Life insurance companies; computation of required interest. This ruling provides that a life insurance company calculates “required interest” under section 812(b)(2)(A) of the Code using the mean of the amount of the reserve at the beginning of the taxable year and the amount of the reserve at the end of such year.

LIFO; price indexes; department stores. The September 2003 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, September 30, 2003.

Section 103(a) of the Code provides that, generally, interest on bonds issued by state and local governments is excluded from gross income. “Qualified mortgage revenue bonds” may also be qualified bonds. A bond may only be a qualified mortgage revenue bond if the effective rate of mortgage interest on the mortgages provided with the bond proceeds does not exceed the yield on the bonds by more that 1.125 percentage points. The proposed regulations provide rules for calculating the effective rate of mortgage interest. Specifically, the proposed regulations provide that amounts paid for pool mortgage insurance are to be excluded from the calculation (which results in a lower effective rate of mortgage interest). A public hearing is scheduled for January 28, 2004.

Optional election to make monthly 706(a) computations. This procedure allows certain partnerships that invest in tax-exempt obligations to make an election that enables the partners to take into account monthly the inclusions required under sections 702 and 707(c) of the Code and provides rules for partnership income tax reporting under section 6031 for such partnerships. Rev. Proc. 2002-68 modified and superseded.

This announcement is a public notice of the suspension of the federal tax exemption under section 501(p) of the Code of certain organizations that have been designated as supporting or engaging in terrorist activity or supporting terrorism. Contributions made to these organizations during the period that the organization's tax-exempt status is suspended are not deductible for federal tax purposes.

Zaire Unlimited of Calumet Park, IL, no longer qualifies as an organization to which contributions are deductible under section 170 of the Code.

2004 social security contribution and benefit base; domestic employee coverage threshold. The Commissioner of the Social Security Administration has announced (1) the OASDI contribution and benefit base for remuneration paid in 2004 and self-employment income earned in taxable years beginning in 2004, and (2) the domestic employee coverage threshold amount for 2004.

Final regulations under section 7701 of the Code contain special rules regarding the entity classification of certain foreign business entities, including a special rule that terminates the grandfathered status of certain foreign business entities upon a 50-percent change of control, and a special rule that clarifies and further modifies the relevancy rules relating to certain foreign eligible entities.

This announcement contains a withdrawal of proposed regulation section 301.7701-3(h), which provided a rule that would have operated to change the classification of a foreign disregarded entity if a so-called "extraordinary transaction" occurred one day before or within one year after the election to treat the entity as disregarded. REG-110385-99 partially withdrawn.

The following Department Store Inventory Price Indexes for September 2003 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, September 30, 2003.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

The principal author of this revenue ruling is Denise Carmichael of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Carmichael at (202) 622-6888 (not a toll-free call).

What is the amount of reserves used to calculate “required interest” under section 812(b)(2)(A) of the Internal Revenue Code?

IC is a life insurance company subject to tax under Part I of subchapter L of the Internal Revenue Code (§§ 801-818). For purposes of determining its life insurance company taxable income, IC computes the amount of the section 807(c)(1) life insurance reserves under section 807(d)(2), using the greater of the applicable Federal interest rate or the prevailing State assumed rate. For purposes of this revenue ruling, assume that the applicable Federal interest rate for the contracts is 6.0% and that the applicable Federal interest rate exceeds the prevailing State assumed rate for the contracts.

On January 1, 200x, the opening balance of IC's life insurance reserves (determined under section 807(d)(2)) equaled $1,000,000x. On December 31, 200x, the closing balance of IC's life insurance reserves for the contracts totaled $1,224,434x.

To prevent a life insurance company from realizing a double benefit for tax-preferred investment income (tax-exempt interest and dividends providing a dividends-received deduction) used to fund the company's liabilities to policyholders, sections 807 and 805 require the company to adjust certain income and deduction items for the policyholders' share of such tax preferred income.

To determine the increase or decrease in reserves for a taxable year, a life insurance company reduces its end-of-year reserves by the “policyholders' share” of tax-exempt interest. Section 807(a) and (b). The company's deduction under section 805(a)(2) for a net increase in reserves, therefore, is reduced by the policyholders' share of tax exempt interest. Conversely, if there is a net decrease in reserves, the company's gross income under section 803(a)(2) is increased by the policyholders' share of tax exempt interest. The adjustments effectively deny the company any exclusion for the policyholders' share of tax-exempt interest.

Section 805(a)(4) prevents a double benefit with regard to dividends eligible for the dividends-received deduction by limiting a life insurance company's deduction for dividends (other than “100 percent dividends” as defined in section 805(a)(4)(C)) received by the company. The deduction is limited to the “company's share” of the dividends received. See section 805(a)(4)(A)(ii). No dividends-received deduction is allowed for the policyholders' share of dividends received.

Section 812 provides the mechanism to calculate the life insurance company's and policyholders' respective shares of net investment income. For purposes of section 805(a)(4), the company's share is the percentage obtained by dividing (1) the company's share of the net investment income for the taxable year, by (2) the net investment income for the year. Section 812(a)(1). The policyholders' share is the excess of 100 percent over the company's percentage share. Section 812(a)(2).

The first step in applying section 812 is to determine, under section 812(d), the amount of the life insurance company's “gross investment income” for the taxable year. Next, “net investment income” for the taxable year is calculated under section 812(c). Except as otherwise provided in section 812(c)(2) with regard to income attributable to assets held in a segregated asset account for variable contracts, the net investment income for a taxable year equals 90% of gross investment income for the year. Under section 812(b)(1), the life insurance company's share of net investment income is the excess (if any) of the net investment income for the taxable year over the sum of the “policy interest” for the taxable year and the “gross investment income's proportionate share of policyholder dividends” for the taxable year. The policyholders' share of net investment income, therefore, is the portion of net investment income equal to the lesser of (1) the sum of policy interest and gross investment income's proportionate share of policyholder dividends for the taxable year or (2) the total net investment income.

Section 812(b)(2) provides that policy interest equals the sum of—

(A) required interest (at the greater of the prevailing State assumed rate or the applicable Federal interest rate) on section 807(c) reserves (other than unearned premiums and unpaid losses under section 807(c)(2));

(B) the deductible portion of excess interest;

(C) the deductible portion of any amount (whether or not a policyholder dividend) that is not taken into account under section 812(b)(2)(A) or (B) and that is credited either to (i) a policyholder's fund under a pension plan contract for employees (other than retired employees), or (ii) a deferred annuity contract before the annuity stating date; and

(D) interest on amounts left on deposit with the company.

If neither the prevailing State assumed interest rate nor the applicable Federal interest rate is used in determining the reserve for a contract, required interest is calculated using another appropriate interest rate.

Although required interest is a significant component of policy interest, section 812(b)(2) provides no guidance (other than the interest rates) regarding the method of calculating required interest. The legislative history that accompanied the enactment of section 812 in 1984, however, states that “the formula used for purposes of determining the policyholders' share is based generally on the proration formula used under prior law in computing gain or loss from operations (i.e., by reference to ‘required interest’).” See H. Rep. No. 432, Pt. 2, 98^th Cong., 2d Sess. 1430-31 (1984); S. Prt. 169, Vol. I, 98^th Cong. 2d Sess. 557-59 (1984).

Under section 809(a)(2) of pre-1984 law, a life insurance company's required interest for any taxable year equaled the sum of the products obtained by multiplying (i) each rate of interest required, or assumed by the taxpayer, in calculating the reserves described in section 810(c) of pre-1984 law [now section 807(c)], by (ii) the means of the amount of the reserves computed at that rate at the beginning and the end of the taxable year. See also section 1.809-2(d) of the Income Tax Regulations.^[1] As the formula in section 812 is based generally on the proration formula used under former section 809(a)(2), required interest under section 812(b)(2)(A) is calculated using mean reserves. Accordingly, required interest under section 812(b)(2)(A) equals the sum of products obtained by multiplying (i) the mean of the beginning-of-year and end-of-year reserves under section 807(c)(1)-(6) (other than section 807(c)(2)) by (ii) the applicable interest rate (the prevailing State assumed interest rate, the applicable Federal interest rate, or another appropriate interest rate).

The opening balance of IC's section 807(c)(1) life insurance reserves is $1,000,000x and the closing balance of the reserves is $1,224,434x. The mean of the reserves is $1,112,217x . Therefore, the required interest on the life insurance reserves is $66,733x [$1,112,217x 6% = $66,733x].

Required interest under § 812(b)(2)(A) is calculated using the mean of the amount of the reserve at the beginning of the taxable year and the amount of the reserve at the end of such year.

The principal author of this revenue ruling is Stephen Hooe of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Mr. Hooe at (202) 622-7595 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final regulations.

This document contains final regulations providing rules regarding the application of the general entity classification rules to certain foreign business entities, in particular providing a rule that terminates the grandfathered status of certain foreign business entities upon a 50 percent change of ownership and a special rule that clarifies and further modifies the rules relating to whether the classification of certain foreign eligible entities is relevant for Federal tax purposes.

These regulations are effective as of October 22, 2003.

Ronald M. Gootzeit, (202) 622-3860 (not a toll-free number).

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

The principal authors of these regulations are Aaron A. Farmer and Ronald M. Gootzeit, Office of Associate Chief Counsel (International). However, other personnel from the Treasury and the IRS participated in their development.

* * * * *

Under authority contained in the Social Security Act (“the Act”), the Commissioner, Social Security Administration, has determined and announced (68 F.R. 60437, dated October 22, 2003) that the contribution and benefit base for remuneration paid in 2004, and self-employment income earned in taxable years beginning in 2004 is $87,900.

This revenue procedure allows certain partnerships that invest in tax-exempt obligations to make an election that enables the partners to take into account monthly the inclusions required under §§ 702 and 707(c) of the Internal Revenue Code and provides rules for partnership income tax reporting under § 6031 for such partnerships.

A partnership may be used to create the economic equivalent of a variable-rate tax-exempt bond. To create this instrument, a sponsor purchases a tax-exempt obligation and transfers the tax-exempt obligation to an entity that qualifies as a partnership for federal tax purposes (tax-exempt-bond partnership). The tax-exempt-bond partnership issues two classes of equity interests: interests that are entitled to a preferred variable return on its capital (variable-rate interests) and interests that are entitled to all of the remaining income of the partnership (inverse interest). The variable return on the variable-rate interests tracks current short-term exempt yields. Under § 702(b), tax-exempt interest income received by a partnership retains its character when the partnership allocates the income to a partner.

Under § 706(a), a partner generally includes in income for a taxable year the partner's allocable share of items of partnership income, gain, loss, deduction, and credit for the partnership's taxable year ending within or with the partner's taxable year. A partner must also include in income for a taxable year guaranteed payments under § 707(c) that are taken into account by the partnership under its method of accounting in the partnership's taxable year ending within or with the partner's taxable year. Moreover, for each taxable year in which a partnership has income, deductions, or credits, § 6031(a) and (b) requires the partnership to file a Form 1065, U.S. Return of Partnership Income, and to issue Schedules K-1 (Form 1065) to each partner.

Annual inclusion of income under § 706(a) can be incompatible with the needs of money market funds and of medium- and long-term bond funds that invest in obligations that produce interest that is exempt from tax. For example, if a regulated investment company's (RIC's) taxable year does not correspond to the taxable year of a tax-exempt-bond partnership in which it holds an interest, the RIC may not be allocated sufficient tax-exempt interest income from the partnership to pay exempt-interest dividends quarterly. See § 852.

To resolve this problem, many tax-exempt-bond partnerships attempted to make an election under § 761(a) to be excluded from the provisions of subchapter K. A tax-exempt-bond partnership is not eligible to elect to be wholly or partially excluded from subchapter K, however, and an attempted election has no effect. Two of the requirements for eligibility to make an election under § 761(a) are that the partners must own the partnership property as co-owners and the partners must be able to compute their income without the necessity of computing partnership taxable income. See § 1.761-2(a)(1) and (2) of the Income Tax Regulations. If a business entity (classified as a partnership) owns a tax-exempt bond and issues membership interests that apportion the benefits and burdens of that bond to its members in a manner that differs significantly from direct investment in the bond, the holders of those membership interests do not satisfy the requirement that they own the partnership property as co-owners. Cf. § 301.7701-4(c) of the Procedure and Administration Regulations. Moreover, if one class of partners has a right to partnership income that is superior to the right of another class of partners, then the net partnership income or loss allocated to the partners with inferior rights to partnership income can be determined only by computing the net income or loss of the partnership and then by reducing that net income by income allocable to partners with superior rights to partnership income. Such a partnership does not meet the requirement of § 1.761-2(a)(1) that the members of the organization be able to compute their incomes without the necessity of computing partnership income.

To assist tax-exempt-bond partnerships to meet the needs of the market for tax-exempt obligations within the requirements of the Internal Revenue Code, the Internal Revenue Service (Service) has issued two revenue procedures. Rev. Proc. 2002-16, 2002-1 C.B. 572, was issued to allow money market fund partners in tax-exempt-bond partnerships to take into account on a monthly basis their distributive shares of partnership items (monthly closing) if the partnership made an effective election under that revenue procedure (monthly closing election).

Rev. Proc. 2002-68, 2002-2 C.B. 753, modified and superseded Rev. Proc. 2002-16 to extend the monthly closing election to all partners in tax-exempt-bond partnerships and established a transition rule. The transition rule provides that for any taxable year beginning before January 1, 2004, the Service will not challenge a partnership's or a partner's tax treatment that is consistent with an election to be excluded from the provisions of subchapter K under § 761(a), provided that the partnership would be an eligible partnership as defined in Rev. Proc. 2002-68 and the partners' inclusion of income, gain, loss, deduction and credits is consistent with that permitted under the revenue procedure.

In Rev. Proc. 2002-68, the Service also requested comments on simplified income tax reporting procedures for some or all of the eligible tax-exempt-bond partnerships. This revenue procedure is issued in response to comments received.

This revenue procedure modifies and supersedes Rev. Proc. 2002-68 by making the following changes:

.01 Section 4 of this revenue procedure expands the definition of tax-exempt-bond partnerships that are eligible to make a monthly closing election and provides that all partners must consent to the election.

.02 Section 5.01 of this revenue procedure provides that a monthly closing election is made by including a binding provision to that effect in the partnership's governing documents.

.03 Section 8 of this revenue procedure provides that a partnership that has a monthly closing election in effect for the partnership's entire taxable year and that meets the other requirements of section 8 of this revenue procedure is not required to file a Form 1065 or to issue Schedules K-1 (Form 1065) to its partners for the taxable year.

.04 Section 9.02(3) of this revenue procedure provides grandfathering rules.

This revenue procedure applies to eligible partnerships (described in section 4.01 of this revenue procedure) that make a monthly closing election (described in section 5 of this revenue procedure).

.01 Eligible Partnership. An entity is an eligible partnership for a calendar month if all of the following conditions are met:

(1) As of the election test date and as of every operational test date that occurs on or before the end of such calendar month, the partnership satisfies both the income test and the expense test. The test dates are described in section 4.05 of this revenue procedure, and the income test and the expense test are described in section 4.02 and section 4.03, respectively.

(2) The entity is a partnership for federal tax purposes;

(3) All allocations of income, gain, loss, deduction, and credit of the partnership are made in accordance with § 704(b); and

(4) A written partnership agreement (or other governing document) provides that —

(a) the entity is making the monthly closing election under this revenue procedure; and,

(b) all partners consent to the election.

.02 Income test. At least 95 percent of the partnership's gross income (computed without regard to items described in section 4.04 of this revenue procedure) is or is reasonably expected to be from:

(1) interest on tax-exempt obligations as defined in § 1275(a)(3) and § 1.1275-1(e);

(2) exempt-interest dividends as defined in § 852(b)(5) that are paid by a RIC as defined in § 851(a); and

(3) gain from the sale, redemption, or other disposition of assets generating the income described in section 4.02(1) and (2) of this revenue procedure and income from the temporary investment (for a period no greater than 7 months) of the proceeds of the disposition, but only if the assets that are sold, redeemed, or disposed are original assets of the partnership. For this purpose, an asset is an original asset of the partnership if the asset is contributed to the partnership or is acquired with capital contributed to the partnership (and not with the proceeds of the sale, redemption, or other disposition of a partnership asset).

.03 Expense test. Substantially all of the partnership's expenses and deductions (computed without regard to items described in section 4.04 of this revenue procedure) are properly allocable to:

(1) producing, collecting, managing, protecting, and conserving the income described in section 4.02(1), (2), or (3) of this revenue procedure or the assets generating the income;

(2) acquiring, managing, conserving, maintaining, or disposing of property held for the production of the income described in section 4.02(1), (2), or (3) of this revenue procedure; and

(3) servicing the equity in the partnership.

.04 Exclusion. For the purposes of sections 4.02 and 4.03 of this revenue procedure, reasonable amounts charged to persons requesting information from the partnership under section 8.03 of this revenue procedure and the costs of collecting, managing, computing, and supplying the information are not taken into account.

.05 Test Dates and Test Periods. The income test described in section 4.02 of this revenue procedure and the expense test described in section 4.03 of this revenue procedure must be satisfied both as of the first day of the first month for which the partnership's monthly closing election is effective (the election test date) and, beginning with the fourth month after the partnership's monthly closing election becomes effective, on the last day of each month (the operational test date). The partnership determines whether the income test and the expense test are satisfied as of the election test date by reference to the election test period. The partnership determines whether the income test and expense test are satisfied as of each operational test date by reference to the operational test period. In applying the income and expense tests for a test period, a termination of the partnership under § 708(b)(1)(B) during that period is ignored.

(1) The Election Test Period. The election test period differs depending upon how long the partnership has been in existence (determined from its start-up date). A partnership's start-up date is the later of the date the entity had more than one owner and the date the entity had more than a de minimis amount of assets.

(a) If, on the election test date, the partnership has been in existence for at least 6 full calendar months, then the test period is the longer of the 6 full calendar months preceding the election test date and the portion of the partnership's taxable year that precedes the election test date; and

(b) If, on the election test date, the partnership has not been in existence for at least 6 full calendar months, then the election test period is the first 6 full calendar months of the partnership's existence.

(2) The Operational Test Period. The operational test period is the 3-calendar-month period consisting of the calendar month within which the operational test date falls and the preceding 2 calendar months.

.01 Manner of Making the Election. An eligible partnership makes a monthly closing election by providing in the entity's governing documents that—

(a) the partnership is making a monthly closing election that is effective as provided under section 5.02 of this revenue procedure, and

(b) all partners consent to the election.

.02 Effective Date of the Election. The monthly closing election is effective on the later of:

(a) the start-up date of the partnership (as defined in section 4.05(1) of this revenue procedure), or

(b) the first day of the month in which the provision described in section 5.01 of this revenue procedure is first included in the entity's governing documents.

.03 Terminations under § 708(b)(1)(B). A termination of the partnership under § 708(b)(1)(B) does not terminate the monthly closing election and does not cause the partnership to close its books under § 1.706-1(c) other than as described in section 6 of this revenue procedure.

If, at the end of any calendar month, an eligible partnership has a monthly closing election in effect, then, with respect to each partner, the partnership must close its books as described in § 1.706-1(c)(2) as if each partner had sold its entire interest in the partnership on the last day of that month. Each partner must include in its taxable income for that month both the partner's distributive share of items described in § 702(a) with respect to the partner that were earned by the partnership since either the last closing of the books or the first day of the partnership's taxable year (whichever is later) and any guaranteed payments under § 707(c) to the partner that are taken into account by the partnership since the last closing of the books. If a partner is on a 52-53 week taxable year, then the provisions of § 1.441-2(e) apply as if the last day of the month were the last day of the partnership's taxable year.

.01 A partnership's monthly closing election terminates as of the first day of the month during which a partnership first fails to be an eligible partnership as defined in section 4.01 of this revenue procedure.

.02 If the partnership's monthly closing election terminates, the partnership may not make another monthly closing election without the consent of the Commissioner.

.03 A partnership's monthly closing election may be revoked only with the consent of the Commissioner.

.01 Initial Filing Requirement. A partnership must file an abbreviated Form 1065, U.S. Return of Partnership Income, for the first taxable year during which the monthly closing election was in effect. The abbreviated Form 1065 must be filed by the date that the partnership's income tax return for that taxable year would ordinarily be due and must be signed by a person with the authority to sign the partnership's Form 1065. The words “Filed in Accordance with Rev. Proc. 2003-84” must be typed or printed across the top of the form. The partnership is required to provide only the following information on the abbreviated Form 1065:

(1) A statement that the partnership has made an election under this revenue procedure to which all present and future partners consent;

(2) Identification of the partnership by name, address, and EIN;

(3) The name, title, address, and phone number of the contact person from whom partners, beneficial owners, middlemen, and the Internal Revenue Service may request information about the partnership;

(4) The issue date of the partnership interests and the CUSIP (Committee on Uniform Securities Identification Procedures) number or other identification of each class of partnership interest;

(5) A statement that the entity's governing documents expressly provide that the entity is making a monthly closing election; and

(6) The effective month of the election and the start-up date of the partnership. See section 4.05(1) of this revenue procedure for a definition of the start-up date.

.02 Annual Filing Requirements.

(1) Elimination of Annual Filing Requirements. A partnership is not required to file a Form 1065, U.S. Return of Partnership Income, or to issue Schedules K-1 (Form 1065) to its partners for any taxable year if the following requirements are satisfied:

(a) The partnership's monthly closing election is effective for the partnership's entire taxable year;

(b) The partnership makes the initial filing described in section 8.01 of this revenue procedure;

(c) A written partnership agreement (or other governing document) provides that —

(i) the entity and its partners will comply with the reporting requirements of sections 8.02 and 8.03, and 8.04 of this revenue procedure in lieu of complying with the requirements of § 6031(a) through (d), and,

(ii) all partners consent to such reporting; and

(d) The partnership complies with the requirements of sections 8.03 and 8.04 of this revenue procedure.

(2) Effect of Elimination of Annual Filing Requirement. An entity that is not required to file a partnership return under this revenue procedure is not required to file a partnership return under § 6031(a) and, as a result, is not a partnership as defined under § 6231(a)(1). Consequently, the entity and its members will not be subject to the provisions of subchapter C of chapter 63. An abbreviated Form 1065 used to make the initial filing described in section 8.01 of this revenue procedure is not considered to be a partnership return for purposes of § 6233.

(3) Monthly Closing Election Effective for Portion of Taxable Year. A partnership that makes a monthly closing election that is effective after the first day of its taxable year must comply with the partnership reporting rules of § 6031(a) for that taxable year (but is still permitted to close its books on a monthly basis). If the partnership also makes the initial filing described in section 8.01 of this revenue procedure by the due date for its return for the first full taxable year during which the monthly closing election is in effect, then the partnership qualifies for elimination of annual filing requirements under section 8.01 of this revenue procedure for subsequent taxable years.

(4) Annual Reporting Required. Failure to qualify for the elimination of annual filing requirements under section 8.02(1) of this revenue procedure does not terminate the partnership's monthly closing election. However, a partnership that fails to satisfy all of the requirements of section 8.02(1) of this revenue procedure is required to file a complete (not abbreviated) Form 1065 and to issue Schedules K-1 (Form 1065) to its partners as required by § 6031(a). A partnership that fails to file a Form 1065 or to issue Schedules K-1 as required is subject to the applicable penalties under §§ 6698 and 6722 for failure to file a partnership return and to furnish payee statements, as well as any other applicable penalties. Moreover, if a partnership is required to file a return under § 6031(a) but fails to do so, the period of limitations on assessment of tax attributable to items of that partnership remains open indefinitely under § 6229(a).

.03 Requests for Information. Within 45 days of a request by the Service or a partner (or a beneficial owner or a nominee of a beneficial owner), the partnership must make available all the information necessary to compute a partner's taxable income, tax-exempt income, gain, loss, deduction, or credit, including sufficient information for a partner to determine the portion of the tax-exempt interest that may be subject to the alternative minimum tax and information regarding each partner's share of any bond premium amortization under § 171, any market or original issue discount, and capital gain or loss.

.04 Nominee and Beneficial Ownership Reporting.

(1) If an eligible electing partnership complies with the requirements of sections 8.02 and 8.03 of this revenue procedure, the nominee reporting requirements of § 6031(c) and the regulations thereunder do not apply. In place of those requirements, the partnership and the partners must comply with this section 8.04. See § 1.6001-1(a) and (e) for rules that apply to recordkeeping requirements.

(2) Any person on whose behalf another person holds as a nominee an interest in an eligible partnership (a beneficial owner), other than a beneficial owner for which the relevant advisor or manager agrees to comply with section 8.04(3) of this revenue procedure, shall notify the partnership of its beneficial ownership status and provide the partnership with:

(a) its name, address, and taxpayer identification number and the name, address, and taxpayer identification number of its nominee; and

(b) the name of the partnership, its CUSIP number or other information sufficient to identify the partnership interest, and the amount of the partnership interest.

(3) In the case of a group of RICs that is managed or advised by a common, or affiliated, manager or advisor (the manager), the manager may elect to be responsible for collecting, retaining, and providing the Service upon demand the beneficial ownership information. To make such an election, the manager must provide each eligible partnership in which any of the RICs has an equity interest a statement indicating that it is responsible for collecting, retaining, and providing the Service upon demand the beneficial ownership information that otherwise would be required to be provided directly to the eligible partnerships by the beneficial owners. In addition, the manager must provide the partnership with:

(a) its name, address, and taxpayer identification number and contact information for the person from whom the Service can request beneficial ownership information; and

(b) the name of the partnership, its CUSIP number or other information sufficient to identify the partnership interests, and the amount of the partnership interests.

.01 In General. This revenue procedure is effective on November 5, 2003.

.02 Grandfathering Rules.

(1) If, prior to January 1, 2004, under the provisions of Rev. Proc. 2002-16 or Rev. Proc. 2002-68, a partnership made an effective Monthly Closing election and a partner consented to the election, then the partnership and the partner may continue to comply with either Rev. Proc. 2002-16 or Rev. Proc. 2002-68, as applicable, except that monthly statements are not required.

(2) Except as provided in section 9.02(4) of this revenue procedure, if, prior to January 1, 2004, under the provisions of Rev. Proc. 2002-16 or Rev. Proc. 2002-68, a partnership made an effective Monthly Closing election and a partner consented to the election and if the partnership and partner consistently report the transaction in a manner that is consistent with an election to be excluded from the provisions of subchapter K under § 761(a), then the Service will not challenge that treatment. If section 9.02(4) of this revenue procedure causes this paragraph (2) to cease to apply, the partner and partnership remain eligible for any relief described in paragraph (1) above that they are otherwise entitled to enjoy.

(3) Except as provided in section 9.02(4) of this revenue procedure, if a partnership's start-up date is before January 1, 2004, the Service will not challenge the partnership's or its partners' tax treatment that is consistent with an election to be excluded from the provisions of subchapter K under § 761(a) for any taxable year during all of which the entity is an eligible partnership as defined in section 4.01 of this revenue procedure (without regard to section 4.01(4) of this revenue procedure). See section 4.05(1) of this revenue procedure for the definition of a partnership's start-up date.

(4) If, on or after January 1, 2005, a partnership acquires new assets, then, as of the first day of the month in which the new assets are acquired, the partnership is no longer eligible for the grandfathering rule provided in section 9.02(2) or (3) of this revenue procedure. For purposes of the preceding sentence, none of the following is treated as the acquisition of a new asset by the partnership:

(a) The receipt of payment (including temporary investment of that payment) on, or in respect of, a sale, redemption, or other disposition of an asset of the partnership;

(b) The receipt of a contribution in cash (including temporary investment of that cash) to fund expenses of the partnership described in section 4.03 of this revenue procedure or to fund distributions to partners in respect of accrued but unpaid tax-exempt interest (including accrued but unpaid tax-exempt original issue discount); or

(c) The acquisition of an asset pursuant to a plan to keep the principal balance of the assets in the partnership stable by reinvesting principal payments.

(5) For purposes of section 9.02(4) of this revenue procedure)—

(a) An investment is temporary if it is held for 7 months or less; and

(b) If an asset was acquired with reasonable certainty it would be a temporary investment but, due to unforeseeable circumstances, it is held for more than 7 months, then, for purposes of section 9.02(4) of this revenue procedure, it is treated as acquired on the first day that it has been held for more than 7 months.

Rev. Proc. 2002-68 is modified and superseded.

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1768. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information is in section 8 of this revenue procedure. The collection of information is required to obtain a benefit, and is required to inform the Service which partnerships are making the monthly closing election. The likely respondents are businesses.

The estimated total annual reporting and recordkeeping burden is 500 hours.

The estimated annual burden per respondent/recordkeeper is 1/2 hour. The estimated number of respondents and recordkeepers is 1,000.

The estimated annual frequency of responses (used for reporting requirements only) is once.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The principal author of this revenue procedure is David A. Shulman of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Mr. Shulman at (202) 622-3070 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed regulations that provide guidance regarding the limitation on the effective rate of mortgage interest for purposes of mortgage revenue bonds issued by State and local governments. This document also contains a notice of public hearing on these proposed regulations.

Written or electronic comments must be received by January 7, 2004. Outlines of topics to be discussed at the public hearing scheduled for January 28, 2004, at 10 a.m., must be received by January 7, 2004.

Send submissions to CC:PA:LPD:PR (REG-146692-03), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-146692-03), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically to the IRS Internet site at www.irs.gov/regs. The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning the regulations, Michael P. Brewer, (202) 622-3980; concerning submissions of comments, the hearing, and requests to be placed on the building access list to attend the meeting, Treena V. Garrett, (202) 622-3401 (not toll-free numbers).

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

The principal authors of these regulations are Timothy L. Jones and Michael P. Brewer, Office of Associate Chief Counsel (Tax-Exempt and Government Entities), IRS, and Bruce M. Serchuk, Office of Tax Policy, Treasury Department. However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Under Title 31, Code of Federal Regulations, Part 10, after notice and an opportunity for a proceeding before an administrative law judge, the following individuals have been disbarred from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Professional Responsibility, in his discretion, may suspend an attorney, certified public accountant, enrolled agent or enrolled actuary in accordance with the consent offered.

The following individuals have been placed under consent suspension from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, the Director, Office of Professional Responsibility, is authorized to immediately suspend from practice before the Internal Revenue Service any practitioner who, within five years from the date the expedited proceeding is instituted (1) has had a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause or (2) has been convicted of certain crimes.

The following individuals have been placed under suspension from practice before the Internal Revenue Service by virtue of the expedited proceeding provisions:

Under Title 31, Code of Federal Regulations, Part 10, in lieu of a proceeding being instituted or continued, an attorney, certified public accountant, enrolled agent, or enrolled actuary, may offer his or her consent to the issuance of a censure. Censure is a public reprimand.

The following individuals have consented to the issuance of a Censure:

This announcement is a public notice of the suspension under section 501(p) of the Internal Revenue Code of the federal tax exemption of certain organizations that have been designated as supporting or engaging in terrorist activity or supporting terrorism. Contributions made to an organization during the period that the organization's tax-exempt status is suspended are not deductible for federal tax purposes.

The federal government has designated a number of organizations as supporting or engaging in terrorist activity or supporting terrorism under the Immigration and Nationality Act, the International Emergency Economic Powers Act, and the United Nations Participation Act of 1945. Federal law prohibits most contributions to organizations that have been so designated.

Section 501(p) of the Code was enacted as part of the Military Family Tax Relief Act of 2003 (P.L. 108-121), effective November 11, 2003. Section 501(p)(1) suspends the exemption from tax under section 501(a) of any organization described in section 501(p)(2). An organization is described in section 501(p)(2) if the organization is designated or otherwise individually identified (1) under certain provisions of the Immigration and Nationality Act as a terrorist organization or foreign terrorist organization; (2) in or pursuant to an Executive Order which is related to terrorism and issued under the authority of the International Emergency Economic Powers Act or section 5 of the United Nations Participation Act of 1945 for the purpose of imposing on such organization an economic or other sanction; or (3) in or pursuant to an Executive Order issued under the authority of any federal law, if the organization is designated or otherwise individually identified in or pursuant to the Executive Order as supporting or engaging in terrorist activity (as defined in the Immigration and Nationality Act) or supporting terrorism (as defined in the Foreign Relations Authorization Act) and the Executive Order refers to section 501(p)(2).

Under section 501(p)(3) of the Code, suspension of an organization's tax exemption begins on the date of the first publication of a designation or identification with respect to the organization, as described above, or the date on which section 501(p) was enacted, whichever is later. This suspension continues until all designations and identifications of the organization are rescinded under the law or Executive Order under which such designation or identification was made.

Under section 501(p)(4) of the Code, no deduction is allowed under any provision of the Internal Revenue Code for any contribution to an organization during any period in which the organization's tax exemption is suspended under section 501(p). Thus, for example, no charitable contribution deduction is allowed under section 170 (relating to the income tax), section 545(b)(2) (relating to undistributed personal holding company income), section 556(b)(2) (relating to undistributed foreign personal holding company income), section 642(c) (relating to charitable set asides), section 2055 (relating to the estate tax), section 2106(a)(2) (relating to the estate tax for nonresident aliens) and section 2522 (relating to the gift tax) for contributions made to the organization during the suspension period.

Prior to the effective date of suspension of exemption under section 501(p), the three organizations listed below were designated under Executive Order 13224, entitled "Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten To Commit, or Support Terrorism.” Contributions made to these organizations in violation of the Executive Order prior to this suspension are not tax deductible under the Internal Revenue Code.

Organizations whose tax exemption has been suspended under section 501(p) and the effective date of such suspension are listed below. Contributions made to these organizations during the period of suspension are not deductible for federal tax purposes.

An organization whose exempt status has been suspended under section 501(p) does not file Form 990 and is required to file the appropriate Federal income tax returns for the taxable periods beginning on the date of the suspension. The organization must continue to file all other appropriate federal tax returns, including employment tax returns, and may also have to file federal unemployment tax returns.

For additional information regarding the designation or identification of an organization described in section 501(p)(2), contact the Compliance Division at the Office of Foreign Assets Control of the U.S. Treasury Department at 202-622-2490. Additional information is also available for download from the Office's Internet Home Page at www.treas.gov/ofac.

For additional information regarding the suspension of the federal tax exemption of an organization under section 501(p), contact Robert Fontenrose at (202) 283-9484 at the Internal Revenue Service.

The name of an organization that no longer qualifies as an organization described in section 170(c)(2) of the Internal Revenue Code of 1986 is listed below.

Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on October 28, 2002, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

Internal Revenue Service (IRS), Treasury.

Partial withdrawal of notice of proposed rulemaking.

This document withdraws a portion of a notice of proposed rulemaking (REG-110385-99, 1999-2 C.B. 670) published on November 29, 1999, addressing certain transactions that occur within a specified period before or after a foreign entity changed its classification to disregarded-entity status.

The withdrawal of proposed §301.7701-3(h) is effective October 22, 2003.

Ronald M. Gootzeit, (202) 622-3860 (not a toll-free number).