are members of a

related group as defined in § 1.1296–

4(i)(4). The IRS and Treasury believe

this change is appropriate because the

acceptance of interbank deposits from

related or unrelated persons on an arm’s

length basis is a banking activity

normally engaged in by banks. In

addition, the impact of a rule that

distinguishes between interbank

deposits received from related persons

and those received from unrelated

persons is diminished where deposittaking activity is not measured with a

bright-line test.

Finally, the proposed rules change the

Notice requirement that a corporation

must hold deposits from at least 1,000

persons who are bona fide residents of

the country that issued the corporation’s

banking license because this

requirement proved troublesome for

certain private banks with clientele from

several countries. The requirement was

intended to address cases where a bank

is licensed by a country but not allowed

to accept deposits from its residents. In

the IRS and Treasury’s view, such an

entity should not be treated as an active

bank for purposes of section 1296

because it is not accorded full bank

status by the bank authorities that

issued its banking license. However, the

IRS and Treasury believe that a brightline deposit standard is not necessary to

address this concern. Instead, the

proposed regulations require that a

corporation regularly accept deposits

from residents of the country in which

it is licensed.

D. Lending Test

A foreign corporation satisfies the

lending test of § 1.1296–4(e) if it

regularly makes loans to customers in

the ordinary course of its trade or

business. This is a change from the

Notice’s requirement that loans to

unrelated persons make up more than

50 percent of the corporation’s loan

portfolio. The lending test is necessary

to distinguish banks, which extend

credit to customers, from corporations

that merely invest. However, such a

distinction can be drawn without

relying on a bright-line standard such as

that contained in the Notice.

In order to distinguish loans from

investments for purposes of these rules,

the proposed regulations provide that a

note, bond, debenture or other evidence

of indebtedness is a loan only if it is

received by the corporation on an

extension of credit made pursuant to a

loan agreement entered into in the

ordinary course of the corporation’s

banking business. Debt instruments

treated as securities for purposes of the

corporation’s financial statements

generally are not loans.

E. Banking Income and Activities

Section 1.1296–4(f)(1) provides that

banking income is gross income derived

from the active conduct of any banking

activity as defined in § 1.1296–4(f)(2).

These activities include all of the

activities treated as banking activities in

the Notice, with no material changes,

except that finance leasing is included

as a banking activity.

The proposed regulations do not

adopt the Notice’s rule that all of the

U.S. effectively connected income

earned by a foreign corporation in the

active conduct of a trade or business

pursuant to a U.S. bank license

automatically is nonpassive. One effect

of this rule was that effectively

connected income earned by a U.S.-

licensed bank from transactions with

related parties would have been banking

income, while income earned by non-
20924 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules

U.S.-licensed banks from similar

related-party transactions would not

have been banking income. Because the

proposed regulations generally do not

differentiate between related party and

non-related party transactions in the

same way as the Notice, the only effect

of the rule would have been to treat, in

the case of U.S. licensed banks only, as

banking income the income earned on

transactions with related parties who

are not customers and income earned

from activities (such as securities

activities) that are not banking activities

described in § 1.1296–4(f). The IRS and

Treasury believe that the standards for

determining whether income is derived

in the active conduct of a banking

business should be the same for all

corporations that are either active banks

or qualified bank affiliates.

The IRS and Treasury are aware that

many bank activities may also be

considered securities activities. Under

the proposed regulations, an entity that

performs an activity that is both a

banking activity and a securities activity

must satisfy only the requirements of

the bank rules to treat income from such

activity as nonpassive. For example, an

entity that derives income from dealing

in foreign exchange may treat such

income as nonpassive if it is an active

bank (or a qualified bank affiliate) even

though it is not a controlled foreign

corporation.

Dealing in securities, however, is not

included as both a banking activity and

a securities activity. The IRS and

Treasury believe that Congress intended

that income from dealing in securities

should be nonpassive only if it is earned

by a controlled foreign corporation that

actively conducts a securities business

and meets the other requirements of

section 1296(b)(3)(A).

The IRS and Treasury have become

aware that certain developing country

economies impose high deposit reserve

requirements as a tool for implementing

monetary policy. Because the central

banks of these countries require the

maintenance of such reserves as a

prerequisite to conducting a banking

business, the earnings on such assets, if

any, should appropriately be excluded

from passive income.

F. Customer Relationship

Under the proposed regulations, a

bank satisfies the deposit and lending

tests only if it carries on such activities

with customers. Moreover, only the

income from its banking activities (and

those of its qualified bank affiliates)

conducted with, or for, customers will

produce nonpassive income. This is a

change from the Notice requirement,

under which activities qualified only if

they were conducted with unrelated

parties. Under the proposed regulations,

a customer may be any person, related

or unrelated, if that person has a

customer relationship with the bank.

Whether such a relationship exists

depends on all the facts and

circumstances. However, persons who

are related to, or who are shareholders,

officers, directors, or other employees

of, the corporation will not be treated as

customers of the corporation if one of

the principal purposes for the

corporation’s transacting business with

such persons was to qualify the

corporation as an active bank or

qualified bank affiliate.

G. Affiliates of Active Banks

The IRS and Treasury recognize that

many active banks conduct one or more

banking activities through separately

incorporated affiliates that may not

individually qualify as active banks.

Accordingly, the proposed regulations

provide rules under which income from

banking activities may be treated as

nonpassive if earned by a corporation

that does not qualify as an active bank

but is a member of a related group of

which an active bank is also a member.

However, such income is nonpassive

only for purposes of determining

whether any member of the related

group is a passive foreign investment

company or for purposes of applying the

excess passive asset rules of section

956A(c)(2)(A). In addition, such income

remains passive with respect to persons

who own stock in the affiliate but who

are not members of the related group of

which the affiliate is a member.

For purposes of these rules, a related

group is any group of persons related

within the meaning of section 954(d)(3),

substituting person for controlled

foreign corporation. This definition is a

departure from the affiliated group

definition of the Notice because it

permits noncorporate entities (such as

partnerships) to count as members of

the group for purposes of satisfying the

groupwide gross income test.

Section 1.1296–4(i)(2) requires the

bank affiliate to generate more than 60

percent of its income from banking,

insurance and securities activities (but

not other financial services). For

purposes of this test, the look-through

rules of sections 1296(c) and

1296(b)(2)(C) do not apply. This

requirement ensures that a bank

affiliate’s eligibility for the bank

exception depends upon the business

activities conducted directly by the

affiliate, and is not influenced by

activities conducted by related persons.

However, a bank affiliate may

nevertheless apply sections 1296(c) and

1296(b)(2)(A) to determine whether it is

a PFIC under the income or asset tests

of section 1296(a).

In addition, the related group must

meet two gross income tests for the

exception to apply. First, under

§ 1.1296–4(i)(3)(i), income from banking

activities derived by active banks must

constitute at least 30 percent of the

financial services income earned by

group members. Second, under

§ 1.1296–4(i)(3)(ii), income earned by

group members from banking activities,

securities activities, and insurance

activities must constitute at least 70

percent of the financial services income

earned by group members that are

financial services entities. The

regulations adopt the definition of

financial services income contained in

§ 1.904–4(e), which includes only

income earned by financial services

entities.

These affiliate rules are structurally

similar to the affiliate rules contained in

the Notice, but have been modified in

several respects to respond to taxpayer

comments. For example, the 80 percent

stock ownership threshold of the Notice

caused many corporations to be treated

as PFICs solely because the gross

income of subsidiaries in which the

group owned less than an 80 percent

interest was excluded for purposes of

the Notice’s gross income tests, even

though the group had voting control of

such subsidiaries. The adoption of a

lower 50 percent ownership threshold

for group membership in the proposed

regulations recognizes that international

groups are not organized to meet the 80

percent threshold required for

consolidation under U.S. tax law.

In addition, the gross income tests

were changed in several ways to deal

with problems encountered by

diversified affiliated groups. First, the

denominators of the fractions now

include only financial services income,

which by its terms includes only

income earned by financial services

entities. This change prevents foreign

corporations that are part of a banking

group from being disqualified solely

because the group is a subgroup of a

larger group that does not perform

solely financial services.

Second, the numerator of the fraction

for the groupwide gross income test now

includes gross income from securities

and insurance activities in addition to

banking activities. This change prevents

a foreign corporation engaged in

banking activities that is part of a

banking subgroup from being

disqualified solely because it is part of

a larger group that provides a broad

range of financial services.
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules 20925

Finally, the proposed rules drop the

Notice requirement that an active bank

be a group member for 5 years before its

income may count towards satisfaction

of the gross income tests. Since PFIC

status is determined annually, the IRS

and Treasury believe that whether a

group is a banking group should depend

only on its status during the current

taxable year.

H. Income From Nonbanking Activities

As in the Notice, § 1.1296–4(j) of the

proposed regulations provides that

income derived from the conduct of

activities other than banking activities

described in § 1.1296–4(f)(2) and

income from assets held for the conduct

of such activities are nonpassive only to

the extent provided in section 1296.

J. Effective Date

Section 1.1296–4 is proposed to be

effective for all taxable years beginning

after December 31, 1994. However,

taxpayers may apply § 1.1296–4 to a

taxable year beginning after December

31, 1986, but must consistently apply

§ 1.1296–4 to such taxable year and all

subsequent years. While application of

§ 1.1296–4 to a year beginning after

December 31, 1986, cannot affect the tax

liability of a taxpayer for any closed

taxable year, a taxpayer may apply

§ 1.1296–4 to a closed taxable year for

the purpose of determining whether a

foreign corporation is a PFIC in

calculating the taxpayer’s liability for an

open taxable year.

II. Exception for Income Earned in a

Securities Business

A. General Rule

Section 1.1296–6(a) of the proposed

regulations provides generally that

securities income earned by an active

securities dealer, active securities broker

or qualified securities affiliate is

nonpassive. As required by section

1296(b)(3)(C), the rules apply only for

purposes of determining whether a

controlled foreign corporation (as

defined in section 957(a)) is a PFIC with

respect to its United States shareholders

(as defined in section 951(b)), or for

purposes of determining whether an

asset is passive under section

956A(c)(2).

B. Active Securities Dealer and Active

Securities Broker

Under § 1.1296–6(b)(1), an active

dealer or broker is a dealer or broker

that meets certain licensing

requirements.

Section 1.1296–6(c) defines a

securities dealer as a dealer in securities

within the meaning of section 475(c)(1).

Under § 1.1296–6(d), a securities broker

is a foreign corporation that stands

ready to effect transactions in securities

and other financial instruments for the

account of customers in the ordinary

course of its trade or business during the

taxable year. A securities dealer or

broker is licensed under § 1.1296–6(b) if

it possesses a U.S. license to do business

as a securities dealer or broker in the

United States or if it is licensed or

authorized in the country in which it is

chartered or incorporated to conduct

one or more securities activities

described in § 1.1296–6(e)(2) with

residents of that country. The conduct

of such activities must be subject to

bona fide regulation, including

appropriate reporting, monitoring and

prudential requirements, by a securities

regulatory authority that regularly

enforces compliance with such

standards.

C. Securities Income & Securities

Activities

Section 1.1296–6(e)(1) provides

generally that securities income means

the gross income derived from the active

conduct of any securities activity that

constitutes a trade or business. The list

of securities activities contained in

§ 1.1296–6(e)(2) generally is consistent

with the legislative history to section

1296(b)(3)(A). See H.R. Rep. No. 111,

103d Cong., 1st Sess. 704 (1993).

Section 1.1296–6(e)(2)(iv) includes as

an additional securities activity the

maintenance of a capital deposit

required under foreign law as a

prerequisite to acting as a broker in that

jurisdiction. Without this rule, a broker

that is not also a dealer could be a PFIC

under section 1296(a)(2) even though

the majority of its income is commission

income. This rule applies only if

significant restrictions exist on the use

of its capital. Thus, working capital will

not qualify as a deposit for purposes of

this rule.

In general, only income from

transactions entered into with, or on

behalf of, persons with whom the

corporation has a dealer-customer

relationship may be treated as

nonpassive. Section 1.1296–6(g) adopts

without change the definition of dealercustomer relationship contained in the

bank rules.

Under § 1.1296–6(h) of the proposed

regulations, income and gain from a

security identified as held for

investment under section 475(b)(1)(A)

or which is not held for sale within the

meaning of section 475(b)(1)(B) is

passive. Because the identification rules

of sections 475(b) and 1.475(b)–1T and

1.475(b)–2T apply, the rules governing

identification of inventory securities in

Notice 88–22, 1988–1 CB 489 and

Notice 89–81, 1989–2 CB 399 do not

apply with respect to taxable years

beginning after September 30, 1993.

However, the inventory identification

rules of Notice 89–81 and Notice 88–22

will continue to apply for taxable years

beginning before October 1, 1993.

D. Matched Book Income

Section 1.1296–6(i) of the proposed

regulations provides special rules for

determining a securities dealer’s income

from certain matched transactions.

These rules are adopted in order to

eliminate a potential opportunity for

abuse that arises from the manner in

which a matched book repo business is

conducted by securities dealers.

A matched transaction is defined as a

sale and repurchase agreement with

respect to the same security, entered

into by the controlled foreign

corporation in the active conduct of its

trade or business and properly treated as

offsetting agreements in a matched

book. In a typical repurchase agreement

a taxpayer sells a security and, at the

same time, agrees to repurchase an

identical security from the purchaser at

a price in excess of the taxpayer’s sales

price. In a reverse repurchase

agreement, a taxpayer purchases a

security and concurrently agrees to sell

an identical security to the seller at a

price in excess of the taxpayer’s

purchase price. A taxpayer who keeps a

matched book generally enters into

offsetting repurchase and reverse

repurchase agreements involving

identical securities. Such taxpayers act

as intermediaries by matching persons

who need cash for a short period with

those who need securities for the same

period.

Under the proposed regulations,

securities income includes only the net

(not gross) income from matched

transactions. Without the proposed

regulation’s netting rule, related groups

that are predominantly engaged in

passive activities could easily meet the

gross income tests contained in the

qualified affiliate rules because a CFC

conducting a matched book business

will earn large amounts of gross income,

even though net economic income from

matched book activities is

comparatively small.

E. Affiliates of Dealers or Brokers

Like banks, securities dealers and

brokers frequently operate through

separately incorporated subsidiaries that

may not qualify independently as active

securities dealers or brokers but which

form part of an integrated securities

business conducted by an active dealer

or broker. Accordingly, the proposed

regulations contain rules that extend the
20926 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules

securities dealer/broker exception to

certain qualified affiliates of active

securities dealers or brokers. These rules

generally mirror the qualified bank

affiliate rules contained in § 1.1296–4(i),

except that they extend the securities

dealer/broker exception only to

qualified securities affiliates that are

CFCs, as required by section

1296(b)(3)(A).

F. Income From Nonsecurities Activities

Section 1.1296–6(k) of the proposed

regulations provides that income

derived from the conduct of activities

other than securities activities described

in § 1.1296–6(e)(2) and income from

assets held for the conduct of such

activities are nonpassive only to the

extent provided in section 1296.

G. Effective Date

The rules contained in § 1.1296–6 are

proposed to be effective for taxable

years beginning after September 30,

1993.

III. Look-Through Rules

The proposed regulations do not

contain guidance regarding the lookthrough rules of sections 1296(c) and

1296(b)(2)(C) or the grouping rules of

section 956A(d). In general, the

proposed regulations also do not

address whether, and to what extent,

look-through principles may apply to

characterize income from a partnership

as nonpassive and an interest in a

partnership as a nonpassive asset,

except to the extent that section 475

may treat a partnership as a securities

dealer. Because these issues are not

unique to financial institutions, the IRS

and Treasury will address them in

future regulations of more general

application. The IRS and Treasury

solicit comments on the proper scope

and application of look-through and

grouping concepts to banks, securities

dealers and securities brokers.

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, 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 (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 August 31, 1995, at 10 a.m., in the

Internal Revenue Service Auditorium,

7400 corridor. 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 and an outline of the

topics to be discussed and the time to

be devoted to each topic (signed original

and eight (8) copies) by August 10,

1995.

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 Ramon Camacho, Office of

the 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 is amended by removing the

entry for Sections 1.1291–10T, 1.1294–

1T, 1.1295–1T, and 1.1297–3T and

adding entries in numerical order to

read as follows:

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

Section 1.1291–10T also issued under 26

U.S.C. 1291(d)(2).

Section 1.1294–1T also issued under 26

U.S.C. 1294.

Section 1.1295–1T also issued under 26

U.S.C. 1295.

Section 1.1296–4 also issued under 26 U.S.C.

1296(b)(2)(A).

Section 1.1296–6 also issued under 26 U.S.C.

1296(b)(3)(A).

Section 1.1297–3T also issued under 26

U.S.C. 1297(b)(1). * * *

§ 1.1291–0T [Redesignated as § 1.1291–0]

Par. 2. Section 1.1291–0T is

redesignated as § 1.1291–0.

Par. 3. Newly designated § 1.1291–0

is amended as follows:

1. The section heading for newly

designated § 1.1291–0 is revised.

2. The introductory language for

newly designated § 1.1291–0 is revised.

3. Entries for §§ 1.1296–4 and 1.1296–

6 are added in numerical order.

The revisions and additions read as

follows:

§ 1.1291–0 Passive foreign investment

companies—table of contents.

This section lists headings under

sections 1291, 1294, 1296 and 1297 of

the Internal Revenue Code.

* * * * *

§ 1.1296–4 Characterization of certain

banking income of foreign banks as

nonpassive.

(a) General rule.

(b) Active bank.

(1) U.S. licensed banks.

(2) Other foreign banks.

(c) Licensing requirements.

(d) Deposit-taking requirements.

(1) General rule.

(2) Deposit.

(3) Substantiality of deposits.

(e) Lending activities test.

(f) Banking income.

(1) General rule.

(2) Banking activities.

(g) Certain restricted reserves.

(h) Customer relationship.

(i) Income earned by qualified bank

affiliates.

(1) General rule.

(2) Affiliate income requirement.

(3) Group income requirements.

(4) Related group.

(j) Income from nonbank activities.

(k) Effective date.

§ 1.1296–6 Characterization of certain

securities income.

(a) General rule.

(b) Active dealer or broker.

(1) General rule.

(2) U.S. licensed dealers and brokers.

(3) Other dealers and brokers.

(i) General rule.

(ii) Licensing requirements.

(c) Securities dealer.

(d) Securities broker.

(e) Securities income.

(1) General rule.

(2) Securities activities.

(f) Certain deposits of capital.

(g) Dealer-customer relationship.

(h) Investment income.
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules 20927

(i) Calculation of gross income from a

matched book.

(j) Income earned by qualified securities

affiliates.

(1) General rule.

(2) Affiliate income requirement.

(3) Group income requirements.

(4) Related group.

(5) Example.

(k) Income from nonsecurities activities.

(l) Effective date.

* * * * *

Par. 4. Section 1.1296–4 is added to

read as follows:

§ 1.1296–4 Characterization of certain

banking income of foreign banks as

nonpassive.

(a) General rule. For purposes of

section 1296, banking income earned by

an active bank, as defined in either

paragraph (b) (1) or (2) of this section,

or by a qualified bank affiliate, as

defined in paragraph (i) of this section,

is nonpassive income.

(b) Active bank—(1) U.S. licensed

banks. A corporation (whether domestic

or foreign) is an active bank if it is

licensed by federal or state bank

regulatory authorities to do business as

a bank in the United States. A foreign

corporation will not satisfy the

requirements of this paragraph (b)(1) if,

under its federal or state license or

licenses, the foreign corporation is

permitted to maintain only an office,

such as a representative office, that is

prohibited by federal or state law from

taking deposits or making loans.

(2) Other foreign banks. A foreign

corporation is an active bank if it meets

the licensing requirement of paragraph

(c) of this section and it actively

conducts, within the meaning of

§ 1.367(a)–2T(b)(3), a banking business

that is a trade or business within the

meaning of § 1.367(a)–2T(b)(2). In order

for the business conducted by a foreign

corporation to be considered a banking

business, the foreign corporation must

also meet the deposit-taking

requirements of paragraph (d) of this

section and the lending requirements of

paragraph (e) of this section.

(c) Licensing requirements. To be an

active bank under paragraph (b)(2) of

this section, a foreign corporation must

be licensed or authorized to accept

deposits from residents of the country in

which it is chartered or incorporated

and to conduct, in that country, one or

more of the banking activities described

in paragraph (f)(2) of this section.

However, in no case will a foreign

corporation satisfy the requirements of

this paragraph (c) if one of the principal

purposes for its obtaining a license or

authorization was to satisfy the

requirements of this section.

(d) Deposit-taking requirements—(1)

General rule. To be an active bank under

paragraph (b)(2) of this section—

(i) A foreign corporation must, in the

ordinary course of the corporation’s

trade or business, regularly accept

deposits from customers who are

residents of the country in which it is

licensed or authorized; and

(ii) The amount of deposits shown on

the corporation’s balance sheet must be

substantial.

(2) Deposit. Whether a liability

constitutes a deposit for purposes of this

paragraph (d) is determined by reference

to the characteristics of the relevant

instrument and does not depend solely

on whether the instrument is designated

as a deposit.

(3) Substantiality of deposits. Whether

the amount of deposits (including

interbank deposits) shown on a

corporation’s balance sheet is

substantial depends on all the facts and

circumstances, including whether the

corporation’s capital structure and

funding sources as a whole are similar

to that of banking institutions engaged

in the same types of activities and

subject to the jurisdiction of the same

bank regulatory authorities.

(e) Lending activities test. To be an

active bank under paragraph (b)(2) of

this section, a corporation must

regularly make loans to customers in the

ordinary course of its trade or business.

A note, bond, debenture or other

evidence of indebtedness will be treated

as a loan for purposes of this section

only if the debt instrument is received

by the corporation on an extension of

credit made pursuant to a loan

agreement entered into in the ordinary

course of the corporation’s banking

business. Such debt instruments

generally will not be considered loans

for purposes of this section if the

instruments are not treated as loans (but

are classified as securities or other

investment assets, for example) for

purposes of the foreign corporation’s

financial statements.

(f) Banking income—(1) General rule.

Banking income is the gross income

derived from the active conduct (within

the meaning of § 1.367(a)–2T(b)(3)) of

any banking activity described in

paragraph (f)(2) of this section.

(2) Banking activities. For purposes of

this section, the following are banking

activities—

(i) Lending activities described in

paragraph (e) of this section;

(ii) Factoring evidences of

indebtedness for customers;

(iii) Purchasing, selling, discounting,

or negotiating for customers notes,

drafts, checks, bills of exchange,

acceptances, or other evidences of

indebtedness;

(iv) Issuing letters of credit and

negotiating drafts drawn thereunder for

customers;

(v) Performing trust services,

including activities as a fiduciary, agent

or custodian, for customers, provided

such trust activities are not performed

in connection with services provided by

a dealer in stock, securities or similar

financial instruments;

(vi) Arranging foreign exchange

transactions (including any section 988

transaction within the meaning of

section 988(c)(1)) for, or engaging in

foreign exchange transactions with,

customers;

(vii) Arranging interest rate or

currency futures, forwards, options or

notional principal contracts for, or

entering into such transactions with,

customers;

(viii) Underwriting issues of stock,

debt instruments or other securities

under best efforts or firm commitment

agreements for customers;

(ix) Engaging in finance leases, as

defined in § 1.904–4(e)(2)(i)(V);

(x) Providing charge and credit card

services for customers or factoring

receivables obtained in the course of

providing such services;

(xi) Providing traveler’s check and

money order services for customers;

(xii) Providing correspondent bank

services for customers;

(xiii) Providing paying agency and

collection agency services for

customers;

(xiv) Maintaining restricted reserves

(including money or securities) as

described in paragraph (g) of this

section; and

(xv) Any other activity that the

Commissioner determines, through a

revenue ruling or other formal

published guidance (see § 601.601(d)(2)

of this chapter), to be a banking activity

generally conducted by active banks in

the ordinary course of their banking

business.

(g) Certain restricted reserves. A

deposit of assets in a reserve is, for

purposes of this section, a banking

activity if the deposit is maintained in

a segregated account in order to satisfy

a capital or reserve requirement under

the laws of a jurisdiction in which the

corporation actively conducts (within

the meaning of § 1.367(a)–2T(b)(3)) a

banking business that is a trade or

business (within the meaning of

§ 1.367(a)–2T(b)(2)). A deposit of assets

into a reserve qualifies under this

paragraph (g) if and only to the extent

that the assets are not available for use

in connection with the corporation’s

banking business because of significant
20928 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules

regulatory restrictions on the investment

of such assets. This paragraph (g) does

not apply to ordinary working capital,

which is available for unrestricted use.

(h) Customer relationship. Whether a

customer relationship exists is

determined by reference to all the facts

and circumstances. Such a relationship

does not exist with respect to

transactions between members of a

related group, as defined in paragraph

(i)(4) of this section, or transactions with

any shareholders, officers, directors or

other employees of any person that

would otherwise be treated as an active

bank or qualified bank affiliate if one of

the principal purposes for such

transactions was to satisfy the

requirements of this section.

(i) Income earned by qualified bank

affiliates—(1) General rule. A foreign

corporation that is not an active bank

but which derives banking income, as

defined in paragraph (f)(1) of this

section, is a qualified bank affiliate for

purposes of this section if such

corporation meets the requirements of

paragraph (i)(2) of this section and the

related group of which it is a member

meets the requirements of paragraph

(i)(3) of this section. Banking income

earned by a qualified bank affiliate is

nonpassive only for purposes of

determining whether any member of the

related group is a passive foreign

investment company or holds stock in a

passive foreign investment company or

for purposes of applying section

956A(c)(2)(A). However, banking

income of a qualified bank affiliate

remains passive with respect to persons

who own stock in that affiliate but who

are not members of the related group of

which the affiliate is a member.

(2) Affiliate income requirement. To

be a qualified bank affiliate, at least 60

percent of the foreign corporation’s total

gross income for the taxable year must

be banking income, securities income,

as defined in § 1.1296–6(e)(1), or gross

income described in section

1296(b)(2)(B) (relating to insurance

activities). For purposes of applying this

paragraph (i)(2), the look-through rules

of sections 1296(b)(2)(C) and 1296(c) do

not apply.

(3) Group income requirements. The

related group qualifies under this

paragraph (i) if—

(i) At least 30 percent of the aggregate

gross financial services income, as

defined in § 1.904–4(e)(1), earned

during the taxable year by members of

the related group is banking income

earned by active banks who are

members of the related group during the

current taxable year; and

(ii) At least 70 percent of the aggregate

gross financial services income earned

during the taxable year by members of

the related group is banking income,

securities income, or gross income

described in section

1296(b)(2)(B)(relating to insurance

activities).

(4) Related group. The related group

is the group of persons consisting of the

entity being tested under this paragraph

(i) and all entities that are related within

the meaning of section 954(d)(3) to such

entity, substituting ‘‘person’’ for

‘‘controlled foreign corporation’’ each

time the latter term appears.

(j) Income from nonbank activities.

Income derived from the conduct of

activities other than banking activities

described in paragraph (f)(2) of this

section and income from assets held for

the conduct of such other activities are

nonpassive only to the extent otherwise

provided in section 1296.

(k) Effective date. This section is

effective for taxable years beginning

after December 31, 1994. However,

taxpayers may apply this section to a

taxable year beginning after December

31, 1986, but must consistently apply

this section to such taxable year and all

subsequent years.

Par. 5. Section 1.1296–6 is added to

read as follows:

§ 1.1296–6 Characterization of certain

securities income.

(a) General rule. For purposes of

section 1296, securities income earned

by an active dealer or active broker, as

defined in paragraph (b) of this section,

or a qualified securities affiliate, as

defined in paragraph (j) of this section,

is nonpassive income. This section

applies only for purposes of

determining whether a controlled

foreign corporation, as defined in

section 957(a), is a passive foreign

investment company with respect to its

United States shareholders as defined in

section 951(b), or for the purpose of

determining whether an asset is passive

under section 956A(c)(2)(A).

(b) Active dealer or broker—(1)

General rule. A securities dealer, as

defined in paragraph (c) of this section,

or a securities broker, as defined in

paragraph (d) of this section, is an active

dealer or an active broker for purposes

of this section if it meets the

requirements of either paragraph (b) (2)

or (3) of this section.

(2) U.S. licensed dealers and brokers.

A securities dealer or securities broker

(whether foreign or domestic) is an

active dealer or an active broker if it is

registered as a securities dealer or

broker under section 15(a) of the

Securities Exchange Act of 1934 or is

registered as a Government securities

dealer or broker under section 15C(a) of

such Act.

(3) Other dealers and brokers—(i)

General rule. A securities dealer or a

securities broker is an active dealer or

an active broker if it meets the licensing

requirements of paragraph (b)(3)(ii) of

this section and actively conducts,

within the meaning of § 1.367(a)–

2T(b)(3), one or more securities

activities, as defined in paragraph (e)(2)

of this section, as a trade or business

within the meaning of § 1.367(a)–

2T(b)(2).

(ii) Licensing requirements. To be an

active dealer or an active broker under

paragraph (b)(3) of this section, a

securities dealer or securities broker

must be licensed or authorized in the

country in which it is chartered,

incorporated or organized to conduct

one or more of the securities activities

described in paragraph (e)(2) of this

section with residents of that country.

The conduct of such activities must be

subject to bona fide regulation,

including appropriate reporting,

monitoring and prudential (including

capital adequacy) requirements, by a

securities regulatory authority in that

country that regularly enforces

compliance with such requirements and

prudential standards.

(c) Securities dealer. For purposes of

this section, a securities dealer is a

dealer (whether foreign or domestic) in

securities within the meaning of section

475(c)(1).

(d) Securities broker. For purposes of

this section, a securities broker is a

corporation (whether domestic or

foreign) that, during its taxable year,

stands ready, in the ordinary course of

its trade or business, to effect

transactions in securities and other

financial instruments for the account of

customers, including the arrangement of

loans of securities owned by customers.

(e) Securities income—(1) General

rule. Securities income means the gross

income (except as provided in

paragraph (i) of this section) derived

from the active conduct (within the

meaning of § 1.367(a)–2T(b)(3)) of any

securities activity described in

paragraph (e)(2) of this section.

(2) Securities activities. For purposes

of this section, the following are

securities activities—

(i) Purchasing or selling stock, debt

instruments, interest rate or currency

futures or other securities or derivative

financial products (including notional

principal contracts) from or to

customers and holding stock, debt

instruments and other securities as

inventory for sale to customers, unless

the relevant securities or derivative

financial products (including notional
Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules 20929

principal contracts) are not held in a

dealer capacity;

(ii) Effecting transactions in securities

for customers as a securities broker;

(iii) Arranging futures, forwards,

options, or notional principal contracts

for, or entering into such transactions

with, customers;

(iv) Arranging foreign exchange

transactions (including any section 988

transaction within the meaning of

section 988(c)(1)) for, or engaging in

foreign exchange transactions with,

customers;

(v) Underwriting issues of stocks, debt

instruments, or other securities under

best efforts or firm commitment

agreements with customers;

(vi) Purchasing, selling, discounting,

or negotiating for customers on a regular

basis notes, drafts, checks, bills of

exchange, acceptances or other

evidences of indebtedness;

(vii) Borrowing or lending stocks or

securities for customers;

(viii) Engaging in securities

repurchase or reverse repurchase

transactions with customers;

(ix) Engaging in hedging activities

directly related to another securities

activity described in this paragraph

(e)(2);

(x) Repackaging mortgages and other

financial assets into securities and

servicing activities with respect to such

financial assets (including the accrual of

interest incidental to such activities);

(xi) Engaging in financing activities

typically provided by an investment

bank, such as—

(A) Project financing provided in

connection with, for example,

construction projects;

(B) Structured finance, including the

extension of a loan and the sale of

participations or interests in the loan to

other financial institutions or investors;

and

(C) Leasing activities to the extent

incidental to financing activities

described in this paragraph (e)(2)(xi) or

to advisory services described in

paragraph (e)(2)(xii) of this section;

(xii) Providing financial or investment

advisory services, investment

management services, fiduciary

services, trust services or custodial

services;

(xiii) Providing margin or any other

financing for a customer secured by

securities or money market instruments,

including repurchase agreements, or

providing financing in connection with

any of the activities listed in paragraphs

(e)(2)(i) through (e)(2)(xii) of this

section;

(xiv) Maintaining deposits of capital

(including money or securities)

described in paragraph (f) of this

section; and

(xv) Any other activity that the

Commissioner determines, through a

revenue ruling or other formal

published guidance, to be a securities

activity generally conducted by active

dealers or active brokers in the ordinary

course of their securities business.

(f) Certain deposits of capital. A

deposit of capital is, for purposes of this

section, a securities activity if the

deposit is maintained in a segregated

account in order to satisfy a capital

requirement for registration as a

securities broker or dealer under the

laws of a jurisdiction in which the

broker or dealer actively conducts

(within the meaning of § 1.367(a)–

2T(b)(3)) a trade or business (within the

meaning of § 1.367(a)–2T(b)(2)) as a

securities broker or dealer. A deposit of

capital qualifies under this paragraph (f)

if and only to the extent that the assets

are not available for use in connection

with the controlled foreign corporation’s

activities as a securities broker or dealer

because of significant regulatory

restrictions on the investment of such

assets. This paragraph (f) does not apply

to ordinary working capital, which is

available for unrestricted use.

(g) Dealer-customer relationship.

Whether a dealer-customer relationship

exists is determined by reference to all

the facts and circumstances. Such a

relationship does not exist with respect

to transactions between members of a

related group, as defined in paragraph

(j)(4) of this section, or transactions with

any shareholders, officers, directors or

other employees of any person that

would otherwise be treated as an active

dealer, active broker or qualified

securities affiliate if one of the principal

purposes for such transactions was to

satisfy the requirements of this section.

(h) Investment income. Income earned

on any securities held for investment

within the meaning of section

475(b)(1)(A) or not held for sale within

the meaning of section 475(b)(1)(B), is

passive for purposes of sections

1296(a)(1), 1296(a)(2) and 956A(c)(2)(A).

(i) Calculation of gross income from a

matched book. Securities income

includes only the net (not gross) income

from matched transactions. For

purposes of this section, a matched

transaction is a sale and repurchase

agreement with respect to the same

security properly treated as offsetting

agreements in a matched book.

(j) Income earned by qualified

securities affiliates—(1) General rule. A

foreign corporation that is not an active

dealer or an active broker but which

derives securities income described in

paragraph (e)(1) of this section is a

qualified securities affiliate for purposes

of this section if such corporation meets

the requirements of paragraph (j)(2) of

this section and is a member of a related

group that meets the requirements of

paragraph (j)(3) of this section.

Securities income earned by a qualified

securities affiliate is nonpassive only for

purposes of determining whether any

member of the related group is a passive

foreign investment company or holds

stock in a passive foreign investment

company or for purposes of applying

section 956A(c)(2)(A). However,

securities income of a qualified

securities affiliate remains passive with

respect to persons who own stock in

that affiliate but who are not members

of the related group of which the

affiliate is a member.

(2) Affiliate income requirement. To

be a qualified securities affiliate, at least

60 percent of the foreign corporation’s

total gross income for the taxable year

must be banking income, as defined in

§ 1.1296–4(f)(1), securities income, as

defined in paragraph (e)(1) of this

section, or gross income described in

section 1296(b)(2)(B) (relating to

insurance activities). For purposes of

this paragraph (j)(2), the look-through

rules of sections 1296(b)(2)(C) and

1296(c) do not apply.

(3) Group income requirements. The

related group qualifies under this

paragraph (j) if—

(i) At least 30 percent of the aggregate

gross financial services income, as

defined in § 1.904–4(e)(1), earned

during the taxable year by members of

the related group is securities income

earned by active dealers or active

brokers who are members of the related

group during the current taxable year;

and

(ii) At least 70 percent of the aggregate

gross financial services income earned

during the taxable year by members of

the related group is banking income,

securities income, or gross income

described in section 1296(b)(2)(B)

(relating to insurance activities).

(4) Related group. The related group

is the group of persons consisting of the

entity being tested under this paragraph

(j) and all entities that are related within

the meaning of section 954(d)(3) to such

entity, substituting ‘‘person’’ for

‘‘controlled foreign corporation’’ each

time the latter term appears.

(5) Example. The following example

illustrates the rules of this paragraph (j).

Example. (i) Facts. SD is a country Y

corporation that owns 85 percent of the stock

of M, a country Z corporation. A, a U.S.

person, owns the remaining 15 percent of the

stock of M. B, C, and D, all unrelated U.S.

persons, own 5, 15, and 36 percent,

respectively, of the stock of SD. The rest of

SD’s stock is publicly held. SD is a securities

dealer within the meaning of section
20930 Federal Register / Vol. 60, No. 82 / Friday, April 28, 1995 / Proposed Rules

475(c)(1) and satisfies the licensing

requirements of paragraph (b)(3)(ii) of this

section. Because M’s sole activity is

conducting a matched book repo business, M

is not a securities dealer within the meaning

of section 475. For its taxable year ending

December 31, 1994, SD earns $100 of gross

income from trading profits and interest and

dividends on inventory. For its taxable year

ending December 31, 1994, M earns $50 of

net interest income from its matched book

repo business. SD and M earn no other

income. All of SD and M’s assets are held in

connection with their securities businesses

and none has been identified as having been

held for investment.

(ii) Securities income earned by SD. SD is

an active dealer under paragraph (b) of this

section because it is a securities dealer under

section 475 and satisfies the licensing

requirements of paragraph (b)(3)(ii) of this

section. Therefore, because SD is a controlled

foreign corporation, SD’s securities income is

nonpassive under paragraph (a) of this

section.

(iii) Securities income earned by M. (A) SD

and M are financial services entities that are

the only members of a related group as

defined in paragraph (j)(4) of this section.

The percentage of the SD–M related group’s

financial services income that is securities

income earned by active dealers (SD), is

66.66 percent (($100/$150) X 100). The

percentage of the SD–M related group’s

financial services income that is securities

income, banking income (as defined in

§ 1.1296–4(f)), or insurance income (as

defined in section 1296(b)(2)(B)) is 100

percent (($150/$150)×100). In addition, the

percentage of M’s income that is securities

income is 100 percent (($50/$50)×100).

(B) M is a qualified securities affiliate

because the gross income tests of paragraphs

(j)(2) and (3) of this section are satisfied.

Accordingly, because M is a controlled

foreign corporation, M’s securities income is

nonpassive for purposes of determining

whether C or D own an interest in a PFIC

(whether SD or M). M is thus not a PFIC with

respect to C or D because it does not meet

the income or asset tests of section 1296(a).

SD also is not a PFIC with respect to C or D

because it does not meet the income or assets

tests of section 1296(a), after applying the

look-through rule of section 1296(c).

(C) However, because B owns less than 10

percent of the stock of SD, and is therefore

not a United States shareholder with respect

to SD under section 951(b), M’s interest

income is passive (even though it is

securities income) for purposes of

determining whether B’s indirect interest in

M is an interest in a PFIC. Moreover, M’s

interest income is passive for purposes of

determining whether A owns an interest in

a PFIC. As a result, M meets the income and

asset tests of section 1296(a) and is therefore

a PFIC with respect to A and B.

(k) Income from nonsecurities

activities. Income derived from the

conduct of activities other than

securities activities described in

paragraph (e)(2) of this section and

income from assets held for the conduct

of such other activities are nonpassive

only to the extent otherwise provided in

section 1296.

(l) Effective date. This section is

effective for taxable years beginning

after September 30, 1993.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95–10174 Filed 4–27–95; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Part 100

[CGD01–95–033]

Special Local Regulation: 1995 Special

Olympics World Games, Long Island

Sound, New Haven, CT

AGENCY: Coast Guard, DOT.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Coast Guard proposes to

establish a temporary special local

regulation for the 1995 Special

Olympics World Games. Maritime

activities held as a part of the Special

Olympics World Games will take place

in the waters of Long Island Sound

approaching New Haven, Connecticut.

The dates for these maritime activities

are July 1–July 10, 1995. This regulation

is needed to allow the Special Olympics

World Games Committee to hold the

various maritime activities associated

with the 1995 Special Olympics World

Games without interference from the

boating public, and to protect boaters,

spectators, and participants from the

dangers associated with these events.

DATES: Comments must be received on

or before May 30, 1995.

ADDRESSES: Comments should be

mailed to Commander (b), First Coast

Guard District, Captain John Foster

Williams Federal Building, 408 Atlantic

Ave., Boston, MA 02110–3350, or may

be hand delivered to Room 428 at the

same address, between 8 a.m. and 4

p.m., Monday through Friday, except

federal holidays. Comments will

become part of this docket and will be

available for inspection or copying at

the above address.

FOR FURTHER INFORMATION CONTACT:

Lieutenant (jg) B.M. Algeo, Chief,

Boating Affairs Branch, First Coast

Guard District, (617) 223–8311.

SUPPLEMENTARY INFORMATION:

Request for Comments

The Coast Guard encourages

interested persons to participate in this

rulemaking by submitting written data,

views, or arguments. Persons submitting

comments should include their names

and addresses, identify this notice

(CGD01–95–033), the specific section of

the proposal to which each comment

applies, and give reasons for each

comment. The Coast Guard requests that

all comments and attachments be

submitted in an 81⁄2′′ × 11′′ unbound

format suitable for copying and

electronic filing. If that is not practical,

a second copy of any bound material is

requested. Persons requesting

acknowledgment of receipt of comments

should enclose a stamped, selfaddressed postcard or envelope.

The Coast Guard will consider all

comments received during the comment

period. It may change this proposal in

view of the comments. The Coast Guard

plans no public hearing. Persons may

request a public hearing by writing to

Commander (b), First Coast Guard

District at the address under ADDRESSES.

The request should include reasons why

a hearing would be beneficial. If it is

determined that the opportunity for oral

presentations will aid this rulemaking,

the Coast Guard will hold a public

hearing at a time and place announced

by a later notice in the Federal Register.

Drafting Information

The drafters of this notice are

Lieutenant(jg) Eric Doucette, Project

Manager, Captain of the Port, Long

Island Sound, and Lieutenant

Commander F.J. Kenney, Project

Counsel, First Coast Guard District Legal

Office.

Background and Purpose

The 1995 Special Olympics World

Games are scheduled to be held in New

Haven, Connecticut, from July 1–July

10, 1995. As part of the schedule of

events, various maritime activities are

planned for the participants and the

public. The Special Olympics World

Games Committee has submitted three

marine events permits to the U.S. Coast

Guard. The maritime activities for

which permits have been requested are

to be held in the waters of Long Island

Sound approaching New Haven,

Connecticut. The activities include

sailboat races, a Parade of Sail, and

fireworks displays. Due to the inherent

dangers of fireworks displays and the

need for vessel control during the

various races and the Parade of Sail,

vessel traffic will be temporarily

restricted to provide for the safety of the

spectators and participants through the

establishment of a proposed regulated

area in New Haven Harbor and Long

Island Sound.

The Coast Guard is establishing an

operational order to provide for the

effective coordination of the activities