Source: https://www.irs.gov/irb/2006-24_IRB
Timestamp: 2020-04-03 23:32:18
Document Index: 779111897

Matched Legal Cases: ['§1', 'art 1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§ 1', '§ 1', '§ 1', '§ 1', '§1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§1', '§1', '§1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', 'art 2', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', 'art 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§1', '§ 1', '§ 3507', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 6103', '§ 1504', '§ 1', '§ 1', '§ 6103', '§1', '§1', '§1', '§1', '§1', '§1', '§1', 'art 1', '§1', '§1', '§1', '§1', '§1']

Internal Revenue Bulletin: 2006-24 | Internal Revenue Service
Internal Revenue Bulletin: 2006-24
Notice 2006-46
Announcement 2006-38
T.D. 9262 T.D. 9262
REG-111578-06 REG-111578-06
REG-139059-02 REG-139059-02
Notice 2006-30 Notice 2006-30
This notice informs trustees and middlemen of non-mortgage widely held fixed investment trusts (NMWHFITs) that the date for satisfying the qualified NMWHFIT exception in regulations section 1.671-5(c)(2)(iv)(E) is extended by 60 days.
Notice 2006-46 Notice 2006-46
This notice announces that the IRS and Treasury intend to issue final regulations under sections 897(d) and (e) of the Code, which will revise the current rules under temporary regulations sections 1.897-5T and 1.897-6T and Notice 89-85, 1989-2 C.B. 403. When finalized, regulations will revise temporary regulations section 1.897-5T(c)(4) to take into account inbound statutory mergers and consolidations described in section 368(a)(1)(A). The regulations will also revise the rules of temporary regulations section 1.897-6T(b)(1) to take into account foreign-to-foreign statutory mergers and consolidations described in section 368(a)(1)(A) and to create two new exceptions to gain recognition under section 1.897-6(b)(1) for certain foreign-to-foreign asset reorganizations. The regulations will also revise the stock disposition rule of temporary regulations section 1.897-6T(b)(1)(iii) and eliminate the conditions specified for nonrecognition in temporary regulations section 1.897-6T(b)(2). Lastly, the regulations will modify the period that must be considered for imposing taxes and accrued interest on prior dispositions of the stock of foreign corporations. Notice 89-85 amplified.
Rev. Proc. 2006-21 Rev. Proc. 2006-21
Announcement 2006-35 Announcement 2006-35
Announcement 2006-38 Announcement 2006-38
Erickson Post Acquisition, Inc. v.
Docket Number: 8218-00
T.C. Memo. 2003-218
[1] Nonacquiescence relating to whether the cash payment from the wholesaler to the retailer was a taxable advance payment or a nontaxable loan.
This document contains temporary regulations concerning the application of section 199 of the Internal Revenue Code, which provides a deduction for income attributable to domestic production activities, to certain transactions involving computer software. The regulations will affect taxpayers engaged in certain domestic production activities involving computer software. The text of these temporary regulations also serves as the text of the proposed regulations (REG-111578-06) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.
Applicability Date: For date of applicability, see §1.199-8T(i)(4).
This document amends 26 CFR part 1 to provide rules relating to the deduction for income attributable to domestic production activities under section 199 of the Internal Revenue Code (Code). Section 199 was added to the Code by section 102 of the American Jobs Creation Act of 2004 (Public Law 108-357, 118 Stat. 1418), and amended by section 403(a) of the Gulf Opportunity Zone Act of 2005 (Public Law 109-135, 119 Stat. 25) and section 514 of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222, 120 Stat. 345). On January 19, 2005, the IRS and Treasury Department issued Notice 2005-14, 2005-1 C.B. 498, providing interim guidance on section 199. On November 4, 2005, the IRS and Treasury Department published in the Federal Register proposed regulations under section 199 (REG-105847-05, 2005-47 I.R.B. 987 [70 FR 67220]). On January 11, 2006, the IRS and Treasury Department held a public hearing on the proposed regulations. Written and electronic comments responding to the proposed regulations were received. Contemporaneous with the publication of these temporary regulations, final regulations have been published under section 199.
Section 4.04(7)(d) of Notice 2005-14 provides that gross receipts derived from computer software do not include gross receipts derived from Internet access services, online services, customer support, telephone services, games played through a website, provider-controlled software online access services, and other services that do not constitute the lease, rental, license, sale, exchange, or other disposition of computer software that was developed by the taxpayer. Consistent with Notice 2005-14, the proposed regulations in §1.199-3(h)(6)(i) state that the provision of online computer software does not rise to the level of a lease, rental, license, sale, exchange, or other disposition as required under section 199, but is instead a service.
Numerous commentators have suggested that the provision of computer software for online use should qualify under section 199. Some commentators proposed that gross receipts derived from providing online access to computer software should qualify under section 199 if the substance of the transaction that gives rise to the gross receipts is the distribution of the computer software’s functionality to end users. These commentators suggested that factors to be considered in determining the substance of the transaction should include: (1) whether an agreement exists, regardless of its form, between the computer software producer and the customer that gives the customer permission to use the computer software; (2) whether the use of computer software is merely incidental to the provision of a separate service or transaction; (3) whether the end user has made a payment to the computer software producer directly for the right to access and use the computer software’s functionality, as opposed to a payment for a separate service or good in which the use of the underlying computer software is only incidental to the separate service or transaction; (4) whether the computer software producer holds itself out to the public as being in the computer software business; (5) whether the computer software producer uses alternate channels for distributing its computer software product or functionality other than through online access; and (6) whether a competitive marketplace exists for the same or similar computer software functionality that provides customers with alternative distribution choices in addition to online access. The commentators explained that this proposed list of factors is not exhaustive and there may be other relevant factors. The commentators suggested that no single factor should control and that failure to satisfy one or more factors should not necessarily result in gross receipts derived from online access to computer software being non-DPGR.
Other commentators suggested that a customer’s use of computer software is tantamount to a license of the computer software. In addition, several commentators asserted that the phrase “other disposition” in section 199(c)(4)(A) is broad enough to include the provision of computer software for online use.
The temporary regulations do not adopt these comments. However, as a matter of administrative convenience, the temporary regulations provide two exceptions under which gross receipts derived by a taxpayer from providing computer software to customers for the customers’ direct use while connected to the Internet will be treated as being derived from the lease, rental, license, sale, exchange, or other disposition of such computer software. Such gross receipts will be treated as DPGR if all the other requirements of section 199 are met (for example, the taxpayer MPGE computer software in whole or in significant part within the United States).
The first exception applies to a taxpayer that derives gross receipts from providing computer software to customers for the customers’ direct use while connected to the Internet (online software) and also derives gross receipts from the lease, rental, license, sale, exchange, or other disposition to customers that are unrelated persons of computer software that has been provided to such customers affixed to a tangible medium or by allowing them to download the computer software from the Internet. The second exception applies if a taxpayer derives gross receipts from providing online software and an unrelated person derives on a regular and ongoing basis in the unrelated person’s business gross receipts from the lease, rental, license, sale, exchange, or other disposition of substantially identical software to its customers affixed to a tangible medium or by allowing its customers to download the substantially identical computer software from the Internet.
The temporary regulations define substantially identical software as computer software that, from a customer’s perspective, has the same functional result as the online software and has a significant overlap of features or purpose with the online software. To avoid controversy between taxpayers and the IRS, the temporary regulations provide a safe harbor under which all computer software games are deemed to be substantially identical software.
If a taxpayer’s provision of computer software for online use meets the requirements set forth in the temporary regulations, then an allocation of gross receipts between DPGR and non-DPGR will be necessary if, as part of the same transaction, the taxpayer derives gross receipts other than from providing computer software to a customer for the customer’s direct use while connected to the Internet. For example, if in connection with providing computer software to a customer for the customer’s direct use while connected to the Internet, a taxpayer also provides a service such as storing its customers’ data or providing telephone support, then the taxpayer must allocate its gross receipts between DPGR and non-DPGR using any reasonable method.
Section 199 applies to taxable years beginning after December 31, 2004. These temporary regulations are applicable for taxable years beginning on or after June 1, 2006. A taxpayer may apply these temporary regulations to taxable years beginning after December 31, 2004, and before June 1, 2006. The applicability of these temporary regulations expires on or before May 22, 2009. Section 1.199-8(i)(1) of the final regulations issued contemporaneous with these temporary regulations provides that, in certain circumstances, a taxpayer may rely on the guidance in Notice 2005-14, 2005-1 C.B. 498, the proposed regulations under section 199 that were published in the Federal Register on November 4, 2005 (70 FR 67220), or the final regulations. Regardless of which guidance a taxpayer applies, the taxpayer may apply these temporary regulations.
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 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) does not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), refer to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.
Par. 2. Section 1.199-3T is added to read as follows:
(a) through (h) [Reserved]. For further guidance, see §1.199-3(a) through (h).
(i) Derived from the lease, rental, license, sale, exchange, or other disposition. (1) through (5) [Reserved]. For further guidance, see §1.199-3(i)(1) through (5).
(6) Computer software—(i) [Reserved]. For further guidance, see §1.199-3(i)(6)(i).
(ii) Gross receipts derived from services. Gross receipts (as defined in §1.199-3(c)) derived from customer and technical support, telephone and other telecommunication services, online services (such as Internet access services, online banking services, providing access to online electronic books, newspapers, and journals), and other similar services do not constitute gross receipts derived from a lease, rental, license, sale, exchange, or other disposition of computer software (as defined in §1.199-3(j)(3)).
(iii) Exceptions. Notwithstanding paragraph (i)(6)(ii) of this section, if a taxpayer derives gross receipts from providing to customers computer software MPGE in whole or in significant part by the taxpayer within the United States for the customers’ direct use while connected to the Internet (online software), then such gross receipts will be treated as being derived from the lease, rental, license, sale, exchange, or other disposition of computer software only if—
(A) The taxpayer also derives, on a regular and ongoing basis in the taxpayer’s business, gross receipts from the lease, rental, license, sale, exchange, or other disposition to customers that are unrelated persons (as defined in §1.199-3(b)(1)) of computer software that—
(2) Has been MPGE (as defined in §1.199-3(e)) by the taxpayer (as defined in §1.199-3(f)) in whole or in significant part (as defined in §1.199-3(g)) within the United States (as defined in §1.199-3(h)); and
(B) An unrelated person derives, on a regular and ongoing basis in the unrelated person’s business, gross receipts from the lease, rental, license, sale, exchange, or other disposition of substantially identical software (as described in paragraph (i)(6)(iv)(A) of this section) (as compared to the taxpayer’s online software) to its customers pursuant to an activity described in paragraph (i)(6)(iii)(A)(3) of this section.
(2) In the case of an EAG partnership (as defined in §1.199-9(j)), the EAG partnership and all members of the EAG to which the EAG partnership’s partners belong are treated as a single taxpayer.
Example 1. L is a bank and produces computer software within the United States that enables its customers to receive online banking services for a fee. Under paragraph (i)(6)(ii) of this section, gross receipts derived from online banking services are attributable to a service and do not constitute a lease, rental, license, sale, exchange, or other disposition of computer software. Therefore, L’s gross receipts derived from the online banking services are non-DPGR.
Example 2. M is an Internet auction company that produces computer software within the United States that enables its customers to participate in Internet auctions for a fee. Under paragraph (i)(6)(ii) of this section, gross receipts derived from online services are attributable to a service and do not constitute a lease, rental, license, sale, exchange, or other disposition of computer software. M’s activities constitute the provision of online services. Therefore, M’s gross receipts derived from the Internet auction services are non-DPGR.
Example 3. N provides telephone services, voicemail services, and e-mail services. N produces computer software within the United States that runs all of these services. Under paragraph (i)(6)(ii) of this section, gross receipts derived from telephone and related telecommunication services are attributable to a service and do not constitute a lease, rental, license, sale, exchange, or other disposition of computer software. Therefore, N’s gross receipts derived from the telephone and other telecommunication services are non-DPGR.
Example 4. O produces tax preparation computer software within the United States. O derives, on a regular and ongoing basis in its business, gross receipts from both the sale to customers that are unrelated persons of O’s computer software that has been affixed to a compact disc as well as from the sale to customers of O’s computer software that customers have downloaded from the Internet. O also derives gross receipts from customers from providing the computer software to its customers for the customers’ direct use while connected to the Internet. Assume that the computer software sold on compact disc or by download has only minor or immaterial differences from the computer software provided over the Internet, and O does not provide any services in connection with the computer software provided over the Internet. Under paragraph (i)(6)(iii)(A) of this section, O’s gross receipts derived from providing its computer software to customers over the Internet will be treated as derived from the lease, rental, license, sale, exchange, or other disposition of computer software and are domestic production gross receipts (DPGR) (as defined in §1.199-3) (assuming all the other requirements of §1.199-3 are met).
Example 5. The facts are the same as in Example 4, except that O does not sell the tax preparation computer software to customers affixed to a compact disc or by download and O’s only method of providing the tax preparation computer software to customers is over the Internet. P, an unrelated person, derives, on a regular and ongoing basis in its business, gross receipts from the sale to customers of P’s substantially identical tax preparation computer software that has been affixed to a compact disc as well as from the sale to customers of P’s substantially identical tax preparation computer software that customers have downloaded from the Internet. Under paragraph (i)(6)(iii)(B) of this section, O’s gross receipts derived from providing its tax preparation computer software to customers over the Internet will be treated as derived from the lease, rental, license, sale, exchange, or other disposition of computer software and are DPGR (assuming all the other requirements of §1.199-3 are met).
Example 6. P produces payroll management computer software within the United States. For a fee, P provides the payroll management computer software to customers for the customers’ direct use while connected to the Internet. This is P’s sole method of providing its payroll management computer software to customers. In conjunction with the payroll management computer software, P provides storage of customers’ data and telephone support. Q, an unrelated person, derives, on a regular and ongoing basis in its business, gross receipts from the sale to customers of Q’s substantially identical payroll management software that has been affixed to a compact disc as well as from the sale to customers of Q’s substantially identical payroll management software that customers have downloaded from the Internet. Under paragraph (i)(6)(iii)(B) of this section, P’s gross receipts derived from providing its payroll management computer software to customers over the Internet will be treated as derived from the lease, rental, license, sale, exchange, or other disposition of computer software and are DPGR (assuming all the other requirements of §1.199-3 are met). However, P’s gross receipts derived from the fees it receives that are properly allocable to the storage of customers’ data and telephone support are non-DPGR.
(a) through (h) [Reserved]. For further guidance, see §1.199-8(a) through (h).
(i) Effective dates. (1) through (3) [Reserved]. For further guidance, see §1.199-8(i)(1) through (3).
(4) Computer software. Section 1.199-3T(i)(6)(ii) through (v) are applicable for taxable years beginning on or after June 1, 2006. A taxpayer may apply these temporary regulations to taxable years beginning after December 31, 2004, and before June 1, 2006. The applicability of §1.199-3T(i)(6)(ii) through (v) expires on or before May 22, 2009.
Approved May 2, 2006.
(Filed by the Office of the Federal Register on May 24, 2006, 11:47 a.m., and published in the issue of the Federal Register for June 1, 2006, 71 F.R. 31074)
This notice informs taxpayers that § 1.671-5, which provides reporting rules for widely held fixed investment trusts (WHFITs), will be amended to provide that the availability of the Qualified NMWHFIT (non-mortgage widely held fixed investment trust) Exception in § 1.671-5(c)(2)(iv)(E) is extended by 60 days from the date indicated in Notice 2006-29, 2006-12 I.R.B. 644, issued by the IRS and the Treasury Department on February 23, 2006.
On January 24, 2006, the IRS and Treasury Department published final regulations under § 1.671-5 (Reporting Requirements for Widely Held Fixed Investment Trusts) in the Federal Register (T.D. 9241, 2006-7 I.R.B. 427 [71 FR 4002]). Following the publication of those final regulations, the IRS and Treasury Department received a number of comments regarding the applicability of those regulations to NMWHFITs. The commentators requested that the IRS and the Treasury Department issue additional guidance to clarify and simplify the application of the final regulations to NMWHFITs. Commentators also requested that the availability of the qualified NMWHFIT exception in § 1.671-5(c)(2)(iv)(E) be extended while the additional guidance was being developed. The qualified NMWHFIT exception, if satisfied, excepts trustees and middlemen from specific reporting requirements in the final regulations regarding market discount, bond premium, sales and dispositions, redemptions, and sales of trust interests. In response, the IRS and Treasury Department issued Notice 2006-29 which, among other things, indicated that the IRS and Treasury Department intended to amend §1.671-5 to extend the availability of the qualified NMWHFIT exception to NMWHFITs created on or after February 23, 2006 which was the cut-off date for qualifying for the exception in the final regulations. Under Notice 2006-29, to satisfy the qualified NMWHFIT exception, a NMWHFIT’s registration statement must become effective under the Securities Act of 1933, as amended (15 U.S.C. 77a, et. seq.) (Securities Act of 1933) and trust interests must be offered for sale to the public by June 1, 2006 and the NMWHFIT must be fully funded by August 1, 2006.
The IRS and the Treasury Department expect to issue additional guidance under § 1.671-5 in the near future that will include minor modifications to the reporting rules for sales and dispositions in § 1.671-5. Such guidance, however, will not be issued prior to June 1, 2006. Accordingly, the IRS and the Treasury Department are extending the availability of the qualified NMWHFIT exception beyond the date in Notice 2006-29. Specifically, taking into account the extensions indicated in Notice 2006-29 and the extension indicated in this notice, § 1.671-5(c)(2)(iv)(E) will be amended to provide that the qualified NMWHFIT exception is satisfied if the calendar year for which the trustee is reporting begins before January 1, 2011 and: (1) the NMWHFIT has a start-up date (as defined in § 1.671-5(b)(19)) before February 23, 2006; (2) the registration statement of the NMWHFIT becomes effective under the Securities Act of 1933 and trust interests are offered for sale to the public before February 23, 2006; or (3) the registration statement of the NMWHFIT becomes effective under the Securities Act of 1933 and trust interests are offered for sale to the public on or after February 23, 2006 and before July 31, 2006, and the NMWHFIT is fully funded before October 1, 2006.
The effective date for amended § 1.671-5(c)(2)(iv)(E) will be the date of publication of those amendments in the Federal Register. Taxpayers, however, may apply those amendments as though they were included in § 1.671-5 as published in the Federal Register on January 24, 2006.
Announcement of Rules to be Included in Final Regulations Under Sections 897(d) and (e) of the Code
This notice announces that the Internal Revenue Service (IRS) and the Treasury Department (Treasury) will issue final regulations under sections 897(d) and (e) of the Internal Revenue Code (Code) that set forth and, to the extent described in this notice, revise, the current rules under sections 1.897-5T and 1.897-6T of the temporary income tax regulations and Notice 89-85, 1989-2 C.B. 403, regarding certain transactions involving the transfer of U.S. real property interests (USRPIs), as defined in section 897(c)(1) of the Code. When issued, the regulations will revise the rules of Notice 89-85 and Temp. Treas. Reg. § 1.897-5T(c)(4) relating to inbound asset reorganizations described in section 368(a)(1)(C), (D), or (F) to take into account statutory mergers and consolidations described in section 368(a)(1)(A). The final regulations will also revise the rules of Temp. Treas. Reg. § 1.897-6T(b)(1) to take into account foreign-to-foreign statutory mergers and consolidations described in section 368(a)(1)(A) and to create two additional exceptions that provide a foreign corporation with nonrecognition treatment on its transfer of a USRPI in certain foreign-to-foreign asset reorganizations. Moreover, the final regulations will incorporate a revised version of Temp. Treas. Reg. § 1.897-6T(b)(1)(iii). The final regulations will eliminate all the conditions required for nonrecognition treatment in Temp. Treas. Reg. § 1.897-6T(b)(2). Finally, the final regulations will modify the period that must be considered for imposing taxes and accrued interest on prior dispositions of the stock of foreign corporations under Temp. Treas. Reg. § 1.897-5T(c)(2), (4), and Treas. Reg. §1.897-3(c)(5), (d).
The portion of the final regulations that will address distributions, transfers, or exchanges occurring in the context of a statutory merger or consolidation described in section 368(a)(1)(A) will generally apply to distributions, transfers, or exchanges occurring on or after January 23, 2006. Final regulations regarding the revisions to Temp. Treas. Reg. §1.897-5T(c)(2), (4), Treas. Reg. §1.897-3(c)(5), (d), and Temp. Treas. Reg. § 1.897-6T(b), except as such regulations are applicable to exchanges in section 368(a)(1)(A) reorganizations, will apply to distributions, transfers, or exchanges occurring on or after May 23, 2006. However, taxpayers may choose to apply these regulatory changes to all dispositions, transfers, or exchanges occurring before May 23, 2006, during any taxable year that is not closed by the period of limitations, provided they do so consistently with respect to all such dispositions, transfers, and exchanges.
Under section 897(a), the disposition of a USRPI by a nonresident alien individual or a foreign corporation is taxable as effectively connected income under section 871(b)(1) or section 882(a)(1), respectively, as if the taxpayer were engaged in a trade or business within the United States during the taxable year and the gain or loss were effectively connected with the trade or business.
Section 897(c)(1) generally defines a USRPI to include any interest (other than an interest solely as a creditor) in any domestic corporation, unless the taxpayer establishes that such corporation was not a U.S. real property holding corporation (USRPHC) at any time during the shorter of the period the taxpayer held such interest or the 5-year period ending on the date of the disposition of such interest. Under section 897(c)(2), a USRPHC is defined as any corporation if the fair market value of its USRPIs equals or exceeds 50-percent of the sum of the fair market value of (i) its USRPIs, (ii) its real property interests located outside of the United States, and (iii) any of its other assets used or held for use in a trade or business.
Under section 897(d)(1), except to the extent provided in regulations, gain is recognized by a foreign corporation on the distribution (including a distribution in liquidation or redemption) of a USRPI in a transaction that otherwise qualifies for nonrecognition under the Code. Section 897(d)(2) provides that gain is not recognized under section 897(d)(1) if either: (i) at the time of the receipt of the distributed property, the distributee would be subject to taxation on a subsequent disposition of the distributed property, and the basis of the distributed property in the hands of the distributee is not greater than the adjusted basis of such property before the distribution, increased by the amount of gain (if any) recognized by the distributing corporation; or (ii) nonrecognition treatment is provided for in regulations prescribed by the Secretary under section 897(e)(2). Temp. Treas. Reg. § 1.897-5T provides rules, exceptions, and limitations regarding section 897(d) distributions in the context of sections 332, 355, and 361. See Temp. Treas. Reg. § 1.897-5T(c)(2), (3), and (4). Notice 89-85 announced rules that would revise the application of certain of the exceptions set forth in the temporary regulations. As relevant to the changes announced in this notice, the provisions of those regulations and Notice 89-85 are discussed below.
Subject to the rules of section 897(d) and any regulations issued under section 897(e)(2), section 897(e)(1) provides that any nonrecognition provision will apply only in the case of an exchange of a USRPI for an interest the sale of which would be taxable under Chapter 1 of the Code. Under section 897(e)(2), Treasury has authority to prescribe regulations providing the extent to which nonrecognition provisions shall apply to transfers of USRPIs.
Pursuant to section 897(e)(2), Temp. Treas. Reg. § 1.897-6T(a)(1) states the general rule of section 897(e) and imposes certain requirements for nonrecognition. Among other things, that regulation provides that except as otherwise provided in Temp. Treas. Reg. §§ 1.897-5T and -6T, any nonrecognition provision applies to a transfer by a foreign person of a USRPI on which gain is realized only to the extent that the transferred USRPI is exchanged for a USRPI which, immediately following the exchange, would be subject to U.S. taxation upon its disposition, and the transferor complies with the filing requirements of Temp. Treas. Reg. § 1.897-5T(d)(1)(iii). Temp. Treas. Reg. § 1.897-6T(b) provides exceptions to this rule for certain exchanges in foreign-to-foreign nonrecognition transactions. The exceptions described in Temp. Treas. Reg. § 1.897-6T(b) are discussed below in the context of the changes announced by this notice to such provisions.
The IRS and Treasury issued final regulations on January 23, 2006, concerning statutory mergers and consolidations described in section 368(a)(1)(A). See T.D. 9242, 2006-7 I.R.B. 422 (February 13, 2006). Treasury Decision 9242 provides a revised definition of the term “statutory merger or consolidation” that permits transactions effected pursuant to the statutes of a foreign jurisdiction or of a United States possession to qualify as a statutory merger or consolidation. Further, that regulation generally applies to transactions occurring on or after January 23, 2006. Prior to the issuance of T.D. 9242, temporary regulations defined a statutory merger or consolidation as including only transactions effected pursuant to the laws of the United States or a State or the District of Columbia.
The IRS and Treasury have determined that the rules of Notice 89-85 and Temp. Treas. Reg. §§ 1.897-5T(c) and 1.897-6T(b) should be revised to reflect the recently issued regulations under section 368(a)(1)(A). This action is necessary because Notice 89-85 and the temporary regulations did not contemplate statutory mergers or consolidations under foreign or possessions law as qualifying under section 368(a)(1)(A). In addition, the IRS and Treasury believe that certain other changes to the scope of the rules under Treas. Reg. § 1.897-3 and Temp. Treas. Reg. §§ 1.897-5T and -6T are appropriate. Accordingly, this notice announces that the IRS and Treasury will issue final regulations under sections 897(d), (e), and (i) that generally incorporate the rules of Treas. Reg. § 1.897-3 and Temp. Treas. Reg. §§ 1.897-5T and -6T, and Notice 89-85, except as described below.
1. Revision to the rules of Temp. Treas. Reg. § 1.897-5T(c)(4) relating to inbound asset reorganizations
Temp. Treas. Reg. § 1.897-5T(c)(4) applies the rules of section 897(d) to certain distributions of stock of a USRPHC by a foreign corporation under section 361(c). Under the temporary regulations, a foreign corporation that transfers property to a domestic corporation (that is a USRPHC immediately after the transfer) in an exchange under section 361(a) or (b) pursuant to a reorganization under section 368(a)(1)(C), (D), or (F) must recognize gain under section 897(d)(1) and Temp. Treas. Reg. § 1.897-5T(c)(4)(i) when it distributes the stock of the USRPHC to its shareholders under section 361(c). Temp. Treas. Reg. § 1.897-5T(c)(4)(ii) and (iii) provide an exception and a limitation to this gain recognition.
In Notice 89-85, the IRS and Treasury announced that the exception and the limitation set forth in Temp. Treas. Reg. § 1.897-5T(c)(4)(ii) and (iii) would be replaced by a new exception. The new exception announced in Notice 89-85 provides that recognition of gain will not be required on the distribution under section 361(c)(1) of the stock of the USRPHC under Temp. Treas. Reg. § 1.897-5T(c)(4)(i) if the foreign corporation pays an amount equal to any taxes that section 897 would have imposed upon all persons who had disposed of interests in the transferor foreign corporation (or a corporation from which such assets were acquired in a transaction described in section 381) after June 18, 1980, as if it were a domestic corporation on the date of each such disposition, and if the conditions of Temp. Treas. Reg. § 1.897-5T(c)(4)(ii)(A) and (C) (relating to the distributee being subject to tax on a subsequent disposition and certain filing requirements) are met. Other requirements relating to the time and manner of payment of tax and interest are also set forth in the notice. The revisions announced in Notice 89-85 generally apply to all distributions of stock under Temp. Treas. Reg. § 1.897-5T(c)(4) occurring after July 31, 1989.
The IRS and Treasury have determined that when final regulations are issued, inbound statutory mergers and consolidations described in section 368(a)(1)(A) (including such reorganizations by reason of 368(a)(2)(D) or (E)) will be subject to the same rules set forth in Temp. Treas. Reg. § 1.897-5T(c)(4) and Notice 89-85 that apply to other inbound asset reorganizations. Further, as described in part 2, below, the period that a foreign corporation must consider with respect to prior stock dispositions under Temp. Treas. Reg. § 1.897-5T(c)(4) will be revised.
2. Revisions to the Notice 89-95 stock disposition look-back period applicable to Temp. Treas. Reg. § 1.897-5T(c)(2)(ii) liquidations, Temp. Treas. Reg. § 1.897-5T(c)(4) inbound asset reorganizations, and section 897(i) elections.
Section 1.897-5T(c)(2) of the temporary regulations applies the rules of section 897(d) to liquidating distributions of USRPIs by a foreign corporation to a domestic corporation pursuant to section 332(a). Under Temp. Treas. Reg. § 1.897-5T(c)(1), a foreign corporation that makes a liquidating distribution of a USRPI to a foreign or domestic shareholder must recognize gain on the distribution under section 897(d), unless the distribution comes within an exception described in Temp. Treas. Reg. § 1.897-5T(c)(2), (3), or (4). Temp. Treas. Reg. § 1.897-5T(c)(2)(i) and (ii) provide exceptions to this recognition rule that are applicable to liquidating distributions under section 332(a).
In Notice 89-85, the IRS and Treasury announced that the exceptions set forth in Temp. Treas. Reg. § 1.897-5T(c)(2)(i) and (ii) would be replaced by a new exception. The new exception announced in Notice 89-85 provides that recognition of gain shall not be required on the liquidating distribution of a USRPI by a foreign corporation to a domestic corporation meeting the stock ownership requirements of section 332(b) in a section 332(a) liquidation if the distributing foreign corporation pays the tax and interest on any prior disposition of its stock (or stock of a corporation from which such assets were acquired in a transaction described in section 381) after June 18, 1980, as if it were a domestic corporation on the date of such dispositions, and if the conditions of Temp. Treas. Reg. § 1.897-5T(c)(2)(i) are met (relating to the distributee being subject to tax on a subsequent disposition and certain basis carryover and filing requirements). The revisions announced in Notice 89-85 generally apply to all distributions of stock under Temp. Treas. Reg. § 1.897-5T(c)(2) occurring after July 31, 1989. Similarly, as described in part 1 of this notice, above, Notice 89-85 revised the look-back period applicable to inbound reorganizations under Temp. Treas. Reg. § 1.897-5T(c)(4) to encompass certain dispositions of the stock of the foreign corporation that occur after June 18, 1980. The rules of Notice 89-85 also require the payment of interest, as determined under section 6621, that would have accrued had tax actually been due with respect to the prior stock dispositions.
Further, section 897(i), which permits a foreign corporation to elect to be treated as a domestic corporation for purposes of section 897, requires as a condition to making the election that the electing foreign corporation verify that no interest in the corporation was disposed of during the shorter of: (1) the period from June 19, 1980 through the date of the election, (2) the period from the date on which the corporation first holds a USPRI through the date of the election, or (3) the five year period ending on the date of the election. See Treas. Reg. § 1.897-3(c)(5). If the foreign corporation cannot make such verification, then it must comply with the conditions of Treas. Reg. § 1.897-3(d) which, among other things, requires the payment of an amount equal to any taxes that section 897 would have imposed on all persons who had disposed of interests in the corporation during such period. The payment must also include any interest, as determined under section 6621, that would have accrued had the tax actually been due with respect to the dispositions. These rules were modified by Notice 89-85 to require the reporting and payment of tax and accrued interest on all dispositions of stock occurring after June 18, 1980 that would have been subject to taxation under section 897(a).
The IRS and Treasury have determined that when final regulations are issued, the look-back, tax, and interest payment periods applicable under Notice 89-85 to Temp. Treas. Reg. § 1.897-5T(c)(2) liquidating distributions, Temp. Treas. Reg. § 1.897-5T(c)(4) inbound asset reorganizations, and section 897(i) elections will be modified as described below.
Regarding distributions of USRPIs by a foreign corporation to a domestic corporation in a section 332 liquidation, the final regulations will amend the rules of Temp. Treas. Reg. § 1.897-5T(c)(2)(ii) and Notice 89-85 to provide that recognition of gain will not be required on the distribution of any USRPI by the distributing foreign corporation to the domestic corporation if the distributing foreign corporation pays an amount equal to the tax and interest that would have been imposed upon all persons who disposed of an interest in the foreign corporation (or a corporation from which such assets were acquired in a transaction described in section 381) during the period beginning on the date that is 10 years prior to the date on which the domestic corporation or any related person (within the meaning of section 267(b)) is in control (as determined under section 304(c)) of the liquidating foreign corporation, and ending on the date of the liquidation, as if the foreign corporation were a domestic corporation on the date of each such disposition and if the conditions of Temp. Treas. Reg. § 1.897-5T(c)(2)(i) are met.
Regarding inbound asset acquisitions described in Temp. Treas. Reg. § 1.897-5T(c)(4) as modified by this notice, the final regulations will amend the rules of Temp. Treas. Reg. § 1.897-5T(c)(4)(ii) and Notice 89-85 to provide that recognition of gain will not be required on the distribution of stock of a USRPHC if the foreign corporation pays an amount equal to any taxes and interest that would have been imposed upon all persons who disposed of an interest in the foreign corporation (or a corporation from which the assets were acquired in a transaction described in section 381) during the applicable period as if the foreign corporation were a domestic corporation on the date of each such disposition, and the conditions of Temp. Treas. § 1.897-5T(c)(4)(ii)(A) and (C) are met. The applicable period means the earliest of either:
The period beginning on the date that is 10 years prior to the date on which the acquiring domestic corporation or a related person (within the meaning of section 267(b)) is in control (as determined under section 304(c)) of the foreign corporation and ending on the date of the reorganization. For purposes of the preceding sentence, the acquiring domestic corporation means the domestic corporation that is the transferee in the 361(a) exchange; or
The period beginning on the date that is 10 years prior to the date of the reorganization and ending on the date of the reorganization.
Regarding the revisions to Treas. Reg. §1.897-3(c)(5), and (d) pertaining to a foreign corporation’s election under section 897(i), the final regulations will provide that the applicable period will be the earliest of either:
The period beginning on the date that is 10 years prior to the date on which one or more domestic shareholders or related persons (within the meaning of section 267(b)) are in control (as determined under section 304(c)) of the foreign corporation and ending on the date of the election; or
The period beginning on the date that is 10 years prior to the date of the section 897(i) election and ending on the date of the election.
3. Revisions to the rules of Temp. Treas. Reg. § 1.897-6T
(a) Revision to the rules of Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) to take into account statutory mergers and consolidations described in section 368(a)(1)(A)
As noted above, Temp. Treas. Reg. § 1.897-6T(a)(1) generally provides that any nonrecognition provision shall apply to a transfer by a foreign person of a USRPI only to the extent that the foreign person receives a USRPI in such exchange. Pursuant to the regulatory authority under section 897(e)(2) of the Code, Temp. Treas. Reg. § 1.897-6T(b)(1) and (2) provide exceptions to the rule of Temp. Treas. Reg. § 1.897-6T(a)(1) for certain foreign-to-foreign reorganizations and certain exchanges under section 351 where a foreign person transfers a USRPI for stock in a foreign corporation. These exceptions require that (1) the transferee’s subsequent disposition of the transferred USRPI be subject to U.S. income taxation in accordance with Temp. Treas. Reg. § 1.897-5T(d)(1); (2) the filing requirements of Temp. Treas. Reg. § 1.897-5T(d)(1)(iii) be satisfied; (3) one of the five conditions set forth in paragraph (b)(2) exists; and (4) the exchange takes one of the three forms of exchange described in paragraph (b)(1).
Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) describes one of the three permissible forms of exchange referenced above. That paragraph describes an exchange by a foreign corporation pursuant to section 361(a) or (b) in a reorganization described in section 368(a)(1)(C), where there is an exchange of the transferor corporation stock for the transferee corporation stock (or stock of the transferee corporation’s parent in the case of a parenthetical C reorganization) under section 354(a), and the transferor corporation’s shareholders own more than fifty percent of the voting stock of the transferee corporation (or stock of the transferee corporation’s parent in the case of a parenthetical C reorganization) immediately after the reorganization. The fifty percent limitation restricts this exception to reorganizations described in section 368(a)(1)(C) that are restructurings where the transferor corporation shareholders control the transferee corporation after the transaction (e.g., internal restructurings).
The IRS and Treasury have determined that when final regulations are issued, foreign-to-foreign statutory mergers and consolidations described in section 368(a)(1)(A) (including such reorganizations by reason of section 368(a)(2)(D) or (E)) will be subject to the same rules set forth in Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) that apply to foreign-to-foreign reorganizations described in section 368(a)(1)(C) (including parenthetical C reorganizations). The exception for statutory mergers and consolidations described in section 368(a)(1)(A) will be limited to restructurings where the 50 percent control requirement is satisfied after the transaction. Further, the final regulations will provide that in determining whether the fifty percent requirement set forth in Temp. Treas. Reg. § 1.897-6T(b)(1)(ii) is met where the transferee corporation owns more than fifty percent of the transferor corporation before a reorganization under section 368(a)(1)(A) or 368(a)(1)(C) (i.e., an upstream reorganization), the shareholders of the transferee corporation before the reorganization (that continue to be shareholders of the transferee corporation after the reorganization) will be treated as shareholders of the transferor corporation before the reorganization to the extent of their indirect interest in the stock of the transferor corporation (owned by the transferee corporation) before the reorganization.
Accordingly, when issued, the final regulations will provide that gain shall not be recognized where an exchange is made by a foreign corporation pursuant to section 361(a) or (b) in a reorganization described in section 368(a)(1)(A) (including such reorganization by reason of section 368(a)(2)(D) or (E)); there is an exchange of the transferor corporation stock for the transferee corporation stock (or the stock of the transferee corporation’s parent in the case of a reorganization by reason of section 368(a)(2)(D)) under section 354(a); immediately after the reorganization, the transferor corporation’s shareholders own more than fifty percent of the voting stock of the transferee corporation (or the transferee corporation’s parent in a reorganization by reason of section 368(a)(2)(D)), or in the case of a reorganization by reason of section 368(a)(2)(E), the shareholders of the corporation that controls the transferor corporation before the reorganization own more than fifty percent of the voting stock of that controlling corporation after the reorganization; and the other requirements of Temp. Treas. Reg. § 1.897-6T(b)(1) are satisfied.
(b) Additional exceptions to be added to the rules of Temp. Treas. Reg. § 1.897-6T(b)(1)
The IRS and Treasury have determined that when final regulations are issued, the rules of Temp. Treas. Reg. § 1.897-6T(b)(1) will be expanded to include two additional exceptions. Those exceptions will apply only in certain foreign-to-foreign statutory mergers and consolidations described in section 368(a)(1)(A) (including such reorganizations by reason of section 368(a)(2)(D) or (E)) and foreign-to-foreign reorganizations described in section 368(a)(1)(C) (including parenthetical C reorganizations). Accordingly, the new exceptions to be incorporated in the final regulations will revise the rules of Temp. Treas. Reg. § 1.897-6T(b)(1) to provide that such foreign-to-foreign reorganizations will be excepted from the general gain recognition rule of Temp. Treas. Reg. § 1.897-6T(a)(1) provided that the other requirements set forth in Temp. Treas. Reg. § 1.897-6T(b)(1) are met. The two additional exceptions apply where an exchange is made by a foreign corporation pursuant to section 361(a) or (b) in a reorganization described in section 368(a)(1)(A) (including a reorganization by reason of section 368(a)(2)(D) or (E)) or section 368(a)(1)(C) (including parenthetical C reorganizations); there is an exchange of the transferor corporation stock for the transferee corporation stock (or the transferee corporation’s parent in the case of a reorganization by reason of section 368(a)(2)(D) or a parenthetical C reorganization) under section 354(a); and either:
Stock in the transferor corporation (including a predecessor corporation in a transaction described in section 381(a)) would not be a USRPI at any time within the five year period ending on the date of the reorganization if the transferor corporation were a domestic corporation; or
Regarding reorganizations under section 368(a)(1)(A) (other than by reason of section 368(a)(2)(D) or (E)) or section 368(a)(1)(C) (other than parenthetical reorganizations described in that section): prior to the exchange the stock of the transferor corporation and the stock of the transferee corporation, and after the exchange the stock of the transferee corporation are regularly traded under Treas. Reg. § 1.897-1(n) and Temp. Treas. Reg. § 1.897-9T(d)(1) and (2) on an established securities market under § 1.897-1(m), and in the case where the transferor corporation would have been a USRPHC at any time within the five year period ending on the date of the reorganization if the transferor corporation had been a domestic corporation, no foreign shareholder of the transferor corporation owned a more than five percent interest in the transferor corporation at such time under the rules of Treas. Reg. § 1.897-1(c)(2)(iii) and Temp. Treas. Reg. § 1.897-9T.
Regarding parenthetical C reorganizations and reorganizations under section 368(a)(1)(A) by reason of section 368(a)(2)(D): prior to the exchange the stock of the transferor corporation and the stock of the corporation in control of the transferee corporation, and after the exchange the stock of the corporation in control of the transferee corporation are regularly traded under Treas. Reg. § 1.897-1(n) and Temp. Treas. Reg. § 1.897-9T(d)(1) and (2) on an established securities market under § 1.897-1(m), and in the case where the transferor corporation would have been a USRPHC at any time within the five year period ending on the date of the reorganization if the transferor corporation had been a domestic corporation, no foreign shareholder of the transferor corporation owned a more than five percent interest in the transferor corporation at such time under the rules of Treas. Reg. § 1.897-1(c)(2)(iii) and Temp. Treas. Reg. § 1.897-9T.
Regarding reorganizations under section 368(a)(1)(A) by reason of section 368(a)(2)(E): prior to the exchange the stock of the transferee corporation and the stock of the corporation in control of the transferor corporation, and after the exchange the stock of the corporation that controls the transferee corporation are regularly traded under Treas. Reg. § 1.897-1(n) and Temp. Treas. Reg. § 1.897-9T(d)(1) and (2) on an established securities market under § 1.897-1(m), and in the case where the transferor corporation or the corporation in control of the transferor corporation would have been a USRPHC at any time within the five year period ending on the date of the reorganization if either corporation had been a domestic corporation, no foreign shareholder of the corporation in control of transferor corporation owned a more than five percent interest in the transferor corporation at such time under the rules of Treas. Reg. § 1.897-1(c)(2)(iii) and Temp. Treas. Reg. § 1.897-9T.
(c) Revision to the rules of Temp. Treas. Reg. § 1.897-6T(b)(1)(iii) relating to foreign-to-foreign section 351 transactions and section 368(a)(1)(B) reorganizations
As discussed above, Temp. Treas. Reg. § 1.897-6T(b)(1) contains exceptions to the general rule provided in Temp. Treas. Reg. § 1.897-6T(a)(1) if one of three forms of exchange occurs and certain other requirements are met. Specifically, Temp. Treas. Reg. § 1.897-6T(b)(1)(iii) provides a foreign person with nonrecognition treatment if the foreign person exchanges stock in a USRPHC under section 351(a) or section 354(a) in a reorganization described in section 368(a)(1)(B), and, immediately after the exchange, all of the outstanding stock of the transferee corporation (or the stock of the transferee corporation’s parent in the case of a parenthetical B reorganization) is owned in the same proportions by the same nonresident alien individuals and foreign corporations that immediately before the exchange owned the stock of the USRPHC. However, if any of the stock in the foreign corporation received by the individual or corporate transferor in the exchange is disposed of within three years from the date of its receipt, then the transferor must recognize that portion of the realized gain with respect to the stock of the USRPHC for which the foreign stock disposed of was received.
The IRS and Treasury have determined that the final regulations will revise Temp. Treas. Reg. § 1.897-6T(b)(1)(iii) in two respects. First, the exception will be revised so that “all of the stock of the transferee corporation” is removed and replaced with “substantially all of the outstanding stock of the transferee corporation” and the words “in the same proportions” will be removed. Second, the three year period will be revised to one year.
(d) Removal of the conditions set forth in Temp. Treas. Reg. § 1.897-6T(b)(2)
As discussed above, to come within an exception to Temp. Treas. Reg. § 1.897-6T(a)(1), not only must an exchange be described in Temp. Treas. Reg. § 1.897-6T(b)(1), but it must also satisfy one of the five conditions set forth in Temp. Treas. Reg. § 1.897-6T(b)(2). The IRS and Treasury have determined that the conditions of Temp. Treas. Reg. § 1.897-6T(b)(2) are no longer necessary. Accordingly, the final regulations will eliminate the conditions of Temp. Treas. Reg. § 1.897-6T(b)(2).
Written comments on issues addressed in this notice may be submitted to the Office of Associate Chief Counsel International, Attention: Margaret Hogan (Notice 2006-46), room 4567, CC:INTL:B04, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically to Notice.Comments@m1.irscounsel.treas.gov Comments will be available for public inspection and copying.
Final regulations to be issued incorporating the guidance set forth in this notice regarding exchanges occurring in the context of a statutory merger or consolidation described in section 368(a)(1)(A) will generally apply to distributions, transfers, or exchanges occurring on or after January 23, 2006. Final regulations regarding the revisions to Temp. Treas. Reg. §§ 1.897-5T(c)(2), (4), Treas. Reg. §1.897-3(c)(5), (d), and Temp. Treas. Reg. § 1.897-6T(b), except as applicable to section 368(a)(1)(A) transactions, will apply to distributions, transfers, or exchanges occurring on or after May 23, 2006. However, taxpayers may choose to apply these regulatory changes to all dispositions, transfers, or exchanges occurring before May 23, 2006 during any taxable year that is not closed by the period of limitations, provided they do so consistently with respect to all dispositions, transfers, and exchanges.
Prior to the issuance of the final regulations, taxpayers may rely on the guidance contained in this notice. Taxpayers applying this notice, however, must do so consistently with respect to all transactions within its scope.
The collections of information contained in this notice have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-2017. 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 OMB control number.
The rules of this notice will apply to a foreign corporation distributing stock of a USRPHC to its shareholders pursuant to an inbound asset reorganization or a foreign corporation transferring a USRPI to another foreign corporation pursuant to an asset reorganization and will require such foreign corporations to satisfy the filing requirements of Temp. Treas. Reg. § 1.897-5T(d)(1)(iii), as modified by Notice 89-57, 1989-1 C.B. 698. The specific collections of information are contained in Temp. Treas. Reg. §§ 1.897-5T(c)(4)(ii)(C) and 1.897-6T(b)(1). These filing requirements notify the IRS of the transfer and enable it to verify that the transferor qualifies for nonrecognition and the transferee will be subject to U.S. tax on a subsequent disposition of the USRPI. Generally, they may be satisfied by: (1) filing the information statement required by Temp. Treas. Reg. § 1.897-5T(d)(1)(iii); (2) filing a notice of nonrecognition to the IRS in accordance with the provisions of Treas. Reg. § 1.1445-2(d)(2); or (3) filing a withholding certificate in accordance with the requirements of Treas. Reg. § 1.1445-3. The collections of information are required in order to obtain the benefit of the nonrecognition provisions. The likely respondents are businesses.
The estimated total annual reporting and/or recordkeeping burden is 500 hours. The estimated annual burden hour per respondent and/or recordkeeper is 1 hour. The estimated number of respondents and/or recordkeepers is 500. The estimated frequency of response is occasional.
Books or records relating to a collection of information must be retained as long as their statements may become material in the administration of any internal revenue law. Generally, tax returns and tax information are confidential, as required by 26 U.S.C. § 6103.
Notice 89-85, 1989-2 C.B. 403 is amplified.
The principal author of this notice is Margaret A. Hogan of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Ms. Hogan at (202) 622-3860 (not a toll-free call).
This revenue procedure modifies Rev. Proc. 89-56, 1989-2 C.B. 643, Rev. Proc. 90-39, 1990-2 C.B. 365, and Rev. Proc. 2002-32, 2002-1 C.B. 959, to eliminate impediments to the electronic filing of Federal income tax returns (e-filing) and to reduce the reporting requirements in each of these revenue procedures.
.01 Rev. Proc. 89-56, Rev. Proc. 90-39, and Rev. Proc. 2002-32 each provide a means for a consolidated group to obtain a specified consent or waiver from the Commissioner without requesting a private letter ruling. The revenue procedures each provide that, in order to obtain the subject consent or waiver, a statement containing specified information must be included on or with the group’s return. The Internal Revenue Service has concluded that the amount of information required to be included in these statements is greater than is necessary to facilitate the administration of the tax law. Moreover, each of these statements presents an impediment to e-filing.
.02 Rev. Proc. 89-56 provides a means for a consolidated group to obtain the Commissioner’s consent to file a consolidated Federal income tax return in which one or more members of the group use a 52-53 week tax year. Section 3.01 of the revenue procedure sets forth the information and representations that must be provided in a statement included on or with the group’s return in order to obtain the consent. Section 3.02 requires the statement to be signed under penalties of perjury by a duly authorized officer of the common parent.
.03 Rev. Proc. 90-39 provides a means for a consolidated group to obtain the Commissioner’s consent to elect or change its method of allocating the consolidated Federal income tax liability to its members for purposes of determining the earnings and profits of each member. Section 4.01 of the revenue procedure sets forth the information and representations that must be provided in a statement included on or with the group’s return in order to obtain the consent. Section 4.02 requires the statement to be signed under penalties of perjury by a duly authorized officer of the common parent.
.04 Rev. Proc 2002-32 provides a means for a consolidated group to obtain the Commissioner’s waiver of the prohibition against including a previously disaffiliated corporation in the group’s return during the sixty-month period following the disaffiliation. See § 1504(a)(3)(A) of the Internal Revenue Code. Paragraphs 5.01 through 5.14 of the revenue procedure set forth the information and representations that must be provided in a statement included on or with the group’s return in order to obtain the consent. In the unnumbered paragraph following the heading, Section 5 requires the statement to be filed under penalties of perjury.
This revenue procedure applies to any taxpayer that applies for a consent or waiver under the provisions of Rev. Proc. 89-56, Rev. Proc. 90-39, or Rev. Proc. 2002-32.
.01 To remove e-filing impediments, this revenue procedure eliminates the signature requirement of each of Rev. Proc. 89-56, Rev. Proc. 90-39, and Rev. Proc. 2002-32. Thus, the following provisions of these revenue procedures are deleted: section 3.02 of Rev. Proc. 89-56, section 4.02 of Rev. Proc. 90-39, and the clause, “filed under penalties of perjury,” in the second sentence in the unnumbered paragraph following the heading of Section 5 of Rev. Proc. 2002-32.
.02 To reduce the reporting requirements of Rev. Proc. 89-56, this revenue procedure permits a consolidated group to obtain consent under that revenue procedure by including the following statement on or with its return in lieu of the statement described in section 3.01 of Rev. Proc. 89-56: “THIS IS A REQUEST UNDER REV. PROC. 89-56 TO USE A 52-53 WEEK TAX YEAR. THE GROUP HAS COMPLIED, AND WILL CONTINUE TO COMPLY, WITH THE CONDITIONS SET FORTH IN SECTION 3.01 OF REV. PROC. 89-56.”
.03 To reduce the reporting requirements of Rev. Proc. 90-39, this revenue procedure permits a consolidated group to obtain consent under that revenue procedure by including the following statement on or with its return in lieu of the statement described in section 4.01 of Rev. Proc. 90-39: “THIS IS A REQUEST UNDER REV. PROC. 90-39 TO ELECT OR CHANGE THE METHOD OF ALLOCATING CONSOLIDATED FEDERAL INCOME TAX LIABILITY FOR PURPOSES OF DETERMINING MEMBERS’ EARNINGS AND PROFITS. THE GROUP HAS COMPLIED, AND WILL CONTINUE TO COMPLY, WITH THE CONDITIONS SET FORTH IN SECTION 4.01 OF REV. PROC. 90-39.”
.04 To reduce the reporting requirements of Rev. Proc. 2002-32, this revenue procedure permits a consolidated group to obtain a waiver under that revenue procedure by including the following statement on or with its return in lieu of the statement described in section 5 of Rev. Proc. 2002-32: “THIS IS A REQUEST UNDER REV. PROC. 2002-32 FOR A WAIVER OF SECTION 1504(a)(3)(A) FOR [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF SUBSIDIARY]. THE GROUP HAS COMPLIED, AND WILL CONTINUE TO COMPLY, WITH THE CONDITIONS SET FORTH IN SECTIONS 5.01 THROUGH 5.14 OF REV. PROC. 2002-32.”
.05 Although paragraphs 4.02, 4.03, and 4.04 of this revenue procedure reduce the amount of information that a taxpayer is required to include on or with its return, the taxpayer’s recordkeeping requirement remains unchanged. Taxpayers should maintain records to establish the information described in Rev. Proc. 89-56 (Sec. 3.01), Rev. Proc. 90-39 (Sec. 4.01), and 2002-32 (Secs. 5.01 through 5.14) in order to substantiate their reporting positions. See § 1.6001-1(e) of the Procedure and Administration Regulations.
Rev. Proc. 89-56, Rev. Proc. 90-39, and Rev. Proc 2002-32 are modified. The IRS and Treasury Department intend to modify Rev. Proc. 89-56 and Rev. Proc. 90-39 to reflect revisions to §§ 1.1502-13 and 1.1502-33 of the Income Tax Regulations. Until these revenue procedures are so modified, taxpayers should continue to apply the provisions of both revenue procedures in a manner that reflects the approach in the applicable regulations.
This revenue procedure is effective on May 26, 2006. However, taxpayers may rely on this revenue procedure for prior taxable years.
The collections of information in this revenue procedure have been previously reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1784.
Books or records relating to a collection of information must be retained as long as their contents may be material in the administration of any internal revenue tax law. Generally tax returns and tax return information are confidential, as required by § 6103.
The principal author of this revenue procedure is Grid R. Glyer of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue procedure, contact Grid R. Glyer at (202) 622-7930 (not a toll-free call).
Section 21 refers interchangeably to expenses “paid” by the taxpayer and expenses “incurred” by the taxpayer. Section 1.44A-1(a)(3) reconciles this use of various tax accounting terms by providing that, regardless of the taxpayer’s method of accounting, the credit is allowable only for expenses both “paid” during the taxable year and “incurred” during the taxable year or an earlier taxable year. The proposed regulations restate this rule in plain language and provide that the credit is allowable only in the taxable year in which the services are provided or the taxable year in which the expenses are paid, whichever is later, regardless of the taxpayer’s method of accounting.
Under section 21(b)(2)(A), expenses are employment-related only if (1) the expenses are primarily for household services or for the care of a qualifying individual, and (2) the taxpayer’s purpose in obtaining the services is to enable the taxpayer to be gainfully employed.
The section 44A regulations provide that expenses are primarily for the care of a qualifying individual if the primary nature of the services is to ensure the qualifying individual’s well-being and protection. Amounts paid for food, lodging, clothing, or education are not for the care of a qualifying individual. However, if these services are incidental to and inseparably a part of the care of a qualifying individual, the entire amount of the expense is deemed to be for care. Section 1.44A-1(c)(3)(i).
Section 1.44A-1(c)(3)(i) provides that expenses for transportation of a qualifying individual between the taxpayer’s household and a place outside the taxpayer’s household where care is provided are not for care. The proposed regulations provide that the cost of transportation (such as transportation to a day camp or to an after-school program not on school premises) furnished by a dependent care provider may be an employment-related expense if all other applicable requirements are satisfied.
Section 1.44A-1(c)(1)(i) provides that employment taxes that a taxpayer pays are employment-related expenses if the related wages are employment-related expenses. Rev. Rul. 76-288, 1976-2 C.B. 83, holds that additional costs for a care provider’s room and board are employment-related expenses. The proposed regulations incorporate these rules. Additionally, the proposed regulations clarify that indirect expenses such as application and agency fees may be employment-related expenses if the taxpayer is required to pay the expenses to obtain the care.
Section 21(d) provides that the amount of employment-related expenses that may be taken into account during any taxable year cannot exceed the taxpayer’s earned income or, if married, the earned income of the taxpayer’s spouse (whichever is less). A spouse who is a full-time student or is incapable of self-care is deemed to have earned income for each month of not less than $200 if there is one qualifying individual or $400 if there are two or more qualifying individuals with respect to the taxpayer for the taxable year. These amounts are increased, respectively, to $250 and $500 for taxable years beginning after December 31, 2002, and before January 1, 2011.
For taxable years beginning before January 1, 2005, section 21(a)(1) provides that the credit is available to a taxpayer who maintains a household that includes one or more qualifying individuals. For those years, section 21(e)(1) provides that a taxpayer is treated as maintaining a household for any period only if over half the cost of maintaining the household is furnished by the taxpayer or by the taxpayer and spouse (if any). Section 1.44A-1(d)(3) defines cost of maintaining a household substantially identically to the definition in §1.2-2(d) (relating to the head of household filing status). For simplicity, the proposed regulations cross-reference to the definition of cost of maintaining a household in §1.2-2(d) without regard to the last sentence of that paragraph. In lieu of that sentence, the proposed regulations provide that, for purposes of section 21, the cost of maintaining a household does not include the value of services performed in the household by the taxpayer or a qualifying individual, or expenses paid or reimbursed by another person.
Section 21(e)(6) provides that payments to a taxpayer’s dependent or child under age 19 do not qualify for the credit. Payments to a relative may qualify for the credit if the relative is not a dependent. The proposed regulations clarify that payments to either the taxpayer’s spouse or to a parent of the taxpayer’s child who is not the taxpayer’s spouse do not qualify for the credit. This rule is consistent with the requirement that a married couple must file a joint return to qualify for the credit, and with the principle that the tax treatment of a payment with respect to a child may be affected by an individual’s underlying legal obligation to the child. See section 21(e)(2); compare section 677(b).
When finalized, the regulations would obsolete Rev. Rul. 76-278, 1976-2 C.B. 84, and Rev. Rul. 76-288, 1976-2 C.B. 83.
§1.21-1 Expenses for household and dependent care services necessary for gainful employment.
§1.21-2 Limitations on amount creditable.
(a) Annual dollar limitation. (1) The amount of employment-related expenses that may be taken into account under §1.21-1(a) for any taxable year cannot exceed—
§1.21-3 Special rules applicable to married taxpayers.
§1.21-4 Payments to certain related individuals.
(Filed by the Office of the Federal Register on May 23, 2006, 8:45 a.m., and published in the issue of the Federal Register for May 24, 2006, 71 F.R. 29847)
Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations and Notice of Public Hearing Computer Software Under Section 199(c)(5)(B)
In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9262) concerning the application of section 199 of the Internal Revenue Code, which provides a deduction for income attributable to domestic production activities, to certain transactions involving computer software. The text of those regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.
Send submissions to: CC:PA:LPD:PR (REG-111578-06), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-111578-06), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS Internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (IRS — REG-111578-06). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.
Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR Part 1) relating to section 199. The temporary regulations provide guidance under section 199 for taxpayers providing computer software to customers for the customers’ direct use while connected to the Internet. The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.
A public hearing has been scheduled for Tuesday, August 29, 2006, at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.
[The text of the amendments to this proposed section is the same as the text of §1.199-3T published elsewhere in this issue of the Bulletin.]
[The text of the amendments to this proposed section is the same as the text of §1.199-8T published elsewhere in this issue of the Bulletin.]
(Filed by the Office of the Federal Register on May 24, 2006, 11:47 a.m., and published in the issue of the Federal Register for June 1, 2006, 71 F.R. 31128)
This document contains a correction to final regulations (T.D. 9243, 2006-8 I.R.B. 475), that was published in the Federal Register on Thursday, January 26, 2006 (71 FR 4276). This final regulation amends the income tax regulations under various provisions of the Internal Revenue Code to account for statutory mergers and consolidations.
The final regulation (T.D. 9243) that is the subject of this correction is under section 367 of the Internal Revenue Code.
As published, T.D. 9243 contains an error that may prove to be misleading and is in need of clarification.
§1.367(b)-6 [Corrected]
Par. 2. Section 1.367(b)-6 is amended by removing the third sentence of paragraph (a) (1) and adding the following sentence in its place to read as follows:
§1.367(b)-6 Effective dates and coordination rules.
(1) * * * Section 1.367(b)-4(b)(1)(ii) applies to all triangular reorganizations and reorganizations described in section 368(a)(1)(G) and (a)(2)(D) occurring on or after January 23, 2006, although taxpayers may apply §1.367(b)-4(b)(1)(ii) to triangular B reorganizations occurring on or after February 23, 2000, that is not closed by the period of limitations if done consistently with respect to all such triangular B reorganizations. * * *
(Filed by the Office of the Federal Register on May 15, 2006, 8:45 a.m., and published in the issue of the Federal Register for May 16, 2006, 71 F.R. 28266)
2006-34 2006-21 I.R.B. 2006-21 937
2006-35 2006-24 I.R.B. 2006-24
2006-36 2006-23 I.R.B. 2006-23 1038
2006-37 2006-23 I.R.B. 2006-23 1039
2006-38 2006-24 I.R.B. 2006-24
2006-30 2006-24 I.R.B. 2006-24
2006-43 2006-21 I.R.B. 2006-21 921
2006-46 2006-24 I.R.B. 2006-24
2006-48 2006-21 I.R.B. 2006-21 922
2006-49 2006-22 I.R.B. 2006-22 943
139059-02 2006-24 I.R.B. 2006-24
144784-02 2006-23 I.R.B. 2006-23 1036
111578-06 2006-24 I.R.B. 2006-24
2006-21 2006-24 I.R.B. 2006-24
2006-22 2006-23 I.R.B. 2006-23 1033
2006-24 2006-22 I.R.B. 2006-22 943
2006-25 2006-21 I.R.B. 2006-21 926
2006-26 2006-21 I.R.B. 2006-21 936
2006-27 2006-22 I.R.B. 2006-22 945
2006-26 2006-22 I.R.B. 2006-22 939
2006-27 2006-21 I.R.B. 2006-21 915
2006-28 2006-22 I.R.B. 2006-22 938
2006-29 2006-23 I.R.B. 2006-23 1031
9260 2006-23 I.R.B. 2006-23 1001
9261 2006-21 I.R.B. 2006-21 919
9262 2006-24 I.R.B. 2006-24
89-85 Amplified by Notice 2006-46 2006-24 I.R.B. 2006-24
131264-04 Withdrawn by Ann. 2006-34 2006-21 I.R.B. 2006-21 937
81-17 Obsoleted by Rev. Proc. 2006-24 2006-22 I.R.B. 2006-22 943
89-56 Modified by Rev. Proc. 2006-21 2006-24 I.R.B. 2006-24
90-39 Modified by Rev. Proc. 2006-21 2006-24 I.R.B. 2006-24
2002-32 Modified by Rev. Proc. 2006-21 2006-24 I.R.B. 2006-24
2002-52 Modified by Rev. Proc. 2006-26 2006-21 I.R.B. 2006-21 936
2003-44 Modified and superseded by Rev. Proc. 2006-27 2006-22 I.R.B. 2006-22 945
2005-21 Superseded by Rev. Proc. 2006-25 2006-21 I.R.B. 2006-21 926
2000-2 Modified and superseded by Rev. Rul. 2006-26 2006-22 I.R.B. 2006-22 939
2006-25 Corrected by Ann. 2006-35 2006-24 I.R.B. 2006-24
9243 Corrected by Ann. 2006-38 2006-24 I.R.B. 2006-24