Internal Revenue Bulletin 2001-5 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
T.D. 8930, page 433.
Final regulations under section 41 of the Code relate to the
computation of the credit for increasing research activities
and the definition of qualified research. These regulations
provide guidance concerning the requirements to qualify for
the credit and rules for electing and revoking the election of
the alternative incremental credit.
Rev. Rul. 2001–5, page 451.
LIFO; price indexes; department stores. The November
2000 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, November 30,
2000.
REG–106542–98, page 473.
Proposed regulations relate to an election under section 645
of the Code to have certain revocable trusts treated and
taxed as part of an estate. A public hearing is scheduled for
February 21, 2001.
Notice 2001–10, page 459.
Split-dollar insurance arrangements.This notice clari-
fies prior rulings issued by the IRS regarding the taxation of
split-dollar arrangements, provides taxpayers with interim
guidance on the tax treatment of split-dollar arrangements
pending publication of further guidance, and requests tax-
payer comments on the interim guidance and a number of
unresolved issues. Rev. Rul 55–747 revoked. Rev. Ruls.
64–328 and 66–110 modified.
Notice 2001–11, page 464.
This notice provides additional guidance to financial institu-
tions located in U.S. possessions in relation to the section
1441 nonresident alien withholding regulations that were
published as T.D. 8734 (1997-2 C.B. 109) and T.D. 8881
(2000–23 I.R.B. 1158). Those regulations will apply to cer-
tain payments of income to foreign persons after December
31, 2000.
EXEMPT ORGANIZATIONS
Rev. Proc. 2001–15, page 465.
This procedure provides a modified and supplemented list of
Indian tribal governments that are to be treated similarly to
states for specified purposes under the Internal Revenue
Code. Rev. Procs. 83–87 and 92–19 superseded.
ESTATE TAX
T.D. 8912, page 452.
Final regulations under section 2601 of the Code relate to
the retention of a trust’s exempt status for generation-skip-
ping transfer tax purposes in the case of modifications, etc.,
to a trust.
Internal Revenue
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Bulletin No. 2001–5
January 29, 2001
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Actions Relating to Court Decisions is on the page following the Introduction.
Finding Lists begin on page ii.
Announcements of Disbarments and Suspensions begin on page 482.

January 29, 20012001–5 I.R.B.
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless oth-
erwise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Ser-
vice personnel in the disposition of other cases. In applying
published rulings and procedures, the effect of subsequent
legislation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same
conclusions in other cases unless the facts and circum-
stances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Ad-
ministrative Rulings. Bank Secrecy Act Administrative Rul-
ings are issued by the Department of the Treasury’s Office
of the Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
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for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual
basis, and are published in the first Bulletin of the succeed-
ing semiannual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2001–5 I.R.B.January 29, 2001
It is the policy of the Internal Revenue
Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on un-
appealed issues decided adverse to the
government. Generally, an Action on De-
cision is issued where its guidance would
be helpful to Service personnel working
with the same or similar issues. Unlike a
Treasury Regulation or a Revenue Ruling,
an Action on Decision is not an affirma-
tive statement of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
over, the recommendation in the Action
on Decision may be superseded by new
legislation, regulations, rulings, cases, or
Actions on Decisions.
Prior to 1991, the Service published ac-
quiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be help-
ful. Accordingly, the Service now may ac-
quiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court decid-
ing the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as ac-
quiescence, acquiescence in result only,
or nonacquiescence. Both “acquies-
cence” and “acquiescence in result only”
mean that the Service accepts the holding
of the court in a case and that the Service
will follow it in disposing of cases with
the same controlling facts. However, “ac-
quiescence” indicates neither approval
nor disapproval of the reasons assigned
by the court for its conclusions; whereas,
“acquiescence in result only” indicates
disagreement or concern with some or all
of those reasons. “Nonacquiescence” sig-
nifies that, although no further review
was sought, the Service does not agree
with the holding of the court and, gener-
ally, will not follow the decision in dis-
posing of cases involving other taxpay-
ers. In reference to an opinion of a circuit
court of appeals, a “nonacquiescence” in-
dicates that the Service will not follow
the holding on a nationwide basis. How-
ever, the Service will recognize the
precedential impact of the opinion on
cases arising within the venue of the de-
ciding circuit.
The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumu-
lative Bulletin for the first half of the
year. A semiannual consolidation also ap-
pears in the first Bulletin for the follow-
ing January and in the Cumulative Bul-
letin for the last half of the year.
The Commissioner ACQUIESCES in
the following decision:
Security State Bank v. Commissioner,
1
214 F.3d 1254 (10
th
Cir. 2000),
aff ’g 111 T.C. 210 (1998)
Actions Relating to Decisions of the Tax Court
1
Acquiescence as to whether a cash method bank that makes short-term loans in the ordinary course of its business is subject to accrual of the stated interest on those
loans under section 1281(a)(2) or, in the alternative, under section 1281(a)(1).

Section 41.—Credit for
Increasing Research Activities
26 CFR 1.41–1: Credit for increasing research
activities.
T.D. 8930
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Credit for Increasing Research
Activities
AGENCY:Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY:This document contains
final regulations relating to the computa-
tion of the credit under section 41(c) and
the definition of qualified researchunder
section 41(d). These regulations are
intended to provide guidance concerning
the requirements necessary to qualify for
the credit for increasing research activi-
ties, guidance in computing the credit for
increasing research activities, and rules
for electing and revoking the election of
the alternative incremental credit. These
regulations reflect changes to section 41
made by the Tax Reform Act of 1986 (the
1986 Act), the Revenue Reconciliation
Act of 1989, the Small Business Job
Protection Act of 1996, the Taxpayer
Relief Act of 1997, the Tax and Trade
Relief Extension Act of 1998 (the 1998
Act), and the Tax Relief Extension Act of
1999 (the 1999 Act). These regulations
also provide certain technical amend-
ments to the existing regulations.
DATES:Effective Dates: These regula-
tions are effective January 3, 2001.
Applicability Dates:For dates of
applicability of these regulations, see
Effective Dates under SUPPLEMEN-
TARY INFORMATION. FOR FUR-
THER INFORMATION CONTACT:
Lisa J. Shuman or Leslie H. Finlow at
(202) 622-3120 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained
in §1.41–8(b) of this final rule have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507) under the number
1545–1625. Responses to these collec-
tions of information are mandatory.
The reporting burden contained in
§1.41–8(b)(2) (relating to the election of
the alternative incremental credit) is
reflected in the burden of Form 6765.
Estimated average annual burden hours
per respondent under §1.41–8(b)(3) (relating
to the revocation of the election to use the
alternative incremental credit) is 250 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn:IRS
Reports Clearance Officer, W:CAR:
MP:FP:S:O, Washington, DC 20224, and
to the Office of Management and
Budget, Attn:Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
The collections of information contained
in §1.41–4(d) of this final rule have been
reviewed and, pending receipt and evalua-
tion of public comments, approved by the
Office of Management and Budget (OMB)
under 44 U.S.C. 3507 and assigned control
number 1545–1625. This information is
required to assist in the examination of the
research credit and to ensure that the
research credit is properly targeted to serve
as an incentive to engage in qualified
research. This information will be used to
verify that the amounts treated as qualified
research expenses were paid or incurred for
activities intended to discover information
that exceeds, expands, or refines the com-
mon knowledge of skilled professionals in
the relevant field of science or engineering.
This collection of information is required
to obtain a benefit. The likely recordkeep-
ers are businesses or other for-profit insti-
tutions.
Estimated total annual recordkeeping
burden for §1.41–4(d) is 18,000 hours.
The annual estimated burden per respon-
dent varies from .5 hours to 2.5 hours,
depending on the circumstances, with an
estimated average of 1.5 hours.
The estimated number of recordkeepers
is 12,000.
Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn:IRS Reports
Clearance Officer, W:CAR:MP:FP:S:O,
Washington, DC 20224. Comments on
the collection of information should be
received by March 4, 2001. Comments
are specifically requested concerning:
Whether the collection of information
is necessary for the proper performance of
the functions of the Internal Revenue
Service, including whether the informa-
tion will have practical utility;
The accuracy of the estimated burden
associated with the collection of informa-
tion (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with the
collection of information may be mini-
mized, including through the application of
automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of services to provide information.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On January 2, 1997, the IRS and
Treasury published in the Federal
Register(62 F.R. 81) a notice of proposed
rulemaking (REG–209494–90, 1997–1
C.B. 723) under section 41 describing
when computer software that is developed
by (or for the benefit of) a taxpayer primar-
ily for the taxpayer’s internal use can qual-
ify for the credit for increasing research
activities (the 1997 proposed regulations).
Comments responding to the 1997 pro-
2001–5 I.R.B.433January 29, 2001
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

January 29, 20014342001–5 I.R.B.
posed regulations were received and a pub-
lic hearing was held on May 13, 1997.
On December 2, 1998, the IRS and
Treasury published in the Federal Register
(63 F.R. 66503) a notice of proposed rule-
making (REG–105170–97, 1998–2 C.B.
729) under section 41 relating to the credit
for increasing research activities (the 1998
proposed regulations). The 1998 proposed
regulations propose rules and examples
relating to (1) the definition of gross receipts
for purposes of computing the base amount
under section 41(c), (2) the application of the
consistency rule in computing the base
amount, (3) the definition of qualified
research under section 41(d), (4) the applica-
tion of the exclusions from the definition of
qualified research, (5) the application of the
shrinking-back rule, and (6) the election of
the alternative incremental credit. The 1998
proposed regulations also propose certain
technical amendments to the existing regula-
tions. Comments responding to the 1998
proposed regulations were received and a
public hearing was held on April 29, 1999.
In the 1999 Act, Congress extended the
credit for a five-year period. The
Conference Report accompanying the
1999 Act included the following language
addressing the proposed regulations:
In extending the research
credit, the conferees are con-
cerned that the definition of
qualified research be adminis-
tered in a manner that is con-
sistent with the intent Congress
has expressed in enacting and
extending the research credit.
The conferees urge the
Secretary to consider carefully
the comments he has and may
receive regarding the proposed
regulations relating to the com-
putation of the credit under
section 41(c) and the definition
of qualified research under sec-
tion 41(d), particularly regard-
ing the “common knowledge”
standard. The conferees fur-
ther note the rapid pace of
technological advance, espe-
cially in service-related indus-
tries, and urge the Secretary to
consider carefully the com-
ments he has and may receive
in promulgating regulations in
connection with what consti-
tutes “internal use” with regard
to software expenditures. The
conferees also wish to observe
that software research, that oth-
erwise satisfies the require-
ments of section 41, which is
undertaken to support the pro-
vision of a service, should not
be deemed “internal use” sole-
ly because the business com-
ponent involves the provision
of a service.
The conferees wish to reaf-
firm that qualified research is
research undertaken for the
purpose of discovering new
information which is techno-
logical in nature. For purposes
of applying this definition, new
information is information that
is new to the taxpayer, is not
freely available to the general
public, and otherwise satisfies
the requirements of section 41.
Employing existing technolo-
gies in a particular field or rely-
ing on existing principles of
engineering or science is quali-
fied research, if such activities
are otherwise undertaken for
purposes of discovering infor-
mation and satisfy the other
requirements of section 41.
The conferees also are con-
cerned about unnecessary and
costly taxpayer record keeping
burdens and reaffirm that eligi-
bility for the credit is not
intended to be contingent on
meeting unreasonable record
keeping requirements.
H.R. Conf. Rep. No. 106–478, at 132
(1999).
After considering the comments
received, the statements made at the pub-
lic hearings, and the legislative history for
the research credit, the proposed regula-
tions are adopted as revised by this
Treasury decision.
Explanation of Provisions
This document amends 26 CFR part 1
to provide additional rules under section
41. Section 41 contains the rules for the
credit for increasing research activities.
I. Basic Principles
A number of commentators objected
to the inclusion of the basic principles
statement in §1.41–1(a) of the proposed
regulations. They stated that the inclu-
sion of a basic principles section was
unusual, and that the basic principles
section could be read to impose addi-
tional and unwarranted conditions for
credit eligibility. In response to these
comments, and because IRS and
Treasury have concluded that the requi-
site principles are adequately reflected
in the provisions of the regulations, the
final regulations omit a separate state-
ment of basic principles. The clarifica-
tions that the credit may be available
where the technological advance sought
is evolutionary, where the taxpayer is
not the first to achieve the advance, and
where the taxpayer fails to achieve the
intended advance have been incorporat-
ed elsewhere in the regulations.
II. Gross Receipts
When Congress revised the computa-
tion of the research credit to incorporate a
taxpayer’s gross receipts, neither the
statute nor the legislative history defined
the term gross receipts, other than to pro-
vide that gross receipts for any taxable
year are reduced by returns and
allowances made during the tax year, and,
in the case of a foreign corporation, that
only gross receipts effectively connected
with the conduct of a trade or business
within the United States are taken into
account. See section 41(c)(6).
The proposed regulations generally
defined gross receipts as the total amount
derived by a taxpayer from all activities
and sources. However, in recognition of
the fact that certain extraordinary gross
receipts might not be taken into account
when a business determines its research
budget, the proposed regulations provided
that certain extraordinary items (such as
receipts from the sale or exchange of cap-
ital assets) would be excluded from the
computation of gross receipts.
Several commentators objected to the
definition of gross receipts in the pro-
posed regulations. Referring to the
inclusion in a House Budget Report of
the term sales growthas an apparent
short-hand reference to an increase in
gross receipts, some commentators
argued that gross receipts should be lim-
ited to income from sales. See H.R. Rep.
No. 101–247, at 1200 (1989). In deter-
mining its research budget, however, a

business may take into account any
expected income stream, regardless of
whether or not the income is derived
from sales or from other active business
activities. Moreover, many businesses
do not generate any income in the form
of sales. Accordingly, the final regula-
tions do not adopt this suggestion.
The final regulations also do not adopt
suggestions that the definition of gross
receipts be narrowed to exclude those
items not directly related to the conduct of
the taxpayer’s trade or business. As noted
above, any expected income stream may
be taken into account in determining a
business’ research budget, regardless of
the source of the income. Moreover, IRS
and Treasury believe that a subjective nar-
rowing of the term gross receipts, as sug-
gested by these commentators, could
leave the definition of the term, and thus
the computation of the base amount, vul-
nerable to manipulation.
For example, a narrower definition
allowing taxpayers to exclude items not
derived in the ordinary course of business
might prompt a taxpayer to assert that cer-
tain royalties received in the 1980s were
derived in the ordinary course of business
and are includible as gross receipts (thus
decreasing the taxpayer’s fixed-base per-
centage), but that certain interest income
received in the years preceding the credit
year was not derived in the ordinary
course of business and was not includible
in gross receipts (thus decreasing the base
amount). Nor would a rule of consistency
be effective in preventing such manipula-
tion. While the taxpayer described above
would be characterizing the nature of its
income items as derived or not derived in
the ordinary course of a trade or business
so as to maximize the amount of the cred-
it, the taxpayer would not be taking incon-
sistent positions with respect to the same
items of income.
Several commentators objected to the
definition of gross receipts in the pro-
posed regulations as it applies to start-up
firms with pre-operating interest income.
If pre-operating interest income is treated
as a gross receipt, many start-up firms
would be precluded from using the start-
up rules to compute their fixed-base per-
centages, because the application of the
start-up rules is conditioned on a taxpayer
not having both gross receipts and quali-
fied research expenses in certain taxable
years during the 1980s. Moreover,
because a start-up firm whose only gross
receipt is pre-operating interest income
likely would have significant qualified
research expenses relative to gross
receipts (and thus a high fixed-base per-
centage), such a firm likely would derive
less benefit from the credit.
IRS and Treasury recognize that the
start-up rules appear to contemplate that
there will be years in which a taxpayer has
qualified research expenses but no gross
receipts. However, it would be difficult to
conceive of such a year if gross receipts are
defined to include pre-operating investment
income. To address these concerns and pur-
suant to the regulatory authority of section
41(c)(3)(B)(iii), the final regulations
exclude from the definition of gross receipts
any income received by a taxpayer in a tax-
able year that precedes the first taxable year
in which the taxpayer derives more than
$25,000 in gross receipts other than invest-
ment income. For this purpose, investment
income is defined as interest or distributions
with respect to stock (other than the stock of
a 20-percent owned corporation as defined
in section 243(c)(2) of the Code).
Some commentators suggested that the
definition of gross receipts should be clar-
ified to exclude certain payments made by
pharmaceutical manufacturers to various
insurers, managed care organizations and
state governments. The final regulations
do not adopt any provision specifically
addressing such payments.
III. The Discovery Requirement
To qualify for the research credit, sec-
tion 41(d) requires that a taxpayer under-
take research for the purpose of discover-
ing information which is technological in
nature, and the application of which is
intended to be useful in the development
of a new or improved business component
of the taxpayer. Section 1.41–4(a)(3) of
the proposed regulations defines the
phrase discovering informationas obtain-
ing knowledge that exceeds, expands, or
refines the common knowledge of skilled
professionals in a particular field of sci-
ence or engineering.
Commentators criticized this definition
of discovering information, arguing that
the definition imposes a discovery require-
ment that was not mandated by the statute.
Commentators suggested that the phrase
discovering information, as used in the
statute, was not intended as an additional
requirement, but was simply used as a
phrase to link the term researchwith the
types of information required as the subject
of the research. Commentators argued that
a taxpayer who seeks to resolve its own
subjective uncertainty as to the information
at issue is undertaking sufficient discovery
for purposes of section 41(d).
Consistent with the legislative history
and case law as described below, however,
IRS and Treasury continue to believe that
section 41 conditions credit eligibility on
an attempt to discover information that
goes beyond the common knowledge of
skilled professionals in the particular field
of science or engineering.
The legislative history to the 1986 Act,
which narrowed the definition of the term
qualified research, explained that Congress
had originally enacted the research credit to
encourage business firms to perform the
research necessary to increase the innova-
tive qualities and efficiency of the U.S.
economy. H.R. Rep. No. 99–426, at
177–78; S. Rep. No. 99–313, at 694–95.
Congress was concerned that taxpayers had
applied the original definition of qualified
research “too broadly,” that some taxpayers
had claimed the credit for “virtually any
expenses relating to product development”
and that many of these taxpayers were “in
industries that do not involve high technol-
ogy or its application in developing techno-
logically new and improved products or
methods of production.”Id.In an illustra-
tion of the changes enacted, the legislative
history explained that, under the new defin-
ition: “Research does not rely on the prin-
ciples of computer science merely because
a computer is employed. Research may be
treated as undertaken to discover informa-
tionthat is technological in nature, howev-
er, if the research is intended to expand or
refine existing principles of computer sci-
ence.” H.R. Conf. Rep. No. 99–841, at
II–71 n.3 (1986) (emphasis added).
Following the 1986 Act changes to the
credit, a discovery requirement has been
applied in several recent cases. See,e.g.,
United Stationers, Inc. v. United States,
163 F.3d 440 (7th Cir. 1998),Norwest v.
Commissioner, 110 T.C. 454 (1998), and
WICOR, Inc. v. United States, 116 F.
Supp. 2d 1028 (E.D. Wis. 2000).
In reaffirming the scope of the term
qualified research, the Conference Report
to the 1998 Act noted that:
2001–5 I.R.B.435January 29, 2001

evolutionary research activi-
ties intended to improve func-
tionality, performance, relia-
bility, or quality are eligible
for the credit, as are research
activities intended to achieve
a result that has already been
achieved by other persons but
is not yet within the common
knowledge(e.g., freely avail-
able to the general public) of
the field (provided that the
research otherwise meets the
requirements of section 41,
including not being excluded
by subsection (d)(4)).
H.R. Conf. Rep. No. 105–825, at 1548
(1998) (emphasis added). In particular, it
is noteworthy that the conferees clarified
that the credit is available for research
intended to achieve a result that has been
achieved by others but is not yet within
the common knowledge. The negative
inference is that the credit is not available
for research intended to achieve a result
that has been achieved by others and is
within the common knowledge of the
field.
The discovery requirement as set forth
in the final regulations also is consistent
with the legislative history to the 1999 Act
(the text of which is set forth above under
Background). In that legislative history,
for example, the conferees stated that:
[e]mploying existing tech-
nologies in a particular field
or relying on existing princi-
ples of engineering or science
is qualified research, if such
activities are otherwise under-
taken for purposes of discov-
ering informationand satisfy
the other requirements under
section 41.
H.R. Conf. Rep. No. 106–478, at 132
(emphasis added). By referring separate-
ly to a requirement that the research be
undertaken for purposes of discovering
information, this legislative history again
confirmed that the phrase “discovering
information” is a separate substantive
requirement and not merely a phrase used
to link the term researchwith the types of
information required as the subject of the
research.
In light of the case law and the legisla-
tive history, the final regulations retain the
requirement that a taxpayer seek to dis-
cover information that exceeds, expands,
or refines the common knowledge of
skilled professionals in the particular field
of science or engineering. However, con-
sistent with the legislative history to the
1999 Act, IRS and Treasury have careful-
ly considered comments relating to the
“common knowledge” standard, and
made a number of changes to address spe-
cific taxpayer concerns about the discov-
ery requirement.
In response to comments regarding the
application of the discovery requirement,
the final regulations clarify that the phrase
“common knowledge of skilled profes-
sionals in a particular field of science or
engineering” means information that
should be known to skilled professionals
had they performed, before the research in
question was undertaken, a reasonable
investigation of the existing level of infor-
mation in the particular field of science or
engineering. Thus, in order to satisfy the
discovery requirement, research must be
undertaken for the purpose of discovering
information that is beyond the knowledge
that should beknown to skilled profes-
sionals had they performed a reasonable
investigation of the existing level of
knowledge in the particular field of sci-
ence or engineering. There is no require-
ment, however, that a taxpayer actually
conduct such an investigation in order to
claim the credit. To further clarify the
application of the discovery requirement,
the final regulations also state, as an
example, that trade secrets generally are
not within the common knowledge of
skilled professionals because they are not
reasonably available to skilled profession-
als not employed, hired, or licensed by the
owner of such trade secrets.
Also, in response to comments, the dis-
covery requirement in the final regula-
tions has been reworded to refer to the
common knowledge of skilled profession-
als in a particular field of science or engi-
neering (rather than a particular field of
technology or science, as in the proposed
regulations). As in the proposed regula-
tions, the common knowledge of skilled
professionals is intended to serve as an
objective standard for the baseline knowl-
edge that a credit-eligible taxpayer must
seek to exceed, expand, or refine. The ref-
erence to the common knowledge of
skilled professionals is not intended to
impose qualification requirements on the
personnel that the taxpayer uses to con-
duct qualified research.
Several commentators raised concerns
that the discovery requirement in the pro-
posed regulations required that taxpayers
must “prove a negative;” in response to
these concerns about the potential burden
imposed on taxpayers to demonstrate that
they satisfy the discovery requirement,
IRS and Treasury have added to the final
regulations a rebuttable presumption. The
final regulations provide that, if a taxpay-
er demonstrates with credible evidence
that research activities were undertaken to
obtain the information described in docu-
mentation prepared before or during the
early stages of the research and if that
documentation also sets forth the basis for
the taxpayer’s belief that obtaining this
information would exceed, expand, or
refine the common knowledge of skilled
professionals in the particular field of sci-
ence or engineering, then the research
activities are presumed to satisfy the dis-
covery requirement. This rebuttable pre-
sumption would arise, however, only if
the taxpayer cooperates with reasonable
requests by the IRS for witnesses, infor-
mation, documents, meetings, and inter-
views.
In a case where the rebuttable presump-
tion arises, the final regulations provide
that the Commissioner may overcome this
presumption by demonstrating that the
information described in the taxpayer’s
documentation was within the common
knowledge of skilled professionals in the
particular field of science or engineering.
That is, the Commissioner would have to
demonstrate that the information would
have been known to such skilled profes-
sionals had they performed (before the
research was undertaken) a reasonable
investigation of the existing level of infor-
mation in the particular field of science or
engineering.
By way of further clarification, a provi-
sion has been added and several examples
have been changed or eliminated to
remove any implication that the underly-
ing principles of science or engineering
used in the research must themselves be
novel. IRS and Treasury recognize that
virtually all research utilizes existing sci-
entific principles and technology. The
requirement that a taxpayer seek to
exceed, expand, or refine the common
knowledge of skilled professionals does
January 29, 20014362001–5 I.R.B.

not mean that the tools and principles
used in the attempt to achieve the techno-
logical advance must themselves be
beyond the common knowledge.
Also, in response to commentators’
suggestions, the final regulations provide
that a taxpayer is conclusively presumed
to have obtained knowledge that exceeds,
expands, or refines the common knowl-
edge of skilled professionals in the rele-
vant field of science or engineering, if that
taxpayer was awarded a patent for the
business component. Section 101 of title
35 of the United States Code provides that
“[w]hoever invents or discovers any new
and useful process, machine, manufac-
ture, or composition of matter, or any new
and useful improvement thereof, may
obtain a patent therefor, subject to the
conditions and requirements of [title 35].”
Such an invention or discovery may be
patentable if it was not previously known,
used, patented, or described, as set forth in
35 U.S.C. 102, and the differences
between the invention and the prior art are
such that the invention would not have
been obvious to a person having ordinary
skill in the relevant art. See 35 U.S.C.
102.
The final regulations contain a patent
safe harbor because IRS and Treasury
believe that information leading to a
patentable invention constitutes informa-
tion that exceeds, expands, or refines the
common knowledge of skilled profession-
als in the relevant field. Of course, quali-
fication under the patent safe harbor does
not necessarily establish that the discov-
ery requirement is satisfied with respect to
all of the research associated with the
patentable invention (for example, some
of the research might relate to style).
The final regulations emphasize that a
patent is not a precondition for credit eli-
gibility. Because not all research suc-
ceeds in achieving its objective and for
other reasons, it is obvious that not all
research intended to discover information
that goes beyond the common knowledge
results in a patent. Thus, the absence of a
patent should have no bearing on credit
eligibility. The factors underlying the
denial of a patent application, on the other
hand, may be relevant to the determina-
tion of whether the discovery requirement
is satisfied.
Because section 41(d)(3)(B) provides
that the credit is not available for research
related to style, taste, cosmetic, or season-
al design factors, the patent safe harbor
does not include patents for design, as
defined by 35 U.S.C. 171.
In light of these changes, modifications
have been made to several examples in the
proposed regulations, including an exam-
ple in the proposed regulations relating to
research undertaken to develop a new tire.
This example has been moved to the sec-
tion of the final regulations that illustrates
the exclusion for research conducted after
the beginning of commercial production
(discussed in VII. Research After
Commercial Productionof this Preamble).
To address concerns expressed by a
number of commentators that the common
knowledge standard may be difficult for
taxpayers and examiners to apply, and may
give rise in practice to inconsistent treat-
ment of similarly situated taxpayers (espe-
cially where examiners have limited
expertise in a particular scientific field)
IRS and Treasury have initiated measures
to promote fair and consistent application
of the discovery requirement and the other
conditions for credit eligibility. Consistent
with the suggestion of one commentator,
IRS has met with Revenue Canada to dis-
cuss Canada’s joint industry/government
initiative to improve administration of the
Canadian research credit. IRS also has
met with various industry associations to
form joint initiatives to devise guidelines
for the administration and examination of
the credit in particular industries. Similar
efforts with respect to other industry
groups are anticipated.
IV. Process of Experimentation
Commentators objected to §1.41–4(a)(5)
of the proposed regulations, which defines a
process of experimentation to include a pre-
scribed four-step process. Commentators
argued that while the four-step process may
accurately have described the pure scientif-
ic method of conducting experiments, com-
mercial and industrial practice does not
always conform precisely to such require-
ments. Commentators also argued that the
four-step process required by the proposed
regulations was adapted from a description
in the legislative history of the 1986 Act that
was included for illustrative purposes and
not as a comprehensive definition of the
term process of experimentation.
In light of these comments, the final
regulations provide that taxpayers con-
ducting a process of experimentation may,
but are not required to, engage in the four-
step process.
Consistent with the legislative history,
the final regulations provide further clari-
fication on the manner in which a process
of experimentation differs from research
and development in the experimental or
laboratory sense,as required by
§1.174–2(a). A process of experimenta-
tion is a process to evaluate more than one
alternative designed to achieve a result
where the capability or method of achiev-
ing that result is uncertain at the outset,
but (in contrast to expenditures that quali-
fy under section 174) does not include the
evaluation of alternatives to establish the
appropriate design of a business compo-
nent when the capability and method for
developing or improving the business
component are not uncertain. See H.R.
Conf. Rep. No. 99–841, at II–72 (“The
term process of experimentation means a
process involving the evaluation of more
than one alternative designed to achieve a
result where the means of achieving that
result is uncertain at the outset.”); United
Stationers, 163 F.3d at 446; Norwest, 110
T.C. at 496.
V. Recordkeeping Requirement
Part of the four-step process of experi-
mentation test prescribed in §1.41–4(a)(5)
of the proposed regulations was a require-
ment that taxpayers record the results of
their experiments. Maintaining that this
requirement was particularly burdensome,
commentators argued that, in the industri-
al or commercial setting, the recording of
results is not necessarily inherent in a
bona fideprocess of experimentation.
For these reasons, the final regulations
do not contain a requirement that taxpay-
ers record the results of their experiments.
Moreover, reference to the recording of
results has been eliminated from the illus-
trative (non-mandatory) description of a
four-step process of experimentation.
To assist in the examination of claims
for the credit and to ensure that the credit
is properly targeted to serve as an incen-
tive to engage in qualified research, the
final regulations do include a less burden-
some contemporaneous documentation
requirement. Under the final regulations,
taxpayers must prepare and retain written
documentation before or during the early
stages of the research project that
2001–5 I.R.B.437January 29, 2001

January 29, 20014382001–5 I.R.B.
describes the principal questions to be
answered and the information the taxpay-
er seeks to obtain that exceeds, expands,
or refines the common knowledge of
skilled professionals in the relevant field
of science or engineering. Taxpayers also
must comply with the general recordkeep-
ing requirements of section 6001.
As noted above, taxpayers may also
avail themselves of a rebuttable presump-
tion that they satisfy the discovery
requirement if their contemporaneous
documentation also sets forth the basis for
the taxpayer’s belief that obtaining this
information would exceed, expand, or
refine the common knowledge of skilled
professionals in the particular field of sci-
ence or engineering.
VI. The Shrinking-back Rule
Under §1.41–4(b) of the proposed regu-
lations, and consistent with the legislative
history to the 1986 Act, if the requirements
of section 41(d) are not met for an entire
product, then the credit may be available
with respect to the next most significant
subset of elements of that product. This
shrinking back continues until either a sub-
set of elements of the product that satisfies
the requirements is reached, or the most
basic element of the product is reached and
such element fails to satisfy the test.
The final regulations clarify that this
shrinking-back rule applies only if the tax-
payer incurs some research expenses with
respect to the overall business component
that would constitute qualified research
expenses with respect to that business com-
ponent but for the fact that less than sub-
stantially all of the research activities with
respect to that component constitute ele-
ments of a process of experimentation that
relates to a new or improved function, per-
formance, reliability or quality. In cases
where the substantially-all test is satisfied
with respect to the overall business compo-
nent, those research expenses with respect
to the overall business component that are
qualified research expenses are credit eligi-
ble, and there is no need for a taxpayer to
shrink back to apply the tests with respect
to subsets of elements of the business com-
ponent. Of course, the mere fact that tax-
payers are not required to shrink back to a
smaller business component does not mean
that all of the research expenses with
respect to the overall credit are credit eligi-
ble. Research expenses that are not quali-
fied research expenses, for example
because they relate to style, taste, cosmetic,
or seasonal design factors, remain ineligible
for the credit.
In response to commentators’ sugges-
tions, the final regulations also clarify that,
if the original product is not eligible for the
credit, the application of the shrinking-back
rule may result in credit eligibility for mul-
tiple business components that are subsets
of the original product. The regulations
clarify that the shrinking-back rule may not
itself be applied as a reason to exclude
research activities from credit eligibility.
Finally, an example has been added to illus-
trate these concepts.
VII. Research After Commercial
Production
Several commentators addressed the sec-
tion of the proposed regulations providing
that activities conducted after the beginning
of commercial production of a business
component are not qualified research.
Under the proposed regulations, activities
are conducted after the beginning of com-
mercial production of a business compo-
nent if such activities are conducted after
the component is developed to the point
where it is ready for commercial sale or
use, or meets the basic functional and eco-
nomic requirements of the taxpayer for the
component’s sale or use. Moreover, certain
specified activities (like preproduction
planning for a finished business component
and trial production runs) are deemed to
occur after the beginning of commercial
production.
Because the provisions set forth above
closely reflect the legislative history of the
post-production exclusion, these tests have
been retained in the final regulations. See
H.R. Conf. Rep. No. 841, at II–74–75.
However, several changes have been made
in response to commentators’ concerns.
First, a change has been made to the list
of activities that are per sedeemed to occur
after the beginning of commercial produc-
tion. In the proposed regulations, one of the
items on that list was “debugging or cor-
recting flaws in a business component.”
Consistent with the legislative history, IRS
and Treasury continue to believe that
debugging should be conclusively pre-
sumed to occur after the beginning of com-
mercial production. However, many activi-
ties conducted before the beginning of
commercial production could be construed
as the correction of flaws. Thus, the per se
list contained in the final regulations has
been changed to refer to debugging activi-
ties but not to the correction of flaws.
Second, an example has been added to
clarify that a new research project to
improve a business component is not dis-
qualified merely because the new research
project commences after the commercial
production of the unimproved business
component. Other examples have been
changed to eliminate references to and fac-
tual assertions about specific industries.
Third, the final regulations incorporate
provisions from the legislative history to the
1986 Act that clinical testing of a pharma-
ceutical product prior to its commercial
production in the United States is not treat-
ed as occurring after the beginning of com-
mercial production even if the product is
commercially available in other countries,
and that additional clinical testing of a phar-
maceutical product after a product has been
approved for a specific therapeutic use by
the Food and Drug Administration and is
ready for commercial production and sale
are not treated as occurring after the begin-
ning of commercial production if such clin-
ical tests are undertaken to establish new
functional uses, characteristics, indications,
combinations, dosages, or delivery forms
for the product.
VIII. Adaptation
Several commentators suggested alter-
nate formulations of the adaptation exclu-
sion. Because such formulations effective-
ly would render the adaptation exclusion
inapplicable to activities that satisfy the
other requirements for qualified research,
thereby reading the exclusion out of the
Internal Revenue Code, the final regula-
tions do not adopt the suggestions.
Two new examples clarify that the adap-
tation exclusion may also apply to contract
research expenses paid by the customer to
the vendor or to in-house research expenses
incurred by the customer itself to adapt an
existing business component to that cus-
tomer’s requirement or need.
IX. Internal-use Software
As noted above, the 1997 proposed regu-
lations describe when software that is
developed by (or for the benefit of) a tax-
payer primarily for the taxpayer’s internal
use can qualify for the credit. The final reg-
ulations incorporate these special provi-

2001–5 I.R.B.439January 29, 2001
sions for internal-use software. A number
of changes have been made to the 1997
proposed regulations to address commenta-
tor concerns, and to coordinate the internal-
use provisions with the other provisions of
the final regulations.
Under the proposed regulations, research
with respect to software developed primar-
ily for a taxpayer’s internal use is qualified
research only if it satisfies both the general
requirements for credit eligibility under
section 41 andan additional condition for
eligibility. Except for certain software
developed for use in conducting qualified
research or for use in a production process,
and for certain software created as part of a
package of hardware and software devel-
oped concurrently, the additional condition
for eligibility is a requirement that the tax-
payer satisfy a three-part test (requiring that
the internal-use software be innovative, that
its development involve significant eco-
nomic risk, and that it not be commercially
available).
Most of the comments received focused
on two issues — (1) the determination of
when software is developed primarily for
internal use, and (2) the application of the
three-part test to internal-use software. On
the first issue, several commentators urged
that internal-use software be defined to
exclude any software used to deliver a ser-
vice to customers or any software that
includes an interface with customers or the
public. After careful analysis of the leg-
islative history to the 1986 Act and the
1999 Act, however, IRS and Treasury con-
cluded that such a broad exclusion would
be inconsistent with the statutory mandate,
because the exclusion would extend to
some software that Congress clearly
intended to treat as internal-use software.
At the same time, IRS and Treasury share
the commentators’ belief that the goals of
the research credit may be advanced by
removing additional conditions for credit-
eligibility in the case of certain internal-use
software used to provide new features to
services offered to customers that are not
otherwise available to them. Accordingly,
as described in more detail below, the final
regulations retain the definition of internal-
use software contained in the proposed reg-
ulations, but provide a new exception (pur-
suant to the regulatory authority under
section 41(d)(4)(E)) under which the devel-
opment of certain internal-use software
used to deliver noncomputer services to
customers with features that are not yet
offered by a taxpayer’s competitors is not
subject to the three-part test.
Consistent with a statement in the
Conference Report to the 1999 Act that
software research undertaken to support the
provision of a service should not be
deemed internal-use software “solely
because the business component involves
the provision of a service,” the final regula-
tions clarify that the determination of
whether software is internal-use software
depends on the nature of the service pro-
vided by the taxpayer. Software that is
intended to be used to provide noncomput-
er services to customers is internal-use soft-
ware, while software that is to be used to
provide computer services is not developed
primarily for internal use. Computer ser-
vices are services offered by a taxpayer to
customers who do business with the tax-
payer primarily for the use of the taxpayer’s
computer or software technology.
Noncomputer services are services offered
by a taxpayer to customers who do business
with the taxpayer primarily to obtain a ser-
vice other than a computer service, even if
such other service is enabled, supported, or
facilitated by computer or software tech-
nology.
The conclusion that software used to
provide noncomputer services is internal-
use software is consistent with the legisla-
tive history to the 1986 Act, which defined
internal-use software as software used in
general administrative functions and soft-
ware used in providing noncomputer ser-
vices (such as accounting, consulting, or
banking services). See H.R. Conf. Rep.
No. 841, at II–73 (emphasis added).
As noted above, the final regulations
contain a new exception under which a tax-
payer is not required to establish that inter-
nal-use software used to provide noncom-
puter services containing features or
improvements that are not yet offered by a
taxpayer’s competitors satisfies the three-
part test. Software that is intended to be
used to provide noncomputer services is
described within the exception if the soft-
ware is designed to provide customers a
new feature with respect to a noncomputer
service; the taxpayer reasonably anticipat-
ed that customers would choose to obtain
the noncomputer service from the taxpayer
(rather than from the taxpayer’s competi-
tors) because of those features of the ser-
vice that will be provided by the software;
and those features are not available (at the
time the research is undertaken) from any
of the taxpayer’s competitors.
No inference should be drawn that soft-
ware described within the foregoing excep-
tion is not internal-use software or that
internal-use software not described within
the exception would fail the three-part test.
Rather, the exception reflects a determina-
tion by IRS and Treasury that it is appro-
priate to exercise the regulatory authority in
section 41(d)(4)(E) to exempt certain inter-
nal-use software from having to fulfil addi-
tional conditions for credit eligibility. This
exercise of regulatory authority is based on
a determination that the development of
software containing features or improve-
ments that are not available from a taxpay-
er’s competitors and that provide a demon-
strable competitive advantage is more
likely to increase the innovative qualities
and efficiency of the U.S. economy (by
generating knowledge that can be used by
other service providers) than is the devel-
opment of software used to provide non-
computer services containing features or
improvements that are already offered by
others. IRS and Treasury believe that
drawing such a line is an appropriate way to
administer the credit with a view to identi-
fying and facilitating the credit availability
for software with the greatest potential for
benefitting the U.S. economy, an important
rationale for the research credit.
The final regulations also make a num-
ber of changes with respect to the three-
part high threshold of innovation test,
which continues to apply to certain soft-
ware not described within the new excep-
tion. For example, commentators had
questioned whether the 1997 proposed
regulations impose a separate high thresh-
old of innovation requirement that serves
as an additional condition for credit eligi-
bility, even where taxpayers otherwise
satisfy the three-part test. The final regu-
lations clarify that the three-part test is the
high threshold of innovation test, and not
a separate requirement. Similarly, com-
mentators had objected to a sentence in
the 1997 proposed regulations that could
be read to suggest that certain internal-use
software could never qualify for the cred-
it. The final regulations clarify that
research with respect to internal-use soft-
ware that satisfies both the general condi-
tions for credit eligibility and the three-
part test is eligible for the credit.

January 29, 20014402001–5 I.R.B.
Consistent with the application of the
discovery requirement, the final regulations
adopt the suggestion of several commenta-
tors that the three-part test should be
applied without regard to whether the tax-
payer succeeds in achieving the results
described in that test.
Commentators questioned whether the
“as where” clauses used to elaborate on the
three requirements of the high threshold of
innovation test in the 1997 proposed regula-
tions were intended as mandatory require-
ments or merely as illustrations of ways in
which taxpayers could satisfy the tests. By
replacing the “as where” clauses with “in
that” clauses, the final regulations confirm
that a taxpayer must satisfy the provisions,
as elaborated. Consistent with this clarifi-
cation, the final regulations provide that the
innovative prong of the three-part test may
be satisfied with respect to any intended
improvement, not just reductions in cost or
improvements in speed.
Under the final regulations, all qualified
research, including research with respect to
internal-use software, must satisfy the dis-
covery requirement (that is, must be intend-
ed to exceed, expand, or refine the common
knowledge of skilled professionals in the
particular field of science or engineering).
The final regulations clarify how the three-
part high threshold of innovation test sup-
plements the discovery requirement.
Specifically, the final regulations provide
that several aspects of the three-part test
(the determination of whether the software
is intended to result in an improvement that
is substantial and economically significant
and the extent of uncertainty and technical
risk) also must be applied with respect to
the common knowledge of skilled profes-
sionals. In essence, the common knowl-
edge of skilled professionals rather than the
knowledge base of the taxpayer’s employ-
ees is treated as the baseline with respect to
which the intended software must satisfy
the innovative prong and other prongs of
the three-part test. Stated differently,
research with respect to internal-use soft-
ware is credit eligible only if it is intended
to exceed, expand, or refine the common
knowledge of skilled professionals (as
defined in §1.41–4(a)(3)(ii)) to a degree
that is substantial and economically signifi-
cant. See Norwest110 T.C. at 499–500
(stating that “...the extent of the improve-
ments required by Congress with respect to
internal use software is much greater than
that required in other fields” and that “...the
significant economic risk test requires a
higher threshold of technological advance-
ment in the development of internal use
software than in other fields”).
Reference to the common knowledge of
skilled professionals as the baseline is nec-
essary to give proper meaning to the statu-
tory three-part test. For example, if the
innovative requirement was applied simply
with respect to the prior state of the taxpay-
er’s own business, then ordinary inventory
software installed by a taxpayer who previ-
ously tracked its inventory manually could
be deemed to satisfy the innovative require-
ment merely because the taxpayer had
achieved a substantial and economically
significant improvement in speed over its
prior non-automated operations.
Although the final regulations related to
internal use software generally are effective
for taxable years beginning after December
31, 1985, the provisions relating to software
developed for use in providing computer
and noncomputer services to customers and
the provisions clarifying the interaction of
the three-part test with the discovery
requirement, like other provisions concern-
ing the discovery requirement, are effective
only prospectively; however, taxpayers may
rely on these rules for expenditures paid or
incurred prior to January 3, 2001.
X. Alternative Incremental Credit
Certain commentators suggested that
taxpayers be permitted to elect the alter-
native incremental credit on an amended
return. However, IRS and Treasury
believe that the intended incentive effects
of the credit would not be advanced by
permitting taxpayers to make retroactive
elections to alter the computation of (and
presumably increase) the credit for prior
years. Similarly, the availability of a
retroactive election would undermine the
application of section 41(c)(4)(B). Thus,
the final regulations retain the require-
ment contained in the proposed regula-
tions that the election to apply the provi-
sions of the alternative incremental credit
must be made on the taxpayer’s timely
filed original return.
Effective Dates
In general, the regulations are applica-
ble for expenditures paid or incurred on or
after January 3, 2001. However, the regu-
lations addressing the base amount are
applicable for taxable years beginning on
or after January 3, 2001. The regulations
addressing internal-use software are
applicable for taxable years beginning
after December 31, 1985. However,
§1.41–4(c)(6)(ii)(C)(4),
§1.41–4(c)(6)(iv)(A) and (B),
§1.41–4(c)(6)(v), the second and third
sentences of §1.41–4(c)(6)(vii), and
§1.41–4(c)(6)(viii) Example 2are applic-
able for expenditures paid or incurred on
or after January 3, 2001. The special doc-
umentation requirements of §1.41–4(d)
are applicable with respect to research
projects that begin on or after March 4,
2001. The regulations providing for the
election and revocation of the alternative
incremental credit are applicable for tax-
able years ending on or after January 3,
2001. No inference should be drawn from
the applicability date concerning the
application of section 41 to expenditures
paid or incurred or the computation of the
base amount before the applicability date.
Special Analyses
It has been determined that these regu-
lations are not a significant regulatory
action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions.
It is hereby certified that the collection
of information contained in these regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based on the
fact that the rules of this section impact
only taxpayers who engage in qualified
research. Moreover, in those instances
where the rules of this section impact small
entities, the economic impact is not likely
to be significant because it merely requires
taxpayers to (1) prepare (before or during
the early stages of a research project) and
retain written documentation describing
the principal questions to be answered and
the information the taxpayer seeks to
obtain that satisfies the requirements of
§1.41–4(a)(3) of these regulations; (2) elect
on Form 6765, “Credit for Increasing
Research Activities,” to use the alternative
incremental credit if the entity desires to
use that method; and (3) obtain permission

2001–5 I.R.B.441January 29, 2001
to revoke the alternative incremental credit
election, if so desired. Further, the eco-
nomic impact of electing the alternative
incremental credit on Form 6765 also
would not be significant because the elec-
tion is made on the same form and is based
on the same information that is used to
claim the research credit. Accordingly, a
regulatory flexibility analysis under the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) is not required.
Pursuant to section 7805(f), the notice
of proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal authors of these regula-
tions are Lisa J. Shuman and Leslie H.
Finlow of the Office of the Associate
Chief Counsel (Passthroughs and Special
Industries), IRS. However, personnel
from other offices of the IRS and the
Treasury Department participated in their
development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Revise the undesignated center-
heading immediately before §1.30–1 to
read as follows:
CREDITS ALLOWABLE UNDER
SECTIONS 30 THROUGH 44B
Par. 3. Remove the undesignated cen-
terheading immediately before §1.41–0.
Par. 4. Section 1.41–0 is revised to read
as follows:
§1.41–0 Table of contents.
This section lists the paragraphs con-
tained in
§§1.41–1 through 1.41–8 as follows:
§1.41–1 Credit for increasing research
activities.
(a) Amount of credit.
(b) Introduction to regulations under sec-
tion 41.
§1.41–2 Qualified research expenses.
(a) Trade or business requirement.
(1) In general.
(2) New business.
(3) Research performed for others.
(i) Taxpayer not entitled to results.
(ii) Taxpayer entitled to results.
(4) Partnerships.
(i) In general.
(ii) Special rule for certain partnerships
and joint ventures.
(b) Supplies and personal property used in
the conduct of qualified research.
(1) In general.
(2) Certain utility charges.
(i) In general.
(ii) Extraordinary expenditures.
(3) Right to use personal property.
(4) Use of personal property in taxable
years beginning after December 31, 1985.
(c) Qualified services.
(1) Engaging in qualified research.
(2) Direct supervision.
(3) Direct support.
(d) Wages paid for qualified services.
(1) In general.
(2) “Substantially all.”
(e) Contract research expenses.
(1) In general.
(2) Performance of qualified research.
(3) “On behalf of.”
(4) Prepaid amounts.
(5) Examples.
§1.41–3 Base amount for taxable years
beginning on or after January 3, 2001.
(a) New taxpayers.
(b) Special rules for short taxable years.
(1) Short credit year.
(2) Short taxable year preceding credit
year.
(3) Short taxable year in determining
fixed-base percentage.
(c) Definition of gross receipts.
(1) In general.
(2) Amounts excluded.
(3) Foreign corporations.
(d) Consistency requirement.
(1) In general.
(2) Illustrations.
(e) Effective date.
§1.41–4 Qualified research for
expenditures paid or incurred on or after
January 3, 2001.
(a) Qualified research.
(1) General rule.
(2) Requirements of section 41(d)(1).
(3) Undertaken for the purpose of discov-
ering information.
(i) In general.
(ii) Common knowledge.
(iii) Means of discovery.
(iv) Patent safe harbor.
(v) Rebuttable presumption.
(4) Technological in nature.
(5) Process of experimentation.
(6) Substantially all requirement.
(7) Use of computers and information
technology.
(8) Illustrations.
(b) Application of requirements for quali-
fied research.
(1) In general.
(2) Shrinking-back rule.
(3) Illustration.
(c) Excluded activities.
(1) In general.
(2) Research after commercial production.
(i) In general.
(ii) Certain additional activities related to
the business component.
(iii) Activities related to production
process or technique.
(iv) Clinical testing.
(3) Adaptation of existing business com-
ponents.
(4) Duplication of existing business com-
ponent.
(5) Surveys, studies, research relating to
management functions, etc.
(6) Internal-use computer software.
(i) General rule.
(ii) Requirements.
(iii) Primarily for internal use.
(iv) Software used in the provision of ser-
vices.
(A) Computer services.
(B) Noncomputer services.
(v) Exception for certain software used in
providing noncomputer services.
(vi) High threshold of innovation test.
(vii) Application of high threshold of
innovation test.
(viii) Illustrations.
(ix) Effective dates.
(7) Activities outside the United States,
Puerto Rico, and other possessions.
(i) In general.
(ii) Apportionment of in-house research
expenses.
(iii) Apportionment of contract research
expenses.

January 29, 20014422001–5 I.R.B.
(8) Research in the social sciences, etc.
(9) Research funded by any grant, con-
tract, or otherwise.
(10) Illustrations.
(d) Documentation.
(e) Effective dates.
§1.41–5 Basic research for taxable years
beginning after December 31, 1986.
[Reserved]
§1.41–6 Aggregation of expenditures.
(a) Controlled group of corporations;
trades or businesses under common con-
trol.
(1) In general.
(2) Definition of trade or business.
(3) Determination of common control.
(4) Examples.
(b) Minimum base period research
expenses.
(c) Tax accounting periods used.
(1) In general.
(2) Special rule where timing of research
is manipulated.
(d) Membership during taxable year in
more than one group.
(e) Intra-group transactions.
(1) In general.
(2) In-house research expenses.
(3) Contract research expenses.
(4) Lease payments.
(5) Payment for supplies.
§1.41–7 Special rules.
(a) Allocations.
(1) Corporation making an election under
subchapter S.
(i) Pass-through, for taxable years begin-
ning after December 31, 1982, in the case
of an S corporation.
(ii) Pass-through, for taxable years begin-
ning before January 1, 1983, in the case of
a subchapter S corporation.
(2) Pass-through in the case of an estate or
trust.
(3) Pass-through in the case of a partner-
ship.
(i) In general.
(ii) Certain expenditures by joint ventures.
(4) Year in which taken into account.
(5) Credit allowed subject to limitation.
(b) Adjustments for certain acquisitions
and dispositions—Meaning of terms.
(c) Special rule for pass-through of credit.
(d) Carryback and carryover of unused
credits.
§1.41–8 Special rules for taxable years
ending on or after January 3, 2001.
(a) Alternative incremental credit.
(b) Election.
(1) In general.
(2) Time and manner of election.
(3) Revocation.
(4) Effective date.
Par. 5. Section 1.41–1 is revised to read
as follows:
§1.41–1 Credit for increasing research
activities.
(a) Amount of credit. The amount of a
taxpayer’s credit is determined under sec-
tion 41(a). For taxable years beginning
after June 30, 1996, and at the election of
the taxpayer, the portion of the credit
determined under section 41(a)(1) may be
calculated using the alternative incremen-
tal credit set forth in section 41(c)(4).
(b) Introduction to regulations under
section 41. (1) Sections 1.41–2 through
1.41–8 and 1.41–3A through 1.41–5A
address only certain provisions of section
41. The following table identifies the pro-
visions of section 41 that are addressed,
and lists each provision with the section
of the regulations in which it is covered.
Section of the Section of the
regulationInternal Revenue Code
§1.41–241(b)
§1.41–341(c)
§1.41–441(d)
§1.41–541(e)
§1.41–641(f)
§1.41–741(f)
41(g)
§1.41–841(c)
§1.41–3A 41(c) (taxable years beginning before January 1, 1990)
§1.41–4A41(d) (taxable years beginning before January 1, 1986)
§1.41–5A41(e) (taxable years beginning before January 1, 1987)
(2) Section 1.41–3A also addresses the
special rule in section 221(d)(2) of the
Economic Recovery Tax Act of 1981
relating to taxable years overlapping the
effective dates of section 41. Section 41
was formerly designated as sections 30
and 44F. Sections 1.41–0 through 1.41–8
and 1.41–0A through 1.41–5A refer to
these sections as section 41 for conformi-
ty purposes. Whether section 41, former
section 30, or former section 44F applies
to a particular expenditure depends upon
when the expenditure was paid or
incurred.
§1.41-2 [Amended]
Par. 6. Section 1.41-2 is amended as
follows:

2001–5 I.R.B.443January 29, 2001
1. The last sentence of paragraph
(a)(3)(i) is amended by removing the lan-
guage “§1.41–5(d)(2)”and adding
“§1.41–4A(d)(2)” in its place.
2. The last sentence of paragraph
(a)(3)(ii) is amended by removing the lan-
guage “§1.41–5(d)(3)”and adding
“§1.41–4A(d)(3)” in its place.
3. The last sentence of paragraph
(a)(4)(ii)(F) is amended by removing the
language “§1.41–9(a)(3)(ii)” and adding
“§1.41–7(a)(3)(ii)” in its place.
4. Paragraph (e)(1)(i) is amended by
removing the language “§1.41–5” and
adding “§1.41–4 or 1.41–4A, whichever
is applicable” in its place.
§§1.41–0A through 1.41–8A
[Removed]
Par. 6A. Sections 1.41–0A through
1.41–8A and the undesignated center-
heading preceding these sections are
removed.
Par. 7. An undesignated centerheading
is added immediately following §1.44B–1
to read as follows:
RESEARCH CREDIT—FOR
TAXABLE YEARS BEGINNING
BEFORE JANUARY 1, 1990
§1.41–3 [Redesignated as §1.41–3A]
Par. 8. Section 1.41–3 is redesignated as
§1.41–3A and added under the new undes-
ignated centerheading “RESEARCH
CREDIT—FOR TAXABLE YEARS
BEGINNING BEFORE JANUARY 1,
1990.”
Par. 9. New §1.41–3 is added to read as
follows:
§1.41–3 Base amount for taxable years
beginning on or after January 3, 2001.
(a) New taxpayers. If, with respect to
any credit year, the taxpayer has not been
in existence for any previous taxable year,
the average annual gross receipts of the
taxpayer for the four taxable years pre-
ceding the credit year shall be zero. If,
with respect to any credit year, the tax-
payer has been in existence for at least one
previous taxable year, but has not been in
existence for four taxable years preceding
the taxable year, then the average annual
gross receipts of the taxpayer for the four
taxable years preceding the credit year
shall be the average annual gross receipts
for the number of taxable years preceding
the credit year for which the taxpayer has
been in existence.
(b) Special rules for short taxable
years—(1) Short credit year. If a credit
year is a short taxable year, then the base
amount determined under section 41(c)(1)
(but not section 41(c)(2)) shall be modi-
fied by multiplying that amount by the
number of months in the short taxable
year and dividing the result by 12.
(2) Short taxable year preceding credit
year. If one or more of the four taxable
years preceding the credit year is a short
taxable year, then the gross receipts for
such year are deemed to be equal to the
gross receipts actually derived in that year
multiplied by 12 and divided by the num-
ber of months in that year.
(3) Short taxable year in determining
fixed-base percentage. No adjustment
shall be made on account of a short tax-
able year to the computation of a taxpay-
er’s fixed-base percentage.
(c) Definition of gross receipts—(1) In
general. For purposes of section 41, gross
receipts means the total amount, as deter-
mined under the taxpayer’s method of
accounting, derived by the taxpayer from
all its activities and from all sources (e.g.,
revenues derived from the sale of inventory
before reduction for cost of goods sold).
(2) Amounts excluded. For purposes of
this paragraph (c), gross receipts do not
include amounts representing—
(i) Returns or allowances;
(ii) Receipts from the sale or exchange
of capital assets, as defined in section
1221;
(iii) Repayments of loans or similar
instruments (e.g., a repayment of the prin-
cipal amount of a loan held by a commer-
cial lender);
(iv) Receipts from a sale or exchange
not in the ordinary course of business,
such as the sale of an entire trade or busi-
ness or the sale of property used in a trade
or business as defined under section
1221(2);
(v) Amounts received with respect to
sales tax or other similar state and local
taxes if, under the applicable state or local
law, the tax is legally imposed on the pur-
chaser of the good or service, and the tax-
payer merely collects and remits the tax to
the taxing authority; and
(vi) Amounts received by a taxpayer in
a taxable year that precedes the first tax-
able year in which the taxpayer derives
more than $25,000 in gross receipts other
than investment income. For purposes of
this paragraph (c)(2)(vi), investment
income is interest or distributions with
respect to stock (other than the stock of a
20-percent owned corporation as defined
in section 243(c)(2).
(3) Foreign corporations. For purposes
of section 41, in the case of a foreign cor-
poration, gross receipts include only gross
receipts that are effectively connected
with the conduct of a trade or business
within the United States,the
Commonwealth of Puerto Rico, or other
possessions of the United States. See sec-
tion 864(c) and applicable regulations
thereunder for the definition of effectively
connected income.
(d) Consistency requirement—(1) In
general. In computing the credit for
increasing research activities for taxable
years beginning after December 31, 1989,
qualified research expenses and gross
receipts taken into account in computing a
taxpayer’s fixed-base percentage and a
taxpayer’s base amount must be deter-
mined on a basis consistent with the defi-
nition of qualified research expenses and
gross receipts for the credit year, without
regard to the law in effect for the taxable
years taken into account in computing the
fixed-base percentage or the base amount.
This consistency requirement applies even
if the period for filing a claim for credit or
refund has expired for any taxable year
taken into account in computing the fixed-
base percentage or the base amount.
(2) Illustrations. The following exam-
ples illustrate the application of the con-
sistency rule of paragraph (d)(1) of this
section:
Example 1. (i) X, an accrual method taxpayer
using the calendar year as its taxable year, incurs
qualified research expenses in 2001. X wants to
compute its research credit under section 41 for the
tax year ending December 31, 2001. As part of the
computation, X must determine its fixed-base per-
centage, which depends in part on X’s qualified
research expenses incurred during the fixed-base
period, the taxable years beginning after December
31, 1983, and before January 1, 1989.
(ii) During the fixed-base period, X reported the
following amounts as qualified research expenses on
its Form 6765:
1984 . . . . . . . . . . . . . . . . . . . . . . .$ 100x
1985 . . . . . . . . . . . . . . . . . . . . . . . . 120x
1986 . . . . . . . . . . . . . . . . . . . . . . . . 150x
1987 . . . . . . . . . . . . . . . . . . . . . . . . 180x
1988 . . . . . . . . . . . . . . . . . . . . . . . . 170x
Total . . . . . . . . . . . . . . . . . . . . . . .$ 720x

January 29, 20014442001–5 I.R.B.
(iii) For the taxable years ending December 31,
1984, and December 31, 1985, X based the amounts
reported as qualified research expenses on the defini-
tion of qualified research in effect for those taxable
years. The definition of qualified research changed for
taxable years beginning after December 31, 1985. If X
used the definition of qualified research applicable to
its taxable year ending December 31, 2001, the credit
year, its qualified research expenses for the taxable
years ending December 31, 1984, and December 31,
1985, would be reduced to $ 80x and $ 100x, respec-
tively. Under the consistency rule in section 41(c)(5)
and paragraph (d)(1) of this section, to compute the
research credit for the tax year ending December 31,
2001, X must reduce its qualified research expenses
for 1984 and 1985 to reflect the change in the defini-
tion of qualified research for taxable years beginning
after December 31, 1985. Thus, X’s total qualified
research expenses for the fixed-base period (1984-
1988) to be used in computing the fixed-base percent-
age is $ 80 + 100 + 150 + 180 + 170 = $ 680x.
Example 2. The facts are the same as in Example
1, except that, in computing its qualified research
expenses for the taxable year ending December 31,
2001, X claimed that a certain type of expenditure
incurred in 2001 was a qualified research expense.
X’s claim reflected a change in X’s position, because
X had not previously claimed that similar expendi-
tures were qualified research expenses. The consis-
tency rule requires X to adjust its qualified research
expenses in computing the fixed-base percentage to
include any similar expenditures not treated as qual-
ified research expenses during the fixed-base period,
regardless of whether the period for filing a claim for
credit or refund has expired for any year taken into
account in computing the fixed-base percentage.
(e) Effective date. The rules in para-
graphs (c) and (d) of this section are
applicable for taxable years beginning on
or after the date final regulations are pub-
lished in the Federal Register.
Par. 10. Section 1.41-4 is revised to
read as follows:
§1.41-4 Qualified research for
expenditures paid or incurred on or after
January 3, 2001.
(a) Qualified research—(1) General rule.
Research activities related to the develop-
ment or improvement of a business compo-
nent constitute qualified research only if the
research activities meet all of the require-
ments of section 41(d)(1) and this section,
and are not otherwise excluded under section
41(d)(3)(B) or (d)(4), or this section.
(2) Requirements of section 41(d)(1).
Research constitutes qualified research
only if it is research—
(i) With respect to which expenditures
may be treated as expenses under section
174, see §1.174-2;
(ii) That is undertaken for the purpose
of discovering information that is techno-
logical in nature, and the application of
which is intended to be useful in the
development of a new or improved busi-
ness component of the taxpayer; and
(iii) Substantially all of the activities of
which constitute elements of a process of
experimentation that relates to a new or
improved function, performance, reliabil-
ity or quality.
For certain recordkeeping require-
ments, see paragraph (d) of this section.
(3) Undertaken for the purpose of dis-
covering information—(i) In general. For
purposes of section 41(d) and this section,
research is undertaken for the purpose of
discovering information only if it is
undertaken to obtain knowledge that
exceeds, expands, or refines the common
knowledge of skilled professionals in a
particular field of science or engineering.
A determination that research is undertak-
en for the purpose of discovering informa-
tion does not require that the taxpayer
succeed in obtaining the knowledge that
exceeds, expands, or refines the common
knowledge of skilled professionals in a
particular field of science or engineering,
nor does it require that the advance sought
be more than evolutionary. However,
research is not undertaken for the purpose
of discovering information merely
because an expenditure may be treated as
an expense under section 174.
(ii) Common knowledge. Common
knowledge of skilled professionals in a
particular field of science or engineering
means information that should be known
to skilled professionals had they per-
formed, before the research in question is
undertaken, a reasonable investigation of
the existing level of information in the
particular field of science or engineering.
Thus, knowledge may, in certain circum-
stances, exceed, expand, or refine the
common knowledge of skilled profession-
als in a particular field of science or engi-
neering even though such knowledge has
previously been obtained by other per-
sons. For example, trade secrets general-
ly are not within the common knowledge
of skilled professionals in a particular
field of science or engineering because
they are not reasonably available to
skilled professionals not employed, hired,
or licensed by the owner of such trade
secrets.
(iii) Means of discovery. In seeking to
obtain knowledge that exceeds, expands,
or refines the common knowledge of
skilled professionals in a particular field
of science or engineering, a taxpayer may
employ existing technologies in a particu-
lar field and may rely on existing princi-
ples of science or engineering.
(iv) Patent safe harbor. For purposes
of section 41(d) and paragraph (a)(3)(i) of
this section, the issuance of a patent by the
Patent and Trademark Office under the
provisions of section 151 of title 35,
United States Code (other than a patent
for design issued under the provisions of
section 171 of title 35, United States
Code) is conclusive evidence that a tax-
payer has obtained knowledge that
exceeds, expands, or refines the common
knowledge of skilled professionals.
However, the issuance of such a patent is
not a precondition for credit availability.
(v) Rebuttable presumption. If a tax-
payer demonstrates with credible evidence
that research activities were undertaken to
obtain the information described in the
taxpayer’s contemporaneous documenta-
tion required under paragraph (d)(1) of
this section, and if that documentation also
sets forth the basis for the taxpayer’s belief
that obtaining this information would
exceed, expand, or refine the common
knowledge of skilled professionals in the
particular field of science or engineering,
the research activities are presumed to sat-
isfy the requirements of this paragraph
(a)(3). However, the presumption applies
only if the taxpayer cooperates with rea-
sonable requests by the Commissioner for
witnesses, information, documents, meet-
ings, and interviews. Furthermore, the
Commissioner may overcome the pre-
sumption in this paragraph if the
Commissioner demonstrates that the infor-
mation described in the taxpayer’s docu-
mentation was within the common knowl-
edge of skilled professionals (as described
in paragraph (a)(3)(ii) of this section), or
that the research activities were not under-
taken to obtain the information described
in the taxpayer’s documentation.
(4) Technological in nature. For pur-
poses of section 41(d) and this section,
information is technological in nature if
the process of experimentation used to
discover such information fundamentally
relies on principles of the physical or bio-
logical sciences, engineering, or computer
science.
(5) Process of experimentation. For
purposes of section 41(d) and this section,

2001–5 I.R.B.445January 29, 2001
a process of experimentation is a process
to evaluate more than one alternative
designed to achieve a result where the
capability or method of achieving that
result is uncertain at the outset. A process
of experimentation does not include the
evaluation of alternatives to establish the
appropriate design of a business compo-
nent, if the capability and method for
developing or improving the business
component are not uncertain. A process
of experimentation in the physical or bio-
logical sciences, engineering, or computer
science may involve—
(i) Developing one or more hypotheses
designed to achieve the intended result;
(ii) Designing an experiment (that,
where appropriate to the particular field of
research, is intended to be replicable with
an established experimental control) to
test and analyze those hypotheses
(through, for example, modeling, simula-
tion, or a systematic trial and error
methodology);
(iii) Conducting the experiment; and
(iv) Refining or discarding the hypotheses
as part of a sequential design process to
develop or improve the business component.
(6) Substantially all requirement. The
substantially all requirement of section
41(d)(1)(C) and paragraph (a)(2)(iii) of this
section is satisfied only if 80 percent or
more of the research activities, measured
on a cost or other consistently applied rea-
sonable basis (and without regard to §1.41-
2(d)(2)), constitute elements of a process of
experimentation for a purpose described in
section 41(d)(3). The substantially all
requirement is applied separately to each
business component.
(7) Use of computers and information
technology. The employment of comput-
ers or information technology, or the
reliance on principles of computer science
or information technology to store, col-
lect, manipulate, translate, disseminate,
produce, distribute, or process data or
information, and similar uses of comput-
ers and information technology does not
itself establish that qualified research has
been undertaken.
(8) Illustrations. The following exam-
ples illustrate the application of this para-
graph (a):
Example 1.(i) Facts. X and other manufacturing
companies have previously designed and manufac-
tured a particular kind of machine using Material S.
Material T is less expensive than Material S. X
wishes to design a new machine that appears and
functions exactly the same as its existing machines,
but that is made of Material T instead of Material S.
The capability and method necessary to achieve this
objective should not have been known to skilled pro-
fessionals had they conducted a reasonable investi-
gation of the existing information in the relevant
field of science or engineering at the time the
research was undertaken.
(ii) Conclusion. X’s activities to design the new
machine using Material T may be qualified research
within the meaning of section 41(d)(1) and this para-
graph (a). In seeking to design the machine, X
undertook to obtain knowledge that exceeds,
expands, or refines the common knowledge of
skilled professionals in the relevant field of science
or engineering.
Example 2. (i) Facts. X is engaged in the busi-
ness of developing and manufacturing widgets. X
wants to manufacture an improved widget made out
of a material that X has not previously used.
Although X is uncertain how to use the material to
manufacture an improved widget, the capability and
method of using the material to manufacture such
widgets should have been known to skilled profes-
sionals had they conducted a reasonable investiga-
tion of the existing level of information in the partic-
ular field of science or engineering at the time the
research was undertaken.
(ii) Conclusion. Even though X’s expenditures
for the activities to resolve the uncertainty in manu-
facturing the improved widget may be treated as
expenses for research activities under section 174
and §1.174-2, X’s activities to resolve the uncertain-
ty in manufacturing the improved widget are not
qualified research within the meaning of section
41(d) and this paragraph (a). Although X’s activities
were intended to eliminate uncertainty, the activities
were not undertaken to obtain knowledge that
exceeds, expands, or refines the common knowledge
of skilled professionals in the relevant field of sci-
ence or engineering.
Example 3. (i) Facts. X desires to build a bridge
that can sustain greater traffic flow without deterio-
ration than can existing bridges. The capability and
method used to build such a bridge should not have
been known to skilled professionals had they con-
ducted a reasonable investigation of the existing
level of information in the particular field of science
or engineering at the time the research was under-
taken. X eventually abandons the project after
attempts to develop the technology prove unsuccess-
ful.
(ii) Conclusion. X’s activities to develop the
technology to build the bridge may be qualified
research within the meaning of section 41(d)(1) and
this paragraph (a), regardless of the fact that X did
not actually succeed in developing that technology.
In seeking to develop the technology, X undertook to
obtain knowledge that exceeds, expands, or refines
the common knowledge of skilled professionals in
the relevant field of science or engineering.
Example 4. (i) Facts. The facts are the same as
in Example 3, except that Y successfully builds a
bridge that can sustain the greater traffic flow.
Thereafter, Z seeks to build a bridge that can also
sustain such greater traffic flow. The method Y used
to build its bridge is a closely guarded trade secret
that is not known to Z and should not have been
known to skilled professionals had they conducted a
reasonable investigation of the existing level of
information in the particular field of science or engi-
neering at the time the research was undertaken.
(ii) Conclusion. Z’s activities to develop the tech-
nology to build the bridge may be qualified research
within the meaning of section 41(d)(1) and this para-
graph (a), even if it so happens that the technology Z
used to build its bridge is similar or identical to the
technology Y used. In developing the technology, Z
undertook to obtain knowledge that exceeds,
expands, or refines the common knowledge of
skilled professionals in the relevant field of science
or engineering.
Example 5. (i) Facts. X, a widget manufacturer,
seeks to develop a new widget and initiates Project
A. Before or during the early stages of Project A,
X’s employees prepare contemporaneous documen-
tation that describes the principal questions to be
answered by Project A and the information that X
seeks to obtain to exceed, expand, or refine the com-
mon knowledge of skilled professionals in the rele-
vant field of science or engineering. The documen-
tation includes a statement from one of X’s skilled
professionals setting forth the basis for that profes-
sional’s belief that the information is beyond the
common knowledge of skilled professionals in the
relevant field. Upon examination by the
Commissioner, X presents credible evidence that the
research activities were undertaken to obtain the
information described in the contemporaneous doc-
umentation. X cooperates with all requests by the
IRS for witnesses, information, documents, meet-
ings, and interviews.
(ii) Conclusion. X’s research activities with
respect to Project A are presumed to be undertaken
for the purpose of obtaining knowledge that exceeds,
expands, or refines the common knowledge of
skilled professionals in the relevant field of science
or engineering. The Commissioner may overcome
this presumption by demonstrating that the informa-
tion X sought to obtain was within the common
knowledge of skilled professionals in the relevant
field of science or engineering (i.e., by demonstrat-
ing that, at the time Project A began, the information
should have been known to skilled professionals had
they performed a reasonable investigation of the
existing level of knowledge in the relevant field).
(b) Application of requirements for
qualified research—(1) In general.The
requirements for qualified research in sec-
tion 41(d)(1) and paragraph (a) of this
section, must be applied separately to
each business component, as defined in
section 41(d)(2)(B). In cases involving
development of both a product and a man-
ufacturing or other commercial produc-
tion process for the product, research
activities relating to development of the
process are not qualified research unless
the requirements of section 41(d) and this
section are met for the research activities
relating to the process without taking into
account the research activities relating to
development of the product. Similarly,
research activities relating to development
of the product are not qualified research
unless the requirements of section 41(d)

January 29, 20014462001–5 I.R.B.
and this section are met for the research
activities relating to the product without
taking into account the research activities
relating to development of the manufac-
turing or other commercial production
process.
(2) Shrinking-back rule. The require-
ments of section 41(d) and paragraph (a)
of this section are to be applied first at the
level of the discrete business component,
that is, the product, process, computer
software, technique, formula, or invention
to be held for sale, lease, or license, or
used by the taxpayer in a trade or business
of the taxpayer. If the requirements for
credit eligibility are met at that first level,
then some or all of the taxpayer’s research
expenses are eligible for the credit. A spe-
cial shrinking-back rule applies in the
case where a taxpayer incurs some
research expenses with respect to that dis-
crete business component that would con-
stitute qualified research expenses with
respect to that business component but for
the fact that less than substantially all of
the research activities with respect to that
component constitute elements of a
process of experimentation that relates to
a new or improved function, performance,
reliability or quality. In such a case, the
requirements for the credit are to be
applied at the next most significant subset
of elements of the business component.
The shrinking-back of the applicable busi-
ness component continues until a subset
or series of subsets of elements of the
business component satisfies the substan-
tially all requirement of section
41(d)(1)(C) and paragraph (a)(2)(iii) of
this section (treating that subset of ele-
ments as a business component) or the
most basic element fails to satisfy the
requirements. This shrinking-back rule is
applied only if a taxpayer does not satisfy
the requirements of section 41(d)(1)(C)
and paragraph (a)(2)(iii) of this section
with respect to the overall business com-
ponent. The shrinking-back rule is not
itself applied as a reason to exclude
research activities from credit eligibility.
(3) Illustration. The following example
illustrates the application of this para-
graph (b):
(i) Facts. X, a widget manufacturer, develops a
widget that is improved in several respects. Among
the various improvements to the widget is an improve-
ment to the widget’s cooling mechanism. Although
the capability and method of making the other
improvements to the widget would have been known
to skilled professionals had they conducted a reason-
able investigation of the existing level of information
in the particular field of science or engineering, the
method of developing the improved cooling mecha-
nism and of incorporating the improved mechanism
into the widget would not have been known to skilled
professionals had they conducted a reasonable inves-
tigation of the existing level of information in the par-
ticular field of science or engineering. Substantially
all of X’s research activities in improving the widget
constitute elements of a process of experimentation
for purposes of improving the performance of the
widget. None of X’s research activities in improving
the widget are described in section 41(d)(4) or para-
graph (c) of this section.
(ii) Conclusion. Some, but not all, of X’s
research activities in developing the improved wid-
get are qualified research within the meaning of sec-
tion 41(d)(1) and paragraph (a) of this section. In
seeking to improve the widget, some of X’s activities
(related to improving the cooling mechanism and
incorporating the improved cooling mechanism into
the widget) were undertaken to obtain knowledge
that exceeds, expands, or refines the common knowl-
edge of skilled professionals in the relevant field of
science or engineering. However, other activities
(related to the other improvements) were not under-
taken to obtain knowledge that exceeds, expands, or
refines the common knowledge of skilled profes-
sionals in the relevant field of science or engineer-
ing, and thus are not qualified research and are not
eligible for the credit. Not all of X’s research activ-
ities relating to the widget are eligible for the credit
because some of the activities are not qualified
research as defined in section 41(d) and paragraph
(a) of this section, even though the widget qualifies
as a business component with respect to which qual-
ified research that satisfies the requirements of sec-
tion 41(d) and paragraph (a) of this section is under-
taken.
(c) Excluded activities—(1) In general.
Qualified research does not include any
activity described in section 41(d)(4) and
paragraph (c) of this section.
(2) Research after commercial produc-
tion—(i) In general. Activities conducted
after the beginning of commercial produc-
tion of a business component are not qual-
ified research. Activities are conducted
after the beginning of commercial produc-
tion of a business component if such
activities are conducted after the compo-
nent is developed to the point where it is
ready for commercial sale or use, or meets
the basic functional and economic
requirements of the taxpayer for the com-
ponent’s sale or use.
(ii) Certain additional activities related
to the business component. The following
activities are deemed to occur after the
beginning of commercial production of a
business component—
(A) Preproduction planning for a fin-
ished business component;
(B) Tooling-up for production;
(C) Trial production runs;
(D) Trouble shooting involving detect-
ing faults in production equipment or
processes;
(E) Accumulating data relating to pro-
duction processes; and
(F) Debugging flaws in a business com-
ponent.
(iii) Activities related to production
process or technique. In cases involving
development of both a product and a man-
ufacturing or other commercial production
process for the product, the exclusion
described in section 41(d)(4)(A) and para-
graphs (c)(2)(i) and (ii) of this section
applies separately for the activities relating
to the development of the product and the
activities relating to the development of the
process. For example, even after a product
meets the taxpayer’s basic functional and
economic requirements, activities relating
to the development of the manufacturing
process still may constitute qualified
research, provided that the development of
the process itself separately satisfies the
requirements of section 41(d) and this sec-
tion, and the activities are conducted before
the process meets the taxpayer’s basic
functional and economic requirements or is
ready for commercial use.
(iv) Clinical testing. Clinical testing of
a pharmaceutical product prior to its com-
mercial production in the United States is
not treated as occurring after the beginning
of commercial production even if the prod-
uct is commercially available in other
countries. Additional clinical testing of a
pharmaceutical product after a product has
been approved for a specific therapeutic
use by the Food and Drug Administration
and is ready for commercial production
and sale are not treated as occurring after
the beginning of commercial production if
such clinical tests are undertaken to estab-
lish new functional uses, characteristics,
indications, combinations, dosages, or
delivery forms for the product. A function-
al use, characteristic, indication, combina-
tion, dosage or delivery form shall be con-
sidered new only if such functional use,
characteristic, indication, combination,
dosage or delivery form must be approved
by the Food and Drug Administration.
(3) Adaptation of existing business com-
ponents. Activities relating to adapting an
existing business component to a particular
customer’s requirement or need are not
qualified research. This exclusion does not
apply merely because a business compo-
nent is intended for a specific customer.

(4) Duplication of existing business
component. Activities relating to repro-
ducing an existing business component
(in whole or in part) from a physical
examination of the business component
itself or from plans, blueprints, detailed
specifications, or publicly available infor-
mation about the business component are
not qualified research. This exclusion
does not apply merely because the tax-
payer inspects an existing business com-
ponent in the course of developing its own
business component.
(5) Surveys, studies, research relating
to management functions, etc. Qualified
research does not include activities relat-
ing to—
(i) Efficiency surveys;
(ii) Management functions or tech-
niques, including such items as prepara-
tion of financial data and analysis, devel-
opment of employee training programs
and management organization plans, and
management-based changes in production
processes (such as rearranging work sta-
tions on an assembly line);
(iii) Market research, testing, or devel-
opment (including advertising or promo-
tions);
(iv) Routine data collections; or
(v) Routine or ordinary testing or
inspections for quality control.
(6) Internal-use computer software—
(i) General rule. Research with respect to
computer software that is developed by
(or for the benefit of) the taxpayer primar-
ily for the taxpayer’s internal use is eligi-
ble for the research credit only if the soft-
ware satisfies the requirements of
paragraph (c)(6)(ii) of this section.
(ii) Requirements. The requirements of
this paragraph (c)(6)(ii) are—
(A) The research satisfies the require-
ments of section 41(d)(1);
(B) The research is not otherwise
excluded under section 41(d)(4) (other
than section 41(d)(4)(E)); and
(C) One of the following conditions is
met—
(1) The taxpayer develops the software
for use in an activity that constitutes qual-
ified research (other than the development
of the internal-use software itself);
(2) The taxpayer develops the software
for use in a production process that meets
the requirements of section 41(d)(1);
(3) The taxpayer develops a new or
improved package of computer software
and hardware together as a single product,
of which the software is an integral part,
that is used directly by the taxpayer in
providing technological services in its
trade or business to customers. In these
cases, eligibility for the research credit is
to be determined by examining the com-
bined hardware-software product as a sin-
gle product;
(4) The taxpayer develops the software
for use in providing computer services to
customers; or
(5) The software satisfies the high
threshold of innovation test of paragraph
(c)(6)(vi) of this section.
(iii) Primarily for internal use.Software
is developed primarily for the taxpayer’s
internal use if the software is to be used
internally, for example, in general adminis-
trative functions of the taxpayer (such as
payroll, bookkeeping, or personnel man-
agement) or in providing noncomputer ser-
vices (such as accounting, consulting or
banking services). If computer software is
developed primarily for the taxpayer’s
internal use, the requirements of paragraph
(c)(6) apply even though the taxpayer
intends to, or subsequently does, sell, lease,
or license the computer software.
(iv) Software used in the provision of
services—(A) Computer services. For
purposes of this section, a computer ser-
vice is a service offered by a taxpayer to
customers who conduct business with the
taxpayer primarily for the use of the tax-
payer’s computer or software technology.
A taxpayer does not provide a computer
service merely because customers interact
with the taxpayer’s software.
(B) Noncomputer services. For purpos-
es of this section, a noncomputer service
is a service offered by a taxpayer to cus-
tomers who conduct business with the
taxpayer primarily to obtain a service
other than a computer service, even if
such other service is enabled, supported,
or facilitated by computer or software
technology.
(v) Exception for certain software used
in providing noncomputer services. The
requirements of paragraph (c)(6)(ii)(C) of
this section are deemed satisfied for
research with respect to computer soft-
ware if, at the time the research was
undertaken—
(A) The software is designed to provide
customers a new feature with respect to a
noncomputer service;
(B) The taxpayer reasonably anticipat-
ed that customers would choose to obtain
the noncomputer service from the taxpay-
er (rather than from the taxpayer’s com-
petitors) because of those new features
provided by the software; and
(C) Those new features were not avail-
able from any of the taxpayer’s competi-
tors.
(vi) High threshold of innovation test.
Computer software satisfies the high
threshold of innovation test of this para-
graph (c)(6)(vi) only if the taxpayer can
establish that—
(A) The software is innovative in that
the software is intended to result in a
reduction in cost, improvement in speed,
or other improvement, that is substantial
and economically significant;
(B) The software development involves
significant economic risk in that the tax-
payer commits substantial resources to the
development and there is a substantial
uncertainty, because of technical risk, that
such resources would be recovered within
a reasonable period; and
(C) The software is not commercially
available for use by the taxpayer in that
the software cannot be purchased, leased,
or licensed and used for the intended pur-
pose without modifications that would
satisfy the requirements of paragraphs
(c)(6)(vi)(A) and (B) of this section.
(vii) Application of high threshold of
innovation test. In determining if the high
threshold of innovation test of paragraph
(c)(6)(vi) of this section is satisfied, all of
the facts and circumstances are consid-
ered. The determination of whether the
software is intended to result in an
improvement or cost reduction that is sub-
stantial and economically significant is
based on a comparison of the intended
result with software that is within the
common knowledge of skilled profession-
als in the relevant field of science or engi-
neering, see §1.41–4(a)(3)(ii). Similarly,
the extent of uncertainty and technical
risk is determined with respect to the
common knowledge of skilled profession-
als in the relevant field of science or engi-
neering. Further, in determining if the
high threshold of innovation test of para-
graph (c)(6)(vi) of this section is satisfied,
the activities to develop the new or
improved software are considered inde-
pendent of the effect of any modifications
to related hardware or other software.
2001–5 I.R.B.447January 29, 2001

(viii) Illustrations. The following
examples illustrate the application of this
paragraph (c)(6):
Example 1. (i) Facts. X is engaged in the busi-
ness of manufacturing and selling widgets to whole-
salers. X has experienced strong growth and at the
same time has expanded its product offerings. X
also has increased significantly the size of its busi-
ness by expanding into new territories. The increase
in the size and scope of its business has strained X’s
existing financial management systems such that
management can no longer obtain timely compre-
hensive financial data. Accordingly, X undertakes
the development of a financial management comput-
er software system that is more appropriate to its
newly expanded operations.
(ii) Conclusion. X’s new computer software sys-
tem is developed by X primarily for X’s internal use.
X’s activities to develop the new computer software
system may be eligible for the research credit only if
the computer software development activities satisfy
the requirements of paragraph (c)(6)(ii) of this sec-
tion.
Example 2. (i) Facts. X is engaged in the busi-
ness of designing, manufacturing, and selling wid-
gets. X delivers its widgets in the same manner and
time as its competitors. In keeping with X’s corpo-
rate commitment to provide customers with top
quality service, X undertakes a project to develop for
X’s internal use a computer software system to facil-
itate the tracking of the manufacturing and delivery
of widgets which will enable X’s customers to mon-
itor the progress of their orders and know precisely
when their widgets will be delivered. X’s computer
software activities include research activities that
satisfy the discovery requirement in section 41(d)(1)
and paragraph (a)(3) of this section. At the time the
research is undertaken, X reasonably anticipates that
if it is successful, X will increase its market share as
compared to X’s competitors, none of which has
such a tracking feature for its delivery system.
(ii) Conclusion. Although X’s computer software
system is developed primarily for X’s internal use,
X’s activities are excepted from the high threshold of
innovation test of paragraph (c)(6)(vi) of this section
because, at the time the research is undertaken, X’s
software is designed to provide improved tracking
features, X reasonably anticipates that customers
will purchase widgets from X because these
improved tracking features, and because comparable
tracking features are not available from any of X’s
competitors.
(ix) Effective dates. This paragraph
(c)(6) is applicable for taxable years
beginning after December 31, 1985,
except paragraphs (c)(6)(ii)(C)(4),
(c)(6)(iv)(A) and (B), (c)(6)(v), the sec-
ond and third sentences of paragraph
(c)(6)(vii), and paragraph (c)(6)(viii)
Example 2of this section apply to expen-
ditures paid or incurred on or after
January 3, 2001.
(7) Activities outside the United States,
Puerto Rico, and other possessions—(i)
In general. Research conducted outside
the United States, as defined in section
7701(a)(9), the Commonwealth of Puerto
Rico and other possessions of the United
States does not constitute qualified
research.
(ii) Apportionment of in-house research
expenses. In-house research expenses
paid or incurred for qualified services per-
formed both (A) in the United States, the
Commonwealth of Puerto Rico and other
possessions of the United States and (B)
outside the United States,the
Commonwealth of Puerto Rico and other
possessions of the United States must be
apportioned between the services per-
formed in the United States, the
Commonwealth of Puerto Rico and other
possessions of the United States and the
services performed outside the United
States, the Commonwealth of Puerto Rico
and other possessions of the United
States. Only those in-house research
expenses apportioned to the services per-
formed within the United States, the
Commonwealth of Puerto Rico and other
possessions of the United States are eligi-
ble to be treated as qualified research
expenses, unless the in-house research
expenses are wages and the 80 percent
rule of §1.41–2(d)(2) applies.
(iii) Apportionment of contract
research expenses. If contract research is
performed partly in the United States, the
Commonwealth of Puerto Rico and other
possessions of the United States and part-
ly outside the United States, the
Commonwealth of Puerto Rico and other
possessions of the United States, only 65
percent (or 75 percent in the case of
amounts paid to qualified research con-
sortia) of the portion of the contract
amount that is attributable to the research
activity performed in the United States,
the Commonwealth of Puerto Rico and
other possessions of the United States
may qualify as a contract research
expense (even if 80 percent or more of the
contract amount is for research performed
in the United States, the Commonwealth
of Puerto Rico and other possessions of
the United States).
(8) Research in the social sciences, etc.
Qualified research does not include
research in the social sciences (including
economics, business management, and
behavioral sciences), arts, or humanities.
(9) Research funded by any grant, con-
tract, or otherwise. Qualified research
does not include any research to the extent
funded by any grant, contract, or other-
wise by another person (or governmental
entity). To determine the extent to which
research is so funded, §1.41–4A(d)
applies.
(10) Illustrations. The following exam-
ples illustrate provisions contained in
paragraphs (c)(1) through (9) of this sec-
tion. No inference should be drawn from
these examples concerning the application
of section 41(d)(1) and paragraph (a) of
this section to these facts. The examples
are as follows:
Example 1. (i) Facts. X, a tire manufacturer,
seeks to build a tire that will not deteriorate as rapid-
ly under certain conditions of high speed and tem-
perature as do existing tires. X commences labora-
tory research on January 1. On April 1, X
determines in the laboratory that a certain combina-
tion of materials and additives can withstand higher
rotational speeds and temperatures than the combi-
nation of materials and additives used in existing
tires. On the basis of this determination, X under-
takes further research activities to determine how to
design a tire using those materials and additives, and
to determine whether such a tire functions outside
the laboratory as intended under various actual road
conditions. By September 1, X’s research has pro-
gressed to the point where the new tire meets X’s
basic functional and economic requirements.
(ii) Conclusion. Any research activities conduct-
ed by X after September 1 with respect to the design
of the tire are not qualified research within the mean-
ing of section 41(d)(1) and paragraph (a) of this sec-
tion because they are undertaken after the beginning
of commercial production of the tire. Whether any
activities X engaged in to develop a process for man-
ufacturing the new tire constitute qualified research
depends on if the development of the process itself
separately satisfies the requirements of section 41(d)
and paragraph (c)(2) of this section, and also
depends on if the activities occur before the point in
time when the process meets the taxpayer’s basic
functional and economic requirements or is ready for
commercial use.
Example 2. (i) Facts. For several years, X has
manufactured and sold a particular kind of widget.
X initiates a new research project to develop an
improved widget.
(ii) Conclusion. X’s activities to develop an
improved widget are not excluded from the defini-
tion of qualified research under section 41(d)(4)(A)
and paragraph (c)(2) of this section until the begin-
ning of commercial production of the improved wid-
get. The fact that X’s activities relating to the
improved widget are undertaken after the beginning
of commercial production of the unimproved widget
does not bar the activities from credit eligibility
because those activities constitute a new research
project to develop a new business component, an
improved widget.
Example 3. (i) Facts. X, a computer software
development firm, owns all substantial rights in a
general ledger accounting software core program
that X markets and licenses to customers. X incurs
expenditures in adapting the core software program
to the requirements of C, one of X’s customers.
January 29, 20014482001–5 I.R.B.

(ii) Conclusion.Because X’s activities represent
activities to adapt an existing software program to a
particular customer’s requirement, X’s activities are
excluded from the definition of qualified research
under section 41(d)(4)(B) and paragraph (c)(3) of
this section.
Example 4. (i) Facts. The facts are the same as
in Example 3, except that C pays X to adapt the core
software program to C’s requirements.
(ii) Conclusion. Because X’s activities are
excluded from the definition of qualified research
under section 41(d)(4)(B) and paragraph (c)(3) of
this section, C’s payments to X do not constitute
contract research expenses under section
41(b)(3)(A).
Example 5. (i) Facts. The facts are the same as
in Example 3, except that C’s own employees adapt
the core software program to C’s requirements.
(ii) Conclusion. Because C’s employees’ activi-
ties are excluded from the definition of qualified
research under section 41(d)(4)(B) and paragraph
(c)(3) of this section, the wages C paid to its employ-
ees do not constitute in-house research expenses
under section 41(b)(2)(A).
Example 6. (i) Facts. An existing gasoline addi-
tive is manufactured by Y using three ingredients, A,
B, and C. X seeks to develop and manufacture its
own gasoline additive that appears and functions in a
manner similar to Y’s additive. To develop its own
additive, X first inspects the composition of Y’s
additive, and uses knowledge gained from the
inspection to reproduce A and B in the laboratory.
Any differences between ingredients A and B that
are used in Y’s additive and those reproduced by X
are insignificant and are not material to the viability,
effectiveness, or cost of A and B. X desires to use
with A and B an ingredient that has a materially
lower cost than ingredient C. Accordingly, X
engages in a process of experimentation to discover
potential alternative formulations of the additive
(i.e., the development and use of various ingredients
other than C to use with A and B).
(ii) Conclusion. X’s activities in analyzing and
reproducing ingredients A and B involve duplica-
tion of existing business components and are
excluded from qualified research under section
41(d)(4)(C) and paragraph (c)(4) of this section.
X’s experimentation activities to discover potential
alternative formulations of the additive do not
involve duplication of an existing business compo-
nent and are not excluded from qualified research
under section 41(d)(4)(C) and paragraph (c)(4) of
this section.
Example 7. (i) Facts. X, an insurance company,
develops a new life insurance product. In the course
of developing the product, X engages in research
with respect to the effect of pricing and tax conse-
quences on demand for the product, the expected
volatility of interest rates, and the expected mortali-
ty rates (based on published data and prior insurance
claims).
(ii) Conclusion. X’s activities related to the new
product represent research in the social sciences, and
are thus excluded from qualified research under sec-
tion 41(d)(4)(G) and paragraph (c)(8) of this section.
(d) Documentation. No credit shall be
allowed under section 41 with regard to an
expenditure relating to a research project
unless the taxpayer—
(1) Prepares documentation before or
during the early stages of the research
project, that describes the principal ques-
tions to be answered and the information
the taxpayer seeks to obtain to satisfy the
requirements of paragraph (a)(3) of this
section, and retains that documentation on
paper or electronically in the manner pre-
scribed in applicable regulations, revenue
rulings, revenue procedures, or other
appropriate guidance until such time as
taxes may no longer be assessed (except
under section 6501(c)(1), (2), or (3)) for
any year in which the taxpayer claims to
have qualified research expenditures in
connection with the research project; and
(2) Satisfies section 6001 and the regu-
lations thereunder.
(e) Effective dates. In general, the rules
of this section are applicable for expendi-
tures paid or incurred on or after January
3, 2001. The rules of paragraph (d), how-
ever, apply to research projects that begin
on or after March 4, 2001.
§1.41–5 [Redesignated as §1.41–4A,
and Amended]
Par. 11. Section 1.41–5 is redesignated
as §1.41–4A, and the last sentence of
paragraph (d)(1) is amended by removing
the language “§1.41–8(e)” and adding
“§1.41–6(e)” in its place.
§1.41–6 [Redesignated as §1.41–5, and
Amended]
Par. 12. Section 1.41–6 is redesignated
as §1.41–5 and the section heading is
amended by removing the language
“December 31, 1985” and adding
“December 31, 1986” in its place.
§1.41–7 [Redesignated as §1.41–5A,
and Amended]
Par. 13. Section 1.41–7 is redesignated
as §1.41–5A, and amended as follows:
1. The section heading is amended by
removing the language “January 1, 1986”
and adding “January 1, 1987” in its place.
2. Paragraph (e)(2) is amended by
removing the language “§1.41–5(c)” and
adding “1.41–4A(c)” in its place.
§1.41–8 [Redesignated as §1.41–6, and
Amended]
Par. 14. Section 1.41–8 is redesignated
as §1.41–6, and the last sentence of para-
graph (c) is amended by removing the lan-
guage “§1.41–3, except that §1.41–3(c)(2)”
and adding “§1.41–3A, except that
§1.41–3A(c)(2)” in its place.
§1.41–9 [Redesignated as §1.41–7]
Par. 15. Section 1.41–9 is redesignated
as §1.41–7.
Par. 16. New §1.41–8 is added to read
as follows:
§1.41–8 Special rules for taxable years
ending on or after January 3, 2001.
(a) Alternative incremental credit. At the
election of the taxpayer, the credit deter-
mined under section 41(a)(1) equals the
amount determined under section 41(c)(4).
(b) Election—(1) In general. A taxpay-
er may elect to apply the provisions of the
alternative incremental credit in section
41(c)(4) for any taxable year of the tax-
payer beginning after June 30, 1996. If a
taxpayer makes an election under section
41(c)(4), the election applies to the tax-
able year for which made and all subse-
quent taxable years.
(2) Time and manner of election. An
election under section 41(c)(4) is made by
completing the portion of Form 6765,
“Credit for Increasing Research
Activities,” relating to the election of the
alternative incremental credit, and attach-
ing the completed form to the taxpayer’s
timely filed original return (including
extensions) for the taxable year to which
the election applies.
(3) Revocation. An election under this
section may not be revoked except with
the consent of the Commissioner. A tax-
payer must attach the Commissioner’s
consent to revoke an election under sec-
tion 41(c)(4) to the taxpayer’s timely filed
original return (including extensions) for
the taxable year of the revocation.
(4) Effective date. Paragraphs (b)(2)
and (3) of this section are applicable for
taxable years ending on or after January 3,
2001.
Par. 17. Section 1.41–0A is added under
the new undesignated centerheading
“RESEARCH CREDIT—FOR TAX-
ABLE YEARS BEGINNING BEFORE
JANUARY 1, 1990” to read as follows:
§1.41–0A Table of contents.
This section lists the paragraphs con-
tained in §§1.41–0A, 1.41–3A, 1.41–4A
and 1.41–5A.
2001–5 I.R.B.449January 29, 2001

§1.41-0A Table of contents.
§1.41-3A Base period research expense.
(a) Number of years in base period.
(b) New taxpayers.
(c) Definition of base period research
expenses.
(d) Special rules for short taxable years.
(1) Short determination year.
(2) Short base period year.
(3) Years overlapping the effective dates
of section 41 (section 44F).
(i) Determination years.
(ii) Base period years.
(4) Number of months in a short taxable
year.
(e) Examples.
§1.41–4A Qualified research for taxable
years beginning before January 1, 1986.
(a) General rule.
(b) Activities outside the United States.
(1) In-house research.
(2) Contract research.
(c) Social sciences or humanities.
(d) Research funded by any grant, con-
tract, or otherwise.
(1) In general.
(2) Research in which taxpayer retains no
rights.
(3) Research in which the taxpayer retains
substantial rights.
(i) In general.
(ii) Pro rata allocation.
(iii) Project-by-project determination.
(4) Independent research and develop-
ment under the Federal Acquisition
Regulations System and similar provi-
sions.
(5) Funding determinable only in subse-
quent taxable year.
(6) Examples.
§1.41–5A Basic research for taxable
years beginning before January 1, 1987.
(a) In general.
(b) Trade or business requirement.
(c) Prepaid amounts.
(1) In general.
(2) Transfers of property.
(d) Written research agreement.
(1) In general.
(2) Agreement between a corporation and
a qualified organization after June 30,
1983.
(i) In general.
(ii) Transfers of property.
(3) Agreement between a qualified fund
and a qualified educational organization
after June 30, 1983.
(e) Exclusions.
(1) Research conducted outside the
United States.
(2) Research in the social sciences or
humanities.
(f) Procedure for making an election to be
treated as a qualified fund.
§1.218–0 [Removed]
Par. 18. Section 1.218–0 is removed.
§1.482–7 [Amended]
Par. 19. In §1.482–7, the sixth sentence
of paragraph (h)(1) is amended by remov-
ing the language “§1.41–8(e)” and adding
“§1.41–6(e)” in its place.
PART 602-OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT.
Par. 20. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 21. In §602.101, paragraph (b) is
amended by adding an entry to the table in
numerical order to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
January 29, 20014502001–5 I.R.B.
CFR part or section where Current OMB control No.
identified and described
* * * * *
1.41–4(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1625
* * * * *
1.41–8(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1625
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 22, 2000.
Joanthan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on De-
cember 27, 2000, 12:33 p.m., and published in the
issue of the Federal Register for January 3, 2001, 66
F.R. 280)
Section 103(c).—Definition.
Interest on State and Local Bonds
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 105(e).—Amounts
Received Under Accident and
Health Plans
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 117(b)(2)(A).—Qualified
Scholarships
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 164.—Deductions-Taxes
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 170.—Deductions-
Charitable, etc., Contributions
and Gifts
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.

Section 403(b)(1)(A)(ii).—
Taxation of Employee Annuities-
Taxability of Beneficiary Under
Annuity Purchased by Section
501(c)(3) Organization or Public
School
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 454(b)(2).—Obligations
Issued at Discount–Short-Term
Obligations Issued on Discount
Basis
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The November 2000 Bureau of
Labor Statistics price indexes are accept-
ed for use by department stores employ-
ing the retail inventory and last-in, first-
out inventory methods for valuing
inventories for tax years ended on, or with
reference to, November 30, 2000.
Rev. Rul. 2001–5
The following Department Store
Inventory Price Indexes for November
2000 were issued by the Bureau of Labor
Statistics. The indexes are accepted by
the Internal Revenue Service, under
§ 1.472–1(k) of the Income Tax Regula-
tions and Rev. Proc. 86–46, 1986–2 C.B.
739, for appropriate application to inven-
tories of department stores employing the
retail inventory and last-in, first-out inven-
tory methods for tax years ended on, or
with reference to, November 30, 2000.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups - soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately,
except for the following:candy, food,
liquor, tobacco, and contract departments.
2001–5 I.R.B.451January 29, 2001
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
Nov.Nov.from Nov. 1999
Groups19992000to Nov. 2000
1
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .514.3499.6-2.9
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .622.0610.2-1.9
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .651.4664.01.9
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .875.1911.24.1
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .647.6648.00.1
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .571.9577.30.9
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .328.9347.0 5.5
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .539.6555.42.9
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . . .410.3402.0-2.0
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .617.4598.8-3.0
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .627.6639.21.8
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .510.2501.3 -1.7
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .950.5936.0-1.5
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .764.6798.04.4
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .983.6973.8-1.0
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .689.7696.61.0
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .602.1625.63.9
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .789.3775.6-1.7
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .235.5227.9-3.2
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63.557.5-9.4
21. Recreation and Education
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96.192.3-4.0
22. Home Improvements
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129.2129.20.0
23. Auto Accessories
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.6107.60.0
Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .606.9604.6-0.4
Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .446.9435.6-2.5
Groups 21 - 23: Misc. Goods
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102.7100.1-2.5
Store Total
3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .547.2541.4-1.1
1 Absence of a minus sign before the percentage change in this column signifies a price increase.
2 Indexes on a January 1986=100 base.
3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,tobacco, and contract departments.

DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Alan J. Tomsic of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue ruling, contact
Mr. Tomsic at (202) 622-4970 (not a toll-
free call).
Section 511(a)(2)(B).—Imposition
of Tax on Unrelated Business
Income of Charitable, etc.,
Organizations–Organizations
Subject to Tax
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 2055.—Transfers for
Public, Charitable, and Religious
Uses
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 2106(a)(2).—Taxable
Estate–Transfer for Public,
Charitable, and Religious Uses
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 2522.—Charitable and
Similar Gifts
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 2601.—Tax Imposed
26 CFR 26.2601–1: Effective dates.
T.D. 8912
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 26
Generation-Skipping Transfer
Issues
AGENCY:Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY:This document contains
final regulations relating to the applica-
tion of the effective date rules of the
generation-skipping transfer (GST) tax
imposed under chapter 13 of the Internal
Revenue Code (Code). These regula-
tions provide guidance with respect to
the type of trust modifications that will
not affect the exempt status of a trust. In
addition, these regulations clarify the
application of the effective date rules in
the case of property transferred pursuant
to the exercise of a general power of
appointment. These regulations are nec-
essary to provide guidance to taxpayers
so that they may properly determine if
chapter 13 of the Code is applicable to a
particular trust.
DATES: These regulations are effective
December 20, 2000.
SUPPLEMENTARY INFORMATION:
Background
On November 18, 1999, the Treasury
Department and the IRS published in the
Federal Register(64 F.R. 62997) a notice
of proposed rulemaking (REG–103841–
99, 1999–2 C.B. 639) relating to the appli-
cation of the GST tax provisions where
the terms of a trust that was irrevocable
before the effective date of the statute are
changed or modified after that date. The
IRS received comments on the notice of
proposed rulemaking. In addition, a pub-
lic hearing was held on March 15, 2000.
This document adopts final regulations
with respect to the notice of proposed
rulemaking. A summary of the principle
comments received is provided below.
1. The Regulatory Approach
In general, under the effective date
rules accompanying the GST statutory
provisions, a trust that was irrevocable on
September 25, 1985, is not subject to the
GST tax provisions, unless a GST transfer
is made out of corpus added to the trust
after that date. Section 1433(b)(2)(A) of
the Tax Reform Act of 1986 (TRA),
Public Law 99–514 (100 Stat. 2085,
2731), 1986–3 (Vol. 1) C.B. 1, 634. Such
trusts are hereinafter referred to as exempt
trusts for GST tax purposes. The pro-
posed regulations provide a number of
safe harbors with respect to changes that
can be made to the terms of an exempt
trust that will not result in the loss of
exempt status.
Commentators argued that the
approach set forth in the proposed regula-
tions is inconsistent with the statutory
effective date provisions. They contend
that, under the TRA, with the exception of
additions to principal, modifications or
other actions with respect to a trust should
not affect the trust’s exempt status.
Rather, any change should have GST tax
consequences only if the change subjects
the trust principal to a current gift tax. In
that case, the individual making the gift
will be treated, to the extent of the gift, as
the transferor of the trust for GST tax pur-
poses and the trust, to the extent of the
gift, will be subject to the GST tax regime.
This approach was not adopted. The
statutory effective date provision protects
generation-skipping trusts that were irrev-
ocable before the GST tax was enacted
and presumably could not be changed to
avoid the imposition of the tax. The
Treasury Department and the IRS believe
that the approach adopted in the regula-
tions is consistent with Congressional
intent to protect these trusts and that most
of the modifications that will not affect
the exempt status of a trust will be cov-
ered by the safe harbors in the final regu-
lations.
2. Trustee Discretionary Actions
Under the proposed regulations, where
there is a distribution of trust principal
from an exempt trust to a new trust, the
new trust will be an exempt trust if the
terms of the governing instrument of the
old trust authorize the trustee to make dis-
tributions to the new trust without the con-
sent or approval of any beneficiary or
court and the terms of the new trust do not
extend the time for vesting of any benefi-
cial interest in the trust beyond the applic-
able perpetuities period.
In response to comments, the final reg-
ulations clarify that the retention of prop-
erty in a continuing trust, as well as the
distribution of property to a new trust, will
not cause loss of exempt status, assuming
the requirements of the regulations are
satisfied.
In response to comments, the final reg-
ulations provide that distribution to a new
trust or retention in a continuing trust will
not cause the loss of exempt status, even if
January 29, 20014522001–5 I.R.B.

the governing instrument does not specif-
ically authorize the action, if state law, at
the time the exempt trust became irrevo-
cable, permitted such distribution or
retention in a continuing trust.
One comment suggested that the final
regulations provide that a discretionary
distribution that otherwise satisfies the
regulatory requirements should not cause
the trust to lose exempt status if the
trustee, although not required to do so,
seeks approval of a court or the trust ben-
eficiaries before taking action. This
change was deemed unnecessary. An
action that satisfies the requirements of
the regulations will not cause loss of
exempt status even if, for whatever rea-
son, the trustee seeks a court’s or a bene-
ficiary’s approval of such action.
Comments suggested that the period for
measuring the appropriate perpetuities
period for the new trust should be the date
the original trust became irrevocable
under local law. The comments noted that
the perpetuities period is properly mea-
sured from the date the trust becomes
irrevocable, which is not always the date
the trust was created (the date referenced
in the proposed regulations). The regula-
tions have been revised accordingly.
3. Settlements and Judicial Constructions
Under the proposed regulations, a
court-approved settlement of a bona fide
issue regarding the administration of the
trust or the construction of terms of the
trust will not cause the trust to lose
exempt status if the settlement is the prod-
uct of arm’s length negotiations, and the
settlement is within the range of reason-
able outcomes under the governing instru-
ment and applicable state law. A judicial
construction of a governing instrument
resolving an ambiguity in the terms of the
instrument or correcting a scrivener’s
error will not cause loss of exempt status
if the judicial action involves a bona fide
issue, and the construction is consistent
with applicable state law that would be
applied by the highest court of the state.
One comment suggested that the stan-
dard applicable for recognition of settle-
ment agreements should also apply for
court decrees, such that one standard
would govern both actions. Thus, the
commentator suggested that a settlement
agreement or court decree should be
binding on the Service (and not cause loss
of exempt status) if the result is within the
range of reasonable outcomes and the
agreement or court decision is the prod-
uct of adversarial proceedings. The sug-
gestion was not adopted. The standard
applied in the regulations for court
decrees was enunciated by the Supreme
Court in Commissioner v. Estate of
Bosch, 387 U.S. 456 (1967), and has been
continuously and repeatedly applied by
the IRS and the courts. The adoption of a
different standard at this time is not
appropriate.
Another comment addressing the rule
for settlements stated that the requirement
that the settlement fall within the range of
reasonable outcomes under the governing
instrument and state law could be read to
deny protection to a settlement that reach-
es a result that a court could not reach.
However, the purpose of this rule is not to
restrict safe harbor protection to only
those settlements that reach the result a
court could reach if the issue was litigat-
ed. Rather, the rule is intended to afford
the parties a greater degree of latitude to
settle a case than would be available if a
court had to decide the issue. Thus, a set-
tlement “within the range of reasonable
outcomes” would include a compromise
that reflects the parties’ assessment of
their relative rights and the strengths and
weaknesses of their respective positions.
The settlement need not (and it is antici-
pated that in most cases it would not)
resolve the issue in the same manner as a
court decision on the merits. Language
has been added to the final regulations
emphasizing this point. On the other
hand, as illustrated in the preamble to the
proposed regulations, a settlement that,
for example, creates beneficial interests
that did not exist under a reasonable inter-
pretation of the instrument will not satisfy
the regulations.
One comment suggested that the scope
of the judicial construction rule should be
expanded to cover not only ambiguities
and scrivener’s error, but any request for
court instructions or any similar proceed-
ings such as requests to modernize the
trust instrument, or adapt the instrument
to unforeseen changed circumstances.
This suggestion was not adopted. The
Treasury Department and the IRS believe
that these and similar actions are properly
addressed under the safe-harbor “shift in
beneficial interest” rule provided in the
regulations, and a separate category to
address these items is not needed.
4. Other Changes
Under the proposed regulations, a mod-
ification that does not satisfy the regulato-
ry rules for trustee distributions, settle-
ments, and constructions will not cause a
trust to lose exempt status, if the modifi-
cation does not shift a beneficial interest
in the trust to any beneficiary who occu-
pies a lower generation (as defined in sec-
tion 2651) than the person or persons who
held the beneficial interest prior to the
modification, and the modification does
not extend the time for vesting of any ben-
eficial interest in the trust beyond the peri-
od provided for in the original trust.
Comments suggested that the regula-
tions should provide additional guidance
on when a modification shifts a beneficial
interest in a trust. In response to these
comments, the final regulations provide
that a modification to an exempt trust will
result in a shift in beneficial interest to a
lower generation beneficiary if the modi-
fication can result in an increase in a GST
transfer or create a new GST transfer. To
determine whether a modification of an
irrevocable trust will shift a beneficial
interest in a trust to a beneficiary who
occupies a lower generation, the effect of
the instrument on the date of the modifi-
cation is measured against the effect of the
instrument in existence immediately
before the modification. If the effect of
the modification cannot be immediately
determined, it is deemed to shift a benefi-
cial interest in the trust to a beneficiary
who occupies a lower generation (as
defined in section 2651) than the person
or persons who held the beneficial interest
prior to the modification.
In conjunction with this change, the
final regulations remove Example 7con-
tained in §26.2601–1(b)(2)(vii)(B). This
example had illustrated the transition rule
contained in §26.2601–1(b)(2) for genera-
tion-skipping transfers under wills or
revocable trusts executed before October
22, 1986. Under this rule, the GST tax
does not apply to transfers made under a
will or revocable trust executed before
October 22, 1986, if the decedent dies
before January 1, 1987, and the instru-
2001–5 I.R.B.453January 29, 2001

ment is not amended after October 21,
1986, in any respect that results in the cre-
ation of, or increase in the amount of, a
generation-skipping transfer. In Example
7, trust income is to be distributed equal-
ly, for life, to A, B, and C who are skip
persons assigned to the same generation.
The trust is amended to increase A’s share
of the income. The example concludes
that the trust is subject to GST tax because
the amendment increases the amount of
the generation-skipping transfers to be
made to A. The amendment to the trust,
however, does not increase the amount of
a generation-skipping transfer when
viewed in the aggregate. The amendment
merely shifts an interest from one benefi-
ciary to another beneficiary assigned to
the same generation. Example 7in
§26.2601–1(b)(4)(i)(E) considers a sub-
stantially similar fact pattern involving a
trust that is irrevocable on or before
September 25, 1985, and concludes that
the modification will not result in an
increase in a generation-skipping transfer.
The standard contained in
§26.2601–1(b)(2) (relating to wills and
revocable trusts executed before October
22, 1986) is similar to the standard con-
tained in §26.2602–1(b)(4)(i)(D)(relating
to a modification to a trust that was irrev-
ocable on September 25, 1985). The
Treasury Department and the IRS believe
that the two provisions should be applied
in a consistent manner. Therefore,
Example 7in §26.2601–1(b)(2)(vii)(B)
has been eliminated.
In response to comments, the final reg-
ulations specify that changes that are
administrative in nature (such as a change
in the number of trustees) will not cause
the trust to lose its exempt status. An
example has been added illustrating this
point.
Several comments indicated that many
states have adopted, or are considering
adopting, section 104 of the Revised
Uniform Principal and Income Act.
Unif. Principal and Income Act § 104,
7B U.L.A. 141 (1997) (Act). The Act
allows a trustee to adjust between princi-
pal and income to the extent necessary to
produce an equitable result, if the trustee
invests and manages trust assets pursuant
to the state’s prudent investor statute and
the trustee is unable to administer the
trust fairly and reasonably under the gen-
eral statutory rules governing the alloca-
tion of income and principal. In addi-
tion, the comments noted that some state
legislatures are contemplating revising
their state principal and income act to
define trust incomeas a unitrust amount
(a fixed percentage of the trust principal
determined annually). The comments
suggested that the regulations provide
additional safe harbors to the effect that
the administration of an exempt trust
pursuant to a state statute adopting the
Act, or the conversion of an income
interest to a unitrust interest pursuant to a
court order or a state statute redefining
trust income, would not cause the trust to
lose exempt status.
A guidance project considering the tax
consequences of these state law changes
in a broader context is currently under
consideration. Accordingly, these regu-
lations do not specifically address this
issue. However, two examples have been
added to the regulations illustrating cir-
cumstances under which a trust will not
lose exempt status where an income
interest is converted to an interest that
pays the greater of trust income or a uni-
trust amount, and a trust is modified to
allow allocation of capital gain to
income.
In response to a comment, the facts pre-
sented in §26.2601–1(b)(4)(i)(E) Example
5, have been changed to clarify that after
the trusts are partitioned, if either benefi-
ciary should die without descendants sur-
viving, the principal of their partitioned
trust will pass to the other partitioned
trust.
5. Effective Dates and Other Matters
Comments requested clarification
regarding the status of exempt trusts that
were modified or subject to other actions
(for example, judicial constructions or set-
tlements) prior to the effective date of
these regulations, December 20, 2000.
The IRS will not challenge the exempt
status of a trust that was, prior to
December 20, 2000,subject to any trustee
action, judicial construction, settlement
agreement, modification, or other action,
if the action satisfies the requirements of
the regulations.
Finally, with respect to the deletion of
§26.2601–1(b)(2)(vii)(B) Example 7, dis-
cussed above, the IRS will not follow that
example when applying the rule in
§26.2601–1(b)(2).
Special Analyses
It has been determined that this
Treasury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
these regulations, and therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, the notice of
proposed rulemaking preceding these reg-
ulations was submitted to the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regulations
is James F. Hogan, Office of the Chief
Counsel, IRS. Other personnel from the
IRS and the Treasury Department partici-
pated in their development.
* * * * *
PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Par. 1. The authority citation for part 26
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §26.2600–1, the table is amend-
ed under §26.2601–1 by revising the entry
for paragraph (b)(4) and adding an entry for
paragraph (b)(5) to read as follows:
§26.2600–1 Table of contents.
* * * * *
§26.2601–1. Effective dates.
* * * * *
(b) * * *
* * * * *
(4) Retention of trust’s exempt status in
the case of modifications, etc.
(5) Exceptions to additions rule.
* * * * *
Par. 3. Section 26.2601–1 is amended
as follows:
1. Adding four sentences to the end of
paragraph (b)(1)(i).
January 29, 20014542001–5 I.R.B.

2. Paragraph (b)(2)(vii)(B) is amended
by revising the heading, removing
Example 7, and redesignating Examples 8
and 9as Examples 7and 8, respectively.
2. Redesignating paragraph (b)(4) as
paragraph (b)(5).
3. Adding a new paragraph (b)(4).
4. Paragraph (c) is amended by adding
a new sentence to the end of the para-
graph.
The additions read as follows:
§26.2601–1 Effective dates.
* * * * *
(b) * * *(1) * * *(i) * * * Further, the
rule in the first sentence of this paragraph
(b)(1)(i) does not apply to a transfer of
property pursuant to the exercise, release,
or lapse of a general power of appoint-
ment that is treated as a taxable transfer
under chapter 11 or chapter 12. The trans-
fer is made by the person holding the
power at the time the exercise, release, or
lapse of the power becomes effective, and
is not considered a transfer under a trust
that was irrevocable on September 25,
1985. See paragraph (b)(1)(v)(B) of this
section regarding the treatment of the
release, exercise, or lapse of a power of
appointment that will result in a construc-
tive addition to a trust. See §26.2652–1(a)
for the definition of a transferor.
* * * * *
(2)* * *
(vii)* * *
(B) Facts applicable to Examples 6
through 8.
* * * * *
(4) Retention of trust’s exempt status in
the case of modifications, etc.—(i) In gen-
eral. This paragraph (b)(4) provides rules
for determining when a modification,
judicial construction, settlement agree-
ment, or trustee action with respect to a
trust that is exempt from the generation-
skipping transfer tax under paragraph
(b)(1), (2), or (3) of this section (here-
inafter referred to as an exempt trust) will
not cause the trust to lose its exempt sta-
tus. The rules contained in this paragraph
(b)(4) are applicable only for purposes of
determining whether an exempt trust
retains its exempt status for generation-
skipping transfer tax purposes. The rules
do not apply in determining, for example,
whether the transaction results in a gift
subject to gift tax, or may cause the trust
to be included in the gross estate of a ben-
eficiary, or may result in the realization of
capital gain for purposes of section 1001.
(A) Discretionary powers. The distrib-
ution of trust principal from an exempt
trust to a new trust or retention of trust
principal in a continuing trust will not
cause the new or continuing trust to be
subject to the provisions of chapter 13,
if—
(1) Either–
(i) The terms of the governing instru-
ment of the exempt trust authorize distrib-
utions to the new trust or the retention of
trust principal in a continuing trust, with-
out the consent or approval of any benefi-
ciary or court; or
(ii) at the time the exempt trust became
irrevocable, state law authorized distribu-
tions to the new trust or retention of prin-
cipal in the continuing trust, without the
consent or approval of any beneficiary or
court; and
(2) The terms of the governing instru-
ment of the new or continuing trust do not
extend the time for vesting of any benefi-
cial interest in the trust in a manner that
may postpone or suspend the vesting,
absolute ownership, or power of alien-
ation of an interest in property for a peri-
od, measured from the date the original
trust became irrevocable, extending
beyond any life in being at the date the
original trust became irrevocable plus a
period of 21 years, plus if necessary, a rea-
sonable period of gestation. For purposes
of this paragraph (b)(4)(i)(A), the exercise
of a trustee’s distributive power that valid-
ly postpones or suspends the vesting,
absolute ownership, or power of alien-
ation of an interest in property for a term
of years that will not exceed 90 years
(measured from the date the original trust
became irrevocable) will not be consid-
ered an exercise that postpones or sus-
pends vesting, absolute ownership, or the
power of alienation beyond the perpetu-
ities period. If a distributive power is
exercised by creating another power, it is
deemed to be exercised to whatever extent
the second power may be exercised.
(B) Settlement. A court-approved set-
tlement of a bona fideissue regarding the
administration of the trust or the construc-
tion of terms of the governing instrument
will not cause an exempt trust to be sub-
ject to the provisions of chapter 13, if—
(1) The settlement is the product of
arm’s length negotiations; and
(2) The settlement is within the range of
reasonable outcomes under the governing
instrument and applicable state law
addressing the issues resolved by the set-
tlement. A settlement that results in a
compromise between the positions of the
litigating parties and reflects the parties’
assessments of the relative strengths of
their positions is a settlement that is with-
in the range of reasonable outcomes.
(C) Judicial construction. A judicial
construction of a governing instrument to
resolve an ambiguity in the terms of the
instrument or to correct a scrivener’s error
will not cause an exempt trust to be sub-
ject to the provisions of chapter 13, if—
(1) The judicial action involves a bona
fideissue; and
(2) The construction is consistent with
applicable state law that would be applied
by the highest court of the state.
(D) Other changes. (1) A modification
of the governing instrument of an exempt
trust (including a trustee distribution, set-
tlement, or construction that does not sat-
isfy paragraph (b)(4)(i)(A), (B), or (C) of
this section) by judicial reformation, or
nonjudicial reformation that is valid under
applicable state law, will not cause an
exempt trust to be subject to the provi-
sions of chapter 13, if the modification
does not shift a beneficial interest in the
trust to any beneficiary who occupies a
lower generation (as defined in section
2651) than the person or persons who held
the beneficial interest prior to the modifi-
cation, and the modification does not
extend the time for vesting of any benefi-
cial interest in the trust beyond the period
provided for in the original trust.
(2) For purposes of this section, a mod-
ification of an exempt trust will result in a
shift in beneficial interest to a lower gen-
eration beneficiary if the modification can
result in either an increase in the amount
of a GST transfer or the creation of a new
GST transfer. To determine whether a
modification of an irrevocable trust will
shift a beneficial interest in a trust to a
beneficiary who occupies a lower genera-
tion, the effect of the instrument on the
date of the modification is measured
against the effect of the instrument in
existence immediately before the modifi-
cation. If the effect of the modification
cannot be immediately determined, it is
deemed to shift a beneficial interest in the
trust to a beneficiary who occupies a
2001–5 I.R.B.455January 29, 2001

lower generation (as defined in section
2651) than the person or persons who held
the beneficial interest prior to the modifi-
cation. A modification that is administra-
tive in nature that only indirectly increas-
es the amount transferred (for example, by
lowering administrative costs or income
taxes) will not be considered to shift a
beneficial interest in the trust.
(E) Examples. The following examples
illustrate the application of this paragraph
(b)(4). In each example, assume that the
trust established in 1980 was irrevocable
for purposes of paragraph (b)(1)(ii) of this
section and that there have been no addi-
tions to any trust after September 25,
1985. The examples are as follows:
Example 1. Trustee’s power to distribute princi-
pal authorized under trust instrument. In 1980,
Grantor established an irrevocable trust (Trust) for
the benefit of Grantor’s child,A,A’s spouse, and A’s
issue. At the time Trust was established,Ahad two
children,Band C. A corporate fiduciary was desig-
nated as trustee. Under the terms of Trust, the
trustee has the discretion to distribute all or part of
the trust income to one or more of the group consist-
ing of A,A’s spouse or A’s issue. The trustee is also
authorized to distribute all or part of the trust princi-
pal to one or more trusts for the benefit of A,A’s
spouse, or A’s issue under terms specified by the
trustee in the trustee’s discretion. Any trust estab-
lished under Trust, however, must terminate 21 years
after the death of the last child of Ato die who was
alive at the time Trust was executed. Trust will ter-
minate on the death of A, at which time the remain-
ing principal will be distributed to A’s issue, per stir-
pes. In 2002, the trustee distributes part of Trust’s
principal to a new trust for the benefit of Band Cand
their issue. The new trust will terminate 21 years
after the death of the survivor of Band C, at which
time the trust principal will be distributed to the issue
of Band C, per stirpes. The terms of the governing
instrument of Trust authorize the trustee to make the
distribution to a new trust without the consent or
approval of any beneficiary or court. In addition, the
terms of the governing instrument of the new trust do
not extend the time for vesting of any beneficial
interest in a manner that may postpone or suspend
the vesting, absolute ownership or power of alien-
ation of an interest in property for a period, mea-
sured from the date of creation of Trust, extending
beyond any life in being at the date of creation of
Trust plus a period of 21 years, plus if necessary, a
reasonable period of gestation. Therefore, neither
Trust nor the new trust will be subject to the provi-
sions of chapter 13 of the Internal Revenue Code.
Example 2. Trustee’s power to distribute princi-
pal pursuant to state statute. In 1980, Grantor estab-
lished an irrevocable trust (Trust) for the benefit of
Grantor’s child,A,A’s spouse, and A’s issue. At the
time Trust was established,Ahad two children,B
and C. A corporate fiduciary was designated as
trustee. Under the terms of Trust, the trustee has the
discretion to distribute all or part of the trust income
or principal to one or more of the group consisting of
A,A’s spouse or A’s issue. Trust will terminate on
the death of A, at which time, the trust principal will
be distributed to A’s issue, per stirpes. Under a state
statute enacted after 1980 that is applicable to Trust,
a trustee who has the absolute discretion under the
terms of a testamentary instrument or irrevocable
inter vivos trust agreement to invade the principal of
a trust for the benefit of the income beneficiaries of
the trust, may exercise the discretion by appointing
so much or all of the principal of the trust in favor of
a trustee of a trust under an instrument other than
that under which the power to invade is created, or
under the same instrument. The trustee may take the
action either with consent of all the persons interest-
ed in the trust but without prior court approval, or
with court approval, upon notice to all of the parties.
The exercise of the discretion, however, must not
reduce any fixed income interest of any income ben-
eficiary of the trust and must be in favor of the ben-
eficiaries of the trust. Under state law prior to the
enactment of the state statute, the trustee did not
have the authority to make distributions in trust. In
2002, the trustee distributes one-half of Trust’s prin-
cipal to a new trust that provides for the payment of
trust income to Afor life and further provides that, at
A’s death, one-half of the trust remainder will pass to
Bor B’s issue and one-half of the trust will pass to C
or C’s issue. Because the state statute was enacted
after Trust was created and requires the consent of
all of the parties, the transaction constitutes a modi-
fication of Trust. However, the modification does
not shift any beneficial interest in Trust to a benefi-
ciary or beneficiaries who occupy a lower generation
than the person or persons who held the beneficial
interest prior to the modification. In addition, the
modification does not extend the time for vesting of
any beneficial interest in Trust beyond the period
provided for in the original trust. The new trust will
terminate at the same date provided under Trust.
Therefore, neither Trust nor the new trust will be
subject to the provisions of chapter 13 of the Internal
Revenue Code.
Example 3. Construction of an ambiguous term
in the instrument. In 1980, Grantor established an
irrevocable trust for the benefit of Grantor’s children,
Aand B, and their issue. The trust is to terminate on
the death of the last to die of Aand B, at which time
the principal is to be distributed to their issue.
However, the provision governing the termination of
the trust is ambiguous regarding whether the trust
principal is to be distributed per stirpes, only to the
children of Aand B, or per capita among the chil-
dren, grandchildren, and more remote issue of Aand
B. In 2002, the trustee files a construction suit with
the appropriate local court to resolve the ambiguity.
The court issues an order construing the instrument
to provide for per capita distributions to the children,
grandchildren, and more remote issue of Aand Bliv-
ing at the time the trust terminates. The court’s con-
struction resolves a bona fideissue regarding the
proper interpretation of the instrument and is consis-
tent with applicable state law as it would be inter-
preted by the highest court of the state. Therefore,
the trust will not be subject to the provisions of chap-
ter 13 of the Internal Revenue Code.
Example 4. Change in trust situs. In 1980,
Grantor, who was domiciled in State X, executed an
irrevocable trust for the benefit of Grantor’s issue,
naming a State Xbank as trustee. Under the terms of
the trust, the trust is to terminate, in all events, no
later than 21 years after the death of the last to die of
certain designated individuals living at the time the
trust was executed. The provisions of the trust do
not specify that any particular state law is to govern
the administration and construction of the trust. In
State X, the common law rule against perpetuities
applies to trusts. In 2002, a State Ybank is named as
sole trustee. The effect of changing trustees is that
the situs of the trust changes to State Y, and the laws
of State Ygovern the administration and construc-
tion of the trust. State Ylaw contains no rule against
perpetuities. In this case, however, in view of the
terms of the trust instrument, the trust will terminate
at the same time before and after the change in situs.
Accordingly, the change in situs does not shift any
beneficial interest in the trust to a beneficiary who
occupies a lower generation (as defined in section
2651) than the person or persons who held the bene-
ficial interest prior to the transfer. Furthermore, the
change in situs does not extend the time for vesting
of any beneficial interest in the trust beyond that pro-
vided for in the original trust. Therefore, the trust
will not be subject to the provisions of chapter 13 of
the Internal Revenue Code. If, in this example, as a
result of the change in situs, State Ylaw governed
such that the time for vesting was extended beyond
the period prescribed under the terms of the original
trust instrument, the trust would not retain exempt
status.
Example 5. Division of a trust. In 1980, Grantor
established an irrevocable trust for the benefit of his
two children,Aand B, and their issue. Under the
terms of the trust, the trustee has the discretion to
distribute income and principal to A,B, and their
issue in such amounts as the trustee deems appropri-
ate. On the death of the last to die of Aand B, the
trust principal is to be distributed to the living issue
of Aand B, per stirpes. In 2002, the appropriate
local court approved the division of the trust into two
equal trusts, one for the benefit of Aand A’s issue
and one for the benefit of Band B’s issue. The trust
for Aand A’s issue provides that the trustee has the
discretion to distribute trust income and principal to
Aand A’s issue in such amounts as the trustee deems
appropriate. On A’s death, the trust principal is to be
distributed equally to A’s issue, per stirpes. If Adies
with no living descendants, the principal will be
added to the trust for Band B’s issue. The trust for
Band B’s issue is identical (except for the beneficia-
ries), and terminates at B’s death at which time the
trust principal is to be distributed equally to B’s
issue, per stirpes. If Bdies with no living descen-
dants, principal will be added to the trust for Aand
A’s issue. The division of the trust into two trusts
does not shift any beneficial interest in the trust to a
beneficiary who occupies a lower generation (as
defined in section 2651) than the person or persons
who held the beneficial interest prior to the division.
In addition, the division does not extend the time for
vesting of any beneficial interest in the trust beyond
the period provided for in the original trust.
Therefore, the two partitioned trusts resulting from
the division will not be subject to the provisions of
chapter 13 of the Internal Revenue Code.
Example 6. Merger of two trusts. In 1980,
Grantor established an irrevocable trust for Grantor’s
child and the child’s issue. In 1983, Grantor’s
spouse also established a separate irrevocable trust
for the benefit of the same child and issue. The
terms of the spouse’s trust and Grantor’s trust are
identical. In 2002, the appropriate local court
approved the merger of the two trusts into one trust
January 29, 20014562001–5 I.R.B.

to save administrative costs and enhance the man-
agement of the investments. The merger of the two
trusts does not shift any beneficial interest in the
trust to a beneficiary who occupies a lower genera-
tion (as defined in section 2651) than the person or
persons who held the beneficial interest prior to the
merger. In addition, the merger does not extend the
time for vesting of any beneficial interest in the trust
beyond the period provided for in the original trust.
Therefore, the trust that resulted from the merger
will not be subject to the provisions of chapter 13 of
the Internal Revenue Code.
Example 7. Modification that does not shift an
interest to a lower generation. In 1980, Grantor
established an irrevocable trust for the benefit of
Grantor’s grandchildren,A,B, and C. The trust
provides that income is to be paid to A,B, and C,
in equal shares for life. The trust further provides
that, upon the death of the first grandchild to die,
one-third of the principal is to be distributed to that
grandchild’s issue, per stirpes. Upon the death of
the second grandchild to die, one-half of the
remaining trust principal is to be distributed to that
grandchild’s issue, per stirpes, and upon the death
of the last grandchild to die, the remaining princi-
pal is to be distributed to that grandchild’s issue,
per stirpes. In 2002,Abecame disabled.
Subsequently, the trustee, with the consent of B
and C, petitioned the appropriate local court and
the court approved a modification of the trust that
increased A’s share of trust income. The modifica-
tion does not shift a beneficial interest to a lower
generation beneficiary because the modification
does not increase the amount of a GST transfer
under the original trust or create the possibility
that new GST transfers not contemplated in the
original trust may be made. In this case, the mod-
ification will increase the amount payable to A
who is a member of the same generation as Band
C. In addition, the modification does not extend
the time for vesting of any beneficial interest in the
trust beyond the period provided for in the original
trust. Therefore, the trust as modified will not be
subject to the provisions of chapter 13 of the
Internal Revenue Code. However, the modifica-
tion increasing A’s share of trust income is a trans-
fer by Band Cto Afor Federal gift tax purposes.
Example 8. Conversion of income interest into
unitrust interest. In 1980, Grantor established an
irrevocable trust under the terms of which trust
income is payable to Afor life and, upon A’s death,
the remainder is to pass to A’s issue, per stirpes. In
2002, the appropriate local court approves a modi-
fication to the trust that converts A’s income inter-
est into the right to receive the greater of the entire
income of the trust or a fixed percentage of the
trust assets valued annually (unitrust interest) to be
paid each year to Afor life. The modification does
not result in a shift in beneficial interest to a bene-
ficiary who occupies a lower generation (as
defined in section 2651) than the person or persons
who held the beneficial interest prior to the modi-
fication. In this case, the modification can only
operate to increase the amount distributable to A
and decrease the amount distributable to A’s issue.
In addition, the modification does not extend the
time for vesting of any beneficial interest in the
trust beyond the period provided for in the original
trust. Therefore, the trust will not be subject to the
provisions of chapter 13 of the Internal Revenue
Code.
Example 9. Allocation of capital gain to
income. In 1980, Grantor established an irrevoca-
ble trust under the terms of which trust income is
payable to Grantor’s child,A, for life, and upon A’s
death, the remainder is to pass to the A’s issue, per
stirpes. Under applicable state law, unless the gov-
erning instrument provides otherwise, capital gain
is allocated to principal. In 2002, the trust is mod-
ified to allow the trustee to allocate capital gain to
the income. The modification does not shift any
beneficial interest in the trust to a beneficiary who
occupies a lower generation (as defined in section
2651)than the person or persons who held the ben-
eficial interest prior to the modification. In this
case, the modification can only have the effect of
increasing the amount distributable to A, and
decreasing the amount distributable to A’s issue.
In addition, the modification does not extend the
time for vesting of any beneficial interest in the
trust beyond the period provided for in the original
trust. Therefore, the trust will not be subject to the
provisions of chapter 13 of the Internal Revenue
Code.
Example 10. Administrative change to terms of
a trust. In 1980, Grantor executed an irrevocable
trust for the benefit of Grantor’s issue, naming a
bank and five other individuals as trustees. In
2002, the appropriate local court approves a mod-
ification of the trust that decreases the number of
trustees which results in lower administrative
costs. The modification pertains to the administra-
tion of the trust and does not shift a beneficial
interest in the trust to any beneficiary who occu-
pies a lower generation (as defined in section
2651) than the person or persons who held the ben-
eficial interest prior to the modification. In addi-
tion, the modification does not extend the time for
vesting of any beneficial interest in the trust
beyond the period provided for in the original
trust. Therefore, the trust will not be subject to the
provisions of chapter 13 of the Internal Revenue
Code.
(ii) Effective date. The rules in this
paragraph (b)(4) are applicable on and
after December 20, 2000.
* * * * *
(c) * * * The last four sentences in para-
graph (b)(1)(i) of this section are applica-
ble on and after November 18, 1999.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 7, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on De-
cember 19, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 20, 2000,
65 F.R. 79735)
Section 4041(g).—Retail Excise
Taxes–Special Fuels-Other
Exemptions
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4216.—Manufacturers
Excise Taxes–Special Provisions
Applicable to Manufacterers Tax
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4253(i).—Facilities and
Services–Communications-State
and Local Government
Exemption
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4483(a).—Certain Other
Excise Taxes–Tax on Use of
Certain Vehicles-Exemptions
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4911.—Tax on Excess
Expenditures to Influence
Legislation
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4940(c).—Excise Tax
Based on Investment Income–Net
Investment Income Defined
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4941(d).—Taxes on
Self-Dealing
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
2001–5 I.R.B.457January 29, 2001

Section 4942(f).—Taxes on
Failure to Distribute
Income–Adjusted Net Income
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4945(f).—Taxes on
Taxable Expenditures–Nonpartisan
Activities Carried on by Certain
Organizations
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
Section 4946(c).—Definitions
and Special Rules–Government
Official
For what purposes are Indian tribal governments
treated as states? See Rev. Proc. 2001–15, page 465.
January 29, 20014582001–5 I.R.B.

2001–5 I.R.B.459January 29, 2001
Split-Dollar Life Insurance
Arrangements
Notice 2001–10
I. PURPOSE
The Treasury Department and Internal
Revenue Service (IRS) are reviewing the
Federal income tax treatment of so-called
“split-dollar” arrangements for the pur-
chase of life insurance contracts. This
notice clarifies prior rulings issued by the
IRS regarding the taxation of split-dollar
arrangements, provides taxpayers with
interim guidance on the tax treatment of
split-dollar arrangements pending publi-
cation of further guidance, and requests
taxpayer comments on the interim guid-
ance and a number of unresolved issues.
This notice primarily addresses split-
dollar arrangements between employers
and employees. However, Treasury and
the IRS believe the same principles gener-
ally govern the Federal tax treatment of
split-dollar arrangements in other con-
texts, including arrangements that provide
compensation to non-employees and eco-
nomic benefits to corporate shareholders
and arrangements involving gifts.
II. BACKGROUND
Rev. Rul. 64–328, 1964–2 C.B. 11, and
Rev. Rul. 66–110, 1966–1 C.B. 12,
addressed the Federal income tax treat-
ment of split-dollar arrangements under
which an employer and employee join in
the purchase of a life insurance contract
on the life of the employee subject to a
contractual allocation of policy benefits
between the employer and employee. The
rulings described two contractual forms:
(1) the endorsement method, under which
the employer is formally designated as the
owner of the contract, and the employer
endorses the contract to specify the por-
tion of the proceeds payable to the
employee’s beneficiary; and (2) the collat-
eral assignment method, under which the
employee is formally designated as the
owner of the contract, the employer’s pre-
mium payments are characterized as loans
from the employer to the employee, and
the employer’s interest in the proceeds of
the contract is designated as collateral
security for its loans.
These rulings conclude that all eco-
nomic benefits conferred on an employee
under such an arrangement, excluding
economic benefits attributable to the
employee’s own premium payments, con-
stitute gross income to the employee. See
also Commissioner v. LoBue, 351 U.S.
243 (1956); Commissioner v. Smith, 324
U.S. 177 (1945). Under the rationale of
these rulings, the determination of an
employee’s gross income is unaffected by
whether the endorsement method or the
collateral assignment method is used.
Under the specific split-dollar arrange-
ment addressed in Rev. Rul. 64–328, all
amounts credited to the cash surrender
value of the life insurance contract inured
to the benefit of the employer. Thus, the
only economic benefit inuring to the
employee was the value of the insurance
protection attributable to the portion of
the contract’s death benefit payable to the
employee’s beneficiary. Rev. Rul. 64–328
holds that, in such a case, the employee’s
gross income in any year includes the
value of the life insurance protection pro-
vided to the employee in that year, less
any amount actually paid by the employ-
ee.
Rev. Rul. 66–110 amplified Rev. Rul.
64–328 by holding that the value of any
economic benefits in addition to current
insurance protection that are provided to
an employee under a split-dollar arrange-
ment are also includible in the employee’s
gross income. More specifically, Rev.
Rul. 66–110 held that an employee has
additional gross income equal to the
amount of any policyholder dividends dis-
tributed to the employee or applied to pro-
vide additional insurance for the exclusive
benefit of the employee. Thus, where the
employer has no interest in the dividend
applied to provide paid-up additional
insurance, the taxable economic benefit is
the dividend itself, not the value of the
insurance protection resulting from the
dividend.
Rev. Rul. 64–328 and Rev. Rul. 66–110
each addressed a situation in which the
employer possessed all beneficial interest
in the cash surrender value of the life
insurance contract (exclusive of any sepa-
rate cash surrender value of paid-up addi-
tions attributable to dividends
1
), and the
employee was entitled only to certain
other economic benefits generated by the
employer’s investment in the contract,
specifically, current insurance protection
or dividends. Consistent with that, Rev.
Rul. 64–328 revoked Rev. Rul. 55–713,
1955–2 C.B. 23, which had treated a split-
dollar arrangement similar to that
addressed in Rev. Rul. 64–328 as a
secured loan from the employer to the
employee. In rejecting the loan charac-
terization, Rev. Rul. 64–328 stated that
the substance of the split-dollar arrange-
ment differed from that of a loan because
the employee was not expected to make
repayment except out of the cash surren-
der value or proceeds of the life insurance
contract. But see Commissioner v. Tufts,
461 U.S. 300, 307 (1983)(“we read
[Crane v. Commissioner, 331 U.S. 1
(1947)] to have approved the
Commissioner’s decision to treat a nonre-
course loan in this context as a true
loan.”).
Rev. Rul. 64–328 held that the table of
one-year premium rates set forth in Rev.
Rul. 55–747, 1955–2 C.B. 228, common-
ly referred to as the “P.S. 58” rates, may
be used to determine the value of the cur-
rent life insurance protection provided to
an employee under a split-dollar arrange-
ment. Rev. Rul. 66–110 amplified Rev.
Rul. 64–328 in this respect by holding that
the insurer’s published premium rates for
one-year term insurance may be used to
measure the value of the current insurance
protection if those rates are lower than the
P.S. 58 rates and available to all standard
risks. Rev. Rul. 67–154, 1967–1 C.B. 11,
modified Rev. Rul. 66–110 by holding
that an insurer’s published term rates must
be available for initial issue insurance (as
distinguished from rates for dividend
options) in order to be substituted for the
P.S. 58 rates set forth in Rev. Rul. 55–747.
Similarly, the IRS has ruled that the
economic benefit inuring to a third-party
donee under an employer-employee split-
dollar arrangement or to a shareholder
under a corporation-shareholder split-dol-
Part III. Administrative, Procedural, and Miscellaneous
1 Under the type of life insurance contract involved
in Rev. Rul. 66-110, the cash surrender value of
paid-up additions purchased with dividends was sep-
arate and distinct from the cash surrender value of
the life insurance contract under which the dividends
were paid.

January 29, 20014602001–5 I.R.B.
lar arrangement is to be determined under
the principles and valuation methods set
forth in Rev. Rul. 64–328, as amplified by
Rev. Rul. 66–110. SeeRev. Rul. 78–420,
1978–2 C.B. 67; Rev. Rul. 79–50, 1979–1
C.B. 138. Also, the same premium rate
alternatives may be relied upon to mea-
sure the value of current life insurance
protection provided to an employee under
a qualified retirement plan. SeeRev. Rul.
55–747,supra.
III. NEED FOR UPDATED
GUIDANCE
A. Equity Split-Dollar
None of the published rulings relating
to split-dollar life insurance has directly
addressed the forms of equity split-dollar
arrangements that have been widely used
in recent years. In contrast with the split-
dollar arrangements described in Rev.
Rul. 64–328 and Rev. Rul. 66–110, an
employee’s economic interest in a life
insurance contract purchased under an
equity split-dollar arrangement includes
an agreed upon portion of the cash surren-
der value. Under the most common form
of equity split-dollar arrangement, the
employer’s interest in the cash surrender
value of the contract is limited to the
aggregate amount of its premium pay-
ments, exclusive of any earnings compo-
nent. In such cases, the employee derives
the entire economic benefit of any posi-
tive return on the employer’s investment
in the life insurance contract.
Under such an equity split-dollar
arrangement, the employee derives a valu-
able economic benefit from the employer’s
premium payments beyond the current life
insurance protection addressed in Rev.
Rul. 64–328. As held in Rev. Rul. 66–110,
an employee who receives economic ben-
efits beyond the value of current life insur-
ance protection is taxable on the value of
those additional benefits. Therefore,
under the general principles followed in
Rev. Rul. 64–328 and Rev. Rul. 66–110, it
is necessary to account for the employee’s
rights in the cash surrender value under an
equity split-dollar arrangement in a man-
ner consistent with the substance of the
parties’ contractual positions.
Under section 83, which was enacted in
1969 and generally governs the income
tax treatment of property transferred in
connection with the performance of ser-
vices, a life insurance contract is consid-
ered to be property to the extent of its cash
surrender value. See§ 1.83–3(e) of the
Income Tax Regulations. Therefore, if the
substance of an equity split-dollar
arrangement involves the transfer of a
beneficial interest in the cash surrender
value of a life insurance contract from an
employer to an employee, that economic
benefit is properly includible in the
employee’s gross income under section
83. For purposes of section 83, a split-
dollar arrangement could, depending on
the facts, involve a series of property
transfers or a single transfer of property.
2
However, whether an equity split-dollar
arrangement involves a transfer of proper-
ty within the meaning of section 83
depends on the substance of the arrange-
ment. See§ 1.83–3(a) of the regulations.
If the employee is the beneficial owner of
the life insurance contract from the incep-
tion of the arrangement, there is no trans-
fer of property under section 83. For
example, assuming there is a reasonable
and bona fideexpectation that the
employer will receive repayment of its
share of the premiums at a fixed or deter-
minable future date, then the arrangement
may in certain circumstances be properly
treated as an acquisition of a life insur-
ance contract by the employee with the
proceeds of a loan or series of loans from
the employer to the employee secured by
the life insurance contract, rather than as
an arrangement whereby the employer
acquires ownership of the life insurance
contract and provides economic benefits
to the employee thereunder.
Section 7872 of the Code, which was
enacted in 1984, sets forth rules for deter-
mining the tax treatment of certain direct
and indirect below-market loans. In gen-
eral, section 7872 recharacterizes a
below-market loan (a loan in which the
interest rate charged is less than the
applicable Federal rate, or “AFR”) as an
arm’s-length transaction in which the
lender makes a loan to the borrower at the
AFR, coupled with a payment or pay-
ments to the borrower sufficient to fund
all or part of the interest that the borrower
is treated as paying on that loan. The
amount, timing, and characterization of
the imputed payments to the borrower
under a below-market loan depend on the
relationship between the borrower and the
lender and whether the loan is character-
ized as a demand loan or a term loan. In
the case of a compensation-related below-
market loan within the meaning of section
7872(c)(1)(B), the imputed payments to
the borrower are treated as compensation
income.
The legislative history of section 7872
states that the term “loan” is to be inter-
preted broadly for purposes of section
7872, potentially encompassing “any
transfer of money that provides the trans-
feror with a right to repayment.”H.R.
Rep. 98–861, 98
th
Cong., 2d Sess. 1018
(1984). Treasury and the IRS believe that
Congress generally intended that section
7872 would govern the determination of
compensation income resulting from an
arrangement the substance of which is a
loan from an employer to an employee,
and that there was no congressional intent
to make section 7872 inapplicable to split-
dollar arrangements if such arrangements
are, in substance, loans.
B. Value of Current Life Insurance
Protection
The P.S. 58 rates set forth in Rev. Rul.
55–747, which are based on mortality
tables originally published in 1946, no
longer bear an appropriate relationship to
the fair market value of current life insur-
ance protection. Since the published split-
dollar rulings merely state that the P.S. 58
rates “may” be used to value the econom-
ic benefit that an employee receives in the
form of current life insurance protection
and allow that economic benefit to instead
be valued using the insurer’s lower pub-
lished one-year term rates, the P.S. 58
rates have come to function more as an
upper limit on the valuation of current life
insurance protection for Federal income
tax purposes than as the presumptive mea-
sure of the fair market value of that eco-
nomic benefit. Nonetheless, because the
P.S. 58 rates represent the only valuation
standard sanctioned by existing published
guidance other than the insurer’s pub-
lished term rates, some taxpayers (and
plan administrators in the case of life
insurance held for participants in qualified
2 For income or gift tax purposes outside of the
compensation context, transfers of beneficial inter-
ests in the cash surrender value of life insurance
contracts may similarly be treated as transfers of
property interests in accordance with general tax
principles.

2001–5 I.R.B.461January 29, 2001
plans) continue to use the P.S. 58 rates to
value current life insurance protection and
thereby report more gross income than is
warranted under current conditions.
Treasury and the IRS are also con-
cerned that the P.S. 58 rates have been
used to understate the economic benefits
provided to employees and other taxpay-
ers under certain split-dollar arrange-
ments. In particular, some taxpayers have
used the P.S. 58 rates to determine the
employer’s share of the premiums under
so-called “reverse” split-dollar arrange-
ments, where the employer’s interest in
the life insurance contract is limited to a
specified portion of the death benefit. The
use of P.S. 58 rates in this manner signifi-
cantly overstates the value of the policy
benefits allocated to the employer, such
that the employee’s share of the premiums
is significantly lower than the employee’s
actual share of the policy benefits. No
published guidance has authorized
reliance on the P.S. 58 rates for this pur-
pose.
In addition, Treasury and the IRS ques-
tion whether insurers’ published term
rates provide an appropriate alternative
measure of the fair market value of current
life insurance protection. Treasury and
the IRS understand that, in some
instances, the published premium rates
used for this purpose may not be realisti-
cally available to all standard risks who
apply for term insurance, as required by
Rev. Rul. 66–110 and the other published
authorities that have sanctioned that alter-
native valuation standard. Moreover, tax-
payers and the IRS ordinarily have no
practical means to confirm that the same
premium rates are available to all standard
risks who apply for one-year term insur-
ance from the same life insurance compa-
ny. It is also questionable whether the life
insurance protection provided to a partic-
ular insured should be valued differently
for Federal tax purposes from that provid-
ed to a similarly situated insured solely
because of differences in the published
premium rates of their respective insurers.
There are a number of variables other
than age that affect the cost and value of
current life insurance protection, includ-
ing assumed mortality rates, the sex and
health of the insured, and the extent of
sales and other expense charges included
or assumed to be included in premiums.
However, valuation standards that allow
some or all of such variables to be taken
into account on an individual basis may
not be administrable or provide taxpayers
with sufficient certainty. Therefore, to
ease administrative burdens, minimize
disputes, and provide greater assurance
that similarly situated taxpayers are treat-
ed the same, Treasury and the IRS believe
it may be preferable, at least as a general
rule, for the value of current life insurance
protection provided under split-dollar
arrangements and qualified retirement
plans to be determined under one or more
premium rate tables prescribed for those
purposes.
IV. INTERIM GUIDANCE
A. Characterization of Split-Dollar
Arrangements
In light of the rationale set forth in Rev.
Rul. 64–328 and the fact that no published
guidance has addressed the potential
applicability of section 7872 to split-dol-
lar arrangements, Treasury and the IRS
recognize that taxpayers have not general-
ly treated employer payments under equi-
ty split-dollar arrangements as loans, and
that the below-market loan rules of sec-
tion 7872 have not generally been applied
to impute compensation income to
employees from such arrangements. It is
also recognized that, without further guid-
ance, it may be difficult for taxpayers to
determine whether an employer’s pay-
ments under a split-dollar arrangement are
properly characterized as loans for
Federal tax purposes or whether the
employer should instead be treated as hav-
ing acquired a beneficial ownership inter-
est in the life insurance contract through
its premium payments and having provid-
ed economic benefits to the employee
thereunder. Accordingly, pending consid-
eration of public comments and the publi-
cation of further guidance, the characteri-
zation and income tax treatment of equity
and other split-dollar arrangements will
generally be determined under the follow-
ing guidelines:
1. The IRS will generally accept the
parties’ characterization of the employer’s
payments under a split-dollar arrange-
ment, provided that (i) such characteriza-
tion is not clearly inconsistent with the
substance of the arrangement, (ii) such
characterization has been consistently fol-
lowed by the parties from the inception of
the arrangement, and (iii) the parties fully
account for all economic benefits con-
ferred on the employee in a manner con-
sistent with that characterization.
2. The IRS will permit an employer’s
payments under a split-dollar arrangement
to be characterized as loans for tax pur-
poses, provided that all of the conditions
set forth in paragraph 1 are satisfied. In
such cases, the tax consequences of the
payments treated as loans will be deter-
mined under section 7872, the employee
will not have additional compensation
income for the value of the insurance pro-
tection provided under the life insurance
contract, and the cash surrender value of
the contract will not represent property
that has been transferred to the employee
for purposes of section 83. However, the
employee ordinarily would have addition-
al gross income if the employer’s
advances were not repaid in accordance
with the terms of the arrangement.
Moreover, the employee could have gross
income under section 72 for distributions
actually received under the life insurance
contract.
3. In any case in which an employer’s
payments under a split-dollar arrangement
have not been consistently treated as loans
in accordance with paragraph 1, the par-
ties will be treated as having adopted a
non-loan characterization of the arrange-
ment, and the parties must fully account
for all of the economic benefits that the
employee derives from the arrangement in
a manner consistent with that characteri-
zation and with Rev. Rul. 64–328, Rev.
Rul. 66–110, and the general tax princi-
ples upon which those rulings are based.
In general, this means that (i) the employ-
er will be treated as having acquired ben-
eficial ownership of the life insurance
contract through its share of the premium
payments, (ii) the employee will have
compensation income under section 61
equal to the value of the life insurance
protection provided to the employee each
year that the arrangement remains in
effect, reduced by any payments made by
the employee for such life insurance pro-
tection, (iii) the employee will have com-
pensation income under section 61 equal
to any dividends or similar distributions
made to the employee under the life insur-
ance contract (including any dividends
described in Rev. Rul. 66–110 applied to
provide additional policy benefits), and

(iv) the employee will have compensation
income under section 83(a) to the extent
that the employee acquires a substantially
vested interest in the cash surrender value
of the life insurance contract, reduced
under section 83(a)(2) by any considera-
tion paid by the employee for such inter-
est in the cash surrender value.
4. Pending the publication of further
guidance, the IRS will not treat an
employer as having made a transfer of a
portion of the cash surrender value of a
life insurance contract to an employee
for purposes of section 83 solely because
the interest or other earnings credited to
the cash surrender value of the contract
cause the cash surrender value to exceed
the portion thereof payable to the
employer on termination of the split-dol-
lar arrangement. If future guidance pro-
vides that such earnings increments are
to be treated as transfers of property for
purposes of section 83, it will apply
prospectively.
5. In any case in which the employer’s
payments under a split-dollar arrangement
have not been consistently treated as
loans, then for so long as the arrangement
remains in effect, the IRS will treat the
employee as continuing to have gross
income under section 61 for any current
life insurance protection provided to the
employee under the arrangement, except
to the extent allocable to premium pay-
ments made by the employee (or included
in the employee’s gross income under
paragraph 6) or to any portion of the cash
surrender value of the contract that has
been treated as a substantially vested
transfer of property to the employee under
section 83. When such an allocation is
required, the IRS will accept a pro rataor
other reasonable method for determining
that portion of the death benefit allocable
to cash surrender value beneficially
owned by the employer and that portion
allocable to cash surrender value trans-
ferred to or purchased by the employee.
6. If an employer makes a premium or
other payment for the benefit of an
employee under a split-dollar arrange-
ment, and the employer neither acquires a
beneficial ownership interest in the life
insurance contract through such payment
nor has a reasonable expectation of
receiving repayment of that amount
through policy proceeds or otherwise,
such payment will be treated as compen-
sation income to the employee under sec-
tion 61. SeeReg. § 1.61–2(d)(2)(ii)(a);
Frost v. Commissioner, 52 T.C. 89 (1969).
In sum, therefore, any payment made
by an employer under a split-dollar
arrangement must be accounted for as a
loan (see paragraph 2), as an investment in
the contract for the employer’s own
account (see paragraph 3), or as a pay-
ment of compensation (see paragraph 6).
B. Revised Standards for Valuing
Current Life Insurance Protection
Pending the consideration of comments
and publication of further guidance, the
following interim guidance is provided on
the valuation of current life insurance pro-
tection:
1. Rev. Rul. 55–747 is hereby revoked,
and the IRS will no longer treat or accept
the P.S. 58 rates set forth therein as a prop-
er measure of the value of current life
insurance protection for Federal tax pur-
poses. Nonetheless, for taxable years
ending on or before December 31, 2001,
taxpayers may continue to use the P.S. 58
rates set forth in Rev. Rul. 55–747 for pur-
poses of determining the value of current
life insurance protection provided to an
employee under a split-dollar arrange-
ment or a qualified retirement plan.
2. Taxpayers may use the premium rate
table set forth at the end of this notice,
captioned as Table 2001, to determine the
value of current life insurance protection
on a single life provided under a split-dol-
lar arrangement or qualified retirement
plan for taxable years ending after the
date of issuance of this notice. Table 2001
is based on the mortality experience
reflected in the table of uniform premiums
promulgated under section 79(c) of the
Code (see§ 1.79–3(d)(2) of the regula-
tions), with extensions for ages below 25
and above 70, and the elimination of the
five-year age brackets.
3
With the revoca-
tion of Rev. Rul. 55–747, the rates set
forth in Table 2001 are provided as an
interim substitute for the P.S. 58 rates that
taxpayers may rely upon pending further
consideration of how the value of current
life insurance protection should be deter-
mined for these Federal tax purposes in
the future. The premium rates set forth in
Table 2001 are materially lower than the
P.S. 58 rates at all ages.
3. Taxpayers may continue to deter-
mine the value of current life insurance
protection by using the insurer’s lower
published premium rates that are available
to all standard risks for initial issue one-
year term insurance as set forth in Rev.
Rul. 66–110, subject to the following
additional limitations. First, for periods
after December 31, 2003, the IRS will not
consider an insurer’s published premium
rates to be available to all standard risks
who apply for term insurance unless (i)
the insurer generally makes the availabili-
ty of such rates known to persons who
apply for term insurance coverage from
the insurer, (ii) the insurer regularly sells
term insurance at such rates to individuals
who apply for term insurance coverage
through the insurer’s normal distribution
channels, and (iii) the insurer does not
more commonly sell term insurance at
higher premium rates to individuals that
the insurer classifies as standard risks
under the definition of standard risk most
commonly used by that insurer for the
issuance of term insurance. Second, with
respect to a life insurance contract (or
individual certificate) issued after
February 28, 2001, no assurance is pro-
vided that such published premium rates
may be used to determine the value of life
insurance protection for periods after the
later of December 31, 2003, or December
31 of the year in which further guidance
relating to the valuation of current life
insurance protection is published.
V. EFFECT ON OTHER DOCUMENTS
Rev. Rul. 55–747 is revoked. Rev. Rul.
64–328 and Rev. Rul. 66–110 are modi-
fied to the extent that those rulings indi-
cate that an employer’s premium pay-
ments under a split-dollar arrangement
should not be treated as loans where an
employee is not expected to make repay-
ment except out of the cash surrender
value or proceeds of the life insurance
contract.
VI. REQUEST FOR COMMENTS
Comments are requested on the issues
discussed in this notice and on any other
issues for which further guidance relating
to the Federal tax treatment of split-dollar
arrangements is needed. In particular,
Treasury and the IRS request comments
on (i) the circumstances in which employ-
er payments under a split-dollar arrange-
ment should be treated as loans; (ii) in
cases where employer payments under a
January 29, 20014622001–5 I.R.B.
3 The table is limited to insureds below age 100.

split-dollar arrangement are not treated as
loans, the circumstances in which inter-
ests in the cash surrender value of a life
insurance contract should be treated as
transfers of property to the employee for
purposes of section 83, including whether
earnings credited to the cash surrender
value of a life insurance contract should
be treated as transfers of property for pur-
poses of section 83 when such earnings
cause the cash surrender value to exceed
the portion thereof payable to the employ-
er (or other transferor); and (iii) whether
additional guidance is needed on the treat-
ment of split-dollar arrangements for
Federal gift tax purposes.
Comments are also invited on the
standards that should be used to value
life insurance protection. Comments are
specifically invited on (i) whether one or
more premium rate tables should be pre-
scribed as the exclusive basis for valuing
current life insurance protection for
Federal tax purposes; (ii) if one or more
premium rate tables are prescribed for
these purposes,what assumptions
should be used in constructing such
table or tables; (iii) if one or more pre-
mium rate tables are prescribed for these
purposes, whether the value of life insur-
ance protection for a given insured
should take account of variables other
than the age of the insured; (iv) whether
one or more premium rate tables should
be prescribed for purposes of determin-
ing the value of current life insurance
protection under a second-to-die policy
and, if so, what assumptions should be
used in constructing such table or tables;
(v) whether there are reasonable and
workable means to incorporate premium
rates actually charged by life insurance
companies into the valuation standards
used for Federal tax purposes; and (vi)
whether there are reasonable and work-
able means to allow the value of life
insurance protection for a given insured
to be determined by reference to the cost
structure of the life insurance contract
covering that insured.
Written comments are requested to be
submitted no later than April 30, 2001, to
CC:FIP (Notice 2001–10), room 4300,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Comments may be hand delivered
between the hours of 8 a.m. and 5 p.m. to
CC:FIP (Notice 2001–10), Courier’s
Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington,
DC. All comments will be available for
public inspection and copying.
DRAFTING INFORMATION
The principal authors of this notice are
David B. Silber of the Office of Associate
Chief Counsel (Financial Institutions and
Products) and Erin Madden of the Office
of Associate Chief Counsel (Tax Exempt
and Government Entities). For further
information regarding this notice, contact
Mr. Silber at (202) 622-3930 or
Ms. Madden at (202) 622-6060 (Not toll-
free calls).
2001–5 I.R.B.463January 29, 2001
TABLE 2001
INTERIM TABLE OF ONE-YEAR TERM PREMIUMS
FOR $1,000 OF LIFE INSURANCE PROTECTION
Section 79Section 79Section 79
AttainedExtended andAttainedExtended andAttainedExtended and
AgeInterpolatedAgeInterpolatedAgeInterpolated
Annual RatesAnnual RatesAnnual Rates
0$0.7035$0.9970$20.62
1$0.4136$1.0171$22.72
2$0.2737$1.0472$25.07
3$0.1938$1.0673$27.57
4$0.1339$1.0774$30.18
5$0.1340$1.1075$33.05
6$0.1441$1.1376$36.33
7$0.1542$1.2077$40.17
8$0.1643$1.2978$44.33
9$0.1644$1.4079$49.23
10$0.1645$1.5380$54.56
11$0.1946$1.6781$60.51
12$0.2447$1.8382$66.74
13$0.2848$1.9883$73.07
14$0.3349$2.1384$80.35
15$0.3850$2.3085$88.76
16$0.5251$2.5286$99.16
17$0.5752$2.8187$110.40
18$0.5953$3.2088$121.85
19$0.6154$3.6589$133.40
20$0.6255$4.1590$144.30
21$0.6256$4.6891$155.80
22$0.6457$5.2092$168.75
23$0.6658$5.6693$186.44

January 29, 20014642001–5 I.R.B.
TABLE 2001—Continued
INTERIM TABLE OF ONE-YEAR TERM PREMIUMS
FOR $1,000 OF LIFE INSURANCE PROTECTION
Section 79Section 79Section 79
AttainedExtended andAttainedExtended andAttainedExtended and
AgeInterpolatedAgeInterpolatedAgeInterpolated
Annual RatesAnnual RatesAnnual Rates
24$0.6859$6.0694$206.70
25$0.7160$6.5195$228.35
26$0.7361$7.1196$250.01
27$0.7662$7.9697$265.09
28$0.8063$9.0898$270.11
29$0.8364$10.4199$281.05
30$0.8765$11.90
31$0.9066$13.51
32$0.9367$15.20
33$0.9668$16.92
34$0.9869$18.70
Withholding and Information
Reporting on Payments to
Financial Institutions in U.S.
Possessions
Notice 2001-11
Corporations and partnerships that are
organized under the laws of a possession
of the United States are generally treated
as foreign persons for purposes of section
1441 and the regulations thereunder
(relating to the withholding of tax on pay-
ments to foreign persons). See section
881(b)(1) for exceptions to this general
rule. Financial institutions organized
under the laws of a U.S. possession (“pos-
sessions financial institutions”) have
noted that, to the extent they act as inter-
mediaries (that is, as agents for others),
the regulations under section 1441, as in
effect on January 1, 2001 (the “new with-
holding regulations”), will require them to
function as nonqualified intermediaries.
Payments of U.S. source income made to
nonqualified intermediaries are generally
subject to 30-percent withholding (or 31-
percent withholding in the case of deposit
interest and certain payments on short-
term obligations) unless the nonqualified
intermediary provides documentation
from, and other information relating to,
customers on whose behalf the nonquali-
fied intermediary acts that supports a
reduced rate of withholding. See section
1.1441-1(b)(1) and 1.1441-1(e)(3)(iii) and
(iv). Possessions financial institutions
have commented that the requirement to
provide a withholding agent with infor-
mation relating to the possessions finan-
cial institution’s customers should not
apply to them because they are subject to
all of the withholding and information
reporting requirements that apply to U.S.
withholding agents under Chapters 3 and
61 and section 3406 of the Internal
Revenue Code and because they are sub-
ject to direct audit supervision by the
Internal Revenue Service.
Treasury and IRS agree that, for the
reasons described above, possessions
financial institutions should not be
required to act as nonqualified intermedi-
aries under the new withholding regula-
tions. Accordingly, until further notice,
any possessions financial institution will
be treated as a U.S. branch under section
1.1441-1(b)(2)(iv) of the new withholding
regulations. As such, it may agree with a
withholding agent from which it is receiv-
ing payments to be treated as a U.S. per-
son. See section 1.1441-1(b)(2)(iv)(A)
and (E). Under the general rule of section
1.1441-1(b)(1), payments of U.S. source
income to a possessions financial institu-
tion that agrees to be treated as a U.S. per-
son will be treated as made to a U.S.
payee and therefore not subject to with-
holding under section 1441. The posses-
sions financial institution shall be subject
to all of the withholding and reporting
obligations of a U.S. withholding agent
under chapters 3 and 61 of the Code and
section 3406. For purposes of this notice,
the term financial institution has the same
meaning as in section 1.1441-1(c)(5).
A possessions financial institution that
agrees to be treated as a U.S. person must
provide a withholding agent with a prop-
erly completed Form W-8IMY on which it
evidences its agreement to be treated as a
U.S. person. The possessions financial
institution should not provide a Form
W-9. See section 1.1441-1(b)(2)(iv). In
addition, a withholding agent making a
payment to a possessions financial institu-
tion that agrees to be treated as a U.S. per-
son must report payments made to the
institution on Form 1042-S. See section
1.1441-1(b)(2)(iv) and 1.1461-1(c)(4)(i)
(C)(1).
Contact Information
The principal author of this Notice is
Carl Cooper of the Office of the Associate
Chief Counsel (International), Internal
Revenue Service, 1111 Constitution
Avenue, N.W., Washington, D.C. 20224.
For further information regarding this
Notice contact Mr. Cooper at 202-622-
3840 (not a toll-free call).

26 CFR 601.201: Rulings and determination letters.
(Also sections 103(c), 105(e), 117(b)(2)(A), 164, 170,
403(b)(1)(A)(ii), 454(b)(2), 511(a)(2)(B), 2055,
2106(a)(2), 2522, 4041(g), 4216, 4253(i), 4483(a),
4911, 4940(c), 4941(d), 4942(f), 4945(f), 4946(c).)
Rev. Proc. 2001-15
SECTION 1. GENERAL
01. PURPOSEThe purpose of this
revenue procedure is to provide a modi-
fied and supplemented list of Indian trib-
al governments that are to be treated sim-
ilarly to states for specified purposes
under the Internal Revenue Code.
.02 BACKGROUNDThe Indian Tribal
Governmental Tax Status Act of 1982
(Title II of Pub. L. No. 97-473, 1983-1
C.B. 510, 511, as amended by Pub. L. No.
98-21, 1983-2 C.B. 309, 315) added cer-
tain provisions to the Code that pertain to
the status of Indian tribal governments.
Section 7871(a) of the Internal Revenue
Code and Section 305.7871-1 of the
Income Tax Regulations provide that
Indian tribal governments (or subdivisions
thereof) will be treated as states for certain
enumerated federal tax purposes. For
example, charitable contributions to or for
the use of a tribal government may be
deductible under the federal income, gift,
and estate tax laws; a tribal government is
entitled to exemption from certain excise
taxes; taxes imposed by a tribe may be
deductible; and public activity bonds may
be tax exempt obligations. Section 1065 of
the Tax Reform Act of 1984, 1984-3 (Vol.
1) C.B. 556, made permanent the rules
treating Indian tribal governments (or sub-
divisions thereof) as states (or political sub-
divisions thereof).
.03 DEFINITIONSThe term “Indian
tribal government” is defined under section
7701(a)(40) of the Code, as amended, to
mean the governing body of any tribe,
band, community, village or group of
Indians, or (if applicable) Alaska Natives
that is determined by the Secretary of
Treasury, after consultation with the
Secretary of the Interior, to exercise gov-
ernmental functions. Section 7871(d) of
the Code states that, for purposes of section
7871(a), a subdivision of an Indian tribal
government shall be treated as a political
subdivision of a state if (and only if) the
Secretary of the Treasury determines (after
consultation with the Secretary of the
Interior) that such subdivision has been
delegated the right to exercise one or more
of the substantial governmental functions
of the Indian tribal government.
SECTION 2. APPLICATION
.01 QUALIFICATIONSThe following
modified and supplemented list of Indian
tribal entities, including Indian tribes,
bands, communities, villages, and groups
of Indians, as well as Alaska Natives, rep-
resents Indian tribal governments and is
subject to these qualifications:
(1) The list does not include In-
dian tribal subdivisions because
the determination of which enti-
ties qualify as subdivisions is dis-
cussed in Rev. Proc. 84-36, 1984-
1 C.B. 510, as modified by Rev.
Proc. 86-17, 1986-1 C.B. 550.
(2) Temporary Regulation section
305.7701-1(a) defines what con-
stitutes “governmental functions”
for purposes of defining an Indian
tribal government or political sub-
division thereof. Tribal entities
not appearing on this list may
apply for a ruling on whether they
qualify pursuant to all applicable
procedural rules set forth in the
Statement of Procedural Rules (26
CFR Part 601), and guidelines set
forth in Rev. Proc. 84-37, 1984-1
C.B. 513, as modified by Rev.
Proc. 86-17, 1986-1 C.B. 550, and
Rev. Proc. 2001-1, IRB 2001-1.
(3) Inclusion on a published list
does not necessarily establish that
a tribe qualifies for a particular tax
benefit. For example, when a
tribal entity seeks exemption from
excise taxes, the entity must be
able to demonstrate that the under-
lying transaction involves the ex-
ercise of an essential governmen-
tal function of the Indian tribal
government.
SECTION 3. LIST
01. INDIAN TRIBAL ENTITIES THAT
EXERCISE GOVERNMENTAL
FUNCTIONS FOR PURPOSES OF
TITLE II OF PUB. L. NO. 97-473.
Absentee-Shawnee Tribe of Indians of
Oklahoma
Agua Caliente Band of Cahuilla Indians
of the Agua Caliente Indian
Reservation, California
Ak Chin Indian Community of the
Maricopa (Ak Chin) Indian
Reservation, Arizona
Alabama-Coushatta Tribes of Texas
Alabama-Quassarte Tribal Town,
Oklahoma
Alturas Indian Rancheria, California
Apache Tribe of Oklahoma
Arapahoe Tribe of the Wind River
Reservation, Wyoming
Aroostook Band of Micmac Indians of
Maine
Assiniboine and Sioux Tribes of the Fort
Peck Indian Reservation, Montana
Augustine Band of Cahuilla Mission
Indians of the Augustine Reservation,
California
Bad River Band of the Lake Superior
Tribe of Chippewa Indians of the Bad
River Reservation, Wisconsin
Barona Group of Capitan Grande Band of
Mission Indians of the Barona
Reservation, California
Bay Mills Indian Community of the Sault
Ste. Marie Band of Chippewa Indians,
Bay Mills Reservation, Michigan
Bear River Band of the Rohnerville
Rancheria, California
Berry Creek Rancheria of Maidu Indians
of California
Big Lagoon Rancheria, California
Big Pine Band of Owens Valley Paiute
Shoshone Indians of the Big Pine
Reservation, California
Big Sandy Rancheria of Mono Indians of
California
Big Valley Band of Pomo Indians of the
Big Valley Rancheria, California
Blackfeet Tribe of the Blackfeet Indian
Reservation of Montana
Blue Lake Rancheria, California
Bridgeport Paiute Indian Colony of
California
Buena Vista Rancheria of Me-Wuk
Indians of California
Burns Paiute Tribe of the Burns Paiute
Indian Colony of Oregon
2001–5 I.R.B.465January 29, 2001

Cabazon Band of Cahuilla Mission Indians
of the Cabazon Reservation, California
Cachil DeHe Band of Wintun Indians of
the Colusa Indian Community of the
Colusa Rancheria, California
Caddo Indian Tribe of Oklahoma
Cahuilla Band of Mission Indians of the
Cahuilla Reservation, California
Cahto Indian Tribe of the Laytonville
Rancheria, California
Campo Band of Diegueno Mission
Indians of the Campo Indian
Reservation, California
Capitan Grande Band of Diegueno
Mission Indians of California
Catawba Indian Nation (aka Catawba
Tribe of South Carolina)
Cayuga Nation of New York
Cedarville Rancheria, California
Chemehuevi Indian Tribe of the
Chemehuevi Reservation, California
Cher-Ae Heights Indian Community of
the Trinidad Rancheria, California
Cherokee Nation, Oklahoma
Cheyenne-Arapaho Tribes of Oklahoma
Cheyenne River Sioux Tribe of the
Cheyenne River Reservation, South
Dakota
Chickasaw Nation, Oklahoma
Chicken Ranch Rancheria of Me-Wuk
Indians of California
Chippewa-Cree Indians of the Rocky
Boy’s Reservation, Montana
Chitimacha Tribe of Louisiana
Choctaw Nation of Oklahoma
Citizen Potawatomi Nation, Oklahoma
Cloverdale Rancheria of Pomo Indians of
California
Cocopah Tribe of Arizona
Coeur D’Alene Tribe of the Coeur
D’Alene Reservation, Idaho
Cold Springs Rancheria of Mono Indians
of California
Colorado River Indian Tribes of the
Colorado River Indian Reservation,
Arizona and California
Comanche Indian Tribe, Oklahoma
Confederated Salish & Kootenai Tribes
of the Flathead Reservation, Montana
Confederated Tribes of the Chehalis
Reservation, Washington
Confederated Tribes of the Colville
Reservation, Washington
Confederated Tribes of the Coos, Lower
Umpqua and Siuslaw Indians of
Oregon
Confederated Tribes of the Goshute
Reservation, Nevada and Utah
Confederated Tribes of the Grande Ronde
Community of Oregon
Confederated Tribes of the Siletz
Reservation, Oregon
Confederated Tribes of the Umatilla
Reservation, Oregon
Confederated Tribes of the Warm Springs
Reservation of Oregon
Confederated Tribes and Bands of the
Yakima Indian Nation of the Yakima
Reservation, Washington
Coquille Tribe of Oregon
Cortina Indian Rancheria of Wintun
Indians of California
Coushatta Tribe of Louisiana
Cow Creek Band of Umpqua Indians of
Oregon
Coyote Valley Band of Pomo Indians of
California
Crow Tribe of Montana
Crow Creek Sioux Tribe of the Crow
Creek Reservation, South Dakota
Cuyapaipe Community of Diegueno
Mission Indians of the Cuyapaipe
Reservation, California
Death Valley Timba-Sha Shoshone Band
of California
Delaware Nation, Oklahoma (formerly
Delaware Tribe of Western Oklahoma)
Delaware Tribe of Indians, Oklahoma
Dry Creek Rancheria of Pomo Indians of
California
Duckwater Shoshone Tribe of the
Duckwater Reservation, Nevada
Eastern Band of Cherokee Indians of North
Carolina
Eastern Shawnee Tribe of Oklahoma
Elem Indian Colony of Pomo Indians of
the Sulphur Bank Rancheria, California
Elk Valley Rancheria, California
Ely Shoshone Tribe of Nevada
Enterprise Rancheria of Maidu Indians of
California
Flandreau Santee Sioux Tribe of South
Dakota
Forest County Potawatomi Community of
Wisconsin Potawatomi Indians, Wisconsin
Fort Belknap Indian Community of the
Fort Belknap Reservation of Montana
Fort Bidwell Indian Community of the Fort
Bidwell Reservation of California
Fort Independence Indian Community of
Paiute Indians of the Fort Independence
Reservation, California
Fort McDermitt Paiute and Shoshone
Tribes of the Fort McDermitt Indian
Reservation, Nevada and Oregon
Fort McDowell Mohave-Apache
Community of the Fort McDowell
Indian Reservation, Arizona
Fort Mojave Indian Tribe of Arizona,
California and Nevada
Fort Sill Apache Tribe of Oklahoma
Gila River Indian Community of the Gila
River Indian Reservation, Arizona
Grand Traverse Band of Ottawa and
Chippewa Indians of Michigan
Graton Rancheria, California
Greenville Rancheria of Maidu Indians of
California
Grindstone Indian Rancheria of Wintun-
Wailaki Indians of California
Guidiville Rancheria of California
Hannahville Indian Community of
Wisconsin Potawatomi Indians of
Michigan
Havasupai Tribe of the Havasupai
Reservation, Arizona
Ho-Chunk Nation of Wisconsin (formerly
known as the Wisconsin Winnebago
Tribe)
January 29, 20014662001–5 I.R.B.

Hoh Indian Tribe of the Hoh Indian
Reservation, Washington
Hoopa Valley Tribe, California
Hopi Tribe of Arizona
Hopland Band of Pomo Indians of the
Hopland Rancheria, California
Houlton Band of Maliseet Indians of
Maine
Hualapai Tribe of the Hualapai Indian
Reservation, Arizona
Huron Potawatomi, Inc., Michigan
Inaja Band of Diegueno Mission Indians
of the Inaja and Cosmit Reservation,
California
Ione Band of Miwok Indians of
California
Iowa Tribe of Kansas and Nebraska
Iowa Tribe of Oklahoma
Jackson Rancheria of Me-Wuk Indians of
California
Jamestown S’Klallam Tribe of
Washington
Jamul Indian Village of California
Jena Band of Choctaw Indians, Louisiana
Jicarilla Apache Tribe of the Jicarilla
Apache Indian Reservation, New Mexico
Kaibab Band of Paiute Indians of the
Kaibab Indian Reservation, Arizona
Kalispel Indian Community of the
Kalispel Reservation, Washington
Karok Tribe of California
Kashia Band of Pomo Indians of the
Stewarts Point Rancheria, California
Kaw Nation, Oklahoma
Keweenaw Bay Indian Community of
L’Anse and Ontonagon Bands of
Chippewa Indians of the L’Anse
Reservation, Michigan
Kialegee Tribal Town, Oklahoma
Kickapoo Tribe of Indians of the
Kickapoo Reservation in Kansas
Kickapoo Tribe of Oklahoma
Kickapoo Traditional Tribe of Texas
Kiowa Indian Tribe of Oklahoma
Klamath Indian Tribe of Oregon
Kootenai Tribe of Idaho
La Jolla Band of Luiseno Mission Indians
of the La Jolla Reservation, California
La Posta Band of Diegueno Mission
Indians of the La Posta Indian
Reservation, California
Lac Courte Oreilles Band of Lake
Superior Chippewa Indians of the Lac
Courte Oreilles Reservation of
Wisconsin
Lac du Flambeau Band of Lake Superior
Chippewa Indians of the Lac du
Flambeau Reservation of Wisconsin,
Wisconsin
Lac Vieu Desert Band of Lake Superior
Chippewa Indians of Michigan
Las Vegas Tribe of Paiute Indians of the
Las Vegas Indian Colony, Nevada
Little River Band of Ottawa Indians of
Michigan
Little Traverse Bay Bands of Odawa
Indians of Michigan
Los Coyotes Band of Cahuilla Mission
Indians of the Los Coyotes
Reservation, California
Lovelock Paiute Tribe of the Lovelock
Indian Colony, Nevada
Lower Brule Sioux Tribe of the Lower
Brule Reservation, South Dakota
Lower Elwha Tribal Community of the
Lower Elwha Reservation, Washington
Lower Lake Rancheria, California
Lower Sioux Indian Community of
Minnesota Mdewakanton Sioux
Indians of the Lower Sioux
Reservation in Minnesota
Lummi Tribe of the Lummi Reservation,
Washington
Lytton Rancheria of California
Makah Indian Tribe of the Makah Indian
Reservation, Washington
Manchester Band of Pomo Indians of the
Manchester-Point Arena Rancheria,
California
Manzanita Band of Diegueno Mission
Indians of the Manzanita Reservation,
California
Mashantucket Pequot Tribe of
Connecticut
Match-e-be-nash-she-wish Band of
Potawatomi Indians of Michigan
Mechoopda Indian Tribe of Chico
Rancheria, California
Menominee Indian Tribe of Wisconsin
Mesa Grande Band of Diegueno Mission
Indians of the Mesa Grande
Reservation, California
Mescalero Apache Tribe of the Mescalero
Reservation, New Mexico
Miami Tribe of Oklahoma
Miccosukee Tribe of Indians of Florida
Middletown Rancheria of Pomo Indians
of California
Minnesota Chippewa Tribe, Minnesota
(Six Component reservations: Bois
Forte Band (Nett Lake); Fond du Lac
Band; Grand Portage Band; Leech
Lake Band; Mille Lacs Band; White
Earth Band)
Mississippi Band of Choctaw Indians,
Mississippi
Moapa Band of Paiute Indians of the
Moapa River Indian Reservation,
Nevada
Modoc Tribe of Oklahoma
Mohegan Indian Tribe of Connecticut
Mooretown Rancheria of Maidu Indians
of California
Morongo Band of Cahuilla Mission
Indians of the Morongo Reservation,
California
Muckleshoot Indian Tribe of the
Muckleshoot Reservation, Washington
Muscogee (Creek) Nation, Oklahoma
Narragansett Indian Tribe of Rhode
Island
Navajo Nation, Arizona, New Mexico
and Utah
Nez Perce Tribe of Idaho
Nisqually Indian Tribe of the Nisqually
Reservation, Washington
Nooksack Indian Tribe of Washington
Northern Cheyenne Tribe of the Northern
Cheyenne Indian Reservation, Montana
Northfork Rancheria of Mono Indians of
California
2001–5 I.R.B.467January 29, 2001

Northwestern Band of Shoshoni Nation
of Utah (Washakie)
Oglala Sioux Tribe of the Pine Ridge
Reservation, South Dakota
Omaha Tribe of Nebraska
Oneida Nation of New York
Oneida Tribe of Wisconsin
Onondaga Nation of New York
Osage Tribe, Oklahoma
Ottawa Tribe of Oklahoma
Otoe-Missouria Tribe of Indians,
Oklahoma
Paiute Indian Tribe of Utah
Paiute-Shoshone Indians of the Bishop
Community of the Bishop Colony,
California
Paiute-Shoshone Tribe of the Fallon
Reservation and Colony, Nevada
Paiute-Shoshone Indians of the Lone Pine
Community of the Lone Pine
Reservation, California
Pala Band of Luiseno Mission Indians of
the Pala Reservation, California
Pascua Yaqui Tribe of Arizona
Paskenta Band of Nomlaki Indians of
California
Passamaquoddy Tribe of Maine
Pauma Band of Luiseno Mission Indians
of the Pauma and Yuima Reservation,
California
Pawnee Nation of Oklahoma
Pechanga Band of Luiseno Mission
Indians of the Pechanga Reservation,
California
Penobscot Tribe of Maine
Peoria Tribe of Indians of Oklahoma
Picayune Rancheria of Chukchansi
Indians of California
Pinoleville Rancheria of Pomo Indians of
California
Pit River Tribe, California ( includes Big
Bend, Lookout, Montgomery Creek
and Roaring Creek Rancherias, and XL
Ranch)
Poarch Band of Creek Indians of
Alabama
Pokagon Band of Potawatomi Indians of
Michigan
Ponca Tribe of Indians of Oklahoma
Ponca Tribe of Nebraska
Port Gamble Indian Community of the
Port Gamble Reservation, Washington
Potter Valley Rancheria of Pomo Indians
of California
Prairie Band of Potawatomi Indians,
Kansas
Prairie Island Indian Community of
Minnesota Mdewakanton Sioux
Indians of the Prairie Island
Reservation, Minnesota
Pueblo of Acoma, New Mexico
Pueblo of Cochiti, New Mexico
Pueblo of Jemez, New Mexico
Pueblo of Isleta, New Mexico
Pueblo of Laguna, New Mexico
Pueblo of Nambe, New Mexico
Pueblo of Picuris, New Mexico
Pueblo of Pojoaque, New Mexico
Pueblo of San Felipe, New Mexico
Pueblo of San Juan, New Mexico
Pueblo of San Ildefonso, New Mexico
Pueblo of Sandia, New Mexico
Pueblo of Santa Ana, New Mexico
Pueblo of Santa Clara, New Mexico
Pueblo of Santo Domingo, New Mexico
Pueblo of Taos, New Mexico
Pueblo of Tesuque, New Mexico
Pueblo of Zia, New Mexico
Puyallup Tribe of the Puyallup
Reservation, Washington
Pyramid Lake Paiute Tribe of the
Pyramid Lake Reservation, Nevada
Quapaw Tribe of Indians, Oklahoma
Quartz Valley Indian Community of the
Quartz Valley Reservation of California
Quechan Tribe of the Fort Yuma Indian
Reservation, California and Arizona
Quileute Tribe of the Quileute
Reservation, Washington
Quinault Tribe of the Quinault
Reservation, Washington
Ramona Band or Village of Cahuilla
Mission Indians of California
Red Cliff Band of Lake Superior
Chippewa Indians of Wisconsin
Red Lake Band of Chippewa Indians of
the Red Lake Reservation, Minnesota
Redding Rancheria, California
Redwood Valley Rancheria of Pomo
Indians of California
Reno-Sparks Indian Colony, Nevada
Resighini Rancheria, California
(formerly known as the Coast Indian
Community of Yurok Indians of the
Resighini Rancheria)
Rincon Band of Luiseno Mission Indians
of the Rincon Reservation, California
Robinson Rancheria of Pomo Indians of
California
Rosebud Sioux Tribe of the Rosebud
Indian Reservation, South Dakota
Round Valley Indian Tribes of the Round
Valley Reservation, California (formerly
known as the Covelo Indian Community)
Rumsey Indian Rancheria of Wintun
Indians of California
Sac and Fox Tribe of the Mississippi in
Iowa
Sac and Fox Nation of Missouri in
Kansas and Nebraska
Sac and Fox Nation, Oklahoma
Saginaw Chippewa Indian Tribe of
Michigan, Isabella Reservation
Salt River Pima-Maricopa Indian
Community of the Salt River
Reservation, Arizona
Samish Indian Tribe, Washington
San Carlos Apache Tribe of the San
Carlos Reservation, Arizona
San Juan Southern Paiute Tribe of
Arizona
San Manual Band of Serrano Mission
Indians of the San Manual
Reservation, California
San Pasqual Band of Diegueno Mission
Indians of California
January 29, 20014682001–5 I.R.B.

Santa Rosa Indian Community of the
Santa Rosa Rancheria, California
Santa Rosa Band of Cahuilla Mission
Indians of the Santa Rosa Reservation,
California
Santa Ynez Band of Chumash Mission
Indians of the Santa Ynez Reservation,
California
Santa Ysabel Band of Diegueno Mission
Indians of the Santa Ysabel
Reservation, California
Santee Sioux Tribe of the Santee
Reservation of Nebraska
Sauk-Suiattle Indian Tribe of Washington
Sault Ste. Marie Tribe of Chippewa
Indians of Michigan
Scotts Valley Band of Pomo Indians of
California
Seminole Nation of Oklahoma
Seminole Tribe of Florida, Dania, Big
Cypress, Brighton, Hollywood and
Tampa Reservations
Seneca Nation of New York
Seneca-Cayuga Tribe of Oklahoma
Shakopee Mdewakanton Sioux
Community of Minnesota (Prior Lake)
Shawnee Tribe, Oklahoma
Sheep Ranch Rancheria of Me-Wuk
Indians of California
Sherwood Valley Rancheria of Pomo
Indians of California
Shingle Springs Band of Miwok Indians,
Shingle Springs Rancheria (Verona
Tract), California
Shoalwater Bay Tribe of the Shoalwater
Bay Indian Reservation, Washington
Shoshone Tribe of the Wind River
Reservation, Wyoming
Shoshone-Bannock Tribes of the Fort
Hall Reservation of Idaho
Shoshone-Paiute Tribes of the Duck
Valley Reservation, Nevada
Sisseton-Wahpeton Sioux Tribe of the
Lake Traverse Reservation, South
Dakota
Skokomish Indian Tribe of the
Skokomish Reservation, Washington
Skull Valley Band of Goshute Indians of
Utah
Smith River Rancheria, California
Snoqualmie Tribe, Washington
Soboba Band of Luiseno Mission Indians
of the Soboba Reservation, California
Sokaogon Chippewa Community of the
Mole Lake Band of Chippewa Indians,
Wisconsin
Southern Ute Indian Tribe of the
Southern Ute Reservation, Colorado
Spirit Lake Tribe, North Dakota
(formerly known as the Devils Lake
Sioux Tribe)
Spokane Tribe of the Spokane
Reservation, Washington
Squaxin Island Tribe of the Squaxin
Island Reservation, Washington
St. Croix Chippewa Indians of
Wisconsin, St. Croix Reservation
St. Regis Band of Mohawk Indians of
New York
Standing Rock Sioux Tribe of North and
South Dakota
Stockbridge-Munsee Community of
Mohican Indians of Wisconsin
Stillaguamish Tribe of Washington
Summit Lake Paiute Tribe of Nevada
Suquamish Indian Tribe of the Port
Madison Reservation, Washington
Susanville Indian Rancheria, California
Swinomish Indians of the Swinomish
Reservation, Washington
Sycuan Band of Diegueno Mission
Indians of California
Table Bluff Reservation-Wiyot Tribe,
California
Table Mountain Rancheria of California
Te-Moak Tribes of Western Shoshone
Indians of Nevada (Four constituent
bands: Battle Mountain Band; Elko
Band; South Fork Band; and Wells
Band)
Thlopthlocco Tribal Town, Oklahoma
Three Affiliated Tribes of the Fort
Berthold Reservation, North Dakota
Tohono O’odham Nation of Arizona
(formerly Papago Tribal Council)
Tonawanda Band of Seneca Indians of
New York
Tonkawa Tribe of Indians of Oklahoma
Tonto Apache Tribe of Arizona
Torres-Martinez Band of Cahuilla
Mission Indians of California
Tule River Indian Tribe of the Tule River
Indian Reservation, California
Tulalip Tribes of the Tulalip Reservation,
Washington
Tunica-Biloxi Indian Tribe of Louisiana
Tuolumne Band of Me-Wuk Indians of
the Tuolumne Rancheria of California
Turtle Mountain Band of Chippewa
Indians of North Dakota
Tuscarora Nation of New York
Twenty-Nine Palms Band of Luiseno
Mission Indians of California
United Auburn Indian Community of the
Auburn Rancheria of California
United Keetoowah Band of Cherokee
Indians of Oklahoma
Upper Lake Band of Pomo Indians of
Upper Lake Rancheria of California
Upper Sioux Indian Community of the
Upper Sioux Reservation, Minnesota
Upper Skagit Indian Tribe of Washington
Ute Indian Tribe of the Uintah and Ouray
Reservation, Utah
Ute Mountain Tribe of the Ute Mountain
Reservation, Colorado, New Mexico
and Utah
Utu Utu Gwaitu Paiute Tribe of the
Benton Paiute Reservation, California
Viejas (Baron Long) Group of Capitan
Grande Band of Mission Indians of the
Viejas Reservation, California
Walker River Paiute Tribe of the Walker
River Reservation, Nevada
Wampanoag Tribe of Gay Head
(Aquinnah) of Massachusetts
2001–5 I.R.B.469January 29, 2001

Washoe Tribe of Nevada and California
(Carson Colony; Dresslerville Colony;
Woodfords Community; Stewart
Community; and Washoe Ranches)
White Mountain Apache Tribe of the Fort
Apache Reservation, Arizona
Wichita and Affiliated Tribes (Wichita,
Keechi, Waco and Twakonie),
Oklahoma
Winnebago Tribe of Nebraska
Winnemucca Indian Colony of Nevada
Wyandotte Tribe of Oklahoma
Yankton Sioux Tribe of South Dakota
Yavapai-Apache Nation of the Camp
Verde Indian Reservation, Arizona
Yavapai-Prescott Tribe of the Yavapai
Reservation, Arizona
Yerington Paiute Tribe of the Yerington
Colony and Campbell Ranch, Nevada
Yomba Shoshone Tribe of the Yomba
Reservation, Nevada
Ysleta Del Sur Pueblo of Texas
Yurok Tribe of the Yurok Reservation,
California
Zuni Tribe of the Zuni Reservation, New
Mexico
ALASKA NATIVE ENTITIES
Afognak, Village of Afognak
Agdaagux Tribe of King Cove
Akhiok, Native Village of Akhiok
Akiachak, Native Village of Akiachak
Akiak Native Community
Akutan, Native Village of Akutan
Alakanak, Village of Alakanak
Alatna Village
Alegnagik, Native Village of Alegnagik
Algaaciq, Native Village of Algaaciq (St.
Mary’s)
Allakaket Village
Ambler, Native Village of Ambler
Anaktuvuk Pass, Village of Anaktuvuk
Pass
Andreafski, Yupiit of Andreafski
Angoon Community Association
Aniak, Village of Aniak
Anvik Village
Arctic Village (See Venetie, Native
Village of Venetie Tribal Government)
Asa’carsarmiut Tribe (formerly Native
Village of Mountain Village)
Atka, Native Village of Atka
Atqasuk Village (Atkasook)
Atmauthluak, Village of Atmauthluak
Barrow, Native Village of Barrow Inupiat
Traditional Government (formerly
Native Village of Barrow)
Beaver Village
Belkofski, Native Village of Belkofski
Bill Moore’s Slough, Village of Bill
Moore’s Slough
Birch Creek Tribe (formerly listed as
Birch Creek Village)
Brevig Mission, Native Village of Brevig
Mission
Buckland, Native Village of Buckland
Cantwell, Native Village of Cantwell
Chalkyitsik Village
Chanega (aka Chenega), Native Village
of Chanega
Chefornak, Village of Chefornak
Chevak Native Village
Chickaloon Native Village
Chignik, Native Village of Chignik
Chignik Lagoon, Native Village of
Chignik Lagoon
Chignik Lake Village
Chilkat Indian Village (Klukwan)
Chilkoot Indian Association (Haines)
Chinik Eskimo Community (Golovin)
Chistochina, Native Village of
Chistochina
Chitina, Native Village of Chitina
Chuathbaluk, Native Village of
Chuathbaluk (Russian Mission,
Kuskokwim)
Chuloonawick Native Village
Circle Native Community
Clark’s Point, Village of Clark’s Point
Council, Native Village of Council
Craig Community Association
Crooked Creek, Village of Crooked
Creek
Curyung Tribal Council (formerly Native
Village of Dillingham)
Deering, Native Village of Deering
Diomede, Native Village of Diomede
(aka Inalik)
Dot Lake, Village of Dot Lake
Douglas Indian Association
Eagle, Native Village of Eagle
Eek, Native Village of Eek
Egegik Village
Eklutna Native Village
Ekuk, Native Village of Ekuk
Ekwok Village
Elim, Native Village of Elim
Emmonak Village
Evansville Village (aka Bettles Field)
Eyak, Native Village of Eyak (Cordova)
False Pass, Native Village of False Pass
Fort Yukon, Native Village of Fort Yukon
Gakona, Native Village of Gakona
Galena Village (aka Louden Village)
Gambell, Native Village of Gambell
Georgetown, Native Village of
Georgetown
Goodnews Bay, Native Village of
Goodnews Bay
Grayling, Organized Village of Grayling
(aka Holikachuk)
Gulkana Village
Hamilton, Native Village of Hamilton
Healy Lake Village
Holy Cross Village
Hoonah Indian Association
Hooper Bay, Native Village of Hooper
Bay
January 29, 20014702001–5 I.R.B.

Hughes Village
Huslia Village
Hydaburg Cooperative Association
Igiugig Village
Iliamna, Village of Iliamna
Inupiat Community of the Arctic Slope
Iqurmuit Traditional Council (formerly
Native Village of Russian Mission)
Ivanoff Bay Village
Kaguyak Village
Kake, Organized Village of Kake
Kaktovik Village (aka Barter Island)
Kalskag, Village of Kalskag
Kaltag, Village of Kaltag
Kanatak, Native Village of Kanatak
Karluk, Native Village of Karluk
Kasaan, Organized Village of Kasaan
Kasigluk, Native Village of Kasigluk
Kenaitze Indian Tribe
Ketchikan Indian Corporation
Kiana, Village of Kiana
King Island Native Community
King Salmon Tribe
Kipnuk, Native Village of Kipnuk
Kivalina, Native Village of Kivalina
Klawock Cooperative Association
Kluti Kaah, Native Village of Kluti Kaah
(aka Copper Center)
Knik Tribe
Kobuk, Native Village of Kobuk
Kokhanok Village
Kongiganak, Native Village of
Kongiganak
Kotlik, Village of Kotlik
Kotzebue, Native Village of Kotzebue
Koyuk, Native Village of Koyuk
Koyukuk Native Village
Kwethluk, Organized Village of
Kwethluk
Kwigillingok, Native Village of
Kwigillingok
Kwinhagak, Native Village of Kwinhagak
(aka Quinhagak)
Larsen Bay, Native Village of Larsen Bay
Levelock Village
Lesnoi Village (aka Woody Island)
Lime Village
Lower Kalskag, Village of Lower
Kalskag
Manley Hot Springs Village
Manokotak Village
Marshall, Native Village of Marshall
(aka Fortuna Ledge)
Mary’s Igloo, Native Village of Mary’s
Igloo
McGrath Native Village
Mekoryuk, Native Village of Mekoryuk
Mentasta Traditional Council (formerly
Mentasta Lake Village)
Metlakatla Indian Community, Annette
Island Reserve
Minto, Native Village of Minto
Naknek Native Village
Nanwalek, Native Village of Nanwalek
(aka English Bay)
Napaimute, Native Village of Napaimute
Napakiak, Native Village of Napakiak
Napaskiak, Native Village Napaskiak
Nelson Lagoon, Native Village of Nelson
Lagoon
Nenana Native Association
New Koliganek Village Council
(formerly Koliganek Village)
Newhalen Village
New Stuyahok Village
Newtok Village
Nightmute, Native Village of Nightmute
Nikolai Village
Nikolski, Native Village of Nikolski
Ninilchik Village
Noatak, Native Village of Noatak
Nome Eskimo Community
Nondalton Village
Noorvik Native Community
Northway Village
Nuiqsut, Native Village of Nuiqsut (aka
Nooiksut)
Nulato Village (Nulato Village Council)
Nunakauyarmiut Tribe (formerly Native
Village of Toksook Bay)
Nunapitchuk, Native Village of
Nunapitchuk
Ohogamiut, Village of Ohogamiut
Old Harbor, Village of Old Harbor
Orutsararmuit Native Village (aka
Bethel)
Oscarville Traditional Village
Ouzinkie, Native Village of Ouzinkie
Paimiut, Native Village of Paimiut
Pauloff Harbor Village
Pedro Bay Village
Perryville, Native Village of Perryville
Petersburg Indian Association
Pilot Point, Native Village of Pilot Point
Pilot Station Traditional Village
Pitka’s Point, Native Village of Pitka’s
Point
Platinum Traditional Village
Point Hope, Native Village of Port Hope
Point Lay, Native Village of Point Lay
Port Graham, Native Village of Port
Graham
Port Heiden, Native Village of Port
Heiden
Port Lions, Native Village of Port Lions
Portage Creek Village (aka Ohgsenakale)
Pribilof Islands Aleut Communities of St.
Paul and St. George Islands
Qagan Tayagungin Tribe of Sand Point
Village
Qawalangin Tribe of Unalaska
Rampart Village
Red Devil, Village of Red Devil
Ruby, Native Village of Ruby
Saint George Island (See Pribilof Islands
2001–5 I.R.B.471January 29, 2001

Aleut Communities of St. Paul and St.
George Islands)
Saint Michael, Native Village of Saint
Michael
Saint Paul Island (See Pribilof Islands
Aleut Communities of St. Paul and St.
George Islands)
Salamatoff, Village of Salamatoff
Savoonga, Native Village of Savoonga
Saxman, Organized Village of Saxman
Scammon Bay, Native Village of
Scammon Bay
Selawik, Native Village of Selawik
Seldovia Village Tribe
Shageluk Native Village
Shaktoolik, Native Village of Shaktoolik
Sheldon’s Point, Native Village of
Sheldon’s Point
Shishmaref, Native Village of Shishmaref
Shoonaq’ Tribe of Kodiak
Shungnak, Native Village of Shungnak
Sitka Tribe of Alaska
Skagway Village
Sleetmute, Village of Sleetmute
Solomon, Village of Solomon
South Naknek Village
Stebbins Community Association
Stevens, Native Village of Stevens
Stony River, Village of Stony River
Takotna Village
Tanacross, Native Village of Tanacross
Tanana, Native Village of Tanana
Tatitlek, Native Village of Tatitlek
Tazlina, Native Village of Tazlina
Telida Village
Teller, Native Village of Teller
Tetlin, Native Village of Tetlin
Tlingit and Haida, Central Council of
Tlingit and Haida Indian Tribes
Togiak, Traditional Village of Togiak
Tuluksak Native Community
Tuntutuliak, Native Village of
Tuntutuliak
Tununak, Native Village of Tununak
Twin Hills Village
Tyonek, Native Village of Tyonek
Ugashik Village
Umkumiute Native Village
Unalakleet, Native Village of
Unalakleet
Unga, Native Village of Unga
Venetie, Native Village of Venetie Tribal
Government (Arctic Village and
Village of Venetie)
Wainwright, Village of Wainwright
Wales, Native Village of Wales
White Mountain, Native Village of White
Mountain.
Wrangell Cooperative Association
Yakutat Tlingit Tribe
SECTION 4. EFFECT ON OTHER
DOCUMENTS
01. Rev. Proc. 83-87, 1983-2 C.B. 606
is superseded. Rev. Proc. 92-19, 1992-1
C.B. 685 is also superseded. Letter rul-
ings received by Indian tribal govern-
ments prior to the effective date below
are not affected by this revenue proce-
dure.
SECTION 5. EFFECTIVE DATE
01. This revenue procedure is effective
as of January 29, 2001.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue proce-
dure is Barbara E. Beckman of the Office of
Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). For
more information concerning this revenue
procedure, contact Ms. Beckman at (202)
622-6010 (not a toll-free call).
January 29, 20014722001–5 I.R.B.

2001–5 I.R.B.473January 29, 2001
Notice of Proposed Rulemaking
and Notice of Public Hearing
Election to Treat Trust as Part of
an Estate
REG–106542–98
AGENCY:Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations that relate to an election
to have certain revocable trusts treated and
taxed as part of an estate. This document
provides the procedures and requirements
for making the election, rules regarding the
tax treatment of the trust and the estate
while the election is in effect, and rules
regarding the termination of the election.
This document also provides clarification
of the reporting rules for a trust, or portion
of a trust, that is treated as owned by the
grantor, or another person under the provi-
sions of subpart E (section 671 and follow-
ing) part I, subchapter J, chapter 1 of the
Internal Revenue Code, for the taxable year
ending with the death of the grantor or other
person. In addition, this document provides
notice of a public hearing on these proposed
regulations.
DATES: Written or electronic comments
must be received by March 19, 2001.
Requests to speak (with outlines of oral
comments) at a public hearing scheduled
for February 21, 2001, at 10 a.m., must be
submitted by January 31, 2001.
ADDRESSES:Send submissions to:
CC:M&SP:RU (REG–106542–98), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may also be hand
delivered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG–106542–98), Cou-
rier’s Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC. Alternatively, taxpayers may submit
comments electronically via the Internet by
selecting the “Tax Regs” option on the IRS
Home Page, or by submitting comments
directly to the IRS Internet site at
http://www.irs.gov/tax_regs/reglist.html
(the IRS Internet site). The public hearing
will be held in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Faith Colson, (202) 622-3060; con-
cerning submission of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing,
LaNita VanDyke, (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in this
notice of proposed rulemaking has been
reviewed and approved by the Office of
Management and Budget in accordance with
the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1578.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to the collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed regu-
lations under section 645 relating to cer-
tain revocable trusts for which an election
is made to be treated and taxed as part of
an estate. This document also contains
proposed amendments to the Income Tax
Regulations under section 671 relating to
reporting for a trust, or portion of a trust,
for the taxable year ending with the death
of the grantor or other person treated as
the owner of the trust, or portion of the
trust.
Explanation of Provisions
A.Overview of Section 645
Both estates and trusts can function to
settle the affairs of a decedent and distribute
assets to heirs. In the case of a revocable
inter vivos trust, the grantor transfers prop-
erty to a trust that the grantor may revoke
during the grantor’s lifetime. When the
grantor dies, the power to revoke ceases,
and the trustee performs the settlement
functions typically performed by an estate
executor. See H.R. Conf. Rep. No. 220,
105
th
Cong., 1
st
Sess. at 711 (1997).
Section 1305 of the TRA 1997 added
section 646 to the Internal Revenue Code.
Section 646 was redesignated section 645
by section 6013(a) of the Internal
Revenue Service Restructuring and
Reform Act of 1998, Public Law 105–206
(112 Stat. 685)(1998). Section 645 pro-
vides that an election may be made to
have certain revocable trusts treated and
taxed as part of an estate.
Under section 645, if both the executor
(if any) of an estate and the trustee of a
qualified revocable trust (QRT) elect the
treatment provided in section 645, the trust
shall be treated and taxed for income tax
purposes as part of the estate (and not as a
separate trust) during the election period.
A QRT is any trust (or portion thereof)
that on the date of death of the decedent
was treated as owned by the decedent
under section 676 by reason of a power
held by the decedent (determined without
regard to section 672(e)). In accordance
with the legislative history accompanying
section 645, the proposed regulations pro-
vide that a trust that was treated as owned
by the decedent under section 676 solely
by reason of a power held by a nonadverse
party is not a QRT. See H.R. Conf. Rep.
No. 220, 105
th
Cong., 1
st
Sess. at 711
(1997). In addition, a trust that was treat-
ed as owned by the decedent under section
676 by reason of a power held by the
decedent that was exercisable by the dece-
dent only with the approval or consent of
another person is not a QRT. Further, a
QRT must be a domestic trust under sec-
tion 7701(a)(30)(E). A section 645 elec-
tion for a QRT must result in a domestic
estate under section 7701(a)(30)(D). A
section 645 election may be made with
respect to more than one QRT.
B. The Election
The section 645 election may be made
whether or not a personal representative is
Part IV. Items of General Interest

January 29, 20014742001–5 I.R.B.
appointed for the decedent’s estate. Under
the proposed regulations, if a personal
representative is appointed for the dece-
dent’s estate, the personal representative
and the trustee of the QRT make the sec-
tion 645 election by attaching a statement
to the Form 1041, “U.S. Income Tax
Return for Estates and Trusts,” filed for
the first taxable year of the decedent’s
estate (related estate). If a personal repre-
sentative is not appointed for the dece-
dent’s estate, the trustee makes a section
645 election for the QRT by attaching a
statement to the Form 1041 filed for the
first taxable year of the trust treating the
trust as an estate.
Rev. Proc. 98–13 (1998–1 C.B. 370)
sets forth procedures for making the sec-
tion 645 election. These proposed regula-
tions, when finalized, will replace Rev.
Proc. 98–13. The proposed regulations, in
some instances, contain different proce-
dures than those provided in Rev. Proc.
98–13. Rev. Proc. 98–13, in most situa-
tions, requires a trust that will make a sec-
tion 645 election to obtain a taxpayer
identification number (TIN) and file a
Form 1041 for the trust’s short taxable
year beginning with the decedent’s death
and ending December 31 of that year. In
these situations, Rev. Proc. 98–13 pro-
vides that the section 645 election is made
at the time the Form 1041 is filed for the
trust. If a Form 1041 is not required to be
filed for the trust, the election is consid-
ered made when the Form 1041 is filed for
the estate. The proposed regulations,
however, provide that if a section 645
election will be made for a trust, the
trustee and the personal representative, if
any, may choose not to obtain a TIN for
the trust or file a Form 1041 for the trust’s
short taxable year. Under the proposed
regulations, the section 645 election is
considered made only upon the filing of a
Form 1041, with the required election
statement attached, for the first taxable
year of the related estate, or, if there is no
personal representative, the first taxable
year of the trust filing as an estate.
C. General Form 1041 Filing
Requirements and TINs for the Related
Estate and Electing Trust During the
Election Period
During the election period, the person-
al representative files one Form 1041 for
the combined electing trust and related
estate under the name and TIN of the
related estate. Thus, the electing trust
must furnish payors of the trust with the
TIN of the related estate. Except as
required under the separate share rule of
section 663(c), for purposes of filing the
Form 1041 and computing the tax, the
items of income, deduction, and credit of
the electing trust and the related estate are
combined. The proposed regulations do
not provide rules for apportioning the tax
liability of the combined estate and elect-
ing trust. The personal representative and
trustee must allocate the tax burden of the
combined electing trust and related estate
to the trust and the estate in a manner that
reasonably reflects the tax obligations of
each. If the tax burdens are not reason-
ably allocated, gifts may be deemed to
have been made.
If there is no personal representative,
the trustee of the electing trust must file a
Form 1041 treating the trust as an estate
under section 645 during the election peri-
od. The trustee of the trust must obtain a
TIN to be used by the trust during the
election period to file as an estate and
must furnish this TIN to payors of the
trust.
D. Tax Treatment of the Electing Trust
and Related Estate During the Election
Period
Under the proposed regulations, the
personal representative treats the electing
trust as part of the related estate for all
purposes of subtitle A of the Internal
Revenue Code.
The electing trust and related estate are
treated as separate shares under section
663(c) for purposes of computing distrib-
utable net income (DNI) and applying the
distribution provisions of sections 661
and 662. The proposed regulations pro-
vide rules for adjusting the DNI of the
separate shares with respect to distribu-
tions made from one share to another
share of the combined electing trust and
related estate to which sections 661 and
662 would apply had the distribution been
made to a beneficiary other than another
share. Under the proposed regulations,
the share making the distribution reduces
its DNI by the amount of the distribution
deduction that it would have been entitled
to under section 661 had the distribution
been made to a beneficiary other than
another share of the combined related
estate and electing trust, and, solely for
purposes of calculating its DNI, the share
receiving the distribution increases its
gross income by this amount.
If there is no personal representative,
the trustee of the electing trust treats the
trust as an estate for all purposes of subti-
tle A of the Internal Revenue Code. Thus,
the trustee of the electing trust may adopt
a taxable year other than a calendar year.
E. Duration of the Election Period
The proposed regulations provide that
the election period begins on the date of
the decedent’s death and terminates on the
day before the applicable date. If a Form
706 is not required to be filed for the dece-
dent’s estate, the applicable date is the day
which is two years after the date of the
decedent’s death.
If a Form 706 is required to be filed, the
applicable date is the day that is 6 months
after the date of final determination of lia-
bility for estate tax. The proposed regula-
tions provide that the final determination
of liability for estate tax is the earliest day
on which any of the following has
occurred: (A) the issuance of an estate tax
closing letter, unless a claim for refund
with respect to the estate tax is filed with-
in six months after the issuance of the let-
ter; (B) the final disposition of a claim for
refund that resolves the liability for the
estate tax, unless suit is instituted within
six months of the disposition of the claim;
(C) the execution of a settlement agree-
ment that resolves the liability for estate
tax; (D) the issuance of a decision, judg-
ment, decree, or other order by a court of
competent jurisdiction resolving the lia-
bility for estate tax unless a notice of
appeal or petition for certiorari is filed
within 90 days after the issuance of the
decision, judgment, decree, or other order
of a court; or (E) the expiration of the
period of limitations for assessment of the
estate tax provided in section 6501.
F.Tax Treatment of the Electing Trust
and Related Estate Upon Termination of
the Election Period
At the close of the last day of the elec-
tion period, the combined related estate
and electing trust, if there is a personal
representative, or the electing trust, if

2001–5 I.R.B.475January 29, 2001
there is no personal representative, is
deemed to distribute all the assets and lia-
bilities of the share (or shares) comprising
the electing trust to a new trust in a distri-
bution to which sections 661 and 662
apply. Thus, the combined related estate
and electing trust, or the electing trust, as
appropriate, is entitled to a distribution
deduction to the extent permitted under
section 661 in the taxable year in which
the election period terminates as a result
of the deemed distribution. The new trust
must include the deemed distribution in
gross income to the extent required under
section 662.
At the end of the election period, the
new trust must obtain a new TIN. The
related estate continues to report under the
TIN assigned to the combined related
estate and electing trust during the elec-
tion period.
Following the termination of the elec-
tion period, the taxable year of the new
trust must be the calendar year. The relat-
ed estate must continue to use the taxable
year chosen by the combined related
estate and electing trust during the elec-
tion period.
G.Clarification of the Reporting Rules
for Grantor Trusts Under §1.671–4
In the process of drafting these pro-
posed regulations regarding section 645,
the IRS and the Treasury Department
received many taxpayer questions con-
cerning the section 645 election proce-
dures and the proper application of the
reporting rules under §1.671–4 to a trust,
or a portion of a trust, treated as owned by
a grantor or another person for the taxable
year ending with the death of the grantor
or other person. Accordingly, these pro-
posed regulations amend §1.671–4 to
clarify those reporting rules.
The proposed regulations clarify that a
trust, or portion of a trust, reports under
§1.671–4 for the taxable year that ends
with the death of the grantor or other per-
son (decedent) treated as the owner of the
trust. If the trust was filing a Form 1041
under §1.671–4(a) during the life of the
decedent, the proposed regulations also
provide that the due date for the return for
the trust or portion of the trust for the tax-
able year ending with the death of the
decedent shall be the date specified under
section 6072 as though the decedent had
lived throughout the decedent’s last tax-
able year.
The proposed regulations provide that a
trust that was wholly owned by the dece-
dent must obtain a new TIN upon the
death of the decedent whether or not a
TIN was obtained for the trust prior to the
death of the decedent; however, if a sec-
tion 645 election will be made for the
trust, a new TIN need not be obtained for
the trust. For administrative convenience,
the proposed regulations clarify that with
respect to a trust which was treated as
owned by two or more grantors or other
persons, following the death of one of the
deemed owners, the trust, including the
portion formerly owned by the decedent
(if it remains part of the original trust fol-
lowing the death of the deemed owner),
continues to report under the TIN used by
the trust prior to the death of the decedent.
Proposed Effective Date
These regulations are proposed to apply
on or after the date that final regulations
are published in the Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a reg-
ulatory assessment is not required. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the under-
standing of the IRS and Treasury
Department that the number of trusts and
estates making the election is not substan-
tial, and none are small entities within the
meaning of the Regulatory Flexibility Act.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or written
comments (a signed original and eight (8)
copies) that are submitted timely (in the
manner described in the ADDRESSES
caption) to the IRS. The IRS and
Treasury Department request comments
on the clarity of the proposed rules and
how they can be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for February 21, 2001, beginning at 10
a.m., in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to
building security procedures, visitors
must enter at the 10
th
Street entrance,
located between Constitution and
Pennsylvania Avenues, NW. In addition,
all visitors must present photo identifica-
tion to enter the building. Because of
access restrictions, visitors will not be
admitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about hav-
ing your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit timely written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
January 31, 2001. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the sched-
uling of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Faith Colson, Office of Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301, and
602 are proposed to be amended as fol-
lows:

January 29, 20014762001–5 I.R.B.
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.645–1 also issued under 26
U.S.C. 645. * * *
Par. 2. Section 1.641(b)–3 is amended
by adding a sentence to the end of para-
graph (a) to read as follows:
§1.641(b)–3 Termination of estates and
trusts.
(a) * * * Notwithstanding the above, if
the estate has joined a valid election under
section 645 to treat a qualified revocable
trust, as defined under section 645(b)(1), as
part of the estate, the estate shall not termi-
nate under this paragraph prior to the ter-
mination of the section 645 election period.
See section 645 and the regulations there-
under for rules regarding the termination of
the section 645 election period.
* * * * *
Par. 3. In §1.642(c)–1, the last sentence
of paragraph (a)(1) is revised to read as
follows:
§1.642(c)–1 Unlimited deduction for
amounts paid for a charitable purpose.
(a) * * * (1) * * * In applying this para-
graph without reference to paragraph (b)
of this section, a deduction shall be
allowed for an amount paid during the
taxable year in respect of gross income
received in a previous taxable year, but
only if no deduction was allowed for any
previous taxable year to the estate or trust,
or in the case of a section 645 election, to
a related estate, as defined under
§1.645–1(b), for the amount so paid.
* * * * *
Par. 4. Section 1.645–1 is added under
a new undesignated center heading to read
as follows:
Election to treat trust as part of an estate.
§1.645–1 Election by certain revocable
trusts to be treated as part of estate.
(a) In general. If an election is filed for
a qualified revocable trust, as defined in
paragraph (b)(1) of this section, in accor-
dance with the rules set forth in paragraph
(c) of this section, the qualified revocable
trust is treated and taxed as part of its
related estate, as defined in paragraph
(b)(4) of this section (and not as a separate
trust) during the election period, as
defined in paragraph (b)(6) of this section.
Rules regarding the use of taxpayer iden-
tification numbers (TINs) by an electing
trust, as defined in paragraph (b)(2) of this
section, are in paragraph (d) of this sec-
tion. Rules regarding obtaining a TIN and
filing requirements for a qualified revoca-
ble trust for which a section 645 election
will or may be made are also in paragraph
(d) of this section. Rules regarding the tax
treatment of an electing trust and related
estate and the general filing requirements
for the combined entity during the elec-
tion period are in paragraph (e)(2) of this
section. Rules regarding the tax treatment
of an electing trust and its filing require-
ments during the election period if no per-
sonal representative, as defined in para-
graph (b)(5) of this section, is appointed
for a related estate are in paragraph (e)(3)
of this section. Rules for determining the
duration of the section 645 election period
are in paragraph (f) of this section. Rules
regarding the tax effects of the termina-
tion of the election are in paragraph (h) of
this section. Rules regarding the tax con-
sequences of the appointment of a person-
al representative after a trustee has made a
section 645 election believing that a per-
sonal representative would not be appoint-
ed for a related estate are in paragraph (g)
of this section.
(b) Definitions. For purposes of this
section:
(1) Qualified revocable trust. A quali-
fied revocable trust(QRT) is any trust (or
portion thereof) that on the date of death
of the decedent was treated as owned by
the decedent under section 676 by reason
of a power held by the decedent (deter-
mined without regard to section 672(e)).
A trust that was treated as owned by the
decedent under section 676 by reason of a
power that was exercisable by the dece-
dent only with the approval or consent of
another person is not a QRT. In addition,
a trust that was treated as owned by the
decedent under section 676 solely by rea-
son of a power held by a nonadverse party
is not a QRT. A QRT must be a domestic
trust as defined in section 7701(a)(30)(E).
A section 645 election for a QRT must
result in a domestic estate as defined in
section 7701(a)(30)(D).
(2) Electing trust. An electing trustis a
QRT for which a valid section 645 elec-
tion has been made. Once a section 645
election has been made for the trust, the
trust shall be treated as an electing trust
throughout the entire election period.
(3) Decedent. The decedentis the indi-
vidual who was treated as the owner of the
QRT under section 676 on the date of that
individual’s death.
(4) Related estate. A related estateis
the estate of the decedent who was treated
as the owner of the QRT on the date of the
decedent’s death. A related estate must be
a domestic estate as defined in section
7701(a)(30)(D).
(5) Personal representative. A person-
al representativeis an executor or admin-
istrator that has obtained letters of
appointment to administer the decedent’s
estate through formal or informal appoint-
ment procedures.
(6) Election period. The election peri-
odis the period of time during which an
electing trust is treated and taxed as part
of its related estate. The rules for deter-
mining the duration of the election period
are in paragraph (f) of this section.
(7) Pa y o r. A payoris any person who
is required by any provision of the
Internal Revenue Code and the regula-
tions thereunder to make any type of
information return with respect to an
electing trust or the related estate for the
taxable year. A payor includes a person
who makes payments to an electing trust
or related estate and a person who collects
(or otherwise acts as a middleman with
respect to) payments on behalf of an elect-
ing trust or related estate.
(c) The election—(1) Filing the election
if there is a personal representative—(i)
Time and manner for filing the election. If
there is a personal representative of the
related estate, the trustee of the QRT and
the personal representative of the related
estate make an election under section 645
and this section to treat a QRT as part of
its related estate in a written statement
described in paragraph (c)(1)(ii) of this
section. The statement must be attached
to the Form 1041, “U.S. Income Tax
Return for Estates and Trusts,” filed for
the first taxable year of the related estate.
See paragraph (e)(2) for rules regarding
the filing of this return. For the election to
be valid, the Form 1041 and the attached
statement must be filed not later than the
time prescribed under section 6072
(including extensions) for filing the return
for such taxable year.
(ii) Written statement. The written
statement must—

2001–5 I.R.B.477January 29, 2001
(A) Identify the election as an election
under section 645;
(B) Contain the name, address, date of
death, and TIN of the decedent;
(C) Contain the name and address of
the QRT and, if a TIN has been obtained
after the death of the decedent, the TIN of
the QRT;
(D) Contain the name, address and TIN
of the related estate;
(E) Provide a representation that the
trust for which the election is being made
meets the definition of a QRT under sec-
tion 645 and paragraph (b)(1) of this sec-
tion;
(F) Contain a statement from the per-
sonal representative, signed and dated
under penalties of perjury, stating that the
personal representative elects to treat the
QRT as part of the related estate under
section 645 and that the personal repre-
sentative understands that the personal
representative is required to make a time-
ly return of income for the combined
related estate and QRT on Form 1041 and
to pay timely any tax due thereon; and
(G) Contain a statement from the
trustee of the QRT, signed and dated
under penalties of perjury, stating that the
trustee elects to treat the trust as part of
the related estate under section 645 and
agrees to cooperate with the personal rep-
resentative to insure that a return of
income is timely made for the combined
related estate and QRT, and that any tax
due thereon is timely paid.
(2) Filing the election if there is no per-
sonal representative—(i) Time and man-
ner for filing the election. If there is no
personal representative for a related
estate, an election to treat a QRT as an
estate is made by the trustee, in a written
statement described in paragraph (c)(2)(ii)
of this section. The statement must be
attached to the Form 1041 filed for the
first taxable year of the QRT taking into
account the trustee’s election to treat the
trust as an estate under section 645. See
paragraph (e)(3) for other rules regarding
the filing of this return. For the election to
be valid, the Form 1041 of the QRT and
the attached statement must be filed not
later than the time prescribed under sec-
tion 6072 (including extensions) for filing
the return for such taxable year.
(ii) Written statement. The written
statement must—
(A) Identify the election as an election
under section 645;
(B) Contain the name, address, date of
death, and TIN of the decedent;
(C) Contain the name and address of
the QRT and, if a TIN has been obtained
after the death of the decedent, the TIN of
the QRT;
(D) Provide a representation that the
trust for which the election is being made
meets the definition of a QRT under sec-
tion 645 and paragraph (b)(1) of this sec-
tion;
(E) Provide a representation that there
is no personal representative and to the
trustee’s knowledge and belief, one will
not be appointed;
(F) Contain the TIN obtained by the
trust to file as an estate under
§301.6109–1(a)(4)(ii)(B) of this chapter;
and
(G) Contain a statement from the
trustee of the QRT, signed and dated
under penalties of perjury, stating that the
trustee elects to treat the trust as an estate
under section 645 and that the trustee
understands that the trustee is required to
make a timely return of income for the
trust on Form 1041 taking into account
the section 645 election and to pay timely
any tax due thereon.
(d) TIN for an electing trust and QRT—
(1) Obtaining a TIN—(i) For an electing
trust—(A) If there is a personal represen-
tative. If there is a personal representa-
tive, a TIN must be obtained for the relat-
ed estate but the electing trust is not
required to obtain a TIN in its own name.
See §301.6109–1(a)(4)(ii)(A)(1) of this
chapter for rules for completing the Form
SS–4,“Application for Employer
Identification Number,” filed for the relat-
ed estate.
(B) If there is no personal representa-
tive. If there is no personal representative,
the trustee must obtain a TIN to file as an
estate. See §301.6109–1(a)(4)(ii)(B) of
this chapter for rules regarding obtaining
a TIN for an electing trust to file as an
estate during the election period. The
trustee is not required to obtain a TIN for
the electing trust to file as a trust.
(ii) Obtaining a TIN and filing a Form
1041 for a QRT—(A) Option not to
obtain a TIN or file a Form 1041 for a
QRT for which a section 645 election will
be made. If a section 645 election will be
made for a QRT, the personal representa-
tive of the related estate, if any, and the
trustee of the QRT may treat the QRT as
an electing trust from the decedent’s date
of death until the due date for the section
645 election. Accordingly, the trustee of
the QRT is not required to obtain a TIN
for the QRT following the death of the
decedent as required under
§301.6109–1(a)(3)(i) of this chapter or
file a Form 1041 for the QRT for the short
taxable year beginning with the dece-
dent’s date of death and ending with
December 31 of that year. However, if a
QRT is treated as an electing trust under
this paragraph from the decedent’s date of
death until the due date for the section 645
election and a valid section 645 election is
not made for the QRT, the QRT will be
subject to penalties and interest for failing
to obtain a TIN and file a Form 1041 and
pay the tax due thereon.
(B) Requirement to obtain a TIN and
file a Form 1041 for QRT if paragraph
(d)(1)(ii)(A) of this section does not
apply—(1) Requirement to obtain TIN
and file Form 1041. If the trustee of the
QRT and the personal representative of
the related estate, if any, do not treat the
QRT as an electing trust as provided under
paragraph (d)(1)(ii)(A) of this section, or
if the trustee of the electing trust and the
personal representative, if any, are uncer-
tain whether a section 645 election will be
made for a QRT, the trustee of the QRT
must obtain a TIN in the name of the QRT
as required under §301.6109–1(a)(3)(i) of
this chapter and must file a Form 1041 for
the short taxable year beginning with the
decedent’s death and ending December 31
of that year (unless, the QRT is not
required to file a Form 1041 under section
6012 for this period).
(2) Requirement to amend return if sec-
tion 645 election is made. If a valid sec-
tion 645 election is made for a QRT after
a Form 1041 is filed for the QRT pursuant
to paragraph (d)(1)(ii)(B)(1) of this sec-
tion, the trustee must amend the Form
1041. The trustee must indicate on the
Form 1041 that the return is a final return
and must attach a copy of the statement
described in paragraph (c) of this section
to the amended Form 1041 filed pursuant
to this paragraph. In addition, the trustee
must provide the following statement at
the top of the return: “FILED PUR-

January 29, 20014782001–5 I.R.B.
SUANT TO §1.645–1.” The QRT’s items
of income, deduction, and credit must be
excluded from the amended Form 1041
filed under this paragraph and must be
included on the Form 1041 filed for the
first taxable year of the related estate
under paragraph (e)(2)(ii)(A) of this sec-
tion, if there is a personal representative,
or for the first taxable year of the electing
trust under (e)(3)(ii) of this section, if
there is no personal representative. The
section 645 election is not considered
made upon the filing, under this para-
graph, of an amended Form 1041 for the
QRT with the attached statement. To be
valid, a section 645 election must be filed
in the time and manner specified in para-
graph (c) of this section.
(2) Furnishing TIN to payors—(i) If
there is a personal representative for a
related estate. If there is a personal repre-
sentative, all payors of an electing trust
shall be furnished a Form W-9, ”Request
for Taxpayer Identification Number and
Certification,” or an acceptable substitute
Form W-9 with the name of the related
estate as the primary name on the form,
the name of the electing trust as the sec-
ondary name on the form, the TIN of the
related estate, and the address of the
trustee. The form must be signed under
penalties of perjury by the personal repre-
sentative. See section 3406 and the regu-
lations thereunder for the information to
include on, and the manner of executing,
the Form W-9, depending on the type of
reportable payments made by the payor to
the trust.
(ii) If there is no personal representa-
tive. If there is no personal representative,
the trustee of the electing trust shall fur-
nish a Form W-9 or an acceptable substi-
tute Form W-9 with the name required by,
and the TIN obtained under,
§301.6109–1(a)(4)(ii)(B) of this chapter.
See section 3406 and the regulations
thereunder for the information to include
on, and the manner of executing, the Form
W-9, depending on the type of reportable
payments made by the payor to the trust.
(e) Tax treatment and general filing
requirements of electing trust and related
estate during the election period—(1)
Effect of election. The section 645 elec-
tion once made is irrevocable.
(2) If there is a personal representative—
(i) Tax treatment of the combined electing
trust and related estate. If there is a per-
sonal representative, during the election
period the personal representative treats the
electing trust as part of the related estate for
all purposes of subtitle A of the Internal
Revenue Code. For example, the electing
trust is treated as part of the related estate
for purposes of the subchapter S sharehold-
er requirements of section 1361(b)(1) and
the special offset for rental real estate activ-
ities in section 469(i)(4).
(ii) Filing requirements—(A) Filing the
Form 1041 for the combined electing trust
and related estate during the election
period. If there is a personal representa-
tive, one income tax return is filed under
the name and TIN of the related estate for
the electing trust and the related estate.
See §301.6109–1(a)(4)(ii)(A)(1) of this
chapter. Except as required under the sep-
arate share rule of section 663(c), for pur-
poses of filing the Form 1041 under this
paragraph and computing the tax, the
items of income, deduction, and credit of
the electing trust and related estate are
combined. One personal exemption in the
amount of $600 is permitted under section
642(b) and the tax is computed under sec-
tion 1(e), taking into account section 1(h),
for the combined taxable income.
(B) Filing a Form 1041 for the electing
trust is not required. The trustee of the
electing trust does not file a Form 1041
for the electing trust during the election
period. In certain situations, the trustee of
a QRT may be required to file a Form
1041 for the QRT’s short taxable year
beginning with the decedent’s date of
death and ending December 31 of that
year. See paragraph (d)(1)(ii) of this sec-
tion.
(iii) Application of the separate share
rules—(A) Distributions to beneficiaries
(other than to a share (or shares) of the
combined electing trust and related
estate). Under the separate share rules of
section 663(c), the electing trust and relat-
ed estate are treated as separate shares for
purposes of computing distributable net
income (DNI) and applying the distribu-
tion provisions of sections 661 and 662.
Further, the electing trust share or the
related estate share may each contain two
or more shares. Thus, if during the tax-
able year, a distribution is made by the
electing trust or the related estate, the DNI
of the share making the distribution must
be determined and the distribution provi-
sions of sections 661 and 662 must be
applied using the separately determined
DNI applicable to the distributing share.
(B) Adjustments to the DNI of the sepa-
rate shares for distributions between
shares to which sections 661 and 662
would apply. A distribution from one
share to another share to which sections
661 and 662 would apply if made to a
beneficiary other than another share of the
combined related estate and electing trust
affects the computation of the DNI of the
share making the distribution and the
share receiving the distribution. The share
making the distribution reduces its DNI
by the amount of the distribution deduc-
tion that it would be entitled to under sec-
tion 661, had the distribution been made
to another beneficiary, and, solely for pur-
poses of calculating DNI, the share
receiving the distribution increases its
gross income by the same amount. The
distribution has the same character in the
hands of the recipient share as in the
hands of the distributing share. The fol-
lowing example illustrates the provisions
of this paragraph (e)(2)(iii)(B):
Example. (i) A’s will provides that after the pay-
ment of debts, expenses, and taxes, the residue of A’s
estate is to be distributed to Trust, an electing trust.
The sole beneficiary of Trust is C. The estate share
has $15,000 of gross income, $5,000 of deductions,
and $10,000 of taxable income and DNI for the tax-
able year based on the assets held in A’s estate.
During the taxable year, A’s estate distributes
$15,000 to Trust. The distribution reduces the DNI
of the estate share by $10,000, the amount of the dis-
tribution deduction A’s estate would be entitled to if
A’s estate made the distribution to a beneficiary other
than Trust.
(ii) For the same taxable year, the trust share has
$25,000 of gross income and $5,000 of deductions.
None of the modifications provided for under sec-
tion 643(a) apply. In calculating the DNI for the
trust share, the gross income of the trust share is
increased by $10,000, the amount of the reduction in
the DNI of the estate share as a result of the distrib-
ution to Trust. Thus, solely for purposes of calculat-
ing DNI, the trust share has gross income of
$35,000, and taxable income of $30,000. Therefore,
the trust share has $30,000 of DNI for the taxable
year.
(iii) During the same taxable year, Trust distrib-
utes $35,000 to C. The distribution deduction
reported on the Form 1041 filed for A’s estate and
Trust is $30,000. As a result of the distribution by
Trust to C, C must include $30,000 in gross income
for the taxable year. The gross income reported on
the Form 1041 filed for A’s estate and Trust is
$40,000.
(iv) Application of the governing
instrument requirement of section 642(c).
A deduction is allowed in computing the
taxable income of the combined related

2001–5 I.R.B.479January 29, 2001
estate and electing trust to the extent per-
mitted under section 642(c) for—
(A) Any amount of the gross income of
the related estate that is paid or set aside
during the taxable year pursuant to the
terms of the governing instrument of the
related estate for a purpose specified in
section 170(c); and
(B) Any amount of gross income of the
electing trust that is paid or set aside dur-
ing the taxable year pursuant to the terms
of the governing instrument of the elect-
ing trust for a purpose specified in section
170(c).
(3) If there is no personal representa-
tive—(i) Tax treatment of the electing
trust.If there is no personal representa-
tive, during the election period the trustee
treats the electing trust as an estate for all
purposes of subtitle A of the Internal
Revenue Code. Thus, for example, an
electing trust is treated as an estate for
purposes of the set-aside deduction under
section 642(c)(2), the subchapter S share-
holder requirements of section
1361(b)(1), and the special offset for
rental real estate activities under section
469(i)(4). The trustee may also adopt a
taxable year other than a calendar year.
(ii) Filing the Form 1041 for the elect-
ing trust. If there is no personal represen-
tative, during the election period the
trustee of the electing trust must file Form
1041 treating the trust as an estate. See
§301.6109–1(a)(4)(ii)(B) of this chapter
for rules regarding the name and TIN to
be used in filing a Form 1041 under this
paragraph (e)(3)(iii). Any return filed by
a trustee of an electing trust, in accor-
dance with this paragraph, shall be treated
under section 6012 as a return filed for the
electing trust and not as a return filed for
any subsequently discovered related
estate. Accordingly, the period of limita-
tions provided in section 6501 for assess-
ments with respect to a subsequently dis-
covered related estate does not start until a
return is filed with respect to the related
estate.
(f) Duration of election period—(1) In
general. The election period begins on
the date of the decedent’s death and ter-
minates on the day before the applicable
date. The election does not apply to suc-
cessor trusts.
(2) Definition of applicable date—(i)
Applicable date if no Form 706 (United
States Estate (and Generation Skipping
Transfer) Tax Return) is required to be
filed. If a Form 706 is not required to be
filed for the decedent’s estate, the applic-
able date is the day which is 2 years after
the date of the decedent’s death.
(ii) Applicable date if a Form 706 is
required to be filed. If a Form 706 is
required to be filed for the decedent’s
estate, the applicable date is the day that is
6 months after the date of final determina-
tion of liability for estate tax. Solely for
purposes of determining the applicable
date under section 645, the date of final
determination of liability is the earliest
day on which any of the following has
occurred—
(A) The issuance by the Internal
Revenue Service of an estate tax closing
letter, unless a claim for refund with
respect to the estate tax is filed within six
months after the issuance of the letter;
(B) The final disposition of a claim for
refund, as defined in paragraph (f)(2)(iii)
of this section, that resolves the liability
for the estate tax, unless suit is instituted
within six months after a final disposition
of the claim;
(C) The execution of a settlement
agreement with the Internal Revenue
Service that determines the liability for
the estate tax;
(D) The issuance of a decision, judg-
ment, decree, or other order by a court of
competent jurisdiction resolving the lia-
bility for the estate tax unless a notice of
appeal or a petition for certiorariis filed
within 90 days after the issuance of a
decision, judgment, decree, or other order
of a court; or
(E) The expiration of the period of lim-
itations for assessment of the estate tax
provided in section 6501.
(iii) Definition of final disposition of
claim for refund. For purposes of para-
graph (f)(2)(ii)(B) of this section, a claim
for refund shall be deemed finally dis-
posed of by the Secretary when all items
have been either allowed or disallowed. If
a waiver of notification with respect to
disallowance is filed with respect to a
claim for refund prior to disallowance of
the claim, the claim for refund will be
treated as disallowed on the date the waiv-
er is filed.
(iv) Examples. The application of this
paragraph (f)(2) is illustrated by the fol-
lowing examples:
Example 1. A died on October 20, 1999. The
personal representative of A’s estate and the trustee
of Trust, an electing trust, made a section 645 elec-
tion. A Form 706 is not required to be filed for A’s
estate. The applicable date is October 20, 2001, the
day that is two years after A’s date of death. The last
day of the election period is October 19, 2001.
Beginning October 20, 2001, Trust will no longer be
treated and taxed as part of A’s estate.
Example 2. Assume the same facts as Example 1,
except that a Form 706 is required to be filed for A’s
estate. The Internal Revenue Service issues an estate
tax closing letter accepting the Form 706 as filed on
March 15, 2001. The estate does not file a claim for
refund by September 15, 2001, the day that is six
months after the date of issuance of the estate tax
closing letter. The final determination of liability is
March 15, 2001 and the applicable date is September
15, 2001. The last day of the election period is
September 14, 2001. Beginning September 15,
2001, Trust will no longer be treated and taxed as
part of A’s estate.
Example 3. Assume the same facts as Example 1,
except that a Form 706 is required to be filed for A’s
estate. The Form 706 is audited and a notice of defi-
ciency authorized under section 6212 is mailed to
the personal representative of A’s estate as a result of
the audit. The personal representative files a petition
in Tax Court. The Tax Court issues a decision
resolving the liability for estate tax on December 14,
2003 and neither party appeals. The final determi-
nation of liability is December 14, 2003. The applic-
able date is June 14, 2004, the day that is six months
after the date of final determination of liability. The
last day of the election period is June 13, 2004.
Beginning June 14, 2004, Trust will no longer be
treated and taxed as part of A’s estate.
(g) Personal Representative appointed
after the section 645 election is made—
(1) Effect on the election. If a personal
representative for the related estate is not
appointed until after the trustee has made
a valid section 645 election, the personal
representative is deemed to agree to the
election and to accept the associated
responsibilities unless, within 60 days of
appointment, the personal representative
notifies the trustee in writing of the per-
sonal representative’s refusal to agree to
the election. If the personal representative
refuses to agree to the election, the elec-
tion period terminates the day before the
effective date of the personal representa-
tive’s appointment. If the personal repre-
sentative and the trustee are the same per-
son, the personal representative cannot
refuse to agree to the election.
(2) Continuation of election period. If
the personal representative does not refuse
to agree to the section 645 election, the
personal representative of the related
estate and the trustee of the electing trust
must file amended Forms 1041 reflecting
the items of income, deduction, and cred-
it of the related estate and the electing
trust for all taxable years ending after the

January 29, 20014802001–5 I.R.B.
death of the decedent. If the period of
limitations for making assessments has
expired with respect to the electing trust
for any of the Forms 1041 filed by the
trustee, the personal representative must
obtain a TIN for the related estate and file
Forms 1041 for any items of income,
deduction, and credit of the related estate
that cannot be properly included on
amended forms for the electing trust.
(3) Termination of the election period.
If the election period terminates as a result
of the personal representative’s refusing to
agree to the election, the personal repre-
sentative must obtain a new TIN for the
related estate. The personal representa-
tive must file returns under the new TIN
for all taxable years of the related estate
ending after the death of the decedent.
The trustee of the electing trust is not
required to amend any returns filed for the
electing trust during the election period.
Following termination of the election
period, the trustee of the electing trust
must obtain a new TIN as required under
§301.6109–1(a)(4)(iii) of this chapter.
(h) Treatment of an electing trust and
related estate following termination of the
election—(1) The share (or shares) com-
prising the electing trust is deemed to be
distributed by its related estate upon ter-
mination of the election period. On the
close of the last day of the election period,
the combined related estate and electing
trust, if there is a personal representative,
or, the electing trust, if there is no person-
al representative, is deemed to distribute
the share (or shares, as determined under
section 663(c)) comprising the electing
trust to a new trust in a distribution to
which sections 661 and 662 apply. Thus,
the combined related estate and electing
trust, if there is a personal representative,
or the electing trust, if there is no person-
al representative, is entitled to a distribu-
tion deduction to the extent permitted
under section 661 in the taxable year in
which the election period terminates as a
result of the deemed distribution. The
new trust shall include such distribution in
gross income to the extent required under
section 662.
(2) Filing of the Form 1041 upon the
termination of the section 645 election—
(i) If there is a personal representative—
If there is a personal representative, the
Form 1041 filed under the name and TIN
of the related estate for the taxable year in
which the election terminates includes—
(A) The items of income, deduction,
and credit of the electing trust attributable
to the period beginning with the first day
of the related estate and electing trust’s
taxable year and ending with the last day
of the election period;
(B) The items of income, deduction,
and credit, if any, of the related estate for
the taxable year; and
(C) A deduction for the deemed distrib-
ution of the share (or shares) comprising
the electing trust to the new trust as pro-
vided for under paragraph (h)(1) of this
section.
(ii) If there is no personal representa-
tive. If there is no personal representative,
the taxable year of the electing trust clos-
es on the last day of the election period. A
Form 1041 is filed in the manner pre-
scribed under paragraph (e)(3)(ii) of this
section reporting the items of income,
deduction, and credit of the electing trust
for the short period ending with the last
day of the election period. The Form
1041 filed under this paragraph includes a
distribution deduction for the deemed dis-
tribution provided for under paragraph
(h)(1) of this section. The Form 1041
must indicate that it is a final return.
(3) Use of TINs following termination
of the election. Upon termination of the
section 645 election, a former electing
trust must obtain a new TIN, as required
under §301.6109–1(a)(4)(iii) of this chap-
ter. If the related estate continues after the
termination of the election period, the
related estate must continue to use the
TIN assigned to the estate during the elec-
tion period.
(4) Taxable year of estate and trust
upon termination of the election—(i)
Estate. Upon termination of the election,
if the estate will continue, the taxable year
of the estate is the same taxable year used
during the election period.
(ii) Trust. Upon termination of the
election, the taxable year of the new trust
is the calendar year. See section 644.
(i) Reserved.
(j) Effective date. This section applies
on or after the date final regulations are
published in the Federal Register.
Par. 5. Section 1.671–4 is amended as
follows:
1. The text of paragraph (d) is redesig-
nated paragraph (d)(1) and a paragraph
heading is added for newly designated
paragraph (d)(1).
2. Paragraph (d)(2) is added
3. Paragraphs (h) and (i) are redesignat-
ed as paragraphs (i) and (j).
4. New paragraph (h) is added.
The additions and revisions read as fol-
lows:
§1.671–4 Method of Reporting.
* * * * *
(d) Due date and other requirements
with respect to statement required to be
furnished by trustee—(1) In general. * * *
(2) Statement for the taxable year end-
ing with the death of the grantor or other
person treated as the owner of the trust. If
a trust ceases to be treated as owned by
the grantor, or other person, by reason of
the death of that grantor or other person
(decedent), the due date for the statement
required to be furnished for the taxable
year ending with the death of the decedent
shall be the date specified by section
6034A(a) as though the decedent had
lived throughout the decedent’s last tax-
able year. See paragraph (h) of this sec-
tion for special reporting rules for a trust
or portion of the trust that ceases to be
treated as owned by the grantor or other
person by reason of the death of the
grantor or other person.
* * * * *
(h) Reporting rules for a trust, or por-
tion of a trust, that ceases to be treated as
owned by a grantor or other person by
reason of the death of the grantor or other
person—(1) Definition of decedent. For
purposes of this paragraph (h), the dece-
dentis the grantor or other person treated
as the owner of the trust, or portion of the
trust, under subpart E, part I, subchapter J,
chapter 1 of the Internal Revenue Code on
the date of death of that person.
(2) In general. The provisions of
§1.671–4 apply to a trust, or portion of a
trust, treated as owned by a decedent for
the taxable year that ends with the dece-
dent’s death. Following the death of the
decedent, the trust or portion of a trust that
ceases to be treated as owned by the dece-
dent, by reason of the death of the dece-
dent, may no longer report under
§1.671–4. A trust, all of which was treat-
ed as owned by the decedent, must obtain
a new TIN upon the death of the decedent,
if the trust will continue after the death of
the decedent. See §301.6109–1(a)(3)(i)
of this chapter for rules regarding obtain-

2001–5 I.R.B.481January 29, 2001
ing a TIN upon the death of the decedent.
An electing trust as defined in
§1.645–1(b)(2) is not required to obtain a
TIN following the death of the decedent.
A qualified revocable trust, as defined in
section 645(b) and §1.645–1(b)(1), for
which a section 645 election will be made,
need not obtain a TIN. See
§301.6109–1(a)(4) of this chapter and
§1.645–1(d)(1)(ii)(A).
(3) Special rules—(i) Trusts reporting
pursuant to paragraph (a) of this section
for the taxable year ending with the dece-
dent’s death. The due date for filing of a
return pursuant to paragraph (a) of this
section for the taxable year ending with
the decedent’s death shall be the due date
provided for under §1.6072–1(a)(2). The
return filed under this paragraph for a trust
all of which was treated as owned by the
decedent must indicate that it is a final
return.
(ii) Trust reporting pursuant to para-
graph (b)(2)(B) of this section for the tax-
able year of the decedent’s death. A trust
that reports pursuant to paragraph
(b)(2)(B) of this section for the taxable
year ending with the decedent’s death
must indicate on each Form 1096 (Annual
Summary and Transmittal of the U.S.
Information Returns) that it files (or
appropriately on magnetic media) for the
taxable year ending with the death of the
decedent that it is the final return of the
trust.
(iii) Trust reporting under paragraph
(b)(3) of this section. If a trust has been
filing under paragraph (b)(3) of this sec-
tion, the trustee may not report under that
paragraph if any portion of the trust has a
short taxable year by reason of the death
of the decedent and the portion treated as
owned by the decedent does not terminate
on the death of the decedent.
(4) Effective date. This paragraph (h)
applies on or after the date final regula-
tions are published in the Federal
Register.
Par. 6. Section 1.6072–1 is amended as
follows:
1. The text of paragraph (a) is redesig-
nated as paragraph (a)(1) and a paragraph
heading is added for newly designated
paragraph (a)(1).
2. Paragraph (a)(2) is added.
The additions are as follows:
§1.6072–1 Time for filing returns of
individuals, estates, and trusts.
(a) In general—(1) Returns of income
for individuals, estates and trusts. * * *
(2) Return of trust, or portion of a trust,
treated as owned by a decedent—(i) In
general.In the case of a return of a trust,
or portion of a trust, that was treated as
owned by a decedent under subpart E
(section 671 and following), part I, sub-
chapter J, chapter 1 of the Internal
Revenue Code as of the decedent’s date of
death that is filed in accordance with
§1.671–4(a) for the fractional part of the
year ending with the date of death of the
decedent, the due date of such return shall
be the fifteenth day of the fourth month
following the close of the 12-month peri-
od which began with the first day of such
fractional part of the year.
(ii) Effective date. This paragraph
(a)(2) applies on or after the date final reg-
ulations are published in the Federal
Register.
* * * * *
PART 301-PROCEDURE AND
ADMINISTRATION
Par. 7. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 8. Section 301.6109–1 is amended
as follows:
1. Paragraph (a)(2)(iii) is removed.
2. Paragraphs (a)(3) through (a)(6) are
added.
The additions are as follows:
§301.6109–1 Identifying numbers.
(a) * * *
(3) Obtaining a taxpayer identification
number for a trust, or portion of a trust,
following the death of the individual treat-
ed as the owner—(i) In general—(A) A
trust all of which was treated as owned by
a decedent. In general, a trust all of which
is treated as owned by a decedent under
subpart E (section 671 and following),
part 1, subchapter J, chapter 1 of the
Internal Revenue Code as of the dece-
dent’s date of death must obtain a new
taxpayer identification number following
the death of the decedent if the trust will
continue after the death of the decedent.
See, however, §301.6109–1(a)(4) for rules
regarding obtaining a taxpayer identifica-
tion number for a qualified revocable
trust, as defined in section 645(b)(1), for
which a section 645 election has been or
will be made.
(B) Taxpayer identification numbers of
trust with multiple owners. With respect
to a portion of a trust treated as owned
under subpart E (section 671 and follow-
ing), part 1, subchapter J, chapter 1 of the
Internal Revenue Code by a decedent as
of the date of the decedent’s death, if, fol-
lowing the death of the decedent, the por-
tion treated as owned by the decedent
remains part of the original trust and the
other portion (or portions) of the trust
continue to report under the taxpayer
identification number assigned to the trust
prior to the decedent’s death, the portion
of the trust treated as owned by the dece-
dent prior to the decedent’s death contin-
ues to report under the taxpayer identifi-
cation number used for reporting by the
other portion (or portions) of the trust.
(ii) Furnishing correct taxpayer identi-
fication number to payors following the
death of the decedent. If the trust contin-
ues after the death of the decedent and is
required to obtain a new taxpayer identifi-
cation number under paragraph
(a)(3)(i)(A) of this section, the trustee
must furnish payors with a new Form
W-9, or an acceptable substitute Form
W-9, containing the new taxpayer identifi-
cation number required under paragraph
(a)(3)(i)(A) of this section, the name of
the trust, and the address of the trustee.
(4) Taxpayer identification numbers if a
section 645 election has been, or will be,
made—(i) Definitions. For purposes of
this paragraph (a)(4), the terms qualified
revocable trust(QRT),electing trust,
related estate,election period, and per-
sonal representativeshall have the mean-
ings provided in §1.645–1(b) of this chap-
ter.
(ii) Taxpayer identification number to
be used during the election period—(A) If
there is a personal representative—(1) In
general. If there is a personal representa-
tive for a related estate, a taxpayer identi-
fication number does not need to be
obtained for an electing trust. The per-
sonal representative of the related estate
must obtain a taxpayer identification
number in the name of the estate. A
trustee of a QRT for which a section 645
election will be made and the personal
representative of the related estate, if any,
may choose to treat the QRT as an elect-
ing trust and not obtain a taxpayer identi-
fication number for the trust. See
§1.645–1(d)(1)(ii)(A) of this chapter. If

January 29, 20014822001–5 I.R.B.
the personal representative knows that a
section 645 election has been made for an
electing trust or will be made for a QRT at
the time the personal representative files
the Form SS-4,“Application for
Employer Identification Number,” for the
related estate, the personal representative
may enter the name of the trust as a sec-
ondary name on the form. All returns
filed for the combined related estate and
electing trust during the election period
must be filed using the name of the relat-
ed estate as the primary name on the
return.
(2) Obligations of persons who make
payments to electing trusts. Any payor
that is required to file an information
return with respect to payments of income
or proceeds to an electing trust must show
the name of the related estate, as the pri-
mary name on the return, the name of the
electing trust as the secondary name on
the return, and the taxpayer identification
number of the related estate on the return.
Nevertheless, the statement to recipients
must be furnished by the payor to the
trustee of the trust, rather than the person-
al representative of the related estate.
Under these circumstances, the payor sat-
isfies all information reporting sections
that require the payor to show the name
and taxpayer identification number of the
payee on the information return and to
furnish the statement to recipients to the
person whose taxpayer identification
number is required to be shown on the
form.
(B) If there is no personal representa-
tive. If there is no personal representative
for a related estate, the trustee of an elect-
ing trust must obtain a taxpayer identifica-
tion number as an estate. The name
entered on the Form SS-4 filed by the
trustee must be the name of the trust fol-
lowed by “filing as an estate under section
645.” Any returns filed by the electing
trust in accordance with section 645 dur-
ing the election period must be filed under
the name required to be entered on the
Form SS-4 under this paragraph and
under the taxpayer identification number
obtained pursuant to this paragraph. A
trustee of a QRT for which a section 645
election will be made may choose to treat
the QRT as an electing trust and obtain a
taxpayer identification number as an
estate under this paragraph and not as a
trust. See §1.645–1(d)(1)(ii)(A) of this
chapter.
(iii) Taxpayer identification number to
be used by a trust upon termination of the
election period. Upon the termination of
the election period, the trustee must obtain
a taxpayer identification number in the
name of the new trust. If there is no per-
sonal representative and the trustee
obtained a taxpayer identification number
under paragraph (a)(4)(ii)(B) of this sec-
tion for the trust to file as an estate under
section 645, the trustee must obtain a new
taxpayer identification number for the
new trust. See §1.645–1(h) of this chap-
ter for rules regarding the treatment of an
electing trust upon termination of the
election period. The trustee must furnish
to all payors of the trust a completed Form
W-9 or acceptable substitute Form W-9
signed under penalties of perjury by the
trustee providing each payor with the
name of the new trust, the TIN required to
be used under this paragraph (a)(4)(iii),
and the address of the trustee.
(5) Persons treated as payors. For pur-
poses of paragraphs (a)(2), (3), and (4) of
this section, a payoris a person described
in §§1.671–4(b)(4) and 1.645–1(b)(7) of
this chapter.
(6) Effective date. Paragraphs (a)(3),
(4), and (5) of this section apply on or
after the date final regulations are pub-
lished in the Federal Register.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 9. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
CFR part or section where Current OMB
identified and describedcontrol No.
* * * * *
1.645–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1578
* * * * *
David A. Mader,
Acting Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Regiater on De-
cember 15, 2000, 8:45 a.m., and published in the
issue of the Federal Register for December 18, 2000,
65 F.R. 79015)
Announcement of the Consent Voluntary Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regulations,
Part 10, an attorney, certified public ac-
countant, enrolled agent or enrolled actu-
ary, in order to avoid the institution or
conclusion of a proceeding for his disbar-
ment or suspension from practice before
the Internal Revenue Service, may offer
his consent to suspension from such prac-
tice. The Director of Practice, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent or en-
rolled actuary in accordance with the con-

2001–5 I.R.B.483January 29, 2001
sent offered.
Attorneys, certified public accountants,
enrolled agents and enrolled actuaries are
prohibited in any Internal Revenue Ser-
vice matter from directly or indirectly em-
ploying, accepting assistance from, being
employed by or sharing fees with, any
practitioner disbarred or suspended from
practice before the Internal Revenue Ser-
vice.
To enable attorneys, certified public ac-
countants, enrolled agents and enrolled ac-
tuaries to identify practitioners under con-
sent suspension from practice before the
Internal Revenue Service, the Director of
Practice will announce in the Internal Rev-
enue Bulletin the names and addresses of
practitioners who have been suspended
from such practice, their designation as at-
torney, certified public accountant, en-
rolled agent or enrolled actuary, and date
or period of suspension. This announce-
ment will appear in the weekly Bulletin at
the earliest practicable date after such ac-
tion and will continue to appear in the
weekly Bulletins for five successive weeks
or for as many weeks as is practicable for
each attorney, certified public accountant,
enrolled agent or enrolled actuary so sus-
pended and will be consolidated and pub-
lished in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
Date of
NameAddressDesignationSuspension
Sinclair, Gerald A.Hammond, INEnrolledAugust 16, 2000
Agentto
August 15, 2001
Barrett, NormanDover, DECPASeptember 1, 2000
to
November 30, 2001
Janus, Stephen E.Michigan City, INCPASeptember 20, 2000
to
September 19, 2003
McCormack, Frank J.Castlebury, FLCPASeptember 20, 2000
to
September 19, 2003
Serio, Vinson J.Metairie, LAEnrolled October 1, 2000
Agentto
September 30, 2003
Baker, Linda L.West Orange, NJCPAOctober 20, 2000
to
April 19, 2004
Duncanson, Thomas D.Mankato, MNCPANovember 7, 2000
to
May 6, 2003
West, KeithPasadena, CAEnrolledNovember 15, 2000
Agentto
May 14, 2001
Overbeck, MariettaEvansville, INCPANovember 15, 2000
to
November 14, 2002
Garrison, John L.Guymon, OKCPANovember 20, 2000
to
November 19, 2002
Aiken, Kim Allen Olympia, WACPADecember 10, 2000
to
June 9, 2002
D’Arata, David J.Buffalo, NYCPAJanuary 1, 2001
to
June 30, 2003
Gambrel, Thomas R.Corbin, KYCPAJanuary 1, 2001
to
December 31, 2004

January 29, 20014842001–5 I.R.B.
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Internal
Revenue Service any practitioner who,
within five years, from the date the expe-
dited proceeding is instituted, (1) has had
a license to practice as an attorney, certi-
fied public accountant, or actuary sus-
pended or revoked for cause; or (2) has
been convicted of any crime under title 26
of the United States Code or, of a felony
under title 18 of the United States Code
involving dishonesty or breach of trust.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Service
matter from directly or indirectly employ-
ing, accepting assistance from, being em-
ployed by, or sharing fees with, any practi-
tioner disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified pubic ac-
countants, enrolled agents, and enrolled ac-
tuaries to identify practitioners under expe-
dited suspension from practice before the
Internal Revenue Service, the Director of
Practice will announce in the Internal Rev-
enue Bulletin the names and addresses of
practitioners who have been suspended
from such practice, their designation as at-
torney, certified public accountant, enrolled
agent, or enrolled actuary, and date or pe-
riod of suspension. This announcement will
appear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks or for as many
weeks as is practicable for each attorney,
certified public accountant, enrolled agent,
or enrolled actuary so suspended and will
be consolidated and published in the Cu-
mulative Bulletin.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by
virtue of the expedited proceeding provi-
sions of the applicable regulations:
Announcement of the Expedited Suspension of Attorneys, Certified
Public Accountants, Enrolled Agents, and Enrolled Actuaries From
Practice Before the Internal Revenue Service
Date of
NameAddressDesignationSuspension
Barger, Robert E.Garden Ridge, TXAttorneyIndefinite
from
October 10, 2000
Roberts, Thomas W.Cincinnati OHCPAIndefinite
from
October 24, 2000
Announcement of the Disbarment and Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Before the Internal Revenue Service
Under Section 330, Title 31 of the
United States Code, the Secretary of the
Treasury, after due notice and opportunity
for hearing, is authorized to suspend or
disbar from practice before the Internal
Revenue Service any person who has vio-
lated the rules and regulations governing
the recognition of attorneys, certified pub-
lic accountants, enrolled agents or en-
rolled actuaries to practice before the In-
ternal Revenue Service.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Service
matter from directly or indirectly employing,
accepting assistance from, being employed
by, or sharing fees with any practitioner dis-
barred or under suspension from practice be-
fore the Internal Revenue Service.
To enable attorneys, certified public ac-
countants, enrolled agents and enrolled
actuaries to identify such disbarred or sus-
pended practitioners, the Director of Prac-
tice will announce in the Internal Revenue
Bulletin the names and addresses of prac-
titioners who have been suspended from
such practice, their designation as attor-
ney, certified public accountant, enrolled
agent or enrolled actuary, and the date of
disbarment or period of suspension. This
announcement will appear in the weekly
Bulletin for five successive weeks or as
long as it is practicable for each attorney,
certified public accountant, enrolled agent
or enrolled actuary so suspended or dis-
barred and will be consolidated and pub-
lished in the Cumulative Bulletin.
After due notice and opportunity for
hearing before an administrative law
judge, the following individual has been
disbarred from futher practice before the
Internal Revenue Service:
Effective
NameAddressDesignationDate
Joyner, JosephGary, INCPANovember 24, 2000

2001–5 I.R.B.iJanuary 29, 2001
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security
Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Definition of Terms

January 29, 2001ii2001–5 I.R.B.
Numerical Finding List
1
Bulletins 2001–1 through 2001–4
Announcements:
2001–1, 2001–2 I.R.B. 277
2001–2, 2001–2 I.R.B. 277
2001–3, 2001–2 I.R.B. 278
2001–4, 2001–2 I.R.B. 286
2001–5, 2001–2 I.R.B. 286
2001–6, 2001–3 I.R.B. 357
2001–7, 2001–3 I.R.B. 357
2001–8, 2001–3 I.R.B. 357
2001–9, 2001–3 I.R.B. 357
2001–10, 2001–4 I.R.B. 431
2001–11, 2001–4 I.R.B. 432
Notices:
2001–1, 2001–2 I.R.B. 261
2001–2, 2001–2 I.R.B. 265
2001–3, 2001–2 I.R.B. 267
2001–4, 2001–2 I.R.B. 267
2001–5, 2001–3 I.R.B. 327
2001–6, 2001–3 I.R.B. 327
2001–7, 2001–4 I.R.B. 374
2001–8, 2001–4 I.R.B. 374
2001–9, 2001–4 I.R.B. 375
2001–12, 2001–3 I.R.B. 328
Proposed Regulations:
REG–251701–96, 2001–4, I.R.B. 396
REG–104683–00, 2001–4, I.R.B. 407
REG–106702–00, 2001–4, I.R.B. 424
REG–107176–00, 2001–4, I.R.B. 428
REG–107566–00, 2001–3, I.R.B. 346
Railroad Retirement Quarterly Rates:
2001–2, I.R.B. 258
Revenue Procedures:
2001–1, 2001–1 I.R.B. 1
2001–2, 2001–1 I.R.B. 79
2001–3, 2001–1 I.R.B. 111
2001–4, 2001–1 I.R.B. 121
2001–5, 2001–1 I.R.B. 164
2001–6, 2001–1 I.R.B. 194
2001–7, 2001–1 I.R.B. 236
2001–8, 2001–1 I.R.B. 239
2001–9, 2001–3 I.R.B. 328
2001–10, 2001–2 I.R.B. 272
2001–11, 2001–2 I.R.B. 275
2001–12, 2001–3 I.R.B. 335
2001–13, 2001–3 I.R.B. 337
2001–14, 2001–3 I.R.B. 343
2001–16, 2001–4 I.R.B. 376
Revenue Rulings:
2001–2, 2001–2 I.R.B. 255
2001–3, 2001–3 I.R.B. 319
2001–4, 2001–3 I.R.B. 295
Treasury Decisions:
8910, 2001–2 I.R.B. 258
8911, 2001–3 I.R.B. 321
8913, 2001–3 I.R.B. 300
8915, 2001–4 I.R.B. 359
8916, 2001–4 I.R.B. 360
8918, 2001–4 I.R.B. 372
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2000–27 through
2000–52 is in Internal Revenue Bulletin 2001–1,
dated January 2, 2001.

2001–5 I.R.B.iiiJanuary 29, 2001
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–1 through 2001–4
Announcement:
98–99
Modified by
Ann. 2001–9, 2001–3 I.R.B. 357
99–79
Superseded by
Ann. 2001–3, 2001–2 I.R.B. 278
2000–97
Corrected by
Ann. 2001–7, 2001–3 I.R.B. 357
Cumulative Bulletin:
1998–2
Corrected by
Ann. 2001–5, 2001–2 I.R.B. 286
Notices:
98–39
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
98–40
Modified by
Notice 2001–9, 2001–4 I.R.B. 375
99–53
Modified and superseded by
Notice 2001–7, 2001–4 I.R.B. 374
2000–21
Superseded by
Notice 2001–1, 2001–2 I.R.B. 261
2000–22
Modified and superseded by
Notice 2001–8, 2001–4 I.R.B. 374
Proposed Regulations:
REG–116733–98
Withdrawn by
Ann. 2001–11, 2001–4 I.R.B. 432
Revenue Procedures:
96–17
Modified by
Rev. Proc. 2001–9, 2001–3 I.R.B. 328
99–47
Superseded by
Rev. Proc. 2001–16, 2001–4 I.R.B. 376
99–49
Modified and Amplified by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
2000–1
Superseded by
Rev. Proc. 2001–1, 2001–1 I.R.B. 1
2000–2
Superseded by
Rev. Proc. 2001–2, 2001–1 I.R.B. 79
2000–3
Superseded by
Rev. Proc. 2001–3, 2001–1 I.R.B. 111
Revenue Procedures—continued:
2000–4
Superseded by
Rev. Proc. 2001–4, 2001–1 I.R.B. 121
2000–5
Superseded by
Rev. Proc. 2001–5, 2001–1 I.R.B. 164
2000–6
Superseded by
Rev. Proc. 2001–6, 2001–1 I.R.B. 194
2000–7
Superseded by
Rev. Proc. 2001–7, 2001–1 I.R.B. 236
2000–8
Superseded by
Rev. Proc. 2001–8, 2001–1 I.R.B. 239
2000–22
Modified and superseded by
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
2001–13
Clarified by
Notice 2001–12, 2001–3 I.R.B. 328
Treasury Decisions:
8889
Corrected by
Ann. 2001–14, 2001–2 I.R.B. 286
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2000–27 through 2000–52 is in Internal Revenue
Bulletin 2001–1, dated January 2, 2001.

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