[Federal Register Volume 69, Number 150 (Thursday, August 5, 2004)]
[Rules and Regulations]
[Pages 47364-47365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17796]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9147]
RIN 1545-BD30


Time and Manner of Making Section 163(d)(4)(B) Election To Treat 
Qualified Dividend Income as Investment Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations relating to an 
election that may be made by noncorporate taxpayers to treat qualified 
dividend income as investment income for purposes of calculating the 
deduction for investment interest. The regulations reflect changes to 
the law made by the Jobs and Growth Tax Relief Reconciliation Act of 
2003. The regulations affect taxpayers making the election under 
section 163(d)(4)(B) to treat qualified dividend income as investment 
income. The text of these temporary regulations also serves as the text 
of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section in this issue 
of the Federal Register.

DATES: Effective Date: These regulations are effective August 5, 2004.
    Applicability Dates: For dates of applicability, see Sec.  
1.163(d)-1T(d).

FOR FURTHER INFORMATION CONTACT: Amy Pfalzgraf, (202) 622-4950 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    Section 163(d)(1) provides that the investment interest deduction 
for a noncorporate taxpayer for any taxable year is limited to the net 
investment income of the taxpayer for the taxable year. Section 
163(d)(4)(A) defines ``net investment income'' as the excess of 
investment income over investment expenses. Section 163(d)(4)(B)(iii) 
provides that an electing taxpayer may take all or a portion of certain 
net capital gain attributable to dispositions of property held for 
investment into account as investment income. Section 1(h)(2) provides 
that any net capital gain taken into account as investment income is 
not eligible to be taxed at the capital gains rates.
    Section 302(b) of the Jobs and Growth Tax Relief Reconciliation Act 
of 2003, (Pub. L. 108-27, 117 Stat. 762) (JGTRRA 2003), amended section 
163(d)(4)(B) to provide that an electing taxpayer may take all or a 
portion of qualified dividend income (as defined in section 
1(h)(11)(B)) into account as investment income. Section 302(a) of 
JGTRRA 2003 added new section 1(h)(11)(D) to provide that any qualified 
dividend income taken into account as investment income is not eligible 
to be taxed at the capital gains rates.
    Section 1.163(d)-1 of the Income Tax Regulations provides rules 
regarding the time and manner for making the net capital gain election 
under section 163(d)(4)(B)(iii). These regulations amend Sec.  
1.163(d)-1 to provide that the rules regarding the time and manner for 
making the qualified dividend income election under section 
163(d)(4)(B) are the same as the rules for making the net capital gain 
election under section 163(d)(4)(B)(iii).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It 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. For application 
of the Regulatory Flexibility Act (5 U.S.C. chapter 6) please refer to 
the cross-reference notice of proposed rulemaking published elsewhere 
in this issue of the Federal Register. Pursuant to section 7805(f) of 
the Internal Revenue Code, these temporary regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Amy Pfalzgraf of the 
Office of Associate Chief Counsel (Income Tax & Accounting). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


0
Par. 2. Section 1.163(d)-1 is revised to read as follows:


Sec.  1.163(d)-1  Time and manner for making elections under the 
Omnibus Budget Reconciliation Act of 1993 and the Jobs and Growth Tax 
Relief Reconciliation Act of 2003.

    (a) [Reserved]. For further guidance, see Sec.  1.163(d)-1T(a).
    (b) [Reserved]. For further guidance, see Sec.  1.163(d)-1T(b).
    (c) [Reserved]. For further guidance, see Sec.  1.163(d)-1T(c).
    (d) [Reserved]. For further guidance, see Sec.  1.163(d)-1T(d).

0
Par. 3. Section 1.163(d)-1T is added to read as follows:


Sec.  1.163(d)-1T  Time and manner for making elections under the 
Omnibus Budget Reconciliation Act of 1993 and the Jobs and Growth Tax 
Relief Reconciliation Act of 2003 (temporary).

    (a) Description. Section 163(d)(4)(B)(iii), as added by section 
13206(d) of the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-
66, 107 Stat. 467), allows an electing taxpayer to take all or a 
portion of certain net capital gain attributable to dispositions of 
property held for investment into account as investment income. Section 
163(d)(4)(B), as amended by section 302(b) of the Jobs and Growth Tax 
Relief Reconciliation Act of 2003 (Pub. L. 108-27, 117 Stat. 762), 
allows an electing taxpayer to take all or a portion of qualified 
dividend income, as defined in section 1(h)(11)(B), into account as 
investment income. As a consequence, the net capital gain and qualified 
dividend income taken into account as investment income under these 
elections are not eligible to be taxed at the capital gains rates. An 
election may be made for net capital gain recognized by noncorporate 
taxpayers during any taxable year beginning after December 31, 1992. An 
election may be made for qualified dividend income received by 
noncorporate taxpayers during any taxable year beginning after December 
31, 2002, but before January 1, 2009.
    (b) Time and manner for making the elections. The elections for net 
capital gain and qualified dividend income must be made on or before 
the due date (including extensions) of the income tax return for the 
taxable year in which the net capital gain is recognized or the 
qualified dividend income is received. The elections are to be made on 
Form 4952, ``Investment Interest Expense Deduction,'' in accordance 
with the form and its instructions.
    (c) Revocability of elections. The elections described in this 
section are

[[Page 47365]]

revocable with the consent of the Commissioner.
    (d) Effective date. The rules set forth in this section regarding 
the net capital gain election are effective December 12, 1996. The 
rules set forth in this section regarding the qualified dividend income 
election apply to any taxable year beginning after December 31, 2002, 
but before January 1, 2009.

Nancy J. Jardini,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: July 29, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-17796 Filed 8-4-04; 8:45 am]
BILLING CODE 4830-01-P