Sections 338 and 1060 and the regulations thereunder provide a methodology by which the purchase or sales price in certain actual and deemed asset acquisitions is computed and allocated among the assets acquired or treated as acquired. The purchase price generally includes liabilities of the seller that are assumed by the purchaser. Those liabilities, however, must be treated as having been incurred by the purchaser. In order to be treated as having been incurred by the purchaser, in addition to other requirements, economic performance must have occurred with respect to the liability.

Sections 338 and 1060 and the regulations promulgated thereunder employ a residual method of allocation under which assets are divided into seven classes and the consideration is allocated to each of the first six classes in turn, up to the fair market value of the assets in the class. The residual amount is allocated to assets in the last class. Accordingly, under the residual method of §1.338-6, the purchase or sales price is first allocated to Class I assets (cash and general deposit accounts other than certain certificates of deposit), then Class II assets (actively traded personal property, certificates of deposit, foreign currency, US government securities, and publicly traded stock), then Class III assets (assets that the taxpayer marks to market at least annually and certain debt instruments), then Class IV assets (inventory), then Class V assets (assets that are not assets of another class), then Class VI assets (section 197 intangibles, except goodwill and going concern value), and then Class VII assets (goodwill and going concern value). The ordering of the nonresidual classes generally reflects a policy of allocating basis first to those assets that are susceptible to more accurate valuation or the cost of which is recovered most rapidly. See Notice of Proposed Rulemaking REG-107069-97, 1999-2 C.B. 346, 350, 354 [64 FR 43462, 43465, 43469; August 10, 1999].

In connection with the sale of a nuclear power station, the assets sold by the seller and purchased by the purchaser may include the plant, equipment, operating assets, and one or more funds holding assets that have been set aside for the purpose of satisfying the owner’s responsibility to decommission the nuclear power station after the conclusion of its useful life (the decommissioning liability), and the purchaser may have agreed to satisfy the decommissioning liability. One or more of the funds may be funds described in section 468A (qualified funds). Contributions to qualified funds are limited by statute and regulations but give rise to a deduction in the year of contribution. The qualified fund, not the contributor, is treated as the owner of the assets of the fund and is taxed on the income earned on the fund’s assets. The assets of qualified funds are not treated as sold or purchased in an actual or deemed sale of the assets of a corporation that owns a nuclear power plant. One or more of the funds, however, may be funds that are not described in section 468A (nonqualified funds). Contributions to nonqualified funds do not give rise to a deduction in the year of contribution. In addition, the assets of a nonqualified fund continue to be treated as assets of the contributor.

Because the decommissioning liability will not satisfy the economic performance test until decommissioning occurs, as of the purchase date, it is not included in the purchase price that the purchaser allocates to the acquired assets. As a result, as of the purchase date, the purchase price to be allocated by the purchaser among the acquired assets may be significantly less than the fair market value of those assets. This situation will generally persist until economic performance with respect to the decommissioning liability is satisfied through decommissioning.

Under the residual method, the purchase price is allocated to the nonqualified fund’s assets, which are typically Class II assets, before it is allocated to the plant, equipment, and other operating assets, which are typically Class V assets. Because the purchase price does not reflect the decommissioning liability and is first allocated to the assets of the nonqualified fund, the purchase price allocated to the plant, equipment, and other operating assets may be less than their fair market value. To the extent the purchase price allocated to the plant, equipment, and other operating assets is less than their fair market value, the purchaser will not recover a tax benefit (i.e., a depreciation deduction) for the decommissioning liability until economic performance occurs on decommissioning. This result is appropriate given Congress’s decision in enacting section 468A not to allow a plant operator a deduction prior to decommissioning for funds set aside in excess of those amounts set aside in qualified funds, and Congress’s decision in enacting section 461(h) not to allow a deduction for costs that do not satisfy the economic performance test.

A number of commentators have argued that economic performance occurs with respect to such decommissioning liabilities at the time of the purchase. These commentators have based their positions on section 461(h)(2)(A)(ii) and §1.461-4(d)(5).

The IRS and Treasury Department do not believe that this position is consistent with the rule and policies of section 461(h)(2). Under section 461(h)(2)(A)(ii), if a liability arises out of the providing of property to the taxpayer by another person, economic performance occurs as such person provides such property. Decommissioning liabilities are the same type of liabilities to both the seller and the purchaser and are fixed by the same circumstances, specifically acquiring a power plant and the license to operate it. The economic performance rules look at the nature of the liability and look to what the taxpayer is required to “perform” in order to satisfy the liability. To the purchaser, merely acquiring the power plant does not satisfy the decommissioning liabilities. Instead, the purchaser cannot be considered to satisfy the liabilities until it performs those services required to decommission the plant. See section 461(h)(2)(B) (providing that where the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or service). Therefore, section 461(h)(2)(A)(ii) does not apply to treat economic performance as satisfied at the time of purchase.

With respect to the application of §1.461-4(d)(5), that regulation provides that if, in connection with the sale or exchange of a trade or business by a taxpayer, the purchaser expressly assumes a liability arising out of the trade or business that the taxpayer (the seller) but for the economic performance requirement would have been entitled to incur as of the date of the sale, economic performance with respect to that liability occurs as the amount of the liability is properly included in the amount realized on the transaction by the taxpayer (the seller). The IRS and Treasury Department believe the “taxpayer” described in §1.461-4(d)(5) is the seller, and the acceleration of economic performance is for the “taxpayer.” Section 1.461-4(d)(5) does not address the treatment of the purchaser. This interpretation is consistent with the discussion of the preamble to that regulation. (T.D. 8408, 1992-1 C.B. 157, 160 [57 FR 12412-3, 12415-6; April 10, 1992].

Nonetheless, the IRS and Treasury Department recognize the special circumstances related to the purchase and sale of nuclear power plants and transfer of nonqualified funds. The Nuclear Regulatory Commission requires, as one of several decommissioning alternatives available to nuclear power plant operators, that funds be established and maintained to fund decommissioning and related administrative expenditures and that the use of such set aside funds be primarily restricted to such uses. Thus, although the assets in nonqualified funds are relatively liquid, they are ones to which the purchaser’s access is significantly limited.

To mitigate the tax effect of these decommissioning liabilities’ not satisfying the statutory requirements for economic performance as to the purchaser, these temporary regulations add §1.338-6T. That regulation provides that, for purposes of allocating purchase or sales price among the acquisition date assets of a target, a taxpayer may elect to treat a nonqualified fund as if such fund were an entity classified as a corporation the stock of which were among the acquisition date assets of the target and a Class V asset. In these cases, for allocation purposes, the hypothetical corporation will be treated as bearing the responsibility for decommissioning to the extent assets of the fund are expected to be used for that purpose. A section 338(h)(10) election will be treated as made for the hypothetical corporation (regardless of whether the requirements for a section 338(h)(10) election are otherwise satisfied).

The election provided for in these temporary regulations converts the assets of the nonqualified fund from primarily Class I and Class II assets to the assets of a corporation the stock of which is a Class V asset and allows the present cost of the decommissioning liability funded by the nonqualified fund, which otherwise cannot be taken into account for income tax purposes, to be netted against the fund assets for the sole purpose of valuing the stock of the hypothetical subsidiary corporation. Therefore, if this election were made, it would be expected that the assets of the nonqualified fund would be allocated a much smaller amount of the initial purchase price than if no such election had been made, and the disposition of fund assets would result in gain. A larger amount of the initial purchase price, however, would be available for allocation to the plant and other operating assets.

This election is available for applicable asset acquisitions and qualified stock purchases on or after September 15, 2004. The purchaser may make this election regardless of whether the seller or sellers also make the election. However, in the case of a deemed asset acquisition under section 338, if the target corporation is an S corporation, all of the S corporation shareholders, including those that do not sell their stock, must consent to the election for the election to be effective as to any S corporation shareholder. In the case of a deemed asset acquisition under section 338, the election is made by taking a position on an original or amended tax return for the taxable year of the qualified stock purchase that is consistent with having made the election. Such tax return, however, must be filed no later than the later of 30 days after the date on which the section 338 election is due or the day the original tax return for the taxable year of the qualified stock purchase is due (with extensions). The election is irrevocable. If the transaction is an applicable asset acquisition within the meaning of section 1060, the election is made by taking a position on the timely filed original return for the year of the applicable asset acquisition.

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. These temporary regulations provide elective relief to certain purchasers of stock and assets by providing an alternative method for allocating basis among acquired assets. It is necessary to provide this relief immediately to remove an impediment to such transactions. Accordingly, good cause is found for dispensing with prior notice and comment pursuant to 5 U.S.C. 553(b) and for dispensing with a delayed effective date pursuant to 5 U.S.C. 553(d). For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), see the notice of proposed rulemaking on this subject in this issue of the Bulletin. The IRS and the Treasury Department request comments from small entities that believe they might be adversely affected by these regulations. Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for the Advocacy of the Small Business Administration for comment on their impact.

* * * * *

* * * * *

(c) * * *

(5) Allocation to certain nuclear decommissioning funds. [Reserved]

* * * * *

(a) through (c)(4) [Reserved].

(c)(5) Allocation to certain nuclear decommissioning funds.

(d) [Reserved].

Par. 3. Section 1.338-6 is amended by adding paragraph (c)(5) to read as follows:

* * * * *

(c) * * *

(5) Allocation to certain nuclear decommissioning funds. [Reserved]. For further guidance, see §1.338-6T.

* * * * *

Par. 4. Section 1.338-6T is added to read as follows:

(a) through (c)(4) [Reserved]. For further guidance, see §1.338-6(a) through (c)(4).

(5) Allocation to certain nuclear decommissioning funds—(i) General rule. For purposes of allocating ADSP or AGUB among the acquisition date assets of a target (and for no other purpose), a taxpayer may elect to treat a nonqualified nuclear decommissioning fund (as defined in paragraph (c)(5)(ii) of this section) of the target as if—

(A) Such fund were an entity classified as a corporation;

(B) The stock of the corporation were among the acquisition date assets of the target and a Class V asset;

(C) The corporation owned the assets of the fund;

(D) The corporation bore the responsibility for decommissioning one or more nuclear power plants to the extent assets of the fund are expected to be used for that purpose; and

(E) A section 338(h)(10) election were made for the corporation (regardless of whether the requirements for a section 338(h)(10) election are otherwise satisfied).

(ii) Definition of nonqualified nuclear decommissioning fund. A nonqualified nuclear decommissioning fund means a trust, escrow account, Government fund or other type of agreement—

(A) That is established in writing by the owner or licensee of a nuclear generating unit for the exclusive purpose of funding the decommissioning of one or more nuclear power plants;

(B) That is described to the Nuclear Regulatory Commission in a report described in 10 CFR 50.75(b) as providing assurance that funds will be available for decommissioning;

(C) That is not a Nuclear Decommissioning Reserve Fund, as described in section 468A;

(D) That is maintained at all times in the United States; and

(E) The assets of which are to be used only as permitted by 10 CFR 50.82(a)(8).

(iii) Availability of election. P may make the election described in this paragraph (c)(5) regardless of whether the selling consolidated group (or the selling affiliate or the S corporation shareholders) also makes the election. In addition, the selling consolidated group (or the selling affiliate or the S corporation shareholders) may make the election regardless of whether P also makes the election. If T is an S corporation, all of the S corporation shareholders, including those that do not sell their stock, must consent to the election for the election to be effective as to any S corporation shareholder.

(iv) Time and manner of making election. The election described in this paragraph (c)(5) is made by taking a position on an original or amended tax return for the taxable year of the qualified stock purchase that is consistent with having made the election. Such tax return must be filed no later than the later of 30 days after the date on which the section 338 election is due or the day the original tax return for the taxable year of the qualified stock purchase is due (with extensions).

(v) Irrevocability of election. An election made pursuant to this paragraph (c)(5) is irrevocable.

(vi) Effective date. This paragraph (c)(5) applies to qualified stock purchases occurring on or after September 15, 2004.

(d) [Reserved]. For further guidance, see §1.338-6(d).

Par. 5. Section 1.1060-1 is amended by revising the Outline of Topics in paragraph (a)(3) to add an entry to reflect the addition of paragraph (e)(1)(ii)(C); by adding a sentence to the end of paragraph (c)(3); and by adding paragraph (e)(1)(ii)(C) to read as follows:

(a) * * *

(3) * * *

* * * * *

(e) Reporting requirements.

(1) Applicable asset acquisitions.

(ii) Time and manner of reporting.

(C) Election described in §1.338-6T(c)(5).

* * * * *

(c) * * *

(3) * * * For further guidance, see §1.1060-1T.

(e) * * *

(1) * * *

(ii) * * *

(C) Allocation to certain nuclear decommissioning funds. [Reserved]. For further guidance, see §1.338-6T.

* * * * *

Par. 6. Section 1.1060-1T is added to read as follows:

(a) through (c)(2) [Reserved]. For further guidance, see §1.1060-1(a) through (c)(2).

(c)(3) Certain costs. The seller and purchaser each adjusts the amount allocated to an individual asset to take into account the specific identifiable costs incurred in transferring that asset in connection with the applicable asset acquisition (e.g., real estate transfer costs or security interest perfection costs). Costs so allocated increase, or decrease, as appropriate, the total consideration that is allocated under the residual method. No adjustment is made to the amount allocated to an individual asset for general costs associated with the applicable asset acquisition as a whole or with groups of assets included therein (e.g., non-specific appraisal fees or accounting fees). These latter amounts are taken into account only indirectly through their effect on the total consideration to be allocated. If an election described in §1.338-6T(c)(5) is made with respect to an applicable asset acquisition, any allocation of costs pursuant to this paragraph (c)(3) shall be made as if such election had not been made. The preceding sentence applies to applicable asset acquisitions occurring on or after September 15, 2004.

(c)(4) through (e)(1)(ii)(B) [Reserved]. For further guidance, see §1.1060-1(c)(4) through (e)(1)(ii)(B).

(e)(1)(ii)(C) Election described in §1.338-6T(c)(5)—(1) Availability. The election described in §1.338-6T(c)(5) is available in respect of an applicable asset acquisition provided that the requirements of that section are satisfied. Such election may be made by the seller, regardless of whether the purchaser also makes the election, and may be made by the purchaser, regardless of whether the seller also makes the election.

(2) Time and manner of making election. The election described in §1.338-6T(c)(5) is made by taking a position on a timely filed original tax return for the taxable year of the applicable asset acquisition that is consistent with having made the election.

(3) Irrevocability of election. The election described in §1.338-6T(c)(5) is irrevocable.

(4) Effective date. This paragraph (e)(1)(ii)(C) applies to applicable asset acquisitions occurring on or after September 15, 2004.

(e)(2) [Reserved]. For further guidance, see §1.1060-1(e)(2).

Approved September 8, 2004.

This document contains final regulations that amend 26 CFR parts 1, 20, 25, 31, 40, 41, 44, 53, 55, 156, and 301 with respect to the place for filing returns and other documents under section 6091 of the Code. These final regulations reflect the changes in the IRS organizational structure following the Internal Revenue Service Restructuring and Reform Act of 1998 (112 Stat. 685). These final regulations specify where the IRS now accepts hand-carried returns in a manner consistent with the instructions in Notice 2003-19, 2003-1 C.B. 703, and do not make any substantive changes to a taxpayer’s ability to hand carry returns to a local IRS office.

These final regulations remove the examples under §1.6091-4(a)(4), which are obsolete due to various amendments to the Code, and add an example in their place that illustrates the application of the rules in §1.6091-4(a)(2) and (3) to a current provision of the Code. These final regulations also include one citation correction in §1.6091-1(b). In certain cases, these final regulations cross reference regulations that contain references to obsolete IRS offices or titles. Taxpayers in those cases should continue to follow any updated instructions in other published guidance. See, e.g., Notice 2003-19.

It has been determined that these final regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these final regulations for two reasons. First, these final regulations reflect changes in the organizational structure of the IRS and are rules concerning agency organization, procedure, or practice that are exempted from the notice and comment requirement of 5 U.S.C. 553. Second, for good cause, Treasury and the IRS have determined that notice and public procedure are impracticable, unnecessary, and contrary to the public interest because these final regulations do not make substantive changes to taxpayers’ current ability to hand carry returns to a local IRS office. Instead, these final regulations replace obsolete references to IRS organizations and titles with updated references that are sufficiently flexible to take into account future changes to IRS structure or operations. In addition, these final regulations reflect existing instructions given to taxpayers with respect to the hand-carrying of returns. Because no notice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Code, these final regulations were submitted four weeks prior to filing with the Office of the Federal Register 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 1.6091-1 is amended as follows:

1. Paragraph (b)(1) is amended by removing the reference “1.6031-1” and adding “1.6031(a)-1” in its place.

2. Paragraph (b)(5) is amended by removing the language “paragraph (d) of §1.6035-1 and paragraph (d) of §1.6035-2” and adding “§1.6035-1” in its place.

3. Paragraph (b)(8) is amended by removing the language “paragraph (d) of §1.6042-1 and”.

4. Paragraph (b)(11) is amended by removing the language “paragraph (b) of §1.6044-1, and” and the parenthetical “(relating to returns for calendar years after 1962)”.

5. Paragraph (b)(12) is amended by removing the language “(e)” and adding “(j)(2)” in its place.

Par. 3. Section 1.6091-2 is amended as follows:

1. The introductory text is amended by removing the parenthetical “(relating to income tax returns required to be filed with the Director of International Operations)” and adding the parenthetical “(relating to certain international income tax returns)” in its place.

2. Paragraph (a)(1) is revised.

3. Paragraph (b) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

4. Paragraph (d)(1) is revised.

5. Paragraph (d)(2), first sentence, is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

6. Paragraph (e)(1) is amended by removing the language “internal revenue district referred to in paragraph (a) of this section” and adding “legal residence or principal place of business of the person required to make the return” in its place.

7. Paragraph (e)(2) is amended by removing the language “internal revenue district referred to in paragraph (b) of this section” and adding “principal place of business or principal office or agency of the corporation” in its place.

8. Paragraph (f)(1) is amended by removing the language “the district director” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office” in its place.

9. Paragraph (f)(2) is amended by removing the language “the district director” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office” in its place.

10. Paragraph (g) is amended by removing the language “the district director” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office” in its place.

The revisions read as follows:

Par. 6. The authority citation for part 20 continues to read, in part, as follows:

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

Par. 7. Section 20.6091-1 is amended as follows:

1. Paragraph (a)(1) is amended by removing the language “district” and adding “location” in its place.

2. Paragraph (a)(2) is amended by removing the language “The district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within an internal revenue district of such director) in whose district” and adding “Any person assigned the responsibility to receive returns in the local Internal Revenue Service office serving the location in which” in its place.

3. Paragraph (b) is amended by removing the language “the Director of International Operations, Washington, DC, depending upon the place” and adding “as” in its place.

Par. 8. Section 20.6091-2 is amended by removing the language “internal revenue district” and adding “local Internal Revenue Service office” in its place.

Par. 9. The authority citation for part 25 continues to read, in part, as follows:

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

Par. 10. Section 25.6091-1 is amended as follows:

1. Paragraph (a), first sentence is amended by removing the language “the district director for the district in which the legal residence or principal place of business of the donor is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves the legal residence or principal place of business of the donor” in its place.

2. Paragraph (a), second sentence is amended by removing the language “located in an internal revenue district, the gift tax return shall be filed with the district director for the internal revenue district in which the donor’s principal place of business is located” and adding “served by a local Internal Revenue Service office, the gift tax return shall be filed with any person assigned the responsibility to receive returns in that office” in its place.

3. Paragraph (b), second sentence is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

4. Paragraph (c) is amended by removing the language “which is located in an internal revenue district” and adding “in the United States” in its place.

5. Paragraph (c) is further amended by removing the language “the Director of International Operations, Washington, D.C., depending upon the place” and adding “as” in its place.

Par. 11. Section 25.6091-2 is amended by removing the language “internal revenue district” and adding “local Internal Revenue Service office” in its place.

Par. 12. The authority citation for part 31 continues to read, in part, as follows:

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

Par. 13. Section 31.6091-1 is amended as follows:

1. Paragraph (a), first sentence is amended by removing the language “The” and adding “Except as provided in paragraph (c) of this section, the” in its place.

2. Paragraph (a) is further amended by removing from the first sentence the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place, and removing the last sentence.

3. Paragraph (b) is amended by removing the language “the district director for the district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

4. Paragraph (c) is revised.

5. Paragraph (e)(1) is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

6. Paragraph (e)(2) is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

7. Paragraph (e)(3)(i) is amended by removing the language “in any internal revenue district” and adding “served by a local Internal Revenue Service office” in its place.

8. The heading for paragraph (f) is amended by removing the language “district other than required district” and adding “office other than required office” in its place.

9. Paragraph (f) is amended by removing the language “internal revenue district” and adding “local Internal Revenue Service office” in its place.

10. Paragraph (g) is amended by removing the language “internal revenue district” and adding “local Internal Revenue Service office” in its place.

The revision reads as follows:

Par. 14. The authority citation for part 40 continues to read, in part, as follows:

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

Par. 15. Section 40.6091-1 is amended as follows:

1. Paragraph (b)(1) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office that serves” in its place.

2. Paragraph (b)(2) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office that serves” in its place.

3. Paragraph (c) is amended by removing the language “instructions of the district director requiring that filing” and adding “forms and instructions, or other published guidance” in its place.

Par. 16. The authority citation for part 41 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 17. Section 41.6091-1 is amended as follows:

1. Paragraph (b)(1) is amended by removing the language “the Commissioner in the internal revenue district in which is located” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office that serves” in its place.

2. Paragraph (b)(2) is amended by removing the language “the Commissioner in the internal revenue district in which is located” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office that serves” in its place.

Par. 18. The authority citation for part 44 continues to read, in part, as follows:

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

Par. 19. Section 44.6091-1 is amended as follows:

1. Paragraph (a), first sentence is amended by removing the language “A” and adding “Except as provided in paragraph (b) of this section, a” in its place.

2. Paragraph (a), first sentence is further amended by removing the language “the district director of internal revenue for the district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

3. Paragraph (a) is amended by removing the second sentence.

4. Paragraph (b) is amended by removing the language “any internal revenue district” and adding “the United States” in its place.

5. Paragraph (b) is further amended by removing the language “Director, International Operations Division, Internal Revenue Service, Washington, DC 20225” and adding “Internal Revenue Service Center, Cincinnati, Ohio 45999, or as otherwise directed in the applicable forms and instructions” in its place.

6. Paragraph (d) is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

Par. 20. The authority citation for part 53 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 21. Section 53.6091-1 is amended as follows:

1. Paragraph (a) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

2. Paragraph (b) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

3. Paragraph (c), second sentence is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

4. Paragraph (d) is amended by removing the language “the district director” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office” in its place.

Par. 22. Section 53.6091-2 is amended by removing the language “internal revenue district” and adding “local Internal Revenue Service office” in its place.

Par. 23. The authority citation for part 55 continues to read, in part, as follows:

Authority: Secs. 6001, 6011, 6071, 6091, and 7805 * * *

Par. 24. Section 55.6091-1 is amended as follows:

1. Paragraph (a) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office serving” in its place.

2. Paragraph (b), second sentence is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within an internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

Par. 25. Section 55.6091-2 is amended by removing the language “internal revenue district” and adding “local Internal Revenue Service office” in its place.

Par. 26. The authority citation for part 156 continues to read, in part, as follows:

Authority: Secs. 6001, 6011, 6061, 6071, 6091, 6161, and 7805 * * *

Par. 27. Section 156.6091-1 is amended as follows:

1. Paragraph (a) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

2. Paragraph (b) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

3. Paragraph (c) is amended by removing the language “the district director for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive returns in the local Internal Revenue Service office that serves” in its place.

4. Paragraph (d) is revised.

5. Paragraph (e), second sentence is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within an internal revenue district of such director)” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

The revision reads as follows:

Par. 28. Section 156.6091-2 is amended by removing the language “with any internal revenue district” and adding “in any local Internal Revenue Service office” in its place.

Par. 29. The authority citation for part 301 continues to read, in part, as follows:

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

Par. 30. Section 301.6091-1 is amended as follows:

1. Paragraph (b)(1), first sentence is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director) for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office that serves” in its place.

2. Paragraph (b)(1), first sentence is further amended by removing the language “internal revenue district in which was” and adding “local Internal Revenue Service office serving” in its place.

3. Paragraph (b)(1), last sentence is amended by removing the language “(i) with the Office of International Operations, by hand carrying to such Office, or (ii) with the office of the assistant regional commissioner (alcohol and tobacco tax) by hand carrying to such office” and adding in its place the language “with an office of the Alcohol and Tobacco Tax and Trade Bureau, by hand carrying as specified in regulations of the Alcohol and Tobacco Tax and Trade Bureau, see, 27 CFR chapter I, subchapter F”.

4. Paragraph (b)(2) is amended by removing the language “the district director (or with any person assigned the administrative supervision of an area, zone or local office constituting a permanent post of duty within the internal revenue district of such director) for the internal revenue district in which is located” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office that serves” in its place.

5. Paragraph (b)(2), last sentence is amended by removing the language “(i) with the Office of International Operations, by hand carrying to such Office, or (ii) with the office of the assistant regional commissioner (alcohol and tobacco tax) by hand carrying to such office” and adding in its place the language “with an office of the Alcohol and Tobacco Tax and Trade Bureau, by hand carrying as specified in regulations of the Alcohol and Tobacco Tax and Trade Bureau, see, 27 CFR chapter I, subchapter F”.

6. Paragraph (c) is amended by removing the language “district director” and adding “any person assigned the responsibility to receive hand-carried returns in the local Internal Revenue Service office” in its place.

Approved July 13, 2004.

The displaced individual must have resided in a Florida county designated for Individual Assistance by FEMA as a result of Hurricane Charley or Hurricane Frances.

The project owner must obtain approval from the Florida Housing Finance Corporation to obtain the relief described in this notice. The Florida Housing Finance Corporation will determine the appropriate period of temporary housing for each project, not to extend beyond September 30, 2005.

To comply with the requirements of § 1.42-5, project owners are required to maintain and certify certain information concerning each displaced individual, specifically: name, address, social security number, and a statement signed under penalties of perjury by the displaced individual that, because of damage to the individual’s home in a Florida county designated for Individual Assistance by FEMA as a result of Hurricane Charley or Hurricane Frances, the individual requires temporary housing. The owner must also certify the date the individual began temporary occupancy and the date the project will discontinue providing temporary housing as established by the Florida Housing Finance Corporation. The certifications and recordkeeping for displaced individuals must be maintained as part of the annual compliance monitoring process with the Florida Housing Finance Corporation.

Rent for the low-income units housing displaced individuals must not exceed the existing rent-restricted rates for the low-income units established under § 42(g)(2).

Existing tenants in occupied low-income units cannot be evicted or have their tenancy terminated as a result of efforts to provide temporary housing for displaced individuals.

.01 Background. This revenue procedure describes the Section 1441 Voluntary Compliance Program (the “Section 1441 VCP”), which is available to certain withholding agents with respect to the withholding, payment, and reporting of certain taxes due on payments to foreign persons. “Payments” includes both actual and deemed payments.

In Treasury Decision 8734, 1997-2 C.B. 109 [62 F.R. 53387], the Treasury Department and the Internal Revenue Service (the “IRS”) issued comprehensive regulations (the “final regulations”) under chapter 3 (sections 1441-1464) and subpart G of Subchapter A of chapter 61 (sections 6041-6050S) of the Internal Revenue Code. The final regulations were amended by T.D. 8804, 1999-1 C.B. 793 [63 F.R. 72183], T.D. 8856, 2000-1 C.B. 298 [64 F.R. 73408], T.D. 8881, 2000-1 C.B. 1158 [65 F.R. 32152], and T.D. 9023, 2002-2 C.B. 955 [67 F.R. 70310]. The final regulations generally were effective January 1, 2001. In addition, in Notice 2001-4, 2001-1 C.B. 267, Notice 2001-11, 2001-1 C.B. 464, and Notice 2001-43, 2001-2 C.B. 72, the IRS and Treasury provided clarification and guidance regarding certain aspects of the final regulations.

Financial institutions have commented that they have expended significant effort to implement the final regulations. This effort has involved ongoing documentation of account holders and major systems and procedural changes. As part of this effort, financial institutions have been identifying tax deficiencies and failures in their systems and have come forward to the IRS to disclose and resolve issues arising from the effort to implement the final regulations. To provide consistent treatment with respect to withholding agents, this revenue procedure formalizes a program for disclosure and resolution of these implementation issues.

The IRS is initiating the Section 1441 VCP as a temporary program. See section 6 of this revenue procedure for the effective date and sunset date of the program. See section 2 of this revenue procedure for the withholding agents that are eligible to participate in the program. See section 3 of this revenue procedure for the tax, withholding, and reporting obligations covered by the Section 1441 VCP.

.02 Applicable law. The objective of the Section 1441 VCP is to enhance voluntary compliance among certain withholding agents making payments of U.S.-source dividends, interest, rents, royalties, and other fixed or determinable, annual or periodical income (“FDAP income”) to foreign persons. Generally, FDAP income received by a foreign person from sources within the United States is subject to tax under section 871(a) or 881(a) of the Internal Revenue Code (the “Code”). The tax is imposed on the gross amount of income, generally at a 30-percent rate. Section 1441 of the Code requires any person who pays to a foreign person income subject to tax under section 871(a) or 881(a) to deduct and withhold the 30-percent tax from the gross amount paid. The rate of tax, and therefore the withholding obligation, may be reduced or eliminated under other provisions of the Code or under an applicable income tax treaty. A withholding agent is required to determine the status of the persons to whom it makes payments by obtaining documentation from them and may withhold at a reduced rate on payments to foreign persons only if the foreign person has furnished the required documentation. See § 1.1441-1 et seq. of the Income Tax Regulations. See also IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations.

.03 Summary of the Section 1441 VCP. The Section 1441 VCP applies only to tax and reporting obligations that relate to Forms 1042 and 1042-S. It does not apply to tax and reporting obligations that relate to Forms 945 and 1099 except to the extent that correction of a failure to document U.S. persons or misclassification of U.S. and foreign persons requires filing or correction of those forms. The Section 1441 VCP does not provide substantive determinations about a payment (such as the amount, timing, character, or source of such a payment) concerning whether or to what extent it was an amount subject to withholding. A withholding agent that requests consideration under the Section 1441 VCP agrees to (1) identify those areas in which it is not in compliance with tax, withholding, and reporting obligations on payments to foreign persons; (2) pay any tax, interest, and penalties (all as determined by the IRS) due to satisfy its outstanding tax, withholding, and reporting obligations; and (3) institute corrective procedures that will ensure compliance in the future with the withholding agent’s tax, withholding, and reporting obligations. The IRS will not impose penalties for identified underpayments or deficiencies if such underpayments or deficiencies are due to reasonable cause. See section 5.02(3) of this revenue procedure. The IRS will provide the withholding agent with a written acknowledgment, as described in section 5.06 of this revenue procedure, if the IRS finds the withholding agent’s proposed procedures and policies relating to tax, withholding, and reporting obligations applicable to payments to foreign persons are acceptable.

.04 No effect on or applicability to other obligations. Subject to the limitations described below, the Section 1441 VCP applies to tax, withholding, and reporting obligations under sections 1441, 1442, 1443, and 1461 and related tax, withholding, and reporting obligations under sections 3406 and 6041 through 6050N that arise from adjustments under sections 1441, 1442, 1443, and 1461. The Section 1441 VCP does not apply to and does not affect any other tax or reporting obligation. In addition, the Section 1441 VCP does not apply to and does not affect any other obligations of the taxpayer or the IRS that are not within the scope of this revenue procedure.

.01 Eligible withholding agents. Except as provided in section 2.02, a withholding agent is eligible for the Section 1441 VCP (an “eligible withholding agent”) if it is a withholding agent, as defined in § 1.1441-7(a)(1) of the Income Tax Regulations, that is not a “qualified intermediary,” a “withholding foreign partnership,” a “withholding foreign trust,” or an “eligible organization” as defined in section 2.01 of Rev. Proc. 2001-20, 2001-1 C.B. 738.

.02 Withholding agents currently under examination. A withholding agent is not eligible for the Section 1441 VCP if the withholding agent is under examination with respect to Form 1042 on the date of the publication of this revenue procedure, or if it comes under examination prior to submitting the information required by section 4 of this revenue procedure. For this purpose, an examination is treated as commencing on the date the withholding agent receives notification from the IRS of an impending examination or of an impending referral for examination. This program also is not available to any withholding agent that has a case pending in Appeals or in litigation on issues involving tax, withholding, or reporting obligations described in section 3 of this revenue procedure.

.01 Disclosures and representations of withholding agent. The Section 1441 VCP allows a withholding agent to come forward voluntarily to disclose withholding deficiencies and reporting errors. The Section 1441 VCP does not provide substantive determinations about a payment (such as the amount, timing, character, or source of such a payment) concerning whether or to what extent it was an amount subject to withholding. The Section 1441 VCP will proceed based on the withholding agent’s disclosures and representations regarding, for example, the amount, timing, character, and source of payments, and the U.S. or foreign status of a beneficial owner. The issuance of an acknowledgment letter, as described in section 5.06 of this revenue procedure, is not a determination of the validity of those disclosures and representations, which remain subject to subsequent examination.

.02 Failures subject to the Section 1441 VCP. The failures for which an eligible withholding agent may make a submission under the Section 1441 VCP are:

(1) Failure to withhold or pay the correct amount of tax on dividends, interest, or other income that would properly be taken into account on Form 1042 and that is paid to foreign persons (sections 1441, 1442, and 1443);

(2) Failure to withhold or pay the correct amount of backup withholding tax as the result of failure to document U.S. persons or misclassification of U.S. and foreign persons (section 3406); and

(3) Failure to correctly report information under section 1461 or, in the case of failures described in (2) above, sections 6041-6050N.

.01 In general. In general, a withholding agent submits a request under the Section 1441 VCP through a letter to the IRS at the address in section 4.08 of this revenue procedure. The submission must contain the information and documentation described in sections 4.02 and 4.03 of this revenue procedure. The IRS will not accept anonymous submissions under the Section 1441 VCP.

.02 Required information. The request for consideration under the Section 1441 VCP must contain the following information:

(1) The name, address, and taxpayer identification number of the withholding agent.

(2) A description of the current procedures that the withholding agent uses to determine tax, withholding, and reporting obligations regarding payments to foreign persons.

(3) A description of the failures in the withholding agent’s tax, withholding, and reporting procedures for payments to foreign persons, how and why the failures occurred, and the years affected by such failures.

(4) The number of persons affected by such failures and how the number was determined.

(5) A calculation of the total amount of taxes the withholding agent failed to withhold, pay, and/or report, not including interest and penalties, for tax periods open for assessment or collection under the provisions of section 6501 of the Code. This calculation should take into account properly substantiated adjustments under section 1463 of the Code. The withholding agent must agree to report and remit all of its additional tax, interest, and penalties (all as determined by the IRS), at the completion of the IRS review. See section 5 of this revenue procedure. (However, regarding the reasonable-cause exception to penalties, see section 5.02(3) of this revenue procedure.) In certain cases involving large liabilities or underpayments, the IRS will consider the withholding agent’s proposal for payment of the liability or underpayment in more than one installment, or will consider the withholding agent’s posting of a cash bond under the procedures outlined in Rev. Proc. 84-58, 1984-2 C.B. 501. See section 5.02(4) of this revenue procedure.

(6) A detailed description of the corrective procedures the withholding agent has implemented or will implement to ensure that payments to foreign persons will be subject to the correct amount of withholding and that withheld amounts will be paid over and reported to the IRS on the proper forms in a timely manner.

(7) A statement signed by the withholding agent or its authorized representative acknowledging and agreeing that the withholding agent’s participation in the section 1441 VCP will not constitute an audit of the withholding agent.

.03 Required documents. The submission must be accompanied by the following documentation:

(1) A statement that the withholding agent is an eligible withholding agent.

(2) Copies of workpapers or schedules that clearly explain the withholding agent’s calculation of its correct tax liability regarding payments to foreign persons (see section 4.02(5) of this revenue procedure). The workpapers or schedules should also show to which specific tax returns and tax periods the liability relates.

(3) Copies of the original Forms 1042 and 945, if any, as filed that relate to the above calculations.

.04 Signatures. The submission must be signed by the withholding agent or the withholding agent’s authorized representative.

.05 Power of attorney requirements. To sign the submission or to appear before the IRS in connection with the submission, a representative must comply with the requirements of section 9 of Rev. Proc. 2004-1, 2004-1 I.R.B. 1.

.06 Penalty of perjury statement. The following declaration must accompany a Section 1441 VCP submission and any factual information submitted after the original submission or any change in the submission at a later time: “Under penalties of perjury, I declare that I have examined this submission, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of the Section 1441 VCP request are true, correct, and complete.” The declaration must be signed by the withholding agent, not the withholding agent’s representative (described in section 4.05 above).

.07 Marked letter and marked envelope. The letter which transmits the submission to the IRS must be marked “Section 1441 VCP” in the upper right-hand corner of the letter, and the envelope containing the submission must be marked “Section 1441 VCP” in the lower left-hand corner of the envelope.

.08 Mailing address. The submission must be mailed to the address shown below. The IRS may issue an announcement later which contains other addresses for the mailing of Section 1441 VCP submissions.

.01 Inadequate or incomplete submission or request for additional information. If the submission fails to comply with the provisions of this revenue procedure, or if the IRS requires additional information, the IRS representative assigned to the case will contact the withholding agent or its authorized representative and explain what is needed to complete the submission. The withholding agent will have 90 business days from the date of this contact to provide the requested information. Any request for an extension of the 90-day time period must be made prior to expiration of the period and must be approved by the Section 1441 VCP Coordinator or his or her designated representative. If the requested information is not received within 90 business days (plus any extension, if granted), the matter will be closed, and the IRS may consider the case for examination.

.02 Determining tax liability. Once the IRS accepts the submission under the Section 1441 VCP, the IRS will analyze the withholding agent’s calculation of its tax liability regarding payments to foreign persons and will analyze the accompanying workpapers, schedules, and returns that support such calculation. The IRS generally will apply the following approach to determine a withholding agent’s liability for tax, interest, and penalties:

(1) The IRS will normally allow reduced rates of withholding in the computation of any adjustments to taxes and withholding of taxes on payments to foreign persons if the withholding agent has properly documented the foreign persons and if the documentation relates to the time of payment.

(2) Interest on the withholding agent’s underpayments will be due from the last date prescribed for payment of the taxes (determined without regard to the Section 1441 VCP or any extension of time for payment) to the date on which payment is received.

(3) The IRS will not assert any penalties on the withholding agent’s liability if the withholding agent’s failure to withhold, pay, and report is due to reasonable cause.

(4) In certain cases involving large liabilities, the IRS will consider the withholding agent’s proposal for payment of the liability in more than one installment. See Internal Revenue Manual (IRM) Handbook 4.20.4, Examination Collectibility Handbook. Applicants may also wish to avail themselves of the procedures for making a deposit in the nature of a cash bond as contained in Rev. Proc. 84-58, 1984-2 C.B. 501.

.03 Review of withholding agent’s corrective procedures. The withholding agent must demonstrate to the satisfaction of the IRS that it has implemented (or that it has plans for implementing) the corrective procedures described in its submission under section 4.02(6). The IRS will review the corrective procedures to assure itself that these procedures are reasonably likely to bring the withholding agent into compliance on a prospective basis. The IRS will discuss with the withholding agent the effectiveness of its corrective procedures. The IRS reserves the right to require modifications to the corrective procedures or to require additional corrective procedures before it will issue an acknowledgment letter, as described in section 5.06 below. Where the IRS believes that the corrective procedures are not adequate to ensure compliance with the relevant tax, withholding, and reporting requirements, the IRS will not issue such an acknowledgment letter.

.04 Other tax liabilities or issues. If while considering the request the IRS discovers an unrelated tax liability that properly could have been the subject of the Section 1441 VCP submission but was not properly identified in the submission, that issue will remain outside the scope of the Section 1441 VCP.

.05 Verification. As part of the processing of the Section 1441 VCP submission, the IRS reserves the right to verify that corrections have been made to the withholding agent’s tax, withholding, and reporting procedures with respect to payments to foreign persons. Verification of such corrections does not constitute an examination of the books and records of the withholding agent. If the IRS determines that the withholding agent has not implemented or does not plan to implement the proper corrections and procedures, the case may be considered for examination. More generally, the IRS does not contemplate opening examinations on issues properly within the scope of a Section 1441 VCP submission but reserves the right to do so. If the IRS decides to examine the withholding agent, the examination will be commenced and completed as soon as possible.

.06 Acknowledgment letter. If, at the conclusion of its review, the IRS is satisfied that the withholding agent has instituted policies and procedures that ensure that the correct amounts of taxes on payments to foreign persons will be withheld, paid, and reported to the IRS on the proper forms in a timely manner, and has paid its outstanding liabilities as determined under section 5.02 of this revenue procedure (or has entered into an arrangement for such payment as described in section 5.02(4)), then the IRS will issue to the withholding agent an acknowledgment letter. The letter shall indicate that, based upon the IRS review, the withholding agent is at that time in substantial compliance with its tax, withholding, and reporting obligations with respect to payments to foreign persons. However, the Section 1441 VCP does not provide substantive determinations about a payment (such as the amount, timing, character, or source of such a payment) concerning whether or to what extent it was an amount subject to withholding, and an acknowledgment letter shall expressly state that the substantial-compliance acknowledgment does not apply to whether or to what extent payments are amounts subject to withholding. After the withholding agent has received an acknowledgment letter at the completion of the Section 1441 VCP process, and provided that the withholding agent in fact complies with the agreed upon withholding, payment, and reporting procedures, the information submitted by the withholding agent to the IRS under the Section 1441 VCP will not be used as the basis to initiate an examination of the withholding agent concerning issues within the scope of the acknowledgment letter for prior tax years that were the subject of the Section 1441 VCP submission.

.07 Failure to reach resolution. If resolution cannot be reached because sufficient information is not timely provided to the IRS or because agreement cannot be reached on corrective procedures, the IRS may consider the case for examination.

.08 Applicability of sections 6103 and 6110. The information received or generated by the IRS under the Section 1441 VCP is subject to the confidentiality requirements of section 6103 of the Code. The acknowledgment letter is not a written determination letter within the meaning of section 6110.

.09 Conferences. If the IRS declines to issue an acknowledgment letter because the parties cannot agree upon the amount of tax, interest, and penalties due, or upon the required corrective procedures, the withholding agent may request a conference. The IRS, in its discretion, may grant or deny the conference request. The conference may be held either in person or by telephone. If a conference request is granted, an IRS representative will contact the withholding agent.

This document contains proposed regulations under sections 2651(e) and (f)(1) of the Internal Revenue Code (Code). Section 2651(e) was added to the Code by section 511(a) of the Taxpayer Relief Act of 1997 (Public Law 105-34; 111 Stat. 778; 1997-4 C.B. 1, vol. 1) (the 1997 Act) and expands the predeceased parent exception from GST tax previously contained in former section 2612(c)(2).

Under chapter 13 of the Code, a GST tax is imposed on all transfers, whether made directly or indirectly, to skip persons. Generally, a skip person is a person who is two or more generations below the generation of the transferor, or a trust if all of the interests are held by skip persons. The transferor is the individual who transferred property in a transaction subject to the gift or estate tax. Transfers that are subject to the GST tax are direct skips, taxable terminations, and taxable distributions. A direct skip is a transfer subject to gift or estate tax of an interest in property to a skip person. A taxable termination is the termination by death, lapse of time, release of power, or otherwise, of an interest in property held in a trust unless, immediately after the termination, a non-skip person has an interest in the property or at no time after the termination may a distribution be made from the trust to a skip person. A taxable distribution is any distribution (other than a direct skip or taxable termination) from a trust to a skip person.

For transfers before 1998, former section 2612(c)(2) provided an exception to the general rule that a transfer, either outright or in trust, to a grandchild of the transferor was a direct skip. Under former section 2612(c)(2), if a parent of the transferor’s grandchild was a lineal descendant of the transferor and that parent was deceased at the time of the transfer, the grandchild was treated as the child of the transferor for purposes of determining whether a transfer was a direct skip. This rule also applied to a transfer made to a grandchild of the transferor’s spouse or former spouse if a parent of the grandchild was a lineal descendant of the transferor’s spouse or former spouse and that parent was deceased at the time of the transfer.

Former section 2612(c)(2) further provided that, if a transferor’s grandchild was treated as the transferor’s child, the lineal descendants of that grandchild also moved up one generation level. Furthermore, if any transfer of property to a trust would be a direct skip but for the application of the exception, any generation assignment determined under this exception also applied for purposes of applying chapter 13 of the Code to transfers from the portion of the trust attributable to the property. Therefore, a subsequent distribution of property from a trust to a grandchild treated as a child of the transferor was not treated as a taxable distribution.

Section 511(a) of the 1997 Act repealed former section 2612(c)(2) and replaced it with new subsection (e) of section 2651, which contains the rules for assigning individuals to generations for purposes of the GST tax. Section 2651(e) broadens the predeceased parent rule by expanding its application to: (1) transfers that would be taxable distributions or taxable terminations; and (2) transfers to collateral heirs (lineal descendants of the transferor’s parents, or the parents of the transferor’s spouse or former spouse), provided that the transferor (or the transferor’s spouse or former spouse) has no living lineal descendants at the time of the transfer. Section 2651(e) applies to terminations, distributions, and transfers occurring after December 31, 1997.

Section 2651(e) applies if an individual is a descendant of a parent of the transferor (or the transferor’s spouse or former spouse) and if the individual’s parent, who also is a lineal descendant of the parent of the transferor (or the transferor’s spouse or former spouse), died prior to the time the transferor is subject to estate or gift tax on the transfer from which an interest of that individual is established or derived. If these criteria are satisfied, then the individual is treated under section 2651(e) as if the individual is a member of the generation that is one generation below the lower of either the transferor’s generation or the generation of the individual’s youngest living lineal ancestor who is also a descendant of the parent of the transferor (or the transferor’s spouse or former spouse). Section 2651(e) does not apply, however, to a transfer to an individual who is not a lineal descendant of the transferor (or the transferor’s spouse or former spouse) if, at the time of the transfer, the transferor (or the transferor’s spouse or former spouse, if applicable) has any living lineal descendant.

It has been determined that these proposed regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact.

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. The IRS and Treasury Department also request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for December 14, 2004, beginning at 10 a.m., in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by December 2, 2004. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Paragraph 1. The authority citation for part 26 continues to read, in part, as follows:

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

Par. 2. In §26.2600-1, the table is amended by:

The additions read as follows:

Temporary regulations in this issue of the Bulletin amend 26 CFR 1 relating to sections 338 and 1060. The temporary regulations affect the treatment of certain nuclear decommissioning funds in the allocation of purchase price in deemed and actual asset acquisitions under sections 338 and 1060. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

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 will be scheduled if requested in writing by any person timely submitting written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.

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 is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities. Nevertheless, the IRS and Treasury Department request comments from small entities that believe they might be adversely affected by these regulations. This certification is based on the fact that the regulations provide relief to purchasers of nuclear power plants, which are generally not small businesses. Therefore, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 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 the impact of these regulations.

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

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

Par. 2. Section 1.338-6 is amended by adding paragraph (c)(5) to read as follows:

Under section 269B(a)(1), if a domestic corporation and a foreign corporation are stapled entities, the foreign corporation will be treated as a domestic corporation for U.S. Federal tax purposes, unless otherwise provided in regulations. A domestic and a foreign corporation are stapled entities if more than 50 percent in value of the beneficial ownership in each corporation consists of stapled interests. Section 269B(c)(2). Interests are stapled if, by reason of form of ownership, restrictions on transfer, or other terms and conditions, in connection with the transfer of one of such interests, the other such interests are also transferred or required to be transferred. Section 269B(c)(3).

Section 269B(e) provides that a stapled foreign corporation will not be treated as a domestic corporation pursuant to section 269B(a)(1) if it is established to the satisfaction of the Secretary that the stapled corporations are foreign owned. A corporation is treated as foreign owned if U.S. persons own directly (or indirectly through applying paragraphs (2) and (3) of section 958(a) and paragraph (4) of section 318(a)) less than 50 percent of the total combined voting power of all classes of stock entitled to vote and less than 50 percent of the total value of the stock of such corporation.

On August 28, 1989, the IRS and the Treasury Department issued Notice 89-94, 1989-2 C.B. 416, announcing the intention to adopt regulations under section 269B. The notice stated that regulations would provide that a stapled foreign corporation treated as a domestic corporation under section 269B(a)(1) was nevertheless to be treated as a foreign corporation for purposes of the definition of an includible corporation under section 1504(b). Notice 89-94 explained that, under these regulations, the stapled foreign corporation’s losses would not offset the income of any member of the affiliated group unless a valid section 1504(d) election was in effect for the stapled foreign corporation.

Subsequent to the issuance of Notice 89-94, the IRS and Treasury Department became aware of instances in which taxpayers attempted to use section 269B and Notice 89-94 to manipulate the computation of their foreign tax credit limitation. These transactions typically involved stapling the interests of a domestic and foreign corporation, all or substantially all of the interests of which were held by the same person or related persons. On July 22, 2003, the IRS and Treasury Department issued Notice 2003-50, 2003-32 I.R.B. 295, to address these situations. Notice 2003-50 announced that regulations would be issued under section 269B providing that a stapled foreign corporation will be treated as a domestic corporation in determining whether it is an includible corporation for purposes of §§1.904(i)-1 and 1.861-11T(d)(6).

Except as otherwise provided, the proposed regulations are applicable for taxable years that begin after the date on which final regulations are published in the Federal Register. Section 1.269B-1(d)(1) and (f) (except in the case of the collection of tax from a 10-percent shareholder that is a foreign person) applies beginning on July 18, 1984, for any foreign corporation that became stapled to a domestic corporation after June 30, 1983, and beginning on January 1, 1987, for any foreign corporation that was stapled to a domestic corporation as of June 30, 1983. Section 1.269B-1(d)(2) applies for taxable years beginning after July 22, 2003, except that in the case of a foreign corporation that becomes stapled to a domestic corporation on or after July 22, 2003, then paragraph (d)(2) applies to taxable years ending on or after July 22, 2003. Section 1.269B-1(e) applies beginning on July 18, 1984, except that §1.269B-1(e) does not apply, and the foreign corporation continues for all U.S. tax purposes to be a foreign entity, if the foreign corporation was stapled to a domestic corporation as of June 30, 1983, was entitled to benefits under an income tax treaty in existence as of that date, and has remained eligible to claim such treaty benefits. At such time as the stapled foreign corporation is no longer eligible to claim treaty benefits, the foreign corporation is deemed to convert to a domestic corporation for U.S. tax purposes.

The IRS and the Treasury Department have 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, and that because this regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this regulation will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS specifically request comments on the clarity of the proposed regulations and how it may be made easier to understand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for December 15, 2004, at 10 a.m., in the auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by December 6, 2004. A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

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

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

Section 1.269B(b)-1 also issued under 26 U.S.C. 269B(b).

Par. 2. Section 1.269B-1 is added to read as follows:

Par 4. The authority citation for part 301 continues to read, in part, as follows:

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

Section 301.269B-1 also issued under 26 U.S.C. 269B(b).

Par. 5. Section 301.269B-1 is added to read as follows: