Notice 97-19

Bulletin No. 1997–10
March 10, 1997

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

INCOME TAX

EXEMPT ORGANIZATIONS

Rev. Rul. 97–10, page 31.
Federal rates; adjusted federal rates; adjusted federal long-term rate, and the long-term exempt rate.
For purposes of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the rates for
March 1997.

Announcement 97–18, page 67.
A list is given of organizations now classified as private
foundations.

Rev. Rul. 97–11, page 5.
Election in respect of losses attributable to a disaster. This ruling lists the areas declared by the President
to qualify as major disaster areas under the Disaster
Relief and Emergency Assistance Act since the publication of Rev. Rul. 96–13.
T.D. 8708, page 14.
Final regulations under section 902 of the Code relate to
the computation of foreign taxes deemed paid.
REG–208172–91, page 59.
Proposed regulations under sections 108 and 1017 of
the Code provide ordering rules for the reduction of
bases of property that affect taxpayers who exclude
discharge of indebtedness from gross income. A public
hearing will be held on April 24, 1997.
Rev. Proc. 97–18, page 53.
This procedure provides guidance for any bank seeking
to change its accounting method for bad debts from the
section 585 reserve method to the section 166 specific
charge-off method in order to elect S corporation status
for the 1997 tax year.
Notice 97–20, page 52.
Accounting periods; small business corporations. Procedures are provided under which a taxpayer may
automatically change its annual accounting period in
order elect to be an S corporation effective for the
taxable year beginning January 1, 1997.

Finding Lists begin on page 71.

ADMINISTRATIVE
Rev. Proc. 97–19, page 55.
Timely filing or payment; private delivery services.
Criteria and application procedures are provided for
designation of private delivery services under section
7502(f) of the Code.
Notice 97–17, page 34.
The “differential earnings rate” under section 809 is
tentatively determined for 1996 together with the “recomputed differential earnings rate” for 1995.
Notice 97–18, page 35.
This notice provides guidance concerning the application
of sections 1491 through 1494 of the Code to certain
transfers of property by a U.S. person to a foreign
corporation, partnership, trust, or estate. Pursuant to
section 1902 of the Small Business Job Protection Act
of 1996, failure to report such a transfer made after
August 20, 1996, could result in a penalty equal to 35
percent of the value of the property transferred.
Notice 97–19, page 40.
This notice provides guidance under sections 877,
2107, 2501, and 6039F for expatriates who lose U.S.
citizenship or cease to be taxed as long-term residents
of the United States with a principal purpose to avoid
U.S. taxes. This notice also provides guidance on the
interaction of section 7701(b)(10) with section 877, as
amended by the Health Insurance Portability and Accountability Act of 1996.
(Continued on page 4)

HIGHLIGHTS
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued

its program to respond to requests for fact-of-filing
information from firms in the tax professional community
with respect to their employees and associates. The tax
professional community consists of all firms that prepare tax returns, offer tax advice, or provide tax services. This includes practitioners governed by Treasury
Department Circular 230.

Announcement 97–10, page 64.
Information on new reporting for medical savings accounts, long-term care accounts, and SIMPLE retirement
accounts is provided.
Announcement 97–19, page 68.
The Service will continue, through December 31, 1997,

4

Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the

quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining of ficers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.

The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.

Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great cour tesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

2

Introduction
The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a
single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Service field offices, identifying details and information
of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory
requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in
this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

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

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 165.—Losses
26 CFR 1.165–11: Election in respect of losses
attributable to a disaster.

Election in respect of losses attributable to a disaster. This ruling lists
the areas declared by the President to
qualify as major disaster areas under the
Disaster Relief and Emergency Assistance Act since the publication of Rev.
Rul. 96–13.
Rev. Rul. 97–11
Under § 165(i) of the Internal Revenue Code, if a taxpayer suffers a loss
attributable to a disaster occurring in an
area subsequently determined by the
President of the United States to warrant

assistance by the Federal Government
under the Disaster Relief and Emergency Assistance Act, 42 U.S.C.
§§ 5121–5204c (1988 & Supp. V 1993)
(the Act), the taxpayer may elect to
claim a deduction for that loss on the
taxpayer’s federal income tax return for
the taxable year immediately preceding
the taxable year in which the disaster
occurred.
Section 1.165–11(e) of the Income
Tax Regulations provides that the election to deduct a disaster loss for the
preceding year must be made by filing a
return, an amended return, or a claim
for refund on or before the later of (1)
the due date of the taxpayer’s income
tax return (determined without regard to
any extension of time to file the return)
for the taxable year in which the disaster actually occurred, or (2) the due date
of the taxpayer’s income tax return
(determined with regard to any extension of time to file the return) for the
taxable year immediately preceding the

taxable year in which the disaster actually occurred.
The provisions of § 165(i) apply only
to losses that are otherwise deductible
under § 165(a). An individual taxpayer
may deduct losses if they are incurred in
a trade or business, if they are incurred
in a transaction entered into for profit,
or if they are casualty losses under
§ 165(c)(3).
The President has determined that
during 1996 the areas listed below have
been adversely affected by disasters of
sufficient severity and magnitude to
warrant assistance by the Federal Government under the Act.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Jonathan Strum of the Office
of Assistant Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue ruling, contact
Mr. Strum on (202) 622–4960 (not a
toll-free call).

Disaster Areas in 1996

Type of Disaster

Date of Disaster

Alabama
Counties of Blount, Colbert, Cullman, DeKalb, Etowah,
Jackson, Lauderdale, Lawrence, Limestone, Madison,
Marion, Marshall, Morgan, and Winston

Severe winter
storm, ice and
flooding

February 1-12, 1996

Severe storms,
flooding and tornadoes

March 5-6, 1996

Alaska
The City of Houston; and the Matanuska-Susitna Borough

Wildland fires

June 2-15, 1996

Arkansas
Counties of Crawford, Franklin, Madison, Marion, Sebastian,
and Washington

Severe storms and
tornadoes

April 21-22, 1996

Severe storms,
flooding, mud and
land slides

December 28, 1996

Blizzard of 1996

January 7-13, 1996

Delaware
Counties of Kent, New Castle, and Sussex

Blizzard of 1996

January 6-12, 1996

District of Columbia

Blizzard of 1996

January 6-12, 1996

Counties of Dallas, Macon, and Montgomery

California
Counties of Alameda, Alpine, Amador, Butte, Calaveras,
Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn,
Humboldt, Lake, Lassen, Madera, Marin, Mariposa,
Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Placer, Plumas, Sacramento, San Benito, San Francisco,
San Joaquin, San Mateo, Santa Clara, Santa Cruz, Shasta,
Sierra, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama,
Trinity, Tulare, Tuolumne, Yolo, and Yuba; and the City of
Morgan Hill
Connecticut
Counties of Fairfield, Hartford, Litchfield, Middlesex, New
Haven, New London, Tolland, and Windham

5

Disaster Areas in 1996

Type of Disaster

Date of Disaster

Storm surge,
heavy rains, flooding, and wind
damage due to
Tropical Storm
Josephine

October 7, 1996

Prolonged and
heavy rains, high
surf, flooding,
landslides,
mudslices and
severe storms

November 5-December 9, 1996

Idaho
Counties of Benewah, Bonner, Boundary, Clearwater, Idaho,
Kootenai, Latah, Lewis, Nez Perce, and Shoshone; and the
Nez Perce Indian Reservation

Severe storms and
flooding

February 6-23, 1996

Counties of Adams, Benewah, Bonner, Boundary, Boise,
Clearwater, Elmore, Gem, Idaho, Kootenai, Latah, Nez Perce,
Owyhee, Payette, Shoshone, Valley, and Washington

Severe storms,
flooding, mud and
land slides

November 16, 1996-January 3, 1997

Severe storms and
tornadoes

April 18-19, 1996

Counties of Adams, Brown, Cass, Champaign, Crawford,
Cumberland, Douglas, Effingham, Franklin, Gallatin,
Hamilton, Hancock, Jackson, Jasper, Lawrence, Madison,
Menard, Monroe, Perry, Richland, Saline, Sangamon,
Schuyler, St. Clair, Vermilion, Wabash, White, and Williamson

Severe storms and
flooding

April 28-May 17, 1996

Counties of Cook, Dekalb, DuPage, Grundy, Kane, Kendall,
LaSalle, Ogle, Stephenson, Will, and Winnebago

Severe storms and
flooding

July 17-August 7, 1996

Blizzard of 1996

January 6-12, 1996

Severe storms and
flooding

April 28-May 25, 1996

Severe storms and
flooding

May 8-28, 1996

Severe storms and
flooding

June 15-30, 1996

Florida
Counties of Baker, Citrus, Clay, Dixie, Duval, Hernando,
Hillsborough, Levy, Manatee, Nassau, Pasco, Pinellas,
Putnam, Sarasota, Taylor, and Volusia

Hawaii
Island of Oahu

Illinois
Counties of Champaign, Henry, Lake, Macon, and Marion

Indiana
Counties of Bartholomew, Blackford, Boone, Brown, Clark,
Clay, Clinton, Crawford, Daviess, Dearborn, Decatur, Delaware, Dubois, Fayette, Floyd, Franklin, Gibson, Greene,
Hamilton, Hancock, Harrison, Hendricks, Henry, Jackson,
Jay, Jefferson, Jennings, Johnson, Knox, Lawrence, Madison,
Marion, Monroe, Montgomery, Morgan, Ohio, Orange,
Owen, Parke, Perry, Pike, Posey, Putnam, Randolph, Rush,
Scott, Shelby, Spencer, Sullivan, Switzerland, Tipton, Union,
Vigo, Warrick, Washington, and Wayne.
Counties of Brown, Crawford, Daviess, Dearborn, Dekalb,
Dubois, Franklin, Gibson, Harrison, Jefferson, Knox,
Lawrence, Martin, Montgomery, Ohio, Orange, Perry, Pike,
Posey, Putnam, Ripley, Steuben, Sullivan, Switzerland,
Union, Vanderburgh, Warrick, Washington, and Whitley.
Iowa
Counties of Adair, Adams, Des Moines, Henry, Iowa,
Johnson, Keokuk, Lee, Louisa, Madison, Mahaska,
Muscatine, Ringgold, Taylor, Union, and Washington.
Counties of Audubon, Boone, Cherokee, Crawford, Hamilton,
Hardin, Harrison, Ida, Monona, Plymouth, Pottawattamie,
Sac, Shelby, Story, and Woodbury.

6

Disaster Areas in 1996

Type of Disaster

Date of Disaster

Counties of Adair, Allen, Anderson, Ballard, Barren, Bath,
Bell, Boone, Bourbon, Boyd, Boyle, Bracken, Breathitt,
Breckinridge, Bullitt, Butler, Caldwell, Calloway, Campbell,
Carlisle, Carroll, Carter, Casey, Christian, Clark, Clay,
Clinton, Crittenden, Cumberland, Daviess, Edmonson, Elliott,
Estill, Fayette, Fleming, Floyd, Franklin, Fulton, Gallatin,
Garrard, Grant, Graves, Grayson, Green, Greenup, Hancock,
Hardin, Harlan, Harrison, Hart, Henderson, Henry, Hickman,
Hopkins, Jackson, Jefferson, Jessamine, Johnson, Kenton,
Knott, Knox, Larue, Laurel, Lawrence, Lee, Leslie, Letcher,
Lewis, Lincoln, Livingston, Logan, Lyon, McCracken, McCreary, McLean, Madison, Magoffin, Marion, Marshall,
Martin, Mason, Meade, Menifee, Mercer, Metcalfe, Monroe,
Montgomery, Morgan, Muhlenberg, Nelson, Nicholas, Ohio,
Oldham, Owen, Owsley, Pendleton, Perry, Pike, Powell,
Pulaski, Robertson, Rockcastle, Rowan, Russell, Scott,
Shelby, Simpson, Spencer, Taylor, Todd, Trigg, Trimble,
Union, Warren, Washington, Wayne, Webster, Whitley, Wolfe,
and Woodford

Blizzard of 1996

January 5-12, 1996

Counties of Bullitt, Owsley, Perry, and Spencer

Severe storms,
flooding and tornadoes

May 28, 1996

Severe storms, ice
jams and flooding

January 19-February 6, 1996

Counties of Androscroggin, Cumberland, Knox, Oxford, and
York

Severe storms,
mudslides, inland
and coastal flooding

April 16-17, 1996

Counties of Cumberland, Oxford, and York

Severe storms,
heavy rains, high
winds, and inland
and coastal flooding

October 20-26, 1996

Blizzard of 1996

January 6-12, 1996

Counties of Allegany, Carroll, Cecil, Frederick, Garrett, and
Washington

Flooding and severe storms

January 19-31, 1996

Counties of Allegany and Frederick

Severe storms and
flooding associated with Tropical
Storm Fran

September 6-9, 1996

Blizzard of 1996

January 7-13, 1996

Extreme weather
conditions and
flooding

October 20-25, 1996

Kentucky

Maine
Counties of Androscroggin, Franklin, Oxford, Penobscot,
Piscataquis, Somerset, and Waldo

Maryland
Counties of Allegany, Anne Arundel, Baltimore, Calvert,
Caroline, Carroll, Cecil, Charles, Dorchester, Frederick, Garrett, Harford, Howard, Kent, Montgomery, Prince Georges,
Queen Anne’s, Somerset, St. Mary’s, Talbot, Washington,
Wicomico and Worchester; and the Cities of Baltimore and
Ocean City.

Massachusetts
Counties of Barnstable, Berkshire, Bristol, Dukes, Essex,
Franklin, Hampden, Hampshire, Middlesex, Nantucket, Norfolk, Plymouth, Suffolk, and Worcester
Counties of Essex, Middlesex, Norfolk, Plymouth, and
Suffolk

7

Disaster Areas in 1996

Type of Disaster

Date of Disaster

Michigan
Counties of Bay, Lapeer, Midland, Saginaw, Sanilac, St.Clair,
and Tuscola

Severe storms and
flooding

June 21-July 1, 1996

Severe storms and
flooding

March 14-June 17, 1996

Severe ice storms

November 14-30, 1996

Severe storms,
flooding and ice
jams

February 4-29, 1996

Severe storms,
flooding, ice jams
and excessive soil
saturation

March 9-June 5, 1996

Tornado and severe storms

May 8-28, 1996

Severe storms,
flooding, mud and
land slides

December 20, 1996—January 17, 1997

Fall Northeaster
rainstorm

October 20-26, 1996

Blizzard of 1996

January 6-12, 1996

Severe storm and
flooding

October 18-23, 1996

Blizzard of 1996

January 6-12, 1996

Counties of Albany, Allegany, Broome, Cattaraugus, Cayuga,
Chemung, Chenango, Clinton, Columbia, Cortland, Delaware,
Dutchess, Essex, Franklin, Greene, Herkimer, Jefferson,
Lewis, Livingston, Madison, Montgomery, Onondaga,
Ontario, Orange, Otsego, Putnam, Rensselaer, Saratoga,
Schenectady, Schoharie, Schuyler, Steuben, St. Lawrence,
Sullivan, Tioga, Tompkins, Ulster, Warren, Washington, Wyoming, and Yates

Severe storms and
flooding

January 19-30, 1996

New York City; and the Counties of Nassau, Suffolk, and
Westchester

Severe storms and
flooding

October 19-20, 1996

Minnesota
Counties of Aitkin, Beltrami, Big Stone, Blue Earth, Chisago,
Clay, Clearwater, Dakota, Faribault, Freeborn, Kittson,
Koochiching, Lake of the Woods, Marshall, Nicollet, Norman, Pennington, Polk, Pope, Red Lake, Roseau, Steele,
Traverse, Wabasha, Waseca, and Washington
Counties of Cottonwood, Faribault, Freeborn, Jackson, Lincoln, Lyon, Murray, Nobles, Pipestone, Rock, Waseca, and
Yellow Medicine
Montana
Counties of Chouteau, Deer Lodge, Gallatin, Jefferson, Lewis
and Clark, Lincoln, Meagher, Mineral, Missoula, Park,
Powell, Ravalli, Sanders, and Silver Bow
Counties of Blain, Flathead, Hill, Liberty, Phillips, and Toole

Nebraska
Counties of Gage, Johnson, Nemaha, and Otoe
Nevada
Counties of Churchill, Douglas, Lyon, Mineral, Storey and
Washoe; and the City of Carson City; and the Walker River
Paiute tribal lands located in Churchill, Lyon, and Mineral
Counties
New Hampshire
Counties of Hillsborough, Merrimack, Rockingham, Strafford, and Sullivan
New Jersey
Counties of Atlantic, Bergen, Burlington, Camden, Cape
May, Cumberland, Essex, Gloucester, Hudson, Hunterdon,
Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union, and Warren
Counties of Hudson, Middlesex, Morris, Somerset, and
Union
New York
Counties of Albany, Bronx, Columbia, Delaware, Dutchess,
Greene, Kings, Nassau, New York, Orange, Putnam, Queens,
Rensselaer, Richmond, Rockland, Suffolk, Sullivan, Ulster,
and Westchester

8

Disaster Areas in 1996

Type of Disaster

Date of Disaster

Severe thunderstorms, high
winds, rain, and
flooding

November 8-15, 1996

Blizzard of 1996

January 6-12, 1996

Counties of Alexander, Burke, Caldwell, Caswell, Catawba,
Cherokee, Cleveland, Davidson, Davie, Forsyth, Gaston,
Gates, Guilford, Halifax, Haywood, Henderson, Hertford,
Iredell, Lincoln, Madison, McDowell, Montgomery,
Northampton, Polk, Randolph, Rockingham, Rutherford
Stokes, Surry, Warren, Watauga, Wilkes, Yadkin, and Yancey

Winter storm

February 2-9, 1996

Counties of Beaufort, Bladen, Brunswick, Cateret, Chowan,
Columbus, Craven, Duplin, Greene, Hyde, Jones, Lenoir,
New Hanover, Onslow, Pamlico, Pender, and Pitt

Severe storms,
high wind, and
flooding and related effects of
Hurricane Bertha

July 10-13, 1996

All Counties

Hurricane Fran

September 5-7, 1996

Counties of Alamance, Anson, Beaufort, Bertie, Bladen,
Brunswick, Buncombe, Caswell, Cateret, Chatham, Chowan,
Columbus, Craven, Cumberland, Davidson, Duplin, Durham,
Edgecombe, Franklin, Granville, Greene, Guilford, Halifax,
Harnett, Henderson, Hertford, Hoke, Hyde, Johnston, Jones,
Lee, Lenoir, Martin, Moore, Nash, New Hanover, Onslow,
Orange, Pamlico, Pender, Person, Pitt, Polk, Randolph,
Richmond, Robeson, Rockingham, Rutherford, Sampson,
Scotland, Stanley, Vance, Wake, Warren, Wayne, and Wilson

Hurricane Fran

September 5-October 21, 1996

North Dakota
Counties of Barnes, Benson, Burleigh, Cass, Cavalier,
Dickey, Eddy, Emmons, Foster, Grand Forks, Grant, Griggs,
Kidder, LaMoure, Logan, McHenry, McIntosh, McLean,
Morton, Nelson, Oliver, Pembina, Pierce, Ramsey, Ransom,
Richland, Sargent, Sheridan, Steele, Stutsman, Traill, Walsh,
and Wells

Severe storms,
flooding, ice jams,
and ground saturation due to high
water tables

March 12-June 21, 1996

Ohio
Counties of Adams, Belmont, Brown, Clermont, Columbiana,
Gallia, Hamilton, Jefferson, Lawrence, Meigs, Monroe,
Scioto, and Washington

Severe storms and
flooding

January 20-31, 1996

Flooding

May 2-June 24, 1996

Counties of Chemung, Clinton, Delaware, Essex, Franklin,
Fulton, Lewis, Montgomery, Schoharie, Schuyler, Steuben,
and Tompkins
North Carolina
Counties of Alamance, Alexander, Alleghany, Ashe, Avery,
Bertie, Buncombe, Burke, Cabarrus, Caldwell, Camden,
Caswell, Catawba, Chatham, Cherokee, Chowan, Cleveland,
Davidson, Davie, Durham, Edgecombe, Forsyth, Franklin,
Gaston, Gates, Graham, Granville, Guilford, Halifax, Harnett,
Haywood, Henderson, Hertford, High Point, Iredell, Jackson,
Johnston, Lee, Lincoln, Macon, Madison, McDowell,
Mecklenburg, Mitchell, Montgomery, Moore, Nash,
Northampton, Orange, Pasquotank, Person, Pitt, Polk,
Randolph, Rockingham, Rowan, Rutherford, Stanley, Stokes,
Surry, Swain, Transylvania, Union, Vance, Wake, Warren,
Watauga, Wilkes, Wilson, Yadkin, and Yancey; and the
Eastern Band of Cherokee Indians Reservation

Counties of Adams, Belmont, Brown, Butler, Clermont,
Gallia, Hamilton, Hocking, Jefferson, Lawrence, Meigs,
Monroe, Paulding, Scioto, Vinton, and Williams

9

Disaster Areas in 1996

Type of Disaster

Date of Disaster

High winds, severe storms and
flooding

February 4-21, 1996

Counties of Coos, Douglas, and Lane

Flooding, land and
mud slides, and
severe storms

November 17-December 11, 1996

Counties of Baker, Gilliam, Grant, Jackson, Josephine,
Klamath, Morrow, and Wheeler

Severe winter
storms, land and
mudslides and
flooding

December 25, 1996-January 6, 1997

Blizzard of 1996

January 6-12, 1996

Counties of Adams, Allegheny, Armstrong, Beaver, Bedford,
Berks, Blair, Bradford, Bucks, Butler, Cambria, Cameron,
Carbon, Centre, Chester, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Dauphin, Delaware, Elk, Erie,
Fayette, Forest, Franklin, Fulton, Greene, Huntingdon, Indiana, Jefferson, Juniata, Lackawanna, Lancaster, Lawrence,
Lebanon, Lehigh, Luzerne, Lycoming, Mercer, McKean,
Mifflin, Monroe, Montgomery, Montour, Northampton,
Northumberland, Philadelphia, Perry, Pike, Potter, Schuylkill,
Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union,
Venango, Warren, Washington, Wayne, Westmoreland, Wyoming, and York

Severe storms and
flooding

January 19-February 1, 1996

Counties of Adams, Beaver, Bedford, Bucks, and Franklin

Severe storms and
flooding

June 12-19, 1996

Counties of Armstrong, Blair, Cambria, Clarion, Clearfield,
Crawford, Greene, Indiana, Jefferson, and Venango

Severe storms,
flooding and tornadoes

July 19, 1996

Counties of Cumberland, Huntingdon, Juniata, Mifflin, Montgomery, and Perry

Flooding associated with Tropical
Depression Fran

September 6-8, 1996

County of Tioga

Severe thunderstorms, high
winds, rain and
flooding

November 8-15, 1996

Oregon
Counties of Benton, Clackamas, Clatsop, Columbia, Coos,
Deschutes, Douglas, Gilliam, Hood River, Jefferson,
Josephine, Lane, Lincoln, Linn, Marion, Morrow,
Multnomah, Polk, Sherman, Tillamook, Umatilla, Union,
Wallowa, Wasco, Washington, Wheeler, and Yamhill; and the
lands of the Coquille Indian Tribe, the Confederated Tribes
of Umatilla Indian Reservation, and the Warm Springs Indian
Reservation.

Pennsylvania
Counties of Adams, Allegheny, Armstrong, Bedford, Berks,
Blair, Bradford, Bucks, Cambria, Carbon, Centre, Chester,
Clearfield, Clinton, Columbia, Cumberland, Dauphin, Delaware, Fayette, Franklin, Fulton, Greene, Huntingdon, Indiana,
Juniata, Lackawanna, Lancaster, Lebanon, Lehigh, Luzerne,
Lycoming, Mifflin, Monroe, Montgomery, Montour,
Northampton, Northumberland, Perry, Philadelphia, Pike,
Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Union,
Washington, Wayne, Westmoreland, Wyoming, and York

10

Disaster Areas in 1996
Puerto Rico
Municipalities of Adjuntas, Aguada, Aguadilla, Aibonito,
Anasco, Arecibo, Arroyo, Augas Buenas, Barceloneta, Barranquitas, Bayamon, Cabo Rojo, Caguas, Camuy, Canovanas,
Carolina, Catano, Cayey, Ceiba, Ciales, Cidra, Coamo,
Comerio, Corozal, Dorado, Florida, Guanica, Guayama,
Guayanilla, Guaynabo, Gurabo, Hatillo, Humacao, Isabela,
Jayuya, Juana Diaz, Juncos, Lares, Las Marias, Las Piedras,
Loiza, Manati, Maricao, Maunabo, Mayaguez, Moca,
Morovis, Naguabo, Naranjito, Orocovis, Patillas, Penuelas,
Ponce, Quebradillas, Rincon, Rio Grande, Salinas, San
German, San Juan, San Lorenzo, San Sebastian, Santa Isabel,
Toa Alta, Toa Baja, Trujillo Alto, Utuado, Vega Alta, Vega
Baja, Villalbo, Yabucoa, and Yauco
Rhode Island
Counties of Bristol, Kent, Newport, Providence, and Washington
South Carolina
Counties of Dillon, Georgetown, Horry, Marion, and Williamsburg

U.S. Virgin Islands
Islands of St. Croix, St. John, and St. Thomas
Vermont
Counties of Addison, Bennington, Chittenden, Franklin,
Lamoille, Orange, Orleans, Rutland, Washington, Windham,
and Windsor
County of Windham
Virginia
Counties of Accomack, Albermarle, Alleghany, Amelia,
Amherst, Appomattox, Arlington, Augusta, Bath, Bedford,
Bland, Botetourt, Brunswick, Buchanan, Buckingham,
Campbell, Caroline, Carroll, Charlotte, Charles City, Chesterfield, Clarke, Craig, Culpeper, Cumberland, Dickenson,
Dinwiddie, Essex, Fauquier, Fairfax, Floyd, Fluvanna,
Franklin, Frederick, Giles, Gloucester, Goochland, Grayson,
Greene, Greensville, Halifax, Hanover, Henrico, Henry, Highland, Isle of Wight, James City, King George, King &
Queen, King William, Lancaster, Lee, Loudoun, Louisa,
Lunenburg, Madison, Mathews, Mecklenburg, Middlesex,
Montgomery, Nelson, New Kent, Northhampton,
Northumberland, Nottoway, Orange, Page, Patrick,
Pittsylvania, Powhatan, Prince George, Prince William,
Pulaski, Rappahannock, Richmond, Roanoke, Rockbridge,
Rockingham, Russell, Scott, Shenandoah, Smyth, Southhampton, Spotsylvania, Stafford, Surry, Sussex, Tazewell,
Warren, Washington, Westmoreland, Wise, Wythe, and York;
and Cities of Alexandria, Bedford, Bristol, Buena Vista,
Charlottesville, Chesapeake, Clifton Forge, Colonial Heights,
Covington, Danville, Emporia, Fairfax, Falls Church,
Franklin, Fredericksberg, Galax, Hampton, Harrisonburg,
Hopewell, Lexington, Lynchburg, Manassas, Manassas Park,

11

Type of Disaster

Date of Disaster

Hurricane
Hortense

September 9-11, 1996

Blizzard of 1996

January 7-13, 1996

Severe winds
and flooding
associated with
Hurricane Fran

September 4-October 15, 1996

Hurricane Bertha

July 8-9, 1996

Ice jams and
flooding

January 19-February 2, 1996

Extreme rainfall
and flooding

June 12-14, 1996

Blizzard of
1996

January 6-12, 1996

Disaster Areas in 1996

Type of Disaster

Date of Disaster

Martinsville, Newport News, Norfolk, Norton, Petersburg,
Portsmouth, Poquoson, Radford, Richmond, Roanoke, Salem,
South Boston Town, Staunton, Suffolk, Virginia Beach,
Waynesboro, Williamsburg, and Winchester

Blizzard of 1996

January 6-12, 1996

Counties of Alleghany, Augusta, Bath, Bland, Botetourt,
Clarke, Fauquier, Frederick, Giles, Grayson, Greene, Highland, Loudoun, Page, Pulaski, Rappahanock, Rockbridge,
Rockingham, Shenandoah, Warren, Washington, and Wythe;
and the Cities of Buena Vista, Clifton Forge, Covington,
Harrisonburg, and Waynesboro

Severe storm, high
winds, flooding,
and wind-driven
rain

January 19-February 1, 1996

All Counties

Hurricane Fran

September 5-7, 1996

Counties of Accomack, Albemarle, Alleghany, Amelia,
Amherst, Appomattox, Augusta, Bath, Bedford, Botetourt,
Brunswick, Buckingham, Campbell, Charles City, Charlotte,
Chesterfield, Clarke, Culpeper, Cumberland, Dinwiddie, Essex, Fluvanna, Giles, Gloucester, Goochland, Greene,
Greenville, Halifax, Hampton City, Henrico, Henry, Highland, Isle of Wight, James City, King & Queen, King
George, King William, Lancaster, Louisa, Lunenburg, Madison, Mathews, Mecklenburg, Middlesex, Montgomery,
Nelson, New Kent, Northampton, Northumberland, Nottoway,
Orange, Page, Pittsylvania, Powhattan, Prince Edward, Prince
George, Prince William, Rappahannock, Richmond, Roanoke,
Rockbridge, Rockingham, Shenandoah, Stafford, Surry, Warren, Westmoreland, and York; and the Cities of Bedford,
Buena Vista, Charlottesville, Danville, Emporia,
Fredericksburg, Hampton, Harrisonburg, Hopewell, Lexington, Lynchburg, Martinsville, Newport News, Poquoson,
Staunton, Suffolk, Waynesboro, and Williamsburg

Hurricane Fran
and severe storm
conditions including high winds,
tornadoes, winddriven rain, and
river and flash
flooding

September 5-23, 1996

High winds, severe storms and
flooding

January 26-February 23, 1996

Counties of Klickitat, Pend Oreille, and Spokane

Severe ice storms

November 19-December 4, 1996

Counties of Adams, Asotin, Benton, Chelan, Clallam, Clark,
Columbia, Cowlitz, Ferry, Garfield, Grant, Grays Harbor,
Island, Jefferson, King, Kitsap, Kittitas, Klickitat, Lewis,
Lincoln, Mason, Okanogan, Pacific, Pend Oreille, Pierce, San
Juan, Skagit, Skamania, Snohomish, Spokane, Stevens,
Thurston, Walla Walla, Whatcom, Whitman, and Yakima

Winter storms,
land and
mudslides and
flooding

December 26, 1996

Blizzard of 1996

January 6-12, 1996

Virginia—Continued

Washington
Counties of Adams, Asotin, Benton, Clark, Columbia,
Cowlitz, Garfield, Grays Harbor, King, Kitsap, Kittitas,
Klickitat, Lewis, Lincoln, Pierce, Skagit, Skamania, Snohomish, Spokane, Thurston, Wahkiakum, Walla Walla, Whitman,
and Yakima

West Virginia
Counties of Barbour, Berkeley, Boone, Braxton, Brooke,
Cabell, Calhoun, Clay, Doddridge, Fayette, Gilmer, Grant,
Greenbrier, Hampshire, Hancock, Hardy, Harrison, Jackson,
Jefferson, Kanawha, Lewis, Lincoln, Logan, Marion,
Marshall, Mason, McDowell, Mercer, Mineral, Mingo,
Monongalia, Monroe, Morgan, Nicholas, Ohio, Pendleton,
Pleasants, Pocahontas, Preston, Putnam, Raleigh, Randolph,
Ritchie, Roane, Summers, Taylor, Tucker, Tyler, Upshur,
Wayne, Webster, Wetzel, Wirt, Wood, and Wyoming

12

Disaster Areas in 1996

Type of Disaster

Date of Disaster

Counties of Berkeley, Brooke, Grant, Greenbriar, Hampshire,
Hancock, Hardy, Jefferson, Marshall, Mason, Mercer, Mineral, Monroe, Morgan, Nicholas, Ohio, Pendleton, Pleasants,
Pocahontas, Preston, Raleigh, Randolph, Summers, Tucker,
Tyler, Webster, Wetzel, and Wood

Flooding

January 19-February 2, 1996

Counties of Barbour, Boone, Harrison, Lincoln, Logan,
McDowell, Mercer, Mingo, Pendleton, Pocahontas, Raleigh,
Randolph, Tucker, Upshur, Wayne, Wetzel, and Wyoming

Flooding and
heavy winds

May 15-June 10, 1996

Counties of Barbour, Braxton, Clay, Gilmer, Monongalia,
Nicholas, Randolph, and Webster

Heavy rains, high
winds, flooding,
and slides

July 18-31, 1996

Counties of Berkeley, Grant, Hardy, Hampshire, Jefferson,
Mineral, Morgan, Pendleton, Randolph, and Tucker

Heavy rain, high
wind, flooding
and slides due to
Hurricane Fran

September 5-8, 1996

Tornadoes, severe
storms and flooding

July 17-22, 1996

West Virginia—Continued

Wisconsin
Counties of Fond du Lac and Green

Section 166.—Bad Debts
26 CFR 1.166–4: Bad debts.
How does a bank change its method of accounting for bad debts from the § 585 reserve method
to the § 166 specific charge-off method so that it
may elect S corporation status for the 1997 tax
year? See Rev. Proc. 97–18, page 53.

Section 280G.—Golden Parachute
Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of March 1997.
See Rev. Rul. 97–10, page 31.

Section 382.—Limitation on Net
Operating Loss Carryforwards and
Certain Built-In Losses Following
Ownership Change
The adjusted federal long-term rate is set forth
for the month of March 1997. See Rev. Rul.
97–10, page 31.

Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 446.—General Rule for
Methods of Accounting

How does a bank change its method of accounting for bad debts from the § 585 reserve method
to the § 166 specific charge-off method so that it
may elect S corporation status for the 1997 tax
year? See Rev. Proc. 97–18, page 53.

Section 467.—Certain Payments
for the Use of Property or Services
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 481.—Adjustments
Required by Changes in Method of
Accounting
26 CFR 1.481–1: Adjustments in general.
How does a bank change its method of accounting for bad debts from the § 585 reserve method
to the § 166 specific charge-off method so that it
may elect S corporation status for the 1997 tax
year? See Rev. Proc. 97–18, page 53.

26 CFR 1.446–1: General rule for methods of
accounting.

13

Section 483.—Interest on Certain
Deferred Payments
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 585.—Reserves for Bad
Debts
26 CFR 1.585–1: Reserve for losses on loans of
banks.
How does a bank change its method of accounting for bad debts from the § 585 reserve method
to the § 166 specific charge-off method so that it
may elect S corporation status for the 1997 tax
year? See Rev. Proc. 97–18, page 53.

Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 846.—Discounted Unpaid
Losses Defined
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 877.—Expatriation To
Avoid Tax
What are the tax consequences under sections
877, 2107, 2501, and 6039F for individuals who
lose U.S. citizenship or cease to be taxed as
long-term residents of the United States with a
principal purpose to avoid U.S. taxes? See Notice
97–19, page 40.

Section 902.—Deemed Paid Credit
Where Domestic Corporation Owns
10 Percent or More of Voting Stock
of Foreign Corporation
26 CFR 1.902.1: Credit for domestic corporate
shareholder of a foreign corporation for foreign
income taxes paid by the foreign corporation.

T.D. 8708
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Computation of Foreign Taxes
Deemed Paid Under Section 902
Pursuant to a Pooling Mechanism
for Undistributed Earnings and
Foreign Taxes
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final income tax regulations relating to
the computation of foreign taxes deemed
paid under section 902. Changes to the
applicable law were made by the Tax
Reform Act of 1986 and by the Technical and Miscellaneous Revenue Act of
1988 (TAMRA). These regulations provide guidance needed to comply with
these changes and affect foreign corporations and their United States corporate
shareholders.
DATES: These regulations are effective
January 7, 1997.
Applicability: For the specific dates
of applicability of these regulations, see
§§ 1.902–1(g) and 1.902–3(l).
FOR FURTHER INFORMATION
CONTACT: Caren S. Shein (202) 622–
3850 (not a toll free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number

1545– 1458. Responses to these collections of information are required by the
IRS to implement the section 902 pooling regime enacted in the Tax Reform
Act of 1986.
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.
The burden for the collection of information is reflected in the burden for
Form 1118.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attention: IRS Reports Clearance Officer
T:FP, Washington, DC 20224, and to the
Office of Management and Budget,
Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to the collections 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.
Background
Section 902 (26 CFR part 1) was
amended by section 1202(a) of the Tax
Reform Act of 1986 (Public Law 99–
514, 100 Stat. 1085), and section
1012(b) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA)
(Public Law 100– 647, 102 Stat. 3242).
On January 6, 1995, the IRS published a
notice of proposed rulemaking in the
Federal Register (60 FR 2049 [INTL–
933–86 (1995–1 C.B. 959)]). The proposed regulations provide guidance
needed to comply with section 902 as
amended in 1986 and 1988. No public
hearing was requested or held, but numerous written comments were received.
The proposed regulations, with certain
changes made in response to comments,
are adopted in this Treasury decision as
final regulations. The principal changes
to the regulations, as well as the major
comments and suggestions, are discussed below.
Explanation of Provisions
Section 1.902–1
In the preamble to the proposed regulations, the IRS requested comments on

14

whether the holding of Revenue Ruling
71–141 (1971–1 C.B. 211) should be
expanded to allow taxes paid by a
foreign corporation to be considered
deemed paid by domestic corporations
that are partners in domestic limited
partnerships or foreign partnerships,
shareholders in limited liability companies, beneficiaries of domestic or foreign
trusts and estates, or interest holders in
other pass-through entities. The revenue
ruling held that two 50-percent domestic
corporate general partners of a domestic
general partnership that owned 40 percent of a foreign corporation were entitled to compute an amount of foreign
taxes deemed paid under section 902
with respect to dividends they received
from the foreign corporation through the
partnership.
The IRS received numerous comments in response to the request in the
preamble. The commenters uniformly
argue that the aggregate theory of partnerships should apply to allow domestic
corporate partners to compute an
amount of foreign taxes deemed paid
with respect to dividends paid to any
partnership by a foreign corporation,
provided that the partner owns at least
10 percent of the voting stock of the
foreign corporation through the partnership.
The final regulations do not resolve
under what circumstances a domestic
corporate partner may compute an
amount of foreign taxes deemed paid
with respect to dividends received from
a foreign corporation by a partnership or
other pass-through entity. That issue will
be the subject of a future proposed
regulations project. However, in recognition of the holding in Revenue Ruling
71–141 (1971–1 C.B. 211) that a general partner of a domestic general partnership may compute an amount of
foreign taxes deemed paid with respect
to a dividend distribution from a foreign
corporation to the partnership, § 1.902–
1(a)(1) is amended to define a domestic
shareholder as a domestic corporation
that ‘‘owns’’ the requisite voting stock
in a foreign corporation rather than one
that ‘‘owns directly’’ the voting stock.
The IRS is still considering under what
other circumstances the revenue ruling
should apply.
Section 1.902–1(a)(8) is amended to
clarify under what circumstances the
pool of post-1986 foreign income taxes
must be reduced to account for distributions made in prior post-1986 taxable
years. The regulations require a reduction in the taxes pool for taxes attribut-

able to earnings distributed to shareholders ineligible for the deemed paid credit
(for example, a foreign shareholder, a
U.S. individual shareholder, or a domestic corporate shareholder that owns less
than 10 percent of the foreign corporation’s voting stock) and to shareholders
that are eligible for the credit but that
choose to deduct foreign taxes under
section 164(a) in the year of the distribution rather than claim a credit.
The IRS understands that some taxpayers have taken the position, contrary
to the position taken in § 1.902–1(a)(8)
of the proposed regulations, that although post-1986 undistributed earnings
must be reduced to account for all
distributions out of current or accumulated earnings and profits, post-1986
foreign income taxes should be reduced
only to account for taxes attributable to
distributions with respect to which a
shareholder both is eligible to claim a
credit for foreign taxes deemed paid
under section 902(a) and in fact elects
to credit foreign taxes for the taxable
year under section 901(a). These taxpayers argue that only in those circumstances are foreign taxes ‘‘deemed paid’’
and thus required to be removed from
the taxes pool under a literal reading of
sections 902(a) and 902(c)(2)(B).
The IRS has not changed its position
as reflected in § 1.902–1(a)(8)(i) of the
proposed regulations that the foreign
taxes pool must be reduced to account
for foreign taxes attributable to all distributions and deemed distributions or
inclusions to all shareholders. However,
the text of the final regulations has been
amended to clarify the rule. The requirement that the foreign taxes pool must be
reduced proportionately as the earnings
pool is reduced is consistent with the
legislative history of the Tax Reform
Act of 1986 (Public Law 99–514). The
House Report states that under the pooling regime, ‘‘[a] dividend or subpart F
inclusion is considered to bring with it a
pro rata share of the accumulated foreign taxes paid by the subsidiary.’’ H.R.
Rep. No. 426, 99th Cong., 1st Sess. 357
(1985). In addition, removing taxes attributable to distributions to ineligible
shareholders and eligible shareholders
that choose to deduct foreign taxes is
supported by the general matching principles of section 902, which presume
that a dividend distribution will carry
with it a ratable share of the foreign
corporation’s taxes. If taxes paid with
respect to distributed earnings remained
in the pool, eligible shareholders eventually could receive credits for more than

their ratable share of the foreign corporation’s taxes, a result at odds with the
statutory scheme.
Section 1.902–1(a)(8)(i) is amended
to correct an oversight in the proposed
regulation. In the case of a distribution
out of current earnings and profits that
is treated as a ‘‘nimble’’ dividend under
section 316(a)(2) when there is a deficit
in accumulated earnings and profits,
post-1986 foreign income taxes are not
reduced. This rule is not inconsistent
with the general rule of paragraph
(a)(8)(i) that the foreign taxes pool must
be reduced to account for taxes attributable to all distributions and deemed
distributions out of post-1986 undistributed earnings. Rather, it reflects the fact
that under section 902 and these regulations, no taxes are deemed paid with
respect to a nimble dividend under section 316(a)(2) because the post-1986
undistributed earnings pool is zero or
less than zero.
Section 1.902–1(a)(9), defining post1986 undistributed earnings, is amended
to clarify that the earnings pool is
reduced only to account for distributions
or deemed distributions that reduce
earnings and profits and inclusions that
result in previously-taxed amounts described in sections 959(c)(1) and (c)(2)
or 1293(c). Thus, for example, in the
case of a controlled foreign corporation
owned 60 percent by a domestic corporate shareholder and 40 percent by a
foreign shareholder, the earnings and
taxes pools are reduced only to account
for 60 percent of the foreign corporation’s subpart F income.
The rules precluding special allocations of earnings and taxes in § 1.902–
1(a)(9)(iv) and (10)(ii) of the proposed
regulations have been retained in the
final regulations. These regulations are
intended to reverse the result in Vulcan
v. Commissioner, 96 T.C. 410 (1991),
aff’d per curiam, 959 F.2d 973 (11th
Cir. 1992), nonacq. 1995–1 C.B. 1, for
post-1986 taxable years. Several commenters argued that the Vulcan decision
was correct and should be applied to
both pre-1987 and post-1986 taxable
years, and the regulations should be
revised to reflect the decision. For the
reasons stated in the preamble to the
proposed regulations, the IRS declines
to do so.
Commenters also argued that the rule
precluding special allocations of earnings and taxes is inconsistent with
§ 1.904–6(a)(2). Section 1.904–6(a)(2)
is an anti-abuse rule designed to prevent
the use of accommodation parties to

15

improve a United States taxpayer’s foreign tax credit position. The rule states
that if a taxpayer receives or accrues a
dividend from a noncontrolled section
902 corporation and the Commissioner
establishes the existence of an express
or implied agreement that the dividend
is paid out of the foreign corporation’s
passive or high withholding tax interest
earnings, then only taxes imposed on
passive or high withholding tax interest
earnings will be considered related to
the dividend. The IRS may invoke this
rule to prevent a shareholder from sheltering investment income from tax by
investing it through a noncontrolled section 902 corporation that distributes only
the investment earnings to the shareholder, which then treats the distribution
as a dividend sheltered by taxes paid on
the corporation’s high-taxed active business income. The IRS believes that this
narrowly defined anti-abuse rule is an
appropriate exception to the general rule
of § 1.902–1(a)(9)(iv) and (a)(10)(ii)
barring special allocations of earnings
and taxes.
Section 1.902–1(a)(11) has been
amended to clarify that the definition of
a dividend in section 316(a) applies for
purposes of section 902, and that the
section 902 definition of a dividend also
includes deemed dividends under sections 551 and 1248. Deemed inclusions
under sections 951(a) and 1293 are not
dividends for purposes of section 902.
However, sections 960(a)(1) and 1293(f)
provide that deemed paid taxes with
respect to inclusions under sections
951(a) and 1293 are determined under
section 902 in the same manner as if a
dividend was paid.
Paragraph (a)(11) also has been
amended to add a cross-reference to
section 1291 and § 1.1291–5 of the
proposed regulations, which provide
special rules for computing foreign taxes
deemed paid with respect to distributions from section 1291 funds. These
distributions are treated as dividends
solely for foreign tax credit purposes,
but the general section 902 computational rules do not apply.
A commenter correctly pointed out
that the regulation’s inclusion of deemed
distributions under section 551 as dividends for purposes of section 902 is
contrary to the holding in Revenue
Ruling 74–59 (1974–1 C.B. 183) that an
amount includible in gross income under
section 551 is not considered a dividend
received for purposes of the allowance
of a foreign tax credit under section
902. The holding of the revenue ruling

is based on language in the 1937 legislative history of the foreign personal
holding company provisions. The Report
of the Joint Committee on Tax Evasion
and Avoidance of the Congress of the
United States, H.R. Doc. No. 337, 75th
Cong., 1st Sess. 18 (1937), recommended that shareholders of foreign personal holding companies not be allowed
a credit for foreign income taxes paid
by the foreign corporation with respect
to amounts deemed distributed. The Report goes on to state that the committee
recommended against allowing a credit
because ‘‘it is not administratively feasible, although it might seem equitable
under the circumstances.’’
Section 551(b) provides that amounts
required to be included in the gross
income of a U.S. shareholder under
section 551(a) are treated as dividends,
and under current law it is administratively feasible to allow deemed paid
taxes to be computed with respect to
deemed dividends. In addition, the Code
now includes other anti-deferral regimes,
e.g., the subpart F and passive foreign
investment company provisions, the application of which may overlap with the
foreign personal holding company rules.
Shareholders are permitted to compute
deemed paid taxes with respect to subpart F and passive foreign investment
company inclusions.
The IRS, therefore, has concluded the
revenue ruling is not supported by current law. A shareholder of a foreign
personal holding company should be
entitled to compute deemed paid taxes
with respect to amounts required to be
included in gross income as dividends
under section 551(a). Revenue Ruling
74–59 (1974–1 C.B. 183) is hereby
revoked effective as of the date these
regulations are published in the Federal
Register.
A commenter argued that the rule in
§ 1.902–1(b)(4), providing that no taxes
are deemed paid with respect to dividends out of current earnings and profits
when the foreign corporation has no
post-1986 undistributed earnings and no
accumulated earnings and profits (socalled ‘‘nimble’’ dividends) conflicts
with the general purpose of the foreign
tax credit to prevent double taxation.
The rule is retained in the final regulations for two reasons. First, the legislative history of the Tax Reform Act of
1986 (Public Law 99–514) clearly indicates that Congress was aware of the
issue and agreed with the position stated
in the regulation. See S. Rep. No. 313,
99th Cong., 2d Sess. 321 (1986). Sec-

ond, because no taxes can be deemed
paid under the computational rules of
section 902 when post-1986 undistributed earnings are zero or less than zero,
no taxes are removed from the post1986 foreign income taxes pool. Thus,
all of the foreign corporation’s taxes
remain in its post-1986 foreign income
taxes pool and are available to be
credited if the corporation pays another
dividend in a later year in which the
post-1986 undistributed earnings pool is
positive.
Section 1.902–1(c)(8) of the proposed
regulations reserved on the application
of section 902 in section 304 exchanges.
Commenters suggested that the regulations should address this area by incorporating the holdings in Revenue Ruling
91–5 (1991–1 C.B. 114), and Revenue
Ruling 92–86 (1992–1 C.B. 199). In
addition, the commenters argued that the
regulations should state that a deemed
paid credit is available in a section 304
exchange involving a foreign parent corporation. The IRS is still studying the
area and the regulations thus continue to
reserve on the application of section 902
in a section 304 exchange.
Section 1.902–1(c)(9) of the proposed
regulations is reserved in these final
regulations. The proposed regulation
provided a cross-reference to regulations
under section 905(c) with respect to
adjustments to post-1986 undistributed
earnings and taxes that result from a
section 482 allocation of income. There
currently are no regulations under section 905(c) addressing section 482 allocations and the IRS, therefore, has reserved this paragraph pending issuance
of final regulations under section 905(c).
Section 1.902–1(d)(3)(ii) through (iv)
of the proposed regulations is not included in the final regulations. Paragraph (d)(3) set out rules and examples
exercising a grant of regulatory authority under the last sentence of section
904(d)(2)(E)(i) to limit beyond the statute the circumstances under which a
dividend paid to a new U.S. shareholder
by a controlled foreign corporation out
of earnings accumulated while it was a
controlled foreign corporation will be
treated
as
dividends
from
a
noncontrolled section 902 corporation.
Identical rules were proposed in 1992
under section 904(d). See § 1.904–
4(g)(3)(ii) through (iv) of the proposed
regulations. The rules address the character of a dividend distribution under
section 904(d) and are more appropriately placed in the regulations under that
section. After considering the comments

16

received, the rule will be finalized as
part of the section 904 regulations.
Section 1.902–2
A commenter suggested that the deficit carryback rules in § 1.902–2(a)(1)
should be amended to provide that a
deficit in post-1986 undistributed earnings will not be carried back to pre1987 years on a return of capital or
capital gain distribution. The rule states
that a deficit will be carried back when
‘‘* * * a corporation makes a distribution to shareholders that is a dividend or
would be a dividend if there were
current or accumulated earnings and
profits, * * * .’’ The commenter suggests that the rule in the proposed
regulation can result in ‘‘locked-in’’
taxes when earnings attributable to one
or more pre-1987 years are eliminated
by the deficit carryback. If the deficit
stays in the post-1986 pool there is a
chance it can be absorbed by future
earnings, leaving the pre-1987 earnings
and taxes intact. In support of its position, the commenter argues that section
902 establishes rules that minimize
double taxation by allowing a taxpayer
to compute a deemed paid credit on a
taxable dividend. The legislative history
indicates that the pooling provisions of
section 902 are to apply solely for
purposes of computing the deemed paid
credit. Because a return of capital or
capital gain distribution is not a taxable
dividend and no section 902 credit is
allowable, the commenter argues that
the pooling rules (including the deficit
carryback rules) should not apply.
The IRS declines to adopt the commenter’s suggestion. When an amount is
distributed in a post-1986 taxable year
and there is a deficit in post-1986
undistributed earnings, the deficit must
be carried back and reduce earnings and
profits in pre-1987 years to determine
whether any earnings remain to support
treatment of the distribution as a dividend. To the extent there are earnings
remaining in one or more pre-1987
years after a deficit is carried back, the
distribution is a dividend. Any remaining amount is a return of capital and
capital gain. It would be incongruous to
adopt a rule providing a different result
if a single dollar of pre-1987 accumulated profits remains in a pre-1987 year
after a post-1986 deficit is carried back
than if the deficit carryback eliminated
all pre-1987 accumulated profits and the
entire distribution were treated as a
return of capital.

Another commenter argued that the
interplay among § 1.902–2(b)(1) (pre1987 accumulated deficit carries over to
become the opening balance of post1986 undistributed earnings pool) and
§ 1.902–1(b)(4) (no taxes deemed paid
if a dividend is a nimble dividend) of
the proposed regulations, and section
960 (incorporating the section 902 rules
with respect to deemed inclusions under
subpart F) results in a denial of deemed
paid taxes to a U.S. shareholder if a
controlled foreign corporation has both a
pre-1987 accumulated deficit and post1986 earnings and profits that are entirely subpart F income. The commenter
suggests that regulations be issued under
section 960 to provide, solely for purposes of that section, that accumulated
deficits in pre-1987 accumulated profits
will not carry over into the post-1986
pool.
The IRS cannot adopt the rule the
commenter suggests. Congress amended
sections 902 and 960 in 1986 specifically to eliminate different earnings and
profits and deemed paid taxes computations for purposes of sections 902 and
960. Further, in the situation the commenter posits, the credits are deferred
but not permanently disallowed. If the
controlled foreign corporation earns
enough post-1986 income to eliminate
the accumulated deficit, any distribution
or deemed distribution will carry with it
a ratable share of post-1986 foreign
income taxes.
A commenter argued that § 1.902–
2(b)(2) and (3), Example 1, are incorrect
because they imply that annual deficits
in pre-1987 accumulated profits were
required to be carried back under pre1987 section 902 regardless of how
foreign income taxes were determined.
The commenter argues that pre-1987
section 902 requires a ‘‘correlation’’ between accumulated profits as determined
under U.S. law and the foreign law
method by which foreign taxes were
determined.
The IRS disagrees with the comment
and the proposed regulation has not
been amended. The regulation reflects
the IRS’ longstanding position that in
the case of a deficit in accumulated
profits of a foreign corporation for a
particular pre-1987 year, the deficit first
reduces prior years’ accumulated profits
on a LIFO basis to the extent thereof,
and then the remaining deficit reduces
accumulated profits in subsequent years.
That rule applies regardless of whether
foreign law permits or requires the carryback or carryforward of losses. See

Revenue Ruling 74–550 (1974–2 C.B.
209) and Revenue Ruling 87–72
(1987–2 C.B. 170).

§ 1.902–0 Outline of regulations provisions for section 902.

Effect on Other Documents

This section lists the provisions under
section 902.

The following revenue ruling is revoked as of January 7, 1997.
Revenue Ruling 74–59, 1974–1 C.B.
183.

§ 1.902–1 Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid by the
foreign corporation.

Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 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 the notice of proposed rulemaking
preceding the regulations was issued
prior to March 29, 1996, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, the notice of
proposed rulemaking preceding these
regulations was submitted to the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these final
regulations is Caren Silver Shein of the
Office of Associate Chief Counsel (International), within the Office of Chief
Counsel, IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
*

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.902–1 also issued under 26
U.S.C. 902(c)(7).
Section 1.902–2 also issued under 26
U.S.C. 902(c)(7). * * *
Par. 2. Sections 1.902–1 and 1.902–2
are redesignated §§ 1.902–3 and
1.902–4, respectively.
Par. 3. Sections 1.902–0, 1.902–1 and
1.902–2 are added to read as follows:

17

(a) Definitions and special effective
date.
(1) Domestic shareholder.
(2) First-tier corporation.
(3) Second-tier corporation.
(4) Third-tier corporation.
(5) Example.
(6) Upper- and lower-tier corporations.
(7) Foreign income taxes.
(8) Post-1986 foreign income taxes.
(i) In general.
(ii) Distributions out of earnings and
profits accumulated by a lower-tier corporation in its taxable years beginning
before January 1, 1987, and included in
the gross income of an upper-tier corporation in its taxable year beginning after
December 31, 1986.
(iii) Foreign income taxes paid or
accrued with respect to high withholding
tax interest.
(9) Post-1986 undistributed earnings.
(i) In general.
(ii) Distributions out of earnings and
profits accumulated by a lower-tier corporation in its taxable years beginning
before January 1, 1987, and included in
the gross income of an upper-tier corporation in its taxable year beginning after
December 31, 1986.
(iii) Reduction for foreign income
taxes paid or accrued.
(iv) Special allocations.
(10) Pre-1987 accumulated profits.
(i) Definition.
(ii) Computation of pre-1987 accumulated profits.
(iii) Foreign income taxes attributable
to pre-1987 accumulated profits.
(11) Dividend.
(12) Dividend received.
(13) Special effective date.
(i) Rule.
(ii) Example.
(b) Computation of foreign income
taxes deemed paid by a domestic shareholder, first-tier corporation, and secondtier corporation.
(1) General rule.
(2) Allocation rule for dividends attributable to post-1986 undistributed
earnings and pre-1987 accumulated
profits.

(i) Portion of dividend out of post1986 undistributed earnings.
(ii) Portion of dividend out of pre1987 accumulated profits.
(3) Dividends paid out of pre-1987
accumulated profits.
(4) Deficits in accumulated earnings
and profits.
(5) Examples.
(c) Special rules.
(1) Separate computations required
for dividends from each first-tier and
lower-tier corporation.
(i) Rule.
(ii) Example.
(2) Section 78 gross-up.
(i) Foreign income taxes deemed paid
by a domestic shareholder.
(ii) Foreign income taxes deemed
paid by an upper-tier corporation.
(iii) Example.
(3) Creditable foreign income taxes.
(4) Foreign mineral income.
(5) Foreign taxes paid or accrued in
connection with the purchase or sale of
certain oil and gas.
(6) Foreign oil and gas extraction
income.
(7) United States shareholders of controlled foreign corporations.
(8) Credit for foreign taxes deemed
paid in a section 304 transaction.
(9) Effect of section 482 adjustments
on post-1986 foreign income taxes and
post-1986 undistributed earnings.
(d) Dividends from controlled foreign
corporations.
(1) General rule.
(2) Look-through.
(i) Dividends.
(ii) Coordination with section 960.
(3) Dividends distributed out of earnings accumulated before a controlled
foreign corporation became a controlled
foreign corporation.
(i) General rule.
(ii) Dividend distributions out of
earnings and profits for a year during
which a shareholder that is currently a
more-than-90-percent United States
shareholder of a controlled foreign corporation was not a United States shareholder of the controlled foreign corporation.
(e) Information to be furnished.
(f) Examples.
(g) Effective date.
§ 1.902–2 Treatment of deficits in post1986 undistributed earnings and pre1987 accumulated profits of a first-,
second-, or third-tier corporation for
purposes of computing an amount of
foreign taxes deemed paid § 1.902–1.

(a) Carryback of deficits in post-1986
undistributed earnings of a first-,
second-, or third-tier corporation to preeffective date taxable years.
(1) Rule.
(2) Examples.
(b) Carryforward of deficits in pre1987 accumulated profits of a first-,
second-, or third-tier corporation to post1986 undistributed earnings for purposes
of section 902.
(1) General rule.
(2) Effect of pre-effective date deficit.
(3) Examples.
§ 1.902–3 Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid with
respect to accumulated profits of taxable
years of the foreign corporation beginning before January 1, 1987.
(a) Definitions.
(1) Domestic shareholder.
(2) First-tier corporation.
(3) Second-tier corporation.
(4) Third-tier corporation.
(5) Foreign income taxes.
(6) Dividend.
(7) Dividend received.
(b) Domestic shareholder owning
stock in a first-tier corporation.
(1) In general.
(2) Amount of foreign taxes deemed
paid by a domestic shareholder.
(c) First-tier corporation owning
stock in a second-tier corporation.
(1) In general.
(2) Amount of foreign taxes deemed
paid by a first-tier corporation.
(d) Second-tier corporation owning
stock in a third-tier corporation.
(1) In general.
(2) Amount of foreign taxes deemed
paid by a second-tier corporation.
(e) Determination of accumulated
profits of a foreign corporation.
(f) Taxes paid on or with respect to
accumulated profits of a foreign corporation.
(g) Determination of earnings and
profits of a foreign corporation.
(1) Taxable year to which section 963
does not apply.
(2) Taxable year to which section 963
applies.
(3) Time and manner of making
choice.
(4) Determination by district director.
(h) Source of income from first-tier
corporation and country to which tax is
deemed paid.
(1) Source of income.

18

(2) Country to which taxes deemed
paid.
(i) United Kingdom income taxes
paid with respect to royalties.
(j) Information to be furnished.
(k) Illustrations.
(l) Effective date.
§ 1.902–4 Rules for distributions attributable to accumulated profits for taxable
years in which a first-tier corporation
was a less developed country corporation.
(a) In general.
(b) Combined distributions.
(c) Distributions of a first-tier corporation attributable to certain distributions
from second- or third-tier corporations.
(d) Illustrations.
§ 1.902–1 Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid by the
foreign corporation.
(a) Definitions and special effective
date. For purposes of section 902, this
section, and § 1.902–2, the definitions
provided in paragraphs (a)(1) through
(12) of this section and the special
effective date of paragraph (a)(13) of
this section apply.
(1) Domestic shareholder. In the case
of dividends received by a domestic
corporation from a foreign corporation
after December 31, 1986, the term domestic shareholder means a domestic
corporation, other than an S corporation
as defined in section 1361(a), that owns
at least 10 percent of the voting stock of
the foreign corporation at the time the
domestic corporation receives a dividend
from that foreign corporation.
(2) First-tier corporation. In the case
of dividends received by a domestic
shareholder from a foreign corporation
in a taxable year beginning after December 31, 1986, the term first-tier
corporation means a foreign corporation,
at least 10 percent of the voting stock of
which is owned by a domestic shareholder at the time the domestic shareholder receives a dividend from that
foreign corporation. The term first-tier
corporation also includes a DISC or
former DISC, but only with respect to
dividends from the DISC or former
DISC that are treated under sections
861(a)(2)(D) and 862(a)(2) as income
from sources without the United States.
(3) Second-tier corporation. In the
case of dividends paid to a first-tier
corporation by a foreign corporation in a
taxable year beginning after December

31, 1986, the foreign corporation is a
second-tier corporation if, at the time a
first-tier corporation receives a dividend
from that foreign corporation, the firsttier corporation owns at least 10 percent
of the foreign corporation’s voting stock
and the product of the following equals
at least 5 percent—
(i) The percentage of voting stock
owned by the domestic shareholder in
the first-tier corporation; multiplied by
(ii) The percentage of voting stock
owned by the first-tier corporation in the
second-tier corporation.
(4) Third-tier corporation. In the case
of dividends paid to a second-tier corporation by a foreign corporation in a
taxable year beginning after December
31, 1986, a foreign corporation is a
third-tier corporation if, at the time a
second-tier corporation receives a dividend from that foreign corporation, the
second-tier corporation owns at least 10
percent of the foreign corporation’s voting stock and the product of the following equals at least 5 percent—
(i) The percentage of voting stock
owned by the domestic shareholder in
the first-tier corporation; multiplied by
(ii) The percentage of voting stock
owned by the first-tier corporation in the
second-tier corporation; multiplied by
(iii) The percentage of voting stock
owned by the second-tier corporation in
the third-tier corporation.
(5) Example. The following example
illustrates the ownership requirements of
paragraphs (a)(1) through (4) of this
section:
Example. (i) Domestic corporation M owns 30
percent of the voting stock of foreign corporation
A on January 1, 1991, and for all periods thereafter. Corporation A owns 40 percent of the voting
stock of foreign corporation B on January 1, 1991,
and continues to own that stock until June 1,
1991, when Corporation A sells its stock in
Corporation B. Both Corporation A and Corporation B use the calendar year as the taxable year.
Corporation B pays a dividend out of its post-1986
undistributed earnings to Corporation A, which
Corporation A receives on February 16, 1991.
Corporation A pays a dividend out of its post-1986
undistributed earnings to Corporation M, which
Corporation M receives on January 20, 1992.
Corporation M uses a fiscal year ending on June
30 as the taxable year.
(ii) On February 16, 1991, when Corporation B
pays a dividend to Corporation A, Corporation M
satisfies the 10-percent stock ownership requirement of paragraphs (a)(1) and (2) of this section
with respect to Corporation A. Therefore, Corporation A is a first-tier corporation within the meaning of paragraph (a)(2) of this section and Corporation M is a domestic shareholder of Corporation
A within the meaning of paragraph (a)(1) of this
section. Also on February 16, 1991, Corporation B
is a second-tier corporation within the meaning of
paragraph (a)(3) of this section because Corporation A owns at least 10 percent of its voting stock,

and the percentage of voting stock owned by
Corporation M in Corporation A on February 16,
1991 (30 percent) multiplied by the percentage of
voting stock owned by Corporation A in Corporation B on February 16, 1991 (40 percent) equals
12 percent. Corporation A shall be deemed to have
paid foreign income taxes of Corporation B with
respect to the dividend received from Corporation
B on February 16, 1991.
(iii) On January 20, 1992, Corporation M satisfies the 10-percent stock ownership requirement of
paragraphs (a)(1) and (2) of this section with
respect to Corporation A. Therefore, Corporation A
is a first-tier corporation within the meaning of
paragraph (a)(2) of this section and Corporation M
is a domestic shareholder within the meaning of
paragraph (a)(1) of this section. Accordingly, for
its taxable year ending on June 30, 1992, Corporation M is deemed to have paid a portion of the
post-1986 foreign income taxes paid, accrued, or
deemed to be paid, by Corporation A. Those taxes
will include taxes paid by Corporation B that were
deemed paid by Corporation A with respect to the
dividend paid by Corporation B to Corporation A
on February 16, 1991, even though Corporation B
is no longer a second-tier corporation with respect
to Corporations A and M on January 20, 1992, and
has not been a second-tier corporation with respect
to Corporations A and M at any time during the
taxable years of Corporations A and M that
include January 20, 1992.

(6) Upper- and lower-tier corporations. In the case of a third-tier corporation, the term upper-tier corporation
means a first- or second-tier corporation.
In the case of a second-tier corporation,
the term upper-tier corporation means a
first-tier corporation. In the case of a
first-tier corporation, the term lower-tier
corporation means a second- or third-tier
corporation. In the case of a second-tier
corporation, the term lower-tier corporation means a third-tier corporation.
(7) Foreign income taxes. The term
foreign income taxes means income, war
profits, and excess profits taxes as defined in § 1.901–2(a), and taxes included in the term income, war profits,
and excess profits taxes by reason of
section 903, that are imposed by a
foreign country or a possession of the
United States, including any such taxes
deemed paid by a foreign corporation
under this section. Foreign income, war
profits, and excess profits taxes shall not
include amounts excluded from the definition of those taxes pursuant to section
901 and the regulations under that section. See also paragraphs (c)(4) and (5)
of this section (concerning foreign taxes
paid with respect to foreign mineral
income and in connection with the purchase or sale of oil and gas).
(8) Post-1986 foreign income taxes—
(i) In general. Except as provided in
paragraphs (a)(10) and (13) of this section, the term post-1986 foreign income
taxes of a foreign corporation means the
sum of the foreign income taxes paid,

19

accrued, or deemed paid in the taxable
year of the foreign corporation in which
it distributes a dividend plus the foreign
income taxes paid, accrued, or deemed
paid in the foreign corporation’s prior
taxable years beginning after December
31, 1986, to the extent the foreign taxes
were not paid or deemed paid by the
foreign corporation on or with respect to
earnings that in prior taxable years were
distributed to, or otherwise included
(e.g., under sections 304, 367(b), 551,
951(a), 1248 or 1293) in the income of,
a foreign or domestic shareholder. Except as provided in paragraph (b)(4) of
this section, foreign taxes paid or
deemed paid by the foreign corporation
on or with respect to earnings that were
distributed or otherwise removed from
post-1986 undistributed earnings in prior
post-1986 taxable years shall be removed from post-1986 foreign income
taxes regardless of whether the shareholder is eligible to compute an amount
of foreign taxes deemed paid under
section 902, and regardless of whether
the shareholder in fact chose to credit
foreign income taxes under section 901
for the year of the distribution or inclusion. Thus, if an amount is distributed
or deemed distributed by a foreign corporation to a United States person that
is not a domestic shareholder within the
meaning of paragraph (a)(1) of this
section (e.g., an individual or a corporation that owns less than 10% of the
foreign corporation’s voting stock), or to
a foreign person that does not meet the
definition of a first- or second-tier corporation under paragraph (a)(2) or (3) of
this section, then although no foreign
income taxes shall be deemed paid
under section 902, foreign income taxes
attributable to the distribution or deemed
distribution that would have been
deemed paid had the shareholder met
the ownership requirements of paragraphs (a)(1) through (4) of this section
shall be removed from post-1986 foreign income taxes. Further, if a domestic
shareholder chooses to deduct foreign
taxes paid or accrued for the taxable
year of the distribution or inclusion, it
shall nonetheless be deemed to have
paid a proportionate share of the foreign
corporation’s post-1986 foreign income
taxes under section 902(a), and the
foreign taxes deemed paid must be
removed from post-1986 foreign income
taxes. In the case of a foreign corporation the foreign income taxes of which
are determined based on an accounting
period of less than one year, the term

year means that accounting period. See
sections 441(b)(3) and 443.
(ii) Distributions out of earnings and
profits accumulated by a lower-tier corporation in its taxable years beginning
before January 1, 1987, and included in
the gross income of an upper-tier corporation in its taxable year beginning after
December 31, 1986. Post-1986 foreign
income taxes shall include foreign income taxes that are deemed paid by an
upper-tier corporation with respect to
distributions from a lower-tier corporation out of non-previously taxed pre1987 accumulated profits, as defined in
paragraph (a)(10) of this section, that
are received by an upper-tier corporation
in any taxable year of the upper-tier
corporation beginning after December
31, 1986, provided the upper-tier corporation’s earnings and profits in that year
are included in its post-1986 undistributed earnings under paragraph (a)(9) of
this section. Foreign income taxes
deemed paid with respect to a distribution of pre-1987 accumulated profits
shall be translated from the functional
currency of the lower-tier corporation
into dollars at the spot exchange rate in
effect on the date of the distribution. To
determine the character of the earnings
and profits and associated taxes for
foreign tax credit limitation purposes,
see section 904 and § 1.904–7(a).
(iii) Foreign income taxes paid or
accrued with respect to high withholding
tax interest. Post-1986 foreign income
taxes shall not include foreign income
taxes paid or accrued by a noncontrolled
section 902 corporation (as defined in
section 904(d)(2)(E)(i)) with respect to
high withholding tax interest (as defined
in section 904(d)(2)(B)) to the extent the
foreign tax rate imposed on such interest
exceeds 5 percent. See section
904(d)(2)(E)(ii) and § 1.904–4(g)(2)(iii).
The reduction in foreign income taxes
paid or accrued by the amount of tax in
excess of 5 percent imposed on high
withholding tax interest income must be
computed in functional currency before
foreign income taxes are translated into
U.S. dollars and included in post-1986
foreign income taxes.
(9) Post-1986 undistributed earnings—(i) In general. Except as provided
in paragraphs (a)(10) and (13) of this
section, the term post-1986 undistributed
earnings means the amount of the earnings and profits of a foreign corporation
(computed in accordance with sections
964(a) and 986) accumulated in taxable
years of the foreign corporation beginning after December 31, 1986, deter-

mined as of the close of the taxable year
of the foreign corporation in which it
distributes a dividend. Post-1986 undistributed earnings shall not be reduced by
reason of any earnings distributed or
otherwise included in income, for example under section 304, 367(b), 551,
951(a), 1248 or 1293, during the taxable
year. Post-1986 undistributed earnings
shall be reduced to account for distributions or deemed distributions that reduced earnings and profits and inclusions that resulted in previously-taxed
amounts described in section 959(c)(1)
and (2) or section 1293(c) in prior
taxable years beginning after December
31, 1986. Thus, post-1986 undistributed
earnings shall not be reduced to the
extent of the ratable share of a controlled foreign corporation’s subpart F
income, as defined in section 952, attributable to a shareholder that is not a
United States shareholder within the
meaning of section 951(b) or section
953(c)(1)(A), because that amount has
not been included in a shareholder’s
gross income. Post-1986 undistributed
earnings shall be reduced as provided
herein regardless of whether any shareholder is deemed to have paid any
foreign taxes, and regardless of whether
any domestic shareholder chose to claim
a foreign tax credit under section 901(a)
for the year of the distribution. For rules
on carrybacks and carryforwards of deficits and their effect on post-1986 undistributed earnings, see § 1.902–2. In the
case of a foreign corporation the foreign
income taxes of which are computed
based on an accounting period of less
than one year, the term year means that
accounting period. See sections
441(b)(3) and 443.
(ii) Distributions out of earnings and
profits accumulated by a lower-tier corporation in its taxable years beginning
before January 1, 1987, and included in
the gross income of an upper-tier corporation in its taxable year beginning after
December 31, 1986. Distributions by a
lower-tier corporation out of nonpreviously taxed pre-1987 accumulated
profits, as defined in paragraph (a)(10)
of this section, that are received by an
upper-tier corporation in any taxable
year of the upper-tier corporation beginning after December 31, 1986, shall be
treated as post-1986 undistributed earnings of the upper-tier corporation, provided the upper-tier corporation’s earnings and profits for that year are
included in its post-1986 undistributed
earnings under paragraph (a)(9)(i) of
this section. To determine the character

20

of the earnings and profits and associated taxes for foreign tax credit limitation purposes, see section 904 and
§ 1.904–7(a).
(iii) Reduction for foreign income
taxes paid or accrued. In computing
post-1986 undistributed earnings, earnings and profits shall be reduced by
foreign income taxes paid or accrued
regardless of whether the taxes are creditable. Thus, earnings and profits shall
be reduced by foreign income taxes paid
with respect to high withholding tax
interest even though a portion of the
taxes is not creditable pursuant to section 904(d)(2)(E)(ii) and is not included
in post-1986 foreign income taxes under
paragraph (a)(8)(iii) of this section.
Earnings and profits of an upper-tier
corporation, however, shall not be reduced by foreign income taxes paid by a
lower-tier corporation and deemed to
have been paid by the upper-tier corporation.
(iv) Special allocations. The term
post-1986 undistributed earnings means
the total amount of the earnings of the
corporation determined at the corporate
level. Special allocations of earnings and
taxes to particular shareholders, whether
required or permitted by foreign law or
a shareholder agreement, shall be disregarded. If, however, the Commissioner
establishes that there is an agreement to
pay dividends only out of earnings in
the separate categories for passive or
high withholding tax interest income,
then only taxes imposed on passive or
high withholding tax interest earnings
shall be treated as related to the dividend. See § 1.904–6(a)(2).
(10) Pre-1987 accumulated profits—
(i) Definition. The term pre-1987 accumulated profits means the amount of the
earnings and profits of a foreign corporation computed in accordance with section 902 and attributable to its taxable
years beginning before January 1, 1987.
If the special effective date of paragraph
(a)(13) of this section applies, pre-1987
accumulated profits also includes any
earnings and profits (computed in accordance with sections 964(a) and 986)
attributable to the foreign corporation’s
taxable years beginning after December
31, 1986, but before the first day of the
first taxable year of the foreign corporation in which the ownership requirements of section 902(c)(3)(B) and paragraphs (a)(1) through (4) of this section
are met with respect to that corporation.
(ii) Computation of pre-1987 accumulated profits. Pre-1987 accumulated
profits must be computed under United

States principles governing the computation of earnings and profits. Pre-1987
accumulated profits are determined at
the corporate level. Special allocations
of accumulated profits and taxes to
particular shareholders with respect to
distributions of pre-1987 accumulated
profits in taxable years beginning after
December 31, 1986, whether required or
permitted by foreign law or a shareholder agreement, shall be disregarded.
Pre-1987 accumulated profits of a particular year shall be reduced by amounts
distributed from those accumulated profits or otherwise included in income from
those accumulated profits, for example
under sections 304, 367(b), 551, 951(a),
1248 or 1293. If a deficit in post-1986
undistributed earnings is carried back to
offset pre-1987 accumulated profits, pre1987 accumulated profits of a particular
taxable year shall be reduced by the
amount of the deficit carried back to
that year. See § 1.902–2. The amount of
a distribution out of pre-1987 accumulated profits, and the amount of foreign
income taxes deemed paid under section
902, shall be determined and translated
into United States dollars by applying
the law as in effect prior to the effective
date of the Tax Reform Act of 1986.
See §§ 1.902–3, 1.902–4 and 1.964–1.
(iii) Foreign income taxes attributable to pre-1987 accumulated profits.
The term pre-1987 foreign income taxes
means any foreign income taxes paid,
accrued, or deemed paid by a foreign
corporation on or with respect to its
pre-1987 accumulated profits. Pre-1987
foreign income taxes of a particular year
shall be reduced by the amount of taxes
paid or deemed paid by the foreign
corporation on or with respect to
amounts distributed or otherwise included in income from pre-1987 accumulated profits of that year. Thus, pre1987 foreign income taxes shall be
reduced by the amount of taxes deemed
paid by a domestic shareholder (regardless of whether the shareholder chose to
credit foreign income taxes under section 901 for the year of the distribution
or inclusion) or a first-tier or second-tier
corporation, and by the amount of taxes
that would have been deemed paid had
any other shareholder been eligible to
compute an amount of foreign taxes
deemed paid under section 902. Foreign
income taxes deemed paid with respect
to a distribution of pre-1987 accumulated profits shall be translated from the
functional currency of the distributing
corporation into United States dollars at

the spot exchange rate in effect on the
date of the distribution.
(11) Dividend. For purposes of section 902, the definition of the term
dividend in section 316 and the regulations under that section applies. Thus,
for example, distributions and deemed
distributions under sections 302, 304,
305(b) and 367(b) that are treated as
dividends within the meaning of section
301(c)(1) also are dividends for purposes of section 902. In addition, the
term dividend includes deemed dividends under sections 551 and 1248, but
not deemed inclusions under sections
951(a) and 1293. For rules concerning
excess distributions from section 1291
funds that are treated as dividends solely
for foreign tax credit purposes, (see
Regulation Project INTL–656–87 published in 1992–1 C.B. 1124; see
§ 601.601(d)(2)(ii)(b) of this chapter).
(12) Dividend received. A dividend
shall be considered received for purposes of section 902 when the cash or
other property is unqualifiedly made
subject to the demands of the
distributee. See § 1.301–1(b). A dividend also is considered received for
purposes of section 902 when it is
deemed received under section 304,
367(b), 551, or 1248.
(13) Special effective date—(i) Rule.
If the first day on which the ownership
requirements of section 902(c)(3)(B) and
paragraphs (a)(1) through (4) of this
section are met with respect to a foreign
corporation, without regard to whether a
dividend is distributed, is in a taxable
year of the foreign corporation beginning after December 31, 1986, then—
(A) The post-1986 undistributed earnings and post-1986 foreign income taxes
of the foreign corporation shall be determined by taking into account only taxable years beginning on and after the
first day of the first taxable year of the
foreign corporation in which the ownership requirements are met, including
subsequent taxable years in which the
ownership requirements of section
902(c)(3)(B) and paragraphs (a)(1)
through (4) of this section are not met;
and
(B) Earnings and profits accumulated
prior to the first day of the first taxable
year of the foreign corporation in which
the ownership requirements of section
902(c)(3)(B) and paragraphs (a)(1)
through (4) of this section are met shall
be considered pre-1987 accumulated
profits.

21

(ii) Example. The following example
illustrates the special effective date rules
of this paragraph (a)(13):
Example. As of December 31, 1991, and since
its incorporation, foreign corporation A has owned
100 percent of the stock of foreign corporation B.
Corporation B is not a controlled foreign corporation. Corporation B uses the calendar year as its
taxable year, and its functional currency is the u.
Assume 1u equals $1 at all relevant times. On
April 1, 1992, Corporation B pays a 200u dividend to Corporation A and the ownership requirements of section 902(c)(3)(B) and paragraphs
(a)(1) through (4) of this section are not met at
that time. On July 1, 1992, domestic corporation
M purchases 10 percent of the Corporation B
stock from Corporation A and, for the first time,
Corporation B meets the ownership requirements
of section 902(c)(3)(B) and paragraph (a)(2) of
this section. Corporation M uses the calendar year
as its taxable year. Corporation B does not
distribute any dividends to Corporation M during
1992. For its taxable year ending December 31,
1992, Corporation B has 500u of earnings and
profits (after foreign taxes but before taking into
account the 200u distribution to Corporation A)
and pays 100u of foreign income taxes that is
equal to $100. Pursuant to paragraph (a)(13)(i) of
this section, Corporation B’s post-1986 undistributed earnings and post-1986 foreign income taxes
will include earnings and profits and foreign
income taxes attributable to Corporation B’s entire
1992 taxable year and all taxable years thereafter.
Thus, the April 1, 1992, dividend to Corporation A
will reduce post-1986 undistributed earnings to
300u (500u – 200u) under paragraph (a)(9)(i) of
this section. The foreign income taxes attributable
to the amount distributed as a dividend to Corporation A will not be creditable because Corporation
A is not a domestic shareholder. Post-1986 foreign
income taxes, however, will be reduced by the
amount of foreign taxes attributable to the dividend. Thus, as of the beginning of 1993, Corporation B has $60 ($100 – [$100 x 40% (200u/
500u)]) of post-1986 foreign income taxes. See
paragraphs (a)(8)(i) and (b)(1) of this section.

(b) Computation of foreign income
taxes deemed paid by a domestic shareholder, first-tier corporation, and
second-tier corporation—(1) General
rule. If a foreign corporation pays a
dividend in any taxable year out of post1986 undistributed earnings to a shareholder that is a domestic shareholder or
an upper-tier corporation at the time it
receives the dividend, the recipient shall
be deemed to have paid the same proportion of any post-1986 foreign income
taxes paid, accrued or deemed paid by
the distributing corporation on or with
respect to post-1986 undistributed earnings which the amount of the dividend
out of post-1986 undistributed earnings
(determined without regard to the
gross-up under section 78) bears to the
amount of the distributing corporation’s
post-1986 undistributed earnings. An
upper-tier corporation shall not be entitled to compute an amount of foreign
taxes deemed paid on a dividend from a
lower-tier corporation, however, unless

the ownership requirements of paragraphs (a)(1) through (4) of this section
are met at each tier at the time the
upper-tier corporation receives the dividend. Foreign income taxes deemed paid
by a domestic shareholder or an uppertier corporation must be computed under
the following formula:

Foreign income taxes
deemed paid
by domestic
shareholder
(or upper-tier
corporation)

Post-1986
foreign income taxes
of first-tier
=
corporation
(or lowertier corporation)

Dividend
paid to domestic shareholder (or
upper-tier
corporation)
by first-tier
corporation
(or lowerx tier) corporation)
Post-1986
undistributed
earnings of
first-tier corporation (or
lower-tier
corporation)

(2) Allocation rule for dividends attributable to post-1986 undistributed
earnings and pre-1987 accumulated
profits—(i) Portion of dividend out of
post-1986 undistributed earnings. Dividends will be deemed to be paid first
out of post-1986 undistributed earnings
to the extent thereof. If dividends exceed post-1986 undistributed earnings
and dividends are paid to more than one
shareholder, then the dividend to each
shareholder shall be deemed to be paid
pro rata out of post-1986 undistributed
earnings, computed as follows:
Portion of
Dividend to
a SharePost-1986
holder AttribUndistrib=
utable to
uted EarnPost-1986
ings
Undistributed
Earnings

Dividend to
Shareholder
Total Divix
dends Paid
To all Shareholders

(ii) Portion of dividend out of pre1987 accumulated profits. After the portion of the dividend attributable to post1986
undistributed
earnings
is
determined under paragraph (b)(2)(i) of
this section, the remainder of the dividend received by a shareholder is attributable to pre-1987 accumulated profits
to the extent thereof. That part of the
dividend attributable to pre-1987 accumulated profits will be treated as paid
first from the most recently accumulated
earnings and profits. See § 1.902–3. If
dividends paid out of pre-1987 accumulated profits are attributable to more
than one pre-1987 taxable year and are
paid to more than one shareholder, then
the dividend to each shareholder attributable to earnings and profits accumu-

lated in a particular pre-1987 taxable
year shall be deemed to be paid pro rata
out of accumulated profits of that taxable year, computed as follows:
Portion of
Dividend to
a Shareholder Attributable to
Accumu=
lated Profits
of a Particular Pre1987 Taxable Year

Divident
Paid Out
of Pre1987 Accumulated
Profits
x
with Respect to
the Particular Pre1987 Taxable Year

Dividend to
Shareholder
Total Dividends Paid
to all Shareholders

(3) Dividends paid out of pre-1987
accumulated profits. If dividends are
paid by a first-tier corporation or a
lower-tier corporation out of pre-1987
accumulated profits, the domestic shareholder or upper-tier corporation that receives the dividends shall be deemed to
have paid foreign income taxes to the
extent provided under section 902 and
the regulations thereunder as in effect
prior to the effective date of the Tax
Reform Act of 1986. See paragraphs
(a)(10) and (13) of this section and
§§ 1.902–3 and 1.902–4.
(4) Deficits in accumulated earnings
and profits. No foreign income taxes
shall be deemed paid with respect to a
distribution from a foreign corporation
out of current earnings and profits that
is treated as a dividend under section
316(a)(2), and post-1986 foreign income
taxes shall not be reduced, if as of the
end of the taxable year in which the
dividend is paid or accrued, the corporation has zero or a deficit in post-1986
undistributed earnings and the sum of
current plus accumulated earnings and
profits is zero or less than zero. The
dividend shall reduce post-1986 undistributed earnings and accumulated earnings and profits.
(5) Examples. The following examples illustrate the rules of this paragraph (b):
Example 1. Domestic corporation M owns 100
percent of foreign corporation A. Both Corporation
M and Corporation A use the calendar year as the
taxable year, and Corporation A uses the u as its
functional currency. Assume that 1u equals $1 at
all relevant times. All of Corporation A’s pre-1987
accumulated profits and post-1986 undistributed
earnings are non-subpart F general limitation earnings and profits under section 904(d)(1)(I). As of
December 31, 1992, Corporation A has 100u of
post-1986 undistributed earnings and $40 of post1986 foreign income taxes. For its 1986 taxable
year, Corporation A has accumulated profits of
200u (net of foreign taxes) and paid 60u of
foreign income taxes on those earnings. In 1992,
Corporation A distributes 150u to Corporation M.
Corporation A has 100u of post-1986 undistributed
earnings and the dividend, therefore, is treated as
paid out of post-1986 undistributed earnings to the

22

extent of 100u. The first 100u distribution is from
post-1986 undistributed earnings, and, because the
distribution exhausts those earnings, Corporation
M is deemed to have paid the entire amount of
post-1986 foreign income taxes of Corporation A
($40). The remaining 50u dividend is treated as a
dividend out of 1986 accumulated profits under
paragraph (b)(2) of this section. Corporation M is
deemed to have paid $15 (60u x 50u/200u,
translated at the appropriate exchange rates) of
Corporation A’s foreign income taxes for 1986. As
of January 1, 1993, Corporation A’s post-1986
undistributed earnings and post-1986 foreign income taxes are 0. Corporation A has 150u of
accumulated profits and 45u of foreign income
taxes remaining in 1986.
Example 2. Domestic corporation M (incorporated on January 1, 1987) owns 100 percent of
foreign corporation A (incorporated on January 1,
1987). Both Corporation M and Corporation A use
the calendar year as the taxable year, and Corporation A uses the u as its functional currency.
Assume that 1u equals $1 at all relevant times.
Corporation A has no pre-1987 accumulated profits. All of Corporation A’s post-1986 undistributed
earnings are non-subpart F general limitation earnings and profits under section 904(d)(1)(I). On
January 1, 1992, Corporation A has a deficit in
accumulated earnings and profits and a deficit in
post-1986 undistributed earnings of (200u). No
foreign taxes have been paid with respect to
post-1986 undistributed earnings. During 1992,
Corporation A earns 100u (net of foreign taxes),
pays $40 of foreign taxes on those earnings and
distributes 50u to Corporation M. As of the end of
1992, Corporation A has a deficit of (100u)
((200u) post-1986 undistributed earnings + 100u
current earnings and profits) in post-1986 undistributed earnings. Corporation A, however, has
current earnings and profits of 100u. Therefore,
the 50u distribution is treated as a dividend in its
entirety under section 316(a)(2). Under paragraph
(b)(4) of this section, Corporation M is not
deemed to have paid any of the foreign taxes paid
by Corporation A because post-1986 undistributed
earnings and the sum of current plus accumulated
earnings and profits are (100u). The dividend
reduces both post-1986 undistributed earnings and
accumulated earnings and profits. Therefore, as of
January 1, 1993, Corporation A’s post-1986 undistributed earnings are (150u) and its accumulated
earnings and profits are (150u). Corporation A’s
post-1986 foreign income taxes at the start of
1993 are $40.

(c) Special rules—(1) Separate computations required for dividends from
each first-tier and lower-tier corporation—(i) Rule. If in a taxable year
dividends are received by a domestic
shareholder or an upper-tier corporation
from two or more first-tier corporations
or two or more lower-tier corporations,
the foreign income taxes deemed paid
by the domestic shareholder or the
upper-tier corporation under sections
902(a) and (b) and paragraph (b) of this
section shall be computed separately
with respect to the dividends received
from each first-tier corporation or lowertier corporation. If a domestic shareholder receives dividend distributions
from one or more first-tier corporations
and in the same taxable year the first-

tier corporation receives dividends from
one or more lower-tier corporations,
then the amount of foreign income taxes
deemed paid shall be computed by starting with the lowest-tier corporation and
working upward.
(ii) Example. The following example
illustrates the application of this paragraph (c)(1):
Example. P, a domestic corporation, owns 40
percent of the voting stock of foreign corporation
S. S owns 30 percent of the voting stock of
foreign corporation T, and 30 percent of the voting
stock of foreign corporation U. Neither S, T, nor
U is a controlled foreign corporation. P, S, T and
U all use the calendar year as their taxable year.
In 1993, T and U both pay dividends to S and S
pays a dividend to P. To compute foreign taxes
deemed paid, paragraph (c)(1) of this section
requires P to start with the lowest tier corporations
and to compute foreign taxes deemed paid separately for dividends from each first-tier and lowertier corporation. Thus, S first will compute foreign
taxes deemed paid separately on its dividends
from T and U. The deemed paid taxes will be
added to S’s post-1986 foreign income taxes, and
the dividends will be added to S’s post-1986
undistributed earnings. Next, P will compute foreign taxes deemed paid with respect to the
dividend from S. This computation will take into
account the taxes paid by T and U and deemed
paid by S.

(2) Section 78 gross-up—(i) Foreign
income taxes deemed paid by a domestic
shareholder. Except as provided in section 960(b) and the regulations under
that section (relating to amounts excluded from gross income under section
959(b)), any foreign income taxes
deemed paid by a domestic shareholder
in any taxable year under section 902(a)
and paragraph (b) of this section shall
be included in the gross income of the
domestic shareholder for the year as a
dividend under section 78. Amounts included in gross income under section 78
shall, for purposes of section 904, be
deemed to be derived from sources
within the United States to the extent
the earnings and profits on which the
taxes were paid are treated under section
904(g) as United States source earnings
and profits. Section 1.904–5(m)(6).
Amounts included in gross income under section 78 shall be treated for
purposes of section 904 as income in a
separate category to the extent that the
foreign income taxes were allocated and
apportioned to income in that separate
category. See section 904(d)(3)(G) and
§ 1.904–6(b)(3).
(ii) Foreign income taxes deemed
paid by an upper-tier corporation. Foreign income taxes deemed paid by an
upper-tier corporation on a distribution
from a lower-tier corporation are not
included in the earnings and profits of

the upper-tier corporation. For purposes
of section 904, foreign income taxes
shall be allocated and apportioned to
income in a separate category to the
extent those taxes were allocated to the
earnings and profits of the lower-tier
corporation in that separate category.
See section 904(d)(3)(G) and § 1.904–
6(b)(3). To the extent that section 904(g)
treats the earnings of the lower-tier
corporation on which those foreign income taxes were paid as United States
source earnings and profits, the foreign
income taxes deemed paid by the uppertier corporation on the distribution from
the lower-tier corporation shall be
treated as attributable to United States
source earnings and profits. See section
904(g) and § 1.904–5(m)(6).
(iii) Example. The following example
illustrates the rules of this paragraph
(c)(2):
Example. P, a domestic corporation, owns 100
percent of the voting stock of controlled foreign
corporation S. Corporations P and S use the
calendar year as their taxable year, and S uses the
u as its functional currency. Assume that 1u equals
$1 at all relevant times. As of January 1, 1992, S
has -0- post-1986 undistributed earnings and -0post-1986 foreign income taxes. In 1992, S earns
150u of non-subpart F general limitation income
net of foreign taxes and pays 60u of foreign
income taxes. As of the end of 1992, but before
dividend payments, S has 150u of post-1986
undistributed earnings and $60 of post-1986 foreign income taxes. Assume that 50u of S’s
earnings for 1992 are from United States sources.
S pays P a dividend of 75u which P receives in
1992. Under § 1.904–5(m)(4), one-third of the
dividend, or 25u (75u x 50u/150u), is United
States source income to P. P computes foreign
taxes deemed paid on the dividend under paragraph (b)(1) of this section of $30 ($60 x
50%[75u/150u]) and includes that amount in gross
income under section 78 as a dividend. Because
25u of the 75u dividend is United States source
income to P, $10 ($30 x 33.33%[25u/75u]) of the
section 78 dividend will be treated as United
States source income to P under this paragraph
(c)(2).

(3) Creditable foreign income taxes.
The amount of creditable foreign income taxes under section 901 shall
include, subject to the limitations and
conditions of sections 902 and 904,
foreign income taxes actually paid and
deemed paid by a domestic shareholder
that receives a dividend from a first-tier
corporation. Foreign income taxes
deemed paid by a domestic shareholder
under paragraph (b) of this section shall
be deemed paid by the domestic shareholder only for purposes of computing
the foreign tax credit allowed under
section 901.
(4) Foreign mineral income. Certain
foreign income, war profits and excess
profits taxes paid or accrued with re-

23

spect to foreign mineral income will not
be considered foreign income taxes for
purposes of section 902. See section
901(e) and § 1.901–3.
(5) Foreign taxes paid or accrued in
connection with the purchase or sale of
certain oil and gas. Certain income, war
profits, or excess profits taxes paid or
accrued to a foreign country in connection with the purchase and sale of oil or
gas extracted in that country will not be
considered foreign income taxes for purposes of section 902. See section 901(f).
(6) Foreign oil and gas extraction
income. For rules relating to reduction
of the amount of foreign income taxes
deemed paid with respect to foreign oil
and gas extraction income, see section
907(a) and the regulations under that
section.
(7) United States shareholders of
controlled foreign corporations. See
paragraph (d) of this section and sections 960 and 962 and the regulations
under those sections for special rules
relating to the application of section 902
in computing foreign income taxes
deemed paid by United States shareholders of controlled foreign corporations.
(8) Credit for foreign taxes deemed
paid in a section 304 transaction. [Reserved].
(9) Effect of section 482 adjustments
on post-1986 foreign income taxes and
post-1986 undistributed earnings. [Reserved].
(d) Dividends from controlled foreign
corporations— (1) General rule. Except
as provided in paragraph (d)(3) of this
section, if a dividend is received by a
domestic shareholder that is a United
States shareholder (as defined in section
951(b) or section 953(c)(1)(A)) from a
first-tier corporation that is a controlled
foreign corporation (as defined in section 957(a) or section 953(c)(1)(B)), or
by an upper-tier corporation from a
lower-tier corporation if the corporations
are related look-through entities within
the meaning of § 1.904–5(i), the following rule applies. If a dividend is paid
out of post-1986 undistributed earnings
or pre-1987 accumulated profits of the
upper- or lower-tier controlled foreign
corporation attributable to more than
one separate category under section
904(d), the amount of foreign income
taxes deemed paid by the domestic
shareholder or the upper-tier corporation
under section 902 and paragraph (b) of
this section shall be computed separately
with respect to the post-1986 undistributed earnings or pre-1987 accumulated

profits in each separate category out of
which the dividend is paid. See
§ 1.904–5(c)(4) and paragraph (d)(2) of
this section. The separately computed
deemed paid taxes shall be added to
other taxes paid by the U.S. shareholder
or upper-tier corporation with respect to
income in the appropriate separate category.
(2) Look-through—(i) Dividends. Except as otherwise provided in paragraph
(d)(3) of this section, any dividend distribution out of post-1986 undistributed
earnings of a look-through entity to a
related look-through entity shall be
deemed to be paid pro rata out of each
separate category of income. See
§§ 1.904–5(c)(4) and 1.904–7. The portion of the foreign income taxes attributable to a particular separate category
that shall be deemed paid by the domestic shareholder or upper-tier corporation
must be computed under the following
formula:
Post-1986
Foreign taxes
foreign indeemed paid
come taxes
by domestic
of first-tier
shareholder
or lower-tier
or upper-tier
corporation
corporation
= allocated
with respect
and apporto a separate
tioned to a
category unseparate
der section
category
904(d)
under
§ 1.904–6

Dividend
amount attributable to
a separate
category
Post-1986
undistributed
x
earnings of
first-tier or
lower-tier
corporation
attributable
to the separate category

(ii) Coordination with section 960.
For rules coordinating the computation
of foreign taxes deemed paid with respect to amounts included in gross income under section 951(a) and dividends distributed by a controlled foreign
corporation, see section 960 and the
regulations under that section.
(3) Dividends distributed out of earnings accumulated before a controlled
foreign corporation became a controlled
foreign corporation—(i) General rule.
Any dividend distributed by a controlled
foreign corporation out of earnings accumulated before the controlled foreign
corporation became a controlled foreign
corporation shall be treated as a dividend from a noncontrolled section 902
corporation regardless of whether the
earnings were accumulated in a taxable
year beginning before January 1, 1987,
or after December 31, 1986.
(ii) Dividend distributions out of
earnings and profits for a year during
which a shareholder that is currently a
more-than-90-percent United States
shareholder of a controlled foreign cor-

poration was not a United States shareholder of the controlled foreign corporation. [Reserved].
(e) Information to be furnished. If the
credit for foreign income taxes claimed
under section 901 includes foreign income taxes deemed paid under section
902 and paragraph (b) of this section,
the domestic shareholder must furnish
the same information with respect to the
foreign income taxes deemed paid as it
is required to furnish with respect to the
foreign income taxes it directly paid or
accrued and for which the credit is
claimed. See § 1.905–2. For other information required to be furnished by the
domestic shareholder for the annual accounting period of certain foreign corporations ending with or within the shareholder’s taxable year, and for reduction
in the amount of foreign income taxes
paid, accrued, or deemed paid for failure
to furnish the required information, see
section 6038 and the regulations under
that section.
(f) Examples. The following examples illustrate the application of this
section:
Example 1. Since 1987, domestic corporation M
has owned 10 percent of the one class of stock of
foreign corporation A. The remaining 90 percent
of Corporation A’s stock is owned by Z, a foreign
corporation. Corporation A is not a controlled
foreign corporation. Corporation A uses the u as
its functional currency, and 1u equals $1 at all
relevant times. Both Corporation A and Corporation M use the calendar year as the taxable year.
In 1992, Corporation A pays a 30u dividend out of
post-1986 undistributed earnings, 3u to Corporation M and 27u to Corporation Z. Corporation M
is deemed, under paragraph (b) of this section, to
have paid a portion of the post-1986 foreign
income taxes paid by Corporation A and includes
the amount of foreign taxes deemed paid in gross
income under section 78 as a dividend. Both the
foreign taxes deemed paid and the dividend would
be subject to a separate limitation for dividends
from Corporation A, a noncontrolled section 902
corporation. Under paragraph (a)(9)(i) of this
section, Corporation A must reduce its post-1986
undistributed earnings as of January 1, 1993, by
the total amount of dividends paid to Corporation
M and Corporation Z in 1992. Under paragraph
(a)(8)(i) of this section, Corporation A must reduce
its post-1986 foreign income taxes as of January
1, 1993, by the amount of foreign income taxes
that were deemed paid by Corporation M and by
the amount of foreign income taxes that would
have been deemed paid by Corporation Z had
Corporation Z been eligible to compute an amount
of foreign income taxes deemed paid with respect
to the dividend received from Corporation A.
Foreign income taxes deemed paid by Corporation
M and Corporation A’s opening balances in post1986 undistributed earnings and post-1986 foreign
income taxes for 1993 are computed as follows:
1.

Assumed post-1986 undistributed
earnings of Corporation A at
start of 1992 . . . . . . . . . . . . . . . 25u

24

2.

Assumed post-1986 foreign in$25
come taxes of Corporation A
at start of 1992 . . . . . . . . . . . . .
3. Assumed pre-tax earnings and
50u
profits of Corporation A for
1992. . . . . . . . . . . . . . . . . . . . . .
4. Assumed foreign income taxes
15u
paid or accrued by Corporation A in 1992 . . . . . . . . . . . . .
5. Post-1986 undistributed earnings 60u
in Corporation A for 1992
(pre-dividend) (Line 1 plus
Line 3 minus Line 4). . . . . . . .
6. Post-1986 foreign income taxes
$40
in Corporation A for 1992
(pre-dividend) (Line 2 plus
Line 4 translated at the appropriate exchange rates) . . . . . . .
7. Dividends paid out of post-1986 3u
undistributed earnings of Corporation A to Corporation M
in 1992 . . . . . . . . . . . . . . . . . . .
8. Percentage of Corporation A’s
5%
post-1986 undistributed earnings paid to Corporation M
(Line 7 divided by Line 5) . . .
9. Foreign income taxes of Corpo- $2
ration A deemed paid by Corporation M under section 902
(a) (Line 6 multiplied by Line
8) . . . . . . . . . . . . . . . . . . . . . . . .
10. Total dividends paid out of post- 30u
1986 undistributed earnings of
Corporation A to all shareholders in 1992. . . . . . . . . . . . .
11. Percentage of Corporation A’s
50%
post-1986 undistributed earnings paid to all shareholders in
1992 (Line 10 divided by Line
5) . . . . . . . . . . . . . . . . . . . . . . . .
12. Post-1986 foreign income taxes
$20
paid with respect to post-1986
undistributed earnings distributed to all shareholders in
1992 (Line 6 multiplied by
Line 11). . . . . . . . . . . . . . . . . . .
13. Corporation A’s post-1986 undis- 30u
tributed earnings at the start of
1993 (Line 5 minus Line 10) .
14. Corporation A’s post-1986 for$20
eign income taxes at the start
of 1993 (Line 6 minus Line
12) . . . . . . . . . . . . . . . . . . . . . . .
Example 2. (i) The facts are the same as in
Example 1, except that Corporation M has also
owned 10 percent of the one class of stock of
foreign corporation B since 1987. Corporation B
uses the calendar year as the taxable year. The
remaining 90 percent of Corporation B’s stock is
owned by Corporation Z. Corporation B is not a
controlled foreign corporation. Corporation B uses
the u as its functional currency, and 1u equals $1
at all relevant times. In 1992, Corporation B has
earnings and profits and pays foreign income
taxes, a portion of which are attributable to high
withholding tax interest, as defined in section
904(d)(2)(B)(i). Corporation B must reduce its
pool of post-1986 foreign income taxes by the
amount of tax imposed on high withholding tax
interest in excess of 5 percent because that amount
is not treated as a tax for purposes of section 902.
See section 904(d)(2)(E)(ii) and paragraph
(a)(8)(iii) of this section. Corporation B pays 50u
in dividends in 1992, 5u to Corporation M and
45u to Corporation Z. Corporation M must compute its section 902(a) deemed paid taxes separately for the dividends it receives in 1992 from

Corporation A (as computed in Example 1) and
from Corporation B. Foreign income taxes of
Corporation B deemed paid by Corporation M,
and Corporation B’s opening balances in post1986 undistributed earnings and post-1986 foreign
income taxes for 1993 are computed as follows:
1.

2.

Assumed post-1986 undistributed
earnings of Corporation B at
start of 1992 . . . . . . . . . . . . . . . (100u)

Assumed post-1986 foreign income taxes of Corporation B
at start of 1992 . . . . . . . . . . . . . $0
3. Assumed pre-tax earnings and
profits of Corporation B for
1992 (including 50u of high
withholding tax interest on
which 5u of tax is withheld) . . 302.50u
4. Assumed foreign income taxes
paid or accrued by Corporation B in 1992 . . . . . . . . . . . . . 102.50u
5. Post-1986 undistributed earnings
in Corporation B for 1992
(pre-dividend) (Line 1 plus
Line 3 minus Line 4). . . . . . . . 100u
6. Amount of foreign income tax of
Corporation B imposed on
high withholding tax interest
in excess of 5% (5u withholding tax - [5% x 50u high
withholding tax interest]) . . . . . 2.50u
7. Post-1986 foreign income taxes
in Corporation B for 1992
(pre-dividend) (Line 2 plus
[Line 4 minus Line 6 translated at the appropriate exchange rate]) . . . . . . . . . . . . . . . $100
8. Dividends paid out of post-1986
undistributed earnings to Corporation M in 1992 . . . . . . . . . 5u
9. Percentage of Corporation B’s
post-1986 undistributed earnings paid to Corporation M
(Line 8 divided by Line 5) . . . 5%
10. Foreign income taxes of Corporation B deemed paid by Corporation M under section
902(a) (Line 7 multiplied by
Line 9) . . . . . . . . . . . . . . . . . . . $5
11. Total dividends paid out of post1986 undistributed earnings of
Corporation B to all shareholders in 1992. . . . . . . . . . . . . 50u
12. Percentage of Corporation B’s
post-1986 undistributed earnings paid to all shareholders in
1992 (Line 11 divided by Line
5) . . . . . . . . . . . . . . . . . . . . . . . . 50%
13. Post-1986 foreign income taxes
of Corporation B paid on or
with respect to post-1986 undistributed earnings distributed
to all shareholders in 1992
(Line 7 multiplied by Line 12)
. . . . . . . . . . . . . . . . . . . . . . . . . . $50
14. Corporation B’s post-1986 undistributed earnings at start of
1993 (Line 5 minus Line 11) . 50u
15. Corporation B’s post-1986 foreign income taxes at start of
1993 (Line 7 minus Line 13) . $50
(ii) For 1992, as computed in Example 1,
Corporation M is deemed to have paid $2 of the
post-1986 foreign income taxes paid by Corporation A and includes $2 in gross income as a
dividend under section 78. Both the income inclusion and the credit are subject to a separate

limitation for dividends from Corporation A, a
noncontrolled section 902 corporation. Corporation
M also is deemed to have paid $5 of the
post-1986 foreign income taxes paid by Corporation B and includes $5 in gross income as a
deemed dividend under section 78. Both the
income inclusion and the foreign taxes deemed
paid are subject to a separate limitation for
dividends from Corporation B, a noncontrolled
section 902 corporation.
Example 3. (i) Since 1987, domestic corporation
M has owned 50 percent of the one class of stock
of foreign corporation A. The remaining 50 percent of Corporation A is owned by foreign corporation Z. For the same time period, Corporation A
has owned 40 percent of the one class of stock of
foreign corporation B, and Corporation B has
owned 30 percent of the one class of stock of
foreign corporation C. The remaining 60 percent
of Corporation B is owned by foreign corporation
Y, and the remaining 70 percent of Corporation C
is owned by foreign corporation X. Corporations
A, B, and C are not controlled foreign corporations. Corporations A, B, and C use the u as their
functional currency, and 1u equals $1 at all
relevant times. Corporation B uses a fiscal year
ending June 30 as its taxable year; all other
corporations use the calendar year as the taxable
year. On February 1, 1992, Corporation C pays a
500u dividend out of post-1986 undistributed
earnings, 150u to Corporation B and 350u to
Corporation X. On February 15, 1992, Corporation
B pays a 300u dividend out of post-1986 undistributed earnings computed as of the close of
Corporation B’s fiscal year ended June 30, 1992,
120u to Corporation A and 180u to Corporation Y.
On August 15, 1992, Corporation A pays a 200u
dividend out of post-1986 undistributed earnings,
100u to Corporation M and 100u to Corporation
Z. In computing foreign taxes deemed paid by
Corporations B and A, section 78 does not apply
and Corporations B and A thus do not have to
include the foreign taxes deemed paid in earnings
and profits. See paragraph (c)(2)(ii) of this section.
Foreign income taxes deemed paid by Corporations B, A and M, and the foreign corporations’
opening balances in post-1986 undistributed earnings and post-1986 foreign income taxes for
Corporation B’s fiscal year beginning July 1,
1992, and Corporation C’s and Corporation A’s
1993 calendar years are computed as follows:
A. Corporation C (third-tier corporation):
1.

2.
3.
4.
5.

6.

7.

Assumed post-1986 undistributed
earnings in Corporation C at
start of 1992 . . . . . . . . . . . . . . . 1300u
Assumed post-1986 foreign income taxes in Corporation C
at start of 1992 . . . . . . . . . . . . .
Assumed pre-tax earnings and
profits of Corporation C for
1992. . . . . . . . . . . . . . . . . . . . . .
Assumed foreign income taxes
paid or accrued in 1992. . . . . .
Post-1986 undistributed earnings
in Corporation C for 1992
(pre-dividend) (Line 1 plus
Line 3 minus Line 4). . . . . . . .
Post-1986 foreign income taxes
in Corporation C for 1992
(pre-dividend) (Line 2 plus
Line 4 translated at the appropriate exchange rates) . . . . . . .
Dividends paid out of post-1986
undistributed earnings of Corporation C to Corporation B
in 1992 . . . . . . . . . . . . . . . . . . .

25

8.

9.

10.

11.

12.

13.

14.

$800

150u

$80

500u

33.33%

$266.66

1000u

$533.34

1.

Assumed post-1986 undistributed
earnings in Corporation B as
of July 1, 1991 . . . . . . . . . . . . . 0

2.

Assumed post-1986 foreign income taxes in Corporation B
as of July 1, 1991 . . . . . . . . . .
Assumed pre-tax earnings and
profits of Corporation B for
fiscal year ended June 30,
1992, (including 150u dividend from Corporation B) . . . .
Assumed foreign income taxes
paid or accrued by Corporation B in fiscal year ended
June 30, 1992 . . . . . . . . . . . . . .
Foreign income taxes of Corporation C deemed paid by Corporation B in its fiscal year
ended June 30, 1992 (Part A,
Line 9 of paragraph (i) of this
Example 3) . . . . . . . . . . . . . . . .
Post-1986 undistributed earnings
in Corporation B for fiscal
year ended June 30, 1992
(pre-dividend) (Line 1 plus
Line 3 minus Line 4). . . . . . . .
Post-1986 foreign income taxes
in Corporation B for fiscal
year ended June 30, 1992
(pre-dividend) (Line 2 plus
Line 4 translated at the appropriate exchange rates plus
Line 5) . . . . . . . . . . . . . . . . . . .
Dividends paid out of post-1986
undistributed earnings of Corporation B to Corporation A
on February 15, 1992. . . . . . . .
Percentage of Corporation B’s
post-1986 undistributed earnings for fiscal year ended June
30, 1992, paid to Corporation
A (Line 8 divided by Line 6) .

3.

4.

5.

6.

7.

300u

1500u

10%

B. Corporation B (second-tier corporation):

$500
500u

Percentage of Corporation C’s
post-1986 undistributed earnings paid to Corporation B
(Line 7 divided by Line 5) . . .
Foreign income taxes of Corporation C deemed paid by Corporation B under section
902(b)(2) (Line 6 multiplied
by Line 8) . . . . . . . . . . . . . . . . .
Total dividends paid out of post1986 undistributed earnings of
Corporation C to all shareholders in 1992. . . . . . . . . . . . .
Percentage of Corporation C’s
post-1986 undistributed earnings paid to all shareholders in
1992 (Line 10 divided by Line
5) . . . . . . . . . . . . . . . . . . . . . . .
Post-1986 foreign income taxes
paid with respect to post-1986
undistributed earnings distributed to all shareholders in
1992 (Line 6 multiplied by
Line 11). . . . . . . . . . . . . . . . . . .
Post-1986 undistributed earnings
in Corporation C at start of
1993 (Line 5 minus Line 10)
Post-1986 foreign income taxes
in Corporation C at start of
1993 (Line 6 minus Line 12) .

8.

9.

0

1000u

200u

$80

800u

$280

120u

15%

10.

Foreign income taxes paid and
deemed paid by Corporation B
as of June 30, 1992, deemed
paid by Corporation A under
section 902(b)(1) (Line 7 multiplied by Line 9) . . . . . . . . . . . $42
11. Total dividends paid out of post1986 undistributed earnings of
Corporation B for fiscal year
ended June 30, 1992 . . . . . . . . 300u
12. Percentage of Corporation B’s
post-1986 undistributed earnings for fiscal year ended June
30, 1992, paid to all shareholders (Line 11 divided by
Line 6) . . . . . . . . . . . . . . . . . . . 37.5%
13. Post-1986 foreign income taxes
paid and deemed paid with
respect to post-1986 undistributed earnings distributed to all
shareholders during Corporation B’s fiscal year ended June
30, 1992 (Line 7 multiplied by
Line 12) . . . . . . . . . . . . . . . . . . $105
14. Post-1986 undistributed earnings
in Corporation B as of July 1,
1992 (Line 6 minus Line 11) . 500u
15. Post-1986 foreign income taxes
in Corporation B as of July 1,
1992 (Line 7 minus Line 13) . $175
C. Corporation A (first-tier corporation):
1.

Assumed post-1986 undistributed
earnings in Corporation A at
start of 1992 . . . . . . . . . . . . . . . 250u

2.

Assumed post-1986 foreign income taxes in Corporation A
at start of 1992 . . . . . . . . . . . .
Assumed pre-tax earnings and
profits of Corporation A for
1992 (including 120u dividend
from Corporation B) . . . . . . . .
Assumed foreign income taxes
paid or accrued by Corporation A in 1992 . . . . . . . . . . . . .
Foreign income taxes paid or
deemed paid by Corporation B
as of June 30, 1992, that are
deemed paid by Corporation A
in 1992 (Part B, Line 10 of
paragraph (i) of this Example
3) . . . . . . . . . . . . . . . . . . . . . . . .
Post-1986 undistributed earnings
in Corporation A for 1992
(pre-dividend) (Line 1 plus
Line 3 minus Line 4) . . . . . . .
Post-1986 foreign income taxes
in Corporation A for 1992
(pre-dividend) (Line 2 plus
Line 4 translated at the appropriate exchange rates plus
Line 5) . . . . . . . . . . . . . . . . . . .
Dividends paid out of post-1986
undistributed earnings of Corporation A to Corporation M
on August 15, 1992 . . . . . . . .
Percentage of Corporation A’s
post-1986 undistributed earnings paid to Corporation M in
1992 (Line 8 divided by Line
6) . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income taxes paid and
deemed paid by Corporation A
in 1992 that are deemed paid
by Corporation M under section 902(a) (Line 7 multiplied
by Line 9) . . . . . . . . . . . . . . . . .

3.

4.
5.

6.

7.

8.

9.

10.

$100

250u
100u

$42

400u

$242

100u

25%

$60.50

11.

Total dividends paid out of post1986 undistributed earnings of
Corporation A to all shareholders in 1992. . . . . . . . . . . . . 200u
12. Percentage of Corporation A’s
post-1986 undistributed earnings paid to all shareholders in
1992 (Line 11 divided by Line
6) . . . . . . . . . . . . . . . . . . . . . . . . 50%
13. Post-1986 foreign income taxes
paid and deemed paid by Corporation A with respect to
post-1986 undistributed earnings distributed to all shareholders in 1992 (Line 7 multiplied by Line 12) . . . . . . . . . . $121
14. Post-1986 undistributed earnings
in Corporation A at start of
1993 (Line 6 minus Line 11) . 200u
15. Post-1986 foreign income taxes
in Corporation A at start of
1993 (Line 7 minus Line 13) . $121
(ii) Corporation M is deemed, under section
902(a) and paragraph (b) of this section, to have
paid $60.50 of post-1986 foreign income taxes
paid, or deemed paid, by Corporation A on or with
respect to its post-1986 undistributed earnings
(Part C, Line 10) and Corporation M includes that
amount in gross income as a dividend under
section 78. Both the income inclusion and the
credit are subject to a separate limitation for
dividends from Corporation A, a noncontrolled
section 902 corporation.
Example 4. (i) Since 1987, domestic corporation M has owned 100 percent of the voting stock
of controlled foreign corporation A, and Corporation A has owned 100 percent of the voting stock
of controlled foreign corporation B. Corporations
M, A and B use the calendar year as the taxable
year. Corporations A and B are organized in the
same foreign country and use the u as their
functional currency. 1u equals $1 at all relevant
times. Assume that all of the earnings of Corporations A and B are general limitation earnings and
profits within the meaning of section 904(d)(2)(I),
and that neither Corporation A nor Corporation B
has any previously taxed income accounts. In
1992, Corporation B pays a dividend of 150u to
Corporation A out of post-1986 undistributed earnings, and Corporation A computes an amount of
foreign taxes deemed paid under section 902(b)(1).
The dividend is not subpart F income to Corporation A because section 954(c)(3)(B)(i) (the same
country dividend exception) applies. Pursuant to
paragraph (c)(2)(ii) of this section, Corporation A
is not required to include the deemed paid taxes in
earnings and profits. Corporation A has no pre1987 accumulated profits and a deficit in post1986 undistributed earnings for 1992. In 1992,
Corporation A pays a dividend of 100u to Corporation M out of its earnings and profits for 1992
(current earnings and profits). Under paragraph
(b)(4) of this section, Corporation M is not
deemed to have paid any of the foreign income
taxes paid or deemed paid by Corporation A
because Corporation A has a deficit in post-1986
undistributed earnings as of December 31, 1992,
and the sum of its current plus accumulated profits
is less than zero. Note that if instead of paying a
dividend to Corporation A in 1992, Corporation B
had made an additional investment of $150 in
United States property under section 956, that
amount would have been included in gross income
by Corporation M under section 951(a)(1)(B) and
Corporation M would have been deemed to have
paid $50 of foreign income taxes paid by Corporation B. See sections 951(a)(1)(B) and 960. Foreign

26

income taxes of Corporation B deemed paid by
Corporation A and the opening balances in post1986 undistributed earnings and post-1986 foreign
income taxes for Corporation A and Corporation B
for 1993 are computed as follows:
A. Corporation B (second-tier corporation):
1.

Assumed post-1986 undistributed
earnings in Corporation B at
start of 1992
200u

2.

Assumed post-1986 foreign income taxes in Corporation B
at start of 1992 . . . . . . . . . . . . . $50
3. Assumed pre-tax earnings and
profits of Corporation B for
1992 . . . . . . . . . . . . . . . . . . . . . 150u
4. Assumed foreign income taxes
paid or accrued in 1992. . . . . . 50u
5. Post-1986 undistributed earnings
in Corporation B for 1992
(pre-dividend) (Line 1 plus
Line 3 minus Line 4) . . . . . . . 300u
6. Post-1986 foreign income taxes
in Corporation B for 1992
(pre-dividend) (Line 2 plus
Line 4 translated at the appropriate exchange rates) . . . . . . . $100
7. Dividends paid out of post-1986
undistributed earnings of Corporation B to Corporation A in
1992 . . . . . . . . . . . . . . . . . . . . . 150u
8. Percentage of Corporation B’s
post-1986 undistributed earnings paid to Corporation A
(Line 7 divided by Line 5) . . 50%
9. Foreign income taxes of Corporation B deemed paid by Corporation A under section
902(b)(1) (Line 6 multiplied
by Line 8) . . . . . . . . . . . . . . . . $50
10. Post-1986 undistributed earnings
in Corporation B at start of
1993 (Line 5 minus Line 7) . . 150u
11. Post-1986 foreign income taxes
in Corporation B at start of
1993 (Line 6 minus Line 9) . . $50
B. Corporation A (first-tier corporation):
1.

Assumed post-1986 undistributed
earnings in Corporation A at
start of 1992 . . . . . . . . . . . . . . . (200u)

2.

Assumed post-1986 foreign income taxes in Corporation A
at start of 1992 . . . . . . . . . . . .
Assumed pre-tax earnings and
profits of Corporation A for
1992 (including 150u dividend
from Corporation B) . . . . . . . .
Assumed foreign income taxes
paid or accrued by Corporation A in 1992 . . . . . . . . . . . . .
Foreign income taxes paid by
Corporation B in 1992 that are
deemed paid by Corporation A
(Part A, Line 9 of paragraph
(i) of this Example 4) . . . . . . .
Post-1986 undistributed earnings
in Corporation A for 1992
(pre-dividend) (Line 1 plus
Line 3 minus Line 4) . . . . . . .
Post-1986 foreign income taxes
in Corporation A for 1992
(pre-dividend) (Line 2 plus
Line 4 translated at the appropriate exchange rates plus
Line 5) . . . . . . . . . . . . . . . . . . .

3.

4.
5.

6.

7.

0

200u
40u

$50

(40u)

$90

8.

Dividends paid out of current
earnings and profits of Corporation A for 1992 . . . . . . . . . . 100u
9. Percentage of post-1986 undistributed earnings of Corporation A paid to Corporation M
in 1992 (Line 8 divided by the
greater of Line 6 or zero) . . . 0
10. Foreign income taxes paid and
deemed paid by Corporation A
in 1992 that are deemed paid
by Corporation M under section 902(a) (Line 7 multiplied
by Line 9) . . . . . . . . . . . . . . . . . 0
11. Post-1986 undistributed earnings
in Corporation A at start of
1993 (line 6 minus line 8) . . . (140u)
12. Post-1986 foreign income taxes
in Corporation A at start of
1993 (Line 7 minus Line 10) . $90
(ii) For 1993, Corporation A has 500u of earnings and profits on which it pays 160u of foreign
income taxes. Corporation A receives no dividends
from Corporation B, and pays a 100u dividend to
Corporation M. The 100u dividend to Corporation
M carries with it some of the foreign income taxes
paid and deemed paid by Corporation A in 1992,
which were not deemed paid by Corporation M in
1992 because Corporation A had no post-1986
undistributed earnings. Thus, for 1993, Corporation M is deemed to have paid $125 of post-1986
foreign income taxes paid and deemed paid by
Corporation A and includes that amount in gross
income as a dividend under section 78, determined
as follows:
1.
2.
3.
4.
5.

6.

7.

8.

9.

10.
11.

Post-1986 undistributed earnings
in Corporation A at start of
1993. . . . . . . . . . . . . . . . . . . . . .
Post-1986 foreign income taxes
in Corporation A at start of
1993 . . . . . . . . . . . . . . . . . . . . .
Pre-tax earnings and profits of
Corporation A for 1993 . . . . . .
Foreign income taxes paid or
accrued by Corporation A in
1993. . . . . . . . . . . . . . . . . . . . . .
Post-1986 undistributed earnings
in Corporation A for 1993
(pre-dividend) (Line 1 plus
Line 3 minus Line 4) . . . . . . .
Post-1986 foreign income taxes
in Corporation A for 1993
(pre-dividend) (Line 2 plus
Line 4 translated at the appropriate exchange rates) . . . . . . .
Dividends paid out of post-1986
undistributed earnings of Corporation A to Corporation M
in 1993 . . . . . . . . . . . . . . . . . .
Percentage of post-1986 undistributed earnings of Corporation A paid to Corporation M
in 1993 (Line 7 divided by
Line 5) . . . . . . . . . . . . . . . . . . .
Foreign income taxes paid and
deemed paid by Corporation A
that are deemed paid by Corporation M in 1993 (Line 6
multiplied by Line 8) . . . . . . .
Post-1986 undistributed earnings
in Corporation A at start of
1994 (Line 5 minus Line 7) . .
Post-1986 foreign income taxes
in Corporation A at start of
1994 (Line 6 minus Line 9) . .

Example 5. (i) Since 1987, domestic corporation M has owned 100 percent of the voting stock
of controlled foreign corporation A. Corporation
M also conducts operations through a foreign
branch. Both Corporation A and Corporation M
use the calendar year as the taxable year. Corporation A uses the u as its functional currency and 1u
equals $1 at all relevant times. Corporation A has
no subpart F income, as defined in section 952,
and no increase in earnings invested in United
States property under section 956 for 1992. Corporation A also has no previously taxed income
accounts. Corporation A has general limitation
income and high withholding tax interest income
that, by operation of section 954(b)(4), does not
constitute foreign base company income under
section 954(a). Because Corporation A is a controlled foreign corporation, it is not required to
reduce post-1986 foreign income taxes by foreign
taxes paid or accrued with respect to high withholding tax interest in excess of 5 percent. See
§ 1.902–1(a)(8)(iii). Corporation A pays a 60u
dividend to Corporation M in 1992. For 1992,
Corporation M is deemed, under paragraph (b) of
this section, to have paid $24 of the post-1986
foreign income taxes paid by Corporation A and
includes that amount in gross income under section 78 as a dividend, determined as follows:
1.

2.
(140u)
$90
500u

3.

160u

200u

4.

$250
5.
100u

50%

$125
100u
$125

6.

Assumed post-1986 undistributed
earnings in Corporation A at
start of 1992 attributable to:
(a) Section 904(d)(1)(B) high
withholding tax interest . . . .
(b) Section 904(d)(1)(I) general
limitation income . . . . . . . . . .
Assumed post-1986 foreign income taxes in Corporation A at
start of 1992 attributable to:
(a) Section 904(d)(1)(B) high
withholding tax interest . . . . .
(b) Section 904(d)(1)(I) general
limitation income . . . . . . . . . .
Assumed pre-tax earnings and
profits of Corporation A for
1992 attributable to:
(a) Section 904(d)(1)(B) high
withholding tax interest . . . . .
(b) Section 904(d)(1)(I) general
limitation income . . . . . . . . .
Assumed foreign income taxes
paid or accrued in 1992 on or
with respect to:
(a) Section 904(d)(1)(B) high
withholding tax interest . . . . .
(b) Section 904(d)(1)(I) general
limitation income . . . . . . . . .
Post-1986 undistributed earnings
in Corporation A for 1992 (predividend) attributable to:
(a) Section 904(d)(1)(B) high
withholding tax interest (Line
1(a) + Line 3(a) minus Line
4(a)) . . . . . . . . . . . . . . . . . . . .
(b) Section 904(d)(1)(I) general
limitation income (Line 1(b)
+ Line 3(b) minus Line 4(b))
........................
(c) Total . . . . . . . . . . . . . . . . . . .
Post-1986 foreign income taxes
in Corporation A for 1992 (predividend) attributable to:
(a) Section 904(d)(1)(B) high
withholding tax interest (Line
2(a) + Line 4(a) translated at
the appropriate exchange
rates) . . . . . . . . . . . . . . . . . . . .

27

20u
55u

$5
$20

20u
20u

10u
5u

30u

70u
100u

$15

(b) Section 904(d)(1)(I) general
limitation income (Line 2(b)
+ Line 4(b) translated at the
appropriate exchange rates) . $25
7. Dividends paid to Corporation M
in 1992 . . . . . . . . . . . . . . . . . . . . 60u
8. Dividends paid to Corporation M
in 1992 attributable to section
904(d) separate categories pursuant to § 1.904–5(d):
(a) Dividends paid to Corporation M in 1992 attributable
to section 904(d)(1)(B) high
withholding tax interest (Line
7 multiplied by Line 5(a)
divided by Line 5(c)). . . . . . . 18u
(b) Dividends paid to Corporation M in 1992 attributable
to section 904(d)(1)(I) general limitation income (Line
7 multiplied by Line 5(b)
divided by Line 5(c)) . . . . . . 42u
9. Percentage of Corporation A’s
post-1986 undistributed earnings
for 1992 paid to Corporation M
attributable to:
(a) Section 904(d)(1)(B) high
withholding tax interest (Line
8(a) divided by Line 5(a)) . . 60%
(b) Section 904(d)(1)(I) general
limitation income (Line 8(b)
divided by Line 5(b)) . . . . . . 60%
10. Foreign income taxes of Corporation A deemed paid by Corporation M under section 902(a)
attributable to:
(a) Foreign income taxes of Corporation A deemed paid by
Corporation M under section
902(a) with respect to section 904(d)(1)(B) high withholding tax interest (Line
6(a) multiplied by Line 9(a)) $9
(b) Foreign income taxes of
Corporation A deemed paid
by Corporation M under section 902(a) with respect to
section 904(d)(1)(I) general
limitation income (Line 6(b)
multiplied by Line 9(b)) . . . $15
11. Post-1986 undistributed earnings
in Corporation A at start of 1993
attributable to:
(a) Section 904(d)(1)(B) high
withholding tax interest (Line
5(a) minus Line 8(a)) . . . . . . 12u
(b) Section 904(d)(1)(I) general
limitation income (Line 5(b)
minus Line 8(b)) . . . . . . . . . . 28u
12. Post-1986 foreign income taxes
in Corporation A at start of 1989
allocable to:
(a) Section 904(d)(1)(B) high
withholding tax interest (Line
6(a) minus Line 10(a)) . . . . . $6
(b) Section 904(d)(1)(I) general
limitation income (Line 6(b)
minus Line 10(b)) . . . . . . . . . $10
(ii) For purposes of computing Corporation M’s
foreign tax credit limitation, the post-1986 foreign
income taxes of Corporation A deemed paid by
Corporation M with respect to income in separate
categories will be added to the foreign income
taxes paid or accrued by Corporation M associated
with income derived from Corporation M’s branch
operation in the same separate categories. The
dividend (and the section 78 inclusion with respect

to the dividend) will be treated as income in
separate categories and added to Corporation M’s
other income, if any, attributable to the same
separate categories. See section 904(d) and
§ 1.904–6.

(g) Effective date. This section applies to any distribution made in and
after a foreign corporation’s first taxable
year beginning on or after January 1,
1987.
§ 1.902–2 Treatment of deficits in post1986 undistributed earnings and pre1987 accumulated profits of a first-,
second-, or third-tier corporation for
purposes of computing an amount of
foreign taxes deemed paid under
§ 1.902–1.
(a) Carryback of deficits in post-1986
undistributed earnings of a first-,
second-, or third-tier corporation to preeffective date taxable years—(1) Rule.
For purposes of computing foreign income taxes deemed paid under § 1.902–
1(b) with respect to dividends paid by a
first-, second-, or third-tier corporation,

when there is a deficit in the post-1986
undistributed earnings of that corporation and the corporation makes a distribution to shareholders that is a dividend
or would be a dividend if there were
current or accumulated earnings and
profits, then the post-1986 deficit shall
be carried back to the most recent
pre-effective date taxable year of the
first-, second-, or third-tier corporation
with positive accumulated profits computed under section 902. See § 1.902–
3(e). For purposes of this § 1.902–2, a
pre-effective date taxable year is a taxable year beginning before January 1,
1987, or a taxable year beginning after
December 31, 1986, if the special effective date of § 1.902–1(a)(13) applies.
The deficit shall reduce the section 902
accumulated profits in the most recent
pre-effective date year to the extent
thereof, and any remaining deficit shall
be carried back to the next preceding
year or years until the deficit is completely allocated. The amount carried
back shall reduce the deficit in post-

1986 undistributed earnings. Any foreign
income taxes paid in a post-effective
date year will not be carried back to
pre-effective date taxable years or removed from post-1986 foreign income
taxes. See section 960 and the regulations under that section for rules governing the carryback of deficits and the
computation of foreign income taxes
deemed paid with respect to deemed
income inclusions from controlled foreign corporations.
(2) Examples. The following examples illustrate the rules of this paragraph (a):
Example 1. (i) From 1985 through 1990, domestic corporation M owns 10 percent of the one
class of stock of foreign corporation A. The
remaining 90 percent of Corporation A’s stock is
owned by Z, a foreign corporation. Corporation A
is not a controlled foreign corporation and uses the
u as its functional currency. 1u equals $1 at all
relevant times. Both Corporation A and Corporation M use the calendar year as the taxable year.
Corporation A has pre-1987 accumulated profits
and post-1986 undistributed earnings or deficits in
post-1986 undistributed earnings, pays pre-1987
and post-1986 foreign income taxes, and pays
dividends as summarized below:

Taxable Year

1985

1986

1987

1988

1989

1990

Current E & P (Deficits) of Corp. A

150u

150u

(100u)

100u

-0-

-0-

Current Plus Accumulated E & P of Corp. A

150u

200u

Post-’86 Undistributed Earnings of Corp. A
Post-’86 Undistributed Earnings of Corp. A Reduced By Current Year Dividend Distributions (increased by deficit carryback)
Foreign Income Taxes of Corp. A (Annual)

120u

300u

200u

250u

250u

(100u)

100u

100u

50u

-0-

100u

50u

50u

120u

$10

$50

-0-

-0-

$10

$60

$60

$30

Post-’86 Foreign Income Taxes of Corp. A
12/31 Distributions to Corp. M

-0-

-0-

5u

-0-

5u

-0-

12/31 Distributions to Corp. Z

-0-

-0-

45u

-0-

45u

-0-

(ii) On December 31, 1987, Corporation A
distributes a 5u dividend to Corporation M and a
45u dividend to Corporation Z. At that time
Corporation A has a deficit of (100u) in post-1986
undistributed earnings and $10 of post-1986 foreign income taxes. The (100u) deficit (but not the
post-1986 foreign income taxes) is carried back to
offset the accumulated profits of 1986 and removed from post-1986 undistributed earnings. The
accumulated profits for 1986 are reduced to 50u
(150u - 100u). The dividend is paid out of the
reduced 1986 accumulated profits. Foreign taxes
deemed paid by Corporation M with respect to the
5u dividend are 12u (120u x (5u/50u)). See
§ 1.902–1(b)(3). Corporation M must include 12u
in gross income (translated under the rule applicable to foreign income taxes paid on earnings
accumulated in pre-effective date years) under
section 78 as a dividend. Both the income inclusion and the foreign taxes deemed paid are subject
to a separate limitation for dividends from Corporation A, a noncontrolled section 902 corporation.
No accumulated profits remain in Corporation A
with respect to 1986 after the carryback of the
1987 deficit and the December 31, 1987, dividend
distributions to Corporations M and Z.

(iii) On December 31, 1989, Corporation A
distributes a 5u dividend to Corporation M and a
45u dividend to Corporation Z. At that time
Corporation A has 100u of post-1986 undistributed
earnings and $60 of post-1986 foreign income
taxes. Therefore, the dividend is considered paid
out of Corporation A’s post-1986 undistributed
earnings. Foreign taxes deemed paid by Corporation M with respect to the 5u dividend are $3 ($60
x 5%[5u/100u]). Corporation M must include $3
in gross income under section 78 as a dividend.
Both the income inclusion and the foreign taxes
deemed paid are subject to a separate limitation
for dividends from noncontrolled section 902
corporation A. Corporation A’s post-1986 undistributed earnings as of January 1, 1990, are 50u
(100u - 50u). Corporation A’s post-1986 foreign
income taxes must be reduced by the amount of
foreign taxes that would have been deemed paid if
both Corporations M and Z were eligible to
compute an amount of deemed paid taxes. Section
1.902–1(a)(8)(i). The amount of foreign income
taxes that would have been deemed paid if both
Corporations M and Z were eligible to compute an
amount of deemed paid taxes on the 50u dividend
distributed by Corporation A is $30 ($60 x

28

50%[50u/100u]). Thus, post-1986 foreign income
taxes as of January 1, 1990, are $30 ($60 - $30).
Example 2. The facts are the same as in
Example 1, except that Corporation A has a deficit
in its post-1986 undistributed earnings of (150u)
on December 31, 1987. The deficit is carried back
to 1986 and reduces accumulated profits for that
year to -0-. Thus, the foreign income taxes paid
with respect to the 1986 accumulated profits will
never be deemed paid. The 1987 dividend is
deemed to be out of Corporation A’s 1985 accumulated profits. Foreign taxes deemed paid by
Corporation M under section 902 with respect to
the 5u dividend paid on December 31, 1987, are
4u (120u x 5u/150u). See § 1.902–1(b)(3). As a
result of the December 31, 1987, dividend distributions, 100u (150u - 50u) of accumulated profits
and 80u (120u reduced by 40u[120u x 50u/150u]
of foreign taxes that would have been deemed
paid had all of Corporation A’s shareholders been
eligible to compute an amount of foreign taxes
deemed paid with respect to the dividend paid out
of 1985 accumulated profits) remain in Corporation A with respect to 1985.
Example 3. (i) From 1986 through 1991, domestic corporation M owns 10 percent of the one class
of stock of foreign corporation A. The remaining

90 percent of Corporation A’s stock is owned by
Corporation Z, a foreign corporation. Corporation
A is not a controlled foreign corporation and uses
the u as its functional currency. 1u equals $1 at all

Taxable Year

relevant times. Both Corporation A and Corporation M use the calendar year as the taxable year.
Corporation A has pre-1987 accumulated profits
and post-1986 undistributed earnings or deficits in

1986

1987

Current E & P (Deficits) of Corp. A

100u

(50u)

150u

75u

25u

-0-

Current Plus Accumulated E & P of Corp. A

100u

50u

200u

175u

200u

80u

(50u)

100u

75u

100u

-0-

Post-’86 Undistributed Earnings of Corp. A
Post-’86 Undistributed Earnings of Corp. A Reduced By Current Year Dividend Distributions (increased by deficit carryback)
Foreign Income Taxes (Annual) of Corp. A

80u

Post-’86 Foreign Income Taxes of Corp. A

1988

post-1986 undistributed earnings, pays pre-1987
and post-1986 foreign income taxes, and pay
dividends as summarized below:

1989

1990

1991

(50u)

-0-

75u

-0-

-0-

-0-

$120

$20

$20

-0-

-0-

$120

$20

$40

-0-

12/31 Distributions to Corp. M

-0-

-0-

10u

-0-

12u

-0-

12/31 Distributions to Corp. Z

-0-

-0-

90u

-0-

108u

-0-

(ii) On December 31, 1988, Corporation A
distributes a 10u dividend to Corporation M and a
90u dividend to Corporation Z. At that time
Corporation A has 100u in its post-1986 undistributed earnings and $120 in its post-1986 foreign
income taxes. Corporation M is deemed, under
§ 1.902–1(b)(1), to have paid $12 ($120 x
10%[10u/100u]) of the post-1986 foreign income
taxes paid by Corporation A and includes that
amount in gross income under section 78 as a
dividend. Both the income inclusion and the
foreign taxes deemed paid are subject to a separate
limitation for dividends from noncontrolled section
902 corporation A. Corporation A’s post-1986
undistributed earnings as of January 1, 1989, are
-0- (100u - 100u). Its post-1986 foreign taxes as
of January 1, 1989, also are -0-, $120 reduced by
$120 of foreign income taxes paid that would have
been deemed paid if both Corporations M and Z
were eligible to compute an amount of foreign
taxes deemed paid on the dividend from Corporation A ($120 x 100%[100u/100u]).
(iii) On December 31, 1990, Corporation A
distributes a 12u dividend to Corporation M and a
108u dividend to Corporation Z. At that time
Corporation A has 100u in its post-1986 undistributed earnings and $40 in its post-1986 foreign
income taxes. The dividend is paid out of post1986 undistributed earnings to the extent thereof
(100u), and the remainder of 20u is paid out of
1986 accumulated profits. Under § 1.902–1(b)(2),
the 12u dividend to Corporation M is deemed to
be paid out of post-1986 undistributed earnings to
the extent of 10u (100u x 12u/120u) and the
remaining 2u is deemed to be paid out of
Corporation A’s 1986 accumulated profits. Similarly, the 108u dividend to Corporation Z is
deemed to be paid out of post-1986 undistributed
earnings to the extent of 90u (100u x 108u/120u)
and the remaining 18u is deemed to be paid out of
Corporation A’s 1986 accumulated profits. Foreign
income taxes deemed paid by Corporation M
under section 902 with respect to the portion of
the dividend paid out of post-1986 undistributed
earnings are $4 ($40 x 10%[10u/100u]), and
foreign taxes deemed paid by Corporation M with
respect to the portion of the dividend deemed paid
out of 1986 accumulated profits are 1.6u (80u x
2u/100u). Corporation M must include $4 plus
1.6u translated under the rule applicable to foreign
income taxes paid on earnings accumulated in
taxable years prior to the effective date of the Tax
Reform Act of 1986 in gross income as a dividend
under section 78. The income inclusion and the
foreign income taxes deemed paid are subject to a

separate limitation for dividends from
noncontrolled section 902 Corporation A. As of
January 1, 1991, Corporation A’s post-1986 undistributed earnings are -0- (100u - 100u). 80u (100u
- 20u) of accumulated profits remain with respect
to 1986. Post-1986 foreign income taxes as of
January 1, 1991, are -0-, $40 reduced by $40 of
foreign income taxes paid that would have been
deemed paid if both Corporations M and Z were
eligible to compute an amount of deemed paid
taxes on the 100u dividend distributed by Corporation A out of post- 1986 undistributed earnings
($40 x 100%[100u/100u]). Corporation A has 64u
of foreign income taxes remaining with respect to
1986, 80u reduced by 16u [80u x 20u/100u] of
foreign income taxes that would have been
deemed paid if Corporations M and Z both were
eligible to compute an amount of deemed paid
taxes on the 20u dividend distributed by Corporation A out of 1986 accumulated profits.

(b) Carryforward of deficits in pre1987 accumulated profits of a first-,
second-, or third-tier corporation to
post-1986 undistributed earnings for
purposes of section 902—(1) General
rule. For purposes of computing foreign
income taxes deemed paid under
§ 1.902–1(b) with respect to dividends
paid by a first-, second-, or third-tier
corporation out of post-1986 undistributed earnings, the amount of a deficit in
accumulated profits of the foreign corporation determined under section 902
as of the end of its last pre-effective
date taxable year is carried forward and
reduces post-1986 undistributed earnings
on the first day of the foreign corporation’s first taxable year beginning after
December 31, 1986, or on the first day
of the first taxable year in which the
ownership requirements of section
902(c)(3)(B) and § 1.902–1(a)(1)
through (4) are met if the special effective date of § 1.902–1(a)(13) applies.
Any foreign income taxes paid with
respect to a pre-effective date year shall
not be carried forward and included in
post-1986 foreign income taxes. Post-

29

1986 undistributed earnings may not be
reduced by the amount of a pre-1987
deficit in earnings and profits computed
under section 964(a). See section 960
and the regulations under that section
for rules governing the carryforward of
deficits and the computation of foreign
income taxes deemed paid with respect
to deemed income inclusions from controlled foreign corporations. For translation rules governing carryforwards of
deficits in pre-1987 accumulated profits
to post-1986 taxable years of a foreign
corporation with a dollar functional currency, see § 1.985–6(d)(2).
(2) Effect of pre-effective date deficit.
If a foreign corporation has a deficit in
accumulated profits as of the end of its
last pre-effective date taxable year, then
the foreign corporation cannot pay a
dividend out of pre-effective date years
unless there is an adjustment made (for
example, a refund of foreign taxes paid)
that restores section 902 accumulated
profits to a pre-effective date taxable
year or years. Moreover, if a foreign
corporation has a deficit in section 902
accumulated profits as of the end of its
last pre-effective date taxable year, then
no deficit in post-1986 undistributed
earnings will be carried back under
paragraph (a) of this section. For rules
concerning carrybacks of eligible deficits from post-1986 undistributed earnings to reduce pre-1987 earnings and
profits computed under section 964(a),
see section 960 and the regulations
under that section.
(3) Examples. The following examples illustrate the rules of this paragraph (b):
Example 1. (i) From 1984 through 1988, domestic corporation M owns 10 percent of the one class
of stock of foreign corporation A. The remaining
90 percent of Corporation A’s stock is owned by
Corporation Z, a foreign corporation. Corporation

A is not a controlled foreign corporation and uses
the u as its functional currency. 1u equals $1 at all
relevant times. Both Corporation A and Corpora-

tion M use the calendar year as the taxable year.
Corporation A has pre-1987 accumulated profits or
deficits in accumulated profits and post-1986 un-

distributed earnings, pays pre-1987 and post-1986
foreign income taxes, and pays dividends as
summarized below:

Taxable Year

1984

1985

1986

1987

1988

Current E & P (Deficits) of Corp. A

25u

(100u)

(25u)

200u

100u

Current Plus Accumulated E & P (Deficits) of Corp. A

25u

(75u)

(100u)

100u

50u

Post-’86 Undistributed Earnings of Corp. A

100u

50u

Post-’86 Undistributed Earnings of Corp. A Reduced By
Current Year Dividend Distributions (reduced by deficit
carryforward)

(50u)

50u

Foreign Income Taxes (Annual) of Corp. A

20u

5u

-0-

Post-’86 Foreign Income Taxes of Corp. A

$100

$50

$100

$50

12/31 Distributions to Corp. M

-0-

-0-

-0-

15u

-0-

12/31 Distributions to Corp. Z

-0-

-0-

-0-

135u

-0-

(ii) On December 31, 1987, Corporation A
distributes a 150u dividend, 15u to Corporation M
and 135u to Corporation Z. Corporation A has
200u of current earnings and profits for 1987, but
its post-1986 undistributed earnings are only 100u
as a result of the reduction for pre-1987 accumulated deficits required under paragraph (b)(1) of
this section. Corporation A has $100 of post-1986
foreign income taxes. Only 100u of the 150u
distribution is a dividend out of post-1986 undistributed earnings. Foreign income taxes deemed
paid by Corporation M in 1987 with respect to the
10u dividend attributable to post-1986 undistributed earnings, computed under § 1.902–1(b), are
$10 ($100 x 10%[10u/100u]). Corporation M
includes this amount in gross income under section 78 as a dividend. Both the income inclusion
and the foreign taxes deemed paid are subject to a
separate limitation for dividends from

noncontrolled section 902 corporation A. After the
distribution, Corporation A has (50u) of post-1986
undistributed earnings (100u - 150u) and -0post-1986 foreign income taxes, $100 reduced by
$100 of foreign income taxes paid that would have
been deemed paid if both Corporations M and Z
were eligible to compute an amount of deemed
paid taxes on the 100u dividend distributed by
Corporation A out of post-1986 undistributed earnings ($100 x 100%[100u/100u]).
(iii) The remaining 50u of the 150u distribution
cannot be deemed paid out of accumulated profits
of a pre-1987 year because Corporation A has an
accumulated deficit as of the end of 1986 that
eliminated all pre-1987 accumulated profits. See
paragraph (b)(2) of this section. The 50u is a
dividend out of current earnings and profits under
section 316(a)(2), but Corporation M is not

Taxable Year

deemed to have paid any additional foreign income taxes paid by Corporation A with respect to
that 50u dividend out of current earnings and
profits. See § 1.902–1(b)(4).
Example 2. (i) From 1986 through 1991, domestic corporation M owns 10 percent of the one class
of stock of foreign corporation A. The remaining
90 percent of Corporation A’s stock is owned by
Corporation Z, a foreign corporation. Corporation
A is not a controlled foreign corporation and uses
the u as its functional currency. 1u equals $1 at all
relevant times. Both Corporation A and Corporation M use the calendar year as the taxable year.
Corporation A has pre-1987 accumulated profits or
deficits in accumulated profits and post-1986 undistributed earnings, pays post-1986 foreign income taxes, and pays dividends as summarized
below:

1986

1987

1988

1989

1990

Current E & P (Deficits) of Corp. A

(100u)

150u

(150u)

100u

250u

Current Plus Accumulated E & P (Deficits) of Corp. A

(100u)

50u

(200u)

(100u)

50u

Post-’86 Undistributed Earnings of Corp. A
Post-’86 Undistributed Earnings of Corp. A Reduced By
Current Year Dividend Distributions (reduced by deficit
carryforward)
Foreign Income Taxes (Annual) of Corp. A

-0-

Post-’86 Foreign Income Taxes of Corp. A

50u

(200u)

(100u)

50u

(50u)

(200u)

(200u)

-0-

$120

-0-

$50

$100

$120

-0-

$50

$150

12/31 Distributions to Corp. M

-0-

10u

-0-

10u 5u

12/31 Distributions to Corp. Z

-0-

90u

-0-

90u

(ii) On December 31, 1987, Corporation A
distributes a 10u dividend to Corporation M and a
90u dividend to Corporation Z. At the time of the
distribution, Corporation A has 50u of post-1986
undistributed earnings and 150u of current earnings and profits. Thus, 50u of the dividend
distribution (5u to Corporation M and 45u to
Corporation Z) is a dividend out of post-1986
undistributed earnings. The remaining 50u is a
dividend out of current earnings and profits under
section 316(a)(2), but Corporation M is not
deemed to have paid any additional foreign income taxes paid by Corporation A with respect to
that 50u dividend out of current earnings and
profits. See § 1.902–1(b)(4). Note that even if
there were no current earnings and profits in
Corporation A, the remaining 50u of the 100u
distribution cannot be deemed paid out of accumu-

lated profits of a pre-1987 year because Corporation A has an accumulated deficit as of the end of
1986 that eliminated all pre-1987 accumulated
profits. See paragraph (b)(2) of this section. Corporation A has $120 of post-1986 foreign income
taxes. Foreign taxes deemed paid by Corporation
M under section 902 with respect to the 5u
dividend out of post-1986 undistributed earnings
are $12 ($120 x 10%[5u/50u]). Corporation M
includes this amount in gross income as a dividend under section 78. Both the foreign taxes
deemed paid and the deemed dividend are subject
to a separate limitation for dividends from
noncontrolled section 902 corporation A. As of
January 1, 1988, Corporation A has (50u) in its
post-1986 undistributed earnings (50u - 100u) and
-0- in its post-1986 foreign income taxes, $120
reduced by $120 of foreign taxes that would have

30

45u

been deemed paid if both Corporations M and Z
were eligible to compute an amount of deemed
paid taxes on the dividend distributed by Corporation A out of post-1986 undistributed earnings
($120 x 100%[50u/50u]).
(iii) On December 31, 1989, Corporation A
distributes a 10u dividend to Corporation M and a
90u dividend to Corporation Z. Although the
distribution is considered a dividend in its entirety
out of 1989 earnings and profits pursuant to
section 316(a)(2), post-1986 undistributed earnings
are (100u). Accordingly, for purposes of section
902, Corporation M is deemed to have paid no
post-1986 foreign income taxes. See § 1.902–
1(b)(4). Corporation A’s post-1986 undistributed
earnings as of January 1, 1990, are (200u) ((100u)
- 100u). Corporation A’s post-1986 foreign income

taxes are not reduced because no taxes were
deemed paid.
(iv) On December 31, 1990, Corporation A
distributes a 5u dividend to Corporation M and a
45u dividend to Corporation Z. At that time
Corporation A has 50u of post-1986 undistributed
earnings, and $150 of post-1986 foreign income
taxes. Foreign taxes deemed paid by Corporation
M under section 902 with respect to the 5u
dividend are $15 ($150 x 10%[5u/50u]). Post-1986
undistributed earnings as of January 1, 1991, are
-0- (50u - 50u). Post-1986 foreign income taxes as
of January 1, 1991, also are -0-, $150 reduced by
$150 ($150 x 100%[50u/50u]) of foreign income
taxes that would have been deemed paid if both
Corporations M and Z were eligible to compute an
amount of deemed paid taxes on the 50u dividend.

Par. 4. Newly designated § 1.902–3
is amended by revising the section heading and paragraph (a) introductory text,
and by designating the last paragraph as
paragraph (l) and revising it to read as
follows:
§ 1.902–3 Credit for domestic corporate shareholder of a foreign corporation for foreign income taxes paid with
respect to accumulated profits of taxable
years of the foreign corporation beginning before January 1, 1987.
(a) Definitions. For purposes of section 902 and §§ 1.902–3 and 1.902–4:
*

*

*

*

tion beginning after December 31, 1986,
then this section shall apply to all
taxable years beginning after December
31, 1964, and before the year in which
the ownership requirements are first
met. See § 1.902–1(a)(13)(iii). For corresponding rules applicable to distributions received by the domestic shareholder prior to January 1, 1965, see
§ 1.902–5 as contained in the 26 CFR
part 1 edition revised April 1, 1976.
Par. 5. Newly designated § 1.902–4,
paragraph (b), in the last sentence, the
language ‘‘§ 1.902–1’’ is removed and
‘‘§ 1.902–3’’ is added in its place.
PART 602—OMB CONTROL
NUMBERS UNDER
THE PAPERWORK REDUCTION ACT
Par. 6. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 7. In § 602.101, paragraph (c) is
amended by adding entries in numerical
order to the table to read as follows:
§ 602.101 OMB Control Numbers.
*

*

*

*

*

(c) * * *

*

(l) Effective date. Except as provided
in § 1.902–4, this section applies to any
distribution received from a first-tier
corporation by its domestic shareholder
after December 31, 1964, and before the
beginning of the foreign corporation’s
first taxable year beginning after December 31, 1986. If, however, the first
day on which the ownership requirements of section 902(c)(3)(B) and
§ 1.902–1(a)(1) through (4) are met
with respect to the foreign corporation is
in a taxable year of the foreign corpora-

CFR part or section where

Current OMB

identified and described

control No.

*
*
*
*
*
1.902–1 . . . . . . . . . . . . . . . . . . . 1545–1458
*
*
*
*
*

Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 12, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on
January 6, 1997, 8:45 a.m., and published in the
issue of the Federal Register on January 6, 1997,
62 F.R. 923)

Section 1274.—Determination of
Issue Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal
rates; adjusted federal long-term rate,
and the long-term exempt rate. For
purposes of sections 1274, 1288, 382,
and other sections of the Code, tables
set forth the rates for March 1997.
Rev. Rul. 97–10
This revenue ruling provides various
prescribed rates for federal income tax
purposes for March 1997 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable federal rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted AFR) for the current month for
purposes of section 1288(b). Table 3
sets forth the adjusted federal long-term
rate and the long-term tax-exempt rate
described in section 382(f). Table 4
contains the appropriate percentages for
determining the low-income housing
credit described in section 42(b)(2) for
buildings placed in service during the
current month. Finally, Table 5 contains
the federal rate for determining the
present value of an annuity, an interest
for life or for a term of years, or a
remainder or a reversionary interest for
purposes of section 7520.

REV. RUL. 97–10 TABLE 1
Applicable Federal Rates (AFR) for March 1997
Period for Compounding
Annual

Semiannual

Quarterly

Monthly

5.83%
6.43%
7.02%
7.62%

5.75%
6.33%
6.90%
7.48%

5.71%
6.28%
6.84%
7.41%

5.68%
6.25%
6.80%
7.37%

Short-Term
AFR
110% AFR
120% AFR
130% AFR

31

REV. RUL. 97–10 TABLE 1—Continued
Applicable Federal Rates (AFR) for March 1997
Period for Compounding
Annual

Semiannual

Quarterly

Monthly

6.42%
7.07%
7.72%
8.39%
9.70%
11.37%

6.32%
6.95%
7.58%
8.22%
9.48%
11.06%

6.27%
6.89%
7.51%
8.14%
9.37%
10.91%

6.24%
6.85%
7.46%
8.08%
9.30%
10.81%

6.86%
7.57%
8.26%
8.97%

6.75%
7.43%
8.10%
8.78%

6.69%
7.36%
8.02%
8.69%

6.66%
7.32%
7.97%
8.62%

Mid-Term
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
Long-Term
AFR
110% AFR
120% AFR
130% AFR

REV. RUL. 97–10 TABLE 2
Adjusted AFR for March 1997
Period for Compounding
Annual

Semiannual

Quarterly

Monthly

Short-term
adjusted AFR

3.77%

3.74%

3.72%

3.71%

Mid-term
adjusted AFR

4.62%

4.57%

4.54%

4.53%

Long-term
adjusted AFR

5.50%

5.43%

5.39%

5.37%

REV. RUL. 97–10 TABLE 3
Rates Under Section 382 for March 1997
Adjusted federal long-term rate for the current month

5.50%

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

5.50%

REV. RUL. 97–10 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for March 1997
Appropriate percentage for the 70% present value low-income housing credit

8.56%

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

3.67%

REV. RUL. 97–10 TABLE 5
Rate Under Section 7520 for March 1997
Applicable federal rate for determining the present value of an annuity, an
interest for life or a term of years, or a remainder or reversionary interest

32

7.8%

Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 1362.—Election,
Revocation, Termination
26 CFR 1.1362–1: Election to be an S corporation.
What are the procedures for a taxpayer to
request to change its annual accounting period and
elect to be an S corporation effective for the
taxable year beginning January 1, 1997? See
Notice 97–20, page 52.

Section 1374.—Tax Imposed on
Certain Built-In Gains
26 CFR 1.1374–4(d): Section 481(a) adjustments.
How does a bank change its method of accounting for bad debts from the § 585 reserve method
to the § 166 specific charge-off method so that it
may elect S corporation status for the 1997 tax
year? See Rev. Proc. 97–18, page 53.

Section 2107.—Expatriation To
Avoid Tax
What are the tax consequences under sections
877, 2107, 2501, and 6039F for individuals who
lose U.S. citizenship or cease to be taxed as
long-term residents of the United States with a
principal purpose to avoid U.S. taxes? See Notice
97–19, page 40.

26 CFR 1.1362–6: Elections and consents.

Section 2501.—Imposition of Tax

How does a bank change its method of accounting for bad debts from the § 585 reserve method
to the § 166 specific charge-off method so that it
may elect S corporation status for the 1997 tax
year? See Rev. Proc. 97–18, page 53.

What are the tax consequences under sections
877, 2107, 2501, and 6039F for individuals who
lose U.S. citizenship or cease to be taxed as
long-term residents of the United States with a
principal purpose to avoid U.S. taxes? See Notice
97–19, page 40.

33

Section 6039F.—Notice of Large
Gifts Received From Foreign
Persons
What are the tax consequences under sections
877, 2107, 2501, and 6039F for individuals who
lose U.S. citizenship or cease to be taxed as
long-term residents of the United States with a
principal purpose to avoid U.S. taxes? See Notice
97–19, page 40.

Section 7520.—Valuation Tables
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Section 7872.—Treatment of Loans
With Below-Market Interest Rates
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of March 1997. See Rev. Rul. 97–10, page
31.

Part III. Administrative, Procedural, and Miscellaneous
Differential Earnings Rate for
Mutual Life Insurance Companies
Notice 97–17
This notice publishes a tentative determination under § 809 of the Internal
Revenue Code of the ‘‘differential earnings rate’’ for 1996 and the rate that is
used to calculate the ‘‘recomputed differential earnings amount’’ for 1995.
(The latter rate is referred to in this
notice as the ‘‘recomputed differential
earnings rate’’ for 1995.) These rates are
used by mutual life insurance companies
to calculate their federal income tax
liability for taxable years beginning in
1996.
BACKGROUND
Section 809(a) provides that, in the
case of any mutual life insurance company, the amount of the deduction allowable under § 808 for policyholder
dividends is reduced (but not below
zero) by the ‘‘differential earnings
amount.’’ Any excess of the differential
earnings amount over the amount of the
deduction allowable under § 808 is
taken into account as a reduction in the
closing balance of reserves under subsections (a) and (b) of § 807. The
‘‘differential earnings amount’’ for any
taxable year is the amount equal to the
product of (a) the life insurance company’s average equity base for the taxable
year multiplied by (b) the ‘‘differential
earnings rate’’ for that taxable year. The
‘‘differential earnings rate’’ for the taxable year is the excess of (a) the
‘‘imputed earnings rate’’ for the taxable
year over (b) the ‘‘average mutual earnings rate’’ for the second calendar year
preceding the calendar year in which the
taxable year begins. The ‘‘imputed earnings rate’’ for any taxable year is the
amount that bears the same ratio to 16.5
percent as the ‘‘current stock earnings
rate’’ for the taxable year bears to the
‘‘base period stock earnings rate.’’
Section 809(f) provides that, in the
case of any mutual life insurance company, if the ‘‘recomputed differential
earnings amount’’ for any taxable year
exceeds the differential earnings amount
for that taxable year, the excess is
included in life insurance gross income
for the succeeding taxable year. If the
differential earnings amount for any tax-

able year exceeds the recomputed differential earnings amount for that taxable
year, the excess is allowed as a life
insurance deduction for the succeeding
taxable year. The ‘‘recomputed differential earnings amount’’ for any taxable
year is an amount calculated in the same
manner as the differential earnings
amount for that taxable year, except that
the average mutual earnings rate for the
calendar year in which the taxable year
begins is substituted for the average
mutual earnings rate for the second
calendar year preceding the calendar
year in which the taxable year begins.
The stock earnings rates and mutual
earnings rates taken into account under
§ 809 generally are determined by dividing statement gain from operations
by the average equity base. For this
purpose, the term ‘‘statement gain from
operations’’ means ‘‘the net gain or loss
from operations required to be set forth
in the annual statement, determined
without regard to Federal income taxes,
and ... properly adjusted for realized
capital gains and losses....’’ See
§ 809(g)(1). The term ‘‘equity base’’ is
defined as an amount determined in the
manner prescribed by regulations equal
to surplus and capital increased by the
amount of nonadmitted financial assets,
the excess of statutory reserves over the
amount of tax reserves, the sum of
certain other reserves, and 50 percent of
any policyholder dividends (or other
similar liability) payable in the following taxable year. See § 809(b)(2), (3),
(4), (5) and (6). Section 1.809–10 of the
Income Tax Regulations provides that
the equity base includes both the asset
valuation reserve and the interest maintenance reserve for taxable years ending
after December 31, 1991.
Section 1.809–9(a) of the regulations
provides that neither the differential
earnings rate under § 809(c) nor the
recomputed differential earnings rate
that is used in computing the recomputed differential earnings amount under
§ 809(f)(3) may be less than zero.
As described above, the differential
earnings rate for 1996 and the recomputed differential earnings rate for 1995
affect the income and deductions reported by mutual life insurance companies on their federal income tax returns
for the 1996 taxable year.

34

Data necessary to determine the tentative differential earnings rate for 1996
and the tentative recomputed differential
earnings rate for 1995 have been compiled from returns filed by mutual life
insurance companies and certain stock
life insurance companies. The Internal
Revenue Service is currently examining
these returns. This examination will not
be completed before the March 17,
1997, due date for filing 1996 calendar
year returns.
NOTICE OF TENTATIVE RATES
This notice publishes a tentative determination of the differential earnings
rate for 1996 and of the recomputed
differential earnings rate for 1995. This
notice also publishes a tentative determination of the rates on which the calculation of the differential earnings rate for
1996 and the recomputed differential
earnings rate for 1995 are based. The
final determination of these rates is
expected to be published before September 1, 1997.
The tentative determination of the
differential earnings rate for 1996 and
the tentative determination of the recomputed differential earnings rate for 1995
that are published in this notice should
be used by mutual life insurance companies to calculate the amount of tax
liability for taxable years beginning in
1996 (in the case of companies that file
returns before publication of the final
determination of these rates) or to calculate the amount of estimated unpaid tax
liability for taxable years beginning in
1996 (in the case of companies that are
allowed an extension of time to file
returns). Companies that file returns before publication of the final determination of these rates should file amended
returns after the final determination of
these rates is published. If there is a
failure to pay tax for a taxable year
beginning in 1996 and the failure is
attributable to a difference between (a)
the tentative determination of the differential earnings rate for 1996 and recomputed differential earnings rate for 1995
and (b) the final determination of these
rates, then any such failure through
September 15, 1997, will be treated as
due to reasonable cause and will not
give rise to any addition to tax under
§ 6651.

The tentative determination of the rates is set forth in Table 1.
Notice 97–17 Table 1
Tentative Determination of Rates To Be Used For Taxable Years Beginning in 1996
Differential earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recomputed differential earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Imputed earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Imputed earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base period stock earnings rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current stock earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock earnings rate for 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock earnings rate for 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average mutual earnings rate for 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average mutual earnings rate for 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transfers to Foreign Entities Under
Sections 1491 Through 1494
Notice 97–18
This notice provides guidance with
respect to certain transfers of property to
foreign corporations, partnerships, trusts,
or estates as described in section 1491
of the Internal Revenue Code (the
‘‘Code’’). This notice also provides
guidance concerning the penalty imposed by section 1494(c) (‘‘section
1494(c) penalty’’) for failure to file a
return reporting a transfer described in
section 1491 (‘‘section 1491 transfer’’).
Sections 1491 and 1494 were amended
by the Small Business Job Protection
Act of 1996 (the ‘‘Act’’).
The Act provides that the section
1494(c) penalty applies to transfers
made after August 20, 1996. However,
Notice 96–60, 1996–49 I.R.B. 7, announced that no section 1494(c) penalty
would be imposed if a section 1491
transfer is reported no later than 60 days
after issuance of forthcoming guidance.
This notice provides the guidance referred to in Notice 96–60.
This notice is divided into eight sections. Section I provides background on
the relationship of the new section
1494(c) penalty with sections 1491
through 1494, 6048, and 6677. Section
II sets forth the section 1491 transfers
that are reportable under section 1494.
Section III explains various changes to
the time and manner for reporting section 1491 transfers, including certain
transfers by domestic trusts described in
Notice 96–65, 1996–52 I.R.B. 28. Section IV contains examples illustrating
the section 1494 reporting requirements.
Section V provides guidance with respect to the section 1494(c) penalty.

Section VI clarifies the application of
section 1491 to organizations that have
made an election under section 761(a).
Section VII announces that no reporting
is required under section 1494 on certain distributions from a corporation or
partnership while Treasury and the Service study the appropriate treatment of
such transfers under section 1491. Section VIII sets forth the effective date of
this notice.
SECTION I. BACKGROUND
A. Sections 1491 through 1494
Section 1491 of the Code imposes a
35 percent excise tax on the transfer of
property by a citizen or resident of the
United States, or by a domestic corporation or partnership, or by an estate or
trust that is not a foreign estate or a
trust (‘‘U.S. transferor’’) to a foreign
corporation if the transfer is made as
paid-in surplus or as a contribution to
capital. The excise tax is also imposed
on any transfer of property by a U.S.
transferor to a foreign partnership, estate
or trust. Tax-free exchanges, gifts, sales
in which any portion of the gain realized is deferred, and private annuity
transactions are examples of transactions
that are within the scope of section
1491. S. Rep. No. 938, 94th Cong. 2d
Sess. 223 (1976), 1976–3 C.B. 49, 261.
See also Rev. Rul. 78–357, 1978–2 C.B.
227. The excise tax is 35 percent of the
excess of the fair market value of the
property transferred over the transferor’s
adjusted basis in such property plus any
gain recognized to the transferor at the
time of the transfer.
Under section 1492, the excise tax
imposed by section 1491 does not apply
to: transfers to certain exempt organizations (section 1492(1)); transfers de-

35

6.555
0
12.625
15.777
18.221
17.422
23.385
11.437
17.445
9.222
16.477

scribed in section 367 (section
1492(2)(A)); transfers with respect to
which an election has been made to
apply principles similar to the principles
of section 367 (section 1492(2)(B)); or
transfers with respect to which an election has been made under section 1057
(section 1492(3)).
Section 1494(a) provides that the excise tax is due and payable by the
transferor at the time of the transfer, and
shall be assessed, collected and paid
under regulations prescribed by the Secretary. Under Treas. Reg. § 1.1494–1(a),
a U.S. transferor is required to report a
section 1491 transfer on Form 926,
Return by a U.S. Transferor of Property
to a Foreign Corporation, Foreign Estate or Trust, or Foreign Partnership, on
the day the transfer is made. Any excise
tax due must also be paid on the day of
the transfer.
B. Sections 1494(c), 6048 and 6677
Section 6048(a), which requires a
U.S. person to report certain transfers of
property (including money) to foreign
trusts, was amended by the Act to
broaden the scope of reportable transactions between U.S. persons and foreign
trusts. The Act also amended section
6677, which provides for a penalty
equal to 35 percent of the gross value of
the property transferred to a foreign
trust if a U.S. person fails to comply
with the reporting requirements of section 6048(a). Additional penalties are
imposed if the failure to file continues
after the Service mails notice of such
failure to the person required to pay the
penalty. The section 6677 penalty applies even if the transfer is to a foreign
trust with respect to which the transferor
is treated as the owner of the transferred
property under sections 671 through

679. Congress imposed a significant
penalty for failure to report such a
transfer, even though there are no tax
consequences resulting from the transfer,
because of the need to trace transfers of
property to a foreign trust to ensure that
any subsequent income earned on the
transferred property is correctly reported
on the income tax return of a U.S.
taxpayer. See H.R. Rep. No. 542, 104th
Cong., 2d Sess., pt. 2, at 25 (1996).
The Act also adds new section
1494(c) to the Code, which imposes a
penalty for failure to file a return required by the Secretary with respect to a
section 1491 transfer. Section 1494(c)
provides that a U.S. transferor shall be
liable for the penalties provided in section 6677 as if such failure were a
failure to file a notice under section
6048(a) (i.e., a penalty equal to 35
percent of the gross value of the property transferred plus additional penalties
for continuing failure to comply).
SECTION II. TRANSFERS SUBJECT
TO REPORTING UNDER SECTION
1494
A. Reportable section 1491 transfers
Section 1491 applies to a broad range
of transactions. Moreover, existing regulations require a U.S. transferor to report
on the day of the transfer any transaction described in section 1491. See
Treas. Reg. § 1.1494–1(a).
In order to administer section 1494(c)
in a manner that is not overly burdensome, Treasury and the Service intend to
amend the existing regulations to narrow
the scope of transfers subject to reporting under section 1494. Until the regulations are amended, a U.S. transferor is
required to report a section 1491 transfer only if it would be reportable under
the guidance provided by this notice.
Thus, no section 1494(c) penalty will be
imposed on a transfer that is not reportable under this notice.
Treasury and the Service believe that
a section 1491 transfer should be reported under section 1494 only if the
United States has a significant tax interest in obtaining the required information. The United States has a significant
tax interest in obtaining information on
transfers of appreciated property to a
foreign entity if the entire amount of
gain is not immediately recognized by
the U.S. transferor. In addition, the
United States has a significant tax interest in obtaining information on transfers
of any property to a foreign entity if the

U.S. transferor may be required to pay
U.S. tax on the income or gain generated by that property after the transfer.
The new foreign trust reporting provisions identify these types of transfers to
foreign trusts. This notice identifies
these types of transfers to other foreign
entities. Finally, Treasury and the Service believe that reporting should not be
required under section 1494 with respect
to certain transfers that are adequately
reported pursuant to another Code section.
Thus, this notice announces that a
U.S. transferor is not required to report
a section 1491 transfer if:
(i) The U.S. transferor immediately
recognizes gain (if any) on the transfer
equal to the difference between the fair
market value of the property and the
U.S. transferor’s adjusted basis in such
property; and
(ii) The U.S. transferor does not have
a significant interest in the transferee
immediately after the transfer.
Thus, a U.S. transferor must report
any transfer if the entire gain is not
immediately recognized, even if the U.S.
transferor does not have a significant
interest in the transferee after the transfer. In addition, a transfer of property
must be reported if the U.S. transferor
has a significant interest in the transferee after the transfer, even if the
property transferred consists of money
or other unappreciated property. However, even if the transfer would otherwise be reportable under this notice,
such reporting will be deemed satisfied
if the transfer is adequately reported by
the U.S. transferor pursuant to a section
of the Code specified in section II.B of
this notice.
1. Taxable transfers for fair market
value
If the U.S. transferor immediately
recognizes gain (if any) on the transfer
equal to the difference between the fair
market value of the property and the
U.S. transferor’s adjusted basis in such
property, no excise tax is imposed and
reporting is not required unless the U.S.
transferor has a significant interest in
the transferee, as discussed in Section
II.A.2 of this notice. Therefore, unless
the U.S. transferor has a significant
interest in the transferee, fair market
value sales of property by a U.S. person
to a foreign partnership, trust or estate
on which gain is immediately recognized are not required to be reported.
However, if any portion of the gain
realized on a transfer is not recognized

36

or is deferred (e.g., installment sales or
private annuity transactions), the transfer
must be reported. Thus, for example, a
U.S. person who contributes appreciated
property to a foreign partnership in a
transaction in which gain is not recognized generally must report the transfer
under section 1494.
Certain transfers by U.S. transferors
(described below) would not result in an
income tax liability regardless of the
method of the transfers. Thus, solely for
purposes of section 1491, Treasury and
the Service believe it is appropriate to
treat such transferors as having immediately recognized the full amount of gain
with respect to these transfers. Hence,
an excise tax will not be imposed on the
following transfers and such transfers
will not be subject to reporting:
(i) A transfer by a U.S. transferor
who is exempt from federal income
taxation under section 501(a) or section
664(c), unless a sale of the transferred
property would be subject to tax under
section 511 as unrelated business taxable
income;
(ii) A transfer to a foreign partnership, trust or estate by a domestic
corporation, of stock (including treasury
stock) in exchange for money or other
property if the domestic corporation is
not required to recognize gain on the
transfer under section 1032; or
(iii) A transfer to a foreign partnership, trust or estate by a domestic
partnership, of an interest in the domestic partnership in exchange for property
if the domestic partnership is not required to recognize gain on the transfer
under section 721.
2. Transfers where the U.S. transferor
has a significant interest in the transferee
To obtain information on transfers of
property by U.S. persons who may be
required to pay U.S. tax on income or
gain generated by that property, transfers
of property (whether or not appreciated)
to a foreign transferee must be reported
if the U.S. transferor has a significant
interest in the transferee after the transfer. Thus, this notice requires U.S.
transferors to report section 1491 transfers of all types of property, including
the taxpayer’s functional currency
(‘‘money’’), whenever the U.S.
transferor has a significant interest in
the transferee after the transfer, regardless of whether the transfers are fair
market value sales in which all of the
gain is recognized immediately.

For purposes of this notice, a U.S.
transferor is treated as having a significant interest in a foreign transferee if
the U.S. transferor and the foreign transferee are related persons within the
meaning of section 643(i)(2)(B), with
the following modifications:
(i) For purposes of applying section 267 (other than section 267(f)) and
section 707(b)(1), ‘‘at least 10 percent’’
shall be substituted for ‘‘more than 50
percent’’ each place it appears;
(ii) The principles of section
267(b)(10), substituting ‘‘at least 10 percent’’ for ‘‘more than 50 percent,’’ shall
apply to determine whether two corporations are related; and
(iii) The principles applicable to
trusts shall apply to determine whether
an estate is related to another person.
For example, a U.S. transferor who
owns a 10-percent interest in a foreign
partnership immediately after the transfer will have a significant interest in the
partnership.
B. Duplicative reporting
A U.S. transferor otherwise required
to report a section 1491 transfer will be
deemed to have satisfied the section
1494 reporting requirement without having to file Form 926 if the transferor
complies with the reporting requirements described in one of the four
sections below.
1. Transactions with certain foreign
corporations (section 6038)
Section 6038 requires reporting of
certain transactions between a U.S. person and foreign corporations controlled
by the U.S. person. A U.S. person
generally satisfies the reporting requirements of section 6038 by filing Form
5471, Information Return of U.S. Persons with Respect to Certain Foreign
Corporations. Capital contributions to
foreign corporations that are subject to
reporting under section 6038 are also
section 1491 transfers.
To the extent section 6038 adequately
addresses the reporting requirements
with respect to transfers to these foreign
corporations, it is not necessary to require additional reporting under section
1494. Therefore, a U.S. transferor that
transfers money or other unappreciated
property (or appreciated property where
the full amount of the gain is recognized
immediately) to a foreign corporation
described in section 6038(a) is not required to report such transfer on Form
926 provided the U.S. transferor has

otherwise complied with the reporting
requirements of section 6038.
The reporting requirements of section
6038 do not provide sufficient information to determine the amount of excise
tax due upon the transfer of appreciated
property if the full amount of gain is not
recognized immediately on the transaction. Therefore, a U.S. transferor is
required to file Form 926 to report a
section 1491 transfer of appreciated
property in that case, even if the U.S.
transferor has filed a Form 5471 with
respect to the foreign transferee. See
Section II.B.3, below, if a transfer of
appreciated property is reported under
sections 367 and 6038B.
2. Transactions with certain foreignowned corporations (section 6038A)
Section 6038A requires reporting of
certain transactions between U.S. corporations and related foreign parties if the
U.S. corporation is 25-percent foreign
owned. U.S. persons generally satisfy
the reporting requirements of section
6038A by filing Form 5472, Information
Return of 25% Foreign-Owned U.S.
Corporation or Foreign Corporation
Engaged in a U.S. Trade or Business. A
transaction with a foreign entity that is
subject to reporting under section 6038A
may also be a section 1491 transfer.
To the extent section 6038A adequately addresses the reporting requirements with respect to transfers between
a U.S. corporation and certain related
foreign entities, it is not necessary to
require additional reporting under section 1494. Therefore, a U.S. transferor
that transfers money or other unappreciated property (or appreciated property
where the full amount of the gain is
recognized immediately) to a foreign
entity described in section 6038A is not
required to report such transfer on Form
926 provided the U.S. transferor reports
the transfer on Form 5472 in compliance with the reporting requirements of
section 6038A.
The reporting requirements of section
6038A do not provide sufficient information to determine the amount of excise tax due upon the transfer of appreciated property if the full amount of
gain is not recognized immediately on
the transaction. Therefore, a U.S.
transferor is required to file Form 926 to
report a section 1491 transfer of appreciated property in that case, even if the
U.S. transferor has reported such transfer on Form 5472 with respect to the
foreign transferee.

37

3. Certain transactions involving foreign corporations (sections 367 and
6038B)
Section 1492(2)(A) provides that to
the extent a section 1491 transfer is
described in section 367, such transfer is
exempt from the section 1491 excise
tax. For example, a transfer of property
by a U.S. person to a wholly-owned
foreign corporation as paid-in surplus or
as a contribution to capital is a transfer
described in both section 367 and section 1491. Existing regulations require
U.S. persons to report transfers of property described in section 367(a) or (d)
on Form 926 and to attach such information as is required under section
6038B. Temp. Treas. Reg. § 1.6038B–
1T(b).
Because section 6038B addresses the
reporting requirements for transfers of
property described in section 367(a) and
(d), it is not necessary to require additional reporting under section 1494.
Therefore, a U.S. transferor that makes a
transfer of property (either appreciated
or unappreciated) described in both section 367 and section 1491 will satisfy
the section 1494 reporting requirements
to the extent the U.S. transferor reports
the property transferred under section
6038B. If money or other unappreciated
property is not reported under section
6038B such property must be reported
under section 1494 unless the property
is adequately reported under Section
II.B.1 of this notice.
4. Transactions with foreign trusts
(section 6048)
The Act amended section 6048(a) to
require enhanced reporting of transfers
of property, including money, between
U.S. persons and foreign trusts. U.S.
persons generally satisfy the reporting
requirements of section 6048(a) by filing Form 3520. A transfer of property to
a foreign trust for which reporting is
required under section 6048(a) may also
be a section 1491 transfer.
Because section 6048 adequately addresses the reporting requirements for
transfers to foreign trusts, it is not
necessary to require additional reporting
under section 1494. Therefore, a U.S.
transferor that makes a transfer of property (either appreciated or unappreciated) described in both sections 6048
and 1491 is not required to report such
transfer on Form 926 provided the U.S.
transferor complies with the reporting
requirements of section 6048 and the
U.S. transferor does not owe excise tax

under section 1491. Form 3520 will be
revised to accommodate elections under
section 1492(2)(B) or 1492(3) to avoid
the section 1491 excise tax.
A U.S. transferor that makes a transfer of property described in both sections 6048 and 1491 is required to
report such transfer on Form 926 only if
the U.S. transferor owes excise tax
under section 1491 on the transfer or
fails to comply with the reporting requirements of section 6048.
SECTION III. CHANGES TO TIME
AND MANNER FOR REPORTING
TRANSFERS DESCRIBED IN
SECTION 1491
Existing regulations require that every
person making a section 1491 transfer
make a return on Form 926 on the day
of the transfer and pay any excise tax
due at that time. Treas. Reg. § 1.1494–
1(a). Treasury and the Service will
amend the regulations to change the
time and manner for reporting section
1491 transfers and paying any excise tax
due. Until the regulations are amended,
U.S. transferors who are required to file
Form 926 with respect to section 1491
transfers made after August 20, 1996,
must file Form 926 and pay any excise
tax due in accordance with the procedures set forth in this notice.
A. Time for filing
Regulations under section 1494 will
be amended to allow a U.S. transferor to
file information regarding section 1491
transfers on an annual basis instead of at
the time of the transfer. Until the regulations are amended, a U.S. transferor
may either file Form 926 with the U.S.
transferor’s annual tax return or information return for the taxable year that
includes the date of the transfer or may
file Form 926 on the day the transfer is
made. See Section III.D of this notice.
See also Section VII of this notice for
relief from penalties under section
1494(c) in certain cases.
B. Elections made pursuant to section
1492
A U.S. transferor can avoid the section 1491 excise tax by making certain
elections under section 1492. One election allows a U.S. transferor to avoid
the excise tax by electing, before the
transfer, to apply principles similar to
the principles of section 367. Section
1492(2)(B). A U.S. transferor that makes
an election to apply principles similar to

the principles of section 367 must comply with the reporting requirements of
section 6038B.
Regulations will be issued under section 1494 to allow such election to be
made with the U.S. transferor’s annual
tax return or information return for the
taxable year that includes the date of the
transfer. Until regulations are issued, an
election to apply principles similar to
the principles of section 367 must be
made on Form 926. Further, provided
the U.S. transferor indicates on Form
926 that such an election is being made,
the information required by the regulations under section 6038B is attached to
Form 926, and Form 926 accompanies
the U.S. transferor’s tax return for the
taxable year that includes the date of the
transfer, the U.S. transferor will be
deemed to have made the election before the transfer.
Alternatively, a U.S. transferor can
avoid the section 1491 excise tax by
electing to treat the transfer as a taxable
exchange under section 1057. Section
1492(3). This election must also be
made on Form 926. A Form 926 that
accompanies the U.S. transferor’s tax
return for the taxable year that includes
the date of the transfer will satisfy the
requirements
in
Treas.
Reg.
§ 301.9100–12T that specify the time
and manner for making an election
under section 1057.
As described in Notice 96–65,
1996–52 I.R.B. 28, the Act amended
section 7701(a)(30) and (31) to set forth
new criteria that must be met to qualify
as a domestic trust. Certain domestic
trusts will be treated as making section
1491 transfers on January 1, 1997 as a
result of becoming foreign trusts under
the new law. If a domestic trust relies in
good faith on Notice 96–65 to continue
to file tax returns as a domestic trust,
but is unable to meet the new domestic
trust criteria by the end of the two-year
period set forth in the notice, the trust
may avoid the section 1491 excise tax
by making a section 1057 election on
the Form 3520 which must be attached
to the domestic trust’s 1997 amended
tax return. Such election will be considered timely for purposes of section
1494(c) and Treas. Reg. § 301.9100–
12T if Form 3520 is attached to the
domestic trust’s 1997 amended tax return that is filed by the due date of the
trust’s tax return for the taxable year
that includes the date that is two years
from the due date of the trust’s 1997 tax
return (including extensions).

38

C. Manner of reporting transactions
A U.S. transferor who transfers appreciated property that is reportable on
Form 926 under this notice must separately identify the property on Form 926
if the full amount of gain is not recognized immediately on the transfer. See
Form 926, Part III. In contrast, to the
extent the transfer consists of money or
other unappreciated property (or appreciated property in which the full amount
of gain is recognized immediately) to a
transferee in which the U.S. transferor
has a significant interest immediately
after the transfer, the value of transferred property may be aggregated by
category on a statement attached to
Form 926. The categories referred to in
the preceding sentence, which are based
on the categories of transactions listed
on Form 5471, Schedule M, are:
(i) Sales of stock in trade (inventory);
(ii) Sales of tangible property other
than stock in trade;
(iii) Sales of property rights (patents, trademarks, etc.);
(iv) Purchases of stock in trade
(inventory);
(v) Purchases of tangible property,
other than stock in trade;
(vi) Purchases of property rights
(patents, trademarks, etc.);
(vii) Compensation paid for technical, managerial, engineering, construction, or like services;
(viii) Commissions paid;
(ix) Rents, royalties, and license
fees paid;
(x) Interest paid;
(xi) Contributions to corporations,
partnerships, trusts or estates (attach a
brief description of the property transferred); and
(xii) All other transfers not required to be separately identified (attach
a brief description of the type of transfer
and property transferred).
If the transferee is a foreign corporation
the U.S. transferor is only required to
report transfers described in paragraph
(xi) (relating to contributions to capital
or paid-in surplus).
D. Payment of tax
Any excise tax due on a transfer of
assets to a foreign transferee may be
paid by attaching Form 926 (with the
tax due) to the U.S. transferor’s income
tax return for the taxable year in which
the transfer occurs. Interest must be paid
on the amount of excise tax due at the
underpayment rate determined under

section 6621 with respect to the period
between the date on which the transfer
occurred and the date on which the
excise tax is actually paid. To avoid
paying interest in the case of a transfer
for which the excise tax is due, a U.S.
transferor may instead file Form 926
and pay any excise tax due on the day
of the transfer.
E. Revisions to forms
Form 926 and Form 3520 are being
revised to reflect the guidance set forth
in this notice. Until the revised forms
are issued, U.S. transferors should continue to use existing Form 926 to report
section 1491 transfers, adjusted as necessary to conform with the new reporting requirements set forth in this notice.
SECTION IV. EXAMPLES
The following examples illustrate the
rules of this notice. In these examples
UST is a U.S. transferor, FC is a foreign
corporation, FP is a foreign partnership,
and FT is a foreign trust.
Example 1. Transfer of appreciated property to
a foreign corporation. UST transfers appreciated
property to FC as a contribution to capital in a
transfer described in section 351. The section 351
transfer is described in both section 367(a) and
section 1491. UST is not required to report the
transfer under section 1494 if the transfer is
reported under section 6038B.
Example 2. Transfer of money to a foreign
corporation. UST transfers money to FC as a
contribution to capital. Immediately after the transfer UST owns 60 percent of the stock of FC. FC
is not required to report the transfer on Form 926
provided UST files Form 5471 reflecting the
transfer to FC for the taxable year in which the
transfer took place.
Example 3. Transfer of appreciated property to
a foreign partnership. UST transfers appreciated
property to FP in a transaction described in section
721. UST must separately identify the property
transferred on Form 926 and pay any excise tax
due. UST may file Form 926 with its tax return
for the taxable year in which the transfer took
place and can make an election under section 1492
at that time to avoid the excise tax. (In contrast,
under prior law UST would have been required to
file Form 926 on the day of the transfer.)
Example 4. Transfer of money to a foreign
partnership. UST makes several transfers of
money to FP during a taxable year in transactions
described in section 721. Immediately after each
transfer UST has more than a 10 percent interest
in the capital of FP. UST is required to report the
transfers on Form 926. However, UST may aggregate the transfers of money into a single amount
on Form 926.
Example 5. Transfer to a foreign trust. UST
transfers appreciated property to FT. UST reports
the transfer on Form 3520 under section 6048(a).
UST is not required to report the transfer on Form
926 unless UST is liable for the section 1491
excise tax. UST can avoid any excise tax by
making a section 1057 election directly on Form
3520.

SECTION V. SECTION 1494(c)
PENALTY

considered a transfer to that foreign
partnership for purposes of section 1491.

Section 1494(c) imposes a penalty on
a U.S. transferor who fails to report a
section 1491 transfer for which reporting is required to the extent the transfer
is not reported or is reported inaccurately. See sections 1494(c), 6677(a).
Thus, if a U.S. person makes a section
1491 transfer of property worth
$1,000,000 to a foreign transferee, but
reports only $400,000 of that amount,
the section 1494(c) penalty is imposed
only on the $600,000 unreported
amount. Further, the section 1494(c)
penalty does not apply if failure to
report a transfer is shown to be due to
reasonable cause and not willful neglect.
See sections 1494(c), 6677(d). For example, if an audit results in an allocation of income under section 482, and
such allocation results in an adjustment
treated as a capital contribution by a
U.S. transferor to a foreign corporation,
reasonable cause exists for failure to
report such capital contribution under
section 1494(c) if reasonable cause prevents the imposition of accuracy-related
penalties under section 6662 in connection with the section 482 allocation.

SECTION VII. DISTRIBUTIONS FROM
CORPORATIONS AND
PARTNERSHIPS

Under Section II.B of this notice, a
U.S. transferor is not required to report
a section 1491 transfer on Form 926 if
such transfer is subject to the reporting
requirements of certain other Code sections. However, if the U.S. transferor
has not complied with the reporting
requirements of that section, the U.S.
transferor will not be treated as having
satisfied its reporting obligation under
section 1494 and will be subject to
penalties under section 1494(c). The
amount of the penalty imposed under
section 1494(c) will be reduced, however, by the amount of the penalty
imposed for failing to comply with the
reporting requirements of that other section.
SECTION VI. ORGANIZATIONS
ELECTING UNDER SECTION 761(a)
Section 761(a) allows certain organizations that would otherwise be treated
as partnerships to elect not to be treated
as partnerships for purposes of
subchapter K of the Code. Treasury and
the Service believe that it is inappropriate to apply section 1491 to a foreign
partnership that has made a section
761(a) election. Thus, a transfer to a
foreign partnership with a valid section
761(a) election in effect will not be

39

Treasury and the Service are studying
the appropriate scope of section 1491,
including the treatment of corporate distributions described in section 301, 302
or 305, and partnership distributions
described in section 731. Notwithstanding any other provision of this notice,
until further guidance is issued taxpayers are not required to report such
distributions, whether or not they constitute transfers described in section 1491.
In addition, if further guidance requires
that these transactions be reported, no
penalty will be imposed under section
1494(c) on the failure to report any such
distribution as long as a return reporting
these transfers is filed no later than sixty
days after the issuance of that guidance
(or such later date as may be specified
in that guidance). Moreover, any applicable election with respect to such distribution will be considered timely for
purposes of Treas. Reg. § 301.9100–
12T if such an election is filed in the
manner required no later than sixty days
after the issuance of that guidance (or
such later date as may be specified in
that guidance).
SECTION VIII. EFFECTIVE DATE
This Notice is effective for transfers
of property occurring after August 20,
1996. No penalties will be imposed
under section 1494(c) if a Form 926
reporting the section 1491 transfer (or
other adequate reporting described in
Section II.B of this notice) is filed by
the due date of the U.S. transferor’s
income tax return, including extensions,
for the taxable year in which the transfer occurred, or the date that is 60 days
after the date this notice is published in
the Internal Revenue Bulletin, whichever
is later. See Notice 96–60.
PUBLIC COMMENT INVITED
Treasury and the Service invite comments on the guidance provided by this
notice. Written comments should be submitted by June 10, 1997 to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn: CC:CORP:T:R (Notice 97–18)
Room 5228
Washington, D.C. 20044;

or, alternatively, via the internet at:
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.
The comments you submit will be
available for public inspection and copying.
DRAFTING INFORMATION
The principal authors of this notice
are Wendy Stanley and Michael Kirsch
of the Office of Associate Chief Counsel
(International). For further information
regarding this notice, contact Ms.
Stanley or Mr. Kirsch on (202) 622–
3860 (not a toll-free call).
Guidance for Expatriates Under
Sections 877, 2501, 2107 and
6039F
Notice 97–19
PURPOSE
The Health Insurance Portability and
Accountability Act of 1996 (the ‘‘Act’’)
recently amended sections 877, 2107
and 2501 of the Internal Revenue Code
(‘‘Code’’), and added new information
reporting requirements under section
6039F.1 This notice provides guidance
regarding certain federal tax consequences under these sections and section
7701(b)(10) for certain individuals who
lose U.S. citizenship, cease to be taxed
as U.S. lawful permanent residents, or
are otherwise subject to tax in the
manner provided by section 877.
This notice has eleven sections. Section I provides background regarding the
general application of sections 877,
2107 and 2501. Section II explains how
to compute tax under section 877. Section III explains how an individual must
determine his or her tax liability and net
worth for purposes of sections 877,
2107 and 2501. Section IV explains the
procedures that an individual must use
to request a private letter ruling that the
individual’s loss of U.S. citizenship did
not have for one of its principal purposes the avoidance of U.S. taxes. Section IV also provides that certain former
long-term U.S. residents may use this
ruling procedure to request a ruling that
cessation of long-term U.S. residency
did not have for one of its principal
1

There are currently two provisions of the Internal
Revenue Code designated as section 6039F. Treasury intends to seek a technical correction to the
Act to redesignate section 6039F, as added by the
Act, as section 6039G. All subsequent references
to section 6039F in this notice relate to section
6039F as contained in the Act.

purposes the avoidance of U.S. taxes.
Section V provides that certain transactions are treated as exchanges of property under section 877 and explains how
to enter into a gain recognition agreement to avoid the immediate recognition
of gain on exchanges of property. Section VI provides anti-abuse rules that
apply to contributions made to certain
foreign corporations. Section VII sets
forth annual filing requirements for certain individuals subject to section 877.
Section VIII explains how new section
877 interacts with certain U.S. income
tax treaties. Section IX explains how to
file information statements in accordance with section 6039F and describes
the information that must be included on
such statements. Section X explains how
the transition provision of the Act affects certain individuals who performed
an expatriating act prior to February 6,
1995. Section XI explains the application of section 7701(b)(10) and how that
section interacts with section 877, as
amended by the Act.
Treasury and the Service expect to
issue regulations under sections 877 and
6039F, and amend regulations under
sections 2107 and 2501, to incorporate
the guidance set forth in this notice.
Until regulations are issued, taxpayers
must comply with the guidance set forth
in this notice.
SECTION I. GENERAL APPLICATION
OF SECTIONS 877, 2107 and 2501
Section 877 generally provides that a
citizen who loses U.S. citizenship or a
long-term resident who ceases to be
taxed as a U.S. resident (collectively,
individuals who ‘‘expatriate’’) within the
10-year period immediately preceding
the close of the taxable year will be
taxed on all of his or her U.S. source
income (as modified by section 877(d))
for such taxable year, unless such loss
or cessation did not have for one of its
principal purposes the avoidance of U.S.
taxes.
Section 877(a)(2) provides that a
former citizen is considered to have lost
U.S. citizenship with a principal purpose
to avoid U.S. taxes if the former citizen’s tax liability or net worth exceeded
certain amounts on the date of expatriation. However, a former citizen will not
be considered to have expatriated with a
principal purpose to avoid U.S. taxes as
a result of the individual’s tax liability
or net worth if he or she qualifies for an
exception under section 877(c). To
qualify for an exception, a former citi-

40

zen must be described in certain statutory categories and submit a ruling
request for a determination by the Secretary as to whether the individual’s
expatriation had for one of its principal
purposes the avoidance of U.S. taxes.
Section 877(c).
Section 2107(a)(1) generally provides
that U.S. estate tax will be imposed on
the transfer of the taxable estate of
every nonresident decedent if, within the
10-year period ending with the date of
death, the decedent lost U.S. citizenship,
unless such loss did not have for one of
its principal purposes the avoidance of
U.S. taxes. Unless a former citizen
qualifies for an exception as provided
by section 877(c), such individual will
be considered to have expatriated with a
principal purpose to avoid U.S. taxes for
purposes of section 2107 if the individual’s tax liability or net worth exceeded
certain amounts on the date of expatriation. Sections 2107(a)(2)(A) and
(a)(2)(B).
Section 2501(a)(1) generally provides
that a tax will be imposed for each
calendar year on the transfer of property
by gift during such calendar year by any
individual, resident or nonresident. Section 2501(a)(2) provides that section
2501(a)(1) will not apply to the transfer
of intangible property made by a nonresident not a citizen of the United
States. Section 2501(a)(3)(A) provides
that this exception does not apply in the
case of a donor who, within the 10-year
period ending with the date of a transfer, lost U.S. citizenship, unless such
loss did not have for one of its principal
purposes the avoidance of U.S. taxes.
Unless a former citizen qualifies for an
exception as provided by section 877(c),
such individual shall be treated as having a principal purpose to avoid U.S.
taxes for purposes of section 2501 if the
individual’s tax liability or net worth
exceeded certain amounts on the date of
expatriation. Sections 2501(a)(3)(B) and
(a)(3)(C).
Section 877(e) provides comparable
treatment for long-term residents. A
long-term resident of the United States
will be treated as if such resident lost
U.S. citizenship for purposes of sections
877, 2107, 2501 and 6039F if the
resident (i) ceases to be a lawful permanent resident of the United States, or (ii)
commences to be treated as a foreign
resident under the provisions of an income tax treaty between the United
States and a foreign country and does

not waive the benefits of such treaty
applicable to residents of the foreign
country.
Section 877(e)(1) defines a long-term
resident as a non-U.S. citizen who was a
lawful permanent resident of the United
States in at least 8 taxable years during
the period of 15 taxable years, ending
with the taxable year in which such
individual ceases to be a lawful permanent resident of the United States or
commences to be treated as a resident of
another country under an income tax
treaty and does not waive the benefits of
such treaty applicable to residents of the
foreign country. For purposes of section
877, an individual is considered a lawful
permanent resident in a taxable year if
he or she is a lawful permanent resident
during any portion of that year.
Section 877(e)(3)(B) provides that
property held by a long-term resident on
the date that such individual first became a resident of the United States
(whether or not a lawful permanent
resident) shall be treated for purposes of
section 877 as having a basis of not less
than the fair market value of the property on such date. A long-term resident
may elect not to have this treatment
apply. Such an election, once made, is
irrevocable.
Sections 877, 2107 and 2501, as
amended by the Act, apply to individuals who expatriate after February 5,
1995, and to individuals subject to section 511(g)(3)(A) of the Act (see section
X of this notice).
SECTION II. COMPUTING TAX
UNDER SECTION 877
Individuals who expatriate with a
principal purpose to avoid U.S. taxes
will be subject to tax on U.S. source
income (as modified by section 877(d))
under sections 1, 55 or 402(d)(1)2 of the
Code (the ‘‘alternative tax’’), or under
section 871 of the Code, depending on
which method results in the highest total
tax. Sections 877(a)(1) and (b).
An expatriate is subject to the alternative tax under section 877 only if the
total tax imposed thereunder on all
items of income for the taxable year
exceeds the total tax under section 871
2

Section 402(d)(1) of the Code generally provides
for 5-year income averaging with respect to certain lump-sum distributions from qualified retirement plans. Section 1401(b)(1) of the Small
Business Job Protection Act of 1996 amended
section 877(b) by striking ‘‘section 1, 55, and
section 402(d)(1)’’ and inserting ‘‘section 1 or 55.’’
This amendment applies to taxable years beginning after December 31, 1999.

for those same items of income. The
following example illustrates how to
compute tax under section 877.
Example 1. A, a former U.S. citizen, expatriated
with a principal purpose to avoid U.S. taxes on
December 31, 1996. In 1997, A earns $100,000 of
U.S. source dividend income and $50,000 of U.S.
source interest income that qualifies as portfolio
interest under section 871(h). After taking into
account the deductions and credits allowed under
section 877(b)(2), A’s net tax liability under section 1 on the dividend and portfolio interest
income is $40,000.
The tax imposed under section 871 on A’s
dividend income is $30,000 (30 percent of
$100,000). Section 871(a)(1)(A). No tax is imposed on A’s portfolio interest under section 871
because section 871(h)(1) exempts portfolio interest received by a nonresident alien from U.S. tax.
Thus, A’s tax liability under section 871 is
$30,000.
Since A’s total tax liability computed under
section 1 exceeds A’s total tax liability computed
under section 871, A must pay the higher tax.
Thus, A must report $40,000 of U.S. tax on his
1997 U.S. income tax return (Form 1040NR) as a
result of section 877.

SECTION III. TAX LIABILITY AND
NET WORTH TESTS
Background. Section 877(a)(2) provides that a former citizen is considered
to have expatriated with a principal
purpose to avoid U.S. taxes if (i) the
individual’s average annual net U.S.
income tax (as defined in section
38(c)(1)) for the five taxable years prior
to expatriation is greater than $100,000
(the ‘‘tax liability test’’), or (ii) the
individual’s net worth on the date of
expatriation is $500,000 or more (the
‘‘net worth test’’). The $100,000 and
$500,000 amounts are subject to cost-ofliving adjustments determined under
section 1(f)(3) for calendar years after
1996. An individual who does not satisfy the tax liability or net worth test,
but expatriates with a principal purpose
to avoid U.S. taxes, is also subject to
section 877.
Section 2107(a)(2)(A) provides that
an individual shall be treated as having
a principal purpose to avoid U.S. taxes
for purposes of section 2107 if such
individual satisfies either the tax liability
test or the net worth test under section
877(a)(2).
Likewise,
section
2501(a)(3)(B) provides that an individual shall be treated as having a
principal purpose to avoid U.S. taxes for
purposes of section 2501 if such individual satisfies either the tax liability
test or the net worth test under section
877(a)(2). The tax liability and net
worth tests also apply for purposes of
determining whether a former long-term
resident is subject to sections 877, 2107,
and 2501. Section 877(e)(1).

41

Determination of tax liability. For
purposes of the tax liability test, an
individual’s net U.S. income tax is determined under section 38(c)(1). An individual who files a joint income tax
return must take into account the net
income tax that is reflected on the joint
income tax return for purposes of the
tax liability test.
Determination of net worth. For purposes of the net worth test, an individual
is considered to own any interest in
property that would be taxable as a gift
under Chapter 12 of Subtitle B of the
Code if the individual were a citizen or
resident of the United States who transferred the interest immediately prior to
expatriation. For this purpose, the determination of whether a transfer by gift
would be taxable under Chapter 12 of
Subtitle B of the Code must be determined without regard to sections
2503(b) through (g), 2513, 2522, 2523,
and 2524.
An interest in property includes
money or other property, regardless of
whether it produces any income or gain.
In addition, an interest in the right to
use property will be treated as an interest in such property. Thus, a
nonexclusive license to use property is
treated as an interest in the underlying
property attributable to the value of the
use of such property.
Valuation of interests in property. In
determining the values of interests in
property for purposes of the net worth
test, individuals must use the valuation
principles of section 2512 and the regulations thereunder without regard to any
prohibitions or restrictions on such interest. Although individuals must use good
faith estimates of values, formal appraisals are not required.
Special rules for determining beneficial interests in trusts. An individual’s
beneficial interest in a trust must be
included in the calculation of that individual’s net worth. For this purpose, the
value of an individual’s beneficial interest in a trust will be determined using a
two-step process. First, all interests in
property held by the trust must be
allocated to beneficiaries (or potential
beneficiaries) of the trust based on all
relevant facts and circumstances, including the terms of the trust instrument,
letter of wishes (and any similar document), historical patterns of trust distributions, and any functions performed by
a trust protector or similar advisor. Interests in property held by the trust that
cannot be allocated based on the factors
described in the previous sentence shall

be allocated to the beneficiaries of the
trust under the principles of intestate
succession (determined by reference to
the settlor’s intestacy) as contained in
the Uniform Probate Code, as amended.
Second, interests in property held by a
trust that are allocated to the expatriate
must be valued under the principles of
section 2512 and the regulations thereunder without regard to any prohibitions
or restrictions on such interest. The
following example illustrates this special
rule.
Example 2. B, a former long-term resident,
expatriated on December 31, 1996. B is a potential
beneficiary of two trusts during his lifetime. Trust
1’s sole asset is an apartment building. Under the
terms of Trust 1, B is entitled to receive 100
percent of the income generated by the apartment
building during B’s life. B’s brother, C, is the
remainderman. For purposes of computing B’s net
worth, Trust 1’s interest in the apartment building
is allocated between B and C. B is treated as
owning a life interest in the apartment building.
The value of the life interest must be determined
under the principles of section 2512 and the
regulations thereunder.
Trust 2 was established by B’s father for the
benefit of B and C. Under the terms of Trust 2,
the trust income and corpus may be distributed at
the trustee’s discretion to either B or C. For
purposes of determining B’s net worth, all of the
interests in property owned by Trust 2 must first
be allocated to either B or C based on all relevant
facts and circumstances. If the facts and circumstances do not indicate how the interest in the
trust’s property should be allocated between B and
C, the trust property will be allocated under the
rules of intestate succession (determined by reference to B’s father’s intestacy) as contained in the
Uniform Probate Code. If B’s father had died
intestate, the Uniform Probate Code would have
allocated his property equally between B and C.
Thus, for purposes of determining B’s net worth,
B will be treated as owning half of the interests in
property owned by Trust 2. The value of these
interests in property will be determined under the
principles of section 2512.

SECTION IV. RULING REQUESTS
Background. Section 877(c) provides
that a former U.S. citizen who satisfies
either the tax liability test or the net
worth test will not be considered to
have a principal purpose of tax avoidance as a result of one of those tests if
that former citizen submits a request for
a ruling within one year of the date of
loss of U.S. citizenship for the Secretary’s determination as to whether such
loss had for one of its principal purposes the avoidance of U.S. taxes. To be
eligible to request a ruling, an individual
must be within one of the following
categories: (1) the individual became at
birth a citizen of the United States and a
citizen of another country and continues
to be a citizen of such other country, (2)
the individual becomes (not later than
the close of a reasonable period after

loss of U.S. citizenship) a citizen of the
country in which the individual, the
individual’s spouse or one of the individual’s parents was born, (3) the individual was present in the United States
for no more than 30 days during each
year of the 10-year period ending on the
date of expatriation, (4) the individual
lost U.S. citizenship before reaching age
18 1/2, or (5) the individual is described
in a category prescribed by regulation.
For purposes of sections 2107 and 2501,
a former citizen who meets the requirements of section 877(c)(1) will not be
considered to have expatriated with a
principal purpose to avoid U.S. taxes.
Sections
2107(a)(2)(B)
and
2501(a)(3)(C).
Section 877(e)(3)(A) provides that the
exception set forth in section 877(c)
with respect to U.S. citizens shall not
apply to former long-term residents.
However, section 877(e)(4) gives the
Secretary the authority to exempt categories of former long-term residents
from section 877. In addition, section
877(e)(5) authorizes the Secretary to
prescribe appropriate regulations to
carry out the purposes of section 877(e).
Additional categories of individuals
eligible to submit ruling requests. Treasury and the Service expect to issue
regulations that will permit a former
long-term resident who is within certain
categories to request a ruling under
sections 877, 2107 and 2501 as to
whether the individual’s expatriation had
for one of its principal purposes the
avoidance of U.S. taxes. Until such
regulations are issued, a former longterm resident may request a ruling if:
(1) on the date of expatriation, the
individual is a citizen of:
(a) the country in which the individual was born,
(b) the country where the individual’s
spouse was born, or
(c) the country where either of the
individual’s parents was born, and
the individual becomes (not later than
the close of a reasonable period after the
individual’s expatriation) fully liable to
tax in such country by reason of the
individual’s residence;
(2) the individual was present in the
United States for no more than 30 days
during each year of the 10-year period
prior to expatriation; or
(3) the individual ceases to be taxed
as a lawful permanent resident, or commences to be treated as a resident of
another country under an income tax
treaty and does not waive the benefits of

42

such treaty applicable to residents of the
foreign country, before the individual
reaches age 18 1/2.
In addition, former long-term residents and former citizens who narrowly
fail to satisfy the criteria of an enumerated category may also submit ruling
requests. The Secretary, in his or her
sole discretion, may decline to rule on
any request if the Secretary determines
that the individual does not narrowly
fail to satisfy the criteria of one of those
categories. If the Secretary declines to
rule on an individual’s ruling request for
this reason, the individual will not be
considered to have ‘‘submitted’’ a ruling
request within the meaning of section
877(c)(1)(B). Accordingly, if that individual satisfies either the tax liability or
net worth test, the individual will be
considered to have expatriated with a
principal purpose to avoid U.S. taxes
under section 877(a)(2).
Examples. The following examples
illustrate circumstances in which an individual narrowly fails to satisfy the
criteria of an enumerated category, and
thus eligible to request a ruling.
Example 3. D, a former citizen of the United
States by birth, expatriated on February 15, 1997.
D satisfied the tax liability test on the date of her
expatriation and thus, will be considered to have
expatriated with a principal purpose to avoid U.S.
taxes unless she qualifies for an exception under
section 877(c). D has resided in the United
Kingdom since 1985. D is not a citizen by birth of
another country and does not plan to become a
citizen of a country in which one of her parents or
her spouse was born. D did not spend any time in
the United States during the 10-year period prior
to her expatriation, except for one year when she
vacationed in Hawaii for 35 days. D narrowly fails
to satisfy the criteria of section 877(c)(2)(B)
because she spent only 35 days in the United
States during one year of the 10-year period
ending on the date of her expatriation. Thus, D is
eligible to submit a ruling request.
Example 4. E is a citizen of France and a
long-term resident of the United States. E’s parents emigrated from Africa to France in 1950 and
acquired French citizenship in 1960. E’s parents
were employed by the French government and
often travelled outside of France. In 1965, E was
born while E’s parents were stationed outside of
France on a short-term assignment. By virtue of
his parents’ French citizenship, E became a citizen
of France at birth. E resided in France from age 1
until age 21. E became a lawful permanent
resident of the United States at age 21. E is now
31 years old and wishes to relinquish his green
card and return to France. E will satisfy the net
worth test on the date of his expatriation.
Although E is not a citizen of France by virtue
of being born in France, E narrowly fails to satisfy
the criteria of an enumerated category because he
was born outside of France only because his
parents were temporarily absent from France during an overseas assignment for the French government. E is a citizen of France by birth, became a
resident of France at age 1, and plans to become a

resident of France after terminating his U.S.
residency. Thus, E is eligible to submit a ruling
request.

Effect of rulings and pending ruling
requests. An expatriate who satisfies the
tax liability or net worth test will be
subject to new sections 877, 2107 or
2501, unless such individual obtains a
favorable ruling, rather than merely submits a request, that the individual did
not expatriate with a principal purpose
to avoid U.S. taxes. If an individual’s
ruling request is pending before the
Service at the time prescribed for filing
the individual’s income tax return for a
particular year, the individual must report income on his or her U.S. income
tax return for that year as if section 877
applied to him or her. If the individual
obtains a favorable ruling at a later date,
the individual may then amend that
previous year’s U.S. income tax return
accordingly.
Challenging an adverse ruling. An
individual who obtains an adverse ruling
may challenge the ruling by initiating a
refund suit to recover any taxes paid by
reason of section 877. See H.R. Conf.
Rep. No. 736, 104th Cong., 2d Sess.
325 (1996).
Time for submitting ruling requests.
Ruling requests must be submitted no
later than one year following the date of
expatriation. If an individual does not
submit a ruling request within this prescribed period and satisfies either the
tax liability test or the net worth test,
such individual will be treated as having
a principal purpose to avoid U.S. taxes.
However, an individual subject to new
section 877 who expatriated after February 5, 1994, but on or before July 8,
1996, and who wishes to submit a ruling
request as to whether such expatriation
had for one of its principal purposes the
avoidance of U.S. taxes must do so by
July 8, 1997.
Ruling requests may be submitted
prior to the expected date of expatriation, provided that the individual submitting the request has formed a definite
intention to expatriate. The Service will
not rule on requests involving alternative plans of proposed transactions or
hypothetical situations. See section 7.02
of Rev. Proc. 97–1, 1997–1 I.R.B. 11,
24.
Procedures for submitting ruling requests. Individuals should refer to section 8 of Rev. Proc. 97–1, 1997–1 I.R.B.
11, 25, for general instructions on the
proper procedures to follow when submitting ruling requests. Individuals
should also consult section 15 of Rev.

Proc. 97–1, 1997–1 I.R.B. 11, 46, for
information on user fees.
Information that must be included in
ruling requests. The burden of proof is
on the individual requesting the ruling
to establish to the satisfaction of the
Secretary that the individual’s expatriation did not (or will not) have for one of
its principal purposes the avoidance of
U.S. taxes under Subtitle A or Subtitle B
of the Code. Therefore, individuals
should submit any relevant information
that will help the Secretary make a
determination as to whether the individual’s expatriation (or planned expatriation) had (or will have) for one of its
principal purposes the avoidance of U.S.
taxes. The ruling request must include
the following information:
(1) the date (or expected date) of
expatriation;
(2) a full explanation of the individual’s reasons for expatriating;
(3) the individual’s date of birth;
(4) all foreign countries where the
individual is a resident for tax purposes
and/or intends to obtain residence for
tax purposes;
(5) all foreign countries of which the
individual is a citizen and/or intends to
acquire citizenship after expatriation;
(6) the countries where the individual’s spouse (if any) and parents were
born;
(7) a description of the individual’s
ties to the United States and the individual’s ties to the foreign country
where the individual resides (or intends
to reside) for the period that begins five
years prior to expatriation and ends on
the date that the ruling request is submitted, including the location of the
individual’s permanent home, tax home
(within the meaning of section
911(d)(3)), family and social relations,
occupation(s), political, cultural, or other
activities, business activities, personal
belongings, the place from which the
individual administers property, the jurisdiction in which the individual holds
a driver’s license, the location where the
individual conducts routine personal
banking activities, the location of the
individual’s cemetery plot (if any), and
any other similar information;
(8) a balance sheet, at fair market
value, that sets forth by category (e.g.,
cash, marketable securities, closely-held
stock, business assets, qualified and
nonqualified deferred compensation arrangements, individual retirement accounts, installment obligations, U.S. real
property, foreign real property, etc.) the
individual’s assets and liabilities imme-

43

diately prior to expatriation. The balance
sheet must also set forth the following:
(i) the source of income and gain,
without applying the source provisions
of section 877, that such property would
have generated during the 5-year period
prior to expatriation and immediately
after expatriation,
(ii) the source of income and gain,
assuming that the source provisions of
section 877 applied (as modified by
section V of this notice), that such
property would have generated during
the 5-year period prior to expatriation
and immediately after expatriation, and
(iii) the gain or loss that would be
realized if the assets were sold for their
fair market values on the date of expatriation.
The individual must separately list
(not by category) each partnership in
which the individual holds an interest,
each trust that the individual is considered to own under sections 671 through
679, each trust that the individual is
considered to own under Chapter 12 of
Subtitle B of the Code, and each trust in
which the individual holds a beneficial
interest (as determined under the procedures described in section III of this
notice). The individual must also describe the types of assets held by each
partnership or trust, and indicate the
methodology (as described in section III
of this notice) used to determine the
individual’s beneficial interest in each
trust. In addition, the individual should
indicate whether there have been (or are
expected to be) significant changes in
the individual’s assets and liabilities for
the period that began five years prior to
expatriation and ends ten years following the date of expatriation. If so, the
individual should attach a statement explaining the changes in the individual’s
assets and liabilities during such period;
(9) a description of all exchanges
described in section 877(d)(2)(B) and all
removals of appreciated tangible personal property from the United States
(as described in section V of this notice), that:
(i) occurred at any time beginning 5
years prior to expatriation (but not including exchanges that took place prior
to February 6, 1995) and ending on the
date that the ruling request is submitted,
or
(ii) occurred, or are expected to occur, during the 10-year period following
expatriation.
If the individual is subject to new
section 877 because of section
511(g)(3)(A) of the Act (see section X

of this notice), the individual must also
include a description of all exchanges
described under section 877(d)(2)(B)
that occurred on or after the date of the
individual’s expatriating act (see section
X of this notice) and before February 6,
1995;
(10) a description of all occurrences
under section 877(d)(2)(E)(ii) that are
treated as exchanges under section
877(d)(2) (as described in section V of
this notice) that:
(i) occurred at any time beginning 5
years prior to expatriation (but not including occurrences that took place prior
to February 24, 1997) and ending on the
date that the ruling request is submitted,
or
(ii) occurred, or are expected to occur, during the 10-year period following
expatriation;
(11) a statement describing the nature
and status of any ongoing audits, disputes or other matters pending before
the Internal Revenue Service;
(12) a statement as to whether the
individual satisfied his or her U.S. tax
liability during the period that he or she
was a U.S. citizen or lawful permanent
resident of the United States;
(13) copies of the individual’s U.S.
tax returns for each of the three years
prior to expatriation;
(14) a copy of the information statement filed in accordance with section
6039F, as described in section IX of this
notice (if such statement has not yet
been filed, provide a draft copy of such
statement);
(15) in the case of an individual with
gross assets that have an aggregate fair
market value in excess of $10,000,000,
a calculation of the individual’s projected U.S. and foreign income tax
liability for the taxable year of expatriation (or expected expatriation) and the
two taxable years following expatriation
under each of the following circumstances:
(i) if it is determined that the individual expatriated with a principal purpose to avoid U.S. taxes under section
877,
(ii) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes under section 877, and
(iii) if the individual had remained a
U.S. citizen or U.S. lawful permanent
resident.
The individual must also indicate
whether the individual expects a substantial change in the individual’s projected U.S. and foreign income tax

liability as a result of a change in
income for the remainder of the 10-year
period following expatriation;
(16) in the case of an individual with
gross assets that have an aggregate fair
market value in excess of $10,000,000,
an actuarial estimate of U.S. and foreign
estate and other death taxes that would
be owed on the individual’s property,
calculated based on the assumption that
the individual owns the same property
on the date of death that the individual
owned (or expects to own) on the date
of expatriation, under each of the following circumstances:
(i) if it is determined that the individual expatriated with a principal purpose to avoid U.S. taxes under section
2107,
(ii) if it is determined that the individual did not expatriate with a principal
purpose to avoid U.S. taxes under section 2107, and
(iii) if the individual had remained a
U.S. citizen or U.S. lawful permanent
resident domiciled in the United States;
and
(17) in the case of an individual with
gross assets that have an aggregate fair
market value in excess of $10,000,000,
a statement as to whether the individual
expects to make a gift during any year
of the 10-year period following expatriation that would be subject to tax under
section 2501 if the individual is determined to have expatriated with a principal purpose to avoid U.S. taxes. If so,
the individual should describe the gift,
provide an estimate of its fair market
value, and indicate when and to whom
the individual expects to make the gift.
The foregoing list of information
must be provided with ruling requests
submitted after March 10, 1997. Although individuals must provide good
faith estimates of fair market values,
formal appraisals are not required. In
processing ruling requests, the Service
may ask individuals with gross assets
that have an aggregate fair market value
of $10,000,000 or less to supply the
information described in (15), (16) and
(17) above. If an individual fails to
provide the aforementioned information
or any other information that may be
reasonably required, the individual’s ruling request may be closed pursuant to
section 10.06(3) of Rev. Proc. 97–1,
1997–1 I.R.B. 11, 39. If an individual’s
ruling request is closed, that individual
will not be considered to have ‘‘submitted’’ a ruling request within the meaning
of section 877(c)(1)(B). Accordingly, if
that individual satisfies either the tax

44

liability test or the net worth test, the
individual will be considered to have
expatriated with a principal purpose to
avoid U.S. taxes under section
877(a)(2).
Finally, an individual must attach his
or her ruling to the individual’s U.S.
income tax return for the year in which
the individual expatriates. See section
8.05 of Rev. Proc. 97–1, 1997–1 I.R.B.
11, 33. If the individual has already
filed a U.S. income tax return for such
year, the individual must attach the
ruling to the individual’s U.S. income
tax return for the year in which he or
she obtains the ruling.
SECTION V. EXCHANGES AND GAIN
RECOGNITION AGREEMENTS
Background. Section 877(d)(1)(A)
provides that gains on the sale or exchange of property (other than stock or
debt obligations) located in the United
States shall be treated as from sources
within the United States. Section
877(d)(1)(B) provides that gains on the
sale or exchange of stock issued by a
domestic corporation or debt obligations
of United States persons, or of the
United States, a State, a political subdivision thereof, or the District of Columbia, shall be treated as from sources
within the United States. Section
877(d)(1)(C) provides that income or
gain derived from a foreign corporation
will be from sources within the United
States if an expatriate owned or is
considered to own (under the principles
of sections 958(a) and (b)), at any time
during the 2-year period ending on the
date of expatriation, more than 50 percent of (i) the total combined voting
power of all classes of stock entitled to
vote of such corporation, or (ii) the total
value of the stock of such corporation.
The amount of income or gain that is
considered U.S. source is limited, however, to the amount that does not exceed
the earnings and profits attributable to
such stock earned before the date of the
individual’s expatriation and during periods that the ownership requirements are
met.
Section 877(d)(2) generally provides
that certain property transferred in nonrecognition exchanges by an individual
subject to section 877 during the 10year period referred to in section 877(a)
will be treated as sold for its fair market
value on the date of the exchange. Thus,
any gain must be recognized by the
individual in the taxable year of the
exchange. Section 877(d)(2) applies to

exchanges that, without regard to section
877, are nontaxable under subtitle A of
the Code and involve the exchange of
property that would produce U.S. source
income or gain for property that would
produce foreign source income or gain.
Under section 877(d)(2)(C), however,
an individual is not required to immediately recognize gain if the individual
enters into an agreement with the Secretary specifying that any income or gain
derived from the property acquired in
the exchange (or any other property that
has a basis determined in whole or in
part by reference to such property) during the 10-year period referred to in
section 877(a) shall be treated as U.S.
source income. In addition, if the transferred property is disposed of by the
acquiror, the gain recognition agreement
will terminate and any gain not recognized by reason of the agreement must
be recognized by the individual as of
the date of such disposition.
Section 877(d)(2)(D) provides the
Secretary with regulatory authority to
substitute the 15-year period beginning
five years prior to expatriation for the
10-year period referred to in section
877(a), and to apply section 877(d)(2) to
all exchanges that occur during such
15-year period. Section 877(d)(2)(E)
also authorizes the Secretary to issue
regulations to treat as a taxable exchange the removal of appreciated tangible personal property from the United
States, and any other occurrence that
results in a change in the source of
income or gain from property from U.S.
source to foreign source without recognition of gain.
Fifteen-year period and expanded
definition of ‘‘exchanges’’. Treasury and
the Service expect to issue regulations
under sections 877(d)(2)(D) and (E) that
extend the 10-year period referred to
section 877(a) and provide an expanded
definition of exchanges. The regulations
will apply to individuals who expatriate
after February 5, 1995, and to individuals subject to section 511(g)(3)(A) of the
Act (see section X of this notice). Until
regulations are issued, taxpayers must
comply with the rules set forth below.
Section 877(d)(2) must be applied by
substituting the 15-year period beginning five years prior to expatriation for
the 10-year period referred to in section
877(a). In addition, removal of appreciated tangible personal property from the
United States with an aggregate fair
market value in excess of $250,000
within this 15-year period must be
treated as an exchange to which section

877(d)(2) applies. Accordingly, any gain
derived from removal of property with
an aggregate fair market value of
$250,000 or less during this 15-year
period will not be taxable under section
877. If an individual removes property
with an aggregate fair market value in
excess of $250,000 during this 15-year
period, the individual must recognize a
pro rata portion of the gain attributable
to the value in excess of $250,000,
unless he or she enters into a gain
recognition agreement. A pro rata portion of the gain must be calculated by
multiplying the total gain on the removed property by a fraction, the numerator of which is the excess of the
aggregate fair market values of all removed property over $250,000 and the
denominator of which is the aggregate
fair market values of all removed property. Removal of appreciated tangible
personal property during the 5-year period prior to expatriation (whether or not
the fair market values exceed $250,000)
will not be treated as an exchange if the
removal occurred prior to February 6,
1995.
Any other occurrence (within the
meaning of section 877(d)(2)(E)(ii))
within the 15-year period that results in
a change of the source of income or
gain from U.S. source to foreign source
must also be treated as an exchange to
which section 877(d)(2) applies. However, an occurrence during the 5-year
period prior to expatriation will not be
treated as an exchange if the occurrence
took place prior to February 24, 1997.
Determination of source of certain
gains. The principles of section
877(d)(1) generally apply for purposes
of determining whether any exchange of
property changes the source of income
or gain from U.S. source to foreign
source during the 15-year period beginning five years prior to expatriation.
Thus, solely for purposes of determining
the source of the expatriate’s income or
gain with respect to any exchange
within this 15-year period, (i) the source
of any gain on the sale or exchange of
tangible personal property will be based
on the physical location of the property,
(ii) the source of gain from the sale or
exchange of stock will be based on the
corporation’s place of incorporation (except as otherwise provided in section
877(d)(1)(C)), and (iii) the source of
gain from the sale or exchange of debt
obligations will be based on the residence of the issuer of such obligations.
The source of gain on the sale or
exchange of an interest in a partnership

45

during the 15-year period will be determined as if the partner directly disposed
of his or her share of the partnership’s
assets. In determining the partner’s share
of gain recognized from each partnership asset, the gain on the sale or
exchange of the partnership interest
shall be allocated among the assets of
the partnership in proportion to the gain
that the partner would have recognized
had the partnership sold each asset for
its fair market value. In all other cases,
the source of an expatriate’s income or
gain with respect to any other transaction will be determined under the general source provisions of the Code (e.g.,
sections 861 through 865).
Recognition of gain. Except as otherwise indicated below, an individual must
recognize any realized or unrealized
gains, but not losses, as a result of any
‘‘exchange’’ described in section
877(d)(2)(B), (d)(2)(E)(i), or (d)(2)(E)(ii), in the year of the exchange unless
that individual enters into a gain recognition agreement. If an exchange occurs
during the 5-year period prior to expatriation, the individual must recognize
any gain from the exchange in the
taxable year of the individual’s expatriation unless the individual enters into a
gain recognition agreement.
Examples. The following examples
illustrate transactions that are treated as
exchanges under section 877(d)(2) and
when gain from such transactions must
be recognized.
Example 5. F, a U.S. citizen by birth, enters into
a notional principal contract in March 1997. Under
the terms of that contract, F is obligated to make
specified annual payments to an unrelated party in
exchange for specified annual payments from the
unrelated party for a period of five years. F is a
calendar year taxpayer who uses the cash method
of accounting. F moves her tax home to a foreign
country in May 1997. F renounces her U.S.
citizenship in 1998 with a principal purpose to
avoid U.S. taxes.
The source of income from a notional principal
contract is generally determined by reference to
the residence of the taxpayer. For this purpose, the
residence of an individual is the country in which
the individual’s tax home is located. See Treas.
Reg. § 1.863–7(a)(1).
Before F changed her tax home in May 1997,
F’s income earned under the contract was treated
as U.S. source income. After F changed her tax
home, the source of this income became foreign
source. Because F’s change in tax home changed
the source of her income from U.S. source to
foreign source, it is an occurrence that is treated
as an exchange to which section 877(d)(2) applies.
Since this occurrence occurred in the 5-year period
prior to her expatriation, F must recognize any
gain from the contract in 1998 (the taxable year of
her expatriation), unless she enters into a gain
recognition agreement.
However, if F also owned stock in a foreign
corporation, her change in tax home coupled with
her expatriation would not be an occurrence that is

treated as an exchange to which section 877(d)(2)
applies with respect to such stock. Pursuant to the
special source rules described in this notice, the
source of gain on the sale or exchange of stock is
based on the corporation’s place of incorporation.
Thus, the gain on the sale or exchange of foreign
stock would be foreign source for the entire
15-year period beginning five years prior to expatriation. Accordingly, there would not be an occurrence during this period that would change the
source of such gain from U.S. source to foreign
source.
Example 6. G is a U.S. citizen by birth. G owns
a home in the United States that he uses as his
principal residence. In April 1997, G sells his
principal residence in the United States at a gain
of $1,000,000. In June 1997, G purchases a new
principal residence located abroad. G’s purchase of
the new residence satisfies the requirements of
section 1034, and thus G does not recognize the
$1,000,000 gain on the sale of his old residence.
G expatriates in 1999 with a principal purpose to
avoid U.S. taxes.
Under section 861(a)(5), gain from the disposition of a United States real property interest is
treated as U.S. source income. A United States
real property interest includes real property that is
located in the United States. Section 897(c). Gain
from the sale or exchange of real property located
outside the United States is considered foreign
source income. Section 862(a)(5).
Since G is not required to recognize the gain on
the sale of his old residence by reason of section
1034, and the source of this gain would change
from U.S. to foreign if G sold his new residence,
it is an occurrence that is treated as an exchange
to which section 877(d)(2) applies. Accordingly, G
must recognize the gain from the sale of his old
residence in 1999 (the taxable year of his expatriation), unless he enters into a gain recognition
agreement.
Example 7. H is a former long-term resident of
the United States. H owns a valuable painting that
she purchased in 1965 for $500,000. H became a
resident of the United States and brought the
painting to the United States in 1975. The fair
market value of the painting in 1975 was
$2,000,000. H became a lawful permanent resident
of the United States in 1980. On January 1, 1996,
H expatriates with a principal purpose to avoid
U.S. taxes. On January 1, 1997, H removes the
painting from the United States. On that date, the
fair market value of the painting is $5,000,000.
Under section 877(d)(1)(A), H’s unrealized gain
in the painting is U.S. source so long as the
painting is located in the United States. Since the
removal of H’s appreciated painting from the
United States changed the source of the unrealized
gain thereon from U.S. source to foreign source, it
is considered an exchange to which section
877(d)(2) applies. For purposes of section 877, H’s
basis in the painting is the painting’s fair market
value on the date that H first became a U.S.
resident (i.e., $2,000,000). Section 877(e)(3)(B).
Thus, H’s unrealized gain on the painting on the
date of removal is $3,000,000 ($5,000,000–
$2,000,000).
Because the value of H’s painting on the date of
removal exceeds $250,000, H must recognize a
pro rata portion of the gain attributable to the
value in excess of $250,000, unless she enters into
a gain recognition agreement. The pro rata portion
of such gain is $2,850,000, determined by multiplying the total gain ($3,000,000) by a fraction,
the numerator of which is the excess of the fair
market value of the painting over $250,000
($4,750,000) and the denominator of which is the
fair market value of the painting ($5,000,000).

Thus, H must recognize $2,850,000 in 1997 (the
taxable year of the removal) unless she enters into
a gain recognition agreement.
Example 8. J, a U.S. citizen by birth, expatriates
on January 1, 1999, with a principal purpose to
avoid U.S. taxes. On the date of J’s expatriation, J
owns appreciated stock in a domestic corporation.
On January 1, 2000, J creates a foreign trust, FT,
and contributes the stock to FT. Under the terms
of the trust instrument, the income and corpus
from FT may be distributed at the discretion of the
trustee to J, J’s spouse, or J’s children.
If J had directly disposed of the domestic stock
instead of contributing it to FT, the gain realized
thereon would be treated as U.S. source income.
Section 877(d)(1)(B). However, if FT disposed of
the stock, the gain realized would be foreign
source because FT is not a resident of the United
States. See sections 865(a)(2) and (g)(1)(B). If FT
then distributed the proceeds to J, his gain would
also be foreign source.
Since J’s contribution of the domestic stock to
FT is nontaxable under subtitle A of the Code and
changed the source of gain on the stock from U.S.
to foreign, it is an occurrence that is treated as an
exchange to which section 877(d)(2) applies. For
this purpose, J’s beneficial interest in FT is treated
as property acquired in the exchange, and the
stock contributed to FT is treated as property
transferred in the exchange. Therefore, J must
recognize the pre-contribution gain on the appreciated stock in 2000 (the taxable year of the
exchange), unless he enters into a gain recognition
agreement.

Guidance on gain recognition agreements. An individual who wishes to
enter into a gain recognition agreement
with the Secretary with respect to any
exchange described in section 877(d)(2)
must submit the agreement with the
individual’s U.S. income tax return (normally Form 1040NR) for the taxable
year of the exchange. If an exchange
occurred during the 5-year period prior
to expatriation, the individual must submit a gain recognition agreement with
his or her U.S. income tax return for the
taxable year of the individual’s expatriation. If an exchange occurred before the
individual’s 1996 taxable year, the individual must submit a gain recognition
agreement with his or her 1996 Form
1040NR to avoid the recognition of
gain.
The gain recognition agreement will
be triggered if the individual disposes of
the property to which the gain recognition agreement applies. In addition, any
disposition of the transferred property
by the acquiror of such property will
also trigger gain, even if the disposition
is otherwise part of a nonrecognition
transaction. For purposes of the gain
recognition agreement, property removed from the United States and property the source of income or gain from
which changed from U.S. to foreign will
be treated as property acquired in an
exchange.

46

All gain recognition agreements must
be signed under penalties of perjury and
set forth the following information:
(1) a description of all property subject to the agreement, (i.e., a description
of property both transferred and acquired in an exchange, a description of
any appreciated tangible personal property that was removed from the United
States, and/or a description of all property affected by an occurrence that
changed the source of income or gain
from the property from U.S. source to
foreign source);
(2) a good faith estimate of the relevant fair market values of the property
transferred and acquired in the exchange
(formal appraisals are not required),
their adjusted basis for U.S. tax purposes, and a calculation of the gain not
recognized by reason of the gain recognition agreement (the ‘‘deferred gain’’)
on a property-by-property basis;
(3) a statement that the individual
agrees to recognize, under section 877,
any income or gain during the 15-year
period that begins five years prior to
expatriation as U.S. source income if it
is derived from property that was acquired in an exchange (as described in
this notice);
(4) a statement that the individual
agrees to recognize, under section 877, a
proportionate amount of the deferred
gain as U.S. source income as of the
date of disposition if the acquiror of the
transferred property disposes of all or a
portion of the property in any manner
during the 15-year period beginning five
years prior to expatriation;
(5) a statement that the individual
agrees to file a U.S. income tax return
(normally Form 1040NR) for each year
of the 10-year period following expatriation (whether or not such individual is
otherwise required to file a return) that
includes an annual certification each
year describing any income or gain that
is taxable pursuant to the gain recognition agreement. If the individual did not
derive any income or gain that is taxable pursuant to the gain recognition
agreement, the certification must provide
a statement to that effect;
(6) if an exchange to which the gain
recognition agreement applies occurred
during the 5-year period prior to expatriation, a certification describing any
income or gain during this 5-year period
that is taxable pursuant to the gain
recognition agreement. If the individual
did not derive any income or gain that
is taxable pursuant to the gain recogni-

tion agreement during this period, the
certification must provide a statement to
that effect;
(7) a representation that all records
relating to the property to which the
gain recognition agreement applies, including those of the acquiror (if any),
will be made available for inspection by
the Service during the period that ends 3
years from the date on which a U.S.
income tax return is filed for the year(s)
in which any income or gain that is
taxable pursuant to the gain recognition
agreement is recognized;
(8) a statement that the individual
agrees to furnish a bond or other security that satisfies the requirements of
Treas. Reg. § 301.7701–1 if the District
Director determines that such security is
necessary to ensure the payment of tax
upon the deferred gain and any other
income or gain that is taxable pursuant
to the gain recognition agreement; and
(9) if applicable, the name, address,
and U.S. taxpayer identification number
(if any) of the acquiror of any property
subject to the agreement.
If, during the period that the agreement is in force, the individual disposes
of the property acquired in the exchange
in a transaction in which gain or loss is
not recognized under U.S. income tax
principles, then the individual shall not
be required to recognize gain, provided
that the individual notifies the Secretary
of the transfer with his or her next
annual certification and modifies the
gain recognition agreement accordingly.
Example. The following example illustrates how to enter into a gain recognition agreement.
Example 9. Assume the same facts as in
example 8 above. To avoid the immediate recognition of gain on the contribution of stock to FT, J
must attach a gain recognition agreement to his
U.S. tax return for the year 2000 (the taxable year
of the exchange). As part of such agreement, J
must agree to recognize any income or gain that J
derives from his beneficial interest in FT as U.S.
source income during the remainder of the 10-year
period following expatriation. J must also agree to
recognize the pre-contribution gain on the transferred stock as U.S. source income if FT directly
or indirectly disposes of the stock. In addition, J
must agree to file an annual certification for each
year of the remaining 10-year period following
expatriation that indicates whether J derived any
income or gain from his beneficial interest in FT
and whether FT disposed of the stock. J must
represent that all records relating to the transferred
stock, including the trust’s records, will be made
available for inspection by the Service for the
period ending 3 years from the date on which J
files a U.S. income tax return for the year in
which he recognizes the deferred gain as a result
of a direct or indirect disposition of the stock by
FT. J must also represent that all records relating
to his beneficial interest in FT will be made
available for inspection by the Service for the

period ending 3 years from the date(s) on which J
files a U.S. income tax return for the year(s) in
which he recognizes any income or gain from his
beneficial interest in FT.

SECTION VI. CONTRIBUTIONS TO
CONTROLLED FOREIGN
CORPORATIONS
Background. Section 877(d)(4) generally provides that when an expatriate
contributes U.S. source property (‘‘contributed property’’) to a corporation that
would be a controlled foreign corporation (as defined in section 957) and the
individual would be a United States
shareholder (as defined in section
951(b)) but for the individual’s expatriation, then any income or gain on such
property (or any other property that has
a basis determined in whole or in part
by reference to such property) received
or accrued by the corporation during the
10-year period following expatriation
shall be treated as received or accrued
directly by the individual and not by the
corporation. If the individual disposes of
any stock in the corporation (or other
stock that has a basis determined in
whole or part by reference to such
stock) during the 10-year period referred
to in section 877(a) and while the
contributed property is held by the corporation, the individual is taxable on the
gain that would have been recognized
by the corporation had it sold a pro rata
share of the property (determined by
comparing the value of the stock disposed of to the value of the stock held
by the individual immediately prior to
the disposition) immediately before the
disposition. Section 877(d)(4)(D) provides that the Secretary may prescribe
such regulations as may be necessary to
prevent the avoidance of the purposes of
section 877(d)(4), including where the
property is sold to the corporation and
where the contributed property is sold
by the corporation. Section 877(d)(4)(E)
provides that the Secretary shall require
such information reporting as is necessary to carry out the purposes of section
877(d)(4).
Anti-abuse rules and reporting requirement. Treasury and the Service intend to issue regulations under sections
877(d)(4)(D) and (E) that extend the
10-year period referred to in section
877(d)(4), set forth reporting requirements, and provide anti-abuse rules intended to prevent individuals from utilizing controlled foreign corporations to
hold or dispose of property that would
otherwise produce income or gain from
sources within the United States. The

47

regulations will provide that if an individual acts with a principal purpose to
avoid section 877(d)(4), then the Commissioner may redetermine the U.S. tax
consequences of that action as appropriate to achieve the purposes of section
877(d)(4). The regulations will apply to
individuals who expatriate after February 5, 1995, and to individuals subject
to section 511(g)(3)(A) of the Act (see
section X of this notice).
Until regulations are issued, individuals must comply with the rules set forth
below. Individuals must apply section
877(d)(4) by substituting the 15-year
period beginning five years prior to
expatriation for the 10-year period referred to in section 877(d)(4). However,
section 877(d)(4) will not apply to any
contribution during the 5-year period
prior to expatriation if the contribution
occurred prior to February 24, 1997.
Moreover, an individual who makes a
contribution described in section
877(d)(4)(A)(i) must attach the following information to the individual’s U.S.
tax return for the year in which such
contribution occurs (whether or not the
individual is otherwise required to file a
U.S. tax return):
(1) the date of the contribution;
(2) a description of the property contributed, including a good faith estimate
of its fair market value (formal appraisals are not required) and a statement of
its adjusted basis for U.S. tax purposes
on the date of the contribution;
(3) a description of the foreign corporation to which the property is contributed, including its name, address, place
of incorporation, and its U.S. employer
identification number, if any; and
(4) a description of the percentage
interest, by vote and by value, owned or
treated as owned by the individual under
section 958 (determined as if such individual were a U.S. person).
If a contribution occurs prior to expatriation, this statement must be attached
to the individual’s U.S. income tax
return for the taxable year of the individual’s expatriation. If a contribution
occurred prior to 1996, the individual
must attach this statement to the individual’s 1996 U.S. tax return (whether
or not the individual is otherwise required to file a U.S. tax return).
SECTION VII. ANNUAL
INFORMATION REPORTING
Background. Section 6001 generally
provides that the Secretary may require
any person, by notice upon such person

or by regulations, to make such returns,
render such statements, or keep such
records as the Secretary deems sufficient
to show whether or not the person is
liable for tax under the Code. Section
6011(a) generally provides that any person who is liable for tax imposed by the
Code, or with respect to the collection
thereof, shall make a return or statement
according to forms and regulations prescribed by the Secretary. Section
6012(a)(1) generally provides that every
individual whose gross income for the
taxable year equals or exceeds the exemption amount must file a U.S. income
tax return for such year. Section
6012(a)(1) further provides, in part, that
nonresident individuals subject to tax
imposed by section 871 may be exempted from making returns under section 6012 subject to conditions, limitations, and exceptions and under such
regulations as may be prescribed by the
Secretary. Treas. Reg. § 1.6012–
1(b)(2)(i) generally provides, in part,
that a nonresident alien individual who
was not engaged in a trade or business
in the United States during a taxable
year is not required to file a return for
such year if the nonresident’s tax liability for the year is fully satisfied by the
withholding of tax at the source under
Chapter 3 of the Code.
Section 874(a) generally provides that
a nonresident alien individual will receive the benefit of deductions and
credits allowed to him by Subtitle A of
the Code only if such individual files a
true and accurate return, including all
the information that the Secretary may
deem necessary for the calculation of
such deductions and credits.
Annual reporting of income. Because
an individual who is liable for U.S.
taxes is generally required to file a
return and other such statements as the
Secretary may prescribe, Treasury and
the Service intend to issue regulations
under section 877 that will require expatriates who are liable for tax to annually
report certain information for the 10year period following expatriation. Until
the issuance of such regulations, taxpayers must report information in compliance with the rules set forth below and
any other information that the Secretary
may require at a later date. At such time
that Form 1040NR is modified to reflect
the rules described below, taxpayers
must report information in accordance
with the instructions to Form 1040NR
instead of the procedures described below. The rules below apply to expatriates who are subject to section 877 as in

effect before the Act, as well as those
subject to section 877 as revised by the
Act.
Beginning with the 1996 taxable year,
an individual who expatriated with a
principal purpose to avoid U.S. taxes
under section 877 as in effect before the
Act must annually file a U.S. income
tax return (Form 1040NR), with the
information described below, for each
year of the remaining 10-year period
following expatriation if such individual
is liable for U.S. tax under any provision of the Code (e.g., section 871(a))
for such year. An individual who expatriated with a principal purpose to avoid
U.S. taxes under section 877 as
amended by the Act must also annually
file a U.S. income tax return (Form
1040NR), with the information described below, for each year of the
10-year period following expatriation if
such individual is liable for U.S. tax
under any provision of the Code (e.g.,
section 871(a)) for such year.3
The return must bear the statement
‘‘Expatriation Return’’ across the top of
page 1 of Form 1040NR. In addition, a
statement must be attached to the return
that sets forth by category (e.g., dividends, interest, etc.) all items of U.S.
and foreign source gross income
(whether or not taxable in the United
States). The statement must identify the
source of such income (determined under section 877 as modified by section
V of this notice) and those items of
income subject to tax under section 877.
In addition, any expatriate who has not
previously filed an information statement under section 6039F should also
attach to his or her first nonresident
return a statement containing the information described in section IX of this
notice.
Treasury and the Service intend to
amend Treas. Reg. § 1.6012–1(b)(2)(i)
in accordance with the rules of this
notice. Until the regulation is modified,
an expatriate who is otherwise required
to report information in accordance with
this section of the notice must attach a
statement to Form 1040NR, even if the
individual has fully satisfied his or her
tax liability through withholding of tax
at source.
An expatriate who fails to furnish a
complete statement in any year for
which he or she is liable for any U.S.
taxes will not be considered to have
3

Individuals should refer to Treas. Reg. § 1.6012–
1(b)(2)(ii) for guidance on how to file a U.S.
income tax return for the taxable year of the
individual’s expatriation.

48

filed a true and accurate return. Therefore, such an individual will not be
entitled to the benefit of any deductions
or credits if the individual’s tax liability
for that year is later adjusted. See
section 874(a).
An individual who is required to file
the above statement for the taxable year
that begins in 1995 will be considered
to have timely filed his or her statement
for that year if the individual files such
statement by the due date (including
extensions) for filing the individual’s
U.S. income tax return for the taxable
year that begins in 1996.
SECTION VIII. INTERACTION WITH
TAX TREATIES
Background. The legislative history of
the Act indicates that Congress believed
that section 877, as amended, is generally consistent with the underlying principles of U.S. income tax treaties to the
extent that section 877 provides for a
foreign tax credit for items taxed by
another country. To the extent that there
is a conflict with U.S. income tax
treaties in force on August 21, 1996 (the
date of enactment of section 877), Congress intended that ‘‘the purpose of
section 877, as amended...[is] not to be
defeated by any treaty provision.’’ H.R.
Rep. No. 496, 104th Cong., 2d Sess.
155 (1996). See also, H.R. Conf. Rep.
No. 736, 104th Cong., 2d Sess. 329
(1996). However, any conflicting treaty
provisions that remain in force 10 years
after August 21, 1996, will take precedence over section 877, as revised. Id.
Coordination with tax treaties. In accordance with Congressional intent,
Treasury and the Service will interpret
section 877 as consistent with U.S.
income tax treaties. To the extent that
there is a conflict, however, all provisions of section 877, as amended, prevail over treaty provisions in effect on
August 21, 1996. This coordination rule
is effective until August 21, 2006, and
applies to those provisions of section
877 that were amended by the Act as
well as those that were not amended by
the Act. In addition, Treasury and the
Service will interpret all treaties,
whether or not in force on August 21,
1996, that preserve U.S. taxing jurisdiction with respect to former U.S. citizens
or former U.S. long-term residents who
expatriate with a principal purpose to
avoid U.S. taxes as consistent with the
provisions of section 877, as amended.

SECTION IX. INITIAL INFORMATION
REPORTING
Background. Section 6039F(a) requires each individual who loses U.S.
citizenship to provide an information
statement to the U.S. Department of
State or a federal court, as applicable.
The information reporting requirements
of section 6039F apply to individuals
who expatriate after February 5, 1995,
and to individuals subject to section
511(g)(3)(A) of the Act (see section X
of this notice).
Section 6039F(a)(1) requires that this
information must be provided not later
than the earliest date on which such
individual (1) renounces the individual’s
U.S. nationality before a diplomatic or
consular officer of the United States, (2)
furnishes to the U.S. Department of
State a statement of voluntary relinquishment of U.S. nationality confirming an act of expatriation, (3) is issued a
certificate of loss of U.S. nationality by
the U.S. Department of State, or (4)
loses U.S. nationality because the individual’s certificate of naturalization is
cancelled by a U.S. court (collectively,
the ‘‘reporting date’’).
Section 6039F(b) requires a former
citizen to report his taxpayer identification number, mailing address of principal foreign residence, foreign country in
which the individual is residing, foreign
country of citizenship, information on
the individual’s assets and liabilities if
such individual’s net worth exceeds
$500,000 (as adjusted by section 1(f)(3)
for taxable years after 1996), and such
other information as the Secretary may
prescribe. Section 6039F(f) requires
long-term residents who expatriate after
February 5, 1995, to provide a similar
statement with their U.S. tax returns for
the taxable year of expatriation.
If a former citizen fails to provide the
required information statement, section
6039F(d) generally provides that the
individual will be subject to a penalty
equal to the greater of (1) five percent
of the tax required to be paid under
section 877 for the taxable year ending
during such year, or (2) $1,000. The
penalty will be assessed for each year
during which such failure continues for
the 10-year period beginning on the date
of loss of citizenship. The penalty will
not be imposed if it is shown that such
failure is due to reasonable cause and
not willful neglect. Section 6039F(f)
also applies this penalty to former longterm residents.

Information Statements. Until such
time that a form is issued for providing
the statement required by section 6039F,
individuals must file an information
statement that includes the information
set forth below.
(1) A former U.S. citizen whose reporting date is on or before March 10,
1997, must provide the information
statement to the Internal Revenue Service, 950 L’Enfant Plaza SW, Washington, D.C. 20224, ATTN: Compliance
Support & Services, by June 8, 1997.
Former U.S. citizens who furnished the
information enumerated in section
6039F(b) to the appropriate entity prior
to February 24, 1997, are not required
to provide an additional statement.
(2) A former U.S. citizen whose reporting date is after March 10, 1997,
and on or before June 8, 1997, must
provide the information statement to (i)
the American Citizens Services Unit,
Consular Section, of the nearest American Embassy or consulate, (ii) Office of
Policy Review and Interagency Liaison
(CA/OCS/PRI), Room 4817, Department
of State, Washington D.C., 20520–
4818, or (iii) a federal court (if the
expatriate’s certificate of nationality was
cancelled by such court), on or before
June 8, 1997.
(3) A former U.S. citizen whose reporting date is after June 8, 1997 must
provide the information statement to the
(i) American Citizens Services Unit,
Consular Section, of the nearest American Embassy or consul, or (ii) a federal
court (if the expatriate’s certificate of
nationality was cancelled by such court)
on or before such reporting date.
(4) A former long-term resident who
expatriated after February 5, 1995, and
before January 1, 1996, must attach the
information statement to either a 1996
Form 1040NR (whether or not the individual is otherwise required to file a
U.S. tax return) or an amended 1995
U.S. income tax return. To comply with
new section 877, an individual whose
1995 tax liability changed as a result of
new section 877 must amend the individual’s 1995 return accordingly and
include the information statement with
that amended return. A former long-term
resident who expatriated in the 1995
taxable year will be deemed to have
timely furnished the information statement if a statement is filed by the due
date (including extensions) for filing the
individual’s 1996 return. A former longterm resident who expatriated after 1995
must attach an information statement to
the former resident’s U.S. income tax

49

return for the year of expatriation.
Former long-term residents who have
already furnished the information enumerated in section 6039F(b) to the Internal Revenue Service prior to February
24, 1997, are not required to provide an
additional statement.
Former citizens and former long-term
residents must include the following
information in their information statements:
(1) name;
(2) date of birth;
(3) taxpayer identification number;
(4) mailing address prior to expatriation;
(5) address where the individual resided prior to expatriation, if different
from (4) above;
(6) mailing address of principal foreign residence, if any;
(7) address where the individual expects to reside after expatriation, if
different from (6) above;
(8) all foreign countries of which the
individual is a citizen and the dates and
methods by which such citizenship was
acquired;
(9) the number of days (including
vacation and nonwork days) that the
individual was physically present in the
United States during the year of expatriation (up to and including the date on
which the information statement is filed)
and each of the two preceding taxable
years;
(10) in the case of an individual
whose average annual net U.S. income
tax (as defined in section 38(c)(1)) for
the five taxable years prior to expatriation exceeded $100,000, the net U.S.
income tax for each of these years
(rounded to the nearest $50,000). If the
individual’s average annual net U.S.
income tax liability for the preceding
five taxable years did not exceed
$100,000, the individual must provide a
representation to that effect;
(11) in the case of an individual with
gross assets that have an aggregate fair
market value in excess of $500,000, a
balance sheet, using good faith estimates
of fair market values (formal appraisals
are not required), that sets forth by
category (e.g., cash, marketable securities, closely-held stock, business assets,
qualified and nonqualified deferred compensation arrangements, individual retirement accounts, installment obligations, U.S. real property, foreign real
property, etc.) the individual’s assets and
liabilities immediately prior to expatriation. The balance sheet must also set
forth the following:

(i) the source of income and gain,
without applying the provisions of section 877, that such property would have
generated during the 5-year period prior
to expatriation and immediately after
expatriation,
(ii) the source of income and gain,
assuming that the provisions of section
877 applied (as modified by section V
of this notice), that such property would
have generated during the 5-year period
prior to expatriation and immediately
after expatriation, and
(iii) the gain or loss that would be
realized if the assets were sold for their
fair market values on the date of expatriation.
The individual must separately list
(not by category) each partnership in
which the individual holds an interest,
each trust that the individual is considered to own under sections 671 through
679, each trust that the individual is
considered to own under Chapter 12 of
Subtitle B of the Code, and each trust in
which the individual holds a beneficial
interest (as determined under the procedures described in section III of this
notice). The individual must also describe the types of assets held by each
partnership or trust, and indicate the
methodology (as described in section III
of this notice) used to determine the
individual’s beneficial interest in each
trust. In addition, the individual should
indicate whether there have been significant changes in the individual’s assets
and liabilities for the period that began
five years prior to expatriation and ends
on the date that the information statement is filed. If so, the individual
should attach a statement explaining the
changes in the individual’s assets and
liabilities during such period;
(12) in the case of a former longterm U.S. resident, a representation as to
whether the former resident was treated
as a resident of a foreign country under
a U.S. income tax treaty for any year in
the preceding 15 years. If so, the individual must list the foreign countries
and years when this occurred. The individual must also list any year(s) that the
former resident waived the benefits of
that treaty; and
(13) a representation, signed under
penalties of perjury by the individual,
that the facts contained in the information statement are true, correct and complete to the best of the individual’s
knowledge and belief.
An individual who timely files a
statement in accordance with the above
guidelines will not be subject to the

penalties described in section 6039F(d).
All individuals whose reporting dates
occur after such time that a form is
issued for reporting information under
section 6039F must complete and submit that form to comply with their
reporting requirements under section
6039F.
SECTION X. TRANSITION
PROVISION
Background. Sections 877 and 6039F
generally apply to individuals who expatriate after February 5, 1995. However,
section 511(g)(3)(A) of the Act provides
a special transition provision in the case
of a former citizen who performed an
expatriating act specified in paragraph
(1), (2), (3), or (4) of section 349(a) of
the Immigration and Nationality Act (8
U.S.C. 1481(a)(1)–(4)) before February
6, 1995, but who did not on or before
such date furnish to the U.S. Department of State a signed statement of
voluntary relinquishment of U.S. nationality confirming the performance of
such act. Such an individual would not
come within the general effective date
of the amendments to sections 877 and
6039F because, under the provisions for
determining the date of loss of citizenship (which were not modified by the
Act), the date of loss of citizenship is
retroactive to the date of the expatriating
act (i.e., prior to February 6, 1995). See
Treas. Reg. § 1.1–1(c).
The transition provision states that
section 6039F and the amendments
made to section 877 by the Act shall
apply to such an individual, except that
the 10-year period referred to in section
877(a) shall not expire before the end of
the 10-year period beginning on the date
the signed statement of voluntary relinquishment is furnished to the U.S. Department of State. Thus, such an individual is subject to new section 877 as
of the date of loss of citizenship and the
10-year period referred to in section
877(a) shall not expire before the end of
the 10-year period beginning on the date
the signed statement of voluntary relinquishment is furnished to the U.S. Department of State.
Section 511(g)(3)(B) of the Act states
that the transition provision of section
511(g)(3)(A) will not apply if the individual establishes to the satisfaction of
the Secretary of the Treasury that the
individual’s loss of U.S. citizenship occurred before February 6, 1994. Accordingly, section 6039F will not apply to
such an individual and he will be sub-

50

ject to section 877 as in effect before
the amendments made by the Act.
Example. The following example illustrates the application of section
511(g)(3)(A) of the Act.
Example 10. K joined a foreign army on
October 1, 1994, with the intent to relinquish his
U.S. citizenship, but did not furnish a statement of
voluntary relinquishment of citizenship to the U.S.
Department of State until October 1, 1995. K is
subject to new section 877 beginning on October
1, 1994, the date that K performed the expatriating
act. However, the 10-year period referred to in
section 877(a) will not expire before the end of
the 10-year period beginning on the date that K
furnished a statement of voluntary relinquishment
of citizenship to the U.S. Department of State. K
furnished this statement on October 1, 1995. Thus,
K is subject to new section 877 for the period that
began on October 1, 1994, and ends on September
30, 2005.

Special rule for individuals who claim
to be within the exception under section
511(g)(3)(B) of the Act. An individual
who (i) furnished a signed statement of
voluntary relinquishment of U.S. nationality to the U.S. Department of State
after February 5, 1995, and (ii) claims
that new section 877 does not apply
because of the exception to the transition provision in section 511(g)(3)(B) of
the Act, must (whether or not the individual is otherwise required to file a
U.S. tax return) attach a statement to
Form 1040NR for the year in which the
signed statement of voluntary relinquishment is furnished to the U.S. Department of State (or to the individual’s
1996 Form 1040NR if the statement of
voluntary relinquishment was furnished
during 1995). The return must bear the
statement ‘‘Expatriation Return’’ across
the top of page 1 of such return. The
statement attached to the return must
include the nature and date of the
expatriating act, the date the signed
statement of voluntary relinquishment
was furnished to the U.S. Department of
State, and a copy of the individual’s
certificate of loss of nationality. An
individual who does not file a statement
in the manner prescribed above will not
be considered to have established to the
satisfaction of the Secretary of the Treasury that the individual lost U.S. citizenship before February 6, 1994.
SECTION XI. INTERACTION WITH
SECTION 7701(b)(10)
Background. Section 7701(b)(10) applies to an alien individual who was
treated as a resident of the United States
during any period that includes at least
three consecutive calendar years (the
‘‘initial residency period’’) and ceased to
be treated as a U.S. resident, but subse-

quently becomes a U.S. resident before
the close of the third calendar year
beginning after the initial residency period. Under section 7701(b)(10), such an
individual will be taxed in the manner
provided by section 877(b) for the period after the close of the initial residency period and before the date on
which the individual subsequently becomes a U.S. resident. This provision
applies only if the tax imposed pursuant
to section 877(b) exceeds the tax imposed under section 871.
Application of section 7701(b)(10).
An individual described in section
7701(b)(10) will be subject to tax on
U.S. source income in the manner provided by section 877(b) (as modified by
section 877(d)) for the period after the
close of the initial residency period and
before the date on which the individual
subsequently becomes a U.S. resident
(the ‘‘intervening period’’). Because the
tax imposed by reason of section
7701(b)(10) applies regardless of
whether the individual had a principal
purpose to avoid U.S. taxes, sections
877(a), (c), and (f), as amended, do not
apply to an individual who is subject to
tax in the manner provided by section
877(b) solely by reason of section
7701(b)(10).
Section 877(e) also does not generally
apply to an individual who is subject to
tax in the manner provided by section
877(b) solely by reason of section
7701(b)(10). However, to treat former
residents who are subject to tax by
reason of section 7701(b)(10) in a similar manner as former long-term residents
who are subject to section 877, all
property held by an individual on the
date that such individual first became a
resident of the United States shall be
treated solely for purposes of section
7701(b)(10) as having a basis of not less
than the fair market value of the property on such date, unless the individual
elects not to have this treatment apply.
Reporting requirements for individuals subject to section 7701(b)(10). An
individual who is liable for U.S. tax by
reason of section 7701(b)(10) during
any year of the intervening period must
file U.S. income tax returns (Form
1040NR) reporting such tax liability for
each of those years by the due date
(including extensions) for filing the individual’s U.S. income tax return for the
year that the individual subsequently
becomes a U.S. resident. If tax returns
for the years of the intervening period
have already been filed, the individual

must amend those returns accordingly to
comply with section 7701(b)(10).
An individual described in section
7701(b)(10) who is liable for U.S. taxes
under any provision of the Code during
the intervening period (e.g., section
871(a)) must attach a statement to his or
her U.S. tax return that sets forth, by
category (e.g., dividends, interest, etc.),
all items of U.S. and foreign source
gross income (whether or not taxable in
the United States) derived during each
year of the intervening period. Such
statement must identify the source of
such income (determined under section
877 as modified by section V of this
notice), the items of income subject to
tax in the manner provided by section
877(b), and any other information that
the Secretary may prescribe at a later
date.
The statement must be filed even if
the individual has fully satisfied his or
her U.S. tax liability for a taxable year
through withholding at source. As discussed in section VII of this notice,
Treasury and the Service expect to
modify Treas. Reg. § 1.6012–1(b)(2)(i)
in accordance with rules of this notice.
Any individual who fails to furnish a
complete statement, as described above,
for the years of the intervening period
will not be considered to have filed a
true and accurate return. Therefore, such
an individual will not be entitled to the
benefit of any deductions or credits if
the individual’s return is later adjusted.
See section 874(a).
An individual who is required to file
the above statement for the taxable year
that begins in 1995 will be considered
to have timely filed his or her statement
for that year if the individual files such
statement by the due date (including
extensions) for filing the individual’s
U.S. income tax return for the taxable
year during which the individual subsequently becomes a U.S. resident.
Exchanges under section 877(d)(2)
and contributions under section
877(d)(4). An individual subject to tax
by reason of section 7701(b)(10) must
recognize any gain realized during the
intervening period on exchanges of
property described in section 877(d)(2),
unless the individual enters into a gain
recognition agreement in accordance
with section V of this notice. The gain
recognition agreement must be submitted with the individual’s U.S. income
tax return (Form 1040NR) for the year
of the exchange. The gain recognition
agreement and the return must be filed
by the due date (including extensions)

51

for filing the individual’s U.S. income
tax return for the year during which the
individual subsequently becomes a U.S.
resident. If a tax return for the year of
the exchange has already been filed, the
individual must amend that return and
attach a gain recognition agreement to
the amended return to comply with
section 7701(b)(10).
The period of such a gain recognition
agreement will be for the intervening
period, and not the 15-year period beginning five years prior to expatriation.
Moreover, annual certification is not
required. Rather, the individual must
submit with the gain recognition agreement a certification that the acquiror (if
any) has not disposed of the transferred
property, and that the individual did not
dispose of the property acquired in the
exchange (or any other property that has
a basis determined in whole or in part
by reference to such property). In addition, the certification must also state
whether the individual derived any income or gain from the property acquired
in the exchange during the intervening
period.
If any property to which the gain
recognition applies was disposed of during any year of the intervening period,
the individual must recognize gain for
the year of disposition. Any income or
gain derived during the intervening period from a contribution described under
section 877(d)(4) must also be recognized for the relevant year. However,
section 7701(b)(10) will not cause an
individual to recognize any income or
gain with respect to any exchange under
section 877(d)(2) or contribution of
property under section 877(d)(4) that
occurred prior to the beginning of the
individual’s initial residency period or
after the date on which the individual
subsequently becomes a U.S. resident.
Example. The following example illustrates how section 7701(b)(10) interacts with section 877 and when income
that arises by reason of section
7701(b)(10) must be recognized.
Example 11. L was a resident alien of the
United States in 1994, 1995 and 1996 because she
satisfied the substantial presence test of section
7701(b)(3) for each of those years. In 1997 and
1998, L was not a resident of the United States. In
1999, L re-establishes residency in the United
States. L is subject to tax in the manner provided
by section 877(b) by reason of section
7701(b)(10). On February 1, 1997, L contributed
property to a ‘‘controlled foreign corporation’’ in a
transaction described in section 877(d)(4).
Any income or gain derived from the property
that L contributed to the foreign corporation
during the intervening period is subject to tax in
the manner provided by section 877(d)(4). Thus, L

must report such income or gain by filing income
tax returns for 1997 and 1998 by the due date
(including extensions) for filing her 1999 U.S.
income tax return. If income tax returns for 1997
and 1998 have already been filed, L must amend
those returns to comply with section 7701(b)(10).
Any income or gain derived after the intervening
period is not taxable under section 877(d)(4).

Coordination with income tax treaties.
The rules of section VIII (interaction
with tax treaties) of this notice do not
apply to an individual who is subject to
tax in the manner provided by section
877(b) solely by reason of section
7701(b)(10). Accordingly, such an individual may claim benefits under a U.S.
income tax treaty for transactions that
occur during the intervening period if
such individual is otherwise eligible for
benefits as a foreign resident under the
terms of such treaty.
Effective date. New section 877 will
apply to an individual subject to tax
thereunder by reason of section
7701(b)(10) if the individual’s initial
residency period ended after August 20,
1996.
REQUEST FOR COMMENTS
Treasury and the Service invite public
comments on the guidance provided in
this notice. Comments should be submitted by June 8, 1997, to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn: CC:CORP:T:R, (Notice 97–19)
Room 5228
Washington, D.C. 20044;
or, alternatively, via the internet at:
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html
The comments you submit will be
available for public inspection and copying.
DRAFTING INFORMATION
The principal authors of this notice
are Trina L. Dang and Michael Kirsch
of the Office of Associate Chief Counsel
(International). For further information
regarding this notice, contact Ms. Dang
or Mr. Kirsch at (202) 622–3860 (not a
toll-free call).
PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1531.

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.
The collection of information related
to the submission of ruling requests is
required to help the Secretary make a
determination as to whether an individual expatriated with a principal purpose to avoid U.S. taxes. The collections
of information related to gain recognition agreements, initial information reporting and reporting of information
with respect to contributions to certain
foreign controlled foreign corporations
are prescribed by statute. The collection
of annual reporting information is necessary to monitor compliance with the
provisions of section 877, as amended.
The collections of information for individuals subject to section 7701(b)(10)
are necessary to administer the provisions of section 7701(b)(10) that interact
with section 877. This information will
be used by the Service for tax administration purposes.
The respondents will be individuals
who lose U.S. citizenship, cease to be
taxed as lawful permanent residents of
the United States, or cease to be taxed
as residents of the United States. The
estimated total annual burden for all
respondents is 6,300 hours. The estimated annual burden per respondent
varies from 0.5 hour to 2.5 hours,
depending on individual circumstances,
with an estimated average of 31 minutes. The estimated number of responses
is 12,300. The estimated annual frequency of responses is annually or on
occasion.
Books or records relating to collections 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 section 6103 of the
Code.
Waiver of Certain Limitations on
Obtaining Automatic Consent To
Change an Accounting Period and
Elect To Be an S Corporation
Effective January 1, 1997
Notice 97–20
SUMMARY: The Internal Revenue Service waives certain limitations on a
corporation’s ability to automatically
change its annual accounting period in
order to elect to be an S corporation

52

under § 1362(a) of the Internal Revenue
Code effective for the taxable year beginning January 1, 1997.
BACKGROUND: Pursuant to § 1378,
an S corporation generally must have a
calendar year as its tax year. However, a
corporation may not automatically
change its annual accounting period to a
calendar year if it attempts to elect to be
an S corporation effective for the taxable year immediately following the
short period required to effect the
change. See § 1.442–1(c)(2)(v) of the
Income Tax Regulations; Rev. Proc. 92–
13, 1992–1 C.B. 665, section 4.01(5). In
addition, a corporation is precluded under § 1.442–1(c)(2)(i) from automatically changing its annual accounting
period if the corporation has changed it
within the last ten calendar years, and
under Rev. Proc. 92–13, section 4.01(2),
if the corporation has changed it within
the last six calendar years.
The Small Business Job Protection
Act of 1996 (SBJPA), Pub. L. No.
104–188, 110 Stat. 1755, significantly
amended Subchapter S of the Code,
expanding eligibility to elect to be an S
corporation. These amendments generally are effective for taxable years beginning after December 31, 1996, and
are intended to allow more corporations
to elect to be S corporations as of
January 1, 1997.
WAIVER OF LIMITATIONS: Consistent with this intent, the Service waives
the limitations of §§ 1.442–1(c)(2)(i)
and (c)(2)(v), and of sections 4.01(2)
and 4.01(5) of Rev. Proc. 92–13, on a
corporation’s ability to automatically
change its annual accounting period to a
calendar year effective for the short
period ending December 31, 1996, provided that the corporation:
(1) is otherwise eligible to change its
annual accounting period under either
§ 1.442–1(c) or Rev. Proc. 92–13;
(2) timely and otherwise validly
elects to be an S corporation effective
for the taxable year beginning on January 1, 1997; and
(3) follows the special filing procedures set forth below.
FILING PROCEDURES: A corporation
that relies upon this notice to change its
annual accounting period under either
§ 1.442–1(c) or Rev. Proc. 92–13 must:
(1) properly complete a Form 2553,
Election by a Small Business Corporation;

(2) properly complete a Form 1128,
Application to Adopt, Change or Retain
a Tax Year, and attach it to the Form
2553;
(3) write ‘‘FILED UNDER NOTICE
97–20’’ at the top of both the Form
2553 and the Form 1128; and
(4) timely file the Form 2553 (with
the attached Form 1128) with the appropriate Internal Revenue Service Center
(Attention: ENTITY CONTROL) in accordance with the instructions for Form
2553. A corporation that qualifies to
automatically change its annual accounting period under § 1.442–1(c) as a
result of this notice should not file the
statement required by § 1.442–1(c)(1).
DRAFTING INFORMATION: The principal author of this notice is Susie K.
Bird of the Office of Assistant Chief
Counsel (Income Tax and Accounting).
For further information, contact Ms.
Sandra Cheston at (202) 622–4840 (not
a toll-free call).
PAPERWORK REDUCTION ACT: The
collections of information contained in
this notice have been reviewed and
approved by the Office of Management
and Budget in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1532.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information displays a valid OMB control number.
The collections of information in this
notice are in the FILING PROCEDURES section of this notice. This
information is required by the Service to
implement the provisions of the Small
Business Job Protection Act of 1996
expanding eligibility to elect to be an S
corporation. The collections of information are mandatory for a taxpayer that
chooses to change its annual accounting
period to a calendar year effective for
the short period ending December 31,
1996, and elect to be an S corporation
effective for the taxable year beginning
January 1, 1997. The likely respondents
are corporations.
The estimated total annual reporting
burden is 500 hours.
The estimated annual burden per respondent will vary from 1 minute to 2
minutes, depending on individual circumstances, with an estimated average
of 1.5 minutes. The estimated number of
respondents is 20,000. The estimated
frequency of responses is once.
Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal revenue law. Generally tax returns
and tax return information are confidential, as required by 26 U.S.C. 6103.
26 CFR 601.204: Changes in accounting period
and in methods of accounting.
(Also Part I, §§ 166, 446, 481, 585, 1362, 1374;
1.446–1, 1.1374–4)

Rev. Proc. 97–18
SECTION 1. PURPOSE

or years in which the § 481(a) adjustment is to be taken into account. Section
1.446–1(e)(3)(ii).
.05 In computing taxable income,
§ 481(a) requires a bank to take into
account those adjustments necessary to
prevent amounts from being duplicated
or omitted when the bank’s taxable
income is computed under a method of
accounting different from the method
used to compute taxable income for the
preceding tax year.
SECTION 3. SCOPE

This revenue procedure provides
guidance for any bank as defined in
§ 581 of the Internal Revenue Code
(except any large bank as defined in
§ 585(c)(2)) that seeks to change its
method of accounting for bad debts
from the § 585 reserve method to the
§ 166 specific charge-off method so that
it may elect S corporation status for the
tax year beginning in 1997.

This revenue procedure applies to any
bank as defined in § 581 (except any
large bank as defined in § 585(c)(2))
that seeks to change its method of
accounting for bad debts from the § 585
reserve method to the § 166 specific
charge-off method, effective for its first
tax year beginning after December 31,
1996 (1997 tax year), in order to elect S
corporation status for its 1997 tax year.

SECTION 2. BACKGROUND

SECTION 4. AUTOMATIC
PROCEDURE

.01 Section 1315 of the Small Business Job Protection Act of 1996, Pub. L.
No. 104–188, 110 Stat. 1755, amended
§ 1361(b)(2) to allow banks (as defined
in § 581) that do not use the reserve
method of accounting for bad debts to
qualify as small business corporations
(and therefore qualify to elect S corporation status), effective for tax years
beginning after December 31, 1996.
.02 Notice 97–5, 1997–2 I.R.B. 25,
states that the Service will issue additional guidance granting permission for
an automatic change in method of accounting for banks that change from the
reserve method of accounting.
.03 Except as otherwise expressly
provided, a bank must obtain the consent of the Commissioner of Internal
Revenue to change a method of accounting for federal income tax purposes. To obtain this consent, a Form
3115 (Application for Change in Accounting Method) generally must be
filed within 180 days after the beginning
of the tax year in which the proposed
change is to be made. Section 446(e)
and § 1.446–1(e)(2)(i) and (3)(i) of the
Income Tax Regulations.
.04 The Commissioner is authorized
to prescribe administrative procedures
setting forth the limitations, terms, and
conditions the Commissioner deems
necessary to obtain consent for effecting
a change in method of accounting and
to prevent amounts from being duplicated or omitted, including the tax year

53

.01 A bank, to which this revenue
procedure applies, that elects under
§ 1362 to become an S corporation by
filing a Form 2553 (Election by a Small
Business Corporation) effective for its
1997 tax year will be deemed to have
elected to change its method of accounting for bad debts from the § 585 reserve method to the § 166 specific
charge-off method effective for its 1997
tax year (year of change) and to have
agreed to all the terms and conditions of
this revenue procedure.
.02 The bank must file a Form 2553
within the first 2 months and 15 days of
the first day of its 1997 tax year for the
S corporation election to be effective for
its 1997 tax year.
.03 In accordance with § 1.446–
1(e)(3)(ii), the requirement to file an
application on Form 3115 within the
180-day period provided in § 1.446–
1(e)(3)(i) is waived for any application
for change in method of accounting
filed pursuant to this revenue procedure.
In addition, under § 1.446–1(e)(2)(i),
the consent of the Commissioner is
hereby granted to any bank within the
scope of this revenue procedure to
change its method of accounting for bad
debts, in accordance with this revenue
procedure, from the § 585 reserve
method to the § 166 specific charge-off
method for the bank’s 1997 tax year.
.04 A bank that uses this revenue
procedure to change its method of ac-

counting for bad debts from the § 585
reserve method to the § 166 specific
charge-off method may not later use
Rev. Proc. 85–8, 1985–1 C.B. 495, to
return to the § 585 reserve method.
.05 A bank changing its method of
accounting under this revenue procedure
also must file a Form 3115 in duplicate.
The original Form 3115 must be attached to the bank’s timely filed (including extensions) S corporation federal
income tax return for its 1997 tax year.
In addition, a copy of the Form 3115
must be filed with the national office
addressed to the Commissioner of Internal Revenue, Attention: Office of Assistant Chief Counsel (Financial Institutions and Products) CC:DOM:FI&P,
P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044, no later
than the date the original Form 3115 is
filed with the 1997 S corporation federal
income tax return. No user fee is required for a Form 3115 filed under this
revenue procedure. A Form 3115 filed
pursuant to this revenue procedure will
not be acknowledged.
.06 In addition to the filing requirements in section 4.05 of this revenue
procedure, a bank that is under examination at any time between February 19,
1997, and the due date for filing its
original federal income tax return (including extensions) for its 1997 tax year
must provide a copy of the Form 3115
to the examining agent no later than the
earlier of (i) 180 days after February 19,
1997, or for a bank that is not under
examination on February 19, 1997, 180
days after the bank first comes under
examination, or (ii) the date the bank
must file its original federal income tax
return (including extensions) for its
1997 tax year.
SECTION 5. SECTION 481(a)
ADJUSTMENT
.01 As a condition of the change in
method of accounting under this revenue
procedure, a bank must include the
amount of its § 481(a) adjustment in its
income, beginning with its 1997 tax
year, ratably over the lesser of 6 years
or the number of years that the bank has
used the § 585 reserve method. See
section 5.04 and 5.05 for exceptions to
the § 481(a) adjustment period.
.02 Generally, the amount of a bank’s
§ 481(a) adjustment for a change in
method of accounting under this revenue
procedure is the amount of the bank’s
reserve for bad debts as of the close of
the tax year immediately before the year

of change. However, the amount of the
§ 481(a) adjustment does not include
the amount of a bank’s pre-1988 reserves (as described in § 593(g)(2)(A)(ii), without taking into account
§ 593(g)(2)(B)) if the bank changed in
a prior year from the § 593 reserve
method to the § 585 reserve method
and § 593(g) applied to that change.
The § 481(a) adjustment is recognized
built-in gain under § 1374. See
§ 1.1374–4(d). In addition, banks
should be aware of the effects of the
interaction between provisions specially
applicable to banks and provisions of
subchapter S, for example, (i) §§ 593(e)
and 1368 with respect to earnings and
profits, and (ii) §§ 593(e) and (g)(3)
and 1374.
.03 A change in method of accounting
under this revenue procedure shall be
treated as a voluntary change in method
of accounting that is initiated by the
bank; and therefore, the § 481(a) adjustment is not restricted to post-1953
items.
.04 A bank may elect to use a oneyear § 481(a) adjustment period if its
entire § 481(a) adjustment is less than
$25,000. A bank that desires to elect this
one-year adjustment period must so indicate by checking the ‘‘Yes’’ box in
Question 26 on its Form 3115 and must
include the entire § 481(a) adjustment
in its income for the 1997 tax year.
.05 A bank taking a § 481(a) adjustment into account under this revenue
procedure that ceases being a bank as
defined in § 581 must include in its
income for the tax year of the cessation
any remaining balance of the § 481(a)
adjustment.
SECTION 6. AUDIT PROTECTION
FOR CHANGE IN METHOD OF
ACCOUNTING
.01 A bank within the scope of this
revenue procedure that timely complies
with all of the terms and conditions of
this revenue procedure will have audit
protection (that is, the district director
may not propose that the bank change
the same method of accounting as the
method that the bank is changing under
this revenue procedure) for tax years
before 1997 unless (1) the bank has
received written notification from an
examining agent (for example, by examination plan, information document
request, notification of proposed adjustments or income tax examination
changes) before February 19, 1997, specifically citing as an issue under consid-

54

eration the bank’s reserve method of
accounting for bad debts, or (2) the
bank’s reserve method of accounting for
bad debts was an issue under consideration by an appeals office or a federal
court before February 19, 1997.
.02 The district director, however, will
verify the amount of the § 481(a) adjustment and the § 481 adjustment period, and otherwise determine that the
bank has fully complied with this revenue procedure.
SECTION 7. EXCLUSIVE
PROCEDURE
.01 This revenue procedure is the
exclusive procedure available to a bank
within the scope of this revenue procedure to obtain the Commissioner’s consent to change its method of accounting
for bad debts from the § 585 reserve
method to the § 166 specific charge-off
method. Any Form 3115 filed with the
national office under Rev. Proc. 92–20,
1992–1 C.B. 685, by a bank that is
within the scope of this revenue procedure, along with any user fee submitted,
will be returned to the bank.
.02 The national office or district
director may review a bank’s Form 3115
filed under this revenue procedure. If it
is determined that the bank does not
qualify for the change in method of
accounting under this revenue procedure, the national office or the district
director will so advise the bank.
SECTION 8. FAILURE TO COMPLY
A bank to which this revenue procedure applies that changes its method of
accounting for bad debts without complying with all of the applicable provisions of this revenue procedure will be
deemed to have initiated the change
without obtaining the consent of the
Commissioner as required by § 446(e)
and will not have audit protection for
prior years as provided in section 6.
Accordingly, the district director may
propose to change the bank’s reserve
method in a prior year, and if the first
year in which the bank improperly uses
the requested method of accounting is
no longer open for the assessment of a
deficiency of tax, the Commissioner
may use the Commissioner’s statutory
discretion to change the bank’s method
of accounting in a later year and impose
an adjustment under § 481(a).

SECTION 9. DEFINITIONS
Except as otherwise provided in this
revenue procedure, the following terms
have the meaning given to them by Rev.
Proc. 92–20:
Under examination (See section 3.02
of Rev. Proc. 92–20);
Year of change (See section 3.03 of
Rev. Proc. 92–20); and
Filed (See section 3.04 of Rev. Proc.
92–20).

SECTION 9—ADMINISTRATIVE
REVIEW AND APPEAL PROCESS
FOR DENIAL OF DESIGNATION
SECTION 10—SPECIAL RULES
SECTION 11—ADVERTISING
STANDARDS FOR DESIGNATED
DELIVERY SERVICES
SECTION 12—MONITORING OF
DESIGNATED DELIVERY SERVICES
AND REVOCATION PROCEDURES

SECTION 10. EFFECT ON OTHER
REVENUE PROCEDURES

SECTION 13—EFFECTIVE DATE

Rev. Proc. 85–8, 1985–1 C.B. 495, is
modified.

SECTION 14—PAPERWORK
REDUCTION ACT

SECTION 11. EFFECTIVE DATE

SECTION 15—DRAFTING
INFORMATION

This revenue procedure is effective
only for accounting method changes by
a bank for which the 1997 tax year is
the year of change.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Laura Howell of the Office of Assistant Chief Counsel
(Passthroughs and Special Industries)
and Nicholas Bogos of the Office of
Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure,
contact Ms. Howell at (202) 622–3060
or Mr. Bogos at (202) 622–3920 (not
toll-free calls).
26 CFR 301.7502–1: Timely mailing treated as
timely filing.

Rev. Proc. 97–19
CONTENTS
SECTION 1—PURPOSE
SECTION 2—BACKGROUND
SECTION 3—SCOPE
SECTION 4—CRITERIA FOR
DESIGNATION
SECTION 5—CONTENT OF
APPLICATION
SECTION 6—APPLICATION
ADDRESSES
SECTION 7—APPLICATION
PERIODS
SECTION 8—NOTIFICATION OF
DESIGNATION

SECTION 1. PURPOSE
This revenue procedure provides the
criteria that will be used during the
interim period (defined in section 3.01
of this revenue procedure) to determine
whether a private delivery service
(‘‘PDS’’) qualifies as a designated private delivery service (‘‘designated
PDS’’) under § 7502(f) of the Internal
Revenue Code. This revenue procedure
also provides the procedures under
which a PDS can apply to become a
designated PDS during the interim period.
SECTION 2. BACKGROUND
.01 Generally, a document is considered filed when it is received. See, e.g.,
Emmons v. Commissioner, 92 T.C. 342,
345–47 (1989), aff’d, 898 F.2d 50 (5th
Cir. 1990) (tax returns were filed on the
date received because § 7502 did not
apply). Section 7502 provides special
rules that apply when a document is
required to be filed (or a payment is
required to be made) within a prescribed
period or on or before a prescribed date
under the authority of any provision of
the internal revenue laws. These rules
can apply to documents filed at offices
of the Internal Revenue Service (‘‘Service’’) as well as the United States Tax
Court.
.02 Section 7502(a) provides the general rule that if a document (or payment) is delivered by the United States
mail after the due date in a postage
prepaid, properly addressed envelope,
then the date of the United States postmark is deemed to be the date of
delivery (or the date of payment) if the
date of the postmark is on or before the

55

due date. (See § 7502(e) for special
rules regarding the mailing of deposits.)
.03 Section
7502(c)
and
§§ 301.7502–1(c)(2) and (d)(1) of the
Procedure and Administration Regulations provide the rules applicable to
registered and certified mail. If a document or payment is sent by registered
mail, the date of the registration is
treated as the postmark date. If a document or payment is sent by certified
mail, the date of the postmark on the
sender’s receipt is treated as the postmark date. Proof of proper registration
of a document, or that a postmark
certified mail sender’s receipt was properly issued for a document, is prima
facie evidence of delivery of that document. For payments sent by registered
or certified mail, however, proof of
proper registration of an item, or that a
postmark certified mail sender’s receipt
was properly issued for an item, is not
prima facie evidence of delivery.
.04 Section 7502(d) provides exceptions to the general rule of § 7502. The
special filing and payment rules of
§ 7502 do not apply to the following:
(1) documents filed in, or payments
made to, any court other than the United
States Tax Court;
(2) currency or other medium of payment unless actually received and accounted for; and
(3) documents or payments that are
required to be delivered by any method
other than by mailing.
.05 Section 1210 of the Taxpayer Bill
of Rights 2, Pub. L. No. 104–168, 110
Stat. 1452, 1474–1475 (1996), amended
§ 7502 by adding subsection (f). Prior
to the amendment, the ‘‘timely mailing
as timely filing/paying’’ rule of
§ 7502(a) could not apply to documents
and payments delivered other than by
United States mail. Section 7502(f) authorizes the Service to expand the
‘‘timely mailing as timely filing/paying’’
rule to documents and payments delivered by certain PDSs. A PDS must be
designated by the Service before it will
qualify for the ‘‘timely mailing as
timely filing/paying’’ rule. Section
7502(f) also grants the Service authority
to accept the equivalent of registered or
certified mail services from designated
PDSs.
.06 In Announcement 96–108,
1996–44 I.R.B. 15, the Service invited
comments, and provided notice of a
public hearing, with respect to developing interim criteria for designating PDSs
for purposes of the ‘‘timely mailing as
timely filing/paying’’ rule of § 7502. A

public hearing was held on December 6,
1996. All comments were considered
during the drafting of this revenue procedure. The comments will also be
considered during the drafting of permanent guidance.
SECTION 3. SCOPE
.01 This revenue procedure provides
the rules for designating a PDS during
the interim period. The interim period
begins on February 25, 1997, and ends
on the date on which the Service issues
guidance superseding this revenue procedure.
.02 This revenue procedure provides
rules applicable for designation solely
for purposes of § 7502(f)(2). During the
interim period, there will be no designation for purposes of § 7502(f)(3) (services that are equivalent to United
States registered or certified mail).
.03 Designation will be determined
with respect to each type of delivery
service offered by a PDS (e.g., next
business morning delivery, next business
day delivery, etc.).
.04 PDSs will not be designated until
the time specified in section 8.01 of this
revenue procedure. Until such designation is announced, the ‘‘timely mailing
as timely filing/paying’’ rule of § 7502
is available only with respect to items
sent by United States mail.
SECTION 4. CRITERIA FOR
DESIGNATION
The following criteria must be satisfied for each type of delivery service for
which designation is sought.
.01 The delivery service offered must
be available to the general public.
.02 The delivery service offered must
be at least as timely and reliable on a
regular basis as United States First-Class
Mail.
.03 The delivery service offered must
provide for the recording or marking of
the date on which an item was given to
the PDS for delivery (the ‘‘received
date’’) under one of the following methods.
(1) The PDS must record electronically to its data base (kept in the regular
course of its business) the received date
and enter into, and comply with, a
written agreement with the Service that
addresses the period for which such data
must be maintained and the terms and
conditions under which the Service will
be provided with such data.
(2) The PDS must indelibly mark the
received date on the cover of the item

so that it is readable by the human eye
without mechanical assistance. A method
does not qualify if only the sender or
the sender’s agent (instead of the PDS)
marks the received date.
.04 The delivery service offered must
provide for delivery to all street addresses within the United States to
which documents and payments subject
to § 7502 must be sent (e.g., all Service
offices and the United States Tax
Court).
.05 The delivery service offered must
have established security procedures that
prevent unauthorized access to the contents of an item by any person (e.g.,
employees, contractors/agents, and third
parties).
.06 The name of the PDS and the
type of delivery service being used must
always be clearly identified on each
item delivered by the PDS to an office
described in § 7502.
.07 The PDS must comply with all
requirements of the Private Express
Statutes (18 U.S.C. §§ 1693–1699 and
39 U.S.C. §§ 601– 606). (See generally
39 C.F.R. Parts 310 and 320.)
SECTION 5. CONTENT OF
APPLICATION
.01 To receive designation, a PDS
must submit a written application. If a
PDS uses a single application to request
designation with respect to more than
one type of delivery service it offers, the
PDS must include all of the required
information for each type of delivery
service.
.02 The application must include the
name and address of the principal place
of business of the PDS and the name
and telephone number of a contact person.
.03 The application must describe
how the PDS satisfies each of the
requirements of section 4 of this revenue procedure. In particular, an application should address the following topics.
(1) In addressing the requirement under section 4.02 of this revenue procedure, the PDS should discuss whether it
guarantees delivery within the time
specified for the type of delivery service
and, if so, it should provide information
on that program.
(2) In addressing the requirement under section 4.03 of this revenue procedure, the PDS must discuss its recording
or marking procedures, including the
security procedures that prevent falsification of the recording or marking of

56

the received date. The PDS must also
submit an example of a cover of an
item. If the PDS is applying for qualification under section 4.03(1), it must
describe its current data storage periods
and all of the methods it currently
provides for senders or recipients to
obtain information concerning the received date (e.g., toll-free telephone
number, Internet access, software/
modem connection).
(3) In addressing the requirement under section 4.04 of this revenue procedure, the PDS must discuss how often
and under what circumstances it uses
contractors/agents in providing nationwide delivery.
(4) In addressing the requirement under section 4.07 of this revenue procedure, the PDS must include a statement
that it certifies it is in compliance and
will remain in compliance.
.04 A PDS should identify any information within its application that it
considers to be confidential trade secrets.
.05 The application must include the
following statement:
Under the penalties of perjury, I declare that I have examined this application and any accompanying information,
and to the best of my knowledge and
belief it is true, correct, and complete.
This applicant will provide prompt written notification to the Service if any
application information changes during
the time it is under consideration for
designation. This applicant will comply
with all of the provisions of Rev. Proc.
97–19 during the time it is a designated
private delivery service if it is designated during the interim period. I understand that noncompliance will result in
the revocation of designation. I am
authorized to make and sign this statement on behalf of this applicant.
.06 The application must be signed
and dated by an authorized official of
the private delivery service (not the
applicant’s representative) who has personal knowledge of the application information and whose duties are not
limited to making the application. A
stamped signature is not permitted.
.07 A PDS must submit an original
and two copies of its application.
SECTION 6. APPLICATION
ADDRESSES
A PDS may submit its written application by either mailing it to:

Internal Revenue Service
Attn: Chief, Taxpayer Service T
Room 3408
1111 Constitution Avenue, N.W.
Washington, D.C. 20044,
or hand delivering it between the hours
of 8:00 a.m. and 5:00 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: Chief, Taxpayer Service T
Room 3408
1111 Constitution Avenue, N.W.
Washington, D.C.
SECTION 7. APPLICATION PERIODS
.01 During the interim period, there
will be an initial application period and
subsequent application periods.
(1) The initial application period ends
on March 14, 1997.
(2) Subsequent application periods
will end on each June 30th and December 31st thereafter.
.02 Once a PDS is designated, it does
not need to reapply during the interim
period unless it desires to receive designation with respect to a new type of
delivery service it offers.
SECTION 8. NOTIFICATION OF
DESIGNATION
.01 After reviewing those applications
filed during the initial application period, the Service anticipates that by
March 31, 1997, it will issue the first
notice that lists the PDSs that are designated under these interim procedures.
That notice will specify the period during which the designated PDSs will be
designated. This period will not begin
earlier than the date the notice is issued,
and the period may begin either on the
date the notice is issued or shortly
thereafter. Except as provided in section
12 of this revenue procedure, this period
will not end earlier than March 1, 1998,
regardless of the time permanent guidance is issued.
.02 The Service will issue additional
notices providing a revised list of the
designated PDSs on or before September 1st and March 1st of each year of
the interim period.
.03 In unusual circumstances, the
Service may issue additional notices at
other times. (See, for example, section
12.06 of this revenue procedure.)
SECTION 9. ADMINISTRATIVE
REVIEW AND APPEAL PROCESS
FOR DENIAL OF DESIGNATION
.01 A PDS that has been denied designation has the right to an administra-

tive review and appeal. During the administrative review and appeal process,
the denial of designation remains in
effect.
.02 If the Service has denied designation with respect to any type of delivery
service offered by a PDS, the Service
will issue a letter of denial that explains
to the applicant why the Service rejected
the request for designation.
.03 An applicant that receives a letter
of denial may obtain administrative review by mailing or delivering, within 30
calendar days of the date of the letter of
denial, a written response to the Service
at one of the application addresses listed
in section 6 of this revenue procedure.
The applicant’s response must address
the Service’s explanation for the denial
of designation.
.04 Upon receipt of an applicant’s
written response, the Service will reconsider its denial of designation. The Service may (1) designate the applicant by
issuing a notice that provides a revised
list of the designated PDSs, or (2)
confirm its denial of designation by
issuing a letter to the applicant.
.05 If an applicant receives a letter
confirming the denial of designation, the
applicant is entitled to an appeal, in
writing, to the National Director of
Appeals.
.06 The appeal must be mailed or
delivered to the Service at one of the
application addresses listed in section 6
of this revenue procedure within 30
calendar days of the date of the letter
confirming the denial of designation. An
applicant’s written appeal must contain a
detailed explanation, with supporting
documentation, of why the denial should
be reversed. In addition, the applicant
must include a copy of the applicant’s
original application, a copy of the letter
of denial, a copy of the applicant’s
request for administrative review, and a
copy of the letter confirming the denial.
.07 Failure to respond within the 30day periods described in sections 9.03
and 9.06 of this revenue procedure irrevocably terminates an applicant’s right
to an administrative review or appeal.
.08 A PDS that has been denied designation during any application period
may reapply during the next application
period.
SECTION 10. SPECIAL RULES
.01 A PDS is required to provide
prompt written notification to the Service at one of the application addresses
listed in section 6 of this revenue proce-

57

dure if any application information
changes during the time the PDS is
under consideration for designation or
during the time it is a designated PDS.
.02 If a designated PDS delivers an
item that is sent by itself, a related
person within the meaning of § 267, or
a member of an affiliated group of
which the designated PDS is also a
member within the meaning of § 1504,
such item will not qualify under the
‘‘timely mailing as timely filing/paying’’
rule unless the item is received by the
addressee no later than two business
days after the due date.
.03 For purposes of the postage prepaid requirement of § 7502(a)(2)(B), a
sender is permitted to use a billing
method other than advance payment if a
designated PDS offers such billing
method in accordance with established
industry practices and the recipient is
not charged without its permission. An
item will not qualify under the ‘‘timely
mailing as timely filing/paying’’ rule if
the recipient is charged without its permission. Moreover, the Service will not
accept delivery of an item if the Service
is billed for the delivery charge without
its permission. Similarly, the United
States Tax Court may not accept delivery of an item if it is billed for the
delivery charge without its permission.
SECTION 11. ADVERTISING
STANDARDS FOR DESIGNATED
DELIVERY SERVICES
.01 No designated PDS may, in any
way, use or participate in the use of any
form of public communication containing a false, fraudulent, misleading, deceptive, unduly influencing, coercive, or
unfair statement or claim.
.02 A designated PDS must adhere to
all relevant federal, state, and local
consumer protection laws that relate to
advertising and soliciting.
.03 A designated PDS must not use
the name of the Treasury Department,
the Service (e.g., ‘‘Internal Revenue Service’’ or ‘‘IRS’’), or the United States
Tax Court within its name.
.04 Advertising materials shall not
carry the seal of any office within the
Treasury Department or of the United
States Tax Court.
.05 If a designated PDS uses any
audio or video media (including radio,
television, and the Internet) to advertise
its status as a designated PDS, the
broadcast must be pre-recorded. The
designated PDS must keep a copy of
such pre-recorded advertisement for a

period of at least 36 months from the
date of the last transmission or use.
.06 If a designated PDS uses any
written media (including newspapers, direct mail, billboards, and fax communications) to advertise its status as a
designated PDS, the designated PDS
must retain a copy (or example) of such
advertisement, along with a list or other
description of the persons to whom the
communication was directed, for a period of at least 36 months from the date
of the last communication.
SECTION 12. MONITORING OF
DESIGNATED DELIVERY SERVICES
AND REVOCATION PROCEDURES
.01 The Service may monitor designated PDSs to ensure compliance with
the requirements of this revenue procedure. If the Service finds that a designated PDS failed to comply with the
requirements of this revenue procedure,
the Service will issue a warning letter
that describes specific corrective action
that must be taken in order to retain
designation.
.02 If the designated PDS fails to
take the appropriate corrective action
within the time specified in the warning
letter, a proposed revocation letter will
be issued. If a designated PDS receives
a proposed revocation letter, the designated PDS is entitled to an appeal, in
writing, to the National Director of
Appeals.
.03 The appeal must be mailed or
delivered to the Service at one of the
application addresses listed in section 6
of this revenue procedure within 30
calendar days of the date of the proposed revocation letter. A designated
PDS’s written appeal must contain a
detailed explanation, with supporting
documentation, of why the revocation
should not be made. In addition, the
designated PDS must include a copy of
the warning letter and a copy of the
proposed revocation letter. Failure to
appeal within the 30-day period irrevocably terminates a designated PDS’s
right to an appeal.

.04 If a designated PDS fails to file a
timely appeal or if an appeal is denied,
the Service will revoke the designation.
The revocation may be either with respect to a single type of delivery service
offered by the designated PDS or with
respect to all types of delivery services
offered, depending on the nature of the
violation. The revocation will be effective after issuance of a notice that
provides a revised list of the designated
PDSs.
.05 A PDS is not permitted to reapply
for designation under the provisions of
this revenue procedure if, after consideration of an appeal if timely requested,
there has been a complete or partial
revocation of its status as a designated
PDS. The permanent guidance may also
preclude such a PDS from reapplying
for an additional specified period of
time.
.06 In exceptional circumstances, the
Service may revoke the status of a
designated PDS before the appeals process is completed. Such revocation will
be effective after issuance of a notice
that provides a revised list of the designated PDSs. If, after consideration of an
appeal, it is determined that a PDS is
qualified for designation, the PDS will
be redesignated. Such redesignation will
be effective after issuance of a notice
that provides a revised list of the designated PDSs.
SECTION 13. EFFECTIVE DATE
This revenue procedure is effective
February 25, 1997.
SECTION 14. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-

58

tion Act (44 U.S.C. § 3507) under control number 1545–1535.
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.
The collections of information in this
revenue procedure are in sections 4.03,
5, 9.03, 9.06, 10.01, 11.05, 11.06, and
12.03. This information is required for
the Internal Revenue Service to determine whether a private delivery service
should be a ‘‘designated’’ private delivery service. This information will be
used to ensure that a private delivery
service conforms to the requirements set
forth in this revenue procedure. The
collections of information are required
to obtain a benefit. The likely respondents are businesses or other for-profit
institutions.
The estimated total annual reporting
and/or recordkeeping burden is 3,069
hours.
The estimated average annual burden
per respondent/recordkeeper is 614
hours. The estimated number of respondents and/or recordkeepers is five.
The estimated frequency of responses
is on occasion.
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 15. DRAFTING
INFORMATION
The principal authors of this revenue
procedure are Robert J. Basso and
Renay France of the Office of Assistant
Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact
Ms. France at (202) 622–6232 (not a
toll-free call).

Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing

SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

Basis Reduction Due to Discharge
of Indebtedness
REG–208172–91
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains
proposed regulations that provide ordering rules for the reduction of bases of
property under sections 108 and 1017 of
the Internal Revenue Code of 1986. The
regulations will affect taxpayers that
exclude discharge of indebtedness from
gross income under section 108.
DATES: Written comments must be received by April 7, 1997. Outlines of oral
comments to be presented at the public
hearing scheduled for April 24, 1997, at
10 a.m. must be received by April 3,
1997.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–208172–91),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative,
submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–208172–91),
Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers may submit comments electronically
via the internet by selecting the ‘‘Tax
Regs’’ option on the IRS Home Page,
or by submitting comments directly to
the IRS internet site at http://
www.irs.ustreas.gov/prod/tax_regs/
comments.html.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations
generally, Sharon L. Hall or Christopher
F. Kane of the Office of Assistant Chief
Counsel (Income Tax & Accounting) at
(202) 622–4930; concerning partnership
adjustments under section 1017, Brian
M. Blum of the Office of Assistant
Chief Counsel (Passthroughs & Special
Industries) at (202) 622–3050; concerning submissions and the hearing,
Evangelista C. Lee of the Regulations
Unit at (202) 622–7190 (not toll-free
numbers).

The collections of information contained in this notice of proposed
rulemaking have 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 on the collections 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, T:FP, Washington, DC 20224.
Comments on the collections of information should be received by March 8,
1997. Comments are specifically requested concerning:
Whether the proposed collections of
information are necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collections
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 operation, maintenance, and
purchase of service to provide information.
The collections of information in this
proposed regulation are in §§ 1.108–
4(b), 1.1017–1(e)(2), and 1.1017–
1(f)(2)(ii) and (iii). This information is
required for a taxpayer to elect to
reduce the adjusted bases of depreciable
property under section 108(b)(5), to
elect to treat section 1221(1) real property as either depreciable property or
depreciable real property, and to account
for a partnership interest as either depreciable property or depreciable real property. This information will be used to
determine whether taxpayers have properly reduced the bases of their properties. The collections of information are

59

required to obtain a benefit. The likely
respondents are individuals, farms, businesses or other for-profit institutions,
and small businesses or organizations.
Estimated total annual reporting burden: 100,000 hours.
Estimated average annual burden per
respondent: 1 hours.
Estimated number of respondents:
100,000.
Estimated annual frequency of responses: On occasion.
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.
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.
Background
This notice contains proposed amendments to the income tax regulations (26
CFR Parts 1 and 301) under sections
108 and 1017 of the Internal Revenue
Code of 1986 (Code). The amendments
are proposed to conform the regulations
to amendments to sections 108 and 1017
made by the Bankruptcy Tax Act of
1980, Pub. L. 96–589, § 2, 94 Stat.
3389 (1980), 1980–2 C.B. 607 (Bankruptcy Tax Act); the Technical Corrections Act of 1982, Pub. L. 97–448,
§ 102(h)(1), 96 Stat. 2365, 2372 (1983),
1983–1 C.B. 451; the Deficit Reduction
Act of 1984, Pub. L. 98–369,
§§ 474(r)(5) and 721(b)(2), 98 Stat.
494, 839, 966 (1984), 1984–3 C.B. (Vol.
1) 1; the Tax Reform Act of 1986, Pub.
L. 99–514, §§ 104(b)(2), 231(d)(3)(D),
822, and 1171(b)(4), 100 Stat. 2085,
2105, 2179, 2373, 2513 (1986), 1986–3
C.B. (Vol. 1) 2; and the Omnibus Budget Reconciliation Act of 1993, Pub. L.
103–66, § 13150, 107 Stat. 312, 446
(1993), 1993–3 C.B. 1.
In general, section 108 excludes from
gross income discharges of indebtedness
if the discharge occurs in a title 11 case
or when the taxpayer is insolvent, or if
the indebtedness is ‘‘qualified farm indebtedness’’ or ‘‘qualified real property
business indebtedness.’’ Taxpayers generally must reduce specified tax attributes, including adjusted bases of
properties, to the extent income from

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I.R.B.

discharge of indebtedness is excluded
from gross income under section 108.
Section 1017 provides rules regarding
any basis reductions required by, or
elected under, section 108.
Explanation of Provisions
Overview
The legislative history of the Bankruptcy Tax Act states that the exclusion
of discharge of indebtedness (COD income) from gross income under section
108 is intended to promote a debtor’s
fresh start. S. Rep. No. 1035, 96th
Cong., 2d Sess. 10 (1980), 1980–2 C.B.
620, 624; H.R. Rep. No. 833, 96th
Cong., 2d Sess. 11 (1980). The exclusion provided by the statute generally
operates, however, to defer, rather than
eliminate, income from discharge of
indebtedness.
The deferral of income provided by
statute is generally achieved by requiring a taxpayer to reduce specified tax
attributes (including adjusted bases of
property) under section 108(b) by an
amount equal to the COD income excluded from gross income under section
108(a). Section 108(b)(2) requires a taxpayer to reduce tax attributes in the
following order: (A) net operating loss;
(B) general business credit; (C) minimum tax credit; (D) capital loss carryovers; (E) adjusted bases of property;
(F) passive activity loss and credit carryovers; and (G) foreign tax credit carryovers. If the excluded COD income
exceeds the sum of the taxpayer’s tax
attributes, the excess is permanently excluded from the taxpayer’s gross income.
When basis reductions are necessary,
section 1017(a) requires the taxpayer to
reduce the adjusted bases of property
held on the first day of the following
tax year. Section 1017(b)(1) provides
that the amount of the basis reduction
required under section 1017(a), and the
particular properties the bases of which
are to be reduced, shall be determined
under regulations.
General Rules for Basis Reduction
Consistent with the legislative history
of the Bankruptcy Tax Act, the proposed
regulations generally retain the ‘‘tracing’’ approach of the existing regulations
issued under prior law. Thus, the proposed regulations require a taxpayer to
reduce the adjusted basis of the property
that secured the discharged indebtedness
before reducing the adjusted bases of
other property.

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I.R.B.

In addition, the proposed regulations
modify the categories in the existing
regulations to simplify the process of
basis reduction. First, the distinction
between purchase-money indebtedness
and other secured indebtedness is eliminated. Second, the order of basis reduction for property that secured discharged
indebtedness is changed. Thus, the first
category of the general ordering rule is
real property used in the taxpayer’s
trade or business or held for the production of income (other than section
1221(1) real property) that secured the
discharged indebtedness, and the second
category is personal property used in the
taxpayer’s trade or business or held for
the production of income (other than
inventory, accounts receivable, and notes
receivable) that secured the discharged
indebtedness. Therefore, if an indebtedness secured by a building, a parcel of
land used in the taxpayer’s trade or
business, office equipment, and office
furniture is discharged, the taxpayer proportionately reduces the adjusted bases
of the building and the parcel of land,
based upon their relative adjusted bases,
to the full extent of the excluded COD
income before reducing the adjusted
bases of the office equipment and the
office furniture. The IRS and Treasury
Department believe that this modification of the current regulations will simplify the process of basis reduction for
many taxpayers.
Special Rules for Depreciable Properties
Instead of reducing tax attributes in
the order specified by section 108(b)(2),
a taxpayer may elect under section
108(b)(5) first to reduce the adjusted
bases of depreciable property (real and
personal) to the extent of the excluded
COD income. If the adjusted bases of
depreciable property are insufficient to
offset the entire amount of excluded
COD income, the taxpayer must reduce
any remaining tax attributes in the order
specified in section 108(b)(2). Section
108(c) requires that excluded COD income from the cancellation of qualified
real property business indebtedness must
be applied against depreciable real property.
Section 1017(b)(3)(C) provides that a
taxpayer must treat a partnership interest
as depreciable property when reducing
adjusted bases under section 108(b)(5),
and as depreciable real property when
reducing adjusted bases under section
108(c), to the extent the partnership
correspondingly reduces the partner’s

60

proportionate interest in the adjusted
bases of depreciable property (or depreciable real property) held by the partnership (inside basis).
The proposed regulations generally
provide that a taxpayer may freely
choose whether or not to request that a
partnership reduce the partner’s share of
depreciable basis in partnership property
and thereby permit the taxpayer to treat
the partnership interest as depreciable
property (or depreciable real property).
In addition, the proposed regulations
generally provide that the partnership is
free to grant or deny its consent. In
order to prevent avoidance of the general ordering rules of the proposed regulations through the use of partnerships,
however, a partner is required to request
consent if the partner owns (directly or
indirectly) more than 50 percent of the
capital and profits interests of the partnership, or if the partner receives a
distributive share of COD income from
the partnership. In addition, the partnership is required to grant consent if
requests are made by partners owning
(directly or indirectly) an aggregate of
more than 50 percent of the capital and
profits interests of the partnership.
The proposed regulations provide that
a partner requesting a reduction in inside basis must make the request before
the due date (including extensions) for
filing the partner’s Federal income tax
return for the taxable year in which the
partner has COD income. A partnership
that consents to a basis reduction must
include a consent statement with its
Form 1065, U.S. Partnership Return of
Income, and must also provide a copy
of that statement to the affected partner
on or before the date the Form 1065 is
filed. The IRS and Treasury Department
recognize that under current law a partner may not always have sufficient
information with which to decide to
request a basis reduction until on, or
shortly before, the due date (including
extensions) for filing the partner’s tax
return. For example, for calendar year
taxpayers, a partner’s tax return and a
partnership’s Form 1065 are generally
due on the same day. See sections 6031
and 6072. Comments are requested as to
whether additional rules (such as requiring a partnership to inform partners of
COD income prior to the date the Form
1065 is filed) are necessary to ensure
that information is exchanged between
the partnership and its partners in a
timely fashion.
The proposed regulations remove
§ 301.9100–13T, which governs elec-

tions under section 108(b)(5), and add
new proposed § 1.108–4. Under the
temporary regulations, a taxpayer is required to make the election with the
taxpayer’s Federal income tax return for
the taxable year in which the discharge
occurs, but is permitted to file an election with an amended return, or claim
for credit or refund, if the taxpayer
establishes reasonable cause for failing
to file the election with the original
return. New proposed § 1.108–4 requires the taxpayer to make the election
on the timely filed (including extensions) Federal income tax return for the
taxable year the taxpayer has COD
income that is excluded under section
108(a). Therefore, a taxpayer that fails
to make the election on that return must
request the Commissioner’s consent to
file a late election under § 301.9100–3T
or any regulations that supersede
§ 301.9100–3T.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant regulatory action as defined in EO
12866. Therefore, a regulatory assessment is not required.
Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of
proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small business.
Initial Regulatory Flexibility Act Analysis
This initial analysis is required under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6). In certain circumstances, the
proposed regulations will require a partnership to include a statement with its
Form 1065, U.S. Partnership Return of
Income, and provide a copy of that
statement with the taxpayer’s Schedule
K–1 (Form 1065), Partner’s Share of
Income, Credits, Deductions, etc., for
the taxable year in which the COD
income is excluded under section
108(a), stating the amount of the partner’s share of the reduction in the
partnership’s adjusted bases of depreciable real or personal property (inside
basis). This requirement will ensure that
the partner knows it is entitled to reduce
the adjusted basis of the partnership
interest and that the affected partnership
knows it must reduce the partner’s interest in inside basis. The legal basis for

this requirement is contained in sections
1017(b), 6001, and 7805(a).
Though the proposed regulations
might affect any partnership owning
depreciable property, the IRS and Treasury Department believe that partnerships owning depreciable real property
are the most likely to be affected.
Approximately 1,560,000 partnership returns were filed for 1993. Approximately 620,000 of these were for partnerships owning real property. It is
unlikely, however, that many of these
partnerships will be affected by the
proposed regulations in any given year.
After a partner conveys information
concerning the amount of COD income
excluded from gross income under section 108(a) to the affected partnership,
the partnership must reduce the partner’s
interest in inside basis. Accordingly, the
partnership must prepare and maintain
special entries on its books because this
basis reduction will reduce the partner’s
share of the partnership’s depreciation
deductions, and ultimate gain or loss on
the sale of the property, in subsequent
years. In many cases, partnership returns
are prepared using computer software
that can prepare and maintain these
special entries after the initial year.
The IRS and Treasury Department are
not aware of any federal rules that may
duplicate, overlap, or conflict with the
proposed rule.
As an alternative to the disclosure
described above, the IRS and Treasury
Department considered, but rejected as
too burdensome, a rule that would have
required an affected partnership to disclose the reductions of adjusted basis on
a property-by-property basis. There are
no known alternative rules that are less
burdensome to small entities but that
accomplish the purpose of the statute.
The IRS and Treasury Department request comments from small entities concerning possible alternatives.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for April 29, 1997, at 10 a.m. in IRS
Auditorium, 7th Floor, Internal Revenue
Building, 1111 Constitution Avenue,
NW, Washington, DC. Because of access restrictions, visitors will not be

61

admitted beyond the Internal Revenue
Building lobby more than 15 minutes
before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by April 7, 1997 and
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 April 3, 1997.
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.
Drafting Information
The principal author of these regulations is Leo F. Nolan II, Office of
Assistant Chief Counsel (Income Tax
and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.
*

*

*

*

*

Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for 26 CFR part 1 is amended by adding
entries in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108–4 also issued under 26
U.S.C. 108.
Section 1.108–5 also issued under 26
U.S.C. 108.
Section 1.1017–1 also issued under 26
U.S.C. 1017.
§ 1.108(a)–1 [Removed]
Par. 2. Section 1.108(a)–1 is removed.
§ 1.108(a)–2 [Removed]
Par. 3. Section 1.108(a)–2 is removed.
§ 1.108(b)–1 [Removed]
Par. 4. Section 1.108(b)–1 is removed.

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I.R.B.

§ 1.1016–7 [Removed]
Par. 5. Section 1.1016–7 is removed.
§ 1.1016–8 [Removed]
Par. 6–7. Section 1.1016–8 is removed.
§ 1.1017–2 [Removed]
Par. 8. Section 1.1017–2 is removed.
Par. 9. Section 1.108–4 is added to
read as follows:
§ 1.108–4 Election to reduce basis
of depreciable property under
section 108(b)(5).
(a) Description. An election under
section 108(b)(5) is available whenever
a taxpayer excludes discharge of indebtedness (COD income) from gross income under sections 108(a)(1)(A), (B),
or (C) (concerning title 11 cases, insolvency, and qualified farm indebtedness,
respectively). See sections 108(d)(2) and
(3) for the definitions of title 11 case
and insolvent. See section 108(g)(2) for
the definition of qualified farm indebtedness.
(b) Time and manner. To make an
election under section 108(b)(5), a taxpayer must enter the appropriate information on Form 982, Reduction of Tax
Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), and attach the form to the timely
filed (including extensions) Federal income tax return for the taxable year in
which the taxpayer has COD income
that is excluded from gross income
under section 108(a). An election under
this section may be revoked only with
the consent of the Commissioner.
(c) Effective date. This section is effective for elections concerning discharges of indebtedness occurring on or
after the date these regulations are published as final regulations in the Federal
Register.
Par. 10. Section 1.108–5 is added to
read as follows:
§ 1.108–5 Limitations on the exclusion
of income from the discharge of
qualified real property business
indebtedness
(a) Indebtedness in excess of value.
The amount excluded from gross income under section 108(a)(1)(D) (concerning discharges of qualified real
property business indebtedness) shall not
exceed the excess, if any, of the out-

1997–10

I.R.B.

standing principal amount of that indebtedness immediately before the discharge
over the net fair market value of the
qualifying real property, as defined in
§ 1.1017–1(c)(1), immediately before
the discharge. For purposes of this section, net fair market value means the
fair market value of the qualifying real
property (notwithstanding section
7701(g)) reduced by the outstanding
principal amount of any other qualified
real property business indebtedness secured by that property immediately before and after the discharge.
(b) Overall limitation. The amount
excluded from gross income under section 108(a)(1)(D) shall not exceed the
aggregate adjusted bases of all depreciable real property held by the taxpayer
immediately before the discharge (other
than depreciable real property acquired
in contemplation of the discharge) reduced by the sum of any—
(1) Depreciation claimed for the taxable year the taxpayer excluded discharge of indebtedness from gross income under section 108(a)(1)(D); and
(2) Reductions to the adjusted bases
of depreciable real property required
under section 108(b) or section 108(g)
for the same taxable year.
(c) Effective date. This section is effective for discharges of qualified real
property business indebtedness occurring
on or after the date these regulations are
published as final regulations in the
Federal Register.
Par. 11. Section 1.1017–1 is revised
to read as follows:
§ 1.1017–1 Basis reductions following a
discharge of indebtedness
(a) General rule for section
108(b)(2)(E). This paragraph (a) applies
to basis reductions under section
108(b)(2)(E) that are required by section
108(a)(1)(A) or (B) because the taxpayer excluded discharge of indebtedness (COD income) from gross income.
A taxpayer must reduce in the following
order, to the extent of the excluded
COD income but not below zero, the
adjusted bases of property held on the
first day of the taxable year following
the taxable year that the taxpayer excluded COD income from gross income
(in proportion to adjusted basis):
(1) Real property used in a trade or
business or held for investment, other
than real property described in section
1221(1), that secured the discharged
indebtedness immediately before the discharge (see paragraph (f)(1) of this

62

section for the treatment of partnership
indebtedness as indebtedness secured by
the taxpayer’s interest in the partnership);
(2) Personal property used in a trade
or business or held for investment, other
than inventory, accounts receivable, and
notes receivable, that secured the indebtedness immediately before the discharge
(see paragraph (f)(1) of this section for
the treatment of partnership indebtedness as indebtedness secured by the
taxpayer’s interest in the partnership);
(3) Remaining property used in a
trade or business or held for investment,
other than inventory, accounts receivable, notes receivable, and real property
described in section 1221(1);
(4) Inventory, accounts receivable,
notes receivable, and real property described in section 1221(1); and
(5) Property not used in a trade or
business nor held for investment.
(b) Operating rules—(1) Prior taxattribute reduction. The amount of excluded COD income applied to reduce
basis does not include any COD income
applied to reduce tax attributes under
sections 108(b)(2)(A) through (D) and,
if applicable, section 108(b)(5). For example, if a taxpayer excludes $100 of
COD income from gross income under
section 108(a) and reduces tax attributes
by $40 under sections 108(b)(2)(A)
through (D), the taxpayer is required to
reduce the adjusted bases of property by
$60 ($100 – $40) under section
108(b)(2)(E).
(2) Multiple discharged indebtednesses. If a taxpayer has COD income
attributable to more than one discharged
indebtedness resulting in the reduction
of tax attributes under sections
108(b)(2)(A) through (D) and, if applicable, section 108(b)(5), paragraph
(b)(1) of this section must be applied by
allocating the tax-attribute reductions
among the indebtednesses in proportion
to the amount of COD income attributable to each discharged indebtedness.
For example, if a taxpayer excludes $20
of COD income attributable to secured
indebtedness A and excludes $80 of
COD income attributable to unsecured
indebtedness B (a total exclusion of
$100), and if the taxpayer reduces tax
attributes by $40 under sections
108(b)(2)(A) through (D), the taxpayer
must reduce the amount of COD income
attributable to secured indebtedness A to
$12 ($20 – ($20 4 $100 x $40)) and
must reduce the amount of COD income
attributable to unsecured indebtedness B
to $48 ($80 – ($80 4 $100 x $40)).

(3) Limitation on basis reductions under section 108(b)(2)(E) in bankruptcy
or insolvency. If COD income arises
from a discharge of indebtedness in a
title 11 case or while the taxpayer is
insolvent, the amount of any basis reduction under section 108(b)(2)(E) shall
not exceed the excess of—
(i) The aggregate of the adjusted
bases of property and the amount of
money held by the taxpayer immediately
after the discharge; over
(ii) The aggregate of the liabilities of
the taxpayer immediately after the discharge.
(c) Modification of ordering rules for
basis reductions under sections
108(b)(5) and 108(c)—(1) In general.
The ordering rules prescribed in paragraph (a) of this section apply, with
appropriate modifications, to basis reductions under sections 108(b)(5) and
(c). Thus, a taxpayer may reduce only
the adjusted bases of depreciable property under section 108(b)(5) and may
reduce only the adjusted bases of depreciable real property under section
108(c). Furthermore, for basis reductions
under section 108(c), a taxpayer must
reduce the adjusted basis of the qualifying real property to the extent of the
discharged qualified real property business indebtedness before reducing the
adjusted bases of other depreciable real
property. The term qualifying real property means real property with respect to
which the indebtedness is qualified real
property business indebtedness within
the meaning of section 108(c)(3). See
paragraphs (e) and (f) of this section for
elections relating to section 1221(1)
property and partnership interests.
(2) Partial basis reductions under
section 108(b)(5). If the amount of basis
reductions under section 108(b)(5) is
less than the amount of the COD income excluded from gross income under
section 108(a), the taxpayer must reduce
the balance of its tax attributes, including any remaining adjusted bases of
depreciable property, under section
108(b)(2). For example, if a taxpayer
excludes $100 of COD income from
gross income under section 108(a) and
elects to reduce the adjusted bases of
depreciable property by $10 under section 108(b)(5), the taxpayer must reduce
its remaining tax attributes by $90 under
section 108(b)(2).
(3) Modification of fresh start rule
for prior basis reductions under section
108(b)(5). After reducing the adjusted
bases of depreciable property under section 108(b)(5), a taxpayer must compute

the limitation on basis reductions under
section 1017(b)(2) using the aggregate
of the remaining adjusted bases of property. For example, if, immediately after
the discharge of indebtedness in a title
11 case, a taxpayer’s adjusted bases of
property is $100 and its undischarged
indebtedness is $70, and if the taxpayer
elects to reduce the adjusted bases of
depreciable property by $10 under section 108(b)(5), section 1017(b)(2) limits
any further basis reductions under section 108(b)(2)(E) to $20 (($100 – $10) –
$70).
(d) Changes in security. Any change
in the property securing an indebtedness
during the one-year period preceding the
discharge of that indebtedness shall be
disregarded if a principal purpose of that
change is to affect the taxpayer’s basis
reductions under section 1017.
(e) Election to treat section 1221(1)
real property as depreciable—(1) In
general. For basis reductions under sections 108(b)(5) and (g), a taxpayer may
elect under sections 1017(b)(3)(E) and
(4)(C), respectively, to treat real property described in section 1221(1) as
depreciable property. This election is not
available, however, for basis reductions
under section 108(c).
(2) Time and manner. To make an
election under section 1017(b)(3)(E) or
(4)(C), a taxpayer must enter the appropriate information on Form 982, Reduction of Tax Attributes Due to Discharge
of Indebtedness (and Section 1082 Basis
Adjustment), and attach the form to a
timely filed (including extensions) Federal income tax return for the taxable
year in which the taxpayer has COD
income that is excluded from gross
income under section 108(a). An election under this paragraph (e) may be
revoked only with the consent of the
Commissioner.
(f) Partnerships—(1) Partnership
COD income. For purposes of paragraph
(a) of this section, a taxpayer must treat
a distributive share of a partnership’s
COD income as attributable to a discharged indebtedness secured by the
taxpayer’s interest in that partnership.
(2) Partnership interest treated as depreciable property— (i) In general. For
purposes of making basis reductions, if
a taxpayer makes an election under
section 108(b)(5) or (c) the taxpayer
must treat a partnership interest as depreciable property (or depreciable real
property) to the extent of the partner’s
proportionate share of the partnership’s
basis in depreciable property (or depreciable real property), provided the part-

63

nership consents to a corresponding reduction in the partnership’s basis (inside
basis) in depreciable property (or depreciable real property) with respect to
such partner.
(ii) Request by partner and consent
of partnership—(A) In general. Except
as otherwise provided in this paragraph
(f)(2)(ii), a taxpayer may choose
whether or not to request that a partnership reduce the inside basis of its depreciable property (or depreciable real
property) with respect to the taxpayer,
and the partnership may grant or withhold such consent, in its sole discretion.
A request by the taxpayer must be made
before the due date (including extensions) for filing the taxpayer’s Federal
income tax return for the taxable year in
which the taxpayer has COD income
that is excluded from gross income
under section 108(a).
(B) Request for consent required. A
taxpayer must request a partnership’s
consent to reduce inside basis if the
taxpayer owns (directly or indirectly) a
greater than 50 percent interest in the
capital and profits of the partnership, or
if reductions to the basis of the taxpayer’s depreciable property (or depreciable
real property) are being made with respect to the taxpayer’s distributive share
of COD income of the partnership.
(C) Granting of request required. A
partnership must consent to reduce its
partners’ shares of inside basis if consent is requested by partners owning
(directly or indirectly) an aggregate of
more than 50 percent of the capital and
profits interests of the partnership. For
example, if there is a cancellation of
partnership indebtedness securing real
property used in a partnership’s trade or
business, and if partners owning (in the
aggregate) 60 percent of the capital and
profits interests of the partnership elect
to exclude the COD income under section 108(c), the partnership must make
the appropriate reductions in those partners’ shares of inside basis.
(iii) Partnership consent statement—
(A) Partnership requirement. A consenting partnership must include with the
Form 1065, U.S. Partnership Return of
Income, for the taxable year of the
partnership that ends with or within the
taxable year the taxpayer excludes COD
income from gross income under section
108(a), and must provide to the taxpayer
on or before the date the Form 1065 is
filed, a statement that—

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I.R.B.

(1) Contains the name, address, and
taxpayer identification number of the
partnership; and
(2) States the amount of the reduction
of the partner’s proportionate interest in
the adjusted bases of the partnership’s
depreciable property or depreciable real
property, whichever is applicable.
(B) Taxpayer’s requirement. Statements
described
in
paragraph
(f)(2)(iii)(A) of this section must be
attached to a taxpayer’s timely filed
(including extensions) Federal income
tax return for the taxable year in which
the taxpayer has COD income that is
excluded from gross income under section 108(a).
(iv) Partner’s share of partnership’s
adjusted basis. [Reserved.]
(3) Partnership basis reduction. The
rules of this section (including this paragraph (f)), apply in determining the
properties to which the partnership’s
basis reductions must be made.
(g) Special allocation rule for cases
to which section 1398 applies. If a
bankruptcy estate and a taxpayer to
whom section 1398 applies (concerning
only individuals under Chapter 7 or 11
of title 11 of the United States Code)
hold property subject to basis reduction
under section 108(b)(2)(E) or (5) on the
first day of the taxable year following

the taxable year of discharge, the bankruptcy estate must reduce all of the
adjusted bases of its property before the
taxpayer is required to reduce any adjusted bases of property.
(h) Effective date. This section is effective for discharges of indebtedness
occurring on or after the date these
regulations are published as final regulations in the Federal Register.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 12. The authority citation for
part 301 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
§ 301.9100–13T [Removed]
Par. 13. Section 301.9100–13T is removed.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
January 6, 1997, 8:45 a.m., and published in the
issue of the Federal Register for January 7, 1997,
62 F.R. 955)

New Reporting for Medical Savings
Accounts, Long-Term Care
Accounts, and SIMPLE Retirement
Accounts

Announcement 97–10
The Health Insurance Portability and
Accountability Act of 1996 added section 220 to the Internal Revenue Code
to permit eligible individuals to establish
medical savings accounts (MSAs). The
Act also added Code section 6050Q,
which requires any person paying longterm care or accelerated death benefits
to report the aggregate benefits paid and
certain other information. In addition,
the Small Business Job Protection Act
of 1996 added section 408(p), which
allows individuals to establish Savings
Incentive Match Plans for Employees of
Small Employers (SIMPLE) retirement
accounts.
To carry out the MSA provisions, the
IRS developed three new forms: Form
1099–MSA, Distributions From Medical
Savings Accounts, for trustees to report
distributions from an MSA; Form 5498–
MSA, Medical Savings Account Information, for trustees to report contributions to an MSA; and Form 8851,
Summary of Medical Savings Accounts,
for trustees to report the number of
MSAs established.
For insurance companies and other
payers to report the aggregate benefits
paid and other information required under section 6050Q, the IRS developed
Form 1099–LTC, Long-Term Care and
Accelerated Death Benefits.

The filing requirements for trustees and other payers are as follows:
If the Form Is
Then File With or Furnish to
By This Date
1099–MSA (Copy A)
1099–MSA (Copy B)
Form 5498–MSA (Copy A)
Form 5498–MSA (Copy B)
Form 8851

IRS
Recipient
IRS
Participant
IRS

Form 8851

IRS

Form 1099–LTC (Copy A)
Form 1099–LTC (Copy B)
Form 1099–LTC (Copy C)

IRS
Policyholder
Insured

Copy A of Forms 1099–MSA, 5498–
MSA, and 1099–LTC are provided for
your information. Form 8851 is also
included. Printed forms are expected to
be available in late February.
No new forms are required for trustees to report distributions from and

1997–10

I.R.B.

March 2, 1998
February 2, 1998
June 1, 1998
June 1, 1998
June 2, 1997 (For MSAs established from Jan. 1—Apr.
30, 1997)
August 1, 1997 (For MSAs established from May
1—June 30, 1997)
March 2, 1998
February 2, 1998
February 2, 1998

contributions to a SIMPLE. Trustees
must report distributions from a
SIMPLE on Form 1099–R and report
contributions to a SIMPLE on Form
5498. The filing dates for Form 1099–R
and Form 5498 will remain the same as
in prior years. The 1997 versions of

64

these forms have been revised for reporting SIMPLEs. Printed copies of
Forms 1099–R and 5498 can be obtained by calling 1–800–829–3676.
All the forms discussed above can be
downloaded from the IRS’s Internet
Web Site at http://www.irs.ustreas.gov.

65

1997–10

I.R.B.

1997–10

I.R.B.

66

Foundations Status of Certain
Organizations
Announcement 97–18
The following organizations have
failed to establish or have been unable
to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing does not indicate that
the organizations have lost their status
as organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities. The following organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
Agape Community Outreach Inc.,
Beaver Springs, PA
Aim for Success, Inc., Mamaroneck, NY
Alaska National Guard Historical
Holding-Museum Fund Inc., Ft.
Richardson, AK
Allentown Liberty Bell Rotary Club
Foundation, Quakertown, PA
American Dental Group Incorporated,
Washington, DC
American Institute of Med. & Public
Health of Central & Eastern Europe,
Inc., New York, NY

Anacostia Growth Fund Inc.,
Washington, DC
Asanteman-Kuo of Washington DC
Metropolitan Area, Silver Spring, MD
Assembly of Sons Ministry, Laurel, MD
Banquete Del Million Y Del Amor,
Arlington, VA
Barnabas Family Ministries Society,
Canada
Birdsboro Library Inc., Birdsboro, PA
Catch Foundation A Washington
Non-profit Corporation, Seattle, WA
Catholic Leadership Institute, Bala
Cynwyd, PA
Center for Middle East Research Inc.,
Washington, DC
Community Services Housing Inc.,
Charlottesville, VA
Consumers Loan Advocates Inc., Lake
Bluff, MN
Cop Care, Inc., Seaford, NY
Council for Safe Families, Inc., New
York, NY
DDD, Inc., Brooklyn, NY
Election Aid Incorporated, Camden, NJ
Essex Horse Trials Inc., Gladstone, NJ
First Stage Theatre, Lititz, PA
Grantsburg Hockey Association,
Grantsburg, WI
Greater Baltimore Community Housing
Resource Board Inc., Baltimore, MD
Hobbit Hollow Inc., Centreville, VA
Humane Society of Calvert County,
Prince Frederick, MD
IFF Wildlife Habitat Club, Union Beach,
NJ
Institute for Catholic Liberal Education
Inc., Falls Church, VA

67

Institute of International Trade and
Development, Washington, DC
Kentucky School Reform Corporation,
Philadelphia, PA
Kids of the Kingdom, Inc., Scranton, PA
Kinder Castle Learning Center Inc.,
Dodgeville, WI
Land Council Inc., Washington, DC
Learning Curve Foundation,
Sergeantsville, NJ
Margaret Brent Special Center PSSO
Association Inc., New Carrollton, MD
Memorial to the Ancestors Project Map
Inc., Newark, NJ
Mercer County Tenant Action Inc.,
Mercer, PA
Mid State Health Advisory Corp.,
Lawrenceville, NJ
Miracle Man Ranch, Virginia Beach, VA
Mission of Hope and Center for
Learning Inc., Philadelphia, PA
Missions in Action Inc., Lynchburg, VA
Monmouth County Association of
School Administrators, Oceanport, NJ
National Association of Purchasing
Management, Salisbury, MD
Native American Economic
Development Advocacy, Baltimore,
MD
New Jersey Association for Middle
Level, Lebanon Hill, NJ
New Visions Inc., Laurel, MD
Northeast Chamber Orchestra,
Philadelphia, PA
North Philadelphia Community Help,
Philadelphia, PA

1997–10

I.R.B.

North Philadelphia East Local
Development Corporation,
Philadelphia, PA
Offender Aid and Restoration of Prince
William Manassas, Manassas, VA
Older But Wiser, Inc., Portland, OR
Options in Supported Living Inc.,
Rockville, MD
Paige Anne Foundation, Glenn Dale,
MD
Palmer Revival Ministries Inc.,
Lewistown, PA
Panther Junior Olympic Volleyball Club,
Baltimore, MD
Pennsylvania Human Performance
Foundation, Bethlehem, PA
Performing Arts League of Philadelphia,
Philadelphia, PA
Perry School Community Services
Center Inc., Washington, DC
Piscataway Township Education
Foundation, Piscataway, NJ
Power of No Association, Merrifield, VA
Prince Georges County Housing
Development Corp., Upper Marlboro,
MD
Princeton Downtown Teen Center NJ
Non-Profit Corp., Princeton, NJ
Professional Bicultural Development
Associates Inc., South Orange, NJ
Profound Paralysis Foundation,
Lovettsville, VA
Project Teach, Penndel, PA
Queen Annes Advocates for Youth Inc.,
Crumpton, MD
Radford Band Boosters Inc., Radford,
VA
Rainbows Way Inn, Inc., Mesa, AZ
Reads, Inc., Philadelphia, PA
Recycling Association of Central
Virginia, Richmond, VA
Renegade Productions Inc., Newtown,
PA
R Group Inc., Wilmington, DE
Rocking, Inc., Media, PA
Self Improvement Life Style Center,
Philadelphia, PA
September Place, Chesapeake, VA
Seventh Councilmatic District
Constituent Fund, Upper Marlboro,
MD
Ships at Sea Inc., Virginia Beach, VA
SNAP Special Needs Alliance of Parents
Inc., Pennsburgh, PA
South Lakes High School Band Boosters
Association, Reston, VA
Sports Medicine Foundation Inc., York,
PA
STARS Inc., Hagerstown, MD
Steel Recycling Foundation, Pittsburgh,
PA
St. James Preparatory School Inc.,
Newark, NJ

1997–10

I.R.B.

Stonebridge Educational Foundation,
Chesapeake, VA
Storks Nest Fund, Washington, DC
Support Forum Inc., Middletown, NJ
Threshold Housing Development Inc.,
Uniontown, PA
Tidewater Ministers Community
Development Inc., Norfolk, VA
Union County Regional Education
Foundation Inc., Clark, NJ
United Way of Carbon County,
Weatherly, PA
Upper Darby Rotary Foundation, Drexel
Hill, PA
Virginia Beach Chapter National
Audubon Society Inc., Virginia
Beach, VA
Washington Community Gymnastics
Center, Washington, DC
Wildcats Wrestling Association Inc.,
Carlstadt, NJ
Womens Way USA, Philadelphia, PA
Woodbridge Academy of Music Inc.,
Metuchen, NJ
World Affairs Council of Greater Valley
Forge Inc., Southwestern, PA
WRC North Fork Heights, Brookville,
PA
York Rotary Charitable Endowment
Fund, York, PA
You Owe Yourself the Chance,
Forestville, MD
Youth and Family Services of Southern
Maryland Inc., Charlotte Hall, MD
If an organization listed above submits information that warrants the renewal of its classification as a public
charity or as a private operating foundation, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.
Fact-of-Filing
Announcement Number 97–19
The Internal Revenue Service (IRS)
will continue, through December 31,
1997, its program to respond to requests
for fact-of-filing information from firms
in the tax professional community with
respect to their employees and associates. The tax professional community
consists of all firms who prepare tax
returns, offer tax advice, or provide tax

68

service. This includes practitioners governed by Treasury Department Circular
230.
It is limited to individual income tax
returns (Form 1040 series) for tax years
1994 through 1996. A YES or NO
answer will be provided for each request. The Service will answer requests
for tax years 1994 and 1995 within 45
days of receipt of the request. Processing of requests for tax year 1996 will
not be accomplished before November
14, 1997.
The fact-of-filing confirmation may
be requested by the individual taxpayer
or by the employer. No consent form is
needed for confirmations mailed to the
taxpayer’s address listed on the IRS
master file. However, if the request
directs the information to a third party
(someone other than the IRS or the
individual taxpayer), the IRS must receive a consent form for each taxpayer
on which fact-of-filing information is
requested.
All requests for fact-of-filing information or revocation of consent for participants in this program will be processed
at the Kansas City Service Center. The
requests should be mailed to:
DISCLOSURE OFFICE
STOP 7000, ANNEX 5
POST OFFICE BOX 24551
KANSAS CITY, MISSOURI 64131
Unless the request is made by the
individual taxpayer, with instructions to
mail the confirmation to the address
listed on the IRS master file, the requests for fact-of-filing information on
individual taxpayers must include completed consent forms. The Service recommends the use of the FORM 8821,
TAX INFORMATION AUTHORIZATION and that the statement ‘‘Fact of
Filing for Individual Income Tax Returns (Form 1040 Series)’’ be included
in the column for Type of Tax. However, if this form is not used, the
substitute form must contain the following at a minimum:
Taxpayer(s) Name and Social
Security Number
Taxpayer Address(es) (Street, City,
State, and ZIP)
Appointee: (TO WHOM
DISCLOSURE IS TO BE MADE)
Name(s)
Address(es)
Return Information to be disclosed:
(FACT-OF-FILING FOR
INDIVIDUAL INCOME TAX
RETURN(S) (FORM 1040
SERIES)

Tax Years 1994, 1995, and
1996
Signature of Taxpayer(s)
Date of Taxpayer(s)’ Signature
The consent forms must be received
by the IRS Dislosure Office in the
Kansas City Service Center within 60
days of the date of the signature(s) on
the consent form. The consent forms for
this program may only authorize release
of fact-of-filing data for tax years 1994,
1995, and 1996.
The Service will process revocations
of consent filed by the individual tax-

payer. Revocation of consent must be
filed at the Kansas City Service Center.
The revocation will be effective upon
receipt by that office.
The IRS will confirm fact-of-filing or
no record of filing with the individual
taxpayer or the appointee listed on the
taxpayer(s)’ consent form. Unless the
individual taxpayer asks for written confirmation, individual written confirmations will be by a list to the employer
(appointee listed on the consent form)
for taxpayers with a record of filing.

69

The individual taxpayer will always receive written notification when the Service is informing the appointee that the
IRS has no record of filing for the
year(s) requested.
The name(s) of non-filers identified
through a request for fact-of-filing information will be forwarded to the IRS
Compliance function servicing the individual geographical area. This function
will determine compliance actions to be
taken by the Service.

1997–10

I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as ‘‘rulings’’)
that have an effect on previous rulings
use the following defined terms to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior position
is being extended to apply to a variation
of the fact situation set forth therein.
Thus, if an earlier ruling held that a
principle applied to A, and the new
ruling holds that the same principle also
applies to B, the earlier ruling is amplified. (Compare with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confusion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling

is modified because it corrects a published position. (Compare with amplified
and clarified, above).
Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly
used in a ruling that lists previously
published rulings that are obsoleted because of changes in law or regulations.
A ruling may also be obsoleted because
the substance has been included in regulations subsequently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing more
than restate the substance and situation
of a previously published ruling (or
rulings). Thus, the term is used to
republish under the 1986 Code and
regulations the same position published
under the 1939 Code and regulations.
The term is also used when it is desired
to republish in a single ruling a series of
situations, names, etc., that were previously published over a period of time in
separate rulings. If the new ruling does

more than restate the substance of a
prior ruling, a combination of terms is
used. For example, modified and superseded describes a situation where the
substance of a previously published ruling is being changed in part and is
continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names
of countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be
published that includes the list in the
original ruling and the additions, and
supersedes all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

Abbreviations

E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.

PHC—Personal Holding Company.
PO—Possession of the U.S.

FC—Foreign Country.
FICA—Federal Insurance Contribution Act.

Pub. L.—Public Law.
REIT—Real Estate Investment Trust.

FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.

Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.

M—Minor.

U.S.C.—United States Code.

Nonacq.—Nonacquiescence.

X—Corporation.

O—Organization.

Y—Corporation.

P—Parent Corporation.

Z—Corporation.

The following abbreviations in current use and
formerly used will appear in material published in
the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.

70

PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.

Numerical Finding List1

Revenue Procedures—Continued

Bulletin 1997–1 through 1997–9
Announcements:
97–1, 1997–2 I.R.B. 63
97–2, 1997–2 I.R.B. 63
97–3, 1997–2 I.R.B. 63
97–4, 1997–3 I.R.B. 14
97–5, 1997–3 I.R.B. 15
97–6, 1997–4 I.R.B. 11
97–7, 1997–4 I.R.B. 12
97–8, 1997–4 I.R.B. 12
97–9, 1997–5 I.R.B. 27
97–11, 1997–6 I.R.B. 19
97–12, 1997–7 I.R.B. 55
97–13, 1997–8 I.R.B. 38
97–14, 1997–8 I.R.B. 38
97–15, 1997–9 I.R.B. 23
97–16, 1997–9 I.R.B. 23
97–17, 1997–9 I.R.B. 23

97–11,
97–12,
97–13,
97–14,
97–15,
97–16,
97–16,

1997–6
1997–4
1997–5
1997–5
1997–5
1997–5
1997–9

I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.

Revenue Rulings:
97–1,
97–2,
97–3,
97–4,
97–5,
97–6,
97–7,
97–8,
97–9,

1997–2
1997–2
1997–2
1997–3
1997–4
1997–4
1997–5
1997–7
1997–9

I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.

1997–9, I.R.B. 17

97–1, 1997–2 I.R.B. 22
97–2, 1997–2 I.R.B. 22
97–3, 1997–1 I.R.B. 8
97–4, 1997–2 I.R.B. 24
97–5, 1997–2 I.R.B. 25
97–6, 1997–2 I.R.B. 26
97–7, 1997–1 I.R.B. 8
97–8, 1997–4 I.R.B. 7
97–9, 1997–2 I.R.B. 35
97–10, 1997–2 I.R.B. 41
97–11, 1997–2 I.R.B. 50
97–12, 1997–3 I.R.B. 11
97–13, 1997–6 I.R.B. 13
97–14, 1997–8 I.R.B. 23
97–15, 1997–8 I.R.B. 23
97–16, 1997–9 I.R.B. 15

Treasury Decisions:

Proposed Regulations:
1997–7
1997–8
1997–8
1997–6
1997–3
1997–7
1997–6
1997–4
1997–9
1997–8
1997–6
1997–8
1997–8
1997–7
1997–7
1997–9

10
7
5
6
5
4
14
4
4

Social Security Domestic Coverage Threshold

Notices:

REG–209040–88,
REG–209494–90,
REG–209839–96,
REG–209672–93,
REG–209762–95,
REG–209817–96,
REG–209828–96,
REG–209834–96,
REG–242996–96,
REG–246018–96,
REG–247678–96,
REG–247862–96,
REG–248770–96,
REG–249819–96,
REG–252231–96,
REG–252233–96,

13
7
18
20
21
25
15

I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.

34
24
26
15
12
41
15
9
18
30
17
32
33
50
52
19

8688,
8689,
8690,
8691,
8692,
8693,
8694,
8695,
8696,
8697,
8698,
8699,
8700,
8701,
8702,
8703,
8704,
8705,
8706,
8707,
8709,

1997–3
1997–3
1997–5
1997–5
1997–3
1997–6
1997–6
1997–4
1997–6
1997–2
1997–7
1997–6
1997–7
1997–7
1997–8
1997–8
1997–8
1997–8
1997–9
1997–7
1997–9

I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.
I.R.B.

7
9
5
16
4
9
11
5
4
11
29
4
5
23
4
18
12
16
11
17
5

Revenue Procedures:
97–1, 1997–1 I.R.B. 11
97–2, 1997–1 I.R.B. 64
97–3, 1997–1 I.R.B. 84
97–4, 1997–1 I.R.B. 96
97–5, 1997–1 I.R.B. 132
97–6, 1997–1 I.R.B. 153
97–7, 1997–1 I.R.B. 185
97–8, 1997–1 I.R.B. 187
97–9, 1997–2 I.R.B. 56
97–10, 1997–2 I.R.B. 59

1

A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1996–27
through 1996–53 will be found in Internal
Revenue Bulletin 1997–1, dated January 6, 1997.

71

Finding List of Current Action on
Previously Published Items1
Bulletin 1997–1 through 1997–9
*Denotes entry since last publication
Revenue Procedures:
66–3
Modified by
97–11, 1997–6 I.R.B. 13
87–21
Modified by
97–11, 1997–6 I.R.B. 13
92–20
Modified by
97–1, 1997–1 I.R.B. 11
92–20
Modified by
97–10, 1997–2 I.R.B. 59
92–90
Superseded by
97–1, 1997–1 I.R.B. 11
94–52
Revoked by
97–11, 1997–6 I.R.B. 13

Revenue Rulings—Continued
92–19
Supplemented in part by
97–2, 1997–2 I.R.B. 7
96–12
Superseded by
97–3, 1997–1 I.R.B. 84
96–13
Modified by
97–1, 1997–1 I.R.B. 11
96–22
Superseded by
97–3, 1997–1 I.R.B. 84
96–34
Superseded by
97–3, 1997–1 I.R.B. 84
96–39
Superseded by
97–3, 1997–1 I.R.B. 84
96–43
Superseded by
97–3, 1997–1 I.R.B. 84
96–56
Superseded by
97–3, 1997–1 I.R.B. 84

96–1
Superseded by
97–1, 1997–1 I.R.B. 11
96–2
Superseded by
97–2, 1997–1 I.R.B. 64
96–3
Superseded by
97–3, 1997–1 I.R.B. 84
96–4
Superseded by
97–4, 1997–1 I.R.B. 96
96–5
Superseded by
97–5, 1997–1 I.R.B. 132
96–6
Superseded by
97–6, 1997–1 I.R.B. 153
96–7
Superseded by
97–7, 1997–1 I.R.B. 185
96–8
Superseded by
97–8, 1997–1 I.R.B. 187
Revenue Rulings:
70–480
Revoked by
97–6, 1997–4 I.R.B. 4
72–527
Obsoleted by
8704, 1997–8 I.R.B. 12
74–59
Revoked by
8708, 1997–10 I.R.B. 14
1

A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–27 through 1996–53 will be found in Internal Revenue Bulletin 1997–1, dated January 6,
1997.

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