65566 Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 / Rules and Regulations

participants in a qualified cost sharing

arrangement must use a consistent

method of accounting to measure costs

and benefits, and must translate foreign

currencies on a consistent basis.

(j) Administrative requirements—(1)

In general. The administrative

requirements of this paragraph consist

of the documentation requirements of

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

reporting requirements of paragraph

(j)(3) of this section.

(2) Documentation. A controlled

participant must maintain sufficient

documentation to establish that the

requirements of paragraphs (b)(4) and

(c)(1) of this section have been met, as

well as the additional documentation

specified in this paragraph (j)(2), and

must provide any such documentation

to the Internal Revenue Service within

30 days of a request (unless an

extension is granted by the district

director). Documents necessary to

establish the following must also be

maintained—

(i) The total amount of costs incurred

pursuant to the arrangement;

(ii) The costs borne by each controlled

participant;

(iii) A description of the method used

to determine each controlled

participant’s share of the intangible

development costs, including the

projections used to estimate benefits,

and an explanation of why that method

was selected;

(iv) The accounting method used to

determine the costs and benefits of the

intangible development (including the

method used to translate foreign

currencies), and, to the extent that the

method materially differs from U.S.

generally accepted accounting

principles, an explanation of such

material differences; and

(v) Prior research, if any, undertaken

in the intangible development area, any

tangible or intangible property made

available for use in the arrangement, by

each controlled participant, and any

information used to establish the value

of pre-existing and covered intangibles.

(3) Reporting requirements. A

controlled participant must attach to its

U.S. income tax return a statement

indicating that it is a participant in a

qualified cost sharing arrangement, and

listing the other controlled participants

in the arrangement. A controlled

participant that is not required to file a

U.S. income tax return must ensure that

such a statement is attached to Schedule

M of any Form 5471 or to any Form

5472 filed with respect to that

participant.

(k) Effective date. This section is

effective for taxable years beginning on

or after January 1, 1996.

(l) Transition rule. A cost sharing

arrangement will be considered a

qualified cost sharing arrangement,

within the meaning of this section, if,

prior to January 1, 1996, the

arrangement was a bona fide cost

sharing arrangement under the

provisions of § 1.482–7T (as contained

in the 26 CFR part 1 edition revised as

of April 1, 1995), but only if the

arrangement is amended, if necessary, to

conform with the provisions of this

section by December 31, 1996.

§ 1.482–7T [Removed]

Par. 4. Section 1.482–7T is removed.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 5. The authority for part 301

continues to read in part as follows:

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

Par. 6. Section 301.7701–3 is

amended by adding paragraph (e) to

read as follows:

§ 301.7701–3 Partnerships.

* * * * *

(e) Qualified cost sharing

arrangements. A qualified cost sharing

arrangement that is described in

§ 1.482–7 of this chapter and any

arrangement that is treated by the

Service as a qualified cost sharing

arrangement under § 1.482–7 of this

chapter is not classified as a partnership

for purposes of the Internal Revenue

Code. See § 1.482–7 of this chapter for

the proper treatment of qualified cost

sharing arrangements.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 7. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 8. In § 602.101, paragraph (c) is

amended by adding an entry to the table

in numerical order to read as follows:

‘‘1.482–7 .......................................1545–1364’’.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: November 30, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30617 Filed 12–19–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 53

[TD 8639]

RIN 1545–AT03

Excise Tax On Self-Dealing By Private

Foundations

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations that clarify the definition of

self-dealing for private foundations.

These regulations modify the

application of the self-dealing rules to

the provision by a private foundation of

directors’ and officers’ liability

insurance to disqualified persons. In

general, these regulations provide that

indemnification by a private foundation

or provision of insurance for purposes

of covering the liabilities of the person

in his/her capacity as a manager of the

private foundation is not self-dealing.

Additionally, the amounts expended by

the private foundation for insurance or

indemnification generally are not

included in the compensation of the

disqualified person for purposes of

determining whether the disqualified

person’s compensation is reasonable.

DATES: These regulations are effective

December 20, 1995.

FOR FURTHER INFORMATION CONTACT:

Terri Harris or Paul Accettura of the

Office of the Associate Chief Counsel

(Employee Benefits and Exempt

Organizations), IRS, at 202–622–6070

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On January 3, 1995 proposed

regulations amending § 53.4941(d)–2(f)

[EE–56–94, 1995–6 I.R.B. 39] under

section 4941 of the Internal Revenue

Code of 1986 were published in the

Federal Register (60 FR 82). The

proposed regulations provided that

generally it would not be self-dealing,

nor treated as the payment of

compensation, if a private foundation

were to indemnify or provide insurance

to a foundation manager in any civil

judicial or civil administrative

proceeding arising out of the manager’s

performance of services on behalf of the

foundation. After IRS and Treasury

consideration of the public comments

received regarding the proposed

regulations, the regulations are adopted

as revised by this Treasury decision.

Explanation of Provisions

Section 4941(a) imposes a tax on each

act of self-dealing between a
Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 / Rules and Regulations 65567

disqualified person and a private

foundation. Section 4941(d)(1)(E)

defines self-dealing to include any

direct or indirect transfer to, or use by

or for the benefit of, a disqualified

person of the income or assets of a

private foundation. Prior to this

Treasury decision, § 53.4941(d)–2(f)(1)

provided that provision of insurance for

the payment of chapter 42 taxes by a

private foundation for a foundation

manager was self- dealing unless the

premium amounts were included in the

compensation of the foundation

manager. The payment of chapter 42

taxes by the private foundation on

behalf of the foundation manager was

self-dealing whether or not the amounts

were included in the manager’s

compensation.

Section 53.4941(d)–2(f)(3) provided

that the indemnification of certain

expenses by a private foundation for a

foundation manager’s defense in a

judicial or administrative proceeding

involving chapter 42 taxes was not selfdealing. Such expenses must have been

reasonably incurred by the manager in

connection with such proceeding. Also,

the manager must have been successful

in such defense, or such proceeding

must have been terminated by

settlement, and the manager must not

have acted willfully and without

reasonable cause with respect to the act

or failure to act which led to the liability

for tax under chapter 42.

This Treasury decision expands the

scope of the regulations to cover

indemnification and insurance

payments made by a private foundation

to or on behalf of a foundation manager

in connection with any civil proceeding

arising from the manager’s performance

of services for the private foundation.

The regulations also clarify the

distinction between the treatment of

indemnification and insurance

payments under chapter 42 and the

treatment of these same items for

income tax purposes.

The proposed regulations resulted in

some confusion as to whether certain

indemnification and insurance

payments would be considered

compensatory or non-compensatory.

The final regulations have been revised

to provide greater clarity. They divide

indemnification payments and

insurance coverage into noncompensatory and compensatory

categories, described comprehensively

in § 53.4941(d)–2(f) (3) and (4). The

second and third sentences of

§ 53.4941(d)–2(f)(1) of the proposed

regulations have been removed because

their substance was incorporated into

§ 53.4941(d)–2(f)(4). Generally, the noncompensatory category includes

indemnification and insurance

payments that cover expenses

reasonably incurred in proceedings that

do not result from a willful act or

omission of the manager undertaken

without reasonable cause. These

payments are viewed as expenses for the

foundation’s administration and

operation rather than compensation for

the manager’s services. The

compensatory category includes

indemnification or insurance payments

that cover taxes (including taxes

imposed by chapter 42), penalties or

expenses of correction, expenses that

were not reasonably incurred, or

expenses for proceedings that result

from a willful act or omission of the

manager undertaken without reasonable

cause. These payments are viewed as

being exclusively for the benefit of the

manager, not the foundation.

The regulations provide that noncompensatory indemnification and

insurance payments are not affected by

the prohibition against self-dealing.

Conversely, compensatory

indemnification and insurance

payments are considered acts of selfdealing unless they are added to the

benefiting manager’s total compensation

for purposes of determining whether

that compensation is reasonable. If the

total compensation is not reasonable,

the foundation will have engaged in an

act of self-dealing.

In some instances, a foundation may

purchase an insurance policy that

provides both non-compensatory and

compensatory coverage. Some

commentators have recommended that

no allocation of insurance premiums be

required when a single policy of this

sort is purchased. These commentators

argue that the allocation requirement

places an undue burden on private

foundations. After careful consideration,

the IRS and the Treasury Department

have decided to retain the allocation

provision in the final regulations. The

self-dealing rules were meant to

discourage foundations from relieving

managers of penalties, taxes and

expenses of correction, as well as

expenses ultimately resulting from the

manager’s willful violation of the law. A

rule that did not require an allocation to

determine whether the disqualified

person’s compensation is reasonable for

purposes of chapter 42 could have the

opposite effect. The insurance allocation

rules are now set forth in § 53.4941(d)–

2(f)(5).

Some commentators requested a

clearer statement of what is meant by

the statement that indemnification or

insurance premiums are to be treated as

compensation to the benefiting

foundation manager. The IRS and the

Treasury Department agree that further

clarification is desirable. Accordingly,

§ 53.4941(d)–2(f)(7) has been added. It

provides that treatment as compensation

for the limited purpose of determining

whether compensation is reasonable

under chapter 42 is separate and

distinct from treatment as income to the

benefiting manager under the income

tax provisions. Whether any amount of

indemnification or insurance is

included in the manager’s gross income

for individual income tax purposes is

determined in accordance with section

132, without regard to the treatment of

such amounts under chapter 42.

Finally, a provision has been added to

the regulations specifying that a

foundation may disregard de minimis

benefits when calculating the total

amount of compensation paid to an

officer, director or foundation manager

for purposes of determining whether

that compensation is reasonable. In this

context, a de minimis benefit is one

excluded from gross income under

section 132(a)(4). This provision makes

explicit a Service position that has

previously been reflected in the

instructions to the Form 990–PF.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It has also

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, the notice of proposed rulemaking

preceding these regulations was

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal author of this Treasury

decision is Terri Harris, Office of the

Associate Chief Counsel (Employee

Benefits and Exempt Organizations),

IRS. However, personnel from other

offices of the IRS and the Treasury

Department participated in their

development.

List of Subjects in 26 CFR Part 53

Excise taxes, Foundations,

Investments, Lobbying, Reporting and

recordkeeping requirements.
65568 Federal Register / Vol. 60, No. 244 / Wednesday, December 20, 1995 / Rules and Regulations

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 53 is

amended as follows:

PART 53—FOUNDATION AND SIMILAR

EXCISE TAXES

Paragraph 1. The authority for part 53

continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 2. Section 53.4941(d)–2 is

amended as follows:

1. Paragraph (f)(1) is amended by

removing the second and third

sentences and revising the fourth

sentence.

2. Paragraph (f)(3) is revised.

3. Paragraph (f)(4) is redesignated as

paragraph (f)(9).

4. New paragraphs (f)(4) through (f)(8)

are added.

The additions and revisions read as

follows:

§ 53.4941(d)–2 Specific acts of selfdealing.

* * * * *

(f) Transfer or use of the income or

assets of a private foundation—(1) In

general. * * * For purposes of the

preceding sentence, the purchase or sale

of stock or other securities by a private

foundation shall be an act of self-dealing

if such purchase or sale is made in an

attempt to manipulate the price of the

stock or other securities to the

advantage of a disqualified person.

* * *

* * * * *

(3) Non-compensatory

indemnification of foundation managers

against liability for defense in civil

proceedings. (i) Except as provided in

§ 53.4941(d)–3(c), section 4941(d)(1)

shall not apply to the indemnification

by a private foundation of a foundation

manager, with respect to the manager’s

defense in any civil judicial or civil

administrative proceeding arising out of

the manager’s performance of services

(or failure to perform services) on behalf

of the foundation, against all expenses

(other than taxes, including taxes

imposed by chapter 42, penalties, or

expenses of correction) including

attorneys’ fees, judgments and

settlement expenditures if—

(A) Such expenses are reasonably

incurred by the manager in connection

with such proceeding; and

(B) The manager has not acted

willfully and without reasonable cause

with respect to the act or failure to act

which led to such proceeding or to

liability for tax under chapter 42.

(ii) Similarly, except as provided in

§ 53.4941(d)–3(c), section 4941(d)(1)

shall not apply to premiums for

insurance to make or to reimburse a

foundation for an indemnification

payment allowed pursuant to this

paragraph (f)(3). Neither shall an

indemnification or payment of

insurance allowed pursuant to this

paragraph (f)(3) be treated as part of the

compensation paid to such manager for

purposes of determining whether the

compensation is reasonable under

chapter 42.

(4) Compensatory indemnification of

foundation managers against liability

for defense in civil proceedings. (i) The

indemnification by a private foundation

of a foundation manager for

compensatory expenses shall be an act

of self-dealing under this paragraph

unless when such payment is added to

other compensation paid to such

manager the total compensation is

reasonable under chapter 42. A

compensatory expense for purposes of

this paragraph (f) is—

(A) Any penalty, tax (including a tax

imposed by chapter 42), or expense of

correction that is owed by the

foundation manager;

(B) Any expense not reasonably

incurred by the manager in connection

with a civil judicial or civil

administrative proceeding arising out of

the manager’s performance of services

on behalf of the foundation; or

(C) Any expense resulting from an act

or failure to act with respect to which

the manager has acted willfully and

without reasonable cause.

(ii) Similarly, the payment by a

private foundation of the premiums for

an insurance policy providing liability

insurance to a foundation manager for

expenses described in this paragraph

(f)(4) shall be an act of self-dealing

under this paragraph (f) unless when

such premiums are added to other

compensation paid to such manager the

total compensation is reasonable under

chapter 42.

(5) Insurance Allocation. A private

foundation shall not be engaged in an

act of self-dealing if the foundation

purchases a single insurance policy to

provide its managers both the

noncompensatory and the compensatory

coverage discussed in this paragraph (f),

provided that the total insurance

premium is allocated and that each

manager’s portion of the premium

attributable to the compensatory

coverage is included in that manager’s

compensation for purposes of

determining reasonable compensation

under chapter 42.

(6) Indemnification. For purposes of

this paragraph (f), the term

indemnification shall include not only

reimbursement by the foundation for

expenses that the foundation manager

has already incurred or anticipates

incurring but also direct payment by the

foundation of such expenses as the

expenses arise.

(7) Taxable Income. The

determination of whether any amount of

indemnification or insurance premium

discussed in this paragraph (f) is

included in the manager’s gross income

for individual income tax purposes is

made on the basis of the provisions of

chapter 1 and without regard to the

treatment of such amount for purposes

of determining whether the manager’s

compensation is reasonable under

chapter 42.

(8) De minimis items. Any property or

service that is excluded from income

under section 132(a)(4) may be

disregarded for purposes of determining

whether the recipient’s compensation is

reasonable under chapter 42.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 12, 1995.

Leslie Samuels,

Assistant Secretary of Treasury.

[FR Doc. 95–30838 Filed 12–19–95; 8:45 am]

BILLING CODE 4830–01–U

Fiscal Service

31 CFR Part 390

Collection By Administrative Offset

AGENCY: Bureau of the Public Debt,

Fiscal Service, Department of the

Treasury.

ACTION: Final rule.

SUMMARY: This final rule amends Title

31 by removing Part 390. The action is

being taken because the Treasury

Department’s promulgation of

administrative offset regulations at 31

CFR Part 5, Subpart D, made Part 390

unnecessary.

EFFECTIVE DATE: December 20, 1995.

FOR FURTHER INFORMATION CONTACT: Ed

Gronseth, Deputy Chief Counsel, Bureau

of the Public Debt, Parkersburg, WV

(304) 480–5187.

SUPPLEMENTARY INFORMATION:

Background

Part 390 applied to the collection of

claims by administrative offset by the

Bureau of the Public Debt. The rule was

needed to implement the administrative

offset provisions of section 10 of the

Debt Collection Act of 1982, (31 U.S.C.

3716). Subsequent to the adoption of

this rule, the Department of the

Treasury promulgated Department-wide