Proposed and Temporary Regulations Relating to Two-Percent Floor on Miscellaneous Deductions.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: In the Rules and Regulations portion of this issue of the Federal Register, the Internal Revenue Service is issuing temporary income tax regulations relating to the 2-percent floor on miscellaneous itemized deductions. The text of the temporary regulations also serves as the comment document for this notice of proposed rulemaking.

DATES:

PROPOSED EFFECTIVE DATE

The regulations are proposed to be effective for taxable years beginning after December 31, 1986.

DATES FOR COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Written comments and requests for a public hearing must be delivered or mailed by May 27, 1988.

ADDRESS: Send comments and requests for a public hearing to: Commissioner of Internal Revenue, Attention: CC:LR:T (IA-97-86) Washington, D.C. 20224.

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman of the Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Ave., N.W., Washington, D.C. 20224 (Attention: CC:LR:T) (202-566-3297, not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

The temporary regulations in the Rules and Regulations portion of this issue of the Federal Register amend the Income Tax Regulations (26 CFR Part 1) to provide rules under section 67.

For the text of the temporary regulations, see T.D. 8189, published in the Rules and Regulations portion of this issue of the Federal Register. The preamble to the temporary regulations explains the addition to the regulations.

SPECIAL ANALYSES

The Commissioner of Internal Revenue has determined that this proposed rule is not a major rule as defined in Executive Order 12291 and that a Regulatory Impact Analysis is therefore not required. Although this document is a notice of proposed rulemaking that solicits public comment, the Internal Revenue Service has concluded that the regulations proposed herein are interpretative and that the notice and public procedure requirements of 5 U.S.C. 553 do not apply. Accordingly, these proposed regulations do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. chapter 6).

COMMENTS AND REQUESTS FOR A PUBLIC HEARING

Before adopting these proposed regulations, consideration will be given to any written comments that are submitted (preferably seven copies) to the Commissioner of Internal Revenue. All comments will be available for public inspection and copying. A public hearing will be held upon written request to the Commissioner by any person who has submitted written comments. If a public hearing is held, notice of time and place will be published in the Federal Register. The collection of information requirements contained herein have been submitted for OMB review under the Paperwork Reduction Act, and comments on them should be sent to the Office of Information and Regulatory Affairs of OMB, ATTN: Desk Office for Internal Revenue Service, New Executive Office Bldg., Washington, D.C. 20503. The Internal Revenue Service requests persons submitting comments to OMB to also send copies of the comments to the Service.

DRAFTING INFORMATION

The principal author of these proposed regulations is Beverly A. Baughman of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

LIST OF SUBJECTS IN 26 CFR 1.61-1 through 1.281-4

Income taxes, Taxable income, Deductions, Exemptions

These amendments are necessary because of the addition of section 67 to the Code by section 132 of Pub. L. 99-514 (100 Stat. 2113). These regulations are proposed to be issued under the authority contained in sections 67(c) and 7805 of the Internal Revenue Code of 1986 (100 Stat. 2114, 26 U.S.C. 67(c); 68A Stat. 917, 26 U.S.C. 7805, respectively).

ACTION: Temporary regulations.

SUMMARY: This document provides temporary regulations under new section 67 of the Internal Revenue Code relating to the 2-percent floor on miscellaneous itemized deductions. The text to the temporary regulations set forth in this document also serves as the text of proposed regulations cross-referenced in the notice of proposed rulemaking in the Proposed Rules section of this issue of the Federal Register.

DATES: The regulations apply to taxable years beginning after December 31, 1986.

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman of the Legislation and Regulations Division, Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:LR:T) (202-566-3297, not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains temporary Income Tax Regulations under section 132 of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2113). That section added new section 67 to the Internal Revenue Code. Section 67(c) directs that regulations be issued relating to the indirect deduction through pass-through entities of amounts for expenses that would be subject to the 2-percent floor on miscellaneous itemized deductions if paid or incurred directly by an individual. In addition section 67(c) directs that regulations be issued relating to the reporting requirements that are necessary to carry out the purposes of the section.

These temporary regulations are issued under the authority contained in Internal Revenue Code sections 67(c) and 7805 (100 Stat. 2114, 26 U.S.C. 67(c); 68A Stat. 917, 26 U.S.C. 7805, respectively).

2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS

Pursuant to section 67 of the Code, section 1.67-1T(a)(1) of the temporary regulations disallows deductions for miscellaneous itemized deductions in computing the taxable income of individuals (i.e., so-called "below-the-line" deductions) to the extent that the aggregate of such expenses does not exceed 2 percent of the individual's adjusted gross income. Examples of expenses that, if otherwise deductible, are subject to the 2-percent floor include unreimbursed employee business expenses, expenses for the production or collection of income such as investment advisory fees and the cost of safe deposit boxes, and expenses for tax advice. To the extent that any other limitation is placed on the amount of a miscellaneous deduction, that limitation generally applies prior to the application of the 2-percent floor. For example, pursuant to section 274(n) the amount allowable as a deduction for meal and entertainment expenses cannot exceed 80 percent of the amount of such expense that is otherwise deductible. The 2-percent floor is applied to the amount allowable after application of the 80-percent limitation.

The term "miscellaneous itemized deduction" means the deductions allowable from adjusted gross income in determining taxable income other than the deductions listed in section 1.67-1T(b) of the temporary regulations, such as the deductions under sections 163, 164, and 217 relating to interest, taxes, and moving expenses, respectively.

Temporary section 1.67-1T(c) provides that, if a taxpayer incurs expenses that relate to both a trade or business activity and a production of income or tax preparation activity, the taxpayer shall allocate such expense between the activities on a reasonable basis.

MEMBERS OF CONGRESS

Section 1.67-1T(d) of the temporary regulations provides that the 2-percent floor is applied prior to the application of the $3,000 limitation on deductions for living expenses of Members of Congress referred to in section 162(a). The amount of miscellaneous itemized deductions of a Member of Congress that is disallowed because of the 2-percent floor is allocated between deductions for living expenses (within the meaning of section 162(a)) and other miscellaneous itemized deductions of a Member of Congress.

REIMBURSED AND UNREIMBURSED EMPLOYEE EXPENSES

Temporary section 1.62-1T(e)(1) provides that expenses paid or incurred by an employee that are otherwise deductible from gross income in computing taxable income and for which the employee is reimbursed by the employer, its agent, or third party (for whom the employee performs a benefit as an employee of the employer) under an express agreement for reimbursement or pursuant to an express expense allowance arrangement may be deducted from gross income in computing adjusted gross income (i.e., so-called "above-the-line" deductions). The same rules apply with respect to amounts allowable as a deduction under section 162(h)(1)(B) to state legislators that are reimbursed by the state.

Section 1.62-1T(e)(1) of the temporary regulations provides generally that, if an employee is reimbursed by his or her employer, its agent, or a third party in an amount less than the total expenses paid or incurred by the employee, the determination of to which of the employee's business expenses the reimbursement applies and the amount of each expense that is covered by the reimbursement is made on the basis of all of the facts and circumstances of the particular case. Section 1.62-1T(e)(2) of the temporary regulations provides rules for allocating reimbursements between meal and entertainment expenses and other business expenses when the facts and circumstances are not clear and the employee pays or incurs meal or entertainment expenses. Section 274(n)(2) excepts from the 80-percent limitation contained in section 274(n), by cross-reference to section 274(e)(3), expenses paid or incurred by an employee, in connection with the performance by the employee of services for the employer, under a reimbursement or other expense allowance arrangement with the employer, but only to the extent the employer does not treat such expenses under section 274(e)(2) as compensation to the employee and as wages for purposes of withholding. In this situation the 80-percent limitation applies to the employer.

For taxable years beginning after December 31, 1986, any portion of the amount allowable to state legislators as a deduction pursuant to section 162(h)(1)(B) that is not reimbursed by the state or a third party is allocated among expenses for lodging, meals, and incidental expenses in the manner described in section 1.62-IT(e)(4) of the temporary regulations.

Temporary section 1.62-1T(f) defines the phrase "reimbursement or other expense allowance arrangement." In addition, a payment under a reimbursement or other expense allowance arrangement must be identified either by making a separate payment or by specifically indicating the separate amount if both wages and the reimbursement or expense allowance are combined in a single payment. It shall be presumed that any amounts treated as compensation to an employee by an employer on the employer's return of tax under chapter 1 of the Code and as wages to such employee for purposes of chapter 24 of the Code (relating to withholding of income tax at source of wages) do not constitute reimbursements or other expense allowances for purposes of section 62. This presumption may be rebutted by clear and convincing evidence to the contrary that includes evidence of an obligation by the employee to make an adequate accounting to the employer for the employee's business expenses.

TREATMENT OF PASS-THROUGH ENTITIES

Temporary section 1.67-2T provides rules for the application of section 67 to holders of interest in pass-through entities. In general, an "affected investor" in a pass-through entity is required to separately take into account as an item of both income and expense an amount equal to his or her allocable share of the "affected expenses" of the pass-through entity for purposes of determining his or her taxable income. In general, the expenses so taken into account are treated as paid or incurred by the affected investor in the same manner as paid or incurred by the pass-through entity.

A pass-through entity includes, pursuant to temporary section 1.67-2T(g), a grantor trust, a partnership, an S corporation, a common trust fund, a nonpublicly offered regulated investment company, and a real estate mortgage investment conduit (REMIC). It does not include an estate, a nongrantor trust, a cooperative, a real estate investment trust, or other entities such as a qualified pension plan, an individual retirement account, or an insurance company holding assets in a separate asset account to fund certain variable contracts.

Section 1.67-2T(b) of the temporary regulations provides rules for the application of section 67 to affected investors in partnerships, S corporations, and grantor trusts and temporary section 1.67-2T(d) provides such rules for affected investors in common trust funds. In addition, section 1.67-2T(c) of the temporary regulations cross-references temporary section 1.67-3T for rules regarding the application of section 67 to holders of interests in REMICs. Temporary section 1.67-2T(p) reserves on the rules regarding publicly offered regulated investment companies. The rules for the application of section 67 to REMICs, estates, and nongrantor trusts are the subject of separate regulations projects. The application of section 67 to estates and trusts and their beneficiaries is the subject of pending technical corrections legislations. Guidance on this issue will be published separately.

The application of section 67 to affected investors that are shareholders in a nonpublicly offered regulated investment company is described in temporary section 1.67-2T(e). In general, an affected investor shall be treated both as having received or accrued a dividend and as having paid or incurred an expense described in section 212. The amount of the dividend and the amount of the expense are each equal to the affected investor's allocable share of the affected RIC expenses of the nonpublicly offered regulated investment company. The affected investor shall take into account such amounts in the affected investor's taxable year with which (or within which) the calendar year with respect to which the expenses are allocated ends. A shareholder of a nonpublicly offered regulated investment company that is not an affected investor does not take into account in computing its taxable income any amount of its allocable share of affected RIC expenses.

DEFINITIONS OF CERTAIN TERMS

The term "affected investor" generally means a partner, shareholders, beneficiary, participant (or other interest holder in a pass-through entity), that is (a) an individual (other than certain nonresident aliens), (b) a person that computes its taxable income in the same manner as in the case of an individual, or (c) a pass-through entity, interests in which are owned by affected investors.

In general, the term "affected expenses" means expenses that, if paid or incurred by an individual, would be deductible, if at all, as miscellaneous itemized deductions. In the case of a nonpublicly offered regulated investment company, the term "affected expenses" means only affected RIC expenses. Temporary section 1.67-2T(j)(1) generally defines the term "affected RIC expenses" as the excess of (a) the aggregate amount of the expenses paid or incurred in the calendar year that are allowable as a deduction in determining the investment company taxable income (without regard to section 852(b)(2)(D)) of the nonpublicly offered regulated investment company for a taxable year that begins or ends with or within the calendar year, over (b) certain expenses, such as registration fees, directors' or trustees' fees, transfer agent fees, and certain legal and accounting fees. For this purpose deductions described in section 62(a)(3) and section 1.67-1T(b) (e.g., losses from the sale or exchange of property, taxes, and interest) are excluded. A nonpublicly offered regulated investment company must determine the amount of affected RIC expenses on a calendar year basis regardless of whether its taxable year is the calendar year.

Section 1.67-2T(j)(2) of the temporary regulations provides an elective safe harbor under which a nonpublicly offered regulated investment company may treat 40 percent of certain deductions for the calendar year as its affected RIC expenses for that year. The election once made remains in effect for each succeeding calendar year unless revoked with the consent of the Commissioner.

ALLOCATION OF EXPENSES BY NONPUBLICLY OFFERED REGULATED INVESTMENT COMPANIES

A nonpublicly offered regulated investment company is required to allocate to each of its affected investors that is a shareholder at any time during the calendar year the affected investor's allocable share of the affected RIC expenses of the nonpublicly offered regulated investment company for that calendar year. (This allocable share is the amount that the affected shareholder is treated as having received or accrued as a dividend and paid or incurred as an expense described in section 212.) A nonpublicly offered regulated investment company may use any reasonable method to make the allocation. Temporary section 1.67-2T(k)(1) provides that an allocation method shall not be reasonable if, for example, it can be expected to have the effect (a) of allocating to the shareholders an amount of affected RIC expenses that is less than the affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year or (b) of allocating a disproportionately high share of the affected RIC expenses of the nonpublicly offered regulated investment company to either (1) shareholders that are not affected investors, or (2) affected investors, the amount of whose miscellaneous itemized deductions exceed the 2-percent floor described in section 67.

Section 1.67-2T(k)(2) of the temporary regulations describes a reasonable allocation method. In general, under this method an affected investor's allocable share of the affected RIC expenses of a nonpublicly offered regulated investment company is the amount that bears the same ratio to the amount of affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year as the amount of dividends paid to the affected investor during the calendar year bears to the sum of (a) the aggregate amount of dividends paid by the nonpublicly offered regulated investment company during the calendar year to all shareholders and (b) for any amount on which tax is imposed under section 852(b)(1) for any taxable year of the nonpublicly offered regulated investment company ending within or with the calendar year. If a nonpublicly offered regulated investment company does not make a reasonable allocation of affected RIC expenses to its affected investors, a reasonable allocation shall be made by an appropriate District Director.

SPECIAL RULES

The amount of dividend income that an affected investor is treated as receiving as a result of an allocation of affected RIC expenses is not subject to backup withholding under section 3406.

Temporary section 1.67-2T(m) describes persons who may, for certain purposes, treat an affected investor's allocable share of the affected RIC expenses of a nonpublicly offered regulated investment company as being an amount determined on the basis of a reasonable estimate published by the nonpublicly offered regulated investment company in a widely available financial publication (e.g., Wall Street Journal or Standard and Poor's Weekly Dividend Record.). For example, a nominee who is required to report dividends paid by a nonpublicly offered regulated investment company to the Internal Revenue Service and to the person to whom the payment is made may rely on the estimate for purposes of such reporting. In addition, the affected investor to which the nominee reports may rely on the estimate for purposes of calculating its taxable income and the amount of its affected expenses.

REPORTING REQUIREMENTS

If a nonpublicly offered regulated investment company is required to make an information return to the Internal Revenue Service pursuant to section 6042 (or would be required to make such a return but for the $10 threshold described in section 6042(a)(1)(A) and (B)) with respect to an affected investor to which an allocation of affected RIC expenses is required to be made, the nonpublicly offered regulated investment shall report to the Internal Revenue Service the amount of affected RIC expenses required to be allocated to the affected investor for the calendar year, as well as certain other information. Temporary section 1.67-2T(n)(1)(ii) requires a nonpublicly offered regulated investment company to provide to each affected investor for each calendar year (whether or not the nonpublicly offered regulated investment company is required to make an information return with respect to the affected investor pursuant to section 6042), a written statement that includes the amount of affected RIC expenses required to be allocated to the affected investor for the calendar year and certain other information. If an affected investor's shares in a nonpublicly offered regulated investment company are held in the name of a nominee, the nonpublicly offered regulated investment company may make the information return with respect to the nominee and provide the written statement to the nominee. Section 1.67-2T(n)(2) of the temporary regulations provides reporting requirements for nominees to which a nonpublicly offered regulated investment company provides a written statement. These requirements are similar to the ones with which regulated investment companies must comply.

Pursuant to temporary section 1.67-2T(n)(5), a nonpublicly offered regulated investment company or a nominee fulfills its reporting obligations with respect to an affected investor (a) by the timely filing with the Internal Revenue Service of an information return pursuant to section 6042 (i.e., Form 1099-DIV) that contains the required information and (b) by furnishing the affected investor with a copy of such information return. Thus, a nonpublicly offered regulated investment company or a nominee is not required to file more than one Form 1099-DIV with respect to an affected investor.

With respect to each affected investor, temporary section 1.67-2T(o) requires a common trust fund to state on the return it is required to make pursuant to section 6032 the amount of the affected investor's proportionate share of the affected expenses for the taxable year as well as certain other information.

SPECIAL ANALYSES

No general notice of proposed rulemaking is required by 5 U.S.C. 553(b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule. The Commissioner of Internal Revenue has determined that this temporary rule is not a major rule as defined in Executive Order 12291 and that a Regulatory Impact Analysis is therefore not required. The reporting requirements added by this document have been submitted to the Office of Management and Budget (OMB) in accordance with the requirements of the Paperwork Reduction Act of 1980. The reporting requirements have been approved by OMB.

DRAFTING INFORMATION

The principal author of these temporary regulations is Beverly A. Baughman of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

LIST OF SUBJECTS IN 26 CFR 1.61-1 through 1.281-4

Income taxes, Taxable income, Deductions, Exemptions

LIST OF SUBJECTS IN 26 CFR 602

Reporting and recordkeeping requirements.

Adoption of amendments to the regulations.

Accordingly, 26 CFR Part 1 is amended as follows:

Paragraph 1. The authority for Part 1 is amended by adding the following citation:

Authority: 26 U.S.C. 7805. * * * Sections 1.67-2T and 1.67-3T also issued under 26 U.S.C. 67(c).

Par. 2. Section 1.62-1 is removed and a new section 1.62-1T is added in its place to read as follows:

Section 1.62-1T Adjusted gross income (temporary).

(a) BASIS FOR DETERMINING THE AMOUNT OF CERTAIN DEDUCTIONS. The term "adjusted gross income" means the gross income computed under section 61 minus such of the deductions allowed by chapter 1 of the Code as are specified in section 62(a). Adjusted gross income is used as the basis for determining the following:

(1) The limitation on the amount of miscellaneous itemized deductions (under section 67).

(2) The limitation on the amount of the deduction for casualty losses (under section 165(h)(2)),

(3) The limitation on the amount of the deduction for charitable contributions (under section 170(b)(1)),

(4) The limitation on the amount of deduction for medical and dental expenses (under section 213),

(5) The limitation on the amount of the deduction for qualified retirement contributions for active participants in certain pension plans (under section 219(g), and

(6) The phase-out of the exemption from the disallowance of passive activity losses and credits (under section 469(i)(3)).

(b) DOUBLE DEDUCTION NOT PERMITTED. Section 62(a) merely specifies which of the deductions provided in chapter 1 of the Code shall be allowed in computing adjusted gross income. It does not create any new deductions. The fact that a particular item may be described in more than one of the paragraphs under section 62(a) does not permit the item to be deducted twice in computing adjusted gross income or taxable income.

(c) DEDUCTIONS ALLOWABLE IN COMPUTING ADJUSTED GROSS INCOME. The deductions specified in section 62(a) for purposes of computing adjusted gross income are:

(1) Deductions allowable under chapter 1 of the Code (other than by part VII (section 211 and following), subchapter B of such chapter) that are attributable to a trade or business carried on by the taxpayer not consisting of services performed as an employee;

(2) Deductions allowable under part VI (section 161 and following), subchapter B, chapter 1 of the Code, that consist of expenses paid or incurred by the taxpayer in connection with the performance of services by him or her as an employee under an express reimbursement or other expense allowance arrangement (as defined in paragraph (f) of this section) with his or her employer;

(3) For taxable years beginning after December 31, 1986, deductions allowable under section 162 that consist of expenses paid or incurred by a qualified performing artist (as defined in section 62(b)) in connection with the performance by him or her of services in the performing arts as an employee;

(4) Deductions allowable under part VI as losses from the sale or exchange of property;

(5) Deductions allowable under part VI, section 212, or section 611 that are attributable to property held for the production of rents or royalties;

(6) Deductions for depreciation or depletion allowable under sections 167 or 611 to a life tenant of property or to an income beneficiary of property held in trust or to an heir, legatee, or devisee of an estate;

(7) Deductions allowed by section 404 for contributions on behalf of a self-employed individual;

(8) Deductions allowed by section 219 for contributions to an individual retirement account described in section 408(a), or for an individual retirement annuity described in section 408(b);

(9) Deductions allowed by section 402(e)(3) with respect to a lump-sum distribution;

(10) For taxable years beginning after December 31, 1972, deductions allowed by section 165 for losses incurred in any transaction entered into for profit though not connected with a trade or business, to the extent that such losses include amount forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit;

(11) For taxable years beginning after December 31, 1976, deductions for alimony and separate maintenance payments allowed by section 215;

(12) Deductions allowed by section 194 for the amortization of reforestation expenditures; and

(13) Deductions allowed by section 165 for the repayment (made in a taxable year beginning after December 28, 1980) to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).

(d) EXPENSES DIRECTLY RELATED TO A TRADE OR BUSINESS. For the purpose of the deductions specified in section 62, the performance of personal services as an employee does not constitute the carrying on of a trade or business, except as otherwise expressly provided. The practice of a profession, not as an employee, is considered the conduct of a trade or business within the meaning of such section. To be deductible for the purposes of determining adjusted gross income, expenses must be those directly, and not those merely remotely, connected with the conduct of a trade or business. For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business or to property from which rents or royalties are derived. Thus, property taxes paid or incurred on real property used in a trade or business are deductible, but state taxes on net income are not deductible even though the taxpayer's income is derived from the conduct of a trade or business.

(e) REIMBURSED AND UNREIMBURSED EMPLOYEE EXPENSES -- (1) IN GENERAL. Expenses paid or incurred by an employee that are deductible from gross income under part VI in computing taxable income (determined without regard to section 67) and for which the employee is reimbursed by the employer, its agent, or third party (for whom the employee performs a benefit as an employee of the employer) under an express agreement for reimbursement or pursuant to an EXPRESS expense allowance arrangement maybe deducted from gross income in computing adjusted gross income. Except as provided in paragraph (e)(2) and (e)(4) of this section, for taxable years beginning after December 31, 1986, if the amount of a reimbursement (as defined in paragraph (f) of this section) made by an employer, its agent, or third party to an employee is less that the total amount of the business expenses paid or incurred by the employee, the determination of to which of the employee's business expenses the reimbursement applies and the amount of each expense that is covered by the reimbursement is made on the basis of all of the facts and circumstances of the particular case.

(2) FACTS AND CIRCUMSTANCES UNCLEAR ON BUSINESS EXPENSES FOR MEALS AND ENTERTAINMENT. If --

(3) DEDUCTIBILITY OF UNREIMBURSED EXPENSES. The amount of expenses that is determined not to be reimbursed pursuant to paragraph (e)(1) or (2) of this section is deductible from adjusted gross income in determining the employee's taxable income subject to the limitations applicable to such expenses (e.g., the 2-percent floor of section 67 and the 80-percent limitation on meal and entertainment expenses provided for in section 274(n)).

(4) UNREIMBURSED EXPENSES OF STATE LEGISLATORS. For taxable years beginning after December 31, 1986, any portion of the amount allowed as a deduction to State legislators pursuant to section 162(h)(1)(B) that is not reimbursed by the State or a third party shall be allocated between lodging and meals in the same ratio as the amount allowable for lodging and meals under the Federal per diem applicable to the legislator's State capital at the end of the legislator's taxable year (see Appendix 1-A of the Federal Travel Regulations (FTR), which as of March 28, 1988 are contained in GSA Bulletin FPMR A-40, Supplement 20). For purposes of this paragraph (e)(4), the amount allowable for meals under the Federal per diem shall be the amount of the Federal per diem allowable for meals and incidental expenses reduced by $2 per legislative day (or other amount allocated to incidental expenses in 1-7.5(a)(2) of the FTR). The unreimbursed portion of each type of expense is deductible from adjusted gross income in determining the State legislator's taxable income subject to the limitations applicable to such expenses. For example, the unreimbursed portion allocable to meals shall be reduced by 20 percent pursuant to section 274(n) before being subjected to the 2-percent floor of section 67 for purposes of computing the taxable income of a State legislator. See section 1.67-1T(a)(2).

(5) EXPENSES PAID DIRECTLY BY AN EMPLOYER, ITS AGENT, OR THIRD PARTY. In the case of an employer, its agent, or a third party who provides property or services to an employee or who pays an employee's expenses directly instead of reimbursing the employee, see section 132 and the regulations thereunder for the income tax treatment of such expenses.

(6) EXAMPLES. The provisions of this paragraph (e) may be illustrated by the following examples:

(g) MOVING EXPENSES. For taxable years beginning after December 31, 1986, a taxpayer described in section 217(a) shall not take into account the deduction described in section 217 relating to moving expenses in computing adjusted gross income under section 62 even if the taxpayer is reimbursed for his or her moving expenses. Such a taxpayer shall include the amount of any reimbursement for moving expenses in income pursuant to section 82. The deduction described in section 217 shall be taken into account in computing the taxable income of the taxpayer under section 63. Pursuant to section 67(b)(6), the 2-percent floor described in section 67(a) does not apply to moving expenses.

(h) CROSS-REFERENCE. See 26 CFR 1.62-1 (Rev. as of April 1, 1986) with respect to pre-1987 deductions for travel, meal, lodging, transportation, and other trade or business expenses of an employee, reimbursed expenses of an employee, expenses of an outside salesperson, long-term capital gains, contributions described in section 405(c) to a bond purchase plan on behalf of a self-employed individual, moving expenses, amounts not received as benefits pursuant to section 1379(b)(3), and retirement bonds described in section 409 (allowed by section 219).

Par. 3. Immediately after section 1.63-2, new sections 1.67-1T and 1.67-2T are added, and section 1.67-4T is reserved. The added provisions read as follows:

Section 1.67-1T 2-percent floor on miscellaneous itemized deductions (temporary).

(a) TYPE OF EXPENSES SUBJECT TO THE FLOOR -- (1) IN GENERAL. With respect to individuals, section 67 disallows deductions for miscellaneous itemized deductions (as defined in paragraph (b) of this section) in computing taxable income (i.e., so-called "below-the-line" deductions) to the extent that such otherwise allowable deductions do not exceed 2-percent of the individual's adjusted gross income (as defined in section 62 and the regulations thereunder). Examples of expenses that, if otherwise deductible, are subject to the 2-percent floor include but are not limited to --

(2) OTHER LIMITATIONS. Except as otherwise provided in paragraph (d) of this section, to the extent that any limitation or restriction is placed on the amount of a miscellaneous itemized deduction, that limitation shall apply prior to the application of the 2-percent floor. For example, in the case of an expense for food or beverages, only 80 percent of which is allowable as a deduction because of the limitations provided in section 274(n), the otherwise deductible 80 percent of the expense is treated as a miscellaneous itemized deduction and is subject to the 2-percent limitation of section 67.

(b) DEFINITION OF MISCELLANEOUS ITEMIZED DEDUCTIONS. For purposes of this section, the term "miscellaneous itemized deductions" means the deductions allowable from adjusted gross income in determining taxable income, as defined in section 63, other than --

(1) The standard deduction as defined in section 63(c),

(2) Any deduction allowable for impairment-related work expenses as defined in section 67(d),

(3) The deduction under section 72(b)(3) (relating to deductions if annuity payments cease before the investment is recovered),

(4) The deductions allowable under section 151 for personal exemptions,

(5) The deduction under section 163 (relating to interest),

(6) The deduction under section 164 (relating to taxes),

(7) The deduction under section 165(a) for losses described in subsection (c)(3) or (d) of section 165,

(8) The deduction under section 170 (relating to charitable contributions and gifts),

(9) The deduction under section 171 (relating to deductions for amortizable bond premiums),

(10) The deduction under section 213 (relating to medical and dental expenses),

(11) The deduction under section 216 (relating to deductions in connection with cooperative housing corporations),

(12) The deduction under section 217 (relating to moving expenses),

(13) The deduction under section 691(c) (relating to the deduction for estate taxes in the case of income in respect of the the decedent),

(14) The deduction under 1341 (relating to the computation of tax if a taxpayer restores a substantial amount held under claim of right), and

(15) Any deduction allowable in connection with personal property used in a short sale.

(c) ALLOCATION OF EXPENSES. If a taxpayer incurs expenses that relate to both a trade or business activity (within the meaning of section 162) and a production of income or tax preparation activity (within the meaning of section 212), the taxpayer shall allocate such expenses between the activities on a reasonable basis.

(d) MEMBERS OF CONGRESS -- (1) IN GENERAL. With respect to the deduction for living expenses of Members of Congress referred to in section 162(a), the 2-percent floor described in section 67 and paragraph (a) of this section shall be applied to the deduction before the application of the $3,000 limitation on deductions for living expenses referred to in section 162(a). (For purposes of this paragraph (d), the term "Member(s) of Congress" includes any Delegate of Resident Commissioner.) The amount of miscellaneous itemized deductions of a Member of Congress that is disallowed pursuant to section 67 and paragraph (a) of this section shall be allocated between deductions for living expenses (within the meaning of section 162(a)) and other miscellaneous itemized deductions. The amount of deductions for living expenses of a Member of Congress that is disallowed pursuant to section 67 and paragraph (a) of this section is determined by multiplying the aggregate amount of such living expenses (determined without regard to the $3,000 limitation of section 162(a) but with regard to any other limitations) by a fraction, the numerator of which is the aggregate amount disallowed pursuant to section 67 and paragraph (a) of this section with respect to miscellaneous itemized deductions of the Member of Congress and the denominator of which is the amount of miscellaneous itemized deductions (including deductions for living expenses) of the Member of Congress (determined without regard to the $3,000 limitation of section 162(a) but with regard to any other limitations). The amount of deductions for miscellaneous itemized deductions (other than deductions for living expenses) of a Member of Congress that are disallowed pursuant to section 67 and paragraph (a) of this section is determined by multiplying the amount of miscellaneous itemized deductions (other than deductions for living expenses) of the Member of Congress (determined with regard to any limitations) by the fraction described in the preceding sentence.

(2) EXAMPLE. The provisions of this paragraph (d) may be illustrated by the following example:

Section 1.67-2T Treatment of Pass-Through Entities (temporary).

(a) APPLICATION OF SECTION 67. This section provides rules for the application of section 67 to partners, shareholders, beneficiaries, participants, and others with respect to their interests in pass-through entities (as defined in paragraph (g) of this section). In general, an affected investor (as defined in paragraph (h) of this section) in a pass-through entity shall separately take into account as an item of income and as an item of expense an amount equal to his or her allocable share of the affected expenses (as defined in paragraph (i) of this section) of the pass-through entity for purposes of determining his or her taxable income. Except as provided in paragraph (e)(1)(ii)(B) of this section, the expenses so taken into account shall be treated as paid or incurred by the affected investor in the same manner as paid or incurred by the pass-through entity. For rules regard in the application of section 67 to affected investors in --

(1) Partnerships, S corporations, and grantor trusts, see paragraph (b) of this section, (2) Real estate mortgage investment conduits, see paragraph (c) of this section,

(3) Common trust funds, see paragraph (d) of this section,

(4) Nonpublicly offered regulated investment companies, see paragraph (e) of this section, and

(5) Publicly offered regulated investment companies, see paragraph (p) of this section.

(b) PARTNERSHIPS, S CORPORATIONS, AND GRANTOR TRUSTS -- (1) IN GENERAL. Pursuant to sections 702(a) and 1366(a) of the Code and the regulations thereunder, each partner of a partnership or shareholder of an S corporation shall take into account separately his or her distributive or pro rata share of any items of deduction of such partnership or corporation that are defined as miscellaneous itemized deductions pursuant to section 67(b). The 2-percent limitation described in section 67 does not apply to the partnership or corporation with respect to such deductions, but such deductions shall be included in the deductions of the partner or shareholder to which that limitation applies. Similarly, the limitation applies to the grantor or other person treated as the owner of a grantor trust with respect to items that are paid or incurred by a grantor trust and are treated as miscellaneous itemized deductions of the grantor or other person pursuant to subpart E, part 1, subchapter J, chapter 1 of the Code, but not to the trust itself. The 2-percent limitation applies to amounts otherwise deductible in taxable years of partners, shareholders, or grantors beginning after December 31, 1986, regardless of the taxable year of the partnership, corporation, or trust.

(2) EXAMPLE. The provision of this paragraph (b) may be illustrated by the following example:

(d) COMMON TRUST FUNDS -- (1) IN GENERAL. For purposes of determining the taxable income of an affected investor that is a participant in a common trust fund --

(i) The ordinary taxable income and ordinary net loss of the common trust fund shall be computed under section 584(d)(2) without taking into account any affected expenses, and

(ii) Each affected investor shall be treated as having paid or incurred an expenses described in section 212 in an amount equal to the affected investor's proportionate share of the affected expenses.

The 2-percent limitation described in section 67 applies to amounts otherwise deductible in taxable years of participants beginning after December 31, 1986, regardless of the taxable year of the common trust fund.

(2) EXAMPLE. The provisions of this paragraph (d) may be illustrated by the following examples:

(i) The current earnings and profits of the nonpublicly offered regulated investment company shall be computed without taking into account any affected RIC expenses that are allocated among affected investors, and

(ii) The affected investor shall be treated --

(2) SHAREHOLDERS THAT ARE NOT AFFECTED INVESTORS. A shareholder of a nonpublicly offered regulated investment company that is not an affected investor shall not take into account in computing its taxable income any amount of income or expense with respect to its allocable share of affected RIC expenses.

(3) EXAMPLE. The provisions of this paragraph (e) may be illustrated by the following example:

(g) PASS-THROUGH ENTITY -- (1) IN GENERAL. Except as provided in paragraph (g)(2) of this section, for purposes of section 67(c) and this section, a pass-through entity is --

(i) A trust (or any portion thereof) to which subpart E, part 1, subchapter J, chapter 1 of the Code applies,

(ii) A partnership,

(iii) An S corporation,

(iv) A common trust fund described in section 584,

(v) A nonpublicly offered regulated investment company,

(vi) A real estate mortgage investment conduit, and

(vii) Any other person --

(A) Which is not subject to the income tax imposed by subtitle A, chapter 1, or which is allowed a deduction in computing such tax for distributions to owners or beneficiaries, and

(B) The character of the income of which may affect the character of the income recognized with respect to that person by its owners or beneficiaries.

Entities that do not meet the requirements of paragraph (g)(1)(vii)(A) and (B), such as qualified pension plans, individual retirement accounts, and insurance companies holding assets in separate asset accounts to fund variable contracts defined in section 817(d), are not described in this paragraph (g)(1).

(2) EXCEPTION. For purposes of section 67(c) and this section, a pass-through entity does not include:

(i) An estate;

(ii) A trust (or any portion thereof) not described in paragraph (g)(1)(i) of this section,

(iii) An cooperative described in section 1381(a)(2), determined without regard to subparagraphs (A) and (C) thereof, or

(iv) A real estate investment trust.

(3) NONPUBLICLY OFFERED REGULATED INVESTMENT COMPANY -- (i) IN GENERAL. For purposes of this section, the term "nonpublicly offered regulated investment company" means a regulated investment company to which part I of subchapter M of the Code applies that is not a publicly offered regulated investment company.

(ii) PUBLICLY OFFERED REGULATED INVESTMENT COMPANY. For purposes of this section, the term "publicly offered regulated investment company" means a regulated investment company to which part I of subchapter M of the Code applies the shares of which are --

(A) Continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),

(B) Regularly traded on an established securities market, or

(C) Held by or for no fewer than 500 persons at all times during the taxable year.

(h) AFFECTED INVESTOR -- (1) IN GENERAL. For purposes of this section, the term "affected investor" means a partner, shareholder, beneficiary, participant, or other interest holder in a pass-through entity at any time during the pass-through entity's taxable year that is --

(i) An individual (other than a nonresident alien whose income with respect to his or her interest in the pass-through entity is not effectively connected with the conduct of a trade or business within the United States),

(ii) A person, including a trust or estate, that computes its taxable income in the same manner as in the case of an individual; or

(iii) A pass-through entity if one or more of its partners, shareholders, beneficiaries, participants, or other interest holders is (A) a pass-through entity or (B) a person described in paragraph (h)(1)(i) or (ii) of this section.

(2) EXAMPLES. The provisions of this paragraph (h) may be illustrated by the following examples:

(2) SPECIAL RULE FOR NONPUBLICLY OFFERED REGULATED INVESTMENT COMPANIES. In the case of a nonpublicly offered regulated investment company, the term "affected expenses" means only affected RIC expenses.

(j) AFFECTED RIC EXPENSES -- (1) IN GENERAL. In general, for purposes of this section, the term "affected RIC expenses" means the excess of --

(i) The aggregate amount of the expenses (other than expenses described in sections 62(a)(3) and 67(b) and section 1.67-1T(b)) paid or incurred in the calendar year that are allowable as a deduction in determining the investment company taxable income (without regard to section 852(b)(2)(D)) of the nonpublicly offered regulated investment company for a taxable year that begins or ends with or within the calendar year, over

(ii) The amount of expenses taken into account under paragraph (j)(1)(i) of this section that are allocable to the following items (whether paid separately or included as part of a fee paid to an investment advisor or other person for a variety of services):

(A) Registration fees;

(B) Directors' or trustees' fees;

(C) Periodic meetings of directors, trustees, or shareholders;

(D) Transfer agent fees;

(E) Legal and accounting fees (other than fees for income tax return preparation or income tax advice); and

(F) shareholder communications required by law (e.g., the preparation and mailing of prospectuses and proxy statements).

Expenses described in paragraph (j)(1)(ii)(A) through (F) of this section do not include, for example, expenses allocable to investment advice, marketing activities, shareholder communications and other services not specifically described in paragraph (j)(1)(ii)(A) through (F) of this section, and custodian fees.

(2) SAFE HARBOR. If a nonpublicly offered regulated investment company makes an election under this paragraph (j)(2), the affected RIC expenses for a calendar year shall be treated as equal to 40 percent of the amount determined under paragraph (j)(1)(i) of this section for the calendar year. The nonpublicly offered regulated investment company shall make the election by attaching to its income tax return for the taxable year that includes the last day of the first calendar year for which the nonpublicly offered regulated investment company makes the election a statement that it is making an election under paragraph (j)(2) of this section. An election made pursuant to this paragraph (j)(2) shall remain in effect for all subsequent calendar years unless revoked with the consent of the Commissioner.

(3) REDUCTION FOR UNUSED RIC EXPENSES. The amount determined under paragraph (j)(1)(i) of this section shall be reduced by the nonpublicly offered regulated investment company's net operating loss, if any, for the taxable year ending with or within the calendar year. In computing the nonpublicly offered regulated investment company's net operating loss for purposes of this section, the deduction for dividends paid shall not be allowed and any net capital gain for the taxable year shall be excluded.

(4) EXCEPTION. The affected RIC expenses of a nonpublicly offered regulated investment company will be treated as zero if the amount of its gross income for the calendar year (determined without regard to capital gain net income) is not greater than 1 percent of the sum of (i) such gross income and (ii) the amount of its interest income for the calendar year that is not includible in gross income pursuant to section 103.

(k) ALLOCATION OF EXPENSES AMONG NONPUBLICLY OFFERED REGULATED INVESTMENT COMPANY SHAREHOLDERS -- (1) GENERAL RULE. A nonpublicly offered regulated investment company shall allocate to each of its affected investors that is a shareholder at any time during the calendar year, the affected investor's allocable share of the affected RIC expenses of the nonpublicly offered regulated investment company for that calendar year. (See paragraph (m) of this section for rules regarding estimates with respect to the amount of an affected investor's share of affected RIC expenses upon which certain persons can rely for certain purposes). A nonpublicly offered regulated investment company may use any reasonable method to make the allocation. A method of allocation shall not be reasonable if --

(i) The method can be expected to have the effect, if applied to all affected RIC expenses and all shareholders (whether or not affected investors), of allocating to the shareholders an amount of affected RIC expenses that is less than the affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year,

(ii) The method can be expected to have the effect of allocating a disproportionately high share of the affected RIC expenses of the nonpublicly offered regulated investment company to (A) shareholders that are not affected investors or (B) affected investors, the amount of whose miscellaneous itemized deductions (including their allocable share of affected RIC expenses) exceeds the 2-percent floor described in section 67, or

(iii) A principal purpose of the method of allocation is to avoid allocating affected RIC expenses to persons described in paragraph (h)(1)(i) or (ii) of this section whose miscellaneous itemized deductions (inclusive of their allocable share of affected RIC expenses) may not exceed the 2-percent floor described in section 67.

(2) REASONABLE ALLOCATION METHOD DESCRIBED -- (i) IN GENERAL. The allocation method described in this paragraph (k)(2) shall be treated as a reasonable allocation method. Under the method described in this paragraph, an affected investor's allocable share of the affected RIC expenses of a nonpublicly offered regulated investment company is the amount that bears the same ratio to the amount of affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year as --

(A) The amount of dividends paid to the affected investor during the calendar year, bears to

(B) The sum of --

(1) The aggregate amount of dividends paid by the nonpublicly offered regulated investment company during the calendar year to all shareholders, and

(2) Any amount on which tax is imposed under section 852(b)(1) for any taxable year of the nonpublicly offered regulated investment company ending within or with the calendar year.

(ii) EXCEPTION. Paragraph (k)(2)(i) of this section does not apply if the amount of the deduction for dividends paid during the calendar year is zero.

(iii) DIVIDENDS PAID. For purposes of this paragraph (k)(2) --

(A) Dividends that are treated as paid during a calendar year pursuant to section 852(b)(7) are treated as paid during that calendar year and not during the succeeding calendar year.

(B) The term "dividends paid" does not include capital gain dividends (as defined in section 852(b)(3)(C)), exempt-interest dividends (as defined in section 852(b)(5)(A)), or any amount to which section 302(a) applies.

(C) The dividends paid during a calendar year is determined without regard to section 855(a).

(3) REASONABLE ALLOCATION MADE BY DISTRICT DIRECTOR. If a nonpublicly offered regulated investment company does not make a reasonable allocation of affected RIC expenses to its affected investors as required by paragraph (k)(1) of this section, a reasonable allocation shall be made by the District Director of the internal revenue district in which the principal place of business or principal office or agency of the nonpublicly offered regulated investment company is located.

(4) EXAMPLES. The provisions of this paragraph (k) may be illustrated by the following examples:

(m) RELIANCE BY NOMINEES AND PASS-THROUGH INVESTORS ON NOTICES -- (1) GENERAL RULE. Persons described in paragraph (m)(3) of this section may, for the purposes described in that paragraph (m)(3), treat an affected investor's allocable share of the affected RIC expenses of a nonpublicly offered regulated investment company as being equal to an amount determined by the nonpublicly offered regulated investment company on the basis of a reasonable estimate (e.g., of allocable expenses as a percentage of dividend distributions or allocable expenses per share) that is (i) reported in writing by the nonpublicly offered regulated investment company to the person or (ii) reported in a newspaper or financial publication having a nationwide circulation (e.g., the Wall Street Journal or Standard and Poor's Weekly Dividend Record).

(2) ESTIMATES MUST BE REASONABLE. In general, for purposes of paragraph (m)(1) of this section, estimates of affected RIC expenses of a nonpublicly offered regulated investment company will be treated as reasonable only if the nonpublicly offered regulated investment company makes a reasonable effort to offset material understatements (or overstatements) of affected RIC expenses for a period by increasing (or decreasing) estimates of affected RIC expenses for a subsequent period. Understatements or overstatements of affected RIC expenses that are not material may be corrected by making offsetting adjustments in future periods, provided that understatements and overstatements are treated consistently.

(3) APPLICATION. Paragraph (m)(1) of this section shall apply to the following persons for the following purposes:

(i) A nominee who, pursuant to section 6042(a)(1)(B) and paragraph (n)(2) of this section, is required to report dividends paid by a nonpublicly offered regulated investment company to the Internal Revenues Service and to the person to whom the payment is made, for purposes of reporting to the Internal Revenue Service and the person to whom the payment is made the amount of affected RIC expenses allocated to such person.

(ii) An affected investor to whom a nominee (to which paragraph (m)(3)(i) of this section applies) reports, for purposes of calculating the affected investor's taxable income and the amount of its affected expenses.

(iii) A shareholder that is a pass-through entity, for purposes of calculating its taxable income and the amount of its affected expenses.

(n) RETURN OF INFORMATION AND REPORTING TO AFFECTED INVESTORS BY A NONPUBLICLY OFFERED REGULATED INVESTMENT COMPANY -- (1) IN GENERAL -- (i) RETURN OF INFORMATION. A nonpublicly offered regulated investment company shall make an information return (e.g., Form 1099-DIV, Dividends and Distributions, for 1987) with respect to each affected investors to which an allocation of affected RIC expenses is required to be made pursuant to paragraph (k) of this section and for which the nonpublicly offered regulated investment company is required to make an information return to the Internal Revenue Service pursuant to section 6042 (or would be required to make such information return but for the $10 threshold described in section 6042(a)(1)(A) and (B). The nonpublicly offered regulated investment company shall make the information return for each calendar year and shall state separately on such return --

(A) The amount of affected RIC expenses required to be allocated to the affected investor for the calendar year pursuant to paragraph (k) of this section,

(B) The sum of --

(1) The aggregate amount of the dividends paid to the affected investor during the calendar year, and

(2) The amount of the affected RIC expenses required to be allocated to the affected investor for the calendar year pursuant to paragraph (k) of this section, and

(C) Such other information as may be specified by the form or its instructions.

(ii) STATEMENT TO BE FURNISHED TO AFFECTED INVESTORS. A nonpublicly offered regulated investment company shall provide to each affected investor for each calendar year (whether or not the nonpublicly offered regulated investment company is required to make an information return with respect to the affected investor pursuant to section 6042), a written statement showing the following information;

(A) The information described in paragraph (n)(1)(i) of this section with respect to the affected investor;

(B) The name and address of the nonpublicly offered regulated investment company;

(C) The name and address of the affected investor; and

(D) If the nonpublicly offered regulated investment company is required to report the amount of the affected investor's allocation of affected RIC expenses to the Internal Revenue Service pursuant to paragraph (n)(1)(i) of this section, a statement to that effect.

(iii) AFFECTED INVESTOR'S SHARES HELD BY A NOMINEE. If an affected investor's shares in a nonpublicly offered regulated investment company are held in the name of a nominee, the nonpublicly offered regulated investment company may make the information return described in paragraph (n)(1)(i) of this section with respect to the nominee in lieu of the affected investor and may provide the written statement described in paragraph (n)(1)(ii) of this section to such nominee in lieu of the affected investor.

(2) BY A NOMINEE -- (i) IN GENERAL. Except as otherwise provided for in paragraph (n)(2)(iii) of this section, in any case in which a nonpublicly offered regulated investment company provides, pursuant to paragraph (n)(1)(iii) of this section, a written statement to the nominee of an affected investor for a calendar year, the nominee shall --

(A) If the nominee is required to make an information return pursuant to section 6042 (or would be required to make an information return but for the $10 threshold described in section 6042(a)(1)(A) and (B)), make an information return (e.g., Form 1099-DIV, Dividends and Distributions, for 1987) for the calendar year with respect to each affected investor and state separately on such information return the information described in paragraph (n)(1)(i) of this section, and

(B) Furnish each affected investor with a written statement for the calendar year showing the information required by paragraph (n)(2)(ii) of this section (whether or not the nominee is required to make an information return with respect to the affected investor pursuant to section 6042).

(ii) FORM OF STATEMENT. The written statement required to be furnished for a calendar year pursuant to paragraph (n)(2)(i)(B) of this section shall show the following information:

(A) The affected investor's proportionate share of the items described in paragraph (n)(1)(i) of this section for the calendar year,

(B) The name and address of the nominee,

(C) The name and address of the affected investor, and

(D) If the nominee is required to report the affected investor's share of the allocable investment expenses to the Internal Revenue Service pursuant to paragraph (n)(2)(i)(A) of this section, a statement to that effect.

(iii) RETURN NOT REQUIRED. A nominee is not required to make an information return with respect to an affected investor pursuant to paragraph (n)(2)(i)(A) of this section if the nominee is excluded from the requirements of section 6042 pursuant to section 1.6042-2(a)(1)(ii) or (iii).

(iv) STATEMENT NOT REQUIRED. A nominee is not required to furnish a written statement to an affected investor pursuant to paragraph (n)(2)(i)(B) of this section if the nonpublicly offered regulated investment company furnishes the written statement to the affected investor pursuant to an agreement with the nominee described in section 1.6042-2(a)(1)(iii).

(v) SPECIAL RULE. Paragraph (n)(1)(i) and (ii) of this section applies to a nonpublicly offered regulated investment company that agrees with the nominee to satisfy the requirements of section 6042 as described in section 1.6042-2(a)(1)(iii) with respect to the affected investor.

(3) TIME AND PLACE FOR FURNISHING RETURNS. The returns required by paragraph (n)(1)(i) and (2)(i)(A) of this section for any calendar year shall be filed at the time and place that a return required under section 6042 is required to be filed. See section 1.6042-2(c).

(4) TIME FOR FURNISHING STATEMENTS. The statements required by paragraph (n)(1)(ii) and (2)(i)(B) of this section to be furnished by a nonpublicly offered regulated investment company and a nominee, respectively, to an affected investor for a calendar year shall be furnished to such affected investor on or before January 31 of the following year.

(5) DUPLICATIVE RETURNS AND STATEMENTS NOT REQUIRED -- (i) INFORMATION RETURN. The requirements of paragraph (n)(1)(i) and (2)(i)(A) of this section for the making of an information return shall be met by the timely filing of an information return pursuant to section 6042 that contains the information required by paragraph (n)(1)(i).

(ii) WRITTEN STATEMENT. The requirements of paragraph (n)(1)(ii) and (2)(i)(B) of this section for the furnishing of a written statement (including the statement required by paragraph (n)(1)(ii)(D) and (2)(ii)(D) of this section) shall be met by furnishing the affected investor a copy of the information return to which section 6042 applies (whether or not the nonpublicly offered regulated investment company or nominee is required to file an information return with respect to the affected investor pursuant to section 6042) that contains the information required by paragraph (n)(1)(ii) or (2)(ii), whichever is applicable, of this section. Nonpublicly offered regulated investment companies and nominees may use a substitute form that contains provisions substantially similar to those of the prescribed form if the nonpublicly offered regulated investment company or nominee complies with all revenue procedures relating to substitute forms in effect at the time. The statement shall be furnished either in person or in a statement mailed by first-class mail that includes adequate notice that the statement is enclosed. A statement shall be considered to be furnished to an affected investor within the meaning of this section if it is mailed to such affected investor at its last known address.

(o) RETURN OF INFORMATION BY A COMMON TRUST FUND. With respect to each affected investor to which paragraph (d) of this section applies, the common trust fund shall state on the return it is required to make pursuant to section 6032 for its taxable year, the following information:

(1) The amount of the affected investor's proportionate share of the affected expenses for the taxable year as described in paragraph (d)(1)(ii) of this section.

(2) The amount of the affected investor's proportionate share of ordinary taxable income or ordinary net loss for the taxable year determined pursuant to paragraph (d)(1)(i) of this section, and

(3) Such other information as may be specified by the form or its instructions.

(p) PUBLICLY OFFERED REGULATED INVESTMENT COMPANIES. [Reserved]

* * * * *

SECTION 1.67-4T ALLOCATION OF EXPENSES BY NONGRANTOR TRUSTS AND ESTATES (TEMPORARY) [Reserved]

Par. 4. Paragraph (b) of section 1.162-1 is amended by adding a new subparagraph (7) immediately following subparagraph (6) to read as set forth below.

Section 1.162-1 Business expenses.

* * * * *

(b) CROSS REFERENCES. * * *

(7) For limitations on the deductibility of miscellaneous itemized deductions, see section 67 and sections 1.67-1T through 1.67-4T.

Authority: 26 U.S.C. 7805.

Par. 6. Paragraph (c) of section 602.101 is amended by inserting in the appropriate place in the table "Section 1.67-2T . . . 1545-0110".

There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure under subsection (b) of section 553 of title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.