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Federal Register / Vol. 70, No.

39 / Tuesday, March 1, 2005 / Rules and Regulations 9869

species by catcher/processors listed in fishery by a fishery cooperative by one or more segregated asset
paragraphs 208(e)(1) through (e)(20) and established under § 679.61 or § 679.62. accounts of one or more insurance
section 209 of the AFA in non-pollock * * * * * companies, and public access to such
target fisheries divided by the sum of [FR Doc. 05–3788 Filed 2–24–05; 2:55 pm] investment company, partnership, or
the catch of that species in 1995 through BILLING CODE 3510–22–S
trust is available exclusively (except as
1997 multiplied by the TAC of that otherwise permitted by section 1.817–
species available for harvest by catcher/ 5(f)(3)) through the purchase of a
processors in the year in which the variable contract. Under § 1.817–
DEPARTMENT OF THE TREASURY 5(f)(2)(ii), the look-through rule applies
harvest limit will be in effect.
Internal Revenue Service to a partnership interest that is not
(ii) If the amount of a species registered under a Federal or state law
calculated under paragraph (a)(4)(i) of regulating the offering or sale of
this section is determined by the 26 CFR Part 1
securities. Unlike § 1.817–5(f)(2)(i),
Regional Administrator to be [TD 9185] satisfaction of the nonregistered
insufficient to meet bycatch needs for partnership look-through rule of
AFA catcher/processors in other RIN 1545–BB77
§ 1.817–5(f)(2)(ii) is not explicitly
directed fisheries for groundfish, the Diversification Requirements for conditioned on limiting the ownership
Regional Administrator will prohibit Variable Annuity, Endowment, and Life of interests in the partnership to certain
directed fishing for that species by AFA Insurance Contracts specified holders.
catcher/processors and establish the On July 30, 2003, the Treasury
sideboard amount equal to the amount AGENCY: Internal Revenue Service (IRS), Department and the IRS published a
of that species caught by AFA catcher/ Treasury. notice of proposed rulemaking (REG–
processors incidental to directed fishing ACTION: Final regulations. 163974–02) under section 817 in the
for other groundfish species. Federal Register (68 FR 44689). The
SUMMARY: This document contains final proposed regulations would remove the
* * * * *
regulations removing provisions of the rule that applies specifically to
(b) Harvesting sideboards for AFA Income Tax Regulations that apply a nonregistered partnerships for purposes
catcher vessels. The Regional look-through rule to assets of a of testing diversification. The proposed
Administrator will restrict the ability of nonregistered partnership for purposes regulations also would remove an
AFA catcher vessels to engage in of satisfying the diversification example that illustrates that rule.
directed fishing for other groundfish requirements of section 817(h) of the The application of § 1.817–5(f)(2)(i) to
species to protect participants in other Internal Revenue Code. interests in nonregistered partnerships
groundfish fisheries from adverse effects DATES: Effective Date: These regulations will be unchanged by the removal of
resulting from the AFA and from fishery are effective as of March 1, 2005. § 1.817–5(f)(2)(ii). Thus, look-through
cooperatives in the BS subarea directed However, arrangements in existence on treatment will be available for interests
pollock fishery. March 1, 2005, will be considered to be in a nonregistered partnership if all the
adequately diversified if: (i) Those beneficial interests in the partnership
* * * * * are held by one or more segregated asset
arrangements were adequately
(3) How will groundfish sideboard accounts of one or more insurance
diversified within the meaning of
limits be calculated? Except for Aleutian companies and public access to the
section 817(h) prior to March 1, 2005,
Islands pollock, the Regional and (ii) by December 31, 2005, the partnership is available exclusively
Administrator will establish annual arrangements are brought into (except as otherwise permitted by
AFA catcher vessel harvest limits for compliance with the final regulations. § 1.817–5(f)(3)) through the purchase of
each groundfish species or species Applicability Date: For dates of a variable contract.
group in which a TAC is specified for Written comments were received in
applicability, see § 1.817–5(i).
an area or subarea of the GOA and BSAI response to the notice of proposed
FOR FURTHER INFORMATION CONTACT: rulemaking. A public hearing on the
as follows:
James Polfer, (202) 622–3970 (not a toll- notice of proposed rulemaking was held
* * * * * free number). on April 1, 2004. After consideration of
■ 19. In § 679.65, paragraphs (a) and (b) SUPPLEMENTARY INFORMATION: all the comments and the hearing
are revised to read as follows: Background testimony, the proposed regulations are
adopted as amended by this Treasury
§ 679.65 Crab processing sideboard limits. Under section 817(h), a variable decision.
(a) What is the purpose of crab contract based on a segregated asset
account is not treated as an annuity, Explanation and Summary of
processing limits? The purpose of crab Comments
endowment, or life insurance contract
processing sideboard limits is to protect
unless the segregated asset account is In addition to requesting comments
processors not eligible to participate in
adequately diversified. For purposes of on the clarity of the proposed rule and
the BS subarea directed pollock fishery
testing diversification, section 817(h)(4) how the rule could be made easier to
from adverse effects as a result of the
and § 1.817–5(f) of the regulations understand, the Treasury Department
AFA and the formation of fishery
provide a look-through rule for assets and the IRS specifically requested
cooperatives in the BS subarea directed held through certain investment comments on: (1) Whether revocation of
pollock fishery. companies, partnerships, or trusts. § 1.817–5(f)(2)(ii) necessitates other
(b) To whom do the crab processing Section 1.817–5(f)(2)(i) provides that changes to the look-through rules of
sideboard limits apply? The crab look-through treatment is available with § 1.817–5(f), in particular whether the
processing sideboard limits in this respect to any investment company, list of holders permitted by § 1.817–
section apply to any AFA inshore or partnership, or trust only if all the 5(f)(3) should be amended or expanded,
mothership entity that receives pollock beneficial interests in the investment and whether a non-pro-rata distribution
harvested in the BS directed pollock company, partnership, or trust are held of the investment returns of a segregated

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9870 Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Rules and Regulations

asset account should be permitted to revocation of § 1.817–5(f)(2)(ii) will be manager of an investment company,
take account of certain bonus payments considered to be adequately diversified partnership, or trust in a manner
to investment managers commonly if: (i) Those arrangements were specified in section 707(b); certain
referred to as incentive payments, (2) adequately diversified within the investment professionals operating as
whether § 1.817–5 should be updated to meaning of section 817(h) prior to the service providers; or persons who
take account of changes to variable revocation of § 1.817–5(f)(2)(ii), and (ii) receive interests in a partnership as a
contracts since the final regulations by the end of the last day of the second result of inadvertent transfers, such as
were published in 1986, and (3) whether calendar quarter ending after the by bankruptcy or death of the permitted
regulations are needed to address when effective date of the regulation, the investor. The sole speaker at the public
a holder of a variable contract will be arrangements are brought into hearing on the notice of proposed
treated as the owner of assets held in a compliance with the final regulations. rulemaking testified that the list of
segregated asset account and, therefore, The Treasury Department and the IRS investors permitted by § 1.817–5(f)(3)
required to include earnings on those do not believe it is appropriate to should be expanded to include ‘‘floor
assets in income. grandfather existing arrangements specialists’’ as that term is defined in
indefinitely. In response to these section 1236(d)(2).
1. Comments on the Proposed Other comments suggested guidance
comments, however, the transition
Regulations on non-pro-rata manager compensation.
period for existing arrangements to be
Two comments on the proposed brought into compliance with the In order for the manager (or a
regulation concerned the definition of regulations is two calendar quarters corporation related in a manner
‘‘security’’ in § 1.817–5(h)(6). Under longer than the period provided in the specified in section 267(b) to the
§ 1.817–5(b)(1)(ii)(A), all securities of proposed regulations. manager) of an investment company,
the same issuer are treated as one Finally, one commentator questioned partnership, or trust, to be a permitted
investment for the purposes of satisfying the authority of the Treasury investor under § 1.817–5(f)(3)(ii), (1) its
the diversification requirements. Department and the IRS to enact this interest must be held in connection with
Section 1.817–5(h)(6) provides that the final regulation because ‘‘the only the creation or management of the
term security includes ‘‘a cash item and substantive impetus for the regulation is investment company, partnership, or
any partnership interest registered a general statement in the legislative trust; (2) the return on such interest
under a Federal or state law regulating history.’’ Congress enacted the must be computed in the same manner
the offering or sale of securities,’’ but diversification requirements of section as the return on an interest held by a
does not include ‘‘any other 817(h) to ‘‘discourage the use of tax- segregated asset account is computed
partnership interest.’’ The preferred variable annuity and variable (determined without regard to expenses
commentators stated that the definition life insurance primarily as investment attributable to variable contracts); and
of ‘‘security’’ that applies to § 1.817–5 vehicles,’’ H.R. Conf. Rep. No. 98–861, (3) there must be no intent to sell such
should be amended to include an at 1055 (1984), and granted the interest to the public. A number of
interest in a non-registered partnership. Secretary broad regulatory authority to commentators stated that the
The Treasury Department and the IRS develop rules to carry out this intent. requirement that the return on a
agree that, in light of the revocation of The Treasury Department and the IRS manager’s interest be computed in the
former § 1.817–5(f)(2)(ii), the definition have determined that this final same manner as the return on a
of security should be modified to regulation and the rest of the regulations segregated asset account’s interest—
remove the distinction between contained in § 1.817–5 were prescribed essentially a pro-rata distribution
registered and nonregistered partnership within the delegation of authority requirement—is inconsistent with
interests. The final regulations reflect provided by Congress. prevailing market practices concerning
this change. manager bonuses, discourages the
A number of commentators also 2. Comments on § 1.817–5 More
creation of insurance dedicated funds,
suggested that the regulation should be Generally
and is not necessary to prevent abuse of
clarified by adding to or otherwise Many comments concerned the list of the look-through rules contained in
revising the examples contained in permitted investors under § 1.817– § 1.817–5(f).
§ 1.817–5(g). In response to these 5(f)(3). Notwithstanding the limitations Some comments stated there is a need
comments, the final regulations revise on public access to an investment to clarify the consequences to a variable
§ 1.817–5(g) Example 1 to remove the company, partnership, or trust that is contract and variable contract holder
reference to partnership P as a publicly subject to look-through treatment under when the contract’s segregated asset
registered partnership. The Treasury § 1.817–5(f), § 1.817–5(f)(3) permits account contains an asset in which
Department and the IRS believe that, look-through treatment if the beneficial beneficial interests are held by investors
with this change, the examples interests of the investment company, (such as qualified plans) that qualified
contained in § 1.817–5(g) adequately partnership, or trust are held by certain as permitted investors in § 1.817–5(f)(2)
explain the application of § 1.817–5 to other ‘‘permitted investors,’’ including or (3) at the time of initial investment,
partnership interests. Any questions the general account of a life insurance but subsequently lose their status.
concerning the application of § 1.817–5 company (if certain requirements are Similarly, one commentator urged that
to more specific factual scenarios may met), the manager or a corporation if an insurance company has a
be addressed by the letter ruling process related to the manager (if certain reasonable basis to believe that an
or by subsequent published guidance. requirements are met), or the trustee of investment company, partnership, or
Two commentators urged that existing a qualified plan. Commentators trust satisfies the requirements of
arrangements either should be suggested that the list of permitted § 1.817–5(f)(2), a variable contract of
grandfathered in some fashion or should investors be expanded to include, for that insurance company should be
be given additional time to be brought example, qualified tuition programs permitted to look-through that entity for
into compliance with the final described in section 529; segregated purposes of testing a segregated asset
regulations. The notice of proposed asset accounts of foreign insurance account on which that contract is based,
rulemaking provided that arrangements companies; foreign pension plans; even if the investment company,
in existence on the effective date of the persons or entities related to the partnership, or trust has investors not

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Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Rules and Regulations 9871

described in § 1.817–5(f)(2) or (3). The retroactively to treat certain investors as tax liability’’ limitation was intended to
commentator suggested that this the ‘‘general public’’ as that term is used apply only to tax on unrelated business
standard would be consistent with the in Rev. Rul. 81–225. Specifically, the income. Finally, one commentator noted
standard of determination often used in commentator requested relief for that, given the inherent factual nature of
the Federal securities laws. investments in real estate partnerships, the determination whether a contract
Other comments included a request interests in which are held directly by holder is treated as the owner of
for clarification of the treatment of fund- (1) organizations described in section segregated account assets, the issue is
of-funds and master-feeder 501(c)(3), and (2) such partnerships’ better addressed by letter ruling or
arrangements for purposes of testing investment managers, if those managers revenue ruling, rather than by
diversification; the desirability of an are not described in § 1.817–5(f)(3)(ii) regulations.
updated correction procedure for failure because of bonus payment Although the comments on investor
to satisfy the diversification arrangements. The commentator control are not adopted in this Treasury
requirements of section 817(h) and believed such relief is warranted decision, they are responsive to the
§ 1.817–5; guidance concerning the use because of uncertainty concerning the request for comments in the July 30,
of independent investment advisors; meaning of ‘‘general public’’ as that 2003, notice of proposed rulemaking
and extension of the special term is used in Rev. Rul. 81–225. and will receive careful attention in the
diversification rules for United States Several other commentators suggested event of further guidance on investor
Treasury securities under section that regulations under section 817 control.
817(h)(3) and § 1.817–5(b)(3) to variable should clarify that the permitted
annuity contracts. (The latter comment investors under § 1.817–5(f)(3) do not Special Analyses
presumably would require a change to constitute the ‘‘general’’ public as that It has been determined that this
section 817(h)(3), as well as to the term is used in Rev. Rul. 2003–92 and Treasury decision is not a significant
regulations.) Rev. Rul. 81–225. According to these
Although the comments on § 1.817–5 regulatory action as defined in
commentators, it would be anomalous Executive Order 12866. Therefore, a
generally are not adopted in this for ownership by a permitted investor
Treasury decision, the Treasury regulatory assessment is not required. It
under § 1.817–5(f)(3) to result in a also has been determined that section
Department and IRS will consider these variable contract holder being treated as
comments in the event of future 553(b) of the Administrative Procedure
the owner of an investment company, Act (5 U.S.C. chapter 5) does not apply
published guidance. For example, Rev. partnership, or trust, when the look-
Rul. 2005–7 (2005–6 I.R.B.) (see to these regulations, and because the
through rule itself appears to endorse regulations do not impose a collection
§ 601.601 (d)(2)(ii)(b) of this chapter) ownership by that same investor for
provides guidance on the application of of information on small entities, the
purposes of testing diversification. Still Regulatory Flexibility Act (5 U.S.C.
the diversification look-through rule to
another commentator noted that when chapter 6) does not apply. Pursuant to
tiered investment companies.
determining whether a contract holder section 7805(f) of the Internal Revenue
3. Comments on Investor Control is treated as the owner of segregated Code, the notice of proposed rulemaking
Finally, some comments concerned account assets, communications preceding these regulations was
the need for additional guidance between investment advisors or officers submitted to the Small Business
addressing circumstances under which and variable contract holders should be Administration for comment on its
the holder of a variable contract will be permitted if the communications are impact on small business.
treated as the owner of assets held by a consistent with Federal securities and
commodities laws. Drafting Information
segregated asset account by virtue of the
control the contract holder has over One commentator suggested that the The principal author of these
those assets. Under Rev. Rul. 81–225, preamble to this Treasury decision regulations is James Polfer, Office of the
1981–2 C.B. 12 (see § 601.601(d)(2)(ii)(b) should confirm the intended scope of Associate Chief Counsel (Financial
of this chapter), the owner of a variable Rev. Proc. 99–44, 1999–2 C.B. 598. Institutions and Products), Office of
annuity contract funded by publicly Under Rev. Proc. 99–44, a contract is Chief Counsel, Internal Revenue
available mutual fund shares is treated treated as an annuity contract described Service. However, personnel from other
as the owner of those shares. Rev. Rul. in sections 403(a), 403(b), or 408(b), offices of the Treasury Department and
2003–92, 2003–33 I.R.B. 350 (see notwithstanding that contract premiums the IRS participated in their
§ 601.601(d)(2)(ii)(b) of this chapter), are invested at the direction of the development.
clarified and amplified Rev. Rul. 81–225 contract holder in publicly available
List of Subjects in 26 CFR Part 1
by applying the same rule to variable securities, so long as certain
life insurance contracts, and by treating requirements are met. Those Income taxes, Reporting and
as publicly available a nonregistered requirements include a limitation that recordkeeping requirements.
partnership, interests in which are sold no additional Federal tax liability would
have been incurred if the employer of Adoption of Amendment to the
only to qualified purchasers that are
the contract holder had instead paid Regulations
accredited investors or to no more than
one hundred accredited investors. See amounts into a custodial account in an ■ Accordingly, 26 CFR part 1 is amended
also Rev. Rul. 2003–91, 2003–33 I.R.B. arrangement that satisfied the as follows:
347; Rev. Rul. 82–54, 1982–1 C.B. 11; requirements of section 403(b)(7)(A) or
Rev. Rul. 80–274, 1980–2 C.B. 27; Rev. no additional Federal tax liability would PART 1—INCOME TAX
Rul. 77–85, 1977–1 C.B. 12.; have been incurred if the consideration
Christoffersen v. U.S., 749 F.2d 513 (8th for the contract had instead been held ■ Paragraph 1. The authority citation for
Cir. 1984), rev’g 578 F. Supp. 398 (N.D. as part of a trust that would satisfy the part 1 continues to read in part as
Iowa 1984). See § 601.601(d)(2)(ii)(b) of requirements of section 408(a), as follows:
this chapter. applicable. The commentator urged that Authority: 26 U.S.C. 7805 * * *
One commentator urged that Rev. Rul. the preamble to this Treasury decision Section 1.817–5 also issued under 26
2003–92 should not be applied clarify that the ‘‘no additional Federal U.S.C. 817(h). * * *

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9872 Federal Register / Vol. 70, No. 39 / Tuesday, March 1, 2005 / Rules and Regulations

■ Par. 2. Section 1.817–5 is amended as ENVIRONMENTAL PROTECTION public rulemaking file for this action
follows: AGENCY under R01–OAR–2004–ME–0002. The
■ 1. Paragraphs (f)(2)(ii) and (g) Example official public file consists of the
40 CFR Part 62 documents specifically referenced in
3 are removed.
[R01–OAR–2004–ME–0002a; A–1–FRL– this action, any public comments
■ 2. Paragraph (f)(2)(iii) is redesignated
7876–8 ] received, and other information related
as paragraph (f)(2)(ii). to this action. Although a part of the
■ 3. The first sentence of paragraph (g) Approval and Promulgation of Air official docket, the public rulemaking
Example 1 is revised. Quality Implementation Plans; Maine; file does not include Confidential
Control of Total Reduced Sulfur From Business Information (CBI) or other
■ 4. Paragraph (g) Example 4 is
Kraft Pulp Mills information whose disclosure is
redesignated as paragraph (g) Example 3.
AGENCY: Environmental Protection restricted by statute. The official public
■ 5. Paragraph (h)(6) is revised.
Agency (EPA). rulemaking file is the collection of
■ 6. New paragraph (i)(2)(v) is added. materials that is available for public
ACTION: Direct final rule.
The revisions read as follows: viewing at the Office of Ecosystem
SUMMARY: The EPA is approving a Protection, U.S. Environmental
§ 1.817–5 Diversification requirements for revision to Maine’s plan for controlling Protection Agency, EPA New England
variable annuity, endowment, and life air pollution according to section 111(d) Regional Office, One Congress Street,
insurance contracts. of the Clean Air Act (i.e., a ‘‘111(d) Suite 1100, Boston, MA. EPA requests
* * * * * plan’’). This revision changes state that if at all possible, you contact the
(g) * * * regulations controlling the emission of contact listed in the FOR FURTHER
total reduced sulfur (‘‘TRS’’) from INFORMATION CONTACT section to
Example 1. (i) The assets underlying existing kraft paper mills by making schedule your inspection. The Regional
variable contracts issued by a life insurance April 17, 2007 the compliance date for Office’s official hours of business are
company consist of two groups of assets: (a) brownstock washers. This action is
a diversified portfolio of debt securities and
Monday through Friday, 8:30 to 4:30
being taken in accordance with section excluding Federal holidays.
(b) interests in P, a partnership. * * * 111(d) of the Clean Air Act (‘‘CAA’’).
* * * * * 2. Copies of the State submittal and
DATES: This direct final rule will be
EPA’s technical support document are
(h) * * * effective May 2, 2005, unless EPA
also available for public inspection
receives adverse comments by March
(6) Security. The term security shall during normal business hours, by
31, 2005. If adverse comments are
include a cash item and any partnership appointment at the State Air Agency.
received, EPA will publish a timely
interest, whether or not registered under Department of Environmental
withdrawal of the direct final rule in the
a Federal or State law regulating the Federal Register informing the public Protection, First Floor of the Tyson
offering or sale of securities. The term that the rule will not take effect. Building, Augusta Mental Health
shall not include any interest in real Institute Complex, Augusta, ME 04333–
ADDRESSES: Comments may be mailed to
property, or any interest in a 0017; Division of Air Quality Control.
Lucy Edmondson, acting Unit Manager,
commodity. Air Permits, Toxics and Indoor Program 3. Electronic Access. You may access
* * * * * Unit, Office of Ecosystem Protection this Federal Register document
(i) * * * (mail code CAP), U.S. Environmental electronically through the
Protection Agency, EPA New England web site located at
(2) * * * where you
Regional Office, One Congress Street,
(v) A segregated asset account in Suite 1100, Boston, MA 02114–2023. can find, review, and submit comments
existence before March 1, 2005, will be Comments may also be submitted on Federal rules that have been
considered to be adequately diversified electronically, or through hand published in the Federal Register, the
if— delivery/courier. Please follow the Government’s legal newspaper, and are
(A) As of March 1, 2005, the account detailed instructions described in Part open for comment.
was adequately diversified within the (I)(B)(1)(i) through (iii) of the For public commenters, it is
SUPPLEMENTARY INFORMATION section. important to note that EPA’s policy is
meaning of section 817(h) and this
regulation as in effect prior to that date; FOR FURTHER INFORMATION CONTACT: Ian that public comments, whether
and D. Cohen, Air Permits, Toxics, and submitted electronically or in paper,
Indoor Air Programs Unit, U.S. will be made available for public
(B) By December 31, 2005, the Environmental Protection Agency, EPA
account is adequately diversified within viewing at the EPA Regional Office, as
New England Regional Office, One EPA receives them and without change,
the meaning of section 817(h) and this Congress Street, Suite 1100 (CAP),
regulation. unless the comment contains
Boston, MA 02114–2023, copyrighted material, CBI, or other
Mark E. Matthews, information whose disclosure is
Deputy Commissioner for Services and SUPPLEMENTARY INFORMATION: restricted by statute. When EPA
Enforcement. I. General Information identifies a comment containing
Approved: February 15, 2005.
copyrighted material, EPA will provide
A. How Can I Get Copies of This a reference to that material in the
Eric Solomon, Document and Other Related version of the comment that is placed in
Acting Deputy Assistant Secretary of the Information? the official public rulemaking file. The
Treasury. entire printed comment, including the
1. The Regional Office has established
[FR Doc. 05–3825 Filed 2–28–05; 8:45 am] an official public rulemaking file copyrighted material, will be available
BILLING CODE 4830–01–P available for inspection at the Regional at the Regional Office for public
Office. EPA has established an official inspection.

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