This document contains amendments to 26 CFR Part 1. On June 27, 2003, temporary regulations (T.D. 9063, 2003-2 C.B. 510 [68 FR 38177]) regarding whether a loss corporation has an owner shift where a qualified trust described in section 401(a) distributes an ownership interest in an entity were published in the Federal Register. A notice of proposed rulemaking (REG-108676-03, 2003-2 C.B. 523) cross-referencing the temporary regulations was published in the Federal Register for the same day (68 FR 38247). The temporary regulations provided that—(1) if a qualified trust distributes an ownership interest in an entity, then for testing dates on or after the date of the distribution, the distributed ownership interest will be treated as having been acquired by the distributee on the date and in the manner acquired by the trust, and (2) the distribution itself does not give rise to a testing date. They further provided that, in determining which ownership interests have been distributed, the loss corporation must account for all dispositions of ownership interests by the qualified trust either by specifically identifying the ownership interest disposed of, or by using a first-in, first-out (FIFO) method.

The preamble of T.D. 9063 included background information and an explanation of provisions regarding the regulations. Also in the preamble, the IRS and Treasury Department requested comments regarding whether there are other events that, under current rules, are taken into account in determining whether an ownership change occurs, but do not cause the ultimate beneficial ownership of the loss corporation to change. In this regard, the IRS and Treasury Department indicated that they had been studying the constructive ownership rules as they apply to members of a family and the effect of those rules on the determination of whether a loss corporation has an ownership change. The IRS and Treasury Department expressed concern that, under the current rules, a change in the composition of a family might be interpreted in certain circumstances as shifting ownership even though there has been no change in the ultimate beneficial ownership of the loss corporation, as, for example, might occur when two individuals owning loss corporation stock get married.

The IRS and Treasury Department further indicated that they were considering the promulgation of regulations to address such changes in family composition in a manner similar to that employed in the proposed regulations concerning qualified trusts. The IRS and Treasury Department will continue to study whether to issue regulations under section 382 concerning shifts in ownership resulting from certain changes in family composition.

No comments were received responding to the notice of proposed rulemaking, and no public hearing was requested or held. The proposed regulations are adopted with no substantive change by this Treasury decision, and the corresponding temporary regulations are removed.

It has been determined that this regulation is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Pursuant to 5 U.S.C. 553(d)(3), it has been determined that good cause exists to dispense with a delayed effective date on grounds that this regulation, which is substantively identical to currently effective temporary regulations and relieves a restriction on affected qualified trusts, merely continues to provide necessary guidance to taxpayers with respect to whether a loss corporation has an ownership change where a qualified trust described in section 401(a) distributes an ownership interest in an entity. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the regulations provide relief to qualifying loss corporations that might be affected by an unintended consequence of the operation of the statute. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these final regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read, in part, as follows:

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

Section 1.382-10 also issued under 26 U.S.C 382(m). * * *

Par. 2. Section 1.382-1 is amended by removing the entry for §1.382-10T and revising the entry for §1.382-10 to read as follows:

Par. 4. Section 1.382-10T is removed.

Approved June 20, 2006.

These temporary regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545-2020. Responses to this collection of information are mandatory.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget.

For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in this issue of the Bulletin.

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.

Section 6038 of the Internal Revenue Code (Code) requires a U.S. person to furnish, with respect to any foreign business entity which such person controls, certain information as prescribed by the Secretary. More specifically, section 6038(a)(1)(D) provides that the information to be furnished includes information relating to transactions between the foreign business entity and (i) such U.S. person, (ii) any corporation or partnership controlled by such U.S. person, and (iii) any U.S. person owning at the time the transaction takes place a 10 percent or greater interest in the foreign business entity.

Section 6038A requires certain foreign-owned domestic corporations to furnish certain information prescribed by the Secretary. In particular, section 6038A(a) requires a 25-percent foreign-owned domestic corporation to furnish information with respect to certain transactions between such corporation and certain related parties.

The final regulations are revised to remove and correct obsolete references to a form and IRS offices. The temporary regulations conform the current final regulations to specific statutory changes and make other minor clarifications to those final regulations.

Section 1.6038-2 provides that each U.S. person, with respect to each foreign corporation such person controls, must furnish the required information on a Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”, (or, in the case of taxable years that ended before December 31, 1982, on a Form 2952, “Information Return With Respect to Foreign Controlled Corporations”). Section 1.6038-2(f) sets forth the information that must be provided on the applicable form. The information that must be reported includes a summary showing the total amount of each of the types of transactions of the corporation specified in §1.6038-2(f)(11). In some cases, §1.6038-2(f)(11) requires reporting of sales and purchases of items. See §1.6038-2(f)(11)(i) (stock in trade) and (iii) (certain intangibles). In other cases, it requires reporting only of purchases. See §1.6038-2(f)(11)(ii) (tangible property other than stock in trade). The temporary regulations modify the rules of the final regulations to include the reporting of sales and purchases, instead of just purchases, of tangible property. The temporary regulations also modify the current rules to include the reporting of premiums paid, instead of just premiums received, for insurance or reinsurance. This consistent treatment of sales and purchases, and premiums paid and received, more fully implements the purpose of section 6038. It also conforms the rules in §1.6038-2 to analogous reporting rules. See §1.6038A-2(b)(3)(ii) (reporting requirements for foreign-owned domestic corporations).

It has come to the IRS’ attention that some foreign corporations that use an accrual method of accounting may not be properly reporting the transactions described in §1.6038-2(f)(11). Accordingly, §1.6038-2T(f)(12) modifies the rules of the final regulations to clarify that foreign corporations that use an accrual method of accounting must report the summary of the total amount of the transactions described in §1.6038-2T(f)(11) on an accrual basis. To maintain conformity, §1.6038A-2(b)(8), which provides a similar rule for foreign-owned domestic corporations, has been similarly clarified.

Section 6038(b)(1), as amended by the TRA ’97, provides for a $10,000 penalty for failure to furnish the required information within the time prescribed under section 6038(a)(2). Section 6038(b)(2), as amended by the TRA ’97, also provides for additional $10,000 penalties (not to exceed a total of $50,000) when there is a continuing failure to furnish the required information. Section 1.6038-2(k)(1) sets forth the dollar amounts of the penalty for failure to furnish the information required under section 6038. To conform to the statutory change made by the TRA ’97, §1.6038-2(k)(1) has been amended to reflect the increased penalty amounts.

Section 6038(c)(4)(B) and §1.6038-2(k)(3) provide a reasonable cause exception for failure to furnish the information required under section 6038. Some questions have arisen regarding how one determines, after reasonable cause has been established, the time prescribed for furnishing the information under §1.6038-2(i) (time and place for filing return) and the 90-day period described in §1.6038-2(k)(1)(ii) (increase in penalty for continued failure after notification) and §1.6038-2(k)(2)(iv)(A) (reduction of foreign tax credit for continued failure after notice). Two examples have been added in §1.6038-2T(k)(5) to illustrate the determination, after reasonable cause has been established under §1.6038-2(k)(3)(i), of the time for filing the Form 5471, and the beginning of the 90-day period.

The temporary regulations also modify the rules of the final regulations to include transactions between the foreign corporation and controlled partnerships, implementing a change made by section 1142 of the TRA ’97.

Section 1.6038-2 of the regulations has been updated to remove references to obsolete Form 2952 and to reflect that the Director of Field Operations has replaced the district director and the Field Director has replaced the director of the service center.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section of the preamble to the cross-reference notice of proposed ruling making published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these final and temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

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

Par. 2. Section 1.6038-2 is amended as follows:

1. Paragraph (f) introductory text is amended by removing the language “Form 2952 or” in the first sentence.

2. Paragraph (f)(11) and (k)(1) are revised.

3. Paragraph (f)(12) and (m) are added.

4. Paragraph (i) is amended by removing the language “Form 2952 or” in the first sentence, the second sentence, and the last sentence.

5. Paragraph (i) is also amended by removing the language “District directors and directors of service centers” and adding the language “Directors of Field Operations and Field Directors” in its place in the second sentence.

6. Paragraph (k)(2)(iv) is amended by removing the language “district director” and adding the language “Director of Field Operations” in its place in the first sentence.

7. Paragraph (k)(3)(i) is amended by removing the language “district director” and adding the language “Director of Field Operations” in its place in the first sentence.

The revisions and additions read as follows:

Par. 6. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 7. Section 602.101(b) is amended by adding an entry to the table in numerical order to read as follows:

The collection of information contained in these proposed regulations has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)).

Comments concerning the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Any such comments should be submitted not later than August 21, 2006.

Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information (see below);

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operations, maintenance, and purchase of service to provide information.

The collection of information is in §1.6038-2(f)(11). This information is required by the IRS pursuant to section 6038 of the Code. The likely recordkeepers are business or other for-profit institutions. The estimated burden is as follows:

Estimated total annual reporting and/or recordkeeping burden: 1250 hours.

Estimated average annual burden per respondent: 15 minutes.

Estimated number of respondents: 5,000.

Estimated annual frequency of responses: once.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget.

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.

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR Part 1) to clarify the existing rules under sections 6038 and 6038A of the Code with respect to the information required to be furnished regarding certain related party transactions of certain foreign corporations and certain foreign-owned domestic corporations. The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations and these proposed regulations.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because these regulations impose no new collection of information on small entities, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested by any person who timely submits comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read in part as follows:

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

Par. 2. Section 1.6038-2 is amended to read as follows:

1. Paragraphs (f)(11), (k)(1), (k)(5) and (m) are revised.

2. Paragraph (f)(12) is added.

The additions and revisions read as follows: