For Tax Professionals  
REG-102144-98 March 09, 1998

Source & Grouping Rules for
Foreign Sales Corporation Transfer Pricing

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-102144-98] RIN 1545-AV90

TITLE: Source and Grouping Rules for Foreign Sales Corporation
Transfer Pricing

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: In the Rules and Regulations section of this issue of the
Federal Register, the IRS is issuing temporary regulations that
provide guidance to taxpayers who have made an election to be
treated as a foreign sales corporation (FSC). The regulations
provide rules clarifying the special sourcing rules under section
927(e)(1) and provide a deadline for the election to group
transactions. This document also provides notice of a public hearing
on these proposed regulations. The text of the temporary regulations
also serves as the text of the proposed regulations.

DATES: Written comments must be received by June 1, 1998.

Requests to speak (with outlines of oral comments) to be discussed
at the public hearing scheduled for June 24, 1998, at 10 a.m., must
be received by June 3, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-102144-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand.2 delivered between
the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG-102144-98), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC.

Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The public
hearing will be held in Room 2615, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,
Elizabeth Beck (202) 622-3880; concerning submissions and the
hearing, Michael Slaughter, (202) 622-7190 (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 sections 925 and 927.

The temporary regulations contain rules relating to the grouping of
transactions under the FSC transfer pricing rules and the special
source rules under section 927(e)(1). 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.3 required. It has
also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations, and because the regulation does not impose a collection
of information on small entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this 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 Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to
the IRS. All comments will be available for public inspection and
copying.

A public hearing has been scheduled for June 24, 1998, at 10 a.m.,
in room 2615, Internal Revenue Building, 1111 Constitution Avenue,
NW., Washington, DC. Because of access restrictions, visitors will
not be admitted beyond the Internal Revenue lobby more than 15
minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must
submit written comments by June 1, 1998, and submit an outline of
the topics to be discussed and the time to be devoted to each topic
(preferably a signed original and eight (8) copies) by June 3,
1998..4 A period of 10 minutes will be allotted to each person for
making comments.

An agenda showing the schedule of 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 the proposed regulations is Elizabeth Beck,
of the Office of the Associate Chief Counsel (International). Other
personnel from the IRS and Treasury Department also participated in
the development of these regulations.

List of Subjects in 26 CFR Part l 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

Paragraph 1. The authority citation for part 1 is amended by adding
the following entries to the table in numerical order to read as
follows:

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

Section 1.925(a)-1 is also issued under 26 U.S.C. 925(b)(1) and (2)
and 927(d)(2)(B).

Section 1.925(b)-1 is also issued under 26 U.S.C. 925(b)(1) and (2)
and 927(d)(2)(B). * * *.

Par. 2. Section 1.925(a)-1 is added as follows:

[The text of proposed 1.925(a)-1 consisting of paragraphs (c)(8)(i)
and (e)(4) is the same as the text of 1.925(a)-1T( c)(8)(i) and (e)
(4) as amended elsewhere in this issue of the Federal Register].

Par. 3. Section 1.925(b)-1 is added as follows:

[The text of proposed 1.925(b)-1 consisting of paragraph (b)(3)(i)
is the same as the text of 1.925(b)-1T(b)(3)(i) as amended
elsewhere in this issue of the Federal Register].

Par. 4. Section 1.927(e)-1 is amended as follows:

[The text of proposed 1.927(e)-1 is the same as the text of
1.927(e)-1T published elsewhere in this issue of the Federal
Register].

Michael P. Dolan
Deputy Commissioner of Internal Revenue


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