Internal Revenue Bulletin 1997-29 (PDF rendition): IRS Announcements

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Internal Revenue
bulletinbulletin
Bulletin No. 1997–29
July 21, 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
T.D. 8722, page 4.
REG-104893–97, page 13.
Temporary and proposed regulations under section 894 of
the Code relate to eligibility for benefits under income tax
treaties for payments to entities. The regulations set forth
rules for determining whether U.S. source payments made
to entities are eligible for treaty-reduced tax rates. A public
hearing on the proposed regulations will be held on Septem-
ber 24, 1997.
EMPLOYEE PLANS
Announcement 97–70, page 14.
This announcement describes certain transition relief to the
minimum distribution rules of section 401(a)(9)(C) of the
Code as amended by section 1404 of the Small Business
Job Protection Act of 1996.
EXEMPT ORGANIZATIONS
Announcement 97–72, page 15.
A list is provided of organizations that no longer qualify as
organizations to which contributions are deductible under
section 170 of the Code.
ADMINISTRATIVE
Notice 97–42, page 12.
This notice modifies the guidance set forth in Notice 97–18,
1997–10 I.R.B. 35, regarding the time for reporting certain
transfers under section 1491 of the Code.
Announcement 97–61, page 13.
This announcement publicizes a Competent Authority agree-
ment executed between the United States and France to resolve
a double taxation issue. The announcement states the double
taxation relief measures as provided under the agreement.
Announcement 97–71, page 15.
An updated edition of Publication 1542, Per Diem Rates,
(revised May 1997), is now available.
Finding Lists begin on page 19.
Announcement of Disbarments and Suspensions begins on page 16.

2
July 21, 19971997-29␣ ␣ I.R.B.
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 prod-
ucts and services; and perform in a manner warranting the
highest degree of public confidence in our integrity, effi-
ciency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to ad-
minister 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 en-
acted 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.
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 as-
certain and apply the true meaning of the statute.
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by ex-
amining officers when they have merit, never arbi-
trarily or for trading purposes. At the same time, t h e
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.
Administration should be both reasonable and vigor-
ous. It should be conducted with as little
delay as possible and with great courtesy and con-
siderateness. It should never try to overreach, and
should be reasonable within the bounds of law and
sound administration. It should, however, be vigor-
ous in requiring compliance with law and it should be
relentless in its attack on unreal tax devices and
fraud.

3
1997-29␣ ␣ I.R.B.July 21, 1997
The Internal Revenue Bulletin is the authoritative instru-
ment of the Commissioner of Internal Revenue for an-
nouncing official rulings and procedures of the Internal
Revenue Service and for publishing Treasury Decisions,
Executive Orders, Tax Conventions, legislation, court deci-
sions, 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 Cu-
mulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform appli-
cation 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 un-
less otherwise indicated. Procedures relating solely to mat-
ters of internal management are not published; however,
statements of internal practices and procedures that affect
the rights and duties of taxpayers are published.
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 fied of-
fices, identifying details and information of a confidential
nature are deleted to prevent unwarranted invasions of
privacy and to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department Regula-
tions, 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, court decisions, rul-
ings, 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 provi-
sions of the Internal Revenue Code of 1986.
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 Sub-
parts. Also included in this part are Bank Secrecy Act Ad-
ministrative Rulings. Bank Secrecy Act Administrative Rul-
ings are issued by the Department of the Treasury’s Office
of the Assistant Secretary (Enforcement).
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.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
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.
Introduction

4
July 21, 19971997-29␣ ␣ I.R.B.
Section 894.—Income Affected
by Treaty
26 CFR 1.894–1T: Income affected by treaty (temporary).
T.D. 8722
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Regarding Claims for
Certain Income Tax Convention
Benefits
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations relating to eligibil-
ity for benefits under income tax treaties
for payments to entities. The regulations
set forth rules for determining whether
U.S. source payments made to entities, in-
cluding entities that are fiscally transpar-
ent in the United States and/or the appli-
cable treaty jurisdiction, are eligible for
treaty-reduced tax rates. The regulations
affect the determination of tax treaty ben-
efits with respect to U.S. source income of
foreign persons. The text of these tempo-
rary regulations also serves as the text of
REG–104893–97.
DATES: These regulations are effective
July 2, 1997.
These regulations apply to amounts
paid on or after January 1, 1998.
FOR FURTHER INFORMATION CON-
TACT: Elizabeth Karzon, (202) 622–
3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains temporary
regulations relating to the Income Tax
Regulations (CFR part 1) under section
894 of the Internal Revenue Code (Code).
Explanation of Provisions
These regulations prescribe rules for de-
termining whether U.S. source income
paid to an entity is eligible for a reduced
rate of U.S. tax under an income tax treaty.
The regulations are designed principally to
clarify the availability of treaty-reduced tax
rates for a payment of U.S. source income
to an entity that is treated as fiscally trans-
parent, including a hybrid entity (i.e., an
entity that is treated as fiscally transparent
in either (but not both) the United States or
the jurisdiction of residence of the person
that seeks to claim treaty benefits).
The regulations address only the treat-
ment of U.S. source income that is not ef-
fectively connected with the conduct of a
U.S. trade or business. Treasury and the
IRS may issue additional regulations ad-
dressing the availability of other tax treaty
benefits, such as the application of busi-
ness profits provisions, with respect to in-
come of fiscally transparent entities.
Under the regulations, payments of
U.S. source income to an entity that is
treated as fiscally transparent for U.S. fed-
eral income tax purposes are eligible for
reduced tax rates under a tax treaty be-
tween the United States and another juris-
diction (the applicable treaty jurisdiction)
if the entity itself is a resident of the ap-
plicable treaty jurisdiction, or if, and only
to the extent that, the interest holders of
the entity are residents of the applicable
treaty jurisdiction and the entity is treated
as fiscally transparent for purposes of the
tax laws of such jurisdiction.
Accordingly, payments of U.S. source
income to an entity that is treated as fis-
cally transparent for U.S. federal income
tax purposes but as non-fiscally transpar-
ent for purposes of the tax laws of the ap-
plicable treaty jurisdiction are not eligible
for a treaty-reduced tax rate under the rel-
evant treaty unless the entity itself is a
resident of the applicable treaty jurisdic-
tion. Conversely, under the regulations, a
payment of U.S. source income to an en-
tity that is treated as non-fiscally transpar-
ent for U.S. federal income tax purposes
(other than a domestic corporation) is eli-
gible for a reduced tax rate under the rel-
evant treaty if the entity itself is a resident
of the applicable treaty jurisdiction or if,
and only to the extent that, interest hold-
ers of the entity are residents of the appli-
cable treaty jurisdiction and the entity is
treated as fiscally transparent for purposes
of the tax laws of such jurisdiction.
Under these temporary regulations, an
entity is treated as fiscally transparent by
a jurisdiction only if the jurisdiction re-
quires interest holders in the entity to take
into account separately their respective
shares of the various items of income of
the entity on a current basis and to deter-
mine the character of such items as if such
items were realized directly from the
source from which realized by the entity
(for purposes of the tax laws of the juris-
diction). Accordingly, entities treated as
fiscally transparent by a jurisdiction are
entities subject in that jurisdiction to rules
analogous to the U.S. rules applicable to
entities that are treated as partnerships for
U.S. federal income tax purposes.
These regulations are consistent with
U.S. tax treaty obligations and basic tax
treaty principles. The regulations as ap-
plied to hybrid entities are based on the
principles discussed below. Treasury and
the Service will continue to coordinate
these issues with U.S. tax treaty partners
in order to resolve any difficulty arising
from the application of the principles set
forth in these regulations.
Problems Arising From Dual Classification
The United States generally applies its
tax rules to determine the classification of
both domestic and foreign entities. When
U.S. and foreign laws differ on classifica-
tion principles, a hybrid entity may re-
sult. If income is paid to a hybrid entity,
the entity may be considered as deriving
the income under U.S. tax principles (e.g.,
as an association taxable as a corporation
under U.S. tax principles), but its interest
holders, rather than the entity, may be
considered to derive the income under
foreign tax principles (e.g., as an entity
equivalent to a U.S. partnership). This
dual classification may give rise to inap-
propriate and unintended results under tax
treaties, such as double exemptions or
double taxation, unless the tax treaties are
interpreted so as to take into account the
conflict of laws.
To avoid inappropriate and unintended
tax treaty results with respect to payments
to hybrid entities, these regulations rely on
the basic principle that income tax treaties
are designed to relieve double taxation or
excessive taxation. This objective is gener-
ally achieved with provisions in treaties
that limit the tax that a country may im-
pose on income arising from sources
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

5
1997-29␣ ␣ I.R.B.July 21, 1997
within its borders to the extent that the in-
come is derived by a resident of a jurisdic-
tion with which the source country has an
income tax treaty in effect (an applicable
treaty jurisdiction). However, the agree-
ment by the source country to cede part or
all of its taxation rights to the treaty partner
is predicated on a mutual understanding
that the treaty partner is asserting tax juris-
diction over the income. Stated simply, tax
treaties contemplate that income relieved
from taxation in the source country will be
subject to tax in the treaty country. This
principle is central to the interpretation of
treaty provisions in determining the extent
to which payments received by a hybrid
entity are eligible for benefits under tax
treaties. Some treaties have specific rules
reflecting this principle that are helpful in
deciding how the treaties should be applied
in such cases. However, the lack of spe-
cific rules in a treaty does not suggest that
this principle does not apply under that
treaty.
In order to implement this principle,
virtually all U.S. income tax treaties limit
the eligibility for treaty benefits on the
condition that the person deriving the in-
come must be a resident of the applicable
treaty country. Typical of this condition,
for example, is Article 12 of the U.S.–
German treaty, which provides that “Roy-
alties derived and beneficially owned by a
resident of a Contracting State shall be
taxable only in that State.” Sometimes,
the term paid to is used instead of the
term derived by. However, those terms
are used interchangeably and a different
choice of words does not indicate that a
different result is intended. Generally, a
resident is defined as a person who is li-
able to tax in the treaty country as a resi-
dent of that country. See, for example,
Article 4.1 of the U.S.–German tax con-
vention, which provides that “the term
‘resident of a Contracting State’ means
any person who, under the laws of that
State, is liable to tax therein by reason of
his domicile, residence, place of manage-
ment, place of incorporation, or any other
criterion of a similar nature ....”
Limiting eligibility for treaty benefits
to residents provides assurance to the
source country that, when it limits its
taxation rights on income arising from
within its borders, it does so with the ex-
pectation that the income derived by a
resident of the treaty country is subject to
tax in the residence country.
Application of Principle to Hybrid Entities
Generally
Based on the typical residence provi-
sions of U.S. tax treaties, if income is paid
to an entity that is treated as fiscally trans-
parent in the treaty country in which it is
organized, the entity itself is not eligible
for benefits under the applicable treaty be-
cause it is not a resident of the treaty
country (i.e., by virtue of not being liable
to tax in that country). Whether the entity
is a resident of the treaty country is deter-
mined under the laws of that country and
not under the laws of the source country.
This observation is important if the entity
is a hybrid (i.e., an entity that is treated as
fiscally transparent in one jurisdiction and
treated as non-fiscally transparent in an-
other jurisdiction). If the entity, treated as
fiscally transparent in the treaty country,
is treated as a taxable entity in the source
country, the entity is considered by the
source country as being liable to tax.
However, this determination under the
source country tax laws does not render
the entity a resident of the treaty country.
In order for the entity to be a resident of
the treaty country, it must be liable to tax
in that country, as determined under the
laws of that country.
Where the entity is not eligible for
treaty benefits (for lack of residence in the
treaty country), there is a question as to
whether the owners of the entity may be
eligible for benefits under an applicable
income tax treaty. As stated above, the
guiding principle is that income is eligible
for a rate reduction or an exemption in the
source country if “derived by” or “paid
to” a resident of that country. Where the
entity is treated as fiscally transparent, the
question is whether the income can be
considered “derived by” or “paid to” the
owner of the entity.
If the entity is treated as fiscally trans-
parent by all tax jurisdictions involved
(i.e., the source country, the country
where the entity is organized, and the
country where the owners are resident), it
is well established under U.S. income tax
treaties that the entity is ignored and a
look-through approach is intended, with
the result that the entity’s owners are
treated as the persons who derive the in-
come. This result is consistent with the
general principle that eligibility for treaty
benefits is conditioned upon the income
being subject to tax in the treaty country
as the income of a resident of that coun-
try. In fact, some treaties clarify this
point. For example, Article 4.1(b) of the
U.S.–German income tax convention pro-
vides, like several other U.S. tax conven-
tions, that “in the case of income derived
or paid by a partnership, estate, or trust,
this term [resident] applies only to the ex-
tent that the income derived by such part-
nership, estate, or trust is subject to tax in
that State [the State other than the source
State] as the income of a resident, either
in its hands or in the hands of its partners
or beneficiaries.” Further, even where no
provisions are included, the Technical Ex-
planation sometimes explains that the
look-through rule applies without the
need for a specific provision. See the
U.S. Treasury Department’s Technical Ex-
planation of U.S.–Japan Income Tax Con-
vention signed March 8, 1971, Article 3
(Fiscal Domicile).
Application of Principle to Reverse Hy-
brid Entity
If an entity is a “reverse” hybrid entity,
meaning that it is treated as a taxable en-
tity under the tax laws of the source coun-
try but as a fiscally transparent entity in
the applicable treaty country, a conflict
arises because, under the source country’s
tax laws, the entity’s owners are not
treated as deriving the income. Yet, under
the tax laws of the jurisdiction where the
entity’s owners are resident, the owners
are treated as deriving the income paid to
the entity. Thus, the question is whether
the source country’s laws or the laws of
each owner’s jurisdiction of residence
should govern the determination of who is
the person deriving the income for tax
treaty purposes. Making that determina-
tion under the tax laws of the applicable
treaty jurisdiction where the owners are
resident leads to results consistent with
the principle discussed earlier that the
source country cedes its tax jurisdiction to
the treaty partner based on the under-
standing that the treaty partner asserts tax
jurisdiction over the income by insuring
that it is taxable in the hands of a resident.
In this case, the entity’s owners are resi-
dent in a treaty country that treats them as
liable to tax on the items of income paid
to the entity. On the other hand, applying
the tax laws of the source country would
lead to results inconsistent with that prin-
ciple. In other words, tax benefits would

6
July 21, 19971997-29␣ ␣ I.R.B.
be denied under the applicable treaty (be-
cause, under the source country’s tax
laws, the entity’s owners are not treated as
deriving the income paid to the entity),
even though the income arising in the
source country is subject to tax in the
hands of persons who are resident in the
applicable treaty jurisdiction.
Application of Principle to Regular Hybrid
Entity
The same principle applies to a “regu-
lar” hybrid entity, i.e., an entity that is
treated as fiscally transparent in the
source country and as a non-fiscally trans-
parent entity in the applicable treaty juris-
diction. If the entity is organized in a
treaty jurisdiction, the applicable treaty
with that country generally would treat
the entity as a resident. Therefore, under
that treaty, the entity should be eligible for
treaty benefits as an entity deriving the in-
come as a resident of the treaty jurisdic-
tion. On the other hand, the entity’s own-
ers who are resident in that jurisdiction
(or in any other jurisdiction that treats the
entity as non-fiscally transparent) should
not be eligible for treaty benefits under
that treaty (or a treaty with the country
where they are resident that treats the en-
tity as non-fiscally transparent). This re-
sult should occur irrespective of the fact
that the source country considers that the
taxpayers with respect to the income are
the entity’s owners and not the entity (by
virtue of treating the entity as fiscally
transparent under its own tax laws).
Again, applying the laws of the applicable
treaty jurisdiction to determine whether
the entity or its owners are deriving the
income as residents of that country leads
to results consistent with the basic prin-
ciple that the source country cedes its tax
jurisdiction over income to the extent the
income is subject to tax in the hands of a
resident of the applicable treaty country.
Applying the tax laws of the source
country to determine the person deriving
the income for treaty purposes would not
only be inconsistent with the basic prin-
ciple that income should be treated as de-
rived by the person in the treaty country
who is liable to tax on that income, it also
potentially leads to tax avoidance under
tax conventions, including an inappropri-
ate double exemption. For example, if the
entity does not fall within the taxing juris-
diction of the applicable treaty jurisdic-
tion (e.g., because the entity is organized
in a third country or as a fiscally transpar-
ent entity in the source country), the in-
come could be eligible for a treaty-re-
duced tax rate in the source country and
yet not be subject to tax in the jurisdiction
where the owners are resident.
In such a case, the owners may eventu-
ally be taxed on the income when the en-
tity makes a distribution of the income de-
rived from the source country. The
Treasury and IRS believe that the poten-
tial for later taxation should not affect the
results under the treaty for two reasons:
first, the interposition of a hybrid entity
between the income and the owner of the
entity allows the taxation event in the
treaty jurisdiction to be deferred, perhaps
indefinitely; second, the income, when
distributed or deemed distributed (for ex-
ample, pursuant to anti-deferral rules of
the treaty jurisdiction), may be trans-
formed. In other words, the income de-
rived by the partner will be treated in the
partner’s residence country as a distribu-
tion (or deemed distribution) of profits
from the entity and not as the type of in-
come derived by the entity from the
source country. This disparity in treat-
ment may lead to a double exemption if,
for example, the dividend distribution is
exempt from tax in the country where the
entity’s owners reside due to double tax
relief or a corporate integration regime
that grants preferential tax treatment to
corporate distributions. Interpreting con-
ventions in a way that allows such a
double exemption would not be consistent
with the primary goal of treaties to relieve
double or excessive taxation. This is es-
pecially true where, as is the case here, an
alternative interpretation exists that would
produce results consistent with basic tax
convention principles.
Certain taxpayers have expressed the
view that this analysis of the treatment of
payments to hybrid entities under tax trea-
ties is inconsistent with the treatment of
so-called hybrid securities that are treated
differently under the tax laws of the
source country and the relevant treaty ju-
risdiction (e.g., an instrument that is
treated as a debt instrument in the source
country but as an equity interest in the rel-
evant treaty jurisdiction). In certain cases,
the use of hybrid securities can lead to
double exemptions, analogous to the
double exemptions possible with respect
to “regular” hybrid entities, based on the
availability of an exemption from tax in
the relevant treaty jurisdiction. Treasury
and the IRS recognize that hybrid securi-
ties can produce inappropriate and unin-
tended results under income tax treaties.
Although the residence concept of tax
treaties, which incorporates the basic
“subject to tax” principle, generally is sat-
isfied with respect to payments on a hy-
brid security for the reasons discussed
above, Treasury and the IRS are consider-
ing whether inappropriate and unintended
tax treaty consequences, including both
double exemptions and double taxation,
can arise with respect to hybrid securities
and, if so, what alternative avenues exist
for addressing them.
The hybrid entity analysis applies re-
gardless of where the entity is organized
and where the owners are resident. One
example involves an entity organized in
one country and owned by persons resid-
ing in a third country. If the third country
and the source country treat the entity as
fiscally transparent, both the source coun-
try and the third country can ignore the
entity for purposes of granting treaty ben-
efits under the third country’s convention
with the source country. In such a case,
the entity’s owners resident in the third
country are treated as deriving the income
received by the entity, under both the
source country tax laws and the tax laws
of the third country. In a three-country
situation, there may also be simultaneous
application of two treaties to the same
flow of income: the treaty with the coun-
try where the entity is organized, and the
treaty with the country where the entity’s
owners are resident.
The analysis applicable to fiscally
transparent entities does not depend on
whether the entity has multiple owners or
a single owner. Accordingly, the analysis
applies to a wholly-owned entity that is
disregarded for federal tax purposes as an
entity separate from its owner.
Application of Principle to Entity Orga-
nized in Source Country
The same analysis generally applies to
entities organized in the source country.
If both the source country and the treaty
jurisdiction where the entity’s owners are
resident treat the entity as fiscally trans-
parent, then the entity is ignored and the
eligibility for treaty benefits is tested at
the owners’ level. If the entity, however,
is treated as non-fiscally transparent in the

7
1997-29␣ ␣ I.R.B.July 21, 1997
treaty jurisdiction, then the income is not
treated by the treaty jurisdiction as being
derived by the owners. Therefore, the
owners are not eligible for benefits under
the treaty since they are not deriving the
income for purposes of the applicable
treaty.
Taxpayers may argue that treaty ben-
efits should be allowed to the owners re-
siding in the treaty country because,
viewed from the source country’s point of
view, the owners are deriving the income
from the source country and are resident
in the treaty country. While the provi-
sions in current treaties do not explicitly
provide for this situation, the situation
raises exactly the same issues as in the
cases discussed above. For this purpose,
it is immaterial that the entity is organized
in the country of the owner, in a third
country, or in the source country.
The analysis does not apply, however,
if the entity is a reverse hybrid organized
in the United States because, in such a
case, the United States treats the entity as
a corporate entity, liable to tax in the
United States at the entity level. The right
of the United States to tax a domestic cor-
poration is established under the “savings
clause” of all U.S. tax treaties which pre-
serves the right of the United States to tax
its residents and citizens under its domes-
tic law. Distributions from a domestic
corporation that is a reverse hybrid are
also subject to U.S. tax in the hands of the
foreign owners who are treated as share-
holders for U.S. tax purposes.
Beneficial Ownership
The principles relied upon in these tem-
porary regulations are consistent with the
proposed withholding tax regulations is-
sued under §§1.1441–1(c)(6)(ii)(B) and
1.1441–6(b)(4) regarding claims of treaty-
reduced withholding rates for U.S. source
payments through foreign entities. The
temporary regulations, however, do not
utilize the same terminology as the pro-
posed withholding tax regulations.
The proposed withholding tax regula-
tions condition eligibility for treaty-
based withholding rates for payments to
an entity on a determination of “benefi-
cial owner” status for the entity or the in-
terest holders of the entity pursuant to
the laws of the applicable treaty jurisdic-
tion. Accordingly, under the proposed
withholding tax regulations, the term
beneficial owner functions as a surrogate
for the principle that a person is eligible
for tax treaty benefits with respect to a
payment received by an entity only if the
person is a resident with respect to such
payment.
The term beneficial owner as used in
the proposed withholding tax regulations
may be confusing because this term has
other meaning in the tax treaty context.
Accordingly, the temporary regulations do
not utilize the term beneficial owner in
the same manner as the proposed with-
holding regulations. Rather, they condi-
tion eligibility for treaty-reduced tax rates
for income paid to an entity on a determi-
nation that the income is “treated as de-
rived by a resident” of the applicable
treaty jurisdiction. Like the determination
of beneficial owner status required in the
proposed withholding tax regulations, the
determination of whether a payment to an
entity is “treated as derived by a resident”
is determined under the principles in ef-
fect under the laws of the applicable
treaty jurisdiction. Treasury and the Ser-
vice intend to conform the final withhold-
ing tax regulations to the temporary regu-
lations.
The temporary regulations reflect the
fact that the concept of beneficial owner-
ship is an important separate condition for
claiming tax treaty benefits. In order to
address difficulties where the recipient
acts as a “nominee” or “conduit” for an-
other person or in other situations involv-
ing a disconnect between legal and eco-
nomic ownership, most income tax
treaties require that the resident be a ben-
eficial owner of the income. This require-
ment is entirely separate from the benefi-
cial ownership requirement with respect
to U.S. source payments to foreign enti-
ties reflected in the proposed withholding
tax regulations and the residence require-
ment with respect to U.S. source pay-
ments to all entities reflected in these tem-
porary regulations. As used in tax
treaties, the term beneficial owner is
meant to address “conduit”, “nominee”
and comparable situations in which the
person receives the payment in form (and
may even be taxed on that income in the
jurisdiction in which it resides), but is
nevertheless not treated as beneficially
owning the income for purposes of a par-
ticular treaty because, under the beneficial
owner rules of the source country, the in-
come is deemed to belong to another per-
son who is determined to have a stronger
economic nexus to the income. See, for
example, section 7701(l) and §§1.7701-
(l)–1(b) and 1.881–3. Thus, the tempo-
rary regulations utilize the term beneficial
owner in a manner consistent with the
treaty approach.
Mutual Agreement
Treasury and IRS intend that the prin-
ciples of the regulations should be applied
in a reciprocal manner by U.S. tax treaty
partners. For this reason, the regulations
include a special rule that provides that,
irrespective of any contrary rules in the
regulations, a reduced rate under a tax
treaty for a payment of U.S. source in-
come will not be available to the extent
that the applicable treaty partner does not
grant a reduced rate under the tax treaty to
a U.S. resident in similar circumstances,
as evidenced by a mutual agreement be-
tween the relevant competent authorities
or a public notice of the treaty partner.
Denial of benefits under this provision
would be effective on a prospective basis
only.
Effective Date
The temporary regulations apply on a
prospective basis only to amounts paid on
or after January 1, 1998. Withholding
agents should consider the effect of these
regulations on their withholding obliga-
tions, including the need to obtain a new
withholding certificate to confirm claims
of treaty benefits for payments made on
or after the effective date. Treasury and
the IRS recognize that the applicable prin-
ciples for determining eligibility of re-
duced treaty rates for income paid to hy-
brid entities may have been uncertain in
the past. Accordingly, the IRS does not
intend to challenge any claim of treaty
benefits for payments to hybrid entities
made before the effective date of these
regulations on the basis that the claim was
based on principles inconsistent with
those upon which these regulations are
based.
Special Analyses
It has been determined that these tem-
porary regulations are not a significant
regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Pro-

8
July 21, 19971997-29␣ ␣ I.R.B.
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations and, because
these regulations do not impose on small
entities a collection of information re-
quirement, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Analy-
sis is not required. Because of rapidly in-
creasing use of hybrid entities for cross-
border transactions, immediate guidance
is needed on rules for determining
whether U.S. source payments made to
entities, including entities that are fiscally
transparent in the United States and/or the
applicable treaty jurisdiction, are eligible
for treaty-reduced tax rates. Therefore,
good cause is found to dispense with the
notice requirement of section 553(b) of
the Administrative Procedure Act. Pursu-
ant to section 7805(f) of the Internal Rev-
enue Code, these regulations will be sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
* * * * *
Adoption of Amendments to the Regula-
tions
Accordingly, CFR 26 part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. §1.894–1T is added to read as
follows:
§1.894–1T: Income affected by treaty
(temporary).
(a) through (c) [Reserved]. For further
guidance, see §1.894–1(a) through (c).
(d) Determination of tax on income
paid to entities—(1) In general. The tax
imposed by sections 871(a), 881(a), 1461,
and 4948(a) on a payment received by an
entity organized in any country (including
the United States) shall be eligible for re-
duction under the terms of an income tax
treaty to which the United States is a party
if such payment is treated as derived by a
resident of an applicable treaty jurisdic-
tion, such resident is a beneficial owner of
the payment, and all other applicable re-
quirements for benefits under the treaty
are satisfied. A payment received by an
entity is treated as derived by a resident of
an applicable treaty jurisdiction only to
the extent the payment is subject to tax in
the hands of a resident of such jurisdic-
tion. For this purpose, a payment re-
ceived by an entity that is treated as fis-
cally transparent by the applicable treaty
jurisdiction shall be considered a payment
subject to tax in thehands of a resident of
the jurisdiction only to the extent that the
interest holders in the entity are residents
of the jurisdiction. For purposes of the
preceding sentence, interest holders shall
not include any direct or indirect interest
holders that are themselves treated as fis-
cally transparent entities by the applicable
treaty jurisdiction. A payment received
by an entity that is not treated as fiscally
transparent by the applicable treaty juris-
diction shall be considered a payment
subject to tax in the hands of a resident of
such jurisdiction only if the entity is itself
a resident of that jurisdiction.
(2) Application of beneficial ownership
requirement in respect of certain pay-
ments received by entities—(i) Entities
treated as fiscally transparent for U.S. tax
purposes. An entity that is treated as fis-
cally transparent under the laws of the
United States and that is resident in an ap-
plicable treaty jurisdiction shall be treated
as the beneficial owner of a payment if
the entity would be treated as the benefi-
cial owner if it were treated as nonfiscally
transparent by the United States.
(ii) Entity’s owners as beneficial own-
ers—(A) A resident of an applicable
treaty jurisdiction that derives a payment
received by an entity that is fiscally trans-
parent under the laws of the applicable tax
jurisdiction shall be treated as the benefi-
cial owner of the payment unless—
(1) Such resident would not have been
treated as the beneficial owner of the pay-
ment had such payment been received di-
rectly by the resident; or
(2) The entity receiving the payment is
not treated as a beneficial owner of the
payment.
(B) For example, persons residing in
treaty Country X and treated under the
laws of Country X as interest holders in a
fiscally transparent entity created under
the laws of Country Y are treated as the
beneficial owners of the payments re-
ceived by the entity from sources within
the United States unless the interest hold-
ers would not have been treated as benefi-
cial owners had they received the pay-
ment directly (e.g., the partners act as
nominees or conduits for other persons).
However, if the entity itself is acting as a
nominee or conduit for another person
and, therefore, is not itself a beneficial
owner, then none of the interest holders
can be treated as beneficial owners, even
if the interest holders own their interests
in the entity as beneficial owners. For
this purpose, the determination of whether
a person is a beneficial owner of a pay-
ment shall be made under U.S. tax laws.
(3) Application to certain domestic en-
tities. Notwithstanding paragraph (d)(1)
of this section, an income tax treaty may
not apply to reduce the amount of tax on
income received by an entity that is
treated as a domestic corporation for U.S.
tax purposes. Therefore, neither the do-
mestic corporation nor its shareholders
are entitled to the benefits of a reduction
of U.S. income tax on income received
from U.S. sources by the corporation.
(4) Definitions—(i) Entity. For pur-
poses of this paragraph (d), the term entity
shall mean any person that is treated by
the United States or the applicable treaty
jurisdiction as other than an individual.
(ii) Fiscally transparent. For purposes
of this paragraph (d), an entity is treated
as fiscally transparent by a jurisdiction to
the extent the jurisdiction requires interest
holders in the entity to take into account
separately on a current basis their respec-
tive shares of the items of income paid to
the entity and to determine the character
of such items as if such items were real-
ized directly from the source from which
realized by the entity (for purposes of the
tax laws of the jurisdiction). Entities that
are fiscally transparent for U.S. federal in-
come tax purposes include partnerships,
common trust funds described under sec-
tion 584, simple trusts, grantor trusts, as
well as certain other entities (including
entities that have a single interest holder)
that are treated as partnerships or as disre-
garded entities for U.S. federal income tax
purposes.
(iii) Applicable treaty jurisdiction.
The term applicable treaty jurisdiction
means the jurisdiction whose income tax
treaty with the United States is invoked
for purposes of reducing the rate of tax
imposed under section 871(a), 881(a),
1461, and 4948(a).
(iv) Resident. The term resident shall
have the meaning assigned to such term in
the applicable income tax treaty.
(5) Application to all income tax trea-
ties. Unless otherwise explicitly agreed

9
1997-29␣ ␣ I.R.B.July 21, 1997
upon in the text of an income tax treaty, the
rules contained in this paragraph (d) shall
apply in respect of all income tax treaties to
which the United States is a party. How-
ever, a reduced rate under a tax treaty for a
payment of U.S. source income will not be
available irrespective of the provisions in
this paragraph (d) to the extent that the ap-
plicable treaty partner would not grant a re-
duced rate under the tax treaty to a U.S.
resident in similar circumstances, as evi-
denced by a mutual agreement between the
relevant competent authorities or by a pub-
lic notice of the treaty partner. The Internal
Revenue Service shall announce the terms
of any such mutual agreement or treaty
partner’s position. Any denial of tax treaty
benefits as a consequence of such a mutual
agreement or treaty partner’s position shall
affect only U.S. source payments made af-
ter announcement of the terms of the agree-
ment or of the position.
(6) Examples. This paragraph (d) is il-
lustrated by the following examples. Un-
less stated otherwise, each example as-
sumes that all conditions for claiming a
treaty-reduced tax rate under a U.S. in-
come tax treaty with respect to a payment
of U.S. source income are satisfied (other
than the condition that the income is
treated as derived by a resident of the ap-
plicable treaty jurisdiction), including the
beneficial ownership requirement and all
requirements relating to applicable limita-
tion on benefits provisions. The examples
are as follows:
Example 1. (i) Facts. Entity A is a business or-
ganization formed under the laws of Country X that
has an income tax treaty with the United States. Un-
der the laws of Country X, A is liable to tax at the
entity level. A is treated as a partnership for U.S. in-
come tax purposes and receives royalties from U.S.
sources that are not effectively connected with the
conduct of a trade or business in the United States.
Some of A’s partners are resident in Country X and
the other partners are resident in Country Y. Coun-
try Y has no income tax treaty in effect with the
United States. Article 12 of the U.S.–X tax treaty
provides that “royalties derived from sources within
a Contracting State by a resident of the other Con-
tracting State shall not exceed 5 percent of the gross
amount thereof...”. Article 4.1 of the treaty provides
that for purposes of the treaty, “a ‘resident’ of a Con-
tracting State means any person who, under the laws
of that State, is liable to tax therein by reason of his
domicile, residence, place of management, place of
incorporation, or any other criterion of a similar na-
ture...”. Article 4.2 of the treaty provides that in the
case of income “derived or paid by a partnership...”,
the term resident applies only to the extent that the
income derived by such partnership is subject to tax
in that State as the income of a resident, either in its
hands or in the hands of its partners.
(ii) Analysis. Under the U.S.–X income tax
treaty, A is a resident of Country X within the mean-
ing of Article 4.1 of the treaty. Also, as a resident of
Country X taxable on the U.S. source royalty under
the tax laws of Country X, A meets the condition un-
der Article 12 of the treaty that it derive the income
from sources within the United States. Accordingly,
the U.S. source royalty income is treated as derived
by a resident of X. Further, A is a beneficial owner
of the royalty income, as determined under para-
graph (d)(2)(i) of this section. The fact that A’s in-
terest holders are also beneficial owners of the roy-
alty income under U.S. tax principles (as partners of
A) does not preclude A from qualifying as a benefi-
cial owner for purposes of the treaty. In addition, A
may claim benefits under the U.S.–X income tax
treaty even though some of its interest holders do not
reside in X or reside in a country that does not have
an income tax treaty in effect with the United States.
Example 2. (i) Facts. The facts are the same as
under Example 1 except that Article 12 of the U.S.–
X income tax treaty provides that royalties “paid” to
a resident of a treaty country from sources within the
other may be taxed in both countries but the tax is
limited to 10 percent of the gross amount of the roy-
alties in the source country. Further the U.S.-X in-
come tax treaty includes no provision relating to in-
come paid or derived through a partnership.
(ii) Analysis. As in Example 1, A is entitled to
claim the benefit of the U.S.-X income tax treaty
with respect to the U.S. source royalty income paid
to A. The term paid and the term derived are used
interchangeably in U.S. income tax treaties. Accord-
ingly, the U.S. source royalty income is treated as
derived by a resident of X. It is irrelevant that the
U.S.–X treaty does not include a provision relating
to income paid or derived through a partnership.
Example 3. (i) Facts. The facts are the same as
under Example 2, except that Country Y has an in-
come tax treaty in effect with the United States. Ar-
ticle 12 of the U.S.–Y income tax treaty reduces the
rate on U.S. source royalty income to zero if the in-
come is paid to a resident of Country Y who benefi-
cially owns the income. Article 4.1 of the U.S.–Y
treaty provides that for purposes of the treaty, “a
‘resident’ of a Contracting State means any person
who, under the laws of that State, is liable to tax
therein by reason of his domicile, residence, place of
management, place of incorporation, or any other
criterion of a similar nature...”. The U.S.–Y treaty
does not include a provision relating to income paid
or derived through a partnership. Under the laws of
Country Y, A is treated as fiscally transparent entity.
Thus, A’s partner, T, a corporation organized in
Country Y is required to include in income on a cur-
rent basis its allocable share of A’s income. T is a
beneficial owner of the income paid to A, as deter-
mined under paragraph (d)(2)(ii) of this section.
(ii) Analysis. As in Example 2, A is entitled to
claim the benefit of the U.S.–X income tax treaty
with respect to the U.S. source royalty income paid
to A. However, T is also entitled to claim the benefit
of the exemption under the U.S.–Y treaty for its allo-
cable share of the U.S. source royalty income. T
meets the conditions of Article 12 because it is a
resident of Country Y within the meaning of Article
4.1 of the treaty. Also, as a resident of Country Y
taxable on the U.S. source royalty under the tax laws
of Country Y, it meets the condition under Article 12
of the treaty that income from sources within the
United States be paid to a resident. Accordingly, T’s
allocable share of the U.S. source royalty income is
treated as derived by a resident of Y. It is irrelevant
that the U.S.–Y treaty does not include a provision
relating to income paid or derived through a partner-
ship.
Example 4. (i) Facts. Entity A is a business or-
ganization organized under the laws of Country V
that has no income tax treaty with the United States.
A is treated as a partnership for U.S. tax purposes
and receives royalty income from U.S. sources that
is not effectively connected with the conduct of a
trade or business in the United States. G, one of A’s
interest holders, is a corporation organized under the
laws of Country X. X treats A as an entity taxable at
the entity level and not as a fiscally transparent en-
tity. Therefore, G is not required to include in in-
come on a current basis its share of A’s income. In-
stead, G is taxed in X on its share of A’s profits when
distributed by A and such distribution is taxed to G
as a dividend. H, A’s other interest holder, is a cor-
poration organized in Country Y. Y treats A as a fis-
cally transparent entity and requires H to include in
income on a current basis its allocable share of A’s
income. Both X and Y have an income tax treaty in
effect with the United States. Article 12 of the U.S.–
X income tax treaty provides that royalties paid to a
resident of a treaty country from sources within the
other may be taxed in both countries but the tax is
limited to 5 percent of the gross amount of the royal-
ties in the source country. Article 4.1 of the U.S.–X
treaty provides that for purposes of the treaty, a
“‘resident’ of a Contracting State means any person
who, under the laws of that State, is liable to tax
therein by reason of his domicile, residence, place of
management, place of incorporation, or any other
criterion of a similar nature...”. The U.S.–X treaty
does not include a provision relating to income paid
or derived through a partnership. Article 12 of the
U.S.–Y treaty provides that “royalties derived and
beneficially owned by a resident of a Contracting
State shall be taxable only in that State.” Article 4.1
of the U.S.–Y treaty provides that, for purposes of
the treaty, a “‘resident’ of a Contracting State means
any person who, under the laws of that State, is li-
able to tax therein by reason of his domicile, resi-
dence, place of management, place of incorporation,
or any other criterion of a similar nature...”. Article
4.2 of the U.S.–Y treaty provides that in the case of
income “derived or paid by a partnership...”, the
term resident applies only to the extent that the in-
come derived by such partnership is subject to tax in
that State as the income of a resident, either, in its
hands or in the hands of its partners.
(ii) Analysis. A may not claim the benefit of any
income tax treaty since it is not a resident of a coun-
try with which the United States has such a treaty.
This result occurs regardless of how A is treated for
U.S. tax purposes or for purposes of the tax laws of
Country V. G may not claim the benefits of Article
12 of the U.S.–X treaty. Under the tax laws of X,
G’s share of the U.S. source royalty income paid to
A is not treated as derived by a resident of X since,
under X’s tax laws, A, rather than G, is required to
account for income received by A. This result oc-
curs even if A distributes the royalty amount imme-
diately after receiving it because, in such a case, G
would be taxable on an amount treated as a profit
distribution from A and not on royalty income re-
ceived from sources within the United States. The
fact that, for U.S. tax purposes, G is treated as the
taxpayer for its allocable share of A’s income is not
relevant for purposes of determining whether, for
purposes of Article 12 of the U.S.–X income tax
treaty, G’s share of the income paid to A is treated as
derived by a resident of X. For this purpose, the
laws of Country X govern the determination of
whether G meets this condition. On the other hand,
H may claim an exemption from U.S. tax on its
share of the royalty income received by A under Ar-
ticle 12 of the U.S.–Y treaty because, under the tax
laws of Y, H rather than A, is required to account for
income received by A. Accordingly, H’s share of the
U.S. source royalty income paid to A is treated as
derived by a resident of Y.
Example 5. The facts are the same as in Example
4, except that A is a business organization formed
under the laws of a U.S. State as a limited liability

10
July 21, 19971997-29␣ ␣ I.R.B.
company. The consequences are the same as de-
scribed in Example 4. G is not eligible for benefits
under Article 12 of the U.S.–X income tax treaty
since, under X’s tax laws, A, rather than G, is re-
quired to account for income received by A. Under
section 881(a), G is liable for U.S. income tax on its
allocable share of A’s U.S. source royalty income at
a 30 percent rate and A must withhold 30 percent
from G’s allocable share under section 1442. Simi-
larly, H may claim an exemption from U.S. tax on its
share of the royalty income received by A under Ar-
ticle 12 of the U.S.–Y treaty because, under the tax
laws of Y, H rather than A, is required to account for
income received by A.
Example 6. The facts are the same as in Example
4, except that A is a so-called dual organized entity.
In addition to being organized under the laws of
Country V, A has also been organized under the laws
of the United States pursuant to the State Z domesti-
cation statute. Accordingly, both Country V and the
United States regard entity A as a domestic entity ex-
isting only in that jurisdiction. Further, Country X
and Country Y regard A as a Country V entity. A is
treated as a partnership for U.S. tax purposes. The
fact that A is a dual organized entity that is regarded
differently in Countries X or Y and the United States
does not impact the relevant tax treaty analysis. As
in Example 4, A may not claim the benefit of any in-
come tax treaty since it is not a resident of a country
with which the United States has such a treaty.
Similarly, G is not eligible for benefits under Article
12 of the U.S.–X income tax treaty since, under X’s
tax laws, A, rather than G, is required to account for
income received by A. Under section 881(a), G is li-
able for U.S. income tax on its allocable share of A’s
U.S. source royalty income at a 30 percent rate. Be-
cause A is treated as a U.S. partnership for U.S. tax
purposes, A must withhold 30 percent from G’s allo-
cable share under section 1442. H may claim an ex-
emption from U.S. tax on its share of the royalty in-
come received by A under Article 12 of the U.S.–Y
income tax treaty because, under the tax laws of Y,
H rather than A, is required to account for the in-
come received by A.
Example 7. The facts are the same as in Example
5, except that A distributes all U.S. source royalty in-
come to its interest holders immediately following
A’s receipt of such income. The consequences are
the same as described in Example 5. G remains in-
eligible for benefits under Article 12 of the U.S.–X
income tax treaty since, under X’s tax laws, A, rather
than G, is required to account for the royalty income
received by A. The fact that A distributes income on
a current basis to G is irrelevant even if Country X
taxes G on such distributions on a current basis.
Country X regards such distributions to G as a distri-
bution of profits from A to G rather than an item of
U.S. source royalty income of G. H remains eligible
for benefits under Article 12 of the U.S.–Y income
tax treaty with respect to H’s allocable share of the
U.S. source royalty treatment received by A.
Example 8. The facts are the same as in Example
5, except that Country X pursuant to a Country X
anti-deferral regime requires that G account for on a
current basis as a deemed distribution G’s pro rata
share of A’s net passive income. For purposes of the
anti-deferral regime, the U.S. source royalty income
of G is regarded as passive income. The conse-
quences are the same as described in Example 5. G
remains ineligible for benefits under Article 12 of
the U.S.–X income tax treaty because, under X’s tax
laws, A, rather than G, is required to account for the
royalty income received by A. The fact that G re-
ceives a current deemed distribution of net passive
income is irrelevant even if Country X taxes G on
such deemed distributions on a current basis. Coun-
try X regards such deemed distributions to G as a
distribution of profits from A to G rather than an al-
location to G of G’s share of A’s U.S. source royalty
income. H remains eligible for benefits under Ar-
ticle 12 of the U.S.–Y income tax treaty with respect
to H’s allocable share of the U.S. source royalty
treatment received by A.
Example 9. (i) Facts. Entity A is a business or-
ganization formed under the laws of Country X that
has an income tax treaty with the United States. A
has made a valid election under §301.7701–3(c) of
this chapter to be treated as a corporation for U.S.
tax purposes and receives royalty income from
sources within the United States that is not effec-
tively connected with the conduct of a trade or busi-
ness in the United States. G, A’s sole shareholder, is
a corporation organized under the laws of Country
X. Under the tax laws of X, A is treated as a fiscally
transparent entity and, therefore, G is required to in-
clude in income on a current basis its share of A’s in-
come. Article 12 of the U.S.–X tax treaty provides
that “royalties derived from sources within a Con-
tracting State by a resident of the other Contracting
State shall not exceed 5 percent of the gross amount
thereof...”. Article 4.1 of the treaty provides that for
purposes of the treaty, a “‘resident’ of a Contracting
State means any person who, under the laws of that
State, is liable to tax therein by reason of his domi-
cile, residence, place of management, place of incor-
poration, or any other criterion of a similar na-
ture...”. Article 4.2 of the treaty provides that in the
case of income “derived or paid by a partnership...”,
the term resident applies only to the extent that the
income derived by such partnership is subject to tax
in that State as the income of a resident, either, in its
hands or in the hands of its partners.
(ii) Analysis. A does not qualify for benefits un-
der the U.S.-X income tax treaty because A is treated
as a fiscally transparent entity under the tax laws of
X and thus is not a resident of X for purposes of the
treaty. G, on the other hand, qualifies for benefits
under the U.S.–X treaty with respect to the U.S.
source royalty income received by A because, under
the tax laws of X, G is required to account for the in-
come received by A on a current basis. This result
applies even though, for U.S. tax purposes, A is
treated as a corporate entity. Accordingly, the U.S.
royalty income paid to A is treated as derived by G,
a resident of X, as determined under the tax laws of
X. Based on G’s qualification for treaty benefits
with respect to the U.S. source royalty income, A, as
the taxpayer under U.S. tax laws, may claim that the
income that it receives for U.S. tax purposes is eli-
gible for benefit under the U.S.–X treaty.
Example 10. The facts are the same as in Ex-
ample 9, except that A is a corporation organized un-
der the laws of a U.S. State and is, therefore, a do-
mestic corporation. A may not claim under the
U.S.–X income tax treaty a reduction of the rate of
U.S. tax otherwise imposed on its income under sec-
tion 11. A reduced rate of tax is unavailable under
the U.S.–X treaty based upon the savings clause in
Article 1 of the U.S.–X treaty. Thus, A remains fully
taxable under U.S. tax laws as a domestic corpora-
tion.
Example 11. (i) Facts. Entity A is a business or-
ganization organized under the laws of Country V
that has no income tax treaty with the United States.
A is treated as a partnership for U.S. tax purposes
and receives royalty income from U.S. sources that
is not effectively connected with the conduct of a
trade or business in the United States. A is directly
owned by H and J. J is a corporation organized in
Country Z which treats A as fiscally transparent and
J as an entity taxable at the entity level. Accord-
ingly, Country Z requires J to include in income on a
current basis J’s share of A’s U.S. source royalty in-
come. H, A’s other direct interest holder, is a corpo-
ration organized in Country Y. H, in turn is owned
by E and F, both of which are entities organized in
Country X. E and F are each wholly owned by C
which is a corporation organized in Country V. Y
treats both A and H as fiscally transparent entities.
X treats A, H, and E as fiscally transparent entities.
X treats F as an entity taxable at the entity level. Ac-
cordingly, X requires F to include in income on a
current basis F’s indirect share of A’s U.S. source
royalty income. H and J are treated as corporations
for U.S. federal income tax purposes while E, F, and
C are treated as partnerships for U.S. federal tax pur-
poses. X, Y and Z each have in effect an income tax
treaty with the United States. Article 12 of the U.S.-
X and the U.S.–Z income tax treaty provides that
royalties paid to a resident of a treaty country from
sources within the other may be taxed in both coun-
tries but the tax is limited to 5 percent of the gross
amount of the royalties in the source country. Ar-
ticle 4.1 of the U.S.–X and the U.S.–Z treaty pro-
vides that for purposes of the treaty, a “‘resident’ of
a Contracting State means any person who, under
the laws of that State, is liable to tax therein by rea-
son of his domicile, residence, place of management,
place of incorporation, or any other criterion of a
similar nature...”. Article 4.2 of the U.S.–X and the
U.S.-Z treaty provides that in the case of income
“derived or paid by a partnership...”, the term resi-
dent applies only to the extent that the income de-
rived by such partnership is subject to tax in that
State as the income of a resident, either in its hands
or in the hands of its partners. Article 12 of the
U.S.–Y treaty provides that “royalties derived and
beneficially owned by a resident of a Contracting
State shall be taxable only in that State.” Article 4.1
of the U.S.-Y treaty provides that, for purposes of
the treaty, a “‘resident’ of a Contracting State means
any person who, under the laws of that State, is li-
able to tax therein by reason of his domicile, resi-
dence, place of management, place of incorporation,
or any other criterion of a similar nature...”. The
U.S.-Y treaty does not include a provision relating to
income paid or derived through a partnership.
(ii) Analysis. A may not claim, based on its own
status, the benefit of any income tax treaty since it is
not a resident of a country with which the United
States has such a treaty. This result occurs regard-
less of how A is treated for U.S. tax purposes or for
purposes of the tax laws of Country V. H may not
claim the benefits of any treaty, including the ben-
efits of Article 12 of the U.S.–Y treaty, because H
does not qualify as a resident of Y or any other treaty
jurisdiction. Similarly, neither E nor C may claim
the benefits of any income tax treaty, since neither
entity qualifies as a resident of X or any other treaty
jurisdiction. F, however, may claim the benefit of
Article 12 of the U.S.–X treaty with respect to F’s
indirect share of the U.S. source royalty income re-
ceived by A. Such income is treated as derived by F,
a resident of X, because X qualifies as a resident of
X and, under the tax laws of X, F is the first entity in
the A, H, F chain that is not itself treated as fiscally
transparent in X. J may claim the benefits of Article
12 of the U.S.–Z treaty with respect to J’s indirect
share of the U.S. source royalty income paid to A be-
cause, under the tax laws of Z, J rather than A, is re-
quired to account for income received by A. Ac-
cordingly, J’s share of the U.S. source royalty
income paid to A is treated as derived by a resident
of Z. As illustrated in this example, the U.S. federal
income tax treatment of A, J, H, E, F and C is irrel-
evant for purposes of determining the extent to
which U.S. source royalty income paid to A is eli-
gible for treaty-reduced tax rates under the U.S. in-
come tax treaty with X, Y or Z.
Example 12. (i) Facts. Entity A is a business
organization formed under the laws of Country X
that has an income tax treaty in effect with the
United States. A owns all of the stock of a U.S.
corporation B. Under the tax laws of X, A is sub-

11
1997-29␣ ␣ I.R.B.July 21, 1997
ject to tax at the entity level. For U.S. tax pur-
poses, A is treated as a branch of its single owner,
G. G is a corporation organized under the laws of
X. A receives dividends from B that are from U.S.
sources and are not effectively connected with the
conduct of a trade or business in the United States.
Article 10 of the U.S.–X tax treaty provides that
“dividends derived from sources within a Contract-
ing State by a resident of the other Contracting
State shall not exceed 5 percent of the gross
amount thereof...”. Article 4.1 of the treaty pro-
vides that for purposes of the treaty, a “‘resident’ of
a Contracting State means any person who, under
the laws of that State, is liable to tax therein by rea-
son of his domicile, residence, place of manage-
ment, place of incorporation, or any other criterion
of a similar nature...”. The U.S.–X treaty contains
no provision regarding income paid or derived
through a partnership.
(ii) Analysis. For U.S. tax purposes, A is
treated as a wholly-owned business entity that is
disregarded for federal income tax purposes. How-
ever, because, under the laws of X and under X’s
application of the treaty, A is treated as deriving the
dividend income as a resident of X, A qualifies for
benefits under the treaty with respect to the U.S.
source dividend. Thus, G, as the taxable person for
U.S. tax purposes, may claim the benefit of a re-
duced rate under Article 10 of the U.S.–X treaty
based on A’s eligibility for tax treaty benefits.
(7) Effective date. This paragraph (d)
applies to amounts paid on or after January
1, 1998.
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
Approved June 26, 1997.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on June
30, 1997, 12:19 p.m., and published in the issue of
the Federal Register for July 2, 1997, 35673).

12
July 21, 19971997-29␣ ␣ I.R.B.
Time for Reporting Transfers to
Foreign Entities Under Sections
1491 Through 1494
Notice 97–42
This notice modifies the guidance set
forth in Notice 97–18, 1997–10 I.R.B. 35,
regarding the time for reporting transfers
of property to foreign corporations, part-
nerships, trusts, or estates as described in
section 1491 (“section 1491 transfers”).
Background
Notice 97–18 provides guidance with re-
spect to section 1491 transfers occurring af-
ter August 20, 1996, that are reportable un-
der section 1494, including the time and
manner for reporting such transfers, the
manner for making elections pursuant to
section 1492, and the penalty imposed by
section 1494(c) for failure to report a sec-
tion 1491 transfer. That notice provides
that a U.S. transferor who is required to re-
port a section 1491 transfer may either file
Form 926 with the U.S. transferor’s annual
tax return or information return for the tax-
able year that includes the date of the trans-
fer or may file Form 926 on the day the
transfer is made. Interest must be paid on
the amount of excise tax due with respect to
the period between the date on which the
transfer occurred and the date on which the
excise tax is actually paid.
A U.S. transferor can avoid the section
1491 excise tax by making certain elec-
tions under section 1492. One election al-
lows a U.S. transferor to avoid the excise
tax by electing, before the transfer, to ap-
ply principles similar to the principles of
section 367. Section 1492(2)(B). Alter-
natively, a U.S. transferor can avoid the
section 1491 excise tax by electing to
treat the transfer as a taxable exchange
Part III. Administrative, Procedural, and Miscellaneous
under section 1057. Section 1492(3).
Section III.B of Notice 97–18 provides
guidance on the time and manner for
making these elections.
Section VIII of Notice 97–18 contains a
transition provision with respect to the re-
porting requirements for the U.S.
transferor’s tax year that includes August
20, 1996. That section provides that no
penalties will be imposed under section
1494(c) if a Form 926 reporting a section
1491 transfer (or certain other adequate re-
porting described in the notice) is filed by
the later of the due date of the U.S.
transferor’s income tax return, including
extensions, for the taxable year in which the
transfer occurred, or May 9, 1997 (the date
that is 60 days after the date that notice was
published in the Internal Revenue Bulletin).
This notice extends the time during
which certain section 1491 transfers may
be reported under that transition provision
without the imposition of the section
1494(c) penalty. This notice does not af-
fect the interest that accrues on any excise
tax due between the date of the transfer
and the date on which the excise tax is ac-
tually paid. Moreover, this notice does
not extend the time for filing under any
duplicative reporting provision described
in section II.B of Notice 97–18.
Guidance
With respect to Form 926 for the tax-
able year that includes August 20, 1996
(the “1996 Form 926”), no penalty will be
imposed under section 1494(c) if the tax-
payer files the 1996 Form 926 with the
taxpayer’s timely–filed (including exten-
sions) income tax return or information
return for the first taxable year beginning
on or after January 1, 1997, provided the
taxpayer’s income tax return or informa-
tion return for the tax year that includes
August 20, 1996, includes the items of
gross income required to be taken into ac-
count as a result of an election on the
1996 Form 926 (for example, any gain
recognized by the taxpayer as a result of a
section 1057 election). Alternatively, no
penalty will be imposed under section
1494(c) if the taxpayer files the 1996
Form 926 within the period set forth in
Section VIII of Notice 97–18.
The U.S. transferor will be deemed to
have made, as the case may be, a section
1492(2)(B) election before the transfer, or
a section 1057 election in accordance with
Treas. Reg. § 301.9100–12T, if the fol-
lowing requirements are satisfied:
(i) The U.S. transferor otherwise
complies with the requirements set
forth in Notice 97–18 for making an
election under section 1494(2)(B) to
apply principles similar to the prin-
ciples of section 367, or under section
1492(3) for treating the transfer as a
taxable exchange under section 1057;
and
(ii) With respect to either election, the
U.S. transferor’s 1996 Form 926 is
filed within the time period set forth
in this notice.
Effect on Other Guidance
Sections III.B and VIII of Notice 97–18
are hereby modified.
Drafting Information
The principal author of this notice is
Michael Kirsch of the Office of Associate
Chief Counsel (International). For fur-
ther information regarding this notice,
contact Mr. Kirsch on (202) 622–3880
(not a toll-free call).

13
1997-29␣ ␣ I.R.B.July 21, 1997
Notice of Proposed Rulemaking
and Notice of Public Hearing
Guidance Regarding Claims for
Income Tax Convention Benefits
REG–104893–97
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rule-making
by cross-reference to temporary regulations
and notice of public hearing.
SUMMARY: In T.D. 8722, page 4, the IRS
is issuing temporary regulations regarding
rules for determining whether U.S. source
payments made to entities, including enti-
ties that are fiscally transparent in the
United States and/or the applicable treaty
jurisdiction, are eligible for treaty–reduced
tax rates. The text of those temporary regu-
lations also serves as the text of these pro-
posed regulations. This document also pro-
vides notice of a public hearing on these
proposed regulations.
DATES: Comments and outlines of topics
to be discussed at the public hearing sched-
uled for September 24, 1997, at 10 a.m.
must be received by September 3, 1997.
ADDRESSES: Send submissions to: CC:
DOM:CORP:R (REG–104893–97), room
5228, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may also be hand de-
livered between the hours of 8 a.m. and 5
p.m. to: CC:DOM:CORP:R (REG–
104893–97), Courier’s Desk, Internal Rev-
enue Service, 1111 Constitution Avenue
NW, Washington, DC. Alternatively, tax-
payers may submit comments electroni-
cally 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. The public
hearing will be held in the Commissioner’s
Conference Room, room 3313, Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Eliza-
beth Karzon, (202) 622-3860; concerning
submissions and the hearing, Evangelista
Lee, (202) 622-7190 (not toll-free num-
bers).
Part IV. Items of General Interest
SUPPLEMENTARY INFORMATION:
Background
T.D. 8722 amends the Income Tax Regu-
lations (26 CFR part 1) relating to section
894. The temporary regulations contain
rules relating to eligibility for benefits un-
der income tax conventions for payments to
flow–through entities or arrangements.
The text of T.D. 8722 also serves as the
text of these proposed regulations. The pre-
amble to the temporary regulations explains
the temporary regulations.
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. It also has been determined that
section 553(b) of the Administrative Proce-
dure Act (5 U.S.C. chapter 5) does not ap-
ply to these regulations and, because these
regulations do not impose on small entities
a collection of information requirement, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Therefore, a Regula-
tory Flexibility Analysis 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 Busi-
ness Administration for comment on its im-
pact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are sub-
mitted timely to the IRS. All comments
will be available for public inspection and
copying.
A public hearing has been scheduled for
September 24, 1997, at 10 a.m. in the
Commissioner’s Conference Room, room
3313, Internal Revenue Building, 1111
Constitution Avenue NW., Washington DC.
Because of access restrictions, visitors will
not be admitted beyond the Internal Rev-
enue Building lobby more than 15 minutes
before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply
to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit com-
ments and an outline of the topics to be dis-
cussed and the time to be devoted to each
topic by September 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.
Proposed Effective Date
This amendment is proposed to apply to
payments received by an entity on or after
January 1, 1998.
* * * * *
Proposed Amendments to the Regulations
Accordingly, 26 part 1 is proposed to be
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.894–1, paragraph (d) is
added to read as follows:
§1.894–1 Income affected by treaty.
* * * * *
[The text of proposed paragraph (d) is
the same as the text of §1.894–1T(d) pub-
lished in T.D. 8722, page 4.
Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on June
30, 1997, 12:19 p.m., and published in the issue of the
Federal Register for July 2, 1997, 62 F.R. 35755).
Special Rule for U.S. Permanent
Residents Receiving Compensation
or Pensions From the Government
of France
Announcement 97–61
The Competent Authorities of the United
States and France have entered into an
agreement to alleviate the double taxation
of U.S. permanent residents with respect to
compensation and pensions for governmen-
tal services rendered to the French govern-
ment. Generally, under the agreement, in-
come of this type received in 1996 is

14
July 21, 19971997-29␣ ␣ I.R.B.
taxable only in France and income of this
type received in 1997 is taxable only in the
United States. For 1998 and subsequent
years, both the United States and France
will tax the income, but the United States
will allow a credit for taxes paid to France.
Taxpayers who are otherwise required to
file an Individual Income Tax Return on
Form 1040 for tax year 1996 should attach
the following statement to the return: “I/we
am/are not taxable in the United States un-
der Article 19 of the Income Tax Conven-
tion between the United States and France
on compensation or pension income re-
ceived in 1996 for services rendered to the
French Government that are of a govern-
mental nature, pursuant to a 1997 Compe-
tent Authority agreement between the
United States and France.” A taxpayer who
has already filed a 1996 return in accor-
dance with the Competent Authority agree-
ment need not amend the return to include
such a statement. A taxpayer who has al-
ready filed a 1996 return and paid tax on in-
come subject to the Competent Authority
agreement should include this statement if
filing a claim for refund.
Contacts
For further information or assistance re-
garding the U.S. income tax treatment of
compensation and pensions received from
the Government of France, please contact
Calvin Watson, Tax Treaty Division, Office
of the Assistant Commissioner (Interna-
tional), ((202) 874–1550 (not a toll-free
number)). For information or assistance re-
garding the French tax treatment of these
compensation and pension payments,
please contact Noel Claudon, Fiscal Atta-
che, French Embassy, ((202) 944–6390 or
(202) 944–6391 (not toll-free numbers)).
In France, please contact Centre des Impots
des Non-Residents, 9, Rue d’Uzes, 75094
Paris Cedex 02.
Announcement 97–70
Transition Relief for Failures To
Make Plan Distributions to Certain
Employees or Offer Options To
Defer Distributions by April 1, 1997
Purpose
This announcement provides transition
relief for qualified plans that fail to make
distributions required under the terms of
the plan to an employee who attained age
70 1/2 in 1996 and who did not retire in
1996. This relief is conditioned upon the
employer meeting specified requirements
with respect to such an employee.
Background
Section 401(a)(9) of the Internal Rev-
enue Code (“Code”) provides that, in or-
der for a plan to be qualified under section
401(a), distributions from the plan must
commence no later than the “required be-
ginning date.” Prior to 1997, section
401(a)(9)(C) generally provided that the
required beginning date is April 1 follow-
ing the calendar year in which the em-
ployee attains age 70 1/2.
Section 1404(a) of the Small Business
Job Protection Act of 1996 (“SBJPA”)
amended section 401(a)(9) of the Code to
provide that, in the case of an employee
who is not a 5-percent owner, the required
beginning date for minimum distributions
from a qualified plan is April 1 of the cal-
endar year following the later of the cal-
endar year in which the employee attains
age 70 1/2 or the calendar year in which
the employee retires. The amendment to
section 401(a)(9) applies to years begin-
ning after December 31, 1996.
Notice 96–67, 1996–53 I.R.B. 12, De-
cember 30, 1996, Q&A–2, provides that,
under section 401(a)(9) as amended by
the SBJPA, an employee (other than a 5-
percent owner) who attained age 70 1/2 in
1996, but who had not retired from em-
ployment with the employer maintaining
the plan by the end of 1996, is not re-
quired to receive a minimum distribution
by April 1, 1997. Such an employee’s re-
quired beginning date is determined under
amended section 401(a)(9), which re-
quires distributions to commence by April
1 of the calendar year following the calen-
dar year in which the employee retires
from employment with the employer
maintaining the plan.
Many qualified plans continue to
contain provisions (consistent with sec-
tion 401(a)(9) prior to its amendment
by the SBJPA) requiring an employee
who attains age 70 1/2 in a calendar
year to begin receiving distributions by
April 1 of the following calendar year.
Announcement 97–24, 1997–11
I.R.B. 24, March 13, 1997, provides
that, prior to amending its plan, an em-
ployer maintaining a plan is permitted
to offer an employee (other than a 5-
percent owner) who attains age 70 1/2
in a calendar year after 1995, e.g. 1996,
and who does not retire by the end of
that calendar year, the option to delay
commencement of distributions until no
later than April 1 following the calen-
dar year in which the employee retires
from employment with the employer.
Announcement 97–24 notes that future
guidance will provide that an employer
that offers this option under a plan must
amend the plan retroactively to provide
for the option. The retroactive plan
amendment must conform the plan to
its pre-amendment operation regarding
this option to defer distributions until
after retirement.
Announcement 97–24 states that it also
applies to an employer that has adopted a
master or prototype or a regional prototype
plan. Announcement 97–24 notes that if a
conforming amendment is not an available
option under the sponsor’s prototype plan
document, the required amendment may re-
sult in the loss of prototype status.
Transition Relief
Under this announcement, if the re-
quirements described below are satis-
fied, a plan will not be treated as failing
to satisfy the requirements of section
401(a) of the Code merely because the
plan fails to make certain distributions
required under the terms of the plan to
an employee (other than a 5-percent
owner) who attained age 70 1/2 in 1996
and who did not retire from employ-
ment with the employer maintaining the
plan by the end of 1996. The relief in
this announcement applies to a plan
with respect to distributions required
under the terms of the plan to be made
to such an employee between August
20, 1996 (the date of enactment of the
SBJPA) and December 31, 1997.
This relief is available only if: (1) the
employee is offered an option to defer the
distribution and elects to defer, or a
make-up distribution is paid to such em-
ployee, and (2) the employee option or
the make-up distribution meets the quali-
fication requirements under section
401(a) of the Code (other than the re-
quirement that a plan operate in accor-
dance with its terms). For example, the
employee option or the make-up distribu-
tion must satisfy the requirements of sec-

15
1997-29␣ ␣ I.R.B.July 21, 1997
tions 401(a)(11) and 417 (relating to joint
and survivor annuities).
If the employer chooses to offer an
election to defer, the election to defer
must be made by the employee by De-
cember 31, 1997. If an employee chooses
not to defer, the plan must pay a make-up
distribution to the employee in a manner
that satisfies the rules set out below.
Whether a make-up distribution from the
plan is paid to all employees (other than 5-
percent owners) who attained age 70 1/2 in
1996 and who did not retire from employ-
ment with the employer maintaining the
plan by the end of 1996 or only to any such
employee who is offered an election to de-
fer but chooses not to defer, the make-up
distribution must be made by December 31,
1997 and must include all of the
employee’s distributions required under the
plan terms up to that date. The make-up
distribution must restore to the employee
the benefits that the employee would have
had if the plan terms had been followed.
For example, in the case of a defined ben-
efit plan, the make-up distribution for an
employee must be increased to take into ac-
count the delayed payment consistent with
the plan’s actuarial adjustments.
Further, future guidance will provide
that an employer who offers the option to
defer described above under a plan must
amend the plan retroactively, no later than
the date specified in that guidance, to pro-
vide for the option. The retroactive plan
amendment must conform the plan to its
preamendment operation regarding the
option to defer commencement of ben-
efits. However, a plan will not fail to sat-
isfy this operational requirement merely
because the amendment provides for an
employee to have the option to either
commence distribution by April 1, 1997
or to defer distribution beyond that date
but, in operation, the plan provided for an
election to defer or make-up distributions
in accordance with this announcement.
This announcement also applies to an
employer that has adopted a master or
prototype or a regional prototype plan.
Such an employer should note that if a
conforming amendment is not an avail-
able option under the sponsor’s prototype
plan document, the required amendment
may result in the loss of prototype status.
Availability of Publication 1542, Per
Diem Rates (Revised May 1997)
Announcement 97–
71
Publication 1542, recently updated, is
now available from the Internal Revenue
Service.
The publication gives the maximum per
diem rate employers can use without treat-
ing part of the allowance as wages for tax
purposes. It also provides the listing of lo-
calities eligible for $166 per diem amount
under the high-low substantiation method.
You can get a copy of this publication
by calling 1–800–829–3676. You can also
write to the IRS Forms Distribution Cen-
ter nearest you.
If you have access to a personal com-
puter and modem, you also can get the
publication electronically. You can get the
publication at:
1) World Wide Web-http://
www.irs.ustreas.gov,
2) FTP-ftp.irs.ustreas.gov, and
3) IRIS at FEDWORLD–(703) 321-8020.
Deletions From Cumulative List
of Organizations Contributions to
Which Are Deductible Under
Section 170 of the Code
Announcement 97–
72
The names of organizations that no
longer qualify as organizations described
in section 170(c)(2) of the Internal Rev-
enue Code of 1986 are listed.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an orga-
nization ceases to qualify under section
170(c)(2) if the organization has not
timely filed a suit for declaratory judg-
ment under section 7428 and if the con-
tributor (1) had knowledge of the revoca-
tion of the ruling or determination letter,
(2) was aware that such revocation was
imminent, or (3) was in part responsible
for or was aware of the activities or omis-
sions of the organization that brought
about this revocation.
If on the other hand a suit for declaratory
judgment has been timely filed, contribu-
tions from individuals and organizations
described in section 170(c)(2) that are oth-
erwise allowable will continue to be de-
ductible. Protection under section 7428(c)
would begin on July 21, 1997, and would
end on the date the court first determines
that the organization is not described in sec-
tion 170(c)(2) as more particularly set forth
in section 7428(c)(1). For individual con-
tributors, the maximum deduction protected
is $1,000, with a husband and wife treated
as one contributor. This benefit is not ex-
tended to any individual who was respon-
sible, in whole or in part, for the acts or
omissions of the organization that were the
basis for revocation.
Kinaman Animal Shelter
Erie, PA
Don Stewart Association
Phoenix, AZ
St. Matthews Publishing, Inc. f/k/a Church
and Bible Study in the Home by Mail, Inc.
Los Angeles, CA
Washington Institute for Policy Studies
Seattle, WA

16
July 21, 19971997-29␣ ␣ I.R.B.
Under 31 Code of Federal Regulations,
section 10.76, the Director of Practice is au-
thorized to immediately suspend from prac-
tice before the Internal Revenue Service
any practitioner who, within five years,
from the date the expedited proceeding is
instituted, (1) has had a license to practice
as an attorney, certified public accountant,
or actuary suspended or revoked for cause;
or (2) has been convicted of any crime un-
der title 26 of the United States Code or, of
a felony under title 18 of the United States
Code involving dishonesty or breach of
trust.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents and Enrolled Actuaries From Practice Before the
Internal Revenue Service
prohibited in any Internal Revenue Service
matter from directly or indirectly employ-
ing, accepting assistance from, being em-
ployed by, or sharing fees with, any practi-
tioner disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled ac-
tuaries to identify practitioners under expe-
dited suspensions from practice before the
Internal Revenue Service, the Director of
Practice will announce in the Internal Rev-
enue Bulletin the names and addresses of
practitioners who have been suspended
from such practice, their designation as at-
torney, certified public accountant, enrolled
agent, or enrolled actuary, and date or pe-
riod of suspension. This announcement will
appear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks or for as many
weeks as is practicable for each attorney,
certified public accountant, enrolled agent,
or enrolled actuary so suspended and will
be consolidated and published in the Cumu-
lative Bulletin.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions of
the applicable regulations:
Gas
NameAddressDesignationDate of Suspension
Newman, Harry J.Covington, VACPAIndefinite from May 16, 1997
Sehnert, FredDallas, TXCPAIndefinite from May 16, 1997
Gaskins, John D.Valdosta, GACPAIndefinite from May 16, 1997
Turner, Charles L.Goshen, KYAttorneyIndefinite from May 16, 1997
Thornton Jr., Kenneth W.Murrells Inlet, SCAttorneyIndefinite from May 16, 1997
Kellogg, RichardWhite Hall, ARCPAIndefinite from May 16, 1997
Stec, Albert J.Schereville, INCPAIndefinite from May 16, 1997
Huff Jr., James G.Raleigh, NCCPAIndefinite from May 16, 1997
Seall, WilliamDayton, OHAttorneyIndefinite from May 16, 1997
Brunner, L. KeithCenterville, OHAttorneyIndefinite from May 16, 1997
Bart, David R.Oakwood, OHAttorneyIndefinite from May 16, 1997
Shafer, David A.Franklin, OHCPAIndefinite from May 16, 1997
Schouman, JamesMilford, MIAttorneyIndefinite from May 16, 1997
Jones, Milo A.Greensboro, NCCPAIndefinite from May 16, 1997
Dolan, Gary L.Lincoln, NEAttorneyIndefinite from May 16, 1997
Coorey, Edward T.Hampton, NHEnrolled AgentIndefinite from May 16, 1997
Sheehan, Thomas J.Maggie Valley, NCCPAIndefinite from May 16, 1997
Millonig, Arthur F.Dayton, OHAttorneyIndefinite from May 16, 1997
McHaffie, Richard T.St. Paul, MNAttorneyIndefinite from June 4, 1997
Rigler, MichaelGainesville, TXCPAIndefinite from June 4, 1997
Hopkins, Diane E.St. Paul, MNAttorneyIndefinite from June 4, 1997
Adae, F. BrianBarrington, RIAttorneyIndefinite from June 4, 1997

17
1997-29␣ ␣ I.R.B.July 21, 1997
Under 31 Code of Federal Regulations,
Part 10, an attorney, certified public ac-
countant, enrolled agent or enrolled actu-
ary, in order to avoid the institution or
conclusion of a proceeding for his disbar-
ment or suspension from practice before
the Internal Revenue Service, may offer
his consent to suspension from such prac-
tice. The Director of Practice, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent, or en-
rolled actuary in accordance with the con-
sent offered.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Ser-
vice matter from directly or indirectly em-
ploying, accepting assistance from, being
employed by or sharing fees with, any
practitioner disbarred or suspended from
practice before the Internal Revenue Ser-
vice.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled
actuaries to identify practitioners under
consent suspension from practice before
the Internal Revenue Service, the Director
of Practice will announce in the Internal
Revenue Bulletin the names and ad-
dresses of practitioners who have been
suspended from such practice, their desig-
nation as attorney, certified public ac-
countant, enrolled agent, or enrolled actu-
ary, and date or period of suspension. This
announcement will appear in the weekly
Bulletin at the earliest practicable date af-
ter such action and will continue to appear
in the weekly Bulletins for five successive
weeks or for as many weeks as is practi-
cable for each attorney, certified public
accountant, enrolled agent, or enrolled ac-
tuary so suspended and will be consoli-
dated and published in the Cumulative
Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Padgett, JohnOrleans, MAAttorneyMay 22, 1997 to October 21, 1998
Crisp, Jerry W.Dallas, TXCPAJune 1, 1997 to May 31, 2000
Kessel, Donald K.Export, PACPAJune 1, 1997 to November 30, 1998
Klimchak, JosephAliquippa, PACPAJune 1, 1997 to February 28, 1998
Steele, Lewis M.Pittsburgh, PACPAJune 1, 1997 to May 31, 1998
Castleberry, Gene A.Oklahoma City, OKAttorneyJune 4, 1997 to August 3, 1997
O’Connor, Paul J.Hanover, MACPAJune 6, 1997 to June 5, 2000
Olshan, Robert M.Washington, DCCPAJune 10, 1997 to December 9, 1998
Johnson, Kirk L.Ann Arbor, MICPAJuly 1, 1997 to June 30, 1999
Mattutat, StephenElicott City, MDCPAJuly 1, 1997 to March 31, 1998
Trenary, Lloyd R.Oklahoma City, OKCPAAugust 1, 1997 to March 31, 1998
Ritchey Jr., FerrisBirmingham, ALAttorneyAugust 1, 1997 to July 31, 2000
Gold, Howard G.Hamden, CTCPAAugust 1, 1997 to July 31, 1999
Womack, KathleenHammond, LACPAAugust 1, 1997 to July 31, 1999
Announcement of the Consent Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents and Enrolled Actuaries From Practice Before the
Internal Revenue Service

18
July 21, 19971997-29␣ ␣ I.R.B.
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 pub-
lished 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 be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is be-
ing 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
Definition of Terms
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 pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. 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 sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing 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 re-
state the substance and situation of a pre-
viously 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 pe-
riod 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 pub-
lished 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 super-
seded.
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
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.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
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.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral 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.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

19
1997-29␣ ␣ I.R.B.July 21, 1997
Numerical Finding List
1
Bulletins 1997–27 through 1997–28
Announcements:
97–67, 1997–27 I.R.B. 37
97–68, 1997–28 I.R.B. 13
97–69, 1997–28 I.R.B. 13
Delegation Orders:
172 (Rev. 5), 1997–28 I.R.B. 6
Notices:
97–37, 1997–27 I.R.B. 4
97–38, 1997–27 I.R.B. 8
97–39, 1997–27 I.R.B. 8
97–40, 1997–28 I.R.B. 6
97–41, 1997–28 I.R.B. 6
Railroad Retirement Quarterly Rate:
1997–28 I.R.B. 5
Revenue Procedures:
97–27, 1997–27 I.R.B. 9
Revenue Rulings:
97–27, 1997–27 I.R.B. 4
97–28, 1997–28 I.R.B. 4
97–29, 1997–28 I.R.B. 4
1
A cumulative list of all revenue rulings, revenue pro-
cedures, Treasury decisions, etc., published in Inter-
nal Revenue Bulletins 1997–1 through 1997–26 will
be found in Internal Revenue Bulletin 1997–27, dated
July 7, 1997.

20
July 21, 19971997-29␣ ␣ I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1997–27 through 1997–28
*Denotes entry since last publication
Revenue Procedures:
96–42
Superseded by
97–27, 1997–27 I.R.B. 9
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins 1997–
1 through 1997–26 will be found in Internal Revenue
Bulletin 1997–27, dated July 7, 1997.

21
1997-29␣ ␣ I.R.B.July 21, 1997
Notes

22
July 21, 19971997-29␣ ␣ I.R.B.
Notes

24
July 21, 19971997-29␣ ␣ I.R.B.
INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is
sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These
are sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers
to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative
Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the
reverse, may purchase them from the Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper
remittance, detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington,
DC 20402. Please allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving
it, we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home
Page (www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW,
Washington, DC 20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.
Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300

25
1997-29␣ ␣ I.R.B.July 21, 1997
INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is
sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These
are sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers
to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative
Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the
reverse, may purchase them from the Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper
remittance, detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington,
DC 20402. Please allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving
it, we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home
Page (www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW,
Washington, DC 20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.
Superintendent of Documents
U.S. Government Printing Office
Washington, DC 20402
Official Business
Penalty for Private Use, $300
First Class Mail
Postage and Fees Paid
GPO
Permit No. G–26

23
1997-29 I.R.B.July 21, 1997