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Federal Register / Vol. 67, No. 139 / Friday, July 19, 2002 / Rules and Regulations
Injection as a treatment for various
bacterial diseases in cattle and swine.
The supplemental ANADA provides for
the subcutaneous administration of this
oxytetracycline injectable solution to
cattle, and for its use in lactating dairy
cattle. The supplemental application is
approved as of April 8, 2002, and the
regulations are amended in 21 CFR
522.1660d to reflect the approval. The
basis of approval is discussed in the
freedom of information summary.
In accordance with the freedom of
information provisions of 21 CFR part
20 and 514.11(e)(2)(ii), a summary of
safety and effectiveness data and
information submitted to support
approval of this application may be seen
in the Dockets Management Branch
(HFA–305), Food and Drug
Administration, 5630 Fishers Lane, rm.
1061, Rockville, MD 20852, between 9
a.m. and 4 p.m., Monday through
Friday.
The agency has determined under 21
CFR 25.33(a)(1) that this action is of a
type that does not individually or
cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor an environmental impact statement
is required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.
List of Subject in 21 CFR Part 522

Therefore, under the Federal Food,
Drug, and Cosmetic Act and under
authority delegated to the Commissioner
of Food and Drugs and redelegated to
the Center for Veterinary Medicine, 21
CFR part 522 is amended as follows:
PART 522—IMPLANTATION OR
INJECTABLE DOSAGE FORM NEW
ANIMAL DRUGS
1. The authority citation for 21 CFR
part 522 continues to read as follows:
Authority: 21 U.S.C. 360b.
[Amended]

2. Section 522.1660 Oxytetracycline
injection is amended in paragraph
(d)(1)(iii) in the second sentence by
numerically adding ‘‘011722,’’; in the
eighth sentence by removing ‘‘011722,’’;
and in the ninth sentence by removing
‘‘sponsor 000069’’ and by adding in its
place ‘‘sponsors 000069 and 011722’’.

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BILLING CODE 4160–01–S

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9004]
RIN 1545–AW98

Real Estate Mortgage Investment
Conduits
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to safe harbor
transfers of noneconomic residual
interests in real estate mortgage
investment conduits (REMICs). The
final regulations provide additional
limitations on the circumstances under
which transferors may claim safe harbor
treatment.
DATES: Effective Date: These regulations
are effective July 19, 2002.
Applicability Date: For dates of
applicability, see § 1.860E–(1)(c)(10).
FOR FURTHER INFORMATION CONTACT:
Courtney Shepardson at (202) 622–3940
(not a toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

Animal drugs.

§ 522.1660

Dated: July 11, 2002.
Andrew J. Beaulieu,
Acting Director, Office of New Animal Drug
Evaluation, Center for Veterinary Medicine.
[FR Doc. 02–18178 Filed 7–18–02; 8:45 am]

Jkt 197001

The collection of information in this
final rule has been reviewed and,
pending receipt and evaluation of
public comments, approved by the
Office of Management and Budget
(OMB) under 44 U.S.C. 3507 and
assigned control number 1545–1675.
The collection of information in this
regulation is in § 1.860E–1(c)(5)(ii). This
information is required to enable the
IRS to verify that a taxpayer is
complying with the conditions of this
regulation. The collection of
information is mandatory and is
required. Otherwise, the taxpayer will
not receive the benefit of safe harbor
treatment as provided in the regulation.
The likely respondents are businesses
and other for-profit institutions.
Comments on the collection of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC,

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47451

20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, W:CAR:MP:FP:S,
Washington, DC 20224. Comments on
the collection of information should be
received by September 17, 2002.
Comments are specifically requested
concerning:
Whether the collection of information
is necessary for the proper performance
of the functions of the Internal Revenue
Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the collection of information may be
minimized, including through the
application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of service to provide
information.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
The estimated total annual reporting
burden is 470 hours, based on an
estimated number of respondents of 470
and an estimated average annual burden
hours per respondent of one hour.
Books or records relating to a
collection of information must be
retained as 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.
Background
This document contains final
regulations regarding the proposed
amendments to 26 CFR part 1 under
section 860E of the Internal Revenue
Code (Code). The regulations provide
the circumstances under which a
transferor of a noneconomic REMIC
residual interest meeting the
investigation and representation
requirements may avail itself of the safe
harbor by satisfying either the formula
test or the asset test.
Final regulations governing REMICs,
issued in 1992, contain rules governing
the transfer of noneconomic REMIC
residual interests. In general, a transfer
of a noneconomic residual interest is
disregarded for all tax purposes if a
significant purpose of the transfer is to

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enable the transferor to impede the
assessment or collection of tax. A
purpose to impede the assessment or
collection of tax (a wrongful purpose)
exists if the transferor, at the time of the
transfer, either knew or should have
known that the transferee would be
unwilling or unable to pay taxes due on
its share of the REMIC’s taxable income.
Under a safe harbor, the transferor of
a REMIC noneconomic residual interest
is presumed not to have a wrongful
purpose if two requirements are
satisfied: (1) the transferor conducts a
reasonable investigation of the
transferee’s financial condition (the
investigation requirement); and (2) the
transferor secures a representation from
the transferee to the effect that the
transferee understands the tax
obligations associated with holding a
residual interest and intends to pay
those taxes (the representation
requirement).
The IRS and Treasury have been
concerned that some transferors of
noneconomic residual interests claim
they satisfy the safe harbor even in
situations where the economics of the
transfer clearly indicate the transferee is
unwilling or unable to pay the tax
associated with holding the interest. For
this reason, on February 7, 2000, the IRS
published in the Federal Register (65
FR 5807) a notice of proposed
rulemaking (REG–100276–97; REG–
122450–98) designed to clarify the safe
harbor by adding the ‘‘formula test,’’ an
economic test. The proposed regulation
provides that the safe harbor is
unavailable unless the present value of
the anticipated tax liabilities associated
with holding the residual interest does
not exceed the sum of: (1) The present
value of any consideration given to the
transferee to acquire the interest; (2) the
present value of the expected future
distributions on the interest; and (3) the
present value of the anticipated tax
savings associated with holding the
interest as the REMIC generates losses.
The notice of proposed rulemaking
also contained rules for FASITs. Section
1.860H–6(g) of the proposed regulations
provides requirements for transfers of
FASIT ownership interests and adopts a
safe harbor by reference to the safe
harbor provisions of the REMIC
regulations.
In January 2001, the IRS published
Rev. Proc. 2001–12 (2001–3 I.R.B. 335)
to set forth an alternative safe harbor
that taxpayers could use while the IRS
and the Treasury considered comments
on the proposed regulations. Under the
alternative safe harbor, if a transferor
meets the investigation requirement and
the representation requirement but the
transfer fails to meet the formula test,

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the transferor may invoke the safe
harbor if the transferee meets a twoprong test (the asset test). A transferee
generally meets the first prong of this
test if, at the time of the transfer, and in
each of the two years preceding the year
of transfer, the transferee’s gross assets
exceed $100 million and its net assets
exceed $10 million. A transferee
generally meets the second prong of this
test if it is a domestic, taxable
corporation and agrees in writing not to
transfer the interest to any person other
than another domestic, taxable
corporation that also satisfies the
requirements of the asset test. A
transferor cannot rely on the asset test
if the transferor knows, or has reason to
know, that the transferee will not
comply with its written agreement to
limit the restrictions on subsequent
transfers of the residual interest.
Rev. Proc. 2001–12 provides that the
asset test fails to be satisfied in the case
of a transfer or assignment of a
noneconomic residual interest to a
foreign branch of an otherwise eligible
transferee. If such a transfer or
assignment were permitted, a corporate
taxpayer might seek to claim that the
provisions of an applicable income tax
treaty would resource excess inclusion
income as foreign source income, and
that, as a consequence, any U.S. tax
liability attributable to the excess
inclusion income could be offset by
foreign tax credits. Such a claim would
impede the assessment or collection of
U.S. tax on excess inclusion income,
contrary to the congressional purpose of
assuring that such income will be
taxable in all events. See, e.g., sections
860E(a)(1), (b), (e) and 860G(b) of the
Code.
The Treasury and the IRS have
learned that certain taxpayers
transferring noneconomic residual
interests to foreign branches have
attempted to rely on the formula test to
obtain safe harbor treatment in an effort
to impede the assessment or collection
of U.S. tax on excess inclusion income.
Accordingly, the final regulations
provide that if a noneconomic residual
interest is transferred to a foreign
permanent establishment or fixed base
of a U.S. taxpayer, the transfer is not
eligible for safe harbor treatment under
either the asset test or the formula test.
The final regulations also require a
transferee to represent that it will not
cause income from the noneconomic
residual interest to be attributable to a
foreign permanent establishment or
fixed base.
Section 1.860E–1(c)(8) provides
computational rules that a taxpayer may
use to qualify for safe harbor status
under the formula test. Section 1.860E–

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1(c)(8)(i) provides that the transferee is
presumed to pay tax at a rate equal to
the highest rate of tax specified in
section 11(b). Some commentators were
concerned that this presumed rate of
taxation was too high because it does
not take into consideration taxpayers
subject to the alternative minimum tax
rate. In light of the comments received,
this provision has been amended in the
final regulations to allow certain
transferees that compute their taxable
income using the alternative minimum
tax rate to use the alternative minimum
tax rate applicable to corporations.
Additionally, § 1.860E–1(c)(8)(iii)
provides that the present values in the
formula test are to be computed using a
discount rate equal to the applicable
Federal short-term rate prescribed by
section 1274(d). This is a change from
the proposed regulation and Rev. Proc.
2001–12. In those publications the
provision stated that ‘‘present values are
computed using a discount rate equal to
the applicable Federal rate prescribed in
section 1274(d) compounded
semiannually’’ and that ‘‘[a] lower
discount rate may be used if the
transferee can demonstrate that it
regularly borrows, in the course of its
trade or business, substantial funds at
such lower rate from an unrelated third
party.’’ The IRS and the Treasury
Department have learned that, based on
this provision, certain taxpayers have
been attempting to use unrealistically
low or zero interest rates to satisfy the
formula test, frustrating the intent of the
test. Furthermore, the Treasury
Department and the IRS believe that a
rule allowing for a rate other than a rate
based on an objective index would add
unnecessary complexity to the safe
harbor. As a result, the rule in the
proposed regulations that permits a
transferee to use a lower discount rate,
if the transferee can demonstrate that it
regularly borrows substantial funds at
such lower rate, is not included in the
final regulations; and the Federal shortterm rate has been substituted for the
applicable Federal rate. To simplify
taxpayers’ computations, the final
regulations allow use of any of the
published short-term rates, provided
that the present values are computed
with a corresponding period of
compounding. With the exception of the
provisions relating to transfers to foreign
branches, these changes generally have
the proposed applicability date of
February 4, 2000, but taxpayers may
choose to apply the interest rate formula
set forth in the proposed regulation and
Rev. Proc. 2001–12 for transfers
occurring before August 19, 2002.
It is anticipated that when final
regulations are adopted with respect to

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Federal Register / Vol. 67, No. 139 / Friday, July 19, 2002 / Rules and Regulations
FASITs, § 1.860H–6(g) of the proposed
regulations will be adopted in
substantially its present form, with the
result that the final regulations
contained in this document will also
govern transfers of FASIT ownership
interests with substantially the same
applicability date as is contained in this
document.
Effect on Other Documents
Rev. Proc. 2001–12 (2001–3 I.R.B.
335) is obsolete for transfers of
noneconomic residual interests in
REMICs occurring on or after August 19,
2002.
Special Analyses
It is hereby certified that these
regulations will not have a significant
economic impact on a substantial
number of small entities. This
certification is based on the fact that it
is unlikely that a substantial number of
small entities will hold REMIC residual
interests. Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. 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 sections 553(b) and 553(d) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) do not apply to these
regulations.
Drafting Information
The principal author of these
regulations is Courtney Shepardson.
However, other personnel from the IRS
and Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and record
keeping requirements.
26 CFR Part 602
Reporting and record keeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. In § 1.860A–0, entries in the
outline for § 1.860E–1(c)(5) through
(c)(10) are added to read as follows:

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§ 1.860A–0

*

*

Outline of REMIC provisions.

*

*

*

§ 1.860E–1 Treatment of taxable income of
a residual interest holder in excess of daily
accruals.

*

*

*

*

*

(c) * * *
(5) Asset test.
(6) Definitions for asset test.
(7) Formula test.
(8) Conditions and limitations on formula
test.
(9) Examples.
(10) Effective dates.

*

*

*

*

*

Par. 3. Section 1.860E–1 is amended
as follows:
1. Paragraph (c)(4)(i) is amended by
removing the language ‘‘and’’ at the end
of the paragraph.
2. Paragraph (c)(4)(ii) is amended by
removing the period at the end of the
paragraph and adding a semicolon in its
place.
3. Paragraphs (c)(4)(iii) and (c)(4)(iv)
are added.
4. Paragraphs (c)(5) through (c)(10) are
added.
The additions read as follows:
§ 1.860E–1 Treatment of taxable income of
a residual interest holder in excess of daily
accruals.

*

*
*
*
*
(c) * * *
(4) * * *
(iii) The transferee represents that it
will not cause income from the
noneconomic residual interest to be
attributable to a foreign permanent
establishment or fixed base (within the
meaning of an applicable income tax
treaty) of the transferee or another U.S.
taxpayer; and
(iv) The transfer satisfies either the
asset test in paragraph (c)(5) of this
section or the formula test in paragraph
(c)(7) of this section.
(5) Asset test. The transfer satisfies the
asset test if it meets the requirements of
paragraphs (c)(5)(i), (ii) and (iii) of this
section.
(i) At the time of the transfer, and at
the close of each of the transferee’s two
fiscal years preceding the transferee’s
fiscal year of transfer, the transferee’s
gross assets for financial reporting
purposes exceed $100 million and its
net assets for financial reporting
purposes exceed $10 million. For
purposes of the preceding sentence, the
gross assets and net assets of a transferee
do not include any obligation of any
related person (as defined in paragraph
(c)(6)(ii) of this section) or any other
asset if a principal purpose for holding
or acquiring the other asset is to permit
the transferee to satisfy the conditions of
this paragraph (c)(5)(i).

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47453

(ii) The transferee must be an eligible
corporation (defined in paragraph
(c)(6)(i) of this section) and must agree
in writing that any subsequent transfer
of the interest will be to another eligible
corporation in a transaction that
satisfies paragraphs (c)(4)(i), (ii), and
(iii) and this paragraph (c)(5). The direct
or indirect transfer of the residual
interest to a foreign permanent
establishment (within the meaning of an
applicable income tax treaty) of a
domestic corporation is a transfer that is
not a transfer to an eligible corporation.
A transfer also fails to meet the
requirements of this paragraph (c)(5)(ii)
if the transferor knows, or has reason to
know, that the transferee will not honor
the restrictions on subsequent transfers
of the residual interest.
(iii) A reasonable person would not
conclude, based on the facts and
circumstances known to the transferor
on or before the date of the transfer, that
the taxes associated with the residual
interest will not be paid. The
consideration given to the transferee to
acquire the noneconomic residual
interest in the REMIC is only one factor
to be considered, but the transferor will
be deemed to know that the transferee
cannot or will not pay if the amount of
consideration is so low compared to the
liabilities assumed that a reasonable
person would conclude that the taxes
associated with holding the residual
interest will not be paid. In determining
whether the amount of consideration is
too low, the specific terms of the
formula test in paragraph (c)(7) of this
section need not be used.
(6) Definitions for asset test. The
following definitions apply for purposes
of paragraph (c)(5) of this section:
(i) Eligible corporation means any
domestic C corporation (as defined in
section 1361(a)(2)) other than—
(A) A corporation which is exempt
from, or is not subject to, tax under
section 11;
(B) An entity described in section
851(a) or 856(a);
(C) A REMIC; or
(D) An organization to which part I of
subchapter T of chapter 1 of subtitle A
of the Internal Revenue Code applies.
(ii) Related person is any person
that—
(A) Bears a relationship to the
transferee enumerated in section 267(b)
or 707(b)(1), using ‘‘20 percent’’ instead
of ‘‘50 percent’’ where it appears under
the provisions; or
(B) Is under common control (within
the meaning of section 52(a) and (b))
with the transferee.
(7) Formula test. The transfer satisfies
the formula test if the present value of
the anticipated tax liabilities associated

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with holding the residual interest does
not exceed the sum of—
(i) The present value of any
consideration given to the transferee to
acquire the interest;
(ii) The present value of the expected
future distributions on the interest; and
(iii) The present value of the
anticipated tax savings associated with
holding the interest as the REMIC
generates losses.
(8) Conditions and limitations on
formula test. The following rules apply
for purposes of the formula test in
paragraph (c)(7) of this section.
(i) The transferee is assumed to pay
tax at a rate equal to the highest rate of
tax specified in section 11(b)(1). If the
transferee has been subject to the
alternative minimum tax under section
55 in the preceding two years and will
compute its taxable income in the
current taxable year using the
alternative minimum tax rate, then the
tax rate specified in section 55(b)(1)(B)
may be used in lieu of the highest rate
specified in section 11(b)(1).
(ii) The direct or indirect transfer of
the residual interest to a foreign
permanent establishment or fixed base
(within the meaning of an applicable
income tax treaty) of a domestic
transferee is not eligible for the formula
test.
(iii) Present values are computed
using a discount rate equal to the
Federal short-term rate prescribed by
section 1274(d) for the month of the
transfer and the compounding period
used by the taxpayer.
(9) Examples. The following examples
illustrate the rules of this section:
Example 1. Transfer to partnership. X
transfers a noneconomic residual interest in
a REMIC to Partnership P in a transaction
that does not satisfy the formula test of
paragraph (c)(7) of this section. Y and Z are
the partners of P. Even if Y and Z are eligible
corporations that satisfy the requirements of
paragraph (c)(5)(i) of this section, the transfer
fails to satisfy the asset test requirements
found in paragraph (c)(5)(ii) of this section
because P is a partnership rather than an
eligible corporation within the meaning of
(c)(6)(i) of this section.
Example 2. Transfer to a corporation
without capacity to carry additional residual
interests. During the first ten months of a
year, Bank transfers five residual interests to
Corporation U under circumstances meeting
the requirements of the asset test in
paragraph (c)(5) of this section. Bank is the
major creditor of U and consequently has
access to U’s financial records and has
knowledge of U’s financial circumstances.
During the last month of the year, Bank
transfers three additional residual interests to
U in a transaction that does not meet the
formula test of paragraph (c)(7) of this
section. At the time of this transfer, U’s
financial records indicate it has retained the

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previously transferred residual interests. U’s
financial circumstances, including the
aggregate tax liabilities it has assumed with
respect to REMIC residual interests, would
cause a reasonable person to conclude that U
will be unable to meet its tax liabilities when
due. The transfers in the last month of the
year fail to satisfy the investigation
requirement in paragraph (c)(4)(i) of this
section and the asset test requirement of
paragraph (c)(5)(iii) of this section because
Bank has reason to know that U will not be
able to pay the tax due on those interests.
Example 3. Transfer to a foreign
permanent establishment of an eligible
corporation. R transfers a noneconomic
residual interest in a REMIC to the foreign
permanent establishment of Corporation T.
Solely because of paragraph (c)(8)(ii) of this
section, the transfer does not satisfy the
formula test of paragraph (c)(7) of this
section. In addition, even if T is an eligible
corporation, the transfer does not satisfy the
asset test because the transfer fails the
requirements of paragraph (c)(5)(ii) of this
section.

(10) Effective dates. Paragraphs (c)(4)
through (c)(9) of this section are
applicable to transfers occurring on or
after February 4, 2000, except for
paragraphs (c)(4)(iii) and (c)(8)(iii) of
this section, which are applicable for
transfers occurring on or after August
19, 2002. For the dates of applicability
of paragraphs (a) through (c)(3) and (d)
of this section, see § 1.860A–1.
*
*
*
*
*
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 5. In § 602.101, paragraph (b) is
amended by adding an entry in
numerical order to the table to read as
follows:
§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

*

*

CFR part or section where
identified and described

*
*
*
1.860E–1 ..............................

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*

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*

Current OMB
control No.

*

1545–1675
*

*

*

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*

*

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: July 10, 2002
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02–18021 Filed 7–18–02; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 601
[TD 9006]
RIN 1545–AY68

Notice to Interested Parties
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to the notice to
interested parties requirement. Before
the IRS can issue an advance
determination regarding the
qualification of a retirement plan, a plan
sponsor must provide evidence that it
has notified all persons who qualify as
interested parties that an application for
an advance determination will be filed
with the IRS. These regulations set forth
standards by which a plan sponsor may
satisfy the notice to interested parties
requirement. The final regulations affect
retirement plan sponsors, plan
participants and other interested parties
with respect to a determination letter
application, and certain representatives
of interested parties.
DATES: Effective Date: These regulations
are effective on July 19, 2002.
Applicability Date: These regulations
apply to applications made on or after
January 1, 2003.
FOR FURTHER INFORMATION CONTACT:
Pamela R. Kinard, (202) 622–6060 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:

Background
This document contains amendments
to 26 CFR parts 1 and 601 under section
7476 of the Internal Revenue Code of
1986 (Code). On May 21, 1976, final
regulations (TD 7421) under section
7476 were published in the Federal
Register (41 FR 20874). These final
regulations provide guidance on the
nature and method of giving notice to
interested parties. On January 17, 2001,
a notice of proposed rulemaking (REG–
129608–00) was published in the
Federal Register (66 FR 3954), setting
forth the proposed new standards for
delivery of the notice to interested

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