Internal Revenue Bulletin 2001-8 (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
Rev. Rul. 2001–9, page 652.
LIFO; price indexes; department stores. The December
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, December 31, 2000.
T.D. 8914, page 653.
Final regulations under section 988 of the Code relate to
when a currency will be considered hyperinflationary. These
final regulations are intended to prevent distortions associ-
ated with the computation of income and expense arising
from section 988 transactions denominated in hyperinfla-
tionary currencies.
EMPLOYEE PLANS
T.D. 8928, page 685.
Final regulations provide guidance on various issues arising
under the COBRA continuation coverage requirements for
group health plans. The issues include those related to busi-
ness reorganizations, employer withdrawals from multiemploy-
er plans, health flexible spending arrangements, and counting
employees for purposes of the exception under the COBRA
continuation coverage provisions for plans of small employers.
REG–209461–79, page 712.
Partial withdrawal of, and amendments to, the notices of pro-
posed rulemaking that relate to the tax treatment of cafete-
ria plans under section 125 of the Code.
EXEMPT ORGANIZATIONS
T.D. 8920, page 654.
REG–246256–96, page 713.
Temporary and proposed regulations under section 4958 of
the Code add details to the definitions and rules of section
4958. Section 4958 imposes excise taxes on excess bene-
fit transactions between a section 501(c)(3) or 501(c)(4)
organization (except a private foundation) and a person with
substantial influence over the affairs of the organization.
Announcement 2001–20, page 716.
A list is provided of organizations that no longer qualify as orga-
nizations to which contributions are deductible under section
170 of the Code.
EMPLOYMENT TAX
Announcement 2001–16, page 715.
This announcement provides guidance to federally recognized
Indian tribal governments about their Federal Unemployment Tax
Act (FUTA) obligations for 2000. Recent legislation changed how
FUTA applies to Indian tribal governments. As of December 21,
2000, federally recognized Indian tribal governments are
exempt from FUTA. The new law contains a transition rule which
eliminates an Indian tribal government’s 2000 liability for FUTA
taxes for services performed before December 21, 2000, if
certain requirements are met. Because the due date for the
2000 Form 940 used to report FUTA tax liability is January 31,
2001, this announcement is made to provide Indian tribal gov-
ernments options in filing their Forms 940.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2001–8
February 20, 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
Finding Lists begin on page ii.
Announcements of Disbarments and Suspensions begin on page 717.
(Continued on the next page)

February 20, 20012001–8 I.R.B.
ADMINISTRATIVE
T.D. 8935, page 702.
REG–103320–00, page 714.
Temporary and proposed regulations under section 6103 of
the Code set forth the requirements and conditions under
which the Service can make disclosures of returns and
return information to the designee of a taxpayer pursuant to
written or nonwritten requests.
Rev. Proc. 2001–18, page 708.
Last known address. This procedure explains how a tax-
payer is to inform the Service of a change of address. When
so informed, the Service will update the taxpayer’s address of
record to the new address. The Service uses the taxpayer’s
address of record for the various notices that are required to
be sent to a taxpayer’s “last known address” under the Code
and for refunds of overpayments of tax. Rev. Proc. 90–18
amplified and superseded.
Announcement 2001–15, page 715.
This announcement advises persons required to file informa-
tion returns that the mandatory use of Form W-9, Request for
Taxpayer Identification Number and Certification, (Rev.
December 2000) by U.S. persons has been delayed until
July 1, 2001. However, foreign persons may not use a Form
W-9 after December 31, 2000.
Announcement 2001–17, page 716.
The Service announces the availability of new Form 8875,
Taxable REIT Subsidiary Election. This form is used by both an
eligible corporation and a REIT to jointly elect to have the cor-
poration treated as a taxable REIT subsidiary.

2001–8 I.R.B.February 20, 2001
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-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
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.

February 20, 20016522001–8 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The December 2000 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, December 31, 2000.
Rev. Rul. 2001–9
The following Department Store
Inventory Price Indexes for December
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
Regulations and Rev. Proc. 86–46,
1986–2 C.B. 739, for appropriate applica-
tion to inventories of department stores
employing the retail inventory and last-in,
first-out inventory methods for tax years
ended on, or with reference to, December
31, 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.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsDec.Dec.from Dec. 1999
19992000to Dec. 2000
1
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512.9489.0-4.7
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . 619.5614.5-0.8
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . 631.0647.42.6
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 887.4901.81.6
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650.0631.7-2.8
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . 561.6567.21.0
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . 325.0342.9 5.5
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . 526.2533.81.4
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . 393.5381.8-3.0
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . 610.1584.0-4.3
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . 626.0618.3-1.2
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . 506.4487.8 -3.7
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924.8910.2-1.6
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768.3795.13.5
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . 981.7984.40.3
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . 688.5692.80.6
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . 602.7628.74.3
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786.9769.3-2.2
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . 234.9229.6-2.3
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . .63.257.1-9.7
21. Recreation and Education
2
. . . . . . . . . . . . . . . . . . .95.391.8-3.7
22. Home Improvements
2
. . . . . . . . . . . . . . . . . . . . . . . 129.3129.30.0
23. Auto Accessories
2
. . . . . . . . . . . . . . . . . . . . . . . . . . 107.3108.20.8
Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . 596.7589.8-1.2
Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . 445.6433.9-2.6
Groups 21 - 23: Misc. Goods
2
. . . . . . . . . . . . . . . . . . . . . 102.1100.0-2.1
Store Total
3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540.2531.7-1.6
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
ruling is Alan J. Tomsic of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Tomsic at (202) 622-4970 (not a toll-free
call).
Section 988.—Treatment of
Certain Foreign Currency
Transactions
26 CFR 1.988–1: Certain definitions and special
rules.
T.D. 8914
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Definition of Hyperinflationary
Currency for Purposes of
Section 988
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations concerning when a cur-
rency will be considered hyperinflation-
ary for purposes of section 988. These
final regulations are intended to prevent
distortions associated with the computa-
tion of income and expense arising from
section 988 transactions denominated in
hyperinflationary currencies.
DATES: The effective date of this regula-
tion is February 14, 2000.
FOR FURTHER INFORMATION CON-
TACT: John W. Rogers III of the Office of
Associate Chief Counsel (International) at
(202) 622-3870.
SUPPLEMENTARY INFORMATION:
Background
This document contains final Income
Tax Regulations (26 CFR part 1) under
section 988 of the Internal Revenue Code
(Code). On March 17, 1992, the IRS and
Treasury published final regulations (57
F.R. 9172) relating to the taxation of sec-
tion 988 transactions, including, inter alia,
transactions denominated in hyperinfla-
tionary currencies. Also on March 17,
1992, proposed regulations were pub-
lished (57 F.R. 9217) relating to the treat-
ment of certain financial instruments
denominated in hyperinflationary curren-
cies. The proposed regulations did not
separately define hyperinflationary cur-
rency. Rather, they simply made refer-
ence to the definition in the final regula-
tions, §1.988–1(f).
T.D. 8860 (2000–5 I.R.B. 437) (65 F.R.
2026) (January 13, 2000) finalized the
proposed regulations relating to the treat-
ment of financial instruments denominat-
ed in hyperinflationary currencies. Also
in that issue of the Bulletin was a notice of
proposed rulemaking (REG–116567–99,
2000–5 I.R.B. 463) regarding a proposed
change in the period of years that are con-
sidered in determining whether a currency
is hyperinflationary for purposes of sec-
tion 988 (base period). The notice of pro-
posed rulemaking also provided notice of
a public hearing on the proposed regula-
tions. No requests to speak were
received, and the public hearing was can-
celed. This Treasury decision finalizes
the proposed regulations relating to the
change in base period, with certain minor
changes.
Explanation of Provisions
As set out in the notice of proposed
rulemaking, the term hyperinflationary
currency, as defined in §1.988–1(f), uti-
lizes the definition in
§1.985–1(b)(2)(ii)(D). This definition
was developed in the context of the Dollar
Approximate Separate Transactions
Method (DASTM) regulations, §1.985–3,
and generally considers the cumulative
effects of inflation over the base period in
determining whether a currency is hyper-
inflationary. In §1.985–1(b)(2)(ii)(D), the
base period consists of the thirty-six cal-
endar month period immediately preced-
ing the first day of the current calendar
year. Use of this base period is generally
appropriate in the context of DASTM
because a qualified business unit needs to
know in advance if it is subject to
§1.985–3 calculations.
However, failure to take the current
year’s inflation into account for purposes
of computing foreign currency gain or
loss under section 988 may lead to distor-
tions in income and expense because
inflation may rise dramatically in a single
year. Accordingly, the IRS and Treasury
believe that for purposes of section 988, it
is more appropriate to consider the cumu-
lative inflation rate over the thirty-six
month period ending on the last day of the
taxpayer’s (or the qualified business
unit’s) current taxable year. This change
in the base period, however, applies only
for the purposes of section 988 and not for
the purpose of determining whether a tax-
payer (or QBU) is subject to the provi-
sions of §1.985–3.
Summary of Comments
One comment was received in connec-
tion with the proposed change in the mea-
surement of the base period under section
988. This comment relates to the applica-
tion of the rule to regulated investment
companies (RICs). The commenter stated
that sections 852(a) and 4982 effectively
require a RIC to distribute essentially all
of its income during the calendar year in
which it is earned. Thus, the commenter
concluded that RICs need to know before
the end of their tax year whether a partic-
ular currency is hyperinflationary. The
Treasury and IRS recognize that the
revised definition of base period could
present an administrative burden for
RICs. Accordingly, the final regulation
provides that RICs are not subject to the
revised base period standard of these final
regulations.
A similar exclusion from the revised
base period standard has been made for
REITs due to their similar distribution
requirements. The regulation has also
been amended to provide that the Service
may by notice provide that the revised
base period standard shall not apply to
any section 988 transaction of an entity
with distribution requirements similar to
that of RICs and REITs.
In addition, the regulation was amend-
ed to provide that generally accepted
accounting principles may not apply to
alter the base period outlined in paragraph
(f)(1)(ii)(A) of this section. This change
is intended to clarify that the last sentence
of §1.985–1(b)(2)(ii)(D) may not be
used to alter the base period for purposes
of section 988.
Special Analyses
It has been determined that this
Treasury decision is not a significant reg-
ulatory action as defined in Executive
2001–8 I.R.B.653February 20, 2001

Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of the
Administrative Procedures 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.
Drafting Information
The principal author of these regula-
tions is John W. Rogers III of the Office
of the Associate Chief Counsel (Interna-
tional). However, other personnel from
the IRS and Treasury Department also
participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.988–1, paragraph (f) is re-
vised to read as follows:
§1.988–1 Certain definitions and special
rules
* * * * *
(f) Hyperinflationary currency—(1)
Definition—(i) General rule. For pur-
poses of section 988, a hyperinflationary
currency means a currency described in
§1.985–1(b)(2)(ii)(D). Unless otherwise
provided, the currency in any example
used in §§1.988–1 through 1.988–5 is
not a hyperinflationary currency.
(ii) Special rules for determining base
period. In determining whether a currency
is hyperinflationary under §1.985–1(b)(2)
(ii)(D) for purposes of this paragraph (f),
the following rules will apply:
(A) The base period means the thirty-
six calendar month period ending on the
last day of the taxpayer’s (or qualified
business unit’s) current taxable year.
Thus, for example, if for 1996, 1997, and
1998, a country’s annual inflation rates
are 6 percent, 11 percent, and 90 percent,
respectively, the cumulative inflation rate
for the three-year base period is 124%
[((1.06 x 1.11 x 1.90) - 1.0 = 1.24) x 100
= 124%]. Accordingly, assuming the
QBU has a calendar year as its taxable
year, the currency of the country is hyper-
inflationary for the 1998 taxable year.
This change in the §1.985–1(b)(2)(ii)(D)
base period shall not apply to any section
988 transaction of an entity described in
section 851 (regulated investment com-
pany (RIC)) or section 856 (real estate in-
vestment trust (REIT)). The Service may,
by notice, provide that the foregoing
change in the §1.985–1(b)(2)(ii)(D) base
period does not apply to any section 988
transaction of an entity with distribution
requirements similar to a RIC or REIT.
(B) The last sentence of
§1.985–1(b)(2)(ii)(D) shall not apply to
alter the base period for purposes of this
paragraph (f) in determining whether a
currency is hyperinflationary for purposes
of section 988. Accordingly, generally
accepted accounting principles may not
apply to alter the base period for purposes
of this paragraph (f). (2) Effective date.
Paragraph (f)(1) of this section shall apply
to transactions entered into after February
14, 2000.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved November 29, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on De-
cember 29, 2000, 8:45 a.m., and published in the
issue of the Federal Register for January 3, 2001, 66
F.R. 279)
Section 4958.—Taxes on Excess
Benefit Transactions
26 CFR 53.4958–1T: Taxes on excess benefit
transactions (temporary).
T.D. 8920
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 53, 301, and 602
Excise Taxes on Excess Benefit
Transactions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations relating to the excise
taxes on excess benefit transactions under
section 4958 of the Internal Revenue Code,
as well as certain amendments and addi-
tions to existing Income Tax Regulations
affected by section 4958. Section 4958
was enacted in section 1311 of the
Taxpayer Bill of Rights 2. Section 4958
imposes excise taxes on transactions that
provide excess economic benefits to dis-
qualified persons of public charities and
social welfare organizations (referred to as
applicable tax-exempt organizations).
Disqualified persons who benefit from an
excess benefit transaction with an applica-
ble tax-exempt organization are liable for a
tax of 25 percent of the excess benefit.
Such persons are also liable for a tax of 200
percent of the excess benefit if the excess
benefit is not corrected by a certain date.
Additionally, organization managers who
participate in an excess benefit transaction
knowingly, willfully, and without reason-
able cause, are liable for a tax of 10 percent
of the excess benefit. The tax for which
participating organization managers are
liable cannot exceed $10,000 for any one
excess benefit transaction.
DATES: Effective Date: These regula-
tions are effective January 10, 2001.
Applicability Date: These regulations
apply as of January 10, 2001, and will
cease to apply January 9, 2004.
FOR FURTHER INFORMATION CON-
TACT: Phyllis D. Haney, (202) 622-4290
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these temporary regulations
have been reviewed and approved by the
Office of Management and Budget in ac-
cordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control num-
ber 1545–1623, in conjunction with the
notice of proposed rulemaking published
August 4, 1998, 63 F.R. 41486,
REG–246256–96, Failure by Certain
Charitable Organizations to Meet Certain
Qualification Requirements; Taxes on Ex-
cess Benefit Transactions.
An agency may not conduct or sponsor,
and a person is not required to respond to,
February 20, 20016542001–8 I.R.B.

a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books and records relating to the col-
lection 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
Section 4958 was added to the Code by
the Taxpayer Bill of Rights 2, Public Law
104–168 (110 Stat. 1452), enacted July
30, 1996. The section 4958 excise taxes
generally apply to excess benefit transac-
tions occurring on or after September 14,
1995. The IRS notified the general public
of the new section 4958 excise taxes in
Notice 96–46 (1996–2 C.B. 212), which
also solicited comments on the new law.
On August 4, 1998, a notice of pro-
posed rulemaking (REG–246256–96) on
page 713 of this Bulletin clarifying cer-
tain definitions and rules contained in sec-
tion 4958 was published in the Federal
Register(63 F.R. 41486). The IRS re-
ceived numerous written comments re-
sponding to this notice, including a com-
ment from the public on the collections of
information estimates contained therein.
That commentator expressed concern
that the purchase of independent compen-
sation surveys is required to certify the
reasonableness of certain outside and per-
sonnel contracts; and that the proposed
regulations place a burden on governing
bodies of applicable tax-exempt organiza-
tions, increasing the personal risk of
members of those governing bodies. The
collections of information in the proposed
regulations are voluntary on the part of
the governing bodies of applicable tax-ex-
empt organizations. Although the collec-
tions of information allow the organiza-
tion to rely on a presumption that a
transaction is reasonable or at fair market
value, the failure to obtain the collections
of information in no way implies that a
transaction is unreasonable.
Further, as discussed under Explana-
tion of Provisions of this preamble (under
the heading Rebuttable presumption that
a transaction is not an excess benefit
transaction), the IRS and the Treasury
Department believe that any applicable
tax-exempt organization may compile its
own comparability data rather than obtain
an independent survey to satisfy the re-
quirement to obtain appropriate data as to
comparability. Therefore, although the
comment on Paperwork Reduction Act re-
quirements was considered in the new es-
timates of the annual burden per record-
keeper and per respondent, these
temporary regulations continue to con-
clude that the estimated annual burden per
recordkeeper varies from 3 hours to 308
hours, depending on individual circum-
stances, with an estimated weighted aver-
age of 6 hours, 3 minutes.
A public hearing was held on March 16
and 17, 1999. After consideration of all
the comments, the proposed regulations
under section 4958 were revised as fol-
lows. The major areas of the comments
and revisions are discussed below.
Explanation of Provisions
Additional Taxes on Disqualified Person
A disqualified person benefitting from
an excess benefit transaction must correct
the excess benefit within the taxable pe-
riod to avoid liability for the 200-percent
tax under section 4958(b). The taxable
period is defined by section 4958 as the
period beginning on the date the transac-
tion occurred and ending on the earlier of
the date of mailing a notice of deficiency,
or the date on which the 25-percent tax is
assessed.
A commentator questioned whether the
disqualified person would receive any no-
tice that the IRS was examining a possible
excess benefit transaction before either of
the events ending the taxable period
occur. In fact, a disqualified person
would be notified if an examination of
that person were opened pursuant to an
examination of an applicable tax-exempt
organization. The IRS has an obligation
under Internal Revenue Code (Code) sec-
tion 7602(c) to notify taxpayers at the be-
ginning of the examination and collection
process that the IRS might contact third
parties (such as the organization) about
the taxpayer’s tax liabilities. Addition-
ally, the IRS follows the procedure of is-
suing a “first letter of proposed defi-
ciency” allowing the taxpayer an
opportunity for administrative review in
the IRS Office of Appeals. This first let-
ter is issued 30 days before the notice of
deficiency is issued. Consequently, a dis-
qualified person would be aware of any
examination of a potential excess benefit
transaction before the end of the taxable
period.
Although it is also IRS practice to issue
a single notice of deficiency for both the
25-percent and 200-percent section 4958
taxes for which the disqualified person is
liable, the abatement rules under section
4961 provide that the 200-percent tax
under section 4958(b) is not to be as-
sessed (and if assessed, is to be abated) if
the excess benefit is corrected within 90
days after the mailing of the notice of de-
ficiency for that tax.
Correction
Section 4958(f)(6) defines correction
as “undoing the excess benefit to the ex-
tent possible, and taking any additional
measures necessary to place the organiza-
tion in a financial position not worse than
that in which it would be if the disquali-
fied person were dealing under the high-
est fiduciary standards.” The proposed
regulations provide a short, general de-
scription of correction, referring to the
statutory language. The proposed regula-
tions define correction as repaying an
amount of money equal to the excess ben-
efit, plus “any additional amount needed
to compensate the organization for the
loss of the use of the money or other prop-
erty” from the date of the excess benefit
transaction to the date the excess benefit
is corrected. The proposed regulations
further allow correction “in certain cir-
cumstances” by permitting the disquali-
fied person to return property to the orga-
nization and “taking any additional steps
necessary to make the organization
whole.” Where there is an ongoing con-
tract for services, the proposed regula-
tions provide that the parties need not ter-
minate the contract in order to correct, but
the contract “may need to be modified” to
avoid future excess benefit transactions.
The IRS received numerous comments
and requests for additional guidance relat-
ing to correction as defined in the pro-
posed regulations. A number of commen-
tators requested that final regulations state
explicitly that correction requires a dis-
qualified person to pay interest on the ex-
cess benefit amount, and to specify the
rate of interest.
The temporary regulations state that the
disqualified person must pay the applica-
2001–8 I.R.B.655February 20, 2001

ble tax-exempt organization a correction
amount in order to correct an excess bene-
fit transaction and prevent imposition of
the 200-percent tax. The correction
amount equals the sum of the excess ben-
efit and interest on the excess benefit.
The amount of the interest charge is deter-
mined by multiplying the excess benefit
by an interest rate, compounded annually,
for the period from the date the excess
benefit transaction occurred to the date of
correction. The interest rate used for this
purpose must be a rate that equals or ex-
ceeds the applicable Federal rate (AFR),
compounded annually, for the month in
which the transaction occurred. The pe-
riod from the date the excess benefit
transaction occurred to the date of correc-
tion is used to determine whether the ap-
propriate AFR is the Federal short-term
rate, the Federal mid-term rate, or the
Federal long-term rate.
Commentators requested that an ap-
plicable tax-exempt organization have
discretion to determine the appropriate
form of correction; for example, payment
of money, return of property, or some
combination. Alternatively, one commen-
tator requested an explicit rule that mone-
tary payment is always sufficient and that
a buy-back or return of property is not re-
quired. Another requested clarification
that rescission could constitute an appro-
priate form of correction.
The temporary regulations provide, in
general, that a disqualified person cor-
rects an excess benefit only by making a
payment in cash or cash equivalents to the
applicable tax-exempt organization equal
to the correction amount. The disquali-
fied person may, however, with the agree-
ment of the applicable tax-exempt organi-
zation, make a payment by returning
specific property previously transferred in
the excess benefit transaction. In the lat-
ter case, the amount of the payment
equals the lesser of the fair market value
of the property determined on the date the
property is returned to the organization, or
the fair market value of the property on
the date the excess benefit transaction oc-
curred.
Under the temporary regulations, if the
payment made by returning the property
is less than the correction amount, the dis-
qualified person must make an additional
cash payment to the organization of the
difference. Conversely, if the payment
made by returning the property exceeds
the correction amount, the organization
may make a cash payment to the disquali-
fied person of the difference. The dis-
qualified person who engaged in the ex-
cess benefit transaction with the
applicable tax-exempt organization may
not participate in the applicable tax-ex-
empt organization’s decision whether to
accept as a correction payment the return
of specific property previously transferred
in the excess benefit transaction. An or-
ganization may always refuse the return
of that property as payment, and require
instead that the disqualified person make
a payment in cash (or cash equivalents) of
the full correction amount.
The temporary regulations provide a
special rule relating to the correction of an
excess benefit transaction resulting from
the vesting of benefits provided under a
nonqualified deferred compensation plan.
To the extent that such benefits have not
been distributed to the disqualified per-
son, the disqualified person may correct
the portion of the excess benefit attribut-
able to such undistributed deferred com-
pensation by relinquishing any right to re-
ceive such benefits (including any
earnings thereon).
The temporary regulations provide five
new examples that illustrate acceptable
forms of correction. The temporary regu-
lations also clarify that, if the disqualified
person makes a payment of less than the
full correction amount, the 200-percent
tax is imposed only on the unpaid portion
of the correction amount.
Another commentator suggested that
where an organization failed to establish
its intent to treat an economic benefit as
consideration for the performance of ser-
vices, amending an information return,
rather than requiring the disqualified per-
son to repay the benefit, should be suffi-
cient to correct the excess benefit transac-
tion, assuming that the total amount of
compensation was reasonable. In this re-
gard, the proposed regulations specifi-
cally allow the reporting of an economic
benefit by an organization on an original
or amended Federal tax information re-
turn to establish that a benefit was in-
tended as compensation. The proposed
regulations and these temporary regula-
tions permit an organization to establish
its intent by amending an information re-
turn at any time prior to when the IRS
commences an examination. Addition-
ally, the temporary regulations explicitly
allow the disqualified person to amend
the person’s Federal tax return to report a
benefit as income at any time prior to
when the IRS commences an examination
of the disqualified person or the applica-
ble tax-exempt organization for the tax-
able year in which the transaction occurs.
In addition, under the proposed regula-
tions and these temporary regulations, if
an organization can show reasonable
cause (using existing standards under sec-
tion 6724) for failing to report an eco-
nomic benefit as compensation as re-
quired under the Code or regulations, then
the organization will be treated as clearly
indicating its intent to provide an eco-
nomic benefit as compensation for ser-
vices. The section 6724 standards include
acting in a responsible manner before and
after the failure to report occurred, along
with either significant mitigating factors
or events beyond the organization’s con-
trol.
Where the applicable tax-exempt orga-
nization provides taxable benefits to a dis-
qualified person, section 4958(c)(1) re-
quires a clear indication that the
organization intended to provide the ben-
efits as consideration for the performance
of services. Where there is no such clear
indication, the value of those benefits
generally is an excess benefit, regardless
of any claim of reasonableness of the total
compensation package. In this case, the
regular correction rules apply.
The temporary regulations provide that
failure of the organization or the disquali-
fied person to report nontaxable economic
benefits (or otherwise document a clear in-
tent) does not result automatically in an ex-
cess benefit transaction. This rule is consis-
tent with the legislative history.
(H. REP. NO. 506, 104th Congress, 2d
SESS. (1996), 53, 57, note 8). These non-
taxable benefits must still be taken into ac-
count (unless specifically excluded else-
where in the regulations) when determining
whether the total amount of compensation
paid to a disqualified person is reasonable.
Therefore, only to the extent that total com-
pensation exceeds what is reasonable could
a section 4958 excise tax be imposed and
correction be required with respect to non-
taxable economic benefits.
The temporary regulations provide ad-
ditional guidance regarding correction
February 20, 20016562001–8 I.R.B.

where an applicable tax-exempt organiza-
tion has ceased to exist or is no longer
tax-exempt under section 501(a) as an or-
ganization described in section 501(c)(3)
or (4). The temporary regulations make
clear that a disqualified person must cor-
rect the excess benefit transaction in ei-
ther event. In the case of section
501(c)(3) organizations, the disqualified
person must pay the correction amount to
another organization described in section
501(c)(3) in accordance with the dissolu-
tion clause of the applicable tax-exempt
organization involved in the excess bene-
fit transaction, provided the other organi-
zation is not related to the disqualified
person. In the case of section 501(c)(4)
organizations, the disqualified person
must pay the correction amount to the
successor section 501(c)(4) organization
or, if there is no tax-exempt successor, to
any section 501(c)(3) or section 501(c)(4)
organization not related to the disquali-
fied person.
Several commentators requested clari-
fication that a disqualified person is al-
lowed to deduct the payment of a correc-
tion amount as a business expense. The
issue is beyond the scope of these regula-
tions. The provisions of Subtitle A of the
Code govern the deductibility of any part
of a correction payment.
Tax Paid by Organization Managers:
Reliance on Advice of Counsel
The proposed regulations provide a safe
harbor under which a manager’s participa-
tion in a transaction will ordinarily not be
subject to tax under section 4958(a)(2),
even though the transaction is subse-
quently held to be an excess benefit trans-
action, if the manager fully discloses the
factual situation to legal counsel, then re-
lies on the advice of such counsel ex-
pressed in a reasoned written legal opinion
that a transaction is not an excess benefit
transaction. This safe harbor parallels the
rules for foundation manager taxes con-
tained in the regulations under section
4941 (taxes on self-dealing) and section
4945 (taxes on taxable expenditures).
A number of commentators suggested
that the final regulations expand the ad-
vice-of-counsel safe harbor to allow re-
liance on the advice of other professionals.
Specifically mentioned were section 7525
practitioners (Federally authorized tax
practitioners), professional tax advisors,
and compensation consultants and apprais-
ers with respect to valuation issues. Com-
mentators likewise suggested that parallel
revisions should be made to the section
4941 and 4945 regulations.
The temporary regulations expand the
safe harbor contained in the proposed reg-
ulations. The temporary regulations pro-
vide that an organization manager’s partic-
ipation in an excess benefit transaction will
ordinarily not be considered knowing to
the extent that, after full disclosure of the
factual situation to an appropriate profes-
sional, the organization manager relies on
a reasoned written opinion of that profes-
sional with respect to elements of the trans-
action within the professional’s expertise.
For this purpose, appropriate professionals
are legal counsel (including in-house coun-
sel), certified public accountants or ac-
counting firms with expertise regarding the
relevant tax law matters, and independent
valuation experts who meet specified re-
quirements. The requirements for appro-
priate valuation experts are modeled after
the section 170 regulations that define
qualified appraisersfor charitable deduc-
tion purposes. Under the section 4958
temporary regulations, the valuation ex-
perts must hold themselves out to the pub-
lic as appraisers or compensation consul-
tants; perform the relevant valuations on a
regular basis; be qualified to make valua-
tions of the type of property or services
being valued; and include in the written
opinion a certification that they meet the
preceding requirements. This section 4958
regulations project did not undertake any
revisions to the advice-of-counsel safe har-
bor or the definition of knowingin the sec-
tion 4941 and 4945 regulations.
The temporary regulations contain an
additional safe harbor, providing that an
organization manager’s participation in a
transaction will ordinarily not be consid-
ered knowing if the manager relies on the
fact that the requirements giving rise to
the rebuttable presumption of reasonable-
ness are satisfied with respect to the trans-
action (for the requirements, see discus-
sion under the heading Rebuttable
presumption that a transaction is not an
excess benefit transactionof this pream-
ble).
Date of Occurrence
Section 4958 does not specify when an
excess benefit transaction occurs. The
proposed regulations provide that an ex-
cess benefit transaction occurs on the date
on which the disqualified person receives
the economic benefit from the applicable
tax-exempt organization for Federal in-
come tax purposes. The proposed regula-
tions also provide that a transaction con-
sisting of the payment of deferred
compensation occurs on the date the de-
ferred compensation is earned and vested.
Several comments were received request-
ing additional guidance about the timing
of an excess benefit transaction. Specifi-
cally, one commentator requested clarifi-
cation in the case of multiple payments.
The temporary regulations continue to
provide as a general rule that an excess
benefit transaction occurs on the date the
disqualified person receives the economic
benefit for Federal income tax purposes.
The temporary regulations contain addi-
tional rules for a series of compensation
payments or other payments arising pur-
suant to a single contractual arrangement
provided to a disqualified person over the
course of the disqualified person’s taxable
year (or part of a taxable year). In such a
case, any excess benefit transaction with
respect to these aggregate payments is
deemed to occur on the last day of the tax-
able year (or, if the payments continue for
part of the year, the date of the last pay-
ment in the series).
The temporary regulations also contain
special rules for deferred, contingent, and
certain noncash compensation. The tem-
porary regulations state that in the case of
benefits provided pursuant to a qualified
pension, profit-sharing, or stock bonus
plan, the transaction occurs on the date
the benefit is vested. In the case of a
transfer of property that is subject to a
substantial risk of forfeiture, or in the case
of rights to future compensation or prop-
erty (including benefits under a nonquali-
fied deferred compensation plan), the
transaction occurs on the date the prop-
erty, or the rights to future compensation
or property, is not subject to a substantial
risk of forfeiture. However, where the
disqualified person elects to include an
amount in gross income in the taxable
year of transfer pursuant to section 83(b),
the general rule applies, such that the
transaction occurs on the date the disqual-
ified person receives the economic benefit
from the applicable tax-exempt organiza-
tion for Federal income tax purposes.
2001–8 I.R.B.657February 20, 2001

Any excess benefit transaction with re-
spect to benefits under a deferred com-
pensation plan which vest during any tax-
able year of the disqualified person is
deemed to occur on the last day of the dis-
qualified person’s taxable year.
The temporary regulations continue to
reference the relevant Code sections for
statute of limitations rules as they apply to
section 4958 excise taxes. Generally, the
statute of limitations for section 4958
taxes begins with the filing of the applica-
ble tax-exempt organization’s return for
the year in which the excess benefit trans-
action occurred. If the organization dis-
closes an item on its return or on an at-
tached schedule or statement in a manner
sufficient to apprise the IRS of the exis-
tence and nature of an excess benefit
transaction, the three-year limitation on
assessment and collection applies. If the
transaction is not so disclosed, a six-year
limitation on assessment and collection
applies, unless an exception listed in sec-
tion 6501(c) applies.
Definition of Applicable Tax-Exempt
Organization
Section 4958(e) defines an applicable
tax-exempt organizationas “any organiza-
tion which (without regard to any excess
benefit) would be described in paragraph
(3) or (4) of section 501(c) and exempt
from tax under section 501(a) . . .” (except
private foundations). An applicable tax-
exempt organization also includes any or-
ganization that was described in section
501(c)(3) or (4) and exempt from tax
under section 501(a) at any time during a
five-year period ending on the date of an
excess benefit transaction (the lookback
period).
The temporary regulations revise the
section defining applicable tax-exempt
organizations to clarify that an organiza-
tion is not described in section 501(c)(3)
or (4) for purposes of section 4958 during
any period covered by a final determina-
tion or adjudication that the organization
is not exempt from tax under section
501(a) as an organization described in
section 501(c)(3) or (4), so long as that
determination or adjudication is not based
upon participation in inurement or one or
more excess benefit transactions.
A number of commentators requested
that the final regulations clarify the status
of section 115 governmental entities that
voluntarily applied for a determination of
their section 501(c)(3) status. Others re-
quested that those governmental entities
that applied for section 501(c)(3) exemp-
tion before the enactment of section 4958
be exempt from section 4958. In re-
sponse to these comments, the temporary
regulations provide that any governmen-
tal entity that is exempt from (or not sub-
ject to) taxation without regard to section
501(a) is not an applicable tax-exempt or-
ganization for purposes of section 4958.
Definition of Disqualified Person
Section 4958(f)(1) defines a disquali-
fied person with respect to any transaction
as “any person who was, at any time dur-
ing the 5-year period ending on the date
of such transaction, in a position to exer-
cise substantial influence over the affairs
of the organization . . .” (and several other
categories of related persons). The pro-
posed regulations list the statutory cate-
gories of related persons (i.e., certain
family members and 35-percent con-
trolled entities) that are treated as disqual-
ified persons for section 4958 purposes.
The proposed regulations also list several
categories of persons who are treated as
disqualified persons by virtue of the func-
tions they perform for, or the interests
they hold in, the organization. The pro-
posed regulations further provide that
other persons may be treated as disquali-
fied persons depending on all relevant
facts and circumstances and list some of
the factors to be considered.
Some commentators questioned certain
categories of persons who are deemed to
have substantial influence under the pro-
posed regulations (e.g., presidents, chief
executive officers, treasurers), arguing
that these per secategories conflict with a
statement in the legislative history that
“[a] person having the title of ‘officer, di-
rector, or trustee’ does not automatically
have the status of a disqualified person.”
These commentators requested that final
regulations adopt an alternative approach
of listing these categories as facts and cir-
cumstances tending to show that a person
has substantial influence over the affairs
of an organization. In response to these
comments, the temporary regulations
clarify that the per secategories of per-
sons who are in a position to exercise sub-
stantial influence for section 4958 pur-
poses are defined by reference to the
actual powers and responsibilities held by
the person and not merely by the person’s
title or formal position. Thus, for exam-
ple, it is possible that a person with the
mere title of “president” could be treated
as not having substantial influence if it is
demonstrated that the person, in fact, does
not have ultimate responsibility for imple-
menting the decisions of the governing
body or for supervising the management,
administration, or operation of the organi-
zation.
A number of commentators objected to
a provision in the proposed regulations
under which a person who has or shares
authority to sign drafts or to authorize
electronic transfer of the organization’s
funds is treated as a treasurer or chief fi-
nancial officer who is in a position to ex-
ercise substantial influence over the af-
fairs of the organization. Other
commentators requested that the final reg-
ulations recognize that a person who may
authorize transfer of only minimal
amounts of the organization’s funds
should not be treated as a disqualified per-
son solely by reason of that authority.
The temporary regulations clarify that a
person who has the powers and responsi-
bilities of a treasurer or chief financial of-
ficer is in a position to exercise substan-
tial influence, provided that the person
has ultimate responsibility for managing
the finances of the organization. As re-
quested by commentators, the temporary
regulations delete the provision from the
proposed regulations that refers to having,
or sharing, authority to sign drafts or to
authorize electronic transfer of funds.
The IRS and the Treasury Department
considered, but declined to adopt at pre-
sent, a special rule with respect to so-
called “donor advised funds” maintained
by an applicable tax-exempt organization.
Unlike other segments of an applicable
tax-exempt organization, such as an oper-
ating department (or division) of the orga-
nization, a donor advised fund consists of
a segregated fund maintained for the spe-
cific purpose of allowing certain persons
to provide ongoing advice regarding the
organization’s use of amounts contributed
by a particular donor (or donors). Al-
though these persons cannot properly
have legal control over the segregated
fund, they nonetheless are in a position to
exercise substantial influence over the
amount, timing, or recipients of distribu-
February 20, 20016582001–8 I.R.B.

tions from the fund. Accordingly, the IRS
and the Treasury Department request
comments regarding potential issues
raised by applying the fair market value
standard of section 4958 to distributions
from a donor advised fund to (or for the
use of) the donor or advisor.
The proposed regulations deem certain
persons not to have substantial influence,
including any applicable tax-exempt or-
ganization described in section 501(c)(3)
(i.e., public charities subject to section
4958). Various commentators requested
that section 501(c)(4) applicable tax-ex-
empt organizations, section 115 govern-
mental entities, corporations or associa-
tions organized as non-profits under the
laws of any State, or entities 100-percent
controlled by and for the benefit of sec-
tion 501(c)(3) applicable tax-exempt or-
ganizations, be deemed not to exercise
substantial influence over the affairs of
applicable tax-exempt organizations.
The temporary regulations provide that
any organization described in section
501(c)(3) and exempt from tax under sec-
tion 501(a) (including a private founda-
tion), is not a disqualified person. The
temporary regulations do not specifically
exclude from disqualified person status
section 115 and section 501(c)(4) organi-
zations generally, as requested in com-
ments. However, the temporary regula-
tions state that an organization described
in section 501(c)(4) is deemed not to have
substantial influence with respect to an-
other applicable tax-exempt organization
described in section 501(c)(4). Addition-
ally, the temporary regulations provide
that the transfer of economic benefits to a
government entity for exclusively public
purposes is disregarded for purposes of
section 4958.
A number of comments were received
on the section of the proposed regulations
providing that facts and circumstances
govern in all cases where disqualified per-
son status is not explicitly described.
Commentators variously requested revi-
sion or deletion of the statement that a
person with managerial control over a dis-
crete segment of an organization could be
in a position to exercise substantial influ-
ence over the affairs of the entire organi-
zation. Instead of considering this factor
in an overall evaluation of the facts and
circumstances, the temporary regulations
provide that the fact that a “person man-
ages a discrete segment or activity of the
organization that represents a substantial
portion of the activities, assets, income, or
expenses of the organization” is a sepa-
rate factor tending to show substantial in-
fluence. The IRS and the Treasury De-
partment believe that, in some
circumstances, a person managing a dis-
crete segment or activity of an organiza-
tion is, in fact, in a position to exercise
substantial influence over the organiza-
tion as a whole.
With respect to the factor that a person
is a substantial contributor within the
meaning of section 507(d)(2), requests
were made to define a substantial contrib-
utoras a person contributing more than
two percent of the organization’s total
support; to use a higher threshold, such as
the greater of $50,000 or 10 percent of
total contributions received; to limit the
treatment of substantial contributor status
as a factor to a reasonable time (e.g.,four
years); and to tie substantial contributor
status to persons required to be disclosed
as such on Form 990 or Schedule A of that
form. Additionally, a request was made to
specify how the five-year lookback period
applies to substantial contributors.
The temporary regulations continue to
include as a factor tending to show sub-
stantial influence the fact that a person is
a substantial contributor, generally as de-
fined in section 507(d)(2)(A). However,
the temporary regulations clarify that, to
determine whether a person is a substan-
tial contributor for section 4958 purposes,
only contributions received by the organi-
zation during its current taxable year and
the four preceding taxable years are taken
into account.
With respect to the factor that a per-
son’s compensation is based on revenues
derived from activities of the organization
that the person controls, a number of
commentators requested that a determina-
tion of disqualified person status not be
based solely on this factor. Several com-
mentators specifically requested clarifica-
tion of this factor with respect to physi-
cians in particular, and others requested
that the factor be deleted altogether.
Other commentators requested that the
factor be narrowed to situations where the
person’s compensation is based on rev-
enues from activities that provide over
half of the organization’s annual revenue,
or that the factor be modified to apply
only if a person’s compensation is based
to a significant extent on revenues derived
from activities of the organization that the
person controls. In response to these
comments, the temporary regulations
modify the factor to require that the per-
son’s compensation is primarily based on
revenues derived from activities of the or-
ganization that the person controls.
A number of commentators argued that
it is inappropriate to include all persons
with managerial authority, or persons
serving as key advisors to a person with
managerial authority, as potential disqual-
ified persons. Additional comments on
this issue requested that the final regula-
tions clarify the meaning of managerial
authorityor delete that factor from the
regulations. Others suggested that the
term key advisorbe limited to those with
real, substantial authority, or deleted alto-
gether and replaced by a standard that a
person can have managerial authority by
virtue of his or her actual impact on the
organization’s affairs without regard to
title or position. In response to these
comments, the temporary regulations
delete as a factor tending to show substan-
tial influence the fact that a person serves
as a key advisor to a manager. Moreover,
with respect to managerial authority, the
temporary regulations list revised factors
tending to show substantial influence, in-
cluding whether: 1) the person has or
shares authority to control or determine a
substantial portion of the organization’s
capital expenditures, operating budget, or
compensation for employees; and 2) the
person manages a discrete segment or ac-
tivity of the organization that represents a
substantial portion of the activities, assets,
income, or expenses of the organization,
as compared to the organization as a
whole.
With respect to factors tending to show
that a person does not have substantial in-
fluence, one commentator requested that
the fact that the person has had no prior
involvement or relationship with the orga-
nization be added as a factor. Another
commentator requested that the indepen-
dent contractor factor be modified so that
all “outside, independent professionals
performing services on a strictly fee-for-
service arrangement” are presumed not to
be disqualified persons. Other commen-
tators requested that additional factors
tending to show no substantial influence
2001–8 I.R.B.659February 20, 2001

be added for employees. In this regard,
suggested factors included that the person
reports to a disqualified person, does not
participate in major policy or financial de-
cisions affecting the organization as a
whole, or holds a position three or more
levels below the governing body. In re-
sponse to these comments, the temporary
regulations provide as a factor tending to
show no substantial influence the fact that
a person is an independent contractor
(such as an attorney, accountant, or in-
vestment manager or advisor) whose sole
relationship to the organization is provid-
ing professional advice, but who does not
have decision-making authority, with re-
spect to transactions from which the inde-
pendent contractor will not economically
benefit either directly or indirectly (aside
from customary fees received for the pro-
fessional advice rendered). In addition,
the temporary regulations add as factors
tending to show no substantial influence
the fact that the direct supervisor of the
individual is not a disqualified person,
and that the person does not participate in
any management decisions affecting the
organization as a whole or a substantial,
discrete segment or activity of the organi-
zation. The temporary regulations also
address the issue of persons with no prior
involvement with the organization by pro-
viding a special exception for initial con-
tracts (see the discussion under the head-
ing Initial Contract Exceptionin this
preamble).
Definition of Excess Benefit Transaction
Section 4958(c)(1) defines the phrase
excess benefit transactionas “any trans-
action in which an economic benefit is
provided by an applicable tax-exempt or-
ganization directly or indirectly to or for
the use of any disqualified person if the
value of the economic benefit provided
exceeds the value of the consideration (in-
cluding the performance of services) re-
ceived for providing such benefit.” The
excess benefit is the amount by which the
value of the economic benefits provided
to (or for the use of) the disqualified per-
son exceeds the value of the consideration
received. The proposed regulations fur-
ther define certain terms in the statutory
definition of excess benefit transaction
and delineate specific items that either are
disregarded or must be taken into account
in determining the value of a compensa-
tion package. The proposed regulations
also prescribe standards for determining
fair market value for section 4958 pur-
poses. In response to comments received
on these topics, the temporary regulations
make numerous changes to the provisions
of the proposed regulations that define the
phrase excess benefit transaction(as sum-
marized under the next six topic head-
ings).
The IRS and the Treasury Department
considered whether embezzled amounts
should be viewed as provided by the orga-
nization for section 4958 purposes. In
this regard, the IRS and the Treasury De-
partment believe that any economic bene-
fit received by a disqualified person (who
by definition has substantial influence)
from the assets of the organization is pro-
vided by the organization even if the
transfer of the benefit was not authorized
under the regular procedures of the orga-
nization.
Economic Benefit Provided Directly or
Indirectly
Section 4958(c)(1)(A) provides that
an excess benefit transaction may arise
when economic benefits are provided by
an applicable tax-exempt organization
directly or indirectly to or for the use of
any disqualified person. In this regard,
the proposed regulations provide that
“[a] benefit may be provided indirectly
through the use of one or more entities
controlled by or affiliated with the ap-
plicable tax-exempt organization. For
example, if an applicable tax-exempt or-
ganization causes its taxable subsidiary
to pay excessive compensation to, or en-
gage in a transaction at other than fair
market value with, a disqualified person
of the parent organization, the payment
of the compensation or the transfer of
property is an excess benefit transac-
tion.” This example is based on similar
language contained in the legislative his-
tory to section 4958 (See H. REP. NO.
506, 104th Congress, 2d SESS. (1996),
53, 56, note 3).
A number of commentators requested
further clarification of the definition of in-
direct excess benefit transactions. Some
commentators requested that the final reg-
ulations clarify that any compensation
disqualified persons receive from unre-
lated third parties through the acquies-
cence of the employing applicable tax-ex-
empt organization not be considered in
determining reasonable compensation.
Another commentator suggested that, as a
general rule, an excess benefit may be
found to be provided indirectly through
an entity controlled by an applicable tax-
exempt organization only when the funds
or other benefits at issue can clearly be
traced to the parent organization. Addi-
tionally, a request was received to specify
that payment by a subsidiary of excessive
compensation does not, by itself, justify
the conclusion that the parent organiza-
tion caused the subsidiary to engage in an
excess benefit transaction. Other requests
were made to clarify that services re-
ceived by the applicable tax-exempt orga-
nization may include services provided by
the disqualified person to one or more
other entities controlled by or affiliated
with the organization.
Commentators also suggested several
clarifications to the phrase “controlled by
or affiliated with” for purposes of deter-
mining whether an indirect excess benefit
transaction has occurred. One commenta-
tor suggested that control or affiliation
must exist at the time the benefit is autho-
rized or approved, rather than when the
benefit is received by the disqualified per-
son. Others suggested that the definition
of “controlled by or affiliated with” fol-
low more closely the definition of control
under the section 4941 self-dealing regu-
lations or under section 512(b)(13) (in-
cluding constructive ownership rules con-
tained in section 318). Another
commentator suggested defining the term
affiliatedto mean that organizations share
a majority of governing body members or
principal officers. Other commentators
requested that the final regulations state
that approval of a benefit by a board inde-
pendent of the applicable tax-exempt or-
ganization would prevent finding that the
organization indirectly provided an ex-
cess benefit to a disqualified person.
Commentators also requested that the
final regulations include examples
demonstrating that the mere existence of a
relationship between two entities, includ-
ing a control relationship, is insufficient
to justify a conclusion that a benefit has
been indirectly provided to a disqualified
person unless a purposeful avoidance of
February 20, 20016602001–8 I.R.B.

section 4958 by conducting a transaction
indirectly is shown.
In response to these comments, the
temporary regulations clarify that an ap-
plicable tax-exempt organization may
provide an economic benefit indirectly to
a disqualified person either through a con-
trolled entity or through an intermediary.
In this regard, the temporary regulations
parallel the section 4941 self-dealing reg-
ulations, except that the temporary regu-
lations generally adopt the section
512(b)(13) standard for control. (The
section 512(b)(13) standard for control
considers only the tax-exempt organiza-
tion’s interest in the controlled entity, or
the tax-exempt organization’s control of a
nonstock corporation’s directors or
trustees. In contrast, the section 4941 reg-
ulations’ definition of control also consid-
ers interests held individually by the di-
rectors or trustees of the foundation). The
temporary regulations provide that all
consideration and benefits exchanged be-
tween a disqualified person and an applic-
able tax-exempt organization, and all enti-
ties the organization controls, are taken
into account to determine whether there
has been an excess benefit transaction.
The temporary regulations provide that
an applicable tax-exempt organization
provides an economic benefit indirectly
through an intermediary when: 1) an ap-
plicable tax-exempt organization provides
an economic benefit to a third party (the
intermediary); 2) the intermediary pro-
vides economic benefits to a disqualified
person of the applicable tax-exempt orga-
nization; and 3) either (a) there is evi-
dence of an oral or written agreement or
understanding that the intermediary will
transfer property to a disqualified person;
or (b) the intermediary lacks a significant
business purpose or exempt purpose of its
own for engaging in such a transfer. The
temporary regulations also include four
new examples illustrating different fact
patterns under which economic benefits
are provided indirectly to a disqualified
person through a controlled entity or
through an intermediary.
Initial Contract Exception
The proposed regulations do not pro-
vide any special rules for transactions
conducted pursuant to the first contract
that a previously unrelated person enters
into with the applicable tax-exempt orga-
nization. Several comments received dur-
ing the regular comment period requested
that a person having no prior relationship
with an organization not be considered a
disqualified person with respect to the
first contractual arrangement with the or-
ganization.
After the close of the written comment
period for the proposed regulations (No-
vember 2, 1998), but before the public
hearing (March 16 and 17, 1999), the
United States Court of Appeals for the
Seventh Circuit issued its decision in
United Cancer Council, Inc. v. Commis-
sioner of Internal Revenue, 165 F.3d 1173
(7th Cir. 1999), rev’ing and remanding
109 T.C. 326 (1997). In this case, the
Seventh Circuit reversed the Tax Court’s
finding that a contract between a charity
and a previously unrelated fundraising
company resulted in private inurement in
violation of the charity’s tax-exempt sta-
tus. The Seventh Circuit remanded the
case back to the Tax Court to address the
question whether the fundraising contract
resulted in private benefit in violation of
section 501(c)(3).
In United Cancer Council, the Seventh
Circuit concluded that prohibited inure-
ment under section 501(c)(3) cannot re-
sult from a contractual relationship nego-
tiated at arm’s length with a party having
no prior relationship with the organiza-
tion, regardless of the relative bargaining
strength of the parties or resultant control
over the tax-exempt organization created
by the terms of the contract. The transac-
tions at issue in United Cancer Council
were conducted prior to the effective date
of section 4958. Consequently, United
Cancer Council involved interpretations
of the general requirements for tax-ex-
empt status under section 501(c)(3), and
not questions of disqualified person sta-
tus or the existence of an excess benefit
transaction under section 4958. Never-
theless, at the public hearing and in sup-
plemental comments received after the
hearing, commentators referenced the
Seventh Circuit decision and requested
that the proposed regulations be modified
so that section 4958 excise taxes will not
be imposed on the first transaction or con-
tract between an applicable tax-exempt
organization and a previously unrelated
person.
The temporary regulations address the
issue raised by United Cancer Councilby
providing that section 4958 does not
apply to any fixed payment made to a per-
son pursuant to an initial contract, regard-
less of whether the payment would other-
wise constitute an excess benefit
transaction. For this purpose, an initial
contract is defined as a binding written
contract between an applicable tax-ex-
empt organization and a person who was
not a disqualified person immediately
prior to entering into the contract. Afixed
paymentmeans an amount of cash or
other property specified in the contract, or
determined by a fixed formula specified
in the contract, which is paid or trans-
ferred in exchange for the provision of
specified services or property. A fixed
formula may incorporate an amount that
depends upon future specified events or
contingencies (e.g., revenues generated
by activities of the organization), pro-
vided that no person exercises discretion
when calculating the amount of a pay-
ment or deciding whether to make a pay-
ment. As suggested by some commenta-
tors, however, the initial contract rule
does not apply if the contract is materially
modified or if a person fails to substan-
tially perform his or her obligations under
the contract.
Thus, under the temporary regulations,
to the extent that an applicable tax-ex-
empt organization and a person who is not
yet a disqualified person conduct negotia-
tions and specify the amounts to be paid
to the person (or specify an objective for-
mula for paying that person), then these
fixed payments are not subject to scrutiny
under section 4958, even if paid after the
person becomes a disqualified person. An
initial contract may provide for both fixed
and non-fixed (i.e., discretionary) pay-
ments. In this case, the fixed payments
are not subject to section 4958, while the
non-fixed payments will be subject to
scrutiny under section 4958 (taking into
account all consideration exchanged be-
tween the parties). In effect, the initial
contract rule contained in the temporary
regulations protects from section 4958 li-
ability those payments made pursuant to
fixed, objective terms specified in a con-
tract entered into before the person was in
a position to exercise substantial influ-
ence, yet allows for scrutiny under section
2001–8 I.R.B.661February 20, 2001

4958 to the extent the contract allows for
subsequent discretion to be exercised
(which may be subject to influence by the
disqualified person) when calculating the
amount of a payment or deciding whether
to make a payment. The temporary regu-
lations include eleven examples to illus-
trate the application of the initial contract
rule.
Certain Economic Benefits Disregarded
for Purposes of Section 4958
For ease of administration, the pro-
posed regulations list several economic
benefits that are disregarded for purposes
of section 4958. These disregarded items
include reimbursements for reasonable
expenses of attending meetings of the
governing body (but not luxury or spousal
travel); certain economic benefits pro-
vided to a disqualified person solely as a
member of, or volunteer for, the organiza-
tion; and economic benefits provided to a
disqualified person solely as a member of
a charitable class. A number of comments
recommended modifying these provi-
sions.
With respect to reimbursements for ex-
penses of attending meetings of the gov-
erning body (but not luxury travel or
spousal travel), suggestions were made to
clarify or delete these terms; to provide as
an alternative that all travel expenses that
are not lavish or extravagant within the
meaning of section 162 may be disre-
garded; to disregard spousal travel ex-
penses in circumstances where the
spousal attendance furthers the exempt
purposes of the organization or meets the
section 274 bona fide business purpose
test; and to address the issue of travel ex-
penses by generally disregarding working
condition fringe benefits and de minimis
fringe benefits described in sections
132(d) and (e). Other commentators re-
quested that any benefits received by a
disqualified person should be disregarded
if incidental to the organization’s achieve-
ment of its exempt purposes, such as
when disqualified persons attend
fundraising dinners or conferences on be-
half of the organization.
In response to these comments, the
temporary regulations delete the separate
provision that provides that reasonable
expenses of attending meetings of the
governing body may be disregarded. In
place of this provision, the temporary reg-
ulations substitute a more general rule
providing that all fringe benefits excluded
from income under section 132 (except
for certain liability insurance premiums,
payments or reimbursements, discussed
below) are disregarded for section 4958
purposes. This change addresses com-
ments received on the limitation in the
proposed regulations with respect to lux-
ury and spousal travel. By referring to
fringe benefits excluded from income
under section 132, the temporary regula-
tions adopt existing standards under sec-
tion 162 and section 274 (which are incor-
porated into section 132) to determine
whether payments or reimbursements of
travel expenses of an employee – or any
other expenses – should be disregarded
for section 4958 purposes or, instead,
treated as part of the disqualified person’s
compensation.
With respect to economic benefits pro-
vided to a disqualified person solely as a
member of, or volunteer for, the organiza-
tion, the proposed regulations disregard
such benefits for section 4958 purposes
only if the organization provides the same
benefits to members of the general public
in exchange for a membership fee of $75
or less per year. Commentators suggested
that this provision be expanded in the
final regulations to apply to any benefit
(without a dollar limitation) provided to a
disqualified person solely by virtue of that
person being a donor, volunteer, or mem-
ber, provided that any member of the gen-
eral public making a comparable contri-
bution receives a similar benefit. Another
commentator requested a similar modifi-
cation, with the additional requirement
that a significant number of non-disquali-
fied persons (e.g., 10 or more) actually
make a comparable payment to the orga-
nization and are given the option of re-
ceiving substantially the same benefit.
The temporary regulations continue to
disregard for section 4958 purposes eco-
nomic benefits provided to a volunteer
(who is also a disqualified person) if that
benefit is provided by the organization to
the general public in exchange for a mem-
bership fee or contribution of $75 or less
per year. In contrast, economic benefits
provided to a disqualified person as a
member of, or a donor to, an applicable
tax-exempt organization are no longer
limited by a specific dollar cap. The tem-
porary regulations disregard economic
benefits provided to a member of an orga-
nization solely on account of the payment
of a membership fee, or to a donor solely
on account of a contribution deductible
under section 170 if: 1) any non-disquali-
fied person paying a membership fee or
making a contribution above a specified
amount to the organization is given the
option of receiving substantially the same
economic benefit; and 2) the disqualified
person and a significant number of non-
disqualified persons in fact make a pay-
ment or contribution of at least the speci-
fied amount.
The temporary regulations clarify that
section 162 standards apply in determin-
ing reasonableness of compensation for
section 4958 purposes, taking into ac-
count all benefits provided to a person
(other than benefits that are specifically
disregarded for section 4958 purposes)
and the rate at which any deferred com-
pensation accrues. The temporary regula-
tions also provide that the fact that a
bonus or revenue-sharing arrangement is
subject to a cap is a relevant factor in de-
termining the reasonableness of compen-
sation.
Insurance or Indemnification of Excise
Taxes
The legislative history to section 4958
indicates that reimbursements of excise
tax liability, or payment of premiums for
liability insurance for excess benefit
taxes, by an applicable tax-exempt orga-
nization constitute an excess benefit un-
less they are included in the disqualified
person’s compensation during the year
paid and the total compensation package
for that person is reasonable. See H. REP.
NO. 506, 104th Congress, 2d SESS.
(1996), 53, 58. Following this legislative
history, the proposed regulations specifi-
cally provide that payment of a premium
for insurance for section 4958 taxes or in-
demnification of a disqualified person for
these taxes is not an excess benefit trans-
action if the premium or the indemnifica-
tion is treated as compensation to the dis-
qualified person when paid, and the total
compensation paid to the person is rea-
sonable. However, some commentators
read the special rule in conjunction with
another section of the proposed regula-
February 20, 20016622001–8 I.R.B.

tions - which listed “[t]he amount of pre-
miums paid for liability or any other in-
surance coverage, as well as any payment
or reimbursement by the organization of
charges, expenses, fees, or taxes not cov-
ered ultimately by the insurance cover-
age” as an item included in compensation
for purposes of section 4958 - as poten-
tially mandating that such insurance pre-
mium or indemnification payments be
treated as taxable income to the disquali-
fied person in order to avoid being char-
acterized as an excess benefit transaction.
Several commentators requested that
premiums for liability insurance be disre-
garded entirely for section 4958 purposes,
along with non-compensatory indemnifi-
cation of members of the governing body
and officers against liability in civil pro-
ceedings (as described in the private foun-
dation self-dealing regulations under sec-
tion 4941), or that de minimiscosts (e.g.,
$200) associated with such insurance cov-
erage be disregarded.
Other commentators suggested that a
portion of the premium payment be allo-
cated to section 4958 tax coverage, and
that only that portion be included in com-
pensation of the disqualified person. Oth-
ers requested that the portion of a pre-
mium allocable to liability insurance
coverage for an organization manager
who is also a disqualified person to cover
the person’s potential liability for the
manager-level tax under section
4958(a)(2) be considered a working con-
dition fringe under section 132(d). Others
requested that benefits under indemnifica-
tion plans be taken into account for sec-
tion 4958 purposes only if and when paid.
To clarify the treatment of insurance
premiums and reimbursements of excise
tax liability, the temporary regulations in-
clude a special rule, which includes in a
disqualified person’s compensation for
section 4958 purposes the payment of lia-
bility insurance premiums for, or the pay-
ment or reimbursement by the organiza-
tion of: 1) any penalty, tax, or expense of
correction owed under section 4958; 2)
any expense not reasonably incurred by
the person in connection with a civil judi-
cial or civil administrative proceeding
arising out of the person’s performance of
services on behalf of the applicable tax-
exempt organization; and 3) any expense
resulting from an act or failure to act with
respect to which the person has acted
willfully and without reasonable cause.
This rule parallels the section 4941 regu-
lations governing the treatment of direc-
tors and officers liability insurance and
indemnification. As under the section
4941 regulations, however, the temporary
regulations provide that insurance premi-
ums and reimbursements may be disre-
garded if they qualify as de minimisfringe
benefits excludable from income under
section 132(a)(4).
In addition, the temporary regulations
clarify that the inclusion of an item in
compensation for section 4958 purposes
does not govern its income tax treatment.
Thus, the mere fact that a premium or re-
imbursement payment, or any other bene-
fit, provided to a disqualified person must
be taken into account in determining the
reasonableness of that person’s total com-
pensation package for section 4958 pur-
poses is not determinative of whether or
not that benefit is included in the disquali-
fied person’s gross income for income tax
purposes.
Timing Rules for Determining
Reasonableness
Section 4958(c)(1) defines an excess
benefit transaction as a transaction in
which the value of an economic benefit
provided to a disqualified person exceeds
the value of the consideration received
(including the performance of services),
but the statutory provisions do not di-
rectly address the issue of when to value
the benefits and consideration exchanged.
In this regard, the proposed regulations
provide that whether compensation is rea-
sonable is generally determined when the
parties enter into the contract for services.
The proposed regulations further provide,
however, that “where reasonableness of
compensation cannot be determined
based on circumstances existing at the
date when the contract for services was
made, then that determination is made
based on all facts and circumstances, up
to and including circumstances as of the
date of payment.” Many commentators
objected to the uncertainty created by this
additional sentence.
To clarify the issue of the timing of the
reasonableness determination, the tempo-
rary regulations provide that reasonable-
ness is determined with respect to any
fixed payment (as defined for purposes of
the initial contract rule discussed above)
at the time the parties enter into the con-
tract. However, the temporary regulations
provide that the reasonableness of any
amounts not fixed in the contract itself or
paid pursuant to an objective formula is
determined based on all facts and circum-
stances, up to and including circum-
stances as of the date of the payment at
issue, because determining the amount of
such a payment (or whether a payment is
made) requires the exercise of discretion
after the contract is entered into.
Establishing Intent to Treat Economic
Benefit as Consideration for the
Performance of Services
The second sentence of section
4958(c)(1)(A) defining excess benefit
transactionstates that an economic bene-
fit will not be treated as consideration for
the performance of services unless the ap-
plicable tax-exempt organization clearly
indicated its intent to so treat the benefit.
The proposed regulations generally re-
quire the organization to provide clear
and convincing evidence of its intent to
treat the benefit as compensation for ser-
vices when the benefit is paid. Under the
proposed regulations, this requirement is
satisfied if the organization reports the
economic benefit on a federal tax infor-
mation return filed before the commence-
ment of an IRS examination in which the
reporting of the benefit is questioned, or if
the recipient disqualified person reports
the benefit as income on the person’s
Form 1040 for the year in which the bene-
fit is received. In addition, an organiza-
tion is deemed to satisfy the clear and
convincing evidence requirement if the
organization’s failure to report a payment
is due to reasonable cause as defined in
the section 6724 regulations. The pro-
posed regulations also provide that an or-
ganization may use other methods to pro-
vide clear and convincing evidence of its
intent. The preamble of the proposed reg-
ulations explicitly solicited comments on
appropriate ways of applying this rule that
would not create an unnecessary burden
on affected organizations.
A number of comments were received
with regard to establishing an organiza-
tion’s intent to treat a benefit as compen-
sation for services. Several commenta-
2001–8 I.R.B.663February 20, 2001

tors suggested that the clear and convinc-
ing standard is higher than appropriate.
Others requested that organizations not be
required to demonstrate intent with re-
spect to specific benefits, such as: reim-
bursement arrangements that are clearly
part of the employment arrangement; de
minimisamounts (for example, taxable
benefits of up to $500 per year provided
to a disqualified person); and certain non-
taxable benefits. Other commentators re-
quested that final regulations clarify the
appropriate method for substantiating an
organization’s intent in the case of certain
nontaxable benefits and transfers of prop-
erty subject to section 83. Others re-
quested guidance on how to report com-
pensation paid to a disqualified person on
Form 990 if that person is not an officer
or director or one of the five highest paid
employees. Some commentators sug-
gested that the final regulations allow
other methods to establish an intention to
treat benefits as compensation, such as a
written contract of employment. Com-
mentators also suggested that an organi-
zation’s reasonable belief that a benefit is
nontaxable should constitute reasonable
cause for failure to report, or that the rea-
sonable cause standard be expanded to or-
dinary business care and prudence.
In response to these comments, the
temporary regulations modify the require-
ment that an organization provide clear
and convincing evidence of its intent to
treat benefits provided to a disqualified
person as compensation for services.
Consistent with the legislative history, the
temporary regulations provide instead
that an organization must provide “writ-
ten substantiation that is contemporane-
ous with the transfer of benefits at issue.”
H. REP. NO. 506, 104th Congress, 2d
SESS. (1996), 53, 57, note 8.
The temporary regulations also provide
a safe harbor for nontaxable benefits.
Under this safe harbor, an applicable tax-
exempt organization is not required to indi-
cate its intent to provide an economic ben-
efit as compensation for services if the
economic benefit is excluded from the dis-
qualified person’s gross income for income
tax purposes under chapter 1 of the Inter-
nal Revenue Code. Examples of such ben-
efits include: employer-provided health
benefits, contributions to a qualified pen-
sion, profit-sharing, or stock bonus plan
under Internal Revenue Code section
401(a), and benefits described in sections
127 (educational assistance programs) and
137 (adoption assistance programs). The
safe harbor is consistent with the legisla-
tive history, which indicates that Congress
intended to except nontaxable benefits
from this contemporaneous substantiation
requirement. H. REP. NO. 506, 104th
Congress, 2d SESS. (1996), 53, 57, note 8.
However, the benefits must still be taken
into account (unless specifically disre-
garded under the regulations) in determin-
ing the reasonableness of the disqualified
person’s compensation for purposes of sec-
tion 4958.
Consistent with the legislative history,
the temporary regulations also clarify
that, if a benefit is not reported on a return
filed with the IRS, other written contem-
poraneous evidence (such as an approved
written employment contract executed on
or before the date of the transfer) may be
used to demonstrate that the appropriate
decision-making body or an authorized
officer approved a transfer as compensa-
tion for services in accordance with estab-
lished procedures.
Transaction in Which the Amount of the
Economic Benefit Is Determined in
Whole or in Part by the Revenues of One
or More Activities of the Organization
Section 4958(c)(2) describes a second
type of excess benefit transaction: “any
transaction in which the amount of any
economic benefit provided to or for the
use of a disqualified person is determined
in whole or in part by the revenues of 1 or
more activities of the organization . . .”, if
the transaction results in inurement under
section 501(c)(3) or (4). However, a rev-
enue-sharing transaction is treated as an
excess benefit transaction under this spe-
cial statutory rule only “[t]o the extent
provided in regulations prescribed by the
Secretary . . . .”
The proposed regulations provide that
whether a revenue-sharing transaction re-
sults in inurement, and therefore consti-
tutes an excess benefit transaction, de-
pends upon all relevant facts and
circumstances. The proposed regulations
provide that, in general, a revenue-sharing
transaction may constitute an excess ben-
efit transaction regardless of whether the
economic benefit provided to the disqual-
ified person exceeds the fair market value
of services (or other consideration) ren-
dered, if a disqualified person is permitted
to receive additional compensation with-
out providing proportional benefits that
contribute to the organization’s accom-
plishment of its exempt purpose.
The proposed regulations consider an
improper revenue-sharing transaction, in
its entirety, to be an excess benefit subject
to section 4958. Special rules governing
revenue-sharing transactions, however,
will be effective only for transactions oc-
curring on or after the date of publication
of final regulations containing such rules.
Until special rules for revenue-sharing
transactions are adopted in final regula-
tions, these transactions are potentially
subject to section 4958 liability under the
general rules governing excess benefit
transactions, but only to the extent that
the value of the economic benefits pro-
vided to the disqualified person is shown
to exceed the value of the services (or
other consideration) received in return.
Numerous comments were received
with respect to revenue-sharing transac-
tions. Some commentators did not believe
a different standard from that applied to all
other transactions (fair market value)
should apply, and that the value of consid-
eration provided by a disqualified person
in a revenue-sharing transaction should be
taken into account in determining the ex-
cess benefit in these transactions. Others
objected to the revenue-sharing transaction
standard of the proposed regulations, and
requested that it be replaced by a standard
based on approaches the IRS has taken in
prior unpublished rulings. Some commen-
tators requested guidance as to the mean-
ing of proportional benefitsor other con-
cepts incorporated in the proposed
regulations standard. Others requested that
existing contractual arrangements not be
subject to this section of the final regula-
tions, or that the effect of the final rules for
existing arrangements be phased in. In ad-
dition, several commentators requested
that the final regulations clarify whether
the rebuttable presumption of reasonable-
ness is available for revenue-sharing trans-
actions. In sum, commentators offered
multiple, often conflicting, suggestions and
recommendations to address the many is-
sues raised with respect to revenue-sharing
transactions.
February 20, 20016642001–8 I.R.B.

The temporary regulations reserve the
separate section governing revenue-shar-
ing transactions. Accordingly, the IRS
and the Treasury Department will con-
tinue to consider the many comments re-
ceived on this issue. Any revised regula-
tions that may, in the future, be issued
governing revenue-sharing transactions in
particular will be issued in proposed
form. This will provide an additional op-
portunity for public comment, and any
special rules governing revenue-sharing
transactions will become effective only
after being published in final form. In the
meantime, revenue sharing transactions
will be evaluated under the general rules
(contained in §53.4958–4T of the tempo-
rary regulations) defining excess benefit
transactions, which apply to all transac-
tions with disqualified persons regardless
of whether the person’s compensation is
computed by reference to revenues of the
organization.
Rebuttable Presumption that a
Transaction is not an Excess Benefit
Transaction
Although the statute is silent on this
point, the legislative history accompany-
ing section 4958 indicated Congress’s in-
tent that the parties to a transaction are en-
titled to rely on a rebuttable presumption
of reasonableness with respect to any
transaction with a disqualified person that
is approved by a board of directors or
trustees (or committee thereof) that: 1) is
composed entirely of individuals unre-
lated to and not subject to the control of
the disqualified person(s) involved in the
transaction; 2) obtained and relied upon
appropriate data as to comparability; and
3) adequately documented the basis for its
determination. If these three require-
ments are satisfied, the IRS can impose
section 4958 taxes only if it develops suf-
ficient contrary evidence to rebut the pro-
bative value of the evidence put forth by
the parties to the transaction. H. REP.
NO. 506, 104th Congress, 2d SESS.
(1996), 53, 56–7.
The proposed regulations incorporate
this rebuttable presumption and provide
guidance regarding the three requirements
for invoking the rebuttable presumption.
The proposed regulations provide that the
presumption established by satisfying the
three requirements may be rebutted by ad-
ditional information showing that the
compensation was not reasonable or that
the transfer was not at fair market value.
Additionally, the proposed regulations
provide that, if the reasonableness of
compensation cannot be determined
based on circumstances existing at the
date when a contract for services was
made, then the presumption cannot arise
until reasonableness of compensation can
be determined and the three requirements
subsequently are satisfied.
Comments were received on various
aspects of the rebuttable presumption of
reasonableness. With regard to the re-
quirement that the compensation arrange-
ment or property transfer must be ap-
proved by a governing body (or
committee) composed entirely of individ-
uals who do not have a conflict of interest
with respect to the transaction, one com-
mentator suggested that the final regula-
tions adopt standards consistent with the
model conflicts of interest policy pub-
lished by the IRS. The IRS and the Trea-
sury Department believe that the stan-
dards contained in the proposed
regulations for determining the absence of
a conflict of interest are consistent with
the legislative history of section 4958,
which requires that the governing body
(or committee) be composed entirely of
individuals who are free of any conflict of
interest, and not merely that its members
disclose the existence of any conflict of
interest. Accordingly, the temporary reg-
ulations retain these standards.
With regard to the requirement that the
governing body (or a committee thereof)
obtain appropriate data as to comparabil-
ity, numerous commentators requested
that the final regulations expand the ac-
ceptable types of comparability data and
authorize additional methods for deter-
mining fair market value or reasonable
compensation. For example, some com-
mentators requested clarification that an
organization need not obtain an indepen-
dent, customized survey, but may rely on
an independent salary survey prepared for
general publication if that survey contains
information specific enough to provide
meaningful data for comparison purposes.
Other commentators requested that the
governing body (or committee) be permit-
ted to rely on compensation surveys com-
piled by staff members (other than dis-
qualified persons) under the supervision
of an independent director or committee
member, rather than incurring the addi-
tional cost of obtaining compensation sur-
veys compiled by independent firms.
Some commentators requested that the
final regulations provide that comparabil-
ity data is viable for some period of time
(e.g., three years).
The temporary regulations continue to
require only that the authorized body have
sufficient information to determine
whether, consistent with the valuation
standards in other sections of the regula-
tions, the compensation arrangement is
reasonable, or the property transfer is at
fair market value. The temporary regula-
tions clarify that a compensation arrange-
ment in its entirety must be evaluated and
also provide examples of relevant compa-
rability data. In the case of a compensa-
tion arrangement, the temporary regula-
tions provide that relevant information
may include a current compensation sur-
vey compiled by an independent firm. As
in the proposed regulations, this list of
relevant comparability data is not exclu-
sive, and the authorized body may rely on
other appropriate data. For clarity, the
temporary regulations list separately ex-
amples of the types of relevant informa-
tion for compensation arrangements and
property transfers. The temporary regula-
tions add competitive bids received from
unrelated third parties as another example
of relevant information in the case of a
property transfer. In response to com-
ments, the temporary regulations revise
examples from the proposed regulations
and add several examples illustrating ap-
propriate comparability data.
Comments were also received regard-
ing the special rule for compensation paid
by small organizations. The proposed
regulations allow small organizations
(those with annual gross receipts of less
than $1 million) to satisfy the requirement
of appropriate data as to comparability by
obtaining data on compensation paid by
five comparable organizations in the same
or similar communities for similar ser-
vices. Some commentators indicated that
the $1 million threshold is too low, be-
cause organizations having gross receipts
above that amount may lack the resources
to hire an independent compensation
firm. These commentators requested that
the ceiling for small organizations be in-
creased from $1 million to $5 million in
gross receipts. Others suggested allowing
2001–8 I.R.B.665February 20, 2001

small organizations to obtain data from
fewer than five comparable organizations.
The IRS and the Treasury Department
believe the general rule regarding appro-
priate comparability data is flexible
enough to permit any organization (not
just small organizations) to compile its
own comparability data. Therefore, the
IRS and the Treasury Department did not
believe it was necessary to extend the spe-
cial safe-harbor rule to organizations
with annual gross receipts over $1 mil-
lion. As requested by commentators,
however, the temporary regulations re-
duce the number of comparables small or-
ganizations must obtain for that safe har-
bor from five to three.
Certain commentators requested that
the final regulations provide a mechanism
for an applicable tax-exempt organization
to satisfy the requirements of the rebut-
table presumption of reasonableness with
respect to large groups of employees,
such as mid-level managers, rather than
requiring the governing body to approve
the compensation paid to each individual.
The IRS and the Treasury Department be-
lieve that changes to the definition of dis-
qualified personin the temporary regula-
tions, including eliminating as a factor
tending to show substantial influence the
fact that a person has any managerial au-
thority, or serves as a key advisor to a
manager, reduce the potential burden on
the governing body. Moreover, the tem-
porary regulations continue to allow the
governing body to delegate responsibility
for approving compensation arrange-
ments and property transfers, to the extent
permitted under State law. Consistent
with the legislative history, the temporary
regulations continue to require that the re-
buttable presumption requirements be sat-
isfied on an individual basis.
With respect to the requirement that the
governing body (or committee) ade-
quately document the basis for its deter-
mination, comments were received re-
questing that the final regulations allow
additional time for records to be prepared.
In response to these comments, the tem-
porary regulations provide that the
records must be prepared by the later of
the next meeting of the authorized body
or 60 days after final approval of the par-
ticular arrangement or transfer. Although
one commentator objected to the require-
ment in the proposed regulations that the
governing body (or committee) review
and approve the records within a reason-
able period of time thereafter, the tempo-
rary regulations retain this requirement in
order to ensure that the records are accu-
rate and complete.
Several commentators requested that
the final regulations permit organizations
to establish a rebuttable presumption of
reasonableness with respect to deferred or
contingent compensation arrangements
when the contract for services is entered
into if the terms of the arrangement are
sufficiently certain (even if the exact dol-
lar amounts are not known) and the gov-
erning body (or committee) obtains ap-
propriate data as to comparability. Other
commentators simply requested that the
final regulations indicate when the board
should take the necessary steps to put the
presumption in place in the event that rea-
sonableness cannot be determined as of
the date the contract is entered into. Con-
sistent with the general rule contained in
the temporary regulations regarding the
timing of the reasonableness determina-
tion, the temporary regulations provide
that, with respect to fixed payments (in-
cluding payments made pursuant to a
fixed formula, although the exact dollar
amount is not known at the time the con-
tract is entered into), the rebuttable pre-
sumption can arise at the time the parties
enter into the contract giving rise to the
payments. Under a special rule in the
temporary regulations, payments pursuant
to a qualified pension, profit-sharing, or
stock bonus plan under section 401(a) are
treated as fixed payments for purposes of
section 4958, even if the employer exer-
cises discretion with respect to the plan or
program. Therefore, a rebuttable pre-
sumption can arise with respect to such
payments at the time the parties enter into
the contract for services.
In contrast, the temporary regulations
provide that the rebuttable presumption
generally can arise with respect to a pay-
ment that is not a fixed payment (as de-
fined for purposes of the initial contract
exception) only after discretion is exer-
cised, the exact amount of the payment is
determined (or a fixed formula for calcu-
lating the payment is specified), and the
three requirements for the presumption
subsequently are satisfied. The temporary
regulations contain a limited exception to
this general rule for certain non-fixed
payments which are subject to a cap.
Under this exception, an applicable tax-
exempt organization may establish the re-
buttable presumption, even with respect
to non-fixed payments, at the time the
contract is entered into if: 1) prior to ap-
proving the contract, the governing body
(or committee) obtains appropriate com-
parability data indicating that a fixed pay-
ment of up to a certain amount to a partic-
ular disqualified person would represent
reasonable compensation; 2) the maxi-
mum amount payable under the contract
(including both fixed and non-fixed pay-
ment amounts) does not exceed the rea-
sonable compensation figure; and 3) the
other requirements for establishing the re-
buttable presumption are satisfied. How-
ever, the general rules for the timing of
the reasonableness determination apply,
such that the IRS may rebut the presump-
tion of reasonableness with respect to a
non-fixed payment subject to a cap based
on all facts and circumstances, up to and
including circumstances as of the date of
payment.
Some commentators suggested that the
final regulations provide specific stan-
dards the IRS must meet in order to rebut
any presumption established by satisfying
the three requirements described above.
For example, one commentator suggested
that the IRS should be allowed to over-
come the presumption only if it is able to
produce clear and convincing evidence
that the transaction was, in fact, an excess
benefit transaction. Another commenta-
tor suggested that the IRS should be re-
quired to establish that one of the require-
ments for invoking the presumption has
not been met in order to rebut the pre-
sumption. Consistent with the legislative
history, the temporary regulations provide
that, if the rebuttable presumption of rea-
sonableness is established, the IRS may
rebut the presumption only if it develops
sufficient contrary evidence to rebut the
probative value of the comparability data
relied upon by the authorized body.
Finally, some commentators requested
clarification whether entities controlled
by or affiliated with an applicable tax-ex-
empt organization that provide economic
benefits to a disqualified person can es-
tablish the presumption, even if those en-
tities are not themselves applicable tax-
exempt organizations. Consistent with
the rules relating to indirect excess benefit
February 20, 20016662001–8 I.R.B.

transactions, the temporary regulations
clarify that an authorized body of an en-
tity controlled by an applicable tax-ex-
empt organization (as defined for pur-
poses of describing indirect transfers of
economic benefits) may establish the re-
buttable presumption.
Special Rules
The proposed regulations provided sev-
eral special rules, one of which stated that
the procedures of section 7611 will be used
in initiating and conducting any inquiry or
examination into whether an excess benefit
transaction has occurred between a church
and a disqualified person. Several com-
ments were received on this rule, including
one stating that there is no statutory author-
ity to extend section 7611 protection to
churches for section 4958 tax inquiries.
Other comments requested that final regu-
lations specify when information from an
informant alone is sufficient to form the
basis for a reasonable belief on the part of
the IRS for purposes of applying this rule,
and clarify how section 4958 interacts with
the section 7611 exception for records re-
lated to the income tax of an individual em-
ployed by the church. The temporary regu-
lations do not modify the special rules for
churches.
Additional Issues
Section 4958 does not contain provi-
sions governing the relationship of the
taxes imposed under that section to revo-
cation of the organization’s tax-exempt
status under sections 501(c)(3) and (4).
With respect to this issue, the legislative
history to section 4958 indicates as fol-
lows: “In general, the intermediate sanc-
tions are the sole sanction imposed in
those cases in which the excess benefit
does not rise to a level where it calls into
question whether, on the whole, the orga-
nization functions as a charitable or other
tax-exempt organization. In practice, re-
vocation of tax-exempt status, with or
without the imposition of excise taxes,
would occur only when the organization
no longer operates as a charitable organi-
zation.” H. REP. NO. 506, 104th Con-
gress, 2d SESS. (1996), 53, 59, note 15.
However, the same legislative history also
indicates that “[t]he intermediate sanc-
tions for ‘excess benefit transactions’ may
be imposed by the IRS in lieu of (or in
addition to) revocation of the organiza-
tion’s tax-exempt status.” Id. at 59 (em-
phasis added)
In the Comments and Requests for a
Public Hearing section of the preamble of
the proposed regulations, the IRS and the
Treasury Department specifically re-
quested comments concerning the rela-
tionship between revocation of tax-ex-
empt status and imposition of section
4958 taxes. Additionally, the preamble of
the proposed regulations lists four factors
that the IRS will consider in determining
whether to revoke an applicable tax-ex-
empt organization’s status: 1) whether the
organization has been involved in re-
peated excess benefit transactions; 2) the
size and scope of the excess benefit trans-
action; 3) whether, after concluding that it
has been party to an excess benefit trans-
action, the organization has implemented
safeguards to prevent future recurrences;
and 4) whether there was compliance with
other applicable laws. The preamble also
states that the IRS intends to publish the
factors that it will consider in exercising
its administrative discretion in guidance
issued in conjunction with the issuance of
final regulations under section 4958.
A number of commentators requested
that the final regulations expressly pro-
vide that section 4958 taxes are the princi-
pal sanction with respect to excess benefit
transactions, in lieu of revocation of the
organization’s tax-exempt status. Other
commentators suggested that the final
regulations incorporate factors to be con-
sidered by the IRS in deciding whether to
impose section 4958 excise taxes or re-
voke tax-exempt status, or both.
The temporary regulations do not fore-
close revocation of tax-exempt status in
appropriate cases. The IRS and the Trea-
sury Department believe that to do so
would effectively change the substantive
standard for tax-exempt status under sec-
tions 501(c)(3) and (4). Accordingly, the
IRS intends to exercise its administrative
discretion in enforcing the requirements
of sections 4958, 501(c)(3) and 501(c)(4)
in accordance with the direction given in
the legislative history. The IRS will pub-
lish guidance concerning the factors that
it will consider in exercising its discretion
as it gains more experience administering
the section 4958 regime.
The temporary regulations reiterate that
section 4958 does not affect the substan-
tive standards for tax exemption under
section 501(c)(3) or (4), including the re-
quirements that the organization be orga-
nized and operated exclusively for ex-
empt purposes, and that no part of its
earnings inure to the benefit of any pri-
vate shareholder or individual. Thus, re-
gardless of whether a particular transac-
tion is subject to excise taxes under
section 4958, existing principles and rules
may be implicated, such as the limitation
on private benefit. For example, transac-
tions that are not subject to section 4958
because of the initial contract exception
may, under certain circumstances, jeopar-
dize an organizations’s tax-exempt status.
Some comments regarding revenue-
sharing transactions included requests to
address gainsharing arrangements in the
final regulations; or to provide that certain
transactions are not revenue-sharing
arrangements because they do not involve
a payment that is contingent on the rev-
enues of (but rather the cost savings to)
the organization. As noted earlier, these
temporary regulations reserve the sepa-
rate section governing revenue-sharing
transactions. However, because the Of-
fice of Inspector General, Department of
Health and Human Services, believes the
methodology involved in calculating pay-
ments under gainsharing arrangements
may violate sections 1128A(b)(1) and (2)
of the Social Security Act in situations
where patient care may be affected by the
cost savings, the IRS will not issue pri-
vate letter rulings under section 4958 on
these arrangements. The Office of In-
spector General issued a Special Advisory
Bulletin on July 8, 1999, addressing the
application of sections 1128A(b)(1) and
(2) of the Social Security Act to gainshar-
ing arrangements, entitled “Gainsharing
Arrangements and CMPs [Civil Money
Penalties] for Hospital Payments to
Physicians to Reduce or Limit Services to
Beneficiaries”.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. Because no preced-
ing notice of proposed rulemaking is re-
quired for this temporary regulation, the
provisions of the Regulatory Flexibility
Act do not apply. Pursuant to section
2001–8 I.R.B.667February 20, 2001

7805(f) of the Internal Revenue Code,
this temporary regulation will be submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on business.
Drafting Information
The principal author of these regula-
tions is Phyllis D. Haney, Office of Divi-
sion Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and The Treasury Department partici-
pated in their development.
* * * * *
Amendments to the Regulations
Accordingly, 26 CFR parts 53, 301,
and 602 are amended as follows:
PART 53—FOUNDATION AND
SIMILAR EXCISE TAXES
Paragraph 1. The authority citation for
part 53 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 2. Sections 53.4958–0T through
53.4958–8T are added to read as follows:
§53.4958–0T Table of contents
(temporary).
This section lists the major captions
contained in §§53.4958–1T through
53.4958–8T.
§53.4958–1T Taxes on excess benefit
transactions (temporary).
(a) In general.
(b) Excess benefit defined.
(c) Taxes paid by disqualified person.
(1) Initial tax.
(2) Additional tax on disqualified person.
(i) In general.
(ii) Taxable period.
(iii) Abatement if correction during the
correction period.
(d) Tax paid by organization managers.
(1) In general.
(2) Organization manager defined.
(i) In general.
(ii) Special rule for certain committee
members.
(3) Participation.
(4) Knowing.
(i) In general.
(ii) Amplification of general rule.
(iii) Reliance on professional advice.
(iv) Reliance on rebuttable presumption
of reasonableness.
(5) Willful.
(6) Due to reasonable cause.
(7) Limits on liability for management.
(8) Joint and several liability.
(9) Burden of proof.
(e) Date of occurrence.
(1) In general.
(2) Special rules.
(3) Statute of limitations rules.
(f) Effective date for imposition of taxes.
(1) In general.
(2) Existing binding contracts.
§53.4958–2T Definition of applicable
tax-exempt organization (temporary).
(a) Organizations described in section
501(c)(3) or (4) and exempt from tax
under section 501(a).
(1) In general.
(2) Organizations described in section
501(c)(3).
(3) Organizations described in section
501(c)(4) .
(4) Effect of non-recognition or revoca-
tion of exempt status.
(b) Special rules.
(1) Transition rule for lookback period.
(2) Certain foreign organizations.
§53.4958–3T Definition of disqualified
person (temporary).
(a) In general.
(1) Scope of definition.
(2) Transition rule for lookback period.
(b) Statutory categories of disqualified
persons.
(1) Family members.
(2) Thirty-five percent controlled entities.
(i) In general.
(ii) Combined voting power.
(iii) Constructive ownership rules.
(A) Stockholdings.
(B) Profits or beneficial interest.
(c) Persons having substantial influence.
(1) Voting members of the governing
body.
(2) Presidents, chief executive officers,
or chief operating officers.
(3) Treasurers and chief financial offi-
cers.
(4) Persons with a material financial
interest in a provider-sponsored organiza-
tion.
(d) Persons deemed not to have substan-
tial influence.
(1) Tax-exempt organizations described
in section 501(c)(3).
(2) Certain section 501(c)(4) organiza-
tions.
(3) Employees receiving economic bene-
fits of less than a specified amount in a
taxable year.
(e) Facts and circumstances govern in all
other cases.
(1) In general.
(2) Facts and circumstances tending to
show substantial influence.
(3) Facts and circumstances tending to
show no substantial influence.
(f) Affiliated organizations.
(g) Examples.
§53.4958–4T Excess benefit transaction
(temporary).
(a) Definition of excess benefit transac-
tion.
(1) In general.
(2) Economic benefit provided indirectly.
(i) In general.
(ii) Through a controlled entity.
(A) In general.
(B) Definition of control.
(1) In general.
(2) Constructive ownership.
(iii) Through an intermediary.
(iv) Examples.
(3) Exception for fixed payments made
pursuant to an initial contract.
(i) In general.
(ii) Fixed payment.
(A) In general.
(B) Special rules.
(iii) Initial contract.
(iv) Substantial performance required.
(v) Treatment as a new contract.
(vi) Evaluation of non-fixed payments.
(vii) Examples.
(4) Certain economic benefits disregard-
ed for purposes of section 4958.
(i) Nontaxable fringe benefits.
(ii) Certain economic benefits provided
to a volunteer for the organization.
(iii) Certain economic benefits provided
to a member of, or donor to, the organi-
zation.
(iv) Economic benefits provided to a
charitable beneficiary.
(v) Certain economic benefits provided
to a governmental unit.
(b) Valuation standards.
(1) In general.
(i) Fair market value of property.
February 20, 20016682001–8 I.R.B.

(ii) Reasonable compensation.
(A) In general.
(B) Items included in determining the
value of compensation for purposes of
determining reasonableness under section
4958.
(C) Inclusion in compensation for rea-
sonableness determination does not gov-
ern income tax treatment.
(2) Timing of reasonableness determination.
(i) In general.
(ii) Treatment as a new contract.
(iii) Examples.
(c) Establishing intent to treat economic
benefit as consideration for the perfor-
mance of services.
(1) In general.
(2) Nontaxable benefits.
(3) Contemporaneous substantiation.
(i) Reporting of benefit.
(ii) Other evidence of contemporaneous
substantiation.
(iii) Failure to report due to reasonable
cause.
(4) Examples.
§53.4958–5T Transaction in which the
amount of the economic benefit is
determined in whole or in part by the
revenues of one or more activities of the
organization (temporary). [Reserved]
§53.4958–6T Rebuttable presumption
that a transaction is not an excess benefit
transaction (temporary).
(a) In general.
(b) Rebutting the presumption.
(c) Requirements for invoking rebuttable
presumption.
(1) Approval by an authorized body.
(i) In general.
(ii) Individuals not included on autho-
rized body.
(iii) Absence of conflict of interest.
(2) Appropriate data as to comparability.
(i) In general.
(ii) Special rule for compensation paid
by small organizations.
(iii) Application of special rule for small
organizations.
(iv) Examples.
(3) Documentation.
(d) No presumption with respect to non-
fixed payments until amounts are deter-
mined.
(1) In general.
(2) Special rule for certain non-fixed
payments subject to a cap.
(e) No inference from absence of pre-
sumption.
(f) Period of reliance on rebuttable pre-
sumption.
§53.4958–7T Correction (temporary).
(a) In general.
(b) Form of correction.
(1) Cash or cash equivalents.
(2) Anti-abuse rule.
(3) Special rule relating to nonqualified
deferred compensation.
(4) Return of specific property.
(i) In general.
(ii) Payment not equal to correction
amount.
(iii) Disqualified person may not partici-
pate in decision.
(c) Correction amount.
(d) Correction where contract has been
partially performed.
(e) Correction in the case of an applica-
ble tax-exempt organization that has
ceased to exist, or is no longer tax-
exempt.
(1) In general.
(2) Section 501(c)(3) organizations.
(3) Section 501(c)(4) organizations.
(f) Examples.
§53.4958–8T Special rules (temporary).
(a) Substantive requirements for exemp-
tion still apply.
(b) Interaction between section 4958 and
section 7611 rules for church tax
inquiries and examinations.
(c) Three year duration of these tempo-
rary regulations.
§53.4958–1T Taxes on excess benefit
transactions (temporary).
(a) In general. Section 4958 imposes
excise taxes on each excess benefit trans-
action (as defined in section 4958(c) and
§53.4958–4T) between an applicable tax-
exempt organization (as defined in sec-
tion 4958(e) and §53.4958–2T) and a dis-
qualified person (as defined in section
4958(f)(1) and §53.4958–3T). A disquali-
fied person who receives an excess bene-
fit from an excess benefit transaction is li-
able for payment of a section 4958(a)(1)
excise tax equal to 25 percent of the ex-
cess benefit. If an initial tax is imposed
by section 4958(a)(1) on an excess benefit
transaction and the transaction is not cor-
rected (as defined in section 4958(f)(6)
and §53.4958–7T) within the taxable pe-
riod (as defined in section 4958(f)(5) and
paragraph (c)(2)(ii) of this section), then
any disqualified person who received an
excess benefit from the excess benefit
transaction on which the initial tax was
imposed is liable for an additional tax of
200 percent of the excess benefit. An or-
ganization manager (as defined in section
4958(f)(2) and paragraph (d) of this sec-
tion) who participates in an excess benefit
transaction, knowing that it was such a
transaction, is liable for payment of a sec-
tion 4958(a)(2) excise tax equal to 10 per-
cent of the excess benefit, unless the par-
ticipation was not willful and was due to
reasonable cause. If an organization man-
ager also receives an excess benefit from
an excess benefit transaction, the manager
may be liable for both taxes imposed by
section 4958(a).
(b) Excess benefit defined. An excess
benefit is the amount by which the value
of the economic benefit provided by an
applicable tax-exempt organization di-
rectly or indirectly to or for the use of any
disqualified person exceeds the value of
the consideration (including the perfor-
mance of services) received for providing
such benefit.
(c) Taxes paid by disqualified person—
(1) Initial tax. Section 4958(a)(1) im-
poses a tax equal to 25 percent of the ex-
cess benefit on each excess benefit
transaction. The section 4958(a)(1) tax
shall be paid by any disqualified person
who received an excess benefit from that
excess benefit transaction. With respect
to any excess benefit transaction, if more
than one disqualified person is liable for
the tax imposed by section 4958(a)(1), all
such persons are jointly and severally li-
able for that tax.
(2) Additional tax on disqualified per-
son—(i) In general. Section 4958(b) im-
poses a tax equal to 200 percent of the ex-
cess benefit in any case in which section
4958(a)(1) imposes a 25-percent tax on an
excess benefit transaction and the transac-
tion is not corrected (as defined in section
4958(f)(6) and §53.4958–7T) within the
taxable period (as defined in section
4958(f)(5) and paragraph (c)(2)(ii) of this
section). If a disqualified person makes a
payment of less than the full correction
amount under the rules of §53.4958–7T,
the 200-percent tax is imposed only on
the unpaid portion of the correction
2001–8 I.R.B.669February 20, 2001

amount (as described in §53.4958–7T(c)).
The tax imposed by section 4958(b) is
payable by any disqualified person who
received an excess benefit from the ex-
cess benefit transaction on which the ini-
tial tax was imposed by section
4958(a)(1). With respect to any excess
benefit transaction, if more than one dis-
qualified person is liable for the tax im-
posed by section 4958(b), all such per-
sons are jointly and severally liable for
that tax.
(ii) Taxable period. Taxable period
means, with respect to any excess benefit
transaction, the period beginning with the
date on which the transaction occurs and
ending on the earlier of—
(A) The date of mailing a notice of de-
ficiency under section 6212 with respect
to the section 4958(a)(1) tax; or
(B) The date on which the tax imposed
by section 4958(a)(1) is assessed.
(iii) Abatement if correction during the
correction period. For rules relating to
abatement of taxes on excess benefit
transactions that are corrected within the
correction period, as defined in section
4963(e), see sections 4961(a), 4962(a),
and the regulations thereunder. The
abatement rules of section 4961 specifi-
cally provide for a 90-day correction pe-
riod after the date of mailing a notice of
deficiency under section 6212 with re-
spect to the section 4958(b) 200-percent
tax. If the excess benefit is corrected dur-
ing that correction period, the 200-percent
tax imposed shall not be assessed, and if
assessed the assessment shall be abated,
and if collected shall be credited or re-
funded as an overpayment. For special
rules relating to abatement of the 25-per-
cent tax, see section 4962.
(d) Tax paid by organization
managers—(1) In general. In any case in
which section 4958(a)(1) imposes a tax,
section 4958(a)(2) imposes a tax equal to
10 percent of the excess benefit on the
participation of any organization manager
who knowingly participated in the excess
benefit transaction, unless such participa-
tion was not willful and was due to rea-
sonable cause. Any organization manager
who so participated in the excess benefit
transaction must pay the tax.
(2) Organization manager defined—(i)
In general. An organization manager is,
with respect to any applicable tax-exempt
organization, any officer, director, or
trustee of such organization, or any indi-
vidual having powers or responsibilities
similar to those of officers, directors, or
trustees of the organization, regardless of
title. A person is an officer of an organi-
zation if that person—
(A) Is specifically so designated under
the certificate of incorporation, by-laws,
or other constitutive documents of the or-
ganization; or
(B) Regularly exercises general author-
ity to make administrative or policy deci-
sions on behalf of the organization. An
independent contractor who acts solely in
a capacity as an attorney, accountant, or
investment manager or advisor, is not an
officer. For purposes of this paragraph
(d)(2)(i)(B), any person who has authority
merely to recommend particular adminis-
trative or policy decisions, but not to im-
plement them without approval of a supe-
rior, is not an officer.
(ii) Special rule for certain committee
members. An individual who is not an of-
ficer, director, or trustee, yet serves on a
committee of the governing body of an
applicable tax-exempt organization (or as
a designee of the governing body de-
scribed in §53.4958–6T(c)(1)) that is at-
tempting to invoke the rebuttable pre-
sumption of reasonableness described in
§53.4958–6T based on the committee’s
(or designee’s) actions, is an organization
manager for purposes of the tax imposed
by section 4958(a)(2).
(3) Participation. For purposes of sec-
tion 4958(a)(2) and paragraph (d) of this
section, participation includes silence or
inaction on the part of an organization
manager where the manager is under a
duty to speak or act, as well as any affir-
mative action by such manager. An orga-
nization manager is not considered to
have participated in an excess benefit
transaction, however, where the manager
has opposed the transaction in a manner
consistent with the fulfillment of the man-
ager’s responsibilities to the applicable
tax-exempt organization.
(4) Knowing—(i) In general. For pur-
poses of section 4958(a)(2) and paragraph
(d) of this section, a manager participates
in a transaction knowingly only if the per-
son—
(A) Has actual knowledge of sufficient
facts so that, based solely upon those
facts, such transaction would be an excess
benefit transaction;
(B) Is aware that such a transaction
under these circumstances may violate the
provisions of federal tax law governing
excess benefit transactions; and
(C) Negligently fails to make reason-
able attempts to ascertain whether the
transaction is an excess benefit transac-
tion, or the manager is in fact aware that it
is such a transaction.
(ii) Amplification of general rule.
Knowingdoes not mean having reason to
know. However, evidence tending to
show that a manager has reason to know
of a particular fact or particular rule is rel-
evant in determining whether the manager
had actual knowledge of such a fact or
rule. Thus, for example, evidence tending
to show that a manager has reason to
know of sufficient facts so that, based
solely upon such facts, a transaction
would be an excess benefit transaction is
relevant in determining whether the man-
ager has actual knowledge of such facts.
(iii) Reliance on professional advice.
An organization manager’s participation
in a transaction is ordinarily not consid-
ered knowing within the meaning of sec-
tion 4958(a)(2), even though the transac-
tion is subsequently held to be an excess
benefit transaction to the extent that, after
full disclosure of the factual situation to
an appropriate professional, the organiza-
tion manager relies on a reasoned written
opinion of that professional with respect
to elements of the transaction within the
professional’s expertise. For purposes of
section 4958(a)(2) and this paragraph (d),
a written opinion is reasoned even though
it reaches a conclusion that is subse-
quently determined to be incorrect so long
as the opinion addresses itself to the facts
and the applicable standards. However, a
written opinion is not reasoned if it does
nothing more than recite the facts and ex-
press a conclusion. The absence of a
written opinion of an appropriate profes-
sional with respect to a transaction shall
not, by itself, however, give rise to any in-
ference that an organization manager par-
ticipated in the transaction knowingly.
For purposes of this paragraph, appropri-
ate professionals on whose written opin-
ion an organization manager may rely, are
limited to—
(A) Legal counsel, including in-house
counsel;
(B) Certified public accountants or ac-
counting firms with expertise regarding
February 20, 20016702001–8 I.R.B.

the relevant tax law matters; and
(C) Independent valuation experts
who—
(1) Hold themselves out to the public as
appraisers or compensation consultants;
(2) Perform the relevant valuations on a
regular basis;
(3) Are qualified to make valuations of
the type of property or services involved;
and
(4) Include in the written opinion a cer-
tification that the requirements of para-
graphs (d)(4)(iii)(C)(1) through (3) of this
section are met.
(iv) Reliance on rebuttable presump-
tion of reasonableness. An organization
manager’s participation in a transaction is
ordinarily not considered knowing within
the meaning of section 4958(a)(2), even
though the transaction is subsequently
held to be an excess benefit transaction, if
the organization manager relies on the
fact that the requirements of
§53.4958–6T(a) are satisfied with respect
to the transaction.
(5) Willful. For purposes of section
4958(a)(2) and this paragraph (d), partici-
pation by an organization manager is will-
ful if it is voluntary, conscious, and inten-
tional. No motive to avoid the restrictions
of the law or the incurrence of any tax is
necessary to make the participation will-
ful. However, participation by an organi-
zation manager is not willful if the man-
ager does not know that the transaction in
which the manager is participating is an
excess benefit transaction.
(6) Due to reasonable cause. An orga-
nization manager’s participation is due to
reasonable cause if the manager has exer-
cised responsibility on behalf of the orga-
nization with ordinary business care and
prudence.
(7) Limits on liability for management.
The maximum aggregate amount of tax
collectible under section 4958(a)(2) and
this paragraph (d) from organization man-
agers with respect to any one excess bene-
fit transaction is $10,000.
(8) Joint and several liability. In any
case where more than one person is liable
for a tax imposed by section 4958(a)(2),
all such persons shall be jointly and sever-
ally liable for the taxes imposed under
section 4958(a)(2) with respect to that ex-
cess benefit transaction.
(9) Burden of proof. For provisions relat-
ing to the burden of proof in cases involving
the issue of whether an organization man-
ager has knowingly participated in an ex-
cess benefit transaction, see section 7454(b)
and §301.7454–2. In these cases, the Com-
missioner bears the burden of proof.
(e) Date of occurrence—(1) In general.
Except as otherwise provided, an excess
benefit transaction occurs on the date on
which the disqualified person receives the
economic benefit for Federal income tax
purposes. When a single contractual
arrangement provides for a series of com-
pensation or other payments to (or for the
use of) a disqualified person over the
course of the disqualified person’s taxable
year (or part of a taxable year), any excess
benefit transaction with respect to these
aggregate payments is deemed to occur
on the last day of the taxable year (or if
the payments continue for part of the year,
the date of the last payment in the series).
(2) Special rules. In the case of bene-
fits provided pursuant to a qualified pen-
sion, profit-sharing, or stock bonus plan,
the transaction occurs on the date the
benefit is vested. In the case of a transfer
of property that is subject to a substantial
risk of forfeiture or in the case of rights to
future compensation or property (includ-
ing benefits under a nonqualified deferred
compensation plan), the transaction oc-
curs on the date the property, or the rights
to future compensation or property, is not
subject to a substantial risk of forfeiture.
However, where the disqualified person
elects to include an amount in gross in-
come in the taxable year of transfer pur-
suant to section 83(b), the general rule of
paragraph (e)(1) of this section applies to
the property with respect to which the
section 83(b) election is made. Any ex-
cess benefit transaction with respect to
benefits under a deferred compensation
plan which vest during any taxable year
of the disqualified person is deemed to
occur on the last day of such taxable year.
For the rules governing the timing of the
reasonableness determination for de-
ferred, contingent, and certain other non-
cash compensation, see
§53.4958–4T(b)(2).
(3) Statute of limitations rules. See
sections 6501(e)(3) and 6501(l) and the
regulations thereunder for statute of limi-
tations rules as they apply to section 4958
excise taxes.
(f) Effective date for imposition of
taxes—(1) In general. The section 4958
taxes imposed on excess benefit transac-
tions or on participation in excess benefit
transactions apply to transactions occur-
ring on or after September 14, 1995.
(2) Existing binding contracts. The sec-
tion 4958 taxes do not apply to any transac-
tion occurring pursuant to a written contract
that was binding on September 13, 1995,
and at all times thereafter before the trans-
action occurs. A written binding contract
that is terminable or subject to cancellation
by the applicable tax-exempt organization
without the disqualified person’s consent
(including as the result of a breach of con-
tract by the disqualified person) and with-
out substantial penalty to the organization,
is no longer treated as a binding contract as
of the earliest date that any such termina-
tion or cancellation, if made, would be ef-
fective. If a binding written contract is ma-
terially changed, it is treated as a new
contract entered into as of the date the ma-
terial change is effective. A material
change includes an extension or renewal of
the contract (other than an extension or re-
newal that results from the person contract-
ing with the applicable tax-exempt organi-
zation unilaterally exercising an option
expressly granted by the contract), or a
more than incidental change to any pay-
ment under the contract.
§53.4958–2T Definition of applicable
tax-exempt organization (temporary).
(a) Organizations described in section
501(c)(3) or (4) and exempt from tax
under section 501(a)—(1) In general. An
applicable tax-exempt organization is any
organization that, without regard to any
excess benefit, would be described in sec-
tion 501(c)(3) or (4) and exempt from tax
under section 501(a). An applicable tax-
exempt organization also includes any or-
ganization that was described in section
501(c)(3) or (4) and was exempt from tax
under section 501(a) at any time during a
five-year period ending on the date of an
excess benefit transaction (the lookback
period). A private foundation as defined
in section 509(a) is not an applicable tax-
exempt organization for section 4958 pur-
poses. A governmental entity that is ex-
empt from (or not subject to) taxation
without regard to section 501(a) is not an
applicable tax-exempt organization for
section 4958 purposes.
(2) Organizations described in section
501(c)(3). An organization is described in
2001–8 I.R.B.671February 20, 2001

section 501(c)(3) for purposes of section
4958 only if the organization provides the
notice described in section 508, unless the
organization otherwise is described in
section 501(c)(3) and specifically is ex-
cluded from the requirements of section
508 by that section.
(3) Organizations described in section
501(c)(4) . An organization is described
in section 501(c)(4) for purposes of sec-
tion 4958 if the organization—
(i) Has applied for and received recog-
nition from the Internal Revenue Service
as an organization described in section
501(c)(4); or
(ii) Has filed an application for recog-
nition under section 501(c)(4) with the In-
ternal Revenue Service, has filed an an-
nual information return as a section
501(c)(4) organization under the Internal
Revenue Code or regulations promul-
gated thereunder, or has otherwise held it-
self out as being described in section
501(c)(4) and exempt from tax under sec-
tion 501(a).
(4) Effect of non-recognition or revoca-
tion of exempt status. An organization is
not described in paragraph (a)(2) or (3) of
this section during any period covered by
a final determination or adjudication that
the organization is not exempt from tax
under section 501(a) as an organization
described in section 501(c)(3) or (4), so
long as that determination or adjudication
is not based upon participation in inure-
ment or one or more excess benefit trans-
actions. However, the organization may
be an applicable tax-exempt organization
for that period as a result of the five-year
lookback rule described in paragraph
(a)(1) of this section.
(b) Special rules—(1) Transition rule
for lookback period. In the case of any
excess benefit transaction occurring be-
fore September 14, 2000, the lookback
period described in paragraph (a)(1) of
this section begins on September 14,
1995, and ends on the date of the transac-
tion.
(2) Certain foreign organizations. A
foreign organization, recognized by the
Internal Revenue Service or by treaty, that
receives substantially all of its support
(other than gross investment income)
from sources outside of the United States
is not an organization described in section
501(c)(3) or (4) for purposes of section
4958.
§53.4958–3T Definition of disqualified
person (temporary).
(a) In general—(1) Scope of definition.
Section 4958(f)(1) defines disqualified
person, with respect to any transaction, as
any person who was in a position to exer-
cise substantial influence over the affairs
of an applicable tax-exempt organization
at any time during the five-year period
ending on the date of the transaction (the
lookback period). Paragraph (b) of this
section describes persons who are defined
to be disqualified persons under the
statute, including certain family members
of an individual in a position to exercise
substantial influence, and certain 35-per-
cent controlled entities. Paragraph (c) of
this section describes persons in a posi-
tion to exercise substantial influence over
the affairs of an applicable tax-exempt or-
ganization by virtue of their powers and
responsibilities or certain interests they
hold. Paragraph (d) of this section de-
scribes persons deemed not to be in a po-
sition to exercise substantial influence.
Whether any person who is not described
in paragraph (b), (c) or (d) of this section
is a disqualified person with respect to a
transaction for purposes of section 4958 is
based on all relevant facts and circum-
stances, as described in paragraph (e) of
this section. Paragraph (f) of this section
describes special rules for affiliated orga-
nizations. Examples in paragraph (g) of
this section illustrate these categories of
persons.
(2) Transition rule for lookback period.
In the case of any excess benefit transac-
tion occurring before September 14,
2000, the lookback period described in
paragraph (a)(1) of this section begins on
September 14, 1995, and ends on the date
of the transaction.
(b) Statutory categories of disqualified
persons—(1) Family members. A person
is a disqualified person with respect to
any transaction with an applicable tax-ex-
empt organization if the person is a mem-
ber of the family of a person who is a dis-
qualified person described in paragraph
(a) of this section (other than as a result of
this paragraph) with respect to any trans-
action with the same organization. For
purposes of the following sentence, a
legally adopted child of an individual is
treated as a child of such individual by
blood. A person’s family is limited to—
(i) Spouse;
(ii) Brothers or sisters (by whole or half
blood);
(iii) Spouses of brothers or sisters (by
whole or half blood);
(iv) Ancestors;
(v) Children;
(vi) Grandchildren;
(vii) Great grandchildren; and
(viii) Spouses of children, grandchil-
dren, and great grandchildren.
(2) Thirty-five percent controlled enti-
ties—(i) In general. A person is a dis-
qualified person with respect to any trans-
action with an applicable tax-exempt
organization if the person is a 35-percent
controlled entity. A 35-percent controlled
entity is—
(A) A corporation in which persons de-
scribed in this section (except in para-
graphs (b)(2) and (d) of this section) own
more than 35 percent of the combined
voting power;
(B) A partnership in which persons de-
scribed in this section (except in para-
graphs (b)(2) and (d) of this section) own
more than 35 percent of the profits inter-
est; or
(C) A trust or estate in which persons
described in this section (except in para-
graphs (b)(2) and (d) of this section) own
more than 35 percent of the beneficial in-
terest.
(ii) Combined voting power. For pur-
poses of this paragraph (b)(2), combined
voting power includes voting power rep-
resented by holdings of voting stock, di-
rect or indirect, but does not include vot-
ing rights held only as a director, trustee,
or other fiduciary.
(iii) Constructive ownership rules—
(A) Stockholdings. For purposes of sec-
tion 4958(f)(3) and this paragraph (b)(2),
indirect stockholdings are taken into ac-
count as under section 267(c), except that
in applying section 267(c)(4), the family
of an individual shall include the mem-
bers of the family specified in section
4958(f)(4) and paragraph (b)(1) of this
section.
(B) Profits or beneficial interest. For
purposes of section 4958(f)(3) and this
paragraph (b)(2), the ownership of profits
or beneficial interests shall be determined
in accordance with the rules for construc-
tive ownership of stock provided in sec-
tion 267(c) (other than section 267(c)(3)),
except that in applying section 267(c)(4),
February 20, 20016722001–8 I.R.B.

the family of an individual shall include
the members of the family specified in
section 4958(f)(4) and paragraph (b)(1) of
this section.
(c) Persons having substantial influ-
ence. A person who holds any of the fol-
lowing powers, responsibilities, or inter-
ests is in a position to exercise substantial
influence over the affairs of an applicable
tax-exempt organization:
(1) Voting members of the governing
body. This category includes any individ-
ual serving on the governing body of the
organization who is entitled to vote on
any matter over which the governing
body has authority.
(2) Presidents, chief executive officers,
or chief operating officers. This category
includes any person who, regardless of
title, has ultimate responsibility for imple-
menting the decisions of the governing
body or for supervising the management,
administration, or operation of the organi-
zation. A person who serves as president,
chief executive officer, or chief operating
officer has this ultimate responsibility un-
less the person demonstrates otherwise.
If this ultimate responsibility resides with
two or more individuals (e.g., co-presi-
dents), who may exercise such responsi-
bility in concert or individually, then each
individual is in a position to exercise sub-
stantial influence over the affairs of the
organization.
(3) Treasurers and chief financial offi-
cers. This category includes any person
who, regardless of title, has ultimate re-
sponsibility for managing the finances of
the organization. A person who serves as
treasurer or chief financial officer has this
ultimate responsibility unless the person
demonstrates otherwise. If this ultimate
responsibility resides with two or more
individuals who may exercise the respon-
sibility in concert or individually, then
each individual is in a position to exercise
substantial influence over the affairs of
the organization.
(4) Persons with a material financial in-
terest in a provider-sponsored organiza-
tion. For purposes of section 4958, if a
hospital that participates in a provider-
sponsored organization (as defined in sec-
tion 1855(e) of the Social Security Act, 42
U.S.C. 1395w-25) is an applicable tax-ex-
empt organization, then any person with a
material financial interest (within the
meaning of section 501(o)) in the provider-
sponsored organization has substantial in-
fluence with respect to the hospital.
(d) Persons deemed not to have sub-
stantial influence. A person is deemed not
to be in a position to exercise substantial
influence over the affairs of an applicable
tax-exempt organization if that person is
described in one of the following cate-
gories:
(1) Tax-exempt organizations described
in section 501(c)(3). This category in-
cludes any organization described in sec-
tion 501(c)(3) and exempt from tax under
section 501(a).
(2) Certain section 501(c)(4) organiza-
tions. Only with respect to an applicable
tax-exempt organization described in sec-
tion 501(c)(4) and §53.4958–2T(a)(3),
this category includes any other organiza-
tion so described.
(3) Employees receiving economic ben-
efits of less than a specified amount in a
taxable year. This category includes, for
the taxable year in which benefits are pro-
vided, any full- or part-time employee of
the applicable tax-exempt organization
who—
(i) Receives economic benefits, di-
rectly or indirectly from the organization,
of less than the amount referenced for a
highly compensated employee in section
414(q)(1)(B)(i);
(ii) Is not described in §53.4958–3T(b)
or (c) with respect to the organization;
and
(iii) Is not a substantial contributor to
the organization within the meaning of
section 507(d)(2)(A), taking into account
only contributions received by the organi-
zation during its current taxable year and
the four preceding taxable years.
(e) Facts and circumstances govern in
all other cases—(1) In general. Whether
a person who is not described in para-
graph (b), (c) or (d) of this section is a dis-
qualified person depends upon all rele-
vant facts and circumstances.
(2) Facts and circumstances tending to
show substantial influence. Facts and cir-
cumstances tending to show that a person
has substantial influence over the affairs
of an organization include, but are not
limited to, the following—
(i) The person founded the organiza-
tion;
(ii) The person is a substantial contrib-
utor to the organization (within the mean-
ing of section 507(d)(2)(A)), taking into
account only contributions received by
the organization during its current taxable
year and the four preceding taxable years;
(iii) The person’s compensation is pri-
marily based on revenues derived from
activities of the organization that the per-
son controls;
(iv) The person has or shares authority
to control or determine a substantial por-
tion of the organization’s capital expendi-
tures, operating budget, or compensation
for employees;
(v) The person manages a discrete seg-
ment or activity of the organization that
represents a substantial portion of the ac-
tivities, assets, income, or expenses of the
organization, as compared to the organi-
zation as a whole;
(vi) The person owns a controlling in-
terest (measured by either vote or value)
in a corporation, partnership, or trust that
is a disqualified person; or
(vii) The person is a non-stock organi-
zation controlled, directly or indirectly, by
one or more disqualified persons.
(3) Facts and circumstances tending to
show no substantial influence. Facts and
circumstances tending to show that a per-
son does not have substantial influence
over the affairs of an organization in-
clude, but are not limited to, the follow-
ing—
(i) The person has taken a bona fide
vow of poverty as an employee, agent, or
on behalf, of a religious organization;
(ii) The person is an independent con-
tractor (such as an attorney, accountant, or
investment manager or advisor) whose
sole relationship to the organization is
providing professional advice (without
having decision-making authority) with
respect to transactions from which the in-
dependent contractor will not economi-
cally benefit either directly or indirectly
(aside from customary fees received for
the professional advice rendered);
(iii) The direct supervisor of the indi-
vidual is not a disqualified person;
(iv) The person does not participate in
any management decisions affecting the
organization as a whole or a discrete seg-
ment or activity of the organization that
represents a substantial portion of the ac-
tivities, assets, income, or expenses of the
organization, as compared to the organi-
zation as a whole; or
(v) Any preferential treatment a person
receives based on the size of that person’s
2001–8 I.R.B.673February 20, 2001

donation is also offered to all other donors
making a comparable contribution as part
of a solicitation intended to attract a sub-
stantial number of contributions.
(f) Affiliated organizations. In the case
of multiple organizations affiliated by
common control or governing documents,
the determination of whether a person
does or does not have substantial influ-
ence shall be made separately for each ap-
plicable tax-exempt organization. A per-
son may be a disqualified person with
respect to transactions with more than one
applicable tax-exempt organization.
(g) Examples. The following examples
illustrate the principles of this section.
Finding a person to be a disqualified per-
son in the following examples does not
indicate that an excess benefit transaction
has occurred. If a person is a disqualified
person, the rules of section 4958(c) and
§53.4958–4T apply to determine whether
an excess benefit transaction has oc-
curred. The examples are as follows:
Example 1. N, an artist by profession, works
part-time at R, a local museum. In the first taxable
year in which R employs N, R pays N a salary and
provides no additional benefits to N except for free
admission to the museum, a benefit R provides to all
of its employees and volunteers. The total econom-
ic benefits N receives from R during the taxable year
are less than the amount referenced for a highly
compensated employee in section 414(q)(1)(B)(i).
The part-time job constitutes N’s only relationship
with R. N is not related to any other disqualified
person with respect to R. N is deemed not to be in a
position to exercise substantial influence over the
affairs of R. Therefore, N is not a disqualified per-
son with respect to R in that year.
Example 2. The facts are the same as in Example
1, except that in addition to the salary that R pays N
for N’s services during the taxable year, R also pur-
chases one of N’s paintings for $x. The total of N’s
salary plus $xexceeds the amount referenced for
highly compensated employees in section
414(q)(1)(B)(i). Consequently, whether N is in a
position to exercise substantial influence over the
affairs of R for that taxable year depends upon all of
the relevant facts and circumstances.
Example 3: Q is a member of K, a section
501(c)(3) organization with a broad-based public
membership. Members of K are entitled to vote only
with respect to the annual election of directors and
the approval of major organizational transactions
such as a merger or dissolution. Q is not related to
any other disqualified person of K. Q has no other
relationship to K besides being a member of K and
occasionally making modest donations to K.
Whether Q is a disqualified person is determined by
all relevant facts and circumstances. Q’s voting
rights, which are the same as granted to all members
of K, do not place Q in a position to exercise sub-
stantial influence over K. Under these facts and cir-
cumstances, Q is not a disqualified person with
respect K.
Example 4. E is the headmaster of Z, a school
that is an applicable tax-exempt organization for
purposes of section 4958. E reports to Z’s board of
trustees and has ultimate responsibility for supervis-
ing Z’s day-to-day operations. For example, E can
hire faculty members and staff, make changes to the
school’s curriculum and discipline students without
specific board approval. Because E has ultimate
responsibility for supervising the operation of Z, E is
in a position to exercise substantial influence over
the affairs of Z. Therefore, E is a disqualified person
with respect to Z.
Example 5. Y is an applicable tax-exempt orga-
nization for purposes of section 4958 that decides to
use bingo games as a method of generating revenue.
Y enters into a contract with B, a company that oper-
ates bingo games. Under the contract, B manages
the promotion and operation of the bingo activity,
provides all necessary staff, equipment, and services,
and pays Yqpercent of the revenue from this activ-
ity. B retains the balance of the proceeds. Y pro-
vides no goods or services in connection with the
bingo operation other than the use of its hall for the
bingo games. The annual gross revenue earned from
the bingo games represents more than half of Y’s
total annual revenue. B’s compensation is primarily
based on revenues from an activity B controls. B
also manages a discrete activity of Y that represents
a substantial portion of Y’s income compared to the
organization as a whole. Under these facts and cir-
cumstances, B is in a position to exercise substantial
influence over the affairs of Y. Therefore, B is a dis-
qualified person with respect to Y.
Example 6. The facts are the same as in Example
5, with the additional fact that P owns a majority of
the stock of B and is actively involved in managing
B. Because P owns a controlling interest (measured
by either vote or value) in and actively manages B, P
is also in a position to exercise substantial influence
over the affairs of Y. Therefore, under these facts
and circumstances, P is a disqualified person with
respect to Y.
Example 7. A, an applicable tax-exempt organi-
zation for purposes of section 4958, owns and oper-
ates one acute care hospital. B, a for-profit corpora-
tion, owns and operates a number of hospitals. A
and B form C, a limited liability company. In
exchange for proportional ownership interests, A
contributes its hospital, and B contributes other
assets, to C. All of A’s assets then consist of its
membership interest in C. A continues to be operat-
ed for exempt purposes based almost exclusively on
the activities it conducts through C. C enters into a
management agreement with a management compa-
ny, M, to provide day to day management services to
C. M is generally subject to supervision by C’s
board, but M is given broad discretion to manage C’s
day to day operation. Under these facts and circum-
stances, M is in a position to exercise substantial
influence over the affairs of A because it has day to
day control over the hospital operated by C, A’s own-
ership interest in C is its primary asset, and C’s activ-
ities form the basis for A’s continued exemption as
an organization described in section 501(c)(3).
Therefore, M is a disqualified person with respect to
A.
Example 8. T is a large university and an applic-
able tax-exempt organization for purposes of section
4958. L is the dean of the College of Law of T, a
substantial source of revenue for T, including contri-
butions from alumni and foundations. L is not relat-
ed to any other disqualified person of T. L does not
serve on T’s governing body or have ultimate
responsibility for managing the university as whole.
However, as dean of the College of Law, L plays a
key role in faculty hiring and determines a substan-
tial portion of the capital expenditures and operating
budget of the College of Law. L’s compensation is
greater than the amount referenced for a highly com-
pensated employee in section 414(q)(1)(B)(i) in the
year benefits are provided. L’s management of a
discrete segment of T that represents a substantial
portion of the income of T (as compared to T as a
whole) places L in a position to exercise substantial
influence over the affairs of T. Under these facts and
circumstances L is a disqualified person with respect
to T.
Example 9. S chairs a small academic depart-
ment in the College of Arts and Sciences of the same
university T described in Example 8. S is not relat-
ed to any other disqualified person of T. S does not
serve on T’s governing body or as an officer of T. As
department chair, S supervises faculty in the depart-
ment, approves the course curriculum, and oversees
the operating budget for the department. S’s com-
pensation is greater than the amount referenced for a
highly compensated employee in section
414(q)(1)(B)(i) in the year benefits are provided.
Even though S manages the department, that depart-
ment does not represent a substantial portion of T’s
activities, assets, income, expenses, or operating
budget. Therefore, S does not participate in any
management decisions affecting either T as a whole,
or a discrete segment or activity of T that represents
a substantial portion of its activities, assets, income,
or expenses. Under these facts and circumstances, S
does not have substantial influence over the affairs
of T, and therefore S is not a disqualified person with
respect to T.
Example 10. U is a large acute-care hospital that
is an applicable tax-exempt organization for purpos-
es of section 4958. U employs X as a radiologist. X
gives instructions to staff with respect to the radiol-
ogy work X conducts, but X does not supervise other
U employees or manage any substantial part of U’s
operations. X’s compensation is primarily in the
form of a fixed salary. In addition, X is eligible to
receive an incentive award based on revenues of the
radiology department. X’s compensation is greater
than the amount referenced for a highly compensat-
ed employee in section 414(q)(1)(B)(i) in the year
benefits are provided. X is not related to any other
disqualified person of U. X does not serve on U’s
governing body or as an officer of U. Although U
participates in a provider-sponsored organization (as
defined in section 1855(e) of the Social Security
Act), X does not have a material financial interest in
that organization. X does not receive compensation
primarily based on revenues derived from activities
of U that X controls. X does not participate in any
management decisions affecting either U as a whole
or a discrete segment of U that represents a substan-
tial portion of its activities, assets, income, or
expenses. Under these facts and circumstances, X
February 20, 20016742001–8 I.R.B.

does not have substantial influence over the affairs
of U, and therefore X is not a disqualified person
with respect to U.
Example 11. W is a cardiologist and head of the
cardiology department of the same hospital U
described in Example 10. The cardiology depart-
ment is a major source of patients admitted to U and
consequently represents a substantial portion of U’s
income, as compared to U as a whole. W does not
serve on U’s governing board or as an officer of U.
W does not have a material financial interest in the
provider-sponsored organization (as defined in sec-
tion 1855(e) of the Social Security Act) in which U
participates. W receives a salary and retirement and
welfare benefits fixed by a three-year renewable
employment contract with U. W’s compensation is
greater than the amount referenced for a highly com-
pensated employee in section 414(q)(1)(B)(i) in the
year benefits are provided. As department head, W
manages the cardiology department and has authori-
ty to allocate the budget for that department, which
includes authority to distribute incentive bonuses
among cardiologists according to criteria that W has
authority to set. W’s management of a discrete seg-
ment of U that represents a substantial portion of its
income and activities (as compared to U as a whole)
places W in a position to exercise substantial influ-
ence over the affairs of U. Under these facts and cir-
cumstances, W is a disqualified person with respect
to U.
Example 12. M is a museum that is an applicable
tax-exempt organization for purposes of section
4958. D provides accounting services and tax
advice to M as an independent contractor in return
for a fee. D has no other relationship with M and is
not related to any disqualified person of M. D does
not provide professional advice with respect to any
transaction from which D might economically bene-
fit either directly or indirectly (aside from fees
received for the professional advice rendered).
Because D’s sole relationship to M is providing pro-
fessional advice (without having decision-making
authority) with respect to transactions from which D
will not economically benefit either directly or indi-
rectly (aside from customary fees received for the
professional advice rendered), under these facts and
circumstances, D is not a disqualified person with
respect to M.
Example 13. F is a repertory theater company
that is an applicable tax-exempt organization for
purposes of section 4958. F holds a fund-raising
campaign to pay for the construction of a new the-
ater. J is a regular subscriber to F’s productions who
has made modest gifts to F in the past. J has no rela-
tionship to F other than as a subscriber and contrib-
utor. F solicits contributions as part of a broad pub-
lic campaign intended to attract a large number of
donors, including a substantial number of donors
making large gifts. In its solicitations for contribu-
tions, F promises to invite all contributors giving $z
or more to a special opening production and party
held at the new theater. These contributors are also
given a special number to call in F’s office to reserve
tickets for performances, make ticket exchanges, and
make other special arrangements for their conve-
nience. J makes a contribution of $zto F, which
makes J a substantial contributor within the meaning
of section 507(d)(2)(A), taking into account only
contributions received by F during its current and the
four preceding taxable years. J receives the benefits
described in F’s solicitation. Because F offers the
same benefit to all donors of $zor more, the prefer-
ential treatment that J receives does not indicate that
J is in a position to exercise substantial influence
over the affairs of the organization. Therefore, under
these facts and circumstances, J is not a disqualified
person with respect to F.
§53.4958–4T Excess benefit transaction
(temporary).
(a) Definition of excess benefit transac-
tion—(1) In general. An excess benefit
transactionmeans any transaction in
which an economic benefit is provided by
an applicable tax-exempt organization
directly or indirectly to or for the use of
any disqualified person, and the value of
the economic benefit provided exceeds
the value of the consideration (including
the performance of services) received for
providing the benefit. Subject to the lim-
itations of paragraph (c) of this section
(relating to the treatment of economic
benefits as compensation for the perfor-
mance of services), to determine whether
an excess benefit transaction has
occurred, all consideration and benefits
(except disregarded benefits described in
paragraph (a)(4) of this section)
exchanged between a disqualified person
and the applicable tax-exempt organiza-
tion and all entities the organization con-
trols (within the meaning of paragraph
(a)(2)(ii)(B) of this section) are taken into
account. For example, in determining the
reasonableness of compensation that is
paid (or vests, or is no longer subject to a
substantial risk of forfeiture) in one year,
services performed in prior years may be
taken into account. For rules regarding
valuation standards, see paragraph (b) of
this section. For the requirement that an
applicable tax-exempt organization clear-
ly indicate its intent to treat a benefit as
compensation for services when paid, see
paragraph (c) of this section.
(2) Economic benefit provided indirect-
ly—(i) In general. A transaction that
would be an excess benefit transaction if
the applicable tax-exempt organization
engaged in it directly with a disqualified
person is likewise an excess benefit trans-
action when it is accomplished indirectly.
An applicable tax-exempt organization
may provide an excess benefit indirectly
to a disqualified person through a con-
trolled entity or through an intermediary,
as described in paragraphs (a)(2)(ii) and
(iii) of this section, respectively.
(ii) Through a controlled entity—(A) In
general. An applicable tax-exempt orga-
nization may provide an excess benefit
indirectly through the use of one or more
entities it controls. For purposes of sec-
tion 4958, economic benefits provided by
a controlled entity will be treated as pro-
vided by the applicable tax-exempt orga-
nization.
(B) Definition of control— (1) In gen-
eral. For purposes of this paragraph, con-
trolby an applicable tax-exempt organiza-
tion means—
(i) In the case of a stock corporation,
ownership (by vote or value) of more than
50 percent of the stock in such corpora-
tion;
(ii) In the case of a partnership, owner-
ship of more than 50 percent of the profits
interests or capital interests in the partner-
ship;
(iii) In the case of a nonstock organiza-
tion (i.e., an entity in which no person
holds a proprietary interest), that at least
50 percent of the directors or trustees of
the organization are either representatives
(including trustees, directors, agents, or
employees) of, or directly or indirectly
controlled by, an applicable tax-exempt
organization; or
(iv) In the case of any other entity, own-
ership of more than 50 percent of the ben-
eficial interest in the entity.
(2) Constructive ownership. Section
318 (relating to constructive ownership of
stock) shall apply for purposes of deter-
mining ownership of stock in a corpora-
tion. Similar principles shall apply for
purposes of determining ownership of
interests in any other entity.
(iii) Through an intermediary. An
applicable tax-exempt organization may
provide an excess benefit indirectly
through an intermediary. An intermediary
is any person (including an individual or a
taxable or tax-exempt entity) who partici-
pates in a transaction with one or more
disqualified persons of an applicable tax-
exempt organization. For purposes of
section 4958, economic benefits provided
by an intermediary will be treated as pro-
vided by the applicable tax-exempt orga-
nization when—
(A) An applicable tax-exempt organiza-
tion provides an economic benefit to an
intermediary; and
(B) In connection with the receipt of
the benefit by the intermediary—
2001–8 I.R.B.675February 20, 2001

(1) There is evidence of an oral or written
agreement or understanding that the inter-
mediary will provide economic benefits to
or for the use of a disqualified person; or
(2) The intermediary provides econom-
ic benefits to or for the use of a disquali-
fied person without a significant business
purpose or exempt purpose of its own.
(iv) Examples. The following exam-
ples illustrate when economic benefits are
provided indirectly under the rules of
paragraph (a)(2) of this section:
Example 1. K is an applicable tax-exempt orga-
nization for purposes of section 4958. L is an entity
controlled by K within the meaning of paragraph
(a)(2)(ii)(B) of this section. J is employed by K, and
is a disqualified person with respect to K. K pays J
an annual salary of $12m, and reports that amount as
compensation during calendar year 2001. Although
J only performed services for K for nine months of
2001, J performed equivalent services for L during
the remaining three months of 2001. Taking into
account all of the economic benefits K provided to J,
and all of the services J performed for K and L,
$12mdoes not exceed the fair market value of the
services J performed for K and L during 2001.
Therefore, under these facts, K does not provide an
excess benefit to J directly or indirectly.
Example 2. F is an applicable tax-exempt orga-
nization for purposes of section 4958. D is an entity
controlled by F within the meaning of paragraph
(a)(2)(ii)(B) of this section. T is the chief executive
officer (CEO) of F. As CEO, T is responsible for
overseeing the activities of F. T’s duties as CEO
make him a disqualified person with respect to F.
T’s compensation package with F represents the
maximum reasonable compensation for T’s services
as CEO. Thus, any additional economic benefits
that F provides to T without T providing additional
consideration constitute an excess benefit. D con-
tracts with T to provide enumerated “consulting ser-
vices” to D. However, the contract does not require
T to perform any additional services for D that T is
not already obligated to perform as F’s chief execu-
tive officer. Therefore, any payment to T pursuant to
the consulting contract with D represents an indirect
excess benefit that F provides through a controlled
entity, even if F, D, or T treats the additional pay-
ment to T as compensation.
Example 3. P is an applicable tax-exempt organi-
zation for purposes of section 4958. S is a taxable
entity controlled by P within the meaning of para-
graph (a)(2)(ii)(B) of this section. V is the chief
executive officer of S, for which S pays V $win
salary and benefits. V also serves as a voting mem-
ber of P’s governing body. Consequently, V is a dis-
qualified person with respect to P. P provides V with
$xrepresenting compensation for the services V pro-
vides P as a member of its governing body. Although
$xrepresents reasonable compensation for the ser-
vices V provides directly to P as a member of its gov-
erning body, the total compensation of $w+ $x
exceeds reasonable compensation for the services V
provides to P and S collectively. Therefore, the por-
tion of total compensation that exceeds reasonable
compensation is an excess benefit provided to V.
Example 4. G is an applicable tax-exempt orga-
nization for section 4958 purposes. F is a disquali-
fied person who was last employed by G in a posi-
tion of substantial influence three years ago. H is an
entity engaged in scientific research and is unrelated
to either F or G. G makes a grant to H to fund a
research position. H subsequently advertises for
qualified candidates for the research position. F is
among several highly qualified candidates who
apply for the research position. H hires F. There
was no evidence of an oral or written agreement or
understanding with G that H will use G’s grant to
provide economic benefits to or for the use of F.
Although G provided economic benefits to H, and in
connection with the receipt of such benefits, H will
provide economic benefits to or for the use of F, H
acted with a significant business purpose or exempt
purpose of its own. Under these facts, G did not pro-
vide an economic benefit to F indirectly through the
use of an intermediary.
(3) Exception for fixed payments made
pursuant to an initial contract—(i) In
general. Except as provided in paragraph
(iv), section 4958 does not apply to any
fixed payment made to a person pursuant
to an initial contract.
(ii) Fixed payment—(A) In general.
For purposes of paragraph (a)(3)(i) of this
section, fixed paymentmeans an amount
of cash or other property specified in the
contract, or determined by a fixed formu-
la specified in the contract, which is to be
paid or transferred in exchange for the
provision of specified services or proper-
ty. A fixed formula may incorporate an
amount that depends upon future speci-
fied events or contingencies, provided
that no person exercises discretion when
calculating the amount of a payment or
deciding whether to make a payment
(such as a bonus). A specified event or
contingency may include the amount of
revenues generated by (or other objective
measure of) one or more activities of the
applicable tax-exempt organization. A
fixed payment does not include any
amount paid to a person under a reim-
bursement (or similar) arrangement where
discretion is exercised by any person with
respect to the amount of expenses
incurred or reimbursed.
(B) Special rules. Amounts payable
pursuant to a qualified pension, profit-
sharing, or stock bonus plan under
Internal Revenue Code section 401(a), or
pursuant to an employee benefit program
that is subject to and satisfies coverage
and nondiscrimination rules under the
Code (e.g., sections 127 and 137), other
than nondiscrimination rules under sec-
tion 9802, are treated as fixed payments
for purposes of this section, regardless of
the applicable tax-exempt organization’s
discretion with respect to the plan or pro-
gram. The fact that a person contracting
with an applicable tax-exempt organiza-
tion is expressly granted the choice
whether to accept or reject any economic
benefit is disregarded in determining
whether the benefit constitutes a fixed
payment for purposes of this paragraph.
(iii) Initial contract. For purposes of
paragraph (a)(3)(i) of this section, initial
contractmeans a binding written contract
between an applicable tax-exempt organi-
zation and a person who was not a dis-
qualified person within the meaning of
section 4958(f)(1) and §53.4958–3T
immediately prior to entering into the
contract.
(iv) Substantial performance required.
Paragraph (a)(3)(i) of this section does not
apply to any fixed payment made pur-
suant to the initial contract during any tax-
able year of the person contracting with
the applicable tax-exempt organization if
the person fails to perform substantially
the person’s obligations under the initial
contract during that year.
(v) Treatment as a new contract.A
written binding contract that provides that
the contract is terminable or subject to
cancellation by the applicable tax-exempt
organization (other than as a result of a
lack of substantial performance by the
disqualified person, as described in para-
graph (a)(3)(iv) of this section) without
the other party’s consent and without sub-
stantial penalty to the organization is
treated as a new contract as of the earliest
date that any such termination or cancel-
lation, if made, would be effective.
Additionally, if the parties make a materi-
al change to a contract, it is treated as a
new contract as of the date the material
change is effective. A material change
includes an extension or renewal of the
contract (other than an extension or
renewal that results from the person con-
tracting with the applicable tax-exempt
organization unilaterally exercising an
option expressly granted by the contract),
or a more than incidental change to any
amount payable under the contract. The
new contract is tested under paragraph
(a)(3)(iii) of this section to determine
whether it is an initial contract for purpos-
es of this section.
(vi) Evaluation of non-fixed payments.
Any payment that is not a fixed payment
(within the meaning of paragraph
(a)(3)(ii) of this section) is evaluated to
determine whether it constitutes an excess
February 20, 20016762001–8 I.R.B.

benefit transaction under section 4958. In
making this determination, all payments
and consideration exchanged between the
parties are taken into account, including
any fixed payments made pursuant to an
initial contract with respect to which sec-
tion 4958 does not apply.
(vii) Examples. The following exam-
ples illustrate the rules governing fixed
payments made pursuant to an initial con-
tract. Unless otherwise stated, assume
that the person contracting with the
applicable tax-exempt organization has
performed substantially the person’s
obligations under the contract with
respect to the payment. The examples are
as follows:
Example 1. T is an applicable tax-exempt organi-
zation for purposes of section 4958. On January 1,
2000, T hires S as its chief financial officer by enter-
ing into a five-year written employment contract
with S. S was not a disqualified person within the
meaning of section 4958(f)(1) and §53.4958–3T
immediately prior to entering into the January 1,
2000, contract (initial contract). S’s duties and
responsibilities under the contract make S a disqual-
ified person with respect to T (see §53.4958–3T(a)).
Under the initial contract, T agrees to pay S an annu-
al salary of $200,000, payable in monthly install-
ments. The contract provides that, beginning in
2001, S’s annual salary will be adjusted by the
increase in the Consumer Price Index (CPI) for the
prior year. Section 4958 does not apply because S’s
compensation under the contract is a fixed payment
pursuant to an initial contract within the meaning of
paragraph (a)(3) of this section. Thus, for section
4958 purposes, it is unnecessary to evaluate whether
any portion of the compensation paid to S pursuant
to the initial contract is an excess benefit transaction.
Example 2. The facts are the same as in Example
1, except that the initial contract provides that, in
addition to a base salary of $200,000, T may pay S
an annual performance-based bonus. The contract
provides that T’s governing body will determine the
amount of the annual bonus as of the end of each
year during the term of the contract, based on the
board’s evaluation of S’s performance, but the bonus
cannot exceed $100,000 per year. Unlike the base
salary portion of S’s compensation, the bonus por-
tion of S’s compensation is not a fixed payment pur-
suant to an initial contract, because the governing
body has discretion over the amount, if any, of the
bonus payment. Section 4958 does not apply to pay-
ment of the $200,000 base salary (as adjusted for
inflation), because it is a fixed payment pursuant to
an initial contract within the meaning of paragraph
(a)(3) of this section. By contrast, the annual bonus-
es that may be paid to S under the initial contract are
not protected by the initial contract exception.
Therefore, each bonus payment will be evaluated
under section 4958, taking into account all payments
and consideration exchanged between the parties.
Example 3. The facts are the same as in Example
1, except that in 2001, T changes its payroll system,
such that T makes biweekly, rather than monthly,
salary payments to its employees. Beginning in
2001, T also grants its employees an additional two
days of paid vacation each year. Neither change is a
material change to S’s initial contract within the
meaning of paragraph (a)(3)(v) of this section.
Therefore, section 4958 does not apply to the base
salary payments to S due to the initial contract
exception.
Example 4. The facts are the same as in Example
1, except that on January 1, 2001, S becomes the
chief executive officer of T and a new chief financial
officer is hired. At the same time, T’s board of direc-
tors approves an increase in S’s annual base salary
from $200,000 to $240,000, effective on that day.
These changes in S’s employment relationship con-
stitute material changes of the initial contract within
the meaning of paragraph (a)(3)(v) of this section.
As a result, S is treated as entering into a new con-
tract with T on January 1, 2001, at which time S is a
disqualified person within the meaning of section
4958(f)(1) and §53.4958–3T. T’s payments to S
made pursuant to the new contract will be evaluated
under section 4958, taking into account all payments
and consideration exchanged between the parties.
Example 5. J is a performing arts organization
and an applicable tax-exempt organization for pur-
poses of section 4958. J hires W to become the chief
executive officer of J. W was not a disqualified per-
son within the meaning of section 4958(f)(1) and
§53.4958–3T immediately prior to entering into the
employment contract with J. As a result of this
employment contract, W’s duties and responsibili-
ties make W a disqualified person with respect to J
(see §53.4958–3T(c)(2)). Under the contract, J will
pay W $x(a specified amount) plus a bonus equal to
2 percent of the total season subscription sales that
exceed $100z. The $xbase salary is a fixed payment
pursuant to an initial contract within the meaning of
paragraph (a)(3) of this section. The bonus payment
is also a fixed payment pursuant to an initial contract
within the meaning of paragraph (a)(3) of this sec-
tion, because no person exercises discretion when
calculating the amount of the bonus payment or
deciding whether the bonus will be paid. Therefore,
section 4958 does not apply to any of J’s payments
to W pursuant to the employment contract due to the
initial contract exception.
Example 6. Hospital B is an applicable tax-
exempt organization for purposes of section 4958.
Hospital B hires E as its chief operating officer. E
was not a disqualified person within the meaning of
section 4958(f)(1) and §53.4958–3T immediately
prior to entering into the employment contract with
Hospital B. As a result of this employment contract,
E’s duties and responsibilities make E a disqualified
person with respect to Hospital B (see
§53.4958–3T(c)(2)). E’s initial employment con-
tract provides that E will have authority to enter into
hospital management arrangements on behalf of
Hospital B. In E’s personal capacity, E owns more
than 35 percent of the combined voting power of
Company X. Consequently, at the time E becomes a
disqualified person with respect to B, Company X
also becomes a disqualified person with respect to B
(see §53.4958–3T(b)(2)(A)). E, acting on behalf of
Hospital B as chief operating officer, enters into a
contract with Company X under which Company X
will provide billing and collection services to
Hospital B. The initial contract exception of para-
graph (a)(3)(i) of this section does not apply to the
billing and collection services contract, because at
the time that this contractual arrangement was
entered into, Company X was a disqualified person
with respect to Hospital B. Although E’s employ-
ment contract (which is an initial contract) autho-
rizes E to enter into hospital management arrange-
ments on behalf of Hospital B, the payments made to
Company X are not made pursuant to E’s employ-
ment contract, but rather are made by Hospital B
pursuant to a separate contractual arrangement with
Company X. Therefore, even if payments made to
Company X under the billing and collection services
contract are fixed payments (within the meaning of
paragraph (a)(3)(ii) of this section), section 4958
nonetheless applies to payments made by Hospital B
to Company X because the billing and collection ser-
vices contract itself does not constitute an initial
contract under paragraph (a)(3)(iii) of this section.
Accordingly, all payments made to Company X
under the billing and collection services contract will
be evaluated under section 4958.
Example 7. Hospital C, an applicable tax-exempt
organization, enters into a contract with Company Y,
under which Company Y will provide a wide range
of hospital management services to Hospital C.
Upon entering into this contractual arrangement,
Company Y becomes a disqualified person with
respect to Hospital C. The contract provides that
Hospital C will pay Company Y a management fee
of xpercent of adjusted gross revenue (i.e., gross
revenue increased by the cost of charity care provid-
ed to indigents) annually for a five-year period. The
management services contract specifies the cost
accounting system and the standards for indigentsto
be used in calculating the cost of charity care. The
cost accounting system objectively defines the direct
and indirect costs of all health care goods and ser-
vices provided as charity care. Because Company Y
was not a disqualified person with respect to
Hospital C immediately before entering into the
management services contract, that contract is an
initial contract within the meaning of paragraph
(a)(3)(iii) of this section. The annual management
fee paid to Company Y is determined by a fixed for-
mula specified in the contract, and is therefore a
fixed payment within the meaning of paragraph
(a)(3)(ii) of this section. Accordingly, section 4958
does not apply to the annual management fee due to
the initial contract exception.
Example 8. The facts are the same as in Example
7, except that the management services contract also
provides that Hospital C will reimburse Company Y
on a monthly basis for certain expenses incurred by
Company Y that are attributable to management ser-
vices provided to Hospital C (e.g., legal fees and
travel expenses). These reimbursement payments
that Hospital C makes to Company Y for the various
expenses covered by the contract are not fixed pay-
ments within the meaning of paragraph (a)(3)(ii) of
this section, because Company Y exercises discre-
tion with respect to the amount of expenses incurred.
Therefore, any reimbursement payments that
Hospital C pays pursuant to the contract will be eval-
uated under section 4958.
Example 9. X, an applicable tax-exempt organi-
zation for purposes of section 4958, hires C to con-
duct scientific research. On January 1, 2000, C
enters into a three-year written employment contract
with X (“initial contract”). Under the terms of the
contract, C is required to work full-time at X’s labo-
ratory for a fixed annual salary of $90,000.
Immediately prior to entering into the employment
2001–8 I.R.B.677February 20, 2001

contract, C was not a disqualified person within the
meaning of section 4958(f)(1) and §53.4958–3T, nor
did C become a disqualified person pursuant to the
initial contract. However, two years after joining X,
C marries D, who is the child of X’s president. As
D’s spouse, C is a disqualified person within the
meaning of section 4958(f)(1) and §53.4958–3T
with respect to X. Nonetheless, section 4958 does
not apply to X’s salary payments to C due to the ini-
tial contract exception.
Example 10. The facts are the same as in
Example 9, except that the initial contract included a
below-market loan provision under which C has the
unilateral right to borrow up to a specified dollar
amount from X at a specified interest rate for a spec-
ified term. After C’s marriage to D, C borrows
money from X to purchase a home under the terms
of the initial contract. Section 4958 does not apply
to X’s loan to C due to the initial contract exception.
Example 11. The facts are the same as in
Example 9, except that after C’s marriage to D, C
works only sporadically at the laboratory, and per-
forms no other services for X. Notwithstanding that
C fails to perform substantially C’s obligations under
the initial contract, X does not exercise its right to
terminate the initial contract for nonperformance and
continues to pay full salary to C. Pursuant to para-
graph (a)(3)(iv) of this section, the initial contract
exception does not apply to any payments made pur-
suant to the initial contract during any taxable year
of C in which C fails to perform substantially C’s
obligations under the initial contract.
(4) Certain economic benefits disre-
garded for purposes of section 4958. The
following economic benefits are disre-
garded for purposes of section 4958:
(i) Nontaxable fringe benefits. An eco-
nomic benefit that is excluded from
income under section 132, except any lia-
bility insurance premium, payment, or
reimbursement that must be taken into
account under §53.4958–4T(b)(1)(ii)
(B)(2);
(ii) Certain economic benefits provided
to a volunteer for the organization. An
economic benefit provided to a volunteer
for the organization if the benefit is pro-
vided to the general public in exchange
for a membership fee or contribution of
$75 or less per year;
(iii) Certain economic benefits provided
to a member of, or donor to, the organiza-
tion. An economic benefit provided to a
member of an organization solely on
account of the payment of a membership
fee, or to a donor solely on account of a con-
tribution deductible under section 170, if—
(A) Any non-disqualified person pay-
ing a membership fee or making a contri-
bution above a specified amount to the
organization is given the option of receiv-
ing substantially the same economic ben-
efit; and
(B) The disqualified person and a sig-
nificant number of non-disqualified per-
sons make a payment or contribution of at
least the specified amount;
(iv) Economic benefits provided to a
charitable beneficiary. An economic ben-
efit provided to a person solely as a mem-
ber of a charitable class that the applicable
tax-exempt organization intends to benefit
as part of the accomplishment of the orga-
nization’s exempt purpose; and
(v) Certain economic benefits provided
to a governmental unit. Any transfer of an
economic benefit to or for the use of a
governmental unit defined in section
170(c)(1), if the transfer is for exclusively
public purposes.
(b) Valuation standards—(1) In gener-
al. This section provides rules for deter-
mining the value of economic benefits for
purposes of section 4958.
(i) Fair market value of property. The
value of property, including the right to
use property, for purposes of section 4958
is the fair market value (i.e., the price at
which property or the right to use proper-
ty would change hands between a willing
buyer and a willing seller, neither being
under any compulsion to buy, sell or
transfer property or the right to use prop-
erty, and both having reasonable knowl-
edge of relevant facts).
(ii) Reasonable compensation—(A) In
general. The value of services is the
amount that would ordinarily be paid for
like services by like enterprises under like
circumstances (i.e., reasonable compensa-
tion). Section 162 standards apply in
determining reasonableness of compensa-
tion, taking into account the aggregate
benefits (other than any benefits specifi-
cally disregarded under paragraph (a)(4)
of this section) provided to a person and
the rate at which any deferred compensa-
tion accrues. The fact that a bonus or rev-
enue-sharing arrangement is subject to a
cap is a relevant factor in determining the
reasonableness of compensation. The fact
that a State or local legislative or agency
body or court has authorized or approved
a particular compensation package paid to
a disqualified person is not determinative
of the reasonableness of compensation for
purposes of section 4958.
(B) Items included in determining the
value of compensation for purposes of
determining reasonableness under section
4958. Except for economic benefits that
are disregarded for purposes of section
4958 under paragraph (a)(4) of this sec-
tion, compensation for purposes of deter-
mining reasonableness under section 4958
includes all economic benefits provided
by an applicable tax-exempt organization
in exchange for the performance of ser-
vices. These benefits include, but are not
limited to—
(1) All forms of cash and noncash com-
pensation, including salary, fees, bonuses,
severance payments, and deferred and
noncash compensation described in
§53.4958–1T(e)(2);
(2) Unless excludable from income as a
de minimisfringe benefit pursuant to sec-
tion 132(a)(4), the payment of liability
insurance premiums for, or the payment
or reimbursement by the organization
of—
(i) Any penalty, tax, or expense of cor-
rection owed under section 4958;
(ii) Any expense not reasonably
incurred by the person in connection with
a civil judicial or civil administrative pro-
ceeding arising out of the person’s perfor-
mance of services on behalf of the applic-
able tax-exempt organization; or
(iii) Any expense resulting from an act
or failure to act with respect to which the
person has acted willfully and without
reasonable cause; and
(3) All other compensatory benefits,
whether or not included in gross income
for income tax purposes, including pay-
ments to welfare benefit plans, such as
plans providing medical, dental, life
insurance, severance pay, and disability
benefits, and both taxable and nontaxable
fringe benefits (other than fringe benefits
described in section 132), including
expense allowances or reimbursements,
and foregone interest on loans.
(C) Inclusion in compensation for rea-
sonableness determination does not gov-
ern income tax treatment. The determina-
tion of whether any item listed in
paragraph (b)(1)(ii)(B) of this section is
included in the disqualified person’s gross
income for income tax purposes is made
on the basis of the provisions of chapter 1
of Subtitle A of the Internal Revenue
Code, without regard to whether the item
is taken into account for purposes of
determining reasonableness of compensa-
tion under section 4958.
(2) Timing of reasonableness determi-
nation—(i) In general. The facts and cir-
February 20, 20016782001–8 I.R.B.

cumstances to be taken into consideration
in determining reasonableness of a fixed
payment (within the meaning of para-
graph (a)(3)(ii) of this section) are those
existing on the date the parties enter into
the contract pursuant to which the pay-
ment is made. However, in the event of
substantial non-performance, reasonable-
ness is determined based on all facts and
circumstances, up to and including cir-
cumstances as of the date of payment. In
the case of a payment that is not a fixed
payment under a contract, reasonableness
is determined based on all facts and cir-
cumstances, up to and including circum-
stances as of the date of payment. In no
event shall circumstances existing at the
date when the payment is questioned be
considered in making a determination of
the reasonableness of the payment.
(ii) Treatment as a new contract. For
purposes of paragraph (b)(2)(i) of this
section, a written binding contract that
provides that the contract is terminable
or subject to cancellation by the applica-
ble tax-exempt organization without the
other party’s consent and without sub-
stantial penalty to the organization is
treated as a new contract as of the earli-
est date that any such termination or
cancellation, if made, would be effec-
tive. Additionally, if the parties make a
material change to a contract (within the
meaning of paragraph (a)(3)(v) of this
section), it is treated as a new contract as
of the date the material change is effec-
tive.
(iii) Examples. The following exam-
ples illustrate the timing of the reason-
ableness determination under the rules of
this paragraph (b)(2):
Example 1. G is an applicable tax-exempt orga-
nization for purposes of section 4958. H is an
employee of G and a disqualified person with
respect to G. H’s new multi-year employment con-
tract provides for payment of a salary and provision
of specific benefits pursuant to a qualified pension
plan under Internal Revenue Code section 401(a)
and an accident and health plan that meets the
requirements of section 105(h)(2). The contract pro-
vides that H’s salary will be adjusted by the increase
in the Consumer Price Index (CPI) for the prior
year. The contributions G makes to the qualified
pension plan are equal to the maximum amount G is
permitted to contribute under the rules applicable to
qualified plans. Under these facts, all items com-
prising H’s total compensation are treated as fixed
payments within the meaning of paragraph (a)(3)(ii)
of this section. Therefore, the reasonableness of H’s
compensation is determined based on the circum-
stances existing at the time G and H enter into the
employment contract.
Example 2. N is an applicable tax-exempt orga-
nization for purposes of section 4958. On January 2,
N’s governing body enters into a new one-year
employment contract with K, its executive director,
who is a disqualified person with respect to N. The
contract provides that K will receive a specified
amount of salary, contributions to a qualified pen-
sion plan under Internal Revenue Code section
401(a), and other benefits pursuant to a section 125
cafeteria plan. In addition, the contract provides that
N’s governing body may, in its discretion, declare a
bonus to be paid to K at any time during the year
covered by the contract. K’s salary and other speci-
fied benefits constitute fixed payments within the
meaning of paragraph (a)(3)(ii) of this section.
Therefore, the reasonableness of those economic
benefits is determined on the date when the contract
was made. However, because the bonus payment is
not a fixed payment within the meaning of paragraph
(a)(3)(ii) of this section, the determination of
whether any bonus awarded to N is reasonable must
be made based on all facts and circumstances
(including all payments and consideration
exchanged between the parties), up to and including
circumstances as of the date of payment of the
bonus.
(c) Establishing intent to treat econom-
ic benefit as consideration for the perfor-
mance of services—(1) In general. An
economic benefit is not treated as consid-
eration for the performance of services
unless the organization providing the ben-
efit clearly indicates its intent to treat the
benefit as compensation when the benefit
is paid. Except as provided in paragraph
(c)(2) of this section, an applicable tax-
exempt organization (or entity controlled
by an applicable tax-exempt organization,
within the meaning of paragraph
(a)(2)(ii)(B) of this section) is treated as
clearly indicating its intent to provide an
economic benefit as compensation for ser-
vices only if the organization provides
written substantiation that is contempora-
neous with the transfer of the economic
benefit at issue. If an organization fails to
provide this contemporaneous substantia-
tion, any services provided by the disqual-
ified person will not be treated as provid-
ed in consideration for the economic
benefit for purposes of determining the
reasonableness of the transaction.
(2) Nontaxable benefits. For purposes
of section 4958(c)(1)(A) and this section,
an applicable tax-exempt organization is
not required to indicate its intent to pro-
vide an economic benefit as compensation
for services if the economic benefit is
excluded from the disqualified person’s
gross income for income tax purposes on
the basis of the provisions of chapter 1 of
Subtitle A of the Internal Revenue Code.
Examples of these benefits include, but
are not limited to, employer-provided
health benefits and contributions to a
qualified pension, profit-sharing, or stock
bonus plan under Internal Revenue Code
section 401(a), and benefits described in
sections 127 and 137. However, except
for economic benefits that are disregarded
for purposes of section 4958 under para-
graph (a)(4) of this section, all compen-
satory benefits (regardless of the federal
income tax treatment) provided by an
organization in exchange for the perfor-
mance of services are taken into account
in determining the reasonableness of a
person’s compensation for purposes of
section 4958.
(3) Contemporaneous substantiation—
(i) Reporting of benefit. An applicable
tax-exempt organization provides con-
temporaneous written substantiation of its
intent to provide an economic benefit as
compensation if—
(A) The organization reports the eco-
nomic benefit as compensation on an
original Federal tax information return
with respect to the payment (e.g., Form
W-2 or 1099) or with respect to the orga-
nization (e.g., Form 990), or on an amend-
ed Federal tax information return filed
prior to the commencement of an Internal
Revenue Service examination of the
applicable tax-exempt organization or the
disqualified person for the taxable year in
which the transaction occurred (as deter-
mined under §53.4958–1T(e)); or
(B) The recipient disqualified person
reports the benefit as income on the per-
son’s original Federal tax return (e.g.,
Form 1040), or on the person’s amended
Federal tax return filed prior to the com-
mencement of an Internal Revenue
Service examination described in para-
graph (b)(3)(i)(A) of this section.
(ii) Other evidence of contemporaneous
substantiation. In addition, other written
contemporaneous evidence may be used
to demonstrate that the appropriate deci-
sion-making body or an authorized officer
approved a transfer as compensation for
services in accordance with established
procedures, including an approved written
employment contract executed on or
before the date of the transfer, or docu-
mentation satisfying the requirements of
§53.4958–6T(a)(3) indicating that an
2001–8 I.R.B.679February 20, 2001

authorized body approved the transfer as
compensation for services on or before
the date of the transfer.
(iii) Failure to report due to reasonable
cause. If an applicable tax-exempt orga-
nization’s failure to report an economic
benefit as required under the Internal
Revenue Code is due to reasonable cause
(within the meaning §301.6724–1 of this
chapter), then the organization will be
treated as having clearly indicated its
intent to provide an economic benefit as
compensation for services. To show that
its failure to report an economic benefit
that should have been reported on an
information return was due to reasonable
cause, an applicable tax-exempt organiza-
tion must establish that there were signif-
icant mitigating factors with respect to its
failure to report (as described in
§301.6724–1(b) of this chapter), or the
failure arose from events beyond the orga-
nization’s control (as described in
§301.6724–1(c) of this chapter), and that
the organization acted in a responsible
manner both before and after the failure
occurred (as described in §301.6724–1(d)
of this chapter).
(4) Examples. The following examples
illustrate the requirement that an organi-
zation contemporaneously substantiate its
intent to provide an economic benefit as
compensation for services, as defined in
paragraph (c) of this section:
Example 1. G is an applicable tax-exempt orga-
nization for purposes of section 4958. G hires an
individual contractor, P, who is also the child of a
disqualified person of G, to design a computer pro-
gram for it. G executes a contract with P for that
purpose in accordance with G’s established proce-
dures, and pays P $1,000 during the year pursuant to
the contract. Before January 31 of the next year, G
reports the full amount paid to P under the contract
on a Form 1099 filed with the Internal Revenue
Service. G will be treated as providing contempora-
neous written substantiation of its intent to provide
the $1,000 paid to P as compensation for the services
P performed under the contract by virtue of either the
Form 1099 filed with the Internal Revenue Service
reporting the amount, or by virtue of the written con-
tract executed between G and P.
Example 2. G is an applicable tax-exempt orga-
nization for purposes of section 4958. D is the chief
operating officer of G, and a disqualified person with
respect to G. D receives a bonus at the end of the
year. G’s accounting department determines that the
bonus is to be reported on D’s Form W-2. Due to
events beyond G’s control, the bonus is not reflected
on D’s Form W-2. As a result, D fails to report the
bonus on his individual income tax return. G acts to
amend Forms W-2 affected as soon as G is made
aware of the error during an Internal Revenue
Service examination. G’s failure to report the bonus
on an information return issued to D arose from
events beyond G’s control, and G acted in a respon-
sible manner both before and after the failure
occurred. Thus, because G had reasonable cause
(within the meaning §301.6724–1 of this chapter)
for failing to report D’s bonus, G will be treated as
providing contemporaneous written substantiation
of its intent to provide the bonus as compensation for
services when paid.
§53.4958–5T Transaction in which the
amount of the economic benefit is
determined in whole or in part by the
revenues of one or more activities of the
organization (temporary). [Reserved]
§53.4958–6T Rebuttable presumption
that a transaction is not an excess benefit
transaction (temporary).
(a) In general. Payments under a com-
pensation arrangement are presumed to be
reasonable, and a transfer of property, or
the right to use property, is presumed to be
at fair market value, if the following con-
ditions are satisfied—
(1) The compensation arrangement or
the terms of the property transfer are
approved in advance by an authorized
body of the applicable tax-exempt organi-
zation (or an entity controlled by the orga-
nization with the meaning of
§53.4958–4T(a)(2)(ii)(B)) composed
entirely of individuals who do not have a
conflict of interest (within the meaning of
paragraph (c)(1)(iii) of this section) with
respect to the compensation arrangement
or property transfer, as described in para-
graph (c)(1) of this section;
(2) The authorized body obtained and
relied upon appropriate data as to compa-
rability prior to making its determination,
as described in paragraph (c)(2) of this
section; and
(3) The authorized body adequately
documented the basis for its determina-
tion concurrently with making that deter-
mination, as described in paragraph (c)(3)
of this section.
(b) Rebutting the presumption. If the
three requirements of paragraph (a) of this
section are satisfied, then the Internal
Revenue Service may rebut the presump-
tion that arises under paragraph (a) of this
section only if it develops sufficient con-
trary evidence to rebut the probative value
of the comparability data relied upon by
the authorized body. With respect to any
fixed payment (within the meaning of
§53.4958–4T(a)(3)(ii)), rebuttal evidence
is limited to evidence relating to facts and
circumstances existing on the date the
parties enter into the contract pursuant to
which the payment is made (except in the
event of substantial nonperformance).
With respect to all other payments
(including non-fixed payments subject to
a cap, as described in paragraph (d)(2) of
this section), rebuttal evidence may
include facts and circumstances up to and
including the date of payment. See
§53.4958–4T(b)(2)(i).
(c) Requirements for invoking rebut-
table presumption—(1) Approval by an
authorized body—(i) In general. An
authorized body means—
(A) The governing body (i.e., the board
of directors, board of trustees, or equiva-
lent controlling body) of the organization;
(B) A committee of the governing body,
which may be composed of any individu-
als permitted under State law to serve on
such a committee, to the extent that the
committee is permitted by State law to act
on behalf of the governing body; or
(C) To the extent permitted under State
law, other parties authorized by the gov-
erning body of the organization to act on
its behalf by following procedures speci-
fied by the governing body in approving
compensation arrangements or property
transfers.
(ii) Individuals not included on autho-
rized body. For purposes of determining
whether the requirements of paragraph (a)
of this section have been met with respect
to a specific compensation arrangement or
property transfer, an individual is not
included on the authorized body when it is
reviewing a transaction if that individual
meets with other members only to answer
questions, and otherwise recuses himself or
herself from the meeting and is not present
during debate and voting on the compensa-
tion arrangement or property transfer.
(iii) Absence of conflict of interest. A
member of the authorized body does not
have a conflict of interest with respect to
a compensation arrangement or property
transfer only if the member—
(A) Is not a disqualified person partici-
pating in or economically benefitting
from the compensation arrangement or
property transfer, and is not a member of
the family of any such disqualified per-
son, as described in section 4958(f)(4) or
§53.4958–3T(b)(1);
(B) Is not in an employment relation-
ship subject to the direction or control of
any disqualified person participating in or
economically benefitting from the com-
February 20, 20016802001–8 I.R.B.

pensation arrangement or property trans-
fer;
(C) Does not receive compensation or
other payments subject to approval by any
disqualified person participating in or
economically benefitting from the com-
pensation arrangement or property trans-
fer;
(D) Has no material financial interest
affected by the compensation arrange-
ment or property transfer; and
(E) Does not approve a transaction pro-
viding economic benefits to any disquali-
fied person participating in the compensa-
tion arrangement or property transfer,
who in turn has approved or will approve
a transaction providing economic benefits
to the member.
(2) Appropriate data as to comparabil-
ity—(i) In general. An authorized body
has appropriate data as to comparability
if, given the knowledge and expertise of
its members, it has information sufficient
to determine whether, under the standards
set forth in §53.4958–4T(b), the compen-
sation arrangement in its entirety is rea-
sonable or the property transfer is at fair
market value. In the case of compensa-
tion, relevant information includes, but is
not limited to, compensation levels paid
by similarly situated organizations, both
taxable and tax-exempt, for functionally
comparable positions; the availability of
similar services in the geographic area of
the applicable tax-exempt organization;
current compensation surveys compiled
by independent firms; and actual written
offers from similar institutions competing
for the services of the disqualified person.
In the case of property, relevant informa-
tion includes, but is not limited to, current
independent appraisals of the value of all
property to be transferred; and offers
received as part of an open and competi-
tive bidding process.
(ii) Special rule for compensation paid
by small organizations. For organizations
with annual gross receipts (including con-
tributions) of less than $1 million review-
ing compensation arrangements, the
authorized body will be considered to
have appropriate data as to comparability
if it has data on compensation paid by
three comparable organizations in the
same or similar communities for similar
services. No inference is intended with
respect to whether circumstances falling
outside this safe harbor will meet the
requirement with respect to the collection
of appropriate data.
(iii) Application of special rule for
small organizations. For purposes of
determining whether the special rule for
small organizations described in para-
graph (c)(2)(ii) of this section applies, an
organization may calculate its annual
gross receipts based on an average of its
gross receipts during the three prior tax-
able years. If any applicable tax-exempt
organization is controlled by or controls
another entity (as defined in
§53.4958–4T(a)(2)(ii)(B)), the annual
gross receipts of such organizations must
be aggregated to determine applicability
of the special rule stated in paragraph
(c)(2)(ii) of this section.
(iv) Examples. The following exam-
ples illustrate the rules for appropriate
data as to comparability for purposes of
invoking the rebuttable presumption of
reasonableness described in this section.
In all examples, compensation refers to
the aggregate value of all benefits provid-
ed in exchange for services. The exam-
ples are as follows:
Example 1. Z is a university that is an applicable
tax-exempt organization for purposes of section
4958. Z is negotiating a new contract with Q, its
president, because the old contract will expire at the
end of the year. In setting Q’s compensation for its
president at $600xper annum, the executive com-
mittee of the Board of Trustees relies solely on a
national survey of compensation for university pres-
idents that indicates university presidents receive
annual compensation in the range of $100xto $700x;
this survey does not divide its data by any criteria,
such as the number of students served by the institu-
tion, annual revenues, academic ranking, or geo-
graphic location. Although many members of the
executive committee have significant business expe-
rience, none of the members has any particular
expertise in higher education compensation matters.
Given the failure of the survey to provide informa-
tion specific to universities comparable to Z, and
because no other information was presented, the
executive committee’s decision with respect to Q’s
compensation was not based upon appropriate data
as to comparability.
Example 2. The facts are the same as Example 1,
except that the national compensation survey divides
the data regarding compensation for university pres-
idents into categories based on various university-
specific factors, including the size of the institution
(in terms of the number of students it serves and the
amount of its revenues) and geographic area. The
survey data shows that university presidents at insti-
tutions comparable to and in the same geographic
area as Z receive annual compensation in the range
of $200xto $300x. The executive committee of the
Board of Trustees of Z relies on the survey data and
its evaluation of Q’s many years of service as a
tenured professor and high-ranking university offi-
cial at Z in setting Q’s compensation at $275xannu-
ally. The data relied upon by the executive commit-
tee constitutes appropriate data as to comparability.
Example 3. X is a tax-exempt hospital that is an
applicable tax-exempt organization for purposes of
section 4958. Before renewing the contracts of X’s
chief executive officer and chief financial officer,
X’s governing board commissioned a customized
compensation survey from an independent firm that
specializes in consulting on issues related to execu-
tive placement and compensation. The survey cov-
ered executives with comparable responsibilities at a
significant number of taxable and tax-exempt hospi-
tals. The survey data are sorted by a number of dif-
ferent variables, including the size of the hospitals
and the nature of the services they provide, the level
of experience and specific responsibilities of the
executives, and the composition of the annual com-
pensation packages. The board members were pro-
vided with the survey results, a detailed written
analysis comparing the hospital’s executives to those
covered by the survey, and an opportunity to ask
questions of a member of the firm that prepared the
survey. The survey, as prepared and presented to X’s
board, constitutes appropriate data as to comparabil-
ity.
Example 4. The facts are the same as Example 3,
except that one year later, X is negotiating a new
contract with its chief executive officer. The gov-
erning board of X has no information indicating that
the relevant market conditions have changed or that
the results of the prior year’s survey are no longer
valid. Therefore, X may continue to rely on the
independent compensation survey prepared for the
prior year in setting annual compensation under the
new contract.
Example 5. W is a local repertory theater and an
applicable tax-exempt organization for purposes of
section 4958. W has had annual gross receipts rang-
ing from $400,000 to $800,000 over its past three
taxable years. In determining the next year’s com-
pensation for W’s artistic director, the board of direc-
tors of W relies on data compiled from a telephone
survey of three other unrelated repertory theaters of
similar size in similar communities. A member of
the board drafts a brief written summary of the annu-
al compensation information obtained from this
informal survey. The annual compensation informa-
tion obtained in the telephone survey is appropriate
data as to comparability.
(3) Documentation—(i) For a decision
to be documented adequately, the written
or electronic records of the authorized
body must note—
(A) The terms of the transaction that
was approved and the date it was
approved;
(B) The members of the authorized
body who were present during debate on
the transaction that was approved and
those who voted on it;
(C) The comparability data obtained
and relied upon by the authorized body
and how the data was obtained; and
(D) Any actions taken with respect to
consideration of the transaction by anyone
2001–8 I.R.B.681February 20, 2001

who is otherwise a member of the autho-
rized body but who had a conflict of inter-
est with respect to the transaction.
(ii) If the authorized body determines
that reasonable compensation for a specif-
ic arrangement or fair market value in a
specific property transfer is higher or
lower than the range of comparability data
obtained, the authorized body must record
the basis for its determination. For a deci-
sion to be documented concurrently,
records must be prepared before the later
of the next meeting of the authorized body
or 60 days after the final action or actions
of the authorized body are taken. Records
must be reviewed and approved by the
authorized body as reasonable, accurate
and complete within a reasonable time
period thereafter.
(d) No presumption with respect to non-
fixed payments until amounts are deter-
mined—(1) In general. Except as provid-
ed in paragraph (d)(2) of this section, in
the case of a payment that is not a fixed
payment (within the meaning of
§53.4958–4T(a)(3)(ii)), the rebuttable
presumption of this section arises only
after the exact amount of the payment is
determined, or a fixed formula for calcu-
lating the payment is specified, and the
three requirements for the presumption
under paragraph (a) of this section subse-
quently are satisfied. See §53.4958–4T
(b)(2)(i).
(2) Special rule for certain non-fixed
payments subject to a cap. If the autho-
rized body approves an employment con-
tract with a disqualified person that
includes a non-fixed payment (such as a
discretionary bonus) subject to a speci-
fied cap, the authorized body may estab-
lish a rebuttable presumption with
respect to the non-fixed payment at the
time the employment contract is entered
into if—
(i) Prior to approving the contract, the
authorized body obtains appropriate com-
parability data indicating that a fixed pay-
ment of up to a certain amount to the par-
ticular disqualified person would
represent reasonable compensation;
(ii) The maximum amount payable
under the contract (taking into account
both fixed and non-fixed payments) does
not exceed the amount referred to in para-
graph (d)(2)(i) of this section; and
(iii) The other requirements for the
rebuttable presumption of reasonableness
under paragraph (a) of this section are sat-
isfied.
(e) No inference from absence of pre-
sumption. The fact that a transaction
between an applicable tax-exempt organi-
zation and a disqualified person is not
subject to the presumption described in
this section neither creates any inference
that the transaction is an excess benefit
transaction, nor exempts or relieves any
person from compliance with any federal
or state law imposing any obligation,
duty, responsibility, or other standard of
conduct with respect to the operation or
administration of any applicable tax-
exempt organization.
(f) Period of reliance on rebuttable pre-
sumption. Except as provided in para-
graph (d) of this section with respect to
non-fixed payments, the rebuttable pre-
sumption applies to all payments made or
transactions completed in accordance
with a contract, provided that the provi-
sions of paragraph (a) of this section were
met at the time the parties entered into the
contract.
§53.4958–7T Correction (temporary).
(a) In general. An excess benefit trans-
action is corrected by undoing the excess
benefit to the extent possible, and taking
any additional measures necessary to
place the applicable tax-exempt organiza-
tion involved in the excess benefit trans-
action in a financial position not worse
than that in which it would be if the dis-
qualified person were dealing under the
highest fiduciary standards. Paragraph
(b) of this section describes the acceptable
forms of correction. Paragraph (c) of this
section defines the correction amount.
Paragraph (d) of this section describes
correction where a contract has been par-
tially performed. Paragraph (e) of this
section describes correction where the
applicable tax-exempt organization
involved in the transaction has ceased to
exist or is no longer tax-exempt.
Paragraph (f) of this section provides
examples illustrating correction.
(b) Form of correction—(1) Cash or
cash equivalents. Except as provided in
paragraphs (b)(3) and (4) of this section, a
disqualified person corrects an excess
benefit only by making a payment in cash
or cash equivalents, excluding payment
by a promissory note, to the applicable
tax-exempt organization equal to the cor-
rection amount, as defined in paragraph
(c) of this section.
(2) Anti-abuse rule. A disqualified per-
son will not satisfy the requirements of
paragraph (b)(1) of this section if the
Commissioner determines that the dis-
qualified person engaged in one or more
transactions with the applicable tax-
exempt organization to circumvent the
requirements of this correction section,
and as a result, the disqualified person
effectively transferred property other than
cash or cash equivalents.
(3) Special rule relating to nonqualified
deferred compensation. If an excess ben-
efit transaction results, in whole or in part,
from the vesting (as described in
§53.4958–1T(e)(2)) of benefits provided
under a nonqualified deferred compensa-
tion plan, then, to the extent that such ben-
efits have not yet been distributed to the
disqualified person, the disqualified per-
son may correct the portion of the excess
benefit resulting from such undistributed
deferred compensation by relinquishing
any right to receive such benefits (includ-
ing any earnings thereon).
(4) Return of specific property—(i) In
general. A disqualified person may, with
the agreement of the applicable tax-
exempt organization, make a payment by
returning specific property previously
transferred in the excess benefit transac-
tion. In this case, the disqualified person
is treated as making a payment equal to
the lesser of—
(A) The fair market value of the prop-
erty determined on the date the property is
returned to the organization; or
(B) The fair market value of the proper-
ty on the date the excess benefit transac-
tion occurred.
(ii) Payment not equal to correction
amount. If the payment described in para-
graph (b)(4)(i) of this section is less than
the correction amount (as described in
paragraph (c) of this section), the disqual-
ified person must make an additional cash
payment to the organization equal to the
difference. Conversely, if the payment
described in paragraph (b)(4)(i) of this
section exceeds the correction amount (as
described in paragraph (c) of this section),
the organization may make a cash pay-
ment to the disqualified person equal to
the difference.
(iii) Disqualified person may not par-
ticipate in decision. Any disqualified per-
February 20, 20016822001–8 I.R.B.

son who received an excess benefit from
the excess benefit transaction may not
participate in the applicable tax-exempt
organization’s decision whether to accept
the return of specific property under para-
graph (b)(4)(i) of this section.
(c) Correction amount. The correction
amount with respect to an excess benefit
transaction equals the sum of the excess
benefit (as defined in §53.4958–1T(b))
and interest on the excess benefit. The
amount of the interest charge for purposes
of this section is determined by multiply-
ing the excess benefit by an interest rate,
compounded annually, for the period from
the date the excess benefit transaction
occurred (as defined in §53.4958–1T(e))
to the date of correction. The interest rate
used for this purpose must be a rate that
equals or exceeds the applicable Federal
rate (AFR), compounded annually, for the
month in which the transaction occurred.
The period from the date the excess bene-
fit transaction occurred to the date of cor-
rection is used to determine whether the
appropriate AFR is the Federal short-term
rate, the Federal mid-term rate, or the
Federal long-term rate. See section
1274(d)(1)(A).
(d) Correction where contract has been
partially performed. If the excess benefit
transaction arises under a contract that has
been partially performed, termination of
the contractual relationship between the
organization and the disqualified person is
not required in order to correct. However,
the parties may need to modify the terms
of any ongoing contract to avoid future
excess benefit transactions.
(e) Correction in the case of an applic-
able tax-exempt organization that has
ceased to exist, or is no longer tax-
exempt—(1) In general. A disqualified
person must correct an excess benefit
transaction in accordance with this para-
graph where the applicable tax-exempt
organization that engaged in the transac-
tion no longer exists or is no longer
described in section 501(c)(3) or (4) and
exempt from tax under section 501(a).
(2) Section 501(c)(3) organizations. In
the case of an excess benefit transaction
with a section 501(c)(3) applicable tax-
exempt organization, the disqualified per-
son must pay the correction amount, as
defined in paragraph (c) of this section, to
another organization described in section
501(c)(3) and exempt from tax under sec-
tion 501(a) in accordance with the disso-
lution clause contained in the constitutive
documents of the applicable tax-exempt
organization involved in the excess bene-
fit transaction, provided that the other
organization is not related to the disquali-
fied person.
(3) Section 501(c)(4) organizations. In
the case of an excess benefit transaction
with a section 501(c)(4) applicable tax-
exempt organization, the disqualified per-
son must pay the correction amount, as
defined in paragraph (c) of this section, to
a successor section 501(c)(4) organization
or, if no tax-exempt successor, to any sec-
tion 501(c)(3) or other section 501(c)(4)
organization not related to the disqualified
person.
(f) Examples. The following examples
illustrate the principles of this section
describing the requirements of correction:
Example 1. W is an applicable tax-exempt orga-
nization for purposes of section 4958. D is a dis-
qualified person with respect to W. W employed D
in 1999 and made payments totaling $12tto D as
compensation throughout the taxable year. The fair
market value of D’s services in 1999 was $7t. Thus,
D received excess compensation in the amount of
$5t, the excess benefit for purposes of section 4958.
In accordance with §53.4958–1T(e)(1), the excess
benefit transaction with respect to the series of com-
pensatory payments during 1999 is deemed to occur
on December 31, 1999, the last day of D’s taxable
year. In order to correct the excess benefit transac-
tion on June 30, 2002, D must pay W, in cash or cash
equivalents, excluding payment with a promissory
note, $5t(the excess benefit) plus interest on $5tfor
the period from the date the excess benefit transac-
tion occurred to the date of correction (i.e.,
December 31, 1999, to June 30, 2002). Because this
period is not more than three years, the interest rate
D must use to determine the interest on the excess
benefit must equal or exceed the short-term AFR,
compounded annually, for December, 1999 (5.74%,
compounded annually).
Example 2. X is an applicable tax-exempt orga-
nization for purposes of section 4958. B is a dis-
qualified person with respect to X. On January 1,
2000, B paid X $6vfor Property F. Property F had a
fair market value of $10von January 1, 2000. Thus,
the sales transaction on that date provided an excess
benefit to B in the amount of $4v. In order to correct
the excess benefit on July 5, 2005, B pays X, in cash
or cash equivalents, excluding payment with a
promissory note, $4v(the excess benefit) plus inter-
est on $4vfor the period from the date the excess
benefit transaction occurred to the date of correction
(i.e., January 1, 2000, to July 5, 2005). Because this
period is over three but not over nine years, the inter-
est rate B must use to determine the interest on the
excess benefit must equal or exceed the mid-term
AFR, compounded annually, for January, 2000
(6.21%, compounded annually).
Example 3. The facts are the same as in Example
2, except that B offers to return Property F. X agrees
to accept the return of Property F, a decision in
which B does not participate. Property F has
declined in value since the date of the excess benefit
transaction. On July 5, 2005, the property has a fair
market value of $9v. For purposes of correction, B’s
return of Property F to X is treated as a payment of
$9v, the fair market value of the property determined
on the date the property is returned to the organiza-
tion. If $9vis greater than the correction amount
($4vplus interest on $4vat a rate that equals or
exceeds 6.21%, compounded annually, for the peri-
od from January 1, 2000, to July 5, 2005), then X
may make a cash payment to B equal to the differ-
ence.
Example 4. The facts are the same as in Example
3, except that Property F has increased in value since
January 1, 2000, the date the excess benefit transac-
tion occurred, and on July 5, 2005, has a fair market
value of $13v. For purposes of correction, B’s return
of Property F to X is treated as a payment of $10v,
the fair market value of the property on the date the
excess benefit transaction occurred. If $10vis
greater than the correction amount ($4vplus interest
on $4vat a rate that equals or exceeds 6.21%, com-
pounded annually, for the period from January 1,
2000, to July 5, 2005), then X may make a cash pay-
ment to B equal to the difference.
Example 5. The facts are the same as in Example
2. Assume that the correction amount B paid X in
cash on July 5, 2005, was $5.58v. On July 4, 2005,
X loaned $5.58vto B, in exchange for a promissory
note signed by B in the amount of $5.58v, payable
with interest at a future date. These facts indicate that
B engaged in the loan transaction to circumvent the
requirement of this section that (except as provided in
paragraph (b)(3) or (4) of this section), the correction
amount must be paid only in cash or cash equiva-
lents. As a result, the Commissioner may determine
that B effectively transferred property other than cash
or cash equivalents, and therefore did not satisfy the
correction requirements of this section.
§53.4958–8T Special rules (temporary).
(a) Substantive requirements for
exemption still apply. Section 4958 does
not affect the substantive standards for tax
exemption under section 501(c)(3) or (4),
including the requirements that the orga-
nization be organized and operated exclu-
sively for exempt purposes, and that no
part of its net earnings inure to the benefit
of any private shareholder or individual.
Thus, regardless of whether a particular
transaction is subject to excise taxes under
section 4958, existing principles and rules
may be implicated, such as the limitation
on private benefit. For example, transac-
tions that are not subject to section 4958
because of the initial contract exception
described in §53.4958–4T(a)(3) may,
under certain circumstances, jeopardize
the organization’s tax-exempt status.
2001–8 I.R.B.683February 20, 2001

(b) Interaction between section 4958 and
section 7611 rules for church tax inquiries
and examinations. The procedures of sec-
tion 7611 will be used in initiating and con-
ducting any inquiry or examination into
whether an excess benefit transaction has
occurred between a church and a disquali-
fied person. For purposes of this rule, the
reasonable belief required to initiate a
church tax inquiry is satisfied if there is a
reasonable belief that a section 4958 tax is
due from a disqualified person with respect
to a transaction involving a church. See
§301.7611–1 Q&A 19 of this chapter.
(c) Three year duration of these tempo-
rary regulations. Sections 53.4958–1T
through 53.4958–8T will cease to apply
on January 9, 2004.
§53.4963–1 [Amended]
Par. 3. In §53.4963–1, paragraphs (a),
(b), and (c) are amended by adding the
reference “4958,” immediately after the
reference “4955,” in each place it appears.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 4. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§301.6213–1 [Amended]
Par. 5. In §301.6213–1, paragraph (e)
is amended by adding the reference
“4958,” immediately after the reference
“4955,” in the first sentence.
§301.6501(e)–1 [Amended]
Par. 6. Section 301.6501(e)–1 is
amended as follows:
1. Paragraph (c)(3)(ii), first and second
sentences are amended by removing the
language “or trust” and adding “trust, or
other organization” in its place.
2. Paragraph (c)(3)(ii), the first sen-
tence is amended by removing the lan-
guage “and 4953” and adding “4953, and
4958” in its place.
§301.6501(n)–1 [Amended]
Par. 7. Section 301.6501(n)–1 is
amended as follows:
1. The paragraph heading for paragraph
(a) is amended by removing the language
“or trust” and adding “trust, or other orga-
nization” in its place.
2. Paragraph (a)(1), the first sentence is
amended by removing the language “or
trust” and adding “trust, or other organi-
zation” in its place.
3. Paragraph (b), the heading and the
first sentence are amended by removing
the language “or trust” and adding “trust,
or other organization” in its place.
§301.7422–1 [Amended]
Par. 8. In §301.7422–1, paragraph (a)
introductory text, paragraph (c) introduc-
tory text and paragraph (d) are amended
by adding the reference “4958,” immedi-
ately after the reference “4955,”.
§301.7454–2 [Amended]
Par. 9. In §301.7454–2, paragraph (a)
is amended by adding the language “or
whether an organization manager (as
defined in section 4958(f)(2)) has “know-
ingly” participated in an excess benefit
transaction (as defined in section
4958(c)),” immediately after “4945”.
§301.7611–1 [Amended]
Par. 10. In §301.7611–1, the Table of
contents is amended by:
1. Adding “Application to Section
4958........19” immediately after “Effective
Date........18”.
2. Adding an undesignated centerhead-
ing and Q-19 and A-19 at the end of the
section to read as follows:
§301.7611–1 Questions and answers
relating to church tax inquiries and
examinations.
* * * * *
Application to Section 4958
Q-19: When do the church tax inquiry
and examination procedures described in
section 7611 apply to a determination of
whether there was an excess benefit trans-
action described in section 4958?
A-19: See §53.4958–7(b) of this chapter
for rules governing the interaction between
section 4958 excise taxes on excess benefit
transactions and section 7611 church tax
inquiry and examination procedures.
PART 602 — OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 11. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 12. 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) * * *
February 20, 20016842001–8 I.R.B.
CFR part or section whereCurrent OMB
identified and described control No.
* * * * *
53.4958–6T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1545–1623
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 19, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 9, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 10, 2001, 66 F.R.
2144)

Section 4980B.—Failure to
Satisfy Continuation Coverage
Requirements of Group Health
Plans
26 CFR 54.4980B–1: COBRA in general.
T.D. 8928
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
Continuation Coverage
Requirements Applicable to
Group Health Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations that provide guidance on
certain issues that arise in connection with
the COBRA continuation coverage
requirements applicable to group health
plans. The regulations in this document
supplement final COBRA regulations
published on February 3, 1999, in the
Federal Register. The regulations will
generally affect sponsors and administra-
tors of, and participants in, group health
plans, and they provide plan sponsors and
plan administrators with guidance neces-
sary to comply with the law.
DATES: Effective date: These regulations
are effective January 10, 2001.
Applicability dates: For dates of applic-
ability, see the discussion under the head-
ing “Effective Date” in this preamble.
FOR FURTHER INFORMATION CON-
TACT: Yurlinda Mathis at 202-622-6080
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA)
imposes continuation coverage require-
ments on group health plans in certain sit-
uations. This document contains amend-
ments to the COBRA health care
continuation coverage regulations in 26
CFR part 54. Proposed regulations inter-
preting COBRA were published in the
Federal Registeron June 15, 1987 (52
F.R. 22716). On February 3, 1999, final
COBRA regulations (T.D. 8812, 1999–1
C.B. 533) were published in the Federal
Register(64 F.R. 5160) (the 1999 final
regulations), and a notice of proposed
rulemaking (REG–121865–98, 1999–1
C.B. 577) was published the same day (64
F.R. 5237) for certain issues not addressed
in the final regulations (the 1999 proposed
regulations). A public hearing was held
on June 8, 1999. In addition, written com-
ments responding to the notice of pro-
posed rulemaking and to the final regula-
tions were received. After consideration
of all the comments, the proposed regula-
tions are adopted as amended by this
Treasury decision. The revisions are dis-
cussed below.
Explanation and Summary of
Comments
Small Employer Plan Exception
Group health plans maintained by an
employer that had fewer than 20 employ-
ees on a typical business day in the previ-
ous calendar year are not subject to
COBRA. The 1999 proposed regulations
relating to plans maintained by an
employer with fewer than 20 employees
in the previous calendar year are adopted
as final regulations without change.
Unlike the 1987 proposed regulations, the
1999 proposed regulations use a full-time
equivalency method in counting part-time
employees for purposes of determining if
an employer had fewer than 20 employ-
ees. Several commenters expressed dis-
approval of this approach or inquired why
it was being considered.
The 1987 proposed regulations con-
tained rules about how to count part-time
employees. An example can be used to
illustrate how the 1987 rules were pro-
posed to apply. In a calendar year two
employers each employ 15 full-time
employees and 12 part-time employees.
Each part-time employee works 15 hours
per week. Each employer has six typical
business days each week. One employer
schedules all 12 of the part-time employ-
ees to work two-and-a-half hours each
typical business day per week. The other
employer staggers the schedule of the
part-time employees so that they each
work seven-and-a-half hours on two typi-
cal business days per week, so that four
part-time employees work on each typical
business day. Under the 1987 proposed
regulations, the part-time employees of
the first employer counted as 12 employ-
ees whereas the part-time employees of
the second employer counted only as four
employees. In the following calendar
year, a group health plan maintained by
the first employer would have been sub-
ject to COBRA (because the first employ-
er employed 27 employees on a typical
business day in the preceding calendar
year) but a group health plan maintained
by the second employer would not have
been subject to COBRA (because the sec-
ond employer employed only 19 employ-
ees on a typical business day in the pre-
ceding calendar year).
The exception for employers with
fewer than 20 employees reflects
Congress’ judgment that the costs and
administrative burden associated with
COBRA should not be imposed on small
employers and that imposing such
requirements on small employers may
discourage them from providing group
health coverage to their employees. There
is no reason to distinguish, as the
approach in the 1987 proposed regula-
tions would have done, between two
employers with identical numbers of full-
and part-time employees based on the par-
ticular days that the part-time employees
work.
In contrast to the result under the 1987
proposed regulations, the 1999 proposed
regulations and these final regulations
provide for the uniform treatment of
employers employing the same number of
part-time employees for equivalent peri-
ods, regardless of how the hours are
scheduled. The full-time equivalency
approach therefore avoids creating an
incentive for employers to schedule the
work of their part-time employees in a
manner that is inconsistent with the con-
venience of the employees or the needs of
the business.
One commenter asked if it is permissi-
ble to count part-time employees on an
aggregate basis rather than an individual
basis. On an individual basis, the number
of part-time employees is computed by
dividing the hours worked by each part-
time employee by the hours required to be
considered working full-time and then by
adding all the quotients together. On an
aggregate basis, the number of part-time
employees is computed by adding all the
hours worked by part-time employees and
2001–8 I.R.B.685February 20, 2001

dividing that sum by the number of hours
required for one worker to be considered
working full-time. Because the two meth-
ods produce identical results, both meth-
ods are permissible.
Determination of Number of Plans
The 1999 proposed regulations relating
to the determination of the number of
plans that an employer or employee orga-
nization maintains are modified and reor-
ganized. Under the 1999 proposed regu-
lations, the number of plans is determined
by the instruments governing the employ-
er’s or employee organization’s arrange-
ment or arrangements to provide health
care benefits (the instruments rule).
Another rule (the default rule) in the 1999
proposed regulations provides that if there
are no instruments or if the instruments
are unclear about whether there is one
plan or more than one plan, all health care
benefits (except benefits for long-term
care) provided by a corporation, partner-
ship, or other entity or trade or business,
or by an employee organization, consti-
tute one group health plan.
Under these final regulations, these rules
are reorganized so that the default rule,
under which all health care benefits pro-
vided by one entity or trade or business are
treated as one plan, is presented first. The
default rule applies unless it is clear from
the instruments governing an arrangement
or arrangements to provide health care ben-
efits that the benefits are being provided
under separate plans and the arrangement
or arrangements are operated pursuant to
such instruments as separate plans. In
effect, this rule revises the instruments rule
in the 1999 proposed regulations by adding
the requirement that the arrangement or
arrangements must be operated pursuant to
the instruments as separate plans to avoid
the application of the default rule. These
organizational and substantive changes
from the 1999 proposed regulations were
developed at the suggestion of and with
substantial assistance from the U.S.
Department of Labor, Pension and Welfare
Benefits Administration.
Health Flexible Spending Arrangements
The 1999 proposed regulations relating
to health flexible spending arrangements
(health FSAs) are adopted with one minor
change and one addition. The minor
change is the cross-reference in which a
health FSA is defined. The 1999 pro-
posed regulations cite the definition in
proposed regulations under section 125.
These final regulations cite the definition
in section 106(c)(2) of the Internal
Revenue Code. (Regulations published
recently under section 125 also use the
section 106(c)(2) definition. See 65 F.R.
15548, 15553 (March 23, 2000).)
The one addition is a clarification
that, to the extent a health FSA is obligat-
ed to make COBRA continuation cover-
age available to a qualified beneficiary, all
the general COBRA continuation cover-
age rules apply in the same way that they
apply to coverage under other group
health plans, including the rule for how
plan limits on coverage apply to someone
on COBRA continuation coverage. This
addition was made in response to the
request of one commenter and numerous
inquiries about how the annual election of
a certain dollar amount by an employee
under a health FSA applies once there is a
qualifying event.
Several commenters were pleased with
the limited exception from the COBRA
rules for health FSAs under the 1999 pro-
posed regulations and asked that the final
regulations go even further. They request-
ed that when participants under a health
FSA experience a qualifying event (and
the benefits under the health FSA are
excepted benefits under sections 9831 and
9832), the final regulations should allow
the health FSA to compute the contribu-
tions made during that plan year on the
participant’s behalf, reduce that amount
by reimbursements already made during
the plan year, and — instead of requiring
the health FSA to offer COBRA continua-
tion coverage in those cases in which
there is a positive balance — allow the
participant to spend whatever balance
remains during the remainder of the plan
year without requiring or allowing addi-
tional contributions. However, such an
approach is inconsistent with the require-
ments under sections 125 and 4980B and
thus has not been adopted.
One commenter requested that the final
regulations clarify that the applicable pre-
mium includes any employer subsidy.
The statute makes clear that the applicable
premium is computed based on the total
cost of coverage, regardless of whether
paid by the employer or employee. The
regulations generally do not address how
to calculate the applicable premium.
However, the example for the health FSA
exception makes clear that the maximum
amount a plan is permitted to charge for
COBRA coverage under a health FSA
includes any employer subsidy.
One commenter requested that the final
regulations clarify that a health FSA is
obligated to make COBRA continuation
coverage available only in connection
with qualifying events that are a termina-
tion of employment or reduction of hours
of employment. This suggestion is not
adopted in the final regulations because it
is inconsistent with the statute. If health
care expenses incurred for a spouse or
dependent child of an active employee
can be reimbursed under a health FSA,
but, were it not for the COBRA continua-
tion coverage rules, would not be reim-
bursed after the death of the employee, the
divorce from the employee, or a depen-
dent child’s ceasing to be a dependent
child under the generally applicable
requirements under the health FSA, then
the spouse or dependent child has experi-
enced a qualifying event and is entitled to
continue coverage under the health FSA
to the same extent as they would follow-
ing termination of the employee’s
employment.
Increase in Premium is Loss of Coverage
The 1999 final regulations provide, in
describing what constitutes a loss of cov-
erage for determining whether a qualify-
ing event has occurred, that any increase
in premium or contribution that must be
paid for coverage as a result of one of the
events that can be a qualifying event is a
loss of coverage. Several commenters
questioned why this rule was adopted and
pointed out that it creates administrative
burdens in two situations without appar-
ently providing any advantage to the peo-
ple whose premium is being increased.
The two situations concern retiring
employees and full-time employees
reducing their work hours to become part-
time employees. In both situations, often
employers will grant the employees
access to the same coverage but will
require them to pay a premium that is
higher than what active employees pay
though still significantly less than the 102
percent rate permitted under COBRA.
The commenters wondered why it is nec-
February 20, 20016862001–8 I.R.B.

essary to provide these individuals with a
COBRA notice if it is always advanta-
geous for the individual to take the other
coverage. They suggested that a loss of
coverage should not be considered to have
occurred if employees (or other qualified
beneficiaries) can get access to the same
coverage for less than the applicable pre-
mium under COBRA.
The IRS and Treasury were mindful of
these situations before they adopted the
rule in the 1999 final regulations.
However, if a mere increase in premium
were not considered a loss in coverage,
the person whose premium is being
increased would not be entitled by law to
a 60-day election period nor to a 45-day
period after the election for making the
first premium payment. Although in
many cases a qualified beneficiary might
prefer a lower premium over these proce-
dural protections under COBRA, in some
cases these procedural protections might
be more valuable. The likelihood of the
COBRA procedural protections being
more valuable than the lower premium
becomes substantial as the amount
required to be paid for part-time or retiree
coverage approaches the amount of the
applicable premium. Accordingly, the
final regulations retain the rule in the
1999 final regulations so as not to deprive
qualified beneficiaries of potentially valu-
able rights.
Termination of Coverage in Anticipation
of a Qualifying Event
The 1999 final regulations provide that
if coverage is reduced or eliminated in
anticipation of an event, the elimination or
reduction is disregarded in determining
whether the event causes a loss of cover-
age. The regulations provide examples of
an employer eliminating an employee’s
coverage in anticipation of a termination
of employment and of an employee elim-
inating a spouse’s coverage in anticipation
of a divorce.
One commenter requested a clarifica-
tion that a reduction or elimination more
than six months before an event could not
be considered to be in anticipation of the
event. However, in many cases where
coverage is eliminated by an employee in
anticipation of a divorce, the divorce will
follow the elimination by more than six
months. Whether a reduction or elimina-
tion of coverage is in anticipation of a
qualifying event is a question to be
resolved based on all the relevant facts
and circumstances. Thus, these final reg-
ulations do not amend the rule in the 1999
final regulations to limit the window dur-
ing which an anticipatory reduction or
elimination can be considered to have
occurred.
The commenter also requested a clarifi-
cation that the coverage the qualified ben-
eficiary is entitled to in such a situation is
the coverage the qualified beneficiary had
before coverage was reduced or eliminat-
ed. The general rule in the 1999 final reg-
ulations for determining what is COBRA
continuation coverage applies in this situ-
ation. Under the rule in the 1999 final
regulations, the qualified beneficiary will
generally be entitled to the coverage that
the qualified beneficiary had before the
qualifying event. However, if between
the date of the elimination or reduction in
coverage and the date of the qualifying
event coverage is modified for similarly
situated nonCOBRA beneficiaries, then
the modified coverage must be made
available to the qualified beneficiary.
Moving Outside Region of Region-
Specific Coverage
The 1999 final regulations require
employers and employee organizations to
make alternative coverage available to
qualified beneficiaries moving outside the
service area of a region-specific benefit
package. One commenter asked for a
clarification that the alternative coverage
must be made available immediately and
cannot be deferred until the beginning of
the plan’s next open enrollment period.
These final regulations clarify that the
alternative coverage must be made avail-
able not later than the date of the qualified
beneficiary’s relocation, or, if later, the
first day of the month following the
month in which the qualified beneficiary
requests the alternative coverage.
Another commenter expressed concern
that a plan might have to incur extraordi-
nary costs (such as negotiating for a sepa-
rate network of providers in an indemnity
plan with a preferred provider organiza-
tion, or establishing a separate schedule of
usual, customary, and reasonable costs) to
provide coverage in areas to which a qual-
ified beneficiary might relocate but in
which there were no active employees of
the employer or employee organization.
The rule in the 1999 final regulations does
not require employers or employee orga-
nizations to incur extraordinary costs to
extend coverage to qualified beneficiaries
in areas in which the employer or employ-
ee organization does not have active
employees. In the case of an indemnity
plan with a preferred provider organiza-
tion, the plan need only provide benefits
at the standard rate (that is, not at the rate
for preferred providers) to a qualified ben-
eficiary who moves outside the service
area of the preferred provider network.
Similarly, a plan is not required to estab-
lish a separate schedule of usual, custom-
ary, and reasonable costs solely for quali-
fied beneficiaries who reside in a region
where no active employees work or reside
(regardless of whether this is to the quali-
fied beneficiary’s benefit or detriment
based on prevailing costs in the region
where the qualified beneficiary resides).
Accordingly, these final regulations do
not modify the rule in the 1999 final reg-
ulations based on this commenter’s con-
cern.
When COBRA Continuation Coverage
Must Become Effective
The 1999 final regulations provide that,
in the case of an indemnity or reimburse-
ment arrangement, claims incurred during
the election period do not have to be paid
before the election (and, if applicable,
payment for the coverage) is made. In the
case of indemnity or reimbursement
arrangements that allow retroactive rein-
statement of coverage, the 1999 final reg-
ulations provide that coverage for quali-
fied beneficiaries can be terminated and
then reinstated when the election is made.
One commenter asked if these two rules
mean that coverage must be reinstated at
the time of the election even if payment is
not made but that no claims need be paid
under that coverage until payment for the
coverage is made. The commenter point-
ed out that this would a pose a problem for
employers and employee organizations
maintaining insured plans in that they
would have to pay the insurer premiums
for the coverage even if payment for the
coverage was never made (whereas the
insurer would never have to pay any claim
under the coverage). These final regula-
tions clarify this rule by explicitly provid-
ing that in the case of indemnity plans and
reimbursement arrangements that allow
2001–8 I.R.B.687February 20, 2001

retroactive reinstatement of coverage,
coverage can be terminated and later rein-
stated when the election (and, if applica-
ble, payment for the coverage) is made.
Thus, under these final regulations, the
rules for when coverage must be reinstat-
ed and when claims must be paid are the
same.
Maximum Coverage Period
The 1999 proposed regulations relating
to the maximum coverage period are
adopted as final regulations with a minor
change to a cross-reference.
Insignificant Underpayments
The 1999 final regulations prescribe
how plans are to treat payments for
COBRA continuation coverage that are
short by an amount that is not significant.
They require the plan to treat the payment
as full payment unless the plan notifies the
qualified beneficiary of the amount of the
deficiency and grants a reasonable period
for payment of the deficiency. The regula-
tions provide as a safe harbor that a period
of 30 days after the notice is provided is a
reasonable period for this purpose.
Many commenters requested that the
regulations specify what is considered a
significant amount. These final regula-
tions provide that a shortfall is not signif-
icant if it is no greater than the lesser of
$50 (or another amount specified by the
Commissioner in guidance of general
applicability) or 10 percent of the required
amount.
Several commenters also requested that
the regulations specify a period shorter
than 30 days for payment of the deficien-
cy to be considered timely, but these final
regulations do not adopt this suggestion.
The regulations require only that a plan
grant a reasonable period for payment of
the deficiency. In some circumstances, a
period shorter than 30 days may be rea-
sonable. However, in other circum-
stances, a shorter period might not be rea-
sonable. The IRS and Treasury believe it
is useful to provide the certainty of a safe
harbor, but they do not believe that a peri-
od shorter than 30 days is sufficiently long
in all cases.
Business Reorganizations
The 1999 proposed regulations relating
to business reorganizations are adopted as
final regulations with two clarifications.
The proposed regulations provide that, in
an asset sale (which is defined as the sale
of substantial assets such as a plant or divi-
sion or substantially all the assets of a
trade or business), a purchaser of assets is
considered a successor employer if the
seller ceases to provide any group health
plan to any employee in connection with
the sale and if the buyer continues the
business operations associated with those
assets without substantial change or inter-
ruption. Several inquiries raised the ques-
tion whether this rule applies if the assets
are purchased as part of a bankruptcy pro-
ceeding. The final regulations clarify this
rule for assets purchased in bankruptcy by
providing that a buying group does not fail
to be a successor employer in connection
with an asset sale merely because the sale
takes place in connection with a bankrupt-
cy proceeding. Thus, the general rule for
determining whether a buyer is a successor
employer applies in bankruptcy the same
way that it does outside of bankruptcy.
These final regulations also clarify that
asset sale includes not only sales but other
transfers as well.
Comments were received about other
aspects of the proposed rules for business
reorganizations.Several commenters
requested additional guidance on the
amount of assets that would constitute
“substantial assets” for purposes of the
asset sale rules. The final regulations
retain the definition in the proposed regu-
lations. This definition is intended to be
flexible enough to apply reasonably to the
myriad situations in which this issue aris-
es. The asset sale rules, including the def-
inition of asset sale, are similar to the var-
ious formulations of successor employer
rules that have been fashioned by the
courts for various labor law purposes,
adapted to the peculiar circumstances that
the COBRA continuation coverage
requirements create. In those cases, as in
the final rule, a case-by-case approach is
favored. See, for example, Golden State
Bottling Co. v. NLRB, 414 U.S. 168
(1973); Howard Johnson Co. v. Detroit
Local Joint Executive Board, Hotel &
Restaurant Employees & Bartenders
International Union, 417 U.S. 249
(1974); John Wiley & Sons, Inc. v.
Livingston, 376 U.S. 543 (1964); NLRB v.
Burns International Security Services,
Inc., 406 U.S. 272 (1972); Fall River
Dyeing & Finishing Corp. v. NLRB, 482
U.S. 27 (1987); EEOC v. MacMillan
Bloedel Containers, Inc., 503 F.2d 1086
(6
th
Cir. 1974); In re National Airlines,
Inc., 700 F.2d 695 (11
th
Cir. 1983);
Upholsterers’International Union
Pension Fund v. Artistic Furniture of
Pontiac, 920 F.2d 1323 (7
th
Cir. 1990);
Central States, Southeast & Southwest
Areas Pension Fund v. PYA/Monarch of
Texas, Inc., 851 F.2d 780 (5
th
Cir. 1988).
One commenter requested clarification
that the cessation of a plan shortly before
an asset sale is in connection with the sale
(and thus that the buying group would be
responsible for making COBRA continua-
tion coverage available to M&A qualified
beneficiaries in connection with the sale if
the buying group is a successor employ-
er). The regulations have not been modi-
fied for this request. In many circum-
stances, cessation of a plan shortly before
an asset sale would be considered to be in
connection with the sale. However, there
may be cases in which the plan was being
terminated for an unrelated reason. The
application of this rule in any particular
case depends on all the relevant facts and
circumstances.
The preamble to the 1999 proposed
regulations included a description of a
potential rule that the IRS and Treasury
were considering adopting and solicited
comments on that potential rule. The rule
would have provided that no loss of cov-
erage occurs, and thus no qualifying event
occurs, if a purchaser of assets maintains
substantially the same plan for continuing
employees for what would otherwise be
the maximum coverage period (generally
18 months). The IRS and Treasury also
acknowledged in the 1999 preamble con-
cerns about protecting the rights of quali-
fied beneficiaries in this situation. After
consideration of the comments, the IRS
and Treasury have determined not to
adopt such a special rule. Thus, under
these final regulations, in an asset sale,
employees who terminate employment
with the seller and who no longer get
health coverage from the seller experience
a qualifying event with respect to the sell-
er’s plan even though they are employed
by the buyer at the same jobs they had
with the seller and have the same health
coverage through the buyer.
Like the 1999 proposed regulations,
these final regulations do not address how
February 20, 20016882001–8 I.R.B.

the obligation to make COBRA continua-
tion coverage available is affected by the
transfer of an ownership interest in a non-
corporate entity. However, it is intended
that, in general, the principles reflected in
the rules in the final regulations for trans-
fers of ownership interests in corporate
entities should apply in a similar fashion
in analogous cases involving the transfer
of ownership interests in noncorporate
entities.
Employer Withdrawals from
Multiemployer Plans
The 1999 proposed regulations relating
to employer withdrawals from a multiem-
ployer plan are adopted with two changes
and two additional examples to illustrate
the rules as changed. The general
approach of the 1999 proposed regula-
tions is retained. However, the proposed
rule renders an employer who stops con-
tributing to a multiemployer plan respon-
sible for making COBRA continuation
coverage available to qualified beneficia-
ries associated with that employer only if
the employer establishes a new plan to
cover active employees formerly covered
under the multiemployer plan. Several
commenters suggested that the employer
should also be responsible for COBRA if
the coverage provided to employees for-
merly covered under the multiemployer
plan comes from an existing plan of the
employer (rather than from a new plan).
The final rules have been revised to apply
the general approach to existing plans as
well as to new plans.
The 1999 proposed regulations also
place a threshold condition on the obliga-
tion of an employer or subsequent multi-
employer plan to make COBRA coverage
available to existing qualified beneficia-
ries associated with the withdrawing
employer. That threshold is that the
employer or subsequent multiemployer
plan must cover a significant number of
the employer’s employees formerly cov-
ered under the multiemployer plan.
Several commenters requested further
guidance on what a significant number
was in this context. Some of them also
wanted to know what purpose this thresh-
old condition serves. The intent in impos-
ing this threshold condition in the pro-
posed regulations was to leave
responsibility for COBRA compliance
with the existing multiemployer plan in a
case where, for example, only one or two
of the employees formerly covered under
the multiemployer plan were transferred
into management and became covered
under a plan of the employer for which
union employees were not eligible. The
final rule has been revised to more clearly
accomplish this intent. This threshold
condition has been revised so that the
employer plan or subsequent multiem-
ployer plan has responsibility for COBRA
compliance once coverage under the plan
is available to a class of employees for-
merly covered under the multiemployer
plan. New examples illustrate the appli-
cation of this standard.
Several commenters expressed concern
that the proposed regulations would
require multiemployer plans to begin
investigating why an employer stops con-
tributing to the multiemployer plan and to
determine whether the withdrawing
employer subsequently covered union (or
former union) employees under a single
employer plan. Concern was also
expressed that the proposed regulations
would require the multiemployer plan to
keep employer-by-employer data for
qualified beneficiaries receiving COBRA
continuation coverage. The IRS and
Treasury recognized when they proposed
these rules that in many industries it is
impracticable for multiemployer plans to
determine whether an employer that stops
contributing to a multiemployer plan cov-
ers union employees under its own plan
and that it is impracticable to maintain
employer-specific data on employees and
qualified beneficiaries. If a multiemploy-
er plan finds it easier to make COBRA
coverage available for the maximum cov-
erage period, these final regulations do
not require the plan to start gathering
information that is difficult to assemble.
Such a plan can comply with the COBRA
continuation coverage requirements by
making COBRA continuation coverage
available to existing qualified beneficia-
ries in accordance with the general rules
for the duration of COBRA continuation
coverage (in §54.4980B–7).
One commenter requested clarification
of the proposed rules if an employer
establishes a plan for employees formerly
covered under the multiemployer plan but
applies a waiting period before the
employees are eligible for coverage under
that plan. These final regulations clarify
that the employer’s obligation does not
arise until the employer makes coverage
available. Thus, the multiemployer plan
would be responsible for COBRA cover-
age until the waiting period under the
employer’s plan had expired for a class of
employees formerly covered under the
multiemployer plan.
Several commenters submitted substan-
tially similar comments requesting that
the rules be revised so that a multiem-
ployer plan no longer receiving contribu-
tions from a certain employer would not
be required to make COBRA continuation
coverage available to any qualified bene-
ficiaries affiliated with that employer.
Such an approach, however, would not
resolve the problem of qualified benefi-
ciaries not having access to COBRA cov-
erage, and the statutory basis for such a
position is questionable in situations in
which none of the statutory reasons for
ending a plan’s obligation to make
COBRA coverage available to a particular
qualified beneficiary is present. The final
regulations do not adopt this suggestion.
The IRS and Treasury received an
inquiry about who has the obligation to
make COBRA continuation coverage
available to existing qualified beneficia-
ries in a situation that reverses the situa-
tion addressed in the proposed rules, one
in which employees cease to be covered
under a plan maintained by their employ-
er and commence to be covered under a
multiemployer plan. In such a situation,
the existing qualified beneficiaries should
get the same coverage that similarly situ-
ated nonCOBRA beneficiaries are receiv-
ing, that is, the coverage under the multi-
employer plan. The 1999 final
regulations suggest this result in describ-
ing what COBRA continuation coverage
is. However, the language used in the
1999 final regulations can be read to sug-
gest that this is the result only when cov-
erage is under the same plan: “If cover-
age under the planis modified for
similarly situated nonCOBRA beneficia-
ries, then the coverage made available to
qualified beneficiaries is modified in the
same way.” (Q&A-1(a) of §54.4980B–5;
emphasis added.) These final regulations
delete the phrase “under the plan” from
the quoted language to make clear that if
coverage for the similarly situated
nonCOBRA beneficiaries is modified by
switching from one plan to another, then
2001–8 I.R.B.689February 20, 2001

coverage for the qualified beneficiaries is
modified by switching to the other plan
too. Although this amendment is being
made due to an inquiry about a switch
from a single-employer plan to a multi-
employer plan, it applies in any situation
in which coverage for nonCOBRA benefi-
ciaries is terminated under one plan and
commences under another, including
those situations in which a single employ-
er maintains both plans.
COBRA and FMLA
The 1999 proposed regulations relating
to how COBRA applies in connection
with leave taken under the Family and
Medical Leave Act of 1993 (FMLA) are
adopted as final regulations with one
minor addition. One commenter observed
that the 1999 proposed regulations sug-
gest by way of cross reference in an
example that the Labor regulations in 29
CFR part 825, not the COBRA regula-
tions, determine when FMLA leave ends.
This commenter requested that this sug-
gestion in an example be made express in
the text of the rules. The final regulations
add in the text of the rules (preceding the
examples) that the end of FMLA leave is
not determined under these regulations
but under the regulations in 29 CFR part
825.
Effective Date
This Treasury decision applies with
respect to qualifying events occurring on
or after January 1, 2002, except as provid-
ed in the following paragraphs.
Paragraphs (d), (e), and (f) in Q&A-5
of §54.4980B–2 (relating to the counting
of employees for purposes of the small
employer plan exception) are applicable
beginning January 1, 2002 for determina-
tions made with reference to the number
of employees in calendar year 2001 or
later.
Q&A-4 of §54.4980B–7 (describing
the maximum coverage period) is applic-
able with respect to individuals who are
qualified beneficiaries on or after January
1, 2002. (See Q&A-1(f) of §54.4980B–3,
under which an individual ceases to be a
qualified beneficiary once the plan’s
obligation to provide COBRA continua-
tion coverage to the individual has ended.)
Q&A-1 through Q&A-8 of
§54.4980B–9 (containing rules for busi-
ness reorganizations) are applicable with
respect to business reorganizations that
take effect on or after January 1, 2002.
Q&A-9 and Q&A-10 of §54.4980B–9
(containing rules for employer withdrawals
from a multiemployer plan) are applicable
with respect to cessations of contributions
that occur on or after January 1, 2002. For
this purpose, a cessation of contributions
occurs on or after January 1, 2002, if the
employer’s last contribution to the plan is
made on or after January 1, 2002.
Section 54.4980B–10 (relating to the
interaction of COBRA and FMLA leave)
is applicable with respect to FMLA leave
that begins on or after January 1, 2002.
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 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, and because the regulations do not
impose a collection of information
requirement on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Code, the notice of proposed rulemak-
ing preceding these regulations was sub-
mitted to the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of these regula-
tions is Russ Weinheimer, Office of the
Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 54 is amend-
ed as follows:
PART 54 – PENSION EXCISE TAXES
Paragraph 1. The authority citation for
part 54 is amended in part by adding entries
in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980B–9 also issued under
26 U.S.C. 4980B.
Section 54.4980B–10 also issued under
26 U.S.C. 4980B. * * *
Par. 2. Section 54.4980B–0 is amend-
ed by:
1. Revising the introductory text.
2. Adding entries for §§54.4980B–9
and 54.4980B–10 at the end of the “List
of Sections”.
3. Revising the entry for Q-2 of
§54.4980B–1 in the “List of Questions”.
4. Revising the entries for Q-3 and Q-
6 of §54.4980B–2 in the “List of
Questions”.
5. Revising the entry for Q-4 of
§54.4980B–7 in the “List of Questions”.
6. Adding entries for the section head-
ings for §§54.4980B–9 and 54.4980B–10
in the “List of Questions”.
The additions and revisions read as fol-
lows:
§54.4980B–0 Table of contents.
This section contains first a list of the
section headings and then a list of the ques-
tions in each section in §§54.4980B–1
through 54.4980B–10.
LIST OF SECTIONS
* * * * *
§54.4980B–9 Business reorganizations
and employer withdrawals from
multiemployer plans.
§54.4980B–10 Interaction of FMLA and
COBRA.
LIST OF QUESTIONS
§54.4980B–1 COBRA in general.
* * * * *
Q-2: What standard applies for topics not
addressed in §§54.4980B–1 through
54.4980B–10?
* * * * *
§54.4980B–2 Plans that must comply.
* * * * *
Q-3: What is a multiemployer plan?
* * * * *
Q-6: How is the number of group health
plans that an employer or employee
organization maintains determined?
* * * * *
February 20, 20016902001–8 I.R.B.

§54.4980B–7 Duration of COBRA
continuation coverage.
* * * * *
Q-4: When does the maximum coverage
period end?
* * * * *
§54.4980B–9 Business reorganizations
and employer withdrawals from
multiemployer plans.
Q-1: For purposes of this section, what
are a business reorganization, a
stock sale, and an asset sale?
Q-2: In the case of a stock sale, what are
the selling group, the acquired orga-
nization, and the buying group?
Q-3: In the case of an asset sale, what are
the selling group and the buying
group?
Q-4: Who is an M&A qualified benefi-
ciary?
Q-5: In the case of a stock sale, is the sale
a qualifying event with respect to a
covered employee who is employed
by the acquired organization before
the sale and who continues to be
employed by the acquired organiza-
tion after the sale, or with respect to
the spouse or dependent children of
such a covered employee?
Q-6: In the case of an asset sale, is the
sale a qualifying event with respect
to a covered employee whose
employment immediately before the
sale was associated with the pur-
chased assets, or with respect to the
spouse or dependent children of
such a covered employee who are
covered under a group health plan
of the selling group immediately
before the sale?
Q-7: In a business reorganization, are the
buying group and the selling group
permitted to allocate by contract the
responsibility to make COBRA con-
tinuation coverage available to
M&A qualified beneficiaries?
Q-8: Which group health plan has the
obligation to make COBRA contin-
uation coverage available to M&A
qualified beneficiaries in a business
reorganization?
Q-9: Can the cessation of contributions by
an employer to a multiemployer group
health plan be a qualifying event?
Q-10: If an employer stops contributing
to a multiemployer group health
plan, does the multiemployer plan
have the obligation to make
COBRA continuation coverage
available to a qualified beneficiary
who was receiving coverage under
the multiemployer plan on the day
before the cessation of contribu-
tions and who is, or whose qualify-
ing event occurred in connection
with, a covered employee whose
last employment prior to the quali-
fying event was with the employer
that has stopped contributing to the
multiemployer plan?
§54.4980B–10 Interaction of FMLA and
COBRA.
Q-1: In what circumstances does a quali-
fying event occur if an employee
does not return from leave taken
under FMLA?
Q-2: If a qualifying event described in
Q&A-1 of this section occurs,
when does it occur, and how is the
maximum coverage period mea-
sured?
Q-3: If an employee fails to pay the
employee portion of premiums for
coverage under a group health plan
during FMLA leave or declines cov-
erage under a group health plan dur-
ing FMLA leave, does this affect the
determination of whether or when
the employee has experienced a
qualifying event?
Q-4: Is the application of the rules in
Q&A-1 through Q&A-3 of this sec-
tion affected by a requirement of
state or local law to provide a peri-
od of coverage longer than that
required under FMLA?
Q-5: May COBRA continuation cover-
age be conditioned upon reimburse-
ment of the premiums paid by the
employer for coverage under a
group health plan during FMLA
leave?
Par. 3. Section 54.4980B–1 is amend-
ed by:
1. Removing the language “54.4980
B–8” and adding “54.4980B–10” in its
place in the last sentence of paragraph (a)
in A-1.
2. Removing the language “54.4980
B–8” and adding “54.4980B–10” in its
place in the third sentence and the last
sentence of paragraph (b) in A-1.
3. Removing the last sentence of para-
graph (c) in A-1 and adding two sentences
in its place.
4. Revising Q&A-2.
The addition and revision read as fol-
lows:
§54.4980B–1 COBRA in general.
* * * * *
A-1: * * *
(c) * * * Section 54.4980B–9 contains
special rules for how COBRA applies in
connection with business reorganizations
and employer withdrawals from a multi-
employer plan, and §54.4980B–10
addresses how COBRA applies for indi-
viduals who take leave under the Family
and Medical Leave Act of 1993. Unless
the context indicates otherwise, any refer-
ence in §§54.4980B–1 through
§54.4980B–10 to COBRA refers to sec-
tion 4980B (as amended) and to the paral-
lel provisions of ERISA.
Q-2: What standard applies for topics
not addressed in §§54.4980B–1
through 54.4980B–10?
A-2: For purposes of section 4980B,
for topics relating to the COBRA
continuation coverage require-
ments of section 4980B that are
not addressed in §§54.4980B–1
through 54.4980B–10 (such as
methods for calculating the
applicable premium), plans and
employers must operate in good
faith compliance with a reason-
able interpretation of the statutory
requirements in section 4980B.
Par. 4. Section 54.4980B–2 is amend-
ed by:
1. Revising paragraph (a) in A-1.
2. Removing the language “54.4980
B–8” and adding “54.4980B–10” in its
place in the first sentence of paragraph (b)
in A-1.
3. Revising A-2.
4. Adding Q&A-3.
5. Removing the language “54.4980
B–8” and adding “54.4980B–10” in its
place in the last sentence of paragraph (a)
in A-4.
6. Adding a sentence immediately
before the last sentence of the introducto-
ry text of paragraph (a) in A-5.
7. Removing the language “54.4980
B–8” and adding “54.4980B–10” in its
place in the last sentence of the introduc-
2001–8 I.R.B.691February 20, 2001

tory text of paragraph (c) in A-5.
8. Adding paragraphs (d), (e), and (f) in
A-5.
9. Adding Q&A-6.
10. Revising A-8.
11. Revising paragraph (a) in A-10.
The additions and revisions read as fol-
lows:
§54.4980B–2 Plans that must comply.
* * * * *
A-1: (a) For purposes of section
4980B,a group health plan is a plan
maintained by an employer or employee
organization to provide health care to
individuals who have an employment-
related connection to the employer or
employee organization or to their fami-
lies. Individuals who have an employ-
ment-related connection to the employer
or employee organization consist of
employees, former employees, the
employer, and others associated or for-
merly associated with the employer or
employee organization in a business rela-
tionship (including members of a union
who are not currently employees).
Health care is provided under a plan
whether provided directly or through
insurance, reimbursement, or otherwise,
and whether or not provided through an
on-site facility (except as set forth in
paragraph (d) of this Q&A-1), or through
a cafeteria plan (as defined in section
125) or other flexible benefit arrange-
ment. (See paragraphs (b) through (e) in
Q&A-8 of this section for rules regarding
the application of the COBRA continua-
tion coverage requirements to certain
health flexible spending arrangements.)
For purposes of this Q&A-1, insurance
includes not only group insurance poli-
cies but also one or more individual
insurance policies in any arrangement
that involves the provision of health care
to two or more employees. A plan main-
tained by an employer or employee orga-
nization is any plan of, or contributed to
(directly or indirectly) by, an employer or
employee organization. Thus, a group
health plan is maintained by an employer
or employee organization even if the
employer or employee organization does
not contribute to it if coverage under the
plan would not be available at the same
cost to an individual but for the individ-
ual’s employment-related connection to
the employer or employee organization.
These rules are further explained in para-
graphs (b) through (d) of this Q&A-1. An
exception for qualified long-term care
services is set forth in paragraph (e) of
this Q&A-1, and for medical savings
accounts in paragraph (f) of this Q&A-1.
See Q&A-6 of this section for rules to
determine the number of group health
plans that an employer or employee orga-
nization maintains.
* * * * *
A-2: (a) For purposes of section
4980B, employer refers to —
(1) A person for whom services are
performed;
(2) Any other person that is a member
of a group described in section 414(b),
(c), (m), or (o) that includes a person
described in paragraph (a)(1) of this
Q&A-2; and
(3) Any successor of a person
described in paragraph (a)(1) or (2) of this
Q&A-2.
(b) An employer is a successor
employer if it results from a consolida-
tion, merger, or similar restructuring of
the employer or if it is a mere continua-
tion of the employer. See paragraph (c) in
Q&A-8 of §54.4980B–9 for rules describ-
ing the circumstances in which a purchas-
er of substantial assets is a successor
employer to the employer selling the
assets.
Q-3: What is a multiemployer plan?
A-3: For purposes of §§54.4980B–1
through 54.4980B–10, a multiemployer
plan is a plan to which more than one
employer is required to contribute, that is
maintained pursuant to one or more col-
lective bargaining agreements between
one or more employee organizations and
more than one employer, and that satisfies
such other requirements as the Secretary
of Labor may prescribe by regulation.
Whenever reference is made in
§§54.4980B–1 through 54.4980B–10 to a
plan of or maintained by an employer or
employee organization, the reference
includes a multiemployer plan.
* * * * *
A-5: (a) * * * See Q&A-6 of this sec-
tion for rules to determine the number of
plans that an employer or employee orga-
nization maintains. * * *
* * * * *
(d) In determining the number of the
employees of an employer, each full-time
employee is counted as one employee and
each part-time employee is counted as a
fraction of an employee, determined in
accordance with paragraph (e) of this
Q&A-5.
(e) An employer may determine the
number of its employees on a daily basis
or a pay period basis. The basis used by
the employer must be used with respect to
all employees of the employer and must
be used for the entire year for which the
number of employees is being deter-
mined. If an employer determines the
number of its employees on a daily basis,
it must determine the actual number of
full-time employees on each typical busi-
ness day and the actual number of part-
time employees and the hours worked by
each of those part-time employees on
each typical business day. Each full-time
employee counts as one employee on each
typical business day and each part-time
employee counts as a fraction, with the
numerator of the fraction equal to the
number of hours worked by that employ-
ee and the denominator equal to the num-
ber of hours that must be worked on a typ-
ical business day in order to be considered
a full-time employee. If an employer
determines the number of its employees
on a pay period basis, it must determine
the actual number of full-time employees
employed during that pay period and the
actual number of part-time employees
employed and the hours worked by each
of those part-time employees during the
pay period. For each day of that pay peri-
od, each full-time employee counts as one
employee and each part-time employee
counts as a fraction, with the numerator of
the fraction equal to the number of hours
worked by that employee during that pay
period and the denominator equal to the
number of hours that must be worked dur-
ing that pay period in order to be consid-
ered a full-time employee. The determi-
nation of the number of hours required to
be considered a full-time employee is
based upon the employer’s employment
practices, except that in no event may the
hours required to be considered a full-
time employee exceed eight hours for any
day or 40 hours for any week.
(f) In the case of a multiemployer plan,
the determination of whether the plan is a
small-employer plan on any particular
date depends on which employers are
contributing to the plan on that date and
on the workforce of those employers dur-
February 20, 20016922001–8 I.R.B.

ing the preceding calendar year. If a plan
that is otherwise subject to COBRA ceas-
es to be a small-employer plan because of
the addition during a calendar year of an
employer that did not normally employ
fewer than 20 employees on a typical
business day during the preceding calen-
dar year, the plan ceases to be excepted
from COBRA immediately upon the addi-
tion of the new employer. In contrast, if
the plan ceases to be a small-employer
plan by reason of an increase during a cal-
endar year in the workforce of an employ-
er contributing to the plan, the plan ceas-
es to be excepted from COBRA on the
January 1 immediately following the cal-
endar year in which the employer’s work-
force increased.
* * * * *
Q-6: How is the number of group
health plans that an employer or employ-
ee organization maintains determined?
A-6: (a) The rules of this Q&A-6 apply
in determining the number of group health
plans that an employer or employee orga-
nization maintains. All references else-
where in §§54.4980B–1 through
54.4980B–10 to a group health plan are
references to a group health plan as deter-
mined under Q&A-1 of this section and
this Q&A-6. Except as provided in para-
graph (b) or (c) of this Q&A-6, all health
care benefits, other than benefits for qual-
ified long-term care services (as defined
in section 7702B(c)), provided by a cor-
poration, partnership, or other entity or
trade or business, or by an employee orga-
nization, constitute one group health plan,
unless —
(1) It is clear from the instruments gov-
erning an arrangement or arrangements to
provide health care benefits that the bene-
fits are being provided under separate
plans; and
(2) The arrangement or arrangements
are operated pursuant to such instruments
as separate plans.
(b) A multiemployer plan and a non-
multiemployer plan are always separate
plans.
(c) If a principal purpose of establish-
ing separate plans is to evade any require-
ment of law, then the separate plans will
be considered a single plan to the extent
necessary to prevent the evasion.
(d) The significance of treating an
arrangement as two or more separate
group health plans is illustrated by the fol-
lowing examples:
Example 1. (i) Employer Xmaintains a single
group health plan, which provides major medical
and prescription drug benefits. Employer Ymain-
tains two group health plans; one provides major
medical benefits and the other provides prescription
drug benefits.
(ii) X’s plan could comply with the COBRA con-
tinuation coverage requirements by giving a quali-
fied beneficiary experiencing a qualifying event with
respect to X’s plan the choice of either electing both
major medical and prescription drug benefits or not
receiving any COBRA continuation coverage under
X’s plan. By contrast, for Y’s plans to comply with
the COBRA continuation coverage requirements, a
qualified beneficiary experiencing a qualifying event
with respect to each of Y’s plans must be given the
choice of electing COBRA continuation coverage
under either the major medical plan or the prescrip-
tion drug plan or both.
Example 2. If a joint board of trustees adminis-
ters one multiemployer plan, that plan will fail to
qualify for the small-employer plan exception if any
one of the employers whose employees are covered
under the plan normally employed 20 or more
employees during the preceding calendar year.
However, if the joint board of trustees maintains two
or more multiemployer plans, then the exception
would be available with respect to each of those
plans in which each of the employers whose employ-
ees are covered under the plan normally employed
fewer than 20 employees during the preceding cal-
endar year.
* * * * *
A-8: (a)(1) The provision of health
care benefits does not fail to be a group
health plan merely because those benefits
are offered under a cafeteria plan (as
defined in section 125) or under any other
arrangement under which an employee is
offered a choice between health care ben-
efits and other taxable or nontaxable ben-
efits. However, the COBRA continuation
coverage requirements apply only to the
type and level of coverage under the cafe-
teria plan or other flexible benefit
arrangement that a qualified beneficiary is
actually receiving on the day before the
qualifying event. See paragraphs (b)
through (e) of this Q&A-8 for rules limit-
ing the obligations of certain health flexi-
ble spending arrangements.
(2) The rules of this paragraph (a) are
illustrated by the following example:
Example: (i) Under the terms of a cafeteria plan,
employees can choose among life insurance cover-
age, membership in a health maintenance organiza-
tion (HMO), coverage for medical expenses under
an indemnity arrangement, and cash compensation.
Of these available choices, the HMO and the indem-
nity arrangement are the arrangements providing
health care. The instruments governing the HMO
and indemnity arrangements indicate that they are
separate group health plans. These group health
plans are subject to COBRA. The employer does not
provide any group health plan outside of the cafete-
ria plan. Band Care unmarried employees. Bhas
chosen the life insurance coverage, and Chas chosen
the indemnity arrangement.
(ii) Bdoes not have to be offered COBRA con-
tinuation coverage upon terminating employment,
nor is a subsequent open enrollment period for active
employees required to be made available to B.
However, if Cterminates employment and the ter-
mination constitutes a qualifying event, Cmust be
offered an opportunity to elect COBRA continuation
coverage under the indemnity arrangement. If C
makes such an election and an open enrollment peri-
od for active employees occurs while Cis still
receiving the COBRA continuation coverage, C
must be offered the opportunity to switch from the
indemnity arrangement to the HMO (but not to the
life insurance coverage because that does not consti-
tute coverage provided under a group health plan).
(b) If a health flexible spending
arrangement (health FSA), within the
meaning of section 106(c)(2), satisfies the
two conditions in paragraph (c) of this
Q&A-8 for a plan year, the obligation of
the health FSA to make COBRA continu-
ation coverage available to a qualified
beneficiary who experiences a qualifying
event in that plan year is limited in accor-
dance with paragraphs (d) and (e) of this
Q&A-8, as illustrated by an example in
paragraph (f) of this Q&A-8. To the extent
that a health FSA is obligated to make
COBRA continuation coverage available
to a qualified beneficiary, the health FSA
must comply with all the applicable rules
of §§54.4980B–1 through 54.4980B–10,
including the rules of Q&A-3 in
§54.4980B–5 (relating to limits).
(c) The conditions of this paragraph (c)
are satisfied if —
(1) Benefits provided under the health
FSA are excepted benefits within the
meaning of sections 9831 and 9832; and
(2) The maximum amount that the
health FSA can require to be paid for a
year of COBRA continuation coverage
under Q&A-1 of §54.4980B–8 equals or
exceeds the maximum benefit available
under the health FSA for the year.
(d) If the conditions in paragraph (c) of
this Q&A-8 are satisfied for a plan year,
then the health FSA is not obligated to
make COBRA continuation coverage
available for any subsequent plan year to
any qualified beneficiary who experiences
a qualifying event during that plan year.
(e) If the conditions in paragraph (c) of
this Q&A-8 are satisfied for a plan year,
2001–8 I.R.B.693February 20, 2001

the health FSA is not obligated to make
COBRA continuation coverage available
for that plan year to any qualified benefi-
ciary who experiences a qualifying event
during that plan year unless, as of the date
of the qualifying event, the qualified ben-
eficiary can become entitled to receive
during the remainder of the plan year a
benefit that exceeds the maximum amount
that the health FSA is permitted to require
to be paid for COBRA continuation cov-
erage for the remainder of the plan year.
In determining the amount of the benefit
that a qualified beneficiary can become
entitled to receive during the remainder of
the plan year, the health FSA may deduct
from the maximum benefit available to
that qualified beneficiary for the year
(based on the election made under the
health FSA for that qualified beneficiary
before the date of the qualifying event)
any reimbursable claims submitted to the
health FSA for that plan year before the
date of the qualifying event.
(f) The rules of paragraphs (b), (c), (d),
and (e) of this Q&A-8 are illustrated by
the following example:
Example. (i) An employer maintains a group
health plan providing major medical benefits and a
group health plan that is a health FSA, and the plan
year for each plan is the calendar year. Both the plan
providing major medical benefits and the health FSA
are subject to COBRA. Under the health FSA, dur-
ing an open season before the beginning of each cal-
endar year, employees can elect to reduce their com-
pensation during the upcoming year by up to $1200
per year and have that same amount contributed to a
health flexible spending account. The employer con-
tributes an additional amount to the account equal to
the employee’s salary reduction election for the year.
Thus, the maximum amount available to an employ-
ee under the health FSA for a year is two times the
amount of the employee’s salary reduction election
for the year. This amount may be paid to the
employee during the year as reimbursement for
health expenses not covered by the employer’s
major medical plan (such as deductibles, copay-
ments, prescription drugs, or eyeglasses). The
employer determined, in accordance with section
4980B(f)(4), that a reasonable estimate of the cost of
providing coverage for similarly situated
nonCOBRA beneficiaries for 2002 under this health
FSA is equal to two times their salary reduction elec-
tion for 2002 and, thus, that two times the salary
reduction election is the applicable premium for
2002.
(ii) Because the employer provides major med-
ical benefits under another group health plan, and
because the maximum benefit that any employee can
receive under the health FSA is not greater than two
times the employee’s salary reduction election for
the plan year, benefits under this health FSA are
excepted benefits within the meaning of sections
9831 and 9832. Thus, the first condition of para-
graph (c) of this Q&A-8 is satisfied for the year. The
maximum amount that a plan can require to be paid
for coverage (outside of coverage required to be
made available due to a disability extension) under
Q&A-1 of §54.4980B–8 is 102 percent of the applic-
able premium. Thus, the maximum amount that the
health FSA can require to be paid for coverage for
the 2002 plan year is 2.04 times the employee’s
salary reduction election for the plan year. Because
the maximum benefit available under the health FSA
is 2.0 times the employee’s salary reduction election
for the year, the maximum benefit available under
the health FSA for the year is less than the maximum
amount that the health FSA can require to be paid for
coverage for the year. Thus, the second condition in
paragraph (c) of this Q&A-8 is also satisfied for the
2002 plan year. Because both conditions in para-
graph (c) of this Q&A-8 are satisfied for 2002, with
respect to any qualifying event occurring in 2002,
the health FSA is not obligated to make COBRA
continuation coverage available for any year after
2002.
(iii) Whether the health FSA is obligated to make
COBRA continuation coverage available in 2002 to
a qualified beneficiary with respect to a qualifying
event that occurs in 2002 depends upon the maxi-
mum benefit that would be available to the qualified
beneficiary under COBRA continuation coverage for
that plan year. Case 1: Employee Bhas elected to
reduce B’s salary by $1200 for 2002. Thus, the max-
imum benefit that Bcan become entitled to receive
under the health FSA during the entire year is $2400.
Bexperiences a qualifying event that is the termina-
tion of B’s employment on May 31, 2002. As of that
date, Bhad submitted $300 of reimbursable expens-
es under the health FSA. Thus, the maximum bene-
fit that Bcould become entitled to receive for the
remainder of 2002 is $2100. The maximum amount
that the health FSA can require to be paid for
COBRA continuation coverage for the remainder of
2002 is 102 percent times 1/12 of the applicable pre-
mium for 2002 times the number of months remain-
ing in 2002 after the date of the qualifying event. In
B’s case, the maximum amount that the health FSA
can require to be paid for COBRA continuation cov-
erage for 2002 is 2.04 times $1200, or $2448. One-
twelfth of $2448 is $204. Because seven months
remain in the plan year, the maximum amount that
the health FSA can require to be paid for B’s cover-
age for the remainder of the year is seven times
$204, or $1428. Because $1428 is less than the max-
imum benefit that Bcould become entitled to receive
for the remainder of the year ($2100), the health
FSA is required to make COBRA continuation cov-
erage available to Bfor the remainder of 2002 (but
not for any subsequent year).
(iv) Case 2: The facts are the same as in Case 1
except that Bhad submitted $1000 of reimbursable
expenses as of the date of the qualifying event. In
that case, the maximum benefit available to Bfor the
remainder of the year would be $1400 instead of
$2100. Because the maximum amount that the
health FSA can require to be paid for B’s coverage is
$1428, and because the $1400 maximum benefit for
the remainder of the year does not exceed $1428, the
health FSA is not obligated to make COBRA contin-
uation coverage available to Bin 2002 (or any later
year). (Of course, the administrator of the health
FSA is permitted to make COBRA continuation cov-
erage available to every qualified beneficiary in the
year that the qualified beneficiary’s qualifying event
occurs in order to avoid having to determine the
maximum benefit available for each qualified bene-
ficiary for the remainder of the plan year.)
* * * * *
A-10: (a) In general, the excise tax is
imposed on the employer maintaining the
plan, except that in the case of a multiem-
ployer plan (see Q&A-3 of this section for
a definition of multiemployer plan) the
excise tax is imposed on the plan.
* * * * *
§54.4980B–3 [Amended]
Par. 5. Section 54.4980B–3 is amend-
ed by:
1. Removing the language “54.49
80B–8” and adding “54.4980B–10” in its
place in the last sentence of paragraph
(a)(3) in A-1.
2. Removing the language “54.49
80B–8” and adding “54.4980B–10” in its
place in the first sentence of paragraph (g)
in A-1.
3. Removing the language “54.49
80B–8” and adding “54.4980B–10” in its
place in the first and second sentences of
paragraph (a)(1) in A-2.
4. Removing the language “54.49
80B–8” and adding “54.4980B–10” in its
place in the first sentence of paragraph
(a)(2) in A-2.
5. Removing the language “54.49
80B–8” and adding “54.4980B–10” in its
place in the first and last sentences in
paragraph (b) in A-2.
6. Removing the language “54.49
80B–8” and adding “54.4980B–10” in its
place in A-3.
7. Removing the language “section
9801(f)(2), and §54.9801–6T(b)” and
adding “and section 9801(f)(2)” in its
place in the last sentence of paragraph (b)
in A-1,.
8. Removing the language “and
§54.9801–6T(b)” in the second sentence
of paragraph (i) in Example 1of para-
graph (h) of A-1.
Par. 6. Section 54.4980B–4 is
amended by:
1. Adding a sentence at the end of para-
graph (a) in A-1.
2. Removing the language “Q&A-1”
and adding “Q&A-4” in its place in the
fifth sentence of paragraph (c) of A-1.
3. Revising the third sentence in para-
graph (e) of A-1.
February 20, 20016942001–8 I.R.B.

4. Removing the language “section
9801(f)(2), and §54.9801–6T(b)” and
adding “and section 9801(f)(2)” in its
place in paragraph (i) in Example 4of
paragraph (g) in A-1.
The addition and revision read as fol-
lows:
§54.4980B–4 Qualifying events.
* * * * *
A-1: (a) * * * See Q&A-1 through
Q&A-3 of §54.4980B–10 for special rules
in the case of leave taken under the
Family and Medical Leave Act of 1993
(29 U.S.C. 2601–2619).
* * * * *
(e) * * * For example, an absence from
work due to disability, a temporary layoff,
or any other reason (other than due to
leave that is FMLAleave; see
§54.4980B–10) is a reduction of hours of
a covered employee’s employment if
there is not an immediate termination of
employment. * * *
* * * * *
Par. 7. Section 54.4980B–5 is amend-
ed by:
1. Revising paragraph (a) of A-1.
2. Revising paragraph (b) in A-4.
3. Removing the language “and
§54.9801–6T” in the second sentence of
paragraph (a) in A-5.
The revisions read as follows:
§54.4980B–5 COBRA continuation
coverage.
* * * * *
A-1: (a) If a qualifying event occurs,
each qualified beneficiary (other than a
qualified beneficiary for whom the quali-
fying event will not result in any immedi-
ate or deferred loss of coverage) must be
offered an opportunity to elect to receive
the group health plan coverage that is pro-
vided to similarly situated nonCOBRA
beneficiaries (ordinarily, the same cover-
age that the qualified beneficiary had on
the day before the qualifying event). See
Q&A-3 of §54.4980B–3 for the definition
of similarly situated nonCOBRA benefi-
ciaries. This coverage is COBRA contin-
uation coverage. If coverage is modified
for similarly situated nonCOBRA benefi-
ciaries, then the coverage made available
to qualified beneficiaries is modified in
the same way. If the continuation cover-
age offered differs in any way from the
coverage made available to similarly situ-
ated nonCOBRA beneficiaries, the cover-
age offered does not constitute COBRA
continuation coverage and the group
health plan is not in compliance with
COBRA unless other coverage that does
constitute COBRA continuation coverage
is also offered. Any elimination or reduc-
tion of coverage in anticipation of an
event described in paragraph (b) of Q&A-
1 of §54.4980B–4 is disregarded for pur-
poses of this Q&A-1 and for purposes of
any other reference in §§54.4980B–1
through 54.4980B–10 to coverage in
effect immediately before (or on the day
before) a qualifying event. COBRA con-
tinuation coverage must not be condi-
tioned upon, or discriminate on the basis
of lack of, evidence of insurability.
* * * * *
A-4: * * *
(b) If a qualified beneficiary partici-
pates in a region-specific benefit package
(such as an HMO or an on-site clinic) that
will not service her or his health needs in
the area to which she or he is relocating
(regardless of the reason for the reloca-
tion), the qualified beneficiary must be
given, within a reasonable period after
requesting other coverage, an opportunity
to elect alternative coverage that the
employer or employee organization
makes available to active employees. If
the employer or employee organization
makes group health plan coverage avail-
able to similarly situated nonCOBRA
beneficiaries that can be extended in the
area to which the qualified beneficiary is
relocating, then that coverage is the alter-
native coverage that must be made avail-
able to the relocating qualified beneficia-
ry. If the employer or employee
organization does not make group health
plan coverage available to similarly situ-
ated nonCOBRA beneficiaries that can be
extended in the area to which the qualified
beneficiary is relocating but makes cover-
age available to other employees that can
be extended in that area, then the coverage
made available to those other employees
must be made available to the relocating
qualified beneficiary. The effective date
of the alternative coverage must be not
later than the date of the qualified benefi-
ciary’s relocation, or, if later, the first day
of the month following the month in
which the qualified beneficiary requests
the alternative coverage. However, the
employer or employee organization is not
required to make any other coverage
available to the relocating qualified bene-
ficiary if the only coverage the employer
or employee organization makes available
to active employees is not available in the
area to which the qualified beneficiary
relocates (because all such coverage is
region-specific and does not service indi-
viduals in that area).
* * * * *
Par. 8. Section 54.4980B–6 is amended
by:
1. Revising the Examplein paragraph
(c) of A-1.
2. Revising the first sentence in para-
graph (b) of A-3.
The revisions read as follows:
§54.4980B–6 Electing COBRA
continuation coverage.
* * * * *
A-1: * * *
(c) * * *
Example. (i) An unmarried employee without
children who is receiving employer-paid coverage
under a group health plan voluntarily terminates
employment on June 1, 2001. The employee is not
disabled at the time of the termination of employ-
ment nor at any time thereafter, and the plan does not
provide for the extension of the required periods (as
is permitted under paragraph (b) of Q&A-4 of
§54.4980B–7).
(ii) Case 1: If the plan provides that the employ-
er-paid coverage ends immediately upon the termi-
nation of employment, the election period must
begin not later than June 1, 2001, and must not end
earlier than July 31, 2001. If notice of the right to
elect COBRA continuation coverage is not provided
to the employee until June 15, 2001, the election
period must not end earlier than August 14, 2001.
(iii) Case 2: If the plan provides that the employ-
er-paid coverage does not end until 6 months after
the termination of employment, the employee does
not lose coverage until December 1, 2001. The elec-
tion period can therefore begin as late as December
1, 2001, and must not end before January 30, 2002.
(iv) Case 3: If employer-paid coverage for 6
months after the termination of employment is
offered only to those qualified beneficiaries who
waive COBRA continuation coverage, the employee
loses coverage on June 1, 2001, so the election peri-
od is the same as in Case 1. The difference between
Case 2 and Case 3 is that in Case 2 the employee can
receive 6 months of employer-paid coverage and
then elect to pay for up to an additional 12 months of
COBRA continuation coverage, while in Case 3 the
employee must choose between 6 months of
employer-paid coverage and paying for up to 18
months of COBRA continuation coverage. In all
three cases, COBRA continuation coverage need not
be provided for more than 18 months after the ter-
mination of employment (see Q&A-4 of
§54.4980B–7), and in certain circumstances might
be provided for a shorter period (see Q&A-1 of
§54.4980B–7).
* * * * *
2001–8 I.R.B.695February 20, 2001

A-3: * * *
(b) In the case of an indemnity or
reimbursement arrangement, the
employer or employee organization can
provide for plan coverage during the
election period or, if the plan allows
retroactive reinstatement, the employer
or employee organization can terminate
the coverage of the qualified beneficiary
and reinstate her or him when the elec-
tion (and, if applicable, payment for the
coverage) is made. * * *
* * * * *
Par. 9. Section 54.4980B–7 is amended
by:
1. Revising paragraph (a) of A-1.
2. Adding Q&A-4.
3. Revising the second sentence in
paragraph (c) of A-5.
4. Revising paragraph (b) of Q&A-6.
5. Removing the language “Q&A-1”
and adding “Q&A-4” in its place in para-
graph (a) of A-7.
The addition and revisions read as fol-
lows:
§54.4980B–7 Duration of COBRA
continuation coverage.
* * * * *
A-1: (a) Except for an interruption of
coverage in connection with a waiver, as
described in Q&A-4 of §54.4980B–6,
COBRA continuation coverage that has
been elected for a qualified beneficiary
must extend for at least the period begin-
ning on the date of the qualifying event
and ending not before the earliest of the
following dates —
(1) The last day of the maximum cov-
erage period (see Q&A-4 of this section);
(2) The first day for which timely pay-
ment is not made to the plan with respect
to the qualified beneficiary (see Q&A-5 in
§54.4980B–8);
(3) The date upon which the employer
or employee organization ceases to pro-
vide any group health plan (including suc-
cessor plans) to any employee;
(4) The date, after the date of the elec-
tion, upon which the qualified beneficiary
first becomes covered under any other
group health plan, as described in Q&A-2
of this section;
(5) The date, after the date of the elec-
tion, upon which the qualified beneficiary
first becomes entitled to Medicare bene-
fits, as described in Q&A-3 of this sec-
tion; and
(6) In the case of a qualified beneficia-
ry entitled to a disability extension (see
Q&A-5 of this section), the later of —
(i) Either 29 months after the date of
the qualifying event, or the first day of the
month that is more than 30 days after the
date of a final determination under Title II
or XVI of the Social Security Act (42
U.S.C. 401–433 or 1381–1385) that the
disabled qualified beneficiary whose dis-
ability resulted in the qualified beneficia-
ry’s being entitled to the disability exten-
sion is no longer disabled, whichever is
earlier; or
(ii) The end of the maximum coverage
period that applies to the qualified benefi-
ciary without regard to the disability
extension.
* * * * *
Q-4: When does the maximum cover-
age period end?
A-4: (a) Except as otherwise provided
in this Q&A-4, the maximum coverage
period ends 36 months after the qualifying
event. The maximum coverage period for
a qualified beneficiary who is a child born
to or placed for adoption with a covered
employee during a period of COBRA con-
tinuation coverage is the maximum cover-
age period for the qualifying event giving
rise to the period of COBRA continuation
coverage during which the child was born
or placed for adoption. Paragraph (b) of
this Q&A-4 describes the starting point
from which the end of the maximum cov-
erage period is measured. The date that
the maximum coverage period ends is
described in paragraph (c) of this Q&A-4
in a case where the qualifying event is a
termination of employment or reduction
of hours of employment, in paragraph (d)
of this Q&A-4 in a case where a covered
employee becomes entitled to Medicare
benefits under Title XVIII of the Social
Security Act (42 U.S.C. 1395–1395ggg)
before experiencing a qualifying event
that is a termination of employment or
reduction of hours of employment, and in
paragraph (e) of this Q&A-4 in the case of
a qualifying event that is the bankruptcy
of the employer. See Q&A-8 of
§54.4980B–2 for limitations that apply to
certain health flexible spending arrange-
ments. See also Q&A-6 of this section in
the case of multiple qualifying events.
Nothing in §§54.4980B–1 through
54.4980B–10 prohibits a group health
plan from providing coverage that contin-
ues beyond the end of the maximum cov-
erage period.
(b)(1) The end of the maximum cover-
age period is measured from the date of
the qualifying event even if the qualifying
event does not result in a loss of coverage
under the plan until a later date. If, how-
ever, coverage under the plan is lost at a
later date and the plan provides for the
extension of the required periods, then the
maximum coverage period is measured
from the date when coverage is lost. A
plan provides for the extension of the
required periods if it provides both —
(i) That the 30-day notice period (dur-
ing which the employer is required to
notify the plan administrator of the occur-
rence of certain qualifying events such as
the death of the covered employee or the
termination of employment or reduction
of hours of employment of the covered
employee) begins on the date of the loss
of coverage rather than on the date of the
qualifying event; and
(ii) That the end of the maximum cov-
erage period is measured from the date of
the loss of coverage rather than from the
date of the qualifying event.
(2) In the case of a plan that provides
for the extension of the required periods,
whenever the rules of §§54.4980B–1
through 54.4980B–10 refer to the mea-
surement of a period from the date of the
qualifying event, those rules apply in such
a case by measuring the period instead
from the date of the loss of coverage.
(c) In the case of a qualifying event
that is a termination of employment or
reduction of hours of employment, the
maximum coverage period ends 18
months after the qualifying event if there
is no disability extension, and 29 months
after the qualifying event if there is a dis-
ability extension. See Q&A-5 of this sec-
tion for rules to determine if there is a dis-
ability extension. If there is a disability
extension and the disabled qualified bene-
ficiary is later determined to no longer be
disabled, then a plan may terminate the
COBRA continuation coverage of an
affected qualified beneficiary before the
end of the disability extension; see para-
graph (a)(6) in Q&A-1 of this section.
(d)(1) If a covered employee becomes
entitled to Medicare benefits under Title
XVIII of the Social Security Act (42
U.S.C. 1395–1395ggg) before experienc-
ing a qualifying event that is a termination
February 20, 20016962001–8 I.R.B.

of employment or reduction of hours of
employment, the maximum coverage
period for qualified beneficiaries other
than the covered employee ends on the
later of —
(i) 36 months after the date the covered
employee became entitled to Medicare
benefits; or
(ii) 18 months (or 29 months, if there is
a disability extension) after the date of the
covered employee’s termination of
employment or reduction of hours of
employment.
(2) See paragraph (b) of Q&A-3 of this
section regarding the determination of
when a covered employee becomes enti-
tled to Medicare benefits.
(e) In the case of a qualifying event
that is the bankruptcy of the employer, the
maximum coverage period for a qualified
beneficiary who is the retired covered
employee ends on the date of the retired
covered employee’s death. The maximum
coverage period for a qualified beneficia-
ry who is the spouse, surviving spouse, or
dependent child of the retired covered
employee ends on the earlier of —
(1) The date of the qualified beneficia-
ry’s death; or
(2) The date that is 36 months after the
death of the retired covered employee.
* * * * *
A-5: * * *
(c) * * * For this purpose, the period of
the first 60 days of COBRA continuation
coverage is measured from the date of the
qualifying event described in paragraph
(b) of this Q&A-5 (except that if a loss of
coverage would occur at a later date in the
absence of an election for COBRA con-
tinuation coverage and if the plan pro-
vides for the extension of the required
periods (as described in paragraph (b) of
Q&A-4 of this section) then the period of
the first 60 days of COBRA continuation
coverage is measured from the date on
which the coverage would be lost). * * *
* * * * *
A-6: * * *
(b) The requirements of this paragraph
(b) are satisfied if a qualifying event that
gives rise to an 18-month maximum cov-
erage period (or a 29-month maximum
coverage period in the case of a disability
extension) is followed, within that 18-
month period (or within that 29-month
period, in the case of a disability exten-
sion), by a second qualifying event (for
example, a death or a divorce) that gives
rise to a 36-month maximum coverage
period. (Thus, a termination of employ-
ment following a qualifying event that is a
reduction of hours of employment cannot
be a second qualifying event that expands
the maximum coverage period; the bank-
ruptcy of an employer also cannot be a
second qualifying event that expands the
maximum coverage period.) In such a
case, the original 18-month period (or 29-
month period, in the case of a disability
extension) is expanded to 36 months, but
only for those individuals who were qual-
ified beneficiaries under the group health
plan in connection with the first qualify-
ing event and who are still qualified ben-
eficiaries at the time of the second quali-
fying event. No qualifying event (other
than a qualifying event that is the bank-
ruptcy of the employer) can give rise to a
maximum coverage period that ends more
than 36 months after the date of the first
qualifying event (or more than 36 months
after the date of the loss of coverage, in
the case of a plan that provides for the
extension of the required periods; see
paragraph (b) in Q&A-4 of this section).
For example, if an employee covered by a
group health plan that is subject to
COBRA terminates employment (for rea-
sons other than gross misconduct) on
December 31, 2000, the termination is a
qualifying event giving rise to a maxi-
mum coverage period that extends for 18
months to June 30, 2002. If the employee
dies after the employee and the employ-
ee’s spouse and dependent children have
elected COBRA continuation coverage
and on or before June 30, 2002, the
spouse and dependent children (except
anyone among them whose COBRA con-
tinuation coverage had already ended for
some other reason) will be able to receive
COBRA continuation coverage through
December 31, 2003. See Q&A-8(b) of
§54.4980B–2 for a special rule that
applies to certain health flexible spending
arrangements.
* * * * *
Par. 10. Section 54.4980B–8 is amend-
ed by:
1. Revising paragraph (c) in A-1.
2. Adding a new sentence at the end of
paragraph (d) and adding paragraphs
(d)(1) and (d)(2) in A-5.
The revision and addition read as fol-
lows:
§54.4980B–8 Paying for COBRA
continuation coverage.
* * * * *
A-1: * * *
* * * * *
(c) A group health plan does not fail to
comply with section 9802(b) (which gen-
erally prohibits an individual from being
charged, on the basis of health status, a
higher premium than that charged for sim-
ilarly situated individuals enrolled in the
plan) with respect to a qualified beneficia-
ry entitled to the disability extension
merely because the plan requires payment
of an amount permitted under paragraph
(b) of this Q&A-1.
* * * * *
A-5: * * *
(d) * * * An amount is not significant-
ly less than the amount the plan requires
to be paid for a period of coverage if and
only if the shortfall is no greater than the
lesser of the following two amounts —
(1) Fifty dollars (or such other amount
as the Commissioner may provide in a
revenue ruling, notice, or other guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii) of this chapter));
or
(2) 10 percent of the amount the plan
requires to be paid.
* * * * *
Par. 11. Sections 54.4980B–9 and
54.4980B–10 are added to read as fol-
lows:
§54.4980B–9 Business reorganizations
and employer withdrawals from
multiemployer plans.
The following questions-and-answers
address who has the obligation to make
COBRA continuation coverage available
to affected qualified beneficiaries in the
context of business reorganizations and
employer withdrawals from multiemploy-
er plans:
Q-1: For purposes of this section, what
are a business reorganization, a stock sale,
and an asset sale?
A-1: For purposes of this section:
(a) Abusiness reorganizationis a stock
sale or an asset sale.
(b) Astock saleis a transfer of stock in
a corporation that causes the corporation
to become a different employer or a mem-
ber of a different employer. (See Q&A-2
of §54.4980B–2, which defines employer
2001–8 I.R.B.697February 20, 2001

to include all members of a controlled
group of corporations.) Thus, for exam-
ple, a sale or distribution of stock in a cor-
poration that causes the corporation to
cease to be a member of one controlled
group of corporations, whether or not it
becomes a member of another controlled
group of corporations, is a stock sale.
(c) An asset saleis a transfer of sub-
stantial assets, such as a plant or division
or substantially all the assets of a trade or
business.
(d) The rules of §1.414(b)–1 of this
chapter apply in determining what consti-
tutes a controlled group of corporations,
and the rules of §§1.414(c)–1 through
1.414(c)–5 of this chapter apply in deter-
mining what constitutes a group of trades
or businesses under common control.
Q-2: In the case of a stock sale, what
are the selling group, the acquired organi-
zation, and the buying group?
A-2: In the case of a stock sale —
(a) The selling groupis the controlled
group of corporations, or the group of
trades or businesses under common con-
trol, of which a corporation ceases to be a
member as a result of the stock sale;
(b) The acquired organizationis the
corporation that ceases to be a member of
the selling group as a result of the stock
sale; and
(c) The buying groupis the controlled
group of corporations, or the group of
trades or businesses under common con-
trol, of which the acquired organization
becomes a member as a result of the stock
sale. If the acquired organization does not
become a member of such a group, the
buying groupis the acquired organization.
Q-3: In the case of an asset sale, what
are the selling group and the buying group?
A-3: In the case of an asset sale —
(a) The selling groupis the controlled
group of corporations or the group of
trades or businesses under common con-
trol that includes the corporation or other
trade or business that is selling the assets;
and
(b) The buying groupis the controlled
group of corporations or the group of
trades or businesses under common con-
trol that includes the corporation or other
trade or business that is buying the assets.
Q-4: Who is an M&A qualified benefi-
ciary?
A-4: (a) Asset sales: In the case of an
asset sale, an individual is an M&A qual-
ified beneficiary if the individual is a
qualified beneficiary whose qualifying
event occurred prior to or in connection
with the sale and who is, or whose quali-
fying event occurred in connection with, a
covered employee whose last employ-
ment prior to the qualifying event was
associated with the assets being sold.
(b) Stock sales: In the case of a stock
sale, an individual is an M&A qualified
beneficiary if the individual is a qualified
beneficiary whose qualifying event
occurred prior to or in connection with the
sale and who is, or whose qualifying event
occurred in connection with, a covered
employee whose last employment prior to
the qualifying event was with the acquired
organization.
(c) In the case of a qualified beneficia-
ry who has experienced more than one
qualifying event with respect to her or his
current right to COBRA continuation cov-
erage, the qualifying event referred to in
paragraphs (a) and (b) of this Q&A-4 is
the first qualifying event.
Q-5: In the case of a stock sale, is the
sale a qualifying event with respect to a
covered employee who is employed by
the acquired organization before the sale
and who continues to be employed by the
acquired organization after the sale, or
with respect to the spouse or dependent
children of such a covered employee?
A-5: No. A covered employee who
continues to be employed by the acquired
organization after the sale does not expe-
rience a termination of employment as a
result of the sale. Accordingly, the sale is
not a qualifying event with respect to the
covered employee, or with respect to the
covered employee’s spouse or dependent
children, regardless of whether they are
provided with group health coverage after
the sale, and neither the covered employ-
ee, nor the covered employee’s spouse or
dependent children, become qualified
beneficiaries as a result of the sale.
Q-6: In the case of an asset sale, is the
sale a qualifying event with respect to a
covered employee whose employment
immediately before the sale was associat-
ed with the purchased assets, or with
respect to the spouse or dependent chil-
dren of such a covered employee who are
covered under a group health plan of the
selling group immediately before the
sale?
A-6: (a) Yes, unless —
(1) The buying group is a successor
employer under paragraph (c) of Q&A-8
of this section or Q&A-2 of §54.4980B–2,
and the covered employee is employed by
the buying group immediately after the
sale; or
(2) The covered employee (or the
spouse or any dependent child of the cov-
ered employee) does not lose coverage
(within the meaning of paragraph (c) in
Q&A-1 of §54.4980B–4) under a group
health plan of the selling group after the
sale.
(b) Unless the conditions in paragraph
(a)(1) or (2) of this Q&A-6 are satisfied,
such a covered employee experiences a
termination of employment with the sell-
ing group as a result of the asset sale,
regardless of whether the covered
employee is employed by the buying
group or whether the covered employee’s
employment is associated with the pur-
chased assets after the sale. Accordingly,
the covered employee, and the spouse and
dependent children of the covered
employee who lose coverage under a plan
of the selling group in connection with the
sale, are M&A qualified beneficiaries in
connection with the sale.
Q-7: In a business reorganization, are
the buying group and the selling group
permitted to allocate by contract the
responsibility to make COBRA continua-
tion coverage available to M&A qualified
beneficiaries?
A-7: Yes. Nothing in this section pro-
hibits a selling group and a buying group
from allocating to one or the other of the
parties in a purchase agreement the
responsibility to provide the coverage
required under §§54.4980B–1 through
54.4980B–10. However, if and to the
extent that the party assigned this respon-
sibility under the terms of the contract
fails to perform, the party who has the
obligation under Q&A-8 of this section to
make COBRA continuation coverage
available to M&A qualified beneficiaries
continues to have that obligation.
Q-8: Which group health plan has the
obligation to make COBRA continuation
coverage available to M&A qualified ben-
eficiaries in a business reorganization?
A-8: (a) In the case of a business reor-
ganization (whether a stock sale or an
asset sale), so long as the selling group
maintains a group health plan after the
sale, a group health plan maintained by
February 20, 20016982001–8 I.R.B.

the selling group has the obligation to
make COBRA continuation coverage
available to M&A qualified beneficiaries
with respect to that sale. This Q&A-8
prescribes rules for cases in which the
selling group ceases to provide any group
health plan to any employee in connection
with the sale. Paragraph (b) of this Q&A-
8 contains these rules for stock sales, and
paragraph (c) of this Q&A-8 contains
these rules for asset sales. Neither a stock
sale nor an asset sale has any effect on the
COBRA continuation coverage require-
ments applicable to any group health plan
for any period before the sale.
(b)(1) In the case of a stock sale, if the
selling group ceases to provide any group
health plan to any employee in connection
with the sale, a group health plan main-
tained by the buying group has the oblig-
ation to make COBRA continuation cov-
erage available to M&A qualified
beneficiaries with respect to that stock
sale. A group health plan of the buying
group has this obligation beginning on the
later of the following two dates and con-
tinuing as long as the buying group con-
tinues to maintain a group health plan (but
subject to the rules in §54.4980B–7, relat-
ing to the duration of COBRA continua-
tion coverage) —
(i) The date the selling group ceases to
provide any group health plan to any
employee; or
(ii) The date of the stock sale.
(2) The determination of whether the
selling group’s cessation of providing any
group health plan to any employee is in
connection with the stock sale is based on
all of the relevant facts and circumstances.
A group health plan of the buying group
does not, as a result of the stock sale, have
an obligation to make COBRA continua-
tion coverage available to those qualified
beneficiaries of the selling group who are
not M&A qualified beneficiaries with
respect to that sale.
(c)(1) In the case of an asset sale, if the
selling group ceases to provide any group
health plan to any employee in connection
with the sale and if the buying group con-
tinues the business operations associated
with the assets purchased from the selling
group without interruption or substantial
change, then the buying group is a succes-
sor employer to the selling group in con-
nection with that asset sale. A buying
group does not fail to be a successor
employer in connection with an asset sale
merely because the asset sale takes place
in connection with a proceeding in bank-
ruptcy under Title 11 of the United States
Code. If the buying group is a successor
employer, a group health plan maintained
by the buying group has the obligation to
make COBRA continuation coverage
available to M&A qualified beneficiaries
with respect to that asset sale. A group
health plan of the buying group has this
obligation beginning on the later of the
following two dates and continuing as
long as the buying group continues to
maintain a group health plan (but subject
to the rules in §54.4980B–7, relating to
the duration of COBRA continuation cov-
erage) —
(i) The date the selling group ceases to
provide any group health plan to any
employee; or
(ii) The date of the asset sale.
(2) The determination of whether the
selling group’s cessation of providing any
group health plan to any employee is in
connection with the asset sale is based on
all of the relevant facts and circumstances.
A group health plan of the buying group
does not, as a result of the asset sale, have
an obligation to make COBRA continua-
tion coverage available to those qualified
beneficiaries of the selling group who are
not M&A qualified beneficiaries with
respect to that sale.
(d) The rules of Q&A-1 through Q&A-
7 of this section and this Q&A-8 are illus-
trated by the following examples; in each
example, each group health plan is subject
to COBRA:
Stock Sale Examples
Example 1. (i) Selling Group Sconsists of three
corporations, A, B, and C. Buying Group Pconsists
of two corporations, Dand E. Penters into a con-
tract to purchase all the stock of Cfrom Seffective
July 1, 2002. Before the sale of C, Smaintains a sin-
gle group health plan for the employees of A, B, and
C(and their families). Pmaintains a single group
health plan for the employees of Dand E(and their
families). Effective July 1, 2002, the employees of
C(and their families) become covered under P’s
plan. On June 30, 2002, there are 48 qualified ben-
eficiaries receiving COBRA continuation coverage
under S’s plan, 15 of whom are M&A qualified ben-
eficiaries with respect to the sale of C. (The other 33
qualified beneficiaries had qualifying events in con-
nection with a covered employee whose last employ-
ment before the qualifying event was with either A
or B.)
(ii) Under these facts, S’s plan continues to have
the obligation to make COBRA continuation cover-
age available to the 15 M&A qualified beneficiaries
under S’s plan after the sale of Cto P. The employ-
ees who continue in employment with Cdo not
experience a qualifying event by virtue of P’s acqui-
sition of C. If they experience a qualifying event
after the sale, then the group health plan of Phas the
obligation to make COBRA continuation coverage
available to them.
Example 2. (i) Selling Group Sconsists of three
corporations, A, B, and C. Each of A, B, and Cmain-
tains a group health plan for its employees (and their
families). Buying Group Pconsists of two corpora-
tions, Dand E. Penters into a contract to purchase
all of the stock of Cfrom Seffective July 1, 2002.
As of June 30, 2002, there are 14 qualified benefi-
ciaries receiving COBRA continuation coverage
under C’s plan. Ccontinues to employ all of its
employees and continues to maintain its group
health plan after being acquired by Pon July 1,
2002.
(ii) Under these facts, Cis an acquired organiza-
tion and the 14 qualified beneficiaries under C’s plan
are M&A qualified beneficiaries. A group health
plan of S(that is, either the plan maintained by Aor
the plan maintained by B) has the obligation to make
COBRA continuation coverage available to the 14
M&A qualified beneficiaries. Sand Pcould negoti-
ate to have C’s plan continue to make COBRA con-
tinuation coverage available to the 14 M&A quali-
fied beneficiaries. In such a case, neither A’s plan
nor B’s plan would make COBRA continuation cov-
erage available to the 14 M&A qualified beneficia-
ries unless C’s plan failed to fulfill its contractual
responsibility to make COBRA continuation cover-
age available to the M&A qualified beneficiaries.
C’s employees (and their spouses and dependent
children) do not experience a qualifying event in
connection with P’s acquisition of C, and conse-
quently no plan maintained by either Por Shas any
obligation to make COBRA continuation coverage
available to C’s employees (or their spouses or
dependent children) in connection with the transfer
of stock in Cfrom Sto P.
Example 3. (i) The facts are the same as in
Example 2, except that Cceases to employ two
employees on June 30, 2002, and those two employ-
ees never become covered under P’s plan.
(ii) Under these facts, the two employees experi-
ence a qualifying event on June 30, 2002, because
their termination of employment causes a loss of
group health coverage. A group health plan of S
(that is, either the plan maintained by Aor the plan
maintained by B) has the obligation to make
COBRA continuation coverage available to the two
employees (and to any spouse or dependent child of
the two employees who loses coverage under C’s
plan in connection with the termination of employ-
ment of the two employees) because they are M&A
qualified beneficiaries with respect to the sale of C.
Example 4. (i) Selling Group Sconsists of three
corporations, A, B, and C. Buying Group Pconsists
of two corporations, Dand E. Penters into a con-
tract to purchase all of the stock of Cfrom Seffec-
tive July 1, 2002. Before the sale of C, Smaintains
a single group health plan for the employees of A, B,
and C(and their families). Pmaintains a single
group health plan for the employees of Dand E(and
their families). Effective July 1, 2002, the employ-
ees of C(and their families) become covered under
2001–8 I.R.B.699February 20, 2001

P’s plan. On June 30, 2002, there are 25 qualified
beneficiaries receiving COBRA continuation cover-
age under S’s plan, 20 of whom are M&A qualified
beneficiaries with respect to the sale of C. (The
other five qualified beneficiaries had qualifying
events in connection with a covered employee
whose last employment before the qualifying event
was with either Aor B.) Sterminates its group
health plan effective June 30, 2002, and begins to
liquidate the assets of Aand Band to lay off the
employees of Aand B.
(ii) Under these facts, Sceases to provide a group
health plan to any employee in connection with the
sale of Cto P. Thus, beginning July 1, 2002, P’s
plan has the obligation to make COBRA continua-
tion coverage available to the 20 M&A qualified
beneficiaries, but Pis not obligated to make COBRA
continuation coverage available to the other 5 quali-
fied beneficiaries with respect to S’s plan as of June
30, 2002 or to any of the employees of Aor Bwhose
employment is terminated by S(or to any of those
employees’ spouses or dependent children).
Asset Sale Examples
Example 5. (i) Selling Group Sprovides group
health plan coverage to employees at each of its
operating divisions. Ssells the assets of one of its
divisions to Buying Group P. Under the terms of the
group health plan covering the employees at the
division being sold, their coverage will end on the
date of the sale. Phires all but one of those employ-
ees, gives them the same positions that they had with
Sbefore the sale, and provides them with coverage
under a group health plan. Immediately before the
sale, there are two qualified beneficiaries receiving
COBRA continuation coverage under a group health
plan of Swhose qualifying events occurred in con-
nection with a covered employee whose last employ-
ment prior to the qualifying event was associated
with the assets sold to P.
(ii) These two qualified beneficiaries are M&A
qualified beneficiaries with respect to the asset sale
to P. Under these facts, a group health plan of S
retains the obligation to make COBRA continuation
coverage available to these two M&A qualified ben-
eficiaries. In addition, the one employee Pdoes not
hire as well as all of the employees Phires (and the
spouses and dependent children of these employees)
who were covered under a group health plan of Son
the day before the sale are M&A qualified beneficia-
ries with respect to the sale. A group health plan of
Salso has the obligation to make COBRA continua-
tion coverage available to these M&A qualified ben-
eficiaries.
Example 6. (i) Selling Group Sprovides group
health plan coverage to employees at each of its
operating divisions. Ssells substantially all of the
assets of all of its divisions to Buying Group P, and
Sceases to provide any group health plan to any
employee on the date of the sale. Phires all but one
of S’s employees on the date of the asset sale by S,
gives those employees the same positions that they
had with Sbefore the sale, and continues the busi-
ness operations of those divisions without substan-
tial change or interruption. Pprovides these
employees with coverage under a group health plan.
Immediately before the sale, there are 10 qualified
beneficiaries receiving COBRA continuation cover-
age under a group health plan of Swhose qualifying
events occurred in connection with a covered
employee whose last employment prior to the quali-
fying event was associated with the assets sold to P.
(ii) These 10 qualified beneficiaries are M&A
qualified beneficiaries with respect to the asset sale
to P. Under these facts, Pis a successor employer
described in paragraph (c) of this Q&A-8. Thus, a
group health plan of Phas the obligation to make
COBRA continuation coverage available to these 10
M&A qualified beneficiaries.
(iii) The one employee that Pdoes not hire and
the family members of that employee are also M&A
qualified beneficiaries with respect to the sale. A
group health plan of Palso has the obligation to
make COBRA continuation coverage available to
these M&A qualified beneficiaries.
(iv) The employees who continue in employment
in connection with the asset sale (and their family
members) and who were covered under a group
health plan of Son the day before the sale are not
M&A qualified beneficiaries because Pis a succes-
sor employer to Sin connection with the asset sale.
Thus, no group health plan of Phas any obligation to
make COBRA continuation coverage available to
these continuing employees with respect to the qual-
ifying event that resulted from their losing coverage
under S’s plan in connection with the asset sale.
Example 7. (i) Selling Group Sprovides group
health plan coverage to employees at each of its two
operating divisions. Ssells the assets of one of its
divisions to Buying Group P1. Under the terms of
the group health plan covering the employees at the
division being sold, their coverage will end on the
date of the sale. P1hires all but one of those
employees, gives them the same positions that they
had with Sbefore the sale, and provides them with
coverage under a group health plan.
(ii) Under these facts, a group health plan of S
has the obligation to make COBRA continuation
coverage available to M&A qualified beneficiaries
with respect to the sale to P1. (If an M&A qualified
beneficiary first became covered under P1’s plan
after electing COBRA continuation coverage under
S’s plan, then S’s plan could terminate the COBRA
continuation coverage once the M&A qualified ben-
eficiary became covered under P1’s plan, provided
that the remaining conditions of Q&A-2 of
§54.4980B–7 were satisfied.)
(iii) Several months after the sale to P1, Ssells
the assets of its remaining division to Buying Group
P2, and Sceases to provide any group health plan to
any employee on the date of that sale. Thus, under
Q&A-1 of §54.4980B–7, Sceases to have an oblig-
ation to make COBRA continuation coverage avail-
able to any qualified beneficiary on the date of the
sale to P2. P1and P2are unrelated organizations.
(iv) Even if it was foreseeable that Swould sell
its remaining division to an unrelated third party
after the sale to P1, under these facts the cessation of
Sto provide any group health plan to any employee
on the date of the sale to P2is not in connection with
the asset sale to P1. Thus, even after the date Sceas-
es to provide any group health plan to any employ-
ee, no group health plan of P1has any obligation to
make COBRA continuation coverage available to
M&A qualified beneficiaries with respect to the
asset sale to P1by S. If P2is a successor employer
under the rules of paragraph (c) of this Q&A-8 and
maintains one or more group health plans after the
sale, then a group health plan of P2would have an
obligation to make COBRA continuation coverage
available to M&A qualified beneficiaries with
respect to the asset sale to P2by S(but in such a case
employees of Sbefore the sale who continued work-
ing for P2after the sale would not be M&A qualified
beneficiaries). However, even in such a case, no
group health plan of P2would have an obligation to
make COBRA continuation coverage available to
M&A qualified beneficiaries with respect to the
asset sale to P1by S. Thus, under these facts, after
Shas ceased to provide any group health plan to any
employee, no plan has an obligation to make
COBRA continuation coverage available to M&A
qualified beneficiaries with respect to the asset sale
to P1.
Example 8. (i) Selling Group Sprovides group
health plan coverage to employees at each of its
operating divisions. Ssells substantially all of the
assets of all of its divisions to Buying Group P. P
hires most of S’s employees on the date of the pur-
chase of S’s assets, retains those employees in the
same positions that they had with Sbefore the pur-
chase, and continues the business operations of those
divisions without substantial change or interruption.
Pprovides these employees with coverage under a
group health plan. Scontinues to employ a few
employees for the principal purpose of winding up
the affairs of Sin preparation for liquidation. Scon-
tinues to provide coverage under a group health plan
to these few remaining employees for several weeks
after the date of the sale and then ceases to provide
any group health plan to any employee.
(ii) Under these facts, the cessation by Sto pro-
vide any group health plan to any employee is in
connection with the asset sale to P. Because of this,
and because Pcontinued the business operations
associated with those assets without substantial
change or interruption, Pis a successor employer to
Swith respect to the asset sale. Thus, a group health
plan of Phas the obligation to make COBRA con-
tinuation coverage available to M&A qualified ben-
eficiaries with respect to the sale beginning on the
date that Sceases to provide any group health plan to
any employee. (A group health plan of Sretains this
obligation for the several weeks after the date of the
sale until Sceases to provide any group health plan
to any employee.)
Q-9: Can the cessation of contributions
by an employer to a multiemployer group
health plan be a qualifying event?
A-9: The cessation of contributions by
an employer to a multiemployer group
health plan is not itself a qualifying event,
even though the cessation of contributions
may cause current employees (and their
spouses and dependent children) to lose
coverage under the multiemployer plan.
An event coinciding with the employer’s
cessation of contributions (such as a
reduction of hours of employment in the
case of striking employees) will constitute
February 20, 20017002001–8 I.R.B.

a qualifying event if it otherwise satisfies
the requirements of Q&A-1 of §54.498
0B–4.
Q-10: If an employer stops contribut-
ing to a multiemployer group health plan,
does the multiemployer plan have the
obligation to make COBRA continuation
coverage available to a qualified benefi-
ciary who was receiving coverage under
the multiemployer plan on the day before
the cessation of contributions and who is,
or whose qualifying event occurred in
connection with, a covered employee
whose last employment prior to the quali-
fying event was with the employer that
has stopped contributing to the multiem-
ployer plan?
A-10: (a) In general, yes. (See Q&A-
3 of §54.4980B–2 for a definition of mul-
tiemployer plan.) If, however, the
employer that stops contributing to the
multiemployer plan makes group health
plan coverage available to (or starts con-
tributing to another multiemployer plan
that is a group health plan with respect to)
a class of the employer’s employees for-
merly covered under the multiemployer
plan, the plan maintained by the employer
(or the other multiemployer plan), from
that date forward, has the obligation to
make COBRA continuation coverage
available to any qualified beneficiary who
was receiving coverage under the multi-
employer plan on the day before the ces-
sation of contributions and who is, or
whose qualifying event occurred in con-
nection with, a covered employee whose
last employment prior to the qualifying
event was with the employer.
(b) The rules of Q&A-9 of this section
and this Q&A-10 are illustrated by the
following examples; in each example,
each group health plan is subject to
COBRA:
Example 1. (i) Employer Zemploys a class of
employees covered by a collective bargaining agree-
ment and participating in multiemployer group
health plan M. As required by the collective bar-
gaining agreement, Zhas been making contributions
to M. Zexperiences financial difficulties and stops
making contributions to Mbut continues to employ
all of the employees covered by the collective bar-
gaining agreement. Z’s cessation of contributions to
Mcauses those employees (and their spouses and
dependent children) to lose coverage under M. Z
does not make group health plan coverage available
to any of the employees covered by the collective
bargaining agreement.
(ii) After Zstops contributing to M, Mcontinues
to have the obligation to make COBRA continuation
coverage available to any qualified beneficiary who
experienced a qualifying event that preceded or
coincided with the cessation of contributions to M
and whose coverage under Mon the day before the
qualifying event was due to an employment affilia-
tion with Z. The loss of coverage under Mfor those
employees of Zwho continue in employment (and
the loss of coverage for their spouses and dependent
children) does not constitute a qualifying event.
Example 2. (i) The facts are the same as in
Example 1except that B, one of the employees cov-
ered under Mbefore Zstops contributing to M, is
transferred into management. Zmaintains a group
health plan for managers and Bbecomes eligible for
coverage under the plan on the day of B’s transfer.
(ii) Under these facts, Zdoes not make group
health plan coverage available to a class of employ-
ees formerly covered under Mafter Bbecomes eligi-
ble under Z’s group health plan for managers.
Accordingly, Mcontinues to have the obligation to
make COBRA continuation coverage available to
any qualified beneficiary who experienced a qualify-
ing event that preceded or coincided with the cessa-
tion of contributions to Mand whose coverage under
Mon the day before the qualifying event was due to
an employment affiliation with Z.
Example 3. (i) Employer Yemploys two classes
of employees – skilled and unskilled laborers – cov-
ered by a collective bargaining agreement and par-
ticipating in multiemployer group health plan M. As
required by the collective bargaining agreement, Y
has been making contributions to M. Ystops making
contributions to Mbut continues to employ all the
employees covered by the collective bargaining
agreement. Y’s cessation of contributions to Mcaus-
es those employees (and their spouses and dependent
children) to lose coverage under M. Ymakes group
health plan coverage available to the skilled laborers
immediately after their coverage ceases under M, but
Ydoes not make group health plan coverage avail-
able to any of the unskilled laborers.
(ii) Under these facts, because Ymakes group
health plan coverage available to a class of employ-
ees previously covered under Mimmediately after
both classes of employees lose coverage under M, Y
alone has the obligation to make COBRA continua-
tion coverage available to any qualified beneficiary
who experienced a qualifying event that preceded or
coincided with the cessation of contributions to M
and whose coverage under Mon the day before the
qualifying event was due to an employment affilia-
tion with Y, regardless of whether the employment
affiliation was as a skilled or unskilled laborer.
However, the loss of coverage under Mfor those
employees of Ywho continue in employment (and
the loss of coverage for their spouses and dependent
children) does not constitute a qualifying event.
Example 4. (i) Employer Xemploys a class of
employees covered by a collective bargaining agree-
ment and participating in multiemployer group
health plan M. As required by the collective bar-
gaining agreement, Xhas been making contributions
to M. Xexperiences financial difficulties and is
forced into bankruptcy by its creditors. Xcontinues
to employ all of the employees covered by the col-
lective bargaining agreement. Xalso continues to
make contributions to Muntil the current collective
bargaining agreement expires, on June 30, 2001, and
then Xstops making contributions to M. X’s
employees (and their spouses and dependent chil-
dren) lose coverage under Meffective July 1, 2001.
Xdoes not enter into another collective bargaining
agreement covering the class of employees covered
by the expired collective bargaining agreement.
Effective September 1, 2001, Xestablishes a group
health plan covering the class of employees former-
ly covered by the collective bargaining agreement.
The group health plan also covers their spouses and
dependent children.
(ii) Under these facts, Mhas the obligation to
make COBRA continuation coverage available from
July 1, 2001 until August 31, 2001, and the group
health plan established by Xhas the obligation to
make COBRA continuation coverage available from
September 1, 2001, until the obligation ends (see
Q&A-1 of §54.4980B–7) to any qualified beneficia-
ry who experienced a qualifying event that preceded
or coincided with the cessation of contributions to M
and whose coverage under Mon the day before the
qualifying event was due to an employment affilia-
tion with X. The loss of coverage under Mfor those
employees of Xwho continue in employment (and
the loss of coverage for their spouses and dependent
children) does not constitute a qualifying event.
Example 5. (i) Employer Wemploys a class of
employees covered by a collective bargaining agree-
ment and participating in multiemployer group
health plan M. As required by the collective bar-
gaining agreement, Whas been making contribu-
tions to M. The employees covered by the collective
bargaining agreement vote to decertify their current
employee representative effective January 1, 2002,
and vote to certify a new employee representative
effective the same date. As a consequence, on
January 1, 2002, they cease to be covered under M
and commence to be covered under multiemployer
group health plan N.
(ii) Effective January 1, 2002, Nhas the obliga-
tion to make COBRA continuation coverage avail-
able to any qualified beneficiary who experienced a
qualifying event that preceded or coincided with the
cessation of contributions to Mand whose coverage
under Mon the day before the qualifying event was
due to an employment affiliation with W. The loss
of coverage under Mfor those employees of Wwho
continue in employment (and the loss of coverage
for their spouses and dependent children) does not
constitute a qualifying event.
§54.4980B–10 Interaction of FMLA and
COBRA.
The following questions-and-answers
address how the taking of leave under the
Family and Medical Leave Act of 1993
(FMLA) (29 U.S.C. 2601–2619) affects
the COBRA continuation coverage
requirements:
Q-1: In what circumstances does a
qualifying event occur if an employee
does not return from leave taken under
FMLA?
A-1: (a) The taking of leave under
FMLA does not constitute a qualifying
event. A qualifying event under Q&A-1
of §54.4980B–4 occurs, however, if —
(1) An employee (or the spouse or a
dependent child of the employee) is cov-
2001–8 I.R.B.701February 20, 2001

ered on the day before the first day of
FMLA leave (or becomes covered during
the FMLA leave) under a group health
plan of the employee’s employer;
(2) The employee does not return to
employment with the employer at the end
of the FMLA leave; and
(3) The employee (or the spouse or a
dependent child of the employee) would,
in the absence of COBRA continuation
coverage, lose coverage under the group
health plan before the end of the maxi-
mum coverage period.
(b) However, the satisfaction of the
three conditions in paragraph (a) of this
Q&A-1 does not constitute a qualifying
event if the employer eliminates, on or
before the last day of the employee’s
FMLA leave, coverage under a group
health plan for the class of employees
(while continuing to employ that class of
employees) to which the employee would
have belonged if the employee had not
taken FMLA leave.
Q-2: If a qualifying event described in
Q&A-1 of this section occurs, when does
it occur, and how is the maximum cover-
age period measured?
A-2: A qualifying event described in
Q&A-1 of this section occurs on the last
day of FMLA leave. (The determination
of when FMLA leave ends is not made
under the rules of this section. See the
FMLA regulations, 29 CFR Part 825
(§§825.100–825.800).) The maximum
coverage period (see Q&A-4 of
§54.4980B–7) is measured from the date
of the qualifying event (that is, the last
day of FMLA leave). If, however, cover-
age under the group health plan is lost at a
later date and the plan provides for the
extension of the required periods (see
paragraph (b) of Q&A-4 of
§54.4980B–7), then the maximum cover-
age period is measured from the date
when coverage is lost. The rules of this
Q&A-2 are illustrated by the following
examples:
Example 1. (i) Employee Bis covered under the
group health plan of Employer Xon January 31,
2001. Btakes FMLA leave beginning February 1,
2001. B’s last day of FMLA leave is 12 weeks later,
on April 25, 2001, and Bdoes not return to work
with Xat the end of the FMLA leave. If Bdoes not
elect COBRA continuation coverage, Bwill not be
covered under the group health plan of Xas of April
26, 2001.
(ii) Bexperiences a qualifying event on April 25,
2001, and the maximum coverage period is mea-
sured from that date. (This is the case even if, for
part or all of the FMLA leave, Bfails to pay the
employee portion of premiums for coverage under
the group health plan of Xand is not covered under
X’s plan. See Q&A-3 of this section.)
Example 2. (i) Employee Cand C’s spouse are
covered under the group health plan of Employer Y
on August 15, 2001. Ctakes FMLA leave beginning
August 16, 2001. Cinforms Yless than 12 weeks
later, on September 28, 2001, that Cwill not be
returning to work. Under the FMLA regulations, 29
CFR Part 825 (§§825.100–825.800), C’s last day of
FMLA leave is September 28, 2001. Cdoes not
return to work with Yat the end of the FMLA leave.
If Cand C’s spouse do not elect COBRA continua-
tion coverage, they will not be covered under the
group health plan of Yas of September 29, 2001.
(ii) Cand C’s spouse experience a qualifying
event on September 28, 2001, and the maximum
coverage period (generally 18 months) is measured
from that date. (This is the case even if, for part or
all of the FMLA leave, Cfails to pay the employee
portion of premiums for coverage under the group
health plan of Yand Cor C’s spouse is not covered
under Y’s plan. See Q&A-3 of this section.)
Q-3: If an employee fails to pay the
employee portion of premiums for cover-
age under a group health plan during
FMLA leave or declines coverage under a
group health plan during FMLA leave,
does this affect the determination of
whether or when the employee has expe-
rienced a qualifying event?
A-3: No. Any lapse of coverage under
a group health plan during FMLA leave is
irrelevant in determining whether a set of
circumstances constitutes a qualifying
event under Q&A-1 of this section or
when such a qualifying event occurs
under Q&A-2 of this section.
Q-4: Is the application of the rules in
Q&A-1 through Q&A-3 of this section
affected by a requirement of state or local
law to provide a period of coverage longer
than that required under FMLA?
A-4: No. Any state or local law that
requires coverage under a group health
plan to be maintained during a leave of
absence for a period longer than that
required under FMLA (for example, for
16 weeks of leave rather than for the 12
weeks required under FMLA) is disre-
garded for purposes of determining when
a qualifying event occurs under Q&A-1
through Q&A-3 of this section.
Q-5: May COBRA continuation cover-
age be conditioned upon reimbursement
of the premiums paid by the employer for
coverage under a group health plan during
FMLA leave?
A-5: No. The U.S. Department of
Labor has published rules describing the
circumstances in which an employer may
recover premiums it pays to maintain cov-
erage, including family coverage, under a
group health plan during FMLA leave
from an employee who fails to return
from leave. See 29 CFR 825.213. Even
if recovery of premiums is permitted
under 29 CFR 825.213, the right to
COBRA continuation coverage cannot be
conditioned upon the employee’s reim-
bursement of the employer for premiums
the employer paid to maintain coverage
under a group health plan during FMLA
leave.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 18, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 9, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 10, 2001, 66 F.R.
1843)
Section 6103.—Confidentiality
and Disclosure of Returns and
Return Information
26 CFR 301.6103(c)–1T: Disclosure of returns and
return information to designee of taxpayer.
T.D. 8935
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosure of Returns and
Return Information to Designee
of Taxpayer
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulation.
SUMMARY: This document contains a
temporary regulation relating to the disclo-
sure of returns and return information to a
designee of the taxpayer. The temporary
regulation provides guidance to IRS
employees responsible for disclosing
returns and return information and to tax-
payers who wish to designate a person or
persons to whom returns and return infor-
mation may be disclosed. The portion of
February 20, 20017022001–8 I.R.B.

this temporary regulation pertaining to
nonwritten requests or consents reflects
changes to the law made by the Taxpayer
Bill of Rights II, Public Law 104–168, sec-
tion 1207, 110 Stat. 1473. With respect to
written requests or consents, the temporary
regulation amends the existing regulation
to provide further guidance in certain lim-
ited situations and to clarify existing proce-
dures. The text of the temporary regulation
also serves as the text of the proposed reg-
ulation set forth in the notice of proposed
rulemaking (REG–103320–00) on page
714 of this Bulletin.
DATES: Effective Date: This regulation
is effective January 11, 2001.
Applicability Date: For dates of applic-
ability, see §301.6103(c)–1T(g).
FOR FURTHER INFORMATION CON-
TACT: Joseph Conley, (202) 622-4580
(not a toll-free number).
Background
Under section 6103(a), returns and
return information are confidential unless
disclosure is otherwise authorized by the
Internal Revenue Code. Section 6103(c),
as amended by section 1207 of the
Taxpayer Bill of Rights II, Public Law
104–168 (110 Stat. 1452), authorizes the
IRS to disclose returns and return infor-
mation to such person or persons as the
taxpayer may designate in a request for or
consent to disclosure, or to any other per-
son at the taxpayer’s request to the extent
necessary to comply with a request for
information or assistance made by the tax-
payer to such other person. Disclosure is
permitted subject to such requirements
and conditions as may be prescribed by
regulations. With the amendment in
1996, Congress eliminated the longstand-
ing requirement that disclosures to
designees of the taxpayer must be pur-
suant to the written request or consent of
the taxpayer. The purpose of this amend-
ment to section 6103(c) was to assist the
IRS in developing a paperless tax admin-
istration system that relies on, among
other things, electronic communication.
H.R. Rep. No. 104–506, at 49 (1996),
reprinted in 1996 U.S.C.A.N. 1143, 1172.
This document contains a temporary reg-
ulation that authorizes the disclosure of
tax returns and return information to a
designee of the taxpayer pursuant to a
nonwritten request or consent when the
taxpayer seeks the assistance of a third
party in resolving a tax matter.
This document also amends the exist-
ing regulation to clarify the rules applica-
ble to written requests or consents to dis-
closure. On October 3, 1980, a final
regulation (T.D. 7723, 1980–2 C.B. 346)
relating to the disclosure of tax returns
and return information to a person desig-
nated by the taxpayer in a written request
or consent were published in the Federal
Register(45 F.R. 65564). Since the pub-
lication of this final regulation, the IRS
and the Treasury Department have deter-
mined that further guidance on written
consent requirements is necessary.
Explanation of Provisions
Nonwritten consents
Under the existing regulation, if a tax-
payer wishes a third party to assist in the
resolution of a tax matter between the tax-
payer and the IRS, and the third party is
not otherwise authorized to practice
before the Internal Revenue Service, a
written section 6103(c) request or consent
must be executed by the taxpayer.
The temporary regulation authorizes
the IRS to accept nonwritten requests or
consents authorizing the disclosure of tax
returns and return information to third
parties assisting taxpayers in resolving tax
related matters. Thus, for example, the
temporary regulation clarifies that the tax-
payer can orally consent to disclosures by
the IRS to a person accompanying the tax-
payer to meetings or interviews with the
IRS, or participating in a telephone con-
versation with the taxpayer. When the
taxpayer is present, either physically or on
the telephone, the taxpayer will be able to
knowingly and voluntarily consent to the
disclosure without the need for further
expressing that intent in writing.
Thus, the use of nonwritten consents
will enable the IRS to improve its cus-
tomer service in that, with the assistance
of their designees, taxpayers will be able
to resolve tax problems in a more timely
fashion, without the need for burdensome
paperwork. Additionally, nonwritten
requests or consents will assist the IRS in
moving to a paperless environment by
further facilitating the use of electronic
communication systems.
As with written requests or consents,
before disclosing tax returns and return
information to a third party pursuant to a
taxpayer’s nonwritten request or consent,
the IRS will take reasonable steps to con-
firm the identity of the taxpayer and the
designee. For example, IRS personnel,
pursuant to existing procedures, verify
that they are speaking to the taxpayer
prior to disclosing return information to
that taxpayer.
Nonwritten requests for or consents
to disclosure do not take the place of a
power of attorney authorizing a third
party to represent the taxpayer before
the IRS. Practice before the IRS
remains governed by the regulations at
26 CFR 601.501 et seq.and Treasury
Department Circular 230 (31 CFR part
10).
Acknowledgments of, and Notices
Regarding, Electronically Filed Returns
The temporary regulation also pro-
vides parameters for the development of
consents for the electronic filing pro-
gram. The IRS currently provides an
acknowledgment to an electronic return
originator (ERO) to indicate that it has
received information from the ERO in an
acceptable form, and that the taxpayer
identity information, as defined by sec-
tion 6103(b)(6), matches IRS records.
Alternatively, the IRS may notify the
ERO that it has rejected the ERO’s elec-
tronic submission because the taxpayer
identity information does not match IRS
records or, for example, because the tax-
payer is not responsible for the tax pay-
ment. The taxpayer may also have
authorized an electronic debit to pay a
tax debt, and the taxpayer may want the
IRS to send an acknowledgment to the
ERO that the account has been properly
debited, or to disclose information to the
taxpayer’s financial institution to resolve
a problem with the electronic debit trans-
action. To ensure that the IRS is autho-
rized to disclose tax returns and return
information to third parties in an elec-
tronic system, the IRS must receive a
valid request for or consent to disclosure
pursuant to section 6103(c). The current
system requires the taxpayer to execute a
written consent on Form 8453 to permit
these disclosures.
The temporary regulation authorizes an
electronic consent to permit the disclo-
sures of the return information described
above and such other information as the
2001–8 I.R.B.703February 20, 2001

IRS determines is necessary to the opera-
tion of the electronic filing program.
Such consent must inform the taxpayer of
the return information that will be trans-
mitted to the ERO and other third parties
as a result of the electronic filing of the
taxpayer’s return or other information.
Combined FedState Filing Programs
The temporary regulation also reduces
the burden on taxpayers in combined
Federal-State (FedState) return filing pro-
grams. If the taxpayer files a single com-
bined Federal and State tax return with the
IRS, the information contained in such
FedState return that is gathered with
respect to a taxpayer’s liability under both
Federal and State law, including the tax-
payer’s name, taxpayer identification
number, and adjusted gross income, is
return information protected by section
6103. If the IRS discloses such return
information to the State in satisfaction of
the taxpayer’s State filing obligations, the
information can be used by the State only
for State tax administration purposes
under section 6103(d). On the other hand,
if a State tax return is filed directly with
the State, information on the State return
is not subject to the restrictions of section
6103(d) and can be used for appropriate
non-tax purposes permitted under State
law.
In the current electronic FedState fil-
ing program, to avoid these section 6103
restrictions, return preparers make two
separate electronic transmissions to the
IRS—one for the Federal return and one
for the State return. The common items
of data are sent twice, once in the
Federal “packet” and once in the State
“packet.” The items of information in
the State packet are not restricted by sec-
tion 6103 because they have not been
filed with the IRS with regard to Federal
tax liability.
Alternatively, in the FedState telefile
program, a consent has been developed
that permits the Internal Revenue Service
to disclose common data items to the
State tax agency. The information
received by the State pursuant to the tax-
payer’s request or consent is treated, for
purposes of section 6103, as if the State
had received the information directly
from the taxpayer, and therefore the infor-
mation can be used for appropriate non-
tax purposes under State law.
Under the existing regulation, consents
for FedState filing programs must comply
with current §301.6103(c)–1(a). The
existing regulation requires, among other
things, a separate written consent docu-
ment. The IRS and the Treasury
Department believe a taxpayer’s volun-
tary participation in an optional FedState
filing program that provides the taxpayer
with notice of the disclosures to be made
to the State as part of the program consti-
tutes a sufficient knowing and voluntary
consent to permit disclosures to States in
this situation. To reduce the burden on
taxpayers and improve the efficiency of
tax administration, the temporary regula-
tion provides that by filing a combined
FedState return, the taxpayer consents to
the disclosure of the common data items
to the State tax agency, and that the infor-
mation will be treated as if it had been
received directly by the State from the
taxpayer. As noted above, the temporary
regulation requires a notice of the disclo-
sures that are to be made in the FedState
filing program so that taxpayers may
choose to participate in such programs
with knowledge of such disclosures.
Other Changes
The temporary regulation also provides
needed clarification in a number of areas
not specifically addressed under the exist-
ing regulation. The temporary regulation
provides rules for receipt of section
6103(c) consents by entities other than the
IRS. Certain Treasury Department agen-
cies, such as the Financial Management
Service, perform Federal tax administra-
tion functions and receive tax information
from the IRS. In addition, IRS contrac-
tors receive tax information to provide tax
administration services pursuant to sec-
tion 6103(n). The existing regulation pro-
vides only for receipt of requests for or
consents to disclosure by the IRS. The
temporary regulation permits Federal
government agencies performing Federal
tax administration functions to receive
section 6103(c) consents and disclose
returns and return information in the pos-
session of such agency to the taxpayer’s
designee. For example, the temporary
regulation clarifies that the Financial
Management Service can disclose return
information related to the offset of the tax-
payer’s tax refund to the designee of the
taxpayer, such as in response to a
Congressional inquiry. The temporary
regulation also clarifies that receipt of a
request or consent by an agent or contrac-
tor of the IRS is the same as receipt by the
IRS. However, an agent or contractor of
the IRS may make disclosures with the
taxpayer’s consent only if such disclo-
sures are specifically authorized in the
contract or otherwise specifically autho-
rized in writing by the IRS.
§301.6103(n)–1(a).
The temporary regulation defines the
term separate written documentto con-
form to current IRS practice. The tempo-
rary regulation also specifies the
Secretary of the Treasury’s authority to
provide for methods of signing requests
for or consents to disclosure. See
§301.6061–1(b).
The temporary regulation clarifies the
requirements for identifying the designee
to whom disclosure is to be made when
the disclosure occurs in a public forum,
such as a courtroom, a congressional hear-
ing, or in the media. In these circum-
stances, it may not be possible to desig-
nate specifically every person to whom
disclosure is to be made. While identify-
ing individual designees in a public forum
may not be practical, a taxpayer can
knowingly and voluntarily authorize dis-
closure in a public forum by specifically
indicating the circumstances surrounding
the public disclosure, including, for exam-
ple, a description of the place, date, and
time. The temporary regulation also
incorporates the longstanding IRS prac-
tice that entities, such as corporations and
State and local government agencies, are
appropriate designees.
The temporary regulation also affirms
longstanding practices of the IRS regard-
ing the authority to execute consents.
Generally, persons that may receive
returns pursuant to section 6103(e), para-
graphs (1) through (5), may execute dis-
closure consents under section 6103(c).
However, a one percent shareholder of a
corporation, who may receive corporate
returns pursuant to section
6103(e)(1)(D)(iii), may not execute dis-
closure consents because the right of
inspection is personal to the shareholder,
and such shareholder is not permitted to
redisclose such information. See Internal
Revenue Code §§6103(a)(3), 7213(a)(5).
The temporary regulation also provides
that if the taxpayer is an entity, generally
February 20, 20017042001–8 I.R.B.

a person with authority under State law to
bind the entity may execute a section
6103(c) consent. Finally, the temporary
regulation provides that the holder of a
taxpayer’s power of attorney may not exe-
cute a disclosure consent unless that
authority is specifically granted in the
power.
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. This tempo-
rary regulation provides taxpayers with
enhanced procedures to resolve problems
with the IRS. For this reason, notice and
public procedure and a delayed effective
date would be contrary to the public inter-
est pursuant to 5 U.S.C. 553(b)(B) and
553(d), respectively. Because this notice
of proposed rulemaking is required, the
provisions of the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.) do not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this temporary regulation
will be submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of this regulation
is Jamie Bernstein, Office of the Associate
Chief Counsel, Procedure and
Administration (Disclosure & Privacy
Law Division). However, other personnel
from the IRS and Treasury Department
participated in its development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(c)–1T also issued
under 26 U.S.C. 6103(c). * * *
§301.6103(c)–1 [Removed]
Par. 2. Section 301.6103(c)–1 is
removed.
Par. 3. Section 301.6103(c)–1T is
added to read as follows:
§301.6103(c)–1T Disclosure of returns
and return information to designee of
taxpayer.
(a) Overview. Subject to such require-
ments and conditions as the Secretary of
the Treasury may prescribe by regulation,
section 6103(c) of the Internal Revenue
Code authorizes the Internal Revenue
Service to disclose a taxpayer’s return or
return information to such person or per-
sons as the taxpayer may designate in a
request for or consent to such disclosure,
or to any other person at the taxpayer’s
request to the extent necessary to comply
with the taxpayer’s request to such other
person for information or assistance. This
regulation contains the requirements that
must be met before, and the conditions
under which, the Internal Revenue
Service may make such disclosures.
Paragraph (b) of this section provides the
requirements that are generally applicable
to designate a third party to receive the
taxpayer’s returns and return information.
Paragraph (c) of this section provides
requirements under which the Internal
Revenue Service may disclose informa-
tion in connection with a taxpayer’s writ-
ten or nonwritten request for a third party
to provide information or assistance with
regard to a tax matter, for example, a
Congressional inquiry. Paragraph (d) of
this section provides the parameters for
disclosure consents connected with elec-
tronic return filing programs and com-
bined Federal State filing. Finally, para-
graph (e) provides definitions and general
rules related to requests for or consents to
disclosure.
(b) Disclosure of returns and return
information to person or persons desig-
nated in a written request or consent—(1)
General requirements. Pursuant to sec-
tion 6103(c) of the Internal Revenue
Code, the Internal Revenue Service (or an
agent or contractor of the Internal
Revenue Service) may disclose a taxpay-
er’s return or return information to such
person or persons as the taxpayer may
designate in a request for or consent to
such disclosure. A request for or consent
to disclosure under this paragraph (b)
must be in the form of a separate written
document pertaining solely to the autho-
rized disclosure. (For the meaning of sep-
arate written document, see paragraph
(e)(1) of this section.) The separate writ-
ten document must be signed (see para-
graph (e)(2) of this section) and dated by
the taxpayer who filed the return or to
whom the return information relates. The
taxpayer must also indicate in the written
document—
(i) The taxpayer’s taxpayer identity
information described in section
6103(b)(6);
(ii) The identity of the person or persons
to whom the disclosure is to be made;
(iii) The type of return (or specified
portion of the return) or return informa-
tion (and the particular data) that is to be
disclosed; and
(iv) The taxable year or years covered
by the return or return information.
(2) Requirement that request or consent
be received within sixty days of when
signed and dated. The disclosure of a
return or return information authorized by
a written request for or written consent to
the disclosure shall not be made unless the
request or consent is received by the
Internal Revenue Service (or an agent or
contractor of the Internal Revenue
Service) within 60 days following the date
upon which the request or consent was
signed and dated by the taxpayer.
(c) Disclosure of returns and return
information to designee of taxpayer to
comply with a taxpayer’s request for
information or assistance. Where a tax-
payer makes a written or nonwritten
request, directly to another person or to
the Internal Revenue Service, that such
other person (for example, a member of
Congress, friend, or relative of the tax-
payer) provide information or assistance
relating to the taxpayer’s return or to a
transaction or other contact between the
taxpayer and the Internal Revenue
Service, the Internal Revenue Service (or
an agent or contractor of the Internal
Revenue Service or a Federal government
agency performing a Federal tax adminis-
tration function) may disclose returns or
return information to such other person
under the circumstances set forth in para-
graphs (c) (1) through- (3) of this section.
2001–8 I.R.B.705February 20, 2001

(1) Written request for information or
assistance. (i) The taxpayer’s request for
information or assistance may be in the
form of a letter or other written document,
which must be signed (see paragraph
(e)(2) of this section) and dated by the
taxpayer. The taxpayer must also indicate
in the written request—
(A) The taxpayer’s taxpayer identity
information described in section
6103(b)(6);
(B) The identity of the person or per-
sons to whom disclosure is to be made;
and
(C) Sufficient facts underlying the
request for information or assistance to
enable the Internal Revenue Service to
determine the nature and extent of the
information or assistance requested and
the returns or return information to be dis-
closed in order to comply with the tax-
payer’s request.
(ii) A person who receives a copy of a
taxpayer’s written request for information
or assistance but who is not the addressee
of the request, such as a member of
Congress who is provided with a courtesy
copy of a taxpayer’s letter to another
member of Congress or to the Internal
Revenue Service, cannot receive returns
or return information under paragraph
(c)(1) of this section.
(2) Nonwritten request or consent. (i)
A request for information or assistance
may also be nonwritten. Disclosure of
returns and return information to a
designee pursuant to a taxpayer’s non-
written request will be made only after the
Internal Revenue Service has—
(A) Obtained from the taxpayer suffi-
cient facts underlying the request for
information or assistance to enable the
Internal Revenue Service to determine the
nature and extent of the information or
assistance requested and the return or
return information to be disclosed in order
to comply with the taxpayer’s request;
(B) Confirmed the identity of the tax-
payer and the designee; and
(C) Confirmed the date, the nature, and
the extent of the information or assistance
requested.
(ii) Examples of disclosures pursuant to
nonwritten requests for information or
assistance under this paragraph (c)(2)
include, but are not limited to, disclosures
to a friend, relative, or other person whom
the taxpayer brings to an interview or
meeting with Internal Revenue Service
officials, or disclosures to a person whom
the taxpayer wishes to involve in a tele-
phone conversation with Internal Revenue
Service officials.
(3) Rules applicable to written and
nonwritten requests for information or
assistance. A return or return information
will be disclosed to the taxpayer’s
designee as provided by this paragraph
only to the extent considered necessary by
the Internal Revenue Service to comply
with the taxpayer’s request or consent.
Such disclosures shall not be made unless
the request or consent is received by the
Internal Revenue Service, its agent or
contractor, or a Federal government
agency performing a Federal tax adminis-
tration function in connection with a
request for advice or assistance relating to
such function. This paragraph (c) does
not apply to disclosures to a taxpayer’s
representative in connection with practice
before the Internal Revenue Service (as
defined in Treasury Department Circular
No. 230). For disclosures in these cases,
see section 6103(e)(6) and §§601.501
through 601.508 of this chapter.
(d) Acknowledgments of electronically
filed returns and other documents; com-
bined filing programs with State tax agen-
cies—(1) Acknowledgment of, and notices
regarding, electronically filed returns and
other documents. When a taxpayer files
returns or other documents or information
with the Internal Revenue Service elec-
tronically, the taxpayer may consent to the
disclosure of return information to the
transmitter or other third party, such as the
taxpayer’s financial institution, necessary
to acknowledge that the electronic trans-
mission was received and either accepted
or rejected by the Internal Revenue
Service, the reason for any rejection, and
such other information as the Internal
Revenue Service determines is necessary
to the operation of the electronic filing
program. The consent must inform the
taxpayer of the return information that
will be transmitted and to whom disclo-
sure will be made. The requirements of
paragraphs (b) and (c) of this section do
not apply to a consent under this para-
graph (d)(1).
(2) Combined return filing programs
with State tax agencies. (i) A taxpayer’s
participation in a combined return filing
program between the Internal Revenue
Service and a State agency, body, or com-
mission (State agency) described in sec-
tion 6103(d)(1) constitutes a consent to
the disclosure by the Internal Revenue
Service, to the State agency, of taxpayer
identity information, signature, and items
of common data contained on such return.
For purposes of this paragraph, common
data means information reflected on the
Federal return required by State law to be
attached to or included on the State return.
Instructions accompanying the forms or
published procedures involved in such
program must indicate that by participat-
ing in the program, the taxpayer is con-
senting to the Internal Revenue Service’s
disclosure to the State agency of the tax-
payer identity information, signature, and
items of common data, and that such
information will be treated by the State
agency as if it had been directly filed with
the State agency. Such instructions or
procedures must also describe any verifi-
cation that takes place before the taxpayer
identity information, signature and com-
mon data is transmitted by the Internal
Revenue Service to the State agency.
(ii) No disclosures may be made under
this paragraph (d)(2) unless there are pro-
visions of State law protecting the confi-
dentiality of such items of common data.
(e) Definitions and rules applicable to
this section—(1) Separate written docu-
ment. (i) For the purposes of paragraph
(b) of this section, separate written docu-
mentmeans—
(A) One side of a standard (8 2'' by 11''
or larger) sheet of paper, which may be
included as part of a larger document;
(B) Text appearing on a single comput-
er screen containing all the elements
described in paragraph (b)(1) of this sec-
tion, which can be signed (see paragraph
(e)(2) of this section) and dated by the
taxpayer, and which can be reproduced, if
necessary; or
(C) A consent on the record in an
administrative or judicial proceeding, or a
transcript of such proceeding recording
such consent, containing the information
required under paragraph (b)(1) of this
section.
(ii) A provision included in a taxpayer’s
application for a loan or other benefit
authorizing the grantor of the loan or
other benefit to obtain any financial infor-
mation, including returns or return infor-
mation, from any source as the grantor
February 20, 20017062001–8 I.R.B.

may request for purposes of verifying
information supplied on the application,
does not meet the requirements of para-
graph (b)(1) of this section because the
provision is not a separate written docu-
ment relating solely to the disclosure of
returns and return information. In addi-
tion, the provision does not contain the
other information specified in paragraph
(b)(1) of this section.
(2) Method of signing. A request for or
consent to disclosure may be signed by
any method of signing the Secretary of the
Treasury has prescribed pursuant to
§301.6061–1(b) in forms, instructions, or
other appropriate guidance.
(3) Permissible designees and public
forums. Permissible designees under this
section include individuals; trusts; estates;
corporations; partnerships; Federal, State,
local and foreign government agencies or
subunits of such agencies; or the general
public. When disclosures are to be made
in a public forum, such as in a courtroom
or congressional hearing, the request for
or consent to disclosure must describe the
circumstances surrounding the public dis-
closure, e.g., congressional hearing, judi-
cial proceeding, media, and the date or
dates of the disclosure.
(4) Authority to execute a request for or
consent to disclosure. Any person who
may obtain returns under section
6103(e)(1) through (5), except section
6103(e)(1)(D)(iii), may execute a request
for or consent to disclose a return or return
information to third parties. For taxpayers
that are legal entities, such as corporations
and municipal bond issuers, any officer of
the entity with authority under applicable
State law to legally bind the entity may
execute a request for or consent to disclo-
sure. A person described in section
6103(e)(6) (a taxpayer’s representative or
individual holding a power of attorney)
may not execute a request for or consent to
disclosure unless the designation of repre-
sentation or power of attorney specifically
delegates such authority. A designee pur-
suant to this section does not have author-
ity to execute a request for or consent to
disclosure permitting the Internal Revenue
Service to disclose returns or return infor-
mation to another person.
(5) No disclosure of return informa-
tion if impairment. A disclosure of
return information shall not be made
under this section if the Internal
Revenue Service determines that the dis-
closure would seriously impair Federal
tax administration (as defined in section
6103(b)(4) of the Internal Revenue
Code).
(f) Effective date. This section is
applicable on January 11, 2001, through
January 10, 2004.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved December 29, 2000.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a. m., and published in the issue
of the Federal Register for January 11, 2001, 66 F.R.
2261)
2001–8 I.R.B.707February 20, 2001

26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability. (Also Part 1,
§ 6212; 301.6212–1.)
Rev. Proc. 2001–18
SECTION 1. PURPOSE
.01 This revenue procedure explains
how a taxpayer is to inform the Internal
Revenue Service of a change of address.
When so informed, the Service will
update the taxpayer’s address of record to
the new address. The Service uses the
taxpayer’s address of record for the vari-
ous notices that are required to be sent to
a taxpayer’s “last known address” under
the Internal Revenue Code and for
refunds of overpayments of tax. Rev.
Proc. 90–18, 1990–1 C.B. 491, is ampli-
fied and superseded by this Revenue
Procedure.
SECTION 2. SCOPE
.01 This revenue procedure applies
to notices that are required to be sent to
a taxpayer’s “last known address”
under the following sections of the
Code:
Section 982(c)(1) (formal document
request for the production of foreign-
based documentation);
Section 6110(f)(3)(B) (notification of
disclosure proceedings);
Section 6110(f)(4)(B) (notification of
disclosure proceedings);
Section 6212(b) (notice of deficiency);
Section 6245(b)(1) (notice of partner-
ship adjustment for electing large partner-
ships);
Section 6303(a) (notice and demand for
tax);
Section 6320(a)(2)(C) (notice and
opportunity for hearing upon filing of
notice of lien);
Section 6325(f)(2)(A) (notice of revo-
cation of certificate of release or nonat-
tachment of a lien);
Section 6330(a)(2)(C) (notice and
opportunity for hearing before levy);
Section 6331(d)(2)(C) (notice of inten-
tion to levy);
Section 6332(b)(1) (copy of notice of
levy with respect to a life insurance or
endowment contract);
Section 6335(a) and (b) (notices of
seizure and sale);
Section 6901(g) (notice of liability in
transferee cases);
Section 7603(b)(1) (summons by mail
to third-party record keeper); and
Section 7609(a)(2) (notice of third-
party summons).
.02 The Service generally will use the
address on the most recently filed and
properly processed return as the address
of record for all the notices set forth in
section 2.01 above. However, the Service
may update the taxpayer’s address of
record by using United States Postal
Service’s (USPS) National Change of
Address database (NCOA database) in
accordance with Treas. Reg.
§ 301.6212–2 (effective January 29,
2001). If a taxpayer wishes to change the
address of record, the taxpayer must give
clear and concise notification as provided
by this revenue procedure. The terms
“return,” “properly processed,” “address
on return,” and “clear and concise notifi-
cation” are defined in section 5 below.
SECTION 3. BACKGROUND
.01 The Code sections listed in section
2.01 of this revenue procedure use the
phrase “last known address.” The intend-
ed purpose of the phrase “last known
address” can be found in the legislative
history of a predecessor to section
6212(b) of the Code, which provides that
the purpose of imposing a last known
address standard was to relieve the
Service of the obviously impossible task
of keeping an up-to-date record of taxpay-
ers’ addresses. H.R. Rep. No. 2, 70th
Cong., 1st Sess. 22 (1927), 1939–1 (Part
2) C.B. 384, 399.
.02 The meaning of the phrase “last
known address” is important, and taxpay-
ers should be aware of their need to
update their address with the Service in
order to receive refunds of tax and the
notices listed in section 2.01 of this rev-
enue procedure. When such a notice is
sent to a taxpayer’s “last known address,”
the notice is legally effective even if the
taxpayer never receives it.
.03 The Tax Court in Abeles v.
Commissioner, 91 T.C. 1019 (1988), acq.,
1989–2 C.B. 1,held that “last known
address” is the address on the most recent-
ly filed and properly processed return,
unless the Service has been given clear
and concise notification of a different
address. This definition has since been
incorporated into Treas. Reg.
§ 301.6212–2(a) (effective January 29,
2001).
SECTION 4. PROCEDURES FOR
CHANGE OF ADDRESS
.01 If a taxpayer files a return with new
address information, the proper process-
ing of the return will update the taxpayer’s
address of record. With the exception of
the returns listed in section 4.04, a tax-
payer’s address of record will be updated
for the name and taxpayer identification
number (the employer identification num-
ber or the social security number) under
which the return is filed.
.02 If a taxpayer no longer wishes the
address of record to be the one shown on
the most recently filed return, for
instance, because the taxpayer moved
after the return was filed, clear and con-
cise written notification of a change of
address should be sent to the Internal
Revenue Service Center serving the tax-
payer’s old address or to the Customer
Service Division in the local area office.
Form 8822 may be used by taxpayers as
clear and concise written notification of a
change of address pursuant to this revenue
procedure.
.03 If, after a joint return is filed, either
taxpayer establishes a separate residence,
each taxpayer should send clear and con-
cise written notification of a current
address to the Service as provided in sec-
tion 4.02 above.
.04 The Service maintains address
records for gift, estate, and generation-
skipping transfer tax returns (Forms 706,
706–A, 706NA, 709, and 709–A) separate
from the address records for individual
income tax returns (Forms 1040, 1040A,
1040EZ, 1040NR, 1040–PR, 1040SS, and
1040X). Thus, an individual taxpayer’s
notification of a change of address should
identify whether any gift, estate, or gener-
ation-skipping transfer tax returns are
affected by the notification.
.05 If a Service employee contacts a
taxpayer in connection with the filing of a
February 20, 20017082001–8 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous

return or an adjustment in the taxpayer’s
account, the taxpayer may provide clear
and concise written notification as provid-
ed in section 4.02 above or oral notifica-
tion of a change of address to the Service
employee who initiated the contact. What
constitutes “clear and concise notifica-
tion” is defined in section 5 below.
.06 A taxpayer should notify the USPS
facility serving the taxpayer’s old address
of the taxpayer’s new address so that mail
from the Service can be forwarded to the
new address. The Service may also
update a taxpayer’s address of record
based on a new address that the taxpayer
provides the USPS that is retained in
USPS’s NCOA database. SeeTreas. Reg.
§ 301.6212–2 (effective January 29,
2001). Taxpayers are nonetheless advised
to notify the Service directly of a change
of address to ensure a timely and accurate
update of the Service’s address of record
for the taxpayer.
SECTION 5. DEFINITIONS
.01 Return. For purposes of updating a
taxpayer’s address of record, the term
“return” includes the following federal tax
or information forms:
(1) Returns filed under a social security
number or an individual taxpayer identifi-
cation number:
(a) Individual income tax returns:
Form 1040 U.S. Individual Income Tax
Return;
Form 1040A U.S. Individual Income
Tax Return;
Form 1040EZ Income Tax Return for
Single and Joint Filers With No
Dependents;
Form 1040NR U.S. Nonresident Alien
Income Tax Return;
Form 1040NR-EZ U.S. Income Tax
Return for Certain Nonresident Aliens
With No Dependents;
Form 1040-PR Planilla Para La
Declaracion De La Contribucion Federal
Sobre El Trabajo Por Cuenta Propia —
Puerto Rico;
Form 1040-SS U.S. Self-Employment
Tax Return, Virgin Islands, Guam,
American Samoa, the Commonwealth of
the Northern Mariana Islands (CNMI), or
Puerto Rico;
Form 1040X Amended U.S. Individual
Income Tax Return;
(b) Gift, estate, and generation-skip-
ping transfer tax returns:
Form 706 United States Estate (and
Generation-Skipping Transfer) Tax
Return;
Form 706-A United States Additional
Estate Tax Return;
Form 706-NA United States Estate (and
Generation-Skipping Transfer) Tax
Return, Estate of nonresident not a citizen
of the United States;
Form 709 United States Gift (and
Generation-Skipping Transfer) Tax Return;
Form 709-A United States Short Form
Gift Tax Return;
(2) Returns filed under an employer
identification number:
Form CT-1 Employer’s Annual
Railroad Retirement Tax Return;
Form 720 Quarterly Federal Excise Tax
Return;
Form 730 Monthly Tax on Wagering
(Section 4401 of the Internal Revenue
Code);
Form 940 Employer’s Annual Federal
Unemployment (FUTA) Tax Return;
Form 940-PR Planilla Para La
Declaracion Anual Del Patrono — La
Contribucion Federal Para El Desempleo
(FUTA);
Form 940-EZ Employer’s Annual
Federal Unemployment (FUTA) Tax
Return;
Form 941 Employer’s Quarterly
Federal Tax Return;
Form 941c Supporting Statement to
Correct Information;
Form 941E Quarterly Return of
Withheld Federal Income Tax and
Medicare Tax;
Form 941-M Employer’s Monthly
Federal Tax Return;
Form 941cPR Planilla Para La
Correccion De Informacion Facilitada
Anteriormente En Cumplimiento Con La
Ley Del Seguro Social Y Del Seguro
Medicare;
Form 941-PR Planilla Para La
Declaracion Trimestral Del Patrono — La
Contribucion Federal Al Seguro Social Y
Al Seguro Medicare;
Form 941SS Employer’s Quarterly
Federal Tax Return;
Form 943 Employer’s Annual Tax
Return for Agricultural Employees;
Form 943-PR Planilla Para La
Declaracion Anual De La Contribucion
Del Patrono De Empleados Agricolas;
Form 945 Annual Return of Withheld
Federal Income Tax;
Form 990 Return of Organization
Exempt from Income Tax — Under sec-
tion 501(c) of the Internal Revenue Code
(except black lung benefit trust or private
foundation), section 527, or section
4947(a)(1) nonexempt charitable trust;
Form 990-C Farmers’ Cooperative
Association Income Tax Return;
Form 990-EZ Short Form Return of
Organization Exempt From Income Tax
— Under section 501(c) of the Internal
Revenue Code (except black lung benefit
trust or private foundation), section 527,
or section 4947(a)(1) nonexempt charita-
ble trust;
Form 990-PF Return of Private
Foundation or Section 4947(a)(1)
Nonexempt Charitable Trust Treated as a
Private Foundation;
Form 990-T Exempt Organization
Business Income Tax Return (and proxy
tax under section 6033(e));
Form 1041 U.S. Income Tax Return for
Estates and Trusts;
Form 1042 Annual Withholding Tax
Return for U.S. Source Income of Foreign
Persons;
Form 1065 U.S. Return of Partnership
Income;
Form 1066 U.S. Real Estate Mortgage
Investment Conduit (REMIC) Income
Tax Return;
Form 1120 U.S. Corporation Income
Tax Return;
Form 1120-A U.S. Corporation Short-
Form Income Tax Return;
Form 1120-F U.S. Income Tax Return
of a Foreign Corporation;
Form 1120-FSC U.S. Income Tax
Return of a Foreign Sales Corporation;
Form 1120-H U.S. Income Tax Return
for Homeowners Associations;
Form 1120-L U.S. Life Insurance
Company Income Tax Return;
Form 1120-ND Return for Nuclear
Decommissioning Funds and Certain
Related Persons;
Form 1120-PC U.S. Property and
Casualty Insurance Company Income Tax
Return;
Form 1120-POL U.S. Income Tax
Return for Certain Political
Organizations;
Form 1120-REIT U.S. Income Tax
Return for Real Estate Investment Trusts;
Form 1120-RIC U.S. Income Tax
Return for Regulated Investment
Companies;
2001–8 I.R.B.709February 20, 2001

Form 1120S U.S. Income Tax Return
for an S Corporation;
Form 1120-SF U.S. Income Tax Return
for Settlement Funds (Under Section
468B);
Form 1120X Amended U.S.
Corporation Income Tax Return;
Form 1139 Corporation Application for
Tentative Refund;
Form 2290 Heavy Highway Vehicle
Use Tax Return; and
Form 5227 Split-Interest Trust
Information Return.
(3) The term “return” includes substi-
tute forms (as defined in Rev. Proc.
2000–19, 2000–12 I.R.B. 785, reprinted
in IRS Publication 1167, or as defined in
other current revenue procedures concern-
ing the requirements for substitute forms)
for those forms listed in section 5.01(1)
and (2) above.
(4) The term “return” does not include
applications for extension of time to file a
return. Thus, for example, a new address
listed on Form 4868, Application for
Automatic Extension of Time to File U.S.
Individual Income Tax Return, will not be
used by the Service to update the taxpay-
er’s address of record.
.02 Properly processed.
(1) Except as otherwise provided by
the exceptions below, a return will be con-
sidered properly processed after a 45-day
processing period which begins the day
after the date of receipt of the return by
the Internal Revenue Service Center.
However, if a return is received prior to
the due date for the return, the 45-day pro-
cessing period will begin the day after the
due date of the return. Returns that are
not filed in a processible form may
require additional processing time. In
such cases, the 45-day processing period
for address changes will begin the day
after the error that caused the return to be
unprocessible is corrected.
(2) Due to the high volume of returns
received during the filing season, if a tax-
payer provides new address information
on a Form 1040, 1040A, 1040EZ,
1040NR, 1040-PR, 1040-SS, or 1040X,
that is received by the Service after
February 14 and before June 1, the return
will be considered properly processed on
July 16.
(3) A clear and concise written notifi-
cation of a change of address will be con-
sidered properly processed after a 45-day
processing period which begins the day
after the date of receipt by:
(a) the Internal Revenue Service
Center serving the taxpayer’s old address;
(b) the Customer Service Division in
the local area office; or
(c) a Service employee who contacted
the taxpayer in connection with the filing
of a return or an adjustment in the taxpay-
er’s account.
(4) Clear and concise oral notification
of a change of address will be considered
properly processed after a 45-day pro-
cessing period which begins the day after
the date of the communication to the
Service employee who contacted the tax-
payer in connection with the filing of a
return or an adjustment in the taxpayer’s
account.
(5) When the processing of address
change information on a particular return
will require a processing time in excess of
45 days, such as in section 5.02(2), tax-
payers may send clear and concise written
notification of a change of address to the
Service in accordance with section
5.02(3) above.
.03 Address on Return.
The “address on return” is the address
information shown in the upper portion
of the front page of the return. When a
taxpayer files an electronic/magnetic
media return, the address information on
the electronic/magnetic media portion of
the return will be used to update the tax-
payer’s address of record. Although the
electronic/magnetic media return
includes a Form 8453 series declaration,
the declaration is not used by the Service
to update the taxpayer’s address of
record.
.04 Clear and Concise Written
Notification.
(1) Clear and concise written notifica-
tion is a statement signed by the taxpay-
er informing the Service that a taxpayer
wishes the address of record changed to
a new address. In addition to the new
address, this notification must contain
the taxpayer’s full name, signature, old
address, and social security number
and/or employer identification number.
Filers of a joint return should provide
both names, social security numbers, and
signatures. Individuals that have
changed last names, for instance, due to
marriage, should provide the last name
shown on the most recently filed return
and the new last name. In all cases, clear
and concise written notification must be
specific as to a change of address. Thus,
a new address reflected in the letterhead
of taxpayer correspondence will not by
itself change a taxpayer’s address of
record.
(2) Correspondence sent by the Service
that solicits or requires a response by the
taxpayer that is returned to the Service by
the taxpayer with corrections marked on
the taxpayer’s address information will
constitute clear and concise written notifi-
cation of a change of address. The taxpay-
er’s signature on the correspondence is
not required.
(3) Additionally, the Form 8822,
Change of Address, can be used by tax-
payers as clear and concise written notifi-
cation of a change of address pursuant to
this revenue procedure.
.05 Clear and Concise Oral
Notification.
Clear and concise oral notification is a
statement made by a taxpayer directly to a
Service employee, who initiated contact
with the taxpayer on an active account,
informing the Service employee that the
taxpayer wishes the address of record
changed to a new address. In addition to
the new address, the taxpayer must pro-
vide the taxpayer’s full name, old address,
and social security number and/or
employer identification number. The
Service employee should follow estab-
lished procedures to determine that the
person providing the information is in fact
the taxpayer whose address of record will
be changed.
SECTION 6. AREAS NOT COVERED
BY THIS REVENUE PROCEDURE
.01 This revenue procedure does not
apply to the notice requirements under
sections 6221 through 6234, and 6037(c)
of the Code concerning the tax treatment
of partnership and subchapter S items.
.02 This revenue procedure does not
apply to the following returns because they
have unique processing requirements:
Form 5330 Return of Excise Taxes
Related to Employee Benefits Plans
(Under sections 4971, 4972, 4973(a)(3),
4975, 4976, 4977, 4978, 4978A, 4978B,
4979A, and 4980 of the Internal Revenue
Code);
Form 5500 Annual Return/Report of
Employee Benefit Plan;
February 20, 20017102001–8 I.R.B.

Form 5500-C/R Return/Report of
Employee Benefit Plan (with fewer than
100 participants); and
Form 5500-EZ Annual Return of One-
Participant (Owners and Their Spouses)
Retirement Plan.
.03 This revenue procedure does not
require the Service to send notices to an
address furnished by the taxpayer when it
is determined that a taxpayer cannot actu-
ally be contacted or located at that
address.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective
February 20, 2001, the date of its publica-
tion.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue pro-
cedure is R. Bradley Taylor of the Office
of the Associate Chief Counsel, Procedure
and Administration (Administrative
Provisions and Judicial Practice). For fur-
ther information regarding this revenue
procedure, contact R. Bradley Taylor at
(202) 622-4940 (not a toll-free call).
2001–8 I.R.B.711February 20, 2001

Partial Withdrawal of Notice of
Proposed Rulemaking and
Amendments to Notice of
Proposed Rulemaking
Tax Treatment of Cafeteria
Plans
REG–209461–79
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of notice of
proposed rulemaking and amendments to
notice of proposed rulemaking.
SUMMARY: This document withdraws
§1.125–2 Q&A–6(b),(c), and (d), and
amends §1.125–2 Q&A–6(a) in the notice
of proposed rulemaking (EE–130–86,
1989–1 C.B. 944) relating to cafeteria
plans that was published in the Federal
Registeron March 7, 1989. Further, this
document amends §1.125–1 Q&A–8 in
the notice of proposed rulemaking relat-
ing to cafeteria plans that was published
in the Federal Register on May 7, 1984,
and amended on November 7, 1997, and
March 23, 2000. This withdrawal and
amendment are made because of changes
made to these rules in the §1.125–4 final
regulations (T.D. 8921, 2001–7 I.R.B.
532) relating to cafeteria plans.
DATES: Written or electronically generated
comments and requests for a public hearing
must be received by April 10, 2001.
ADDRESSES: Send submission to:
CC:M&SP:RU (REG–209461–79), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand delivered
Monday through Friday between the hours
of 8 a.m. and 5 p.m. to CC:M&SP:RU
(REG–209461–79), Courier’s Desk,
Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit com-
ments 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/regslist.html.
FOR FURTHER INFORMATION CON-
TACT: Christine Keller or Janet Laufer at
(202)622-6080 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On March 7, 1989, the IRS issued pro-
posed regulations §1.125–2 Q&A-6 relat-
ing to the circumstances under which par-
ticipants may revoke existing elections
and make new elections under a cafeteria
plan. The IRS published final regulations
(T.D. 8921, 2001–7 I.R.B. 532) under
§ 1.125–4 that address certain parts of
this rule. Accordingly, §1.125–2 Q&A-
6(b), (c), and (d) are withdrawn and
§1.125–2 Q&A-6(a) of this rule is
amended.
Further, on May 7, 1984, the IRS issued
proposed regulations §1.125–1 Q&A-8
relating to the requirements that apply to
participants’ elections under a cafeteria
plan. Q&A-8 of these regulations was
amended on November 7, 1997, and
March 23, 2000, to conform with the
§1.125–4T and §1.125–4 regulations
published on these dates, and is further
amended to conform with the final
§1.125–4 regulations published on
January 10, 2001.
Partial Withdrawal of Notice of
Proposed Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, §1.125–2 Q&A-6(b), (c) and
(d) in the notice of proposed rulemaking
that was published on March 7, 1989 (54
F.R. 9460), is withdrawn.
* * * * *
Amendments to Previously Proposed
Rules
Accordingly, the proposed rules published
on May 7, 1984 (49 F.R. 19321), and amend-
ed on November 7, 1997 (62 F.R. 60196),
and March 23, 2000 (65 F.R. 15587), and the
rules published on March 7, 1989 (54 F.R.
9460), are amended as follows:
PART 1— INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.125–1, as proposed May
7, 1984 (49 F.R. 19321), and as amended
March 23, 2000 (65 F.R. 15587), Q&A-8
is amended by removing the last four sen-
tences of A-8 and adding a sentence in
their place to read as follows:
§1.125–1 Questions and answers relating
to cafeteria plan.
* * * * *
Q-8: What requirements apply to par-
ticipants’ elections under a cafeteria plan?
A-8: * * * However, a cafeteria plan
may permit a participant to revoke a ben-
efit election after the period of coverage
has commenced and make a new election
with respect to the remainder of the peri-
od of coverage if both the revocation and
the new election are permitted under
§ 1.125–4.
* * * * *
Par. 3. In §1.125–2, as proposed
March 7, 1989 (54 F.R. 9460), and as
amended March 23, 2000 (65 F.R.
15587), A-6 is amended by removing A-
6(b), A-6(c), and A-6(d), redesignating
A-6(e) as paragraph A-6(b), removing
the last 5 sentences of A-6(a) and adding
a sentence in their place to read as fol-
lows:
Q-6: In what circumstance may partici-
pants revoke existing elections and make
new elections under a cafeteria plan?
A-6: * * *
(a) * * * However, to the extent permit-
ted under §1.125–4, the terms of a cafe-
teria plan may permit a participant to
revoke an existing election and to make a
new election with respect to the remaining
portion of the period of coverage.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 9, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 10, 2001, 66 F.R.
1923)
Notice of Proposed Rulemaking
by Cross-Reference to
Temporary Regulations
February 20, 20017122001–8 I.R.B.
Part IV. Items of General Interest

Excise Taxes on Excess Benefit
Transactions
REG–246256–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations.
SUMMARY: In T.D. 8920 on page 654 of
this Bulletin, the IRS is issuing temporary
regulations relating to the excise taxes on
excess benefit transactions under section
4958 of the Internal Revenue Code (Code),
as well as certain amendments and addi-
tions to existing Income Tax Regulations
affected by section 4958. Section 4958
was enacted in section 1311 of the
Taxpayer Bill of Rights 2. Section 4958
generally is effective for transactions
occurring on or after September 14, 1995.
Section 4958 imposes excise taxes on
transactions that provide excess economic
benefits to disqualified persons of public
charities and social welfare organizations
(referred to as applicable tax-exempt orga-
nizations). Disqualified persons who ben-
efit from an excess benefit transaction with
an applicable tax-exempt organization are
liable for a tax of 25 percent of the excess
benefit. Such persons are also liable for a
tax of 200 percent of the excess benefit if
the excess benefit is not corrected by a cer-
tain date. Additionally, organization man-
agers who participate in an excess benefit
transaction knowingly, willfully, and with-
out reasonable cause, are liable for a tax of
10 percent of the excess benefit. The tax
for which participating organization man-
agers are liable cannot exceed $10,000 for
any one excess benefit transaction.
DATES: Written comments and requests
for a public hearing must be received by
April 10, 2001. In addition to any com-
ments addressing substantive issues of the
proposed regulations, the IRS and
Treasury specifically request comments
on the clarity of the proposed rule and
how it may be made easier to understand.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–246256–96), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG–246256–96),
Courier’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 sub-
mitting comments directly to the IRS
Internet site at http://www.irs.
gov/prod/tax_regs/comments.html.
A public hearing will be scheduled if
requested.
FOR FURTHER INFORMATION CON-
TACT: Concerning submissions, Guy
Traynor, (202) 622-7180; concerning the
regulations, Phyllis D. Haney, (202) 622-
4290 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained
in these proposed regulations have 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 1545–1623, in
conjunction with the notice of proposed rule-
making published August 4, 1998, 63 F.R.
41486, REG–246256–96, Failure by Certain
Charitable Organizations to Meet Certain
Qualification Requirements; Taxes on
Excess Benefit Transactions.
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 and records relating to the col-
lection 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.
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.
An initial regulatory flexibility analysis
was prepared as required for the collection of
information under 5 U.S.C. 603 in the notice
of proposed rulemaking, REG–246256–96,
Failure by Certain Charitable Organizations
to Meet Certain Qualification Requirements;
Taxes on Excess Benefit Transactions, pub-
lished August 4, 1998, at 63 F.R. 41486. The
initial analysis was submitted to the Chief
Counsel for Advocacy of the Small Business
Administration pursuant to section 7805(f)
of the Code for comment on its impact on
business. The initial analysis continues to
apply to this proposed rule. Pursuant to sec-
tion 7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on its
impact on business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments (a signed
original and eight (8) copies) that are sub-
mitted timely to the IRS. The IRS and
Treasury specifically request comments
on the clarity of the proposed rule and
how it may be made easier to understand.
All comments will be available for public
inspection and copying.
A public hearing may be scheduled if
requested in writing by a person who
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place will be published in
the Federal Register.
Drafting Information
The principal author of these regula-
tions is Phyllis D. Haney, Office of
Division Counsel/Associate Chief
Counsel (Tax-Exempt and Government
Entities). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
* * * * *
26 CFR Part 301
Employment taxes, Estate taxes, Excise
taxes, Gift taxes, Income taxes, Penalties,
Reporting and recordkeeping requirements.
Accordingly, 26 CFR Parts 53 and 301 are
proposed to be amended as follows:
PART 53—FOUNDATION AND
SIMILAR EXCISE TAXES
Paragraph 1. The authority citation for
part 53 continues to read as follows:
2001–8 I.R.B.713February 20, 2001

Authority: 26 U.S.C. 7805.
Par. 2. Sections 53.4958–0 through
53.4958–8 are added to read as follows:
[The text of proposed §§53.4958–0
through 53.4958–8 is the same as the text
of §53.4958–0T through 53.4958–8T
published in T.D. 8920.]
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 9, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 10, 2001, 66 F.R.
2173)
Notice of Proposed Rulemaking
Disclosure of Returns and
Return Information to Designee
of Taxpayer
REG –103320–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: In T.D. 8935 on page 702 of
this Bulletin, the IRS is issuing a tempo-
rary regulation relating to the disclosure
of returns and return information to the
designee of a taxpayer. The text of that
temporary regulation also serves as the
text of this regulation.
DATES: Written and electronic comments
and requests for a public hearing must be
received by April 11, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–103320–00), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, D.C.
20044. Submissions may be hand delivered
Monday through Friday between the hours
of 8 a.m. and 5 p.m. to: CC:M&SP:RU
(REG–103320–00), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively, tax-
payers may submit comments electronically
via the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by submit-
ting comments directly to the IRS Internet
site: http://www.irs.gov/prod/tax_regs/com-
ments/html.
FOR FURTHER INFORMATION CON-
TACT: Joseph Conley (202) 622-4580
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 6103(c), as amended by section
1207 of the Taxpayer Bill of Rights II,
Public Law 104–168 (110 Stat. 1452),
authorizes the IRS to disclose returns and
return information to such person or per-
sons as the taxpayer may designate in a
request for or consent to disclosure or to
any other person at the taxpayer’s request
to the extent necessary to comply with a
request for information or assistance
made by the taxpayer to such other per-
son. Disclosure is permitted subject to
such requirements and conditions as may
be prescribed by regulations. With the
amendment in 1996, Congress eliminated
the longstanding requirement that disclo-
sures to designees of the taxpayer must be
pursuant to the written request or consent
of the taxpayer. The purpose of this
amendment to section 6103(c) was to
assist the IRS in developing a paperless
tax administration system that relies on,
among other things, electronic communi-
cation. H.R. Rep. No. 104–506, at 49
(1996), reprinted in 1996 U.S.C.A.N.
1143, 1172.
On October 3, 1980, a final regulation
(T.D. 7723, 1980–2 C.B. 346) relating to
the disclosure of tax returns and return
information to a person designated by the
taxpayer in a written request or consent
was published in theFederal Register
(45 F.R. 65564). Since the publication of
this final regulation, the IRS has deter-
mined that further guidance on written
consent requirements is necessary.
This document contains a proposed
regulation that authorizes the disclosure
of tax returns and return information to a
designee of the taxpayer pursuant to
nonwritten requests or consents autho-
rizing the disclosures. Such proposed
regulation also amends the existing reg-
ulation to clarify the rules applicable to
written requests or consents to disclo-
sure.
The text of the temporary regulation
(T.D. 8935) on page 702 of this Bulletin
serves as the text of this proposed regula-
tion. The preamble to the temporary reg-
ulation explains the regulation.
Special Analysis
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 is hereby
certified that this proposed regulation will
not impose a significant economic impact
on a substantial number of small entities.
The regulation is intended to reduce the
burden on taxpayers and to facilitate the
development of a paperless tax adminis-
tration system. The prior regulation
required that a taxpayer provide a written
request or consent before the IRS could
disclose the taxpayer’s return information
to a designee of the taxpayer; this regula-
tion permits such a disclosure, under cer-
tain specified circumstances, pursuant to
the taxpayer’s nonwritten request or con-
sent. The regulation also provides para-
meters for the development of consents
for the electronic filing program, and it
reduces the burden on taxpayers in com-
bined Federal-State return filing programs
by facilitating the electronic filing of a
Federal-State return by means of a single
electronic transmission.
Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel of Small Business
Administration for comment on its impact
on small businesses.
Comments and Requests for a Public
Hearing
Before the proposed regulation is adopt-
ed as a final regulation, consideration will
be given to any electronic and written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the IRS.
The IRS and Treasury Department specifi-
cally request comments on consents or
notices authorizing disclosures in an elec-
tronic environment. Additionally, the IRS
and Treasury Department specifically
request comments on the clarity of the pro-
posed regulation and how it can be made
easier to understand. All comments will be
available for public inspection and copying.
A public hearing may be scheduled if
requested in writing by a person that timely
submits comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published in
the Federal Register.
February 20, 20017142001–8 I.R.B.

Drafting Information
The principal author of this regulation
is Jamie Bernstein, Office of the Associate
Chief Counsel, Procedure and
Administration (Disclosure & Privacy
Law Division). However, other personnel
from the IRS and Treasury Department
participated in its development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(c)–1 also issued
under 26 U.S.C. 6103(c). ***
Par. 2. Section 301.6103(c)–1 is added
to read as follows:
§301.6103(c)–1 Disclosure of returns
and return information to designee of
taxpayer.
[The text of this proposed section is the
same as the text of §301.6103(c)–1T pub-
lished in T.D. 8935.]
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 10, 2001, 8:45 a.m., and published in the issue of
the Federal Register for January 11, 2001, F.R.
2373)
Extended Time for Use of the
Revised Form W-9
Announcement 2001–15
Purpose
This is to advise persons required to file
information returns of the availability and
required use of Form W-9, Request for
Taxpayer Identification Number and
Certification(Rev. December, 2000). In
response to payor concerns about imple-
menting the new certification require-
ments, the use of revised Form W-9 is
optional until July 1, 2001.
Certification of U.S. Status
The major change to the form is that
under Part III, Certification, a payee must
now certify that he or she is a U.S. person
(including a U.S. resident alien). Payors
must use the revised Form W-9 for all new
solicitations after June 30, 2001.
Foreign Payees
A foreign person may not use Form W-
9 to furnish his or her taxpayer identifica-
tion number to the payor after December
31, 2000. Instead, foreign payees must
use the appropriate Form W-8.
Guidance to Federally
Recognized Indian Tribal
Governments About Their
Federal Unemployment Tax Act
Obligations for 2000
Announcement 2001–16
This announcement provides guidance
to federally recognized Indian tribal gov-
ernments, including any subdivision,
subsidiary, or wholly-owned business
enterprise, about their Federal
Unemployment Tax Act (FUTA) obliga-
tions for 2000. The announcement is
being made because the recent enactment
of Section 166 of the Community
Renewal Tax Relief Act of 2000 (H.R.
5662, incorporated in H.R. 4577, the
Consolidated Appropriations Act, 2001)
(Pub. L. No. 106–554, 114 Stat. 2763)
changed how FUTA applies to Indian
tribal governments.
For services rendered after December
20, 2000, federally recognized Indian
tribal governments are exempt from
FUTA. Instead, an Indian tribal gov-
ernment may elect to make contribu-
tions to the State unemployment fund
as if services by its employees were
employment under FUTA, or it may
make payments in lieu of the contribu-
tions in amounts equal to the unem-
ployment benefits attributable under
the State law to such service; and
Indian tribal governments may make
separate elections for any subdivision,
subsidiary, or business enterprise whol-
ly owned by it.
The new law also includes a transition
rule that may eliminate an Indian tribal
government’s obligation to pay FUTA
taxes for certain services rendered during
2000, but before December 21, of that
year. Under the transition rule, an
Indian tribal government has no FUTA
tax liability for services performed by its
employees if the following conditions
are satisfied: (1) the service was per-
formed before December 21, 2000; (2)
the tax imposed under FUTA was not
paid; and(3) the Indian tribal govern-
ment reimburses a State unemployment
fund for unemployment benefits actually
paid for services performed before
December 21, 2000.
The due date for Form 940, for ser-
vices rendered in 2000, is January 31,
2001, and FUTA taxes deposited during
2000, generally are deemed not paid
until that date. Therefore, FUTA tax
deposits for services performed from
January 1, 2000, through December 20,
2000, were not paid by December 21,
2000, and are therefore not considered
paid for purposes of the transition rule.
Note, however, that FUTA tax liability
paid before the enactment of the
Community Renewal Tax Relief Act of
2000 (i.e., for years before 2000), may
not be refunded under the terms of the
law. Therefore, the transition rule
options described in this announcement
apply to Form 940 only for year 2000.
Because this law was enacted in
December of 2000, many Indian tribal
governments may not have had time to
consider the options available and may
not know how they plan to proceed by
January 31, 2001, under this new law.
Furthermore, the State governments have
not yet had time to establish procedures
for the reimbursement of the State unem-
ployment funds.
Indian tribal governments may use one
of the following options in filing Form
940 for 2000:
OPTION 1
If the Indian tribal government knows
before January 31, 2001, that it wishes to
use the transition rule for all of its 2000
FUTA liabilities and will satisfy the terms
2001–8 I.R.B.715February 20, 2001

of that rule, including the reimbursement
of the State, it may file a Form 940 filled
out in the following way:
1. Write across the top of the Form 940:
“Announcement 2001–16.”
2. Check the box stating that it is not
required to file Form 940 in the future.
3. Total payments made in 2000 for ser-
vices rendered for the year 2000,
should be entered on line 1 of Part I of
Form 940.
4. The amount entered on line 1 of Part I
should also be entered on line 2.
5. Line 2 also requests an explanation
about why the amounts are exempt.
The Indian tribal government should
state: “Announcement 2001–16.”
6. On line 5, enter zero as FUTA tax lia-
bility.
7. On line 7 of Part II, enter zero.
8. On line 8 of Part II, enter the total
FUTA tax deposited for the year.
9. On line 10 of Part II, enter the amount
from line 8.
OPTION 2
If the Indian tribal government has
not determined how it wishes to pro-
ceed concerning the transition rule, it
should file the Form 940 for 2000
claiming exemption only for services
performed after December 20, 2000.
The Indian tribal government may later
use an amended return for 2000 to exer-
cise its option to use the transition rule
and receive a refund for amounts
deposited. If the Indian tribal govern-
ment chooses to amend its return, it
should file another Form 940 and check
the box that indicates it is an amended
return. It should follow the directions
in Option 1 when it prepares this
amended Form 940. These amended
Forms 940 for 2000 must be filed no
later than January 31, 2004.
In the alternative, recognizing the limit-
ed period of time the Indian tribal govern-
ment has to react to the new law, it may
file the Form 940 for 2000 as if the new
law had not been enacted. The Indian
tribal government should later use an
amended return for 2000 to receive a
refund for amounts deposited for services
after December 21, 2000, but before
January 1, 2001, even if the Indian tribal
government decides not to use the transi-
tion rule.
TRANSITION RULE ELECTIONS FOR
SUBDIVISIONS, SUBSIDIARIES, OR
WHOLLY-OWNED BUSINESS
ENTERPRISES
An Indian tribal government may
choose to apply the transition rule sepa-
rately to each subdivision, subsidiary, or
wholly-owned business enterprise. For
example, the Indian tribal government
could elect to reimburse the State unem-
ployment funds for one wholly-owned
business enterprise, and receive a refund
of amounts deposited with respect to that
wholly-owned business enterprise, but not
make the election for another wholly-
owned business enterprise. If the Indian
tribal government decides to apply the
transition rule differently to different sub-
divisions, subsidiaries, or wholly-owned
business enterprises, it may use either
Option 1 or Option 2, but should enter on
line 2 of Part I ONLY those amounts
attributable to subdivisions, subsidiaries,
or wholly-owned business enterprises to
which its transition rule election applies,
then complete the calculations by follow-
ing the form instructions.
For further information regarding this
announcement, contact the Tax Exempt
and Government Entities Customer
Account Services call site at 1-877-829-
5500 (toll-free).
New Form 8875, Taxable REIT
Subsidiary Election
Announcement 2001–17
New Form 8875 is now available for
tax years beginning after 2000. An eligi-
ble corporation and a REIT use Form
8875 to jointly elect to have the corpora-
tion treated as a taxable REIT subsidiary.
The corporation and the REIT can make
this election if the REIT directly or indi-
rectly owns stock in the corporation.
You can obtain Form 8875 by tele-
phone or by using IRS electronic informa-
tion services.
Request by Number or address
Telephone 1-800-TAX-FORM
(1-800-829-3676)
Personal computer:
IRS Web Site www.irs.gov
File transfer protocol ftp://ftp.irs.gov
Deletions From Cumulative List
of Organizations Contributions
to Which Are Deductible Under
Section 170 of the Code
Announcement 2001–20
The names of organizations that no
longer qualify as organizations described
in section 170(c)(2) of the Internal
Revenue Code of 1986 are listed below.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date of
announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an orga-
nization ceases to qualify under section
170(c)(2) if the organization has not time-
ly filed a suit for declaratory judgment
under section 7428 and if the contributor
(1) had knowledge of the revocation of
the ruling or determination letter, (2) was
aware that such revocation was imminent,
or (3) was in part responsible for or was
aware of the activities or omissions of the
organization that brought about this revo-
cation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on February 20,
2001, and would end on the date the court
first determines that the organization is
not described in section 170(c)(2) as more
particularly set forth in section 7428
(c)(1). For individual contributors, the
maximum deduction protected is $1,000,
with a husband and wife treated as one
contributor. This benefit is not extended
to any individual, in whole or in part, for
the acts or omissions of the organization
that were the basis for revocation.
Hemotec Medical Research Foundation
Ontario, CA
St. David’s Health Care System, Inc.
Austin, TX
Watts 13 Foundation
Los Angeles, CA
February 20, 20017162001–8 I.R.B.

2001–8 I.R.B.717February 20, 2001
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, certi-
fied public accountant, enrolled agent or
enrolled actuary in accordance with the
consent 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 practica-
ble for each attorney, certified public ac-
countant, enrolled agent or enrolled actu-
ary so suspended and will be consolidated
and published 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

Announcement of the Disbarment and Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Before the Internal Revenue Service
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:
February 20, 20017182001–8 I.R.B.
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
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
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
public 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-

2001–8 I.R.B.719February 20, 2001
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

February 20, 2001i2001–8 I.R.B.
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

2001–8 I.R.B.iiFebruary 20, 2001
Numerical Finding List
1
Bulletins 2001–1 through 2001–7
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
2001–12, 2001–6 I.R.B. 526
2001–14, 2001–7 I.R.B. 648
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
2001–10, 2001–5 I.R.B. 459
2001–11, 2001–5 I.R.B. 464
2001–12, 2001–3 I.R.B. 328
2001–13, 2001–6 I.R.B. 514
2001–14, 2001–6 I.R.B. 516
2001–15, 2001–7 I.R.B. 589
Proposed Regulations:
REG–251701–96, 2001–4, I.R.B. 396
REG–106542–98, 2001–5, I.R.B. 473
REG–121928–98, 2001–6, I.R.B. 520
REG–104683–00, 2001–4, I.R.B. 407
REG–106702–00, 2001–4, I.R.B. 424
REG–106791–00, 2001–6, I.R.B. 521
REG–107176–00, 2001–4, I.R.B. 428
REG–107566–00, 2001–3, I.R.B. 346
REG–114082–00, 2001–7, I.R.B. 629
REG–114083–00, 2001–7, I.R.B. 630
REG–114084–00, 2001–7, I.R.B. 633
REG–116468–00, 2001–6, I.R.B. 522
REG–119352–00, 2001–6, I.R.B. 525
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
Revenue Procedures:—continued:
2001–12, 2001–3 I.R.B. 335
2001–13, 2001–3 I.R.B. 337
2001–14, 2001–3 I.R.B. 343
2001–15, 2001–5 I.R.B. 465
2001–16, 2001–4 I.R.B. 376
2001–17, 2001–7 I.R.B. 589
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
2001–5, 2001–5 I.R.B. 451
2001–6, 2001–6 I.R.B. 491
2001–7, 2001–7 I.R.B. 541
Treasury Decisions:
8910, 2001–2 I.R.B. 258
8911, 2001–3 I.R.B. 321
8912, 2001–5 I.R.B. 452
8913, 2001–3 I.R.B. 300
8915, 2001–4 I.R.B. 359
8916, 2001–4 I.R.B. 360
8917, 2001–7 I.R.B. 538
8918, 2001–4 I.R.B. 372
8919, 2001–6 I.R.B. 505
8921, 2001–7 I.R.B. 532
8922, 2001–6 I.R.B. 508
8923, 2001–6 I.R.B. 485
8924, 2001–6 I.R.B. 489
8925, 2001–6 I.R.B. 496
8926, 2001–6 I.R.B. 492
8930, 2001–5 I.R.B. 433
8931, 2001–7 I.R.B. 542
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.

February 20, 2001iii2001–8 I.R.B.
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–1 through 2001–7
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
2000–43
Extended by
Notice 2001–13, 2001–6 I.R.B. 514
Proposed Regulations:
REG–116733–98
Withdrawn by
Ann. 2001–11, 2001–4 I.R.B. 432
Revenue Procedures:
83–87
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
92–19
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
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
Revenue Procedures–continued:
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
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
2000–16
Modified and superseded by
Rev. Proc. 2001–17, 2001–7 I.R.B. 589
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
Revenue Rulings:
64–328
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
66–110
Modified by
Notice 2001–10, 2001–5 I.R.B. 459
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.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the
Superintendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www
.irs.gov
. Select Tax Info for Business at the bottom of the
page. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD–ROM
Internal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD–ROM). The CD–ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders(discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250–7954. Please allow two
to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the IRS Bulletin Unit, W:CAR:MP:FP, Washington, DC 20224.
Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300