35696 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Proposed Rules

and that the average labor rate is

approximately $60 an hour. Based on

these figures, the total cost impact of the

proposed AD on U.S. operators is

estimated to be $45,480. This figure

only takes into account the cost of the

inspection and does not take into

account the cost of replacing any fuel

filter assembly found to have a

nonfunctional bypass valve. A fuel filter

assembly replacement would take

approximately 1 workhour (possible two

fuel filter assembly replacements per

airplane) at approximately $60 per hour.

The manufacturer will provide parts at

no cost to the owner/operator. The FAA

knows of no affected airplane owner/

operator that has already accomplished

the proposed action.

Regulatory Impact

The regulations proposed herein

would not have substantial direct effects

on the States, on the relationship

between the national government and

the States, or on the distribution of

power and responsibilities among the

various levels of government. Therefore,

in accordance with Executive Order

12612, it is determined that this

proposal would not have sufficient

federalism implications to warrant the

preparation of a Federalism Assessment.

For the reasons discussed above, I

certify that this action (1) is not a

‘‘significant regulatory action’’ under

Executive Order 12866; (2) is not a

‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034, February 26, 1979); and (3) if

promulgated, will not have a significant

economic impact, positive or negative,

on a substantial number of small entities

under the criteria of the Regulatory

Flexibility Act. A copy of the draft

regulatory evaluation prepared for this

action has been placed in the Rules

Docket. A copy of it may be obtained by

contacting the Rules Docket at the

location provided under the caption

ADDRESSES.

List of Subjects in 14 CFR Part 39

Air transportation, Aircraft, Aviation

safety, Safety.

The Proposed Amendment

Accordingly, pursuant to the

authority delegated to me by the

Administrator, the Federal Aviation

Administration proposes to amend part

39 of the Federal Aviation Regulations

(14 CFR part 39) as follows:

PART 39—AIRWORTHINESS

DIRECTIVES

1. The authority citation for part 39

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40113, 44701.

§ 39.13 [Amended]

2. Section 39.13 is amended by

adding a new airworthiness directive

(AD) to read as follows:

Raytheon Aircraft Corporation (formerly

Beech Aircraft Corporation): Docket No.

96–CE–30–AD.

Applicability: The following airplane

model and serial numbers, certificated in any

category:

Models Serial numbers

1900C ........................ UC–1 through UC–

174

1900C (C–12J) .......... UD–1 through UD–6

1900D ........................ UE–1 through UE–

205

2000 .......................... NC–4 through NC–53

Note 1: This AD applies to each airplane

identified in the preceding applicability

provision, regardless of whether it has been

modified, altered, or repaired in the area

subject to the requirements of this AD. For

airplanes that have been modified, altered, or

repaired so that the performance of the

requirements of this AD is affected, the

owner/operator must request approval for an

alternative method of compliance in

accordance with paragraph (c) of this AD.

The request should include an assessment of

the effect of the modification, alteration, or

repair on the unsafe condition addressed by

this AD; and, if the unsafe condition has not

been eliminated, the request should include

specific proposed actions to address it.

Compliance: Required within the next 50

hours time-in-service after the effective date

of this AD, unless already accomplished.

To prevent lack of fuel to the engine and

eventual engine shutdown caused by a

clogged fuel filter and a contaminated fuel

filter by-pass valve, accomplish the

following:

(a) Inspect (one-time) the fuel filter

assemblies to detect any bypass valve that is

glued shut. If a bypass valve is glued shut,

prior to further flight, replace the associated

fuel filter assembly. Accomplish the

inspection and replacement (if necessary) in

accordance with Raytheon Service Bulletin

(SB) No. 2677 (for Model 2000), dated March,

1996; and Beechcraft SB No. 2678 (for

Models 1900C and 1900D), dated May, 1996.

(b) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the airplane to

a location where the requirements of this AD

can be accomplished.

(c) An alternative method of compliance or

adjustment of the compliance time that

provides an equivalent level of safety may be

approved by the Manager, Wichita Aircraft

Certification Office (ACO), 1801 Airport

Road, Room 100, Mid-Continent Airport,

Wichita, Kansas 67209. The request shall be

forwarded through an appropriate FAA

Maintenance Inspector, who may add

comments and then send it to the Manager,

Wichita ACO.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the Wichita ACO.

(d) All persons affected by this directive

may obtain copies of the documents referred

to herein upon request to the Raytheon

Aircraft Corporation, P.O. Box 85, Wichita,

Kansas 67201–0085; or may examine these

documents at the FAA, Central Region, Office

of the Assistant Chief Counsel, Room 1558,

601 E. 12th Street, Kansas City, Missouri

64106.

Issued in Kansas City, Missouri, on June

25, 1996.

James E. Jackson,

Acting Manager,

Small Airplane Directorate, Aircraft

Certification Service.

[FR Doc. 96–17296 Filed 7–5–96; 8:45 am]

BILLING CODE 4910–13–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[INTL–4–95]

RIN 1545–AT41

Allocation of Loss on Disposition of

Stock

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed Income Tax Regulations

relating to the allocation of loss realized

on the disposition of stock. These

regulations will affect United States and

foreign shareholders of stock in

domestic and foreign corporations. The

regulations are necessary to modify

existing guidance with respect to stock

losses. This document also contains a

notice of public hearing on the

regulations.

DATES: Written comments must be

received by October 7, 1996. Outlines of

topics to be discussed at the public

hearing scheduled for November 6,

1996, at 10 a.m. must be received by

October 16, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (INTL–4–95), 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:R (INTL–4–95),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC. The public hearing

will be held in room 2615, Internal
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Proposed Rules 35697

Revenue Building, 1111 Constitution

Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Seth B.

Goldstein, (202) 622–3850; concerning

submissions and the hearing,

Evangelista Lee, (202) 622–7190 (not

toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collection of

information should be sent to the Office

of Management and Budget, Attn: Desk

Officer for the Department of Treasury,

Office of Information and Regulatory

Affairs, Washington, DC 20503, with

copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer,

T:FP, Washington, DC 20224. Comments

on the collection of information should

be received by September 6, 1996.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The collection of information under

section 865(j)(1) is in § 1.865–2(e)(2)(ii).

The proposed regulations provide that

in order for taxpayers to elect retroactive

application of the regulations, taxpayers

must comply with the reporting

requirements contained in § 1.865–

2(e)(2)(ii). This information is required

by the IRS as a condition for a taxpayer

to elect to apply the rules of § 1.865–2

retroactively. This information will be

used to determine whether a taxpayer

properly applied the regulations. The

respondents generally will be U.S.

corporations or individuals that sell or

otherwise dispose of stock in a foreign

corporation of which the seller owns

more than 10% of the vote or value.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Estimated total annual reporting

burden: 4,000 hours. The estimated

annual burden per respondent varies

from 1 hour to 5 hours, depending on

individual circumstances, with an

estimated average of 2 hours.

Estimated number of respondents:

2,000.

Estimated annual frequency of

responses: Once.

Background

This document contains proposed

regulations amending the Income Tax

Regulations (26 CFR Part 1) under

sections 861, 865, and 904 of the

Internal Revenue Code. These

regulations are also issued under

authority contained in section 7805 of

the Internal Revenue Code.

Explanation of Provisions

This notice of proposed rulemaking

provides rules under section 865(j)

relating to the treatment of losses from

the sale or other disposition of stock.

Section 1.865–1 provides that the

allocation of loss on the disposition of

property not governed by § 1.865–2

continues to be governed by the

generally applicable rules of § 1.861–8,

except as provided in other

administrative pronouncements. For

example, Notice 89–58 (1989–1 C.B.

699) remains in effect with respect to

losses described in that Notice. The

treatment of portfolio stock, which is

excluded from § 1.865–2, will be

reviewed in the context of a broader

project dealing with similar portfolio

investments, including debt instruments

and derivative financial products.

Allocation of loss on the disposition of

stock of a regulated investment

company and stock of an S corporation

also will continue to be governed by

§§ 1.861–8(e)(7)(i) and (ii).

Section 1.865–2(a) provides the

general rule that stock losses are

allocated in the same manner as stock

gains (determined without regard to

sections 1248 and 865(f)). Thus, stock

loss generally is allocated to the

residence of the seller. Loss recognized

by a United States resident on the

disposition of stock attributable to a

foreign branch is allocated to foreign

source income if a gain would have

been taxable by the foreign country and

the highest marginal rate of tax imposed

in that foreign country is at least 10

percent. Loss recognized by a

nonresident alien individual or foreign

corporation with respect to stock

constituting a United States real

property interest reduces United States

source income, in accordance with

section 897.

Section 1.865–2(b) provides

exceptions to the general rule. Section

1.865–2(b)(1) provides a dividend

recapture rule that applies to losses

realized on a disposition of stock within

24 months following the inclusion of a

dividend or similar amount. To the

extent of the dividend recapture

amount, the loss shall be allocated to

the same class of income as the

dividend. Under a de minimis rule, the

recapture rule will not apply if the sum

of all dividend recapture amounts is less

than 10 percent of the realized loss.

A dividend recapture amount

includes an actual dividend, a subpart

F or qualified electing fund inclusion

attributable to a dividend received by a

controlled foreign corporation in a

separate limitation category other than

that for passive income, and an

inclusion attributable to section 956 or

956A. Dividends from foreign

corporations, which often are sheltered

from United States tax by foreign tax

credits and do not reduce the

shareholder’s basis in the stock, may

reduce the selling price of the stock,

thereby creating or increasing a loss on

sale. Similarly, the identified subpart F

inclusions may increase the

shareholder’s stock basis without

substantially affecting the value of the

stock, offering similar opportunities to

create a tax mismatch from an economic

‘‘wash’’ by pairing tax-sheltered foreign

source inclusions and United States

source loss.

Section 1.865–2(b)(2) provides a

consistency rule requiring generally that

loss recognized on the disposition of an

80%-owned foreign affiliate reduces

foreign source passive income if, within

the past five years, the seller or any

member of its consolidated group

recognized gain on the disposition of a

foreign affiliate that was sourced under

section 865(f). In order to provide relief

for taxpayers that could have taken

steps to avoid section 865(f) treatment

on gain sales occurring prior to the

publication of these proposed

regulations, the five-year lookback

period will be phased in so that losses

will be tainted only by reason of gains

recognized after September 6, 1996.

Section 1.865–2(b)(3) provides antiabuse rules designed to prevent

taxpayers from changing the allocation

of a loss with respect to stock or other

property by entering into certain

transactions.

Section 1.865–2(c) provides rules of

general application. Section 1.865–

2(c)(1) provides that a partner’s

distributive share of loss resulting from

a disposition of stock by a partnership

is allocated as if the partner disposed of

the stock. In an appropriate case the loss

may be attributable to a fixed place of

business of the partnership rather than

to the partner’s residence.

Section 1.865–2(c)(2) provides that

worthlessness shall be treated as a

disposition for purposes of the stock

loss allocation rules.

Section 1.865–2(d) provides

definitions.
35698 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Proposed Rules

Under § 1.865–2(e), the regulations

are proposed to be effective for taxable

years beginning after 60 days after the

date final regulations are published in

the Federal Register. However, a

taxpayer may elect to apply the

regulations retroactively to stock losses

in all open post-1986 taxable years. A

taxpayer generally may make the

election by attaching a statement to an

original or amended federal income tax

return filed after final regulations are

published in the Federal Register.

However, the election will not be

effective unless amended returns are

filed within 120 days of the date final

regulations are published in the Federal

Register.

Section 1.904–4(c) is proposed to be

amended to provide rules specifically

addressing the treatment of loss

allocated to the section 904(d) separate

category for passive income. The

proposed amendments provide that, for

purposes of the grouping rules relating

to the high-tax kick-out described in

section 904(d)(2)(F), a passive loss is

initially allocated to a group based on

the foreign tax that was, or would have

been, imposed on the transaction had

the sale resulted in a gain under foreign

law. If, after allocation and

apportionment of all deductions, net

income in a group is less than zero, any

taxes imposed with respect to the group

are considered related to general

limitation income. The net loss is not

considered related to general limitation

income, but proportionately reduces

income in the other passive income

groups. The determination of whether

income in the positive income groups is

high-taxed is made after this allocation

of loss groups. Any net loss in the

section 904(d) separate category for

passive income constitutes a separate

limitation loss governed by section

904(f)(5).

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

is hereby certified that these regulations

do not have a significant economic

impact on a substantial number of small

entities. This certification is based on

the fact that these regulations will

primarily affect U.S. owners of

significant interests in foreign

corporations, which owners generally

are large multinational corporations.

This certification is also based upon the

fact that, even in cases in which the

regulation applies to small entities, the

burden imposed by the collection of

information in the regulation, which is

merely an election to apply the

regulation to prior taxable years, is not

substantial and, therefore, the collection

of information will not impose a

significant economic impact on such

entities. 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 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 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 (signed original and

eight (8) copies) that are timely

submitted to the IRS. All comments will

be available for public inspection and

copying.

A public hearing has been scheduled

for November 6, 1996, at 10 a.m., in

room 2615, Internal Revenue Building,

1111 Constitution Avenue NW.,

Washington DC. Because of access

restrictions, visitors will not be

admitted beyond the 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

October 7, 1996 and submit an outline

of topics to be discussed and time to be

devoted to each topic (signed original

and eight (8) copies) by October 16,

1996.

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 Seth B. Goldstein, of the

Office of the Associate Chief Counsel

(International), IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR Part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding entries

in numerical order to read as follows:

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

Section 1.865–1 is also issued under

26 U.S.C. 865(j)(1).

Section 1.865–2 is also issued under

26 U.S.C. 865(j)(1).

Par. 2. Section 1.861–8 is amended by

adding paragraph (e)(7)(iii) to read as

follows:

§ 1.861–8 Computation of taxable income

from sources within the United States and

from other sources and activities.

* * * * *

(e) * * *

(7) * * *

(iii) Special rules for allocation of loss

from disposition of stock. See § 1.865–

2 for special rules regarding the

allocation of loss recognized on certain

dispositions of stock in taxable years

beginning after December 31, 1986.

Par. 3. Sections 1.865–1 and 1.865–2

are added under the undesignated

center heading ‘‘Determination of

Sources of Income’’ to read as follows:

§ 1.865–1 Loss from the disposition of

personal property.

Allocation of loss on the sale or other

disposition of portfolio stock, stock of a

regulated investment company (as

defined in section 851), stock of an S

corporation (as defined in section 1361),

and other personal property not

governed by § 1.865–2 is governed by

§ 1.861–8 or other administrative

pronouncements. Portfolio stock is, with

respect to a taxpayer, stock in a

corporation in which the taxpayer owns,

or is considered to own under the rules

of section 267(c), less than 10 percent of

the total combined voting power of all

classes of stock entitled to vote of such

corporation and less than 10 percent of

the total value of the stock of such

corporation.

§ 1.865–2 Loss from the disposition of

certain stock.

(a) General rules for allocation of loss

on disposition of stock—(1) Allocation

against gain. Except as otherwise

provided in § 1.865–1 and paragraph (b)

of this section, loss recognized on the

sale or other disposition of stock shall

be allocated to the class of gross income

and, if necessary, apportioned between

the statutory grouping of gross income

(or among the statutory groupings) and

the residual grouping of gross income,

with respect to which gain (other than

gain treated as a dividend under section

1248) from the sale of such stock would

give rise in the hands of the seller
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Proposed Rules 35699

(without regard to section 865(f)). For

purposes of section 904, any such loss

shall be allocated to the separate

category to which such gain would have

been assigned (without regard to section

904(d)(2)(A)(iii)(III)). For purposes of

§ 1.904–4(c)(2)(ii)(A), any loss allocated

to passive income shall be allocated

(prior to the application of § 1.904–

4(c)(2)(ii)(B)) to the group of passive

income to which gain on the sale would

have been assigned if the sale of the

stock had resulted in the recognition of

a gain under the law of the relevant

foreign jurisdiction or jurisdictions. See

section 904(f)(5) and the regulations

under that section for rules regarding

the treatment of separate limitation

losses.

(2) Stock attributable to foreign office.

Except as otherwise provided in

§ 1.865–1 and paragraph (b) of this

section, in the case of loss on the sale

or other disposition of stock (other than

stock constituting inventory) by a

United States resident that is

attributable to an office or other fixed

place of business in a foreign country

within the meaning of section 865(e)(3),

the loss shall be allocated to reduce

foreign source income if a gain would

have been taxable by the foreign country

and the highest marginal rate of tax

imposed in the foreign country is at

least 10 percent.

(3) Stock constituting a United States

real property interest. Loss recognized

by a nonresident alien individual or a

foreign corporation on the sale or other

disposition of stock that constitutes a

United States real property interest shall

be allocated to reduce United States

source income. For additional rules

governing the treatment of such loss, see

section 897 and the regulations

thereunder.

(b) Exceptions—(1) Dividend

recapture exception—(i) In general.

Except as otherwise provided in

§ 1.865–1, if a taxpayer realizes a loss on

a disposition of stock, and the taxpayer

included in income a dividend

recapture amount (or amounts) with

respect to such stock at any time during

the recapture period, then, to the extent

of the dividend recapture amount (or

amounts), the loss shall be allocated and

apportioned on a proportionate basis to

the class or classes of gross income or

the statutory or residual grouping or

groupings of gross income to which the

dividend recapture amount was

assigned.

(ii) Exception for de minimis

amounts. Paragraph (b)(1)(i) of this

section shall not apply to a loss realized

by a taxpayer on the disposition of stock

if the sum of all dividend recapture

amounts included in income by the

taxpayer with respect to such stock

during the recapture period is less than

10 percent of the realized loss.

(2) Consistency exception—(i) In

general. Except to the extent provided

in paragraph (b)(1) of this section, loss

recognized by a taxpayer with respect to

the sale or other disposition of stock of

a foreign affiliate (or of a corporation

that was a foreign affiliate within the

five-year period preceding the date of

the sale) or a foreign affiliate holding

company shall be allocated to reduce

foreign source income if the taxpayer

(or, in the case of a taxpayer that is a

member of a consolidated group (within

the meaning of § 1.1502–1(h)) at the

time the loss is recognized, the

consolidated group) recognized gain on

the disposition of any stock that was

sourced under section 865(f) within the

five-year period ending on the last day

of the taxable year in which the loss was

recognized. See paragraph (a)(1) of this

section for rules relating to the

allocation of the loss to separate

categories described in section 904(d).

(ii) Phased-in lookback period. The

rule of paragraph (b)(2)(i) of this section

shall apply only if gain sourced under

section 865(f) was recognized after

September 6, 1996.

(3) Anti-abuse rules. If one of the

principal purposes of a reorganization

within the meaning of section 368(a),

liquidation under section 332, transfer

to a corporation under section 351,

transfer to a partnership under section

721, transfer to a trust, distribution by

a partnership, distribution by a trust, or

transfer to or from a qualified business

unit (within the meaning of section

989(a)) is to change the allocation of a

built-in loss on the disposition of stock

(or other personal property), the loss

shall be allocated as if it were

recognized on the disposition of the

stock (or other personal property)

immediately prior to the reorganization,

liquidation, transfer, or distribution. In

addition, if a loss recognized by a

taxpayer with respect to the sale or

other disposition of stock in a

corporation is primarily attributable to

loss with respect to one or more

financial instruments held by the

corporation, and one of the taxpayer’s

principal purposes for holding the

financial instrument or instruments

through the corporation is to allocate

loss under § 1.865–2, the stock loss shall

be allocated under § 1.865–1 as if it

were recognized on the disposition of

such financial instrument or

instruments. Whether a taxpayer has a

principal purpose to allocate loss under

§ 1.865–2 shall be determined by taking

into account all the facts and

circumstances, including whether the

corporation engages in business

activities (other than trading financial

instruments) and whether the taxpayer

or any related person or persons (within

the meaning of section 267(b) or

954(d)(3)) hold positions that offset loss

positions held by the corporation. For

purposes of this paragraph (b)(3),

positions are offsetting if the risk of loss

of holding one or more positions is

substantially diminished by holding one

or more other positions. A person may

have a principal purpose of affecting

loss allocation even though this purpose

is outweighed by other purposes (taken

together or separately).

(4) Example. The application of this

paragraph (b) may be illustrated by the

following example:

Example. (i) P, a domestic corporation, is

a United States shareholder of N, a controlled

foreign corporation. N has never had any

subpart F income and all of its earnings and

profits are described in section 959(c)(3). On

August 5, 1997, N distributes a dividend to

P in the amount of $100. The dividend gives

rise to a $5 foreign withholding tax, and P

is deemed to have paid an additional $45 of

foreign income tax with respect to the

dividend under section 902. Under section

904(d)(3) the dividend is general limitation

income described in section 904(d)(1)(I).

(ii) On February 6, 1998, P sells its shares

of N and recognizes a $110 loss. In 1998, P

has the following taxable income, excluding

the loss on the sale of N:

(A) $1,000 of foreign source income that is

general limitation income described in

section 904(d)(1)(I), which is subject to

foreign taxes of $400;

(B) $1,000 of foreign source capital gain

that is passive income described in section

904(d)(1)(A) attributable to gain on the sale

of stock in a foreign affiliate that is sourced

under section 865(f), which is subject to

foreign taxes of $30.

(iii) The $100 dividend paid in 1997 is a

dividend recapture amount that was

included in P’s income within the recapture

period preceding the disposition of the N

stock. The de minimis exception of

paragraph (b)(1)(ii) of this section does not

apply because the $100 dividend recapture

amount exceeds 10 percent of the $110 loss.

Therefore, to the extent of the $100 dividend

recapture amount, the loss must be allocated

under paragraph (b)(1)(i) of this section to the

separate limitation category to which the

dividend was assigned (general limitation

income).

(iv) Because P recognized gain on the sale

of stock in a foreign affiliate that was sourced

under section 865(f) within the period

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

section, P’s remaining $10 loss on the

disposition of the N stock is allocated to

foreign source passive income under

paragraph (b)(2)(i) of this section.

(v) After allocation of the stock loss, P’s

taxable income in 1998 consists of $900 of

foreign source general limitation income and

$990 of foreign source passive income.

(c) Rules of application—(1) Loss

recognized by partnership. A partner’s
35700 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Proposed Rules

distributive share of loss resulting from

the sale or other disposition of stock by

a partnership shall be allocated and

apportioned in accordance with this

section as if the partner had disposed of

the stock. If a sale of stock is attributable

to an office or other fixed place of

business of the partnership within the

meaning of section 865(e)(3), such office

or fixed place of business shall be

considered to be an office of the partner

for purposes of this section.

(2) Worthless stock. For purposes of

this section, worthlessness giving rise to

a deduction under section 165(g)

(including section 165(g)(3)) with

respect to stock shall be treated as a

disposition.

(d) Definitions—(1) Terms defined in

§ 1.861–8. See § 1.861–8 for the meaning

of class of gross income, statutory

grouping of gross income, and residual

grouping of gross income.

(2) Dividend recapture amount. A

dividend recapture amount is a

dividend (except for an amount treated

as a dividend under section 78), an

inclusion described in section

951(a)(1)(A)(i) (but only to the extent

attributable to a dividend included in

the earnings of a controlled foreign

corporation that is included in foreign

personal holding company income

under section 954(c)(1)(A) and that,

pursuant to section 904(d)(3)(B), is

treated as income in a separate category

other than the separate category for

passive income described in section

904(d)(2)(A)), an inclusion described in

section 951(a)(1)(B) or (C), and an

inclusion described in section

1293(a)(1) (but only to the extent

attributable to a dividend that is

included in the earnings of a qualified

electing fund and that, pursuant to

section 904(d)(3)(I), is treated as income

in a separate category other than the

separate category for passive income

described in section 904(d)(2)(A)).

(3) Foreign affiliate. A foreign affiliate

is a foreign corporation that is a member

of the affiliated group (within the

meaning of section 1504(a) without

regard to section 1504(b)) that includes

the taxpayer.

(4) Foreign affiliate holding company.

A foreign affiliate holding company is

any corporation, substantially all the

assets of which consist of stock of one

or more foreign affiliates, held directly

or indirectly. For purposes of this

paragraph, any assets acquired or held

by a corporation with a principal

purpose of avoiding foreign affiliate

holding company status shall be

disregarded.

(5) Recapture period. A recapture

period is the 24-month period preceding

the date on which a taxpayer realizes a

loss on a disposition of stock, increased

by any period of time in which the

taxpayer has diminished its risk of loss

in a manner described in section

246(c)(4) and the regulations

thereunder.

(6) Taxpayer. A taxpayer shall include

all predecessors or successors of the

taxpayer.

(7) United States resident. See section

865(g) and the regulations thereunder

for the definition of United States

resident.

(e) Effective date—(1) In general. This

section is effective for taxable years

beginning after the date that is 60 days

after the date these regulations are

published as final regulations in the

Federal Register.

(2) Prior year election—(i) In general.

A taxpayer may elect to apply the rules

of this section to all (but not less than

all) of its taxable years that begin after

December 31, 1986, and on or before the

date that is 60 days after the date these

regulations are published as final

regulations in the Federal Register, and

with respect to which the statute of

limitations expires after the date that is

120 days after the date these regulations

are published as final regulations in the

Federal Register. The election shall be

effective only if the taxpayer satisfies all

the applicable requirements specified in

paragraph (e)(2)(ii) of this section.

(ii) Requirements for election—(A)

Statement filed with original or

amended return. For each taxable year

subject to the election, a taxpayer shall

file an original or amended federal

income tax return that reflects the rules

of this section and includes the

statement described in paragraph

(e)(2)(ii)(C) of this section. Amended

returns filed pursuant to this section

must be filed on or before the date that

is 120 days after the date these

regulations are published as final

regulations in the Federal Register.

(B) Presentation of statement upon

audit. A taxpayer that is under

examination with respect to any taxable

year subject to the election on the date

that is 120 days after the date these

regulations are published as final

regulations in the Federal Register must

furnish a copy of the statement

described in paragraph (e)(2)(ii)(C) of

this section for all years subject to the

election to the revenue agent

responsible for examining its federal

income tax returns on or before the date

that is 140 days after the date these

regulations are published as final

regulations in the Federal Register. For

purposes of this paragraph (e)(2)(ii)(B),

a taxpayer is under examination

beginning on the date the taxpayer (or

any member of the consolidated group

of which the taxpayer is a member) has

been contacted in any manner by a

representative of the Internal Revenue

Service for the purpose of scheduling

any type of examination of any of its

federal income tax returns and ending

on the earliest of the date: the taxpayer

(or consolidated group of which the

taxpayer is a member) receives a ‘‘no

change’’ letter; the taxpayer (or

consolidated group of which the

taxpayer is a member) pays the

deficiency (or proposed deficiency); or

on which a deficiency, jeopardy,

termination, bankruptcy, or receivership

assessment is made. An electing

taxpayer that is not under examination

with respect to any taxable year subject

to the election on the date that is 120

days after the date these regulations are

published as final regulations in the

Federal Register and is contacted

thereafter by a representative of the

Internal Revenue Service for the

purpose of scheduling any type of

examination of any of its federal income

tax returns for a year subject to the

election must furnish a copy of the

statement described in paragraph

(e)(2)(ii)(C) of this section for all years

subject to the election to the revenue

agent responsible for examining its

federal income tax returns within 20

days of being contacted.

(C) Contents of statement. The

statement shall be entitled ‘‘ELECTION

UNDER § 1.865–2(e)(2) TO APPLY

RETROACTIVELY § 1.865–2 STOCK

LOSS ALLOCATION RULES.’’ The

statement shall identify, for the taxable

year subject to the election, each loss

from the disposition of stock that is

subject to this section and that was

incurred by the taxpayer or by any

controlled foreign corporation (within

the meaning of section 953(c)(1)(B) or

957) with respect to which the taxpayer

is a United States shareholder (within

the meaning of section 951(b) or

953(c)(1)(A)). For each such loss, the

statement shall provide the name and

identifying number of the entity that

incurred the loss, the amount of the

loss, and the paragraph of this section

under which the loss is allocated. Each

loss subject to paragraph (b)(1) of this

section shall be separately identified

with a notation stating ‘‘Subject to

dividend recapture under § 1.865–

2(b)(1).’’ The statement shall also

include the following declaration: ‘‘No

losses, other than those so identified

herein, are subject to § 1.865–2(b)(1).’’

The statement shall indicate whether

the taxpayer or any controlled foreign

corporation (within the meaning of

section 953(c)(1)(B) or 957) with respect

to which the taxpayer is a United States
Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Proposed Rules 35701

shareholder (within the meaning of

section 951(b) or 953(c)(1)(A)) acquired

the stock after July 8, 1996 as a result

of a transaction described in paragraph

(b)(3) of this section (regardless of the

purpose or purposes of the transaction).

An election shall not be effective unless

each statement required by this

paragraph (e)(2)(ii) contains all the

information specified herein.

PAR. 4. Section 1.904–0 is amended by

revising the entry for § 1.904–4(c)(2)(ii)

and adding entries for paragraphs

(c)(2(ii)(A) and (B) of that section to read

as follows:

§ 1.904–0 Outline of regulation provisions

for section 904.

* * * * *

§ 1.904–4 Separate application of section

904 with respect to certain categories of

income.

* * * * *

(c) * * *

(2) * * *

(ii) Grouping rules.

(A) Initial allocation and

apportionment of deductions.

(B) Reallocation of loss groups.

PAR. 5. Section 1.904–4 is amended by

revising paragraphs (c)(1) and (c)(2) and

adding paragraph (c)(8) Example 11 and

Example 12 to read as follows:

(c) High-taxed income—(1) In general.

Income received or accrued by a United

States person that would otherwise be

passive income shall not be treated as

passive income if the income is

determined to be high-taxed income.

Income shall be considered to be hightaxed income if, after allocating

expenses, losses and other deductions of

the United States person to that income

under paragraph (c)(2)(ii) of this section,

the sum of the foreign income taxes paid

or accrued by the United States person

with respect to such income and the

foreign taxes deemed paid or accrued by

the United States person with respect to

such income under section 902 or

section 960 exceeds the highest rate of

tax specified in section 1 or section 11,

whichever applies (and with reference

to section 15 if applicable), multiplied

by the amount of such income

(including the amount treated as a

dividend under section 78). If, after

application of this paragraph (c), income

that would otherwise be passive income

is determined to be high-taxed income,

such income shall be treated as general

limitation income, and any taxes

imposed on that income shall be

considered related to general limitation

income under § 1.904–6. If, after

application of this paragraph (c), passive

income is less than zero, the loss shall

constitute a passive separate limitation

loss (subject to the rules of section

904(f)(5) and the regulations under that

section), but any taxes imposed on

passive income shall be considered

related to general limitation income

under § 1.904–6. For additional rules

regarding losses related to passive

income, see paragraph (c)(2) of this

section. Income and taxes shall be

translated at the appropriate rates, as

determined under sections 986, 987 and

989 and the regulations under those

sections, before application of this

paragraph (c). For purposes of allocating

taxes to groups of income, United States

source passive income is treated as any

other passive income. In making the

determination whether income is hightaxed, however, only foreign source

income, as determined under United

States tax principles, is relevant. See

paragraph (c)(8) Examples (10), (11) and

(12) of this section for examples

illustrating the application of this

paragraph (c)(1) and paragraph (c)(2) of

this section.

(2) Grouping of items of income in

order to determine whether passive

income is high-taxed income—(i)

Effective date. For purposes of

determining whether passive income is

high-taxed income, the grouping rules of

paragraphs (c)(3), (c)(4), and (c)(5) of

this section apply to taxable years

beginning after December 31, 1987. See

notice 87–6 for the grouping rules

applicable to taxable years beginning

after December 31, 1986 and before

January 1, 1988. Paragraph (2)(ii)(B) of

this section is effective for taxable years

beginning after the date that is 60 days

after the date these regulations are

published as final regulations in the

Federal Register.

(ii) Grouping rules—(A) Initial

allocation and apportionment of

deductions. For purposes of

determining whether passive income is

high-taxed, expenses, losses and other

deductions shall be allocated and

apportioned initially to each of the

groups of passive income (described in

paragraphs (c)(3), (4), and (5) of this

section) under the rules of §§ 1.861–8

through 1.861–14T, 1.865–1, and 1.865–

2. Taxpayers that allocate and apportion

interest expense on an asset basis may

nevertheless apportion passive interest

expense among the groups of passive

income on a gross income basis. If loss

from the disposition of property gives

rise to foreign tax (e.g., the transaction

giving rise to the loss is treated under

foreign law as having given rise to a

gain), the foreign tax shall be allocated

to the group of passive income to which

the loss is allocated under this

paragraph (c)(2)(ii)(A), without regard to

paragraph (c)(2)(ii)(B) of this section. A

determination of whether passive

income is high-taxed shall be made only

after application of paragraph

(c)(2)(ii)(B) of this section (if

applicable).

(B) Reallocation of loss groups. If,

after allocation and apportionment of

expenses, losses and other deductions

under paragraph (c)(2)(ii)(A) of this

section, the sum of the allocable

deductions exceeds the gross income in

one or more groups, the excess

deductions shall proportionately reduce

income in the other groups (but not

below zero), and any taxes imposed

with respect to such loss group or

groups shall be considered related to

general limitation income.

* * * * *

(8) * * *

Example 11. P, a domestic corporation,

earns the following items of gross income:

$100 of foreign source, passive limitation

interest income not subject to any foreign tax,

$200 of foreign source, passive limitation

royalty income subject to a 5 percent foreign

withholding tax (foreign tax paid is $10),

$1300 of foreign source, passive limitation

rental income subject to a 25 percent foreign

withholding tax (foreign tax paid is $325),

$500 of foreign source, general limitation

income that gives rise to a $250 foreign tax,

and $2000 of U.S. source capital gain that is

not subject to any foreign tax. P has a $700

deduction allocable to its passive rental

income. P’s only other deduction is a $500

capital loss on a sale of stock that is allocated

to foreign source passive limitation income

under § 1.865–2(b)(2). If P had recognized a

gain on the stock sale under foreign law, the

gain would not have been subject to foreign

tax. The $500 capital loss is initially

allocated to the group of passive income not

subject to any foreign tax, and the $400

amount by which the capital loss exceeds the

income in the group must be reapportioned

to the other groups under paragraph

(c)(2)(ii)(B) of this section. The net royalty

income is thus reduced by $100 to $100

($200¥($400×(200/800))) and the net rental

income is reduced by $300 to $300

($1300¥$700¥($400×(600/800))). The $100

net royalty income is not high-taxed and

remains passive income. The $300 net rental

income is high-taxed because the foreign

taxes exceed the highest United States rate of

tax on that income. Under the high-tax kickout, the $300 of net rental income (the gross

rental income and expenses allocated and

apportioned thereto) and the $325 of

associated foreign tax are assigned to the

general limitation category.

Example 12. The facts are the same as in

Example 11 except the amount of the capital

loss that is allocated under § 1.865–2(b)(2)

and paragraph (c)(2) of this section to the

group of foreign source passive income

subject to no foreign tax is $1100. Under

paragraph (c)(2)(ii)(B) of this section, the

excess deductions of $1000 must be

reapportioned to the $200 of net royalty

income subject to a 5% withholding tax and

the $600 of net rental income subject to a
35702 Federal Register / Vol. 61, No. 131 / Monday, July 8, 1996 / Proposed Rules

25% withholding tax. The income in each of

these groups is reduced to zero, and the

foreign taxes imposed on the rental and

royalty income are considered related to

general limitation income. The remaining

loss of ($200) constitutes a separate

limitation loss with respect to passive

income.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96–17004 Filed 7–5–96; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Part 117

[CGD 11–90–03]

RIN–2115–AE47

Drawbridge Operation Regulations;

Cerritos Channel, CA

AGENCY: Coast Guard, DOT.

ACTION: Supplemental notice of

proposed rulemaking.

SUMMARY: At the request of the Port of

Los Angeles, the Coast Guard is

proposing a temporary change to the

regulations for the Henry Ford Avenue

Railroad Bridge (Ford Bridge), across

Cerritos Channel of Los Angeles/Long

Beach Harbor, mile 4.8, at Long Beach,

California, to authorize a five month

(150 day) closure of the bridge to

replace the movable span and erect the

support towers. The proposed closure

would start November 7, 1996 and

conclude on April 7, 1997. If these dates

change, the actual 5 month closure dates

will be advertised in the Local Notice to

Mariners. The bridge, also known as the

Badger Avenue Bridge, currently

remains open to navigation except for

the passage of trains. This proposal is

being made because the bridge needs to

be replaced to preserve rail access to

Terminal Island and to insure reliable

service to vessel traffic.

DATES: Comments must be received on

or before August 7, 1996.

ADDRESSES: Comments may be mailed to

Commander (oan-br), Eleventh Coast

Guard District, Building 50–6, Coast

Guard Island, Alameda, CA 94501–

5100, or may be delivered to the same

address between 7 a.m. and 4 p.m.,

Monday through Friday, except Federal

holidays. The telephone number is

number is (510) 437–3514. Commander

(oan-br) maintains the public docket for

this rulemaking. Comments will become

part of this docket and will be available

for inspection or copying at Bldg. 10,

Room 214, Coast Guard Island,

Alameda.

FOR FURTHER INFORMATION CONTACT:

Susan Worden, Bridge Section, Eleventh

Coast Guard District, at (501) 437–3461.

SUPPLEMENTARY INFORMATION:

Request for Additional 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 rulemaking

(CGD 11–90–03) and the specific section

of this proposal to which each comment

applies, and give the reason for each

comment. Persons wanting

acknowledgement of receipt of

comments should enclose a stamped,

self-addressed postcard or envelope.

Comments previously submitted have

been entered into the record and need

not be resubmitted.

The Commander, Eleventh Coast

Guard district will evaluate all

communications received and

determine a final course of action on

this proposal. The proposed regulations

may be changed in light of the

comments received.

The Cost Guard plans no public

hearing, but one may be held if written

requests for a hearing are received, and

it is determined that the opportunity to

make oral presentations will add to the

rulemaking process.

Discussion of the Proposal

Regulatory History

This supplements a Notice of

Proposed Rulemaking dated August 28,

1990 (55 FR 35154), which discussed a

six and one-half month closure of the

bridge draw for bridge rehabilitation,

from February 1, 1991 through August

15, 1991. The Ford Bridge provides the

only rail access to port facilities on

Terminal Island. The bridge is over 70

years old and no longer meets California

seismic standards or Federal Railroad

Administration clearance standards.

The bridge owner determined that the

bridge could not be rehabilitated

economically, and in 1993 applied for a

permit to replace the bridge. In 1995,

the Coast Guard issued a permit for its

replacement. The new bridge is

currently under construction, and it is

anticipated that the work can be

accomplished with a slightly shorter

closure period. Since more than five

years has elapsed since the publication

of the NPRM, an additional opportunity

for public comment is being provided.

The four comments received on the

previous NPRM will be considered part

of the record.

The Notice of Proposed Rulemaking

(NPRM) in 1990 was for the earlier plan

to rehabilitate the bridge, a plan that is

no longer feasible. That NPRM, which

involved a slightly longer closure,

generated only four comments: Pacific

Towing Company requested one leaf

operation of the bridge; Jacobson Pilot

Service requested the closure period to

be kept to a minimum; Dow Chemical

expressed concern about land access

during construction; and the Port of

Long Beach wrote supporting the

proposal.

Because of the change from

rehabilitation to reconstruction, it is not

possible to have the bridge in partial

service during the construction of the

towers and lift span for which the

closure is necessary. The Coast Guard

has reviewed the construction plans and

determined that the proposed closure is

the shortest feasible time period

consistent with safety and good

engineering practice. The bridge

construction will only cause brief

interruptions to rail service or land

access to nearby facilities.

The revised bridge plan has been

advertised in the Federal Register on

three occasions: a Notice of Intent to

prepare an Environmental Impact

Statement (EIS) (58 F.R. 28087); a Notice

of Availability of the Draft EIS (59 F.R.

6639); and a Notice of Availability of the

final EIS (59 F.R. 60631).

The circulation of the Coast Guard

Environmental Impact Statement for the

Ford Bridge Replacement Project

provided additional opportunities for

public comment on the bridge closure.

No comments were received addressing

the closure. Because the revised plan

has been advertised extensively and no

opposition has thus far been expressed,

the Coast Guard for good cause believes

that a 30 day comment period is

adequate to solicit any remaining

comments on this supplemental notice

of proposed rulemaking.

Current Proposal

The Port of Los Angeles has requested

the bridge span closure to allow them to

safely construct the replacement bridge.

The proposed closure of the span would

start November 7, 1996, and conclude

on April 7, 1997. If these dates change,

the actual 5 month closure dates will be

advertised in the Local Notice to

Mariners.

The Ford Avenue Railroad Bridge

provides vertical clearance of 14 feet

above Mean Lower Low Water (9 feet

above Mean High Water) when closed.

The waterway is a connecting channel

in the Los Angeles/Long Beach Harbor

complex and is used by oceangoing

cargo ships, tugs and barges, tour boats,