[Federal Register Volume 68, Number 139 (Monday, July 21, 2003)]
[Proposed Rules]
[Pages 43058-43059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18211]


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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-129709-03]
RIN 1545-BC34


Prohibited Allocations of Securities in an S Corporation

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulations and notice of public hearing.

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SUMMARY: In the Rules and Regulations section of this issue of the 
Federal Register, the IRS is issuing temporary regulations that provide 
guidance on identifying disqualified persons and determining whether a 
plan year is a nonallocation year under section 409(p) and on the 
definition of synthetic equity under section 409(p)(5). These proposed 
regulations would generally affect plan sponsors of, and participants 
in, ESOPs holding stock of Subchapter S corporations. The text of those 
temporary regulations also serves as the text of these proposed 
regulations. This document also provides notice of a public hearing on 
these proposed regulations.

DATES: Written or electronic comments must be received by October 20, 
2003.
    Requests to speak (with outlines of oral comments to be discussed) 
at the public hearing scheduled for November 20, 2003, at 10 a.m. must 
be received by October 30, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-129709-03), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG-129709-03), 
Courier's Desk, Internal Revenue

[[Page 43059]]

Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, 
taxpayers may submit comments electronically directly to the IRS 
Internet site at http://www.irs.gov/regs. The public hearing will be 
held in room 6718.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
John Ricotta at 622-6060; concerning submissions of comments, Guy 
Traynor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Temporary regulations in the Rules and Regulations portion of this 
issue of the Federal Register amend the Income Tax Regulations (26 CFR 
part 1) relating to section 409(p). The temporary regulations contain 
rules relating to the identification of disqualified persons and 
determination whether a plan year is a nonallocation year under section 
409(p) and the definition of synthetic equity under section 409(p)(5). 
The text of those temporary regulations also serves as the text of 
these proposed regulations. The preamble 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 Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. Because Sec.  
1.409(p)-1 imposes no new collection of information on small entities, 
a Regulatory Flexibility Analysis under the Regulatory Flexibility Act 
(5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    Comments are requested with respect to issues raised by S 
corporation ESOPs established by March 14, 2001, that will need to 
comply with the requirements of section 409(p) beginning in 2005. For 
these ESOPs, the inclusion of deferred compensation as synthetic equity 
can be avoided by distributing such deferred compensation before 2005. 
Some employers may prefer other transition approaches. For example, a 
preferable transition approach may be to spin off and terminate the 
portion of a plan benefitting disqualified persons. Comments are 
requested on whether guidance is needed to address these possible 
transition approaches.
    Comments are also requested on issues that are reserved in the 
regulations with respect to whether certain interests in an S 
corporation should be treated as synthetic equity, including the extent 
to which rights to acquire assets of the S corporation or another 
person are established for reasonable business purposes and should not 
be treated as synthetic equity. While comments can be filed as late as 
October 20, 2003, commentators are encouraged to file comments as early 
as possible because the IRS and Treasury intend to move forward to 
address these issues as early as 2003.
    Commentators may also wish to comment on section 409(p)-related 
issues that are not directly raised in the proposed regulations. For 
example, commentators may wish to comment on the extent to which 
administrative guidance may be needed on an interim basis to deal with 
specific structures used to avoid or evade the purpose of section 
409(p).
    A public hearing has been scheduled for November 20, 2003, at 10 
a.m. in room 6718 of the Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. All visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts at the Constitution Avenue 
entrance. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (signed original and eight (8) copies) by 
October 30, 2003. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the scheduling of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal author of these regulations is John Ricotta of the 
Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and 
Government Entities). However, other personnel from the IRS and 
Treasury participated in their development.

List of Subjects 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

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

PART 1--INCOME TAXES

    1. The authority citation for part 1 is amended by an entry in 
numerical order to read in part as follows:

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

    Section 1.409(p)-1 also issued under 26 U.S.C. 409(p)(7)(A). * * 
*

    2. Section 1.409(p)-1 is added to read as follows:


Sec.  1.409(p)-1  Prohibited allocation of securities in an S 
corporation.

[The text of proposed Sec.  1.409(p)-1 is the same as the text of 
Sec.  1.409(p)-1T published elsewhere in this issue of the Federal 
Register].

Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 03-18211 Filed 7-18-03; 8:45 am]
BILLING CODE 4830-01-P