Bulletin No. 1997–18 May 5, 1997

HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

INCOME TAX Announcement 97–46, page 53. A list is given of organizations now classified as private Rev. Rul. 97–19, page 11. foundations. Federal rates; adjusted federal rates; adjusted fed- eral long-term rate, and the long-term exempt rate. For purposes of sections 1274, 1288, 382, and other EXCISE TAX sections of the Code, tables set forth the rates for May 1997. P.L. 105–2, page 14. An Act to amend the Internal Revenue Code of 1986 to T.D. 8715, page 5. reinstate the Airport and Airway Trust Fund excise taxes, REG–209785–95, page 46. and other purposes. Final, temporary, and proposed regulations under sec- tion 274 of the Code relate to the requirement that business expenses for travel, entertainment, gifts, or ADMINISTRATIVE listed property be substantiated by documentary evi- dence (such as a receipt). REG–209823–96, page 47. Proposed regulations under sections 664 and 2707 of EXEMPT ORGANIZATIONS the Code relate to guidance regarding charitable remain- der trusts and transfers of interests in trusts. A public Rev. Rul. 97–21, page 8. hearing will be held on September 9, 1997. Tax consequences of physician recruitment incen- tives provided by hospitals described in section Notice 97–28, page 45. 501(c)(3) of the Code. This ruling provides examples Credit for producing fuel from a nonconventional illustrating whether nonprofit hospitals that provide in- source, section 29 inflation adjustment factor, and centives to physicians to join their medical staffs or to section 29 reference price. This notice publishes the provide medical services in the community violate the section 29 inflation adjustment factor, the requirements for exemption as organizations described nonconventional source fuel credit, and the section 29 in section 501(c)(3) of the Code. reference price for calendar year 1996.

Finding Lists begin on page 58. Index for January—April begins on page 60. Announcements of Disbarments and Suspensions begin on page 56. Announcement Relating to Court Decisions on page 4. Announcement of Declaratory Judgment Proceedings Under Section 7428 on page 53. Mission of the Service

The purpose of the Internal Revenue Service is to quality of our products and services; and perform in a collect the proper amount of tax revenue at the least manner warranting the highest degree of public cost; serve the public by continually improving the confidence in our integrity, efficiency and fairness.

Statement of Principles of Internal Revenue Tax Administration The function of the Internal Revenue Service is to The Service also has the responsibility of applying administer the Internal Revenue Code. Tax policy and administering the law in a reasonable, for raising revenue is determined by Congress. practical manner. Issues should only be raised by examining officers when they have merit, never With this in mind, it is the duty of the Service to arbitrarily or for trading purposes. At the same carry out that policy by correctly applying the laws time, the examining officer should never hesitate enacted by Congress; to determine the reasonable to raise a meritorious issue. It is also important meaning of various Code provisions in light of the that care be exercised not to raise an issue or to Congressional purpose in enacting them; and to ask a court to adopt a position inconsistent with perform this work in a fair and impartial manner, an established Service position. with neither a government nor a taxpayer point of view. Administration should be both reasonable and At the heart of administration is interpretation of the vigorous. It should be conducted with as little Code. It is the responsibility of each person in the delay as possible and with great courtesy and Service, charged with the duty of interpreting the considerateness. It should never try to overreach, law, to try to find the true meaning of the statutory and should be reasonable within the bounds of law provision and not to adopt a strained construction in and sound administration. It should, however, be the belief that he or she is ‘‘protecting the revenue.’’ vigorous in requiring compliance with law and it The revenue is properly protected only when we as- should be relentless in its attack on unreal tax certain and apply the true meaning of the statute. devices and fraud.

2 Introduction

The Internal Revenue Bulletin is the authoritative instru- court decisions, rulings, and procedures must be consid- ment of the Commissioner of Internal Revenue for ered, and Service personnel and others concerned are announcing official rulings and procedures of the Inter- cautioned against reaching the same conclusions in nal Revenue Service and for publishing Treasury Deci- other cases unless the facts and circumstances are sions, Executive Orders, Tax Conventions, legislation, substantially the same. court decisions, and other items of general interest. It is published weekly and may be obtained from the Superin- The Bulletin is divided into four parts as follows: tendent of Documents on a subscription basis. Bulletin contents of a permanent nature are consolidated semi- annually into Cumulative Bulletins, which are sold on a Part I.—1986 Code. single-copy basis. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform Part II.—Treaties and Tax Legislation. application of the tax laws, including all rulings that This part is divided into two subparts as follows: supersede, revoke, modify, or amend any of those Subpart A, Tax Conventions, and Subpart B, Legislation previously published in the Bulletin. All published rulings and Related Committee Reports. apply retroactively unless otherwise indicated. Proce- dures relating solely to matters of internal management Part III.—Administrative, Procedural, and Miscellaneous. are not published; however, statements of internal To the extent practicable, pertinent cross references to practices and procedures that affect the rights and these subjects are contained in the other Parts and duties of taxpayers are published. Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administra- Revenue rulings represent the conclusions of the Ser- tive Rulings are issued by the Department of the vice on the application of the law to the pivotal facts Treasury’s Office of the Assistant Secretary (Enforce- stated in the revenue ruling. In those based on positions ment). taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information Part IV.—Items of General Interest. of a confidential nature are deleted to prevent unwar- With the exception of the Notice of Proposed Rulemak- ranted invasions of privacy and to comply with statutory ing and the disbarment and suspension list included in requirements. this part, none of these announcements are consoli- dated in the Cumulative Bulletins. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department The first Bulletin for each month includes an index for Regulations, but they may be used as precedents. the matters published during the preceding month. Unpublished rulings will not be relied on, used, or cited These monthly indexes are cumulated on a quarterly and as precedents by Service personnel in the disposition of semiannual basis, and are published in the first Bulletin other cases. In applying published rulings and proce- of the succeeding quarterly and semi-annual period, dures, the effect of subsequent legislation, regulations, 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.

3 Announcement Relating to Court Decisions It is the policy of the Internal Rev- escence’’ and ‘‘acquiescence in result States,3 enue Service to announce at an early only’’ mean that the Service accepts the 81 F.3d 114 (9th Cir. 1996) date whether it will follow the holdings holding of the court in a case and that in certain cases. An Action on Decision the Service will follow it in disposing of The Commissioner does NOT AC- QUIESCE in the following decisions: is the document making such an an- cases with the same controlling facts. nouncement. An Action on Decision will However, ‘‘acquiescence’’ indicates nei- Xerox Corporation v. United States,4 be issued at the discretion of the Service ther approval nor disapproval of the 41 F.3d 647 (Fed. Cir. 1994) only on unappealed issues decided ad- reasons assigned by the court for its verse to the government. Generally, an conclusions; whereas, ‘‘acquiescence in Charles E. Hurt v. United States,5 Action on Decision is issued where its result only’’ indicates disagreement or 70 F.3d 1261, 76 AFTR2d 95–7815 (4th guidance would be helpful to Service concern with some or all of those Cir. 1995) personnel working with the same or reasons. Nonacquiescence signifies that, similar issues. Unlike a Treasury Regu- although no further review was sought, Robert B. and Eleanor Risman v. lation or a Revenue Ruling, an Action the Service does not agree with the Commissioner,6 on Decision is not an affirmative state- holding of the court and, generally, will 100 T.C. 191 (1993) ment of Service position. It is not not follow the decision in disposing of 2Acquiescence relating to whether disability ben- intended to serve as public guidance and cases involving other taxpayers. In refer- efits paid to taxpayer from the Policemen and may not be cited as precedent. ence to an opinion of a circuit court of Firefighter’s Retirement Fund of the Lexington- Actions on Decisions shall be relied Fayette Urban County Government can be ex- appeals, a nonacquiescence indicates cluded from gross income under Internal Revenue upon within the Service only as conclu- that the Service will not follow the sions applying the law to the facts in the Code section 104(a)(1) as benefits paid under a holding on a nationwide basis. However, statute in the nature of a workmen’s compensation particular case at the time the Action on the Service will recognize the act. Decision was issued. Caution should be 3Acquiescence in result only relating to whether precedential impact of the opinion on the Service can issue summonses to compel a exercised in extending the recommenda- cases arising within the venue of the tion of the Action on Decision to similar taxpayer to sign consent directives which authorize deciding circuit. the release of records from unidentified domestic cases where the facts are different. The announcements published in the and foreign banks, consistent with the require- Moreover, the recommendation in the ments of Internal Revenue Code section 7609. Action on Decision may be superseded weekly Internal Revenue Bulletins are 4Nonacquiescence relating to whether, under Ar- by new legislation, regulations, rulings, consolidated semiannually and annually. ticle 23(1)(c) of the U.S.–U.K. Income Tax Treaty, cases, or Actions on Decisions. The semiannual consolidation appears in a U.S. corporation is entitled to continue to treat the first Bulletin for July and in the U.K. Advance Corporation Tax (ACT) as a credit- Prior to 1991, the Service published able tax paid by a U.K. subsidiary in computing acquiescence or nonacquiescence only in Cumulative Bulletin for the first half of the allowable credit for foreign taxes deemed paid certain regular Tax Court opinions. The the year, and the annual consolidation under section 902(a) of the Internal Revenue Code Service has expanded its acquiescence appears in the first Bulletin for the for the year in which the ACT was paid, when the subsidiary subsequently surrenders all or part of program to include other civil tax cases following January and in the Cumulative Bulletin for the last half of the year. the ACT to lower-tier U.K. subsidiaries for use to where guidance is determined to be satisfy their U.K. corporate tax liabilities. helpful. Accordingly, the Service now The Commissioner ACQUIESCES in 5Nonacquiescence relating to whether the Service may acquiesce or nonacquiesce in the the following decisions: was entitled to assess and collect statutory interest on the amount of tax and additions to tax holdings of memorandum Tax Court embodied in a Tax Court decision that resulted opinions, as well as those of the United Buckeye Countrymark v. Commis- sioner,1 from a settlement agreement entered into by the States District Courts, Claims Court, and taxpayers and the Service. 103 T.C. 547 (1994) 6 Circuit Courts of Appeal. Regardless of Continued nonacquiescence, but that this action the court deciding the case, the recom- on decision be substituted for the action on Robert E. and Geneva U. Duncan v. decision reported at Risman v. Commissioner, mendation of any Action on Decision United States,2 AOD CC–1996–003 (March 4, 1996), relating to will be published in the Internal Rev- Docket No. 95–338 whether a remittance forwarded to the Service enue Bulletin. with a Form 4868, Application for Automatic The recommendation in every Action Cheng C. and Susan L. Kao v. United Extension of Time to File U.S. Individual Income Tax Return, constitutes a payment of tax or a on Decision will be summarized as 1Acquiescence relating to whether section 277 of deposit in the nature of a cash bond for purposes acquiescence, acquiescence in result the Internal Revenue Code applies to nonexempt of the period of limitations for seeking a refund of only, or nonacquiescence. Both ‘‘acqui- cooperatives subject to subchapter T of the Code. such remittance.

4 Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 42.—Low-Income Housing control number 1545–0771. Responses 333), the IRS announced that it would Credit to this collection of information are raise the receipt threshold of § 1.274– The adjusted applicable federal short-term, mid- required for a taxpayer to deduct certain 5T(c)(2)(iii)(B) from $25 to $75, effec- term, and long-term rates are set forth for the business expenses or to substantiate cer- tive for expenses incurred on or after month of May 1997. See Rev. Rul. 97–19, tain reimbursements of business ex- October 1, 1995. The temporary regula- page 11. penses. tions effect this amendment by changing An agency may not conduct or spon- ‘‘$25’’ in § 1.274–5T(c)(2)(iii)(B) to Section 274.—Disallowance of sor, and a person is not required to ‘‘$75.’’ This change is applicable to both Certain Entertainment, Etc., respond to, a collection of information deductions and reimbursement arrange- Expenses unless the collection of information dis- ments and is expected to reduce the plays a valid control number. recordkeeping burden on affected tax- 26 CFR 1.274–5T: Substantiation requirements For further information concerning payers, including individuals and small (temporary). this collection of information, and where businesses. T.D. 8715 to submit comments on the collection of information and the accuracy of the Definition of an ‘‘adequate accounting’’ to the employer DEPARTMENT OF THE TREASURY estimated burden, and suggestions for Internal Revenue Service reducing the burden, please refer to the An employee who is reimbursed un- 26 CFR Parts 1 and 602 preamble in the cross-reference notice of der a reimbursement or other expense proposed rulemaking published in the allowance arrangement for expenses Substantiation of business Proposed Rules section of this issue of covered by section 274(d) must make an expenses for travel, entertainment, the Federal Register. ‘‘adequate accounting’’ to the employer gifts and listed property Books or records relating to a collec- for the reimbursed expenses. Section tion of information must be retained as 1.274–5T(f)(4) specifies that, as part of AGENCY: Internal Revenue Service long as their contents may become ma- an adequate accounting, the employee (IRS), Treasury. terial in the administration of any inter- must submit substantiation to the em- ACTION: Final and temporary regula- nal revenue law. Generally, tax returns ployer that satisfies the requirements of tions. and tax return information are confiden- § 1.274–5T(c). Notice 95–50 also solic- tial, as required by 26 U.S.C. 6103. ited comments on whether changes SUMMARY: This document contains should be made to the substantiation amendments to temporary regulations Background and Explanation of requirements of the adequate accounting relating to the requirement that business Provisions rules in § 1.274–5T. Comments re- expenses for travel, entertainment, gifts, Receipt threshold ceived related primarily to the adequate or listed property be substantiated by accounting rules and the substantiation documentary evidence (such as a re- Section 274(d) disallows a trade or requirements in general. ceipt). The regulations affect persons business deduction under section 162 for making or receiving reimbursements for any traveling (including meals and lodg- 1. Submission and retention of docu- travel, entertainment, gifts, or listed ing), entertainment, gift, or listed prop- mentary evidence property. The text of these temporary erty expense, unless the taxpayer sub- A number of commentators, particu- regulations also serves as the text of stantiates the elements of the expense by larly federal government agencies, com- REG–209785–95, page 46. adequate records or by sufficient evi- plained of the administrative burden and DATES: These temporary regulations dence. Under § 1.274–5T(c) of the tem- cost of storing large quantities of paper are effective March 25, 1997. Applica- porary Income Tax Regulations, a tax- receipts. Some comments proposed that bility: These temporary regulations are payer must maintain two types of the employer should be allowed to dis- applicable to expenses paid or incurred records to satisfy the ‘‘adequate records’’ pose of the documentary evidence after after September 30, 1995. requirement: (1) a summary of expenses an employee has made an adequate (account book, diary, log, statement of accounting, or return the documentary FOR FURTHER INFORMATION CON- expense, trip sheets, or other similar evidence to the employee for retention. TACT: Donna M. Crisalli at (202) 622– record), sometimes called an expense Other comments suggested that submis- 4920 (not a toll-free number). account or expense voucher, and (2) sion by an employee of an expense documentary evidence (such as receipts voucher alone, without documentary evi- SUPPLEMENTARY INFORMATION: or paid bills). Together, these records dence, should be considered an adequate must establish the elements of amount, Paperwork Reduction Act accounting. time, place, and business purpose (and With the increase in the receipt These regulations are being issued for gifts and entertainment, business re- threshold to $75, and the use of elec- without prior notice and public comment lationship of recipient or persons enter- tronic document transmission and reten- pursuant to the Administrative Procedure tained) for each expenditure or use. tion (discussed below), the necessity for Act (5 U.S.C. 553). For this reason, the Section 1.274–5T(c)(2)(iii) generally storing large quantities of paper records collection of information contained in requires that a taxpayer have a receipt is significantly reduced. Nonetheless, the these regulations has been reviewed and, or other documentary evidence to sub- temporary regulations respond to the pending receipt and evaluation of public stantiate (A) any expenditure for lodging concerns expressed by these comments comments, approved by the Office of and (B) any other expenditure of $25 or by amending § 1.274–5T(f)(4) to autho- Management and Budget (OMB) under more. In Notice 95–50 (1995–2 C.B. rize the Commissioner to prescribe rules 5 modifying the substantiation require- form a basis for a ‘‘safe harbor’’ per- stances, including the employer’s use of ments for an adequate accounting by an centage or percentages (e.g., by industry internal controls. The employer’s ac- employee to an employer. Under the or size of company) of hotel bills that counting procedures should include a amendment, the Commissioner could would be deemed to represent the vari- requirement that an expense account be publish rules defining the circumstances ous types of possible expenses. Another verified and approved by a reasonable (including the use of specified internal comment suggested that the IRS adopt a person other than the person incurring controls) under which an employee may mechanical test based on statistical sam- the expense. To the extent the employer make an adequate accounting to his pling to make a reasonable allocation of fails to maintain adequate accounting employer by submitting an expense ac- the total hotel charge to meals. procedures, the district director may re- count alone, without the necessity of The temporary regulations make no quire the employee to separately sub- submitting documentary evidence (such change to the current documentary evi- stantiate his expense account informa- as receipts). This change is expected to dence requirements for lodging ex- tion. reduce the recordkeeping burden for penses. Because of the large number of Section 1.274–5T(f)(5)(iii) cites post- employers and employees. These rules expenses that can be charged to hotel expenditure review of employees’ ex- would not change the substantiation re- bills, and extensive variation from trav- pense accounts as an internal control quirements of § 1.274–5T(c) for deduc- eler to traveler in the types of expenses that should normally be employed. tions. charged to hotel bills, any attempt to However, whether the employer’s post- establish percentages for allocating hotel expenditure review procedures are ap- 2. Maintenance of adequate records in bills to lodging and other fully deduct- propriate is a matter within the discre- electronic form ible business expenses, meals and enter- tion of the district director, based on a Some commentators suggested that tainment, and personal expenses is con- review of all the facts and circum- taxpayers should be permitted to obtain sidered impracticable. stances. and maintain records substantiating ex- A comment requested that the IRS 3. De minimis exception to substantia- penses under section 274(d) in elec- clarify whether statements provided to tion requirements tronic form. The temporary regulations travelers by airlines in lieu of tickets make no change to the current regula- can constitute documentary evidence of A comment proposed that employees tions, which do not require that the travel. The current regulations are suffi- receiving $1000 or less per year in records be in paper form. Rev. Proc. ciently flexible to permit use of a vari- reimbursed expenses be exempted from 91–59 (1991–2 C.B. 841), provides pro- ety of forms of documentary evidence. the requirement to substantiate the ele- cedures for maintaining tax records in ments of the expenses, other than busi- electronic form. Section 3.08 of Rev. Other Comments in Response to Notice ness purpose, to the employer. In view Proc. 91–59 states that the procedures 95–50 of the other changes made by the tem- apply to documentation required by sec- 1. Substantiation of business purpose porary regulations that will lessen a tion 274(d). taxpayer’s recordkeeping burden, such A commentator suggested that the as the increase in the receipt threshold, 3. Types of records that constitute ac- regulations be revised to permit an em- the temporary regulations do not incor- ceptable documentary evidence ployee to initially substantiate business porate this suggestion. Some commentators suggested that purpose to the employer orally, for later 4. Department of Labor substantiation credit card charge records should be entry into the expense processing sys- requirements for plan trustees considered acceptable documentary evi- tem. The current regulations do not dence of travel expenses, including preclude an initial oral substantiation of A comment requested the IRS to lodging. They noted, however, that business purpose which is reduced to coordinate with the Department of La- § 1.274–5T(c)(2)(iii) requires that docu- writing no later than the time of the bor to establish common substantiation mentary evidence of lodging must show employee’s final accounting to the em- requirements under ERISA for travel by separate amounts for charges such as ployer. multi-employer plan trustees. Modifica- lodging, meals, and telephone calls. A 2. Post-expenditure verification proce- tions to conform the substantiation re- credit card statement or record of dures quirements under ERISA to those pro- charge, unlike a hotel bill, normally will vided in the temporary regulations are not segregate lodging and other ex- A comment suggested that the regula- outside the scope of the section 274(d) penses, such as meals and entertainment tions be revised to permit an employer regulations. subject to the section 274(n) partial to conduct a post-expenditure review of 5. Increase in limit on deduction for deduction disallowance, or personal ex- only a statistical sampling, as opposed gifts penses (such as personal phone calls or to 100%, of expense vouchers. gift purchases) that may not be de- Section 1.274–5T(f)(5)(iii) states that A comment requested that the $25 ducted. Therefore, such a credit card an employee who makes an adequate limit on the deduction for gifts con- statement or record of charge alone will accounting to his employer will not tained in section 274(b) be increased to not constitute acceptable documentary again be required to substantiate such $75. The IRS has no discretion to raise evidence of a lodging expense. expenses, unless the employer’s ac- this statutory limit. The commentators proposed address- counting procedures are not adequate or 6. Use of full federal per diem method ing this problem by using statistical it cannot be determined that such proce- to substantiate travel for deduction pur- sampling, conducted either by the IRS dures are adequate. The district director poses or by taxpayers, to establish a break- will determine whether the employer’s down of expenses on hotel bills. One accounting procedures are adequate by A comment suggested that self- comment suggested that sampling could considering all the facts and circum- employed individuals and unreimbursed 6 employees should be entitled to substan- Taxable Years Beginning Prior to PART 602—OMB CONTROL NUM- tiate lodging expenses for deduction January 1, 1986 BERS UNDER THE PAPERWORK purposes by means of the ‘‘high-low’’ REDUCTION ACT per diem method. Rev. Proc. 96–64 § 1.274–5 redesignated as § 1.274–5A Par. 5. The authority citation for part (1996–53 I.R.B. 52), permits this sub- Par. 3. Section 1.274–5 is redesig- 602 continues to read as follows: stantiation method for employee reim- nated as § 1.274–5A and added immedi- bursements only. This suggestion is out- ately following the undesignated Authority: 26 U.S.C. 7805. side the scope of this revision to the centerheading ‘‘Taxable Years Beginning Par. 6. In § 602.101, paragraph (c) is temporary regulations. Prior to January 1, 1986’’. amended by: Special Analyses Par. 4. Section 1.274–5T is amended 1. Removing the following entry by: from the table: It has been determined that these 1. Revising the first sentence of para- temporary regulations are not a signifi- graph (c)(2)(iii)(B). CFR part or section cant regulatory action as defined in EO 2. Redesignating the text of para- where identified and Current OMB 12866. Therefore, a regulatory assess- graph (f)(4) as paragraph (f)(4)(i). described control No. ment is not required. It is hereby certi- fied that these regulations do not have a 3. Adding a paragraph heading for ***** significant economic impact on a sub- paragraph (f)(4)(i). 1.274–5 ...... 1545–0139 stantial number of small entities. This 4. Adding paragraphs (f)(4)(ii) and 1545–0771 certification is based on the fact that, by (f)(4)(iii). ***** The revisions and additions read as increasing the receipt threshold from 2. Adding an entry in numerical order $25 to $75, these regulations reduce the follows: to the table to read as follows: existing recordkeeping requirements of § 1.274–5T Substantiation requirements taxpayers, including small entities. The CFR part or section (temporary). regulations do not otherwise signifi- where identified and Current OMB cantly alter the reporting or recordkeep- described control No. ing duties of small entities. Therefore, a ***** Regulatory Flexibility Analysis under (c) * * * ***** the Regulatory Flexibility Act (5 U.S.C. (2) * * * 1.274–5A...... 1545–0139 chapter 6) is not required. Pursuant to (iii) * * * 1545–0771 section 7805(f) of the Internal Revenue (B) Any other expenditure of $75 or ***** Code, these temporary regulations will more ($25 or more for expenditures be submitted to the Chief Counsel for incurred before October 1, 1995) except, Margaret Milner Richardson, Advocacy of the Small Business Admin- for transportation charges, documentary Commissioner of Internal Revenue. istration for comment on their impact on evidence will not be required if not small business. readily available, provided, however, Approved February 14, 1997. that the Commissioner, in his discretion, Drafting Information may prescribe rules waiving such re- Donald C. Lubick, The principal author of these regula- quirements in circumstances where he Acting Assistant Secretary tions is Donna M. Crisalli, Office of the determines it is impracticable for such of the Treasury. documentary evidence to be required. * Assistant Chief Counsel (Income Tax (Filed by the Office of the Federal Register on and Accounting). However, other per- ** March 24, 1997, 8:45 a.m., and published in the sonnel from the IRS and Treasury De- issue of the Federal Register for March 25, 1997, partment participated in their develop- ***** 62 F.R. 13988) ment. (f) * * * ***** (4) * * * (i) In general. *** (ii) Procedures for adequate ac- Section 280G.—Golden Parachute Adoption of Amendments to the Regula- counting without documentary evidence. Payments tions The Commissioner may, in his discre- Accordingly, 26 CFR part 1 is tion, prescribe rules under which an Federal short-term, mid-term, and long-term amended as follows: employee may make an adequate ac- rates are set forth for the month of May 1997. See counting to his employer by submitting Rev. Rul. 97–19, page 11. PART 1—INCOME TAXES an account book, log, diary, etc., alone, Paragraph 1. The authority citation for without submitting documentary evi- part 1 is amended by adding an entry in dence. Section 382.—Limitation on Net numerical order to read as follows: (iii) Employer. For purposes of this Operating Loss Carryforwards and Authority: 26 U.S.C. 7805 * * * section, the term employer includes an Certain Built-In Losses Following agent of the employer or a third party Section 1.274–5T also issued under 26 Ownership Change payor who pays amounts to an em- U.S.C. 274(d). * * * ployee under a reimbursement or other The adjusted federal long-term rate is set forth for the month of May 1997. See Rev. Rul. 97–19, Par. 2. An undesignated centerheading expense allowance arrangement. page 11. is added immediately following § 1.280H–1T to read as follows: ***** 7 Section 412.—Minimum Funding FACTS Board of Directors to approve contracts Standards with hospital medical staff. Hospital A All of the hospitals in the situations does not provide any recruiting incen- The adjusted applicable federal short-term, mid- described below have been recognized tives to Physician M other than those set term, and long-term rates are set forth for the as exempt from federal income tax month of May 1997. See Rev. Rul. 97–19, forth in the written agreement. page 11. under § 501(a) as organizations de- scribed in § 501(c)(3) and operate in In accordance with the agreement, accordance with the standards for ex- Hospital A pays Physician M a signing bonus, Physician M’s professional liabil- Section 467.—Certain Payments emption set forth in Revenue Ruling ity insurance premium for a limited for the Use of Property or Services 69–545, 1969–2 C.B. 117. The physi- cians described in the following recruit- period, provides office space in a build- The adjusted applicable federal short-term, mid- ing owned by Hospital A for a limited term, and long-term rates are set forth for the ing transactions do not have substantial influence over the affairs of the hospi- number of years at a below market rent month of May 1997. See Rev. Rul. 97–19, (after which the rental will be at fair page 11. tals that are recruiting them. Therefore, they are not disqualified persons as market value), and guarantees Physician defined in § 4958, nor do they have any M’s mortgage on a residence in County Section 468.—Special Rules for personal or private interest in the activi- V. Hospital A also lends Physician M Mining and Solid Waste ties of the organizations that would practice start-up financial assistance pur- Reclamation and Closing Costs subject them to the inurement proscrip- suant to an agreement that is properly documented and bears reasonable terms. The adjusted applicable federal short-term, mid- tion of § 501(c)(3). Furthermore, in term, and long-term rates are set forth for the Situations 1, 2, and 4, the physicians month of May 1997. See Rev. Rul. 97–19, have no pre-existing relationship with Situation 2 page 11. the hospital or the members of its board. Hospital B is located in an economi- For purposes of this revenue ruling, the cally depressed inner-city area of City physician recruiting activities described Section 483.—Interest on Certain W. Hospital B has conducted a commu- in Situations 1, 2, 3, and 4 are assumed Deferred Payments nity needs assessment that indicates both to be lawful. However, because the a shortage of pediatricians in Hospital The adjusted applicable federal short-term, mid- Internal Revenue Service does not have B’s service area and difficulties Medic- term, and long-term rates are set forth for the jurisdiction regarding whether the activi- month of May 1997. See Rev. Rul. 97–19, aid patients are having obtaining pediat- page 11. ties described in Situations 1, 2, 3, and ric services. Physician N is a pediatri- 4 are lawful under the Medicare and cian currently practicing outside of Medicaid anti-kickback statute, 42 Hospital B’s service area and is not on Section 501.—Exemption From Tax U.S.C. § 1320a–7b(b), taxpayers may Hospital B’s medical staff. Hospital B on Corporations, Certain Trusts, not rely upon the facts or assumptions recruits Physician N to relocate to City Etc. described in this ruling for purposes W, establish and maintain a full-time relating to that statute. 26 CFR 1.501(c)(3)–1: Organizations organized pediatric practice in Hospital B’s service and operated for religious, charitable, scientific, area, become a member of Hospital B’s testing for public safety, literary, or educational Situation 1 medical staff, and treat a reasonable purposes, or for the prevention of cruelty to number of Medicaid patients. Hospital B children or animals. Hospital A is located in County V, a rural area, and is the only hospital offers Physician N a recruitment incen- Tax consequences of physician re- within a 100 mile radius. County V has tive package pursuant to a written agree- cruitment incentives provided by hos- been designated by the U.S. Public ment negotiated at arm’s-length and ap- pitals described in section 501(c)(3) of Health Service as a Health Professional proved by Hospital B’s Board of the Code. This ruling provides ex- Shortage Area for primary medical care Directors. Hospital B does not provide amples illustrating whether nonprofit professionals (a category that includes any recruiting incentives to Physician N hospitals that provide incentives to phy- obstetricians and gynecologists). Physi- other than those set forth in the written sicians to join their medical staffs or to cian M recently completed an ob/gyn agreement. provide medical services in the commu- residency and is not on Hospital A’s Under the agreement, Hospital B re- nity violate the requirements for exemp- medical staff. Hospital A recruits Physi- imburses Physician N for moving ex- tion as organizations described in sec- cian M to establish and maintain a penses as defined in § 217(b), reim- tion 501(c)(3) of the Code. full-time private ob/gyn practice in its burses Physician N for professional service area and become a member of liability ‘‘tail’’ coverage for Physician Rev. Rul. 97–21 its medical staff. Hospital A provides N’s former practice, and guarantees Phy- ISSUE Physician M a recruitment incentive sician N’s private practice income for a package pursuant to a written agreement limited number of years. The private Whether, under the facts described negotiated at arm’s-length. The agree- practice income guarantee, which is below, a hospital violates the require- ment is in accordance with guidelines properly documented, provides that Hos- ments for exemption from federal in- for physician recruitment that Hospital pital B will make up the difference to come tax as an organization described in A’s Board of Directors establishes, the extent Physician N practices full- § 501(c)(3) of the Internal Revenue monitors, and reviews regularly to en- time in its service area and the private Code when it provides incentives to sure that recruiting practices are consis- practice does not generate a certain level recruit private practice physicians to join tent with Hospital A’s exempt purposes. of net income (after reasonable expenses its medical staff or to provide medical The agreement was approved by the of the practice). The amount guaranteed services in the community. committee appointed by Hospital A’s falls within the range reflected in re- 8 gional or national surveys regarding in- for its radiology department. Hospital D requirement that their purposes may not come earned by physicians in the same offers Physician P a recruitment incen- be illegal. See Restatement (Second) of specialty. tive package pursuant to a written agree- Trusts § 377 (1959); 4A Austin W. ment, negotiated at arm’s-length and Scott and William F. Fratcher, The Law Situation 3 approved by Hospital D’s Board of of Trusts § 377 (4th ed. 1989); Bob Hospital C is located in an economi- Directors. Hospital D does not provide Jones University v. U.S., 461 U.S. 574, cally depressed inner city area of City any recruiting incentives to Physician P 591 (1983); Rev. Rul. 80–278, 1980–2 X. Hospital C has conducted a commu- other than those set forth in the written C.B. 175; Rev. Rul. 80–279, 1980–2 nity needs assessment that indicates in- agreement. C.B. 176. digent patients are having difficulty get- Pursuant to the agreement, Hospital D Section 1.501(c)(3)–1(c)(2) states that ting access to care because of a shortage guarantees Physician P’s private practice an organization is not operated exclu- of obstetricians in Hospital C’s service income for the first few years that sively for charitable purposes if its net area willing to treat Medicaid and char- Physician P is a member of its medical earnings inure in whole or in part to the ity care patients. Hospital C recruits staff and provides coverage for its radi- benefit of private shareholders or indi- Physician O, an obstetrician who is ology department. The private practice viduals. currently a member of Hospital C’s income guarantee, which is properly Section 1.501(a)–1(c) defines ‘‘private medical staff, to provide these services documented, provides that Hospital D shareholder or individual’’ as referring and enters into a written agreement with will make up the difference to Physician to persons having a personal and private Physician O. The agreement is in accor- P to the extent the private practice does interest in the activities of the organiza- dance with guidelines for physician re- not generate a certain level of net tion. cruitment that Hospital C’s Board of income (after reasonable expenses of the Section 1.501(c)(3)–1(d)(1)(ii) states Directors establishes, monitors, and re- practice). The net income amount guar- that an organization is not organized views regularly to ensure that recruiting anteed falls within the range reflected in exclusively for any of the purposes practices are consistent with Hospital regional or national surveys regarding specified in § 501(c)(3) unless it serves C’s exempt purpose. The agreement was income earned by physicians in the public, rather than private interests. approved by the officer designated by same specialty. Thus, an organization applying for tax Hospital C’s Board of Directors to enter exemption under § 501(c)(3) must es- Situation 5 into contracts with hospital medical tablish that it is not organized or oper- ated for the benefit of private interests. staff. Hospital C does not provide any Hospital F is located in City Z, a recruiting incentives to Physician O Rev. Rul. 69–545, 1969–2 C.B. 117, medium to large size metropolitan area. holds that a non-profit hospital that other than those set forth in the written Because of its physician recruitment agreement. Pursuant to the agreement, benefits a broad cross section of its practices, Hospital F has been found community by having an open medical Hospital C agrees to reimburse Physi- guilty in a court of law of knowingly cian O for the cost of one year’s staff and a board of trustees broadly and willfully violating the Medicare and representative of the community, operat- professional liability insurance in return Medicaid anti-kickback statute, 42 for an agreement by Physician O to treat ing a full-time emergency room open to U.S.C. § 1320a–7b(b), for providing re- all regardless of ability to pay, and a reasonable number of Medicaid and cruitment incentives that constituted charity care patients for that year. otherwise admitting all patients able to payments for referrals. The activities pay (either themselves, or through third resulting in the violations were substan- Situation 4 party payers such as private health in- tial. surance or government programs such as Hospital D is located in City Y, a LAW Medicare) may qualify as an organiza- medium to large size metropolitan area. tion described in § 501(c)(3). The same Hospital D requires a minimum of four Section 501(c)(3) provides, in part, standard has been used by the courts as diagnostic radiologists to ensure ad- for the exemption from federal income the basis for evaluating whether health equate coverage and a high quality of tax of corporations organized and oper- maintenance organizations qualify for care for its radiology department. Two ated exclusively for charitable, scien- exemption as organizations described in of the four diagnostic radiologists cur- tific, or educational purposes, provided § 501(c)(3). Sound Health Association rently providing coverage for Hospital D no part of the organization’s net earn- v. Commissioner, 71 T.C. 158 (1978), are relocating to other areas. Hospital D ings inures to the benefit of any private acq. 1981–2 C.B. 2; Geisinger Health initiates a search for diagnostic radiolo- shareholder or individual. Plan v. Commissioner, 985 F.2d 1210 gists and determines that one of the two Section 1.501(c)(3)–1(d)(2) of the In- (3rd Cir. 1993), rev’g 62 T.C.M. (CCH) most qualified candidates is Physician P. come Tax Regulations provides that the 1656 (1991). Physician P currently is practicing in term ‘‘charitable’’ is used in § 501(c)(3) Rev. Rul. 72–559, 1972–2 C.B. 247, City Y as a member of the medical staff in its generally accepted legal sense. holds that an organization that provides of Hospital E (which is also located in The promotion of health has long been subsidies to recent law school graduates City Y). As a diagnostic radiologist, recognized as a charitable purpose. See during the first three years of their Physician P provides services for pa- Restatement (Second) of Trusts, §§ 368, practice to enable them to establish legal tients receiving care at Hospital E, but 372 (1959); 4A Austin W. Scott and practices in economically depressed does not refer patients to Hospital E or William F. Fratcher, The Law of Trusts communities that have a shortage of any other hospital in City Y. Physician P §§ 368, 372 (4th ed. 1989); and Rev. available legal services and to provide is not on Hospital D’s medical staff. Rul. 69–545, 1969–2 C.B. 117. Under free legal service to needy members of Hospital D recruits Physician P to join the common law of charitable trusts, all the community may qualify as an orga- its medical staff and to provide coverage such organizations are subject to the nization described in § 501(c)(3). 9 Rev. Rul. 73–313, 1973–2 C.B. 174, following conditions are met: (1) the Avenue Clinic v. Commissioner, 31 T.C. holds that attracting a physician to a purpose of the organization is charitable; 141 (1958); Birmingham Business Col- community that had no available medi- (2) the activities are not illegal, contrary lege, Inc. v. Commissioner, 276 F.2d cal services furthered the charitable pur- to a clearly defined and established 476 (5th Cir. 1960). pose of promoting the health of the public policy, or in conflict with express Third, the organization may not en- community. In Rev. Rul. 73–313, resi- statutory restrictions; and (3) the activi- gage in substantial activities that cause dents of an isolated rural community ties are in furtherance of the organiza- the hospital to be operated for the had to travel a considerable distance to tion’s exempt purpose and are reason- benefit of a private interest rather than obtain care. Faced with the total lack of ably related to the accomplishment of public interest so that it has a substantial local services, the community formed an that purpose. non-exempt purpose. Section organization to raise funds and build a 1.501(c)(3)–1(d)(1)(ii). medical office building to attract a doc- ANALYSIS tor to the locality. (No hospitals or Finally, the organization may not en- gage in substantial unlawful activities. existing medical practices were in- In order to meet the requirements of As discussed in Rev. Rul. 75–384, Rev. volved.) The ruling states that certain § 501(c)(3), a hospital that provides facts are particularly relevant: (1) the Rul. 80–278, and Rev. Rul. 80–279, the recruitment incentives to physicians conduct of an unlawful activity is incon- demonstrated need for a physician to must provide those incentives in a man- avert a real and substantial threat to the sistent with charitable purposes. An or- ner that does not cause the organization ganization conducts an activity that is community; (2) evidence that the lack of to violate the operational test of a suitable office had impeded efforts to unlawful, and therefore not in further- § 1.501(c)(3)–1. Whether the recruit- ance of a charitable purpose, if the attract a physician; (3) the arrangements ment incentives cause the organization were completely at arm’s-length; and (4) organization’s property is to be used for to violate the operational test is deter- an objective that is in violation of the there was no relationship between any mined based on all relevant facts and person connected with the organization criminal law. Activities can accomplish circumstances. When a § 501(c)(3) hos- and the recruited physician. The ruling an unlawful purpose through either di- pital recruits a physician for its medical states that, under all the circumstances, rect or indirect means. the arrangement used to induce the staff who is to perform services for or doctor to locate a practice in the area on behalf of the organization, the orga- Situation 1 ‘‘bear[s] a reasonable relationship to nization meets the operational test by showing that, taking into account all of Like the organization described in promotion and protection of the health Rev. Rul. 73–313, Hospital A has objec- of the community’’ and any private the benefits provided the physician by the organization, the organization is pay- tive evidence demonstrating a need for benefit to the physician is incidental to obstetricians and gynecologists in its the public purpose achieved. It con- ing reasonable compensation for the services the physician is providing in service area and has engaged in physi- cludes that the activity furthers a chari- cian recruitment activity bearing a rea- table purpose and the organization quali- return. A somewhat different analysis must be applied when a § 501(c)(3) sonable relationship to promoting and fies for exemption as an organization protecting the health of the community described in § 501(c)(3). hospital recruits a physician for its medical staff to provide services to in accordance with Rev. Rul. 69–545. Rev. Rul. 75–384, 1975–2 C.B. 204, As with the subsidies provided to the holds that an organization whose pri- members of the surrounding community but not necessarily for or on behalf of recent law school graduates in Rev. Rul. mary activity is sponsoring antiwar pro- 72–559, the payment of a bonus, the test demonstrations in which demonstra- the organization. In these cases, a viola- tion will result from a failure to comply guarantee of a mortgage, the reimburse- tors are urged to commit violations of ment of professional liability insurance local ordinances and breaches of the with any of the following four require- ments: and provision of subsidized office space public order does not qualify as an for a limited time, and the lending of First, the organization may not engage organization described in § 501(c)(3) start-up financial assistance as recruit- in substantial activities that do not fur- because its activities demonstrate an ment incentives are reasonably related to ther the hospital’s exempt purposes or illegal purpose that is inconsistent with causing Physician M to become a mem- that do not bear a reasonable relation- charitable purposes. ber of Hospital A’s medical staff and to ship to the accomplishment of those Rev. Rul. 80–278, 1980–2 C.B. 175, establish and maintain a full-time pri- purposes. As discussed in Rev. Rul. and Rev. Rul. 80–279, 1980–2 C.B. 176, vate ob/gyn practice in Hospital A’s 80–278 and Rev. Rul. 80–279, in deter- discuss the qualification as organizations service area. The provision of the incen- mining whether an organization meets described in § 501(c)(3) of organiza- tives under the circumstances described the operational test, the issue is whether tions that conduct environmental litiga- furthers the charitable purposes served the particular activity undertaken by the tion and environmental dispute media- by the hospital and is consistent with organization is appropriately in further- tion. In holding that these organizations the requirements for exemption as an ance of the organization’s exempt pur- may qualify, the rulings state that, in organization described in § 501(c)(3). determining whether an organization pose. meets the operational test, the issue is Second, the organization must not Situation 2 whether the particular activity under- engage in activities that result in inure- taken by the organization appropriately ment of the hospital’s net earnings to a Like Hospital A in Situation 1, Hospi- furthers the organization’s exempt pur- private shareholder or individual. An tal B has objective evidence demonstrat- pose. The rulings state that an organiza- activity may result in inurement if it is ing a need for pediatricians in its service tion’s activities will be considered per- structured as a device to distribute the area and has engaged in physician re- missible under § 501(c)(3) if the net earnings of the hospital. See Lorain cruitment activity bearing a reasonable 10 relationship to promoting and protecting nation by the Board of Directors of DRAFTING INFORMATION the health of the community in much Hospital D that it needs additional diag- the same manner as the organization The principal author of this revenue nostic radiologists to provide adequate ruling is Judith E. Kindell of the Ex- described in Rev. Rul. 73–313. As with coverage and to ensure a high quality of the recruitment incentive package pro- empt Organizations Division. For further medical care. The recruitment activity information regarding this revenue rul- vided by Hospital A, the payment of described is consistent with the require- moving expenses, the reimbursement of ing contact Judith E. Kindell on (202) ments for exemption as an organization 622–6494 (not a toll-free call). professional liability ‘‘tail’’ coverage, described in § 501(c)(3). and the provision of a reasonable private practice income guarantee as recruitment Situation 5 Section 807.—Rules for Certain incentives are reasonably related to Reserves causing Physician N to become a mem- Hospital F has engaged in physician The adjusted applicable federal short-term, mid- ber of Hospital B’s medical staff and to recruiting practices resulting in a crimi- term, and long-term rates are set forth for the establish and maintain a full-time pri- nal conviction. As in Rev. Rul. 75–384, month of May 1997. See Rev. Rul. 97–19, vate pediatric practice in Hospital B’s the recruiting activities were intentional on this page. service area. Thus, the recruitment activ- and criminal, not isolated or inadvertent ity described furthers the charitable pur- violations of a regulatory statute. An Section 846.—Discounted Unpaid poses served by the hospital and is organization that engages in substantial Losses Defined consistent with the requirements for ex- unlawful activities, including activities emption as an organization described in The adjusted applicable federal short-term, mid- involving the use of the organization’s § 501(c)(3). term, and long-term rates are set forth for the property for an objective that is in month of May 1997. See Rev. Rul. 97–19, on this page. Situation 3 violation of criminal law, does not qualify as an organization described in In accordance with the standards for § 501(c)(3). Because Hospital F has Section 1274.—Determination of exemption set forth in Rev. Rul. 69–545, knowingly and willfully conducted sub- Issue Price in the Case of Certain Hospital C admits and treats Medicaid stantial activities that are inconsistent Debt Instruments Issued for patients on a non-discriminatory basis. with charitable purposes, it does not Property Hospital C has identified a shortage of comply with the requirements of (Also Sections 42, 280G, 382, 412, 467, 468, 482, obstetricians willing to treat Medicaid § 501(c)(3) and § 1.501(c)(3)–1. patients. The payment of Physician O’s 483, 642, 807, 846, 1288, 7520, 7872.) professional liability insurance premi- Federal rates; adjusted federal ums in return for Physician O’s agree- HOLDING rates; adjusted federal long-term rate, ment to treat a reasonable number of and the long-term exempt rate. For The hospitals in Situations 1, 2, 3, Medicaid and charity care patients is purposes of sections 1274, 1288, 382, reasonably related to the accomplish- and 4 have not violated the requirements and other sections of the Code, tables ment of Hospital C’s exempt purposes. for exemption from federal income tax set forth the rates for May 1997. Because the amount paid by Hospital C as organizations described in is reasonable and any private benefit to § 501(c)(3) as a result of the physician Rev. Rul. 97–19 Physician O is outweighed by the public recruitment incentive agreements they This revenue ruling provides various purpose served by the agreement, the have made because the transactions fur- prescribed rates for federal income tax recruitment activity described is consis- ther charitable purposes, do not result in purposes for May 1997 (the current tent with the requirements for exemption inurement, do not result in the hospitals month.) Table 1 contains the short-term, as an organization described in serving a private rather than a public mid-term, and long-term applicable fed- § 501(c)(3). purpose, and are assumed to be lawful eral rates (AFR) for the current month for purposes of this revenue ruling. Situation 4 for purposes of section 1274(d) of the Hospital F in Situation 5 does not Internal Revenue Code. Table 2 contains Hospital D has objective evidence qualify as an organization described in the short-term, mid-term, and long-term demonstrating a need for diagnostic ra- § 501(c)(3) because its unlawful physi- adjusted applicable federal rates (ad- diologists to provide coverage for its cian recruitment activities are inconsis- justed AFR) for the current month for radiology department so that it can tent with charitable purposes. purposes of section 1288(b). Table 3 promote the health of the community. sets forth the adjusted federal long-term The provision of a reasonable private SCOPE rate and the long-term tax-exempt rate practice income guarantee as a recruit- described in section 382(f). Table 4 ment incentive that is conditioned upon This ruling addresses only issues un- contains the appropriate percentages for Physician P obtaining medical staff der § 501(c)(3) in the described situa- determining the low-income housing privileges and providing coverage for tions. No inference is intended as to any credit described in section 42(b)(2) for the radiology department is reasonably other issue under any other provision of buildings placed in service during the related to the accomplishment of the law, including any issue involving current month. Finally, Table 5 contains charitable purposes served by the hospi- worker classification, income tax conse- the federal rate for determining the tal. A significant fact in determining that quences to the physicians, and applica- present value of an annuity, an interest the community benefit provided by the tion of the Medicare and Medicaid anti- for life or for a term of years, or a activity outweighs the private benefit kickback statute, 42 U.S.C. § 1320a– remainder or a reversionary interest for provided to Physician P is the determi- 7b(b). purposes of section 7520. 11 REV. RUL. 97–19 TABLE 1 Applicable Federal Rates (AFR) for May 1997 Period for Compounding

Annual Semiannual Quarterly Monthly Short-Term AFR 6.23% 6.14% 6.09% 6.06% 110% AFR 6.86% 6.75% 6.69% 6.66% 120% AFR 7.51% 7.37% 7.30% 7.26% 130% AFR 8.14% 7.98% 7.90% 7.85% Mid-Term AFR 6.85% 6.74% 6.68% 6.65% 110% AFR 7.55% 7.41% 7.34% 7.30% 120% AFR 8.25% 8.09% 8.01% 7.96% 130% AFR 8.95% 8.76% 8.67% 8.60% 150% AFR 10.37% 10.11% 9.99% 9.90% 175% AFR 12.15% 11.80% 11.63% 11.52% Long-Term AFR 7.18% 7.06% 7.00% 6.96% 110% AFR 7.92% 7.77% 7.70% 7.65% 120% AFR 8.65% 8.47% 8.38% 8.32% 130% AFR 9.39% 9.18% 9.08% 9.01%

REV. RUL. 97–19 TABLE 2 Adjusted AFR for May 1997 Period for Compounding

Annual Semiannual Quarterly Monthly Short-term adjusted AFR 3.97% 3.93% 3.91% 3.90% Mid-term adjusted AFR 4.84% 4.78% 4.75% 4.73% Long-term adjusted AFR 5.64% 5.56% 5.52% 5.50%

REV. RUL. 97–19 TABLE 3 Rates Under Section 382 for May 1997

Adjusted federal long-term rate for the current month 5.64% Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 5.64%

REV. RUL. 97–19 TABLE 4 Appropriate Percentages Under Section 42(b)(2) for May 1997

Appropriate percentage for the 70% present value low-income housing credit 8.65% Appropriate percentage for the 30% present value low-income housing credit 3.71%

12 REV. RUL. 97–19 TABLE 5 Rate Under Section 7520 for May 1997

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 8.2%

Section 1288.—Treatment of Section 7520.—Valuation Tables Section 7872.—Treatment of Loans Original Issue Discount on The adjusted applicable federal short-term, mid- With Below-Market Interest Rates Tax-Exempt Obligations term, and long-term rates are set forth for the The adjusted applicable federal short-term, mid- The adjusted applicable federal short-term, mid- month of May 1997. See Rev. Rul. 97–19, term, and long-term rates are set forth for the term, and long-term rates are set forth for the page 11. month of May 1997. See Rev. Rul. 97–19, month of May 1997. See Rev. Rul. 97–19, page 11. page 11.

13 Part II. Treaties and Tax Legislation

Subpart B.—Legislation and Related Committee Reports

Public Law 105–2 105th Congress, H.R. 668 February 28, 1997 An Act to amend the Internal Revenue Code of 1986 to reinstate the Airport and Airway Trust Fund excise taxes, and other purposes.

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Part III. Administrative, Procedural, and Miscellaneous Credit for Producing Fuel From a Section 29(c)(1) defines the term the persons in proportion to their respec- Nonconventional Source, Section ‘‘qualified fuels’’ to include oil produced tive interests in the gross sales from the 29 Inflation Adjustment Factor, and from shale and tar sands; gas produced property or facility. Section 29 Reference Price from geopressurized brine, Devonian Section 29(d)(5) and (6) provides that shale, coal seams, or a tight formation, the term ‘‘barrel-of-oil equivalent’’ with Notice 97–28 or biomass; and liquid, gaseous, or solid respect to any fuel generally means that This notice publishes the § 29 infla- synthetic fuels produced from coal (in- amount of the fuel which has a Btu tion adjustment factor, the cluding lignite), including such fuels content of 5.8 million. nonconventional source fuel credit, and when used as feedstocks. the § 29 reference price for calendar Section 29(d)(1) provides that the INFLATION ADJUSTMENT FACTOR year 1996. These are used to determine credit is to be applied only for sale of AND REFERENCE PRICE the credit allowable on fuel produced qualified fuels the production of which The inflation adjustment factor for from a nonconventional source under is within the United States (within the calendar year 1996 is 1.9837. The refer- § 29 of the Internal Revenue Code. The meaning of § 638(1)) or a possession of ence price for calendar year 1996 is calendar year 1996 inflation-adjusted the United States (within the meaning of $18.46. As required by § 29(d)(2)(A), credit applies to the sales of barrel-of-oil § 638(2)). the inflation adjustment factor and refer- equivalent of qualified fuels sold by a Section 29(d)(2)(A) requires that the ence price for calendar year 1996 were taxpayer to an unrelated person during Secretary, not later than April 1 of each published in the Federal Register on the 1996 calendar year, the domestic calendar year, determine and publish in April 4, 1997 (62 Fed. Reg. 16216). production of which is attributable to the Federal Register the inflation adjust- ment factor and the reference price for the taxpayer. PHASE-OUT CALCULATION the preceding calendar year. BACKGROUND Section 29(d)(2)(B) defines ‘‘inflation Because the calendar year 1996 refer- Section 29(a) provides for a credit for adjustment factor’’ for a calendar year ence price does not exceed $23.50 mul- producing fuel from a nonconventional as the fraction the numerator of which is tiplied by the inflation adjustment factor, source, measured in barrel-of-oil equiva- the GNP implicit price deflator for the the phaseout of the credit provided for lent of qualified fuels, the production of calendar year and the denominator of in § 29(b)(1) does not occur for any which is attributable to the taxpayer and which is the GNP implicit price deflator qualified fuel sold in calendar year sold by the taxpayer to an unrelated for calendar year 1979. The term ‘‘GNP 1996. person during the tax year. The credit is implicit price deflator’’ means the first equal to the product of $3.00 and the version of the implicit price deflator for CREDIT AMOUNT appropriate inflation adjustment factor. the gross national product as computed The nonconventional source fuel Section 29(b)(1) and (2) provides for and published by the Department of credit under § 29(a) is $5.95 per barrel- a phaseout of the credit. The credit Commerce. of-oil equivalent of qualified fuels allowable under § 29(a) must be re- Section 29(d)(2)(C) defines ‘‘refer- ($3.00 x 1.9837). This amount was duced by an amount which bears the ence price’’ to mean with respect to a published in the Federal Register on same ratio to the amount of the credit calendar year the Secretary’s estimate of April 4, 1997 (62 Fed. Reg. 16216). (determined without regard to the annual average wellhead price per § 29(b)(1)) as the amount by which the barrel of all domestic crude oil the price DRAFTINGINFORMATIONCON- reference price for the calendar year in of which is not subject to regulation by TACT which the sale occurs exceeds $23.50 the United States. bears to $6.00. The $3.00 in § 29(a) Section 29(d)(3) provides that in the The principal author of this notice is and the $23.50 and $6.00 must each be case of a property or facility in which David G. McMunn of the Office of adjusted by multiplying these amounts more than one person has an interest, Assistant Chief Counsel (Passthroughs by the 1996 inflation adjustment factor. except to the extent provided by regula- and Special Industries). For further in- In the case of gas from a tight forma- tions prepared by the Secretary, produc- formation regarding this notice contact tion, the $3.00 amount in § 29(a) must tion from the property or facility (as the Mr. McMunn on (202)622–3110 (not a not be adjusted. case may be) must be allocated among toll-free call).

45 Part IV. Items of General Interest Notice of Proposed Rulemaking sury, Office of Information and Regu- Estimated annual frequency of re- latory Affairs, Washington, DC 20503, sponses: On occasion. Substantiation of Business with copies to the Internal Revenue An agency may not conduct or spon- Expenses for Travel, Entertainment, Service, Attn: IRS Reports Clearance sor, and a person is not required to Gifts and Listed Property Officer, T:FP, Washington, DC 20224. respond to, a collection of information Comments on the collection of informa- unless the collection of information dis- REG–209785–95 tion should be received by May 27, plays a valid control number. AGENCY: Internal Revenue Service 1997. Books or records relating to a collec- (IRS), Treasury. Comments are specifically requested tion of information must be retained as concerning: long as their contents may become ma- ACTION: Notice of proposed rulemak- terial in the administration of any inter- Whether the proposed collection of in- ing by cross-reference to temporary nal revenue law. Generally, tax returns formation is necessary for the proper regulations. and tax return information are confiden- performance of the functions of the tial, as required by 26 U.S.C. 6103. SUMMARY: In T.D. 8715, page 5, the Internal Revenue Service, including IRS is issuing temporary regulations whether the information will have prac- Special Analyses relating to the substantiation require- tical utility; ments for business expenses for travel, The accuracy of the estimated burden It has been determined that this notice entertainment, gifts, or listed property. associated with the proposed collection of proposed rulemaking is not a signifi- The text of those temporary regulations of information (see below); cant regulatory action as defined in EO also serves as the text of these proposed How the quality, utility, and clarity of 12866. Therefore, a regulatory assess- regulations. the information to be collected may be ment is not required. It is hereby certi- enhanced; fied that these regulations do not have a DATES: Written or electronically gener- How the burden of complying with the significant economic impact on a sub- ated comments and requests for a public proposed collection of information may stantial number of small entities. This hearing must be received by June 23, be minimized, including through the certification is based on the fact that, by 1997. application of automated collection tech- increasing the receipt threshold from $25 to $75, these regulations are ex- ADDRESSES: Send submissions to niques or other forms of information pected to reduce the existing CC:DOM:CORP:R (REG–209795–95), technology; and recordkeeping requirements of taxpay- room 5228, Internal Revenue Service, Estimates of capital or start-up costs and ers, including small entities, from P.O. Box 7604, Ben Franklin Station, costs of operation, maintenance, and 49,375,000 hours to 36,920,000 hours. Washington, DC 20044. In the alterna- purchase of service to provide informa- The regulations do not otherwise signifi- tive, submissions may be hand delivered tion. cantly alter the reporting or recordkeep- between the hours of 8 a.m. and 5 p.m. The collection of information in this ing duties of small entities. Therefore, a to CC:DOM:CORP:R (REG–209785– notice of proposed rulemaking is in Regulatory Flexibility Analysis under 95), Courier’s Desk, Internal Revenue § 1.274–5T(c)(2) and (f)(4). This infor- the Regulatory Flexibility Act (5 U.S.C. Service, 1111 Constitution Avenue NW, mation is required by the IRS as a chapter 6) is not required. Pursuant to Washington, DC, or electronically, via condition for a taxpayer to deduct cer- section 7805(f) of the Internal Revenue the IRS Internet site at: http:// tain business expenses or exclude from Code, this notice of proposed rulemak- www.irs.ustreas.gov/prod/tax_regs/ income certain reimbursed business ex- ing will be submitted to the Chief comments.html. penses of employees. This information will be used to determine whether a Counsel for Advocacy of the Small FOR FURTHER INFORMATION CON- taxpayer properly qualifies for a deduc- Business Administration for comment on TACT: Concerning the regulations, con- tion or exclusion. The collection of its impact on small business. tact Donna M. Crisalli, (202) 622–4920; information is required in order to de- concerning submissions, contact Chris- duct certain business expenses or ex- Comments and Requests for a Public tina Vasquez, (202) 622–7190 (not toll- clude from income certain reimbursed Hearing free numbers). business expenses of employees. The Before adopting these proposed regu- likely respondents and recordkeepers are SUPPLEMENTARY INFORMATION lations as final regulations, consideration individuals, business or other for-profit will be given to any comments that are Paperwork Reduction Act institutions, state or local governments, submitted timely (and in the manner federal agencies, and nonprofit institu- described in ADDRESSES portion of The collection of information con- tions. Estimated total annual reporting this preamble) to the IRS. The IRS is tained in this notice of proposed and recordkeeping burden: 36,920,000 considering publishing a revenue proce- rulemaking has been submitted to the hours. dure implementing § 1.274–5T(f)(4)(ii) Office of Management and Budget for The estimated annual burden per re- of the temporary regulations (that is, review in accordance with the Paper- spondent or recordkeeper varies from 10 prescribing rules under which an em- work Reduction Act of 1995 (44 U.S.C. minutes to 20 hours, depending on indi- ployee may make an adequate account- 3507). Comments on the collection of vidual circumstances, with an estimated ing to his employer by submitting an information should be sent to the Office average of 1.3 hours. expense voucher or equivalent without of Management and Budget, Attn: Desk Estimated number of respondents and submitting documentary evidence such Officer for the Department of the Trea- recordkeepers: 28,400,000. as receipts) for federal government 1997–18 I.R.B. 46 agencies that use the published proce- (f)(4) through (f)(4)(iii) [The text of room 5228, Internal Revenue Service, dures. In addition, the IRS is consider- paragraphs (f)(4) through (f)(4)(iii) is POB 7604, Ben Franklin Station, Wash- ing whether there are circumstances or the same as the text in T.D. 8715, ington, DC 20044. Submissions may conditions under which the IRS could page 5. also be hand delivered between the extend these procedures beyond federal (f)(5) through (l) [Reserved]. For fur- hours of 8 a.m. and 5 p.m. to: government agencies, and requests com- ther guidance, see § 1.274–5T. CC:DOM:CORP:R (REG–209823–96), ments in this regard. The IRS also Courier’s Desk, Internal Revenue Ser- requests comments on what procedures Margaret Milner Richardson, vice, 1111 Constitution Avenue NW, (such as internal controls) should be Commissioner of Internal Revenue. Washington, DC. Alternatively, taxpay- required in any rules that permit a ers may submit comments electronically (Filed by the Office of the Federal Register on taxpayer to satisfy the substantiation March 24, 1997, 8:45 a.m., and published in the via the internet by selecting the ‘‘Tax requirements of section 274(d) for pur- issue of the Federal Register for March 25, 1997, Regs’’ option on the IRS Home Page, or poses of deducting business expenses 62 F.R. 14051) by submitting comments directly to the reimbursed to employees who have ac- IRS internet site at http://www.irs. counted for their expenses only by Notice of Proposed Rulemaking ustreas.gov/prod/tax_regs/com- means of an expense voucher or equiva- and Notice of Public Hearing ments.html. The public hearing will be lent without documentary evidence such held in the IRS Auditorium, Internal as receipts. All comments will be avail- Guidance Regarding Charitable Revenue Building, 1111 Constitution able for public inspection and copying. Remainder Trusts Avenue, NW, Washington, DC. A public hearing will be scheduled and held upon written request by any person REG–209823–96 FOR FURTHER INFORMATION CON- who submits written comments on the TACT: Concerning the regulations, Jef- proposed rules. Notice of the time and AGENCY: Internal Revenue Service frey A. Erickson or Mary Beth Collins, place for the hearing will be published (IRS), Treasury. (202) 622–3070; concerning submissions and the hearing, Evangelista Lee, (202) in the Federal Register. ACTION: Notice of proposed rulemak- 622–7190 (not toll-free numbers). ing and notice of public hearing. Drafting Information SUPPLEMENTARY INFORMATION: SUMMARY: This document contains The principal author of these regula- proposed amendments to the regulations Paperwork Reduction Act tions is Donna M. Crisalli, Office of the under section 664 of the Internal Rev- Assistant Chief Counsel (Income Tax enue Code of 1986 relating to charitable The collection of information con- and Accounting). However, personnel remainder trusts and under section 2702 tained in this notice of proposed from other offices of the IRS and Trea- relating to special valuation rules for rulemaking has been submitted to the sury Department participated in their transfers of interests in trusts. The pro- Office of Management and Budget for development. posed amendments contain rules on the review in accordance with the Paper- conditions under which the governing work Reduction Act of 1995 (44 U.S.C. ***** instrument may provide for a change in 3507(d)). Comments on the collection of the method of calculating the unitrust information should be sent to the Office Proposed Amendments to the amount, the date by which the annuity of Management and Budget, Attn: Regulations amount or the unitrust amount under the Desk Officer for the Department of the Accordingly, 26 CFR part 1 is pro- fixed percentage method must be paid to Treasury, Office of Information and posed to be amended as follows: the recipient, who is required to value Regulatory Affairs, Washington, DC unmarketable assets, and when section 20503, with copies to the Internal Rev- PART 1—INCOME TAXES 2702 applies to certain charitable re- enue Service, Attn: IRS Reports Clear- mainder unitrusts. The proposed regula- ance Officer, T:FP, Washington, DC Paragraph 1. The authority citation for tions clarify existing law that prohibits 20224. Comments on the collection of part 1 is amended by adding an entry to allocating precontribution capital gain to information should be received by July read in part as follows: trust income. The proposed amendments 17, 1997. Comments are specifically Authority: 26 U.S.C. 7805 * * * also contain an example illustrating how requested concerning: the ordering rule of section 664(b) ap- Whether the proposed collection of Section 1.274–5 also issued under 26 plies to distributions from a charitable information is necessary for the proper U.S.C. 274(d). * * * remainder unitrust using an income ex- performance of the functions of the Par. 2. Section 1.274–5 is added to ception method to calculate the unitrust Internal Revenue Service, including read as follows: amount. This document also provides whether the information will have prac- notice of a public hearing on these tical utility; § 1.274–5 Substantiation requirements. proposed regulations. The accuracy of the estimated burden associated with the proposed collection DATES: Comments and outlines of top- (a) through (c)(2)(iii)(A) [Reserved]. of information; For further guidance, see § 1.274–5T. ics to be discussed at the public hearing scheduled for September 9, 1997, at 10 How the quality, utility, and clarity of (c)(2)(iii)(B) [The text of paragraph the information to be collected may be (c)(2)(iii)(B) is the same as the text in a.m. must be received by August 19, 1997. enhanced; § 1.274–5T published in T.D. 8715]. How the burden of complying with (c)(2)(iv) through (f)(3) [Reserved]. ADDRESSES: Send submissions to: the proposed collection of information For further guidance, see § 1.274–5T. CC:DOM:CORP:R (REG–209823–96), may be minimized, including through 47 1997–18 I.R.B. the application of automated collection There are two types of charitable The proposed regulations provide that techniques or other forms of information remainder trusts. A charitable remainder a donor may establish a flip unitrust that technology; and annuity trust (a CRAT) pays a sum qualifies as a CRUT if the following Estimates of capital or start-up costs certain at least annually to one or more conditions are satisfied. First, to ensure and costs of operation, maintenance, and noncharitable beneficiaries. A charitable that the CRUT has substantially all purchase of service to provide informa- remainder unitrust (a CRUT) pays a unmarketable assets prior to the switch tion. unitrust amount at least annually to one in methods, at least 90 percent of the The collection of information in this or more noncharitable beneficiaries. The fair market value of the assets held in proposed regulation is in § 1.664– unitrust amount is generally a fixed the trust immediately after the initial 1(a)(7). This information is required to percentage of the net fair market value contribution or any subsequent contribu- allow taxpayers alternative means of of the CRUT’s assets valued annually tion (prior to the switch in methods) valuing a charitable remainder trust’s (the fixed percentage method). The must consist of unmarketable assets. hard-to-value assets. This information unitrust amount can instead be the lesser Unmarketable assets are assets that are will be used to determine if a taxpayer of the fixed percentage amount or the not cash, cash equivalents, or market- properly claimed a charitable deduction trust’s net income (the net income able securities (within the meaning of for a contribution to a charitable remain- method). Alternatively, the unitrust section 731(c)). der trust and if assets in the charitable amount can be the amount determined Second, because the legislative history remainder trust are properly valued each under the net income method plus any indicates that a trustee should not have year. The collection of information is amount of income that exceeds the discretion to change the method used to voluntary. The likely respondents are current year’s fixed percentage amount calculate the unitrust amount, the gov- for-profit entities. to ‘‘make up’’ for any shortfall in distri- erning instrument must provide that the butions in prior years when the trust Estimated total annual recordkeeping CRUT will use an income exception income was less than the fixed percent- burden: 75 hours. method until the earlier of (a) the sale age amount (the NIMCRUT method). of a specified unmarketable asset or Estimated average annual burden Explanation of group of unmarketable assets contrib- hours per respondent: .5 hours. uted at the time the trust was created or Provisions Estimated number of respondents: (b) the sale of unmarketable assets such 150. I. Flip Unitrusts that immediately following the sale, any An agency may not conduct or spon- A. General Explanation remaining unmarketable assets total 50 sor, and a person is not required to percent or less of the fair market value respond to, a collection of information The governing instrument of a CRUT of the trust’s assets. For making this unless it displays a valid control number must specify the method of computing determination, the remaining unmarket- assigned by the Office of Management the unitrust payments. Section 664(d)(3) able assets are valued as of the most and Budget. provides that the income exception recent valuation date. Books or records relating to a collec- methods (either the net income method Third, to ensure that the CRUT will tion of information must be retained as or the NIMCRUT method) may be used use the fixed percentage method after long as their contents may become ma- to pay the unitrust amount ‘‘for any the unmarketable assets are sold, the terial in the administration of any inter- year.’’ The legislative history, however, CRUT must switch exclusively to the nal revenue law. Generally, tax returns provides that the method used to deter- fixed percentage method for calculating and tax return information are confiden- mine the unitrust amount may not be all remaining unitrust amounts payable tial, as required by 26 U.S.C. 6103. discretionary with the trustee. H.R. to any income beneficiary at the begin- Conf. Rep. No. 782, 91st Cong., 1st ning of the first taxable year following Background Sess. 296 (1969), 1969–3 C.B. 644, 655. the year in which the earlier of the Some donors may fund a CRUT with above events occurs. This document proposes amendments unmarketable assets that produce little Finally, because the fixed percentage to 26 CFR parts 1 and 25 to provide or no income. These donors often want method does not provide for a makeup additional rules under sections 664 and the income beneficiary or beneficiaries amount, any makeup amount described 2702. Section 664, added to the Internal of the CRUT to receive a steady stream in section 664(d)(3)(B) is forfeited when Revenue Code by section 201 of the Tax of payments based on the total return the trust switches to the fixed percent- Reform Act of 1969 (Public Law 91– available from the value of the assets. age method. 172), contains the rules for charitable The donors recognize, however, that the remainder trusts. In general, a charitable CRUT cannot make these payments un- The IRS and Treasury request com- remainder trust provides for a specified til it can convert the unmarketable assets ments on whether there are additional periodic distribution to one or more into liquid assets that can be used to pay circumstances under which a combina- noncharitable beneficiaries for life or for the fixed percentage amount. These do- tion of methods should be addressed in a term of years with an irrevocable nors establish CRUTs that use one of regulations. remainder interest held for the benefit of the income exception methods to calcu- B. Proposed Effective Date and Transi- charity. Section 664(c) provides that a late the unitrust amount until the unmar- tional Rules charitable remainder trust is exempt ketable assets are sold. Following the from all taxes under subtitle A of the sale, the donors may prefer that the The amendments allowing a flip Code for any taxable year except a CRUT use the fixed percentage method unitrust are proposed to be effective for taxable year in which the trust has to calculate the unitrust amount. A trust CRUTs created on or after the date the unrelated business taxable income under using such a combination of methods final regulations are published in the section 512. would be a ‘‘flip unitrust.’’ Federal Register. 1997–18 I.R.B. 48 If a trust was created before the sions in the current regulations that sponding provision, many practitioners effective date of this amendment and its permit a trustee to pay the annuity or have asked whether a charitable remain- governing instrument contains a flip unitrust amount within a reasonable time der trust that holds unmarketable assets provision other than the one permitted after the close of the taxable year for must have an independent trustee value by the regulations, the trust may be which the payment is due. The IRS and the assets. amended or reformed to comply with Treasury are especially concerned about The proposed regulations provide that the final regulations. If a trust is created accelerated charitable remainder trusts if a charitable remainder trust holds after the effective date of this amend- described in Notice 94–78 (1994–2 C.B. unmarketable assets and the trustee is ment and has a flip provision not ex- 555). Therefore, the regulations propose the grantor of the charitable remainder pressly permitted by the regulations, the to amend §§ 1.664–2(a)(1)(i) and trust, a noncharitable beneficiary, or a trust will qualify as a CRUT if it is 1.664–3(a)(1)(i) to provide that the pay- related or subordinate party to the amended or reformed to use the initial ment of the annuity amount or the grantor or the noncharitable beneficiary method for computing the unitrust unitrust amount determined under the within the meaning of section 672(c) amount throughout the term of the trust. fixed percentage method must be made and the applicable regulations, the If a qualified CRUT is created before or by the close of the taxable year in trustee must use a current qualified after the effective date of this amend- which it is due. These proposed amend- appraisal, as defined in § 1.170A– ment and its governing instrument does ments should not require the amendment 13(c)(3), from a qualified appraiser, as not contain a flip provision, the trust or reformation of governing instruments defined in § 1.170A–13(c)(5), to value will not continue to qualify as a CRUT of existing charitable remainder trusts those assets. A trustee who is not the if it is amended or reformed to add a that allow a trustee to pay the unitrust grantor, a noncharitable beneficiary, or a flip provision. or annuity amount after the close of the related or subordinate party does not taxable year. The trustees of such trusts The IRS and Treasury invite com- have to use a qualified appraisal from a can comply with the proposed regula- ments on the least burdensome methods qualified appraiser to value the unmar- tions by actually paying the annuity or of changing the terms of a trust’s gov- ketable assets. Therefore, the grantor, a unitrust amount within the time permit- erning instrument. noncharitable beneficiary, or a related or ted by the proposed amendments. subordinate party may be the sole II. Time for Paying the Annuity Amount For CRUTs using an income excep- trustee of a charitable remainder trust if or the Unitrust Amount tion method, the regulations continue to the trustee uses a current qualified ap- provide that if the CRUT pays the A. General Explanation praisal from a qualified appraiser to unitrust amount within a reasonable time compute the fair market value of the The regulatory provisions permitting a after the close of the trust’s taxable year, trust’s unmarketable assets. trustee of a charitable remainder trust to the trust is not deemed to have engaged pay the annuity or unitrust amount in an act of self-dealing, to have unre- B. Proposed Effective Date within a reasonable period of time fol- lated debt-financed income, to have re- lowing the close of the trust’s taxable ceived an additional contribution, or to The amendments are proposed to be year were intended as an administrative have failed to function exclusively as a effective for trusts created on or after convenience for trustees. Under the in- charitable remainder trust. the date on which the final regulations come exception methods, the trustee are published in the Federal Register. may not be able to determine the B. Proposed Effective Date If the governing instrument of an exist- ing trust created before the effective amount of trust income and, thus, the These amendments are proposed to be date of this amendment already requires amount to be distributed for a trust’s effective for taxable years ending after an independent trustee to value the taxable year until after the close of that April 18, 1997. trust’s unmarketable assets, the govern- year. Therefore, a trustee may need the The IRS will continue to challenge ing instrument may be amended or additional time to pay the unitrust the purported tax consequences of accel- reformed to conform with this provision. amount if a CRUT uses one of the erated charitable remainder trusts as de- income exception methods. scribed in Notice 94–78. IV. Application of Section 2702 to Cer- In contrast, a trustee of a CRAT or a tain Charitable Remainder Unitrusts CRUT using the fixed percentage III. Appraising Unmarketable Assets method can easily determine the annuity A. General Explanation A. General Explanation or unitrust amount and pay it before the close of the taxable year to which it Under § 1.664–1(a)(1)(iii)(a), a trust Section 2702 provides special rules to relates. The annuity amount is fixed and may qualify as a charitable remainder determine the amount of the gift when determinable as of the date the trust is trust only if a deduction is allowable an individual makes a transfer in trust to created. The fixed percentage unitrust under sections 170, 2055, 2106, or 2522 or for the benefit of a family member amount is fixed and determinable as of for transfers to the trust. The legislative and the individual or an applicable fam- the annual valuation date, which is history of section 664 indicates that ily member retains an interest in the specified in the governing instrument or Congress contemplated denying a chari- trust. Under section 2702(a), the re- on the initial Form 5227, Split-Interest table contribution deduction to a donor tained interest in these situations is Trust Information Return. The valuation who transferred unmarketable assets to a generally valued at zero unless the inter- date can be set well before the end of charitable remainder trust unless an in- est is a qualified interest. Under section the taxable year. dependent trustee valued the assets. H.R. 2702(b), a qualified interest includes the The IRS and Treasury believe that Rep. No. 413, 91st Cong., 1st Sess. 60 right to receive fixed payments at least certain trustees of charitable remainder (1969), 1969–3 C.B. 200, 239. Because annually and the right to receive trusts have attempted to abuse the provi- the statute does not contain a corre- amounts at least annually that are a 49 1997–18 I.R.B. fixed percentage of the annual fair mar- the donor to another family member expected distributions to the income ket value of the property in the trust. and, thus, creates an opportunity for beneficiaries. H.R. Rep. No. 413, 91st Section 2702(a)(3)(A)(iii) was added transferring property to a family mem- Cong., 1st Sess. 58–59 (1969), 1969–3 by section 1702(f)(11)(A)(iv) of the ber free of transfer tax that is contrary C.B. 200, 237–38; S. Rep. No. 552, 91st Small Business Job Protection Act of to section 2702(a)(3)(A)(iii). Therefore, Cong., 1st Sess. 87 (1969), 1969–3 C.B. 1996 (Public Law 104–188) as a techni- the proposed regulations will amend 423, 479. Therefore, the regulations cal correction to the Revenue Reconcili- § 25.2702–1(c)(3) to provide that the clarify that the proceeds from the sale of ation Act of 1990 (Public Law 101– unitrust interests in a CRUT using an an income exception CRUT’s assets, at 508). Section 2702(a)(3)(A)(iii) provides income exception method retained by least to the extent of the fair market that section 2702(a) shall not apply to the donor or any applicable family value of the asset when contributed to any transfer to the extent regulations member will be valued at zero when the trust, must be allocated to principal. provide that such transfer is not incon- someone other than (1) the donor, (2) sistent with the purposes of the section. the donor’s spouse, or (3) both the B. Proposed Effective Date According to the legislative history, the donor and the donor’s spouse (who is a This amendment is proposed to be regulatory authority could be used to citizen of the U.S.) is a noncharitable effective for sales or exchanges after create an exception from the application beneficiary of the trust. In these situa- April 18, 1997. For sales or exchanges of section 2702 for a qualified charitable tions, the value of the donor’s gift is the on or before the effective date of this remainder trust that does not otherwise fair market value of all the property amendment, the Service will continue to create an opportunity for transferring transferred to the CRUT. The present challenge any attempt to allocate property to a family member free of value of the remainder interest passing precontribution gain to trust income as transfer tax. H.R. Rep. No. 586, 104th to the charitable organization will being fundamentally inconsistent with Cong., 2d Sess. 155–56 (1996). Under qualify for the deduction under section applicable local law and with the § 25.2702–1(c)(3) of the Gift Tax Regu- 2522. Accordingly, the amount used to amount of the charitable deduction lations, section 2702 does not apply to calculate the donor’s gift tax liability is claimed. CRUTs or CRATs. the value of the property transferred to Some taxpayers have created CRUTs the trust less the value of the interest VI. Example Illustrating Rule for Char- using an income exception method to passing to charity. acterizing Distributions from CRUTs take advantage of the section 2702 ex- Section 25.2702–1(c)(3) will continue clusion granted to charitable remainder to exclude from the application of sec- Section 664(b) contains the ordering trusts in the regulations. These taxpayers tion 2702 transfers to pooled income rule used to determine the character of attempt to use this exclusion and the funds described in section 642(c)(5) and the annuity or unitrust amount in the income exception feature of a CRUT to to CRATs and CRUTs that pay the hands of the recipient. The legislative pass substantial assets to family mem- unitrust amount under the fixed percent- history states that the ordering rule bers with minimal transfer tax conse- age method. applies to both CRATs and CRUTs. S. quences. Rep. No. 552, 91st Cong., 1st Sess. 90 For example, a donor establishes a B. Proposed Effective Date (1969), 1969–3 C.B. 423, 481. The NIMCRUT to pay the lesser of trust ordering rule applies to the unitrust This amendment is proposed to be amounts received from all CRUTs re- income or a fixed percentage to the effective for transfers in trust made on donor for a term of 15 years or his life, gardless of the method used by the or after May 19, 1997. CRUT to determine the unitrust amount. whichever is shorter, and then to the V. Prohibition on Allocating Pre- donor’s daughter for her life. If the Although the current regulations contribution Gain to Trust Income clearly provide that the ordering rule of tables under section 7520 are used to A. General Explanation value the donor’s retained interest and section 664(b) and § 1.664–1(d)(1)(i) the donor’s gift to the daughter, the When assets are transferred to a applies to all unitrust amounts received amount of the donor’s gift to the daugh- charitable remainder trust, the amount of from CRUTs, some practitioners have ter is relatively small compared to the the donor’s charitable deduction is gen- asked whether the ordering rule applies amount the daughter may actually re- erally based in part on the fair market to unitrust amounts paid under the in- ceive. To illustrate, the trustee may value of the property transferred to the come exception methods. To provide invest in assets that produce little or no trust. Although an income exception taxpayers with additional guidance, the trust income while the donor retains the CRUT provides a different method for proposed regulations add an example of unitrust interest, creating a substantial calculating the unitrust amount than a how the ordering rule operates when the makeup amount. At the end of the fixed percentage CRUT, any charitable unitrust amount is computed under an donor’s interest, the trustee alters the deduction for an income exception income exception method. NIMCRUT’s investments to generate CRUT is calculated as if the fixed VII. Request for Comments on Income significant amounts of trust income. The percentage is distributed each year. Allo- Exception CRUTs Holding Certain In- trustee then uses the income to pay to cating amounts to trust income that are vestments the donor’s daughter the current fixed part of the fair market value of the percentage amount and the makeup contributed property on which the chari- The IRS and Treasury are aware that amount, which includes the makeup table deduction was based would be taxpayers are using income exception amount accumulated while the donor inconsistent with Congress’s intent to CRUTs to take advantage of the timing was the unitrust recipient. assure that the amount claimed as a difference between the receipt of trust The use of a CRUT as described in charitable deduction for the contribution income (as defined in section 643(b)) the above example permits the shifting to the trust relates to the projected and income for federal income tax pur- of a beneficial interest in the trust from growth of the assets contributed less the poses. For example, an income excep- 1997–18 I.R.B. 50 tion CRUT may hold an interest in a ted to the Chief Counsel for Advocacy Par. 2. In § 1.664–1, paragraphs partnership controlled by a trustee of the of the Small Business Administration for (a)(7), (d)(1)(iii), and (f)(4) are added to trust, a grantor, a beneficiary, or a party comment on its impact on small busi- read as follows (paragraph (f)(4) follows related or subordinate to the trustee, the ness. the concluding text of paragraph (f)(3)): grantor, or a beneficiary. In such a case, an interested party controls when the Comments and Public Hearing § 1.664–1 Charitable remainder trusts. trust will receive the earnings from its Before these proposed regulations are (a) * * * partnership interest and, accordingly, adopted as final regulations, consider- (7) Valuation of unmarketable assets. when the unitrust recipient will receive ation will be given to any comments If a trust has assets that are not cash, distributions from the trust. Although that are submitted timely to the IRS. All cash equivalents, or marketable securi- the income exception CRUT has taxable comments will be available for public ties (within the meaning of section income on its distributive share of part- inspection and copying. 731(c) and the applicable regulations) nership items, the trust does not have A public hearing has been scheduled and the trustee is the grantor of the trust income until it actually receives a for September 9, 1997, at 10 a.m. in the charitable remainder trust, a distribution of its share of the partner- IRS Auditorium, Internal Revenue noncharitable beneficiary, or a related or ship’s earnings. Building, 1111 Constitution Ave, NW., subordinate party to the grantor or The IRS and Treasury are studying Washington DC. Because of access re- noncharitable beneficiary within the whether investing the assets of an in- strictions, visitors will not be admitted meaning of section 672(c) and the appli- come exception CRUT to take advan- beyond the Internal Revenue Building cable regulations, the trustee must use a tage of the timing difference between lobby more than 15 minutes before the current qualified appraisal, as defined in the receipt of trust income and income hearing starts. § 1.170A–13(c)(3), from a qualified ap- for federal tax purposes causes the trust The rules of 26 CFR 601.601(a)(3) praiser, as defined in § 1.170A– to fail to function exclusively as a apply to the hearing. 13(c)(5), to value those assets. A trustee charitable remainder trust. Therefore, the Persons who wish to present oral who is not the grantor of the charitable IRS and Treasury request comments on comments at the hearing must submit remainder trust, a noncharitable benefi- drafting future guidance on this issue. comments by August 19, 1997, and ciary, or a related or subordinate party Revenue Procedure 97–23, to be pub- submit an outline of the topics to be to the grantor or noncharitable benefi- lished on April 28, 1997, in Internal discussed and the time to be devoted to ciary does not have to use a current Revenue Bulletin 1997–17, provides that each topic by August 19, 1997. qualified appraisal from a qualified ap- the IRS will not issue letter rulings on A period of 10 minutes will be allot- praiser to value the trust’s assets. whether a trust that will calculate the ted to each person for making com- unitrust amount under section 664(d)(3) ments. ***** (d) * * * qualifies as a section 664 charitable An agenda showing the scheduling of (1) * * * remainder trust when a grantor, a the speakers will be prepared after the trustee, a beneficiary, or a person related deadline for receiving outlines has (iii) Example. The following example or subordinate to a grantor, a trustee, or passed. Copies of the agenda will be illustrates the application of this para- a beneficiary can control the timing of available free of charge at the hearing. graph (d)(1): Example. (i) X is a charitable remainder unitrust the trust’s receipt of trust income from a described in sections 664(d)(2) and (3). The partnership or a deferred annuity con- Drafting Information annual unitrust amount is the lesser of the amount tract to take advantage of the difference of trust income, as defined in § 1.664– between trust income under section The principal authors of these pro- 3(a)(1)(i)(b)(3), or six percent of the net fair 643(b) and income for federal income posed regulations are Mary Beth Collins market value of the trust assets valued annually. The net fair market value of the trust assets on the tax purposes for the benefit of the and Jeffrey A. Erickson, Office of the Assistant Chief Counsel (Passthroughs valuation date in 1996 is $150,000. During 1996, unitrust recipient. X has $7,500 of income after allocating all and Special Industries), IRS. However, expenses. All of X’s income for 1996 is tax- Special Analyses personnel from other offices of the IRS exempt income. At the end of 1996, X’s ordinary and Treasury Department participated in income for the current taxable year and undistrib- It has been determined that this notice their development. uted ordinary income for prior years are both zero; X’s capital gain for the current taxable year is zero of proposed rulemaking is not a signifi- ***** and undistributed capital gain for prior years is cant regulatory action as defined in EO $30,000; and X’s tax-exempt income for the 12866. Therefore, a regulatory assess- 26 CFR Part 25 current year is $7,500 and undistributed tax- exempt income for prior years is $2,500. ment is not required. It is hereby certi- Gift taxes, Reporting and recordkeep- fied that these regulations do not have a (ii) Because the trust income of $7,500 is less ing requirements. than the fixed percentage amount of $9,000, the significant economic impact on a sub- unitrust amount for 1996 is $7,500. The character stantial number of small entities. This Proposed Amendments to the Regula- of that amount in the hands of the recipient of the certification is based upon the fact that tions unitrust amount is determined under section the recordkeeping requirement in these 664(b). Because the unitrust amount is less than regulations does not affect small entities. Accordingly, CFR parts 1 and 25 are X’s undistributed capital gain income, the recipient proposed to be amended as follows: of the unitrust amount treats the distribution of Therefore, a Regulatory Flexibility $7,500 as capital gain. At the beginning of 1997, Analysis under the Regulatory Flexibil- PART 1—INCOME TAXES X’s undistributed capital gain for prior years is ity Act (5 U.S.C. chapter 6) is not reduced to $22,500, and X’s undistributed tax- required. Pursuant to section 7805(f) of Paragraph 1. The authority for part 1 exempt income is increased to $10,000. the Internal Revenue Code, this notice continues to read in part as follows: ***** of proposed rulemaking will be submit- Authority: 26 U.S.C. 7805 * * * (f) * * * 51 1997–18 I.R.B. (4) Valuation of unmarketable assets. tion for each taxable year of the period in this paragraph (a)(1)(i)(c) takes effect The rules contained in paragraph (a)(7) specified in paragraph (a)(5) of this at the beginning of the first taxable year of this section are effective for trusts section. following the year in which the earlier created on or after the date the final (b)*** of paragraph (a)(1)(i)(c)(2)(i) or (ii) of regulations are published in the Federal (1) The amount of trust income for a this section occurs; and Register. A trust whose governing in- taxable year to the extent that such (4) Following the trust’s conversion strument requires that an independent amount is not more than the amount to the method described in paragraph trustee value the trust’s unmarketable required to be distributed under para- (a)(1)(i)(a) of this section, the trust will assets may be amended or reformed to graph (a)(1)(i)(a) of this section. pay at least annually to the permissible permit any trustee to value those assets (2) An amount of trust income for a recipients the amount described only in if the trustee uses a current qualified taxable year that is in excess of the paragraph (a)(1)(i)(a) of this section and appraisal, as defined in § 1.170A– amount required to be distributed under not any amount described in paragraph 13(c)(3), from a qualified appraiser, as (a)(1)(i)(a) of this section for such year (a)(1)(i)(b) of this section. defined in § 1.170A–13(c)(5), in the to the extent that (by reason of para- (5) For this paragraph (a)(1)(i)(c), un- taxable years beginning on or after the graph (a)(1)(i)(b)(1) of this section) the marketable assets are assets that are not date the final regulations are published aggregate of the amounts paid in prior cash, cash equivalents, or marketable in the Federal Register. years was less than the aggregate of securities as defined in section 731(c) ***** such required amounts. and the applicable regulations. Par. 3. In § 1.664–2, paragraph (3) For this paragraph (a)(1)(i)(b), (d) Example. The following example (a)(1)(i) is revised to read as follows: trust income means income as defined illustrates the rules in paragraph under section 643(b) and the applicable (a)(1)(i)(c) of this section: § 1.664–2 Charitable remainder annu- regulations. Proceeds from the sale or Example. (i) On the creation of charitable ity trust. exchange of any assets contributed to remainder unitrust Y, S contributes four assets—A, the trust by the donor must be allocated B, C, and D. A is a marketable security under (a) * * * section 731(c) and the applicable regulations. B, (1) * * * (i) Payment of sum certain to principal and not to trust income at C, and D are unmarketable assets. The fair market at least annually. The governing instru- least to the extent of the fair market value of B, C, and D is at least 90 percent of the value of those assets on the date of fair market value of all four assets at the time of ment provides that the trust will pay a contribution. sum certain not less often than annually contribution. (c) Combination of methods. Instead (ii) The governing instrument of Y provides for to a person or persons described in calculating the unitrust amount under the combina- paragraph (a)(3) of this section for each of the amount described in paragraph tion of methods described in paragraph (a)(1)(i)(c) taxable year of the period specified in (a)(1)(i)(a) or (b) of this section, the of this section. The initial method for calculating the unitrust amount is the lesser of the amount of paragraph (a)(5) of this section. The governing instrument may provide that the trust will pay the amount described trust income, as defined in paragraph annuity amount must be paid to the (a)(1)(i)(b)(3) of this section, or six percent of the recipient no later than the close of the in paragraph (a)(1)(i)(b) of this section net fair market value of the trust assets valued taxable year for which the payment is for an initial period and then pay the annually. The unitrust amount also includes any amount described in paragraph amount of trust income for any taxable year that due. The rules contained in this para- exceeds six percent of the net fair market value of graph (a)(1)(i) are effective for taxable (a)(1)(i)(a) of this section (calculated using the same fixed percentage) for the the trust’s assets valued annually to the extent the years ending after April 18, 1997. total of the amounts paid in prior years was less remaining years of the trust if— ***** than the total of the amounts computed as six Par. 4. Section 1.664–3 is amended as (1) At least 90 percent of the fair percent of the net fair market value of Y’s assets market value of the assets held in the on the valuation dates. After the change in follows: method, the unitrust amount will equal six percent 1. Paragraphs (a)(1)(i)(a), (a)(1)(i)( trust immediately after either the initial contribution or any subsequent contribu- of the net fair market value of Y’s assets on the b)(1), and (a)(1)(i)(b)(2) are revised. valuation dates. 2. Paragraphs (a)(1)(i)(b)(3), tion (prior to the change in methods) to (iii) The governing instrument provides that the the trust consists of unmarketable assets; change in method will occur for the first taxable (a)(1)(i)(c), (a)(1)(i)(d), (a)(1)(i)(e), and year beginning after both B and C are sold or the (a)(1)(i)(f) are added. (2) The governing instrument pro- vides that the change of method de- year in which the trust has sold or exchanged 3. The third sentence of paragraph enough unmarketable assets so that the remaining (a)(1)(iv) is revised. scribed in this paragraph (a)(1)(i)(c) will unmarketable assets total 50 percent or less of the 4. Paragraph (a)(1)(vi) is added. be triggered by the earlier of— fair market value of the trust’s assets, whichever (i) The sale or exchange of a speci- occurs first. The added and revised provisions (iv) In Year 3, the trustee of Y sells B, one of read as follows: fied asset or group of assets that was contributed to the trust on its creation; the three unmarketable assets. After the sale of B, the fair market value of all of Y’s unmarketable § 1.664–3 Charitable remainder or assets is greater than 50 percent of the fair market unitrust. (ii) The sale or exchange of unmar- value of Y’s assets. Therefore, in Year 3, the ketable assets if immediately following method used to calculate the unitrust amount (a) * * * the sale or exchange, the fair market remains the initial method. (1) * * * (v) In Year 4, the trustee sells D. After the sale value of any remaining unmarketable of both B and D, the fair market value of Y’s (i) * * * (a) General rule. The gov- assets total 50 percent or less of the unmarketable assets is 50 percent or less of the erning instrument provides that the trust total fair market value of the trust’s fair market value of Y’s assets. In Year 4, however, will pay not less often than annually a assets. For making this determination, the method used to calculate the unitrust amount fixed percentage of the net fair market the remaining unmarketable assets must remains the initial method. (vi) In Year 5 and for all subsequent years, the value of the trust assets determined be valued as of the most recent valua- trust must pay a unitrust amount equal only to six annually to a person or persons de- tion date; percent of the net fair market value of Y’s assets scribed in paragraph (a)(3) of this sec- (3) The change of method described determined annually. The change in method occurs 1997–18 I.R.B. 52 in Year 5 because the fair market value of Y’s unitrusts created on or after the date the unitrust amount is computed only under unmarketable assets totaled 50 percent or less of final regulations are published in the section 664(d)(2)(A); and a transfer to a the fair market value of Y’s assets after the sale of both B and D. The change in method occurs even Federal Register. If a trust was created charitable remainder unitrust described though Y still owns C, the other unmarketable before the effective date of paragraph in sections 664(d)(2) and (3) if the only asset specified in the governing instrument. (a)(1)(i)(c) of this section and contains a permitted recipients of the unitrust (vii) By the end of Year 4, Y’s total trust provision allowing a change in calculat- amount are the donor, the donor’s income had been less than the sum of the unitrust amounts based on six percent of the net fair ing the unitrust method, the trust may be spouse, or both the donor and the do- market value of Y’s assets determined annually, amended or reformed to comply with nor’s spouse who is a citizen of the leaving a balance of $1,000. The $1,000 balance the provisions of paragraph (a)(1)(i)(c) United States. can never be distributed to the unitrust recipient of this section. If a trust is created after (ii) For transfers made before May after the change to the fixed percentage method. the effective date of paragraph 19, 1997, a transfer in trust if the (e) Payment under general rule. (a)(1)(i)(c) of this section and contains a remainder interest in the trust qualifies When the unitrust amount is computed provision allowing a change in calculat- for a deduction under section 2522. under paragraph (a)(1)(i)(a) of this sec- ing the unitrust method that does not tion, the unitrust amount must be paid to comply with the provisions of paragraph ***** the recipient no later than the close of (a)(1)(i)(c) of this section, the trust will the taxable year of the trust for which continue to qualify as a charitable re- Margaret Milner Richardson, the payment is due. mainder unitrust if it is amended or Commissioner of Internal Revenue. (f) Payment under income exception. reformed to use the initial method for (Filed by the Office of the Federal Register on When the unitrust amount is computed computing the unitrust amount through- April 17, 1997, 8:45 a.m., and published in the under paragraph (a)(1)(i)(b) of this sec- out the term of the trust. A qualified issue of the Federal Register for April 18, 1998, 62 F.R. 19072) tion, the unitrust amount may be paid to charitable remainder unitrust created be- the recipient after the close of the fore or after the effective date of para- taxable year of the trust for which the graph (a)(1)(i)(c) of this section will not Notice of Disposition of Declaratory payment is due if paid within a reason- continue to qualify as a charitable re- Judgment Proceedings Under able time after the close of such taxable mainder unitrust if its governing instru- Section 7428 year. The trust will not be deemed to ment is amended or reformed to add a have engaged in an act of self-dealing provision allowing a change in the This announcement serves notice to (within the meaning of section 4941), to method for calculating the unitrust donors that by agreement of the parties, have unrelated debt-financed income amount. the organization listed below is an orga- (within the meaning of section 514), to (c) The rules in paragraphs nization exempt from taxes under Inter- have received an additional contribution (a)(1)(i)(b)(1), (2), and (3) of this sec- nal Revenue Code section 501(a) as an (within the meaning of paragraph (b) of tion are effective for taxable years end- organization described in IRC section this section), or to have failed to func- ing after April 18, 1997, and for sales or 501(c)(3). tion exclusively as a charitable remain- exchanges described in paragraph Jack Rehburg Ministries a/k/a Total der trust (within the meaning of para- (a)(1)(i)(b)(3) of this section that occur Christian Television graph (a)(4) of this section) merely after April 18, 1997. Snow Camp, NC because payment of the unitrust amount (d) The rules in paragraphs is made after the close of the taxable (a)(1)(i)(e) and (f) of this section are year if such payment is made within a Foundations Status of Certain effective for taxable years ending after Organizations reasonable time after the close of such April 18, 1997. taxable year. For this paragraph ***** (a)(1)(i)(f), a reasonable time will not Announcement 97–46 ordinarily extend beyond the date by PART 25—GIFT TAX; GIFTS MADE The following organizations have which the trustee is required to file AFTER DECEMBER 31, 1954 failed to establish or have been unable Form 5227, Split-Interest Trust Informa- Par. 5. The authority for part 25 to maintain their status as public chari- tion Return, (including extensions) for continues to read in part as follows: ties or as operating foundations. Accord- the taxable year. Authority: 26 U.S.C. 7805 * * * ingly, grantors and contributors may not, ***** Par. 6. In § 25.2702–1, paragraph after this date, rely on previous rulings (iv) * * * If the governing instrument (c)(3) is revised to read as follows: or designations in the Cumulative List does not specify the valuation date or of Organizations (Publication 78), or on dates, the trustee must select such date § 25.2702–1 Special valuation rules in the presumption arising from the filing or dates and indicate the selection on the case of transfers of interests in trust. of notices under section 508(b) of the the first return on Form 5227, Split- ***** Code. This listing does not indicate that Interest Trust Information Return, that (c) * * * the organizations have lost their status the trust must file. * * * (3) Charitable remainder trust. (i) as organizations described in section ***** For transfers made on or after May 19, 501(c)(3), eligible to receive deductible (vi) Effective date and reformations. 1997, a transfer to a pooled income fund contributions. (a) The rules in paragraph (a)(1)(i)(a) of described in section 642(c)(5); a transfer Former Public Charities. The follow- this section are effective for taxable to a charitable remainder annuity trust ing organizations (which have been years ending after April 18,1997. described in section 664(d)(1); a transfer treated as organizations that are not (b) The rules in paragraphs to a charitable remainder unitrust de- private foundations described in section (a)(1)(i)(c) and (d) of this section are scribed in section 664(d)(2) if under the 509(a) of the Code) are now classified effective for charitable remainder terms of the governing instrument the as private foundations: 53 1997–18 I.R.B. African Connection, Inc., Cambridge, Colorado Health Policy Council, Mojave Native Plant Society, Las Vegas, MA Denver, CO NV Alcohol and Drug Abuse Recovery Colorado Operation Lifesaver, Inc., Montebello-El Rosario Sister City Environment, Inc., Houston, TX Denver, CO Association, Montebello, CA American Friends of the Imperial War Colorado Springs Parents of Prematures, Montgomery County Master Gardener Museum, St. Louis, MO Colorado Springs, CO Association, Conroe, TX Americas Business Conscience Corp., Colorado Yale Association, Denver, CO Northeastern Connecticut Aids Project, Scarsdale, NY Colors of Life, Inc., Lawton, OK Inc., Pomfret Center, CT Arts for Life, Albuquerque, NM Colquitt-Miller County Historic and Our Lady of Fatima Sanctuary Inc., Asanteman Association of Greater Economic Revitalization Organization, Anchorage, AK Houston, Missouri City, TX Inc., Colquitt, GA Pend’Orelle County District 3 Firemans Association for Christian Public School Columbus Community Foundation, Fund, Newport, WA Teachers and Administrators, Columbus, KS Permian Basin Aids Coalition, Midland, Stillwater, OK Contemporary Housing Alternatives Inc., TX Association for Recreation as an Topeka, KS Permian Choir Booster Club, Odessa, Alternative, Inc., New York, NY Cross Country Ministries, Buckeye, AZ TX Association of Hispanic Educators of Dinosaurland Resource Conservation & Poltava Center, Inc., Beachwood, OH Massachusetts, Inc., Springfield, MA Development Area, Vernal, UT Prairie Preservation Incorporated, BAA & Company, San Antonio, TX Disadvantaged Business Development Fennimore, WI Ballet, Inc., New York, NY Association, Youngstown, OH Rio Grande Dispute Resolution Center, Barbara Oneglia Alvarez Tycienski Firecon Institute for Research and Inc., El Paso, TX Christmas Fund for Needy Children, Education, Inc., East Earl, PA River of Light Christian Ministries, Torrington, CT Five Moons Theatre, Inc., New York, Phoenix, AZ Becket Land Trust, Inc., Becket, MA NY Riverside Recover Center, Inc., Houston, Bellevue Avalon Girls Association, For the Record, Inc., Los Angeles, CA TX Bellevue, PA Friends of Father Joseph Inc., Baltimore, Sagebrush Bible Chapel Inc., Sparks, Bethany Center Inc., Lakeland, FL MD NV Birthright of Encinitas, Encinitas, CA Give One Day Inc., Austin, TX Southwestern Native American Art Black Transplants Action Committee, Gospel for India, Dallas, TX Foundation, Albuquerque, NM Denver, CO Heavens Gate Ministries, Inc., Nowata, Space Science Educational Foundation Choices Inc., A Cancer Survivor OK for Tomorrow, Inc., Sugarland, TX Advocate Group, Prairie Village, KS Heber Overgaard Economic Sparta-White County Main Street, Christian Medical Missions, Inc., Development Corporation, Overgaard, Sparta, TN Woodward, OK AZ Sports for Life, Inc., Oklahoma City, Christian Medical Relief International, Helping Hands Community Resource OK Inc., Tulsa, OK Center, Beckley, WV Sports Turf Managers Benevolent Christian Mission Resident Ministry Helping Horse Therapeutic Riding Foundation, Aurora, CO Corp., St. Petersburg, FL Center, Thermopolis, WY Stinesville Renaissance Group, Christian Support Ministries, Houston, Henderson Junior High School Parent, Stinesville, IN TX Inc., China, TX Stop Six Community Services, Inc., Fort Christian United Enterprise Non-Profit Worth, TX Hendrick Academy of Honor Inc., Housing Corporation, Flint, MI Sunshine House Foundation, Denver, Plano, TX Christians United Productions, Littleton, CO High Frequency Wavelengths, Virginia CO Upper Valley Foundation, White River Beach, VA Christine Historical Society, Christine, Jct., VT TX Holdenville General Hospital Vivid Theater Ensemble, Dallas, TX Circle S. Rodeo Ministries, Inc., Trinity, Foundation, Holdenville, OK Vore Buffalo Jump Foundation, TX Johnston-Mitchell Preservation Sundance, WY Citadel Gymnastics Association, Tulsa, Foundation, Inc., Plano, TX West Allegheny Chorus Boosters, OK John Wesley White Franklin Graham Imperial, PA Citizens Crime Line of Gaines County, Desert Southwest Crusade, Yuma, AZ West Coast Dance Project Inc., Sarasota, Inc., Seagraves, TX Little Britches Rodeo Association of FL City of Deer Park Texas Senior Citizens Texas, Bandera, TX Women Against Violence Everywhere, Foundation Trust, Deer Park, TX Littlefield Arts and Heritage Committee, Westminster, CA Clayton Community Center, Inc., Inc., Lubbock, TX Woodstock Academy Inc., Woodstock, Clayton, KS Living Improvements for Elderly, Port MD Clear Thinking, Inc., Scottsdale, AZ Neches, TX Working Theatre, Cleveland, OH Cliff Haven Adult Day Health Care, MGA Golf Foundation, Jefferson City, Wyoming Pioneer Woman, Worland, Inc., Dallas, TX MO WY Clinton Crimestoppers, Clinton, OK Mile by Mile Inc., Mesa, AZ If an organization listed above sub- C. N. Linscott Memorial Childrens Missouri City Girls Softball Association, mits information that warrants the re- Foundation, Austin, TX Missouri City, TX newal of its classification as a public Colorado Coaches of Girls Sports, Mohave County Trails Association Inc., charity or as a private operating founda- Broomfield, CO Kingman, AZ tion, the Internal Revenue Service will 1997–18 I.R.B. 54 issue a ruling or determination letter ruling or determination letter as pro- such revised classification of foundation with the revised classification as to vided in section 1.509(a)–7 of the status in the Internal Revenue Bulletin. foundation status. Grantors and con- Income Tax Regulations. It is not tributors may thereafter rely upon such the practice of the Service to announce

55 1997–18 I.R.B. Announcement of the Expedited Suspension of Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the Internal Revenue Service Under title 31 of the Code of Federal aries are prohibited in any Internal Rev- accountant, enrolled agent, or enrolled Regulations, section 10.76, the Director enue Service matter from directly or actuary, and date or period of suspen- of Practice is authorized to immediately indirectly employing, accepting assis- sion. This announcement will appear in suspend from practice before the Inter- tance from, being employed by, or shar- the weekly Bulletin at the earliest practi- nal Revenue Service any practitioner ing fees with, any practitioner disbarred cable date after such action and will who, within five years, from the date or suspended from practice before the continue to appear in the weekly Bulle- the expedited proceeding is instituted, Internal Revenue Service. tins for five successive weeks or for as (1) has had a license to practice as an To enable attorneys, certified public many weeks as is practicable for each attorney, certified public accountant, or accountants, enrolled agents, and en- attorney, certified public accountant, en- actuary suspended or revoked for cause; rolled actuaries to identify practitioners rolled agent, or enrolled actuary so or (2) has been convicted of any crime under expedited suspension from prac- suspended and will be consolidated and under title 26 of the United States Code tice before the Internal Revenue Service, published in the Cumulative Bulletin. or, of a felony under title 18 of the the Director of Practice will announce in The following individuals have been United States Code involving dishonesty the Internal Revenue Bulletin the names placed under suspension from practice or breach of trust. and addresses of practitioners who have before the Internal Revenue Service by Attorneys, certified public accoun- been suspended from such practice, their virtue of the expedited proceeding pro- tants, enrolled agents and enrolled actu- designation as attorney, certified public visions of the applicable regulations:

Name Address Designation Date of Suspension

Loberg, Thomas St. Paul, MN CPA Indefinite from November 13, 1996 Rose Ann Galati Thousand Oaks, CA CPA Indefinite from November 25, 1996 Labendeira, Anthony Fresno, CA CPA Indefinite from November 25, 1996 Nation, D. Mark Albuquerque, NM CPA Indefinite from November 25, 1996 Behren, Daryl D. Visalia, CA CPA Indefinite from November 25, 1996 Murphy, Virginia T. Laurinburg, NC CPA Indefinite from November 25, 1996 Best III, James M. Monroe, NC CPA Indefinite from November 25, 1996 Rehm, Aysha Tulsa, OK CPA Indefinite from November 25, 1996 Dineen, Lee M. Castle Hayne, NC CPA Indefinite from December 12, 1996 Miele, Ralph J. North Babylon, NY CPA Indefinite from February 14, 1997

56 Definition of Terms Revenue rulings and revenue procedures is modified because it corrects a pub- more than restate the substance of a (hereinafter referred to as ‘‘rulings’’) lished position. (Compare with amplified prior ruling, a combination of terms is that have an effect on previous rulings and clarified, above). used. For example, modified and super- use the following defined terms to de- Obsoleted describes a previously pub- seded describes a situation where the scribe the effect: lished ruling that is not considered de- substance of a previously published rul- Amplified describes a situation where terminative with respect to future trans- ing is being changed in part and is no change is being made in a prior actions. This term is most commonly continued without change in part and it published position, but the prior position used in a ruling that lists previously is desired to restate the valid portion of is being extended to apply to a variation published rulings that are obsoleted be- the previously published ruling in a new of the fact situation set forth therein. cause of changes in law or regulations. ruling that is self contained. In this case Thus, if an earlier ruling held that a A ruling may also be obsoleted because the previously published ruling is first principle applied to A, and the new the substance has been included in regu- modified and then, as modified, is su- ruling holds that the same principle also lations subsequently adopted. applies to B, the earlier ruling is ampli- Revoked describes situations where perseded. fied. (Compare with modified, below). the position in the previously published Supplemented is used in situations in Clarified is used in those instances ruling is not correct and the correct which a list, such as a list of the names where the language in a prior ruling is position is being stated in the new of countries, is published in a ruling and being made clear because the language ruling. that list is expanded by adding further has caused, or may cause, some confu- Superseded describes a situation names in subsequent rulings. After the sion. It is not used where a position in a where the new ruling does nothing more original ruling has been supplemented prior ruling is being changed. than restate the substance and situation several times, a new ruling may be Distinguished describes a situation of a previously published ruling (or published that includes the list in the where a ruling mentions a previously rulings). Thus, the term is used to original ruling and the additions, and published ruling and points out an es- republish under the 1986 Code and supersedes all prior rulings in the series. sential difference between them. regulations the same position published Suspended is used in rare situations to Modified is used where the substance under the 1939 Code and regulations. show that the previous published rulings of a previously published position is The term is also used when it is desired will not be applied pending some future being changed. Thus, if a prior ruling to republish in a single ruling a series of action such as the issuance of new or held that a principle applied to A but not situations, names, etc., that were previ- amended regulations, the outcome of to B, and the new ruling holds that it ously published over a period of time in cases in litigation, or the outcome of a applies to both A and B, the prior ruling separate rulings. If the new ruling does Service study.

Abbreviations ER—Employer. PR—Partner. ERISA—Employee Retirement Income Security Act. PRS—Partnership. The following abbreviations in current use and EX—Executor. formerly used will appear in material published in PTE—Prohibited Transaction Exemption. F—Fiduciary. the Bulletin. Pub. L.—Public Law. FC—Foreign Country. A—Individual. REIT—Real Estate Investment Trust. Acq.—Acquiescence. FICA—Federal Insurance Contribution Act. Rev. Proc.—Revenue Procedure. B—Individual. FISC—Foreign International Sales Company. Rev. Rul.—Revenue Ruling. BE—Beneficiary. FPH—Foreign Personal Holding Company. BK—Bank. F.R.—Federal Register. S—Subsidiary. B.T.A.—Board of Tax Appeals. FUTA—Federal Unemployment Tax Act. S.P.R.—Statements of Procedural Rules. C.—Individual. FX—Foreign Corporation. Stat.—Statutes at Large. G.C.M.—Chief Counsel’s Memorandum. C.B.—Cumulative Bulletin. T—Target Corporation. CFR—Code of Federal Regulations. GE—Grantee. T.C.—Tax Court. CI—City. GP—General Partner. T.D.—Treasury Decision. COOP—Cooperative. GR—Grantor. Ct.D.—Court Decision. IC—Insurance Company. TFE—Transferee. CY—County. I.R.B.—Internal Revenue Bulletin. TFR—Transferor. D—Decedent. LE—Lessee. T.I.R.—Technical Information Release. DC—Dummy Corporation. LP—Limited Partner. TP—Taxpayer. DE—Donee. LR—Lessor. TR—Trust. Del. Order—Delegation Order. M—Minor. TT—Trustee. DISC—Domestic International Sales Corporation. Nonacq.—Nonacquiescence. U.S.C.—United States Code. DR—Donor. O—Organization. E—Estate. P—Parent Corporation. X—Corporation. EE—Employee. PHC—Personal Holding Company. Y—Corporation. E.O.—Executive Order. PO—Possession of the U.S. Z—Corporation. 57 Numerical Finding List1 Notices—Continued Revenue Rulings—Continued 97–21, 1997–11 I.R.B. 9 97–7, 1997–5 I.R.B. 14 Bulletin 1997–1 through 1997–17 97–22, 1997–13 I.R.B. 9 97–8, 1997–7 I.R.B. 4 Announcements: 97–23, 1997–14 I.R.B. 8 97–9, 1997–9 I.R.B. 4 97–24, 1997–16 I.R.B. 6 97–10, 1997–10 I.R.B. 31 97–1, 1997–2 I.R.B. 63 97–25, 1997–16 I.R.B. 8 97–11, 1997–10 I.R.B. 5 97–2, 1997–2 I.R.B. 63 97–26, 1997–17 I.R.B. 6 97–12, 1997–11 I.R.B. 5 97–3, 1997–2 I.R.B. 63 97–27, 1997–17 I.R.B. 7 97–13, 1997–16 I.R.B. 4 97–4, 1997–3 I.R.B. 14 97–14, 1997–11 I.R.B. 5 Proposed Regulations: 97–5, 1997–3 I.R.B. 15 97–15, 1997–12 I.R.B. 42 97–6, 1997–4 I.R.B. 11 REG–209332–80, 1997–14 I.R.B. 9 97–16, 1997–13 I.R.B. 4 97–7, 1997–4 I.R.B. 12 REG–209040–88, 1997–7 I.R.B. 34 97–17, 1997–14 I.R.B. 5 97–8, 1997–4 I.R.B. 12 REG–209121–89, 1997–11 I.R.B. 15 97–18, 1997–15 I.R.B. 4 97–9, 1997–5 I.R.B. 27 REG–208288–90, 1997–11 I.R.B. 14 Social Security Domestic Coverage Threshold 97–10, 1997–10 I.R.B. 64 REG–209494–90, 1997–8 I.R.B. 24 97–11, 1997–6 I.R.B. 19 REG–208172–91, 1997–10 I.R.B. 59 1997–9, I.R.B. 17 97–12, 1997–7 I.R.B. 55 REG–209672–93, 1997–6 I.R.B. 15 Tax Conventions: 97–13, 1997–8 I.R.B. 38 REG–209709–94 1997–13 I.R.B. 12 97–14, 1997–8 I.R.B. 38 REG–209729–94, 1997–11 I.R.B. 19 1997–17 I.R.B. 5 97–15, 1997–9 I.R.B. 23 REG–209762–95, 1997–3 I.R.B. 12 Treasury Decisions: 97–16, 1997–9 I.R.B. 23 REG–209817–96, 1997–7 I.R.B. 41 97–17, 1997–9 I.R.B. 23 REG–209824–96, 1997–11 I.R.B. 19 8688, 1997–3 I.R.B. 7 97–18, 1997–10 I.R.B. 67 REG–254394–96, 1997–14 I.R.B. 14 8689, 1997–3 I.R.B. 9 97–19, 1997–10 I.R.B. 68 REG–209828–96, 1997–6 I.R.B. 15 8690, 1997–5 I.R.B. 5 97–20, 1997–11 I.R.B. 22 REG–209830–96, 1997–15 I.R.B. 7 8691, 1997–5 I.R.B. 16 97–21, 1997–11 I.R.B. 23 REG–209834–96, 1997–4 I.R.B. 9 8692, 1997–3 I.R.B. 4 97–22, 1997–12 I.R.B. 47 REG–209839–96, 1997–8 I.R.B. 26 8693, 1997–6 I.R.B. 9 97–23, 1997–11 I.R.B. 23 REG–242996–96, 1997–9 I.R.B. 18 8694, 1997–6 I.R.B. 11 97–24, 1997–11 I.R.B. 24 REG–246018–96, 1997–8 I.R.B. 30 8695, 1997–4 I.R.B. 5 97–25, 1997–12 I.R.B. 47 REG–247678–96, 1997–6 I.R.B. 17 8696, 1997–6 I.R.B. 4 97–26, 1997–12 I.R.B. 48 REG–247862–96, 1997–8 I.R.B. 32 8697, 1997–2 I.R.B. 11 97–27, 1997–13 I.R.B. 30 REG–248770–96, 1997–8 I.R.B. 33 8698, 1997–7 I.R.B. 29 97–28, 1997–14 I.R.B. 15 REG–249819–96, 1997–7 I.R.B. 50 8699, 1997–6 I.R.B. 4 97–29, 1997–14 I.R.B. 16 REG–252231–96, 1997–7 I.R.B. 52 8700, 1997–7 I.R.B. 5 97–30, 1997–14 I.R.B. 16 REG–252233–96, 1997–9 I.R.B. 19 8701, 1997–7 I.R.B. 23 97–31, 1997–14 I.R.B. 16 REG–252665–96, 1997–12 I.R.B. 46 8702, 1997–8 I.R.B. 4 97–32, 1997–14 I.R.B. 17 8703, 1997–8 I.R.B. 18 97–33, 1997–15 I.R.B. 8 Revenue Procedures: 8704, 1997–8 I.R.B. 12 97–34, 1997–15 I.R.B. 8 97–1, 1997–1 I.R.B. 11 8705, 1997–8 I.R.B. 16 97–35, 1997–15 I.R.B. 9 97–2, 1997–1 I.R.B. 64 8706, 1997–9 I.R.B. 11 97–36, 1997–15 I.R.B. 10 97–3, 1997–1 I.R.B. 84 8707, 1997–7 I.R.B. 17 97–37, 1997–15 I.R.B. 10 97–4, 1997–1 I.R.B. 96 8708, 1997–10 I.R.B. 14 97–38, 1997–15 I.R.B. 10 97–5, 1997–1 I.R.B. 132 8709, 1997–9 I.R.B. 5 97–39, 1997–16 I.R.B. 27 97–6, 1997–1 I.R.B. 153 8710, 1997–13 I.R.B. 4 97–40, 1997–16 I.R.B. 28 97–7, 1997–1 I.R.B. 185 8711, 1997–12 I.R.B. 35 97–41, 1997–16 I.R.B. 28 97–8, 1997–1 I.R.B. 187 8712, 1997–12 I.R.B. 4 97–42, 1997–17 I.R.B. 19 97–9, 1997–2 I.R.B. 56 8713, 1997–14 I.R.B. 4 97–43, 1997–17 I.R.B. 19 97–10, 1997–2 I.R.B. 59 8714, 1997–15 I.R.B. 5 97–44, 1997–17 I.R.B. 19 97–11, 1997–6 I.R.B. 13 97–45, 1997–17 I.R.B. 20 97–12, 1997–4 I.R.B. 7 Notices: 97–13, 1997–5 I.R.B. 18 97–14, 1997–5 I.R.B. 20 97–1, 1997–2 I.R.B. 22 97–15, 1997–5 I.R.B. 21 97–2, 1997–2 I.R.B. 22 97–16, 1997–5 I.R.B. 25 97–3, 1997–1 I.R.B. 8 97–17, 1997–9 I.R.B. 15 97–4, 1997–2 I.R.B. 24 97–18, 1997–10 I.R.B. 53 97–5, 1997–2 I.R.B. 25 97–19, 1997–10 I.R.B. 55 97–6, 1997–2 I.R.B. 26 97–20, 1997–11 I.R.B. 10 97–7, 1997–1 I.R.B. 8 97–21, 1997–12 I.R.B. 44 97–8, 1997–4 I.R.B. 7 97–22, 1997–13 I.R.B. 9 97–9, 1997–2 I.R.B. 35 97–23, 1997–17 I.R.B. 7 97–10, 1997–2 I.R.B. 41 97–24, 1997–16 I.R.B. 10 97–11, 1997–2 I.R.B. 50 97–25, 1997–17 I.R.B. 8 97–12, 1997–3 I.R.B. 11 97–26, 1997–17 I.R.B. 17 97–13, 1997–6 I.R.B. 13 97–14, 1997–8 I.R.B. 23 Revenue Rulings: 97–15, 1997–8 I.R.B. 23 97–1, 1997–2 I.R.B. 10 97–16, 1997–9 I.R.B. 15 97–2, 1997–2 I.R.B. 7 97–17, 1997–10 I.R.B. 34 97–3, 1997–2 I.R.B. 5 97–18, 1997–10 I.R.B. 35 97–4, 1997–3 I.R.B. 6 97–19, 1997–10 I.R.B. 40 97–5, 1997–4 I.R.B. 5 97–20, 1997–10 I.R.B. 52 97–6, 1997–4 I.R.B. 4

1A cumulative list of all Revenue Rulings, Revenue Procedures, Treasury Decisions, etc., published in Internal Revenue Bulletins 1996–27 through 1996–53 will be found in Internal Revenue Bulletin 1997–1, dated January 6, 1997. 58 Finding List of Current Action on Revenue Procedures—Continued 1 Previously Published Items 97–3 Amplified by Bulletin 1997–1 through 1997–17 97–23, 1997–17 I.R.B. 7 *Denotes entry since last publication Revenue Rulings: Revenue Procedures: 70–480 66–3 Revoked by Modified by 97–6, 1997–4 I.R.B. 4 97–11, 1997–6 I.R.B. 13 72–527 87–21 Obsoleted by Modified by 8704, 1997–8 I.R.B. 12 97–11, 1997–6 I.R.B. 13 74–59 92–20 Revoked by Modified by 8708, 1997–10 I.R.B. 14 97–1, 1997–1 I.R.B. 11 92–19 92–20 Supplemented in part by Modified by 97–2, 1997–2 I.R.B. 7 97–10, 1997–2 I.R.B. 59 96–12 92–90 Superseded by Superseded by 97–3, 1997–1 I.R.B. 84 97–1, 1997–1 I.R.B. 11 96–13 94–52 Modified by Revoked by 97–1, 1997–1 I.R.B. 11 97–11, 1997–6 I.R.B. 13 96–22 96–1 Superseded by Superseded by 97–3, 1997–1 I.R.B. 84 97–1, 1997–1 I.R.B. 11 96–34 96–2 Superseded by Superseded by 97–3, 1997–1 I.R.B. 84 97–2, 1997–1 I.R.B. 64 96–39 96–3 Superseded by Superseded by 97–3, 1997–1 I.R.B. 84 97–3, 1997–1 I.R.B. 84 96–43 96–4 Superseded by Superseded by 97–3, 1997–1 I.R.B. 84 97–4, 1997–1 I.R.B. 96 96–56 96–5 Superseded by Superseded by 97–3, 1997–1 I.R.B. 84 97–5, 1997–1 I.R.B. 132 96–6 Superseded by 97–6, 1997–1 I.R.B. 153 96–7 Superseded by 97–7, 1997–1 I.R.B. 185 96–8 Superseded by 97–8, 1997–1 I.R.B. 187 96–24 96–24A Superseded by 97–24, 1997–16 I.R.B. 10 96–37 Obsoleted by 97–26, 1997–17 I.R.B. 17 97–2 Amplified by 97–21, 1997–12 I.R.B. 44

1A cumulative finding list for previously published items mentioned in Internal Revenue Bulletins 1996–27 through 1996–53 will be found in Inter- nal Revenue Bulletin 1997–1, dated January 6, 1997. 59 Index Internal Revenue Bulletins 1997–1 EXCISE TAX—Continued INCOME TAX—Continued Through 1997–17 Regulations: Forms W–2 and W–3; general rules and For index of items published during 26 CFR 48.4082–5T, 48.6715–2T, specifications for private printing (RP the last six months of 1996, see added; diesel fuel excise tax, spe- 24) 16, 10 cial rules for Alaska (TD 8693) 6, I.R.B. 1997–1, dated January 6, Form 8851; electronic and magnetic 9 1997. media filing specifications (RP 25) 17, 8 INCOME TAX The abbreviation and number in pa- Fringe benefits aircraft valuation for- renthesis following the index entry Abusive trusts (Notice 24) 16, 6 mula (RR 14) 11, 5 Accounting periods; small business cor- refer to the specific item; numbers in Insurance companies: porations (Notice 20) 10, 52 roman and italic type following the Interest rate tables (RR 2) 2, 8 Adoption assistance (Notice 9) 2, 35 parenthesis refer to the Internal Rev- Premium stabilization reserves (RR 5) Advance guidance under Section 877 4, 5 enue Bulletin in which the item may (Notice 19) 10, 40 Interest: be found and the page number on Alternative minimum tax, change in ac- Investment: which it appears. counting method (Notice 13) 6, 13 Federal short-term, mid-term, and Automobile inflation adjustment (RP 20) long-term rates for January 1997 Key to Abbreviations: 11, 10 RR Revenue Ruling (RR 1) 2, 10; February 1997 (RR Books and records; electronic storage; 7) 5, 14; March 1997 (RR 10) RP Revenue Procedure imaging (RP 22) 13, 9 TD Treasury Decision 10, 31; April 1997 (RR 17) 14, 5 Charitable remainder unitrusts; no rule Penalties: CD Court Decision on CRT abuses (RP 23) 17, 7 PL Public Law Underpayment and overpayment Credits against tax: rates for April 1997 (RR 12) 11, EO Executive Order Low-income housing credit: DO Delegation Order 5 Building’s credit period beginning TDO Treasury Department Order Inventories: after 1995 (RR 4) 3, 6 TC Tax Convention LIFO, price indexes, department Satisfactory bond, bond factor SPR Statement of Procedural stores, November 1996 (RR 6) 4, amounts for January, February, Rules 4; December 1996 (RR 8) 7, 4; and March 1997 (RR 16) 13, 4 PTE Prohibited Transaction January 1997 (RR 15) 12, 42; Feb- Exemption Depreciation: ruary 1997 (RR 18) 15, 4 Retail motor fuels outlets (RP 10) 2, Low-income housing tax credit (Notice 59 EMPLOYMENT TAX 14) 8, 23 Differential earnings rate (Notice 17) 10, Major disaster areas (RR 11) 10, 5 Social Security domestic employee cov- 34 erage threshold amount for 1997, 9, Domestic asset/liability and investment Medical and dental expenses (RR 9) 9, 17 yield percentages (RP 16) 5, 25 4 Electing Small Business Trust (ESBT) Obsolete revenue rulings and revenue ESTATE & GIFT TAXES election (Notice 12) 3, 11 procedures under TD 8697 (Notice 1) ADMINISTRATIVE Employee plans: 2, 22 Photocopy fee increase (RP 11) 6, 13 Proposed regulations: Cash or deferred arrangements (No- Pilot pre-submission conference proce- 26 CFR 20.2044–1, added; tice 2) 2, 22 dure (RP 21) 12, 44 20.2056(b)–7, amended; estate and Funding: gift tax marital deduction (REG– Full funding limitations, weighted Proposed regulations: 209830–96) 15, 7 average interest rate, January 26 CFR 1.41–0, amended; 1.41–4, Regulations: 1997 (Notice 8) 4, 7; February revised; research activities increase, 26 CFR 20.2044–1T, 20.2056(b)–7T, 1997 (Notice 16) 9, 15; March credit, hearing (REG–209494–90) –10T, added; estate tax marital de- 1997 (Notice 23) 14, 8; April 8, 24 duction (TD 8714) 15, 5 1997 (Notice 27) 17, 7 26 CFR 1.42–16, added; low-income Qualification: housing tax credits, Federal grants EXCISE TAX Qualified domestic relations orders (REG–254394–96) 14, 14 Deposits (Notice 15) 8, 23 (Notice 11) 2, 49 26 CFR 1.167(a)–3, amended; Epoxy (DGEBA) determination (Notice Qualified joint and survivor annu- 1.167(a)–14, 1.197–0, 1.197–2, 22) 13, 9 ities (Notice 10) 2, 49 added; amortization of intangible Proposed regulations: SIMPLES (RP 9) 2, 55 property (REG–209709–94) 13, 12 26 CFR 48.4081–1, amended; SIMPLE–IRAs (Notice 6) 2, 26 26 CFR 1.337(d)–4, added; certain 48.4082–5, 48.6715–2, added; User fees (RP 8) 1, 187 asset transfers to tax-exempt entity gasoline and diesel fuel excise tax, Exempt organizations: (REG–209121–89) 11, 15 special rules for Alaska, definition Unrelated business taxable income 26 CFR 1.338(b)–2, –3, added; intan- of aviation gasoline and kerosene (RP 12) 4, 7 gibles under sections 1060 and 338 (REG–247678–96) 6, 17 User fees (RP 8) 1, 187 (REG–252665–96) 12, 46 60 INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued Proposed regulations—Continued Proposed regulations—Continued Regulations—Continued 26 CFR 1.354–1, 1.355–1, 1.356–3, 26 CFR 53.6011–1, amended; 53.6017– get affiliates that are controlled amended; reorganizations, receipt 1T; return and time for filing re- foreign corporations (TD 8710) 13, of securities (REG–249819–96) 7, quirements (REG–247862–96) 8, 32 4 50 Qualified mortgage bonds; mortgage 26 CFR 1.367(a)–3, added; foreign 26 CFR 1.368–1, amended; share- credit certificates; national median corporations, transfer of domestic holder interest continuity require- gross income (RP 26) 17, 17 stock or securities by U.S. person ment for corporate reorganizations Regulations: (TD 8702) 8, 4 (REG–252231–96) 7, 52 26 CFR 1.475(b)–1T, –2T, 1.475(c)– 26 CFR 1.368–1, –2, amended; conti- 26 CFR 1.25–3, added; 1.25–3T, 1T, –2T, 1.475(d)–1T, 1.475(e)–1T, nuity of interest and business re- amended; mortgage credit certifi- removed; 1.475–0, 1.475(a)–3, quirements (REG–252233–96) 9, cate reissuance (TD 8692) 3, 4 1.475(b)–1, –2, –4, 1.475(c)–1, –2, 19 26 CFR 1.42–16T, added; low-income 1.475(d)–1, 1.475(e)–1, added; se- 26 CFR 1.453–11, added; installment housing tax credits, Federal grants curities dealers; mark-to-market ac- obligations received from liquidat- (TD 8713) 14, 4 counting; equity interests in related ing corporations; partial withdrawal 26 CFR 1.45B–1; withdrawal of parties and dealer-customer rela- (REG–209332–80) 14, 9 credit for employer social security tionship (TD 8700) 7, 5 26 CFR 1.468A–2, –3, amended; taxes paid on employee tips (REG– 26 CFR 1.581–1, revised; 1.581–2, nuclear decommissioning reserve 209672–93) 6, 15 1.761–1(a), revised; 301.6109–1, funds; revised schedules of ruling 26 CFR 1.45B–1T, removed; credit for amended; 301.7701–1, –2, –3, re- amounts (REG–209828–96) 6, 15 employer social security taxes paid vised; 301.7701–4, amended; do- 26 CFR 1.704–3, 1.1245–1, amended; on employee tips (TD 8699) 6, 4 mestic unincorporated business depreciation allocations, recapture 26 CFR 1.108(a)–1, –2, 108(b)–1, organizations classified as partner- among partners in a partnership 1.1016–7, –8, 1.1017–2, removed; ships or associations (TD 8697) 2, (REG–209762–95) 3, 12 1.108–4, –5, added; 1.1017–1, re- 11 26 CFR 1.801–4, amended; life insur- vised; 1.301.9100–13T, removed; 26 CFR 1.731–2, added; partnerships, ance reserves, recomputation hear- basis reduction due to discharge of distribution of marketable securities ing (REG–246018–96) 8, 30 indebtedness (REG–208172–91) 10, (TD 8707) 7, 17 26 CFR 1.832–4, amended; insurance 59 26 CFR 1.902–0, –1, –2, added; for- companies, determination of earned 26 CFR 1.108(c)–1T, 1.163(d)–1T, eign taxes deemed paid by domes- premiums (REG–209839–96) 8, 26 1.1044(a)–1T, 1.6655(e)–1T, re- tic corporate shareholder; computa- 26 CFR 1.905–2, amended; foreign moved; 1.108(c)–1, 1.163(d)–1, tion (TD 8708) 10, 14 tax credit filing requirements 1.1044(a)–1, 1.6655(e)–1, added; 26 CFR 1.952–1(e), (f), addee; 1.952– (REG–208288–90) 11, 14 Omnibus Budget Reconciliation 2(c)(1), 1.954–1(d)(4)(iii), 1.954– 26 CFR 1.1275–7, 1.1286–2, added; Act, elections (TD 8688) 3, 7 2(b)(3), 1.954–2(g)(2)(ii)(B)(1)(i), inflation-indexed debt instruments –(2), revised; 1.957–1, amended; 26 CFR 1.141–1, revised; 1.143–1, (REG–242996–96) 9, 18 1.960–1(i), added; controlled for- redesignated; 1.144–3, removed; eign corporations, foreign bas com- 26 CFR 1.1293–2, 1.1295–2, added; 1.141–0, –2 through –16, 1.142–0, pany and foreign personal holding qualified electing fund elections, –3, 1.144–0, 1.145–0, –1, –2, company income, definitions (TD preferred shares, hearing (REG– 1.147–0, –1, –2, 1.150–4, added; 8704) 8, 12 209040–88) 7, 34 1.142–1, –2, 1.144–1, –2, revised; 26 CFR 1.1396–1, added; empower- 1.148–6, 1.150–1, amended; private 26 CFR 1.1271–0, 1.1275–4, ment zone employment credit; activity bonds definition (TD 8712) amended; 1.1275–7T, 1.1286–2T, qualified zone employees (REG– 12, 4 added; inflation-indexed debt in- 209834–96) 4, 9 strument (TD 8709) 9, 5 26 CFR 1.170A–1, –13, amended; 26 CFR 1.1402(a)–18, withdrawn; 26 CFR 1.1291–0, –9, –10, added; charitable contributions, deductibil- (REG–209729–94) 11, 19 1.1291–0T, amended; 1.1291–9T, ity, substantiation, and disclosure 26 CFR 1.6013–2, 301.6334–1, –10T, removed; treatment of share- (TD 8690) 5, 5 301.6601–1, 301.6651–1, 301.7430– holders of certain passive foreign 0, –1, –2, –4, –5, amended; 26 CFR 1.267(f)–1, 1.1502–11, –13, investment companies (TD 8701) 7, 301.6656–3, added; 301.7122–1(e), –19, –20, –32, –43, –76, –80, cor- 23 301.7430–6, revised; Taxpayer Bill rected; consolidated returns, con- 26 CFR 1.1368–1 amended; 1.1377– of Rights 2 and Personal Responsi- solidated and controlled groups 0, –1, –2, –3, added; 18.1377–1, bility and Work Opportunity Rec- (Notice 25) 16, 8 removed; S corporations and their onciliation Act of 1996, miscella- 26 CFR 1.338(b)–2T(b)(2)(v), –2T(c)- shareholders, definitions under neous sections affected (REG– (4), added; 1.338–3, 1.338(b)–2T, subchapter S (TD 8696) 6, 4 248770–96) 8, 33 –3T, 1.1060–1T, amended; intan- 26 CFR 1.1402(a)–2, amended; defi- 26 CFR 1.7701(1)–1, amended; gibles under sections 1060 and 338 nition of limited partner for self- 1.7701(1)–2; obligation-shifting (TD 8711) 12, 35 employment tax purposes (REG– transactions, multiple-party, realized 26 CFR Part 1, 1.338–0, –4, 209824–96) 11, 19 income and deductions (REG– amended; 1.338–4T, removed; 26 CFR 1.6081–2, –6, added; 1.6081– 209817–96) 7, 41 1.338(i)–1(a) and (b), revised; tar- 2T, –3T, –4T, removed; 1.6081–4, 61 INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued Regulations—Continued REIT preferred stock (Notice 21) 11, 9 Rulings—Continued amended; 301.6651, amended; Rulings: Benefits and Exempt Organiza- 301.6651–1T, removed; individual, tions), Associate Chief Counsel Areas in which advance rulings will partnership, trust, and U.S. real (Enforcement Litigation), Associate estate mortgage investment conduit not be issued: Chief Counsel (International) (RP income tax returns, automatic ex- Associate Chief Counsel (Domes- 2) 1, 64 tension of filing time (TD 8703) 8, tic), Associate Chief Counsel SBA guaranteed payment rights; partici- 18 (Employee Benefits and Exempt pating securities (RR 3) 2, 5 26 CFR 1.6695–1(b), amended; 1.6695– Organizations (RP 3) 1, 85; As- Scenarios of disciplinary actions, 13, 32 1T, removed; 301.6061–1, revised; sociate Chief Counsel (Interna- S corporation bank accounting method 301.6061–1T, removed; returns, tional) (RP 7) 1, 185 change (RP 18) 10, 53 statements, or other documents, sign- Determination letters, employee plans S corporation subsidiaries (Notice 4) 2, ing methods (TD 8689) 3, 9 (RP 6) 1, 153 26 CFR 31.3402(f)(5)–1, amended; 24 Environmental cleanup costs; letter Small Business Corporations: 31.3402(f)(5)–2T, removed; em- rulings (Notice 7) 1, 8 ployment taxes and collection of Accounting periods (Notice 3) 1, 8 Letter rulings, determination letter, in- income taxes at source, Form W–4, Electing small business corporations formation letter, Associate Chief electronic filing (TD 8706) 9, 11 and banks (Notice 5) 2, 25 Counsel (Domestic), Associate 26 CFR 53.6011–1, amended; Chief Counsel (Employee Benefits Special use value; farms; interest rates 53.6071–1T; return and time for and Exempt Organizations), Associ- (RR 13) 16, 4 filing requirements (TD 8705) 8, 16 ate Chief Counsel (Enforcement Tax conventions: 26 CFR 301.6103(n)–1, amended; re- Litigation), Associate Chief Coun- Shipping and aircraft agreements turn information disclosure; prop- sel (International) (RP 1) 1, 11 Malta, 17, 5 erty or services for tax administra- tion purposes, Justice Department Rulings and determination letters, is- Tax-exempt bonds: (TD 8695) 4, 5 suance procedures (RP 4) 1, 97 Private activity bonds (RP 13) 5, 18; 26 CFR 301.6231(a)(7)–1T, removed; Technical advice; employee plans, ex- (RP 14) 5, 20; (RP 15) 5, 21 301.6231(a)(7)–1, added; limited li- empt organizations (RP 5) 1, 132 Timely filing or payment; private deliv- ability companies; tax matters part- Technical advice to district directors ery services (RP 19) 10, 55; (Notice ner selection (TD 8698) 7, 29 and chiefs, appeals offices, Associ- 26) 17, 6 26 CFR 301.6335–1, amended; sale ate Chief Counsel (Domestic), As- Transfers to foreign entities (Notice 18) of seized property (TD 8691) 5, 16 sociate Chief Counsel (Employee 10, 35

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