WAIT FOR TECHNICAL CORRECTIONS CHANGE REGARDING SECTION 448, TREASURY'S CHAPOTON TELLS OHIO'S GLENN.

In an August 12 letter to Glenn, Chapoton said that the regulations are "clearly consistent" with section 448 of the 1986 Tax Act, which prohibits tax shelters from using the cash method. Furthermore, wrote Chapoton, "if we were to suspend the application of the current regulations in anticipation of a particular provision in the Technical Corrections Bill, large and diverse groups of taxpayers who would be beneficially affected by the Technical Corrections Bill would immediately demand that we delay or suspend enforcement of those provisions of law which are to be the subject of technical corrections."

Tax shelters are defined in the Code as enterprises that are required by either Federal or state laws to file notices of exemption from registration. All S corporations in Ohio are required to file notices of exemption with the state, thus making them all tax shelters according to the Treasury regulations. Under the proposed technical corrections bill, the section 448 regulations would not apply to S corporations required to file notices of exemption for state law purposes.

Thank you for your letter of May 19, 1988 to Secretary Baker regarding section 448 of the Internal Revenue Code, enacted in the Tax Reform Act of 1986, which limits the use of the cash method of accounting for Federal income tax purposes.

In your letter, you express support for the position taken by the Bar Association of Columbus, Ohio which has suggested that certain Treasury regulations promulgated under section 448 be suspended pending Congressional consideration of the Technical Corrections Bill. In particular, you have suggested that we suspend section 1.448-1T(b)(2) of the regulations which deals with the definition of a "tax shelter" for purposes of section 448.

Section 448(a)(3) of the Code provides that a tax shelter is prohibited from using the cash method of accounting. The term "tax shelter" is defined, for purposes of section 448, by reference to the definition contained in section 461(i)(3) of the Code, which was enacted in the Tax Reform Act of 1984.

On June 16, 1987 temporary and proposed regulations interpreting section 448 were published in the Federal Register. These regulations provide that a tax shelter includes any enterprise (other than a C corporation) "if, under the applicable federal or state law, failure [by such entity] to file a notice of exemption from registration would result in a violation of the applicable federal or state law (regardless of whether the notice is in fact filed)." Section 1.448- lT(b)(2) of the Regulations.

In your letter, you correctly point out that section 108(a)(7) of the Technical Corrections Bill of 1988, would, if enacted, modify the definition of a tax shelter for purposes of section 448. This provision in the proposed legislation would effectively overrule the section 448 regulations as they apply to S corporations required to file a notice of exemption for State law purposes, but only if there is a requirement applicable to all corporations organized or offered in the State that to be exempt from registration the corporation must file such a notice.

You have requested in your letter that we suspend application of these section 448 regulations pending Congressional consideration of the Technical Corrections Bill. The basis for your concern is that, under the definition of tax shelter contained in the regulations, apparently every S corporation organized in the state of Ohio would be considered a tax shelter, and thus prohibited from using the cash method of accounting. The result occurs because Ohio law requires every Ohio S corporation to file a notice of exemption with the Ohio State Division of Securities upon its organization.

Although we sympathize with your concerns in this matter, we believe the regulations at issue are entirely consistent with the relevant statute and legislative history. Section 461(i)(3) of the Code provides that a tax shelter includes, inter alia, "any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale." The Report of the House Ways and Means Committee accompanying the enactment of section 461(i) in the 1984 Act provides, in this regard, that "[t]he committee intends that an offering required to be registered with any Federal or State agency will include ANY offering filed with, or with respect to which NOTICE IS GIVEN to such agency." H.R. Rep. No. 98-432 (part 2) 98th, Cong., 2d. Sess. at 1260 (1984) (emphasis added).

Because the regulations are so clearly consistent with the statute and legislative history, it would be inappropriate to reverse them at this time. As I know you can appreciate, if we were to suspend the application of the current regulations in anticipation of a particular provision in the Technical Corrections Bill, large and diverse groups of taxpayers who would be beneficially affected by the Technical Corrections Bill would immediately demand that we delay or suspend enforcement of those provisions of law which are to be the subject of technical corrections.

Finally, let me add that the Treasury Department strongly supports the prompt enactment of the Technical Corrections Bill into law and stands ready to work with you in any way to help insure passage of this legislation.

Thank you for your letter expressing your concerns with respect to this important problem. Please do not hesitate to contact me if I can provide you with any additional information regarding this matter.

Sincerely,