Internal Revenue Bulletin 2002-14 (PDF rendition): IRS Notices

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.

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.
SPECIAL ANNOUNCEMENTS
Announcement 2002–41, page 739.
The Director of Practice has extended all enrollment cards of
enrolled agents until April 30, 2002.
Announcement 2002–42, page 739.
The Director of Practice has extended all existing continuing
professional education sponsor agreements through August
31, 2002.
INCOME TAX
Rev. Rul. 2002–17, page 716.
Federal rates; adjusted federal rates; adjusted federal
long-term rate and the long-term exempt rate.For pur-
poses of sections 382, 1274, 1288, and other sections of the
Code, tables set forth the rates for April 2002.
T.D. 8985, page 707.
Final regulations under section 1221 of the Code relate to the
determination of the character of gain or loss from hedging
transactions.
Notice 2002–21, page 730.
This notice addresses a transaction generating tax losses
based on an inflated basis in assets acquired from another
party. The inflated basis is claimed as a result of a transfer of
assets in which a taxpayer becomes jointly and severally liable
on indebtedness of the transferor, with the indebtedness hav-
ing a stated principal amount substantially in excess of the fair
market value of the assets transferred. The notice states that
the taxpayer’s basis in the assets transferred is equal to the fair
market value of such assets upon their acquisition by the tax-
payer rather than the stated principal amount of the indebted-
ness.
Rev. Proc. 2002–20, page 732.
Guidance is provided to individuals who fail to meet the eligibil-
ity requirements of section 911(d)(1) of the Code because
adverse conditions in a foreign country preclude the individual
from meeting those requirements. A current list of countries
and the dates those countries are subject to the section
911(d)(4) waiver is provided. Rev. Proc. 2001–27 supple-
mented.
EXEMPT ORGANIZATIONS
Announcement 2002–39, page 738.
Section 911(d)(4) waiver.This document contains correc-
tions to final regulations (T.D. 8978, 2002–7 I.R.B. 500) relat-
ing to the excise taxes on excess benefit transactions.
(Continued on the next page)
Finding Lists begin on page ii.
Bulletin No. 2002–14
April 8, 2002

EXCISE TAX
Ct. D. 2073, page 718.
The Supreme Court has concluded, that under sections
4401(a), 1441, 3402(q), 6041, and 6050I of the Code, tribes
are not exempt from paying the gambling-related taxes that
Chapter 35 of the Code imposes.Chickasaw Nation v.
United States.
Announcement 2002–39, page 738.
This document contains corrections to final regulations (T.D.
8978, 2002–7 I.R.B. 500) relating to the excise taxes on
excess benefit transactions.
TAX CONVENTIONS
Page 725.
The bilateral agreement between the United States and the
Republic of Ghana, providing for the reciprocal tax exemption
of income from the international operation of ships and/or air-
craft, is set forth.
ADMINISTRATIVE
Notice 2002–22, page 731.
Guidance priority list.Public comments are requested about
items that should be included in the Guidance Priority List for
2002–2003. All comments should be submitted by April 30,
2002.
Rev. Proc. 2002–22, page 733.
Undivided fractional interests in real estate.This proce-
dure specifies the conditions under which the Service will con-
sider a request for a ruling that an undivided fractional interest
in rental real property (other than a mineral property as defined
in section 614) is not an interest in a business entity within the
meaning of section 301.7701–3 of the regulations. Rev. Proc.
2000–46 superseded. Rev. Proc. 2002–3 modified.
Announcement 2002–38, page 738.
This document contains corrections to proposed regulations
(REG–112991–01, 2002–4 I.R.B. 404) relating to the compu-
tation of the research credit.
April 8, 20022002–14 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, 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 Bulle-
tins, 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 Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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 rev-
enue ruling. In those based on positions taken in rulings to tax-
payers 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 published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions 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 Other Related Items, and Subpart B, Legisla-
tion 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 Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (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 semiannual
period, respectively.
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.
2002–14 I.R.B.April 8, 2002

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 267.—Losses,
Expenses, and Interest With
Respect to Transactions
Between Related Taxpayers
26 CFR 1.267(a)–1: Deductions disallowed.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in § 614) is not an inter-
est in a business entity within the meaning of
§ 301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 2002. See
Rev. Rul. 2002–17, page 716.
Section 382.—Limitation on
Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of April 2002. See Rev. Rul.
2002–17, page 716.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 468.—Special Rules
for Mining and Solid Waste
Reclamation and Closing
Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 482.—Allocation of
Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 2002. See
Rev. Rul. 2002–17, page 716.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 511.—Imposition of
Tax on Unrelated Business
Income of Charitable, etc.,
Organizations
26 CFR 1.511–1: Imposition and rates of tax.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in § 614) is not an inter-
est in a business entity within the meaning of
§ 301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 512.—Unrelated
Business Taxable Income
26 CFR 1.512(a)–1: Definition.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in § 614) is not an inter-
est in a business entity within the meaning of
§ 301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 642.—Special Rules
for Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 2002. See
Rev. Rul. 2002–17, page 716.
Section 707.—Transactions
Between Partner and
Partnership
26 CFR 1.707–1: Transactions between partner and
partnership.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in § 614) is not an inter-
est in a business entity within the meaning of
§ 301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 761.—Terms Defined
26 CFR 1.761–1: Terms defined.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in § 614) is not an inter-
est in a business entity within the meaning of
§ 301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
2002–14 I.R.B.706April 8, 2002

Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 856.—Definition of
Real Estate Investment Trust
26 CFR 1.856–1: Definition of real estate invest-
ment trust.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in§614) is not an inter-
est in a business entity within the meaning of
§301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 1031.—Exchange of
Property Held For Productive
Use or Investment
26 CFR 1.1031(a)–1: Property held for productive
use in trade or business or for investment.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in§614) is not an inter-
est in a business entity within the meaning of
§301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 1221.—Capital Asset
Defined
26 CFR 1.1221–2: Hedging transactions.
T.D. 8985
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Hedging Transactions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the character
of gain or loss from hedging transactions.
The regulations reflect changes to the law
made by the Ticket to Work and Work
Incentives Improvement Act of 1999. The
regulations affect businesses entering into
hedging transactions.
DATES:Effective Date: These regula-
tions are effective March 20, 2002.
Applicability Dates: For dates of appli-
cability of these regulations, see the dis-
cussion in the Dates of Applicability para-
graph in the Supplementary Information
portion of the preamble.
FOR FURTHER INFORMATION CON-
TACT: Elizabeth Handler, (202) 622–
3930 or Viva Hammer at (202) 622–0869
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1480. Some responses to
these collections of information are man-
datory, and others are required to obtain
the benefit of the separate-entity election.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
The estimated annual burden per
respondent or recordkeeper varies from .1
to 40 hours, depending on individual cir-
cumstances, with an estimated average of
5.9 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS
ReportsClearanceOfficer,W:CAR:
MP:FP:S, Washington, DC 20224, and to
theOffice of Management and Budget,
Attn: Desk Officer for the Department of
the Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial 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 amendments
to 26 CFR Part 1 under section 1221 of
the Internal Revenue Code (Code). Prior
to amendment in 1999, section 1221 gen-
erally 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) property used in a trade
or business that is real property or prop-
erty subject to depreciation; (3) certain
copyrights (or similar property); (4)
accounts or notes receivable acquired in
the ordinary course of a trade or business;
and (5) U.S. government publications.
In 1994, the IRS published in theFed-
eral Register(T.D. 8555, 1994–2 C.B.
180 [59 FR 36360]) final Treasury regu-
lations under section 1221 providing for
ordinary character treatment for certain
business hedges. The regulations gener-
ally apply to transactions that reduce risk
with respect to ordinary property, ordi-
nary obligations, and borrowings of the
taxpayer and that meet certain identifica-
tion requirements. (§1.1221–2). In 1996,
the IRS published in theFederal Regis-
ter(T.D. 8653, 1996–1 C.B. 67 [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. In this preamble, the
final regulations published in 1994 and
1996 are referred to collectively as the
Treasury regulations.
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
ordinary treatment for hedging transac-
tions 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 as a transaction entered into by the
taxpayer in the normal course of business
primarily to manage risk of interest rate,
price changes, or currency fluctuations
with respect to ordinary property, ordi-
nary obligations, or borrowings of the
April 8, 20027072002–14 I.R.B.

taxpayer. Sections 1221(b)(2)(A)(i) and
(ii). The statutory definition of hedging
transaction also includes transactions 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 pro-
vide regulations to address the treatment
of nonidentified or improperly identified
hedging transactions, and hedging trans-
actions involving related parties (sections
1221(b)(2)(B) and (b)(3), respectively).
The statutory hedging provisions are
effective for transactions entered into on
or after December 17, 1999. Congress
intended that the hedging rules be the
exclusive means through which the gains
and losses from hedging transactions are
treated as ordinary. S. Rep. No. 201,
106th Cong., 1st Sess. 25 (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.
A notice of proposed rulemaking
(REG–107047–00, 2001–14 I.R.B. 1002)
was published in theFederal Register
(66 FR 4738) on January 18, 2001. On
May 16, 2001, the IRS held a public hear-
ing on the proposed regulations. Written
comments responding to the notice of
proposed rulemaking were also received.
In response to these comments, the pro-
posed regulations were modified and as
so modified are adopted as final regula-
tions. The principal changes to the pro-
posed regulations are discussed below.
Explanation of Provisions
Coordination with International
Provisions of the Code
The provisions of these regulations
generally apply to determine the character
of gain or loss from transactions that are
also subject to various international pro-
visions of the Code. Paragraph (a)(4) of
the regulations, however, provides that
the character of gain or loss on section
988 transactions is not determined under
these regulations because gain or loss on
those transactions is ordinary under sec-
tion 988(a)(1). In addition, no implication
is intended as to what constitutes“risk
management”or“managing risk”for pur-
poses of proposed or final regulations
under section 482.
Paragraph (a)(4) of the proposed regu-
lations provided that the definition of a
hedging transaction under§1.1221–2(b)
of the proposed regulations would apply
for purposes of certain other international
provisions of the Code only to the extent
provided in regulations issued under
those provisions. Technical changes have
been made in the final regulations to
eliminate references to proposed regula-
tions as well as Code sections for which
the relevant regulations have not been
issued in final form. Subsequent regula-
tions will specify the extent to which the
rules relating to hedging transactions that
are contained in§1.1221–2 will be appli-
cable for purposes of those other regula-
tions and related Code sections.
Risk Management Standard
Several commentators noted that the
proposed regulations used risk reduction
as the operating standard to implement
the risk management definition of hedg-
ing introduced by section 1221(b)(2)(A).
These commentators found that risk
reduction is too narrow a standard to
encompass the intent of Congress which
defined hedges to include transactions
that manage risk of interest rate, price
changes or currency fluctuations. They
urged the IRS and Treasury to adopt a
broader definition of hedging to reflect
Congress’intent. With one exception, the
commentators did not suggest a definition
of risk management.
In response to these comments, the
final regulations have been restructured to
implement the risk management standard.
No definition of risk management is pro-
vided, but instead, the rules characterize a
variety of classes of transactions as hedg-
ing transactions because they manage
risk. Risk reducing transactions still
qualify as one class of hedging transac-
tions, but there are also others. In addi-
tion, specific provision is made for the
recognition of additional types of qualify-
ing risk management transactions through
published guidance or private letter rul-
ings. Under the final regulations, as under
the proposed regulations, transactions
entered into for speculative purposes will
not qualify as hedging transactions. See
S. Rep. No. 201, 106th Cong., 1st Sess.
24 (1999).
Application on the Basis of Separate
Business Units
The proposed regulations provided
that a taxpayer has risk of a particular
type only if it is at risk when all of its
operations are considered. That is, risk
must exist on a“macro”basis. For this
purpose, under the proposed regulations,
a taxpayer has to show that hedges of par-
ticular assets or liabilities, or groups of
assets or liabilities, are reasonably
expected to reduce the overall risk of the
taxpayer’s operations.
Commentators pointed out that this
entity-based approach to hedging is no
longer uniform business practice. Instead,
businesses often conduct risk manage-
ment on a business unit by business unit
basis. In response to these comments, the
final regulations permit the determination
of whether a transaction manages risk to
be made on a business unit basis provided
that the business unit is within a single
entity or consolidated return group that
adopts the single-entity approach. An
example was added to the final regula-
tions in which for one taxpayer, the deter-
mination of whether hedging activities
reduce risk is made at the business unit
level. In the example, the conduct of risk
management activities within separate
business units is undertaken as part of a
program to reduce the overall risk of the
taxpayer’s operations.
Fixed-to-floating Interest Rate Hedges
Paragraph (c)(1) of the proposed regu-
lations recognized that a transaction that
economically converts an interest rate or
price from a fixed rate or price to a float-
ing rate or price may manage risk. Com-
mentators suggested that the rule in the
proposed regulations provides insufficient
guidance in that it states only that fixed-
to-floating interest rate or price hedges
may be hedging transactions. In response
to these comments, the regulations have
been restructured to separately address
interest rate hedges and price hedges.
Commentators suggested that in the
case of interest rate conversions, a tax-
payer may choose to convert from a float-
ing to a fixed rate to fix the amount pay-
able on the obligation. However, a
taxpayer could also elect to convert from
a fixed to a floating rate to insure that the
value of the liability remained relatively
2002–14 I.R.B.708April 8, 2002

constant. In response to these comments,
the final regulations provide that a trans-
action that converts an interest rate from
a fixed rate to a floating rate or from a
floating rate to a fixed rate manages risk.
With respect to fixed-to-floating price
hedges, the final regulations adopt the
proposed rules without change.
Transactions Not Entered into Primarily
to Manage Risk
Paragraph (c)(3) of the proposed regu-
lations provided that the purchase or sale
of certain assets will not qualify as a
hedging transaction if the assets are not
acquired primarily to manage risk. This
rule was illustrated by the example of a
taxpayer that has an interest rate risk from
a floating rate borrowing and that
acquires debt instruments bearing a com-
parable floating interest rate. Although
the taxpayer’s interest rate risk from the
floating rate borrowing may be reduced
by the purchase of the floating rate debt
instruments, the proposed regulations pro-
vided that the acquisition of the debt
instruments is not made primarily to
reduce risk and, therefore, is not a hedg-
ing transaction.
The IRS and Treasury understand that
some employers may invest in assets
(such as shares of a mutual fund) that are
used as a reference investment for pur-
poses of computing their liability to
employees under a nonqualified deferred
compensation plan. A question may arise
whether such an investment may consti-
tute a hedging transaction and, if so,
whether income from the investment may
be deferred by the employer until pay-
ments of deferred compensation are made
to employees. See§1.446–4(b); but com-
pareAlbertson’s, Inc. v. Commissioner,42
F.3d 537 (9th Cir. 1994).
The rule in the proposed regulations is
based on§1.1221–2(c)(1)(vii). The rule
has been restated in the final regulations
to refer specifically to investments in debt
instruments, equity securities, and annuity
contracts so as to provide greater cer-
tainty in its application. For this purpose
certain transactions in instruments that
are not themselves debt instruments may
include a debt investment. See,e.g.,
§1.446–3(g)(4). Further, the final regula-
tions provide that the IRS may identify by
future published guidance specified trans-
actions that are determined not to be
entered into primarily to manage risk. An
example has been added to the final regu-
lations to illustrate that an investment in
mutual fund shares in the case described
in the preceding paragraph does not
qualify as a hedging transaction. A similar
example is added with respect to an
investment in an annuity contract.
Hedging Risks Other Than Interest Rate
or Price Changes, or Currency
Fluctuations
Paragraph (c)(8) of the proposed regu-
lations provided that the Commissioner
may, by published guidance, provide that
hedging transactions include transactions
entered into to manage risks other than
interest rate or price changes, or currency
fluctuations.
The notice of proposed rulemaking
solicited comments regarding the expan-
sion of the definition of hedging transac-
tions 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.
Some comments were received in
response to that request. Because the
comments described hedging transactions
that related to the general operating
results of a business (such as gross sales)
rather than specific ordinary property,
ordinary obligations or borrowings of the
taxpayer, the implementation of rules
respecting such hedges would present a
number of issues not easily dealt with by
the rules contained in the final regula-
tions. Thus, the expansion of the scope of
operation of the hedging rules is not
being proposed at this time, so as not to
delay the publication of guidance on the
matters that are covered by the final regu-
lations. However, the IRS is continuing to
consider whether to expand the definition
of hedging transactions to cover hedges
of such other risks. The IRS and Treasury
invite comments on the types of risks that
should be covered, including specific
examples of derivative transactions that
may be incorporated into future guidance,
as well as the appropriate timing of inclu-
sion of gains and losses with respect to
such transactions. Send submissions to:
CC:ITA:RU (REG–107047–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044.
“Gap”Hedges
The status of so-called gap hedges was
not separately addressed in the proposed
regulations and is not covered in the final
regulations. Insurance companies, for
example, sometimes hedge the gap
between their liabilities and the assets that
fund them. Under the final regulations, a
hedge of those assets would not qualify as
a hedging transaction if the assets are
capital assets. Whether a gap hedge quali-
fies as a liability hedge is a question of
fact and depends on whether it is more
closely associated with the liabilities than
with the assets.
Identification Requirement
A rule has been added specifying addi-
tional information that must be provided
for a transaction that counteracts a hedg-
ing transaction.
Dates of Applicability
The regulations generally apply to all
transactions entered into on or after
March 20, 2002. However, the IRS will
not challenge any transaction entered into
on or after December 17, 1999, and
before March 20, 2002, that satisfies the
provisions of either§1.1221–2ofREG–
107047–00 (2001–14 I.R.B. 1002), pub-
lished in theFederal Register(66 FR
4738) on January 18, 2001, or the provi-
sions of this final regulation.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that the collection of information 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 businesses that hedge enter
into very few hedging transactions
because hedging transactions are costly,
complex, and require constant monitoring
and a sophisticated understanding of the
capital markets. Therefore, a Regulatory
Flexibility Analysis under the Regulatory
April 8, 20027092002–14 I.R.B.

Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Code, the notice of proposed rulemak-
ing preceding these regulations was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Elizabeth Handler, Office of the
Associate Chief Counsel (Financial Insti-
tutions and Products). However, other
personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PA RT 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***
Section 1.1221–2 also issued under 26
U.S.C. 1221(b)(2)(A)(iii), (b)(2)(B), and
(b)(3); 1502 and 6001.***
Par. 2. In the list below, for each loca-
tion indicated in the left column, remove
the language in the middle column from
that section, and add the language in the
right column.
Affected sectionRemoveAdd
1.446–4(d)(2), first sentence1.1221–2(e)1.1221–2(f)
1.446–4(d)(2), last sentence1.1221–2(e)(2)1.1221–2(f)(2)
1.446–4(d)(3), first sentence1.1221–2(e)1.1221–2(f)
1.446–4(d)(3), last sentence1.1221–2(a)(4)(i)1.1221–2(a)(4)
1.446–4(e)(7), first sentence1.1221–2(c)(2)1.1221–2(d)(4)
1.446–4(e)(9)(ii), first sentence1.1221–2(d)(2)1.1221–2(e)(2)
1.446–4(e)(9)(ii), last sentence1.1221–2(d)(2)(ii)1.1221–2(e)(2)(ii)
1.475(b)–1(d)(2)1.1221–2(e)1.1221–2(f)
1.954–2(a)(4)(ii)(A), first sentence1.1221–2(a) through (c)1.1221–2(a) through (d)
1.954–2(a)(4)(ii)(B), first sentence1.1221–2(e)1.1221–2(f)
1.954–2(g)(2)(ii)(B)(2), last sentence1.1221–2(c)(7)1.1221–2(c)(3)
1.954–2(g)(3)(i)(B), last sentence1.1221–2(c)(7)1.1221–2(c)(3)
1.1256(e)–1(b), first and last sentences1.1221–2(e)(1)1.1221–2(f)(1)
1.1256(e)–1(c), first sentence1.1221–2(e)(1)1.1221–2(f)(1)
1.1256(e)–1(c), last sentenceparagraph (f)(1)(ii) of§1.1221–21.1221–2(g)(1)(ii)
Par. 3. Section 1.1221–2 is revised to
read as follows:
§1.1221–2 Hedging transactions.
(a)Treatment of hedging transact-
ions—(1)In general. This section gov-
erns the treatment of hedging transactions
under section 1221(a)(7). Except as pro-
vided in paragraph (g)(2) of this section,
the term capital asset does not include
property that is part of a hedging transac-
tion (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
provided in paragraph (g)(2) of this sec-
tion, gain or loss on a short sale or option
that is part of a hedging transaction (as
defined 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 section 988.
This section does not apply to determine
the character of gain or loss realized on a
section 988 transaction as defined in sec-
tion 988(c)(1) or realized with respect to
any qualified fund as defined in section
988(c)(1)(E)(iii).
(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
primarily—
(1) To manage risk of price changes or
currency fluctuations with respect to ordi-
nary property (as defined in paragraph
(c)(2) 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 (d)(6) of this section).
(c)General rules—(1)Normal course.
Solely for purposes of paragraph (b) of
this section, if a transaction is entered
into in furtherance of a taxpayer’s trade
or business, the transaction is entered into
2002–14 I.R.B.710April 8, 2002

in the normal course of the taxpayer’s
trade or business. This rule includes man-
aging risks relating to the expansion of an
existing business or the acquisition of a
new trade or business.
(2)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 under any cir-
cumstances. Thus, for example, property
used in a trade or business within the
meaning of section 1231(b) (determined
without regard to the holding period
specified in that section) is not ordinary
property. An obligation is an ordinary
obligation if performance or termination
of the obligation by the taxpayer could
not produce capital gain or loss. For pur-
poses of this paragraph (c)(2), the term
termination has the same meaning as it
does in section 1234A.
(3)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 ade minimisamount of
the risk, is with respect to ordinary prop-
erty, ordinary obligations, or borrowings.
(4)Managing risk—(i)In general.
Whether a transaction manages a taxpay-
er’s risk is determined based on all of the
facts and circumstances surrounding the
taxpayer’s business and the transaction.
Whether a transaction manages a taxpay-
er’s risk may be determined on a business
unit by business unit basis (for example
by treating particular groups of activities,
including the assets and liabilities attrib-
utable to those activities, as separate busi-
ness units), provided that the business
unit is within a single entity or consoli-
dated return group that adopts the single-
entity approach. A taxpayer’s hedging
strategies and policies as reflected in the
taxpayer’s minutes or other records are
evidence of whether particular transac-
tions were entered into primarily to man-
age the taxpayer’s risk.
(ii)Limitation of risk management
transactionstothosespecifically
described. Except as otherwise deter-
mined by published guidance or by pri-
vate letter ruling, a transaction that is not
treated as a hedging transaction under
paragraph (d) does not manage risk.
Moreover, a transaction undertaken for
speculative purposes will not be treated as
a hedging transaction.
(d)Transactions that manage risk—
(1)Risk reduction transactions—(i)In
general. A transaction that is entered into
to reduce a taxpayer’s risk, manages a
taxpayer’s risk.
(ii)Micro and macro hedges—(A)In
general. A taxpayer generally has risk of
a particular type only if it is at risk when
all of its operations are considered. None-
theless, a hedge of a particular asset or
liability generally will be respected as
reducing risk if it reduces the risk attrib-
utable to the asset or liability and if it is
reasonably expected to reduce the overall
risk of the taxpayer’s operations. If a tax-
payer hedges particular assets or liabili-
ties, or groups of assets or liabilities, and
the hedges are undertaken as part of a
program that, as a whole, is reasonably
expected 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)Example. The following example
illustrates the rules stated in paragraph
(d)(1)(ii)(A) of this section:
Example. Corporation X manages its business
operations by treating particular groups of activities,
including the assets and liabilities attributable to
those assets, as separate business units. A separate
set of books and records is maintained with respect
to the activities, assets and liabilities of separate
business unity. As part of a risk management pro-
gram that Corporation X reasonably expects to
reduce the overall risks of its business operations,
Corporation X enters into hedges to reduce the risks
of separate business unity. Corporation X may dem-
onstrate that the hedges reduce risk by taking into
account only the activities, assets and liabilities of
business unity.
(iii)Written options. A written option
may reduce 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
assets to be acquired by a taxpayer may
be a hedging transaction. See also para-
graph (d)(3) of this section.
(iv)Fixed-to-floating price hedges.
Under the principles of paragraph
(d)(1)(ii)(A) of this section, a transaction
that economically converts a price from a
fixed price to a floating price may reduce
risk. For example, 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, for
such a taxpayer a transaction that con-
verts its fixed price to a floating price
may be a hedging transaction.
(2)Interest rate conversions. A trans-
action that economically converts an
interest rate from a fixed rate to a floating
rate or that converts an interest rate from
a floating rate to a fixed rate manages
risk.
(3)Transactions that counteract hedg-
ing transactions. If a transaction is
entered into primarily to offset all or any
part of the risk management effected by
one or more hedging transactions, the
transaction is a hedging transaction. For
example, if a written option is used to
reduce or eliminate the risk reduction
obtained from another position such as a
purchased option, then it may be a hedg-
ing transaction.
(4)Recycling. A taxpayer may enter
into a hedging transaction by using a
position that was a hedge of one asset or
liability as a hedge of another asset or
liability (recycling).
(5)Transactions not entered into pri-
marily to manage risk—(i)Rule. Except
as otherwise determined in published
guidance or private letter ruling, the pur-
chase or sale of a debt instrument, an
equity security, or an annuity contract is
not a hedging transaction even if the
transaction limits or reduces the taxpay-
er’s risk with respect to ordinary property,
borrowings, or ordinary obligations. In
addition, the Commissioner may deter-
mine in published guidance that other
transactions are not hedging transactions.
(ii)Examples. The following examples
illustrate the rule stated in paragraph
(d)(5)(i) of this section:
Example 1. Taxpayer borrows money and agrees
to pay a floating rate of interest. Taxpayer purchases
debt instruments that bear a comparable floating
rate. Although taxpayer’s interest rate risk from the
floating rate borrowing may be reduced by the pur-
chase of the debt instruments, the acquisition of the
debt instruments is not a hedging transaction,
because the transaction is not entered into primarily
to manage the taxpayer’s risk.
Example 2. Taxpayer undertakes obligations to
pay compensation in the future. The amount of the
future compensation payments is adjusted as if
amounts were invested in a specified mutual fund
and were increased or decreased by the earnings,
gains and losses that would result from such an
investment. Taxpayer invests funds in the shares of
the mutual fund. Although the investment in shares
of the mutual fund reduces the taxpayer’s risk of
fluctuation in the amount of its obligation to
employees, the investment was not made primarily
to manage the taxpayer’s risk. Accordingly, the
transaction is not a hedging transaction.
April 8, 20027112002–14 I.R.B.

Example 3. Taxpayer provides a nonqualified
retirement plan for employees that is structured like
a defined contribution plan. Based on a schedule
that takes into account an employee’s monthly sal-
ary and years of service with the taxpayer, the tax-
payer makes monthly credits to an account for each
employee. Each employee may designate that the
account will be treated as if it were used to pay pre-
miums on a variable annuity contract issued by the
M insurance company with a value that reflects a
specified investment option. M offers a number of
investment options for its variable annuity contracts.
Taxpayer invests funds in M company variable
annuity contracts that parallel the investment
options selected by the employees. The investment
is not made primarily to manage the taxpayer’s risk
and is not a hedging transaction.
(6)Hedges of other risks. The Com-
missioner may, by published guidance,
determine that hedging transactions
include transactions entered into to man-
age risks other than interest rate or price
changes, or currency fluctuations.
(7)Miscellaneous provision—(i)Ex-
tent of risk management. A taxpayer 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.
(ii)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 rel-
evant to whether these transactions are
hedging transactions. Thus, for example,
a taxpayer hedging the risk associated
with an asset or liability may frequently
establish and terminate positions that
hedge that risk, depending on the extent
the taxpayer wishes to be hedged. Simi-
larly, if a taxpayer maintains its level of
risk exposure by entering into and termi-
nating a large number of transactions in a
single day, its transactions may nonethe-
less qualify as hedging transactions.
(e)Hedging by members of a consoli-
dated group—(1)General rule: single-
entity approach. For purposes of this sec-
tion, the risk of one member of a
consolidated group is treated as the risk
of the other members as if all of the
members of the group were divisions of a
single 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 con-
sidered as transactions between divisions
of a single corporation, they do not man-
age the risk of that single corporation.
(2)Separate-entity election. In lieu of
the single-entity approach specified in
paragraph (e)(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 para-
graph (e)(1) of this section, the risk of
one member is not treated as the risk of
other members.
(ii)Intercompany transactions.An
intercompany 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 (e)(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
(e)(2)(ii)(A) and (B) of this section) is
subject to the following rules—
(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
(g)(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 (e)(2) must be made in a sepa-
rate statement saying“[Insert Name and
Employer Identification Number of Com-
mon Parent] HEREBY ELECTS THE
APPLICATION OF SECTION 1.1221–
2(e)(2) (THE SEPARATE-ENTITY
APPROACH).”The statement must also
indicate the date as of which the election
is to be effective. The election must be
signed by the common parent and filed
with the group’s Federal income tax
return for the taxable year that includes
the first date for which the election is to
apply. The election applies to all transac-
tions entered into on or after the date so
indicated. The election may be revoked
only with the consent of the Commis-
sioner.
(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.General Facts. In these examples,
OandHare members of the same consolidated
group.O’s business operations give rise to interest
rate risk“A,”whichOwishes to hedge.Oenters
into an intercompany transaction withHthat trans-
fers the risk toH.O’s position in the intercompany
transaction is“B,”andH’s position in the transac-
tion is“C.”Henters into position“D”with a third
party to reduce the interest rate risk it has with
respect to its positionC.Dwould be a hedging
transaction with respect to riskAifO’s riskAwere
H’s risk. The following examples illustrate this para-
graph (e):
Example 1.Single-entity treatment—(i)General
rule. Under paragraph (e)(1) of this section,O’s risk
Ais treated asH’s risk, and thereforeDis a hedging
transaction with respect to riskA. Thus, the charac-
ter ofDis determined under the rules of this section,
and the income, deduction, gain, or loss fromD
must be accounted for under a method of account-
ing that satisfies§1.446–4. The intercompany trans-
actionB-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 (f)(1) of this
section, andAmust be identified as the hedged item
under paragraph (f)(2) of this section. Under para-
graph (f)(5) of this section, the identification ofAas
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 intoD,H
may identifyCas the hedged item andOmay iden-
tifyBas a hedge andAas the hedged item.
Example 2.Separate-entity election; counter-
party that does not mark to market. In addition to
theGeneral Factsstated above, assume that the
group makes a separate-entity election under para-
graph (e)(2) of this section. IfHdoes not markCto
market under its method of accounting, thenBis not
a hedging transaction, and theB-Cintercompany
transaction is taken into account under the rules of
section 1502.Dis not a hedging transaction with
respect toA, butDmay be a hedging transaction
with respect toCifCis ordinary property or an
ordinary obligation and if the other requirements of
paragraph (b) of this section are met. IfDis not part
of a hedging transaction, thenDmay be part of a
straddle for purposes of section 1092.
2002–14 I.R.B.712April 8, 2002

Example 3.Separate-entity election; counter-
party that marks to market. The facts are the same
as inExample 2above, except thatHmarksCto
market under its method of accounting. Also assume
thatBwould be a hedging transaction with respect
to riskAifOhad entered into that transaction with
an unrelated party. Thus, forO, theB-Ctransaction
is an intercompany hedging transaction with respect
toO’s riskA, the character and timing rules of
§1.1502–13 do not apply to theB-Ctransaction,
andH’s income, deduction, gain, or loss fromCis
ordinary. However, other attributes of the items
from theB-Ctransaction are determined under
§1.1502–13.Dis a hedging transaction with respect
toCif it meets the requirements of paragraph (b) of
this section.
(f)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
acquired, 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
enters into a hedging transaction must
identify 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
(f)(3) of this section.
(ii)Timing of the identification. The
identification required by this paragraph
(f)(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 (f)(3), the identification under
paragraph (f)(2) of this section must
include the information specified.
(i)Anticipatory asset hedges.Ifthe
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 transac-
tion relates. If the hedging transaction
relates to specific purchases or sales, the
identification 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 issu-
ance of debt by the taxpayer or to accru-
als or payments under debt that is
expected to be issued by the taxpayer, the
identification must specify the following
information: the expected date of issu-
ance of the debt; the expected maturity or
maturities; the total expected issue price;
and the expected interest provisions. If
the hedge is for less than the entire
expected issue price of the debt or the full
expected term of the debt, the identifica-
tion 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,
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 approximately 20 to 30 years.
(iv)Hedges of aggregate risk—(A)
Required identification. If a transaction
hedges aggregate risk as described in
paragraph (c)(3) of this section, the iden-
tification under paragraph (f)(2) of this
section must include a description of the
risk being hedged and of the hedging pro-
gram 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 system under which
individual transactions can be identified
as being entered into pursuant to the pro-
gram.
(B)Description of hedging program.A
description of a hedging program must
include an identification of the type of
risk being hedged, a description of the
type of items giving rise to the risk being
aggregated, and sufficient additional
information to demonstrate that the pro-
gram is designed to reduce aggregate risk
of the type identified. If the program con-
tains controls on speculation (for
example, position limits), the description
of the hedging program must also explain
how the controls are established, commu-
nicated, and implemented.
April 8, 20027132002–14 I.R.B.

(v)Transactions that counteract hedg-
ing transactions. If the hedging transac-
tion is described in paragraph (d)(3) of
this section, the description of the hedg-
ing transaction must include an identifica-
tion of the risk management transaction
that is being offset and the original under-
lying hedged item.
(4)Manner of identification and
records to be retained—(i)Inclusion of
identification in tax records. The identifi-
cation required by this paragraph (f) 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 (f)
must be unambiguous. The identification
of a hedging transaction for financial
accounting or regulatory purposes does
not satisfy this requirement unless the
taxpayer’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 (f)(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)Principles of paragraph (f)(4)(iii)
of this section illustrated. Paragraphs
(f)(4)(iv)(A) through (C) of this section
illustrate the principles of paragraph
(f)(4)(iii) of this section and assume that
the other requirements of this paragraph
(f) 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
membersofthesameconsolidated
group—(i)General rule: single-entity
approach. A member of a consolidated
group must satisfy the requirements of
this paragraph (f) 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 (f)(1) of this section.
Under paragraph (f)(2) of this section,
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 (f)(2) of this
section may be met by identifying the
intercompany 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
required by paragraph (f)(2) of this sec-
tion. For example, if a member transfers
risk in an intercompany transaction, it
may identify under the rules of this para-
graph (f) both its position in that transac-
tion 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 (f) both
its position with the third party and its
position in the intercompany transaction.
Paragraph (e)(4)Example 1of this sec-
tion 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 (e)(2) of this
section, each member of the group must
satisfy the requirements of this paragraph
(f) as though it were not a member of a
consolidated group.
(6)Consistencywithsection
1256(e)(2). Any identification for pur-
poses of section 1256(e)(2) is also an
identification for purposes of paragraph
(f)(1) of this section.
(g)Effect of identification and non-
identification—(1)Transactions identi-
fied—(i)In general. If a taxpayer identi-
fies a transaction as a hedging transaction
for purposes of paragraph (f)(1) of this
section, the identification is binding with
respect to gain, whether or not all of the
requirements of paragraph (f) of this sec-
tion are satisfied. Thus, gain from that
transaction is ordinary income. If the
transaction is not in fact a hedging trans-
action described in paragraph (b) of this
section, 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 purpose. Thus, the taxpayer’s
identification of the transaction as a hedg-
ing transaction does not itself make loss
from the transaction ordinary.
(ii)Inadvertent identification. Not-
withstanding paragraph (g)(1)(i) of this
section, if the taxpayer identifies a trans-
action as a hedging transaction for pur-
poses of paragraph (f) 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 transac-
tion as a hedging transaction was due to
inadvertent 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.
2002–14 I.R.B.714April 8, 2002

(2)Transactions not identified—(i)In
general. Except as provided in paragraphs
(g)(2)(ii) and (iii) of this section, the
absence of an identification that satisfies
the requirements of paragraph (f)(1) of
this section is binding and establishes that
a transaction is not a hedging transaction.
Thus, subject to the exceptions, the rules
of paragraphs (a)(1) and (2) of this sec-
tion 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
insurance 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 (f) 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
transactions 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 (f) of
this section but the taxpayer has no rea-
sonable grounds for treating the transac-
tion as other than a hedging transaction,
then gain from the transaction is ordinary.
The reasonableness of the taxpayer’s fail-
ure to identify a transaction is determined
by taking into consideration not only the
requirements 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 identi-
fication of similar transactions as hedging
transactions.
(3)Transactions by members of a con-
solidated group—(i)Single-entity app-
roach. If a consolidated group is under
the general rule of paragraph (e)(1) of this
section (the single-entity approach), the
rules of this paragraph (g) apply only to
transactions that are not intercompany
transactions.
(ii)Separate-entity election. If a con-
solidated group has made the election
under paragraph (e)(2) of this section,
then, in addition to the rules of para-
graphs (g)(1) and (2) of this section, the
following rules apply:
(A) If an intercompany transaction is
identified as a hedging transaction but
does not meet the requirements of para-
graphs (e)(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
paragraph (g)(1) of this section with
respect to the transaction as though it had
incorrectly identified its position in the
transaction as a hedging transaction.
(B) If a transaction meets the require-
ments of paragraphs (e)(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 (g)(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 (e)(2)(iii)(A) of this
section.)
(h)Effective date. The rules of this
section apply to transactions entered into
on or after March 20, 2002.
Par. 4. Section 1.1256(e)–1 is revised
to read as follows:
§1.1256(e)–1 Identification of hedging
transactions.
(a)Identification and recordkeeping
requirements. 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)
mustsatisfytherequirementsof
§1.1221–2(f)(1). Solely for purposes of
section 1256(f)(1), however, an identifi-
cation that does not satisfy all of the
requirements of§1.1221–2(f)(1) is nev-
ertheless treated as an identification under
section 1256(e)(2).
(c)Consistency with§1.1221–2. Any
identification for purposes of§1.1221–
2(f)(1) is also an identification for pur-
poses of this section. If a taxpayer satis-
fies the requirements of§1.1221–
2(f)(1)(ii), the transaction is treated as if
it were not identified as a hedging trans-
action for purposes of section 1256(e)(2).
(d)Effective date. The rules of this
section apply to transactions entered into
on or after March 20, 2002.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par.6.In§602.101, paragraph (b) is
amended by removing the entries for
“1.1221–2,”“1.1221–2(d)(2)(iv),”
“1.1221–2(e)(5),”“1.1221–2(g)(5)(ii),”
“1.1221–2(g)(6)(ii),”“1.1221–
2(g)(6)(iii),”and“1.1221–2T(c)”and
adding an entry in numerical order to the
table to read as follows:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.1221–2 ...................................................................................................................................................................1545–1480
*****
April 8, 20027152002–14 I.R.B.

Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved March 14, 2002.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
March 15, 2002, 8:54 a.m., and published in the
issue of the Federal Register for March 20, 2002, 67
F.R. 12863)
Section 1274.—Determin-
ation of Issue Price in the
Case of Certain Debt
Instruments Issued for
Property
(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal
rates; adjusted federal long-term rate
and the long-term exempt rate. For pur-
poses of sections 382, 1274, 1288, and
other sections of the Code, tables set forth
the rates for April 2002.
Rev. Rul. 2002–17
This revenue ruling provides various
prescribed rates for federal income tax
purposes for April 2002 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the
appropriate percentages for determining
the low-income housing credit described
in section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
REV. RUL. 2002–17 TABLE 1
Applicable Federal Rates (AFR) for April 2002
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR2.88%2.86%2.85%2.84%
110% AFR3.17%3.15%3.14%3.13%
120% AFR3.46%3.43%3.42%3.41%
130% AFR3.75%3.72%3.70%3.69%
Mid-Term
AFR4.65%4.60%4.57%4.56%
110% AFR5.12%5.06%5.03%5.01%
120% AFR5.60%5.52%5.48%5.46%
130% AFR6.07%5.98%5.94%5.91%
150% AFR7.02%6.90%6.84%6.80%
175% AFR8.21%8.05%7.97%7.92%
Long-Term
AFR5.62%5.54%5.50%5.48%
110% AFR6.18%6.09%6.04%6.01%
120% AFR6.76%6.65%6.60%6.56%
130% AFR7.33%7.20%7.14%7.09%
2002–14 I.R.B.716April 8, 2002

REV. RUL. 2002–17 TABLE 2
Adjusted AFR for April 2002
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR2.08%2.07%2.06%2.06%
Mid-term
adjusted AFR3.52%3.49%3.47%3.46%
Long-term
adjusted AFR4.87%4.81%4.78%4.76%
REV. RUL. 2002–17 TABLE 3
Rates Under Section 382 for April 2002
Adjusted federal long-term rate for the current month4.87%
Long-term tax-exempt rate for ownership changes during the current month (the
highest of the adjusted federal long-term rates for the current month and the prior
two months.)5.01%
REV. RUL. 2002–17 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for April 2002
Appropriate percentage for the 70% present value low-income housing credit8.20%
Appropriate percentage for the 30% present value low-income housing credit3.51%
April 8, 20027172002–14 I.R.B.

REV. RUL. 2002–17 TABLE 5
Rate Under Section 7520 for April 2002
Applicable federal rate for determining the present value of an annuity, an
interest for life or a term of years, or a remainder or reversionary interest5.6%
Section 1288.—Treatment of
Original Issue Discounts on
Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 1361.—S Corporation
Defined
26 CFR 1.1361–1: S Corporation defined.
Under what conditions will the Internal Revenue
Service consider a request for a ruling that an undi-
vided interest in rental real property (other than a
mineral property as defined in§614) is not an inter-
est in a business entity within the meaning of
§301.7701–3 of the Procedure and Administration
Regulations? See Rev. Proc. 2002–22, page 733.
Section 4401.—Imposition of
Ta x
Ct. D. 2073
SUPREME COURT OF THE
UNITED STATES
No. 00–507
CHICKASAW NATIONv. UNITED
STATES
CERTIORARI TO THE UNITED
STATES COURT
OF APPEALS FOR THE TENTH
CIRCUIT
November 27, 2001*
Syllabus
The Indian Gaming Regulatory Act
(Gaming Act) provides, as relevant here,
that Internal Revenue Code (Code) provi-
sions“(including [Secs.] 1441, 3402(q),
6041, and 6050I, and chapter 35...)
concerning the reporting and withholding
of taxes”with respect to gambling opera-
tions shall apply to Indian tribes in the
same way as they apply to States. 25
U.S.C.Sec.2719(d)(i).Chapter35
imposestaxes from which it exempts cer-
tain state-controlled gambling activities,
but says nothing about taxreporting or
withholding. Petitioners, the Choctaw and
Chickasaw Nations, claim that the Gam-
ing Act subsection’s explicit parenthetical
reference exempts them from paying
those chapter 35 taxes from which the
States are exempt. Rejecting that claim,
the Tenth Circuit held that the subsection
applies only to Code provisions concern-
ing tax withholding and reporting.
Held: Section 2719(d)(i) does not
exempt tribes from paying the gambling-
related taxes that chapter 35 imposes. Pp.
3–11.
(a) The subsection’s language outside
the parenthetical says that the subsection
applies to Code provisions concerning
reporting and withholding, and the other
four parenthetical references arguably
concern reporting and withholding. The
Tribes nonetheless claim that the subsec-
tion’s explicit parenthetical reference to
chapter 35 expands the Gaming Act’s
scope beyond reporting and withholding
provisions—to the tax-imposing provi-
sions that chapter 35 contains—and at
the very least gives the subsection an
ambiguity that can be resolved by apply-
ing the canon that statutes are to be con-
strued liberally in favor of Indians with
ambiguous provisions interpreted to their
benefit. Rejecting their argument reduces
the chapter 35 phrase to surplusage, but
there is no other reasonable reading of the
statute. Pp. 3–4.
(b) The statute’s language is too strong
to give the chapter 35 reference indepen-
dent operative effect. The unambiguous
language outside the parenthetical says
without qualification that the subsection
applies to“provisions...concerning the
reporting and withholding of taxes”; and
the language inside the parenthetical,
prefaced with the word“including,”liter-
ally says the same, since to“include”
means to“contain.”The use of parenthe-
ses emphasizes the fact that that which is
within is meant simply to be illustrative.
To give the chapter 35 reference indepen-
dent operative effect would require seri-
ously rewriting the rest of the statute. One
would have to read“including”to mean
what it does not mean, namely,“includ-
ing. . . and.”To read the language outside
the parenthetical as if it referred to (1)
Code provisions concerning tax reporting
and withholding and (2) those“concern-
ing...wagering operations”would be
far too convoluted to believe Congress
intended it. There is no reason to think
Congress intended to sweep within the
subsection’s scope every Code provision
concerning wagering. The subject matter
at issue—tax exemption—also coun-
sels against accepting the Tribes’inter-
pretation. This Court can find no com-
parable instance in which Congress
*Together withChoctaw Nation of Oklahoma v. United States(see this Court’s Rule 12.4), also on certiorari to the same court.
2002–14 I.R.B.718April 8, 2002

legislated an exemption through a paren-
thetical numerical cross-reference. Since
the more plausible role for the parentheti-
cal to play in this subsection is that of
providing an illustrative list of examples,
common sense suggests that“chapter 35”
is simply a bad example that Congress
included inadvertently, a drafting mistake.
Pp. 4–6.
(c) The Gaming Act’s legislative his-
tory on balance supports this Court’s con-
clusion. And the canons of interpretation
to which the Tribes point—that every
clause and word of a statute should be
given effect and that statutes are to be
construed liberally in favor of the Indians
with ambiguous provisions interpreted to
their benefit—do not determine how to
read this statute. First, the canons are
guides that need not be conclusive.Cir-
cuit City Stores, Inc. v. Adams, 532 U.S.
105, 115. To accept these canons as con-
clusive here would produce an interpreta-
tion that the Court firmly believes would
conflict with congressional intent. Sec-
ond, specific canons are often countered
by some maxim pointing in a different
direction.Ibid. The canon requiring a
court to give effect to each word“if pos-
sible”is sometimes offset by the canon
permitting a court to reject words as mere
surplusage if inadvertently inserted or if
repugnant to the rest of the statute. More-
over, the pro-Indian canon is offset by the
canon warning against interpreting fed-
eral statutes as providing tax exemptions
unless the exemptions are clearly
expressed. Given the individualized
nature of this Court’s previous cases, one
cannot say that the pro-Indian canon is
inevitably stronger, particularly where the
interpretation of a congressional statute
rather than an Indian treaty is at issue. Pp.
6–11.
208 F.3d 871 (first judgment); 210
F.3d 389 (second judgment), affirmed.
BREYER, J., delivered the opinion of
the Court, in which REHNQUIST, C. J.,
and STEVENS, KENNEDY, and GINS-
BURG, JJ., joined, and in all but Part II-B
of which SCALIA and THOMAS, JJ.,
joined. O’CONNOR, J., filed a dissenting
opinion, in which SOUTER, J., joined.
SUPREME COURT OF THE
UNITED STATES
No. 00–507
CHICKASAW NATION,
PETITIONERv. UNITED STATES
CHOCTAW NATION OF
OKLAHOMA, PETITIONERv.
UNITED STATES
ON WRIT OF CERTIORARI TO
THE UNITED STATES COURT
OF APPEALS FOR THE TENTH
CIRCUIT
November 27, 2001
JUSTICE BREYER delivered the
opinion of the Court.*
In these cases, we must decide whether
a particular subsection in the Indian Gam-
ing Regulatory Act, 102 Stat. 2467–2486,
25 U.S.C. Secs. 2701–2721 (1994 ed.),
exempts tribes from paying the gambling-
related taxes that chapter 35 of the Inter-
nal Revenue Code imposes—taxes that
States need not pay. We hold that it does
not create such an exemption.
I
The relevant Indian Gaming Regula-
tory Act (Gaming Act) subsection, as
codified in 25 U.S.C. Sec. 2719(d)(i),
reads as follows:
“The provisions of [the Internal
Revenue Code of 1986] (including
sections 1441, 3402(q), 6041, and
6050I, and chapter 35 of such Code)
concerning the reporting and with-
holding of taxes with respect to the
winnings from gaming or wagering
operations shall apply to Indian
gaming operations conducted pursu-
ant to this chapter, or under a Tribal-
State compact entered into under
section 2710(d)(3) of this title that is
in effect, in the same manner as
such provisions apply to State gam-
ing and wagering operations.”
The subsection says that Internal Revenue
Code provisions that“concer[n] the
reporting and withholding of taxes”with
respect to gambling operations shall
apply to Indian tribes in the same way as
they apply to States. The subsection also
says in its parenthetical that those provi-
sions“includ[e]”Internal Revenue Code
“chapter 35.”Chapter 35, however, says
nothing about thereportingor thewith-
holdingof taxes. Rather, that chapter sim-
plyimposestaxes—excise taxes and
occupational taxes related to gambling—
from which it exempts certain state-
controlled gambling activities. See,e.g.,
26 U.S.C. Sec. 4401(a) (1994 ed.)
(imposing 0.25% excise tax on each
wager); Sec. 4411 (imposing $50 occupa-
tional tax on each individual engaged in
wagering business); Sec. 4402(3)
(exempting state-operated gambling
operations, such as lotteries).
In this lawsuit two Native American
Indian Tribes, the Choctaw and Chick-
asaw Nations, claim that the Gaming Act
subsection exempts them from paying
those chapter 35 taxes from which States
are exempt. Brief for Petitioners 34–36.
They rest their claim upon the subsec-
tion’s explicit parenthetical reference to
chapter 35. The Tenth Circuit rejected
their claim on the ground that the subsec-
tion, despite its parenthetical reference,
applies only to Code provisions that con-
cern the“reporting and withholding of
taxes.”208 F.3d 871, 883–884 (2000);
see also 210 F.3d 389 (2000). The Court
of Appeals for the Federal Circuit, how-
ever, reached the opposite conclusion.
Little Six, Inc. v. United States, 210 F.3d
1361, 1366 (2000). We granted certiorari
in order to resolve the conflict. We agree
with the Tenth Circuit.
II
The Tribes’basic argument rests upon
the subsection’s explicit reference to
“chapter 35”—contained in a parentheti-
cal that refers to four other Internal Rev-
enue Code provisions as well. The sub-
section’slanguageoutsidethe
parenthetical says that the subsection
applies to those Internal Revenue Code
provisions that concern“reporting and
withholding.”The other four parentheti-
cal references are to provisions that con-
cern, or at least arguably concern, report-
ing and withholding. See 26 U.S.C. Sec.
1441 (withholding of taxes for nonresi-
dent alien); Sec. 3402(q) (withholding of
*JUSTICE SCALIA and JUSTICE THOMAS join all but Part II-B of this opinion.
April 8, 20027192002–14 I.R.B.

taxes from certain gambling winnings);
26 U.S.C. Sec. 6041 (reporting by busi-
nesses of payments, including payments
of gambling winnings, to others); Sec.
6050I (reporting by businesses of large
cash receipts, arguably applicable to cer-
tain gambling winnings or receipts).
But what about chapter 35? The Tribes
correctly point out that chapter 35 has
nothing to do with“reporting and with-
holding.”Brief for Petitioners 28–29.
They add that the reference must serve
some purpose, and the only purpose that
the Tribes can find is that of expanding
the scope of the Gaming Act’s subsection
beyond reporting and withholding provi-
sions—to the tax-imposing provisions
that chapter 35 does contain. The Gaming
Act therefore must exempt them (like
States) from those tax payment require-
ments. The Tribes add that at least the
reference to chapter 35 makes the subsec-
tion ambiguous. And they ask us to
resolve the ambiguity by applying a spe-
cial Indian-related interpretative canon,
namely,“‘statutes are to be construed lib-
erally in favor of the Indians’with
ambiguous provisions interpreted to their
benefit.”Brief for Petitioners 13 (quoting
Montana v. Blackfeet Tribe, 471 U.S. 759,
766 (1985)).
We cannot accept the Tribes’claim.
We agree with the Tribes that rejecting
their argument reduces the phrase
“(including...chapter 35)...”to sur-
plusage. Nonetheless we can find no
other reasonable reading of the statute.
A
The language of the statute is too
strong to bend as the Tribes would wish
—i.e., so that it gives the chapter 35 ref-
erence independent operative effect. For
one thing, the language outside the paren-
thetical is unambiguous. It says without
qualification that the subsection applies to
“provisions...concerning the reporting
and withholding of taxes.”And the lan-
guage inside the parenthetical, prefaced
with the word“including,”literally says
the same. To“include”is to“contain”or
“comprise as part of a whole.”Webster’s
Ninth New Collegiate Dictionary 609
(1985). In this instance, that which“con-
tains”the parenthetical references—the
“whole”of which the references are
“parts”—is the phrase“provisions...
concerning the reporting and withholding
of taxes....”The use of parentheses
emphasizes the fact that that which is
within is meant simply to be illustrative,
hence redundant—a circumstance under-
scored by the lack of any suggestion that
Congress intended the illustrative list to
be complete. Cf. 26 U.S.C. Sec. 3406
(backup withholding provision not men-
tioned in parenthetical).
Nor can one give the chapter 35 refer-
ence independent operative effect without
seriously rewriting the language of the
rest of the statute. One would have to
read the word“including”to mean what it
does not mean, namely,“including...
and.”One would have to read the statute
as if, for example, it placed“chapter 35”
outside the parenthetical and said“provi-
sions of the...Codeincluding chapter
35 and also provisions. . . concerning the
reporting and withholding of taxes....”
Or, one would have to read the language
as if it said“provisions of the...Code
. . . concerningthe taxation andthe
reporting and withholding of taxes....”
We mention this latter possibility because
the congressional bill that became the law
before us once did read that way. But
when the bill left committee, it contained
not the emphasized words (“the taxation
and”) but the cross-reference to chapter
35.
We recognize the Tribes’claim (made
here for the first time) that one could
avoid rewriting the statute by reading the
language outside the parenthetical as if it
referred to two kinds of“provisions of the
. . . Code”: first those“concerning the
reporting and withholding of taxes with
respect to the winnings from gaming,”
and, second, those“concerning...
wagering operations.”See Reply Brief for
Petitioners 8–10. The subsection’s gram-
mar literally permits this reading. But that
reading, even if ultimately comprehen-
sible, is far too convoluted to believe
Congress intended it. Nor is there any
reason to think Congress intended to
sweep within the subsection’s scope
every Internal Revenue Code provision
concerning wagering—a result that this
unnatural reading would accomplish.
The subject matter at issue also coun-
sels against accepting the Tribes’inter-
pretation. That subject matter is tax
exemption. When Congress enacts a tax
exemption, it ordinarily does so explic-
itly. We can find no comparable instance
in which Congress legislated an exemp-
tion through an inexplicit numerical
cross-reference—especially a cross-
reference that might easily escape notice.
As we have said, the more plausible
role for the parenthetical to play in this
subsection is that of providing an illustra-
tive list of examples. So considered,
“chapter 35”is simply a bad example—
an example that Congress included inad-
vertently. The presence of a bad example
in a statute does not warrant rewriting the
remainder of the statute’s language. Nor
does it necessarily mean that the statute is
ambiguous,i.e.,“capable of being under-
stood in two or more possible senses or
ways.”Webster’s Ninth New Collegiate
Dictionary 77 (1985). Indeed, in ordinary
life, we would understand an analogous
instruction—say,“Test drive some cars,
including Plymouth, Nissan, Chevrolet,
Ford, and Kitchenaid”—not as creating
ambiguity, but as reflecting a mistake.
Here too, in context, common sense sug-
gests that the cross-reference is simply a
drafting mistake, a failure to delete an
inappropriate cross-reference in the bill
that Congress later enacted into law. Cf.
Little Six, Inc. v. United States, 229 F.3d
1383, 1385 (CA Fed. 2000) (Dyk, J., dis-
senting from denial of rehearing en banc)
(“The language of the provision has all
the earmarks of a simple mistake in legis-
lative drafting”).
B
The Gaming Act’s legislative history
on balance supports our conclusion. The
subsection as it appeared in the original
Senate bill applied both to taxation and to
reporting and withholding. It read as fol-
lows:
“Provisions of the Internal Revenue
Code . . . concerningthe taxation
andthe reporting and withholding
of taxes with respect to gambling or
wagering operations shall apply to
Indian gaming operations...the
same as they apply to State opera-
tions,”S. 555, 100th Cong., 1st
Sess., 37 (1987).
With the“taxation”language present, it
would have made sense to include chap-
ter 35, which concerns taxation, in a par-
enthetical that included other provisions
that concern reporting and withholding.
But the Senate committee deleted the
taxation language. Why did it permit the
2002–14 I.R.B.720April 8, 2002

cross-reference to chapter 35 to remain?
Committee documents do not say.
The Tribes argue that the committee
intentionally left it in the statute in order
to serve as asubstitutefor the word
“taxation.”Anamicustries to support this
view by pointing to a tribal representa-
tive’s testimony that certain Tribes were
“opposed to any indication where Internal
Revenue would be collecting taxes from
the tribal bingo operations.”Hearings on
S. 555 and S. 1303 before the Senate
Select Committee on Indian Affairs,
100th Cong., 1st Sess., 109 (1987) (state-
ment of Lionel John, Executive Director
of United South and Eastern Tribes).
Other Tribes thought the“taxation”lan-
guage too“vague,”preferring a clear
statement“that the Internal Revenue Ser-
vice is not being granted authority to tax
tribes.”Id., at 433, 435 (statement of
Charles W. Blackwell, Representative of
the American Indian Tribal Government
and Policy Consultants, Inc.).
Substitution of“chapter 35”for the
word“taxation,”however, could not have
served the tribal witnesses purposes, for
doing so took from the bill the very
words that made clear the tribes would
notbe taxed and substituted language that
made it more likely they would be taxed.
Nor can we believe that anyone seeking
to grant a tax exemption would intention-
ally substitute a confusion-generating
numerical cross-reference, see Part A,
supra, for pre-existing language that
unambiguously carried out that objective.
It is far easier to believe that the drafters,
having included the entire parenthetical
while the word“taxation”was still part of
the bill, unintentionally failed to remove
what had become a superfluous numerical
cross-reference—particularly since the
tax-knowledgeable Senate Finance Com-
mittee never received the opportunity to
examine the bill. Cf. S. Doc. No. 100–1,
Senate Manual, 30 (1987) (proposed leg-
islation concerning revenue measures
shall be referred to the Committee on
Finance).
Finally, the Tribes point to a letter
written by one of the Gaming Act’s
authors, stating that“by including refer-
ence to Chapter 35,”Congress intended
“that the tax treatment of wagers con-
ducted by tribal governments be the same
as that for wagers conducted by state gov-
ernments under Chapter 35.”App. to Pet.
for Cert. 113a. This letter, however, was
written after the event. It expresses the
views of only one member of the commit-
tee. And it makes no effort to explain the
critical legislative circumstance, namely,
the elimination of the word“taxation”
from the bill. The letter may express the
Senator’s interpretive preference, but that
preference cannot overcome the language
of the statute and the related consider-
ations we have discussed. SeeHeintz v.
Jenkins, 514 U.S. 291, 298 (1995) (A
“statement [made] not during the legisla-
tive process, butafterthe statute became
law...isnotastatement upon which
other legislators might have relied in vot-
ing for or against the Act, but it simply
represents the views of one informed per-
son on an issue about which others may
(or may not) have thought differently”).
Cf.New York Telephone Co. v. New York
State Dept. of Labor, 440 U.S. 519, 564,
n. 18 (1979) (Powell, J., dissenting) (“The
comments...ofasingle Congressman,
delivered long after the original passage
of the [act at issue], are of no aid in deter-
mining congressional intent...”).
In sum, to adopt the Tribes’interpreta-
tion would read back into the Act the very
word“taxation”that the Senate commit-
tee deleted. We ordinarily will not assume
that Congress intended“‘to enact statu-
tory language that it has earlier discarded
in favor of other language.’”INS v.
Cardoza-Fonseca, 480 U.S. 421, 443
(1987) (quotingNachman Corp. v. Pen-
sion Benefit Guaranty Corporation, 446
U.S. 359, 392–393 (1980));Gulf Oil
Corp. v. Copp Paving Co., 419 U.S. 186,
200 (1974) (same);Mescalero Apache
Tribe v. Jones, 411 U.S. 145, 157 (1973)
(same). There is no special reason for
doing so here.
C
The Tribes point to canons of interpre-
tation that favor their position. The Court
has often said that“‘every clause and
word of a statute’”should,“‘if possible,’”
be given“‘effect.’”United States v.
Menasche, 348 U.S. 528, 538–539 (1955)
(quotingMontclair v. Ramsdell, 107 U.S.
147, 152 (1883)). The Tribes point out
that our interpretation deprives the words
“chapter 35”of any effect. The Court has
also said that“statutes are to be construed
liberally in favor of the Indians with
ambiguous provisions interpreted to their
benefit.”Montana v. Blackfeet Tribe, 471
U.S. at 766;South Carolina v. Catawba
Tribe, Inc., 476 U.S. 498, 520 (1986)
(Blackmun, J., dissenting). The Tribes
point out that our interpretation is not to
the Indians’benefit.
Nonetheless, these canons do not
determine how to read this statute. For
one thing, canons are not mandatory
rules. They are guides that“need not be
conclusive.”Circuit City Stores, Inc. v.
Adams, 532 U.S. 105, 115 (2001). They
are designed to help judges determine the
Legislature’s intent as embodied in par-
ticular statutory language. And other cir-
cumstances evidencing congressional
intent can overcome their force. In this
instance, to accept as conclusive the can-
ons on which the Tribes rely would pro-
duce an interpretation that we conclude
would conflict with the intent embodied
in the statute Congress wrote. Cf.Cho-
teau v. Burnet, 283 U.S. 691 (1931)
(upholding taxation where congressional
intent reasonably clear);Superintendent
of Five Civilized Tribes v. Commissioner,
295 U.S. 418 (1935) (same);Mescalero
Apache Tribe v. Jones, supra(same). In
light of the considerations discussed ear-
lier, we cannot say that the statute is
“fairly capable”of two interpretations, cf.
Montana v. Blackfeet Tribe, supra, at 766,
nor that the Tribes’interpretation is fairly
“possible.”
Specific canons“are often countered
...bysome maxim pointing in a differ-
ent direction.”Circuit City Stores, Inc. v.
Adams, supra, at 115. The canon requir-
ing a court to give effect to each word“if
possible”is sometimes offset by the
canon that permits a court to reject words
“as surplusage”if“inadvertently inserted
or if repugnant to the rest of the statute
....”K. Llewellyn, The Common Law
Tradition 525 (1960). And the latter
canon has particular force here where the
surplus words consist simply of a numeri-
cal cross-reference in a parenthetical. Cf.
Cabell Huntington Hospital, Inc. v.
Shalala, 101 F.3d 984, 990 (CA4 1996)
(“A parenthetical is, after all, a parentheti-
cal, and it cannot be used to overcome the
operative terms of the statute”).
Moreover, the canon that assumes
Congress intends its statutes to benefit the
tribes is offset by the canon that warns us
against interpreting federal statutes as
April 8, 20027212002–14 I.R.B.

providing tax exemptions unless those
exemptions are clearly expressed. See
United States v. Wells Fargo Bank, 485
U.S. 351, 354 (1988) (“[E]xemptions
from taxation...must be unambiguously
proved”);Squire v. Capoeman, 351 U.S.
1, 6 (1956) (“[T]o be valid, exemptions to
tax laws should be clearly expressed”);
United States Trust Co. v. Helvering, 307
U.S. 57, 60 (1939) (“Exemptions from
taxation do not rest upon implication”).
Nor can one say that the pro-Indian canon
is inevitably stronger—particularly
where the interpretation of a congres-
sional statute, rather than an Indian treaty,
is at issue. Cf.post, at 7. This Court’s
earlier cases are too individualized,
involving too many different kinds of
legal circumstances, to warrant any such
assessment about the two canons’relative
strength. Compare,e.g.,Choate v. Trapp,
224 U.S. 665, 675–676 (1912) (interpret-
ing statement in treaty-related Indian land
patents that land is“nontaxable”as creat-
ing property right invalidating later con-
gressional effort to tax);Squire, supra,at
3 (Indian canon offsetting tax canon when
related statutory provision and history
make clear that language freeing Indian
land“‘of all charge or incumbrance what-
soever’”includes tax);McClanahan v.
Arizona Tax Comm’n, 411 U.S. 164, 174
(1973) (state tax violates principle of
Indian sovereignty embodied in treaty),
withMescalero, supra(relying on tax
canon to find Indians taxable);Choteau,
supralanguage makes clear no exemp-
tion);Five Tribes, supra(same).
Consequently, the canons here cannot
make the difference for which the Tribes
argue. We conclude that the judgments of
the Tenth Circuit must be affirmed.
It is so ordered.
SUPREME COURT OF THE
UNITED STATES
No. 00–507
CHICKASAW NATION,
PETITIONERv. UNITED STATES
CHOCTAW NATION OF
OKLAHOMA, PETITIONERv.
UNITED STATES
ON WRIT OF CERTIORARI TO
THE UNITED STATES COURT
OF APPEALS FOR THE TENTH
CIRCUIT
November 27, 2001
JUSTICE O’CONNOR, with whom
JUSTICE SOUTER joins, dissenting.
The Court today holds that 25 U.S.C.
Sec. 2719(d) (1994 ed.) clearly and
unambiguously fails to give Indian
Nations (Nations) the exemption from
federal wagering excise and related occu-
pational taxes enjoyed by the States.
Because I believe Sec. 2719(d) is subject
to more than one interpretation, and
because“statutes are to be construed lib-
erally in favor of the Indians, with
ambiguous provisions interpreted to their
benefit,”Montana v. Blackfeet Tribe, 471
U.S. 759, 766 (1985), I respectfully dis-
sent.
I
I agree with the Court that Sec.
2719(d) incorporates an error in drafting.
I disagree, however, that the section’s ref-
erence to chapter 35 is necessarily that
error.
As originally proposed in the Senate,
the bill that became the Indian Gaming
Regulatory Act (IGRA) would have
applied all gambling and wagering-
related sections of the Internal Revenue
Code to the Nations in the same manner
as the States:
“Provisions of the Internal Revenue
Code of 1986, concerning the taxa-
tion and the reporting and withhold-
ing of taxes with respect to gam-
bling or wagering operations shall
apply to Indian gaming operations
conducted pursuant to this Act the
same as they apply to State opera-
tions.”S. 555, 100th Cong., 1st
Sess., 37 (1987).
The Senate Indian Affairs Committee
altered the language of this bill in two
contradictory ways. It restricted the appli-
cable Code sections to those relating to
the“reporting and withholding of taxes
with respect to the winnings”from gam-
ing operations. 25 U.S.C. Sec. 2719(d). It
also added a parenthetical listing specific
Code sections to be applied to the Nations
in the same manner as the States, includ-
ing chapter 35, a Code provision that
relates to gambling operations generally,
but not to the reporting and withholding
of gambling winnings.Ibid.
One of these two changes must have
been made in error. There is no reason to
assume, however, that it must have been
the latter. It is equally likely that Con-
gress intended Sec. 2719(d) to apply
chapter 35 to the Nations, but adopted too
restrictive a general characterization of
the applicable sections.
The Court can do no more than specu-
late that the bill’s drafters included the
parenthetical while the original restriction
was in place and failed to remove it when
that restriction was altered. Seeante,at7.
Both the inclusion of the parenthetical
and the alteration of the restriction
occurred in the Senate committee, S. Rep.
No. 100–446 (1988), and there is no way
to determine the order in which they were
adopted. If the parenthetical was added
after the restriction, one could just as eas-
ily characterize therestrictionas an unin-
tentional holdover from a previous ver-
sion of the bill.
True, reading the statute to grant the
Nations the exemption requires the sec-
tion’s reference to the“reporting and
withholding of taxes with respect to the
winnings”from gaming operations to sus-
tain a meaning the words themselves can-
not bear. But the Court’s reading of the
statute fares no better: It requires excising
from Sec. 2719(d) Congress’explicit ref-
erence to chapter 35. This goes beyond
treating statutory language as mere sur-
plusage. SeePotter v. United States, 155
U.S. 438, 446 (1894) (the presence of
statutory language“cannot be regarded as
mere surplusage; it means something”);
cf.ante, at 3. Surplusage is redundant
statutory language,Babbitt v. Sweet Home
Chapter, Communities for Great Ore.,
515 U.S. 687, 697–698 (1995); W. Pop-
kin, Materials on Legislation: Political
Language and the Political Process 214
(3d ed. 2001)—the Court’s reading
negates language that undeniably bears
separate meaning. This is not a step to be
undertaken lightly.
Bothapproaches, therefore, require
rewriting the statute, seeante, at 4. Nei-
ther of these rewritings is necessarily
more“serious”than the other: At most,
each involves doing no more than revers-
ing a change made in committee. Cf.
ante,at4–5.
2002–14 I.R.B.722April 8, 2002

The Court argues that because the ref-
erence to chapter 35 occurs in a paren-
thetical, negating this language does less
damage to the statute than concluding that
the restrictive language outside the paren-
thetical is too narrowly drawn. I am
aware of no generally accepted canon of
statutory construction favoring language
outside of parentheses to language within
them, see,e.g., W. Eskridge, P. Frickey, &
E. Garrett, Legislation and Statutory
Interpretation, App. C (2000) (listing can-
ons), nor do I think it wise for the Court
to adopt one today. The importance of
statutory language depends not on its
punctuation, but on its meaning. See
United States Nat. Bank of Ore. v. Inde-
pendent Ins. Agents of America, Inc., 508
U.S. 439, 454 (1993) (“[A] purported
plain-meaning analysis based only on
punctuation is necessarily incomplete and
runs the risk of distorting a statute’s true
meaning”).
The fact that the parenthetical is illus-
trative does not change the analysis: If
Congress’illustration does not match its
general description, there is as much rea-
son to question the description as the
illustration. Where another general
description is possible—and was in fact
part of the bill at an earlier stage—Con-
gress’choice of an example that matches
the earlier description is at least ambigu-
ous. Moreover, as Sec. 2719(d)’s paren-
thetical specifically lists statutory sections
to be applied to the Nations, one might in
fact conclude that the doctrine that the
specific governs the general,Crawford
Fitting Co. v. J. T. Gibbons, Inc., 482
U.S. 437, 445 (1987), makes this specific
parenthetical even more significant than
the general restriction that follows.
Nor is negating Congress’clear refer-
ence to chapter 35 required by the policy
behind the statute. If anything, congres-
sional policy weighs in favor of the
Nations. Congress’central purpose in
enacting IGRA was“to provide a statu-
tory basis for the operation of gaming by
Indian tribes as a means of promoting
tribal economic development, self-
sufficiency, and strong tribal govern-
ments.”Sec. 2702(1). Exempting Nations
from federal gaming taxation in the same
manner as States preserves the Nations’
sovereignty and avoids giving state gam-
ing a competitive advantage that would
interfere with the Nations’ability to raise
revenue in this manner.
II
Because nothing in the text, legislative
history, or underlying policies of Sec.
2719(d) clearly resolves the contradiction
inherent in the section, it is appropriate to
turn to canons of statutory construction.
The Nations urge the Court to rely upon
the Indian canon, that“statutes are to be
construed liberally in favor of the Indians,
with ambiguous provisions interpreted to
their benefit,”Montana v. Blackfeet Tribe,
471 U.S., at 766, as a basis for deciding
that the error in Sec. 2719(d) lies in the
restriction of the subclass, not in the spe-
cific listing of chapter 35.“[R]ooted in
the unique trust relationship between the
United States and the Indians,”County of
Oneida v. Oneida Indian Nation of N.Y.,
470 U.S. 226, 247 (1985), the Indian
canon presumes congressional intent to
assist its wards to overcome the disadvan-
tages our country has placed upon them.
Consistent with this purpose, the Indian
canon applies to statutes as well as trea-
ties: The form of the enactment does not
change the presumption that Congress
generally intends to benefit the Nations.
Montana v. Blackfeet Tribe, supra;
County of Yakima v. Confederated Tribes
and Bands of Yakima Nation, 502 U.S.
251 (1992). In this case, because Con-
gress has chosen gaming as a means of
enabling the Nations to achieve self-
sufficiency, the Indian canon rightly dic-
tates that Congress should be presumed to
have intended the Nations to receive
more, rather than less, revenue from this
enterprise.
Of course, the Indian canon is not the
only canon with potential applicability in
this case. Also relevant is the taxation
principle, that exemptions from taxation
must be clearly expressed.United States
Trust Co. v. Helvering, 307 U.S. 57, 60
(1939); see alsoante, at 10. These canons
pull in opposite directions, the former
favoring the Nations’preferred reading,
and the latter favoring the Government’s.
This Court has repeatedly held that,
when these two canons conflict, the
Indian canon predominates. InChoate v.
Trapp, 224 U.S. 665 (1912), a State
attempted to rely on the taxation principle
to argue that a treaty provision making
land granted to Indians nontaxable was
merely a bounty, capable of being with-
drawn at any time. The Court acknowl-
edged the taxation principle, responding:
“But in the Government’s dealings
with the Indians, the rule is exactly
the contrary. The construction,
instead of being strict, is liberal;
doubtful expressions, instead of
being resolved in favor of the
United States, are to be resolved in
favor of [Indian nations.]Id.,at
674–675.
InSquire v. Capoeman, 351 U.S. 1, 3
(1956), the Federal Government had con-
veyed land to the Nations“‘free of all
charge or encumbrance whatsoever.’”
Although this phrase did not expressly
mention nontaxability, the Court held that
the language“might well be sufficient to
include taxation,”id., at 7. Invoking the
Indian canon,id.,at6–7, we found the
Nations exempt.
Likewise, inMcClanahan v. Arizona
Tax Comm’n, 411 U.S. 164 (1973), this
Court inferred an exemption from state
taxation of property inside reservations
from a treaty reserving lands for the
exclusive use and occupancy of the
Nations. In doing so, the Court noted that:
“It is true, of course, that exemptions
from tax laws should, as a general rule,
be clearly expressed. But we have in the
past construed language far more ambigu-
ous than this as providing a tax exemp-
tion for Indians.”Id., at 176 (citing
Squire,supra,at6).
As the purpose behind the Indian
canon is the same regardless of the form
of enactment,supra, at 5, there is no rea-
son to alter the Indian canon’s relative
strength where a statute rather than a
treaty is involved. Cf.ante, at 10. The
primacy of the Indian canon over the
taxation principle should not be surpris-
ing, as this Court has also held that the
general presumption supporting the legal-
ity of executive action must yield to the
Indian canon, a“counterpresumption spe-
cific”to Indians.Minnesota v. Mille Lacs
Band of Chippewa Indians, 526 U.S. 172,
194, n. 5 (1999).
This Court has failed to apply the
Indian canon to extend tax exemptions to
the Nations only when nothing in the lan-
guage of the underlying statute or treaty
suggests the Nations should be exempted.
The Cherokee Tobacco, 11 Wall. 616,
618–620 (1871) (finding no exemption
for the Nations from language imposing
April 8, 20027232002–14 I.R.B.

taxes on certain“‘articles produced any-
where within the exterior boundaries of
the United States’”);Choteau v. Burnet,
283 U.S. 691, 693–694 (1931) (finding
no exemption in provisions“subject[ing]
the income of‘every individual’to tax,”
including“income‘from any source
whatever’”);Superintendent of Five Civi-
lized Tribes v. Commissioner, 295 U.S.
418 (1935) (same);Mescalero Apache
Tribe v. Jones, 411 U.S. 145, 155 (1973)
(refusing to exempt the Nations from
taxes on land use income based on lan-
guage that“[o]n its face...exempts land
and rights in land, not income derived
from its use”).Mescaleroalso went fur-
ther, suggesting that because of the taxa-
tion principle, the Court would refuse to
find such an exemption absent“clear
statutory guidance.”Id., at 156.Mescale-
ro’sformulation is admittedly in tension
with the Court’s precedents giving the
Indian canon primacy over the taxation
principle where statutory language is
ambiguous. AsMescalerowas decided on
the same day as one of those very prece-
dents,theunanimousdecisionin
McClanahan v. Arizona Tax Comm’n,
supra, however, it cannot have intended
to alter the Court’s established practice.
Section 2719(d) provides an even
more persuasive case for application of
the Indian canon than any of our prece-
dents. Here, the Court is not being asked
to create out of vague language a tax
exemption not specifically provided for in
the statute. Instead, the Nations simply
ask the Court to use the Indian canon as a
tiebreaker between two equally plausible
(or, in this case, equally implausible) con-
structions of a troubled statute, one which
specifically makes chapter 35’s tax
exemption applicable to the Nations, and
one which specifically does not. Breaking
interpretive ties is one of the least contro-
versial uses of any canon of statutory
construction. See Eskridge, Frickey, &
Garrett, Legislation and Statutory Inter-
pretation, at 341 (“The weakest kind of
substantive canon operates merely as a
tiebreakerat the end of the interpretive
analysis”).
Faced with the unhappy choice of
determining which part of a flawed statu-
tory section is in error, I would thus rely
upon the long-established Indian canon of
construction and adopt the reading most
favorable to the Nations.
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page 716.
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2002. See Rev. Rul. 2002–17, page716.
2002–14 I.R.B.724April 8, 2002

Part II. Treaties and Tax Legislation
Subpart A.—Tax Conventions and Other Related Items
April 8, 20027252002–14 I.R.B.

2002–14 I.R.B.726April 8, 2002

April 8, 20027272002–14 I.R.B.

2002–14 I.R.B.728April 8, 2002

April 8, 20027292002–14 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Tax Avoidance Using Inflated
Basis
Notice 2002–21
The Internal Revenue Service and the
Treasury Department have become aware
of a type of transaction, described below,
that is used by taxpayers to generate tax
losses. This Notice alerts taxpayers and
their representatives that the tax benefits
purportedly generated by these transac-
tions are not allowable for federal income
tax purposes. This Notice also alerts tax-
payers, their representatives, and promot-
ers of these transactions of certain respon-
sibilities that may arise from participating
in these transactions.
FACTS
In general, the transaction involves the
use of a loan assumption agreement to
claim an inflated basis in assets acquired
from another party. This inflated basis is
claimed as a result of a transfer of assets
in which a U.S. taxpayer (Taxpayer)
becomes jointly and severally liable on
indebtedness of the transferor of the
assets (Transferor), with the indebtedness
having a stated principal amount substan-
tially in excess of the fair market value of
the assets transferred. Transferor may not
be subject to U.S. tax or otherwise may
be indifferent to the federal income tax
consequences of the transaction.
In one variation of the transaction,
Transferor borrows money from a lender
(Lender) on a long term basis such as 30
years (the“Loan”). The amount borrowed
may be in a foreign currency. Interest is
payable at regular intervals, and principal
is due at maturity. The Loan may permit
prepayment. The Loan is made with full
recourse to Transferor.
Transferor uses the proceeds to pur-
chase assets (the“Assets”), such as short-
term deposits, government bonds, or
high-grade corporate debt, which may be
denominated in a foreign currency. The
Assets serve as collateral for the Loan
pursuant to a loan agreement. As each
interest payment becomes due, the collat-
eral is used to satisfy such payments.
Upon maturity or earlier payment, the
Loan is satisfied, by its terms, first from
the collateral, and only then against
Transferor (or Transferor and any party
that has assumed the liability as a joint
and several obligor) to satisfy any short-
fall.
Pursuant to a separate agreement
between Transferor and Taxpayer, Transf-
eror transfers a portion of the Assets to
Taxpayer in consideration for Taxpayer’s
agreement to pay a portion of the Loan
and become jointly and severally liable to
Lender as a co-obligor on the Loan. The
fair market value of the Assets transferred
to Taxpayer (the“Conveyed Assets”)
equals the present value of the Loan’s
principal payment at maturity, determined
by using a market rate of interest. Thus,
the fair market value of the Conveyed
Assets is substantially less than the
Loan’s stated principal amount. Taxpayer
provides substitute collateral for the
Loan, equal in value to the Conveyed
Assets. The remainder of the Assets
owned by Transferor continue to serve as
collateral for the Loan.
Also pursuant to the agreement
between Transferor and Taxpayer, Transf-
eror agrees to make all interest payments
on the Loan, and Taxpayer agrees to pay
the principal due at maturity. The
co-obligors and Lender anticipate that the
collateral will be substantially (if not
entirely) sufficient to repay the Loan.
Taxpayer subsequently disposes of the
Conveyed Assets for their fair market
value. Taxpayer claims that, as a result of
its assumption of joint and several liabil-
ity on the Loan, the entire principal
amount of the Loan is included in Tax-
payer’s basis in the Conveyed Assets. As
a result, Taxpayer claims a loss for fed-
eral income tax purposes in an amount
equal to the excess of the stated principal
amount of the Loan over the fair market
value of the Conveyed Assets. If the Con-
veyed Assets are nonfunctional currency,
Taxpayer claims an ordinary loss.
ANALYSIS
Section 1012 of the Internal Revenue
Code provides that the basis of property
is equal to the cost of the property. Sec-
tion 1.1012–1(a) of the Income Tax Regu-
lations defines“cost”to mean the
“amount paid”for the property in cash or
other property. Under general tax law
principles, the amount paid for property
generally includes the amount of the sell-
er’s liabilities assumed by the buyer.
Commissioner v. Oxford Paper Co., 194
F.2d 190 (2d. Cir. 1952). The inclusion of
liabilities in basis by a buyer, however, is
predicated on the assumption that the
liabilities will be paid in full by the buyer.
See Commissioner v. Tufts, 461 U.S. 300,
308 (1983), 1983–1 C.B. 120, 123.
In appropriate cases, the courts have
rejected attempts to assign an inflated
basis to property and have limited the
basis of property to its fair market value.
For example, the basis of property
acquired with the issuance or assumption
of recourse indebtedness has been limited
to the acquired property’s fair market
value where“a transaction is not con-
ducted at arm’s-length by two economi-
cally self-interested parties or where a
transaction is based upon‘peculiar cir-
cumstances’which influence the pur-
chaser to agree to a price in excess of the
property’s fair market value.”Lemmen v.
Commissioner, 77 T.C. 1326, 1348 (1981)
(citingBixby v. Commissioner, 58 T.C.
757, 776 (1972));Webber v. Commis-
sioner, T.C. Memo. 1983–633,aff’d, 790
F.2d 1463 (9th Cir. 1986).See also
Majestic Securities Corp. v. Commis-
sioner, 42 B.T.A. 698, 701 (1940),aff’d,
120 F.2d 12 (8th Cir. 1941) (“The general
rule that the price paid is the basis for
determining gain or loss on future dispo-
sition presupposes a normal business
transaction.”)
Other cases have limited the portion of
an assumed indebtedness that may be
taken into account for federal income tax
purposes. For example, where two or
more persons are liable on the same
indebtedness, or hold separate properties
subject to the same indebtedness, the
amount taken into account for federal
income tax purposes by each person gen-
erally is based on all the facts and cir-
cumstances, including the economic reali-
ties of the situation and the parties’
expectations as to how the liabilities will
be paid.See Maher v. United States, No.
16253–1 (W.D. Mo. 1969) (property was
not in substance“subject to”liability
where lender was not actually relying on
2002–14 I.R.B.730April 8, 2002

property as collateral);Maher v. Commis-
sioner, 469 F.2d 225 (8th Cir. 1972) (cor-
poration’s assumption of primary liability
on shareholder’s indebtedness becomes
taxable dividend only as corporation
makes payments as promised);Snowa v.
Commissioner, T.C. Memo 1995–336,
rev’d on other grounds, 123 F.3d 190 (4th
Cir. 1997) (co-obligor’s cost of a new
residence included only her ratable share
of the liability due to state law’s right of
contribution).
Under the facts and circumstances of
the transaction described in this Notice,
as a matter of economic reality, the par-
ties will bear responsibility for repayment
of the Loan in accordance with their rela-
tive ownership of the Assets immediately
after the transfer from Transferor to Tax-
payer. Accordingly, the Service and the
Treasury believe that Taxpayer’s basis in
the Conveyed Assets is equal to the fair
market value of such assets upon their
acquisition by Taxpayer. The losses pur-
portedly resulting from the transaction
described in this Notice (or substantially
similar to the transaction described in this
Notice) are not allowable to the extent
Taxpayer derives a tax benefit that is
attributable to a basis in excess of the fair
market value of the Conveyed Assets.
The purported tax benefits from these
transactions also may be subject to chal-
lenge under other provisions of the Code
and regulations, including but not limited
to§988 and, in the case of individuals,
§§165(c)(2) and 465.
In addition, the Service may impose
penalties on participants in these transac-
tions or, as applicable, on persons who
participate in the promotion or reporting
of these transactions, including the
accuracy-related penalty under§6662,
the return preparer penalty under§6694,
the promoter penalty under§6700, and
the aiding and abetting penalty under
§6701.
Transactions that are the same as, or
substantially similar to, the transaction
described in this Notice 2002–21 are
identified as“listed transactions”for the
purposes of§§1.6011–4T(b)(2) of the
Temporary Income Tax Regulations and
301.6111–2T(b)(2) of the Temporary Pro-
cedure and Administrative Regulations.
See also§301.6112–1T, A–4. It should
be noted that, independent of their classi-
fication as“listed transactions”for pur-
poses of§§1.6011–4T(b)(2) and
301.6111–2T(b)(2), such transactions
may already be subject to the tax shelter
registration and list maintenance require-
ments of§§6111 and 6112 under the
regulations issued in February 2000
(§§301.6111–2T and 301.6112–1T, A–4),
as well as the regulations issued in 1984
and amended in 1986 (§§301.6111–1T
and 301.6112–1T, A–3). Persons required
to register these tax shelters who have
failed to register the shelters may be sub-
ject to the penalty under§6707(a), and to
the penalty under§6708(a) if the require-
ments of§6112 are not satisfied.
The Service and the Treasury recog-
nize that some taxpayers may have filed
tax returns taking the position that they
were entitled to the purported tax benefits
of the type of transaction described in this
Notice. These taxpayers are advised to
take prompt action to file amended
returns.
The principal author of this Notice is
Christina A. Morrison of the Office of
Associate Chief Counsel (Financial Insti-
tutions and Products). For further infor-
mation regarding this Notice, contact Ms.
Morrison at (202) 622–3950 (not a toll-
free call).
Request for Comments on
Items for 2002–2003
Published Guidance Priority
List
Notice 2002–22
The Department of Treasury and Inter-
nal Revenue Service request public com-
ment about items that should be included
in the Guidance Priority List for 2002–
2003.
IRS and Treasury’s Office of Tax
Policy use the Guidance Priority List
(“Priority List”) each year to identify and
prioritize the tax issues that should be
addressed through regulations, rulings,
and other published administrative guid-
ance. The Priority List will set forth guid-
ance Treasury and the IRS intend to issue
from July 1, 2002, through June 30, 2003.
Public input is invited as part of the pro-
cess of formulating the Priority List to
ensure that the agencies’resources focus
on the guidance items that are most
important to taxpayers and tax adminis-
tration.
As Treasury and the IRS draft guid-
ance and consider suggestions for guid-
ance, we will focus on providing needed
guidance on a timely basis and consider
the following questions:
1. Whether the guidance is consistent
with the letter and the intent of the statu-
tory language.
2. Whether the guidance is easily under-
stood and applied by taxpayers.
3. Whether the guidance is enforceable on
a uniform basis by the IRS.
4. Whether the guidance provides bright-
line rules and resolves issues rather than
raises issues.
5. Whether the guidance reduces contro-
versy and lessens the burden on taxpayer
and IRS resources.
No particular format is required for
comments submitted in response to this
Notice. However, it will be helpful for
comments both to briefly describe the
item that is recommended for inclusion
on the Priority List and to explain why
there is a need for guidance. In addition,
comments may present an analysis of
how the issue should be resolved.
Please submit all comments by April
30, 2002. Written comments should be
sent to:
Internal Revenue Service
Attn: CC:ITA:RU (Notice 2002–22)
Room 5226
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
or hand delivered between the hours of 8
a.m. and 5 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:ITA:RU (Notice 2002–22)
1111Constitution Avenue, N.W.
Washington, D.C. 20224
Alternatively, comments may be sub-
mitted electronically via e-mail to the fol-
lowing address:Notice.Comments@irs
counsel.treas.gov. Please include“Notice
2002–22”in the subject line. All com-
ments will be available for public inspec-
tion and copying in their entirety.
April 8, 20027312002–14 I.R.B.

For further information regarding this
notice, contact Brenda Wilson of the
Office of Associate Chief Counsel
(Income Tax and Accounting) at (202)
622–4800 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I,§911, 1.911–1)
Rev. Proc. 2002–20
SECTION 1. PURPOSE
01. This revenue procedure provides
information to any individual who failed
to meet the eligibility requirements of
§911(d)(1) of the Internal Revenue Code
because adverse conditions in a foreign
country precluded the individual from
meeting those requirements for taxable
year 2001.
02. The Internal Revenue Service has
previously listed countries for which the
eligibility requirements of§911(d)(1) of
the Code are waived under§911(d)(4)
because of adverse conditions in those
countries on and after the date stated. See
Rev. Proc. 2001–27 (2001–19 I.R.B.
1155), Rev. Proc. 2000–14 (2000–1 C.B.
960), and Rev. Proc. 99–20 (1999–1 C.B.
872) . This revenue procedure lists the
country added to the list in 2001, for
which the eligibility requirements of
§911(d)(1) are waived. Rev. Proc. 2001–
27, Rev. Proc. 2000–14, and Rev. Proc.
99–20 remain in full force and effect.
SECTION 2. BACKGROUND
01. Section 911(a) of the Code allows
a“qualified individual,”as defined in
§911(d)(1), to exclude foreign earned
income and housing cost amounts from
gross income. Section 911(c)(3) of the
Code allows a qualified individual to
deduct housing cost amounts from gross
income.
02. Section 911(d)(1) of the Code
defines the term“qualified individual”as
an individual whose tax home is in a for-
eign country and who is (A) a citizen of
the United States and establishes to the
satisfaction of the Secretary of the Trea-
sury that the individual has been abona
fideresident of a foreign country or coun-
tries for an uninterrupted period that
includes an entire taxable year, or (B) a
citizen or resident of the United States
who, during any period of 12 consecutive
months, is present in a foreign country or
countries during at least 330 full days.
03. Section 911(d)(4) of the Code pro-
vides an exception to the eligibility
requirements of§911(d)(1). An indi-
vidual will be treated as a qualified indi-
vidual with respect to a period in which
the individual was abona fideresident of,
or was present in, a foreign country if the
individual left the country during a period
for which the Secretary of the Treasury,
after consultation with the Secretary of
State, determines that individuals were
required to leave because of war, civil
unrest, or similar adverse conditions that
precluded the normal conduct of business.
An individual must establish that but for
those conditions the individual could rea-
sonably have been expected to meet the
eligibility requirements.
04. For 2001, the Secretary of the
Treasury in consultation with the Secre-
tary of State, has determined that war,
civil unrest, or similar adverse conditions
that precluded the normal conduct of
business existed in the following country
beginning on the specified date:
Date of Departure
CountryOn or After
MacedoniaJuly 27, 2001
05. Accordingly, for purposes of§911
of the Code, an individual who left Mace-
donia on or after July 27, 2001, shall be
treated for 2001 as a qualified individual
with respect to the period during which
that individual was present in, or was a
bona fideresident of Macedonia, if the
individual establishes a reasonable expec-
tation of meeting the requirements of
§911(d) but for those conditions.
06.Toqualifyforreliefunder
§911(d)(4) of the Code, an individual
must have established residency on or
prior to July 27, 2001, or have been
physically present in Macedonia on July
27, 2001, the date that the Secretary of
the Treasury determined that individuals
were required to leave the foreign coun-
try. Individuals who establish residency
or are first physically present in Mace-
donia after July 27, 2001, shall not be
treated as qualified individuals under
§911(d)(4) of the Code for taxable year
2001.
07. In order to assist those individuals
who are filing prior year or amended tax
returns, the Internal Revenue Service is
republishing the countries listed for tax
years 1998, 1999, and 2000, for which
the eligibility requirements of§911(d)(1)
of the Code are waived under§911(d)(4):
2002–14 I.R.B.732April 8, 2002

Tax Year 1998—
Date of Departure
CountryOn or After
AlbaniaAugust 14, 1998
Democratic Republic of the CongoAugust 5, 1998
EritreaJune 5, 1998
Guinea-BissauJune 10, 1998
IndonesiaMay 15, 1998
PakistanAugust 16, 1998
Sierra LeoneDecember 23, 1998
Serbia-MontenegroOctober 11, 1998
Tax Year 1999—
Date of Departure
CountryOn or After
EritreaFebruary 12, 1999
EthiopiaFebruary 12, 1999
Serbia-MontenegroMarch 20, 1999
Tax Year 2000—
Date of Departure
CountryOn or After
EritreaMay 19, 2000
SECTION 3. INQUIRIES
A taxpayer who needs assistance on
how to claim this exclusion, or on how to
file an amended return, should contact a
local IRS Office or, for a taxpayer resid-
ing or traveling outside the United States,
the nearest overseas IRS office.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2001–27 (2001–19 I.R.B.
1155) is supplemented.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Kate Y. Hwa of the Office of
Associate Chief Counsel (International).
For further information regarding this
revenue procedure contact Ms. Hwa at
(202) 622–3840 (not a toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also Part I,§§267, 511, 512, 707, 761, 856, 1031,
1361; 1.761–1, 1.761–2; 301.7701–1, 301.7701–2,
301.7701–3, 301.7701–4.)
Rev. Proc. 2002–22
SECTION 1. PURPOSE
This revenue procedure specifies the
conditions under which the Internal Rev-
enue Service will consider a request for a
ruling that an undivided fractional interest
in rental real property (other than a min-
eral property as defined in section 614) is
not an interest in a business entity, within
the meaning of§301.7701–2(a) of the
Procedure and Administration Regula-
tions.
This revenue procedure supersedes
Rev. Proc. 2000–46 (2000–2 C.B. 438),
which provides that the Service will not
issue advance rulings or determination
letters on the questions of whether an
undivided fractional interest in real prop-
erty is an interest in an entity that is not
eligible for tax-free exchange under
§1031(a)(1) of the Internal Revenue
Code and whether arrangements where
taxpayers acquire undivided fractional
interests in real property constitute sepa-
rate entities for federal tax purposes under
§7701. This revenue procedure also
modifies Rev. Proc. 2002–3 (2002–1
I.R.B. 117) by removing these issues
from the list of subjects on which the Ser-
vice will not rule. Requests for advance
rulings described in Rev. Proc. 2000–46
that are not covered by this revenue pro-
cedure, such as rulings concerning min-
eral property, will be considered under
procedures set forth in Rev. Proc. 2002–1
(2002–1 I.R.B. 1) (or its successor).
SECTION 2. BACKGROUND
Section 301.7701–1(a)(1) provides that
whether an organization is an entity sepa-
rate from its owners for federal tax pur-
poses is a matter of federal law and does
not depend on whether the entity is recog-
nized as an entity under local law. Section
301.7701–1(a)(2) provides that a joint
venture or other contractual arrangement
April 8, 20027332002–14 I.R.B.

may create a separate entity for federal
tax purposes if the participants carry on a
trade, business, financial operation, or
venture and divide the profits therefrom,
but the mere co-ownership of property
that is maintained, kept in repair, and
rented or leased does not constitute a
separate entity for federal tax purposes.
Section 301.7701–2(a) provides that a
business entity is any entity recognized
for federal tax purposes (including an
entity with a single owner that may be
disregarded as an entity separate from its
owner under§301.7701–3) that is not
properly classified as a trust under
§301.7701–4 or otherwise subject to spe-
cial treatment under the Internal Revenue
Code. A business entity with two or more
members is classified for federal tax pur-
poses as either a corporation or a partner-
ship.
Section 761(a) provides that the term
“partnership”includes a syndicate, group,
pool, joint venture, or other unincorpo-
rated organization through or by means of
which any business, financial operation,
or venture is carried on, and that is not a
corporation or a trust or estate.
Section 1.761–1(a) of the Income Tax
Regulations provides that the term“part-
nership”means a partnership as deter-
mined under§§301.7701–1, 301.7701–2,
and 301.7701–3.
The central characteristic of a tenancy
in common, one of the traditional concur-
rent estates in land, is that each owner is
deemed to own individually a physically
undivided part of the entire parcel of
property. Each tenant in common is
entitled to share with the other tenants the
possession of the whole parcel and has
the associated rights to a proportionate
share of rents or profits from the property,
to transfer the interest, and to demand a
partition of the property. These rights
generally provide a tenant in common the
benefits of ownership of the property
within the constraint that no rights may
be exercised to the detriment of the other
tenants in common. 7 Richard R. Powell,
Powell on Real Property§§50.01–50.07
(Michael Allan Wolf ed., 2000).
Rev. Rul. 75–374 (1975–2 C.B. 261)
concludes that a two-person co-ownership
of an apartment building that was rented
to tenants did not constitute a partnership
for federal tax purposes. In the revenue
ruling, the co-owners employed an agent
to manage the apartments on their behalf;
the agent collected rents, paid property
taxes, insurance premiums, repair and
maintenance expenses, and provided the
tenants with customary services, such as
heat, air conditioning, trash removal,
unattended parking, and maintenance of
public areas. The ruling concludes that
the agent’s activities in providing custom-
ary services to the tenants, although
imputed to the co-owners, were not suffi-
ciently extensive to cause the
co-ownership to be characterized as a
partnership. See also Rev. Rul. 79–77
(1979–1 C.B. 448), which did not find a
business entity where three individuals
transferred ownership of a commercial
building subject to a net lease to a trust
with the three individuals as beneficiaries.
Whereasponsorpackages
co-ownership interests for sale by acquir-
ing property, negotiating a master lease
on the property, and arranging for financ-
ing, the courts have looked at the rela-
tionships not only among the co-owners,
but also between the sponsor (or persons
related to the sponsor) and the co-owners
in determining whether the co-ownership
gives rise to a partnership. For example,
inBergford v. Commissioner, 12 F.3d 166
(9th Cir. 1993), seventy-eight investors
purchased“co-ownership”interests in
computer equipment that was subject to a
7-year net lease. As part of the purchase,
the co-owners authorized the manager to
arrange financing and refinancing, pur-
chase and lease the equipment, collect
rents and apply those rents to the notes
used to finance the equipment, prepare
statements, and advance funds to partici-
pants on an interest-free basis to meet
cash flow. The agreement allowed the
co-owners to decide by majority vote
whether to sell or lease the equipment at
the end of the lease. Absent a majority
vote, the manager could make that deci-
sion. In addition, the manager was
entitled to a remarketing fee of 10 percent
of the equipment’s selling price or lease
rental whether or not a co-owner termi-
nated the agreement or the manager per-
formed any remarketing. A co-owner
could assign an interest in the
co-ownership only after fulfilling numer-
ous conditions and obtaining the manag-
er’s consent.
The court held that the co-ownership
arrangement constituted a partnership for
federal tax purposes. Among the factors
that influenced the court’s decision were
the limitations on the co-owners’ability
to sell, lease, or encumber either the
co-ownership interest or the underlying
property, and the manager’s effective par-
ticipation in both profits (through the
remarketing fee) and losses (through the
advances).Bergford, 12 F.3d at 169–170.
Accord Bussing v. Commissioner, 88 T.C.
449 (1987),aff’donreh’g, 89 T.C. 1050
(1987);Alhouse v. Commissioner, T.C.
Memo. 1991–652.
Under§1.761–1(a) and§§301.
7701–1 through 301.7701–3, a federal tax
partnership does not include mere
co-ownership of property where the own-
ers’activities are limited to keeping the
property maintained, in repair, rented or
leased. However, as the above authorities
demonstrate, a partnership for federal tax
purposes is broader in scope than the
common law meaning of partnership and
may include groups not classified by state
law as partnerships.Bergford, 12 F.3d at
169. Where the parties to a venture join
together capital or services with the intent
of conducting a business or enterprise and
of sharing the profits and losses from the
venture, a partnership (or other business
entity) is created.Bussing, 88 T.C. at 460.
Furthermore, where the economic ben-
efits to the individual participants are not
derivative of their co-ownership, but
rather come from their joint relationship
toward a common goal, the co-ownership
arrangement will be characterized as a
partnership (or other business entity) for
federal tax purposes.Bergford, 12 F.3d at
169.
SECTION 3. SCOPE
This revenue procedure applies to
co-ownership of rental real property
(other than mineral interests) (the Prop-
erty) in an arrangement classified under
local law as a tenancy-in-common.
This revenue procedure provides
guidelines for requesting advance rulings
solely to assist taxpayers in preparing rul-
ing requests and the Service in issuing
advance ruling letters as promptly as
practicable. The guidelines set forth in
this revenue procedure are not intended to
be substantive rules and are not to be
used for audit purposes.
2002–14 I.R.B.734April 8, 2002

SECTION 4. GUIDELINES FOR
SUBMITTING RULING REQUESTS
The Service ordinarily will not con-
sider a request for a ruling under this rev-
enue procedure unless the information
described in section 5 of this revenue pro-
cedure is included in the ruling request
and the conditions described in section 6
of this revenue procedure are satisfied.
Even if sections 5 and 6 of this revenue
procedure are satisfied, however, the Ser-
vice may decline to issue a ruling under
this revenue procedure whenever war-
ranted by the facts and circumstances of a
particular case and whenever appropriate
in the interest of sound tax administra-
tion.
Where multiple parcels of property
owned by the co-owners are leased to a
single tenant pursuant to a single lease
agreement and any debt of one or more
co-owners is secured by all of the parcels,
the Service will generally treat all of the
parcels as a single“Property.”In such a
case, the Service will generally not con-
sider a ruling request under this revenue
procedure unless: (1) each co-owner’s
percentage interest in each parcel is iden-
tical to that co-owner’s percentage inter-
est in every other parcel, (2) each
co-owner’s percentage interests in the
parcels cannot be separated and traded
independently, and (3) the parcels of
property are properly viewed as a single
business unit. The Service will generally
treat contiguous parcels as comprising a
single business unit. Even if the parcels
are not contiguous, however, the Service
may treat multiple parcels as comprising
a single business unit where there is a
close connection between the business
use of one parcel and the business use of
another parcel. For example, an office
building and a garage that services the
tenants of the office building may be
treated as a single business unit even if
the office building and the garage are not
contiguous.
For purposes of this revenue proce-
dure, the following definitions apply. The
term“co-owner”means any person that
owns an interest in the Property as a ten-
ant in common. The term“sponsor”
means any person who divides a single
interest in the Property into multiple
co-ownership interests for the purpose of
offering those interests for sale. The term
“related person”means a person bearing a
relationship described in§267(b) or
707(b)(1),exceptthatinapplying
§267(b) or 707(b)(1), the co-ownership
will be treated as a partnership and each
co-owner will be treated as a partner. The
term“disregarded entity”means an entity
that is disregarded as an entity separate
from its owner for federal tax purposes.
Examples of disregarded entities include
qualified REIT subsidiaries (within the
meaning of§856(i)(2)), qualified sub-
chapter S subsidiaries (within the mean-
ing of§1361(b)(3)(B)), and business
entities that have only one owner and do
not elect to be classified as corporations.
The term“blanket lien”means any mort-
gage or trust deed that is recorded against
the Property as a whole.
SECTION 5. INFORMATION TO BE
SUBMITTED
.01 Section 8 of Rev. Proc. 2002–1
outlines general requirements concerning
the information to be submitted as part of
a ruling request, including advance rul-
ings under this revenue procedure. For
example, any ruling request must contain
a complete statement of all facts relating
to the co-ownership, including those
relating to promoting, financing, and
managing the Property. Among the infor-
mation to be included are the items of
information specified in this revenue pro-
cedure; therefore, the ruling request must
provide all items of information and con-
ditions specified below and in section 6
of this revenue procedure, or at least
account for all of the items. For example,
if a co-ownership arrangement has no
brokerage agreement permitted in section
6.12 of this revenue procedure, the ruling
request should so state. Furthermore,
merely submitting documents and supple-
mentary materials required by section
5.02 of this revenue procedure does not
satisfy all of the information requirements
contained in section 5.02 of this revenue
procedure or in section 8 of Rev. Proc.
2002–1; all material facts in the docu-
ments submitted must be explained in the
ruling request and may not be merely
incorporated by reference. All submitted
documents and supplementary materials
must contain applicable exhibits, attach-
ments, and amendments. The ruling
request must identify and explain any
information or documents required in sec-
tion 5 of this revenue procedure that are
not included and any conditions in section
6 of this revenue procedure that are or are
not satisfied.
.02Required General Information and
Copies of Documents and Supplementary
Materials. Generally the following infor-
mation and copies of documents and
materials must be submitted with the rul-
ing request:
(1) The name, taxpayer identification
number, and percentage fractional interest
in Property of each co-owner;
(2) The name, taxpayer identification
number, ownership of, and any relation-
ship among, all persons involved in the
acquisition, sale, lease and other use of
Property, including the sponsor, lessee,
manager, and lender;
(3) A full description of the Property;
(4) A representation that each of the
co-owners holds title to the Property
(including each of multiple parcels of
property treated as a single Property
under this revenue procedure) as a tenant
in common under local law;
(5) All promotional documents relat-
ing to the sale of fractional interests in the
Property;
(6) All lending agreements relating to
the Property;
(7) All agreements among the
co-owners relating to the Property;
(8) Any lease agreement relating to
the Property;
(9) Any purchase and sale agreement
relating to the Property;
(10) Any property management or
brokerage agreement relating to the Prop-
erty; and
(11) Any other agreement relating to
the Property not specified in this section,
including agreements relating to any debt
secured by the Property (such as guaran-
tees or indemnity agreements) and any
call and put options relating to the Prop-
erty.
SECTION 6. CONDITIONS FOR
OBTAINING RULINGS
The Service ordinarily will not con-
sider a request for a ruling under this rev-
enue procedure unless the conditions
described below are satisfied. Neverthe-
less, where the conditions described
below are not satisfied, the Service may
consider a request for a ruling under this
revenue procedure where the facts and
April 8, 20027352002–14 I.R.B.

circumstances clearly establish that such
a ruling is appropriate.
.01Tenancy in Common Ownership.
Each of the co-owners must hold title to
the Property (either directly or through a
disregarded entity) as a tenant in common
under local law. Thus, title to the Property
as a whole may not be held by an entity
recognized under local law.
.02Number of Co-Owners. The num-
ber of co-owners must be limited to no
more than 35 persons. For this purpose,
“person”is defined as in§7701(a)(1),
except that a husband and wife are treated
as a single person and all persons who
acquire interests from a co-owner by
inheritance are treated as a single person.
.03No Treatment of Co-Ownership as
an Entity. The co-ownership may not file
a partnership or corporate tax return, con-
duct business under a common name,
execute an agreement identifying any or
all of the co-owners as partners, share-
holders, or members of a business entity,
or otherwise hold itself out as a partner-
ship or other form of business entity (nor
may the co-owners hold themselves out
as partners, shareholders, or members of a
business entity). The Service generally
will not issue a ruling under this revenue
procedure if the co-owners held interests
in the Property through a partnership or
corporation immediately prior to the for-
mation of the co-ownership.
.04Co-Ownership Agreement. The
co-owners may enter into a limited
co-ownership agreement that may run
with the land. For example, a
co-ownership agreement may provide that
a co-owner must offer the co-ownership
interest for sale to the other co-owners,
the sponsor, or the lessee at fair market
value (determined as of the time the par-
tition right is exercised) before exercising
any right to partition (see section 6.06 of
this revenue procedure for conditions
relating to restrictions on alienation); or
that certain actions on behalf of the
co-ownership require the vote of
co-owners holding more than 50 percent
of the undivided interests in the Property
(see section 6.05 of this revenue proce-
dure for conditions relating to voting).
.05Voting. The co-owners must retain
the right to approve the hiring of any
manager, the sale or other disposition of
the Property, any leases of a portion or all
of the Property, or the creation or modifi-
cation of a blanket lien. Any sale, lease,
or re-lease of a portion or all of the Prop-
erty, any negotiation or renegotiation of
indebtedness secured by a blanket lien,
the hiring of any manager, or the negotia-
tion of any management contract (or any
extension or renewal of such contract)
must be by unanimous approval of the
co-owners. For all other actions on behalf
of the co-ownership, the co-owners may
agree to be bound by the vote of those
holding more than 50 percent of the undi-
vided interests in the Property. A
co-owner who has consented to an action
in conformance with this section 6.05
may provide the manager or other person
a power of attorney to execute a specific
document with respect to that action, but
may not provide the manager or other
person with a global power of attorney.
.06Restrictions on Alienation. In gen-
eral, each co-owner must have the rights
to transfer, partition, and encumber the
co-owner’s undivided interest in the Prop-
erty without the agreement or approval of
any person. However, restrictions on the
right to transfer, partition, or encumber
interests in the Property that are required
by a lender and that are consistent with
customary commercial lending practices
are not prohibited. See section 6.14 of
this revenue procedure for restrictions on
who may be a lender. Moreover, the
co-owners, the sponsor, or the lessee may
have a right of first offer (the right to
have the first opportunity to offer to pur-
chase the co-ownership interest) with
respect to any co-owner’s exercise of the
right to transfer the co-ownership interest
in the Property. In addition, a co-owner
may agree to offer the co-ownership
interest for sale to the other co-owners,
the sponsor, or the lessee at fair market
value (determined as of the time the par-
tition right is exercised) before exercising
any right to partition.
.07Sharing Proceeds and Liabilities
upon Sale of Property. If the Property is
sold, any debt secured by a blanket lien
must be satisfied and the remaining sales
proceeds must be distributed to the
co-owners.
.08Proportionate Sharing of Profits
and Losses. Each co-owner must share in
all revenues generated by the Property
and all costs associated with the Property
in proportion to the co-owner’s undivided
interest in the Property. Neither the other
co-owners, nor the sponsor, nor the man-
ager may advance funds to a co-owner to
meet expenses associated with the
co-ownership interest, unless the advance
is recourse to the co-owner (and, where
the co-owner is a disregarded entity, the
owner of the co-owner) and is not for a
period exceeding 31 days.
.09Proportionate Sharing of Debt.
The co-owners must share in any indebt-
edness secured by a blanket lien in pro-
portion to their undivided interests.
.10Options. A co-owner may issue an
option to purchase the co-owner’s undi-
vided interest (call option), provided that
the exercise price for the call option
reflects the fair market value of the Prop-
erty determined as of the time the option
is exercised. For this purpose, the fair
market value of an undivided interest in
the Property is equal to the co-owner’s
percentage interest in the Property multi-
plied by the fair market value of the Prop-
erty as a whole. A co-owner may not
acquire an option to sell the co-owner’s
undivided interest (put option) to the
sponsor, the lessee, another co-owner, or
the lender, or any person related to the
sponsor, the lessee, another co-owner, or
the lender.
.11No Business Activities. The
co-owners’activities must be limited to
those customarily performed in connec-
tion with the maintenance and repair of
rental real property (customary activities).
See Rev. Rul. 75–374 (1975–2 C.B. 261).
Activities will be treated as customary
activities for this purpose if the activities
would not prevent an amount received by
an organization described in§511(a)(2)
fromqualifyingasrentunder
§512(b)(3)(A) and the regulations there-
under. In determining the co-owners’
activities, all activities of the co-owners,
their agents, and any persons related to
the co-owners with respect to the Prop-
erty will be taken into account, whether
or not those activities are performed by
the co-owners in their capacities as
co-owners. For example, if the sponsor or
a lessee is a co-owner, then all of the
activities of the sponsor or lessee (or any
person related to the sponsor or lessee)
with respect to the Property will be taken
into account in determining whether the
co-owners’activities are customary
activities. However, activities of a
co-owner or a related person with respect
2002–14 I.R.B.736April 8, 2002

to the Property (other than in the
co-owner’s capacity as a co-owner) will
not be taken into account if the co-owner
owns an undivided interest in the Prop-
erty for less than 6 months.
.12ManagementandBrokerage
Agreements. The co-owners may enter
into management or brokerage agree-
ments, which must be renewable no less
frequently than annually, with an agent,
who may be the sponsor or a co-owner
(or any person related to the sponsor or a
co-owner), but who may not be a lessee.
The management agreement may autho-
rize the manager to maintain a common
bank account for the collection and
deposit of rents and to offset expenses
associated with the Property against any
revenues before disbursing each
co-owner’s share of net revenues. In all
events, however, the manager must dis-
burse to the co-owners their shares of net
revenues within 3 months from the date
of receipt of those revenues. The manage-
ment agreement may also authorize the
manager to prepare statements for the
co-owners showing their shares of rev-
enue and costs from the Property. In addi-
tion, the management agreement may
authorize the manager to obtain or modify
insurance on the Property, and to negoti-
ate modifications of the terms of any
lease or any indebtedness encumbering
the Property, subject to the approval of
the co-owners. (See section 6.05 of this
revenue procedure for conditions relating
to the approval of lease and debt modifi-
cations.) The determination of any fees
paid by the co-ownership to the manager
must not depend in whole or in part on
the income or profits derived by any per-
son from the Property and may not
exceed the fair market value of the man-
ager’s services. Any fee paid by the
co-ownership to a broker must be compa-
rable to fees paid by unrelated parties to
brokers for similar services.
.13Leasing Agreements. All leasing
arrangements must bebona fideleases for
federal tax purposes. Rents paid by a les-
see must reflect the fair market value for
the use of the Property. The determination
of the amount of the rent must not
depend, in whole or in part, on the
income or profits derived by any person
from the Property leased (other than an
amount based on a fixed percentage or
percentages of receipts or sales). See sec-
tion 856(d)(2)(A) and the regulations
thereunder. Thus, for example, the
amount of rent paid by a lessee may not
be based on a percentage of net income
from the Property, cash flow, increases in
equity, or similar arrangements.
.14Loan Agreements. The lender with
respect to any debt that encumbers the
Property or with respect to any debt
incurred to acquire an undivided interest
in the Property may not be a related per-
son to any co-owner, the sponsor, the
manager, or any lessee of the Property.
.15Payments to Sponsor. Except as
otherwise provided in this revenue proce-
dure, the amount of any payment to the
sponsor for the acquisition of the
co-ownership interest (and the amount of
any fees paid to the sponsor for services)
must reflect the fair market value of the
acquired co-ownership interest (or the
services rendered) and may not depend,
in whole or in part, on the income or
profits derived by any person from the
Property.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2000–46 is superseded.
Rev. Proc. 2002–3 is modified by remov-
ing sections 5.03 and 5.06.
SECTION 7. DRAFTING
INFORMATION
The principal authors of this revenue
procedure are Jeanne Sullivan and Deane
Burke of the Office of Associate Chief
Counsel (Passthroughs and Special Indus-
tries). For further information regarding
this revenue procedure, contact Ms. Sulli-
van or Mr. Burke at (202) 622–3070 (not
a toll-free call).
April 8, 20027372002–14 I.R.B.

Part IV. Items of General Interest
Credit for Increasing
Research Activities;
Correction
Announcement 2002–38
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posed rulemaking and notice of public
hearing.
SUMMARY: This document contains
corrections to a notice of proposed rule-
making (REG–112991–01, 2002–4 I.R.B.
404) and notice of public hearing relating
to the computation of the research credit.
This document was published in theFed-
eral Registeron December 26, 2001 (66
FR 66362).
FOR FURTHER INFORMATION
CONTACT: Lisa J. Shuman (202) 622–
3120 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The proposed regulations that are the
subject of these corrections are under sec-
tions 41(c) and and 41(d) of the Internal
Revenue Code.
Need for Correction
As published, the proposed regulations
REG–112991–01, contains errors that
may prove to be misleading and are in
need of clarification.
Correction of Publication
Accordingly, the publication of the
proposed regulations REG–112991–01,
which is the subject of FR. Doc.
01–31007, is corrected as follows:
§ 1.41–3 [Corrected]
1. On page 66368, column 1,§1.41–3,
paragraph (e), line 3, the language“end-
ing on or after the date December 21”is
corrected to read“ending on or after
December 26”.
§ 1.41–4 [Corrected]
2. On page 66369, column 1,§1.41–4,
paragraph(a)(8),paragraph(i)of
Example 2., line 3 from the bottom of
paragraph, the language“tests the nozzles
to ensure that to ensure that”is corrected
to read“tests the nozzles to ensure that”.
3. On page 66369, column 1,§1.41–4,
paragraph(a)(8),paragraph(ii)of
Example 2., line 2 the language“painting
process is a separate business”is cor-
rected to read“painting process relate to
a separate business”.
4. On page 66369, column 3,§1.41–4,
paragraph(a)(8),paragraph(i)of
Example 6., lines 5 through 8 from the
bottom of the paragraph, the language“X
conducts extensive and complex scientific
or laboratory testing to determine if the
current model vehicle meets X’s require-
ments.”is removed.
5. On page 66370, column 3,§1.41–4,
paragraph (c)(6), line 2 of the paragraph
heading, the language“years beginning
on or after the”is corrected to read“years
beginning on or after”.
6. On page 66371, column 2,§1.41–4,
paragraph (c)(6)(iv)(C), line 1 of the col-
umn, the language“leased, licensed or
otherwise marketed”is corrected to read
“leased, licensed, or otherwise marketed”.
7. On page 66371, column 2,§1.41–4,
paragraph (c)(6)(vi)(C), line 2 from the
bottom of the paragraph, the language
“paragraphs (c)(6)(v)(A) and (B) of this”
is corrected to read“paragraphs
(c)(6)(vi)(A) and (B) of this”.
8. On page 66371, column 3,§1.41–4,
paragraph (c)(6)(viii), paragraph (i) of
Example 2., line 3, the language“order to
create an improved reserve valuation”is
corrected to read“order to create the
improved reserve valuation”.
9. On page 66372, column 3,§1.41–4,
paragraph(c)(6),paragraph(ii)of
Example 7., line 1, the language“(ii)
Conclusion.X’s software is software”is
corrected to read“(ii)Conclusion.X’s
software is”.
10. On page 66375, column 1,
§1.41–4, paragraph (c)(10), paragraph (i)
ofExample 6., line 1, the language
“Example 6. (i)Facts. X manufacturer
and”is corrected to read“Example 6. (i)
Facts. X manufacturers and”.
11. On page 66375, column 2,
§1.41–4, paragraph (c)(10), paragraph
(1) ofExample 7. is correctly designated
§1.41–4, paragraph (c)(10), paragraph (i)
ofExample 7.
12. On page 66375, column 2,
§1.41–4, paragraph (c)(10), paragraph (i)
ofExample 7., line 9, the language“pur-
chases the existing robotic equipment
for”is corrected to read“purchases exist-
ing robotic equipment for”.
13. On page 66375, column 3,
§1.41–4, paragraph (e), line 4, the lan-
guage“December 26, 2002.”is corrected
to read“December 26, 2001.”.
§ 1.41–8 [Corrected]
14. On page 66375, column 3,
§1.41–8, paragraph (b)(4), line 4, the lan-
guage“December 26, 2002.”is corrected
to read“December 26, 2001.”.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Associate Chief Counsel
(Income Tax and Accounting).
(Filed by the Office of the Federal Register on
March 18, 2002, 8:45 a.m., and published in the
issue of the Federal Register for March 19, 2002, 67
F.R. 12494)
Excise Taxes on Excess
Benefit Transactions;
Correction
Announcement 2002–39
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to final regulations.
SUMMARY: This document contains
corrections to final regulations (T.D.
8978, 2002–7 I.R.B. 500) that were pub-
lished in theFederal Registeron
Wednesday, January 23, 2002 (67 FR
3076) relating to the excise taxes on
excess benefit transactions.
DATES: This correction is effective Janu-
ary 23, 2002.
FOR FURTHER INFORMATION CON-
TACT: Phyllis D. Haney, (202) 622–4290
(not a toll-free number).
2002–14 I.R.B.738April 8, 2002

SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the sub-
ject of these corrections are under section
4958 of the Internal Revenue Code.
Need for Correction
As published, the final regulations
contain errors that may prove to be mis-
leading and are in need of clarification.
Correction of Publication
Accordingly, the publication of the
final regulations (T.D. 8978), that were
the subject of FR Doc. 02–985, is cor-
rected as follows:
1. On page 3078, column 1, in the pre-
amble under the paragraph heading“Defi-
nition of Applicable Tax-Exempt Organi-
zation”, line 6 from the top of the
column, the language“to the efficient
administration of the”is corrected to read
“for the efficient administration of the”.
2. On page 3082, column 3, in the pre-
amble under the paragraph heading
“Final Regulatory Flexibility Analysis”,
first paragraph, line 13, the language
“REP. 104–506 at 56–7, March 28,
1996)”is corrected to read“REP. 506,
104th Congress, 2d SESS. (1996), 53,
56–7)”.
3. On page 3083, column 1, in the pre-
amble under the paragraph heading
“Final Regulatory Flexibility Analysis”,
first full paragraph, line 1, the language
“The objective for the rebuttable”is cor-
rected to read“The objective of the rebut-
table”.
§53.4958–4 [Corrected]
4.Onpage3091,column3,
§53.4958–4(a)(3)(vii),Example 1, line
12, the language“T (see§53.4958–3(a)).
Under the initial”is corrected to read“T
(see§53.4958–3(c)(3)). Under the ini-
tial”.
5.Onpage3095,column2,
§53.4958–4(c)(4),Example 2, line 10,
the language“D fails to report the bonus
on his individual”is corrected to read“D
fails to report the bonus on D’s indi-
vidual”.
§301.7611–1 [Corrected]
6. On page 3099, column 2, in A–19,
line1,thelanguage“A–19:See
§53.4958–7(b) of this”is corrected to
read“A–19: See§53.4958–8(b) of this”.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Associate Chief Counsel
(Income Tax and Accounting).
(Filed by the Office of the Federal Register on
March 18, 2002, 8:45 a.m., and published in the
issue of the Federal Register for March 19, 2002, 67
F.R. 12471)
Renewal of Enrolled Agent
Status
Announcement 2002–41
Enrolled agent cards will expire on
March 31, 2002. However, all cards for
the upcoming three year cycle will not be
mailed out by that date. Therefore, the
Director of Practice has extended all cur-
rent enrollment cards until April 30, 2002.
Anyone not receiving their enrollment
card by that date should call (313) 234–
1280 or e-mail the Enrolled Practitioner
Unit atepp@irs.gov. Enrolled agents may
continue to use their existing enrollment
card until April 30, 2002.
Renewal of Sponsor
Agreements for Enrolled
Agent Continuing Professional
Education
Announcement 2002–42
Sponsor agreements for sponsors of
qualifying continuing professional educa-
tion expire on March 31, 2002. The
Director of Practice will not mail out their
approval or disapproval of sponsor agree-
ments for the upcoming three year cycle
by that date. Therefore, the Director of
Practice has extended all existing sponsor
agreements through August 31, 2002.
Sponsors will be notified by August 31,
2002, of their renewal status. Sponsors
seeking renewal will continue to be
approved until that date.
April 8, 20027392002–14 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes 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
withmodified, below).
Clarifiedis 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.
Modifiedis 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
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes 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.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes 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
period 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
andsupersededdescribes 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.
Supplementedis 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 published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis 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 formerly 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.—Intemal 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.
2002–14 I.R.B.iApril 8, 2002

Numerical Finding List
1
Bulletins 2002–1 through 2002–13
Announcements:
2002–1, 2002–2 I.R.B.304
2002–2, 2002–2 I.R.B.304
2002–3, 2002–2 I.R.B.305
2002–4, 2002–2 I.R.B.306
2002–5, 2002–4 I.R.B.420
2002–6, 2002–5 I.R.B.458
2002–7, 2002–5 I.R.B.459
2002–8, 2002–6 I.R.B.494
2002–9, 2002–7 I.R.B.536
2002–10, 2002–7 I.R.B.539
2002–11, 2002–6 I.R.B.494
2002–12, 2002–8 I.R.B.553
2002–13, 2002–7 I.R.B.540
2002–14, 2002–7 I.R.B.540
2002–15, 2002–7 I.R.B.540
2002–16, 2002–7 I.R.B.541
2002–17, 2002–8 I.R.B.561
2002–18, 2002–10 I.R.B.621
2002–19, 2002–8 I.R.B.561
2002–20, 2002–8 I.R.B.561
2002–21, 2002–8 I.R.B.562
2002–22, 2002–8 I.R.B.562
2002–23, 2002–8 I.R.B.563
2002–24, 2002–9 I.R.B.606
2002–25, 2002–10 I.R.B.621
2002–26, 2002–11 I.R.B.629
2002–27, 2002–11 I.R.B.629
2002–28, 2002–11 I.R.B.630
2002–29, 2002–11 I.R.B.631
2002–30, 2002–11 I.R.B.632
2002–32, 2002–12 I.R.B.664
2002–33, 2002–12 I.R.B.666
2002–34, 2002–13 I.R.B.702
2002–35, 2002–12 I.R.B.667
2002–36, 2002–13 I.R.B.703
2002–37, 2002–13 I.R.B.703
Notices:
2002–1, 2002–2 I.R.B.283
2002–2, 2002–2 I.R.B.285
2002–3, 2002–2 I.R.B.289
2002–4, 2002–2 I.R.B.298
2002–5, 2002–3 I.R.B.320
2002–6, 2002–3 I.R.B.326
2002–7, 2002–6 I.R.B.489
2002–8, 2002–4 I.R.B.398
2002–9, 2002–5 I.R.B.450
2002–10, 2002–6 I.R.B.490
2002–11, 2002–7 I.R.B.526
2002–12, 2002–7 I.R.B.526
2002–13, 2002–8 I.R.B.547
2002–14, 2002–8 I.R.B.548
2002–15, 2002–8 I.R.B.548
2002–16, 2002–9 I.R.B.567
2002–17, 2002–9 I.R.B.567
2002–18, 2002–12 I.R.B.644
2002–19, 2002–10 I.R.B.619
Proposed Regulations:
REG–209135–88, 2002–4 I.R.B.418
REG–209114–90, 2002–9 I.R.B.576
REG–107100–00, 2002–7 I.R.B.529
REG–107366–00, 2002–12 I.R.B.645
REG–118861–00, 2002–12 I.R.B.651
REG–105344–01, 2002–2 I.R.B.302
REG–112991–01, 2002–4 I.R.B.404
REG–115054–01, 2002–7 I.R.B.530
REG–119436–01, 2002–3 I.R.B.376
REG–120135–01, 2002–8 I.R.B.552
REG–125450–01, 2002–5 I.R.B.457
REG–125626–01, 2002–9 I.R.B.604
REG–142299–01, 2002–4 I.R.B.418
REG–159079–01, 2002–6 I.R.B.493
REG–102740–02, 2002–13 I.R.B.701
Revenue Procedures:
2002–1, 2002–1 I.R.B.1
2002–2, 2002–1 I.R.B.82
2002–3, 2002–1 I.R.B.117
2002–4, 2002–1 I.R.B.127
2002–5, 2002–1 I.R.B.173
2002–6, 2002–1 I.R.B.203
2002–7, 2002–1 I.R.B.249
2002–8, 2002–1 I.R.B.252
2002–9, 2002–3 I.R.B.327
2002–10, 2002–4 I.R.B.400
2002–11, 2002–7 I.R.B.526
2002–12, 2002–3 I.R.B.374
2002–13, 2002–8 I.R.B.549
2002–14, 2002–5 I.R.B.450
2002–15, 2002–6 I.R.B.490
2002–16, 2002–9 I.R.B.572
2002–17, 2002–13 I.R.B.676
2002–18, 2002–13 I.R.B.678
2002–19, 2002–13 I.R.B.696
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
2002–3, 2002–3 I.R.B.316
2002–4, 2002–4 I.R.B.389
2002–5, 2002–6 I.R.B.461
2002–6, 2002–6 I.R.B.460
2002–7, 2002–8 I.R.B.543
2002–8, 2002–9 I.R.B.564
2002–9, 2002–10 I.R.B.614
2002–10, 2002–10 I.R.B.616
2002–11, 2002–10 I.R.B.608
2002–12, 2002–11 I.R.B.624
2002–13, 2002–12 I.R.B.637
2002–14, 2002–12 I.R.B.636
2002–15, 2002–13 I.R.B.668
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
8971, 2002–3 I.R.B.308
8972, 2002–5 I.R.B.443
8973, 2002–4 I.R.B.391
8974, 2002–3 I.R.B.318
8975, 2002–4 I.R.B.379
8976, 2002–5 I.R.B.421
8977, 2002–6 I.R.B.463
8978, 2002–7 I.R.B.500
8979, 2002–6 I.R.B.466
8980, 2002–6 I.R.B.477
8981, 2002–7 I.R.B.496
8982, 2002–8 I.R.B.544
8983, 2002–9 I.R.B.565
8984, 2002–13 I.R.B.668
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
April 8, 2002ii2002–14 I.R.B.

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 through 2002–13
Announcements:
2001–83
Modified by
Ann. 2002–36, 2002–13 I.R.B.703
2002–9
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–35, 2002–12 I.R.B.667
Notices:
98–31
Supplemented by
Ann. 2002–37, 2002–13 I.R.B.703
98–43
Modified and superseded by
Notice 2002–5, 2002–3 I.R.B.320
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
2001–10
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
2001–61
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2001–68
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
Proposed Regulations:
REG–209135–88
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–251502–96
Withdrawn by
Ann. 2002–33, 2002–12 I.R.B.666
REG–107100–00
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–105344–01
Corrected by
Ann. 2002–7, 2002–5 I.R.B.459
REG–112991–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Proposed Regulations:—Continued
REG–115054–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–119436–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–120135–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125450–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125626–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–126485–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–137519–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–142299–01
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–142686–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–159079–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
84–57
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
87–50
Modified by
Rev. Proc. 2002–10, 2002–4 I.R.B.400
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
97–27
Modified and amplified by
Rev. Proc. 2002–19, 2002–13 I.R.B.696
98–49
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
Revenue Procedures:—Continued
99–49
Modified and superseded by
Rev. Proc. 2002–9, 2002–3 I.R.B.327
2000–20
Modified by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–1
Superseded by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2001–2
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–3
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–4
Superseded by
Rev. Proc. 2002–4, 2002–1 I.R.B.127
2001–5
Superseded by
Rev. Proc. 2002–5, 2002–1 I.R.B.173
2001–6
Superseded by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–7
Superseded by
Rev. Proc. 2002–7, 2002–1 I.R.B.249
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
2001–13
Corrected by
Ann. 2002–5, 2002–4 I.R.B.420
2001–16
Modified by
Ann. 2002–26, 2002–11 I.R.B.629
2001–36
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–41
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–51
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
2002–14 I.R.B.iiiApril 8, 2002

Revenue Procedures:—Continued
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–9
Modified and clarified by
Ann. 2002–17, 2002–8 I.R.B.561
Modified and amplified by
Rev. Rul. 2002–9, 2002–10 I.R.B.614
Rev. Proc. 2002–17, 2002–13 I.R.B.676
Rev. Proc. 2002–19, 2002–13 I.R.B.696
Revenue Rulings:
55–747
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
61–146
Distinguished by
Rev. Rul. 2002–3, 2002–3 I.R.B.316
64–328
Modified by
Notice 2002–8, 2002–4 I.R.B.398
66–110
Modified by
Notice 2002–8, 2002–4 I.R.B.398
89–29
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
92–19
Supplemented in part by
Rev. Rul. 2002–12, 2002–11 I.R.B.624
2002–7
Corrected by
Ann. 2002–13, 2002–7 I.R.B.540
Treasury Decisions:
8971
Corrected by
Ann. 2002–20, 2002–8 I.R.B.561
8972
Corrected by
Ann. 2002–23, 2002–8 I.R.B.563
8973
Corrected by
Ann. 2002–14, 2002–7 I.R.B.540
8975
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8976
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
April 8, 2002iv2002–14 I.R.B.