Notice 97-64

This test for materiality is intended to
reflect reasonable estate administration
practices and would generally be simple
to apply.
Another approach under consideration
is a test for materiality that provides for a
de minimis safe harbor amount of income
that may be used to pay administration
expenses without constituting a material
limitation on the surviving spouse’s right
to income. The safe harbor amount could
be a cumulative amount determined by a
percentage of gross income derived from
the property during the period of administration, or a specified dollar amount, or
some combination thereof. If more than
the safe harbor amount of income were
used to pay administration expenses, the
marital deduction would be reduced dollar for dollar by the excess over the safe
harbor amount of income so used.
The safe harbor approach provides a
“bright line” material limitation test.
However, if the safe harbor amount were
based on the cumulative amount of income derived from the property during
administration, the safe harbor amount
would have to be recomputed yearly to reflect additional income earned during the
year, which might make the test difficult
to apply.
An additional approach would be to
adopt a regulation stating that any use of
income for the payment of administration
expenses constitutes a material limitation
on the spouse’s right to income.

whether post-death interest accruing on
deferred federal estate tax should be
treated as properly charged to principal.
Rev. Rul. 93–48, 1993–2 C.B. 270, holds
that post-death interest accruing on deferred federal estate tax payable from a
testamentary transfer does not ordinarily
reduce the date of death value of the
transfer.
Comments and suggestions are requested by February 4, 1998. An original
and eight copies of written comments
should be sent to:
Internal Revenue Service
Attn: CC:DOM:CORP:R
Room 5431 (P&SI:Br4)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
or hand delivered between the hours of
8:00 a.m. and 5:00 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:DOM:CORP:R
Room 5431 (P&SI:Br4)
1111 Constitution Ave., NW
Washington, DC
Alternatively, comments may be submitted electronically via the Service’s Internet site at:
http://www.irs.ustreas.gov/prod/tax_re
gs/comments.html
All comments will be available for public
inspection and copying in their entirety.
DRAFTING INFORMATION

REQUEST FOR COMMENTS
The Service and Treasury invite comments on the tests for materiality described above and also welcome any suggestions for alternative approaches to the
issue. In addition, the Service and Treasury are interested in receiving comments
on (1) whether the test for materiality
under § 20.2056(b)–4(a) should be a
quantitative test based on a comparison of
the relative size of the income and the expenses charged to income; (2) whether
materiality should be determined based
on projections as of the date of death
rather than on the facts that develop afterwards; and (3) whether present value
principles should be applied and, if so,
how the practical difficulties of a present
value computation can be overcome.
The Service and Treasury are also interested in receiving comments on

1997–47 I.R.B.

The principal author of this notice is
Deborah Ryan of the Office of Assistant
Chief Counsel (Passthroughs and Special
Industries). For further information regarding this notice contact Ms. Ryan on
(202) 622-3090 (not a toll-free call).

Temporary Regulations To Be
Issued Under Section 1(h) of the
Internal Revenue Code (Applying
Section 1(h) to Capital Gain
Dividends of RICs and REITs).
Notice 97–64
SECTION 1. PURPOSE
This notice describes temporary regulations that will be issued under § 1(h) of
the Internal Revenue Code, effective for

7

taxable years ending on or after May 7,
1997, and provides guidance that regulated investment companies (“RICs”),
real estate investment trusts (“REITs”),
and their shareholders must use in applying § 1(h) until further guidance is issued.
SEC. 2. BACKGROUND
For individuals, estates, and trusts,
§ 1(h), as amended by the Taxpayer Relief
Act of 1997 (the “1997 Act”), Pub. L. No.
105–34, 111 Stat. 788, imposes differing
rates of tax on various transactions giving
rise to long-term capital gains or losses.
For transactions taken into account during
taxable years ending on or after May 7,
1997, a taxpayer’s long-term capital gains
and losses are separated into three tax rate
groups: a 20-percent group, a 25-percent
group, and a 28-percent group. See Notice 97–59, 1997–45 I.R.B. 7.
The Secretary has authority to issue
regulations concerning the application of
section 1(h) to long-term gains from sales
or exchanges by (or of interests in) passthrough entities, including RICs and
REITs.
To the extent that a RIC or a REIT has
net capital gain for a taxable year, dividends that it pays during the year (or that
it is deemed to pay during the year under
§ 855, § 858, or § 860) may be designated
by it as capital gain dividends. In general,
a capital gain dividend is treated by the
shareholders as a gain from the sale or exchange of a capital asset held for more
than one year.
SEC. 3. BASIC DESIGNATION RULE
Subject to the limitations in section 5,
if a RIC or REIT designates a dividend as
a capital gain dividend for a taxable year
ending on or after May 7, 1997, it may
also designate the dividend as a 20% rate
gain distribution, an unrecaptured section
1250 gain distribution, or a 28% rate gain
distribution. If no additional designation
is made regarding a capital gain dividend,
it is a 28% rate gain distribution. If a dividend was designated as a capital gain
dividend in a written notice mailed to
shareholders on or before December 31,
1997, the additional designations permitted by this paragraph may be effected by a
written notice, mailed to all shareholders
not later than February 2, 1998.
If any capital gain dividend is received
on or after May 7, 1997, but is treated

November 24, 1997

under § 855, § 858, or § 860 as being paid
during a taxable year that ends on or before that date, the dividend is a 28% rate
gain distribution.
For purposes of this notice, a designation of undistributed capital gains under §
852(b)(3)(D) or § 857(b)(3)(D) is considered to be the designation of a dividend as
a capital gain dividend.
SEC. 4. SHAREHOLDER
TREATMENT OF CAPITAL
GAIN DIVIDENDS
A capital gain dividend received from a
RIC or REIT in a taxable year of the
shareholder ending on or after May 7,
1997, is treated as follows:
.01 A 20% rate gain distribution is an
amount of long-term capital gain in the
20-percent group;
.02 An unrecaptured section 1250 gain
distribution is an amount of long-term
capital gain in the 25-percent group; and
.03 A 28% rate gain distribution is an
amount of long-term capital gain in the
28-percent group.
SEC. 5. LIMITATIONS ON
DESIGNATIONS OF CAPITAL
GAIN DIVIDENDS
Additional designations of capital gain
dividends for a taxable year are effective
only to the extent that they do not exceed
the limitations stated below and only to
the extent that they comply with the principles of Rev. Rul. 89–81, 1989–1 C.B.
226, which requires that distributions
made to different classes of shares not be
composed disproportionately of dividends
of a particular type. Designations of capital gain dividends must also comply with
§ 852(b)(3)(C) or § 857(b)(3)(C) (as appropriate), which make designations ineffective to the extent they exceed the net
capital gain for the year.
Subject to a deferral adjustment or bifurcation adjustment discussed in section
6, a RIC or REIT determines the maximum amounts which may be designated
in each class of capital gains dividends by
performing the computation required by
§ 1(h) as if the RIC or REIT were an individual whose ordinary income is subject
to a marginal tax rate of at least 28 percent. Then, the maximum distributable
20% rate gain is equal to the amount multiplied by 20% in performing that computation and the maximum distributable un-

November 24, 1997

recaptured section 1250 gain is equal to
the amount multiplied by 25% in performing that computation. The maximum
distributable 28% rate gain is the net capital gain minus the amount of unrecaptured
section 1250 gain distributions and 20%
rate gain distributions that have been
properly designated. For example, if a
RIC has net capital gain in the tax year of
$100, of which $60 would be multiplied
by 20% and $5 would be multiplied by
25% in performing the computations required by § 1(h), then the maximum distributable 20% rate gain is $60 and the
maximum unrecaptured section 1250 gain
is $5. If the RIC properly designates the
maximum permissible unrecaptured section 1250 gain distribution and 20% rate
gain distribution, then the RIC’s maximum distributable 28% rate gain is $35;
i.e., the net capital gain of $100 less the
properly designated unrecaptured section
1250 gain distribution of $5 and 20% rate
gain distribution of $60.
SEC. 6. DEFERRAL ADJUSTMENT
AND BIFURCATION ADJUSTMENT
The adjustment (a deferral adjustment)
required by § 852(b)(3)(C) and § 1.852–
11(e) for a RIC with post-October capital
losses or by § 857(b)(3)(C) for a fiscal
year REIT with post-December capital
losses must be made before calculating
the limitations on the various classes of
capital gain dividends for the RIC’s or
REIT’s taxable year. The deferral adjustment is disregarded in determining the
group in which any deferred gain or loss
belongs, however, if the group depends on
whether an item of gain or loss is taken
into account before May 7, 1997, after
July 28, 1997, or between those dates. For
example, if a RIC’s sale of a capital asset
held for 19 months occurs before May 7,
1997, but is treated under § 852(b)(3)(C)
and § 1.852–11(e) as arising after that
date, the sale gives rise to capital gain in
the 28-percent group.
A RIC or REIT must make the bifurcation adjustment described in the next
paragraph if: (1) its taxable year is not the
period used to determine capital gain net
income for purposes of the excise tax imposed by § 4982 or § 4981 (that is, it is a
RIC with a taxable year that does not end
on October 31 and that has not made an
election under § 4982(e)(4) or it is a REIT
whose taxable year is not the calendar

8

year); (2) it has a net capital gain during
the pre-November (for a RIC) or pre-January (for a REIT) portion of its taxable
year; and (3) it is not required to make the
deferral adjustment.
If a RIC or REIT is required to make a
bifurcation adjustment, it must calculate
the maximum distributable 20% rate gain
and the maximum distributable unrecaptured section 1250 gain separately for the
pre-November (pre-January for REITs)
portion of the year and for the post-October (post-December for REITs) portion of
the year, as if the two portions of the year
were separate taxable years. Then, the
maximum distributable 20% rate gain and
the maximum distributable unrecaptured
section 1250 gain for the taxable year
equals the sum of the maximum distributable amounts for gains in that group determined for each portion of the year.
SEC. 7. EXAMPLES
(1) Example 1. RIC X’s taxable year ends on
July 31. RIC X has only the following capital gains
and losses for the periods indicated:
8/1 to 10/31/97
gain
Long-term capital gain or loss
stock held 19 months
300
stock held 13 months
200
Short-term capital gain or
loss
100
11/1 to 7/31/98
Long-term capital gain or loss
stock held 19 months
200
stock held 13 months
200
Short-term capital gain or
loss
0

loss

net

(150)
(100)

150
100

0

100

(50)
(300)

150
(100)

(100)

(100)

Because X has a taxable year ending in July and a
post-October net capital loss of $50, it is required by
§ 852(b)(3)(C) and § 1.852-11(e) to make a deferral
adjustment and so does not make a bifurcation adjustment. X must disregard the capital gains and
losses for the post-October period in computing its
net capital gains for purposes of designating capital
gain dividends for its taxable year ending July 31,
1998. X must also disregard those gains and losses
for purposes of calculating the various maximum
distributable amounts of gain. For this taxable year,
therefore, X may designate up to $250 as capital gain
dividends, of which up to $150 may be designated as
20% rate gain distributions. The amount that may be
designated as 28% rate gain distributions (or is a
28% rate gain distribution if designated only as a
capital gain dividend) is $250 minus any amounts
properly designated as 20% rate gain distributions.
X must take the post-October capital gains and
losses into account on August 1, 1998 (the first day
of the next taxable year), to determine its net capital
gain and various maximum distributable amounts of
gain for the taxable year beginning on that date.
(2) Example 2. RIC Y’s taxable year ends on July
31. RIC Y has only the following capital gains and
losses for the periods indicated:

1997–47 I.R.B.

8/1 to 10/31/97
gain
Long-term capital gain or loss
stock held 19 months
300
stock held 13 months
200
Short-term capital gain or
loss
100
11/1/97 to 7/31/98
Long-term capital gain or loss
stock held 19 months
200
stock held 13 months
200
Short-term capital gain or
loss
0

loss
(150)
(100)
0

(50)
(300)
0

net
150
100
100

150
(100)
0

Because Y does not have a post-October capital loss
for its taxable year ending July 31, 1998, it does not
make a deferral adjustment. Because Y has a taxable
year ending in July and a pre-November net capital
gain, it must make a bifurcation adjustment. Y must
determine the maximum distributable amounts of
20% rate gain and unrecaptured section 1250 gain
separately for the pre-November and the post-October portion of its taxable year ending July 31, 1998.
The sum of these amounts determines the various
maximum distributable amounts of gain for the entire taxable year. For the pre-November period, Y’s
maximum distributable 20% rate gain is $150. For
the post-October portion of the year, Y’s maximum
distributable 20% rate gain is $50. Y’s net capital
gain for the entire year is $300. For this taxable
year, therefore, Y may designate up to $300 of capital gain dividends, of which up to $200 may be designated as 20% rate gain distributions. The amount
that may be designated as 28% rate gain distributions (or that will be deemed a 28% rate gain distribution if designated only as a capital gain dividend) is
$300 minus any amounts properly designated as
20% rate gain distributions.

SEC. 8. SECTION 1202 GAIN
In the future, RICs may recognize gain
from the sale or exchange of qualified
small business stock held for more than 5
years that may be distributed to shareholders subject to certain limitations provided by § 1202(g). It is expected that the
temporary regulations will provide guidance on how RICs may designate dividends as “section 1202 gain distributions.” This guidance is expected to
provide that: (1) section 1202 gain distributions will be designated separately for
different issuers of qualified small business stock; (2) the exclusion from income
permitted by § 1202 will be determined at
the shareholder level not the RIC level;
and (3) the maximum distributable section 1202 gain for each issuer will be calculated separately from limitations on all
other classes of capital gain dividends but
in the aggregate will not exceed the RIC’s
net capital gain.

1997–47 I.R.B.

SEC. 9. USE OF SUBSTITUTE FORMS
1099–DIV FOR 1997
The rules set forth in this section and in
section 10 previously have been published in Announcement 97–109,
1997–45 I.R.B. 12.
RICs, REITs, brokers, and others reporting capital gain distributions on the
1997 Form 1099–DIV must provide additional information with their statements to
recipients. Payers must continue to report
the total capital gain distributions in box
1c. Payers should also advise recipients
that they cannot report capital gain distributions on Form 1040, line 13, as stated
in the official 1997 Form 1099–DIV.
Rather, they must report the distributions
on Schedule D (Form 1040), line 13, column (f).
In addition, payers must provide to recipients information sufficient to determine the following:
.01 The amount of 28% rate gain distributions. Payers should advise recipients
to report this amount on Schedule D
(Form 1040), line 13, column (g).
.02 The amount of unrecaptured section
1250 gain distributions. Payers should
advise recipients to report this amount on
Schedule D (Form 1040), line 25.
Payers may provide this additional information to recipients on a substitute
statement or on a separate statement.
Payers are not required to report the additional information to the IRS.
SEC. 10 USE OF SUBSTITUTE
FORMS 2439 FOR 1996–1997
RICs and other filers completing the
1996 Form 2439 for fiscal years ending
after May 6, 1997, must provide additional information with their notices to
shareholders. Filers must continue to report the total undistributed long-term capital gains for the year on line 1 of Form
2439. Filers should also advise individual
shareholders that they cannot report the
amount on line 1 on Schedule D (Form
1040), Part II, line 12, as stated in the official 1996 Form 2439 instructions.
Rather, they must report the amount on
line 1 on the 1997 Schedule D (Form
1040), line 11, Column (f).
In addition, filers must provide to

9

shareholders information sufficient to determine the following:
.01 The amount of 28% rate gain included on line 1 of Form 2439. Filers
should advise recipients to report this
amount on Schedule D (Form 1040), line
11, column (g).
.02 The amount of unrecaptured section
1250 gain included on line 1 of Form
2439. Filers should advise recipients to
report this amount on Schedule D (Form
1040), line 25.
Filers may provide this additional information to shareholders on a substitute
statement or on a separate statement. Filers are not required to report this additional information on Forms 2439 filed
with the IRS.
SEC. 11. SUBMISSION OF
COMMENTS
Comment are requested on the subject
matter of this notice and, additionally, on
the proper treatment of a loss on the sale
of a RIC or REIT share held for six
months or less that is recharacterized
under § 852(b)(4)(A) or § 857(b)(7) as a
long-term capital loss. Taxpayers may
submit comments to: CC:DOM:CORP:R
(OGI–117972–97), Room 5226, Internal
Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20022.
Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (OGI–117972–97),
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 of 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.
Comments will be available for public inspection.
SEC. 12 PAPERWORK REDUCTION
ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1565.

November 24, 1997

An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
The collections of information in this
notice are in sections 3, 9 and 10. This information is required to permit RIC and
REIT shareholders to properly report income following the amendment of § 1(h)
by the 1997 Act. The information collected will be used by RIC and REIT
shareholders reporting income. The collection of information is mandatory. The
likely respondents are businesses and
other for-profit institutions.
The burden for the collections of information in section 3 is as follows:
The estimated total annual reporting
and/or recordkeeping burden is 1500
hours.
The estimated annual burden per respondent varies from 1/4 hour to 10
hours, depending on individual circumstances, with an estimated average of 1/2
hour. The estimated number of respondents is 3,000.
The estimated annual frequency of responses is annually.
The burden for the collection of information in sections 9 and 10 is reflected in
the burden for Form 1099–DIV and Form
2439.
Books or records relating to a collection of information must be retained as

November 24, 1997

long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this notice is
Kenneth Christman of the Office of Assistant Chief Counsel (Financial Institutions
and Products). For further information
regarding this notice contact Kenneth
Christman on (202) 622-3950 (not a tollfree call).

26 CFR 601.201: Rulings and determination
letters.
(Also Part I, §§ 355; 1.355–2.)

Rev. Proc. 97–53
SECTION 1. PURPOSE
This revenue procedure modifies Rev.
Proc. 97–3, 1997–1 I.R.B. 85, (January 6,
1997), which sets forth provisions of the
Internal Revenue Code under the jurisdiction of the Associate Chief Counsel (Domestic) and the Associate Chief Counsel
(Employee Benefits and Exempt Organizations) relating to matters where the Service will not issue advance rulings or determination letters.

10

SECTION 2. BACKGROUND
Section 5 of Rev. Proc. 97–3 lists areas
under extensive study in which rulings or
determination letters will not be issued
until the Service resolves the issue through
publication of a revenue ruling, revenue
procedure, regulations, or otherwise. Section 5.17 of Rev. Proc. 97–3 provides that
rulings or determination letters will not be
issued under § 355(a)(1) of the Code with
respect to certain distributions until the
Service resolves issues related to these
distributions. The no rule position of section 5.17 was originally set forth in Rev.
Proc. 96–39, 1996–2 C.B. 300, which was
superseded by Rev. Proc. 97–3.
SECTION 3. PROCEDURE
Rev. Proc. 97–3 is modified by deleting
section 5.17.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective on
November 10, 1997, the date it is made
available to the public.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Dean P. Lekos of the Office
of Assistant Chief Counsel (Corporate).
For further information regarding this
revenue procedure, contact Mr. Lekos on
(202) 622-7550 (not a toll-free call).

1997–47 I.R.B.