bulletin no. 1996–25 · tween the destruction of the residence and its sale or reconstruction and...

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Bulletin No. 1996–25June 17, 1996

HIGHLIGHTSOF THIS ISSUE

These synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 96–31, page 4.LIFO; price indexes; department stores. The April 1996Bureau of Labor Statistics price indexes are acceptedfor use by department stores employing the retailinventory and last-in, first-out inventory methods forvaluing inventories for tax years ended on, or withreference to, April 30, 1996.

Rev. Rul. 96–32, page 5.Involuntary conversion of a residence; deduction forqualified residence interest. If a principal residence isdestroyed, and the land portion is later sold, gain onthe scale may be deferred under section 1033(a) if therequirements of that section are met. Taxpayers maycontinue to deduct otherwise deductible mortgageinterest on a destroyed residence during a reasonableperiod between the destruction of the residence and itssale or reconstruction and reoccupation.

EXEMPT ORGANIZATIONS

Announcement 96–59, page 22.A list is given of organizations now classified as privatefoundations.

ADMINISTRATIVE

Notice 96–35, page 8.As part of the President’s Regulatory ReinventionInitiative, certain listed regulations have been identifiedas obsolete. Public comments are requested.

PS–5–96, page 17.Proposed regulations under section 708 of the Coderelate to the termination of a partnership upon the saleor exchange of 50 percent or more of the total interestin partnership capital and profits.

Rev. Proc. 96–35, page 8.Magnetic/Electronic Media Filing Program; Form 1040NR.Participants in the 1996 Magnetic/Electronic MediaProgram for Form 1040NR, U.S. Nonresident AlienIncome Tax Return, are informed of their obligations tothe Service and other participants.

Announcement 96–57, page 20.The schedule, agenda and registration information forthe 1996 Information Reporting Seminars for magnetic/electronic filing is published. Members of the publicmay register to attend one or more of these seminars.

Announcement 96–58, page 21.T.D. 8658, 1996–14 I.R.B. 13, relating to thedetermination of the interest expense deduction offoreign corporations, is corrected.

Finding Lists begin on page 27.Announcement of Disbarments and Suspensions begins on page 24.

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Mission of the ServiceThe purpose of the Internal Revenue Service is tocollect the proper amount of tax revenue at the leastcost; serve the public by continually improving the

quality of our products and services; and perform in amanner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is toadminister the Internal Revenue Code. Tax policyfor raising revenue is determined by Congress.

With this in mind, it is the duty of the Service tocarry out that policy by correctly applying the lawsenacted by Congress; to determine the reasonablemeaning of various Code provisions in light of theCongressional purpose in enacting them; and toperform this work in a fair and impartial manner,with neither a government nor a taxpayer point ofview.

At the heart of administration is interpretation of theCode. It is the responsibility of each person in theService, charged with the duty of interpreting thelaw, to try to find the true meaning of the statutoryprovision and not to adopt a strained construction inthe belief that he or she is ‘‘protecting the revenue.’’The revenue is properly protected only when we as-certain and apply the true meaning of the statute.

The Service also has the responsibility of applyingand administering the law in a reasonable,practical manner. Issues should only be raised byexamining officers when they have merit, neverarbitrarily or for trading purposes. At the sametime, the examining officer should never hesitateto raise a meritorious issue. It is also importantthat care be exercised not to raise an issue or toask a court to adopt a position inconsistent withan established Service position.

Administration should be both reasonable andvigorous. It should be conducted with as littledelay as possible and with great courtesy andconsiderateness. It should never try to overreach,and should be reasonable within the bounds of lawand sound administration. It should, however, bevigorous in requiring compliance with law and itshould be relentless in its attack on unreal taxdevices and fraud.

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IntroductionThe Internal Revenue Bulletin is the authoritativeinstrument of the Commissioner of Internal Revenue forannouncing official rulings and procedures of theInternal Revenue Service and for publishing TreasuryDecisions, Executive Orders, Tax Conventions, legisla-tion, court decisions, and other items of generalinterest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscrip-tion basis. Bulletin contents of a permanent nature areconsolidated semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletinall substantive rulings necessary to promote a uniformapplication of the tax laws, including all rulings thatsupersede, revoke, modify, or amend any of thosepreviously published in the Bulletin. All publishedrulings apply retroactively unless otherwise indicated.Procedures relating solely to matters of internalmanagement are not published; however, statements ofinternal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of theService on the application of the law to the pivotal factsstated in the revenue ruling. In those based onpositions taken in rulings to taxpayers or technicaladvice to Service field offices, identifying details andinformation of a confidential nature are deleted toprevent unwarranted invasions of privacy and to complywith statutory requirements.

Rulings and procedures reported in the Bulletin do nothave the force and effect of Treasury DepartmentRegulations, but they may be used as precedents.Unpublished rulings will not be relied on, used, or citedas precedents by Service personnel in the disposition of

other cases. In applying published rulings and proce-dures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must beconsidered, and Service personnel and others con-cerned are cautioned against reaching the sameconclusions in other cases unless the facts andcircumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based onprovisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows:Subpart A, Tax Conventions, and Subpart B, Legislationand Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts andSubparts. Also included in this part are Bank SecrecyAct Administrative Rulings. Bank Secrecy Act Admin-istrative Rulings are issued by the Department of theTreasury’s Office of the Assistant Secretary(Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemak-ing and the disbarment and suspension list included inthis part, none of these announcements are consoli-dated in the Cumulative Bulletins.

The first Bulletin for each month includes an index forthe matters published during the preceding month.These monthly indexes are cumulated on a quarterlyand semiannual basis, and are published in the firstBulletin of the succeeding quarterly and semi-annualperiod, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 163.—Interest

If a principal residence is destroyed and eitherthe remaining land portion is sold or the dwellingis reconstructed and reoccupied within a reason-able period of time after the destruction ordamage, is the property treated as a qualifiedresidence under § 163(h) during the period be-tween the destruction of the residence and its saleor reconstruction and reoccupation as a qualifiedresidence? See Rev. Rul. 96–32, page 5.

Section 472.—Last-in, First-outInventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department

stores. The April 1996 Bureau of LaborStatistics price indexes are accepted foruse by department stores employing theretail inventory and last-in, first-outinventory methods for valuing invento-ries for tax years ended on, or withreference to, April 30, 1996.

Rev. Rul. 96–31

The following Department Store In-ventory Price Indexes for April 1996were issued by the Bureau of LaborStatistics on May 14, 1996. The in-dexes are accepted by the InternalRevenue Service, under § 1.472–1(k)of the Income Tax Regulations and

Rev. Proc. 86–46, 1986–2 C.B. 739, forappropriate application to inventories ofdepartment stores employing the retailinventory and last-in, first-out inven-tory methods for tax years ended on, orwith reference to, April 30, 1996.

The Department Store InventoryPrice Indexes are prepared on a na-tional basis and include (a) 23 majorgroups of departments, (b) three specialcombinations of the major groups —soft goods, durable goods, and mis-cellaneous goods, and (c) a store total,which covers all departments, includingsome not listed separately, except forthe following: candy, foods, liquor,tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STOREINVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups Apr 1995 Apr 1996Percent Change from

Apr 1995 to Apr 19961

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . 485.2 528.6 8.92. Domestics and Draperies . . . . . . . . . . . . . . . . 642.6 655.0 1.93. Women’s and Children’s Shoes . . . . . . . . . . 639.1 658.2 3.04. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . 919.0 899.6 –2.15. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . 613.8 640.9 4.46. Women’s Underwear. . . . . . . . . . . . . . . . . . . . 540.1 538.5 –0.37. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . 281.3 285.7 1.68. Women’s and Girls’ Accessories . . . . . . . . . 545.3 554.9 1.89. Women’s Outerwear and Girls’ Wear . . . . . 448.3 430.9 –3.9

10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . 613.4 625.7 2.011. Men’s Furnishings. . . . . . . . . . . . . . . . . . . . . . 573.0 590.3 3.012. Boys’ Clothing and Furnishings . . . . . . . . . . 494.1 491.2 –0.613. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1024.3 1036.3 1.214. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779.7 785.1 0.715. Toilet Articles and Drugs . . . . . . . . . . . . . . . 850.8 883.3 3.816. Furniture and Bedding . . . . . . . . . . . . . . . . . . 649.4 672.2 3.517. Floor Coverings. . . . . . . . . . . . . . . . . . . . . . . . 570.2 571.1 0.218. Housewares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 778.8 802.9 3.119. Major Appliances . . . . . . . . . . . . . . . . . . . . . . 245.7 246.8 0.420. Radio and Television . . . . . . . . . . . . . . . . . . . 85.4 79.6 –6.821. Recreation and Education2. . . . . . . . . . . . . . . 114.2 113.7 –0.422. Home Improvements2 . . . . . . . . . . . . . . . . . . . 122.7 125.7 2.423. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . 106.9 107.3 0.4

Groups 1–15: Soft Goods. . . . . . . . . . . . . . . . . . . . 604.0 608.2 0.7

Groups 16–20: Durable Goods . . . . . . . . . . . . . . . 465.7 468.8 0.7

Groups 21–23: Misc. Goods2. . . . . . . . . . . . . . . . . 114.1 114.1 0.0

Store Total3. . . . . . . . . . . . . . . . . . . . . . . . . . . . 556.6 560.1 0.6

1Absence of a minus sign before percentage change in this column signifies price increase.2Indexes on a January 1986=100 base.3The store total index covers all departments, including some not listed separately, except for the following: candy, foods,liquor, tobacco, and contract departments.


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DRAFTING INFORMATION

The principal author of this revenueruling is Stan Michaels of the Office ofAssistant Chief Counsel (Income Taxand Accounting). For further informa-tion regarding this revenue ruling,contact Mr. Michaels on (202)622-4970 (not a toll-free call).

Section 1033.—InvoluntaryConversions

26 CFR 1.1033(a)–3: Involuntary conversionof a principal residence.(Also §§ 163, 1034; 1.1034–1(c)(3).)

Involuntary conversion of a re-sidence; deduction for qualified re-sidence interest. If a principal re-sidence is destroyed, and the landportion is later sold, the sale is treatedas part of the involuntary conversion ofthe residence, if the requirements ofsection 1033(a) are met. Taxpayersmay continue to deduct otherwisedeductible mortgage interest on a de-stroyed residence during a reasonableperiod between the destruction of theresidence and its sale or reconstructionand reoccupation.

Rev. Rul. 96–32

ISSUES

(1) If the dwelling portion of thetaxpayer’s principal residence is de-stroyed and the remaining land portionof the principal residence is subse-quently sold within the period de-scribed in § 1033(a)(2)(B) of the Inter-nal Revenue Code, is the sale treated aspart of the involuntary conversion ofthe principal residence to which§ 1033(a) may apply to defer recogni-tion of gain realized on the sale?

(2) If the taxpayer subsequently sellsthe remaining land portion of theprincipal residence described above orreconstructs the destroyed dwelling andreoccupies it as the taxpayer’s principalresidence within a reasonable period oftime after the destruction, is the prop-erty treated as a qualified residenceunder § 163(h) during the period be-tween the destruction of the dwellingand the sale or reoccupancy?

FACTS

Situation (1)—A’s principal re-sidence (within the meaning of §§ 1034

and 163(h)(4)(A)(i)(I)) was destroyedin September 1991 by a tornado thatwas subsequently declared a disaster bythe President. In the same year, Areceived insurance proceeds of $120xfor the destruction of the dwelling. A’sadjusted basis in the property (land andimprovements) was $100x. A did notrebuild the dwelling, but instead soldthe land for $10x in November 1993.In March 1995, A purchased anotherhome for $130x and used it as A’sprincipal residence.

Situation (2)—B’s principal re-sidence (within the meaning of §§ 1034and 163(h)(4)(A)(i)(I)) was destroyedin December 1991 by an earthquakethat was subsequently declared a disas-ter by the President. Because thewidespread destruction in the regionresulted in a severe shortage of avail-able equipment, materials, and skilledlabor, B was not able to begin recon-struction of the dwelling until June1993. Upon its completion in October1994, B reoccupied the reconstructeddwelling and used it as B’s principalresidence. During the period from theearthquake until B reoccupied the re-constructed dwelling, B lived in rentalhousing.

In Situations (1) and (2), the re-sidences were encumbered by mort-gages securing debts the interest onwhich was qualified residence interestunder § 163(h)(3)(A) prior to the disas-ter. Had the residences not been de-stroyed, they would have continued toqualify as principal residences under§ 163(h)(4)(A)(i)(I). After the destruc-tion of their principal residences, A andB continued to make payments ofprincipal and interest on their mortgagedebts.

LAW AND ANALYSIS—ISSUE (1)

Section 1033(a)(2)(A) provides, inpart, that if property (as a result of itsdestruction in whole or in part, theft,seizure, or requisition or condemnationor threat or imminence thereof) iscompulsorily or involuntarily convertedinto money, which in turn is used topurchase (within the period specified in§ 1033(a)(2)(B)) property similar orrelated in service or use to the con-verted property, gain will be recog-nized only to the extent that theamount realized upon the conversionexceeds the cost of the replacementproperty.

Section 1033(a)(2)(B) provides thatthe period for replacing converted

property generally shall be the periodbeginning on the date of the dispositionof the converted property and ending 2years after the close of the taxable yearin which any part of the gain isrealized. However, § 1033(h)(1)(B),added by § 13431 of the OmnibusBudget Reconciliation Act of 1993,provides that if a principal residence iscompulsorily or involuntarily convertedas a result of a Presidentially declareddisaster, § 1033(a)(2)(B) shall be ap-plied by substituting ‘‘4 years’’ for ‘‘2years.’’ For this purpose, § 1033(h)(3)generally provides that the term ‘‘prin-cipal residence’’ has the same meaningas when used in § 1034. Section1033(h) is effective for property con-verted as a result of disasters deter-mined after August 31, 1991, to bePresidentially declared disasters, andfor taxable years ending after that date.

Section 1033(b) provides that thebasis of property acquired in a transac-tion that resulted in nonrecognition ofgain under § 1033(a)(2) shall be thecost of the property acquired reducedby the amount of the gain not sorecognized.

Section 1.1033(a)–3 of the IncomeTax Regulations provides, in part, that§ 1033 shall apply in the case ofproperty that the taxpayer uses as thetaxpayer’s principal residence if itsdestruction occurs after December 31,1953. Thus, the nonrecognition of gainprovided by § 1034 is not applicable ifa principal residence is destroyed andreplacement property is acquired.

Section 1.1034–1(c)(3) provides thatwhether property is used by the tax-payer as a principal residence under§ 1034 depends upon all the facts andcircumstances in each case, includingthe good faith of the taxpayer.

In Rev. Rul. 76–541, 1976–2 C.B.246, a taxpayer owned and resided in ahouse situated on an undivided parcelof land containing 10 acres, all ofwhich the taxpayer used as the princi-pal residence. During a particular year,the taxpayer sold the dwelling andthree immediately surrounding acres ata gain. Later in the same year, thetaxpayer sold two more acres at a gain.The taxpayer constructed a new princi-pal residence on the taxpayer’s remain-ing five acres within the period pro-vided under § 1034. Rev. Rul. 76–541holds that § 1034 applies to deferrecognition of the total gain realized onboth sales, and that a single replace-ment period under § 1034(a) (deter-


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mined with reference to the date of thefirst sale) applies. Rev. Rul. 76–541treats the dwelling and the ten acres ofsurrounding land as the taxpayer’sprincipal residence. The sale of the firstthree acres and the dwelling did notalter the ‘‘principal residence’’ charac-ter of the two-acre portion of land thatwas later sold during the applicablereplacement period.

Consistent with the integral nature ofa taxpayer’s principal residence for§ 1034 purposes, § 1.165–7(b)(2)(ii)provides that, in determining theamount of a casualty loss for residen-tial real property and improvementsthereon (such as buildings and land-scaping), the improvements are consid-ered an integral part of the residentialproperty so that no separate basis needbe apportioned to such improvements.Cf. § 1.165–7(b)(2)(i) (a loss incurredin a trade or business or in any trans-action entered into for profit is deter-mined by reference to the separate fairmarket value and basis of each single,identifiable property damaged ordestroyed).

In Situation (1), A realized $120x ofinsurance proceeds upon the 1991 con-version of the dwelling. A may offsetthe entire $100x basis in the propertyagainst the amount realized, consistentwith the nonapportionment of basis forthe computation of casualty loss deduc-tions on residential real property under§ 1.165–7(b)(2)(ii). Thus, A realized again from the insurance proceeds of$20x and A’s basis in the property isreduced to $0x.

A thereafter realized an additional$10x of gain on the 1993 sale of theland, for a total gain of $30x on theproperty. Because the principal re-sidence of A before the disaster con-sisted of both the dwelling and the landthat was later sold by A after thedestruction of the dwelling, A’s sale ofthat land will be treated as part of asingle involuntary conversion of A’sprincipal residence that occurred on thedate the dwelling was destroyed. Thus,§ 1033, and not § 1034, will apply todefer recognition of A’s $30x gain.

For purposes of this § 1033 deferral,A’s period for purchasing replacementproperty under § 1033(a)(2)(B) and(h)(1)(B) begins on the date that thedwelling is destroyed and ends 4 yearsafter the close of the taxable year inwhich gain is first realized. Because Apurchased a new principal residencewithin this period at a cost ($130x) that

was not less than the sum of the in-surance proceeds ($120x) and the salesproceeds ($10x), A may defer recogni-tion of the entire $30x gain. A’s basisin the new principal residence is $100x($130x cost less $30x unrecognizedgain).

LAW AND ANALYSIS—ISSUE (2)

Section 163(a) allows a deduction forall interest paid or accrued within thetaxable year on indebtedness. Section163(h)(1) generally provides that, inthe case of taxpayers other than acorporation, no deduction is allowedfor personal interest. Section 163(h)-(2)(D) specifically excludes from thedefinition of the term ‘‘personal inter-est’’ any qualified residence interest.

Section 163(h)(3)(A) provides thatthe term ‘‘qualified residence interest’’means any interest paid or accruedduring the taxable year on acquisitionor home equity indebtedness withrespect to any qualified residence ofthe taxpayer. Section 163(h)(4)(A)(i)defines the term ‘‘qualified residence’’to mean (I) the taxpayer’s principalresidence, within the meaning of§ 1034, and (II) one other residence ofthe taxpayer selected by the taxpayerfor purposes of § 163(h) for the taxableyear and used by the taxpayer as aresidence.

In Situation (1), A’s property willcontinue to be treated as a qualifiedresidence under § 163(h) for purposesof A’s deduction of the interest that Apaid on the mortgage debt until thedate on which A sold the property.

In Situation (2), B began and com-pleted reconstruction of the dwelling,and reoccupied it as B’s principalresidence, all within a reasonableperiod of time after it was destroyed.Accordingly, B’s property will continueto be treated as a qualified residenceunder § 163(h) for purposes of B’sdeduction for the interest that B paidon the mortgage debt during thatperiod. See H.R. Rep. No. 99–426, 99thCong., 1st Sess. 299 (1985), 1986–3C.B. (Vol. 2) 299 (accompanying theTax Reform Act of 1986, whichenacted § 163(h)).

HOLDINGS

(1) If the dwelling portion of thetaxpayer’s principal residence is de-stroyed and the remaining land portionof the principal residence is subse-

quently sold within the period de-scribed in § 1033(a)(2)(B), the sale istreated as part of the involuntaryconversion of the principal residence towhich § 1033(a) applies to defer recog-nition of gain realized on the sale if therequirements of that section are met.

(2) If the taxpayer subsequently sellsthe land portion of the principal re-sidence described above within a rea-sonable period of time after the de-struction, the property will continue tobe treated as a qualified residenceunder § 163(h) during the period be-tween the destruction of the dwellingand the sale of land. Likewise, if thetaxpayer reconstructs the destroyeddwelling and reoccupies it as thetaxpayer’s principal residence within areasonable period of time after thedestruction, the property will continueto be treated as a qualified residenceunder § 163(h) during that period.

Holdings (1) and (2) apply whetheror not the destruction occurred inconnection with a Presidentially de-clared disaster. These holdings alsoapply if the property is a secondresidence within the meaning of§ 163(h)(4)(A)(i)(II).

EFFECT ON OTHERDOCUMENTS

Rev. Rul. 74–206, 1974–1 C.B. 198,is clarified to provide that, in thecontext of a casualty involving ataxpayer’s residence, a taxpayer neednot allocate the basis of the taxpayer’sresidence between the house and theland to compute a § 165 casualty lossdeduction or the gain eligible fordeferral under § 1033, but instead mayuse the aggregate basis of the houseand the land.

DRAFTING INFORMATION

The principal author of this revenueruling is George Wright of the Officeof Assistant Chief Counsel (IncomeTax and Accounting). For further infor-mation regarding this revenue ruling,contact Mr. Wright on (202) 622-4950(not a toll-free call).

Section 1034.—Rollover of Gain onSale of Principal Residence

26 CFR 1.1034–1(c)(3): Property used by thetaxpayer as his principal residence.

If a principal residence is destroyed and eitherthe remaining portion is sold or the dwelling is


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reconstructed and reoccupied, within a reason-able period of time after the destruction ordamage, is the property treated as a principalresidence within the meaning of § 1034, andtherefore as a qualified residence under § 163(h)during a reasonable period between the destruc-tion of the dwelling and its sale or reconstructionand reoccupation as a qualified residence? SeeRev. Rul. 96–32, page 5.

Section 6012.—Persons required toMake Returns of Income

26 CFR 1.6012–5: Composite return in lieu ofspecified form.

What are the requirements for participation inthe 1996 Magnetic/Electronic Media Filing Pro-gram for the Form 1040NR, U.S. NonresidentAlien Income Tax Return? See Rev. Proc. 96–35,page 8.

Section 6061.—Signing of Returnsand Other Documents

26 CFR 1.6061–1: Signing of returns andother documents by individuals.

What are the requirements for participation inthe 1996 Magnetic/Electronic Media Filing Pro-gram for the Form 1040NR, U.S. NonresidentAlien Income Tax Return? See Rev. Proc. 96–35,page 8.

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Part III. Administrative, Procedural, and Miscellaneous

Regulatory Reinvention Initiative—Request For Comments

Notice 96–35

As part of the President’s RegulatoryReinvention Initiative, the TreasuryDepartment and the Internal RevenueService have identified obsolete regula-tions that relate to prior law, provide

elections for prior years, or are other-wise outdated due to changes in theunderlying statutory provisions. TheTreasury Department and the InternalRevenue Service believe that the reg-ulations listed below should be with-drawn or removed.

Public comments are requested priorto August 1, 1996, regarding whetherany of these regulations should be

retained. Comments should be ad-dressed to Office of Chief Counsel,Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Attn:CC:CORP:R (Regulatory ReinventionInitiative), Room 5228, Washington,D.C. 20044. For further information,contact Philip Bennet, (202) 622-3926(not a toll-free number).

SECTION SUBJECT

1.921–1T(c) Export Trade Corporations

1.1502–81T Alaskan Native Corporations

5c.103–1, 5c.103–2 and 5c.103–3 Leases and industrial development bonds; Leases andarbitrage; Special rules for leases

FEDERAL REGISTER CITE ANDPROJECT NUMBER SECTION SUBJECT

44 FR 31228 (5/31/79) (EE–16–78)40 FR 18798 (4/30/75)

1.402(a)–1 Taxability of beneficiary under a trust which meets therequirements of section 401(a)

44 FR 31228 (5/31/79) (EE–16–78) 1.402(e)–2 Treatment of certain lump sum distributions made after 1973

44 FR 31228 (5/31/79) (EE–16–78) 1.402(e)–14 Election to treat pre-1974 participation as post-1973 participation(the ‘‘402(e)(4)(L) election’’)

40 FR 18798 (4/30/75) 1.403(a)–1 Taxability of beneficiary under a qualified annuity plan

44 FR 31228 (5/31/79) (EE–16–78)40 FR 18798 (4/30/75)

1.403(a)–2 Capital gains treatment for certain distributions

40 FR 18798 (4/30/75) 1.405–3 Taxation of retirement bonds

26 CFR 601.602: Tax forms and instructions.(Also Part I, Sections 6012, 6061; 1.6012–5, 1.6061–1.)

Rev. Proc. 96–35

CONTENTS

SECTION 1 PURPOSESECTION 2 BACKGROUND AND CHANGESSECTION 3 TRANSMITTED MEDIA FILING PARTICIPANTS—DEFINITIONSSECTION 4 ACCEPTANCE INTO THE 1040NR PROGRAMSECTION 5 RESPONSIBILITIES OF A 1040NR FILERSECTION 6 PENALTIESSECTION 7 FORM 8453–NR, U.S. NONRESIDENT ALIEN INCOME TAX DECLARATION FOR MAGNETIC

MEDIA FILINGSECTION 8 OBLIGATIONS OF A 1040NR RETURN ORIGINATOR TO THE TAXPAYERSECTION 9 DIRECT DEPOSIT OF REFUNDSSECTION 10 BALANCE DUE RETURNSSECTION 11 ADVERTISING STANDARDS FOR A 1040NR FILER AND A FINANCIAL INSTITUTIONSECTION 12 MONITORING AND SUSPENSION OF A 1040NR FILERSECTION 13 ADMINISTRATIVE REVIEW PROCESS FOR DENIAL OF PARTICIPATION IN THE 1040NR

PROGRAMSECTION 14 ADMINISTRATIVE REVIEW PROCESS FOR SUSPENSION FROM THE 1040NR PROGRAMSECTION 15 EFFECT ON OTHER DOCUMENTS


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SECTION 16 EFFECTIVE DATESECTION 17 PROJECT OFFICE INFORMATION

SECTION 1. PURPOSE

This revenue procedure informsthose who participate in the MagneticMedia/Electronic Filing Program forForm 1040NR, U.S. Nonresident AlienIncome Tax Return (‘‘1040NR Pro-gram’’), of their obligations to theInternal Revenue Service, taxpayers,and other participants. This revenueprocedure updates Rev. Proc. 95–22,1995–1 C.B. 686.

SECTION 2. BACKGROUND ANDCHANGES

.01 Section 1.6012–5 of the IncomeTax Regulations provides that the Com-missioner may authorize the use, at theoption of a person required to make areturn, of a composite return in lieu ofany form specified in 26 CFR Part 1(Income Tax), subject to the conditions,limitations, and special rules governingthe preparation, execution, filing, andcorrection thereof as the Commissionermay deem appropriate.

.02 For purposes of this revenueprocedure, a magnetically or elec-tronically filed Form 1040NR is acomposite return consisting of datatransmitted on magnetic tape, floppydisk, or via modem (‘‘transmitted me-dia’’), and certain paper documents.The non-transmitted media paper por-tion of the return consists of a Form8453–NR, U.S. Nonresident Alien In-come Tax Declaration for MagneticMedia Filing, and other paper docu-ments that cannot be filed on transmit-ted media. Form 8453–NR must bereceived by the Service before anycomposite return is complete. A com-posite return must contain the sameinformation that a return filed com-pletely on paper contains. See section 7of this revenue procedure for proce-dures for completing Form 8453–NR.

.03 The Magnetic Media Project Of-fice (‘‘Project Office’’, see section 17of this revenue procedure for addressand telephone numbers) will periodi-cally issue a list of the forms andschedules that can be magnetically orelectronically filed, as well as forms,schedules, and other information thatcannot be magnetically or electronicallyfiled.

.04 A tax return with a zero balance,balance due, or refund due may befiled on transmitted media.

.05 A tax return cannot be filed ontransmitted media after December 2,1996, notwithstanding the fact that thetaxpayer has been granted an extensionto file beyond that date. Form 2688,Application for Additional Extension ofTime To File U.S. Individual IncomeTax Return, cannot be filed on trans-mitted media.

.06 An amended tax return cannot befiled on transmitted media. A taxpayermust file an amended tax return onpaper in accordance with the instruc-tions for Form 1040X, Amended U.S.Individual Income Tax Return.

.07 Upon request, the Project Officewill provide technical information (i.e.,file specifications, record layouts, andtesting procedures) for transmitted me-dia filing.

.08 This revenue procedure updatesRev. Proc. 95–22, which applied to the1040NR Program for the 1995 filingseason. The updates include changes inthe 1040NR Program for the 1996 fil-ing season, clarifications of prior1040NR Program statements, and addi-tional guidance derived from otherService documents that relate to the1040NR Program. Some of these up-dates are:

(1) Form 4868, Application forAutomatic Extension of Time To FileU.S. Individual Income Tax Return,may now be filed on transmitted media;

(2) a 1040NR Filer must completethe necessary testing at least 30 daysbefore the 1040NR Filer may submit atax return (section 4.03);

(3) a 1040NR Filer may not basea fee for submission of transmittedmedia returns on the amount of taxessaved (section 5.05);

(4) a 1040NR Filer must submit arevised Form MAR–8980, Applicationfor Magnetic Media Filing of Form1040NR, if there is a change to the1040NR Filer’s business address (sec-tion 5.07);

(5) a 1040NR Filer must notifythe Service when it discontinues par-ticipation in the 1040NR Program(section 5.08);

(6) additions are provided to theresponsibilities of a 1040NR ReturnOriginator (sections 5.11(5) and 5.13);

(7) a Software Developer may notincorporate into its software a Service-assigned production password (section5.18);

(8) procedures are provided forsubmitting balance due returns (section10);

(9) a 1040NR Filer must adhere toall relevant federal, state, and localconsumer protection laws that relate toadvertising and soliciting (section11.02);

(10) a 1040NR Filer may be sus-pended for having more than oneMTFIN for the same business entity atthe same location unless the Servicehas issued more than one MTFIN to abusiness entity (section 12.05(9)); and

(11) the two-year period for denialor suspension is clarified (section12.08).

SECTION 3. TRANSMITTEDMEDIA FILING PARTICIPANTS—DEFINITIONS

.01 After acceptance into the1040NR Program, as described insection 4 of this revenue procedure, aparticipant is referred to as ‘‘1040NRFiler.’’

.02 A 1040NR Filer is categorizedas follows:

(1) 1040NR RETURN ORIGINA-TOR. A ‘‘1040NR Return Originator’’is either (a) a ‘‘1040NR Return Pre-parer’’ who prepares tax returns, in-cluding Forms 8453–NR, for taxpayerswho intend to have their returnsmagnetically or electronically filed; or(b) a ‘‘1040NR Return Collector’’ whoaccepts completed tax returns, includ-ing Forms 8453–NR, from taxpayerswho intend to have their returnsmagnetically or electronically filed.

(2) SERVICE BUREAU. A ‘‘Ser-vice Bureau’’ receives tax return infor-mation on any media from a 1040NRFiler, formats the return information,and either forwards the return informa-tion to a Transmitter or sends back thereturn information to the 1040NR Filer.A Service Bureau may or may not pro-cess Forms 8453–NR and send them tothe Project Office. A Service Bureaudoes not transmit returns directly to theService.

(3) SOFTWARE DEVELOPER. A‘‘Software Developer’’ develops soft-ware for the purposes of (a) formattingreturns according to the Service’s trans-mitted media return specifications; and/or (b) filing transmitted media returnsdirectly with the Service. A SoftwareDeveloper may also sell its software.


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(4) TRANSMITTER. A ‘‘Trans-mitter’’ accepts a transmitted media taxreturn from a 1040NR Filer and sub-mits the return directly to the Service.

.03 The 1040NR Filer categories arenot mutually exclusive. For example, a1040NR Return Originator can, at thesame time, be considered a Transmitter,Software Developer, or Service Bureaudepending on the function(s) per-formed.

SECTION 4. ACCEPTANCE INTOTHE 1040NR PROGRAM

.01 To be accepted into the 1040NRProgram, an applicant must:

(1) file a properly completed ap-plication using Form MAR–8980 withthe Project Office, unless previouslyaccepted into the 1040NR Program;

(2) successfully complete the nec-essary testing with the Project Office ifthe applicant intends to file transmittedmedia returns or has developed soft-ware for formatting or filing transmit-ted media returns; and

(3) receive a letter of acceptanceinto the 1040NR Program.

.02 Once accepted into the 1040NRProgram, a 1040NR Filer must, foreach year that it intends to submitreturns on transmitted media:

(1) submit a revised Form MAR–8980 if there is any change to theinformation previously submitted onthat form.

(2) successfully complete the nec-essary testing with the Project Office ifthe 1040NR Filer intends to filetransmitted media returns or has devel-oped software for formatting or filingtransmitted media returns; and

(3) receive a letter confirming thatthe 1040NR Filer may submit taxreturns for the current filing season.

.03 A 1040NR Filer may only sub-mit actual tax returns beginning 30days after successfully completing thenecessary testing.

.04 The following reasons may re-sult in a rejection of an application toparticipate in the 1040NR Program(this list is not all-inclusive):

(1) conviction of any criminal of-fense under the revenue laws of theUnited States, or of any offense involv-ing dishonesty or breach of trust;

(2) failure to file timely and accu-rate business or personal tax returns;

(3) failure to timely pay personalor business tax liabilities;

(4) assessment of penalties;(5) suspension/disbarment from

practice before the Service;(6) other facts or conduct of a

disreputable nature that would reflectadversely on the 1040NR Program;

(7) misrepresentation on anapplication;

(8) suspension or rejection fromthe 1040NR Program in a prior year;

(9) unethical practices in returnpreparation;

(10) stockpiling returns (see sec-tion 5.06 of this revenue procedure)prior to official acceptance into the1040NR Program;

(11) knowingly and directly orindirectly employing or accepting as-sistance from any person who has beendenied acceptance into the 1040NRProgram or is suspended from thatProgram. This includes any individualwhose actions resulted in the rejectionor suspension of a corporation or apartnership from that Program; or

(12) knowingly and directly orindirectly accepting employment as anassociate, correspondent, or subagentfrom, or sharing fees with, any personwho has been denied acceptance intothe 1040NR Program or is suspendedfrom that Program. This includes anyindividual whose actions resulted in therejection or suspension of a corporationor a partnership from that Program.

SECTION 5. RESPONSIBILITIESOF A 1040NR FILER

.01 To ensure that complete returnsare accurately and efficiently filed, a1040NR Filer must comply with allpublications and notices of the Service.Currently, these publications andnotices include:

(1) Procedures for Magnetic Me-dia Filing of U.S. Nonresident AlienIncome Tax Returns, Form 1040NR(available from the Project Office); and

(2) File Specifications and RecordLayouts for Magnetic Media Filing ofU.S. Nonresident Alien Income TaxReturns, Form 1040NR (available fromthe Project Office).

.02 A 1040NR Filer must ensure thatno other entity uses its assigned Mag-netic Tape 1040NR Filer IdentificationNumber (MTFIN). A MTFIN cannot betransferred by sale, loan, gift, orotherwise to another entity.

.03 A 1040NR Filer must maintain ahigh degree of integrity, compliance,and accuracy.

.04 A 1040NR Filer may only accepta return for transmitted media filingdirectly from a taxpayer or from a1040NR Return Originator.

.05 If a 1040NR Filer charges a feefor the submission of a transmittedmedia tax return, the fee may not bebased on a percentage of the refundamount or on the amount of taxessaved. A 1040NR Filer may not chargea separate fee for Direct Deposit. Seesection 9 of this revenue procedure fora discussion of Direct Deposit.

.06 A 1040NR Filer is responsiblefor ensuring that stockpiling does notoccur. Prior to official acceptance ofthe 1040NR Filer into the 1040NRProgram, stockpiling means collectingreturns from taxpayers. After officialacceptance, stockpiling means:

(1) in the case of a 1040NRReturn Originator, waiting for morethan three days after receiving thenecessary information to submit areturn to a Transmitter, or

(2) in the case of a Transmitter,waiting for more than ten days afterreceiving the necessary information tosubmit a transmitted media tax returnto the Service.

.07 A previously accepted 1040NRFiler must submit a revised FormMAR-8980 to update information whenthere is any change to:

(1) the Firm name or Doing Busi-ness As (DBA) name;

(2) the business mailing address;(3) the contact representative’s

name or telephone number; or(4) the transmitted media filing

category..08 A 1040NR Filer must notify the

Project Office within 14 days ofdiscontinuing its participation in the1040NR Program.

.09 A 1040NR Filer must ensure thata transmitted media return is filed onor before the due date of the tax return.A tax return is not considered fileduntil the transmitted media portion ofthe tax return is acknowledged by theService as accepted for processing anda completed and signed Form 8453–NRis received by the Service. However, ifthe transmitted media portion of areturn is successfully transmitted on orshortly before the due date and thetaxpayer complies with section 7.01 ofthis revenue procedure, the return willbe deemed timely filed. If the transmit-ted media portion of a return is initiallytransmitted on or shortly before the due


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date and is ultimately rejected, but thetaxpayer complies with section 5.13 ofthis revenue procedure, the return willbe deemed timely filed. In the case of abalance due return, see section 10 ofthis revenue procedure for instructionson how to make a timely payment oftax.

.10 A 1040NR Filer must ensure thatthe return for any individual is receivedby the Service on or before:

(1) April 15 if the individual wasan employee and received wages sub-ject to U.S. federal income tax with-holding; or

(2) June 15 if the individual didnot receive such wages. However,section 2.05 of this revenue procedureprovides that a transmitted media returncannot be filed after December 2, 1996.

.11 A 1040NR Return Originatormust:

(1) comply with the proceduresfor completing Form 8453–NR de-scribed in section 7 of this revenueprocedure;

(2) furnish the taxpayer with acopy of the signed Form 8453–NR and,in the case of a prepared or correctedreturn, the non-transmitted media por-tions of the return;

(3) retain the following materialuntil the end of the calendar year inwhich the transmitted media return wasfiled, unless otherwise notified by theService:

(a) a copy of the signed Form8453–NR, Forms W–2, W–2G, CertainGambling Winnings, and 1099–R, Dis-tributions From Pensions, Annuities,Retirement or Profit-Sharing Plans,IRAs, Insurance Contracts, etc., and thenon-transmitted media portion of thetaxpayer’s return;

(b) a complete copy of themagnetically or electronically transmit-ted portion of the taxpayer’s return(may be retained on computer media)that can be readily and accuratelyconverted into a transmitted media thatthe Service can process; and

(c) the acknowledgement filereceived from the Service or from aTransmitter;

(4) upon request by the Servicefor the materials described in section5.11(3) of this revenue procedure,make those materials available to theService at the business address fromwhich a return was accepted for trans-mitted media filing; and

(5) identify the paid preparer (ifany) in the appropriate field of the

transmitted media return, in addition toensuring that the paid preparer signedForm 8453–NR. If Form 8453–NR isnot signed by the paid preparer, the1040NR Return Originator must attacha copy of pages one and two of acompleted Form 1040NR that includesthe paid preparer’s signature. Thesecopies must be marked ‘‘COPY-DONOT PROCESS’’ to prevent duplicatefilings.

.12 A 1040NR Return Originatorwho is also the paid preparer of atransmitted media return must complywith § 1.6107–1(b). This section of theregulations describes the tax returnmaterials that must be retained and theretention periods for these materials.

.13 If the transmitted media portionof a taxpayer’s return is acknowledgedas rejected by the Service, and thereason for the rejection cannot berectified by making nonsubstantivechanges as described in section 6.02(3)of this revenue procedure, the 1040NRReturn Originator must notify the tax-payer within one work day by mail thatthe taxpayer’s return has not been filed.If the taxpayer chooses to have therejected return resubmitted on transmit-ted media, and the 1040NR ReturnOriginator successfully works with theProject Office to correct the problemscausing the return to be rejected, thereturn will be accepted as timely filed.A new Form 8453–NR may be required(see section 7 of this revenue proce-dure). However, even when no newForm 8453–NR is required, the Trans-mitter must submit a photocopy of theoriginal Form 8453–NR with the re-jected file or return and mark thephotocopy ‘‘Retransmitted.’’ If theProject Office determines that a trans-mitted media return cannot be acceptedfor processing or the taxpayer choosesnot to have the rejected return resub-mitted on transmitted media, the tax-payer must file a paper return. If thedue date (with regard to any extensionsof time to file) of the return has passed,the taxpayer must file a paper returnwithin ten days of the rejection alongwith an explanation of why the returnis being filed after the due date. Apaper return filed in good faith underany of these circumstances will beaccepted as timely filed.

.14 A 1040NR Return Originatormust use the taxpayer’s address in thetransmitted media portion of the return.In addition, a 1040NR Return Origina-tor must not put its address as thetaxpayer’s address in the transmittedmedia portion of the return.

.15 A Service Bureau must:(1) deliver all transmitted media

returns to a Transmitter or to the1040NR Return Originator who gavethe transmitted media returns to theService Bureau within three days ofreceipt;

(2) retrieve the acknowledgementfile from the Transmitter within oneday of being informed of the receipt bythe Transmitter;

(3) initiate the communication ofthe acknowledgement file to the1040NR Return Originator (whetherrelated or not) within one work day ofretrieving the acknowledgement file;

(4) if the Service Bureau proc-esses Form 8453–NR, send back to the1040NR Return Originator any returnand Form 8453–NR that needs correc-tion, unless the correction is describedin section 7.02(3) of this revenueprocedure;

(5) accept tax return informationonly from a 1040NR Return Originatorwho is in good standing in the 1040NRProgram;

(6) include its MTFIN and the1040NR Return Originator’s MTFIN inthe transmission of all tax returninformation;

(7) retain each acknowledgementfile received from a Transmitter untilthe end of the calendar year in whichthe transmitted media return was filed;

(8) if requested, serve as a contactpoint between its client 1040NR ReturnOriginator and the Service; and

(9) if requested, provide the Serv-ice with a list of each client 1040NRReturn Originator.

.16 A Transmitter must:(1) transmit all transmitted media

returns within ten days of receipt andforward the acknowledgement files tothe 1040NR Return Originators or theService Bureau within five days afterreceipt of the acknowledgments fromthe Service;

(2) match the acknowledgementfile to the original transmission file andresubmit any return that was notacknowledged as accepted for process-ing after necessary corrections aremade within seven days of receivingthe acknowledgement file;

(3) contact the Project Office forassistance if a return has been rejectedafter three attempts, or if an acknowl-edgement is received for a return thatwas not in the original submission;

(4) ensure the security of all trans-mitted data;


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(5) promptly correct any transmis-sion error that causes a transmittedmedia return to be rejected; and

(6) retain an acknowledgementfile received from the Service until theend of the calendar year in which thetransmitted media return was filed.

(7) immediately contact the Proj-ect Office for further instructions if anacknowledgement of a transmitted me-dia return’s acceptance for processinghas not been received by the Transmit-ter within 14 days of transmission or ifa Transmitter receives an acknowledge-ment for a return that was not transmit-ted on the designated transmission.

.17 A Transmitter who providestransmission services to another1040NR Filer must, in addition to theitems covered in section 5.16 of thisrevenue procedure, also:

(1) only accept a transmitted me-dia return for transmission to theService from an accepted 1040NRFiler;

(2) provide each client with theacknowledgement file for the transmit-ted return within five days after receiptof the acknowledgment from the Serv-ice; and

(3) use its assigned MTFIN whenfiling returns.

.18 A Software Developer must:(1) promptly correct any software

error that causes a transmitted mediareturn to be rejected; and

(2) promptly distribute any soft-ware correction made to its softwarepackages to all 1040NR Filers utilizingthese packages.

(3) not incorporate into its soft-ware a Service-assigned productionpassword.

.19 In addition to the specific re-sponsibilities described in this section,a 1040NR Filer must meet all therequirements of this revenue procedureto keep the privilege of participating inthe 1040NR Program.

SECTION 6. PENALTIES

.01 Penalties for Disclosure or Useof Information.

(1) A 1040NR Filer, except aSoftware Developer, is a tax returnpreparer (‘‘Preparer’’) under the defini-tion of § 301.7216–1(b) of the Regula-tions on Procedure and Administration.A Preparer is subject to a criminalpenalty for disclosure or use of taxreturn information, as described in

§ 301.7216–1(a). In general, that reg-ulation provides that any preparer whodiscloses or uses any tax return infor-mation for a purpose other than prepar-ing, assisting in preparing, or obtainingor providing services in connectionwith the preparation of a tax return isguilty of a misdemeanor. In addition,§ 6713 of the Internal Revenue Codeprovides for civil penalties that may beassessed against a preparer who makesan unauthorized disclosure or use oftax return information.

(2) Under § 301.7216–2(h), dis-closure of tax return informationamong accepted 1040NR Filers for thepurpose of preparing a return is permis-sible. For example, it is permissible fora 1040NR Return Originator to pass ontax return information to a ServiceBureau and/or a Transmitter for thepurpose of having a transmitted mediareturn formatted and filed with theService. However, if the tax returninformation is disclosed or used in anyother way, a Service Bureau and or aTransmitter may be guilty of a misde-meanor as described in paragraph (1)above.

.02 Other Preparer Penalties. (1) Preparer penalties may be as-

serted against an individual or firmwho meets the definition of an incomet a x r e t u r n p r e p a r e r u n d e r§§ 7701(a)(36) and 301.7701–15. Ex-amples of preparer penalties that maybe asserted under appropriate circum-stances include, but are not limited to,those set forth in §§ 6694, 6695, and6713.

(2) Under § 301.7701–15(d),1040NR Return Collectors, ServiceBureaus, Software Developers, andTransmitters are not income tax returnpreparers for the purpose of assessingmost preparer penalties as long as theirservices are limited to ‘‘typing, repro-duction, or other mechanical assistancein the preparation of a return or claimfor refund.’’

(3) If a 1040NR Return Collector,Service Bureau, Software Developer, orTransmitter alters the return informa-tion in a nonsubstantive way, thisalteration will be considered to comeunder the ‘‘mechanical assistance’’ ex-ception described in § 301.7701–15(d)-(1). A nonsubstantive change is acorrection or change limited to atransposition error, misplaced entry,spelling error, or arithmetic correctionthat falls within one of the followingtolerances:

(a) the Total Tax amount, TotalPayments amount, Refund amount, orthe Amount You Owe shown on Form8453–NR differs from the correspond-ing amount on the transmitted mediareturn by no more than $7;

(b) the Total Income amountshown on Form 8453–NR differs fromthe corresponding amount on the trans-mitted media return by no more than$25; or

(c) dropping cents and roundingto whole dollars.

(4) If a 1040NR Return Collector,Service Bureau, or Transmitter altersthe return information in a substantiveway, rather than having the taxpayeralter the return, the 1040NR ReturnCollector, Service Bureau, or Transmit-ter will be considered to be an incometax return preparer for purposes of§ 7701(a)(36).

(5) If a 1040NR Return Collector,Service Bureau, Transmitter, or theproduct of a Software Developer, goesbeyond mechanical assistance, any ofthese parties may be held liable forincome tax return preparer penalties.Rev. Rul. 85–189, 1985–2 C.B. 341,describes a situation where a SoftwareDeveloper was determined to be anincome tax return preparer and subjectto certain preparer penalties.

.03 In addition to the above spec-ified provisions, the Service reservesthe right to assert all appropriate civiland criminal penalties, including pre-parer, nonpreparer, and disclosurepenalties, against a 1040NR Filer aswarranted under the circumstances.

SECTION 7. FORM 8453–NR, U.S.NONRESIDENT ALIEN INCOMETAX DECLARATION FORMAGNETIC MEDIA FILING

.01 Procedures for Completing Form8453–NR.

(1) Form 8453–NR must be com-pleted in accordance with the instruc-tions for Form 8453–NR.

(2) The taxpayer’s name, address,taxpayer identification number, tax re-turn information, and direct deposit ofrefund information in the transmittedmedia submission must be identical tothe information on the Form 8453–NRthat the taxpayer signed and providedfor submission to the Service.

(3) After the transmitted mediareturn has been prepared and before thereturn is submitted, the taxpayer must


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verify the information on the transmit-ted media return and on Form 8453–NR and sign Form 8453–NR. An easilyreadable file copy of the preparedreturn must be provided to the taxpayerat the time of signature.

(4) A 1040NR Filer must submit aForm 8453–NR to the Project Officewith each magnetically or electronicallyfiled return. A single Form 8453–NR(inscribed with the language ‘‘Seeattached Multiple Return InformationListing’’) may be used for a multiplereturn filing if the person who signsForm 8453–NR has authorization,either by a specific power of attorneyor as a responsible representative oragent under § 1.6012–3(b) of the In-come Tax Regulations, to sign each ofthe returns included in the multiplereturn filing. A person who makes amultiple return filing must attach toForm 8453–NR an information page(s)titled ‘‘Form 8453–NR for MultipleReturns—Tax Return Information List-ing’’ at the top of the pages(s). Belowthe title, the multiple return 1040NRFiler must provide his or her name andaddress. The next item on the page(s)must be a list that includes everytaxpayer’s name control, taxpayer iden-tification number, and the informationshown on lines one through five onForm 8453–NR, for each return in-cluded in a multiple return filing.

(5) If a 1040NR Filer functions asa 1040NR Return Originator, the1040NR Filer must sign the 1040NRReturn Originator’s Declaration onForm 8453–NR.

(6) If the 1040NR Filer is also thepaid preparer, the 1040NR Filer mustcheck the ‘‘Paid Preparer’’ box andsign the 1040NR Return OriginatorDeclaration on Form 8453–NR.

.02 Corrections to Form 8453–NR.(1) If the 1040NR Return Origina-

tor makes changes to a transmittedmedia return after Form 8453–NR hasbeen signed by the taxpayer, but beforeit is transmitted, the 1040NR ReturnOriginator must have all the necessaryparties described above sign a newForm 8453–NR with the corrections ifeither of the following applies:

(a) the ‘‘Total Tax’’ (Form8453–NR, line 2), the ‘‘Refund’’ (Form8453–NR, line 4), or the ‘‘AmountOwed’’ (Form 8453–NR, line 5) differsfrom the amount on the transmittedmedia return by more than $7; or

(b) the ‘‘Total Income’’ (Form8453–NR, line 1) differs from the

amount on the transmitted media returnby more than $25.

(2) A new Form 8453–NR is notrequired for a nonsubstantive change. Anonsubstantive change is limited to acorrection within the above tolerancesfor an arithmetic error, transpositionerror, misplaced entry, or a spellingerror. The incorrect nonsubstantive in-formation must be neatly lined throughon Form 8453–NR and the correct dataentered next to the lined-through entry.Also, the initials or the name of theperson making the correction must beentered.

(3) Dropping cents and roundingto whole dollars does not constitute asubstantive change or alteration to thereturn unless the amount differs bymore than the above tolerances. Allrounding should be accomplished inaccordance with the instructions in theForm 104ONR tax package.

.03 If the Service determines that aForm 8453–NR is missing, the 1040NRReturn Originator must provide theService with a replacement. A 1040NRReturn Originator must also provide acopy of any Form(s) W–2, Wage andTax Statement, W–2G, Certain Gam-bling Winnings, 1099R, Distributionsfrom Pensions, Annuities, Retirementor Profit-Sharing Plans, IRAs, Insur-ance Contracts, etc., and all otherattachments to the Form 8453–NR.

.04 If a substitute Form 8453–NR isused, it must be approved by theService prior to use. See Rev. Proc.95–16, 1995–1 C.B. 525.

SECTION 8. OBLIGATIONS OF A1040NR RETURN ORIGINATOR TOTHE TAXPAYER


(1) furnish the taxpayer with acomplete paper copy of the transmittedmedia material that was transmitted tothe Service. This information can becontained on a replica of an officialform or on an unofficial form. How-ever, on an unofficial form, data entriesmust be referenced to the line numberson an official form;

(2) provide the taxpayer with acopy of Form 8453–NR and, in thecase of a prepared or corrected return,the non-transmitted media portion ofthe taxpayer’s return;

(3) advise the taxpayer to retain acomplete copy of the return and anysupporting material;

(4) advise the taxpayer that anamended return, if needed, must befiled as a paper return and mailed tothe Philadelphia Service Center;

(5) upon request, provide the tax-payer with the date the transmittedmedia portion of the taxpayer’s returnwas acknowledged as accepted forprocessing by the Service; and

(6) inform the taxpayer that theaddress reported on the transmittedmedia portion of the return, onceprocessed, will be used to update thetaxpayer’s address of record. The Inter-nal Revenue Service uses the tax-payer’s address of record for variousnotices that are required to be sent to ataxpayer’s ‘‘last known address’’ underthe Internal Revenue Code and forrefunds of overpayments of tax (unlessotherwise specifically directed by thetaxpayer, such as by Direct Deposit).See Rev. Proc. 90–18, 1990–1 C.B.491, for additional information about‘‘last known address.’’

.02 A 1040NR Return Originatorshould advise the taxpayer to wait atleast three weeks from the acceptancedate of the transmitted media tax returnbefore contacting the Service for thestatus of a refund. If such contact isnecessary, the taxpayer should be ad-vised to use the IRS Tele-Tax system.

SECTION 9. DIRECT DEPOSIT OFREFUNDS

.01 The Service will ordinarily proc-ess a request for Direct Deposit butreserves the right to issue a paperrefund check.

.02 The Service does not guarantee aspecific date by which a refund will bedirectly deposited into the taxpayer’sfinancial institution account. The tax-payer’s account must be with a finan-cial institution located in the UnitedStates.

.03 Neither the Service nor theFinancial Management Service (FMS)is responsible for the misapplication ofa Direct Deposit that is caused byerror, negligence, or malfeasance onthe part of the taxpayer, 1040NR Filer,financial institution, or any of theiragents.


(1) ensure that the taxpayer isaware of all the general informationregarding a Direct Deposit;

(2) not charge a separate fee forDirect Deposit;


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(3) accept any Direct Depositelection to any eligible financial insti-tution designated by the taxpayer;

(4) ensure that the taxpayer iseligible to choose Direct Deposit;

(5) verify that the Direct Depositinformation requested on Part II ofForm 8453–NR was entered correctlyand that the information entered is theinformation transmitted on the transmit-ted media portion of the return;

(6) caution the taxpayer that oncea transmitted media return has beenaccepted for processing by the Service:

(a) the Direct Deposit electioncannot be rescinded;

(b) the Routing Transit Numberof the financial institution cannot bechanged; and

(c) the taxpayer’s account num-ber cannot be changed; and

(7) advise the taxpayer to followthe procedures in section 8.02 of thisrevenue procedure if there is a need tocontact the Service about a DirectDeposit request.

SECTION 10. BALANCE DUERETURNS

.01 A magnetically or electronicallyfiled balance due return is submitted tothe Philadelphia Service Center in thesame manner that a refund or zerobalance return is submitted. A balancedue return is not complete unless anduntil the Service receives a Form8453–NR completed and signed by thetaxpayer.

.02 A taxpayer who magnetically orelectronically files a balance due returnmust make a full and timely paymentof any tax that is due. Failure to makefull payment of any tax that is due onor before April 15, 1996 (for individ-uals who were employees and receivedwages subject to U.S. income tax with-holding), or June 15, 1996 (for individ-uals who did not receive wages as anemployee that were subject to U.S.income tax withholding), will result inthe imposition of interest and mayresult in the imposition of penalties.

SECTION 11. ADVERTISINGSTANDARDS FOR A 1040NRFILER AND A FINANCIALINSTITUTION

.01 A 1040NR Filer must complywith the advertising and solicitationprovisions of 31 C.F.R. Part 10 (Treas-

ury Department Circular No. 230). Thiscircular prohibits the use or participa-tion in the use of any form of publiccommunication containing a false,fraudulent, misleading, deceptive, un-duly influencing, coercive, or unfairstatement or claim. In addition, adver-tising must not imply a special relation-ship with the Service, FMS, or theTreasury Department. Any claims con-cerning faster refunds by virtue oftransmitted media filing must be con-sistent with the language in officialService publications.

.02 A 1040NR Filer must adhere toall relevant federal, state, and localconsumer protection laws.

.03 A 1040NR Filer must not usethe Service’s name, ‘‘Internal RevenueService,’’ or ‘‘IRS’’ within a firm’sname.

.04 A 1040NR Filer must not useimproper or misleading advertising inrelation to the 1040NR Program (in-cluding the time frames for refunds).

.05 Use of Direct Deposit name andlogo.

(1) The name ‘‘Direct Deposit’’will be used with initial capital lettersor all capital letters.

(2) The logo/graphic for DirectDeposit will be used whenever feasiblein advertising copy.

(3) The color or size of the DirectDeposit logo/graphic may be changedwhen used in advertising pieces.

.06 Advertising materials must notcarry the FMS, IRS, or other Treasuryseals.

.07 Advertising for a cooperativetransmitted media return project(public/private sector) must clearlystate the names of all cooperatingparties.

.08 If a 1040NR Filer uses radio ortelevision broadcasting to advertise, thebroadcast must be pre-recorded. The1040NR Filer must keep a copy of thepre-recorded advertisement for a periodof at least 36 months from the date ofthe last transmission or use.

.09 If a 1040NR Filer uses directmail or fax communications to adver-tise, the 1040NR Filer must retain acopy of the actual mailing or fax, alongwith a list or other description ofpersons to whom the communicationwas mailed, faxed, or otherwise dis-tributed for a period of at least 36months from the date of the lastmailing, fax, or distribution.

.10 Acceptance to participate in the1040NR Program does not imply en-

dorsement by the Service or FMS ofthe software or quality of servicesprovided.

SECTION 12. MONITORING ANDSUSPENSION OF A 1040NR FILER

.01 The Service will monitor a1040NR Filer for conformity with thisrevenue procedure. The Service canimmediately suspend, without notice, a1040NR Filer from the 1040NR Pro-gram. However, in most circumstances,a suspension from participation in the1040NR Program is effective as of thedate of the letter informing the 1040NRFiler of the suspension. Before sus-pending a 1040NR Filer, the Servicemay issue a warning letter that de-scribes specific corrective action fordeviations from this revenue procedure.

.02 The Service will monitor thetimely receipt of Forms 8453–NR, aswell as their overall legibility.

.03 The Service will monitor thequality of the 1040NR Filer’s submis-sions throughout the filing season. TheService will also monitor transmittedmedia returns and tabulate rejections,errors, and other defects. If qualitydeteriorates, the 1040NR Filer mayreceive a warning from the Service.

.04 The Service will monitor com-plaints about a 1040NR Filer and issuea warning or suspension letter asappropriate.

.05 The Service reserves the right tosuspend the transmitted media filingprivilege of any 1040NR Filer whoviolates any provision of this revenueprocedure. Generally, the Service willadvise a suspended 1040NR Filer con-cerning the requirements for reaccep-tance into the 1040NR Program. Thefollowing reasons may lead to a warn-ing letter and/or suspension of a1040NR Filer from the 1040NR Pro-gram (this list is not all-inclusive):

(1) the reasons listed in section4.04 of this revenue procedure;

(2) deterioration in the format ofindividual submissions;

(3) unacceptable cumulative erroror rejection rate;

(4) untimely received, illegible,missing, or unapproved substituteForms 8453–NR;

(5) stockpiling of returns whileparticipating in the 1040NR Program;

(6) failure on the part of a Trans-mitter to provide clients with acknowl-edgement files within five days afterreceipt from the Service;


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(7) significant complaints about a1040NR Filer’s performance in the1040NR Program;

(8) failure on the part of a1040NR Filer to ensure that no otherentity uses its assigned MTFIN;

(9) having more than one MTFINfor the same business entity at thesame location (the business entity isgenerally the entity that reports on itsreturn the income derived from trans-mitted media filing), unless the Servicehas issued more than one MTFIN to abusiness entity;

(10) failure on the part of a1040NR Filer to cooperate with theService’s efforts to monitor 1040NRFilers and investigate transmitted mediafiling abuse;

(11) failure on the part of a1040NR Filer to properly use thestandard/non-standard W–2 indicator;

(12) failure on the part of aTransmitter to use its assigned MTFINwhen filing returns;

(13) failure on the part of theTransmitter to include a Service Bu-reau’s MTFIN in the transmission of areturn submitted by a Service Bureau;

(14) failure on the part of aService Bureau or a Transmitter toinclude the 1040NR Return Origina-tor’s MTFIN as part of a return that the1040NR Return Originator submits tothe Service Bureau or the Transmitter;

(15) violation of the advertisingstandards described in section 11 ofthis revenue procedure;

(16) failure to maintain and makeavailable records as described in sec-tion 5.11(3) and (4) of this revenueprocedure;

(17) accepting a tax return fortransmitted media filing either directlyor indirectly from a person (other thanthe taxpayer who is submitting his orher return) who is not in the 1040NRProgram;

(18) submitting the transmittedmedia portion of the return withinformation that is not identical to theinformation on the Form 8453–NR;

(19) failure to timely pay anyapplicable fees, as implemented bysubsequent guidance; or

(20) filing returns before February15, 1996, with any form of substituteForm W–2 or wage and taxdocumentation.

.06 The Service will list in theInternal Revenue Bulletin, district of-fice listings, district office newsletters,

and on the EFS Bulletin Board, thename of any entity that is suspendedfrom the 1040NR Program and theeffective date of that suspension.

.07 A suspension from participationin the 1040NR Program or a revocationof the privilege to participate in the1040NR Program is effective as of thedate of the letter informing the 1040NRFiler of the suspension or revocation.

.08 Most denials and suspensions ofparticipation in the 1040NR Programwill result in:

(1) a rejected applicant not beingreconsidered for participation in the1040NR Program for at least two filingseasons; and

(2) a suspended 1040NR Filer notbeing reconsidered for participation inthe 1040NR Program for at least twoyears. For purposes of this section12.08, two years means the remainingmonths in the calendar year of denialof participation or suspension and thefollowing two calendar years.

SECTION 13. ADMINISTRATIVEREVIEW PROCESS FOR DENIALOF PARTICIPATION IN THE1040NR PROGRAM

.01 An applicant who has beendenied participation in the 1040NRProgram has the right to an administra-tive review. During the administrativereview process, the denial of participa-tion remains in effect.

.02 In response to the submission ofa Form MAR–8980, the Service willeither (1) accept an applicant into the1040NR Program, or (2) issue aproposed letter of denial that explainsto the applicant why the Serviceproposes to reject the application toparticipate in the 1040NR Program.

.03 An applicant who receives aproposed letter of denial may respond,in writing, to the Project Office. Theapplicant’s response must address theProject Office’s explanation for propos-ing the denial to participate. TheProject Office must receive the appli-cant’s response within 30 days of thedate of the proposed letter of denial.

.04 Upon receipt of an applicant’swritten response, the Project Officewill reconsider its proposed letter ofdenial. The Project Office may (1)withdraw its proposed letter of denialand admit the applicant into the1040NR Program, or (2) finalize itsproposed letter of denial and issue it tothe applicant.

.05 If an applicant receives a finalletter from the Project Office thatdenies the applicant participation in the1040NR Program, the applicant is en-titled to an appeal, in writing, to theDirector of Practice.

.06 The appeal must be filed withthe Project Office within 30 days of thedate of the denial letter. An applicant’swritten appeal must contain a detailedexplanation, with supporting documen-tation, of why the denial should bereversed. In addition, the applicantmust include a copy of the applicant’sForm MAR–8980 and a copy of thedenial letter.

.07 The Project Office, upon receiptof a written appeal to the Director ofPractice, will forward to the Director ofPractice its file on the applicant and thematerials described in section 13.06that the applicant has submitted to theProject Office. The Project Office willforward to the Director of Practicethese materials within 15 days ofreceipt of the applicant’s appeal to theDirector of Practice.

.08 Failure to respond within the 30-day periods described in sections 13.03and 13.06 of this revenue procedureirrevocably terminates an applicant’sright to an administrative review orappeal.

SECTION 14. ADMINISTRATIVEREVIEW PROCESS FORSUSPENSION FROM THE 1040NRPROGRAM

.01 A 1040NR Filer who has beensuspended from participation in the1040NR Program has the right to anadministrative review. During the ad-ministrative review process, the suspen-sion remains in effect.

.02 If a 1040NR Filer receives asuspension letter from the Project Of-fice, the 1040NR Filer is entitled to anappeal, in writing, to the Director ofPractice.

.03 The 1040NR Filer must ensurethat the Project Office receives the1040NR Filer’s written appeal forreview by the Director of Practicewithin 30 days of the date of thesuspension letter. The 1040NR Filer’swritten appeal for review must containdetailed reasons, with supporting docu-mentation, for reversal of the suspen-sion. In addition, the 1040NR Filermust include a copy of its Form MAR–8980 and a copy of the suspensionletter.


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.04 The Project Office, upon receiptof a written appeal to the Director ofPractice, will forward to the Director ofPractice its file on the 1040NR Filerand the material described in section14.03 of this revenue procedure that the1040NR Filer has submitted to theProject Office. The Project Office willforward to the Director of Practicethese materials within 15 days of thereceipt of a 1040NR Filer’s writtenrequest for appeal.

.05 Failure to appeal within the 30-day period described in section 14.03of this revenue procedure irrevocably

terminates a 1040NR Filer’s right toappeal the decision to suspend the1040NR Filer from participation in the1040NR Program.

SECTION 15. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 95–22, 1995–1 C.B. 686,is superseded.

SECTION 16. EFFECTIVE DATE

This revenue procedure is effectiveMay 31, 1996.

SECTION 17. PROJECT OFFICEINFORMATION

All questions regarding this revenueprocedure should be directed to:

Internal Revenue ServicePhiladelphia Service CenterATTN: DP-115-Magnetic MediaProject Office11601 Roosevelt Blvd.Philadelphia, PA 19154U.S.A.

The telephone number of this office is(215) 516-7533 (not a toll-free number)or 800-829-6945 (a toll-free number).


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Part IV. Items of General Interest

Notice of Proposed Rulemaking andNotice of Public Hearing

Termination of a Partnership underSection 708(b)(1)(B)

PS–5–96

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations relating to thetermination of a partnership upon thesale or exchange of 50 percent or moreof the total interest in partnershipcapital and profits. The proposed reg-ulations affect all partners and part-nerships that terminate under section708(b)(1)(B).

DATES: Written comments and re-quests to speak (with outlines of oralcomments) at a public hearing sched-uled for September 5, 1996, must bereceived by August 15, 1996.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (PS–5–96), Room5228, Internal Revenue Service, POB7604, Ben Franklin Station, Wash-ington, DC 20044. In the alternative,submissions may be hand deliveredbetween the hours of 8 a.m. and 5 p.m.to: CC:DOM:CORP:R (PS–5–96), Cou-rier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW., Wash-ington, DC. The public hearing will beheld in the IRS Auditorium, SeventhFloor, 7400 Corridor, Internal RevenueBuilding, 1111 Constitution Avenue,NW., Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Steven R. Schneider, (202)622-3060; concerning submissions andthe hearing, Christina Vasquez, (202)622-7190; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Introduction

This document proposes to revise§1.708–1(b)(1)(iv) of the Income Tax

Regulations (26 CFR Part 1) undersection 708(b)(1)(B) of the InternalRevenue Code (Code). This documentalso proposes revisions to other sec-tions of the Income Tax Regulations toreflect the proposed revision to §1.708–1(b)(1)(iv).

Background

Section 708(b)(1)(B) provides that,for purposes of section 708(a), apartnership shall be considered termi-nated if within a 12-month period thereis a sale or exchange of 50 percent ormore of the total interest in partnershipcapital and profits. The Code and thelegislative history to section 708(b)-(1)(B) do not specify the tax con-sequences of that termination or thesteps by which such a terminationoccurs.

However, §1.708–1(b)(1)(iv) of theIncome Tax Regulations provides that,if a partnership is terminated by a saleor exchange of an interest, the follow-ing is deemed to occur: the partnershipdistributes its properties to the pur-chaser and the other remaining partnersin proportion to their respective inter-ests in the partnership properties; and,immediately thereafter, the purchaserand the other remaining partners con-tribute the properties to a new part-nership, either for the continuation ofthe business or for its dissolution andwinding up.

The distribution of property that isdeemed to occur upon a terminationunder section 708(b)(1)(B) is treatedlike an actual distribution for federaltax purposes. As a result, a continuingpartner may recognize gain under sec-tion 731(a) if the amount of moneydeemed distributed to the partner (in-cluding any money deemed distributedupon a shift in liabilities under section752) exceeds the partner’s basis in thepartnership interest. In addition, thedistribution may affect the basis of thepartnership’s assets because the basisof the distributed property in the handsof the partners (and thus in the handsof the reconstituted partnership) isdetermined under section 732(b) byreference to the partners’ bases in theirpartnership interests. Another possibleconsequence of the deemed distributionis a change in the holding periods ofthe par tners’ interests in thepartnership.

The deemed distribution of part-nership property that occurs on atermination raises particular concernswith respect to the interaction ofsections 708(b)(1)(B), 704(c), and 737.Section 704(c)(1)(A) requires that gainor loss with respect to property contrib-uted to a partnership by a partner beshared among the partners so as to takeinto account any built-in gain or loss inthe property at the time of the contribu-tion. Section 704(c)(1)(B) providesthat, if property contributed by apartner is distributed to another partnerwithin five years, the contributingpartner must recognize gain or loss inan amount equal to the gain or loss thepartner would have been allocatedunder section 704(c)(1)(A) on a sale ofthe property by the partnership. Section737 provides that, if property is dis-tributed to a partner that had contrib-uted other property to the partnershipwithin five years, the distributee part-ner must recognize gain equal to thelesser of (i) the net precontribution gainon property contributed by the partner,or (ii) the excess of the value of thedistributed property over the adjustedbasis of the partner’s interest in thepartnership. Net precontribution gain isthe net gain, if any, that would havebeen recognized by the distributeepartner under section 704(c)(1)(B) if allpartnership property contributed by thedistributee partner within five years ofthe distribution had been distributed toanother partner.

The legislative history of sections704(c)(1)(B) and 737 indicates thatCongress intended these sections to becoordinated with the rules governingpartnership terminations under section708(b)(1)(B). The legislative historystates that such coordination willprovide that (1) no gain is recognizedunder sections 704(c)(1)(B) and 737 asa result of a deemed distribution ontermination; (2) the deemed distributionwill not change the application of thesharing requirements of section 704(c)to precontribution gain or loss withrespect to property contributed to thepartnership before the termination; and(3) the constructive contribution ofpartnership property to a new part-nership is treated as beginning a newfive-year period for all contributedproperty to the extent that the preter-mination appreciation in the value ofproperty was not already required to be


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allocated to the original contributor (ifany) of the property. H.R. Rep. No.247, 101st Cong., 1st Sess. 1355(1989); H.R. Conf. Rep. No. 1018,102d Cong., 2d Sess. 428 (1992).These results are difficult to integratewith the current regulations undersection 708(b)(1)(B). The difficultyarises primarily because the section708(b)(1)(B) regulations provide for apro rata distribution of property to thepartners, while the legislative historyseems to contemplate that partnershipproperty previously contributed to thepartnership by a partner will be dis-tributed to that partner, at least to theextent of the remaining built-in gain orloss in the property.

The IRS and Treasury Departmentrecently issued final regulations undersections 704(c)(1)(B) and 737. Com-mentators, however, noted that theapproach taken in the legislative historyand the final regulations would not berequired if the section 708(b)(1)(B)regulations did not create a deemeddistribution of partnership property tothe partners as part of a section708(b)(1)(B) termination. The preambleto the final regulations indicated thatthe IRS and Treasury would considerissuing separate guidance on the inter-action of sections 704(c) and 708(b)-(1)(B) and invited additional commentsand suggestions regarding the project.

Explanation of Provisions

The proposed regulations under sec-tion 708(b)(1)(B) provide that, if apartnership is terminated by a sale orexchange of an interest, the followingis deemed to occur: the partnershiptransfers all of its assets and liabilitiesto a new partnership in exchange for aninterest in the new partnership; imme-diately thereafter, the terminated part-nership distributes interests in the newpartnership to the purchasing partnerand the other remaining partners inliquidation of the terminated part-nership, either for the continuation ofthe business or for its dissolution andwinding up.

Under the proposed regulations, atermination under section 708(b)(1)(B)will no longer result in a deemeddistribution of the terminated part-nership’s assets to the purchasing andremaining partners. As a result, thefederal tax consequences of a termina-tion that result from the deemeddistribution of assets will no longer

occur on a section 708(b)(1)(B) termi-nation. Such consequences include thepossibility of gain under section 731(a),a change in the partnership’s basis inpartnership property, and the com-mencement of a new five-year periodfor purposes of sections 704(c)(1)(B)and 737. In addition, the interactionbetween section 704(c) and section708(b)(1)(B) is greatly simplified underthe proposed regulation. The section704(c) property held by the terminatedpartnership (and deemed contributed toa new partnership) will continue to betreated as section 704(c) property in thehands of the new partnership under§1.704–3(a)(9). A distribution of prop-erty by the new partnership will havethe same effect for purposes of section704(c)(1)(B) and section 737 as adistribution from the terminated part-nership. See §§1.704–4(c)(4) and1.737–2(b)(1) as proposed to beamended by this document.

The proposed regulations do notchange the federal tax consequences ofa termination under section 708(b)-(1)(B) to the extent that the con-sequences were not dependent on thedeemed distribution. Such con-sequences will continue under theproposed regulations. For example, thetax year of the terminated partnershipwill still close as a result of thetermination, the elections of the termi-nated partnership will be invalidated,and a termination will continue to betreated as a liquidation under thesection 704(b) regulations.

In addition, the proposed regulationswill not change the effect of a termina-tion on the depreciation of partnershipproperty by the new partnership. Prop-erty deemed contributed to the newpartnership will continue to be subjectto the anti-churning provisions of sec-tion 168(f)(5), which generally requirethe new partnership to depreciate theproperty as if it were newly-acquiredproperty under the same depreciationsystem used by the terminated part-nership. This result is required bystatute and is not affected by thespecific mechanics of a terminationunder section 708(b)(1)(B). See Codesections 168(f)(5); 168(i)(7); 168(e)(4)and (f)(10) (repealed 1986).

This document also contains pro-posed regulations under sections704(b), 704(c)(1)(B), 743(b), 737, and761(e). These proposed regulations re-late to the elimination of a deemeddistribution of partnership assets as part

of a section 708(b)(1)(B) termination.The proposed regulations under section704(b) will eliminate the reference to adeemed contribution of partnershipproperty by the partners of the continu-ing partnership. The proposed regula-tions under sections 704(c)(1)(B) and737 provide that a termination undersection 708(b)(1)(B) does not com-mence a new five-year period forpartnership property and that a distribu-tion of property by the new partnershipwill be treated in the same manner as adistribution by the terminated part-nership would have been treated. Al-though the legislative history suggeststhe beginning of a new five year periodfor built in gain or loss in the propertydeemed contributed to the new part-nership, that legislative history wascommenting on a deemed contributionof property by the partners to the newpartnership, as then required by thesection 708 regulations. Under theapproach proposed in this regulation, anew five year period is no longerappropriate.

The proposed regulations under sec-tion 743(b) provide that any specialbasis adjustment a partner has in assetsof the terminated partnership as a resultof a section 754 election will carryover to the new partnership. The pro-posed regulations under section 761(e)provide that the distribution of interestsin the new partnership by the termi-nated partnership is not treated as asale or exchange of the interests in thenew partnership. This provision isnecessary to prevent the distribution ofinterests in the new partnership fromcausing a termination of the newpartnership.

Proposed Effective Date

This section is proposed to apply toterminations of partnerships under sec-tion 708(b)(1)(B) occurring on or afterthe date on which these regulations arepublished as final regulations in theFederal Register.

Special Analyses

It has been determined that thisnotice of proposed rulemaking is not asignificant regulatory action as definedin EO 12866. Therefore, a regulatoryassessment is not required. It has alsobeen determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) and the Regulatory


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Flexibility Act (5 U.S.C. chapter 6) donot apply to these regulations, and,therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant tosection 7805(f) of the Internal RevenueCode, this notice of proposed rulemak-ing will be submitted to the ChiefCounsel for Advocacy of the SmallBusiness Administration for commenton its impact on small business.

Comments and Public Hearing

Before these proposed regulationsare adopted as final regulations, consid-eration will be given to any writtencomments (a signed original and eight(8) copies) that are timely submitted tothe IRS. All comments will be avail-able for public inspection and copying.

A public hearing has been scheduledfor September 5, 1996, at 10 a.m. inthe Auditorium of the Internal RevenueBuilding, 1111 Constitution AvenueNW., Washington, DC. Because of ac-cess restrictions, visitors will not beadmitted beyond the Internal RevenueBuilding lobby more than 15 minutesbefore the hearing starts.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons that wish to present oralcomments at the hearing must submitwritten comments by August 15, 1996,and submit an outline of the topics tobe discussed and the time to be devotedto each topic (signed original and eight(8) copies) by August 15, 1996.

A period of 10 minutes will beallotted to each person for makingcomments.

An agenda showing the schedulingof the speakers will be prepared afterthe deadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.

Drafting Information

The principal author of these regula-tions is Steven R. Schneider of theOffice of Assistant Chief Counsel(Passthroughs and Special Industries),IRS. However, other personnel fromthe IRS and Treasury Departmentparticipated in their development.

* * * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 isproposed to be amended as follows:

PART I—INCOME TAXES

Paragraph 1. The authority citationfor part 1 continues to read in part asfollows:

Authority: 26 U.S.C. 7805. * * *Section 1.704–4 also issued under 26

U.S.C. 704(c). * * *Par. 2. Section 1.704–1 is amended

as follows:1. Paragraph (b)(2)(iv)(l) is amended

by removing the fourth sentence.2. Paragraph (b)(5) Example 13(v) is

amended by removing sentences five tothe end and adding five new sentencesin their place.

The revisions and addition read asfollows:

§1.704–1 Partner’s distributive share.

* * * * * *

(b) * * * (5) * * * Example 13. * * *(v) * * * In accordance with para-

graph (b)(2)(iv)(e) of this section, thepartnership agreement provides that thepartners’ capital accounts are adjustedto reflect how unrealized taxable gainwould have been allocated if theproperty distributed to the partners inliquidation of the partnership (i.e., theinterest in the new partnership con-structively received by the terminatedpartnership under §1.708–1(b)(1)(iv))had been sold for its fair market valueof $40,000. Accordingly, the $18,000of unrealized gain ($40,000 less$22,000 adjusted tax basis) is creditedto the partners’ capital accounts asfollows:

Z LKCapital account followingsale . . . . . . . . . . . . . . . . . . . . .

$11,000 $11,000

Deemed sale adjustment. . . . 9,000 9,000Capital account before con-structive liquidation. . . . . . . .

$20,000 $20,000

Constructive liquidating distributions of theinterests in the new partnership are made withreference to its $40,000 fair market value. Undersection 732(b), the adjusted tax basis of the 50percent interest in the new partnership con-structively distributed to Z is equal to the$11,000 adjusted tax basis of Z’s partnershipinterest before the constructive liquidation, andthe adjusted tax basis of the 50 percent interestin the new partnership constructively distributedto LK is equal to the $20,000 adjusted tax basisof LK’s partnership interest before the con-struct ive l iquidat ion. Under paragraph(b)(2)(iv)(d) of this section, the capital accountof the terminated partnership with respect to the

new partnership would be $40,000 (i.e., the fairmarket value of the property constructivelycontributed to the new partnership by theterminated partnership). The capital accounts ofZ and LK with respect to the constructivelydistributed interests in the new partnership arestated at $20,000 (i.e., one-half of the $40,000capital account of the terminated partnership).This Example 13(v) applies to terminations ofpartnerships under section 708(b)(1)(B) occurringon or after the date on which these regulationsare published as final regulations in the FederalRegister.

* * * * * *

Par. 3. Section 1.704–4 is amendedby revising paragraphs (a)(4)(ii) and(c)(3) to read as follows:

§1.704–4 Distribution of contributedproperty.

(a) * * *(4) * * *(ii) Section 708(b)(1)(B) termina-

tions. A termination of the partnershipunder section 708(b)(1)(B) does notbegin a new five-year period for eachpartner with respect to the built-in gainand built-in loss property that theterminated partnership is deemed tocontribute to a new partnership follow-ing the termination. See §1.704–3(a)-(3)(ii) for the definitions of built-ingain and built-in loss on section 704(c)property. This paragraph (a)(4)(ii) ap-plies to terminations of partnershipsunder section 708(b)(1)(B) occurringon or after the date on which theseregulations are published as final reg-ulations in the Federal Register.

* * * * * *

(c) * * *(3) Section 708(b)(1)(B) termina-

tions. Section 704(c)(1)(B) and thissection do not apply to a deemeddistribution of interests in a newpartnership caused by a termination ofa partnership under section 708(b)-(1)(B). A subsequent distribution ofsection 704(c) property by the newpartnership to a partner of the newpartnership is subject to section704(c)(1)(B) to the same extent that adistribution by the terminated part-nership would have been subject tosection 704(c)(1)(B). See also §1.737–2(a) for a similar rule in the context ofsection 737. This paragraph (c)(3)applies to terminations of partnershipsunder section 708(b)(1)(B) occurringon or after the date on which these


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regulations are published as final reg-ulations in the Federal Register.

* * * * * *

Par. 4. In §1.708–1, paragraph(b)(1)(iv) is amended by removing thefirst sentence and adding two newsentences in its place to read asfollows:

§1.708–1 Continuation of Partnership.

* * * * * *

(b) * * *(1) * * *(iv) If a partnership is terminated by

a sale or exchange of an interest, thefollowing is deemed to occur: Thepartnership transfers all of its assetsand liabilities to a new partnership inexchange for an interest in the newpartnership; and, immediately thereaf-ter, the terminated partnership dis-tributes an interest in the new part-nership to the purchasing partner andthe other remaining partners in liquida-tion of the terminated partnership,either for the continuation of thebusiness of the new partnership or forits dissolution and winding up. Thefirst sentence of this paragraph(b)(1)(iv) applies to terminations ofpartnerships under section 708(b)(1)(B)occurring on or after the date on whichthese regulations are published as finalregulations in the Federal Register.* * *

* * * * * *

Par. 5. Section 1.743–1 is amendedby adding paragraph (d) as follows:

§1.743–1 Optional adjustment tobasis of partnership property.

* * * * * *

(d) Section 708(b)(1)(B) termina-tions. A partner with a special basis

adjustment in property held by apartnership that terminates under sec-tion 708(b)(1)(B) will continue to havethe same special basis adjustment withrespect to property contributed by theterminated partnership to the new part-nership under §1.708–1(b)(1)(iv). Thisparagraph (d) applies to terminations ofpartnerships under section 708(b)(1)(B)occurring on or after the date on whichthese regulations are published as finalregulations in the Federal Register.

Par. 6. In §1.737–2, paragraph (a) isrevised to read as follows:

§1.737–2 Exceptions and specialrules.

(a) Section 708(b)(1)(B) termina-tions. Section 737 and this section donot apply to a deemed distribution ofinterests in a new partnership causedby a termination of a partnership undersection 708(b)(1)(B). A subsequent dis-tribution of section 704(c) property bythe new partnership to a partner of thenew partnership is subject to section737 to the same extent that a distribu-tion by the terminated partnershipwould have been subject to section737. See also §1.704–4(c)(3) for asimilar rule in the context of section704(c)(1)(B). This paragraph (a) ap-plies to terminations of partnershipsunder section 708(b)(1)(B) occurringon or after the date on which theseregulations are published as final reg-ulations in the Federal Register.

* * * * * *

Par 7. In §1.761–1, paragraph (e) isadded to read as follows:

§1.761–1 Terms defined.

* * * * * *

(e) Distribution of partnership inter-

est. For purposes of section 708(b)-(1)(B) and §1.708–1(b)(1)(iv), the dis-tribution of an interest in a newpartnership by a partnership that termi-nates under section 708(b)(1)(B) is nota sale or exchange of an interest in thenew partnership. This paragraph (e)applies to terminations of partnershipsunder section 708(b)(1)(B) occurringon or after the date on which theseregulations are published as final reg-ulations in the Federal Register.

Margaret Milner Richardson,Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register onMay 9, 1996, 8:45 a.m., and published in theissue of the Federal Register for May 13,1996, 61 F.R. 21985)

Information Reporting Seminars

Announcement 96–57

Representatives from the Mar-tinsburg Computing Center, Informa-tion Returns Branch, will conductseminars in 13 cities during the monthsof August and September. They willcover the latest magnetic/electronicfiling of Forms 1099, 1098, 5498, andW–2G information, backup withholdingand penalties relating to the filing ofinformation returns. A representativefrom Internal Revenue Service/Inter-national will discuss the filing of Form1042–S.

Following is a schedule of seminarsites and dates, as well as the telephonenumbers of the Internal Revenue Serv-ice offices closest to the sites. Pleasecontact these Internal Revenue Serviceoffices after July 22 for the exactlocation and times. The agenda for theday has also been included for yourconvenience.


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1996 Information Reporting Seminars

Sites Dates Telephone Numbers

Atlanta GA 9/10-11 (404)331-3808Baltimore MD 8/20 (410)962-2402Boston MA 9/25 (617)424-5310Chicago IL 9/24-25 (312)886-1572Cincinnati OH 9/17-18 (513)684-2828Dallas TX 8/27-28 (214)767-3755Denver CO 8/29 (303)446-1667Los Angeles CA 8/28-29 (304)263-8700Minneapolis MN 9/26 (612)290-3320New York NY 9/26 (212)436-1023Seattle WA 8/27 (206)220-5803St. Louis MO 9/19 (314)539-2161Tampa FL 9/12 (904)232-2514

AGENDA

MORNING SESSION AFTERNOON SESSION

IRS/MARTINSBURG COMPUTING CENTER SOCIAL SECURITY ADMINISTRATION

9:00a Welcome 1:00p W–2 Magnetic MediaMagnetic Media and Electronic Filing ofForms 1099, 1098, 5498, & W–2GBackup Withholding and Penalties

IRS/INTERNATIONAL

10:45a Form 1042–S12:00p LUNCH

ATTENTION PAPER FILERS:

The 1099/W–2 sessions are geared toward the magnetic media/electronic filer, and attendees should expect presentationsto highlight that filing only. No tax law representative will be present to answer questions.

The Form 1042–S presentation will be structured to educate withholding agents on the special rules that apply toindividuals who are not U.S. citizens or resident aliens, and how to report that information to the recipient and IRS.

Determination of Interest ExpenseDeduction of Foreign Corporations;Correction


AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correc t ion to f ina lregulations.

SUMMARY: This document containcorrections to final regulations [TD8658 [1996–14 I.R.B. 13]] which werepublished in the Federal Register forFriday, March 8, 1996 (61 FR 9326).The final regulations relate to the

determination of the interest expensededuction of foreign corporations andapply to foreign corporations engagedin a trade or business within the UnitedStates.

EFFECTIVE DATE: June 6, 1996.

FOR FURTHER INFORMATIONCONTACT: Ahmad Pirasteh orRichard Hoge (202) 622-3870 (not atoll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are subjectto these corrections are under sections

882, 864(e), 988(d), and 7701(l) of theInternal Revenue Code.

Need for Correction

As published, the final regulations[TD 8658] contain errors that are inneed of clarification.

Correction of Publication

Accordingly, the publication of finalregulations which are the subject of FRDoc. 96–5262 is corrected as follows:

§ 1.882–0 [Corrected]

1. On page 9329, column 1,§ 1.882–0, the section heading entry

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for § 1.882–1, ‘‘§ 1.882–1 Taxation offoreign corporations engaged in U.S.business or of foreign corporationstreated as having effectively connectedincome.’’ is corrected to read‘‘§ 1.882–1 Taxation of foreign corpo-rations engaged in U.S. business or offoreign corporations treated as havingeffectively connected income.’’.

§ 1.882-5 [Corrected]

2. On page 9330, column 3,§ 1.882–5, paragraph (a)(6), line 7from the bottom of the paragraph, thelanguage ‘‘respect to U.S.-booked lia-bilities that’’ is corrected to read‘‘respect to U.S. booked liabilitiesthat’’.

3. On page 9331, column 1,§ 1.882–5, paragraph (a)(8), paragraph(ii) of Example 1, line 12, the language‘‘(c)(2)(vi), and (d)(2)(vii) or (e)(1)(ii)this’’ is corrected to read ‘‘(c)(2)(vi),and (d)(2)(vii) or (e)(1)(ii) of this’’.

4. On page 9332, column 2,§ 1.882–5, paragraph (b)(3), last fourlines of the paragraph, the language‘‘less frequently than monthly by alarge bank (as defined in section585(c)(2)) and semi-annually by anyother taxpayer’’ is corrected to read‘‘less frequently than monthly (begin-ning of taxable year and monthly there-after) by a large bank (as defined insection 585(c)(2)) and semi-annually(beginning, middle and end of taxableyear) by any other taxpayer’’.

5. On page 9332, column 2,§ 1.882–5, paragraph (c)(2)(i), lines 3and 2 from the bottom of the para-graph, the language ‘‘annually by alarge bank (as defined in section585(c)(2)) and annually by any’’ iscorrected to read ‘‘annually (beginning,middle and end of taxable year) by alarge bank (as defined in section585(c)(2)) and annually (beginning andend of taxable year) by any’’.

6. On page 9334, column 3,§ 1.882–5, paragraph (d)(6), paragraph(i) of Example 1, the table

Value

Asset 1 . . . . . . . $2,000Asset 2 . . . . . . . 2,500Asset 3 . . . . . . . 5,500

Amount InterestLiability 1 . . . . . $800 56Liability 2 . . . . . 3,200 256Capital . . . . . . . . 6,000 0

is corrected to read

Value

Asset 1 . . . . . . . $2,000Asset 2 . . . . . . . 2,500Asset 3 . . . . . . . 5,500

Amount InterestExpense

Liability 1 . . . . . $800 56Liability 2 . . . . . 3,200 256Capital . . . . . . . . 6,000 0

Michael L. Slaughter,Acting Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register onApril 9, 1996, 8:45 a.m., and published in theissue of the Federal Register for April 10,1996, 61 F.R. 15891)

Foundations Status of CertainOrganizations


The following organizations havefailed to establish or have been unableto maintain their status as publiccharities or as operating foundations.Accordingly, grantors and contributorsmay not, after this date, rely on pre-vious rulings or designations in theCumulative List of Organizations (Pub-lication 78), or on the presumptionarising from the filing of notices undersection 508(b) of the Code. This listingdoes not indicate that the organizationshave lost their status as organizationsdescribed in section 501(c)(3), eligibleto receive deductible contributions.

Former Public Charities. The fol-lowing organizations (which have beentreated as organizations that are notprivate foundations described in section509(a) of the Code) are now classifiedas private foundations:

Alliance of Youth and Industry,Chicago, IL

Ancient Egyptian Museum Inc.,Chicago, IL

Animal Advocates Inc., Chicago, ILApples of Gold Outreach Center Inc.,

Hartland, WIAurora Life Education Center Corp.,

Aurora, ILBayou Brigade Washington Battalion,

Beach Park, IL

Bend Lake Search and Rescue Assoc.Inc., Benton, IL

Big Game Theater, Chicago, ILBrady County Water District, Brady,

MTBright Beginnings Childcare Inc.,

Aledo, ILBroadway Childrens Center, Chicago,

ILCapital Soccer Association, Lincoln,

NECarrollton Farmers Branch Insurance

Agents Assoc., Carrollton, TXCenter for the Study of Great Ideas,

Chicago, ILCenter High School Booster Club

Inc., Kansas City, MOChicago 1994 Bid Committee,

Chicago, ILClay County Adult Literacy Council,

Inc., Henrietta, TXClowns for Kids Charity, Palatine, ILClub Impulse Inc., McCook, NECoalition for the Homeless of

Northwest Cook County, Chicago,IL

Colorado Rural Job TrainingFoundation Inc., Denver, CO

Common Bread Ministry,Minneapolis, MN

Community Action Group, Chicago,IL

Community Business Assoc. ofNebraska Inc., Lincoln, NE

Concert Singers Chorale Inc.,Chicago, IL

Dickinson Public Library Foundation,Dickinson, ND

Dunbar Vocational High SchoolAlumni Assoc., Chicago, IL

Elmwood-Murdock Education,Murdock, NE

Family Information & ReferralCenter, Albert Lea, MN

Friends of H S Family Ed Prog Inc.,Boyceville, WI

Geeta Ashram of Chicago Inc.,Floosmoor, IL

Guttenberg Heritage Society,Guttenberg, IA

Herman Town Senior CommunityCenter, Herman Town, MN

Hinkley Softball Assoc. Inc., BrookPark, MN

Illinois Academic Decathlon Assoc.,Chicago, IL

Illinois Association of TeacherEducators, Mt. Vernon, IL


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Illinois Drill Team Assoc., OlympiaFields, IL

Interpret Inc., Helena, MTJesus Never Fails Pentocostal Church,

Chicago, ILJodie Bailey and Friends Inc., St.

Louis, MOJohnson County Area Council on

Child Abuse and Neglect, IowaCity, IA

Kansas City Camerata Inc., KansasCity, MO

Korean-American Cultural Foundation,St. Louis, MO

Learning and Educational Alliance ofRogers Park Neighborhood,Chicago, IL

Littleville Preschool and KindergartenIII, Dixmoor, IL

Metropolitan Employment &Rehabilitation Service, Belleville,IL

Minneapolis Area Among MutualAssistance Association,Minneapolis, MN

Mississippi County Transit SystemInc., East Prairie, MO

Moline Babe Ruth Baseball League,Moline, IL

Mt. Vernon Humane Center Inc., Mt.Vernon, IL

National Organization for FetalAlcohol Syndrome, Rapid City, SD

National Youth Volleyball Assoc.,Palatine, IL

North End Community Center, EastSt. Louis, MO

Northern Choice Volleyball Club Inc.,Roseau, WI

North Dakota Environmental HealthAssoc., Bismarck, ND

Oak Lawn-Home Town SchoolDistrict, Oak-Lawn, IL

Opportunities for Access, Mt. Vernon,IL

Osseo Area School District No. 279Foundation, Maple Grove, MN

Pathways International, New Brighton,MN

Peoria Area Literacy Coalition,Peoria, IL

Public Interest Law Foundation,Champaign, IL

Quad Cities in Schools, Rock Island,IL

Rainbow Project, McLaughlin, SDRape Crisis Center of Mid Central

IL, Inc., Bloomington, ILRay and Rosetta Doerhoff Scholarship

Trust, St. Elizabeth, MOBen Brandt Chamber Players Inc.,

Evanston, ILRotary Club of Glenview Charitable

Foundation, Glenview, ILRosciuszko Community Center

Advisory Board, Milwaukee, WIRichmond Beautification Club,

Richmond, MOSamaritan Inn Foundation,

Milwaukee, WISangamon Valley Youth Symphony,

Springfield, ILSoag Corp., Chicago, ILSouth Shore Philharmonic Orchestra,

Chicago, ILSpringfield Music Foundation Inc.,

Springfield, MOSt. Louis Youth Corps Experience,

University City, MOTallgrass Prairie Audubon Society,

Grinnell, IATeam Elmhurst Soccer Club, Elm

Hurst, ILTechnology Learning Center Inc.,

Milwaukee, WI

Theater By Design, Chicago, ILTomorrows Future Inc., Kansas City,

MOValley & Lakes Education District

(VAL-ED), Fergus Falls, MNWabash Valley Arts Council Inc.,

Mt. Carmel, ILWawokiya Ospaya Inc., Rapid City,

SDWestern Cass Fire Fighters Assoc.,

Cleveland, MOWest of the Moon Theatre Company,

Minneapolis, MNWestside Health Authority, Chicago,

ILWeston Arts Coalition, Weston, MOWhite Fish Baseball Inc., White Fish,

MTWisconsin Women in Government

Inc., Madison, WIWomens Consortium, St. Louis, MOWorking Church, Chicago, ILYoung Footliters Childrens Theatre

Inc., Iowa City, IAYouth Law Foundation, St. Louis,

MO

If an organization listed above sub-mits information that warrants therenewal of its classification as a publiccharity or as a private operating foun-dation, the Internal Revenue Servicewill issue a ruling or determinationletter with the revised classification asto foundation status. Grantors andcontributors may thereafter rely uponsuch ruling or determination letter asprovided in section 1.509(a)–7 of theIncome Tax Regulations. It is not thepractice of the Service to announcesuch revised classification of founda-tion status in the Internal RevenueBulletin.

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Announcement of the Disbarment, Suspension, or Consent to VoluntarySuspension of Attorneys, Certified Public Accountants, Enrolled Agents andEnrolled Actuaries From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regula-tions, Part 10, an attorney, certifiedpublic accountant, enrolled agent or en-rolled actuary, in order to avoid the in-stitution or conclusion of a proceedingfor his disbarment or suspension frompractice before the Internal RevenueService, may offer his consent tosuspension from such practice. TheDirector of Practice, in his discretion,may suspend an attorney, certifiedpublic accountant, enrolled agent orenrolled actuary in accordance with theconsent offered.

Attorneys, certified public account-ants, enrolled agents and enrolled actu-aries are prohibited in any Internal

Revenue Service matter from directlyor indirectly employing, acceptingassistance from, being employed by,or sharing fees with, any practi-tioner disbarred or suspended frompractice before the Internal RevenueService.

To enable attorneys, certified publicaccountants, enrolled agents and en-rolled actuaries to identify practitionersunder consent suspension from practicebefore the Internal Revenue Service,the Director of Practice will announcein the Internal Revenue Bulletin thenames and addresses of practitionerswho have been suspended from suchpractice, their designation as attor-

ney, certified public accountant, en-rolled agent or enrolled actuary anddate or period of suspension. This an-nouncement will appear in the weeklyBulletin at the earliest practicable dateafter such action and will continue toappear in the weekly Bulletins for fivesuccessive weeks or for as many weeksas is practicable for each attorney,certified public accountant, enrolledagent or enrolled actuary so suspendedand will be consolidated and publishedin the Cumulative Bulletin.

The following individuals have beenplaced under consent suspension frompractice before the Internal RevenueService:

Name Address Designation Date of Suspension

Behrens, William Kenosha, WI Enrolled Agent March 6, 1996 to May 5, 1996Warter, J. Christopher South Bend, IN Attorney Indefinite from March 8, 1996Leckie, Jerry B. Macon, GA Enrolled Agent March 9, 1996 to March 8, 1999Retzlaff, Gene Hortonville, WI Enrolled Agent March 18, 1996 to July 17, 1996Cahill, Donal Stratford, CT Attorney April 4, 1996 to April 3, 1997Guidera, George C. Straford, CT Attorney April 11, 1996 to October 10, 1996Kirk, Gregg T. Dallas, TX CPA Indefinite from May 1, 1996Brock, Guy Charles Spokane, WA CPA Indefinite from May 1, 1996Mathews, Thomas Cincinnati, OH CPA May 1, 1996 to August 31, 1996Farnsworth Jr., Harold Starke, FL CPA May 1, 1996 to April 30, 1998King, John C. Wichita, KS Attorney May 1, 1996 to August 31, 1996

Announcement of the Expedited Suspension of Attorneys, Certified PublicAccountants, Enrolled Agents, and Enrolled Actuaries From Practice Before theInternal Revenue Service

Under title 31 of the Code of FederalRegulations, section 10.76, the Directorof Practice is authorized to immediatelysuspend from practice before the Inter-nal Revenue Service any practitionerwho, within five years, from the datethe expedited proceeding is instituted,(1) has had a license to practice as anattorney, certified public accountant, oractuary suspended or revoked forcause; or (2) has been convicted of anycrime under title 26 of the UnitedStates Code or, of a felony under title18 of the United States Code involvingdishonesty or breach of trust.

Attorneys, certified public account-ants, enrolled agents, and enrolled ac-tuaries are prohibited in any Internal

Revenue Service matter from directlyor indirectly employing, accepting as-sistance from, being employed by, orsharing fees with, any practitionerdisbarred or suspended from practicebefore the Internal Revenue Service.

To enable attorneys, certified publicaccountants, enrolled agents, and en-rolled actuaries to identify practitionersunder expedited suspension from prac-tice before the Internal Revenue Serv-ice, the Director of Practice will an-nounce in the Internal Revenue Bulletinthe names and addresses of practition-ers who have been suspended from suchpractice, their designation as attorney,certified public accountant, enrolled

agent, or enrolled actuary, and date orperiod of suspension. This announce-ment will appear in the weekly Bulletinat the earliest practicable date aftersuch action and will continue to appearin the weekly Bulletins for five succes-sive weeks or for as many weeks as ispracticable for each attorney, certifiedpublic accountant, enrolled agent, orenrolled actuary so suspended and willbe consolidated and published in theCumulative Bulletin.

The following individuals have beenplaced under suspension from practicebefore the Internal Revenue Service byvirtue of the expedited proceedingprovisions of the applicable regulations:

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Name Address Designation Date of Suspension

Noske, Joan M. Richmond, MN CPA Indefinite from March 1, 1996Wahl, Roger W. Martinez, GA CPA Indefinite from March 1, 1996Stojanov, Dragan Detroit, MI Attorney Indefinite from March 13, 1996Gay, Randall D. Honolulu, HI CPA Indefinite from March 13, 1996Sheffey, Ralph LaCrosse, WI Attorney Indefinite from March 13, 1996Doyle, Robert Sacramento, CA CPA Indefinite from March 19, 1996Singer, Michael G. Minnetonka, MN Attorney Indefinite from March 19, 1996Mohme, Robert H. St. Louis, MO Attorney Indefinite from March 20, 1996Vogelei, George Mac Novato, CA Attorney Indefinite from March 20, 1996Gaskins, Oscar N. Cherry Hill, NJ Attorney Indefinite from March 26, 1996Gawel, Michael S. Niagara Falls, NY Attorney Indefinite from March 29, 1996

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Definition of TermsRevenue rulings and revenue proce-dures (hereinafter referred to as ‘‘rul-ings’’) that have an effect on previousrulings use the following defined termsto describe the effect:

Amplified describes a situation whereno change is being made in a priorpublished position, but the prior posi-tion is being extended to apply to avariation of the fact situation set forththerein. Thus, if an earlier ruling heldthat a principle applied to A, and thenew ruling holds that the same princi-ple also applies to B, the earlier rulingis amplified. (Compare with modified,below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position ina prior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out anessential difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A butnot to B, and the new ruling holds thatit applies to both A and B, the prior

ruling is modified because it corrects apublished position. (Compare with am-plified and clarified, above).

Obsoleted describes a previouslypublished ruling that is not considereddeterminative with respect to futuretransactions. This term is most com-monly used in a ruling that listspreviously published rulings that areobsoleted because of changes in law orregulations. A ruling may also beobsoleted because the substance hasbeen included in regulations subse-quently adopted.

Revoked describes situations wherethe position in the previously publishedruling is not correct and the correctposition is being stated in the newruling.

Superseded describes a situationwhere the new ruling does nothingmore than restate the substance andsituation of a previously publishedruling (or rulings). Thus, the term isused to republish under the 1986 Codeand regulations the same position pub-lished under the 1939 Code and regula-tions. The term is also used when it isdesired to republish in a single ruling aseries of situations, names, etc., thatwere previously published over aperiod of time in separate rulings.

If the new ruling does more thanrestate the substance of a prior ruling, acombination of terms is used. Forexample, modified and superseded de-scribes a situation where the substanceof a previously published ruling isbeing changed in part and is continuedwithout change in part and it is desiredto restate the valid portion of thepreviously published ruling in a newruling that is self contained. In thiscase the previously published ruling isfirst modified and then, as modified, issuperseded.

Supplemented is used in situations inwhich a list, such as a list of the namesof countries, is published in a rulingand that list is expanded by addingfurther names in subsequent rulings.After the original ruling has beensupplemented several times, a newruling may be published that includesthe list in the original ruling and theadditions, and supersedes all priorrulings in the series.

Suspended is used in rare situationsto show that the previous publishedrulings will not be applied pendingsome future action such as the issuanceof new or amended regulations, theoutcome of cases in litigation, or theoutcome of a Service study.

AbbreviationsThe following abbreviations in current use andformerly used will appear in material publishedin the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C.—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contribution Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—GrantorIC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.

PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

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Numerical Finding List1

Bulletins 1996–1 through 1996–24

Announcements:

96–1, 1996–2 I.R.B. 5796–2, 1996–2 I.R.B. 5796–3, 1996–2 I.R.B. 5796–4, 1996–3 I.R.B. 5096–5, 1996–4 I.R.B. 9996–6, 1996–5 I.R.B. 4396–7, 1996–5 I.R.B. 4496–8, 1996–7 I.R.B. 5696–9, 1996–8 I.R.B. 3096–10, 1996–8 I.R.B. 3096–11, 1996–9 I.R.B. 1196–12, 1996–11 I.R.B. 3096–13, 1996–12 I.R.B. 3396–14, 1996–12 I.R.B. 3596–15, 1996–11 I.R.B. 996–16, 1996–13 I.R.B. 2296–17, 1996–13 I.R.B. 2296–18, 1996–15 I.R.B. 1596–19, 1996–15 I.R.B. 1596–20, 1996–15 I.R.B. 1596–21, 1996–15 I.R.B. 1596–22, 1996–15 I.R.B. 1696–23, 1996–18 I.R.B. 796–24, 1996–16 I.R.B. 3596–25, 1996–17 I.R.B. 1396–26, 1996–17 I.R.B. 1396–27, 1996–17 I.R.B. 1696–28, 1996–17 I.R.B. 1696–29, 1996–17 I.R.B. 1796–30, 1996–17 I.R.B. 1796–31, 1996–17 I.R.B. 1896–32, 1996–17 I.R.B. 1896–33, 1996–18 I.R.B. 1296–34, 1996–18 I.R.B. 1396–35, 1996–18 I.R.B. 1396–36, 1996–18 I.R.B. 1396–37, 1996–18 I.R.B. 1496–38, 1996–19 I.R.B. 8496–39, 1996–19 I.R.B. 8496–40, 1996–19 I.R.B. 8596–41, 1996–20 I.R.B. 1896–42, 1996–20 I.R.B. 1896–43, 1996–20 I.R.B. 1896–44, 1996–21 I.R.B. 1096–45, 1996–21 I.R.B. 1096–46, 1996–21 I.R.B. 1096–47, 1996–22 I.R.B. 1096–48, 1996–22 I.R.B. 1096–49, 1996–22 I.R.B. 1096–50, 1996–22 I.R.B. 1196–51, 1996–22 I.R.B. 1196–52, 1996–22 I.R.B. 1296–53, 1996–23 I.R.B. 1296–54, 1996–23 I.R.B. 1296–55, 1996–23 I.R.B. 1296–56, 1996–24 I.R.B. 29

See footnote at the end of list.

Delegations Orders:

232 (Rev. 2), 1996–7 I.R.B. 49236 (Rev. 2), 1996–21 I.R.B. 7239 (Rev. 1), 1996–7 I.R.B. 49247, 1996–21 I.R.B. 7

Notices:

96–2, 1996–2 I.R.B. 1596–1, 1996–3 I.R.B. 3096–4, 1996–4 I.R.B. 6996–5, 1996–6 I.R.B. 2296–6, 1996–5 I.R.B. 2796–7, 1996–6 I.R.B. 2296–8, 1996–6 I.R.B. 2396–9, 1996–6 I.R.B. 2696–10, 1996–7 I.R.B. 4796–11, 1996–8 I.R.B. 1996–12, 1996–10 I.R.B. 2996–13, 1996–10 I.R.B. 2996–14, 1996–12 I.R.B. 1196–15, 1996–13 I.R.B. 1996–16, 1996–13 I.R.B. 2096–17, 1996–13 I.R.B. 2096–18, 1996–14 I.R.B. 2796–19, 1996–14 I.R.B. 2896–20, 1996–14 I.R.B. 3096–21, 1996–14 I.R.B. 3096–22, 1996–14 I.R.B. 3096–23, 1996–16 I.R.B. 2396–24, 1996–16 I.R.B. 2396–25, 1996–17 I.R.B. 1196–26, 1996–18 I.R.B. 496–27, 1996–18 I.R.B. 496–28, 1996–19 I.R.B. 796–29, 1996–19 I.R.B. 796–30, 1996–20 I.R.B. 1196–31, 1996–22 I.R.B. 796–32, 1996–22 I.R.B. 796–33, 1996–22 I.R.B. 896–34, 1996–24 I.R.B. 15

Proposed Regulations:

DL–1–95, 1996–6 I.R.B. 28EE–20–95, 1996–5 I.R.B. 15EE–34–95, 1996–3 I.R.B. 49EE–35–95, 1996–5 I.R.B. 19EE–53–95, 1996–5 I.R.B. 23EE–55–95, 1996–12 I.R.B. 12EE–106–82, 1996–10 I.R.B. 31EE–142–87, 1996–12 I.R.B. 13EE–148–81, 1996–11 I.R.B. 29GL–1–96, 1996–21 I.R.B. 7IA–3–94, 1996–17 I.R.B. 12IA–33–95, 1996–4 I.R.B. 99IA–41–93, 1996–11 I.R.B. 29INTL–52–86, 1996–19 I.R.B. 26INTL–62–90, 1996–19 I.R.B. 26INTL–32–93, 1996–19 I.R.B. 26INTL–52–94, 1996–19 I.R.B. 26INTL–3–95, 1996–6 I.R.B. 29

Proposed Regulations—Continued

INTL–9–95, 1996–5 I.R.B. 25INTL–54–95, 1996–14 I.R.B. 39PS–2–95, 1996–7 I.R.B. 50PS–6–95, 1996–16 I.R.B. 27PS–43–95, 1996–24 I.R.B. 20PS–4–96, 1996–18 I.R.B. 5

Revenue Procedures:

96–1, 1996–1 I.R.B. 896–2, 1996–1 I.R.B. 6096–3, 1996–1 I.R.B. 8296–4, 1996–1 I.R.B. 9496–5, 1996–1 I.R.B. 12996–6, 1996–1 I.R.B. 15196–7, 1996–1 I.R.B. 18596–8, 1996–1 I.R.B. 18796–8A, 1996–9 I.R.B. 1096–9, 1996–2 I.R.B. 1596–10, 1996–2 I.R.B. 1796–11, 1996–2 I.R.B. 1896–12, 1996–3 I.R.B. 3096–13, 1996–3 I.R.B. 3196–14, 1996–3 I.R.B. 4196–15, 1996–3 I.R.B. 4196–16, 1996–3 I.R.B. 4596–17, 1996–4 I.R.B. 6996–18, 1996–4 I.R.B. 7396–19, 1996–4 I.R.B. 8096–20, 1996–4 I.R.B. 8896–21, 1996–4 I.R.B. 9696–22, 1996–5 I.R.B. 2796–23, 1996–5 I.R.B. 2796–24, 1996–5 I.R.B. 2896–24A, 1996–15 I.R.B. 1296–25, 1996–8 I.R.B. 1996–26, 1996–8 I.R.B. 2296–27, 1996–11 I.R.B. 2796–28, 1996–14 I.R.B. 3196–29, 1996–16 I.R.B. 2496–30, 1996–19 I.R.B. 896–31, 1996–20 I.R.B. 1196–32, 1996–20 I.R.B. 1496–33, 1996–22 I.R.B. 8

Revenue Rulings:

96–1, 1996–1 I.R.B. 796–2, 1996–2 I.R.B. 596–3, 1996–2 I.R.B. 1496–6, 1996–2 I.R.B. 896–4, 1996–3 I.R.B. 1696–5, 1996–3 I.R.B. 2996–7, 1996–3 I.R.B. 1296–8, 1996–4 I.R.B. 6296–9, 1996–4 I.R.B. 596–10, 1996–4 I.R.B. 2796–11, 1996–4 I.R.B. 2896–12, 1996–9 I.R.B. 496–13, 1996–10 I.R.B. 1996–14, 1996–6 I.R.B. 20

SEQ 0073 JOB IRS25-052-004 PAGE-0028 FINDING LIST REVISED 29JUL96 AT 21:33 BY LR DEPTH: 65.01 PICAS WIDTH 32.08 PICAS COMPOSITE COLOR

778/20054/29JUL96/IRS25-052

28

Numerical Finding List1—Continued

Bulletins 1996–1 through 1996–24

Revenue Rulings—Continued

96–15, 1996–11 I.R.B. 996–16, 1996–11 I.R.B. 496–17, 1996–13 I.R.B. 596–18, 1996–13 I.R.B. 496–19, 1996–14 I.R.B. 2496–20, 1996–15 I.R.B. 596–21, 1996–15 I.R.B. 796–22, 1996–15 I.R.B. 996–23, 1996–15 I.R.B. 1196–24, 1996–19 I.R.B. 596–25, 1996–19 I.R.B. 496–26, 1996–21 I.R.B. 996–27, 1996–24 I.R.B. 996–28, 1996–24 I.R.B. 1196–29, 1996–24 I.R.B. 596–30, 1996–24 I.R.B. 4

Treasury Decisions:

8630, 1996–3 I.R.B. 198631, 1996–3 I.R.B. 78632, 1996–4 I.R.B. 68633, 1996–4 I.R.B. 208634, 1996–3 I.R.B. 178635, 1996–3 I.R.B. 58636, 1996–4 I.R.B. 648637, 1996–4 I.R.B. 298638, 1996–5 I.R.B. 58639, 1996–5 I.R.B. 128640, 1996–2 I.R.B. 108641, 1996–6 I.R.B. 48642, 1996–7 I.R.B. 48643, 1996–11 I.R.B. 48644, 1996–7 I.R.B. 168645, 1996–8 I.R.B. 48646, 1996–8 I.R.B. 108647, 1996–9 I.R.B. 78648, 1996–10 I.R.B. 238649, 1996–9 I.R.B. 58650, 1996–10 I.R.B. 58651, 1996–11 I.R.B. 248652, 1996–11 I.R.B. 118653, 1996–12 I.R.B. 48654, 1996–11 I.R.B. 148655, 1996–12 I.R.B. 98656, 1996–13 I.R.B. 98657, 1996–14 I.R.B. 48658, 1996–14 I.R.B. 138659, 1996–16 I.R.B. 48660, 1996–17 I.R.B. 48661, 1996–17 I.R.B. 78662, 1996–23 I.R.B. 58663, 1996–23 I.R.B. 4

1A cumulative list of all Revenue Rulings,Revenue Procedures, Treasury Decisions, etc.,published in Internal Revenue Bulletins 1995–27 through 1995–52 will be found in InternalRevenue Bulletin 1996–1, dated January 2,1996.

Treasury Decisions—Continued

8664, 1996–20 I.R.B. 78665, 1996–21 I.R.B. 48667, 1996–20 I.R.B. 48668, 1996–22 I.R.B. 48669, 1996–23 I.R.B. 68670, 1996–24 I.R.B. 6