Internal Revenue Bulletin 2001-14 (PDF rendition): IRS Announcements

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

INCOME TAX
T.D. 8941, page 977.
REG–114998–99, page 992.
Final regulations under section 142(f)(4) of the Code provide
rules for making the election to terminate tax-exempt bond
financing for certain local furnishers. Temporary and proposed
regulations under section 141 of the Code relate to special
rules for output facilities. A public hearing on the proposed
regulations is scheduled for July 24, 2001.
REG–115560–99, page 993.
Proposed regulations under section 1092 of the Code con-
cern qualified covered call treatment for equity options with
flexible terms, equity options with standardized terms, and
certain qualifying over-the-counter equity options. A public
hearing is scheduled for May 9, 2001.
REG–101739–00, page 996.
Proposed regulations under section 7701 of the Code (the
check-the-box regulations) address the applicability of the
elective federal tax classification regime to business entities
wholly owned by a foreign government and to wholly owned
nonbank entities of foreign banks. These regulations also
provide that the term “entity” for purposes of section
892(a)(2)(B) of the Code includes a partnership. A public
hearing is scheduled for May 16, 2001.
REG–104876–00, page 998.
Proposed regulations under section 706 of the Code provide
guidance on determining the taxable year of a partnership
with foreign partners. A public hearing is scheduled for June
6, 2001.
REG–107047–00, page 1002.
Proposed regulations under section 1221 of the Code relate
to the determination of the character of gain or loss from
hedging transactions. A public hearing is scheduled for May
16, 2001.
Notice 2001–29, page 989.
Research credit suspension period.This notice provides
guidance to corporate taxpayers that file Form 7004
requesting an extension of time to file their income tax return
for a taxable year that includes expired research credit sus-
pension periods.
Announcement 2001–29, page 1014.
The Service announces that supplemental information on
short-term Treasury bills for Publication 1212, List of
Original Issue Discount Instruments (2000 edition), is avail-
able.
EMPLOYEE PLANS
REG–129608–00, page 1011.
Proposed regulations under section 7476 of the Code set
forth new standards for satisfying the notice to interested
parties requirement with respect to an application for a
determination letter.
ADMINISTRATIVE
Notice 2001–30, page 989.
This notice provides tax relief under sections 6081, 6161,
6404(h), 6654(e)(3), and 7508A of the Code for taxpayers
affected by the Cerro Grande Fire.
Internal Revenue
bbuulllleettiinn
Bulletin No. 2001–14
April 2, 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.
Index for January through March begins on page iv.

April 2, 20012001–14 I.R.B.
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise 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 Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
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 Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
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 succeeding semi-
annual 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.

Section 141.—Private Activity
Bond; Qualified Bond
26 CFR 1.141–7T: Special rules for output facilities
(temporary).
T.D. 8941
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Obligations of States and
Political Subdivisions
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains tem-
porary regulations that provide guidance to
issuers of tax-exempt bonds for output fa-
cilities. This document also contains final
regulations that provide guidance to certain
nongovernmental persons that are engaged
in the local furnishing of electric energy or
gas using facilities financed with state or
local government bonds. These regulations
will affect issuers of tax-exempt bonds and
nongovernmental persons engaged in the
local furnishing of electric energy or gas
after the effective date.
The text of the temporary regulations
also serves as the text of the proposed regu-
lations (REG-114998-99) set forth in the
notice of proposed rulemaking on this sub-
ject on page 992 of this Bulletin.
DATES: Effective Date: These regulations
are effective January 19, 2001.
Applicability Date: For dates of applica-
bility, see §§1.141–15T, 1.142(f)(4)–1(g),
and 1.150–5(b).
FOR FURTHER INFORMATION CON-
TACT: Rose M. Weber (202) 622-3980
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in this rule
has been reviewed and, pending receipt and
evaluation of public comments, approved
by the Office of Management and Budget
(OMB) under 44 U.S.C. 3507 and assigned
control number 1545-1730.
The collection of information in this
regulation is in §1.142(f)(4)–1. This in-
formation is required to enable the IRS to
identify persons engaged in the local fur-
nishing of electric energy or gas that use
facilities financed with exempt facility
bonds under section 142(a)(8) and that
expand their service area in a manner in-
consistent with the requirements of sec-
tions 142(a)(8) and (f) who have made an
election to ensure that those bonds will
continue to be treated as exempt facility
bonds. The data collected will be used by
the IRS as the mechanism for identifying
bonds that will remain tax-exempt
notwithstanding a service area expansion
that is inconsistent with the requirements
of sections 142(a)(8) and (f). The collec-
tion of information is mandatory. The
likely respondents are business institu-
tions.
Comments on the collection of informa-
tion should be sent to the Office of Man-
agement and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Re-
ports Clearance Officer, W:CAR:MP:
FP:S:O Washington, DC 20224. Comments
on the collection of information should be
received by March 19, 2001. Comments
are specifically requested concerning:
Whether the collection of information is
necessary for the proper performance of the
functions of the Internal Revenue
Service, including whether the information
will have practical utility;
The accuracy of the estimated burden as-
sociated with the collection of information
(see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
collection of information may be mini-
mized, including through the application of
automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of services to provide information.
Estimated total annual reporting burden
is 15 hours.
Estimated average annual burden hours
per respondent is 1 hour.
Estimated number of respondents is 15.
Estimated annual frequency of responses
is on occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long as
their contents may become material in the
administration of any internal revenue law.
Generally, tax returns and tax return infor-
mation are confidential, as required by 26
U.S.C. 6103.
Background
This document amends the Income Tax
Regulations (26 CFR part 1) under section
141 by providing special rules for tax-ex-
empt bonds issued for output facilities.
This document also amends the Income
Tax Regulations under section 142(f)(4) by
providing rules to make the election pro-
vided in that section for nongovernmental
persons engaged in local furnishing of elec-
tric energy or gas using facilities financed
with tax-exempt bonds.
On January 22, 1998, temporary regula-
tions (T.D. 8757, 1998–1 C.B. 775) (the
1998 temporary regulations) were pub-
lished in the Federal Register(63 FR
3256) to provide guidance under the Inter-
nal Revenue Code of 1986 regarding the
application of the private activity bond tests
under section 141(b)(1) and (2) to output
contracts for output facilities; the applica-
tion of the $15 million limit under section
141(b)(4) to output facility financings; the
election provided in section 142(f)(4) for
nongovernmental persons engaged in local
furnishing of electric energy or gas using
facilities financed with tax-exempt bonds;
and the filing location for certain notices
and elections. A notice of proposed rule-
making (REG–110965–97, 1998–1 C.B.
793) cross-referencing the temporary regu-
lations was published in the Federal Regis-
teron the same day (63 FR 3296). On
April 28, 1998, the IRS held a public hear-
ing on the proposed regulations. Written
comments responding to the notice of pro-
posed rulemaking were also received.
After consideration of all the comments,
the 1998 temporary regulations are revised
by this Treasury decision. The new tempo-
2001–14 I.R.B.977April 2, 2001
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

April 2, 20019782001–14 I.R.B.
rary regulations are referred to below as the
“revised regulations.” The revisions are
discussed below.
Explanation of Provisions
A.Section 1.141–7T Special Rules for
Output Facilities
1.Benefits and burdens test - transmission
contracts
Under the 1998 temporary regulations,
an agreement to provide firm or priority
transmission services is generally treated as
a take or take or pay contract. Commenta-
tors suggested that firm or priority trans-
mission contracts should not automatically
be treated as take or take or pay contracts.
They recommended that the same stan-
dards that apply to determine whether gen-
eration contracts result in private business
use, including the requirements contract
provisions, should also apply to transmis-
sion contracts. The revised regulations
adopt this recommendation by deleting the
provision that generally treats all contracts
for firm or priority transmission service as
take or take or pay contracts.
2. Retail requirements contracts
The 1998 temporary regulations provide
that a retail requirements contract generally
meets the benefits and burdens test to the
extent it obligates the purchaser to make
payments that are not contingent on the pur-
chaser’s output requirements. Commenta-
tors requested clarification regarding the ap-
plication of this rule to reasonable contract
damages and termination provisions. The
revised regulations clarify that a retail re-
quirements contract does not meet the bene-
fits and burdens test by reason of (1) a pro-
vision that requires the purchaser to pay
reasonable and customary damages (includ-
ing liquidated damages) in the event of a de-
fault, or (2) a provision that permits the pur-
chaser to pay a specified amount to
terminate the contract while the purchaser
has requirements, in each case if the amount
of the payment is reasonably related to the
purchaser’s obligation to buy requirements
that is discharged by the payment.
3. Output contract properly characterized
as a lease
Under the 1998 temporary regulations,
output contracts that provide the purchaser
with specific rights to control the output of
a facility or with other specific performance
rights to the use of output of the facility are
generally taken into account under the pri-
vate business tests, even if the benefits and
burdens test is not met. Commentators re-
quested clarification of the scope of this
rule.
The revised regulations amend the rule
and clarify its application by specifying that
an output contract that is properly charac-
terized as a lease for federal income tax
purposes is tested under §§1.141–3 and
1.141–4 to determine whether it is taken
into account under the private business
tests.
4.Special rule for facilities with
significant unutilized capacity
The 1998 temporary regulations provide
that, if an issuer reasonably expects on the
issue date that persons that are treated as
private business users will purchase more
than 30 percent of the actual output of the
facility, the Commissioner may determine
the number of units produced or to be pro-
duced by the facility in one year on a rea-
sonable basis other than by reference to
nameplate capacity, such as the average ex-
pected annual output of the facility. The re-
vised regulations change the 30 percent
threshold to 20 percent.
5. Special rule for facilities with a limited
source of supply
Under the 1998 temporary regulations,
the available output of a facility that is con-
strained by a limited source of supply must
be determined by reasonably taking those
constraints into account. Commentators re-
quested clarification of the meaning of lim-
ited source of supply. For example, they
asked whether the term includes not only
physical but also economic limitations.
The revised regulations clarify that a
limited source of supply includes a physical
limitation, such as the flow of water, but
not an economic limitation, such as the cost
of coal or gas.
6. Measurement of private business use
The 1998 temporary regulations provide
that, if an output contract results in private
business use, the amount of such use gener-
ally is the capacity that must be reserved for
the nongovernmental person under prudent
reliability standards. Commentators stated
that this provision is difficult to apply and
may overstate the amount of private busi-
ness use. They suggested that the amount
of private business use should be the
amount of output actually purchased under
the contract.
The revised regulations provide that, if
an output contract results in private busi-
ness use, the amount of private business use
generally is the amount of output purchased
under the contract.
7. Exception for small purchases of output
The 1998 temporary regulations provide
that output contracts are not taken into ac-
count under the private business tests if the
purchaser is not required to make a sub-
stantially certain payment in any year that
is greater than 0.5 percent of the average
annual debt service on an issue that fi-
nances the facility. Some commentators
suggested that this provision should be
amended to take into account average an-
nual payments under a contract, rather than
payments in any one year, and that the pro-
vision should apply based on all the out-
standing bonds for the facility. Other com-
mentators stated that the exception should
be eliminated as inconsistent with a com-
petitive electric industry.
The revised regulations provide that out-
put contracts are not taken into account
under the private business tests if the aver-
age annual payments under the contract
that are substantially certain to be made do
not exceed 0.5 percent of the average an-
nual debt service on all outstanding tax-ex-
empt bonds issued to finance the facility.
8.Exception for short-term sales of output
The 1998 temporary regulations pro-
vide that the exceptions for short-term use
that apply to other types of arrangements
under the general private activity bond
rules in §1.141–3 also apply to output
contracts. Many commentators suggested
that these exceptions may have limited
practical application in the output context
and recommended that they be expanded
to permit contracts of a longer duration.
These commentators stated that longer-
term contracts are required in order to
transfer substantial benefits of ownership
and substantial burdens of debt service
with respect to an output facility. Other
commentators suggested that any sale of
output by a municipal utility outside of its
traditional service territory should result
in private business use.

2001–14 I.R.B.979April 2, 2001
The revised regulations provide an ex-
ception under which an output contract
with a nongovernmental person will not be
taken into account under the private busi-
ness tests if: (1) the term of the contract, in-
cluding all renewal options, does not ex-
ceed one year; (2) the compensation under
the contract is based on generally applica-
ble and uniformly applied rates or repre-
sents a negotiated, fair market price; and
(3) the facility is not financed for a princi-
pal purpose of serving that nongovernmen-
tal person.
9. Special exception for sales of output
attributable to excess generating
capacity resulting from open access
The 1998 temporary regulations contain
an exception to private business use for cer-
tain output contracts if: (1) the contract
term does not exceed three years; (2) the is-
suer does not utilize tax-exempt financing
to increase the generating capacity of its
system during the contract term; (3) the
governmental owner offers non-discrimina-
tory, open access transmission tariffs under
certain rules of the Federal Energy Regula-
tory Commission (FERC) (or comparable
provisions of state law pursuant to a plan
approved by the FERC); (4) all of the out-
put sold is attributable to excess capacity
resulting from the offer of the open access
tariffs; (5) the contract mitigates stranded
costs attributable to the open access tariffs;
and (6) any stranded costs recovered by the
governmental owner are applied as
promptly as is reasonably practical to re-
deem tax-exempt bonds in a manner con-
sistent with §1.141–12.
Comments were received regarding
many of the above requirements. In par-
ticular, many commentators suggested that
the maximum contract term should be ex-
tended beyond three years. Some com-
mentators recommended eliminating the
prohibition on tax-exempt financing to in-
crease capacity during the contract term.
Others suggested that de minimiscapacity
increases should be permitted. Some
commentators suggested that the require-
ment that a contract mitigate stranded
costs should be eliminated because the
purpose of that provision is accomplished
by the requirement that all of the output
sold be attributable to excess capacity
from open access tariffs. Some commenta-
tors recommended deleting the reference
to FERC approval of state open access
plans because the FERC may not approve
all such plans. Other commentators re-
quested clarification regarding the amounts
that an issuer must use to redeem bonds.
Finally, some commentators recommended
deleting the exception entirely.
The revised regulations retain the excep-
tion, with certain modifications. First, the
revised exception permits tax-exempt fi-
nancing during the contract term for prop-
erty that does not increase the generating
capacity of the issuer’s system by more
than three percent. Second, the amended
exception deletes the reference to FERC
approval of state open access plans. Third,
the revised regulations remove the refer-
ence to stranded costs. Finally, the revised
exception clarifies that the amounts that an
issuer must use to redeem bonds consist of
all payments that it receives under the con-
tract, other than the portion of such pay-
ments that is properly allocable to the pay-
ment of ordinary and necessary expenses
directly attributable to the operation and
maintenance of the facility (as described in
§1.141–4(c)(2)(C)).
10. Special exceptions for transmission
facilities
The 1998 temporary regulations do not
treat all use of transmission facilities pur-
suant to standard tariffs as general public
use, but contain certain special exceptions
to private business use of transmission fa-
cilities. Some commentators suggested that
use of transmission facilities under standard
tariffs should be treated as general public
use, and therefore should never result in
private business use. The revised regula-
tions do not treat all use of transmission fa-
cilities pursuant to standard tariffs as gen-
eral public use, but retain and modify the
special exceptions, as discussed below.
The 1998 temporary regulations contain
two special exceptions under which certain
actions with respect to transmission facili-
ties financed by an issue are not treated as
deliberate actions under §1.141–2(d). The
first exception provides that the execution
of a contract for the use of transmission fa-
cilities is not treated as a deliberate action if
the contract is entered into in response to or
in anticipation of a specific order by the
FERC to wheel power under sections 211
and 212 of the Federal Power Act (16
U.S.C. 824j and 824k) (or a state regulatory
authority under comparable provisions of
state law pursuant to a plan approved by the
FERC); the terms of the contract are bona
fideand arm’s-length; and the considera-
tion paid is consistent with section 212(a)
of the Federal Power Act.
Commentators suggested eliminating the
requirement that orders of state regulatory
authorities be undertaken pursuant to a
FERC-approved state open access plan be-
cause FERC approval may not be required
for all such plans. The revised regulations
adopt this suggested change.
The second exception in the 1998 tem-
porary regulations provides that an action is
not treated as a deliberate action if it is
taken to implement the offering of non-dis-
criminatory, open access tariffs for the use
of financed transmission facilities in a man-
ner consistent with FERC rules, including
the reciprocity conditions of FERC Order
No. 888 (61 FR 21540, May 10, 1996).
The exception also applies to orders and
rules of state regulatory authorities pur-
suant to a plan approved by the FERC that
are comparable to certain FERC orders and
rules. The exception does not apply, how-
ever, to the sale, exchange, or other disposi-
tion of bond-financed transmission facili-
ties to a nongovernmental person.
Commentators recommended that the
exception be expanded to apply to open ac-
cess tariffs that are offered under state law
provisions that are comparable to FERC
rules, regardless of whether those provi-
sions are promulgated by a state regulatory
authority or approved by the FERC. The
revised regulations adopt this suggested
change.
Commentators also requested clarifica-
tion regarding the circumstances in which
an independent system operator (ISO) may
be treated as a private business user of
transmission facilities. Some commenta-
tors suggested that the operation of trans-
mission facilities by an ISO is a quasi-gov-
ernmental function and thus should never
constitute private business use. Some com-
mentators requested clarification of
whether the existing rules for management
contracts under section 141 may be applied
to arrangements for the operation of trans-
mission facilities by an ISO.
The revised regulations do not provide
that the operation of bond-financed trans-
mission facilities by an ISO or other re-
gional transmission organization (RTO) is
disregarded under section 141. However,
the existing rules for management contracts
under section 141, including Revenue Pro-

April 2, 20019802001–14 I.R.B.
cedure 97–13 (1997–1 C.B. 632), are ap-
plicable in determining whether an arrange-
ment for the operation of transmission fa-
cilities by an ISO or other RTO results in
private business use, including a determina-
tion of whether the arrangement is properly
characterized as a lease for federal income
tax purposes. Comments are requested on
whether additional guidance is needed con-
cerning the treatment under section 141 of
arrangements for the operation of bond-fi-
nanced transmission facilities by an ISO or
other RTO.
The 1998 temporary regulations provide
a special transition rule for bonds (other
than advance refunding bonds) that refund
bonds issued prior to July 9, 1996 (the ef-
fective date of FERC Order No. 888).
Under this rule, an action taken or to be
taken with respect to transmission facilities
is not taken into account under the reason-
able expectations test of §1.141–2(d) if the
action is described in one of the two special
exceptions discussed above and the
weighted average maturity of the refunding
bonds does not exceed the remaining
weighted average maturity of the prior
bonds.
Commentators recommended that the
July 9, 1996, date be changed to a date on
or after February 23, 1998 (the effective
date of the 1998 temporary regulations).
The revised regulations change the cut-off
date to February 23, 1998.
Under the 1998 temporary regulations,
issuers may apply the special exceptions
for transmission facilities to any bonds is-
sued before the effective date of those regu-
lations. However, issuers may not apply
the exceptions to refunding bonds issued on
or after the effective date, unless the re-
funding bonds are subject to the 1998 tem-
porary regulations in their entirety. Com-
mentators suggested that, in order to
encourage open access, issuers should be
permitted to apply the exceptions to refund-
ing bonds that are not otherwise subject to
the regulations. The revised regulations
adopt this change.
11. Definition of transmission facilities
The 1998 temporary regulations define
transmission facilities to include facilities
that are necessary to provide ancillary ser-
vices required to be offered as part of open
access transmission tariffs under FERC
rules. Commentators stated that the inclu-
sion of ancillary services within the general
definition of transmission facilities creates
unwarranted complexity. They recom-
mended that facilities used for ancillary ser-
vices be treated as transmission facilities
only for purposes of the special exceptions
for transmission facilities in the regulations.
The revised regulations adopt this ap-
proach.
B. Section 1.141–8T $15 Million
Limitation for Output Facilities
Under the 1998 temporary regulations,
property that replaces existing property is
treated as part of the same project as the re-
placed property unless, among other things,
the bonds that finance the replaced property
have a weighted average maturity that is
not greater than 120 percent of the reason-
ably expected economic life of the replaced
property.
One commentator noted that it is not
common to allocate bonds that finance out-
put facilities to the specific assets that com-
prise those facilities, and thus it may be dif-
ficult to determine whether this 120 percent
requirement is met. The revised regula-
tions amend this rule so that it applies to the
entire output facility of which the replaced
property is a part, rather than the specific
asset being replaced.
C. Need for Temporary Regulations and
Request for Public Comments
Congress passed the Energy Policy Act
of 1992 to encourage restructuring of the
electric power industry. Since that time, the
FERC and many states have adopted poli-
cies to open up access to transmission facil-
ities. Treasury and the IRS are aware that
these initiatives are causing rapid changes
in the electric power industry.
The 1998 temporary regulations were
published in order to provide immediate
guidance under section 141 regarding the
effect on the tax-exempt status of bonds of
certain restructuring transactions necessary
for utilities to participate in a restructured
electric utility industry. Treasury and the
IRS are aware, however, that restructuring
efforts are evolving and uncertain, and that
new types of arrangements may be devel-
oped to implement restructuring.
Accordingly, the revised regulations are
published in both temporary and proposed
form in order to continue to provide guid-
ance on which issuers can rely in evaluat-
ing their participation in open access
regimes, while providing the opportunity
for public comment with respect to devel-
opments in the electric power industry that
have occurred since the publication of the
1998 temporary regulations. The revised
regulations are published in temporary
form with the expectation that the Treasury
and the IRS will reexamine them in light of
new developments within the next three
years.
Comments are invited on whether fur-
ther guidance is needed to address the new
types of contractual arrangements that are
arising in the electric power industry. In
particular, comments are invited on
whether additional guidance is needed to
address the proper treatment under section
141 of output contracts for the use of trans-
mission and distribution facilities under
open access, and output contracts for ancil-
lary services that are necessary to maintain
the reliability of a transmission grid. Com-
ments are also requested on the impact of
FERC Order No. 2000 (65 FR 810, January
6, 2000) on tax-exempt bonds issued by
public power systems, including whether
additional guidance is needed regarding the
proper treatment under section 141 of
arrangements for the operation of bond-fi-
nanced transmission facilities by an ISO or
other RTO that satisfies the requirements of
Order 2000.
Effective Dates
Sections 1.141–7T and 1.141–8T are ap-
plicable to bonds sold on or after January
19, 2001. Section 1.142(f)(4)–1 applies to
elections made on or after January 19,
2001. Section 1.150–5 applies to notices
and elections filed on or after January 19,
2001.
Special Analyses
It has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Proce-
dure Act (5 U.S.C. chapter 5) does not
apply to these regulations.
It is hereby certified that the collection of
information in these regulations will not
have a significant impact on a substantial
number of small entities. This certification
is based upon the fact that in the years 1987
through 1997 a total of only 80 different
state or local government issuers of exempt
facility bonds issued under section 142(f)

2001–14 I.R.B.981April 2, 2001
for facilities for the local furnishing of elec-
tric energy or gas filed information returns
with the IRS under section 149(e). Further,
an election under section 142(f)(4) is in no
event required to be filed with the Internal
Revenue Service more than once. There-
fore, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursuant
to section 7805(f) of the Internal Revenue
Code, these temporary regulations will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Drafting Information
The principal authors of these regula-
tions are Bruce M. Serchuk, and Rose M.
Weber, Office of Chief Counsel (Tax Ex-
empt and Government Entities), Internal
Revenue Service, and Stephen J. Watson,
Office of Tax Legislative Counsel, Depart-
ment of the Treasury. However, other per-
sonnel from the IRS and Treasury Depart-
ment 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. Section 1.141–0 is amended by
revising the entries for §§1.141–7T,
1.141–8T and 1.141–15T to read as fol-
lows:
§1.141–0 Table of contents.
* * * * *
§1.141–7T Special rules for output
facilities (temporary).
(a) Overview.
(b) Definitions.
(1) Available output.
(2) Measurement period.
(3) Sale at wholesale.
(4) Take contract and take or pay contract.
(5) Transmission facilities.
(6) Nonqualified amount.
(c) Output contracts.
(1) General rule.
(2) Benefits and burdens test.
(3) Take contract or take or pay contract.
(4) Requirements contracts.
(5) Output contract properly characterized
as a lease.
(d) Measurement of private business use.
(e) Measurement of private security or pay-
ment.
(f) Exceptions for certain contracts.
(1) Small purchases of output.
(2) Swapping and pooling arrangements.
(3) Short-term output contracts.
(4) Special 3-year exception for sales of
output attributable to excess generating ca-
pacity resulting from participation in open
access.
(5) Special exceptions for transmission fa-
cilities.
(6) Certain conduit parties disregarded.
(g) Allocations of output facilities and sys-
tems.
(1) Facts and circumstances analysis.
(2) Illustrations.
(3) Transmission contracts.
(4) Allocation of payments.
(h) Examples.
§1.141–8T $15 million limitation for
output facilities (temporary).
(a) In general.
(1) General rule.
(2) Reduction in $15 million output limita-
tion for outstanding issues.
(3) Benefits and burdens test applicable.
(b) Definition of project.
(1) General rule.
(2) Separate ownership.
(3) Generating property.
(4) Transmission.
(5) Subsequent improvements.
(6) Replacement property.
(c) Examples.
* * * * *
§1.141–15T Effective dates (temporary).
(a) through (e) [Reserved].
(f) Effective dates for certain regulations re-
lating to output facilities.
(1) General rule.
(2) Transition rule for requirement con-
tracts.
(3) Elective application of 1998 temporary
regulations.
(g) Refunding bonds.
(h) Permissive retroactive application.
(i) Permissive retroactive application of
certain regulations pertaining to output con-
tracts.
* * * * *
Par. 3. Section 1.141–7T is revised to
read as follows:
§1.141–7T Special rules for output
facilities (temporary).
(a) Overview. This section provides spe-
cial rules to determine whether arrange-
ments for the purchase of output from an
output facility cause an issue of bonds to
meet the private business tests. For this
purpose, unless otherwise stated, water fa-
cilities are treated as output facilities. Sec-
tions 1.141–3 and 1.141–4 generally apply
to determine whether other types of
arrangements for use of an output facility
cause an issue to meet the private business
tests.
(b) Definitions. For purposes of this sec-
tion and §1.141–8T, the following defini-
tions and rules apply:
(1) Available output. The available out-
put of a facility financed by an issue is de-
termined by multiplying the number of
units produced or to be produced by the fa-
cility in one year by the number of years in
the measurement period of that facility for
that issue.
(i) Generating facilities. The number
of units produced or to be produced by a
generating facility in one year is deter-
mined by reference to its nameplate ca-
pacity or the equivalent (or where there is
no nameplate capacity or the equivalent,
its maximum capacity), which is not re-
duced for reserves, maintenance or other
unutilized capacity.
(ii) Transmission and other output facili-
ties—(A) In general.For transmission, co-
generation, and other output facilities,
available output must be measured in a rea-
sonable manner to reflect capacity.
(B) Electric transmission facilities.
Measurement of the available output of all
or a portion of electric transmission facili-
ties may be determined in a manner con-
sistent with the reporting rules and re-
quirements for transmission networks
promulgated by the Federal Energy Regu-
latory Commission (FERC). For example,
for a transmission network, the use of ag-
gregate load and load share ratios in a
manner consistent with the requirements of
the FERC may be reasonable. In addition,
depending on the facts and circumstances,
measurement of the available output of
transmission facilities using thermal capac-
ity or transfer capacity may be reasonable.

(iii) Special rule for facilities with signif-
icant unutilized capacity. If an issuer rea-
sonably expects on the issue date that per-
sons that are treated as private business
users will purchase more than 20 percent of
the actual output of the facility financed
with the issue, the Commissioner may de-
termine the number of units produced or to
be produced by the facility in one year on a
reasonable basis other than by reference to
nameplate capacity, such as the average ex-
pected annual output of the facility. For ex-
ample, the Commissioner may determine
the available output of a financed peaking
electric generating unit by reference to the
reasonably expected annual output of that
unit if the issuer reasonably expects, on the
issue date of bonds that finance the unit,
that an investor-owned utility will purchase
more than 20 percent of the actual output of
the facility during the measurement period
under a take or pay contract, even if the
amount of output purchased is less than 10
percent of the available output determined
by reference to nameplate capacity. The
reasonably expected annual output of the
generating facility must be consistent with
the capacity reported for prudent reliability
purposes.
(iv) Special rule for facilities with a lim-
ited source of supply. If a limited source of
supply constrains the output of an output
facility, the number of units produced or to
be produced by the facility must be deter-
mined by reasonably taking into account
those constraints. For this purpose, a lim-
ited source of supply shall include a physi-
cal limitation (for example, flow of water),
but not an economic limitation (for exam-
ple, cost of coal or gas). For example, the
available output of a hydroelectric unit
must be determined by reference to the rea-
sonably expected annual flow of water
through the unit.
(2) Measurement period. The measure-
ment period of an output facility financed
by an issue is determined under
§1.141–3(g).
(3) Sale at wholesale. For purposes of
this section, a sale at wholesale means a
sale of output to any person for resale.
(4) Take contract and take or pay con-
tract. Atake contractis an output contract
under which a purchaser agrees to pay for
the output under the contract if the output
facility is capable of providing the output.
Atake or pay contractis an output contract
under which a purchaser agrees to pay for
the output under the contract, whether or
not the output facility is capable of provid-
ing the output.
(5) Transmission facilities—(i) In gen-
eral. Transmission facilitiesare facilities
for the transmission or distribution of out-
put.
(ii) Special rule for ancillary services.
For purposes of paragraph (f)(5), transmis-
sion facilities include facilities necessary to
provide ancillary services required to be of-
fered as part of open access transmission
tariffs under rules promulgated by the
FERC under sections 205 and 206 of the
Federal Power Act (16 U.S.C. 824d and
824e). Thus, if a facility also serves an-
other function (for example, a facility that
provides for operating reserves for trans-
mission and also provides generation) an
allocable portion of the facility is treated as
a transmission facility for purposes of para-
graph (f)(5) of this section.
(6) Nonqualified amount. The nonquali-
fied amount with respect to an issue is de-
termined under section 141(b)(8).
(c) Output contracts—(1) General rule.
The purchase by a nongovernmental person
of available output of an output facility (out-
put contract) financed with the proceeds of
an issue is taken into account under the pri-
vate business tests if the purchase has the ef-
fect of transferring substantial benefits of
owning the facility and substantial burdens
of paying the debt service on bonds used
(directly or indirectly) to finance the facility
(the benefits and burdens test). See para-
graph (c)(5) of this section for the treatment
of an output contract that is properly charac-
terized as a lease for Federal income tax
purposes. See paragraphs (d) and (e) of this
section for rules regarding measuring the
use of, and payments of debt service for, an
output facility for determining whether the
private business tests are met. See also
§1.141–8T for rules for when an issue that
finances an output facility (other than a
water facility) meets the private business
tests because the nonqualified amount of the
issue exceeds $15 million.
(2) Benefits and burdens test—(i) Bene-
fits of ownership. An output contract trans-
fers substantial benefits of owning a facility
if the contract gives the purchaser (directly
or indirectly) rights to capacity of the facil-
ity on a basis that is preferential to the
rights of the general public.
(ii) Burdens of paying debt service. An
output contract transfers substantial bur-
dens of paying debt service on an issue to
the extent that the issuer reasonably expects
that it is substantially certain that payments
will be made under the terms of the con-
tract (disregarding default, insolvency, or
other similar circumstances). For example,
an output contract is treated as transferring
burdens of paying debt service on an issue
if payments must be made upon contract
termination.
(iii) Payments pursuant to pledged con-
tract. Payments made or to be made under
the terms of an output contract that is
pledged as security for an issue are taken
into account under the private business tests
even if the issuer reasonably expects that it
is not substantially certain that payments
will be made under the contract (disregard-
ing default, insolvency, or other similar cir-
cumstances). For this purpose, an output
contract is pledged as security only if the
bond documents provide that the pledged
contract cannot be substantially amended
without the consent of bondholders or a
trustee for the bondholders. This paragraph
(c)(2)(iii) applies to pledges made on or
after February 23, 1998, with respect to
bonds that are subject to this section.
(3) Take contract or take or pay contract.
The benefits and burdens test is met if a
nongovernmental person agrees pursuant to
a take contract or a take or pay contract to
purchase available output of a facility.
(4) Requirements contracts—(i) In gen-
eral. A requirements contract under which
a nongovernmental person agrees to pur-
chase all or part of its output requirements
is taken into account under the private busi-
ness tests only to the extent that, based on
all the facts and circumstances, the contract
meets the benefits and burdens test. See
§1.141–15T(f)(2) for special effective dates
for the application of this paragraph (c)(4)
to issues financing facilities subject to re-
quirements contracts.
(ii) Significant factors. Significant fac-
tors that tend to establish that the benefits
and burdens test is met under the rule set
forth in paragraph (c)(4)(i) of this section
include, but are not limited to—
(A) The purchaser’s customer base has
significant indicators of stability, such as
large size, diverse composition, and a sub-
stantial residential component;
(B) The contract covers historical re-
quirements of the purchaser, rather than
only projected requirements that are in ad-
dition to historical requirements; and
April 2, 20019822001–14 I.R.B.

(C) The purchaser agrees not to construct
or acquire other power resources to meet
the requirements covered by the contract.
(iii) Special rule for retail requirements
contracts. In general, a requirements con-
tract that is not a sale at wholesale (a retail
requirements contract) does not meet the
benefits and burdens test because the oblig-
ation to make payments on the contract is
contingent on the output requirements of a
single user. Such a requirements contract in
general meets the benefits and burdens test,
however, to the extent that it contains con-
tractual terms that obligate the purchaser to
make payments that are not contingent on
the output requirements of the purchaser or
that obligate the purchaser to have output
requirements. For example, a requirements
contract with an industrial purchaser meets
the benefits and burdens test if the purchaser
enters into additional contractual obliga-
tions with the issuer or another governmen-
tal unit not to cease operations. A retail re-
quirements contract does not meet the
benefits and burdens test by reason of a pro-
vision that requires the purchaser to pay rea-
sonable and customary damages (including
liquidated damages) in the event of a de-
fault, or a provision that permits the pur-
chaser to pay a specified amount to termi-
nate the contract while the purchaser has
requirements, in each case if the amount of
the payment is reasonably related to the pur-
chaser’s obligation to buy requirements that
is discharged by the payment.
(5) Output contract properly character-
ized as a lease. Notwithstanding any other
provision of this section, an output contract
that is properly characterized as a lease for
Federal income tax purposes shall be tested
under the rules contained in §§1.141–3 and
1.141–4 to determine whether it is taken
into account under the private business
tests.
(d) Measurement of private business use.
If an output contract results in private busi-
ness use under this section, the amount of
private business use generally is the
amount of output purchased under the con-
tract.
(e) Measurement of private security or
payment.The measurement of payments
made or to be made by nongovernmental
persons under output contracts as a percent
of the debt service of an issue is determined
under the rules provided in §1.141–4.
(f) Exceptions for certain contracts—(1)
Small purchases of output. An output con-
tract is not taken into account under the pri-
vate business tests if the average annual
payments under the contract that are sub-
stantially certain to be made under para-
graph (c)(2)(ii) of this section do not ex-
ceed 0.5 percent of the average annual debt
service on all outstanding tax-exempt
bonds issued to finance the facility, deter-
mined as of the effective date of the con-
tract.
(2) Swapping and pooling arrange-
ments. An agreement that provides for
swapping or pooling of output by one or
more governmental persons and one or
more nongovernmental persons does not
result in private business use of the output
facility owned by the governmental person
to the extent that—
(i) The swapped output is reasonably ex-
pected to be approximately equal in value
(determined over periods of one year or
less); and
(ii) The purpose of the agreement is to
enable each of the parties to satisfy differ-
ent peak load demands, to accommodate
temporary outages, to diversify supply, or
to enhance reliability in accordance with
prudent reliability standards.
(3) Short-term output contracts. An out-
put contract with a nongovernmental per-
son is not taken into account under the pri-
vate business tests if—
(i) The term of the contract, including all
renewal options, is not longer than 1 year;
(ii) The contract either is a negotiated,
arm’s-length arrangement that provides for
compensation at fair market value, or is
based on generally applicable and uni-
formly applied rates; and
(iii) The output facility is not financed
for a principal purpose of providing that fa-
cility for use by that nongovernmental per-
son.
(4) Special 3-year exception for sales of
output attributable to excess generating ca-
pacity resulting from participation in open
access. The purchase of output of an elec-
tric generating facility by a nongovernmen-
tal person is not treated as private business
use if all of the following requirements are
met:
(i) The term of the contract is not longer
than 3 years, including all renewal options.
(ii) The issuer does not make expendi-
tures to increase the generating capacity of
its system during the term of the contract
that are, or will be, financed with proceeds
of tax-exempt bonds (other than expendi-
tures for property that does not increase the
generating capacity of the system by more
than 3 percent).
(iii) The governmental owner offers non-
discriminatory, open access transmission
tariffs for use of its transmission system
pursuant to rules promulgated by the FERC
under sections 205 and 206 of the Federal
Power Act (16 U.S.C. 824d and 824e) (or
comparable provisions of state law).
(iv) All of the output sold under the con-
tract is attributable to excess capacity re-
sulting from the offer of the non-discrimi-
natory, open access transmission tariffs
referred to in paragraph (f)(5)(iii) of this
section.
(v) All payments received by the govern-
mental owner under the contract (other than
the portion of such payments described in
§1.141–4(c)(2)(C)) are applied as promptly
as is reasonably practical to redeem tax-ex-
empt bonds that financed the output facility
in a manner consistent with §1.141–12.
(5) Special exceptions for transmission
facilities—(i) Mandated wheeling. Enter-
ing into a contract for the use of transmis-
sion facilities financed by an issue is not
treated as a deliberate action under
§1.141–2(d) if—
(A) The contract is entered into in re-
sponse to (or in anticipation of) an order by
the United States under sections 211 and
212 of the Federal Power Act (16 U.S.C.
824j and 824k) (or a state regulatory au-
thority under comparable provisions of
state law); and
(B) The terms of the contract are bona
fideand arm’s length, and the consideration
paid is consistent with the provisions of
section 212(a) of the Federal Power Act.
(ii) Actions taken to implement non-dis-
criminatory, open access. An action is not
treated as a deliberate action under
§1.141–2(d) if it is taken to implement the
offering of non-discriminatory, open access
tariffs for the use of transmission facilities
financed by an issue in a manner consistent
with rules promulgated by the FERC under
sections 205 and 206 of the Federal Power
Act (16 U.S.C. 824d and 824e) (or compa-
rable provisions of state law). This para-
graph (f)(5)(ii) does not apply, however, to
the sale, exchange, or other disposition of
transmission facilities to a nongovernmen-
tal person.
(iii) Application of reasonable expecta-
tions test to certain current refunding
bonds. An action taken or to be taken with
2001–14 I.R.B.983April 2, 2001

respect to transmission facilities refinanced
by an issue is not taken into account under
the reasonable expectations test of
§1.141–2(d) if—
(A) The action is described in paragraph
(f)(5)(i) or (ii) of this section;
(B) The bonds of the issue are current re-
funding bonds that, directly or indirectly,
refund bonds originally issued before Feb-
ruary 23, 1998; and
(C) The weighted average maturity of
the refunding bonds is not greater than the
remaining weighted average maturity of
those prior bonds.
(6) Certain conduit parties disregarded.
A nongovernmental person acting solely as a
conduit for the exchange of output among
governmentally owned and operated utilities
is disregarded in determining whether the
private business tests are met with respect to
financed facilities owned by a governmental
person. Use of property by a power mar-
keter in the trade or business of purchasing
and reselling power, however, is taken into
account under the private business tests.
(g) Allocations of output facilities and
systems—(1) Facts and circumstances
analysis. Whether output sold under an
output contract is allocated to a particular
facility (for example, a generating unit), to
the entire system of the seller of that output
(net of any uses of that system output allo-
cated to a particular facility), or to a portion
of a facility is based on all the facts and cir-
cumstances. Significant factors to be con-
sidered in determining the allocation of an
output contract to financed property are the
following:
(i) The extent to which it is physically
possible to deliver output to or from a par-
ticular facility or system.
(ii) The terms of a contract relating to the
delivery of output (such as delivery limita-
tions and options or obligations to deliver
power from additional sources).
(iii) Whether a contract is entered into as
part of a common plan of financing for a fa-
cility.
(iv) The method of pricing output under
the contract, such as the use of market rates
rather than rates designed to pay debt ser-
vice of tax-exempt bonds used to finance a
particular facility.
(2) Illustrations. The following illustrate
the factors set forth in paragraph (g)(1) of
this section:
(i) Physical possibility.Output from a
generating unit that is fed directly into a
low voltage distribution system of the
owner of that unit and that cannot physi-
cally leave that distribution system gener-
ally must be allocated to those receiving
electricity through that distribution system.
Output may be allocated without regard to
physical limitations, however, if exchange
or similar agreements provide output to a
purchaser where, but for the exchange
agreements, it would not be possible for the
seller to provide output to that purchaser.
(ii) Contract terms relating to perfor-
mance. A contract to provide a specified
amount of electricity from a system, but
only when at least that amount of electricity
is being generated by a particular unit, is al-
located to that unit. For example, a contract
to buy 20 MW of system power with a right
to take up to 40 percent of the actual output
of a specific 50 MW facility whenever total
system output is insufficient to meet all of
the seller’s obligations generally is allo-
cated to the specific facility rather than to
the system.
(iii) Common plan of financing. A con-
tract entered into as part of a common plan
of financing for a facility generally is allo-
cated to the facility if debt service for the
issue of bonds is reasonably expected to be
paid, directly or indirectly, from payments
substantially certain to be made under the
contract (disregarding default, insolvency,
or other similar circumstances).
(iv) Pricing method. Pricing based on
the capital and generating costs of a partic-
ular turbine tends to indicate that output
under the contract is properly allocated to
that turbine.
(3) Transmission contracts. Whether use
under an output contract for transmission is
allocated to a particular facility or to a
transmission network is based on all the
facts and circumstances, in a manner simi-
lar to paragraphs (g)(1) and (2) of this sec-
tion. In general, the method used to deter-
mine payments under a contract is a more
significant contract term for this purpose
than nominal contract path. In general, if
reasonable and consistently applied, the de-
termination of use of transmission facilities
under an output contract may be based on a
method used by third parties, such as relia-
bility councils.
(4) Allocation of payments. Payments
for output provided by an output facility fi-
nanced with two or more sources of fund-
ing are generally allocated under the rules
in §1.141–4(c).
(h) Examples. The following examples
illustrate the application of this section:
Example 1. Joint ownership. Z, an investor-owned
electric utility, and City H agree to construct an elec-
tric generating facility of a size sufficient to take ad-
vantage of the economies of scale. H will issue $50
million of its 24-year bonds, and Z will use $100 mil-
lion of its funds for construction of a facility they will
jointly own as tenants in common. Each of the partic-
ipants will share in the ownership, output, and operat-
ing expenses of the facility in proportion to its contri-
bution to the cost of the facility, that is, one-third by H
and two-thirds by Z. H’s bonds will be secured by H’s
ownership interest in the facility and by revenues to be
derived from its share of the annual output of the facil-
ity. H will need only 50 percent of its share of the an-
nual output of the facility during the first 20 years of
operations. It agrees to sell 10 percent of its share of
the annual output to Z for a period of 20 years pur-
suant to a contract under which Z agrees to take that
power if available. The facility will begin operation,
and Z will begin to receive power, 4 years after the H
bonds are issued. The measurement period for the
property financed by the issue is 20 years. H also will
sell the remaining 40 percent of its share of the annual
output to numerous other private utilities under con-
tracts of one year or less that satisfy the exception
under paragraph (f)(3) of this section. No other con-
tracts will be executed obligating any person to pur-
chase any specified amount of the power for any spec-
ified period of time. No person (other than Z) will
make payments substantially certain to be made (dis-
regarding default, insolvency, or other similar circum-
stances) under paragraph (c)(2) of this section that will
result in a transfer of substantial burdens of paying
debt service on bonds used directly or indirectly to
provide H’s share of the facilities. The bonds are not
private activity bonds, because H’s one-third interest
in the facility is not treated as used by the other owners
of the facility. Although 10 percent of H’s share of the
annual output of the facility will be used in the trade or
business of Z, a nongovernmental person, under this
section, that portion constitutes not more than 10 per-
cent of the available output of H’s ownership interest
in the facility.
Example 2. Requirements contract treated as take
contract. (i) City J issues 20-year bonds to acquire an
electric generating facility having a reasonably ex-
pected economic life substantially greater than 20
years and a nameplate capacity of 100 MW. The
available output of the facility under paragraph (b)(1)
of this section is approximately 17,520,000 MWh
(100 MW X 24 hours X 365 days X 20 years). On the
issue date, J enters into a contract with T, an investor-
owned utility, to provide T with all of its power re-
quirements for a period of 10 years, commencing on
the issue date. J reasonably expects that T will actu-
ally purchase an average of 30 MW over the 10-year
period. Based on all of the facts and circumstances,
including the size, diversity, and composition of T’s
customer base, J reasonably expects that it is substan-
tially certain (disregarding default, insolvency, or
other similar circumstances) that T will actually pur-
chase only an average of 26 MW over the 10-year pe-
riod. The contract is a requirements contract that must
be taken into account under the private business tests
pursuant to paragraph (c)(4) of this section because it
provides T with substantial benefits of ownership
(rights to capacity) and obligates T with substantial
April 2, 20019842001–14 I.R.B.

burdens of making payments that the issuer reason-
ably expects are substantially certain.
(ii) Under paragraph (d) of this section, the amount
of reasonably expected private business use under this
contract is approximately 15 percent (30 MW X 24
hours X 365 days X 10 years, or 2,628,000 MWh) of
the available output. Accordingly, the issue meets the
private business use test. J reasonably expects that the
amount to be paid for an average of 26 MW of power
(less the operation and maintenance costs directly at-
tributable to generating that 26 MW of power), will be
more than 10 percent of debt service on the issue on a
present-value basis. The payment for 26 MW of
power is an amount that J reasonably expects is sub-
stantially certain to be made under paragraph (c)(2) of
this section. Accordingly, the issue meets the private
security or payment test because J reasonably expects
that it is substantially certain that payment of more
than 10 percent of the debt service will be indirectly
derived from payments by T. The bonds are private
activity bonds under paragraph (c) of this section.
Further, if 15 percent of the sale proceeds of the issue
is greater than $15 million and the issue meets the pri-
vate security or payment test with respect to the $15
million output limitation, the bonds are also private ac-
tivity bonds under section 141(b)(4). See §1.141–8T.
Example 3. Allocation of existing contracts to new
facilities. Power Authority K, a political subdivision
created by the legislature in State X to own and oper-
ate certain power generating facilities, sells all of the
power from its existing facilities to four private utility
systems under contracts executed in 1999, under
which the four systems are required to take or pay for
specified portions of the total power output until the
year 2029. Existing facilities supply all of the present
needs of the four utility systems, but their future power
requirements are expected to increase substantially be-
yond the capacity of K’s current generating system. K
issues 20-year bonds in 2004 to construct a large gen-
erating facility. As part of the financing plan for the
bonds, a fifth private utility system contracts with K to
take or pay for 15 percent of the available output of the
new facility. The balance of the output of the new fa-
cility will be available for sale as required, but initially
it is not anticipated that there will be any need for that
power. The revenues from the contract with the fifth
private utility system will be sufficient to pay less than
10 percent of the debt service on the bonds (deter-
mined on a present value basis). The balance, which
will exceed 10 percent of the debt service on the
bonds, will be paid from revenues derived from the
contracts with the four systems initially from sale of
power produced by the old facilities. The output con-
tracts with all the private utilities are allocated to K’s
entire generating system. See paragraphs (g)(1) and
(2) of this section. Thus, the bonds meet the private
business use test because more than 10 percent of the
proceeds will be used in the trade or business of a non-
governmental person. In addition, the bonds meet the
private security or payment test because payment of
more than 10 percent of the debt service, pursuant to
underlying arrangements, will be derived from pay-
ments in respect of property used for a private busi-
ness use.
Example 4. Allocation to displaced resource. Mu-
nicipal utility MU, a political subdivision, purchases
all of the electricity required to meet the needs of its
customers (1,000 MW) from B, an investor-owned
utility that operates its own electric generating facili-
ties, under a 50-year take or pay contract. MU does
not anticipate that it will require additional electric re-
sources, and any new resources would produce elec-
tricity at a higher cost to MU than its cost under its
contract with B. Nevertheless, B encourages MU to
construct a new generating plant sufficient to meet
MU’s requirements. MU issues obligations to con-
struct facilities that will produce 1,000 MW of elec-
tricity. MU, B, and I, another investor-owned utility,
enter into an agreement under which MU assigns to I
its rights under MU’s take or pay contract with B.
Under this arrangement, I will pay MU, and MU will
continue to pay B, for the 1,000 MW. I’s payments to
MU will at least equal the amounts required to pay
debt service on MU’s bonds. In addition, under para-
graph (g)(1)(iii) of this section, the contract among
MU, B, and I is entered into as part of a common plan
of financing of the MU facilities. Under all the facts
and circumstances, MU’s assignment to I of its rights
under the original take or pay contract is allocable to
MU’s new facilities under paragraph (g) of this sec-
tion. Because I is a nongovernmental person, MU’s
bonds are private activity bonds.
Example 5. Transmission facilities transferred to
regional transmission organization. (i) In 2001, the
public utilities commission of State C adopts a plan for
restructuring its electric power industry. The plan fos-
ters competition by providing both wholesale and re-
tail customers with non-discriminatory access to trans-
mission facilities within the State. The plan provides
that investor-owned utilities will transfer operating
control over all of their transmission assets to a re-
gional transmission organization (RTO), which is a
nongovernmental person that will operate those com-
bined assets as a single, state-wide system. Munici-
pally-owned utilities are eligible for, but are not re-
quired to participate in, the open access system
implemented by the RTO. The functions of the RTO
include control of transmission access and pricing,
scheduling transmission, control area operations, and
settlements and billing. The RTO’s compensation
under its operating agreement with transmission own-
ers is based on a share of net profits from operating the
facilities. The restructuring plan is approved by the
FERC pursuant to sections 205 and 206 of the Federal
Power Act.
(ii) In 1994, City D had issued bonds to finance im-
provements to its transmission system. In 2001, D
transfers operating control of its transmission system
to the RTO pursuant to the restructuring plan. At the
same time, D chooses to apply the private activity
bond regulations of §§1.141–1 through 1.141–15 to
the 1994 bonds. The operation of the financed facili-
ties by the RTO results in private business use under
§1.141–3. Under the special exception in paragraph
(f)(5) of this section, however, the transfer of control is
not treated as a deliberate action. Accordingly, the
transfer of control does not cause the 1994 bonds to
meet the private activity bond tests.
Example 6. Current refunding. The facts are the
same as in Example 5 of this paragraph (h), and in ad-
dition D issues bonds in 2003 to currently refund the
1994 bonds. The weighted average maturity of the
2003 bonds is not greater than the remaining weighted
average maturity of the 1994 bonds. D chooses to
apply the private activity bond regulations of
§§1.141–1 through 1.141–15 to the refunding bonds.
In general, reasonable expectations must be separately
tested on the date that refunding bonds are issued
under §1.141–2(d). Under the special exception in
paragraph (f)(5) of this section, however, the transfer
of the financed facilities to the RTO need not be taken
into account in applying the reasonable expectations
test to the refunding bonds.
Par. 4. Section 1.141–8T is revised to
read as follows:
§1.141–8T $15 million limitation for
output facilities (temporary).
(a) In general—(1) General rule. Sec-
tion 141(b)(4) provides a special private ac-
tivity bond limitation (the $15 million out-
put limitation) for issues 5 percent or more
of the proceeds of which are to be used to
finance output facilities (other than a facil-
ity for the furnishing of water). Under this
rule, an issue consists of private activity
bonds under the private business tests of
section 141(b)(1) and (2) if the nonquali-
fied amount with respect to output facilities
financed by the proceeds of the issue ex-
ceeds $15 million. The $15 million output
limitation applies in addition to the private
business tests of section 141(b)(1) and (2).
Under section 141(b)(4) and paragraph
(a)(2) of this section, the $15 million output
limitation is reduced in certain cases.
Specifically, an issue meets the test in sec-
tion 141(b)(4) if both of the following tests
are met:
(i) More than $15 million of the pro-
ceeds of the issue to be used with respect to
an output facility are to be used for a pri-
vate business use. Investment proceeds are
disregarded for this purpose if they are not
allocated disproportionately to the private
business use portion of the issue.
(ii) The payment of the principal of, or
the interest on, more than $15 million of the
sales proceeds of the portion of the issue
used with respect to an output facility is
(under the terms of the issue or any under-
lying arrangement) directly or indirectly—
(A) Secured by any interest in an output
facility used or to be used for a private busi-
ness use (or payments in respect of such an
output facility); or
(B) To be derived from payments
(whether or not to the issuer) in respect of
an output facility used or to be used for a
private business use.
(2) Reduction in $15 million output limi-
tation for outstanding issues—(i) General
rule. In determining whether an issue 5
percent or more of the proceeds of which
are to be used with respect to an output fa-
cility consists of private activity bonds
under the $15 million output limitation, the
$15 million limitation on private business
2001–14 I.R.B.985April 2, 2001

use and private security or payments is ap-
plied by taking into account the aggregate
nonqualified amounts of any outstanding
bonds of other issues 5 percent or more of
the proceeds of which are or will be used
with respect to that output facility or any
other output facility that is part of the same
project.
(ii) Bonds taken into account. For pur-
poses of this paragraph (a)(2), in applying
the $15 million output limitation to an issue
(the later issue), a tax-exempt bond of an-
other issue (the earlier issue) is taken into
account if—
(A) That bond is outstanding on the issue
date of the later issue;
(B) That bond will not be redeemed
within 90 days of the issue date of the later
issue in connection with the refunding of
that bond by the later issue; and
(C) 5 percent or more of the sale pro-
ceeds of the earlier issue financed an output
facility that is part of the same project as
the output facility that is financed by 5 per-
cent or more of the sale proceeds of the
later issue.
(3) Benefits and burdens test applica-
ble—(i) In general. In applying the $15
million output limitation, the benefits
and burdens test of §1.141–7T applies,
except that “$15 million” is substituted
for “10 percent”, or “5 percent” as ap-
propriate.
(ii) Earlier issues for the project. If
bonds of an earlier issue are outstanding
and must be taken into account under para-
graph (a)(2) of this section, the nonquali-
fied amount for that earlier issue is multi-
plied by a fraction, the numerator of which
is the adjusted issue price of the earlier
issue as of the issue date of the later issue,
and the denominator of which is the issue
price of the earlier issue. Pre-issuance ac-
crued interest as defined in §1.148–1(b) is
disregarded for this purpose.
(b) Definition of project—(1) General
rule. For purposes of paragraph (a)(2) of
this section,projecthas the meaning pro-
vided in this paragraph. Facilities that are
functionally related and subordinate to a
project are treated as part of that same pro-
ject. Facilities having different purposes or
serving different customer bases are not or-
dinarily part of the same project. For ex-
ample, the following are generally not part
of the same project—
(i) Generation and transmission facili-
ties;
(ii) Separate facilities designed to serve
wholesale customers and retail customers;
and
(iii) A peaking unit and a baseload unit.
(2) Separate ownership. Except as oth-
erwise provided in this paragraph (b)(2), fa-
cilities that are not owned by the same per-
son are not part of the same project. If
different governmental persons act in con-
cert to finance a project, however (for ex-
ample as participants in a joint powers au-
thority), their interests are aggregated with
respect to that project to determine whether
the $15 million output limitation is met. In
the case of undivided ownership interests in
a single output facility, property that is not
owned by different persons is treated as
separate projects only if the separate inter-
ests are financed—
(i) With bonds of different issuers; and
(ii) Without a principal purpose of avoid-
ing the limitation in this section.
(3) Generating property—(i) Property
on same site. In the case of generation and
related facilities,projectmeans property lo-
cated at the same site.
(ii) Special rule for generating units.
Separate generating units are not part of the
same project if one unit is reasonably ex-
pected, on the issue date of each issue that
finances the units, to be placed in service
more than 3 years before the other. Com-
mon facilities or property that will be func-
tionally related to more than one generating
unit must be allocated on a reasonable
basis. If a generating unit already is con-
structed or is under construction (the first
unit) and bonds are to be issued to finance
an additional generating unit (the second
unit), all costs for any common facilities
paid or incurred before the earlier of the
issue date of bonds to finance the second
unit or the commencement of construction
of the second unit are allocated to the first
unit. At the time that bonds are issued to fi-
nance the second unit (or, if earlier, upon
commencement of construction of that
unit), any remaining costs of the common
facilities may be allocated between the first
and second units so that in the aggregate
the allocation is reasonable.
(4) Transmission. In the case of trans-
mission facilities, projectmeans function-
ally related or contiguous property. Sepa-
rate transmission facilities are not part of
the same project if one facility is reason-
ably expected, on the issue date of each
issue that finances the facilities, to be
placed in service more than 2 years before
the other.
(5) Subsequent improvements—(i) In gen-
eral. An improvement to generating or
transmission facilities that is not part of the
original design of those facilities (the origi-
nal project) is not part of the same project as
the original project if the construction, re-
construction, or acquisition of that improve-
ment commences more than 3 years after the
original project was placed in service and the
bonds issued to finance that improvement
are issued more than 3 years after the origi-
nal project was placed in service.
(ii) Special rule for transmission facili-
ties. An improvement to transmission facil-
ities that is not part of the original design of
that property is not part of the same project
as the original project if the issuer did not
reasonably expect the need to make that
improvement when it commenced con-
struction of the original project and the con-
struction, reconstruction, or acquisition of
that improvement is mandated by the fed-
eral government or a state regulatory au-
thority to accommodate requests for wheel-
ing.
(6) Replacement property. For purposes
of this section, property that replaces exist-
ing property of an output facility is treated
as part of the same project as the replaced
property unless—
(i) The need to replace the property was
not reasonably expected on the issue date
or the need to replace the property occurred
more than 3 years before the issuer reason-
ably expected (determined on the issue date
of the bonds financing the property) that it
would need to replace the property; and
(ii) The bonds that finance (and refi-
nance) the output facility have a weighted
average maturity that is not greater than
120 percent of the reasonably expected
economic life of the facility.
(c) Example. The application of the pro-
visions of this section is illustrated by the
following example:
Example. (i) Power Authority K, a political subdi-
vision, intends to issue a single issue of tax-exempt
bonds at par with a stated principal amount and sale
proceeds of $500 million to finance the acquisition of
an electric generating facility. No portion of the facil-
ity will be used for a private business use, except that
L, an investor-owned utility, will purchase 10 percent
of the output of the facility under a take contract and
will pay 10 percent of the debt service on the bonds.
The nonqualified amount with respect to the bonds is
$50 million.
(ii) The maximum amount of tax-exempt bonds
that may be issued for the acquisition of an interest in
April 2, 20019862001–14 I.R.B.

the facility in paragraph (i) of this Exampleis $465
million (that is, $450 million for the 90 percent of the
facility that is governmentally owned and used plus a
nonqualified amount of $15 million).
Par. 5. Section 1.141–15 is amended by
revising paragraphs (c), (d) and (e) to read
as follows:
§1.141–15 Effective dates.
* * * * *
(c) Refunding bonds. Sections 1.141–1
through 1.141–6(a), 1.141–9 through
1.141–14, 1.145–1 through 1.145–2,
1.150–1(a)(3) and the definition of bond
documents contained in §1.150–1(b) do not
apply to any bonds issued on or after May
16, 1997, to refund a bond to which those
sections do not apply unless—
(1) The refunding bonds are subject to
section 1301 of the Tax Reform Act of
1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of
the refunding bonds is longer than—
(A) The weighted average maturity of
the refunded bonds; or
(B) In the case of a short-term obligation
that the issuer reasonably expects to refund
with a long-term financing (such as a bond
anticipation note), 120 percent of the
weighted average reasonably expected eco-
nomic life of the facilities financed; or
(ii) A principal purpose for the issuance
of the refunding bonds is to make one or
more new conduit loans.
(d) Permissive application of regula-
tions. Except as provided in paragraph (e)
of this section, §§1.141–1 through
1.141–6(a), 1.141–9 through 1.141–14,
1.145–1 through 1.145–2, 1.150–1(a)(3)
and the definition of bond documents con-
tained in §1.150–1(b) may be applied in
whole, but not in part, to actions taken be-
fore February 23, 1998, with respect to—
(1) Bonds that are outstanding on May
16, 1997, and subject to section 141; or
(2) Refunding bonds issued on or after
May 16, 1997, that are subject to section
141.
(e) Permissive application of certain sec-
tions. The following sections may each be
applied to any bonds—
(1) Section 1.141–3(b)(4);
(2) Section 1.141–3(b)(6); and
(3) Section 1.141–12.
Par. 6. Section 1.141–15T is revised to
read as follows:
§1.141–15T Effective dates (temporary).
(a) through (e) [Reserved]. For further
guidance see §1.141–15.
(f) Effective dates for certain regulations
relating to output facilities—(1) General
rule. Except as otherwise provided in this
section, §§1.141–7T and 1.141–8T apply to
bonds sold on or after January 19, 2001,
that are subject to section 1301 of the Tax
Reform Act of 1986 (100 Stat. 2602).
(2) Transition rule for requirements con-
tracts. For bonds otherwise subject to
§§1.141–7Tand 1.141–8T,
§1.141–7T(c)(4) applies to output contracts
entered into on or after February 23, 1998.
An output contract is treated as entered into
on or after that date if its term is extended,
the parties to the contract change, or other
material terms are amended on or after that
date. For purposes of this paragraph
(f)(2)—
(i) The extension of the term of a con-
tract causes the contract to be treated as en-
tered into on the first day of the additional
term;
(ii) The exercise by a party of a legally
enforceable right that was provided under a
contract before February 23, 1998, on terms
that were fixed and determinable before
such date, is not treated as an amendment of
the contract. For example, the exercise by a
purchaser after February 23, 1998, of a re-
newal option that was provided under a con-
tract before that date, on terms identical to
the original contract, is not treated as an
amendment of the contract; and
(iii) An amendment that reduces the term
of a contract, or the amount of requirements
covered by a contract, is not, in and of it-
self, material.
(3) Elective application of 1998 tempo-
rary regulations. For an issue sold on or
after January 19, 2001, and before February
15, 2001, an issuer may apply the provi-
sions of §§1.141–7T and 1.141–8T in effect
prior to January 19, 2001 (26 CFR part 1,
revised April 1, 2000) in whole, but not in
part, in lieu of applying §§1.141–7T and
1.141–8T.
(g) Refunding bonds in general. Except
as otherwise provided in paragraph (h) or
(i) of this section, §§1.141–7T and
1.141–8T do not apply to any bonds sold
on or after January 19, 2001, to refund a
bond to which §§1.141–7T and 1.141–8T
do not apply unless—
(1) The refunding bonds are subject to
section 1301 of the Tax Reform Act of
1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of
the refunding bonds is longer than—
(A) The weighted average maturity of
the refunded bonds; or
(B) In the case of a short-term obliga-
tion that the issuer reasonably expects to
refund with a long-term financing (such
as a bond anticipation note), 120 percent
of the weighted average reasonably ex-
pected economic life of the facilities fi-
nanced; or
(ii) A principal purpose for the issuance
of the refunding bonds is to make one or
more new conduit loans.
(h) Permissive retroactive application.
Except as provided in §1.141–15(d) or (e)
or paragraph (i) of this section, §§1.141–1
through 1.141–6, 1.141–7T through
1.141–8T, 1.141–9 through 1.141–14,
1.145–1 through 1.145–2, 1.150–1(a)(3)
and the definition of bond documents con-
tained in §1.150–1(b) may be applied in
whole, but not in part to—
(1) Outstanding bonds that are sold be-
fore January 19, 2001, and subject to sec-
tion 141; or
(2) Refunding bonds sold on or after Jan-
uary 19, 2001, that are subject to section
141.
(i) Permissive application of certain reg-
ulations pertaining to output contracts.
Section 1.141–7T(f)(4) and (5) may be ap-
plied to any bonds.
Par. 7. Section 1.142(f)(4)–1 is added to
read as follows:
§1.142(f)(4)–1 Manner of making election
to terminate tax-exempt bond financing.
(a) Overview. Section 142(f)(4) permits
a person engaged in the local furnishing of
electric energy or gas (a local furnisher)
that uses facilities financed with exempt fa-
cility bonds under section 142(a)(8) and
that expands its service area in a manner in-
consistent with the requirements of sections
142(a)(8) and (f) to make an election to en-
sure that those bonds will continue to be
treated as exempt facility bonds. The elec-
tion must meet the requirements of para-
graphs (b) and (c) of this section.
(b) Time for making election—(1) In
general. An election under section
142(f)(4)(B) must be filed with the Internal
Revenue Service on or before 90 days after
the date of the service area expansion that
causes bonds to cease to meet the require-
ments of sections 142(a)(8) and (f).
2001–14 I.R.B.987April 2, 2001

(2) Date of service area expansion. For
the purposes of this section, the date of the
service area expansion is the first date on
which the local furnisher is authorized to
collect revenue for the provision of service
in the expanded area.
(c) Manner of making election. An elec-
tion under section 142(f)(4)(B) must be
captioned “ELECTION TO TERMINATE
TAX-EXEMPT BOND FINANCING”,
must be signed under penalties of perjury
by a person who has authority to sign on
behalf of the local furnisher, and must con-
tain the following information—
(1) The name of the local furnisher;
(2) The tax identification number of the
local furnisher;
(3) The complete address of the local
furnisher;
(4) The date of the service area expan-
sion;
(5) Identification of each bond issue sub-
ject to the election, including the complete
name of each issue, the tax identification
number of each issuer, the report number of
the information return filed under section
149(e) for each issue, the issue date of each
issue, the CUSIP number (if any) of the
bond with the latest maturity of each issue,
the issue price of each issue, the adjusted
issue price of each issue as of the date of
the election, the earliest date on which the
bonds of each issue may be redeemed, and
the principal amount of bonds of each issue
to be redeemed on the earliest redemption
date;
(6) A statement that the local furnisher
making the election agrees to the condi-
tions stated in section 142(f)(4)(B); and
(7) A statement that each issuer of the
bonds subject to the election has received
written notice of the election.
(d) Effect on section 150(b). Except as
provided in paragraph (e) of this section, if
a local furnisher files an election within the
period specified in paragraph (b) of this
section, section 150(b) does not apply to
bonds identified in the election during and
after that period.
(e) Effect of failure to meet agreements.
If a local furnisher fails to meet any of the
conditions stated in an election pursuant to
paragraph (c)(6) of this section, the election
is invalid.
(f) Corresponding provisions of the In-
ternal Revenue Code of 1954. Section
103(b)(4)(E) of the Internal Revenue Code
of 1954 set forth corresponding require-
ments for the exclusion from gross income
of the interest on bonds issued for facilities
for the local furnishing of electric energy or
gas. For the purposes of this section any
reference to sections 142(a)(8) and (f) of
the Internal Revenue Code of 1986 in-
cludes a reference to the corresponding
portion of section 103(b)(4)(E) of the Inter-
nal Revenue Code of 1954.
(g) Effective dates. This section applies
to elections made on or after January 19,
2001.
§1.142(f)(4)–1T [Removed]
Par. 8. Section 1.142(f)(4)–1T is re-
moved.
Par. 9. Section 1.150–5 is added to read
as follows:
§1.150–5 Filing notices and elections.
(a) In general. Notices and elections
under the following sections must be filed
with the Internal Revenue Service, 1111
Constitution Avenue, NW, Attention:
T:GE:TEB:O, Washington, DC 20224 or
such other place designated by publication
of a notice in the Internal Revenue Bul-
letin—
(1) Section 1.141–12(d)(3);
(2) Section 1.142(f)(4)–1; and
(3) Section 1.142–2(c)(2).
(b) Effective dates. This section applies
to notices and elections filed on or after
January 19, 2001.
§1.150–5T [Removed]
Par. 10. Section 1.150–5T is removed.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 11. The authority for part 602 con-
tinues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 12 . In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved January 10, 2001.
Jonathan Talisman,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on January
17, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 18, 2001, 66 F.R. 4661)
April 2, 20019882001–14 I.R.B.
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
1.142(f)(4)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1730
* * * * *

2001–14 I.R.B.989April 2, 2001
Form 7004—Research Credit
Suspension Period
Notice 2001–29
In Notice 2001–2, 2001–2 I.R.B. 265,
the Internal Revenue Service provided
guidance to help taxpayers compute and
report their credit for increasing research
activities (research credit) under § 41 of
the Internal Revenue Code for taxable
years that include the research credit sus-
pension periods described in § 502(d)(2)
of the Tax Relief Extension Act of 1999,
Pub. L. No. 106-170 (the Act). This no-
tice provides additional guidance to cor-
porate taxpayers that may request exten-
sions of time to file their income tax
returns for taxable years that include ex-
pired research credit suspension periods.
Section 502(d) of the Act provides that,
for purposes of the Code, any research
credit attributable to the period beginning
on July 1, 1999, and ending on September
30, 2000, that is otherwise allowable
under the Code, may not be taken into ac-
count prior to October 1, 2000. Further,
any research credit attributable to the pe-
riod beginning on October 1, 2000, and
ending on September 30, 2001, that is
otherwise allowable under the Code, may
not be taken into account prior to October
1, 2001.
Notice 2001–2 provides that, for the
Service to administer § 502(d) of the Act
properly, research credits attributable to a
research credit suspension period may not
be used as a credit against tax on a timely
filed or late filed original return for a tax-
able year that includes any part of that
suspension period even if that original re-
turn is filed after the expiration of the sus-
pension period. The research credit at-
tributable to a suspension period may be
taken into account after the close of that
period as a credit against tax for a taxable
year that includes any part of a suspension
period by filing a Form 1045, Application
for Tentative Refund,or a Form 1139,
Corporation Application for Tentative Re-
fund,or by filing an amended income tax
return (Form 1040X, Form 1120X, or
other amended return) on or after the date
the taxpayer files an original return for the
applicable tax year. Further, after the
close of the applicable research credit sus-
pension period, taxpayers may use re-
search credits attributable to a suspension
period as an adjustment to estimated
taxes.
Under § 1.6081–3 of the Income Tax
Regulations, a 6-month extension of time
to file a corporate income tax return is
granted automatically, if a corporation
properly files a completed Form 7004,
Application for Automatic Extension of
Time to File Corporation Income Tax Re-
turn, and pays the balance due on line six
of the form by the due date of the return
for which the extension applies. Because
Notice 2001–2 provides that research
credits attributable to a research credit
suspension period may not be used as a
credit against tax on a timely filed or late
filed original return for a taxable year that
includes any part of the suspension pe-
riod, a taxpayer seeking to obtain an ex-
tension of time for filing a corporate in-
come tax return by filing Form 7004 may
indicate a balance due on that form. Any
balance due that is attributable to a re-
search credit suspension period that ended
on or before the close of the taxable year
will be eliminated when the taxpayer files
its Form 1139 or its amended income tax
return to claim its research credit for the
suspension period that ended on or before
the close of the taxable year. Therefore, if
a taxpayer is otherwise eligible for an ex-
tension of time to file its return and shows
a balance due that relates to the research
credit attributable to a suspension period
that ended before the close of the applica-
ble taxable year, the taxpayer may file a
Form 7004 without paying that balance.
Taxpayers should file the Form 7004,
with the statement “Research Credit
Suspension Period”indicated at the top
of the form.
For example, assume that a calendar-
year corporation expects that it will have
at least 800xdollars of research credit for
the taxable year ending December 31,
2000. The amount of research credit at-
tributable to the period from January 1
through September 30, 2000, would be
600xdollars (9/12 x 800xdollars).
Taxpayer’s 600xdollars of research
credit attributable to the period January 1
through September 30, 2000, may not be
taken into account in determining any of
the estimated tax payments that are due
before October 1, 2000. The taxpayer’s
first estimated tax payment due on or after
October 1, 2000, is the payment due on
December 15, 2000. Taxpayer reduced
the amount of its estimated tax payments
otherwise required to be paid on Decem-
ber 15, 2000, by 600xdollars, the amount
equal to its 600xdollars of research credit
attributable to the period January 1
through September 30, 2000, and avail-
able for use on October 1, 2000.
For its taxable year ending December
31, 2000, taxpayer wants an extension of
time to file its corporation income tax re-
turn. Taxpayer’s Form 7004 shows a bal-
ance due of 600xdollars, the amount of
its research credit attributable to the first
suspension period that ended on Septem-
ber 30, 2000. Taxpayer files the Form
7004 on March 15, 2001, showing a bal-
ance due of 600xdollars and indicating at
the top “Research Credit Suspension
Period.”Because taxpayer’s 600xdollar
balance due for the taxable year ending
December 31, 2000, results from research
credits for the taxable year that are attrib-
utable to the first suspension period that
ended on September 30, 2000, the exten-
sion will be granted automatically.
DRAFTING INFORMATION
The principal author of this notice is
Lisa J. Shuman of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice, contact Ms. Shuman
at (202) 622-3120 (not a toll-free call).
Disaster Relief for Taxpayers
Affected by the Cerro Grande
Fire
Notice 2001–30
PURPOSE
This notice provides tax relief under
sections 6081, 6161, 6404(h), 6654(e)(3),
and 7508A of the Internal Revenue Code
for taxpayers affected by the Cerro
Grande Fire, which burned more than
40,000 acres in New Mexico in 2000.
This fire started on May 4, 2000, when
the National Park Service initiated a pre-
Part III. Administrative, Procedural, and Miscellaneous

scribed burn at Bandelier National Monu-
ment in New Mexico. The President is-
sued a federal disaster declaration on May
13, 2000. The declaration covers 21 New
Mexico counties: Los Alamos, Rio Ar-
riba, Sandoval, Santa Fe, Bernalillo, Ci-
bola, McKinley, Mora, San Juan, San
Miguel, Taos, Chaves, DeBaca, Dona
Ana, Eddy, Guadalupe, Lincoln, Otero,
Sierra, Socorro, and Torrance (“affected
counties”). These counties constitute a
“covered disaster area” within the mean-
ing of section 301.7508A–1(d)(2) of the
Procedure and Administration Regula-
tions.
SUMMARY OF RELIEF
(1) Individuals located in the affected
counties and other individuals who are
“affected taxpayers” as defined by section
301.7508A–1(d)(1) of the regulations will
have a postponement to January 16, 2002,
to file certain federal tax returns for calen-
dar year 2000 that would otherwise be
due on April 16, 2001 (April 15, 2001, is
a Sunday). A postponement to January
16, 2002, is also granted to pay the
amount of tax (or any installment of tax)
shown or required to be shown on those
returns. These returns include individual
income tax returns (Forms 1040, 1040A,
1040EZ, 1040NR, or 1040NR-EZ) and
gift tax returns (Forms 709 and 709-A).
See section 301.7508A–1(c)(1) for a list
of affected returns.
(2) Interest (and penalties relating to a
failure to timely file or pay) will be abated
through January 16, 2002, with respect to
individual income tax returnsfor calendar
year 2000 originally due on April 16,
2001, for individuals located in the af-
fected counties and other individuals who
are “affected taxpayers” as defined by
section 301.7508A–1(d)(1).
(3) Affected taxpayers as defined by
section 301.7508A–1(d)(1) of the regula-
tions other than individualsare granted
both a 90 day postponement under section
7508A and a six month extension under
sections 6081 and 6161 to file certain fed-
eral tax returns otherwise due on or after
May 4, 2000, and on or before April 16,
2001, and to pay the tax shown or re-
quired to be shown on those returns.
These returns include partnership returns,
corporate income tax returns, estate and
trust income tax returns, estate tax re-
turns, annual returns filed by tax-exempt
organizations, certain excise tax returns
and employment tax returns. See section
301.7508A–1(c)(1) for a list of affected
returns.
(4) The due date of any estimated tax
payment originally due on or after May 4,
2000, and on or before April 16, 2001, for
taxpayers located in the affected counties,
and other affected taxpayers, is postponed
by 90 days and extended by an additional
six months. This applies to estimated tax
payments made by individuals, corpora-
tions, estates, and trusts. Individuals,
trusts, and calendar year corporations will
not be subject to penalties for failure to
pay estimated tax installments for 2000
with respect to installments that were
originally due on or after May 4, 2000.
Individuals, estates, trusts, and calendar
year corporations will not be subject to
penalties with respect to the estimated tax
installment due for 2001 that was origi-
nally due on or before April 16, 2001, as
long as the installment is paid by January
16, 2002. Fiscal year corporations and es-
tates will not be subject to penalties for
failure to pay estimated tax installments
due on or after May 4, 2000, and on or be-
fore April 16, 2001, as long as such in-
stallments are paid by the extended and
postponed due date.
(5) In addition the Internal Revenue
Service has granted a 90 day postpone-
ment of time to the “affected taxpayers”
to perform the other acts described in sec-
tion 301.7508A–1(c)(1) of the regula-
tions, including the making of contribu-
tions to certain pension plans and
individual retirement accounts. The post-
ponement applies to acts required to be
performed within the period beginning on
the date of the fire (May 4, 2000) and
ending on April 16, 2001.
BACKGROUND
Section 6081 of the Code provides that
the Secretary may grant a reasonable ex-
tension of time (generally not to exceed 6
months) for filing any return, declaration,
statement, or other document required by
the Internal Revenue Code or by regula-
tions thereunder.
Section 6161 of the Code provides that
the Secretary may grant a reasonable ex-
tension of time (generally not to exceed 6
months) for paying the amount (or any in-
stallments) of tax shown or required to be
shown on any return or declaration re-
quired by the Code or by regulations
thereunder.
Section 7508A of the Code provides
the Secretary with authority to postpone
the time for performing certain acts under
the internal revenue laws for a taxpayer
affected by a Presidentially declared dis-
aster as defined in section 1033(h)(3).
Pursuant to section 7508A(a) and section
301.7508A–1 of the regulations, a period
of up to 90 days may be disregarded in
determining whether the performance of
certain acts is timely under the internal
revenue laws. Section 301.7508A–
1(c)(1) lists seven acts performed by tax-
payers for which section 7508A relief
may apply. Among these acts are the fil-
ing of certain tax returns; the payment of
certain taxes; the making of contributions
to certain pension plans and individual re-
tirement accounts; the filing of a Tax
Court petition; the filing of a claim for
credit or refund of tax; and the bringing of
a lawsuit upon a claim for credit or refund
of tax. Section 301.7508A–1(d)(1) de-
scribes the seven types of “affected tax-
payers” eligible for the 90 day postpone-
ment. These taxpayers include, among
others, any individual whose principal
residence, and any business entity whose
principal place of business, is located in
the covered disaster area.
Section 6404(h) of the Code provides
that if the Secretary extends for any pe-
riod the time for filing income tax returns
under section 6081 and the time for pay-
ing income tax with respect to such re-
turns under section 6161 for taxpayers lo-
cated in a Presidentially declared disaster
area, the Secretary shall abate for such pe-
riod the assessment of any interest pre-
scribed under section 6601 on such in-
come tax. Section 301.7508A–1(f)
provides that if there is both a postpone-
ment under section 7508A and extensions
of time to file the return and pay the tax
under sections 6081 and 6161, interest
will be abated under section 6404(h) for
the period of time disregarded under sec-
tion 7508A in addition to the period of
time covered by the filing and payment
extensions.
GRANT OF RELIEF
The Internal Revenue Service, by the
exercise of its authority under section
7508A of the Code, has granted a 90 day
postponement of time to taxpayers af-
April 2, 20019902001–14 I.R.B.

fected by the Cerro Grande Fire to per-
form the acts specified in section
301.7508A–1(c)(1) of the regulations.
The postponement applies to acts required
to be performed within the period begin-
ning on the date of the fire (May 4, 2000)
and ending on April 16, 2001.
In addition, the Internal Revenue Ser-
vice has granted an extension of time to
file returns under section 6081 of the
Code and to pay tax under section 6161.
In particular, individual income tax re-
turns for calendar year 2000 originally
due on April 16, 2001, are postponed and
extended until January 16, 2002 (90 days
plus six months from April 16, 2001).
Further, payments of tax (or any install-
ments of tax) shown or required to be
shown on those returns are correspond-
ingly postponed and extended until Janu-
ary 16, 2002. Income tax returns of tax-
payers other than individuals, and returns
other than income tax returns, originally
due on or after May 4, 2000, and on or be-
fore April 16, 2001, are also postponed
and extended for a period of 90 days plus
six months.
Further, pursuant to sections 6404(h)
and 7508A of the Code and section
301.7508A–1(f) of the regulations, the In-
ternal Revenue Service will abate the as-
sessment of any interest on income tax li-
abilities due under section 6601 for the
period of time disregarded under section
7508A and the period of time covered by
the filing and payment extensions under
sections 6081 and 6161. Also, penalties
relating to a failure to timely file or pay
will be waived for the period of time dis-
regarded under section 7508A and the pe-
riod of time covered by the filing and pay-
ment extensions.
Taxpayers filing for relief under this
notice should mark “Cerro Grande Fire”
in red ink on the top of their return.
DRAFTING INFORMATION
The principal author of this notice is
Charles Hall of the Office of Associate
Chief Counsel, Procedure and Adminis-
tration (Administrative Provisions and Ju-
dicial Practice Division). For further in-
formation regarding this notice, contact
Charles Hall at (202) 622-4940 (not a toll-
free call).
2001–14 I.R.B.991April 2, 2001

Partial Withdrawal of Notice of
Proposed Rulemaking; Notice of
Proposed Rulemaking by Cross-
Reference to Temporary
Regulations; and Notice of
Public Hearing
Obligations of States and
Political Subdivisions
REG–114998–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of notice of
proposed rulemaking; notice of proposed
rulemaking by cross-reference to temporary
regulations; and notice of public hearing.
SUMMARY: This document withdraws
portions of the notice of proposed rulemak-
ing published in the Federal Registeron
January 22, 1998. In T.D. 8941 on page
977 of this Bulletin, the IRS is issuing tem-
porary regulations that provide guidance to
state and local governments that issue
bonds for output facilities. The text of
those temporary regulations also serves as
the text of these proposed regulations. This
document provides a notice of public hear-
ing on these proposed regulations.
DATES: Written comments must be re-
ceived by July 18, 2001. Outlines of top-
ics to be discussed at the public hearing
scheduled for July 24, 2001, at 10 a.m.
must be received by July 3, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–114998–99), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered between the hours of 8 a.m. and 5
p.m. to: CC:M&SP:RU (REG–114998–
99), courier’s desk, Internal Revenue Ser-
vice, 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 In-
ternet site at http://www.irs.gov/tax_regs/
regslist.html. The public hearing will be
held in the Auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW,
Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Rose
M. Weber, (202) 622-3980; concerning sub-
missions and the hearing, Treena Garrett,
(202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Proposed regulations (REG–110965–97,
1998–1 C.B. 793) §§1.141–7, 1.141–8 and
1.141–15(f) through (i), published on Janu-
ary 22, 1998 (63 FR 3296), addressed the
application of the private activity bond tests
of section 141(b) (1) and (2) to output con-
tracts for output facilities and the applica-
tion of the $15 million limitation under sec-
tion 141(b)(4) to output facility financings.
These proposed sections are withdrawn.
Sections 1.141–7T, 1.141–8T and
1.141–15T published in T.D. 8941 are is-
sued to provide guidance on certain as-
pects of the private activity bond restric-
tions under section 141 of the Internal
Revenue Code.
The text of the temporary regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations explains the temporary
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue 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 small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments that
are submitted timely (preferably a signed
original and eight copies) to the IRS. All
comments will be available for public in-
spection and copying.
A public hearing has been scheduled for
July 24, 2001, at 10 a.m. in the Auditorium,
Internal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC. Be-
cause of access restrictions, visitors will not
be admitted beyond the lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written com-
ments by July 18, 2001, and submit an outline
of the topics to be discussed and the time to be
devoted to each topic by July 3, 2001.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these regula-
tions are Bruce M. Serchuk, and Rose M.
Weber, Office of Chief Counsel (Tax Ex-
empt and Government Entities), Internal
Revenue Service, and Stephen J. Watson,
Office of Tax Legislative Counsel, Depart-
ment of the Treasury. However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
Partial Withdrawal of Notice of
Proposed Rulemaking
Under the authority of 26 U.S.C. 7805,
§§1.141–7, 1.141–8 and 1.141–15(f)
through (i) in the notice of proposed rule-
making that was published on January 22,
1998 (63 FR 3256) are withdrawn.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
April 2, 20019922001–14 I.R.B.
Part IV. Items of General Interest

2001–14 I.R.B.993April 2, 2001
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 1.141–7 and 1.141–8
are added to read as follows:
§1.141–7 Special rules for output
facilities.
[The text of this proposed section is the
same as the text of §1.141–7T published
in T.D. 8941.]
§1.141–8 $15 million limitation for
output facilities.
[The text of this proposed section is the
same as the text of §1.141–8T published
in T.D. 8941.]
Par. 3. Section 1.141–15 is amended by
adding paragraphs (f) through (i) to read
as follows:
§1.141–15 Effective dates.
* * * * *
(f) through (i) [The text of proposed
paragraphs (f) through (i) is the same as
the text of §1.141–15T(f) through (i) pub-
lished in T.D. 8941.]
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
17, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 18, 2001, 66 F.R. 4754)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Equity Options with Flexible
Terms; Qualified Covered Call
Treatment
REG–115560–99
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations providing guidance
on the application of the rules governing
qualified covered calls. The new rules ad-
dress concerns that were created by the
introduction of new financial instruments
several years after the enactment of the
qualified covered call rules. The pro-
posed regulations would provide guid-
ance to taxpayers writing equity call op-
tions. This document also provides notice
of public hearing on these proposed regu-
lations.
DATES: Written and electronic com-
ments and requests to appear and outlines
of topics to be discussed at the public
hearing scheduled for May 9, 2001, at 10
a.m., must be submitted by April 18,
2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–115560–99), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered between the hours of 8 a.m. and 5
p.m. to: CC:M&SP:RU (REG–115560–
99), Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option of the IRS Home Page, or by sub-
mitting comments directly to the IRS Inter-
net site at http://www.irs.gov/tax_regs/
regslist.html.The public hearing will be
held in the IRS Auditorium, Internal Rev-
enue Building, 1111 Constitution Avenue,
NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Pamela Lew, (202) 622-3950; concerning
submissions and the hearing, Guy
Traynor, (202) 622-7180, (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
On June 25, 1998, the IRS published in
the Federal Registerproposed regula-
tions (REG–104641–97, 1998–2 C.B. 75
[63 FR 34616]) addressing whether strike
prices available for equity options with
flexible terms affect the definition of a
qualified covered call (QCC) under sec-
tion 1092(c)(4) for equity options with
standardized terms. No requests to speak
at a public hearing were received, and no
public hearing was held.
The proposed regulations provided that
strike prices available for equity options
with flexible terms do not affect the bench
marks used to determine whether equity
options with standardized terms are eligi-
ble for QCC treatment. That provision
was adopted as §1.1092(c)–1 of the final
regulations (T.D. 8866, 2000-6 I.R.B.
495), published in the Federal Register
for January 25, 2000 (65 F.R. 3812).
The regulatory text of REG–104641–
97 did not address whether an equity op-
tion with flexible terms is itself eligible
for QCC treatment. The preamble to the
proposed regulations, however, did re-
quest comments about whether equity op-
tions with flexible terms should be eligi-
ble for QCC treatment and, if eligible,
what bench marks should apply. In light
of the comments received, consideration
was also given to the treatment of over-
the-counter options and standardized op-
tions with terms of more than one year.
After consideration of the written com-
ments, this NPRM proposes regulations
addressing the eligibility for QCC treat-
ment of equity options with flexible
terms, over-the-counter options and stan-
dardized options with terms longer than
one year.
QCC Treatment
Section 1092(c) defines a straddle as
offsetting positions with respect to per-
sonal property. Under section
1092(d)(3)(B)(i)(I), stock is personal
property if the stock is part of a straddle
that involves an option on that stock or
substantially identical stock or securities.
Under section 1092(c)(4), however, writ-
ing a QCC option and owning the op-
tioned stock is not treated as a straddle
under section 1092 if certain conditions
are satisfied.
The legislative history of section 1092
indicates that QCCs were excepted from
the loss deferral rule for straddles because
“they are undertaken primarily to enhance
the taxpayer’s investment return on the
stock and not to reduce the taxpayer’s risk
of loss on the stock.” H.R. Rep. No. 432,
98th Cong., 2d Sess. at 1266-68 (1983).
To qualify as a QCC, a covered call must,
among other things, be exchange traded
and not be deep in the money. An option
is exchange traded if the option is traded
on a national securities exchange that is
registered with the Securities and Ex-
change Commission or on some other
market that the Secretary determines has
rules adequate to carry out the purposes of
the QCC provisions. An option is deep in
the money if the strike price of the option
is lower than the lowest qualified bench
mark for the stock at the time the option is
written.

Section 1092(c)(4)(H) grants the Secre-
tary of the Treasury the authority to pre-
scribe regulations to carry out the pur-
poses of the QCC exception, including
regulations modifying the provisions of
the exception as appropriate to take ac-
count of changes in the practices of op-
tions exchanges.
The introduction of exchange-traded
equity options with flexible terms is one
such change. Unlike equity options
with standardized terms, equity options
with flexible terms can have strike
prices at other than fixed intervals and
have other than standardized expiration
dates. Options exchanges have also in-
troduced standardized options with
longer terms.
In response to the request for com-
ments, two comments were received.
One commentator argued that equity op-
tions with flexible terms should not be el-
igible for QCC treatment. This commen-
tator noted that in 1984, when section
1092(c)(4) was enacted, only equity op-
tions with standardized terms were traded
on the national exchanges and that it is
likely that Congress did not intend to in-
clude customizable options within the de-
finition of a QCC. This commentator also
pointed out that equity options with flexi-
ble terms were developed to compete with
over-the-counter (OTC) options, which
are not eligible for QCC treatment. The
commentator suggested that excluding
equity options with flexible terms from
QCC treatment would avoid a competi-
tive imbalance from different tax treat-
ment for competing products.
The second commentator stated that, as
a matter of statutory analysis, equity op-
tions with flexible terms are already eligi-
ble for QCC treatment. This commenta-
tor argued that QCC treatment is
appropriate if the taxpayer is using the op-
tion to increase the yield on its stock in-
vestment and not to reduce the risk of loss
on its stock. In support of this point, the
commentator noted that nothing in the ap-
plicable legislative history suggests that
Congress intended to limit the QCC op-
tion exception to standardized options.
Alternatively, this commentator argued
that because equity options with flexible
terms were designed to compete with
OTC options, regulations should be pro-
mulgated allowing OTC options to qual-
ify for QCC treatment on the same terms
as exchange-traded equity options with
flexible terms.
Explanation of Provisions
Equity Options with Flexible Terms and
Qualifying OTC Options
After consideration of the comments
received, the proposed regulations pro-
vide that equity options with flexible
terms may be QCC options as long as
they satisfy the general rules for QCC
treatment described in section 1092(c)(4),
are not for a term of longer than one year,
and meet other specified requirements. In
addition, an equity option with standard-
ized terms must be outstanding for the un-
derlying equity. For purposes of applying
the general rules, the bench marks will be
the same as those for an equity option
with standardized terms on the same stock
having the same applicable stock price.
The proposed regulations also provide
that certain OTC options may be QCC op-
tions so that OTC options that are eco-
nomically similar to equity options with
flexible terms may enjoy the same tax
benefits as equity options with flexible
terms. Specifically, the proposed regula-
tions provide that an OTC option is eligi-
ble for QCC treatment if it is entered into
with a person registered with the Securi-
ties and Exchange Commission as a bro-
ker-dealer or alternative trading system
and meets the same requirements for
QCC treatment that apply to equity op-
tions with flexible terms.
QCC Status for Equity Options with
Standardized Terms
In the process of considering the proper
treatment for equity options with flexible
terms, the IRS examined QCC status in
general. At the time that Congress en-
acted section 1092(c)(4), options avail-
able on the national securities exchanges
had a term of nine months or less. Con-
gress did not include in the legislative his-
tory any guidance on the effect of the time
value of money upon the strike price.
Subsequent to the enactment of section
1092(c)(4), the national securities ex-
changes began offering certain standard-
ized options with expiration dates that are
12 or more months after the date entered
into. The longer term of these options
may reduce the taxpayer’s risk of loss on
its stock position because of the time pe-
riod involved.
Increased risk reduction through the
use of long term options applies equally
to equity options with flexible terms,
OTC options, and equity options with
standardized terms. The proposed regula-
tions therefore provide that a one-year
term limit also applies to equity options
with standardized terms. Comments are
requested on this issue, including a dis-
cussion of time limitations in general, as
well as the appropriateness of a one-year
cutoff.
If QCC treatment should apply to
longer-term options, it may be appropriate
to change the deep-in-the-money standard
to prevent the increase in risk reduction.
A comment recommending a time limita-
tion greater than one year or recommend-
ing that there be no time limitation should
also provide detailed, comprehensive de-
scriptions of possible solutions to the
problem of increased risk reduction.
Comments should also address the admin-
istrability of any proposed solutions.
Proposed Effective Date
These regulations would apply to op-
tions entered into on or after 30 days after
the date that the Treasury decision adopt-
ing these rules as final regulations is pub-
lished in the Federal Register.
Regulations concerning time limita-
tions for equity options with standardized
terms would be prospective in nature and
would apply to transactions entered into
on or after 90 days from the date of publi-
cation of the final regulation promulgat-
ing such rules.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that these regulations do not impose any
recordkeeping or reporting requirements
and therefore impose minimal compliance
costs, if any, upon any small entities that
may be affected. Because equity options
with standardized terms will not be eligi-
ble for QCC treatment if such options
have a duration of more than 1 year, some
April 2, 20019942001–14 I.R.B.

2001–14 I.R.B.995April 2, 2001
taxpayers may lose substantive tax bene-
fits. This certification is further based
upon the understanding that such taxpay-
ers will not include a substantial number
of small entities. Comments are specifi-
cally requested on the question of whether
a substantial number of small entities (as
opposed to large entities or individual in-
vestors) will suffer a significant economic
impact under these regulations. There-
fore, a Regulatory Flexibility Analysis
under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pur-
suant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written or electronic
comments (a signed original and eight (8)
copies, if written) that are submitted timely
(in the manner described in the AD-
DRESSES portion of this preamble) to the
IRS. The IRS and Treasury request com-
ments on the clarity of the proposed regu-
lations and how they may be made easier
to understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for May 9, 2001, at 10 a.m., in the IRS
Auditorium, Internal Revenue Building,
1111 Constitution Avenue NW, Washing-
ton DC. Due to building security proce-
dures, visitors must enter at the 10th
Street entrance located between Consti-
tution and Pennsylvania Avenues, NW.
In addition, all visitors must present
photo identifications to enter the build-
ing. Because of access restrictions, visi-
tors will not be admitted beyond the im-
mediate entrance area more than 15
minutes before the hearing starts. For in-
formation about having your name
placed on the building access list to at-
tend the hearing, see the “FOR FUR-
THER INFORMATION CONTACT”
section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
April 18, 2001. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the
scheduling of the speakers will be pre-
pared after the deadline for receiving out-
lines has passed. Copies of the agenda
will be available free of charge at the
hearing.
Drafting Information
The principal author of these regula-
tions is Pamela Lew, Office of Associate
Chief Counsel (Financial Institutions and
Products). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1092(c)–2 also issued under
26 U.S.C.1092(c)(4)(H)
Section 1.1092(c)–3 also issued under
26 U.S.C. 1092(c)(4)(H).* * *
Par. 2. Section 1.1092(c)–1 is amended
as follows:
1. Paragraphs (b) and (d)(1)(ii) intro-
ductory text are revised.
2. Paragraphs (c) and (d)(3) are added.
3. Paragraph (e) is revised.
The revisions and addition read as fol-
lows:
§1.1092(c)–1 Equity options with
flexible terms.
* * * * *
(b) No effect on lowest qualified bench
mark for standardized options. The avail-
ability of strike prices for equity options
with flexible terms does not affect the de-
termination of the lowest qualified bench
mark, as defined in section 1092(c)(4)(D),
for an equity option with standardized
terms.
(c) Qualified covered call option
status—(1) Requirements. An equity op-
tion with flexible terms is a qualified cov-
ered call option only if—
(i) The option meets the requirements
of section 1092(c)(4)(B) (taking into ac-
count paragraph (c)(2) of this section);
(ii) The only payments permitted with
respect to the option are a single fixed
premium paid not later than 5 business
days after the day on which the option is
granted, and a single fixed strike price
stated as a dollar amount that is payable
entirely at (or within 5 business days of)
exercise;
(iii) The option is granted not more
than 1 year before the day on which the
option expires; and
(iv) An equity option with standard-
ized terms is outstanding for the underly-
ing equity.
(2) Lowest qualified bench mark—(i)
In general. For purposes of determining
whether an equity option with flexible
terms is deep in the money within the
meaning of section 1092(c)(4)(C), the
lowest qualified bench mark under sec-
tion 1092(c)(4)(D) is the same for an eq-
uity option with flexible terms as the low-
est qualified bench mark for an equity
option with standardized terms on the
same stock having the same applicable
stock price.
(ii) Example. The following example
illustrates the rules set out in paragraph
(c)(2)(i) of this section:
Example. Taxpayer owns stock in Corporation
X. Taxpayer writes an equity call option with flexi-
ble terms on Corporation X stock through a national
securities exchange. The applicable stock price for
Corporation X stock is $73.75. Using the bench
marks for an equity option with standardized terms
with an applicable stock price of $73.75, the highest
available bench mark less than the applicable stock
price is $70, and the second highest bench mark is
$65. Therefore, an equity call option with flexible
terms on Corporation X with a term of 90 days or
less will not be deep in the money if the strike price
is not less than $70. If the term is greater than 90
days, an equity call option with flexible terms on
Corporation X will not be deep in the money if the
strike price is not less than $65.
(d) * * *
(1) * * *
(ii) That is traded on any national secu-
rities exchange which is registered with
the Securities and Exchange Commission
(other than those described in the SEC
Releases set forth in paragraph (d)(1)(i) of
this section) and is—
* * * * *
(3) Equity option with standardized
termsmeans an equity option that is
traded on a national securities exchange
registered with the Securities and Ex-

change Commission and that is not an eq-
uity option with flexible terms.
(e) Effective date—(1) In general. Ex-
cept as provided in paragraph (e)(2) of
this section, this section applies to equity
options with flexible terms entered into
on or after January 25, 2000.
(2) Special effective date for paragraph
(c). Paragraph (c) of this section applies
to equity options with flexible terms en-
tered into on or after 30 days after the date
that the Treasury decision adopting these
regulations is published in the Federal
Register.
Par. 3. Section 1.1092(c)–2 is added to
read as follows:
§1.1092(c)–2 Equity options with
standardized terms.
(a) One-year limitation. An equity op-
tion with standardized terms (as defined
in §1.1092(c)–1(d)(3)) is a qualified cov-
ered call only if—
(1) The option meets the requirements
of section 1092(c)(4)(B); and
(2) The option is granted not more than
1 year before the day on which the option
expires.
(b) Effective date. This section applies
to equity options with standardized terms
entered into on or after 90 days after the
date that the Treasury decision adopting
these regulations is published in the Fed-
eral Register.
Par. 4. Section 1.1092(c)–3 is added.
§1.1092(c)–3 Qualifying over-the-
counter options.
(a) In general. Under section
1092(c)(4)(B)(i), an equity option is not a
qualified covered call option unless it is
traded on a national securities exchange
which is registered with the Securities and
Exchange Commission or other market
which the Secretary determines has rules
adequate to carry out the purposes of sec-
tion 1092(c)(4). In accordance with section
1092(c)(4)(H), this requirement is modified
as provided in paragraph (b) of this section.
(b) Qualified covered call option status.
A qualifying over-the-counter option is a
qualified covered call option if it meets the
requirements of §1.1092(c)–1(c) after sub-
stituting “qualifying over-the-counter op-
tion” for “equity option with flexible
terms”. For the purposes of this paragraph
(b), a qualifying over the counter option is
deemed to satisfy the requirements of sec-
tion 1092(c)(4)(B)(i).
(c) Qualifying over-the-counter option.
For the purposes of this section, qualify-
ing over-the-counter optionmeans an eq-
uity option that—
(1) Is not traded on a national securities
exchange registered with the Securities
and Exchange Commission; and
(2) Is entered into with a person regis-
tered with the Securities and Exchange
Commission as—
(i) A broker-dealer under section 15 of
the Securities Act of 1934 and the regula-
tions thereunder; or
(ii) An alternative trading system under
17 CFR 242.300 et seq.
(d) Effective date. This section applies
to qualifying over-the-counter options en-
tered into on or after 30 days after the date
that the Treasury decision adopting these
regulations is published in the Federal
Register.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
17, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 18, 2001, 66 F.R. 4751)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Clarification of Entity
Classification Rules
REG–101739–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document proposes
regulations under section 7701 that ad-
dress the Federal tax classification of a
business entity wholly owned by a foreign
government and provide that a nonbank
entity that is wholly owned by a foreign
bank cannot be disregarded as an entity
separate from its owner (disregarded en-
tity) for purposes of applying the special
rules of the Internal Revenue Code ap-
plicable to banks. This document also
proposes regulations under section 892
that provide that a partnership can be a
controlled commercial entity for purposes
of section 892(a)(2)(B). In addition, this
document provides notice of a public
hearing on the proposed regulations.
DATES: Written comments and outline
of topics to be discussed at the public
hearing scheduled for May 16, 2001, must
be received by April 25, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–101739–00), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. In the alternative, submissions may
be hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:M&SP:RU
(REG–101739–00), Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution Av-
enue NW, Washington, DC. Alternatively,
taxpayers may submit comments electroni-
cally via the Internet by selecting the “Tax
Regs” option of the IRS Home Page, or by
submitting comments directly to the IRS In-
ternet site at: http://www.irs.gov/tax_regs/
regslist.html. The public hearing will be
held in room 6718, Internal Revenue Build-
ing, 1111 Constitution Avenue, NW, Wash-
ington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regula-
tions, Camille B. Evans, (202) 622-3860
(not a toll-free number); concerning
submissions and the hearing, Sonya M.
Cruse, (202) 622-7180 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background and Purpose
On December 18, 1996, the IRS and
the Treasury Department published the
elective regime under section 7701
known as the check-the-box regulations
(T.D. 8697, 1997–1 C.B. 215 [61 FR
66584]). Generally, the check-the-box
regulations allow any business entity to
elect to be treated for Federal tax pur-
poses as a corporation, a partnership (if it
has two or more members), or a disre-
garded entity (if it has a single owner).
This document proposes to amend the
current Procedure and Administration
Regulations (26 CFR Part 301) to address
the treatment of an entity wholly owned
by a foreign government (as defined in
§1.892–2T) and a nonbank entity wholly
owned by a foreign bank.
This document also proposes to pro-
vide that a partnership can be a controlled
commercial entity under section 892.
April 2, 20019962001–14 I.R.B.

Explanation of Provisions
A. §301.7701–2
Section 301.7701–2(b) of the check-
the-box regulations specifies that certain
business entities are classified as per se
corporations for Federal tax purposes
(i.e., those business entities that are not
permitted to elect a noncorporate Federal
tax classification). Section 301.7701–
2(b)(6) classifies a business entity wholly
owned by a State or any of its political
subdivisions as a per secorporation.
However, the regulations do not specify
that the phrase State or any political sub-
division thereofincludes a foreign gov-
ernment.
The IRS and Treasury believe that it is
appropriate to treat a foreign government
similarly to a State in this context. Thus,
to achieve parallel tax treatment under the
check-the-box regulations of a business
entity wholly owned by a State or any of
its political subdivisions and a business
entity wholly owned by a foreign govern-
ment, these proposed regulations provide
that a business entity wholly owned by a
foreign government cannot elect to be
treated as a disregarded entity.
The check-the-box regulations also
provide a special rule for the treatment of
nonbank entities that are wholly owned
by banks. In particular, §301.7701–
2(c)(2)(ii) provides that a bank cannot
treat a wholly owned nonbank entity as a
disregarded entity for purposes of apply-
ing the special rules of the Internal Rev-
enue Code (Code) applicable to banks.
The term bankfor this purpose is defined
in section 581 to include only domestic
entities. Section 301.7701–2(c)(2)(ii)
does not explicitly restrict foreign banks
from treating their wholly owned non-
bank entities as disregarded entities for all
tax purposes (because foreign banks are
not defined as banks under section 581).
As with the rule described for foreign
governments, the IRS and Treasury be-
lieve that nonbank entities wholly owned
by domestic banks and foreign banks
should be treated similarly in this context.
These regulations incorporate a reference
to section 585(a)(2)(B) (which includes
certain foreign banks that are engaged in a
U.S. trade or business in the definition of
the term bank) in §301.7701–2(c)(2)(ii).
As a result, neither domestic banks nor
foreign banks engaged in a U.S. trade or
business can treat wholly owned nonbank
entities as disregarded entities for pur-
poses of applying the special rules of the
Code applicable to banks.
B.§1.892–5(a)
Section 1.892–5T(a) currently provides
that for purposes of defining the term con-
trolled commercial entity,the term entity
encompasses corporations and trusts (in-
cluding pension trusts described in
§1.892–2T(c)) and estates. To ensure that
investments in the United States by a for-
eign government through separate juridi-
cal entities are treated similarly, these
proposed regulations under §1.892–5(a)
provide that, for purposes of section
892(a)(2)(B), the term entity also includes
a partnership.
Proposed Effective Dates
The regulations that address the Fed-
eral tax classification of business entities
wholly owned by a foreign government
under §301.7701–2 are proposed to apply
on or after the earlier of January 14, 2002,
or the date these regulations are published
as final regulations in the FEDERAL
REGISTERto such business entities re-
gardless of any prior entity classification,
and the regulations that address the defin-
ition of the term entity for purposes of
section 892(a)(2)(B) are proposed to
apply on or after the earlier of January 14,
2002, or the date these regulations are
published as final regulations in the FED-
ERAL REGISTER. The regulations re-
lating to a nonbank entity that is wholly
owned by a foreign bank are proposed to
apply to taxable years beginning after
January 12, 2001.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory 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
regulations, and because these regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, these regula-
tions will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(preferably a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and Treasury Department re-
quest comments on the clarity of the pro-
posed rules and how they may be made
easier to understand. All comments will be
available for public inspection and copying.
A public hearing has been scheduled
for May 16, 2001, beginning at 10 a.m., in
room 6718, Internal Revenue Building,
1111 Constitution Avenue NW., Washing-
ton, DC. Because of access restrictions,
visitors will not be admitted beyond the
Internal Revenue Building lobby more
than fifteen (15) minutes before the hear-
ing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit timely
written comments and an outline of the
topics to be discussed and the time to be
devoted to each topic (preferably a signed
original and eight (8) copies) by
April 25, 2001.
A period of ten (10) minutes will be al-
lotted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Camille B. Evans of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
2001–14 I.R.B.997April 2, 2001

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for “Sections 1.892–1T through
1.892–7T” and adding the following en-
tries in numerical order:
Authority: 26 U.S.C. 7805 * * *
Section 1.892–1T also issued under 26
U.S.C. 892(c).
Section 1.892–2T also issued under 26
U.S.C. 892(c).
Section 1.892–3T also issued under 26
U.S.C. 892(c).
Section 1.892–4T also issued under 26
U.S.C. 892(c).
Section 1.892–5 also issued under 26
U.S.C. 892(c).
Section 1.892–5T also issued under 26
U.S.C. 892(c).
Section 1.892–6T also issued under 26
U.S.C. 892(c).
Section 1.892–7T also issued under 26
U.S.C. 892(c). * * *
Par. 2. Section 1.892–5 is added to
read as follows:
§1.892–5 Controlled commercial entity.
(a) through (a)(2) [Reserved]. For fur-
ther information, see §1.892–5T(a)
through (a)(2).
(3) For purposes of section
892(a)(2)(B), the term entitymeans and
includes a corporation, a partnership, a
trust (including a pension trust described
in §1.892–2T(c)) and an estate.
(4) Effective date. This section applies
on or after the earlier of January 14, 2002,
or the date these regulations are published
as final regulations in the FEDERAL
REGISTER.
(b) through (d) [Reserved]. For further
information, see §§1.892–5T(b) through
(d).
Par. 3. Section 1.892–5T is amended
by:
1. Removing the flush language imme-
diately following paragraph (a)(2).
2. Adding paragraph (a)(3).
The addition reads as follows:
§1.892–5T Controlled commercial entity
(temporary regulations).
(a) * * *
(3) [Reserved]. For further informa-
tion, see §1.892–5(a)(3).
* * * * *
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 * * *
Par. 5. Section 301.7701–2 is amended
by:
1. Revising paragraphs (b)(6) and
(c)(2)(ii).
2. Revising the first sentence of para-
graph (e).
The revisions read as follows:
§301.7701–2 Business entities;
definitions.
* * * * *
(b) * * *
(6) A business entity wholly owned by
a State or any political subdivision
thereof, or a business entity wholly
owned by a foreign government (as de-
fined in §1.892–2T);
* * * * *
(c) * * *
(2) * * *
(ii) Special rule for certain business en-
tities. If the single owner of a business
entity is a bank (as defined in section 581,
or, in the case of a foreign bank, as de-
fined in section 585(a)(2)(B) without re-
gard to the second sentence thereof), then
the special rules of the Internal Revenue
Code applicable to banks will continue to
apply to the single owner as if the wholly
owned entity were a separate entity.
* * * * *
(e) Effective date. Except as otherwise
provided in this paragraph (e), the rules of
this section apply as of January 1, 1997,
except that paragraph (b)(6) applies on or
after the earlier of January 14, 2002, or
the date these regulations are published as
final regulations in the FEDERAL REG-
ISTERto a business entity wholly owned
by a foreign government regardless of any
prior entity classification, and paragraph
(c)(2)(ii) of this section applies to taxable
years beginning after January 12, 2001.
* * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
11, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 12, 2001, 66 F.R. 2854)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Taxable Years of Partner and
Partnership; Foreign Partners
REG–104876–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations on the taxable year
of a partnership with foreign partners.
The proposed regulations affect partner-
ships and their partners. This document
also contains a notice of public hearing on
these proposed regulations.
DATES: Written comments must be re-
ceived by April 17, 2001. Requests to
speak (with outlines of oral comments) at
the public hearing scheduled for June 6,
2001, at 10 a.m., must be submitted by
May 16, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–104876–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered between the hours of 8 a.m. and 5
p.m. to: CC:M&SP:RU (REG–104876–
00), 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 of the IRS Home Page or by sub-
mitting comments directly to the IRS In-
ternet site at http://www.irs.ustreas.gov/
tax_regs/regslist.html. The public hear-
ing will be held in room 4718, Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Dan
Carmody, (202) 622-3080; concerning spe-
cific international issues, Ronald M.
Gootzeit, (202) 622-3860; concerning sub-
missions of comments, the hearing, and/or
to be placed on the building access list to
attend the hearing, LaNita VanDyke, (202)
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
This document proposes to amend sec-
tion 706 of the Income Tax Regulations
April 2, 20019982001–14 I.R.B.

(26 CFR part 1) regarding partnership
taxable years.
Background
Section 706 governs the taxable years
for a partnership and its partners. The
partners and the partnership each have
their own taxable years, which may or
may not coincide. Under section 706(a),
for a partner’s taxable year, the partner
must include in taxable income the part-
ner’s share of any income, gain, loss,
deduction, or credit of the partnership
for the partnership’s taxable year that
ends within or with the partner’s taxable
year. Section 706(b) provides rules for
determining a partnership’s taxable year.
Prior to the Tax Reform Act of 1986,
it was possible for partners to create in-
come deferral opportunities through ar-
ranging divergent taxable years for a
partnership and its partners. For exam-
ple, under certain circumstances, a part-
nership could elect a June 30 taxable
year while its partners were calendar
year taxpayers. Under such an arrange-
ment, the partners would include part-
nership income earned from July 1, Year
1, to June 30, Year 2, in Year 2, when the
partnership’s taxable year ended, even
though six months of income was gener-
ated during Year 1. To prevent this po-
tential for income deferral, Congress
amended section 706(b). See generally
Staff of the Joint Committee on Taxa-
tion, General Explanation of the Tax Re-
form Act of 1986, 533-39 (1986).
Section 706(b) provides that, unless
the partnership establishes a business
purpose for a different taxable year, a
partnership cannot have a taxable year
other than: (i) the majority interest tax-
able year; (ii) if there is no majority in-
terest taxable year, the taxable year of
all the principal partners of the partner-
ship; or (iii) if there is no taxable year
described in (i) or (ii), the calendar year
unless the Secretary by regulation pre-
scribes another period. Section
1.706–1T(a)(1) and (2) provides that if
neither (i) nor (ii) is applicable, the part-
nership’s taxable year will be the taxable
year that results in the least aggregate
deferral of partnership income. Addi-
tionally, §1.706–3T(a) provides that
under certain circumstances, a tax-ex-
empt partner will be disregarded for pur-
poses of section 706(b).
Explanation of Provisions
I. Treatment of Foreign Partners
Currently, foreign partners are taken
into consideration when determining a
partnership’s taxable year under section
706(b). In some circumstances, this could
allow the taxable year of a partnership to
be determined for Federal tax purposes by
reference to the taxable year of one or
more partners who may not be subject to
U.S. taxation on income earned through
the partnership. For instance, assume that
a foreign partner owns a majority interest
in a partnership that generates only for-
eign source income that is not effectively
connected with a trade or business con-
ducted within the United States. The mi-
nority partners are domestic persons sub-
ject to tax in the United States on income
earned through the partnership. If the tax-
able year or years of the domestic partners
are different from that of the majority
partner, the majority partner’s taxable
year would determine the partnership’s
taxable year, which would affect the tim-
ing of the domestic partners’ inclusion of
partnership income. Thus, by conforming
the partnership’s taxable year to the tax-
able year of foreign partners, the mechan-
ical application of section 706(b) can cre-
ate deferral for those partners who are
subject to tax in the United States on in-
come earned through the partnership,
while having no impact on the majority
foreign partners who are not subject to tax
in the United States on such income. The
IRS and the Treasury do not believe that
such a result is consistent with the intent
of the statute.
A.Disregard certain foreign partners
The proposed regulations generally re-
quire foreign partners who are not subject
to U.S. taxation on a net basis on income
earned through the partnership to be dis-
regarded for purposes of applying section
706(b). For these purposes a foreign part-
ner will be considered subject to Federal
income tax only if the partner is allocated
gross income of the partnership that is ef-
fectively connected (or treated as effec-
tively connected) with the conduct of a
trade or business within the United States
(effectively connected income or ECI). In
the case of a foreign partner claiming ben-
efits under a U.S. income tax treaty, a for-
eign partner will be disregarded unless it
is allocated gross income that is attribut-
able to a permanent establishment in the
United States.
A foreign partner also may be subject
to U.S. Federal income tax on its distribu-
tive share of fixed or determinable annual
or periodic income (FDAP income) from
U.S. sources. In certain circumstances,
the timing for imposing United States
withholding tax on FDAP income earned
through a partnership may be affected by
the partnership’s taxable year. See, e.g.,
§1.1441–5(b)(2)(i) (providing the timing
for withholding under section 1441 in the
case of a domestic partnership that has re-
ceived, but not distributed, FDAP income
that is includible in the distributive share
of a foreign partner). The IRS and Trea-
sury believe that the withholding provi-
sions of section 1441 provide a more ap-
propriate mechanism than section 706 for
addressing timing issues for these part-
ners. Additionally, the IRS and Treasury
are concerned that the ability of a partner-
ship to earn small amounts of FDAP in-
come, and thereby alter the determination
of its taxable year, may permit inappropri-
ate manipulation of the rule under section
706(b) for the domestic partners. Accord-
ingly, under these proposed regulations,
the taxable year of a foreign partner
would be disregarded for purposes of sec-
tion 706(b) if that partner is subject to
Federal income tax solely due to the pres-
ence of U.S. source income earned
through the partnership that is not ECI. In
addition, it is irrelevant, for purposes of
the proposed regulations, whether the for-
eign partner is subject to tax in the United
States with respect to income other than
income earned by the partnership.
The rule for foreign partners provided
in these proposed regulations generally is
consistent with the present rule under
§1.706–3T for the treatment of partners
that are exempt from taxation under sec-
tion 501(a). The taxable years of tax-ex-
empt partners are not considered for pur-
poses of section 706(b) unless those
partners are subject to tax on income from
the partnership. One difference between
the rules for foreign partners and the rules
for tax-exempt partners is that foreign
partners will be included in determining a
partnership’s taxable year where the for-
eign partner is allocated gross income that
is effectively connected with a U.S. trade
or business, but actually has a net loss
2001–14 I.R.B.999April 2, 2001

from the partnership for the taxable year
(i.e., the foreign partners are not actually
subject to tax on their allocable portion of
the partnership’s income). By contrast, a
tax-exempt partner is disregarded where
its allocable share of the partnership’s tax
items produces a net loss for the taxable
year even though, if the foreign partner
were allocated net income for the taxable
year, the tax-exempt entity would have
been subject to tax on such income. The
IRS and Treasury are considering modify-
ing the tax-exempt rule to conform with
the proposed rule for foreign partners and
request comments in this regard.
Finally, for purposes of these rules, the
proposed regulations generally define a
foreign partner as a partner that is not a
U.S. person (as defined in section
7701(a)(30)), but provide that controlled
foreign corporations (CFCs) and foreign
personal holding companies (FPHCs) are
not treated as foreign partners. These en-
tities are not treated as foreign for pur-
poses of determining a partnership’s tax-
able year under section 706 because the
U.S. owners of such entities may be sub-
ject to Federal income taxation on a cur-
rent basis with respect to income earned
by the entities.
The IRS and Treasury also considered,
but did not include, a similar rule for pas-
sive foreign investment companies
(PFICs). The proposed regulations do not
include a similar rule for PFICs because,
unlike the rules for CFCs and FPHCs,
which require that a majority of the own-
ership be concentrated in a small group of
U.S. persons, the PFIC rules apply with-
out regard to the level of ownership of the
individual, or of all U.S. owners in the ag-
gregate. Additionally, in most instances
where a PFIC does have substantial U.S.
ownership, it will also be a CFC or a
FPHC.
B. Minority interest rule
The IRS and Treasury recognize that
requiring a partnership taxable year to be
determined without regard to certain for-
eign partners may present difficulties for
minority partners in some cases. If the
taxable years of certain foreign partners
are disregarded for purposes of section
706(b), it is possible that the taxable year
of a partnership may be determined solely
by reference to the taxable year of one or
more small minority domestic partners.
This could create significant administra-
tive burdens for minority partners if the
partnership maintains its books and
records on a taxable year selected by sig-
nificant foreign partners that is different
from the taxable year of the minority part-
ner or partners.
In order to provide relief in this situa-
tion, the proposed regulations contain an
exception providing that foreign partners
will not be disregarded for purposes of
section 706(b) if the partnership’s taxable
year would be determined by reference to
partners that individually hold less than a
10-percent interest, and in the aggregate
hold less than a 20-percent interest, in the
capital and profits of the partnership. For
purposes of this rule, a partner’s interest
will include interests held directly and in-
terests held by related partners. In deter-
mining whether the minority interest rule
applies, the proposed regulations take into
account the ownership of tax-exempt enti-
ties that are disregarded under
§1.706–3T(a).
Where a domestic tax-exempt entity (or
entities) owns a relatively small interest in
the partnership, but enough to cause the
minority interest rule not to apply, the re-
sult may be anomalous, given that the tax-
exempt entity has no real interest in a par-
ticular taxable year and thus has no
incentive to convince significant foreign
partners to cause the partnership to deter-
mine its taxable year by reference to the
domestic partners. However, where such
a tax-exempt entity (or entities) owns a
majority interest in the partnership, the re-
sult may be more appropriate because the
domestic partners are more likely to have
significant bargaining power regarding
the taxable year vis-a-vis the foreign part-
ners. An appropriate solution may be to
exclude tax-exempt entities from both the
numerator and denominator in applying
the de minimisrule. The IRS and Trea-
sury request comments regarding how
tax-exempt entities should be treated for
purposes of the minority interest rule.
C. Transitional relief
Under current law, a partnership may
have adopted a taxable year that creates
deferral by reference to the taxable year
of a foreign partner not subject to U.S. net
income taxation. In such instances, com-
pliance with these regulations could result
in a change in the partnership taxable year
which would cause a “bunching” of more
than 12 months of partnership income
into a single taxable year of the partners
subject to Federal income tax.
For example, consider a partnership
that has a June 30 taxable year because of
the presence of a 60-percent foreign part-
ner that is not subject to U.S. net income
taxation on income earned through the
partnership. This taxable year creates six
months of deferral for the 40-percent do-
mestic partner, who is on the calendar
year. In the year that these proposed reg-
ulations become effective, two partner-
ship taxable years (the taxable year con-
cluding on June 30 and the initial short
calendar year concluding December 31)
would close during the domestic partner’s
taxable year. Thus, section 706(a) would
require the domestic partner to recognize
its distributive share of 18 months of part-
nership income during a single taxable
year. While the historic taxable year of
the partnership in this example is incon-
sistent with the intent of section 706(b),
the IRS and Treasury recognize that the
potential bunching of income caused by
changing to an appropriate taxable year
might present an undue hardship for some
taxpayers.
In order to alleviate such a hardship,
the proposed regulations would permit
adversely affected taxpayers to apply the
four-year spread provisions of §1.702–3T.
This transitional rule will have limited ap-
plication; it is intended only to provide re-
lief for bunching of income that occurs in
the first taxable year beginning on or after
the effective date of these proposed regu-
lations.
II.Application of §1.701–2
The mechanical rules of section 706(b)
operate to limit partners’ opportunities to
defer the recognition of partnership in-
come. Where partners have different tax-
able years, eliminating or limiting deferral
for one partner may result in increasing de-
ferral for another partner. Such deferral is
an anticipated result of section 706(b).
However, an application of the mechanical
rules of section 706(b) and these proposed
regulations remains subject to the anti-
abuse rule of §1.701–2.
For example, assume that these proposed
regulations would disregard the taxable
year of a 76-percent foreign partner and re-
quire the partnership (which only has for-
April 2, 200110002001–14 I.R.B.

eign operations, and therefore does not earn
ECI) to adopt the taxable year of the 24-
percent domestic partner. Conceivably the
partners could attempt to avoid this result
by forming a tiered structure where the for-
eign partner would own a 95-percent inter-
est in an upper-tier domestic partnership
that would hold, as its only asset, an 80 per-
cent interest in the lower-tier operating
partnership (the domestic partner would
own the remaining 5 percent of the upper-
tier partnership and the remaining 20 per-
cent of the lower-tier partnership). In sub-
stance, this is the same arrangement as the
single partnership except that the minority
interest rule would generally require the
upper-tier partnership to adopt the taxable
year of the foreign partner (because the do-
mestic partner owns less than a 10-percent
interest in the upper-tier partnership). The
upper-tier domestic partnership’s taxable
year would then be considered the majority
interest taxable year of the lower-tier part-
nership under section 706(b)(1)(B)(i). In
these circumstances, the Commissioner
may determine that in order to achieve a tax
result that is consistent with the intent of
section 706, §1.701–2 should apply. In
such event, the Commissioner may disre-
gard the upper-tier partnership and treat the
assets thereof (in this case, the interest in
the lower-tier partnership) as being owned
directly by its partners, with the result that
the foreign partner would be disregarded in
determining the taxable year of the lower-
tier partnership under section 706(b) and
these proposed regulations.
III. Finalization of Prior Proposed
Regulations
The current temporary regulations under
section 706 are the product of three sepa-
rate Treasury decisions. The text of these
Treasury decisions, T.D. 7991 (1985–1
C.B. 71) (adopted November 29, 1984),
T.D. 8169 (1988–1 C.B. 259) (adopted De-
cember 23, 1987), and T.D. 8205 (1988–1
C.B. 156) (adopted May 24, 1988), were
also contemporaneously promulgated as
proposed regulations, LR–183–84 (1985–1
C.B. 653) (published in the Federal Regis-
teron November 30, 1984), LR–101–86
(1988–1 C.B. 924) (published in the Fed-
eral Registeron December 29, 1987), and
LR–53–88 (1988–1 C.B. 935) (published
in the Federal Registeron May 27, 1988).
These proposed regulations have not been
withdrawn, and it is likely that they will be
finalized in conjunction with the finaliza-
tion of the regulations proposed by this
document. The IRS and Treasury expect
that the finalization of these previously pro-
posed regulations will be accompanied by
the withdrawal of the existing temporary
regulations. Comments previously re-
ceived in connection with the prior pro-
posed regulations will be considered as
well as new or additional comments with
respect to such regulations.
IV.Effective Date
These regulations are proposed to
apply to partnership taxable years begin-
ning on or after the date final regulations
are published in the Federal Register.
For example, if the final regulations were
published on November 1, 2001, a part-
nership that historically has determined
its taxable year by reference to a 75-per-
cent foreign partner with a March 31 tax-
able year end rather than by reference to a
25-percent domestic partner that uses the
calendar year would be required to
change to the calendar year as of April 1,
2002 (the partnership year beginning after
the date final regulations were published).
This would result in a short taxable year
from April 1, 2002, to December 31,
2002.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory 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
regulations, and because these regulations
do not impose on small entities a collec-
tion of information requirement, the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Therefore, a Regula-
tory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted timely
to the IRS. The IRS and Treasury specifi-
cally request comments on the clarity of
the proposed regulations and how they
may be made easier to understand. All
comments will be available for public in-
spection and copying.
A public hearing has been scheduled
for June 6, 2001, beginning at 10 a.m., in
room 4718, Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must enter at the 10th
Street entrance, located between Consti-
tution and Pennsylvania Avenues, NW. In
addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 15 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons that wish to
present oral comments at the hearing must
submit timely written comments and must
submit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic (preferably a signed original and
eight (8) copies) by May 16, 2001.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Dan Carmody, Office of Chief
Counsel (Passthroughs and Special Indus-
tries). However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
2001–14 I.R.B.1001April 2, 2001

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.706–4 is added to read
as follows:
§1.706–4 Certain foreign partners
disregarded
(a) General rule—(1) Foreign part-
ners not claiming benefits under a U.S.
income tax treaty. In determining the
taxable year (the current taxable year) of
a partnership under section 706(b) and
the regulations thereunder, a foreign
partner shall be disregarded unless such
partner is allocated any gross income of
the partnership that was effectively con-
nected (or treated as effectively con-
nected) with the conduct of a trade or
business within the United States during
the partnership’s taxable year immedi-
ately preceding the current taxable year.
However, if a foreign partner was not a
partner during the partnership’s immedi-
ately preceding taxable year, such part-
ner will be disregarded for the current
taxable year if the partnership reason-
ably believes that the partner will not be
allocated any gross income generated by
the partnership during the current tax-
able year that is effectively connected
with the conduct of a trade or business
within the United States.
(2) Foreign partners claiming benefits
under a U.S. income tax treaty. In the
case of a foreign partner claiming bene-
fits under an income tax treaty between
the United States and another jurisdic-
tion, a foreign partner will be disre-
garded under this paragraph (a) unless
such partner was allocated any gross in-
come that was attributable to a perma-
nent establishment in the United States
during the partnership’s taxable year im-
mediately preceding the current taxable
year (or, if such partner was not a partner
during the immediately preceding tax-
able year, the partnership reasonably be-
lieves that such partner will be allocated
such income during the current taxable
year).
(b) Minority interest rule. If the part-
ners that are not disregarded by paragraph
(a) of this section (absent the application
of this paragraph (b)) individually hold
less than a 10-percent interest, and in the
aggregate hold less than a 20-percent in-
terest, in the capital and profits of the
partnership, paragraph (a) of this section
will not apply. For purposes of determin-
ing ownership in the partnership after ap-
plication of paragraph (a) of this section,
the constructive ownership rules of sec-
tion 318 shall apply, and the attribution
rules of section 267(c) also shall apply to
the extent they attribute ownership to per-
sons to whom section 318 does not at-
tribute ownership. However, “10 per-
cent” shall be substituted for “50 percent”
in section 318(a)(2)(C) and (3)(C). For
purposes of determining if partners hold
less than a 20-percent interest in the ag-
gregate, the same interests will not be
considered as being owned by more than
one partner.
(c) Definition of foreign partner. For
purposes of this section, a foreign partner
is any partner that is not a U.S. person (as
defined in section 7701(a)(30)), except
that a partner that is a controlled foreign
corporation (as defined in section 957(a))
or a foreign personal holding company (as
defined in section 552) shall not be
treated as a foreign partner.
(d) Example. The provisions of this
section may be illustrated by the follow-
ing example:
Example. Partnership B is owned by two part-
ners, F, a foreign corporation that owns a 95-percent
interest in the capital and profits of partnership B,
and D, a domestic corporation that owns the remain-
ing 5-percent interest in the capital and profits of
partnership B. Partnership B is not engaged in the
conduct of a trade or business within the United
States, and, accordingly, partnership B does not earn
any income that is effectively connected with a U.S.
trade or business. F uses a March 31 fiscal year, and
causes partnership B to maintain its books and
records on a March 31 fiscal year as well. D is a cal-
endar year taxpayer. Under paragraph (a) of this
section, F would be disregarded and partnership B’s
taxable year would be determined by reference to D.
However, because D owns less than a 10-percent in-
terest in the capital and profits of partnership B, the
minority interest rule of paragraph (b) of this section
applies, and partnership B must adopt the March 31
fiscal year.
(e) Effective date—(1) Generally. The
provisions of this section are applicable
for partnership taxable years that begin on
or after the date final regulations are pub-
lished in the Federal Register.
(2) Transition rule. Partners of a part-
nership that is required to change its tax-
able year as of the beginning of its first
taxable year after the date final regula-
tions are published in the Federal Regis-
termay apply the provisions of
§1.702–3T if the change in taxable year
occurs in the first taxable year following
the date final regulations are published in
the Federal Register.
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
16, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 17, 2001, 66 F.R. 3920)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Hedging Transactions
REG–107047–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the char-
acter of hedging transactions. These pro-
posed regulations reflect changes to the
law made by the Ticket to Work and Work
Incentives Improvement Act of 1999.
The proposed regulations affect busi-
nesses entering into hedging transactions.
This document also provides notice of a
public hearing on these proposed regula-
tions.
DATES: Written or electronically gener-
ated comments must be received by April
25, 2001. Requests to speak (with out-
lines of oral comments to be discussed) at
the public hearing scheduled for May 16,
2001, at 10 a.m., must be submitted by
April 25, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–107047–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered between the hours of 8 a.m. and 5
p.m. to: CC:M&SP:RU (REG–107047–
00), 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-
April 2, 200110022001–14 I.R.B.

mitting comments directly to the IRS in-
ternet site at http://www.irs.gov/tax_regs/
regslist.html.The public hearing will be
held in the IRS auditorium, 1111 Consti-
tution Ave., NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Jo
Lynn Ricks, (202) 622-3920; concerning
submissions of comments, the hearing,
and/or to be placed on the building access
list to attend the hearing, contact Lanita
Vandyke, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been reviewed and approved by
the Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d))
under control numbers 1545-1403 and
1545-1480.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 1221 of the Internal Revenue Code
(Code). Prior to amendment in 1999, sec-
tion 1221 generally defined a capital asset
as property held by the taxpayer other
than: (1) stock in trade or other types of
assets includible in inventory; (2) prop-
erty used in a trade or business that is real
property or property subject to deprecia-
tion; (3) certain copyrights (or similar
property); (4) accounts or notes receiv-
able acquired in the ordinary course of a
trade or business; and (5) U.S. govern-
ment publications.
In 1994, the IRS published in the Fed-
eral Register(59 FR 36360) final Trea-
sury regulations under section 1221 pro-
viding for ordinary character treatment
for most business hedges. The regula-
tions generally apply to hedges that re-
duce risk with respect to ordinary prop-
erty, ordinary obligations, and borrowings
of the taxpayer and that meet certain iden-
tification requirements. (§1.1221–2). In
1996, the IRS published in the Federal
Register(61 FR 517) final regulations on
the character and timing of gain or loss
from hedging transactions entered into by
members of a consolidated group. The
final regulations published in 1994 and
1996 are collectively referred to as the
Treasury regulations in this preamble.
On December 17, 1999, section 1221
was amended by section 532 of the Ticket
to Work and Work Incentives Improve-
ment Act of 1999 (113 Stat 1860) to pro-
vide ordinary gain or loss treatment for
hedging transactions and consumable
supplies. Section 1221(a)(7) provides or-
dinary treatment for hedging transactions
that are clearly identified as such before
the close of the day on which they were
acquired, originated, or entered into.
The statute defines a hedging transac-
tion generally to include a transaction en-
tered into by the taxpayer in the normal
course of business primarily to manage
risk of interest rate, price changes, or cur-
rency fluctuations with respect to ordi-
nary property, ordinary obligations, or
borrowings of the taxpayer. §1221(b)
(2)(A)(i) and (ii). The statutory definition
of hedging transaction also includes trans-
actions to manage such other risks as the
Secretary may prescribe in regulations.
Section 1221(b)(2)(A)(iii). Further, the
statute grants the Secretary the authority
to provide regulations to address the treat-
ment of nonidentified or improperly iden-
tified hedging transactions, and hedging
transactions involving related parties
(sections 1221(b)(2)(B) and (b)(3), re-
spectively). The statutory hedging provi-
sions are effective for transactions entered
into on or after December 17, 1999.
Section 1221(a)(8) provides that sup-
plies of a type regularly consumed by the
taxpayer in the ordinary course of a tax-
payer’s trade or business are not capital
assets. That provision is effective for sup-
plies held or acquired on or after Decem-
ber 17, 1999.
The legislative history to the hedging
provisions states that Congress intended
that the approach taken in the Treasury
regulations with respect to the character
of hedging transactions generally should
be codified as an appropriate interpreta-
tion of present law. S. Rep. No. 201,
106th Cong., 1st Sess. 24 (1999). These
proposed regulations conform the Trea-
sury regulations to these statutory provi-
sions.
Explanation of Provisions
Paragraph (a) of the proposed regula-
tions provides basic rules for the treat-
ment of hedging transactions. The sub-
stance of these rules is the same as the
rules under §1.1221–2(a).
Accordingly, paragraph (a)(1) of the
proposed regulations generally provides
that property that is part of a hedging
transaction, as defined in section
1221(b)(2)(A) and paragraph (b) of the
proposed regulations, is not a capital
asset. Paragraph (a)(2) of the proposed
regulations provides a similar rule for
short sales and options. Where a short
sale or option is part of a hedging transac-
tion, as defined, any gain or loss on the
short sale or option is ordinary. Under
paragraph (a)(3), if a transaction falls out-
side the regulations, gain or loss from the
transaction is not made ordinary by the
fact that property is a surrogate for a non-
capital asset, that the transaction serves as
insurance against a business risk, that the
transaction serves a hedging function, or
that the transaction serves a similar func-
tion or purpose. As under the Treasury
regulations, Congress intended that the
hedging rules be the exclusive means
through which the gains and losses on
hedging transactions are treated as ordi-
nary. S. Rep. No. 201, 106th Cong., 1st
Sess. 25 (1999).
The provisions of the proposed regula-
tions generally apply to determine the
character of gain or loss from transactions
that also are subject to various interna-
tional provisions of the Code. Paragraph
(a)(4) of the proposed regulations, how-
ever, provides that section 988 transac-
tions are excluded from these regulations
because gain or loss on those transactions
is ordinary under section 988(a)(1). Para-
graph (a)(4) of the proposed regulations
also provides that the definition of a hedg-
ing transaction under §1.1221–2(b) of the
proposed regulations does not apply for
purposes of the hedging exceptions to the
subpart F rules of section 954(c) and cer-
2001–14 I.R.B.1003April 2, 2001

tain hedging rules in the interest alloca-
tion regulations under section 864(e).
Regulations under §1.482–8 will ad-
dress risk management activities in the
context of a global dealing operation.
Thus, except to the extent provided in
§§1.475(g)–2, 1.482–8, and 1.863–3(h),
these regulations do not apply in deter-
mining the allocation and source of in-
come for a participant in a global dealing
operation or whether a risk management
function related to the activities of a regu-
lar dealer in securities has been con-
ducted.
Proposed regulations under §§1.882–5
and 1.884–1 also refer to hedging under
§1.1221–2 for purposes of determining
assets and liabilities of a foreign corpora-
tion for interest allocation and branch tax
purposes. The IRS and Treasury are eval-
uating the appropriate requirements nec-
essary to implement cross-border and
worldwide hedging rules for these pur-
poses and seek comments in this regard.
Therefore, paragraph (a)(4) of the pro-
posed regulations provides that the defini-
tion of hedging transaction in paragraph
(b) of the proposed regulations is inap-
plicable in determining the hedging re-
quirements under sections 882(c) and
884, except to the extent provided in reg-
ulations under those sections.
Paragraph (b) of the proposed regula-
tions restates the definition of hedging
transaction in section 1221(b)(2)(A).
Under this rule, a hedging transaction is
generally a transaction that a taxpayer en-
ters into in the normal course of its busi-
ness primarily to manage the risk of inter-
est rate or price changes or currency
fluctuations with respect to ordinary prop-
erty, ordinary obligations, or borrowings
of the taxpayer.
Paragraph (c) of the proposed regula-
tions provides rules of application de-
signed to ensure that the definition of
hedging transaction is applied reasonably
to include most common types of busi-
ness hedges. Congress intended that the
approach taken in the Treasury regula-
tions with respect to the character of
hedging transactions generally should be
codified as an appropriate interpretation
of present law. S. Rep. No. 201, 106th
Cong., 1st Sess. 24 (1999). The Senate
Finance Committee believed that the
Treasury regulations interpret risk reduc-
tion flexibly to provide hedging transac-
tion treatment for fixed to floating
hedges, certain written call options, dy-
namic hedges, partial hedges, recycled
hedges, and hedges of aggregate risk (see
§1.1221–2(c)). Id. at n.12. The Commit-
tee believed that (depending on the facts)
the treatment of those transactions as
hedging transactions is appropriate and
that it is also appropriate to modernize the
definition of hedging transaction by pro-
viding risk management as the standard.
Id. These proposed regulations revise the
Treasury regulations to reflect the risk
management standard.
Paragraph (c)(1) of the proposed regu-
lations deals with the meaning of risk
management. It provides that, except as
otherwise provided in paragraph (c), a
transaction satisfies the risk management
standard if it reduces risk. To enter into a
hedging transaction, the taxpayer must
have risk when all of its operations are
considered — that is, there must be risk on
a “macro” basis. Nonetheless, a hedge of
a single asset or liability, or pool of assets
or liabilities, will be respected as manag-
ing risk if the hedge reduces the risk attrib-
utable to the item or items being hedged
and if the hedge is reasonably calculated
to reduce the overall risk of the taxpayer’s
operations. In addition, if a taxpayer
hedges a particular asset or liability, or a
pool of assets or liabilities, and the hedge
is undertaken as part of a program to re-
duce the overall risk of the taxpayer’s op-
erations, the taxpayer need not show that
the hedge reduces its overall risk.
Paragraph (c)(1) of the proposed regu-
lations also recognizes that fixed to float-
ing hedges and certain types of written
options may manage risk and may be
hedging transactions in appropriate situa-
tions. For example, a covered call with
respect to assets held or a written put op-
tion with respect to assets to be acquired
may be a hedging transaction.
In addition, paragraph (c)(1) of the pro-
posed regulations provides that a hedging
transaction includes a transaction that re-
verses or counteracts a hedging transac-
tion. This rule recognizes that some
transactions are used to eliminate some or
all of the risk reduction accomplished
through another hedging transaction. Al-
though the transactions are not risk reduc-
ing if viewed independently, they are con-
sidered to be part of the larger hedging
transaction.
Paragraph (c)(1) of the proposed regu-
lations further provides that a taxpayer
may hedge any part or all of its risk for
any part of the period during which it has
risk. The proposed regulations also pro-
vide that the fact that a taxpayer fre-
quently enters into and terminates hedg-
ing positions is not relevant to whether
transactions are hedging transactions.
Except as otherwise provided in para-
graph (c) of the proposed regulations, a
transaction that is not entered into primar-
ily to reduce risk is not a hedging transac-
tion. For example, the so-called “store-
on-the-board” transaction, in which a
taxpayer disposes of its production output
and enters into a long futures contract
with respect to the same product, is not a
hedging transaction. In this example, the
long futures contact could be viewed as a
surrogate for the storage of the commod-
ity. The net proceeds from the sale of the
production output and the gain or loss on
the long futures contract simulates the
price at which the production output
would have sold if it had been physically
stored and sold at a later time. However,
because the production output to which
the futures contract relates has been sold,
there is no underlying position (with re-
spect to ordinary property held or to be
held) that exposes the taxpayer to price
risk. Thus, the long position does not re-
duce risk. Moreover, gain or loss on the
contract is not treated as ordinary on the
grounds that it is a surrogate for inven-
tory.
Paragraph (c)(2) of the proposed regu-
lations provides that a hedging transaction
may be entered into by using a position
that was a hedge of one asset or liability
to hedge another asset or liability.
Paragraph (c)(3) of the proposed regu-
lations provides that the acquisition of cer-
tain assets, such as investments, may not
be a hedging transaction. Even though ac-
quisition of these assets may involve some
risk reduction, they typically are not ac-
quired primarily to manage risk. For ex-
ample, a taxpayer’s interest rate risk from
a floating rate borrowing may be reduced
by the purchase of debt instruments that
bear a comparable floating rate. The pro-
posed regulations provide that the acquisi-
tion of the debt instruments, however, is
not made primarily to reduce risk and,
therefore, is not a hedging transaction.
Similarly, borrowings generally are not
April 2, 200110042001–14 I.R.B.

made primarily to manage risk. The IRS
and Treasury request comments on the cir-
cumstances in which the acquisition of
debt instruments or borrowings are made
primarily to manage risk.
Paragraph (c)(4) defines the normal
course requirement of paragraph (b) to in-
clude any transaction entered into in fur-
therance of a taxpayer’s trade or business.
Thus, for example, a liability hedge meets
this requirement regardless of whether the
liability is undertaken to fund current op-
erations, an acquisition, or an expansion
of a taxpayer’s business. This definition
does not apply to other uses of the term
“normal course” in the Code or regula-
tions.
Paragraph (c)(5) of the proposed regu-
lations provides that a hedge of property
or of an obligation is a hedging transac-
tion only if a sale or exchange of the prop-
erty, or performance or termination of the
obligation, could not produce capital gain
or loss. The special rule in the Treasury
regulations for noninventory supplies
(§1.1221–2(c)(5)(ii)), however, is not
contained in these proposed regulations.
Under the noninventory supply rule, if a
taxpayer sells only a negligible amount of
a noninventory supply, then, only for pur-
poses of determining whether a hedge of
the purchase of that noninventory supply
is a hedging transaction, that noninven-
tory supply is treated as ordinary prop-
erty. This rule is not being proposed be-
cause section 1221(a)(8) generally
provides ordinary gain or loss treatment
for consumable supplies held or acquired
on or after December 17, 1999.
Paragraph (c)(6) of the proposed regu-
lations provides that the status of liability
hedges as hedging transactions is deter-
mined without regard to the use that is
made of the proceeds of a borrowing so
long as the transaction is entered into in
furtherance of the taxpayer’s trade or
business. The Service and Treasury be-
lieve that a liability hedge should not fail
to qualify as a hedging transaction be-
cause the proceeds of the borrowing being
hedged are used to purchase a capital
asset.
Paragraph (c)(7) of the proposed regu-
lations provides that, in the case of hedges
of aggregate risk, all but a de minimis
amount of the risk being hedged must be
attributable to ordinary property, ordinary
obligations, or borrowings.
Although the purpose of the rules in
paragraph (c) is to ensure that the defini-
tion of hedging transaction will be inter-
preted reasonably to cover most common
business hedges, not all hedges are in-
tended to be covered. For example, the
regulations do not apply where a taxpayer
hedges a dividend stream, the overall
profitability of a business unit, or other
business risks that do not relate directly to
interest rate or price changes or currency
fluctuations with respect to ordinary prop-
erty, ordinary obligations, or borrowings.
Moreover, the regulations do not provide
ordinary treatment for gain or loss from
the disposition of stock where, for exam-
ple, the stock is acquired to protect the
goodwill or business reputation of the ac-
quirer or to ensure the availability of
goods.
Paragraph (c)(8) of the proposed regu-
lations provides that a hedging transaction
does not include a transaction entered into
to manage risks other than interest rate or
price changes, or currency fluctuations,
unless a regulation, revenue ruling, or
revenue procedure provides otherwise.
Thus, until such guidance is published, a
hedge of volume or revenue fluctuations
is not a hedging transaction. One exam-
ple of this type of hedge is a weather de-
rivative used by an energy producer to
hedge against the decrease in volume of
sales from variations in weather patterns.
The IRS is considering whether to ex-
pand the definition of hedging transaction
to include transactions that manage risks
other than interest rate or price changes,
or currency fluctuations with respect to
ordinary property, ordinary obligations or
borrowings of the taxpayer. The Service
solicits comments on the types of risks
that should be covered, including specific
examples of derivative transactions that
may be incorporated into future guidance.
The status of so-called “gap” hedges is
not separately addressed in paragraph (c)
of the proposed regulations. Insurance
companies, for example, sometimes
hedge the “gap” between their liabilities
and the assets that fund them. Under the
proposed regulations, a hedge of those as-
sets does not qualify as a hedging transac-
tion if the assets are capital assets.
Whether a gap hedge qualifies as a liabil-
ity hedge is a question of fact and depends
on whether it is more closely associated
with the liabilities than with the assets.
For example, a contract to purchase assets
is generally not a liability hedge even if
the assets are being purchased to fund the
liability. Other gap hedges may be appro-
priately treated as liability hedges and,
therefore, may qualify as hedging transac-
tions.
The rules in paragraphs (d), (e) and (f)
of the proposed regulations, covering
consolidated group hedging, identifica-
tion and recordkeeping rules, and the ef-
fect of identification and non-identifica-
tion, respectively, are generally
unchanged from the corresponding rules
in the Treasury regulations. This is be-
cause Congress generally intended to cod-
ify the approach to hedging transactions
that was taken in the Treasury regulations.
S. Rep. No. 201, 106th Cong., 1st Sess.
24 (1999).
Paragraph (d) of the proposed regula-
tions provides rules applicable to hedging
by members of a consolidated group. The
proposed regulations retain the single-en-
tity approach of the Treasury regulations.
That is, they treat the risk of one member
of the group as the risk of the other mem-
bers, as if all the members were divisions
of a single corporation. Thus, a member
of a consolidated group that hedges the
risk of another member by entering into a
transaction with a third party may receive
ordinary gain or loss treatment on that
transaction if the transaction otherwise
qualifies as a hedging transaction.
Under this single-entity approach, in-
tercompany transactions are neither hedg-
ing transactions nor hedged items. Be-
cause they are treated as transactions
between divisions of a single corporation,
intercompany transactions do not manage
the risk of that single corporation and,
therefore, fail to qualify as hedging trans-
actions.
The proposed regulations also retain
the separate-entity election of the Trea-
sury regulations, permitting a consoli-
dated group to treat its members as sepa-
rate entities when applying the hedging
rules. The election is made by attaching a
statement to the group’s federal income
tax return.
For a group that elects separate-entity
treatment, an intercompany transaction is
treated as a hedging transaction if and
only if: (1) it would qualify as a hedging
transaction if entered into with an unre-
lated party; and (2) it is entered into with
2001–14 I.R.B.1005April 2, 2001

a member that, under its method of ac-
counting, marks its position in the inter-
company transaction to market. If these
requirements are satisfied, the member
with respect to which it is an intercom-
pany hedging transaction must account
for its position in the transaction under
§1.446–4, and, if that member properly
identifies the transaction as a hedging
transaction, each member treats the gain
or loss from its position in the transaction
as ordinary.
The proposed regulations provide that,
even when these two requirements are
met, these regulations supplant only the
character and timing rules of §1.1502–13.
Other aspects of the transaction, such as
the source of the gain or loss, are unaf-
fected by these regulations and thus may
be governed by other portions of
§1.1502–13.
Pursuant to section 1221(a)(7), para-
graph (e)(1) of the proposed regulations
provides that hedging transactions must
be identified before the close of the day
on which they are entered into. Paragraph
(e)(2) of the proposed regulations requires
that the item, items, or aggregate risk
being hedged be identified substantially
contemporaneously with entering into the
hedging transaction. The identification
must be made no more than 35 days after
entering into the hedging transaction.
Paragraph (e)(3) of the proposed regu-
lations contains a series of special rules
for identifying certain types of hedging
transactions. In the case of inventory, the
identification must specify the type or
class of inventory to which the hedge re-
lates. If particular inventory purchases or
sales transactions are being hedged, the
taxpayer must also identify the expected
date and the amount to be acquired or
sold. In the case of hedges of aggregate
risk, the identification requirement is sat-
isfied if a taxpayer’s records contain a de-
scription of the hedging program and if
there is a system for identifying transac-
tions as entered into as part of that pro-
gram. The intent underlying this rule is to
provide verifiable information with re-
spect to the item being hedged without re-
quiring the taxpayer to identify individu-
ally the many items that give rise to the
aggregate risk being hedged.
Paragraph (e)(4) of the proposed regu-
lations provides rules with respect to how
an identification is made. It must be clear
that the identification is being made for
tax purposes. In lieu of separately identi-
fying each transaction, however, a tax-
payer may establish a system in which
identification is indicated by the type of
transaction or the manner in which the
transaction is consummated or recorded.
Paragraph (e)(5) of the proposed regu-
lations deals with the required identifica-
tion where the taxpayer is a member of a
consolidated group, and paragraph (e)(6)
of the proposed regulations provides that
an identification for purposes of section
1256(e)(2) is also an identification for
purposes of §1.1221–2(e)(1).
Pursuant to section 1221(b)(2)(B),
paragraph (f) of the proposed regulations
deals with the effect of identification and
non-identification. The rules in this para-
graph are the same as the rules in para-
graph (f) of the Treasury regulations.
The proposed regulations under section
1256 generally restate the rules of
§1.1256(e)–1 that coordinate the identifi-
cation of hedges for purposes of section
1256(e). The citations to section
1256(e)(2)(C) in the Treasury regulations
have been replaced with citations to sec-
tion 1256(e)(2) in the proposed regula-
tions.
Proposed Effective Date
The proposed regulations are proposed
to be effective for transactions entered
into on or after January 18, 2001. How-
ever, the IRS will not challenge any trans-
action entered into on or after December
17, 1999, and before January 18, 2001,
that satisfies the provisions of these pro-
posed regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It is
hereby certified that the collection of in-
formation in these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based upon the fact that
very few small businesses enter into
hedging transactions due to their cost and
complexity. Further, those small busi-
nesses that hedge enter into very few
hedging transactions because hedging
transactions are costly, complex, and re-
quire constant monitoring and a sophisti-
cated understanding of the capital mar-
kets. Therefore, a Regulatory Flexibility
analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic or
written comments (a signed original and
eight (8) copies of written comments) that
are submitted timely (in the manner de-
scribed in “ADDRESSES”) to the IRS.
The IRS and Treasury request comments
on the clarity of the proposed rules and
how they may be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for May 16, 2001, beginning at 10 a.m., in
the IRS auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building secu-
rity procedures, visitors must enter at the
10
th
Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see “FOR FURTHER INFORMATION
CONTACT.”
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments and an outline
of topics to be discussed and the time to
be devoted to each topic (signed original
and eight (8) copies) by April 25, 2001. A
period of 10 minutes will be allotted to
each person making comments. An
agenda showing the scheduling of the
speakers will be prepared after the dead-
line for receiving outlines has passed.
Copies of the agenda will be available
free of charge at the hearing.
April 2, 200110062001–14 I.R.B.

Drafting Information
The principal author of these regula-
tions is Jo Lynn Ricks, Office of the Asso-
ciate Chief Counsel (Financial Institu-
tions and Products). However, other
personnel from the IRS and Treasury De-
partment participated in their develop-
ment.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by revising the entry for
§1.1221–2 to read as follows:
Authority: 26 U.S.C. 7805 * * *
§1.1221–2 also issued under 26 U.S.C.
1221(b)(2)(A)(iii), (b)(2)(B), and (b)(3).***
Par. 2. Section 1.1221–2 is revised to
read as follows:
§1.1221–2 Hedging transactions.
(a) Treatment of hedging transactions—
(1) In general. This section governs the
treatment of hedging transactions under
section 1221(a)(7). Except as provided in
paragraph (f)(2) of this section, the term
capital asset does not include property that
is part of a hedging transaction (as defined
in paragraph (b) of this section).
(2) Short sales and options.This sec-
tion also governs the character of gain or
loss from a short sale or option that is part
of a hedging transaction. Except as pro-
vided in paragraph (f)(2) of this section,
gain or loss on a short sale or option that
is part of a hedging transaction (as de-
fined in paragraph (b) of this section) is
ordinary income or loss.
(3)Exclusivity. If a transaction is not a
hedging transaction as defined in para-
graph (b) of this section, gain or loss from
the transaction is not made ordinary on
the grounds that property involved in the
transaction is a surrogate for a noncapital
asset, that the transaction serves as insur-
ance against a business risk, that the
transaction serves a hedging function, or
that the transaction serves a similar func-
tion or purpose.
(4) Coordination with other sections—
(i) Section 988. This section does not
apply to determine the character of gain
or loss realized on a section 988 transac-
tion as defined in section 988(c)(1) or re-
alized with respect to any qualified fund
as defined in section 988(c)(1)(E)(iii).
(ii) Sections 864(e) and 954(c). Except
as otherwise provided in regulations is-
sued pursuant to sections 864(e) and
954(c), the definition of hedging transac-
tion in paragraph (b) of this section does
not apply for purposes of sections 864(e)
and 954(c).
(iii) Global dealing operation. Except
as otherwise provided in §§1.475(g)–2,
1.482–8, and 1.863–3(h), the rules of ap-
plication for purposes of the definition of a
hedging transaction in paragraph (c) of this
section do not apply in determining the al-
location and source of income with respect
to a participant in a global dealing opera-
tion or in determining whether a risk man-
agement function related to the activities of
a regular dealer in securities has been con-
ducted. See §1.482–8(a) for the defini-
tions of global dealing operation, regular
dealer in securities, and participant.
(iv) Sections 882(c) and 884. Except
as otherwise provided in regulations is-
sued under sections 882(c) and 884, the
definition of hedging transaction in para-
graph (b) of this section does not apply
for purposes of those sections.
(b) Hedging transaction defined. Sec-
tion 1221(b)(2)(A) provides that a hedg-
ing transaction is any transaction that a
taxpayer enters into in the normal course
of the taxpayer’s trade or business primar-
ily—
(1) To manage risk of price changes or
currency fluctuations with respect to ordi-
nary property (as defined in paragraph
(c)(5) of this section) that is held or to be
held by the taxpayer;
(2) To manage risk of interest rate or
price changes or currency fluctuations
with respect to borrowings made or to be
made, or ordinary obligations incurred or
to be incurred, by the taxpayer; or
(3) To manage such other risks as the
Secretary may prescribe in regulations
(see paragraph (c)(8) of this section).
(c) Rules of application. The rules of
this paragraph (c) apply for purposes of
the definition of the term hedging transac-
tion in section 1221(b)(2)(A) and para-
graph (b) of this section. These rules
must be interpreted reasonably and con-
sistently with the purposes of this section.
Where no specific rules of application
control, the definition of hedging transac-
tion must be interpreted reasonably and
consistently with the purposes of section
1221(b)(2)(A) and this section.
(1) Managing risk—(i) Transactions
that manage risk. Whether a transaction
manages a taxpayer’s risk is determined
based on all of the facts and circum-
stances surrounding the taxpayer’s busi-
ness and the transaction. In general, a
taxpayer’s hedging strategies and poli-
cies as reflected in the taxpayer’s min-
utes or other records are evidence of
whether particular transactions were en-
tered into primarily to manage the tax-
payer’s risk.
(ii) Micro and macro hedges—(A) In
general. A taxpayer has risk of a particu-
lar type only if it is at risk when all of its
operations are considered. Nonetheless, a
hedge of a particular asset or liability gen-
erally will be respected as managing risk
if it reduces the risk attributable to the
asset or liability and if it is reasonably ex-
pected to reduce the overall risk of the
taxpayer’s operations. If a taxpayer
hedges particular assets or liabilities, or
groups of assets or liabilities, and the
hedges are undertaken as part of a pro-
gram that, as a whole, is reasonably ex-
pected to reduce the overall risk of the
taxpayer’s operations, the taxpayer gener-
ally does not have to demonstrate that
each hedge that was entered into pursuant
to the program reduces its overall risk.
(B) Fixed-to-floating hedges. Under
the principles of paragraph (c)(1)(ii)(A)
of this section, a transaction that econom-
ically converts an interest rate or price
from a fixed rate or price to a floating rate
or price may manage risk. For example,
if a taxpayer’s income varies with interest
rates, the taxpayer may be at risk if it has
a fixed rate liability. Similarly, a taxpayer
with a fixed cost for its inventory may be
at risk if the price at which the inventory
can be sold varies with a particular factor.
Thus, a transaction that converts an inter-
est rate or price from fixed to floating
may be a hedging transaction.
(iii) Written options. A written option
may manage risk. For example, in appro-
priate circumstances, a written call option
with respect to assets held by a taxpayer
or a written put option with respect to as-
sets to be acquired by a taxpayer may be a
hedging transaction. See also paragraph
(c)(1)(v) of this section.
2001–14 I.R.B.1007April 2, 2001

(iv) Extent of risk management. A tax-
payer may hedge all or any portion of its
risk for all or any part of the period during
which it is exposed to the risk.
(v) Transactions that counteract hedg-
ing transactions. If a transaction is en-
tered into primarily to counteract all or
any part of the risk reduction effected by
one or more hedging transactions, the
transaction is a hedging transaction. For
example, if a written option is used to re-
duce or eliminate the risk reduction ob-
tained from another position such as a
purchased option, then it may be a hedg-
ing transaction.
(vi) Number of transactions. The fact
that a taxpayer frequently enters into and
terminates positions (even if done on a
daily or more frequent basis) is not rele-
vant to whether these transactions are
hedging transactions. Thus, for exam-
ple, a taxpayer hedging the risk associ-
ated with an asset or liability may fre-
quently establish and terminate positions
that hedge that risk, depending on the ex-
tent the taxpayer wishes to be hedged.
Similarly, if a taxpayer maintains its
level of risk exposure by entering into
and terminating a large number of trans-
actions in a single day, its transactions
may nonetheless qualify as hedging
transactions.
(vii) Transactions that do not manage
risk. A transaction that is not entered into
to reduce a taxpayer’s risk does not man-
age risk. For example, assume that a tax-
payer produces a commodity for sale,
sells the commodity, and enters into a
long futures or forward contract in that
commodity in the hope that the price will
increase. Because the long position does
not reduce risk, and is not otherwise
treated as a hedging transaction in this
paragraph (c), the transaction is not a
hedging transaction. Moreover, gain or
loss on the contract is not made ordinary
on the grounds that it is a surrogate for in-
ventory. See paragraph (a)(3) of this sec-
tion.
(2) Entering into a hedging transaction.
A taxpayer may enter into a hedging trans-
action by using a position that was a hedge
of one asset or liability as a hedge of an-
other asset or liability (recycling).
(3) No investments as hedging transac-
tions. If an asset (such as an investment)
is not acquired primarily to manage risk,
the purchase or sale of that asset is not a
hedging transaction even if the terms of
the asset limit or reduce the taxpayer’s
risk with respect to other assets or liabili-
ties. For example, a taxpayer’s interest
rate risk from a floating rate borrowing
may be reduced by the purchase of debt
instruments that bear a comparable float-
ing rate. The acquisition of the debt in-
struments, however, is not a hedging
transaction because the transaction is not
entered into primarily to reduce the tax-
payer’s risk. Similarly, borrowings gen-
erally are not made primarily to manage
risk.
(4) Normal course. Solely for purposes
of paragraph (b) of this section, if a trans-
action is entered into in furtherance of a
taxpayer’s trade or business, the transac-
tion is entered into in the normal course of
the taxpayer’s trade or business. This rule
applies even if the risk to be managed re-
lates to the expansion of an existing busi-
ness or the acquisition of a new trade or
business.
(5) Ordinary property and obligations.
Property is ordinary property to a tax-
payer only if a sale or exchange of the
property by the taxpayer could not pro-
duce capital gain or loss regardless of the
taxpayer’s holding period when the sale
or exchange occurs. Thus, for example,
property used in a trade or business within
the meaning of section 1231(b) (deter-
mined without regard to the holding pe-
riod specified in that section) is not ordi-
nary property. An obligation is an
ordinary obligation if performance or ter-
mination of the obligation by the taxpayer
could not produce capital gain or loss.
For purposes of the preceding sentence,
termination has the same meaning as in
section 1234A.
(6) Borrowings. Whether hedges of a
taxpayer’s debt issuances (borrowings)
are hedging transactions is determined
without regard to the use of the proceeds
of the borrowing.
(7) Hedging an aggregate risk. The
term hedging transaction includes a trans-
action that manages an aggregate risk of
interest rate changes, price changes,
and/or currency fluctuations only if all of
the risk, or all but a de minimisamount of
the risk, is with respect to ordinary prop-
erty, ordinary obligations, or borrowings.
(8) Hedges of other risks. Except as
otherwise determined in a regulation, rev-
enue ruling, or revenue procedure, a
hedging transaction does not include a
transaction entered into to manage risks
other than interest rate or price changes,
or currency fluctuations.
(d) Hedging by members of a consoli-
dated group—(1) General rule: single-
entity approach. For purposes of this
section, the risk of one member of a con-
solidated group is treated as the risk of
the other members as if all of the mem-
bers of the group were divisions of a sin-
gle corporation. For example, if any
member of a consolidated group hedges
the risk of another member of the group
by entering into a transaction with a third
party, that transaction may potentially
qualify as a hedging transaction. Con-
versely, intercompany transactions are
not hedging transactions because, when
considered as transactions between divi-
sions of a single corporation, they do not
manage the risk of that single corpora-
tion.
(2) Separate-entity election. In lieu of
the single-entity approach specified in
paragraph (d)(1) of this section, a consoli-
dated group may elect separate-entity
treatment of its hedging transactions. If a
group makes this separate-entity election,
the following rules apply.
(i) Risk of one member not risk of other
members. Notwithstanding paragraph
(d)(1) of this section, the risk of one
member is not treated as the risk of other
members.
(ii) Intercompany transactions. An in-
tercompany transaction is a hedging
transaction (an intercompany hedging
transaction) with respect to a member of a
consolidated group if and only if it meets
the following requirements—
(A) The position of the member in the
intercompany transaction would qualify
as a hedging transaction with respect to
the member (taking into account para-
graph (d)(2)(i) of this section) if the mem-
ber had entered into the transaction with
an unrelated party; and
(B) The position of the other member
(the marking member) in the transaction
is marked to market under the marking
member’s method of accounting.
(iii) Treatment of intercompany hedg-
ing transactions. An intercompany hedg-
ing transaction (that is, a transaction that
meets the requirements of paragraphs
(d)(2)(ii)(A) and (B) of this section) is
subject to the following rules—
April 2, 200110082001–14 I.R.B.

(A) The character and timing rules of
§1.1502–13 do not apply to the income,
deduction, gain, or loss from the inter-
company hedging transaction; and
(B) Except as provided in paragraph
(f)(3) of this section, the character of the
marking member’s gain or loss from the
transaction is ordinary.
(iv) Making and revoking the election.
Unless the Commissioner otherwise pre-
scribes, the election described in this
paragraph (d)(2) must be made in a sepa-
rate statement saying “[Insert Name and
Employer Identification Number of
Common Parent] HEREBY ELECTS
THE APPLICATION OF SECTION
1.1221–2(d)(2) (THE SEPARATE-EN-
TITY APPROACH).” The statement
must also indicate the date as of which
the election is to be effective. The elec-
tion must be signed by the common par-
ent and filed with the group’s federal in-
come tax return for the taxable year that
includes the first date for which the elec-
tion is to apply. The election applies to
all transactions entered into on or after
the date so indicated. The election may
be revoked only with the consent of the
Commissioner.
(3) Definitions. For definitions of con-
solidated group, divisions of a single cor-
poration, group, intercompany transac-
tions, and member, see section 1502 and
the regulations thereunder.
(4) Examples. The following examples
illustrate this paragraph (d):
General Facts. In these examples, Oand Hare
members of the same consolidated group. O’s busi-
ness operations give rise to interest rate risk “A,”
which Owishes to hedge. Oenters into an inter-
company transaction with Hthat transfers the risk to
H. O’s position in the intercompany transaction is
“B,” and H’s position in the transaction is “C.” H
enters into position “D” with a third party to reduce
the interest rate risk it has with respect to its position
C. Dwould be a hedging transaction with respect to
risk Aif O’s risk Awere H’s risk.
Example 1. Single-entity treatment—(i) General
rule. Under paragraph (d)(1) of this section, O’s
risk Ais treated as H’s risk, and therefore Dis a
hedging transaction with respect to risk A. Thus, the
character of Dis determined under the rules of this
section, and the income, deduction, gain, or loss
from Dmust be accounted for under a method of ac-
counting that satisfies §1.446–4. The intercompany
transaction B-Cis not a hedging transaction and is
taken into account under §1.1502–13.
(ii) Identification. Dmust be identified as a
hedging transaction under paragraph (e)(1) of this
section, and Amust be identified as the hedged item
under paragraph (e)(2) of this section. Under para-
graph (e)(5) of this section, the identification of Aas
the hedged item can be accomplished by identifying
the positions in the intercompany transaction as
hedges or hedged items, as appropriate. Thus, sub-
stantially contemporaneous with entering into D, H
may identify Cas the hedged item and Omay iden-
tify Bas a hedge and Aas the hedged item.
Example 2. Separate-entity election; counter-
party that does not mark to market. In addition to
the General Factsstated above, assume that the
group makes a separate-entity election under para-
graph (d)(2) of this section. If Hdoes not mark Cto
market under its method of accounting, then Bis not
a hedging transaction, and the B-Cintercompany
transaction is taken into account under the rules of
section 1502. Dis not a hedging transaction with re-
spect to A, but Dmay be a hedging transaction with
respect to Cif Cis ordinary property or an ordinary
obligation and if the other requirements of para-
graph (b) of this section are met. If Dis not part of a
hedging transaction, then Dmay be part of a strad-
dle for purposes of section 1092.
Example 3. Separate-entity election; counter-
party that marks to market. The facts are the same
as in Example 2above, except that Hmarks Cto
market under its method of accounting. Also assume
that Bwould be a hedging transaction with respect
to risk Aif Ohad entered into that transaction with
an unrelated party. Thus, for O, the B-Ctransaction
is an intercompany hedging transaction with respect
to O’s risk A, the character and timing rules of
§1.1502–13 do not apply to the B-Ctransaction, and
H’s income, deduction, gain, or loss from Cis ordi-
nary. However, other attributes of the items from the
B-Ctransaction are determined under §1.1502–13.
Dis a hedging transaction with respect to Cif it
meets the requirements of paragraph (b) of this sec-
tion.
(e) Identification and recordkeeping—
(1) Same-day identification of hedging
transactions. Under section 1221(a)(7), a
taxpayer that enters into a hedging trans-
action (including recycling an existing
hedging transaction) must clearly identify
it as a hedging transaction before the
close of the day on which the taxpayer ac-
quired, originated, or entered into the
transaction (or recycled the existing hedg-
ing transaction).
(2) Substantially contemporaneous
identification of hedged item—(i) Content
of the identification. A taxpayer that en-
ters into a hedging transaction must iden-
tify the item, items, or aggregate risk
being hedged. Identification of an item
being hedged generally involves identify-
ing a transaction that creates risk, and the
type of risk that the transaction creates.
For example, if a taxpayer is hedging the
price risk with respect to its June pur-
chases of corn inventory, the transaction
being hedged is the June purchase of corn
and the risk is price movements in the
market where the taxpayer buys its corn.
For additional rules concerning the con-
tent of this identification, see paragraph
(e)(3) of this section.
(ii) Timing of the identification. The
identification required by this paragraph
(e)(2) must be made substantially contem-
poraneously with entering into the hedg-
ing transaction. An identification is not
substantially contemporaneous if it is
made more than 35 days after entering
into the hedging transaction.
(3) Identification requirements for cer-
tain hedging transactions. In the case of
the hedging transactions described in this
paragraph (e)(3), the identification under
paragraph (e)(2) of this section must in-
clude the information specified.
(i) Anticipatory asset hedges. If the
hedging transaction relates to the antici-
pated acquisition of assets by the tax-
payer, the identification must include the
expected date or dates of acquisition and
the amounts expected to be acquired.
(ii) Inventory hedges. If the hedging
transaction relates to the purchase or sale
of inventory by the taxpayer, the identifi-
cation is made by specifying the type or
class of inventory to which the transaction
relates. If the hedging transaction relates
to specific purchases or sales, the identifi-
cation must also include the expected
dates of the purchases or sales and the
amounts to be purchased or sold.
(iii) Hedges of debt of the taxpayer—
(A) Existing debt. If the hedging transac-
tion relates to accruals or payments under
an issue of existing debt of the taxpayer,
the identification must specify the issue
and, if the hedge is for less than the full
issue price or the full term of the debt, the
amount of the issue price and the term
covered by the hedge.
(B) Debt to be issued. If the hedging
transaction relates to the expected is-
suance of debt by the taxpayer or to ac-
cruals or payments under debt that is ex-
pected to be issued by the taxpayer, the
identification must specify the following
information: the expected date of is-
suance of the debt; the expected maturity
or maturities; the total expected issue
price; and the expected interest provi-
sions. If the hedge is for less than the en-
tire expected issue price of the debt or the
full expected term of the debt, the identi-
fication must also include the amount or
the term being hedged. The identification
may indicate a range of dates, terms, and
amounts, rather than specific dates, terms,
2001–14 I.R.B.1009April 2, 2001

or amounts. For example, a taxpayer
might identify a transaction as hedging
the yield on an anticipated issuance of
fixed rate debt during the second half of
its fiscal year, with the anticipated amount
of the debt between $75 million and $125
million, and an anticipated term of ap-
proximately 20 to 30 years.
(iv) Hedges of aggregate risk—(A) Re-
quired identification. If a transaction
hedges aggregate risk as described in para-
graph (c)(7) of this section, the identifica-
tion under paragraph (e)(2) of this section
must include a description of the risk being
hedged and of the hedging program under
which the hedging transaction was entered.
This requirement may be met by placing in
the taxpayer’s records a description of the
hedging program and by establishing a sys-
tem under which individual transactions
can be identified as being entered into pur-
suant to the program.
(B) Description of hedging program. A
description of a hedging program must in-
clude an identification of the type of risk
being hedged, a description of the type of
items giving rise to the risk being aggre-
gated, and sufficient additional informa-
tion to demonstrate that the program is
designed to reduce aggregate risk of the
type identified. If the program contains
controls on speculation (for example, po-
sition limits), the description of the hedg-
ing program must also explain how the
controls are established, communicated,
and implemented.
(4) Manner of identification and
records to be retained—(i) Inclusion of
identification in tax records. The identifi-
cation required by this paragraph (e) must
be made on, and retained as part of, the
taxpayer’s books and records.
(ii) Presence of identification must be
unambiguous. The presence of an identi-
fication for purposes of this paragraph (e)
must be unambiguous. The identification
of a hedging transaction for financial ac-
counting or regulatory purposes does not
satisfy this requirement unless the tax-
payer’s books and records indicate that
the identification is also being made for
tax purposes. The taxpayer may indicate
that individual hedging transactions, or a
class or classes of hedging transactions,
that are identified for financial accounting
or regulatory purposes are also being
identified as hedging transactions for pur-
poses of this section.
(iii) Manner of identification. The tax-
payer may separately and explicitly make
each identification, or, so long as para-
graph (e)(4)(ii) of this section is satisfied,
the taxpayer may establish a system pur-
suant to which the identification is indi-
cated by the type of transaction or by the
manner in which the transaction is con-
summated or recorded. An identification
under this system is made at the later of
the time that the system is established or
the time that the transaction satisfies the
terms of the system by being entered, or
by being consummated or recorded, in the
designated fashion.
(iv) Examples. The following exam-
ples illustrate the principles of paragraph
(e)(4)(iii) of this section and assume that
the other requirements of paragraph (e)
are satisfied.
(A) A taxpayer can make an identifica-
tion by designating a hedging transaction
for (or placing it in) an account that has
been identified as containing only hedges
of a specified item (or of specified items
or specified aggregate risk).
(B) A taxpayer can make an identifica-
tion by including and retaining in its
books and records a statement that desig-
nates all future transactions in a specified
derivative product as hedges of a speci-
fied item, items, or aggregate risk.
(C) A taxpayer can make an identifica-
tion by designating a certain mark, a cer-
tain form, or a certain legend as meaning
that a transaction is a hedge of a specified
item (or of specified items or a specified
aggregate risk). Identification can be
made by placing the designated mark on a
record of the transaction (for example,
trading ticket, purchase order, or trade
confirmation) or by using the designated
form or a record that contains the desig-
nated legend.
(5) Identification of hedges involving
members of the same consolidated
group—(i) General rule: single-entity ap-
proach. A member of a consolidated
group must satisfy the requirements of
this paragraph (e) as if all of the members
of the group were divisions of a single
corporation. Thus, the member entering
into the hedging transaction with a third
party must identify the hedging transac-
tion under paragraph (e)(1) of this sec-
tion. Under paragraph (e)(2) of this sec-
tion, that member must also identify the
item, items, or aggregate risk that is being
hedged, even if the item, items, or aggre-
gate risk relates primarily or entirely to
other members of the group. If the mem-
bers of a group use intercompany transac-
tions to transfer risk within the group, the
requirements of paragraph (e)(2) of this
section may be met by identifying the in-
tercompany transactions, and the risks
hedged by the intercompany transactions,
as hedges or hedged items, as appropriate.
Because identification of the intercom-
pany transaction as a hedge serves solely
to identify the hedged item, the identifica-
tion is timely if made within the period re-
quired by paragraph (e)(2) of this section.
For example, if a member transfers risk in
an intercompany transaction, it may iden-
tify under the rules of this paragraph (e)
both its position in that transaction and
the item, items, or aggregate risk being
hedged. The member that hedges the risk
outside the group may identify under the
rules of this paragraph (e) both its posi-
tion with the third party and its position in
the intercompany transaction. Paragraph
(d)(4) Example 1of this section illustrates
this identification.
(ii) Rule for consolidated groups mak-
ing the separate-entity election. If a con-
solidated group makes the separate-entity
election under paragraph (d)(2) of this
section, each member of the group must
satisfy the requirements of this paragraph
(e) as though it were not a member of a
consolidated group.
(6) Consistency with section
1256(e)(2). Any identification for pur-
poses of section 1256(e)(2) is also an
identification for purposes of paragraph
(e)(1) of this section.
(f) Effect of identification and non-iden-
tification—(1) Transactions identified—(i)
In general. If a taxpayer identifies a trans-
action as a hedging transaction for purposes
of paragraph (e)(1) of this section, the iden-
tification is binding with respect to gain,
whether or not all of the requirements of
paragraph (e) are satisfied. Thus, gain from
that transaction is ordinary income. If the
transaction is not in fact a hedging transac-
tion described in paragraph (b) of this sec-
tion, however, paragraphs (a)(1) and (2) of
this section do not apply and the character
of loss is determined without reference to
whether the transaction is a surrogate for a
noncapital asset, serves as insurance
against a business risk, serves a hedging
function, or serves a similar function or
April 2, 200110102001–14 I.R.B.

purpose. Thus, the taxpayer’s identifica-
tion of the transaction as a hedging transac-
tion does not itself make loss from the
transaction ordinary.
(ii) Inadvertent identification.
Notwithstanding paragraph (f)(1)(i) of
this section, if the taxpayer identifies a
transaction as a hedging transaction for
purposes of paragraph (e) of this section,
the character of the gain is determined as
if the transaction had not been identified
as a hedging transaction if—
(A) The transaction is not a hedging
transaction (as defined in paragraph (b) of
this section);
(B) The identification of the transaction
as a hedging transaction was due to inad-
vertent error; and
(C) All of the taxpayer’s transactions in
all open years are being treated on either
original or, if necessary, amended returns
in a manner consistent with the principles
of this section.
(2) Transactions not identified—(i) In
general. Except as provided in para-
graphs (f)(2)(ii) and (iii) of this section,
the absence of an identification that satis-
fies the requirements of paragraph (e)(1)
of this section is binding and establishes
that a transaction is not a hedging transac-
tion. Thus, subject to the exceptions, the
rules of paragraphs (a)(1) and (2) of this
section do not apply, and the character of
gain or loss is determined without refer-
ence to whether the transaction is a surro-
gate for a noncapital asset, serves as in-
surance against a business risk, serves a
hedging function, or serves a similar
function or purpose.
(ii) Inadvertent error. If a taxpayer
does not make an identification that satis-
fies the requirements of paragraph (e) of
this section, the taxpayer may treat gain
or loss from the transaction as ordinary
income or loss under paragraph (a)(1) or
(2) of this section if—
(A) The transaction is a hedging trans-
action (as defined in paragraph (b) of this
section);
(B) The failure to identify the transac-
tion was due to inadvertent error; and
(C) All of the taxpayer’s hedging trans-
actions in all open years are being treated
on either original or, if necessary,
amended returns as provided in para-
graphs (a)(1) and (2) of this section.
(iii) Anti-abuse rule.If a taxpayer does
not make an identification that satisfies all
the requirements of paragraph (e) of this
section but the taxpayer has no reasonable
grounds for treating the transaction as
other than a hedging transaction, then
gain from the transaction is ordinary. The
reasonableness of the taxpayer’s failure to
identify a transaction is determined by
taking into consideration not only the re-
quirements of paragraph (b) of this sec-
tion but also the taxpayer’s treatment of
the transaction for financial accounting or
other purposes and the taxpayer’s identifi-
cation of similar transactions as hedging
transactions.
(3) Transactions by members of a con-
solidated group—(i) Single-entity ap-
proach. If a consolidated group is under
the general rule of paragraph (d)(1) of this
section (the single-entity approach), the
rules of this paragraph (f) apply only to
transactions that are not intercompany
transactions.
(ii) Separate-entity election. If a con-
solidated group has made the election
under paragraph (d)(2) of this section,
then, in addition to the rules of paragraphs
(f)(1) and (2) of this section, the follow-
ing rules apply:
(A) If an intercompany transaction is
identified as a hedging transaction but
does not meet the requirements of para-
graphs (d)(2)(ii)(A) and (B) of this sec-
tion, then, notwithstanding any contrary
provision in §1.1502–13, each party to the
transaction is subject to the rules of para-
graph (f)(1) of this section with respect to
the transaction as though it had incor-
rectly identified its position in the transac-
tion as a hedging transaction.
(B) If a transaction meets the require-
ments of paragraphs (d)(2)(ii)(A) and (B)
of this section but the transaction is not
identified as a hedging transaction, each
party to the transaction is subject to the
rules of paragraph (f)(2) of this section.
(Because the transaction is an intercom-
pany hedging transaction, the character
and timing rules of §1.1502–13 do not
apply. See paragraph (d)(2)(iii)(A) of this
section.)
(g) Effective date. The rules of this
section apply to transactions entered into
on or after January 18, 2001.
Par. 2. Section 1.1256(e)–1 is revised
to read as follows:
§1.1256(e)–1 Identification of hedging
transactions.
(a) Identification and recordkeeping re-
quirements. Under section 1256(e)(2), a
taxpayer that enters into a hedging trans-
action must identify the transaction as a
hedging transaction before the close of
the day on which the taxpayer enters into
the transaction.
(b) Requirements for identification.
The identification of a hedging transac-
tion for purposes of section 1256(e)(2)
must satisfy the requirements of
§1.1221–2(e)(1). Solely for purposes of
section 1256(f)(1), however, an identifi-
cation that does not satisfy all of the re-
quirements of §1.1221–2(e)(1) is never-
theless treated as an identification under
section 1256(e)(2).
(c) Consistency with §1.1221–2. Any
identification for purposes of
§1.1221–2(e)(1) is also an identification
for purposes of this section. If a taxpayer
satisfies the requirements of
§1.1221–2(f)(1)(ii), the transaction is
treated as if it were not identified as a
hedging transaction for purposes of sec-
tion 1256(e)(2).
(d) Effective date. This section applies
to transactions entered into on or after
January 18, 2001.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
17, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 18, 2001, 66 F.R. 4738)
Notice of Proposed Rulemaking
Notice to Interested Parties
REG–129608–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to the notice
to interested parties. Before the IRS can
issue an advance determination regarding
the qualification of a retirement plan, a
plan sponsor must provide evidence that it
has notified all persons who qualify as in-
terested parties that an application for an
advance determination will be filed.
2001–14 I.R.B.1011April 2, 2001

These proposed regulations set forth stan-
dards by which a plan sponsor may satisfy
the notice to interested parties require-
ment. The proposed regulations affect re-
tirement plan sponsors, plan participants
and other interested parties with respect to
an application for a determination letter,
and certain representatives of interested
parties.
DATES: Written or electronic comments
and requests for a public hearing must be
received by April 17, 2001.
ADDRESSES: Send submissions to:
CC:M&SP:RU (REG–129608–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG–129608–00),
Courier’s Desk, Internal Revenue Ser-
vice, 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 In-
ternet site at http://www.irs.gov/tax_regs/
reglist.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, contact Pamela R. Kinard, (202)
622-6060; concerning the submission of
comments, contact LaNita VanDyke,
(202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR Parts 1 and 601) under sec-
tion 7476 of the Internal Revenue Code of
1986 (Code).
Section 7476(b)(2) provides that, with
respect to a pleading filed by a petitioner
for a request for a determination on the
qualified status of a retirement plan under
section 7476(a), the Tax Court may find
the pleading to be premature unless the
petitioner establishes to the satisfaction of
the court that he has complied with the re-
quirements prescribed by the regulations
of the Secretary regarding the notice to in-
terested parties.
On May 21, 1976, Final Income Tax
Regulations (T.D. 7421, 1976–1 C.B. 405)
under section 7476 were published in the
Federal Register(41 FR 20874). The
final regulations provide guidance on the
nature and method of giving notice to in-
terested parties. Existing §1.7476–
1(a)(1) provides that in order to receive a
determination on the qualified status of a
retirement plan, the applicant must pro-
vide evidence that individuals who quali-
fied as interested parties received notifica-
tion of the determination letter
application. In general, interested parties
are defined in §1.7476–1(b)(1) as all pre-
sent employees of the employer eligible to
participate in the plan, and all other pre-
sent employees whose principal place of
employment is the same as the principal
place of employment of the employees eli-
gible to participate. For plan terminations,
§1.7476–1(b)(5) defines interested parties
as all present employees with accrued
benefits, all former employees with vested
benefits, and all beneficiaries of deceased
former employees currently receiving
benefits under the plan.
Existing §1.7476–2(b) provides that
the notice must be given in writing, must
contain the information in §601.201(o)(3)
(Statement of Procedural Rules) and must
be given in the manner prescribed in
§1.7476–2(c). For present employees,
§1.7476–2(c)(1) provides that the notice
must be given in person, by mailing, by
posting, or by printing it in a publication
of the employer or an employee organiza-
tion that is reasonably available to em-
ployees. For interested parties who are in
a unit of employees covered by a collec-
tive-bargaining agreement, the notice
must also be given in person or by mail to
the collective-bargaining representative
of the interested parties. For former em-
ployees and beneficiaries who qualify as
interested parties, §1.7476–2(c)(2)(i) pro-
vides that notice shall be given in person
or by mail to the last known address of the
interested party.
On February 8, 2000, the IRS and Trea-
sury published Final Income Tax Regula-
tions (T.D. 8873, 2000–9 I.R.B. 713) in
the Federal Register(65 FR 6001) that
provide safe harbor methods for plan
sponsors and administrators using elec-
tronic media to transmit notices and con-
sents required under sections 402(f),
411(a)(11), or 3405(e)(10)(B). Notice
99–1 (1999–1 C.B. 269) and Announce-
ment 99–6 (1999–1 C.B. 352) also pro-
vide guidance on the use of electronic
media by retirement plans.
In order to continue to advance the goal
of permitting plan sponsors to use elec-
tronic media in administering their retire-
ment plans, this amendment to the regula-
tions eliminates the writing requirement
for the notice to interested parties. In-
stead, the proposed regulations set forth
new standards for satisfying the notice re-
quirement that would ensure that inter-
ested parties will receive timely and ade-
quate notice.
Explanation of Provisions
This notice of proposed rulemaking
would amend §§1.7476–2 and 601.201
regarding the nature and method of giving
notices to interested parties. The pro-
posed regulations do not change the infor-
mation that the notice must contain or the
time period in which the notice must be
given. These regulations continue to pro-
vide that the notice to interested parties
must contain the information and be given
within the time period prescribed in
§601.201(o)(3) (Statement of Procedural
Rules). The proposed regulations would
set forth new standards for providing the
notice to interested parties. These new
standards permit greater flexibility in the
manner in which the notice may be pro-
vided.
The proposed regulations provide that,
in the case of a present employee, former
employee, or beneficiary who is an inter-
ested party, the notice may be provided by
any method that reasonably ensures that
all interested parties will receive the no-
tice. The method used must be reasonably
calculated to provide timely and adequate
notice to all interested parties. In addition,
the proposed regulations provide that if an
interested party who is a present employee
is in a unit of employees covered by a col-
lective-bargaining agreement between em-
ployee representatives and one or more
employers, notice shall also be given to
the collective-bargaining representative of
such interested party by any method that
reasonably ensures that the collective-bar-
gaining representative will receive the no-
tice. The proposed regulations also pro-
vide if the notice to interested parties is
delivered using an electronic medium
under a system that satisfies the require-
ments of Q&A-5 of §1.402(f)–1, the no-
tice will be deemed to be provided in a
April 2, 200110122001–14 I.R.B.

manner that satisfies the notice to inter-
ested parties requirement.
The proposed regulations provide that
whether the notice to interested parties is
given in a manner that satisfies the re-
quirements under these regulations will
be determined on the basis of all the facts
and circumstances. These regulations fur-
ther provide that since the facts and cir-
cumstances will differ depending on the
interested party, it is possible that more
than one method of delivery (including
nonelectronic writing) must be used in
order to ensure timely and adequate no-
tice to all interested parties.
The proposed regulations also revise
§601.201 (Statement of Procedural Rules)
to conform to the changes in §1.7476–2.
Proposed Effective Date
These regulations are proposed to be
effective with respect to applications
made on or after the date they are pub-
lished in the Federal Registeras final
regulations. Plan sponsors may rely on
these proposed regulations for guidance
pending the issuance of final regulations.
If, and to the extent, future guidance is
more restrictive than the guidance in these
proposed regulations, the future guidance
will be applied without retroactive effect.
Special Analyses
It has been determined that this notice of
proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and because these regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Code, these pro-
posed regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) or electronic comments that are
submitted 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 that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the hearing will
be published in the Federal Register.
Drafting Information
The principal author of these regula-
tions is Pamela R. Kinard of the Office of
the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities), IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.7476–2 is amended as
follows:
1. Paragraphs (b) and (c) are revised.
2. Paragraph (d) is redesignated as
paragraph (e) and a new paragraph (d) is
added.
3. Paragraph (e)(1) is revised.
The revisions and additions read as fol-
lows:
§1.7476–2 Notice to interested parties.
* * * * *
(b) Nature of notice. The notice re-
quired by this section shall —
(1) Contain the information and be
given within the time period prescribed in
§601.201(o)(3) of this chapter (Statement
of Procedural Rules); and,
(2) Be given in a manner prescribed in
paragraph (c) of this section.
(c) Method of giving notice. (1) In the
case of a present employee, former em-
ployee, or beneficiary who is an inter-
ested party, the notice may be provided by
any method that reasonably ensures that
all interested parties will receive timely
and adequate notice. If an interested
party who is a present employee is in a
unit of employees covered by a collec-
tive-bargaining agreement between em-
ployee representatives and one or more
employers, notice shall also be given to
the collective-bargaining representative
of such interested party by any method
that satisfies this paragraph. Whether the
notice is provided in a manner that satis-
fies the requirements of this paragraph
will be determined on the basis of all the
facts and circumstances. Because the
facts and circumstances will differ de-
pending on the interested party, it is possi-
ble that more than one method of delivery
must be used in order to ensure timely and
adequate notice to all interested parties.
(2) If the notice to interested parties is
delivered using an electronic medium
under a system that satisfies the require-
ments of Q&A-5 of §1.402(f)–1, the no-
tice will be deemed to be provided in a
manner that satisfies the requirements of
paragraph (c)(1) of this section.
(d) Examples. The principles of this
section are illustrated by the following ex-
amples:
Example 1. (i) Employer A is amending Plan C
and applying for a determination letter. Plan C is not
maintained pursuant to one or more collective-bar-
gaining agreements and is not being terminated. As
part of the determination letter application process,
Employer A provides the notice required under this
section to interested parties. For present employees,
Employer A provides the notice by posting the no-
tice at those locations within the principal places of
employment of the interested parties which are cus-
tomarily used for employer notices to employees
with regard to labor-management relations matters.
(ii) In this Example 1, Employer A satisfies the
notice to interested parties requirement described in
this section.
Example 2. (i) Employer B is amending Plan D
and applying for a determination letter. As part of
the determination letter application process, Em-
ployer B provides the notice required under this sec-
tion to interested parties.
(ii) Employer B has multiple worksites. Em-
ployer B’s employees located at worksites 1 through
4 have access to computers at their workplace.
However, Employer B’s employees located at work-
site 5 do not have access to computers.
(iii) For present employees with access to com-
puters (worksites 1 through 4), Employer B provides
the notice by posting the notice on Employer B’s
web site (Internet or intranet). Employer B custom-
arily posts employer notices to employees at work-
sites 1 through 4 with regard to labor-management
relations matters on its web site. For present em-
ployees without access to computers (worksite 5),
2001–14 I.R.B.1013April 2, 2001

Employer B provides the notice by posting the no-
tice at worksite 5 in a location that is customarily
used for employer notices to employees with regard
to labor-management relations matters.
(iv) Employer B also sends the notice by e-mail
to each collective-bargaining representative of inter-
ested parties who are present employees of Em-
ployer B covered by a collective-bargaining agree-
ment between employee representatives and
Employer B, using the e-mail address previously
provided to Employer B by such collective-bargain-
ing representative.
(v) In this Example 2, Employer B satisfies the
notice to interested parties requirement described in
this section.
Example 3. (i) Employer C is terminating Plan E
and applying for a determination letter as to whether
the plan termination affects the continuing qualifica-
tion of Plan E. As part of the determination letter
application process, Employer C provides the notice
required under this section to interested parties.
(ii) All of Employer C’s employees have access
to computers. Each employee has an e-mail address
where he or she can receive messages from Em-
ployer C. Employer C has set up kiosks for employ-
ees’ use. The kiosks are located within the principal
places of employment of the employees and are cus-
tomarily used for employer notices to employees
with regard to labor-management relations matters.
(iii) For present employees, Employer C pro-
vides the notice by sending the notice by e-mail.
(iv) Employer C also sends the notice by e-mail
to each collective-bargaining representative of inter-
ested parties who are present employees of Em-
ployer C covered by a collective-bargaining agree-
ment between employee representatives and
Employer C, using the e-mail address previously
provided to Employer C by such collective-bargain-
ing representative.
(v) In addition, Employer C sends the notice by
e-mail to each interested party who is a former em-
ployee or beneficiary, using the e-mail address pre-
viously provided to Employer C by such interested
party. For any former employee or beneficiary who
did not provide an e-mail address, Employer C sends
the notice by regular mail to the last known address
of such former employee or beneficiary.
(vi) In this Example 3, Employer C satisfies the
notice to interested parties requirement described in
this section.
(e) Effective date. (1) The provisions
of this section shall apply to applications
referred to in paragraph (a) of §1.7476–1
made on or after the date the regulations
are published in the Federal Registeras
final regulations.
* * * * *
PART 601 — STATEMENT OF
PROCEDURAL RULES
Paragraph 1. The authority citation
for part 601 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 601.201 is amended as
follows:
1. In paragraph (o)(3)(xv), the first
sentence is replaced by two new sen-
tences.
2. In paragraph (o)(3)(xvi), introduc-
tory text is revised.
The revisions read as follows:
§601.201 Rulings and determination
letters.
* * * * *
(o) * * * (3) * * *
(xv) When the notice referred to in
paragraph (o)(3)(xiv) of this section is
given in the manner set forth in
§1.7476–2(c), the following time limita-
tions for providing the notice apply.
When the notice is given other than by
mailing, it should be given not less than 7
days nor more than 21 days prior to the
date that the application for a determina-
tion is made. * * *
(xvi) The notice referred to in para-
graph (o)(3)(xiv) of this section shall be
given in the manner prescribed in
§1.7476–2 and shall contain the following
information:
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on January
16, 2001, 8:45 a.m., and published in the issue of the
Federal Register for January 17, 2001, 66 F.R. 3954)
Supplemental Information on
Treasury Bills for Publication
1212
Announcement 2001–29
Banks, brokers, and other middlemen
who report discount on Treasury bill re-
demptions on Form 1099-INT must use
the owner’s purchase price, where avail-
able, to determine the amount of discount
to report. This information can usually be
obtained from the owner’s or middle-
man’s records. However, if the owner’s
purchase price is not available from exist-
ing records, the middleman must report
the discount as if the holder had pur-
chased the Treasury bill at its original
issue price. In this case, the middleman
must use as the original issue price the
noncompetitive issue price for the
longest-maturity Treasury bill maturing
on that date.
For Treasury bill redemptions when the
owner’s purchase price cannot be deter-
mined, the following list gives the non-
competitive issue prices and correspond-
ing amounts of discount to be reported on
Form 1099-INT for Treasury bills matur-
ing May through July 2001. This list,
which should also help middlemen deter-
mine any amounts subject to backup with-
holding, supplements the list that appears
in the 2000 edition of Publication 1212,
List of Original Issue Discount Instru-
ments.
April 2, 200110142001–14 I.R.B.

SHORT-TERM UNITED STATES TREASURY BILLS
Issued at a discount and maturing May 2001 - July 2001
NoncompetitiveDollar Amount of OID
CUSIPMaturityIssueIssue Price (% ofto be reported (per
NumberDateDatePrincipal Amount)$1,000 of Maturity Value)
2001–14 I.R.B.1015April 2, 2001
912795GE505/03/0111/02/0096.92930.71
912795GF205/10/0111/09/0096.91430.86
912795GG005/17/0111/16/0096.93130.69
912795GH805/24/0111/24/0096.95830.42
*912795GJ405/31/0106/01/0093.93360.67
912795GK106/07/0112/07/0097.04829.52
912795GL906/14/0112/14/0097.07329.27
912795GM706/21/0112/21/0097.13928.61
912795GN506/28/0112/28/0097.21927.81
912795HA207/05/0101/04/0197.29027.10
912795HC807/12/0101/11/0197.56124.39
912795GP007/19/0101/18/0197.44425.56
912795HD607/26/0101/25/0197.51324.87
*52-Week Bill

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.
Z—Corporation.
Definition of Terms
April 2, 2001i2001–14 I.R.B.

2001–14 I.R.B.iiApril 2, 2001
Numerical Finding List
1
Bulletins 2001–1 through 2001–13
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
2001–13, 2001–96 I.R.B. 752
2001–14, 2001–7 I.R.B. 648
2001–15, 2001–8 I.R.B. 715
2001–16, 2001–8 I.R.B. 715
2001–17, 2001–8 I.R.B. 716
2001–18, 2001–10 I.R.B. 791
2001–19, 2001–10 I.R.B. 791
2001–20, 2001–8 I.R.B. 716
2001–21, 2001–9 I.R.B. 752
2001–22, 2001–11 I.R.B. 895
2001–23, 2001–10 I.R.B. 791
2001–24, 2001–10 I.R.B. 793
2001–25, 2001–11 I.R.B. 895
2001–26, 2001–11 I.R.B. 896
2001–27, 2001–11 I.R.B. 897
2001–28, 2001–13 I.R.B. 975
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
2001–16, 2001–9 I.R.B. 730
2001–17, 2001–9 I.R.B. 730
2001–18, 2001–9 I.R.B. 731
2001–19, 2001–10 I.R.B. 784
2001–20, 2001–11 I.R.B. 818
2001–21, 2001–11 I.R.B. 818
2001–22, 2001–12 I.R.B. 911
2001–23, 2001–12 I.R.B. 911
2001–24, 2001–12 I.R.B. 912
2001–25, 2001–13 I.R.B. 941
2001–26, 2001–13 I.R.B. 942
2001–27, 2001–13 I.R.B. 942
2001–28, 2001–13 I.R.B. 944
Proposed Regulations:
LR–230–76, 2001–13 I.R.B. 945
REG–209461–79, 2001–8 I.R.B. 712
REG–246256–96, 2001–8 I.R.B. 713
REG–251701–96, 2001–4 I.R.B. 396
Proposed Regulations—Continued:
REG–106030–98, 2001–11 I.R.B. 820
REG–106446–98, 2001–13 I.R.B. 945
REG–106542–98, 2001–5 I.R.B. 473
REG–121928–98, 2001–6 I.R.B. 520
REG–109481–99, 2001–13 I.R.B. 961
REG–111835–99, 2001–11 I.R.B. 834
REG–103320–00, 2001–8 I.R.B. 714
REG–104683–00, 2001–4 I.R.B. 407
REG–105801–00, 2001–13 I.R.B. 965
REG–106702–00, 2001–4 I.R.B. 424
REG–106791–00, 2001–6 I.R.B. 521
REG–107175–00, 2001–13 I.R.B. 971
REG–107176–00, 2001–4 I.R.B. 428
REG–107186–00, 2001–13 I.R.B. 973
REG–107566–00, 2001–3 I.R.B. 346
REG–110374–00, 2001–12 I.R.B. 915
REG–110659–00, 2001–12 I.R.B. 917
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
REG–125237–00, 2001–12 I.R.B. 919
REG–126100–00, 2001–11 I.R.B. 862
REG–130477–00, 2001–11 I.R.B. 865
REG–130481–00, 2001–11 I.R.B. 865
Railroad Retirement Quarterly Rates:
2001–2, I.R.B. 258
Revenue Procedures:
2001–1, 2001–1 I.R.B. 1
2001–2, 2001–1 I.R.B. 79
2001–3, 2001–1 I.R.B. 111
2001–4, 2001–1 I.R.B. 121
2001–5, 2001–1 I.R.B. 164
2001–6, 2001–1 I.R.B. 194
2001–7, 2001–1 I.R.B. 236
2001–8, 2001–1 I.R.B. 239
2001–9, 2001–3 I.R.B. 328
2001–10, 2001–2 I.R.B. 272
2001–11, 2001–2 I.R.B. 275
2001–12, 2001–3 I.R.B. 335
2001–13, 2001–3 I.R.B. 337
2001–14, 2001–3 I.R.B. 343
2001–15, 2001–5 I.R.B. 465
2001–16, 2001–4 I.R.B. 376
2001–17, 2001–7 I.R.B. 589
2001–18, 2001–8 I.R.B. 708
2001–19, 2001–9 I.R.B. 732
2001–20, 2001–9 I.R.B. 738
2001–21, 2001–9 I.R.B. 742
2001–22, 2001–9 I.R.B. 745
2001–23, 2001–10 I.R.B. 784
2001–24, 2001–10 I.R.B. 788
2001–25, 2001–12 I.R.B. 913
Revenue Rulings:
2001–1, 2001–9 I.R.B. 726
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
2001–8, 2001–9 I.R.B. 726
2001–9, 2001–8 I.R.B. 652
2001–10, 2001–10 I.R.B. 755
Revenue Rulings—Continued:
2001–11, 2001–10 I.R.B. 780
2001–12, 2001–11 I.R.B. 811
2001–13, 2001–12 I.R.B. 898
2001–14, 2001–12 I.R.B. 898
2001–15, 2001–13 I.R.B. 922
2001–16, 2001–13 I.R.B. 936
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
8914, 2001–8 I.R.B. 653
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
8920, 2001–8 I.R.B. 654
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
8927, 2001–11 I.R.B. 807
8928, 2001–8 I.R.B. 685
8929, 2001–10 I.R.B. 756
8930, 2001–5 I.R.B. 433
8931, 2001–7 I.R.B. 542
8932, 2001–11 I.R.B. 813
8933, 2001–11 I.R.B. 794
8934, 2001–12 I.R.B. 904
8935, 2001–8 I.R.B. 702
8937, 2001–11 I.R.B. 806
8938, 2001–13 I.R.B. 929
8939, 2001–12 I.R.B. 899
8942, 2001–13 I.R.B. 929
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.

April 2, 2001iii2001–14 I.R.B.
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2001–1 through 2001–13
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
2000–78
Obsoleted by
T.D. 8933, 2001–11 I.R.B. 794
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:
94–3
Modified by
T.D. 8933, 2001–11 I.R.B. 794
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
2000–26
Modified by
Notice 2001–22, 2001–12 I.R.B. 911
2000–43
Extended by
Notice 2001–13, 2001–6 I.R.B. 514
Proposed Regulations:
EE–130–86
Partially withdrawn by
REG–209461–79, 2001–8 I.R.B. 712
REG–106542–98
Corrected by
Ann. 2001–24, 2001–13 I.R.B. 793
REG–116733–98
Withdrawn by
Ann. 2001–11, 2001–4 I.R.B. 432
Proposed Regulations—Continued:
REG–116048–99
Withdrawn by
Ann. 2001–27, 2001–11 I.R.B. 897
REG–106702–00
Corrected by
Ann. 2001–28, 2001–13 I.R.B. 975
Revenue Procedures:
83–87
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
90–18
Amplified and superseded by
Rev. Proc. 2001–18, 2001–8 I.R.B. 708
92–19
Superseded by
Rev. Proc. 2001–15, 2001–5 I.R.B. 465
96–15
Modified by
Ann. 2001–22, 2001–11 I.R.B. 895
96–17
Modified by
Rev. Proc. 2001–9, 2001–3 I.R.B. 328
99–18
Modified and superseded by
Rev. Proc. 2001–21, 2001–9 I.R.B. 742
99–47
Superseded by
Rev. Proc. 2001–16, 2001–4 I.R.B. 376
99–49
Modified and amplified by
Notice 2001–23, 2001–12 I.R.B. 911
Rev. Proc. 2001–10, 2001–2 I.R.B. 272
Rev. Proc. 2001–23, 2001–10 I.R.B. 784
Rev. Proc. 2001–24, 2001–10 I.R.B. 788
Rev. Proc. 2001–25, 2001–12 I.R.B. 913
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
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
Revenue Procedures—Continued:
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
2001–3
Corrected by
Ann. 2001–25, 2001–11 I.R.B. 895
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
85–30
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
88–95
Clarified by
Rev. Rul. 2001–8, 2001–9 I.R.B. 762
92–19
Supplemented in part by
Rev. Rul. 2001–11, 2001–10 I.R.B. 780
2000–56
Corrected by
Ann. 2001–19, 2001–10 I.R.B. 791
2001–4
Modified by
Notice 2001–23, 2001–12 I.R.B. 911
Treasury Decisions:
7530
Removed by
T.D. 8938, 2001–13 I.R.B. 929
8889
Corrected by
Ann. 2001–14, 2001–2 I.R.B. 286
8913
Corrected by
Ann. 2001–26, 2001–11 I.R.B. 896
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.

2001–14 I.R.B.ivApril 2, 2001
INDEX
Internal Revenue Bulletins
2001–1 through 2001–13
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the paranthesis
refer to the Internal Revenue Bulletin in
which the item may be found and the
page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel & Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1, 111; correction
(Ann 25) 11, 895
Associate Chief Counsel International
(RP 7) 1, 236
Cafeteria plans, tax treatment of (TD 8921)
7, 532; (REG–209461–79) 8, 712
Defined benefit pension plan, transfer of
excess assets (REG–116468–00) 6, 522
Determination letters, issuing procedures
(RP 6) 1, 194
Employee Plans Compliance Resolution
System (EPCRS), update (RP 2001–17)
7,589
Employee stock ownership plans,
deductibility of redemption proceeds
(RR 6) 6, 491
Full funding limitations:
Weighted average interest rate for:
December 2000 (Notice 3) 2, 267
January 2001 (Notice 15) 7, 589
February 2001 (Notice 20) 11, 818
March 2001 (Notice 28) 13, 944
Group health plans:
Continuation coverage requirements
(TD 8928) 8, 685
HIPAA nondiscrimination:
Bona fide wellness programs
(REG–114084–00) 7, 633
Certain grandfathered church plans,
exception (REG–114083–00) 7,630
Eligibility not limited by certain
health factors (TD 8931) 7, 542;
(REG–114082–00) 7, 629
GUST remedial amendment period, M&P
plans and volume submitter plans (Ann
12) 6, 526
Letter rulings:
Determination letters, and information
letters issued by Associates Chief
Counsel (RP 1) 1, 1
Information letters, etc. (RP 4) 1, 121
Life insurance contracts, “split-dollar”
arrangements (Notice 10) 5, 459
Nondiscrimination rules, governmental
and church plans, relief from (Notice 9)
4, 375
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–
99) 11, 834
Proposed Regulations:
26 CFR 1.125–1 Q&A–8, amended;
1.125–2 Q&A–6(a), amended;
1.125–2 Q&A–6(b), (c), and (d), with-
drawn; 1.125–2 Q&A–6(e), redesig-
nated as (b); tax treatment of cafeteria
plans (REG–209461–79) 8, 712
26 CFR 1.401(a)(9)–0 through –8, added;
1.403(b)–2, added; 1.408–8, added;
54.4974–2, added; required minimum
distributions (REG–130477–00 and
REG–130481–00) 11, 865
26 CFR 1.417(e)–1, amended; special
rule for written explanation by quali-
fied retirement plans provided after
annuity starting date (REG–109481–
99) 13, 961
26 CFR 1.420–1, added; defined bene-
fit pension plan, transfer of excess
assets (REG–116468–00) 6, 522
26 CFR 54.9802–1, amended; group
health plans, HIPAA nondiscrimina-
tion requirements, eligibility not lim-
ited by certain health factors
(REG–114082–00) 7, 629
26 CFR 54.9802–1(f), amended; group
health plans, HIPAA nondiscrimina-
tion requirements, bona fide well-
ness programs (REG–114084–00) 7,
633
26 CFR 54.9802–2, added; group
health plans, HIPAA nondiscrimina-
tion requirements for certain grand-
fathered church plans, exception
(REG–114083–00) 7, 630
31 CFR Part 10, amended; practice
before the Internal Revenue Service;
Circular 230 (REG–111835–99) 11,
834
Qualified retirement plans:
Required minimum distributions (Ann
18) 10, 791
Written explanation provided after
annuity starting date (REG–109481–
99) 13, 961
Regulations:
26 CFR 1.125–4, amended; 1.125–4T,
removed; tax treatment of cafeteria
plans (TD 8921) 7, 532
26 CFR 54.4980B–0 through –8,
amended; 54.4980B–9, –10, added;
group health plans, continuation
coverage requirements (TD 8928) 8,
685
26 CFR 54.9802–1, added; 54.9802–1T,
removed; group health plans, HIPAA
nondiscrimination requirements, eli-
gibility not limited by certain health
factors (TD 8931) 7, 542
Required minimum distributions (REG–
130477–00 and REG–130481–00) 11, 865
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel
& Division Counsel/Associate Chief
Counsel (TE/GE) (RP 2) 1, 79
IRS employees (RP 5) 1, 164
User fees, request for letter rulings (RP 8)
1, 239
EMPLOYMENT TAX
Electronic filing, Form 940 (RP 9) 3, 328
Electronic furnishing of payee statements,
voluntary (TD 8942) 13, 929;
(REG–107186–00) 13, 973
Forms:
W-2, new code (Ann 7) 3,357
W-2, voluntary electronic furnishing of
payee statements (TD 8942) 13, 929;
(REG–107186–00) 13, 973
EMPLOYEE PLANS—
Cont.
EMPLOYEE PLANS—
Cont.

940, electronic filing (RP 9) 3, 328
1098-E, voluntary electronic furnishing
of payee statements (TD 8942) 13,
929; (REG–107186–00) 13, 973
1098-T, voluntary electronic furnishing
of payee statements (TD 8942) 13,
929; (REG–107186–00) 13, 973
Indian tribal governments under FUTA,
treatment of (Ann 16) 8, 715
Interest-free adjustments (REG–110374–
00) 12, 915
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–
99) 11, 834
Proposed Regulations:
26 CFR 31.3406(g)–1(d), revised;
reporting requirements for interest
on deposits paid to nonresident
aliens (REG–126100–00) 11, 862
26 CFR 31.6051–1, amended; electron-
ic payee statements, voluntary
(REG–107186–00) 13, 973
26 CFR 31.6205–1, revised; interest-
free adjustments (REG–110374–00)
12, 915
26 CFR 31.6302–1, amended;
31.6302(c)–3, amended; removal of
Federal Reserve banks as federal
depositaries (REG–107176–00) 4,
428
31 CFR Part 10, amended; practice
before the Internal Revenue Service;
Circular 230 (REG–111835–99) 11,
834
Railroad retirement, rate determination,
quarterly, January 1, 2001, 2, 258
Regulations:
26 CFR 31.6051–1T, added; electronic
payee statements, voluntary (TD
8942) 13, 929
26 CFR 31.6053–1, –4, amended;
tips, tip reporting, employer estab-
lished electronic systems (TD
8910) 2, 258
Reporting requirements for interest on
deposits paid to nonresident aliens
(REG–126100–00) 11, 862
Statutory stock options (Notice 14) 6, 516
Tips:
Tips reporting:
Employer-designed tip reporting,
food and beverage industry
(EmTRAC) programs (Notice 1)
2, 261
Employer established electronic sys-
tems (TD 8910) 2, 258
Voluntary tip reporting agreements
proformas(TRDA and TRAC)
(Ann 1) 2, 277
ESTATE TAX
Art valuation requests, change of address
for submissions (Ann 22) 11, 895
Charitable deductions, guaranteed annuity
and unitrust interest (TD 8923) 6, 485
Generation-skipping transfer tax and reten-
tion of exempt status (TD 8912) 5, 452
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–99)
11, 834
Proposed Regulations:
26 CFR 1.641(b)–3, amended;
1.642(c)–1, revised; 1.645–1, added;
1.671–4, amended; 1.6072–1, amend-
ed; 301.6109–1, amended; election to
treat trust as part of an estate
(REG–106542–98) 5, 473; correction
(Ann 24) 10, 793
31 CFR Part 10, amended; practice
before the Internal Revenue Service;
Circular 230 (REG–111835–99) 11,
834
Regulations:
26 CFR 20.2055–2, amended; charitable
deductions, guaranteed annuity and
unitrust interest (TD 8923) 6, 485
26 CFR 26.2601–1, amended; genera-
tion-skipping transfer issues (TD
8912) 5,452
Trusts, election to treat trust as part of an
estate (REG–106542–98) 5, 472; correc-
tion (Ann 24) 10,793
Valuation of art requests, change of address
for submissions (Ann 22) 11, 895
EXCISE TAX
Air transportation, mileage awards (Notice
6) 3, 327
Excess benefit transactions (TD 8920) 8,
654; (REG–246256–96) 8, 713
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–
99) 11, 834
Proposed Regulations:
26 CFR 53.4958–0 through –8, added;
excise taxes on excess benefit trans-
actions (REG–246256–96) 8, 713
31 CFR Part 10, amended; practice before
the Internal Revenue Service; Circular
230 (REG–111835–99) 11, 834
Regulations:
26 CFR 53.4958–0T through –8T,
added; 53.4963–1, amended;
301.6213–1, amended; 301.6501(e)
–1, amended; 301.6501(n)–1,
amended; 301.7422–1, amended;
301.7454–2, amended; 301.7611–1,
amended; 602.101, amended; excise
taxes on excess benefit transactions
(TD 8920) 8, 654
EXEMPT ORGANIZA-
TIONS
Advance letter rulings and determination
letters, areas which will not be issued
from Associates Chief Counsel &
Division Counsel/Associate Chief
Counsel (TE/GE) (RP 3) 1, 111; correc-
tion (Ann 25) 11, 895
Excise taxes on excess benefit transactions
(TD 8920) 8, 654; (REG–246256–96) 8,
713
Indian tribal governments treated as
states, list (RP 15) 5, 465
Letter rulings, information letters, etc.
(RP 4) 1, 121
Plain language publications and voluntary
compliance programs (Ann 14) 7, 648
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–
99) 11, 834
Proposed Regulations:
26 CFR 53.4958–0 through –8, added;
excise taxes on excess benefit trans-
actions (REG–246256–96) 8, 713
31 CFR Part 10, amended; practice
before the Internal Revenue Service;
Circular 230 (REG–111835–99) 11,
834
Regulations:
26 CFR 53.4958–0T through –8T, added;
53.4963–1, amended; 301.6213–1,
amended; 301.6501(e)–1, amended;
301.6501(n)–1, amended; 301.7422–1,
amended; 301.7454–2, amended;
301.7611–1, amended; 602.101,
amended; excise taxes on excess bene-
fit transactions (TD 8920) 8, 654
April 2, 2001v2001–14 I.R.B.
EMPLOYMENT TAX—
Cont.
EMPLOYMENT TAX—
Cont.
EXCISE TAX—Cont.

Revocations (Ann 20) 8,716
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel &
Division Counsel/Associate Chief
Counsel (TE/GE) (RP 2) 1, 79
IRS employees (RP 5) 1, 164
User fees, request for letter rulings (RP 8)
1, 239
Withholding, Voluntary Compliance on
Alien Withholding Program (VCAP)
(RP 20) 9,738
GIFT TAX
Art valuation requests, change of address
for submissions (Ann 22) 11, 895
Charitable deductions, transfers to chari-
table lead trust (TD 8923) 6, 485
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–
99) 11, 834
Proposed Regulations:
31 CFR Part 10, amended; practice
before the Internal Revenue Service;
Circular 230 (REG–111835–99) 11,
834
Regulations:
26 CFR 25.2522(c)–3, amended; chari-
table deductions, lifetime charitable
lead trust (TD 8923) 6, 485
Valuation of art requests, change of
address for submissions (Ann 22) 11,
895
INCOME TAX
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel & Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1, 111; correction
(Ann 25) 11, 895
Associate Chief Counsel International
(RP 7) 1, 236
Aircraft maintenance costs (RR 4) 3, 295
Appeals, extension of test of mediation
procedure (Ann 9) 3, 357
Archer MSA (Ann 21) 9, 752
Art valuation requests, change of address
for submissions (Ann 22) 11, 895
Attorney’s fees, recovery of (TD 8922) 6,
508; (REG–121928–98) 6, 520
Automobile owners and lessees, determi-
nation of correct tax liability, 2001
inflation adjustment (RP 19) 9, 732
Business expenses, changes in method of
accounting (Notice 23) 12, 911
Case Resolution Pilot Program, extension
(Notice 13) 6, 514
Charitable deductions, transfers to chari-
table lead trust (TD 8923) 6, 485
Classification of certain business enti-
ties, check-the-box regulations
(REG–110659–00) 12, 917
Consumer Price Index (CPI) adjustments,
below-market loans (Ann 19) 10, 791
Contribution in aid of construction
(CIAC), regulated public utilities, water
or sewerage disposal (TD 8936) 9, 720
Conversion to the euro (TD 8927) 11, 807
Corporations:
Assumed liabilities (TD 8924) 6, 489;
(REG–106791–00) 6, 521
Consolidated groups, tentative carry-
back adjustments (TD 8919) 6, 505;
(REG–119352–00) 6,525
Distributions of stock or securities in
connection with an acquisition:
Purchase of 50% or greater interest
in the corporation making the
distribution or being distributed
(REG–107566–00) 3, 346
Withdrawal of REG–116733–98
(Ann 11) 4, 432
Recognition of gain on certain distribu-
tions of stock or securities (TD 8913)
3, 300; correction (Ann 26) 11, 896
Tax shelter:
Contingent liability (Notice 17) 9, 730
Intermediary transactions (Notice
16) 9, 730
Cost-of-living adjustments for inflation,
2001 (RP 13) 3, 337; clarified (Notice
12) 3, 328
Credits:
Deemed-paid credit computations
(REG–104683–00) 4, 407
Foreign tax credit limitations:
Affiliated groups and interest expense
allocations (TD 8916) 4, 360
Income subject to separate limita-
tions (REG–104683–00) 4, 407
Increasing research activities, defini-
tion of qualified research (TD 8930)
5, 433
Low-income housing credit:
Resident population estimates, 2001
(Notice 21) 11, 818
Satisfactory bond; “bond factor”
amounts for the period:
October through December 2000
(RR 2) 2, 225;
January through March 2001 (RR
10) 10, 755
Research credit (Notice 2) 2, 265
Research credit computation (Notice
19) 10, 784
Cumulative Bulletin 1998–2, numerical
finding list, finding list of current
actions on previously published items
and index; corrections (Ann 5) 2, 286
Dealers in securities futures contracts
(Notice 27) 13, 942
Debt instrument, annuity issued by insur-
ance company (REG–125237–00) 12,
919
Debt substitution, election to treat as real-
ization event (RP 21) 9, 742
Disclosure of returns or return informa-
tion to designee of taxpayer (TD 8935)
8, 702; (REG–103320–00) 8, 714
Disqualified person, definition of
(REG–107175–00) 13, 971
Earnings and profits adjustments, exercise
of stock option (RR 1) 9, 726
Electing small business trusts; ESBT:
Qualifications and treatments (REG–
251701–96) 4, 396
Tiered structures (TD 8915) 4, 359
Electronic filing; magnetic media, Form
W-4, Employee’s Withholding Allow-
ance Certificate, specifications (RP 16)
4, 376
Electronic furnishing of payee statements,
voluntary (TD 8942) 13, 929;
(REG–107186–00) 13, 973
Employee stock ownership plans, deduc-
tibility of redemption proceeds (RR 6)
6, 491
Federal tax deposits, removal of Federal
Reserve banks as depositaries (TD
8918) 4, 372; (REG–107176–00) 4,
428
Financial asset securitization investment
trusts (FASITs) (RP 12) 3, 335
Foreign corporations, requirements relat-
ing to certain exchanges (TD 8938) 13,
929; (LR–230–76) 13, 945
Forms:
W-2, new code (Ann 7) 3, 357
2001–14 I.R.B.viApril 2, 2001
EXEMPT ORGANIZA-
TIONS—Cont.
INCOME TAX—Cont.INCOME TAX—Cont.

W-2, voluntary electronic furnishing of
payee statements (TD 8942) 13, 929;
(REG–107186–00) 13, 973
W-4, Employee’s Withholding Allow-
ance Certificate, specifications (RP
6) 4, 376
W-9, Request for Taxpayer Identifi-
cation Number and Certification
(Ann 15) 8, 715
1042S, specifications for filing magnet-
ically or electronically (Ann 3) 2,
278
1098-E, voluntary electronic furnishing
of payee statements (TD 8942) 13,
929; (REG–107186–00) 13, 973
1098-T, voluntary electronic furnishing
of payee statements (TD 8942) 13,
929; (REG–107186–00) 13, 973
1120, Schedule N, Foreign Operations
of U.S. Corporations (Ann 13) 9, 752
8875, Taxable REITSubsidiary
Election, revised (Ann 17) 8,716
Hyperinflationary currency, definition of
(TD 8914) 8, 653
Information reporting:
Discharges of indebtedness (Notice 8)
4, 374
Payments to attorneys (Notice 7) 4, 374
Payments of qualified tuition and pay-
ments of interest on qualified educa-
tion loans, magnetic media filing
requirements (Ann 10) 4,431
Installment sales; changes in method of
accounting (Notice 22) 12, 911
Insurance companies:
Interest rate tables (RR 11) 10, 780
Tentative differential earnings rate and
tentative recomputed differential
earnings rate (Notice 24) 12, 912
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2001 (RR 3) 3, 319
February 2001 (RR 7) 7, 541
March 2001 (RR 12) 11, 811
Rates:
Reserve rate tables, insurance com-
panies (RR 11) 10, 780
Underpayments and overpayments,
quarter beginning April 1, 2001
(RR 16) 13, 936
Inventory:
Floor stocks payments (RR 8) 9, 726
LIFO:
Optional dollar-value LIFO invento-
ry computation method for used
vehicle dealers (RP 23) 10, 784
Price indexes, department stores for:
November 2000 (RR 5) 5, 451
December 2000 (RR 9) 8, 652
January 2001 (RR 14) 12, 898
Joint and several liability, relief from
(REG–106446–98) 13, 945
Last known address (RP 18) 8, 708
Last known address, definition of (TD
8939) 12, 899
Letter rulings, determination letters, and
information letters issued by Associates
Chief Counsel (RP 1) 1, 1
Life insurance contracts, “split-dollar”
arrangements (Notice 10) 5, 459
Long-term contracts, accounting for (TD
8929) 10, 756
Methods of accounting:
General rule for 2001 (RP 24) 10, 788
Inventories, small taxpayers (RP 10) 2,
272
Short-term loans, stated interest, cash
method banks, automatic change (RP
25) 12, 913
Partnerships:
Corporate partner’s stock, partnership
termination (REG–106702–00) 4,
424; correction (Ann 28) 13, 975
Final short-year tax return, determina-
tion of basis (Notice 5) 3, 327
Mergers and divisions (TD 8925) 6,
496
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–
99) 11, 834
Pre-filing agreement program (RP 22) 9,
745
Presidentially declared disaster areas:
Disaster and combat zone, tax-related
deadlines (TD 8911) 3, 321
Major disaster and emergency areas
(RR 15) 13, 922
Proposed Regulations:
26 CFR 1.263(g)–1 through –5, added;
1.1092(d)–1, amended; capitaliza-
tion of interest and carrying charges
properly allocable to straddles
(REG–105801–00) 13, 965
26 CFR 1.301–1, amended; liabilities
assumed in certain corporate transac-
tions (REG–106791–00) 6, 521
26 CFR 1.355–0, amended; 1.355–7,
added; recognition of gain on certain
distributions of stock or securities in
connection with an acquisition
(REG–107566–00) 3, 346
26 CFR 1.444–4, added; 1.641(c)–0,
–1, added; 1.1361–0, –1, amended;
1.1362–6, –7, amended; 1.1377–1,
–3, amended; electing small business
trusts (REG–251701–96) 4, 396
26 CFR 1.705–1, amended; 1.705–2,
added; basis adjustments upon the
sale of a corporate partner’s stock
(REG–106702–00) 4, 424; correc-
tion (Ann 28) 13, 975
26 CFR 1.863–3, amended; 1.863–8,
–9, added; source of income from
space and ocean activities, communi-
cations activities (REG–106030–98)
11, 820
26 CFR 1.902–0, –1, amended; 1.904–0,
–4, –5, –6, amended; 1.904–5,
revised; 1.904(b)–1, –2, revised;
1.904(b)–3, –4, removed; 1.904(j)–1,
added; application of section 904 to
income subject to separate limitations
and computations of deemed paid
credit under section 902
(REG–104683–00) 4, 407
26 CFR 1.1031(k)–1, amended; defini-
tion of disqualified person
(REG–107175–00) 13, 971
26 CFR 1.1271–0, amended; 1.1275–1,
amended; debt instruments with
original issue discount, annuity con-
tracts (REG–125237–00) 12, 919
26 CFR 1.1502–78, amended; corpo-
rations, consolidated groups, tenta-
tive carryback adjustments
(REG–119352–00) 6, 525
26 CFR 1.6013–4, added; 1.6015–0
through –9, added; relief from joint
and several liability (REG–106446–
98) 13, 945
26 CFR 1.6041–2, amended; 1.6050S–1,
–2, added; 301.6724–1, amended;
electronic payee statements, voluntary
(REG–107186–00) 13, 973
26 CFR 1.6049–4(b)(5), revised;
1.6049–6, amended; 1.6049–8,
revised; reporting requirements for
interest on deposits paid to nonresi-
dent aliens (REG–126100–00) 11,
862
April 2, 2001vii2001–14 I.R.B.
INCOME TAX—Cont.INCOME TAX—Cont.INCOME TAX—Cont.

26 CFR 1.6302–1, –2, amended;
removal of Federal Reserve banks
as federal depositaries
(REG–107176–00) 4, 428
26 CFR 7.367(c)–1, –2, withdrawn;
requirements relating to certain
exchanges involving a foreign corpo-
ration (LR–230–76) 13, 945
26 CFR 301.6103(c)–1, added; disclo-
sure of return and return infor-
mation to designee of taxpayer
(REG–103320–00) 8, 714
26 CFR 301.7430–0, removed;
301.7430–7, added; attorney’s fees,
recovery of (REG–121928–98) 6, 520
26 CFR 301.7701–3, amended; clas-
sification of certain business enti-
ties, check-the-box regulations
(REG–110659–00) 12, 917
31 CFR Part 10, amended; practice
before the Internal Revenue Service;
Circular 230 (REG–111835–99) 11,
834
Publications:
547, Casualties, Disasters, and Thefts,
revised (Ann 6) 3, 357
551, Basis of Assets, revised 2000 (Ann
2) 2, 277
575, changes in minimum required dis-
tributions (Ann 23) 10, 791
583, Starting a Businesss and Keeping
Records, revised (Ann 8) 3, 357
590, changes in minimum required dis-
tributions (Ann 23) 10, 791
1245, Specifications for Filing Forms
W-4, Employee’s Withholding
Allowance Certificate, magnetically
or electronically (RP 6) 4, 376
Qualified transportation fringe benefits
(TD 8933) 11, 794
Qualified zone academy bonds, limitation
for 2001 (RP 14) 3, 343
Real estate mortgage investment conduits
(REMICs), safe harbor (RP 12) 3, 335
Regulations:
26 CFR 1.41–0, –1, –4, revised;
1.41–2, amended; 1.41–3, redesig-
nated as 1.41–3A; 1.41–3, added;
1.41–5, redesignated as 1.41–4A,
amended; 1.41–6, redesignated as
1.41–5, amended; 1.41–7, redesig-
nated as 1.41–5A, amended;
1.41–8, redesignated as 1.41–6,
amended; 1.41–9, redesignated as
1.41–7; 1.41–8, added; 1.41–0A
through –8A, removed; 1.41–0A,
added; 1.218–0, removed; 1.482–7,
amended; credit for increasing
research activities (TD 8930) 5,
433
26 CFR 1.118–2, added; contribution in
aid of construction (CIAC), regulat-
ed public utilities, water or sewerage
disposal (TD 8936) 9,720
26 CFR 1.132–0, –5, amended;
1.132–9, added; 602.101, amended;
qualified transportation fringe bene-
fits (TD 8933) 11, 794
26 CFR 1.163–7, amended; 1.1271–0,
amended; 1.1275–1(f), –2, revised;
1.1275–2T, removed; 1.1275–7,
added; reopenings of Treasury secu-
rities and other debt instruments,
original issue discount (TD 8934)
12, 904
26 CFR 1.170A–6, amended; lifetime
charitable lead trust (TD 8923) 6, 485
26 CFR 1.301–1, amended; 1.301–1T,
added; assumed liabilities (TD
8924) 6, 489
26 CFR 1.355–0, amended; 1.355–6,
revised; recognition of gain on cer-
tain distributions of stock or securi-
ties (TD 8913) 3,300; correction
(Ann 26) 11, 896
26 CFR 1.367(b)–0, amended;
1.367(b)–12, added; 7.367(b)–12,
removed; stock transfer rules, transi-
tion rules (TD 8937) 11, 806
26 CFR 1.367(b)–3(b)(4), withdrawn;
stock transfer rules (Ann 27) 11, 897
26 CFR 1.444–4T, added; ESBT, elect-
ing small business trusts, tiered
structures (TD 8915) 4, 359
26 CFR 1.446–1, amended; 1.451–3,
removed; 1.451–5, amended;
1.460–0, –4, –6, amended; 1.460–1
through –3, revised; 1.460–5, added;
1.460–7, –8, removed; 1.471–10,
amended; 602.101, amended;
accounting for long-term contracts
(TD 8929) 10, 756
26 CFR 1.467–0, –1, amended; 1.467–2,
added; 1.467–3, revised; rental agree-
ments involving payments of
$2,000,000 or less (TD 8917) 7,538
26 CFR 1.468A–5, amended;
1.503(a)–1, amended; 1.547–2,
amended; 1.856–6, amended;
1.860–2, amended; 1.963–6, amend-
ed; 1.992–3, amended; 1.6081–2, –3,
–4, –6, –7, amended; 301.6110–4,
–5, –6, amended; 301.6212–2,
added; 301.6301–1, amended;
301.6305–1, revised; 301.6320–1T,
amended; 301.6325–1, revised;
301.6330–1T, amended; 301.6331–
2, amended; 301.6332–2, amended;
301.6335–1, amended; 301.6503(c)–
1, amended; 301.6672–1, amended;
301.6903–1, amended; last known
address, definition of (TD 8939) 12,
899
26 CFR 1.643(a)–8, added; 1.664–1, –2,
–3, amended; charitable remainder
trusts, deemed sale, trust distributions,
abusive transactions (TD 8926) 6, 492
26 CFR 1.708–1, amended; 1.752–1,
–5, amended; partnership mergers
and divisions (TD 8925) 6, 496
26 CFR 1.861–9, –11, –14, added;
1.861–9T, –11T, –14T, revised;
1.902–1, amended; 1.904–0, –4, –5,
amended; application of section 904
to income subject to separate limita-
tions and section 864(e) affiliated
group expense allocation and appor-
tionment rules (TD 8916) 4, 360
26 CFR 1.894–1, amended; 1.894–1T,
removed; guidance regarding claims
for certain income tax convention
benefits (Ann 4) 2, 286
26 CFR 1.985–1, –4, amended;
1.985–8, added; 1.985–8T, removed;
1.1001–5, added; 1.1001–5T,
removed; conversion to the euro (TD
8927) 11, 807
26 CFR 1.988–1, revised; hyperinfla-
tionary currency (TD 8914) 8, 653
26 CFR 1.1502–78T, added; corpora-
tions, consolidated groups, tentative
carryback adjustments (TD 8919) 6,
505
26 CFR 1.6041–2T, added; 1.6050S–
1T, –2T, added; 301.6724–1T, added;
602.101, amended; electronic payee
statements, voluntary (TD 8942) 13,
929
26 CFR 7.367(c)–1, –2, removed;
requirements relating to certain
exchanges involving a foreign corpo-
ration (TD 8938) 13, 929
2001–14 I.R.B.viiiApril 2, 2001
INCOME TAX—Cont.INCOME TAX—Cont.INCOME TAX—Cont.

26 CFR 301.6103(c)–1, removed;
301.6103(c)–1T, added; disclosure of
returns or return information to
designee of taxpayer (TD 8935) 8, 702
26 CFR 301.6302–1T, added; removal
of Federal Reserve banks as deposi-
taries (TD 8918) 4,372
26 CFR 301.7430–7T, added; attorney’s
fees, recovery of (TD 8922) 6, 508
26 CFR 301.7502–1, revised;
301.7502–1T, removed; 301.7502–2,
added; timely mailing treated as
timely filing (TD 8932) 11, 813
26 CFR 301.7508–1, added; 301.7508
A–1, added; for combat zone service
or Presidentially declared disasters,
tax related deadlines (TD 8911) 3, 321
Rental agreements (TD 8917) 7, 538
Reopenings, debt instruments, Treasury
securities, original issue discount (TD
8934) 12, 904
Reporting requirements for interest on
deposits paid to nonresident aliens
(REG–126100–00) 11, 862
Short-term loans, stated interest, cash
method banks, automatic change (RP
25) 12, 913
Source of income from space and ocean
activities, communications activities
(REG–106030–98) 11, 820
Standard Industry Fare Level (SIFL) for-
mula (RR 13) 12, 898
Stock transfer rules:
Supplemental rules (Ann 27) 11, 897
Transition rules (TD 8937) 11, 806
Straddles; capitalization of interest and
carrying charges (REG–105801–00)
13, 965
Substantial understatement penalty, ade-
quate disclosure (RP 11) 2, 275
Tax convention, claims for benefits (Ann 4)
2,286
Tax shelters, leasing transactions, excep-
tions (Notice 18) 9, 731
Technical advice to directors and chiefs,
appeals offices, from Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE) (RP
2) 1, 79
Timely mailing treated as timely filing
(TD 8932) 11, 813
Trusts:
Charitable remainder trusts, deemed
sale, trust distributions, abusive
transactions (TD 8926) 6, 492
Election to treat trust as part of an
estate (REG–106542–98) 5, 473;
correction (Ann 24) 10, 793
ESBTs, electing small business trusts,
estimated tax payments (Notice 25)
13, 941
Qualified revocable trust treated as part
of an estate (Notice 26) 13, 942
Valuation of art requests, change of
address for submissions (Ann 22) 11,
895
Withholdings:
Payments to financial institutions in
U.S. possessions (Notice 11) 5, 464
Qualified intermediary agreements,
clarifications (Notice 4) 2, 267
Voluntary Compliance on Alien
Withholding Program (VCAP) (RP
20) 9, 738
SELF-EMPLOYMENT
TAX
Practice before the Internal Revenue
Service; Circular 230 (REG–111835–
99) 11, 834
Proposed Regulations:
31 CFR Part 10, amended; practice
before the Internal Revenue Service;
Circular 230 (REG–111835–99) 11,
834
April 2, 2001ix2001–14 I.R.B.
INCOME TAX—Cont.INCOME TAX—Cont.INCOME TAX—Cont.

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